| CALLAWAY GOLF CO /CA Item 1A Risk Factors Certain Factors Affecting Callaway Golf Company The financial statements contained in this report and the related discussions describe and analyze the Company’s financial performance and condition for the periods presented |
| The Company’s prior results, however, are not necessarily indicative of the Company’s future performance or financial condition |
| The Company has also included certain forward-looking statements concerning the Company’s future performance or financial condition |
| These forward-looking statements are based upon current information and expectations and actual results could differ materially |
| The Company therefore has included the following discussion of certain factors that could cause the Company’s future performance or financial condition to differ materially from its prior performance or financial condition or from management’s expectations or estimates of the Company’s future performance or financial condition |
| These factors, among others, should be considered in assessing the Company’s future prospects and prior to making an investment decision with respect to the Company’s stock |
| Market Acceptance of Products A golf equipment 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 golf 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, but not always, 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 premium prices for golf equipment or that the Company will be able to design and manufacture products that achieve market acceptance |
| In general, there can be no assurance as to whether or how long the Company’s golf clubs and golf balls will achieve and maintain market acceptance, and therefore, there can be 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 have been 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 has resulted in closeouts of existing inventories at both the wholesale and retail levels |
| Such closeouts have resulted 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 |
| The Company’s newly introduced golf club products generally, but not always, have a product life cycle of up to two years |
| These products generally sell significantly better in the first year after introduction as compared to the second year |
| In certain markets, such as Japan, the decline in sales occurs sooner in the product cycle and is more significant |
| The Company’s fusion woods generally sell at higher price points than its titanium metal woods, and its titanium metal woods generally sell at higher price points than its steel metal woods |
| Historically, the Company’s woods products generally have achieved better gross margins than its other products |
| However, price compression in the woods market has made this differential less, and at times gross margins on woods may be less than other products |
| The Company’s sales and gross margins for a particular period may be negatively or positively affected by the mix of new products sold in such period |
| 8 ______________________________________________________________________ [34]Table of Contents Manufacturing Capacity The Company plans its manufacturing capacity based upon the forecasted demand for its products |
| The nature of the Company’s business makes it difficult to quickly adjust its manufacturing capacity if actual demand for its products exceeds or is less than forecasted demand |
| If actual demand for its products exceeds the forecasted demand, the Company may not be able to produce sufficient quantities of new products in time to fulfil actual demand, which could limit the Company’s sales and adversely affect its financial performance |
| On the other hand, if actual demand is less than the forecasted demand for its products, 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 |
| Dependence on Certain Suppliers and Materials The Company is dependent on a limited number of suppliers for its clubheads and shafts, some of which are single-sourced |
| In addition, some of the Company’s products require specifically developed manufacturing techniques and processes which make it difficult to identify and utilize alternative suppliers quickly |
| The Company believes that suitable clubheads and shafts could be obtained from other manufacturers in the event its regular suppliers (because of financial difficulties or otherwise) are unable or fail to provide suitable components |
| However, there could be a significant production delay or disruption caused by the inability of current suppliers to deliver or the transition to other suppliers, which in turn could have a material adverse impact on the Company’s results of operations |
| The Company is also single-sourced or dependent on a limited number of suppliers for the materials it uses to make its golf balls |
| Any delay or interruption in such supplies could have a material adverse impact upon the Company’s golf ball business |
| If the Company did experience any such delays or interruptions, there is no assurance that the Company would be able to find adequate alternative suppliers at a reasonable cost or without significant disruption to its business |
| The Company’s size has made it a large consumer of certain materials, including steel, titanium alloys, carbon fiber and rubber |
| The Company does not make these materials itself, and must rely on its ability to obtain adequate supplies in the world marketplace in competition with other users of such materials |
| While the Company has been successful in obtaining its requirements for such materials thus far, there can be no assurance that it always will be able to do so at a reasonable price |
| 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 |
| The Company’s golf club and golf ball manufacturing facilities use, among other resources, significant quantities of electricity to operate |
| An interruption in the supply of electricity or a significant increase in the cost of electricity could have a significant adverse effect upon the Company’s results of operations |
| The Company uses United Parcel Service (“UPS”) for substantially all ground shipments of products to its US customers |
| The Company uses air carriers and ship services for most of its international shipments of products |
