Callaway 2010 Annual Report Download - page 112

allowance for a deferred tax asset when it is more likely than not that some or all of the deferred tax asset will not
be realized. In evaluating whether a valuation allowance is required, the Company considers all available positive
and negative evidence, including prior operating results, the nature and reason for any losses, its forecast of
future taxable income, and the dates on which any deferred tax assets are expected to expire. These assumptions
require a significant amount of judgment, including estimates of future taxable income. These estimates are
based on the Company’s best judgment at the time made based on current and projected circumstances and
conditions.
At December 31, 2010, the Company had deferred tax assets of $69,237,000. Approximately $62,694,000 of
the deferred tax assets pertain to the Company’s U.S. business and $6,543,000 pertain to foreign jurisdictions. In
evaluating the likelihood that these deferred tax assets will be realized, the Company considered the Company’s
taxable loss in the United States in each of the past two years, the reasons for such loss, the Company’s projected
financial forecast for 2011 and 2012, and any applicable expiration dates. As a result of this evaluation, the
Company concluded that (except for some discrete items for which it established a non-cash valuation allowance
as discussed below) it was more likely than not that the deferred tax assets would be realized. If the Company’s
operating losses in the United States do not recover and return to profitability as projected by management, the
Company could be required to establish a non-cash valuation allowance against a portion or all of the U.S.
deferred tax assets.
At December 31, 2010, the Company recorded a non-cash valuation allowance for its deferred tax assets in
the amount of $1,704,000 related to state tax credit carryforwards and $511,000 related to certain Top-Flite
deferred tax assets existing at the time of the acquisition. In the future, if the Company determines that the
realization of the Top-Flite deferred tax assets is more likely than not, the reversal of the related valuation
allowance will reduce the provision for income taxes. The change in the valuation allowance during 2010
resulted primarily from the reversal of the deferred tax assets and related allowance on certain state net operating
losses and state tax credits that expired unutilized.
The Company has a significant amount of U.S. federal and state deferred tax assets, which include net
operating loss carryforwards (“NOLs”) and other losses. The Company’s ability to utilize the losses to offset
future taxable income may be limited significantly if the Company were to experience an “ownership change” as
defined in section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). In general, an ownership
change will occur if there is a cumulative increase in ownership of the Company’s stock by “5-percent
shareholders” (as defined in the Code) that exceeds 50 percentage points over a rolling three-year period. The
determination of whether an ownership change has occurred for purposes of Section 382 is complex and requires
significant judgment. The extent to which the Company’s ability to utilize the losses is limited as a result of such
an ownership change depends on many variables, including the value of the Company’s stock at the time of the
ownership change. Although the Company’s ownership has changed significantly during the three-year period
ended December 31, 2010 (due in significant part to the Company’s June 2009 preferred stock offering), the
Company does not believe there has been a cumulative increase in ownership in excess of 50 percentage points
during that period. The Company continues to monitor changes in ownership. If such a cumulative increase did
occur in any three year period and the Company were limited in the amount of losses it could use to offset
taxable income, the Company’s results of operations and cash flows would be adversely impacted.
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