Callaway 2003 Annual Report Download - page 38

CALLAWAY GOLF COMPANY 35
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 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 international 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 manufac-
turing, distribution, sales and accounting, are dependent
upon the Company’s information computer systems. The
Callaway Golf business information systems and the acquired
Top-Flite information systems are different and the Company
is therefore currently operating multiple platforms. The
Company is in the process of evaluating whether to integrate
the two systems and the best manner of doing so. Any sig nificant
disruption in the operation of such systems, as a result of an
internal system malfunction, infection from an external
computer virus, or complications in connection with any
attempted integration of the two systems, or otherwise,