Callaway 2004 Annual Report Download - page 44

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Terrorist Activity and Armed ConÖict
Terrorist activities and armed conÖicts in recent years (such as the attacks on the World Trade Center
and the Pentagon, the incidents of Anthrax poisoning and the military actions in the Middle East, including
the war in Iraq), as well as the threat of future conÖict, have had a signiÑcant adverse eÅect upon the
Company's business. Any such additional events would likely have an adverse eÅect upon the world economy
and would likely adversely aÅect the level of demand for the Company's products as consumers' attention and
interest are diverted from golf and become focused on these events and the economic, political, and public
safety issues and concerns associated with such events. Also, such events could adversely aÅect the Company's
ability to manage its supply and delivery logistics. If such events caused a signiÑcant disruption in domestic or
international air, ground or sea shipments, the Company's ability to obtain the materials necessary to produce
and sell its products and to deliver customer orders also would be materially adversely aÅected. Furthermore,
such events can negatively impact tourism, which could adversely aÅect the Company's sales to retailers at
resorts and other vacation destinations.
Natural Disasters and Pandemic Diseases
The occurrence of a natural disaster, such as an earthquake or hurricane, or the outbreak of a pandemic
disease, such as Severe Acute Respiratory Syndrome (""SARS'') or the Avian Flu, could signiÑcantly
adversely aÅect the Company's business. A natural disaster or a pandemic disease could signiÑcantly adversely
aÅect both the demand for the Company's products as well as the supply of the components used to make the
Company's products. Demand for golf products could be negatively aÅected as consumers in the aÅected
regions restrict their recreational activities and as tourism to those areas declines. If the Company's suppliers
experienced a signiÑcant disruption in their business as a result of a natural disaster or pandemic disease, the
Company's ability to obtain the necessary components to make its products could be signiÑcantly adversely
aÅected. In addition, the occurrence of a natural disaster or the outbreak of a pandemic disease generally
restricts the travel to and from the aÅected areas, making it more diÇcult in general to manage the Company's
international operations.
Foreign Currency Risk
A signiÑcant portion of the Company's sales are international sales. As a result, the Company conducts
transactions in approximately 12 currencies worldwide. Conducting business in such various currencies
increases the Company's exposure to Öuctuations in foreign currency exchange rates relative to the
U.S. dollar.
The Company's Ñnancial results are reported in U.S. dollars. As a result, transactions conducted in
foreign currencies must be translated into U.S. dollars for reporting purposes based upon the applicable foreign
currency exchange rates. Fluctuations in these foreign currency exchange rates therefore may positively or
negatively aÅect the Company's reported Ñnancial results.
The eÅect of the translation of foreign currencies on the Company's Ñnancial results can be signiÑcant.
The Company therefore engages in certain hedging activities to mitigate over time the impact of the
translation of foreign currencies on the Company's Ñnancial results. The Company's hedging activities reduce,
but do not eliminate, the eÅects of foreign currency Öuctuations. Factors that could aÅect the eÅectiveness of
the Company's hedging activities include accuracy of sales forecasts, volatility of currency markets and the
availability of hedging instruments. Since the hedging activities are designed to reduce volatility, they not only
reduce the negative impact of a stronger U.S. dollar but they also reduce the positive impact of a weaker
U.S. dollar. For the eÅect of the Company's hedging activities during the current reporting periods, see below
""Quantitative and Qualitative Disclosures about Market Risk.'' The Company's future Ñnancial results could
be signiÑcantly aÅected by the value of the U.S. dollar in relation to the foreign currencies in which the
Company conducts business. The degree to which the Company's Ñnancial results are aÅected will depend in
part upon the eÅectiveness or ineÅectiveness of the Company's hedging activities.
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