Callaway 2003 Annual Report Download - page 35

32 CALLAWAY GOLF COMPANY
the new golf season. Orders for many of these sales are received
during the fourth quarter of the prior year. The Company’s
second and third quarter sales generally represent re-order
business. Sales during the second and third quarters therefore
are significantly affected not only by the sell-through
of the
Company’s products that were sold into the channel during
the
first quarter but also by the sell-through of the products of the
Company’s competitors. Retailers are sometimes reluctant to
re-order the Company’s products in significant quantity when
they already have excess inventory of the Company’s competi-
tors’ products. The Company’s sales during the fourth quarter
are generally significantly less than the other quarters because
in general in the Company’s principal markets less people are
playing golf during that time of year due to cold weather.
Furthermore, it previously was the Company’s practice to
announce its new product line at the beginning of each calendar
year.
The Company has departed from that practice and now
generally announces its new product line in the fourth quarter
to allow retailers to plan better. Such early announcements of
new products could cause golfers, and therefore the
Company’s customers, to defer purchasing additional golf
equipment until the Company’s
new products are available.
Such deferments could have a material adverse effect upon
sales of the Company’s current products and/or result in
close-out sales at reduced prices.
Because of these seasonal trends, the Company’s business can
be significantly adversely affected by unusual or severe weather
conditions. Unfavorable weather conditions generally result in
less golf rounds played, which generally results in less demand
for golf clubs and golf balls. Consequently, sustained adverse
weather conditions, especially during the warm weather months,
could materially affect the Company’s sales.
Conformance with the Rules of Golf
New golf club and golf ball products generally seek to satisfy the
standards established by the USGA and R&A because these
standards are generally followed by golfers within their respective
jurisdictions. The USGA rules are generally followed in the United
States, Canada and Mexico, and the R&A rules are generally
followed in most other countries throughout the world. The Rules
of Golf as published by the R&A and the USGA are virtually the
same except with respect to the regulation of “driving clubs.”
All of the Company’s current products (including the new ERC
Fusion and Great Big Bertha II Drivers), with the exception of
the ERC Fusion+ and Great Big Bertha II+ Drivers, are believed
to be “conforming” under the Rules of Golf as published by the
USGA. All of the Company’s current products are believed to be
conforming to the existing Rules of Golf as published by the
R&A. However, effective January 1, 2003 the Company’s ERC
Fusion+ and Great Big Bertha II+ Titanium Drivers are not
conforming in certain competitions involving highly skilled
golfers and effective January 1, 2008 such drivers will not be
conforming under the generally applicable Rules of Golf as
published by the R&A. These new R&A restrictions could affect
current and future sales of such drivers in R&A jurisdictions,
including jurisdictions in which the Company previously sold
such products and in which there previously were no R&A
restrictions. The Company also believes that the general confusion
created by the USGA as to what is a conforming or non-
conforming driver has hurt sales of its drivers generally.
In addition, there is no assurance that the Company’s future
products will satisfy USGA and/or R&A standards, or that existing
USGA and/or R&A standards will not be altered in ways that
adversely affect the sales of the Company’s products or the
Company’s brand. For example, both the USGA and the R&A
are considering rules which would limit clubhead volume. If any
such volume limitation rules were adopted and caused one or
more of the Company’s current products to be non-conforming,
the Company’s sales of such products could be adversely affected.
Furthermore, such clubhead volume limitations would restrict
the Company’s ability to develop new golf club products.
Golf Professional Endorsements
The Company establishes relationships with professional golfers
in order to evaluate and promote Callaway Golf, Odyssey, Top-
Flite and Ben Hogan branded products. The Company has
entered into endorsement arrangements with members of the
various professional tours, including the Champions Tour, the
PGA Tour, the LPGA Tour, the PGA European Tour, the Japan
Golf Tour and the Nationwide Tour. While most professional
golfers fulfill their contractual obligations, some have been
known to stop using a sponsor’s products despite contractual
commitments. If certain of the Company’s professional
endorsers were to stop using the Company’s products contrary