Callaway 1999 Annual Report Download - page 28

26 CALLAWAY GOLF COMPANY
MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
has been and will be an element in the future growth and suc-
cess of the Company. The Company has been actively pursuing
a reorganization of its international operations, including the
acquisition of distribution rights in certain key countries in
Europe, Asia and North America. These efforts have resulted
and will continue to result in additional investments in inven-
tory, accounts receivable, corporate infrastructure and facili-
ties. The integration of foreign distribution into the Company’s
international sales operations will continue to require the ded-
ication of management and other Company resources.
Additionally, the Company’s plan to integrate foreign dis-
tribution increases the Company’s exposure to fluctuations in
exchange rates for various foreign currencies which could
result in losses and, in turn, could adversely impact the
Company’s results of operations. There can be no assurance
that the Company will be able to mitigate this exposure in the
future through its management of foreign currency transac-
tions. The integration of foreign distribution also could result
in disruptions in the distribution of the Company’s products in
some areas. There can be no assurance that the acquisition of
some or all of the Company’s foreign distribution will be suc-
cessful, and it is possible that an attempt to do so will adverse-
ly affect the Company’s business.
The Company appointed Sumitomo as the sole distribu-
tor of Callaway Golf®clubs in Japan, through a distribution
agreement that ended December 31, 1999. In 1999, 1998 and
1997, sales to Sumitomo accounted for 7%, 8% and 10%,
respectively, of the Company’s net sales. In the fourth quarter
of 1999, the Company successfully completed negotiations
with Sumitomo to provide a smooth transition of its business.
As a result of the transition agreement, the Company recorded
a net charge of $8.6million in the fourth quarter of 1999 for
buying certain current inventory, payments for non-current
inventory and other transition expenses, including foreign cur-
rency transaction losses.
Effective January 1, 2000, the Company began distribut-
ing Callaway Golf®brand products through Callaway Golf
K. K., which also distributes Odyssey®products and will also
distribute Callaway Golf™balls. In addition to the fourth
quarter 1999 charges noted above, there will be significant
costs and capital expenditures invested in Callaway Golf K. K.
before there will be sales sufficient to support such costs.
Furthermore, there are significant risks associated with the
Company’s intention to effectuate distribution of Callaway
Golf®products in Japan through Callaway Golf K. K. rather
than through Sumitomo. Some of these risks include
increased delinquent and uncollectible accounts now that
the Company will be collecting its receivables from many
retailers as opposed to only one distributor. Furthermore, the
Company will no longer have the benefit of the minimum pur-
chases that Sumitomo was required to make. It is possible
that these circumstances could have a material adverse
effect on the Company’s operations and financial perfor-
mance. There also will be a delay in the recording of revenues
for sales in Japan as compared to previous years because rev-
enue now will be recorded upon sale to retailers and not
upon sale to a distributor.
Year 2000 Issue
The Y2K issue is the name given to the computer program
problem whereby two digits rather than four were used to
define the applicable year, which could result in the program
failing to properly recognize a year that begins with “20”
instead of “19.” This, in turn, could result in major system fail-
ures or miscalculations, and is generally referred to as the
“Year 2000” or “Y2K” issue. A more detailed description of the
risks associated with the Y2K issue as applied to the Company
and the Company’s remedial actions and contingency plans for
the Y2K issue are contained in certain of the Company’s prior
filings with the Securities and Exchange Commission, includ-
ing its Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999.
The Y2K issue has not had, and is not expected to have,
any material adverse effect on the Company. In 1998 and 1999
the Company formulated and implemented a Year 2000 Plan to
address the Company’s Y2K issue. To date, the Company’s
computer systems and manufacturing facilities have operated
without any significant Year 2000 problems and appear to be
Year 2000 compliant. The Company is not aware that any of its
major third party suppliers have experienced any significant
Year 2000 problems. The Company currently does not expect
any significant future disruptions in its operations as a result
of the Y2K issue. Nevertheless, since it is impossible to predict
all future outcomes, there could be circumstances in which the
Company could be adversely affected.
The total cost associated with the assessment and
required modifications to implement the Company’s Year 2000
Plan to date has not been material to the Company’s financial
position or results of operations. The Company does not
expect to incur any significant future expenses related to the
Y2K issue. The total amount expended on the Year 2000 plan
through December 1999 was $2.7million, of which approxi-
mately $1.2million related to repair or replacement of soft-
ware and related hardware problems and approximately $1.5
million related to internal and external labor costs.
Euro Currency
Many of the countries in which the Company sells its prod-
ucts are Member States of the Economic and Monetary Union