Toro 2008 Annual Report Download - page 23

maintain our research and development data. The failure of our Our reliance upon patents, trademark laws, and
management information systems to perform properly could disrupt contractual provisions to protect our proprietary rights
our business and product development and could result in may not be sufficient to protect our intellectual property
decreased sales, increased overhead costs, excess inventory, and from others who may sell similar products. Our products
product shortages, causing our business and operating results to may infringe the proprietary rights of others.
suffer. In addition, our management information systems, including We hold patents relating to various aspects of our products and
our computer systems, Internet web sites, telecommunications, and believe that proprietary technical know-how is important to our bus-
data networks, are vulnerable to damage or interruption from natu- iness. Proprietary rights relating to our products are protected from
ral or man-made disasters, terrorist attacks and attacks by com- unauthorized use by third parties only to the extent that they are
puter viruses or hackers, or power loss. Any such interruption covered by valid and enforceable patents or are maintained in con-
could adversely affect our business and operating results. fidence as trade secrets. We cannot be certain that we will be
issued any patents from any pending or future patent applications
A significant portion of our net sales are financed by owned by, or licensed to us, or that the claims allowed under any
third parties. Some Toro dealers and Exmark issued patents will be sufficiently broad to protect our technology.
distributors and dealers finance their inventories with In the absence of enforceable patent protection, we may be vulner-
third party financing sources. The termination of the able to competitors who attempt to copy our products or gain
agreements with these third parties, any material change access to our trade secrets and know-how. Our competitors may
to the terms of the agreements with these third parties initiate litigation to challenge the validity of our patents, or allege
or in the availability or terms of credit offered to our that we infringe their patents, or they may use their resources to
customers by these third parties, or any delay in design comparable products that do not infringe our patents. We
securing replacement credit sources, could adversely may incur substantial costs if our competitors initiate litigation to
affect our sales and operating results. challenge the validity of our patents, or allege that we infringe their
Most of Toro and Lawn-Boy dealers and Exmark distributors and patents, or if we initiate any proceedings to protect our proprietary
dealers generally finance their inventories with third party financing rights. If the outcome of any such litigation is unfavorable to us,
companies. These third party financing companies purchase select our business, operating results, and financial condition could be
receivables from us and our distributors and dealers for extended adversely affected. We also cannot be certain that our products or
periods that assist our distributors and dealers in carrying repre- technologies have not infringed or will not infringe the proprietary
sentative inventories of our products. We also have agreements rights of others. Any such infringement could cause third parties,
with third party financing companies to provide financing options to including our competitors, to bring claims against us, resulting in
golf course and sports fields and grounds equipment customers significant costs, possible damages and substantial uncertainty.
and micro-irrigation customers in North America and Europe. The We could also be forced to develop an alternative that could be
purpose of these agreements is to increase our net sales by giving costly and time-consuming, or acquire a license, which we might
buyers of our products alternative financing options when purchas- not be able to do on terms favorable to us, or at all. For example,
ing our products. We also have an agreement with a third party we are currently a defendant in an action in which Textron Innova-
financing company to provide financing programs under a private tions, Inc. is alleging that we willfully infringe certain claims of three
label program offered primarily to Toro, Lawn-Boy, and Exmark patents by selling our Groundsmaster commercial mowers. Tex-
dealers that provides our end-user customers a revolving line of tron Innovations, Inc. seeks damages for past sales and an injunc-
credit for Toro and Exmark products, parts, and services. The tion against future infringement. This litigation is currently stayed
availability of financing by third parties is affected by many factors, as our reexamination applications are pending in the USPTO. For
including the distress in the worldwide credit markets and the additional information regarding this lawsuit, see Part I, Item 3
credit worthiness of our dealers, distributors, and customers. Ter- ‘‘Legal Proceedings’’ of this report. While we do not believe that
mination of our agreements with these third parties, any material this litigation will have a material adverse effect on our financial
change to the terms of our agreements with these third parties, condition, an unfavorable resolution could be material to our oper-
any significant increase in the expense we incur to make such ating results.
third party financing available, any material changes in the availa- In addition, we rely on trade secrets and proprietary know-how
bility or terms of credit for our customers from these third parties, that we seek to protect, in part, by confidentiality agreements with
or any delay in securing replacement credit sources could our employees and consultants. These agreements may be
adversely affect our operating results. Similarly, significant financed breached, and we may not have adequate remedies for any such
product repurchase requirements could have a material impact on breach. Even if these confidentiality agreements are not breached,
our future operating results. our trade secrets may otherwise become known or be indepen-
dently developed by competitors.
15