Callaway 2010 Annual Report Download - page 31

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Accounting rules require that the Company’s goodwill and intangible assets with indefinite lives be
evaluated for impairment at least annually. In addition, accounting rules require that the Company’s goodwill and
intangible assets, including intangible assets with definite lives, be evaluated for impairment whenever events or
changes in circumstances indicate that the carrying value of such assets may not be recoverable. Such indicators
include a sustained decline in the Company’s stock price or market capitalization, adverse changes in economic
or market conditions or prospects, and changes in the Company’s operations.
An asset is considered to be impaired when its carrying value exceeds its fair value. The Company
determines the fair value of an asset based upon the discounted cash flows expected to be realized from the use
and ultimate disposition of the asset. If in conducting an impairment evaluation the Company were to determine
that the carrying value of an asset exceeded its fair value, the Company would be required to record a non-cash
impairment charge for the difference between the carrying value and the fair value of the asset. If a significant
amount of the Company’s goodwill and intangible assets were deemed to be impaired, the Company’s results of
operations and shareholders’ equity would be significantly adversely affected.
The Company’s ability to utilize all or a portion of its U.S. deferred tax assets may be limited significantly if
the Company experiences an “ownership change.”
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.
Changes in equipment standards under applicable Rules of Golf could adversely affect the Company’s
business.
The Company seeks to have its new golf club and golf ball products satisfy the standards published by the
USGA and the R&A in the Rules of Golf because these standards are generally followed by golfers, both
professional and amateur, within their respective jurisdictions. The USGA publishes rules that are generally
followed in the United States, Canada and Mexico, and the R&A publishes rules that are generally followed in
most other countries throughout the world. However, the Rules of Golf as published by the R&A and the USGA
are virtually the same, and are intended to be so pursuant to a Joint Statement of Principles issued in 2001.
In the future, existing USGA and/or R&A standards may be altered in ways that adversely affect the sales of
the Company’s current or future products. If a change in rules were adopted and caused one or more of the
Company’s current or future products to be nonconforming, the Company’s sales of such products would be
adversely affected.
The Company’s sales could decline if professional golfers do not endorse or use the Company’s products.
The Company establishes relationships with professional golfers in order to evaluate and promote Callaway
Golf, Odyssey, Top-Flite and Ben Hogan branded products. The Company has entered into endorsement
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