Callaway 2004 Annual Report Download - page 97

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CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
PlaintiÅ is seeking compensatory damages, attorneys' fees and prejudgment interest according to the proof to
be presented. On January 12, 2005, Callaway Golf removed the case to the United States District Court for
the Southern District of Florida.
The Company and its subsidiaries, incident to their business activities, are parties to a number of legal
proceedings, lawsuits and other claims, including the matters speciÑcally 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 Ñnancial impact with respect to these matters. Except as discussed above with regard to the
MaxÖi litigation and the NPIP cases, management believes at this time that the Ñnal resolution of these
matters, individually and in the aggregate, will not have a material adverse eÅect upon the Company's
consolidated annual results of operations, cash Öows or Ñnancial position.
Supply of Electricity and Energy Contracts
In 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, Ñxed-priced, Ñxed-
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
$43,484,000.
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.
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 determination of the
net diÅerential 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 $19,922,000.
On November 29, 2001, the Company notiÑed 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 eÅective 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 notiÑed 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, Ñled 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.
F-32