Callaway 2003 Annual Report Download - page 28

CALLAWAY GOLF COMPANY 25
During its normal course of business, the Company has made
certain indemnities, commitments and guarantees under
which it may be required to make payments in relation to
certain transactions. These include (i) intellectual property
indemnities to the Company’s customers and licensees in
connection with the use, sale and/or license of Company prod ucts
or trademarks, (ii) indemnities to various lessors in connection
with facility leases for certain claims arising from such facilities
or leases, (iii) indemnities to vendors and service providers
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 several employees providing for severance payments upon
the occurrence of certain prescribed events. The Company also
has several 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 indemni-
ties, 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,
2003 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 credit facilities, 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 below “Certain Factors
Affecting Callaway Golf Company”).
Supply of Electricity and Energy Contracts
Beginning in the summer of 2000, the Company identified a
future risk to ongoing operations as a result of the deregulation
of the electricity market in California. In July 2000, the
Company entered into a one-year supply agreement with
Idaho Power Company (“Idaho Power”), a subsidiary of
Idacorp, Inc., for the supply of electricity at $64 per megawatt
hour. During the second quarter of 2001, Idaho Power advised
the Company that it was unwilling to renew the contract upon
expiration in July 2001 due to concerns surrounding the
volatility of the California electricity market at that time.
As a result, 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 (“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 electricity while capping costs in the
volatile California electricity 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 $43.5 million.