Callaway 2005 Annual Report Download - page 30

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 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 confidentiality 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 prohibits misappropriation of trade secrets and confidential information of
third parties. The Code of Conduct is contained in the Company’s Employee Handbook and is also available on
the Company’s 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.
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. In
addition, the Company requires its licensees to abide by certain standards of conduct and the laws and regulations
of the jurisdictions in which they do business. However, if a licensee fails to adhere to these requirements, the
Company’s brand could be damaged. The Company’s brand could also be damaged if a licensee becomes
insolvent or by any negative publicity concerning a licensee or if the licensee does not maintain good
relationships with its customers or consumers, many of which are also the Company’s customers and consumers.
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 below, “Critical Accounting
Policies and Estimates—Warranty” contained in Item 7.
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