| Any significant interruption in UPS, air carrier or ship services could have a material adverse effect upon the Company’s ability to deliver its products to its customers |
| If there were any significant interruption in such services, there is no assurance that the Company could engage alternative suppliers to deliver its products in a timely and cost-efficient manner |
| In addition, many of the components the Company uses to build its golf clubs, including clubheads and shafts, are shipped to the Company via air carrier and ship services |
| Any significant interruption in UPS services, air carrier services or ship services into or out of the United States could have a material adverse effect upon the Company (see below “International Risks”) |
| The golf club business is highly competitive, and is served by a number of well-established and well-financed companies with recognized brand names |
| New product introductions, price reductions, consignment sales, extended payment terms, “closeouts” (including closeouts of products that were recently 9 ______________________________________________________________________ [35]Table of Contents 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 |
| 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 US market share of approximately 50prca |
| 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 4prca 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 24prca 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 ______________________________________________________________________ [36]Table of Contents affect the Company’s business |
| A natural disaster or a pandemic disease could significantly adversely affect both the demand for the Company’s products as well as the supply of the components used to make the Company’s products |
| Demand for golf products could be negatively affected as consumers in the affected regions restrict their recreational activities and as tourism to those areas declines |
| If the Company’s suppliers experienced a significant disruption in their business as a result of a natural disaster or pandemic disease, the Company’s ability to obtain the necessary components to make its products could be significantly adversely affected |
| In addition, the occurrence of a natural disaster or the outbreak of a pandemic disease generally restricts the travel to and from the affected areas, making it more difficult in general to manage the Company’s international operations |
| Foreign Currency Risk A significant portion of the Company’s sales are international sales |
| As a result, the Company conducts transactions in approximately 12 currencies worldwide |
| Conducting business in such various currencies increases the Company’s exposure to fluctuations in foreign currency exchange rates relative to the US dollar |
| The Company’s financial results are reported in US dollars |
| As a result, transactions conducted in foreign currencies must be translated into US dollars for reporting purposes based upon the applicable foreign currency exchange rates |
| Fluctuations in these foreign currency exchange rates therefore may positively or negatively affect the Company’s reported financial results |
| The effect of the translation of foreign currencies on the Company’s financial results can be significant |
| The Company therefore engages in certain hedging activities to mitigate over time the impact of the translation of foreign currencies on the Company’s financial results |
| The Company’s hedging activities are designed to reduce, but not to eliminate, the effects of foreign currency fluctuations |
| Factors that could affect the effectiveness of the Company’s hedging activities include accuracy of sales forecasts, volatility of currency markets and the availability of hedging instruments |
| Since the hedging activities are designed to reduce volatility, they not only reduce the negative impact of a stronger US dollar but they also reduce the positive impact of a weaker US dollar |
| For the effect of the Company’s hedging activities during the current reporting periods, see below “Quantitative and Qualitative Disclosures about Market Risk |
| ” The Company’s future financial results could be significantly affected by the value of the US dollar in relation to the foreign currencies in which the Company conducts business |
| The degree to which the Company’s financial results are affected will depend in part upon the effectiveness or ineffectiveness of the Company’s hedging activities |
| In addition, foreign currency fluctuations can also affect the prices at which products are sold in the Company’s international markets |
| The Company therefore adjusts its pricing based in part upon fluctuations in foreign currency exchange rates |
| Significant unanticipated changes in foreign currency exchange rates make it more difficult for the Company to manage pricing in its international markets |
| If the Company is unable to adjust its pricing in a timely manner to counteract the effects of foreign currency fluctuations, the Company’s pricing may not be competitive in the marketplace and the Company’s financial results in its international markets could be adversely affected |
| Growth Opportunities In order for the Company to significantly grow its sales of golf clubs or golf balls, the Company must either increase its share of the market for golf clubs or balls, or the market for golf clubs or balls must grow |
| The Company already has a significant share of worldwide golf club sales and the Company’s golf ball products achieved the number two retail market share in 2004 |
| 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 worldwide in over four years |
| Furthermore, the Company believes that overall worldwide golf club sales have generally not experienced substantial growth in the past several years |
| There is no assurance that the overall dollar volume of worldwide golf club or ball sales will grow, or that it will not decline, in the future |
