Callaway 2003 Annual Report Download - page 32

CALLAWAY GOLF COMPANY 29
grow. The Company already has a significant share of the
worldwide premium golf club market and therefore opportunities
for additional market share may be limited. The Company does
not believe there has been any material increase in the number
of golfers in the United States in over four years. Golf Datatech
has reported that during 2003 the number of golf rounds
played in the United States declined 2.6%, as compared to the
same period in 2002, and that rounds played have decreased
each year since at least 1999. Furthermore, the Company
believes that since 1997 the overall worldwide premium golf
club market has generally not experienced substantial growth
in dollar volume from year to year. There is no assurance that
the overall dollar volume of the worldwide premium golf club
market will grow, or that it will not decline, in the future.
Golf Balls. In connection with the acquisition of the Top-Flite
assets, the Company anticipates that it will significantly
increase its golf ball market share. Prior to the acquisition,
however, both Callaway Golf’s and Top-Flite’s market shares
had been declining. The Company’s ability to reverse such
decline and obtain the market share previously enjoyed by The
Top-Flite Golf Company will depend in part upon the
Company’s ability to integrate the Top-Flite brands and operations
with the Callaway Golf brands and operations. There is no
assurance that the Company will be able to successfully or
profitably integrate these brands or operations or maintain the
combined market share previously enjoyed by The Top-Flite
Golf Company and Callaway Golf Company.
Golf Ball Costs
The cost of entering the golf ball business has been significant.
The cost of competing in the golf ball business has also been
significant and has required significant investment in advertising,
tour and promotion. The development of the Callaway Golf
Company golf ball business has had a significant negative
impact on the Company’s cash flows, financial position and
results of operations. In addition, the Company spent approx-
imately $154 million in cash to acquire substantially all of the
golf-related assets of TFGC Estate Inc. (f/k/a The Top-Flite Golf
Company, f/k/a Spalding Sports Worldwide, Inc.). As presently
structured, the Company will need to produce and sell golf
balls in large volumes to cover its costs and be profitable. There
is no assurance that the Company will be able to achieve the
sales volume necessary to make its golf ball business profitable.
Until the golf ball business becomes profitable, the Company’s
results of operations, cash flows and financial position will
continue to be negatively affected.
Manufacturing Capacity
The Company plans its manufacturing capacity based upon the
forecasted demand for its products. Actual demand for such
products may exceed or be less than forecasted demand. The
Company’s unique product designs often require sophisticated
manufacturing techniques, which can require significant start-up
expenses and/or limit the Company’s ability to quickly expand
its manufacturing capacity to meet the full demand for its
products. If the Company is unable to produce sufficient
quantities of new products in time to fulfill actual demand,
especially during the Company’s traditionally busy season, it
could limit the Company’s sales and adversely affect its financial
performance. On the other hand, the Company invests in man-
ufacturing capacity and commits to components and other
manufacturing inputs for varying periods of time, which can
limit the Company’s ability to quickly react if actual demand is
less than forecasted demand. This could result in less than
optimum capacity usage and/or in excess inventories and related
obsolescence charges that could adversely affect the Company’s
financial performance. In addition, if the Company were to
experience delays, difficulties or increased costs in its produc-
tion of golf clubs or golf balls, including production of new
products needed to replace current products, the Company’s
future golf club or golf ball sales could be adversely affected.
Dependence on Energy Resources
The Company’s golf club and golf ball manufacturing facilities
use, among other resources, significant quantities of electricity
to operate. In 2001, some companies in California, including
the Company, experienced periods of blackouts during which
electricity was not available. The Company has taken certain
steps to provide access to alternative power supplies for certain
of its operations, and believes that these measures could mitigate
any impact resulting from possible future blackouts. The
Company is currently purchasing wholesale energy through
the Company’s energy service provider under short-term