Callaway 2004 Annual Report Download - page 46

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.'' The R&A rules currently permit driver clubheads with greater Öexibility (as
measured by a speciÑc test) than are permitted under the USGA rules. As a result, in jurisdictions where the
R&A rules are followed, the Company (like many of its competitors) has marketed and sold drivers that
conform to the R&A rules but not the USGA rules (the ""Plus Drivers''). In those jurisdictions where the
USGA rules are followed, the Company markets and sells its standard drivers that conform to both the R&A
and the USGA rules. All of the Company's other products are believed to conform to both the USGA and
R&A rules.
EÅective January 1, 2008, the more Öexible clubheads such as those used for the Plus Drivers will not be
conforming under the generally applicable Rules of Golf as published by the R&A. It is not clear what eÅect
the change in rules will have upon demand for Plus Drivers in R&A jurisdictions as 2008 approaches or
subsequent to the implementation of the new restrictions. It is possible that some jurisdictions and/or golfers
will choose not to follow the R&A's changes and will instead continue to use Plus Drivers. This uncertainty
adversely aÅects the Company's research and development and manufacturing operations which must plan
and commit resources years in advance of a new product release. If the Company does not accurately
anticipate consumer reaction to the new rule changes, the Company's sales in such jurisdictions could be
adversely aÅected and the Company could be required to invest signiÑcant resources to change its product
oÅerings at such time. The Company also believes that the general confusion created by the ruling bodies of
golf as to what is a conforming or non-conforming driver and the limits imposed on new driver technology
generally have hurt sales of drivers.
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 aÅect the sales of the
Company's products or the Company's brand. If a change in 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
aÅected. Furthermore, any such new rules could restrict the Company's ability to develop new products.
Golf Professional Endorsements
The Company establishes relationships with professional golfers in order to evaluate and promote Cal-
laway Golf, Odyssey, Top-Flite and Ben Hogan branded products. The Company has entered into endorse-
ment 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 fulÑll 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 to their endorsement agreements, the Company's business could be
adversely aÅected in a material way by the negative publicity or lack of endorsement.
The Company believes that professional usage of its golf clubs and golf balls contributes to retail sales.
The Company therefore spends a signiÑcant amount of money to secure professional usage of its products.
Many other companies, however, also aggressively seek the patronage of these professionals and oÅer many
inducements, including signiÑcant cash rewards and specially designed products. There is a great deal of
competition to secure the representation of tour professionals. As a result, it is becoming increasingly diÇcult
and more expensive to attract and retain such tour professionals. The inducements oÅered by other companies
could result in a decrease in usage of the Company's products by professional golfers or limit the Company's
ability to attract other tour professionals. A decline in the level of professional usage of the Company's
products could have a material adverse eÅect on the Company's sales and business.
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