Callaway 2002 Annual Report Download - page 35

32 CALLAWAY GOLF COMPANY
“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 Callaway
Golf 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 in 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 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 and (vi) increased exposure to interruptions
in air carrier or shipping services (including interruptions
resulting from longshoreman labor disputes or strikes) 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 inter-
national 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 uncollectable 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 retailers. 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.
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. Although
the Company has taken steps to mitigate the effect of any such
disruptions, there is no assurance that such steps would be
adequate in a particular situation. Consequently, a significant
or extended disruption in the operation of the Company’s