Callaway 2005 Annual Report Download - page 29

Company’s research and development and manufacturing operations which must plan and commit resources
years in advance of a new product release. If the Company does not accurately anticipate consumer reaction to
the new rule changes, the Company’s sales in such jurisdictions could be adversely affected and the Company
could be required to invest significant resources to change its product offerings at such time. The Company also
believes that the general confusion created by the ruling bodies of golf as to what is a conforming or
non-conforming driver and the limits imposed on new driver technology generally have hurt sales of drivers.
There is no assurance that the Company’s future products will satisfy USGA and/or R&A standards, or that
existing USGA and/or R&A standards will not be altered in ways that adversely affect the sales of the
Company’s products or the Company’s brand. If a change in rules were adopted and caused one or more of the
Company’s current products to be non-conforming, the Company’s sales of such products could be adversely
affected. Furthermore, any such new rules could restrict the Company’s ability to develop new products.
Golf Professional Endorsements
The Company establishes relationships with professional golfers in order to evaluate and promote Callaway
Golf, Odyssey, Top-Flite and Ben Hogan branded products. The Company has entered into endorsement
arrangements with members of the various professional tours, including the Champions Tour, the PGA Tour, the
LPGA Tour, the PGA European Tour, the Japan Golf Tour and the Nationwide Tour. While most professional
golfers fulfil their contractual obligations, some have been known to stop using a sponsor’s products despite
contractual commitments. If certain of the Company’s professional endorsers were to stop using the Company’s
products contrary to their endorsement agreements, the Company’s business could be adversely affected in a
material way by the negative publicity or lack of endorsement.
The Company believes that professional usage of its golf clubs and golf balls contributes to retail sales. The
Company therefore spends a significant amount of money to secure professional usage of its products. Many
other companies, however, also aggressively seek the patronage of these professionals and offer many
inducements, including significant cash rewards and specially designed products. There is a great deal of
competition to secure the representation of tour professionals. As a result, it is becoming increasingly difficult
and more expensive to attract and retain such tour professionals. The inducements offered by other companies
could result in a decrease in usage of the Company’s products by professional golfers or limit the Company’s
ability to attract other tour professionals. 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.
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 proprietary rights that have been
infringed upon 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
13