Callaway 1999 Annual Report Download - page 27

25CALLAWAY GOLF COMPANY
substantial costs to redesign its golf ball product and/or
defend legal actions.
The Company has procedures to maintain the secrecy of
its confidential business information. These procedures
include criteria for dissemination of information and written
confidentiality agreements with employees and vendors.
Suppliers, when engaged in joint research projects, are
required to enter into additional confidentiality agreements.
While these efforts are taken seriously, there can be no assur-
ance that these measures will prove adequate in all instances
to protect the Company’s confidential information.
“Gray Market” Distribution
Some quantities of the Company’s products find their way to
unapproved outlets or distribution channels. This “gray mar-
ket” for the Company’s products can undermine authorized
retailers and foreign wholesale distributors who promote and
support the Company’s products, and can injure the
Company’s image in the minds of its customers and con-
sumers. On the other hand, stopping such commerce could
result in a potential decrease in sales to those customers who
are selling Callaway Golf®products to unauthorized distribu-
tors and/or an increase in sales returns over historical levels.
For example, the Company experienced a decline in sales in
the United States in 1998, and believes the decline was due, in
part, to a decline in “gray market” shipments to Asia and
Europe. While the Company has taken some lawful steps to
limit commerce in its products in the “gray market” in both the
U.S. and abroad, it has not stopped such commerce.
Golf Professional Endorsements
The Company establishes relationships with professional
golfers in order to evaluate and promote Callaway Golf®and
Odyssey®branded products. The Company has entered into
endorsement arrangements with members of the various pro-
fessional tours, including the Senior PGA Tour, the PGA Tour,
the LPGA Tour and the PGA European Tour. While most profes-
sional golfers fulfill their contractual obligations, some have
been known to stop using a sponsor’s products despite con-
tractual commitments. If certain of the Company’s profession-
al endorsers were to stop using the Company’s products con-
trary to their endorsement agreements, the Company’s busi-
ness could be adversely affected in a material way by the neg-
ative publicity.
Many professional golfers throughout the world use the
Company’s golf clubs even though they are not contractually
bound to do so and do not grant any endorsement to the
Company. In addition, the Company has created cash pools
(“Pools”) that reward such usage. However, in 1999, as com-
pared to 1998, the Company significantly reduced these Pools
for both Callaway Golf®and Odyssey®brand products for the
PGA and the Senior PGA Tours, and has significantly reduced
the Pools for Odyssey®brand products and eliminated the
Pools for Callaway Golf®brand products for the LPGA and
buy.com (formerly Nike) tours. The Company expects that the
Pools for 2000 will be comparable to 1999. In addition, many
other companies are aggressively seeking the patronage of
these professionals, and are offering many inducements,
including specially designed products and significant cash
rewards. As a result, in 1999, usage of the Company’s drivers
on the PGA, Senior PGA, LPGA and buy.com tours was sub-
stantially reduced compared to 1998. This trend may continue
in the year 2000.
For the last several years, the Company has experienced
an exceptional level of driver penetration on the world’s five
major professional tours, and the Company has heavily adver-
tised that fact. While it is not clear to what extent professional
usage contributes to retail sales, it is possible that the recent
decline in the level of professional usage of the Company’s
products could have a material adverse effect on the
Company’s business.
Many golf ball manufacturers, including the leading U.S.
manufacturer of premium golf balls, have focused a great deal
of their marketing efforts on promoting the fact that tour pro-
fessionals use their balls. Some of these golf ball competitors
spend large amounts of money to secure professional endorse-
ments, and the market leader has obtained a very high degree
of tour penetration. While several of the Company’s staff pro-
fessionals have decided to use the Company’s golf balls in play,
there are others who are already under contract with other golf
ball manufacturers or, for other reasons, may not choose to
play the Company’s products. In addition, several professionals
who are not on the Company’s staff have expressed an interest
in playing the Company’s ball, but it is too early to predict if a
significant number will actually do so. The Company does not
plan to match the endorsement spending levels of the leading
manufacturer in 2000, and will instead rely more heavily upon
the performance of the ball and other factors to attract profes-
sionals to the product. In the future the Company may or may
not increase its tour spending in support of the golf ball. It is
not clear to what extent use by professionals is important to
the commercial success of the Company’s golf ball, but it is pos-
sible that the results of the Company’s golf ball business could
be significantly affected by its success or lack of success in
securing acceptance on the professional tours.
International Distribution
The Company’s management believes that controlling the dis-
tribution of its products in certain major markets in the world