Callaway 2005 Annual Report Download - page 26

commercially successful) and increased tour and advertising spending by competitors continue to generate
increased market competition. Furthermore, continued price compression in the club industry for new clubs could
have a significant adverse affect on the Company’s pre-owned club business as the gap between the cost of a new
club and a pre-owned club lessens. There can be no assurance that successful marketing activities, discounted
pricing, consignment sales, extended payment terms or new product introductions by competitors will not
negatively impact the Company’s future sales.
Golf Balls. The golf ball business is also highly competitive. There are a number of well-established and
well-financed competitors, including one competitor with an estimated U.S. market share of approximately 50%.
As competition in this business increases, many of these competitors are increasing advertising, tour or other
promotional support. This increased competition has resulted in significant expenses for the Company in both
tour and advertising support and product development. Unless there is a change in competitive conditions, these
competitive pressures and increased costs will continue to adversely affect the profitability of the Company’s
golf ball business.
On a consolidated basis, no one customer that distributes the Company’s golf clubs or golf balls in the
United States accounted for more than 4% of the Company’s revenue during 2005, 2004 and 2003. On a segment
basis, the Company’s golf ball customer base is much more concentrated than its golf club customer base. In
2005, the top five golf ball customers accounted for approximately 24% of the Company’s total golf ball sales. A
loss of one or more of these customers could have a significant adverse effect upon the Company’s golf ball
sales.
Adverse Global Economic Conditions
The Company sells golf clubs, golf balls and golf accessories. These products are recreational in nature and
are therefore discretionary purchases for consumers. Consumers are generally more willing to make discretionary
purchases of golf products during favorable economic conditions and when consumers are feeling confident and
prosperous. Adverse economic conditions in the United States or in the Company’s international markets (which
represent almost half of the Company’s total sales), or a decrease in prosperity among consumers, or even a
decrease in consumer confidence as a result of anticipated adverse economic conditions, could cause consumers
to forgo or to postpone purchasing new golf products, which could have a material adverse effect upon the
Company.
Terrorist Activity and Armed Conflict
Terrorist activities and armed conflicts in recent years (such as the attacks on the World Trade Center and
the Pentagon, the incidents of Anthrax poisoning and the military actions in the Middle East, including the war in
Iraq), as well as the threat of future conflict, have had a significant adverse effect upon the Company’s business.
Any such additional events would likely have an adverse effect upon the world economy and would likely
adversely affect the level of demand for the Company’s products as consumers’ attention and interest are
diverted from golf and become focused on these events and the economic, political, and public safety issues and
concerns associated with such events. Also, such events could adversely affect the Company’s ability to manage
its supply and delivery logistics. If such events caused a significant disruption in domestic or international air,
ground or sea shipments, the Company’s ability to obtain the materials necessary to produce and sell its products
and to deliver customer orders also would be materially adversely affected. Furthermore, such events can
negatively impact tourism, which could adversely affect the Company’s sales to retailers at resorts and other
vacation destinations.
Natural Disasters and Pandemic Diseases
The occurrence of a natural disaster, such as an earthquake or hurricane, or the outbreak of a pandemic
disease, such as Severe Acute Respiratory Syndrome (“SARS”) or the Avian Flu, could significantly adversely
10