Callaway 2002 Annual Report Download - page 31

28 CALLAWAY GOLF COMPANY
such materials thus far, there can be no assurance that it always
will be able to do so. An interruption in the supply of the
materials used by the Company or a significant change in costs
could have a material adverse effect on the Company.
Competition
Golf Clubs. The worldwide market for premium golf clubs is
highly competitive, and is served by a number of well-
established and well-financed companies with recognized
brand names, as well as new companies with popular products.
For example, in 2002 Nike began marketing and selling golf
clubs that compete with the Company’s products, and several
manufacturers in Japan have announced plans to expand their
businesses in the United States. New product introductions,
price reductions, consignment sales, extended payment terms
and “close-outs” (including close-outs of products that were
recently commercially successful) by competitors continue to
generate increased market competition. While the Company
believes that its products and its marketing efforts continue to
be competitive, there can be no assurance that successful
marketing activities, discounted pricing, consignment sales,
extended payment terms or new product introductions by com-
petitors will not negatively impact the Company’s future sales.
Golf Balls. The premium golf ball business is also highly com-
petitive and may be becoming even more competitive. There are
a number of well-established and well-financed competitors,
including one competitor with an estimated market share in
excess of 50% of the premium golf ball business. Furthermore,
as
competition in this business increases, many of these competitors
are substantially discounting the prices of their products. This
increased competition has resulted in significant expenses in
both tour and advertising. In order for its golf ball business to be
successful, the Company will need to penetrate the market
share held by existing competitors, while competing with new
entrants, and must do so at prices and costs that are profitable.
There can be no assurance that the Company’s golf balls will
obtain the market acceptance or profitability necessary to be
commercially successful (see also above “Liquidity”).
Market Acceptance of Products
A golf manufacturer’s ability to compete is in part dependent
upon its ability to satisfy the various subjective requirements of
golfers, including a golf club’s and golf ball’s look and “feel,” and
the level of acceptance that a golf club and ball has among
professional and recreational golfers. The subjective preferences
of golf club and ball purchasers are difficult to predict and may be
subject to rapid and unanticipated changes. In addition, the
Company’s products have tended to incorporate significant
innovations in design and manufacture, which have often resulted
in higher prices for the Company’s products relative to other
products in the marketplace. There can be no assurance that a
significant percentage of the public will always be willing to pay
such premium prices for golf equipment or that the Company will
be able to continue to design and manufacture premium products
that achieve market acceptance in the future. For example, in
2002, the Company introduced the C4 Driver made of compression-
cured carbon composite. This product did not meet the
Company’s expectations and is indicative of the risks associated
with the subjective preferences of golfers. In general, there can
be no assurance as to how long the Company’s golf clubs and golf
balls will maintain market acceptance and therefore no assurance
that the demand for the Company’s products will permit the
Company to experience growth in sales, or maintain historical
levels of sales, in the future.
New Product Introduction and Product Cyclicality
The Company believes that the introduction of new, innovative
golf clubs and golf balls is important to its future success. A
major portion of the Company’s revenues is generated by
products that are less than two years old. The Company faces
certain risks associated with such a strategy. For example, in
the golf industry, new models and basic design changes in golf
equipment are frequently met with consumer rejection. In
addition, prior successful designs may be rendered obsolete
within a relatively short period of time as new products are
introduced into the marketplace. Further, any new products
that retail at a lower price than prior products may negatively
impact the Company’s revenues unless unit sales increase. The
rapid introduction of new golf club or golf ball products by the
Company could result in close-outs of existing inventories at
both the wholesale and retail levels. Such close-outs can result
in reduced margins on the sale of older products, as well as
reduced sales of new products, given the availability of older
products at lower prices.