Callaway 2003 Annual Report Download - page 36

CALLAWAY GOLF COMPANY 33
to their endorsement agreements, the Company’s business
could be adversely affected in a material way by the negative
publicity.
Golf Clubs. In the past, the Company has experienced an excep-
tional level of club usage on the world’s major professional
tours, and the Company has heavily advertised that fact. Many
professional golfers throughout the world use the Company’s
golf clubs even though they are not contractually bound to do
so and do not grant any endorsement to the Company. The
Company from time to time implements programs that create
cash incentives that financially reward such usage. Many other
companies, however, also aggressively seek the patronage of
these professionals and offer many inducements, including
significant cash rewards and specially designed products. The
inducements offered by other companies could result in a
decrease in usage of the Company’s clubs by professional golfers
or increase the amount the Company must spend to maintain
its tour presence. The Company believes that professional usage
contributes to retail sales, and it is therefore possible that a
decline in the level of professional usage of the Company’s
products could have a material adverse effect on the Company’s
sales and business.
Golf Balls. Many golf ball manufacturers, including the leading
U.S. manufacturer of premium golf balls, have focused a great
deal of their marketing efforts on promoting the fact that tour
professionals use their balls. Some of these golf ball competitors
spend large amounts of money to secure professional endorse-
ments and/or usage, and the market leader has obtained a very
high degree of tour penetration. While all of the Company’s
staff professionals, as well as other professionals who are not
on the Company’s staff, have decided to use the Company’s
golf balls in play, there is no assurance they will continue to do
so. Furthermore, there are many other professionals who are
already under contract with other golf ball manufacturers or
who, for other reasons, may not choose to play the Company’s
golf ball products. The Company does not currently plan to
match the endorsement spending levels of the leading man-
ufacturer, and will instead rely more heavily upon the
performance of the Company’s golf ball products and other
factors to attract professionals to the product. There is some
evidence to suggest that there is a correlation between use by
professional golfers and retail sales. The Company therefore
believes that the results of the Company’s golf ball business
could be significantly affected by its success or lack of success in
securing acceptance on the professional tours.
Intellectual Property and Proprietary Rights
The golf club industry, in general, has been characterized by
widespread imitation of popular club designs. The Company
has an active program of enforcing its proprietary rights against
companies and individuals who market or manufacture
counterfeits and “knock off” products, and asserts its rights
against infringers of its copyrights, patents, trademarks and
trade dress. However, there is no assurance that these efforts
will reduce the level of acceptance obtained by these infringers.
Additionally, there can be no assurance that other golf club
manufacturers will not be able to produce successful golf clubs
which imitate the Company’s designs without infringing any of
the Company’s copyrights, patents, trademarks or trade dress.
An increasing number of the Company’s competitors have, like
the Company itself, sought to obtain patent, trademark, copyright
or other protection of their proprietary rights and designs for
golf clubs and golf balls. As the Company develops new products,
it attempts to avoid infringing the valid patents and other
intellectual property rights of others. Before 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 propri-
etary 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 oth-
ers. This effect could include alteration or withdrawal of exist-
ing products and delayed introduction of new products.