Callaway 2002 Annual Report Download - page 34

CALLAWAY GOLF COMPANY 31
introducing new products, the Company’s legal staff evaluates
the patents and other intellectual property rights of others to
determine if changes are required to avoid infringing any valid
intellectual property rights that could be asserted against the
Company’s new product offerings. From time to time, others
have contacted or may contact the Company to claim that
they have proprietary rights that have been infringed by the
Company and/or its products. The Company evaluates any
such claims and, where appropriate, has obtained or sought to
obtain licenses or other business arrangements. To date, there
have been no interruptions in the Company’s business as a
result of any claims of infringement. No assurance can be
given, however, that the Company will not be adversely affected
in the future by the assertion of intellectual property rights
belonging to others. This effect could include alteration or
withdrawal of existing products and delayed introduction of
new products.
Various patents have been issued to the Company’s competitors
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 tech-
nology, 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 confiden-
tiality 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 assurance that these
measures will prove adequate in all instances to protect the
Company’s confidential information.
The Company’s Code of Conduct and Ethics Policy 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 internal website. Employees also sign an
Employee Invention and Confidentiality Agreement prohibiting
disclosure 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.
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 tradi-
tional designs. For example, clubs have been returned with
cracked clubheads, broken graphite shafts and loose medal-
lions. While any breakage or warranty problems are deemed
significant to 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 inci-
dence 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 could 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.