Callaway 2003 Annual Report Download - page 29

26 CALLAWAY GOLF COMPANY
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.
Because the Enron Contract provided for the Company to
purchase an amount of energy in excess of what it expected to
be able to use in its operations, the Company accounted for the
Enron Contract as a derivative instrument in accordance with
SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities.” The Enron Contract did not qualify for
hedge accounting under SFAS No. 133. Therefore, the
Company recognized changes in the estimated fair value of the
Enron Contract currently in earnings. The estimated fair value
of the Enron Contract was based upon a present value deter-
mination of the net differential between the contract price for
electricity and the estimated future market prices for electricity
as applied to the remaining amount of unpurchased electricity
under the Enron Contract. Through September 30, 2001, the
Company had recorded unrealized pre-tax losses of $19.9 million.
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 con-
tract price for the remaining energy to be purchased under
the Enron Contract through May 2006 was approximately
$39.1 million.
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. However, 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 terminated. As a result, the Company
adjusted the estimated value of the Enron Contract through
the date of termination, at which time the terminated Enron
Contract ceased to represent a derivative instrument in
accordance with SFAS No. 133. Because the Enron Contract is
terminated and neither party to the contract is performing
pursuant to the terms of the contract, the Company no longer
records future valuation adjustments for changes in electricity
rates. The Company continues to reflect on its balance sheet
the derivative valuation account of $19.9 million, subject to
periodic review, in accordance with SFAS No. 140,
“Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities.”
The Company believes the Enron Contract has been terminated,
and as of March 1, 2004, EESI has not asserted any claim
against the Company. There can be no assurance, however,
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.
Certain Factors Affecting Callaway Golf Company
The financial statements contained in this report and the
related discussion describe and analyze the Company’s financial
performance and condition for the periods indicated. For the
most part, this information is historical. The Company’s prior
results, however, are not necessarily indicative of the
Company’s future performance or financial condition. The
Company has also included certain forward-looking statements
concerning the Company’s future performance or financial
condition. These forward-looking statements are based upon
current information and expectations and actual results could
differ materially. The Company therefore has included the
following discussion of certain factors that could cause the
Company’s future performance or financial condition to differ
materially from its prior performance or financial condition or