Callaway 2002 Annual Report Download - page 25

22 CALLAWAY GOLF COMPANY
In addition to the obligations listed above, the Company has
entered into contracts with professional golfers to endorse and
promote the Company’s products. Many of these contracts provide
incentives for successful performances using the Company’s
products. For example, under these contracts, the Company
could be obligated to pay a cash bonus to a professional who
wins a particular tournament while playing the Company’s golf
clubs. It is not possible to predict with any certainty the amount
of such performance awards the Company will be required to
pay in any given year. Such expenses, however, are an ordinary
part of the Company’s business and the Company does not
believe that the payment of these performance awards will have
a material adverse effect upon the Company. See below “Certain
Factors Affecting Callaway Golf Company — Golf Professional
Endorsements.”
During its normal course of business, the Company has made
certain indemnities, commitments and guarantees under which
it may be required to make payments in relation to certain
transactions. These include (i) intellectual property indemnities
to the Company’s customers and licensees in connection with
the use, sale and/or license of Company products, (ii) indemnities
to various lessors in connection with facility leases for certain
claims arising from such facility or lease, (iii) indemnities to
vendors and service providers pertaining to claims based on the
negligence or willful misconduct of the Company, (iv) indemnities
involving the accuracy of representations and warranties in certain
contracts, and (v) indemnities to directors and officers of the
Company to the maximum extent permitted under the laws of
the State of Delaware. In addition, the Company has made
contractual commitments to several employees providing for
severance payments upon the occurrence of certain prescribed
events. The Company also has several consulting agreements
that provide for payment of fees upon the issuance of patents
and/or the commercialization of research results. The Company
has also issued a guarantee in the form of a standby letter of
credit as security for contingent liabilities under certain workers
compensation insurance policies. The duration of these indem-
nities, commitments and guarantees varies, and in certain
cases, may be indefinite. The majority of these indemnities,
commitments and guarantees do not provide for any limitation
on the maximum amount of future payments the Company
could be obligated to make. The Company has not recorded any
liability for these indemnities, commitments and guarantees in
the accompanying consolidated balance sheets.
In addition to the contractual obligations listed above, the
Company’s liquidity could also be adversely affected by an
unfavorable outcome with respect to claims and litigation that
the Company is subject to from time to time. See Note 12 to the
Company’s Consolidated Financial Statements.
Although the Company’s golf club operations are mature and
historically have generated cash from operations, the
Company’s golf ball operations are relatively new and through
December 31, 2002 have not generated cash flows sufficient to
fund these operations. The Company has not achieved the sales
volume necessary for its golf ball business to be profitable. The
Company is evaluating all available actions to reduce and
eliminate the losses in its golf ball business. Some of these
actions could result in a write-down of a significant portion of
the assets used in the Company’s golf ball operations.
Based upon its current operating plan, analysis of its
con solidated financial position and projected future results of
operations, the Company believes that its operating cash flows,
together with its current or future credit facilities, will be suffi-
cient to finance current operating requirements, including
planned capital expenditures, contractual obligations and
commercial commitments, for the next twelve months. There
can be no assurance, however, that future industry specific or
other developments, general economic trends or other matters
will not adversely affect the Company’s operations, its ability to
enter into a new credit facility upon terms acceptable to the
Company or its ability to meet its future cash requirements (see
below “Certain Factors Affecting Callaway Golf Company”).
USGA Ac tion
In 1998, the United States Golf Association (“USGA”) adopted a
so-called “spring-like effect test” that limited the coefficient of
restitution (“COR”) of drivers. At that time, the Royal and
Ancient Golf Club of St. Andrews (“R&A”) disagreed with the
USGA and did not adopt such a test because it did not believe
that such a limitation was needed or in the best interests of the
game of golf.
On October 18, 2000, the Company announced that it intended to
sell its ERC II Forged Titanium Driver (“ERC II Driver”) in the