Callaway 2003 Annual Report Download - page 37

34 CALLAWAY GOLF COMPANY
Various patents have been issued to the Company’s competi-
tors in the golf ball industry. As the Company develops its
golf ball products, it attempts to avoid infringing valid
patents or other intellectual property rights. Despite these
attempts, it cannot be guaranteed that competitors will not
assert and/or a court will not find that the Company’s golf
balls infringe certain patent or other rights of competitors. If
the Company’s golf balls are found to infringe on protected
technology, there is no assurance that the Company would
be able to obtain a license to use such technology, and it
could incur substantial costs to redesign them and/or defend
legal actions.
The Company has procedures to maintain the secrecy of its
confidential business information. These procedures include
criteria for dissemination of information and written confi-
dentiality agreements with employees and suppliers.
Suppliers, when engaged in joint research projects, are
required to enter into additional confidentiality agreements.
While these efforts are taken seriously, there can be no assur-
ance that these measures will prove adequate in all instances
to protect the Company’s confidential information.
The Company’s Code of Conduct prohibits misappropriation
of trade secrets and confidential information of third parties.
The Code of Conduct is contained in the Company’s
Employee Handbook and available to all employees on the
Company’s website. Employees also sign an Employee
Invention and Confidentiality Agreement prohibiting disclo-
sure of trade secrets and confidential information from third
parties. Periodic training is provided to employees on this
topic as well. Despite taking these steps, as well as others, the
Company cannot guarantee that these measures will be
adequate in all instances to prevent misappropriation of
trade secrets from third parties or the accusation by a third
party that such misappropriation has taken place.
Brand Licensing
The Company licenses its trademarks to third party licensees
who produce, market and sell their products bearing the
Company’s trademarks. The Company chooses its licensees
carefully and imposes upon such licensees various restrictions
on the products, and on the manner, on which such trademarks
may be used. Despite these restrictions, or if a licensee fails
to adhere to these restrictions, the Company’s brand could be
damaged by the use or misuse of the Company’s trademarks
in connection with its licensees’ products.
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 significant 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. Significant increases in the
incidence of breakage or other product problems may
adversely affect 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 financial results
would be adversely affected. See above, “Critical Accounting
Policies and Estimates — Warranty.”
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. However, 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