Callaway 2006 Annual Report Download - page 30

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rules are followed, the Company markets and sells its standard drivers that conform to both the R&A and the
USGA rules. The Company believes that all of its other products conform to both the USGA and R&A rules.
Effective January 1, 2008, the more flexible clubheads such as those used for the Plus Drivers will not be
conforming under the generally applicable Rules of Golf as published by the R&A. It is not clear what effect the
change in rules will have upon demand for Plus Drivers in R&A jurisdictions as 2008 approaches or subsequent
to the implementation of the new restrictions. Some jurisdictions and golfers may choose not to follow the
R&A’s changes and instead continue to use Plus Drivers. This uncertainty adversely affects the Company’s
research and development and manufacturing operations which must plan and commit resources 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.
The Company’s future products may not satisfy USGA and/or R&A standards or existing USGA and/or
R&A standards may 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.
The Company’s sales could decline if professional golfers do not endorse or use the Company’s products.
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 fulfill 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.
If the Company is unable to enforce its intellectual property rights, its sales could be adversely affected.
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, these efforts may not be successful in reducing sales
of golf products by these infringers. Additionally, other golf club manufacturers may 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. The failure to prevent or limit such infringers or imitators, could adversely
affect the Company’s sales.
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