| 11 ______________________________________________________________________ [37]Table of Contents Seasonality and Adverse Weather Conditions In addition to the effects of product cycles described above, the Company’s business is also subject to the effects of seasonal fluctuations |
| The Company’s first quarter sales generally represent the Company’s sell-in to the golf retail channel of its golf club products for the new golf season |
| The Company’s second and third quarter sales generally represent re-order business for golf clubs |
| Sales of golf clubs during the second and third quarters 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 or its competitors’ products |
| The Company’s sales of golf balls are generally associated with the level of rounds played in the areas where the Company’s products are sold |
| Therefore, golf ball sales tend to be greater in the second and third quarters, when the weather is good in most of the Company’s key markets and rounds played are up |
| Golf ball sales are also stimulated by product introductions as the retail channel takes on initial supplies |
| Like golf clubs, re-orders of golf balls depend on the rate of sell-through |
| The Company’s sales during the fourth quarter are generally significantly less than the other quarters because in general in many of 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 |
| In recent years, 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 |
| Furthermore, catastrophic storms can negatively affect golf rounds played not only during the storms but also for a significant period of time afterward as storm damaged golf courses are repaired and golfers focus on repairing the damage to their homes, businesses and communities |
| 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 |
| ” The R&A rules currently permit driver clubheads with greater flexibility (as measured by a specific 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 |
| Effective January 1, 2008, the more flexible 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 effect 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 affects the 12 ______________________________________________________________________ [38]Table of Contents 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 affected and the Company could be required to invest significant resources to change its product offerings 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 affect 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 affected |
| 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 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 fulfil 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 affected 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 significant amount of money to secure professional usage of its products |
| Many other companies, however, also aggressively seek the patronage of these professionals and offer many inducements, including significant 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 difficult and more expensive to attract and retain such tour professionals |
| The inducements offered 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 effect on the Company’s sales and business |
| Intellectual Property and Proprietary Rights The golf club industry, in general, has been characterized by widespread imitation of popular club designs |
| The Company has an active program of enforcing its proprietary rights against companies and individuals who market or manufacture counterfeits and “knock off” products, and asserts its rights against infringers of its copyrights, patents, trademarks, and trade dress |
| However, there is no assurance that these efforts will reduce the level of acceptance obtained by these infringers |
| Additionally, there can be no assurance that other golf club manufacturers will not be able to produce successful golf clubs which imitate the Company’s designs without infringing any of the Company’s copyrights, patents, trademarks, or trade dress |
| An increasing number of the Company’s competitors have, like the Company itself, sought to obtain patent, trademark, copyright or other protection of their proprietary rights and designs for golf clubs and golf balls |
| As the Company develops new products, it attempts to avoid infringing the valid patents and other intellectual property rights of others |
| Before introducing new products, the Company’s legal staff evaluates the patents and other intellectual property rights of others to determine if changes are required to avoid infringing any valid intellectual property rights that could be asserted against the Company’s new product offerings |
| From time to time, others have contacted or may contact the Company to claim that they have proprietary rights that have been infringed upon by the Company and/or its products |
| The Company evaluates any such claims and, where appropriate, has obtained or sought to obtain licenses or other business arrangements |
| To date, there have been no 13 ______________________________________________________________________ [39]Table of Contents interruptions in the Company’s business as a result of any claims of infringement |
| No assurance can be given, however, that the Company will not be adversely affected in the future by the assertion of intellectual property rights belonging to others |
| This effect could include alteration or withdrawal of existing products and delayed introduction of new products |
| Various patents have been issued to the Company’s competitors in the golf ball industry |
| As the Company develops its golf ball products, it attempts to avoid infringing valid patents or other intellectual property rights |
| Despite these attempts, it cannot be guaranteed that competitors will not assert and/or a court will not find that the Company’s golf balls infringe certain patent or other rights of competitors |
| If the Company’s golf balls are found to infringe on protected technology, there is no assurance that the Company would be able to obtain a license to use such technology, and it could incur substantial costs to redesign them and/or defend legal actions |
| The Company has procedures to maintain the secrecy of its confidential business information |
| These procedures include criteria for dissemination of information and written confidentiality agreements with employees and suppliers |
| Suppliers, when engaged in joint research projects, are required to enter into additional confidentiality agreements |
| While these efforts are taken seriously, there can be no assurance that these measures will prove adequate in all instances to protect the Company’s confidential information |
| The Company’s Code of Conduct prohibits misappropriation of trade secrets and confidential information of third parties |
| The Code of Conduct is contained in the Company’s Employee Handbook and is also available on the Company’s website |
| Employees also sign an Employee Invention and Confidentiality Agreement prohibiting disclosure of trade secrets and confidential information from third parties |
| Periodic training is provided to employees on this topic as well |
| Despite taking these steps, as well as others, the Company cannot guarantee that these measures will be adequate in all instances to prevent misappropriation of trade secrets from third parties or the accusation by a third party that such misappropriation has taken place |
| Brand Licensing The Company licenses its trademarks to third party licensees who produce, market and sell their products bearing the Company’s trademarks |
| The Company chooses its licensees carefully and imposes upon such licensees various restrictions on the products, and on the manner, on which such trademarks may be used |
| In addition, the Company requires its licensees to abide by certain standards of conduct and the laws and regulations of the jurisdictions in which they do business |
| However, if a licensee fails to adhere to these requirements, the Company’s brand could be damaged |
| The Company’s brand could also be damaged if a licensee becomes insolvent or by any negative publicity concerning a licensee or if the licensee does not maintain good relationships with its customers or consumers, many of which are also the Company’s customers and consumers |
| The Company supports all of its golf clubs with a limited two-year written warranty |
| Since the Company does not rely upon traditional designs in the development of its golf clubs, its products may be more likely to develop unanticipated problems than those of many of its competitors that use traditional designs |
| For example, clubs have been returned with cracked clubheads, broken graphite shafts and loose medallions |
| While any breakage or warranty problems are deemed significant by the Company, the incidence of defective clubs returned to date has not been material in relation to the volume of clubs that have been sold |
| The Company monitors the level and nature of any golf club breakage and, where appropriate, seeks to incorporate design and production changes to assure its customers of the highest quality available in the market |
| Significant increases in the incidence of breakage or other product problems may adversely affect the Company’s sales and image with golfers |
| The Company believes that it has adequate reserves for warranty claims |
| If the Company were to experience an unusually high incidence of breakage or other warranty problems in excess of these reserves, the Company’s financial results would be adversely affected |
| See below, “Critical Accounting Policies and Estimates—Warranty” contained in Item 7 |
| The Company has not experienced significant returns of defective golf balls, and in light of the quality control procedures implemented in the production of its golf balls, the Company does not expect a significant amount of defective ball returns |
| However, if future returns of defective golf balls were significant, it could have a material adverse effect upon the Company’s golf ball business |
| “Gray Market” Distribution Some quantities of the Company’s products find their way to unapproved outlets or distribution channels |
| This “gray market” for the Company’s products can undermine authorized retailers and foreign wholesale distributors who promote and support the Company’s products, and can injure the Company’s image in the minds of its customers and consumers |
| On the other hand, stopping such commerce could result in a potential decrease in sales to those customers who are selling the Company’s products to unauthorized distributors and/or an increase in sales returns over historical levels |
| While the Company has taken some lawful steps to limit commerce of its products in the “gray market” in both the US and abroad, it has not stopped such commerce |
| International Risks The Company’s management believes that controlling the distribution of its products in certain major markets in the world has been and will be an element in the future growth and success of the Company |
| The Company sells and distributes its products directly (as opposed to through third party distributors) in many key international markets in Europe, Asia, North America and elsewhere around the world |
| These activities have resulted and will continue to result in investments in inventory, accounts receivable, employees, corporate infrastructure and facilities |
| In addition, there are a limited number of suppliers of golf club components in the United States, and the Company has increasingly become more reliant on suppliers and vendors located outside of the United States |
| The operation of foreign distribution in the Company’s international markets, as well as the management of relationships with international suppliers and vendors, will continue to require the dedication of management and other Company resources |
| As a result of this international business, the Company is exposed to increased risks inherent in conducting business outside of the United States |
| In addition to foreign currency risks, these risks include (i) increased difficulty in protecting the Company’s intellectual property rights and trade secrets, (ii) unexpected government action or changes in legal or regulatory requirements, (iii) social, economic or political instability, (iv) the effects of any anti-American sentiments on the Company’s brands or sales of the Company’s products, (v) increased difficulty in controlling and monitoring foreign operations from the United States, including increased difficulty in identifying and recruiting qualified personnel for its foreign operations, and (vi) increased exposure to interruptions in air carrier or ship services, which interruptions could significantly adversely affect the Company’s ability to obtain timely delivery of components from international suppliers or to timely deliver its products to international customers |
