Callaway 2005 Annual Report Download - page 53

pertaining to claims based on the negligence or willful misconduct of the Company and (iv) indemnities
involving the accuracy of representations and warranties in certain contracts. In addition, the Company has made
contractual commitments to each of its officers and certain other employees providing for severance payments
upon the termination of employment. The Company also has consulting agreements that provide for payment of
nominal fees upon the issuance of patents and/or the commercialization of research results. The Company has
also issued a guarantee in the form of a standby letter of credit as security for contingent liabilities under certain
workers’ compensation insurance policies. The duration of these indemnities, commitments and guarantees
varies, and in certain cases, may be indefinite. The majority of these indemnities, commitments and guarantees
do not provide for any limitation on the maximum amount of future payments the Company could be obligated to
make. Historically, costs incurred to settle claims related to indemnities have not been material to the Company’s
financial position, results of operations or cash flows. In addition, the Company believes the likelihood is remote
that material payments will be required under the commitments and guarantees described above. The fair value
of indemnities, commitments and guarantees that the Company issued during the fiscal year ended December 31,
2005 was not material to the Company’s financial position, results of operations or cash flows.
In addition to the contractual obligations listed above, the Company’s liquidity could also be adversely
affected by an unfavorable outcome with respect to claims and litigation that the Company is subject to from
time to time. See Note 13 to the Company’s Consolidated Financial Statements.
Sufficiency of Liquidity
Based upon its current operating plan, analysis of its consolidated financial position and projected future
results of operations, the Company believes that its operating cash flows, together with its Line of Credit, will be
sufficient to finance current operating requirements, planned capital expenditures, contractual obligations and
commercial commitments, for the next 12 months. There can be no assurance, however, that future industry-
specific or other developments, general economic trends or other matters will not adversely affect the Company’s
operations or its ability to meet its future cash requirements (see above, “Certain Factors Affecting Callaway
Golf Company” contained in Item IA).
Capital Resources
The Company does not currently have any material commitments for capital expenditures.
Off-Balance Sheet Arrangements
At December 31, 2005 and 2004, the Company did not have any relationships with unconsolidated entities
or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which
would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company uses derivative financial instruments for hedging purposes to limit its exposure to changes in
foreign currency exchange rates. Transactions involving these financial instruments are with creditworthy firms.
The use of these instruments exposes the Company to market and credit risk which may at times be concentrated
with certain counterparties, although counterparty nonperformance is not anticipated. The Company is also
exposed to interest rate risk from its credit facility.
Foreign Currency Fluctuations
In the normal course of business, the Company is exposed to foreign currency exchange rate risks (see
Note 8 to the Company’s Consolidated Condensed Financial Statements) that could impact the Company’s
results of operations. The Company’s risk management strategy includes the use of derivative financial
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