Callaway 1998 Annual Report Download - page 17

CALLAWAY GOLF COMPANY
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However, if certain of Callaway Golf’s professional
endorsers were to stop using the Company’s products
contrary to their endorsement agreements, the
Company’s business could be adversely affected in a
material way by the negative publicity.
Many professional golfers throughout the world use
the Company’s golf clubs even though they are not con-
tractually bound to do so. The Company has created
cash “pools” that reward such usage. For the last several
years, the Company has experienced an exceptional level
of driver penetration on the world’s five major profes-
sional tours, and the Company has heavily advertised
that fact. It is unlikely that the Company will be able to
sustain this level of professional usage in 1999. Many
other companies are aggressively seeking the patronage
of these professionals, and are offering many induce-
ments, including specially designed products and signif-
icant cash rewards.
As in past years, during 1998, the Company con-
tinued its Big Bertha®Players’ Pools (“Pools”) for the
PGA, Senior PGA, LPGA and Nike Tours. Those pro-
fessional players participating in the Pools received cash
for using Callaway Golf products in professional tour-
naments, but were not bound to use the products or
grant any endorsement to the Company. The Company
believes that its professional endorsements and its Pools
contributed to its usage on the professional tours in
1998. However, in connection with its new business
plan for 1999 the Company has significantly reduced
these Pools for the PGA and the Senior PGA Tours, and
has eliminated the Pools for the LPGA and Nike Tours.
As a result, the Company anticipates that the level of
professional usage of the Company’s products will be
lower in 1999 than 1998. Further, while it is not clear
whether professional endorsements materially con-
tribute to retail sales, it is possible that a decline in the
level of professional usage of the Company’s products
could have a material adverse effect on the Company’s
business.
New Business Ventures
The Company has invested significant capital in new
business ventures. However, in connection with the
Company’s review of its business, the Company has
determined to discontinue, transfer or suspend certain
business ventures not directly associated with the
Company’s core business. See “Restructuring.”
However, the Company continues development of its
golf ball business. See “Certain Factors Affecting
Callaway Golf Company - Golf Ball Development.”
International Distribution
The Company’s management believes that controlling
the distribution of its products throughout the world
will be an element in the future growth and success of
the Company. The Company has been actively pursuing
a reorganization of its international operations, includ-
ing the acquisition of distribution rights in certain key
countries in Europe, Asia and North America. These
efforts have resulted and will continue to result in addi-
tional investments in inventory, accounts receivable,
corporate infrastructure and facilities. The integration of
foreign distribution into the Company’s international
sales operations will require the dedication of manage-
ment resources which may temporarily detract from
attention to the day-to-day business of the Company.
Additionally, the Company’s plan of integration of
foreign distribution increases the Company’s exposure to
fluctuations in exchange rates for various foreign curren-
cies which could result in losses and, in turn, could
adversely impact the Company’s results of operations.
There can be no assurance that the Company will be
able to mitigate this exposure in the future through its
management of foreign currency transactions.
International reorganization also could result in disrup-
tions in the distribution of the Company’s products in
some areas. There can be no assurance that the acquisi-
tion of some or all of the Company’s foreign distribution
will be successful, and it is possible that an attempt to do
so will adversely affect the Company’s business.
In 1993, the Company, through a distributor agree-
ment, appointed Sumitomo Rubber Industries, Ltd. as
the sole distributor, and Sumitomo Corporation as the
sole importer, of Callaway®golf clubs in Japan. This dis-
tributor agreement runs through December 31, 1999.
The Company does not intend to extend it.
The Company has established ERC, a wholly
owned Japanese corporation, for the purpose of distrib-
uting Odyssey®products. ERC also will distribute
Callaway Golf balls when ready and Callaway Golf clubs
beginning January 1, 2000. There will be significant
costs and capital expenditures invested in ERC before
there will be sales sufficient to support such costs.
However, these costs have not been material to date.
Furthermore, there are significant risks associated with
the Company’s intention to effectuate distribution in
Japan through ERC, and it is possible that doing so will
have a material adverse effect on the Company’s opera-
tions and financial performance.