Callaway 2008 Annual Report Download - page 107

alleged trade dress of plaintiff’s EZ Line putters. The Company responded to the complaint on September 5,
2008, denying that it infringes the patent or the trade dress. Pursuant to a scheduling conference held on
October 6, 2008, the Court set various pretrial deadlines and a trial date of March 1, 2010.
On January 19, 2009, the Company filed suit in the Superior Court for the County of San Diego, case no.
37-2009-00050363-CU-BC-NC, against Corporate Trade International, Inc. (“CTI”) seeking damages for breach
of contract and for declaratory relief based on the asserted use and transfer of corporate trade credits to the
Company in connection with assets from Top-Flite in 2003. On January 26, 2009, CTI filed its own suit in the
United States District Court for the Southern District of New York, case no. 09CV0698, asserting claims for
breach of contract, account stated and unjust enrichment, and seeking damages of approximately $8,900,000.
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 specifically 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. 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
consolidated annual results of operations, cash flows or financial 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, 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.
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 present value determination 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 $19,922,000.
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,
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