Callaway 2000 Annual Report Download - page 28

Callaway Golf Company | 28
believes that it has sufficient reserves for warranty claims, there
can be no assurance that these reserves will be sufficient if the
Company were to experience an unusually high incidence of
breakage or other product problems.
Golf Balls. 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. How-
ever, 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, stop-
ping such commerce could result in a potential decrease in sales
to those customers who are selling Callaway Golf® products to
unauthorized distributors and/or an increase in sales returns over
historical levels. For example, the Company experienced a decline
in sales in the U.S. in 1998, and believes the decline was due, in
part, to a decline in “gray market” shipments to Asia and Europe.
While the Company has taken some lawful steps to limit commerce
in its products in the “gray market” in both the U.S. and abroad,
it has not stopped such commerce.
International Distribution
The Company’s management believes that controlling the distribu-
tion 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 has reorganized a substantial portion 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 addi-
tional investments in inventory, accounts receivable, employees,
corporate infrastructure and facilities. The integration of foreign
distribution into the Company’s international sales operations will
continue to require the dedication of management and other
Company resources. 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 acqui-
sition and integration of the Company’s foreign distribution chan-
nels will be successful, and the Company’s attempts to do so may
adversely affect the Company’s business. Additionally, the
Company’s plan to integrate foreign distribution 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 cur-
rency transactions.
Credit Risk
The Company primarily sells its products to golf equipment retail-
ers, 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 down-
turn in the retail golf equipment market, like the one experienced
in 1998 and 1999, primarily in the U.S., could result in increased
delinquent or uncollectible accounts for some of the Company’s
significant customers. In addition, as the Company integrates its
foreign distribution its exposure to credit risks increases as it no
longer sells to a few wholesalers but rather directly to many retail-
ers. A failure of a significant portion of the Company’s customers
to meet their obligations to the Company would adversely impact
the Company’s performance and financial condition.
Information Systems
Many of the countries in which the Company sells its products are
Member States of the Economic and Monetary Union (“EMU”).
Beginning January 1, 1999, Member States of the EMU have the
option of trading in either their local currencies or the euro, the
official currency of EMU participating Member States. Parties are
free to choose the unit they prefer in contractual relationships
until 2002 when their local currencies will be phased out. The cur-
rent version of the Company’s enterprise-wide business system
does not support transactions denominated in euro. The Company
is in the process of upgrading its business systems to support
transactions denominated in euro. The Company intends to enable
the euro functionality of its upgraded system no later than the
end of its third quarter in 2001. Until such time as the upgrade
has occurred and the euro functionality has been enabled, trans-
actions denominated in euro will be processed manually. To date,
the Company has not experienced, and does not anticipate in the
MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS