Callaway 2004 Annual Report Download - page 48

Product Returns
Golf Clubs. 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 signiÑcant 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. SigniÑcant increases in the incidence of breakage or other product problems may adversely aÅect 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 Ñnancial results would be adversely aÅected. See above,
""Critical Accounting Policies and Estimates Ì Warranty.''
Golf Balls. The Company has not experienced signiÑcant 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
signiÑcant amount of defective ball returns. However, if future returns of defective golf balls were signiÑcant,
it could have a material adverse eÅect upon the Company's golf ball business.
""Gray Market'' Distribution
Some quantities of the Company's products Ñnd 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 U.S. 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 diÇculty 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 eÅects of any anti-American sentiments on the Company's brands or sales of the
Company's products, (v) increased diÇculty in controlling and monitoring foreign operations from the United
States, including increased diÇculty in identifying and recruiting qualiÑed personnel for its foreign operations,
and (vi) increased exposure to interruptions in air carrier or shipping services, which interruptions could
signiÑcantly adversely aÅect 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
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