Callaway 1999 Annual Report Download - page 26

24 CALLAWAY GOLF COMPANY
MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
requires no collateral from these customers. Historically, the
Company’s bad debt expense has been low. However, the
recent downturn in the retail golf equipment market, primarily
in the United States, has resulted in delinquent or uncollectible
accounts for some of the Company’s significant customers. As a
result, during 1999 the Company wrote off approximately $5.3
million of past due trade accounts receivable against the
Company’s reserve for uncollectible accounts receivable.
Management does not foresee any significant improvement in
the U.S. retail golf equipment market during 2000. In addition,
the Company’s transition in Japan from selling to one distribu-
tor to selling directly to many retailers could increase the
Company’s delinquent or uncollectible accounts. There can be
no assurance that failure of the Company’s customers to meet
their obligations to the Company will not adversely impact the
Company’s results of operations or cash flows.
Dependence on Certain Vendors and Materials
The Company is dependent on a limited number of suppliers
for its club heads and shafts. In addition, some of the
Company’s products require specifically developed manufac-
turing techniques and processes which make it difficult to
identify and utilize alternative suppliers quickly. The Company
believes that suitable club heads and shafts could be obtained
from other manufacturers in the event its regular suppliers are
unable to provide components. However, any significant pro-
duction delay or disruption caused by the inability of current
suppliers to deliver or the transition to other suppliers could
have a material adverse impact on the Company’s results of
operations.
The Company is also dependent on a limited number of
suppliers for the materials it uses to make its golf balls. Many
of the materials, including the golf ball cover, are customized
for the Company. 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 rea-
sonable cost or without significant disruption to its business.
The Company uses United Parcel Service (“UPS”) for sub-
stantially all ground shipments of products to its U.S. cus-
tomers. The Company is continually reviewing alternative
methods of ground shipping to supplement its use and reduce
its reliance on UPS. To date, a limited number of alternative
vendors have been identified and are being used by the
Company. Nevertheless, any interruption in UPS services could
have a material adverse effect on the Company’s sales and
results of operations.
The Company’s size has made it a large consumer of cer-
tain materials, including titanium alloys and carbon fiber.
The Company does not make these materials itself, and must
rely on its ability to obtain adequate supplies in the world mar-
ketplace 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. An interruption
in the supply of such materials or a significant change in costs
could have a material adverse effect on the Company.
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 manufac-
ture counterfeits and “knock off” products, and aggressively
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, trade-
mark, copyright or other protection of their proprietary rights
and designs for golf clubs. From time to time others have or
may contact the Company to claim that they have proprietary
rights that have been infringed 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
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 of existing prod-
ucts, withdrawal of existing products and delayed introduc-
tion of new products.
Various patents have been issued to the Company’s
competitors in the golf ball industry. As Callaway Golf Ball
Company developed its new golf ball product, it attempted to
avoid infringing valid patents or other intellectual property
rights. Despite these attempts, it cannot be guaranteed that
a competitor will not assert and/or a court will not find that
the Company's new golf ball products infringe any patent or
other rights of competitors. If the Company’s new golf ball
product is 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 the Company could incur