Callaway 2013 Annual Report Download - page 29

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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 determines 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 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. 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 and business could be materially and adversely affected 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
and Odyssey branded products. The Company has entered into endorsement arrangements with members of the various
professional tours, including the Champions Tour, the PGA Tour, the LPGA Tour, the PGA European Tour, the Japan Golf
Tour and the Nationwide Tour. While most professional golfers fulfill their contractual obligations, some have been known
to stop using a sponsor’s products despite contractual commitments. If certain of the Company’s professional endorsers
were to stop using the Company’s products contrary to their endorsement agreements, the Company’s business could be
adversely affected in a material way by the negative publicity or lack of endorsement.
The Company believes that professional usage of its golf clubs and golf balls contributes to retail sales. The Company
therefore spends a significant amount of money to secure professional usage of its products. Many other companies,
however, also aggressively seek the patronage of these professionals and offer many inducements, including significant
cash incentives and specially designed products. There is a great deal of competition to secure the representation of tour
professionals. As a result, it is expensive to attract and retain such tour professionals. The inducements offered by other
companies could result in a decrease in usage of the Company’s products by professional golfers or limit the Company’s