| Although the Company believes the benefits of conducting business internationally outweigh these risks, any significant adverse change in circumstances or conditions could have a significant adverse effect upon the Company’s operations and therefore financial performance and condition |
| Credit Risk The Company primarily sells its products to golf equipment retailers directly and through wholly owned domestic and foreign subsidiaries, and to foreign distributors |
| The Company performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral from these customers |
| Historically, the Company’s bad debt expense has been low |
| However, a downturn in the retail golf equipment market could result in increased delinquent or uncollectible accounts for some of the Company’s significant customers |
| A failure by the Company’s customers to pay a significant portion of outstanding account receivable balances would adversely impact the Company’s performance and financial condition |
| 15 ______________________________________________________________________ [41]Table of Contents Information Systems All of the Company’s major operations, including manufacturing, distribution, sales and accounting, are dependent upon the Company’s information computer systems |
| Any significant disruption in the operation of such systems, as a result of an internal system malfunction, infection from an external computer virus, or otherwise, would have a significant adverse effect upon the Company’s ability to operate its business |
| Consequently, a significant or extended disruption in the operation of the Company’s information systems could have a material adverse effect upon the Company’s operations and therefore financial performance and condition |
| Change in Accounting Rules The Company currently and historically has accounted for its stock-based compensation under Accounting Principles Board Opinion Nodtta 25, “Accounting for Stock Issued to Employees” (“APB Nodtta 25”) |
| Under APB Nodtta 25, the Company is not required to record compensation expense for equity-based awards granted to employees |
| The Financial Accounting Standards Board recently issued SFAS Nodtta 123R, “Share-Based Payment,” which requires the Company to begin recording compensation expense for such awards based upon the fair value of such awards for the first fiscal year beginning after January 1, 2006 |
| Such non-cash compensation expense is anticipated to have a significant adverse effect upon the Company’s reported earnings |
| Although the Company has historically provided in the notes to its financial statements pro forma earnings information showing what the Company’s results would have been had the Company been recording compensation expense for such awards, the amount of such expense was not reflected in its financial results |
| Consequently, when the Company begins recording such compensation expense in 2006, the period over period comparisons will be significantly affected by the inclusion of such expense in 2006 and the absence of such expense from prior periods |
| If investors do not appropriately consider these changes in accounting rules, the price at which the Company’s stock is traded could be significantly adversely affected |
| Analyst Guidance, Media Reports and Market Volatility The Company’s stock is traded publicly, principally on the New York Stock Exchange |
| As a result, at any given time, there are usually various securities analysts who follow the Company and issue reports on the Company |
| These reports include information about the Company’s historical financial results as well as the analysts’ estimates of the Company’s future performance |
| The analysts’ estimates are based upon their own opinions and are often different from the Company’s own estimates or expectations |
| The Company has a policy against confirming financial forecasts or projections issued by analysts and any reports issued by such analysts are not the responsibility of the Company |
| Investors should not assume that the Company agrees with any report issued by any analyst or with any statements, projections, forecasts or opinions contained in any such report |
| In addition to analyst reports, the media also reports its opinion on the Company’s results |
| These media reports are often written quickly so as to be the first to the news wire and in an attempt to garner attention often lead with headlines that are not representative of the substance of the article |
| Furthermore, these media reports, which are often written by writers who are not financial experts, reflect only the writers’ views of the Company’s results |
| Investors should not assume that the Company agrees with such media reports or the manner in which the Company’s results are presented or characterized in such reports |
| The price at which the Company’s stock is traded on the securities exchanges is based upon many factors |
| In the short-term, the price at which the Company’s stock is traded can be significantly affected, positively or negatively, by analysts’ reports and media reports, regardless of the accuracy of such reports |
| Over the long term, the price at which the Company’s stock is traded should tend to reflect the Company’s performance irrespective of such reports |
| 16 ______________________________________________________________________ [42]Table of Contents The Company may from time to time provide investors with estimates of anticipated revenues and earnings per share |
| If the Company provides such estimates, they will be based upon the information available and management’s expectations at the time such estimates are made and actual results could differ materially |
| See “Important Notice to Investors” on the inside cover of this report |