Callaway 2002 Annual Report Download - page 65

62 CALLAWAY GOLF COMPANY
Ye ar Ended Decem be r 31,
(In thousands) 2002 2001 2000
Amounts computed at statutory U.S. tax rate $ 39,085 $ 34,367 $ 45,263
State income taxes, net of U.S. tax benefit 4,213 4,047 4,112
State tax credits, net of U.S. tax benefit (429) (878) (325)
Expenses with no tax benefit 1,089 693 931
Foreign sales corporation tax benefits (1,060) (1,406) (1,487)
Change in deferred tax valuation allowance (310) 1,410 (2,836)
Other (363) 1,584 1,708
Income tax provision $ 42,225 $ 39,817 $ 47,366
U.S. income taxes were not provided for undistributed earnings of
certain non-U.S. subsidiaries that will be re-invested outside the
United States indefinitely. As of December 31, 2002 the cumulative
amount of net undistributed earnings of foreign subsidiaries was
$22,368,000. It is not practical to calculate the unrecognized
deferred tax liability associated with the undistributed earnings.
U.S. tax return examinations have been completed for the years
through 1997. Management believes adequate provisions for
income tax have been recorded for all years.
Note 12. Com m itm ent s a nd Con t in g e n cies
Supply of Electricity and Energy Contracts
In the second quarter of 2001, the Company entered into an
agreement with Pilot Power Group, Inc. (“Pilot Power”) as the
Company’s energy service provider and in connection therewith
entered into a long-term, fixed-priced, fixed-capacity, energy
supply contract (the “Enron Contract”) with Enron Energy
Services, Inc. (“EESI”), a subsidiary of Enron Corporation, as part
of a comprehensive strategy to ensure the uninterrupted supply
of energy while capping electricity costs in the volatile California
energy market. The Enron Contract provided, subject to the
other terms and conditions of the contract, for the Company to
purchase nine megawatts of energy per hour from June 1, 2001
through May 31, 2006 (394,416 megawatts over the term of the
contract). The total purchase price for such energy over the full
contract term would have been approximately $43,484,000.
At the time the Company entered into the Enron Contract, nine
megawatts per hour was in excess of the amount the Company
expected to be able to use in its operations. The Company agreed
to purchase this amount, however, in order to obtain a more
favorable price than the Company could have obtained if the
Company had purchased a lesser quantity. The Company expected
to be able to sell any excess supply through Pilot Power.
On November 29, 2001, the Company notified EESI that, among
other things, EESI was in default of the Enron Contract and that
based upon such default, and for other reasons, the Company
was terminating the Enron Contract effective immediately. At
the time of termination, the contract price for the remaining
energy to be purchased under the Enron Contract through May
2006 was approximately $39,126,000.
On November 30, 2001, EESI notified the Company that it
disagreed that it was in default of the Enron Contract and that
it was prepared to deliver energy pursuant to the Enron
Contract. On December 2, 2001, EESI, along with Enron
Corporation and numerous other related entities, filed for
bankruptcy. Since November 30, 2001, the parties have not
been operating under the Enron Contract and Pilot Power has
been providing energy to the Company from alternate suppliers.
As a result of the Company’s notice of termination to EESI, and
certain other automatic termination provisions under the Enron
Contract, the Company believes that the Enron Contract has been
effectively and appropriately terminated. There can be no assurance
that EESI or another party will not assert a future claim against the
Company or that a bankruptcy court or arbitrator will not ultimately
nullify the Company’s termination of the Enron Contract. No
provision has been made for contingencies or obligations, if any,
under the Enron Contract beyond November 30, 2001.
A reconciliation of income taxes computed by applying the statutory U.S. income tax rate to the Company’s income before income
taxes to the income tax provision is as follows: