Callaway 2003 Annual Report Download - page 71

68 CALLAWAY GOLF COMPANY
noted above. Such matters are subject to many uncertainties
and outcomes are not predictable with assurance.
Consequently, management is unable to estimate the ultimate
aggregate amount of monetary liability, amounts which
may be covered by insurance, or the financial impact with
respect to these matters as of December 31, 2003. Except as
discussed above with regard to the MaxFli litigation,
management believes at this time that the final resolution
of these matters, individually and in the aggregate, will not
have a material adverse effect upon the Company’s
con
solidated annual results of operations or cash flows, or
financial position.
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 bank-
ruptcy 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.
Vendor Arrangements
The Company is dependent on a limited number of suppliers
for its clubheads and shafts, some of which are single-
sourced. In addition, some of the Company’s products require
specifically developed manufacturing techniques and
processes which make it difficult to identify and utilize alter-
native suppliers quickly. The Company believes that suitable
clubheads and shafts could be obtained from other manufacturers
in the event its regular suppliers (because of financial difficulties
or otherwise) are unable or fail to provide suitable components.
However, any significant production delay or disruption
caused by the inability of current suppliers to deliver or the
transition to other suppliers could have a material adverse
impact on the Company’s results of operations. The Company
is also single-sourced or dependent on a limited number of
suppliers for the materials it uses to make its golf balls. Many
of the materials are customized for the Company. Any delay
or interruption in such supplies could have a material
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