Callaway 2005 Annual Report Download - page 97

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CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As of December 31, 2005, the Company did not provide for United States income taxes or foreign
withholding taxes on a cumulative total of $56,7000,000 of undistributed earnings from certain non-U.S.
subsidiaries that will be permanently reinvested outside the United States. Should the Company repatriate foreign
earnings, the Company would have to adjust the income tax provision in the period management determined that
the Company would repatriate earnings. The Company has studied the impact of the one-time favorable foreign
dividend provision enacted on October 22, 2004 as part of the American Jobs Creation Act of 2004, and has
decided not to repatriate earnings of some of its foreign subsidiaries.
Note 13. Commitments and Contingencies
Legal Matters
In conjunction with the Company’s program of enforcing its proprietary rights, the Company has initiated or
may initiate actions against alleged infringers under the intellectual property laws of various countries, including,
for example, the U.S. Lanham Act, the U.S. Patent Act, and other pertinent laws. Defendants in these actions
may, among other things, contest the validity and/or the enforceability of some of the Company’s patents and/or
trademarks. Others may assert counterclaims against the Company. Historically, these matters individually and in
the aggregate have not had a material adverse effect upon the financial position or results of operations of the
Company. It is possible, however, that in the future one or more defenses or claims asserted by defendants in one
or more of those actions may succeed, resulting in the loss of all or part of the rights under one or more patents,
loss of a trademark, a monetary award against the Company or some other material loss to the Company. One or
more of these results could adversely affect the Company’s overall ability to protect its product designs and
ultimately limit its future success in the marketplace.
In addition, the Company from time to time receives information claiming that products sold by the
Company infringe or may infringe patent or other intellectual property rights of third parties. It is possible that
one or more claims of potential infringement could lead to litigation, the need to obtain licenses, the need to alter
a product to avoid infringement, a settlement or judgment, or some other action or material loss by the Company.
In the fall of 1999, the Company adopted a unilateral sales policy called the New Product Introduction
Policy (“NPIP”). The NPIP sets forth the basis on which the Company chooses to do business with its customers
with respect to the introduction of new products. The NPIP has been the subject of several legal challenges.
Currently pending cases, described below, include Lundsford v. Callaway Golf, Case No. 2001-24-IV, pending in
Tennessee state court (“Lundsford I”); Foulston v. Callaway Golf, Case No. 02C3607, pending in Kansas state
court (“Foulston”); Murray v. Callaway Golf Sales Company, Case No. 3:04CV274-H, pending in the United
States District Court for the Western District of North Carolina (“Murray”); and Lundsford v. Callaway Golf,
Civil Action No. 3:04-cv-442, pending in the United States District Court for the Eastern District of Tennessee
(“Lundsford II”). An adverse resolution of the NPIP cases could have a significant adverse effect upon the
Company’s results of operations, cash flows and financial position.
Lundsford I was filed on April 6, 2001, and seeks to assert a putative class action by plaintiff on behalf of
himself and on behalf of consumers in Tennessee and Kansas who purchased select Callaway Golf products
covered by the NPIP on or after March 30, 2000. Plaintiff asserts violations of Tennessee and Kansas antitrust
and consumer protection laws and is seeking damages, restitution and punitive damages. The court has not made
any determination that the case may proceed in the form of a class action. In light of the subsequently filed
Lundsford II case, the parties agreed to stay Lundsford I and to dismiss it without prejudice once the federal court
accepted jurisdiction over the state-law claims. Plaintiff has moved for summary judgment and class-certification
in Lundsford I, but has withdrawn his request for a hearing on those motions.
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