Callaway 2005 Annual Report Download - page 80

CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The pro forma amounts reflected above may not be representative of future disclosures since the estimated
fair value of stock options is amortized to expense as the options vest and additional options may be granted in
future years. The fair value of employee stock options was estimated at the date of grant using the Black-Scholes
option-pricing model with the assumptions included in the table below. The pro forma expense includes the fair
value of the Company’s shares issued under its Employee Stock Purchase Plan using similar assumptions as
those in the table below and an expected life of 6 to 12 months.
Year Ended December 31,
2005 2004 2003
Dividend yield ................................................... 2.0% 1.9% 1.7%
Expected volatility ............................................... 42.4% 42.6% 46.1%
Risk free interest rates ............................................. 4.2% 2.9% 2.6%
Expected lives ................................................... 3-4years 3-4 years 3-4 years
The weighted-average grant-date fair value of options granted during 2005, 2004 and 2003 was $4.78, $4.80
and $6.74 per share, respectively. The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are fully transferable. The Company’s
employee stock options, however, have characteristics significantly different from those of traded options. For
example, employee stock options are generally subject to vesting restrictions and are generally not transferable.
In addition, option valuation models require the input of highly subjective assumptions including the expected
stock price volatility and the expected life of an option. Changes in subjective input assumptions can materially
affect the fair value estimates of an option. Furthermore, the estimated fair value of an option does not
necessarily represent the value that will ultimately be realized by an employee.
Income Taxes
Current income tax expense (benefit) is the amount of income taxes expected to be paid (refunded) for the
current year. A deferred income tax asset or liability is established for the expected future consequences resulting
from temporary differences in the financial reporting and tax bases of assets and liabilities. Deferred income tax
expense (benefit) is the net change during the year in the deferred income tax asset or liability.
Deferred taxes have not been provided on the cumulative undistributed earnings of foreign subsidiaries
since such amounts are expected to be reinvested indefinitely. The Company provides a valuation allowance for
its deferred tax assets when, in the opinion of management, it is more likely than not that such assets will not be
realized (see Note 12).
Interest and Other Income, Net
Interest and other income, net primarily includes gains and losses on foreign currency transactions, interest
income and gains and losses on investments to fund the deferred compensation plan. The components of interest
and other income, net are as follows:
Year Ended December 31,
2005 2004 2003
(In thousands)
Foreign currency gains (losses) .......................................... $(2,441) $ 744 $1,567
Interest income ....................................................... 900 745 1,098
Gains on deferred compensation plan assets ................................ 1,209 360 888
Other ............................................................... (58) 85 (3)
$ (390) $1,934 $3,550
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