Callaway 1998 Annual Report Download - page 32

CALLAWAY GOLF COMPANY
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During 1998, the Company modified certain terms
of 720,000 options held by directors, certain officers
and employees. These modifications, which largely
resulted from the Company’s restructuring plan, includ-
ed acceleration of vesting and extension of expiration
terms at the Company’s discretion. At the time of mod-
ification, the exercise prices of the options were in excess
of the then-current market price and accordingly, this
action did not result in compensation expense for the
Company.
Also during 1998, the Company canceled 150,000
options held by non-employees with option prices in
excess of the then-current market price of the
Company’s stock. The Company then reissued an equiv-
alent number of options at the then-current market
price and extended certain expiration terms, and record-
ed the related compensation expense of $71,000. An
additional $195,000 was recorded in unearned compen-
sation, which will be amortized over the remaining vest-
ing periods.
Rights
The Company has granted officers, consultants, and
employees rights to receive an aggregate of 826,800
shares of Common Stock for services or other consid-
eration. During 1998, 80,000 rights were exercised
while none were granted. At December 31, 1998, no
rights to receive shares of Common Stock remained
outstanding. No rights were granted or exercised dur-
ing 1997 or 1996.
The Company has a plan to protect shareholders’
rights in the event of a proposed takeover of the
Company. Under the plan, each share of the Company’s
outstanding Common Stock carries one right to pur-
chase one one-thousandth of a share of the Company’s
Series “A” Junior Participating Preferred Stock (the
“Right”). The Right entitles the holder, under certain
circumstances, to purchase Common Stock of Callaway
Golf Company or of the acquiring company at a sub-
stantially discounted price ten days after a person or
group publicly announces it has acquired or has ten-
dered an offer for 15% or more of the Company’s out-
standing Common Stock. The Rights are redeemable by
the Company at $.01 per Right and expire in 2005.
Restricted Common Stock
During 1998, the Company granted 130,000 shares of
Restricted Common Stock to 26 officers of the
Company. Of these shares, 19,250 shares have been
canceled. The shares, which are restricted as to sale or
transfer until vesting, will vest on January 1, 2003. The
related net compensation expense of $3,433,000 is
being recognized ratably over the vesting period, based
on the difference between the exercise price and market
value of the stock on the measurement date.
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan
(“ESPP”) whereby eligible employees may purchase
shares of Common Stock at 85% of the lower of the fair
market value on the first day of a two year offering peri-
od or the last day of each six month exercise period.
Employees may authorize the Company to withhold
compensation during any offering period, subject to cer-
tain limitations. During 1997, the ESPP was amended
to increase the maximum number of shares of the
Company’s Common Stock that employees may acquire
under this plan to 1,500,000 shares. During 1998, 1997
and 1996, the ESPP purchased approximately 386,000,
372,000 and 168,000 shares, respectively, of the
Company’s Common Stock. As of December 31, 1998,
574,000 shares were reserved for future issuance.
Compensation Expense
During 1998, 1997, and 1996, the Company recorded
$2,321,000, $2,041,000 and $1,919,000, respectively,
in compensation expense for certain options and rights
to purchase shares of Common Stock granted to
employees and consultants of the Company. The valua-
tion of options and rights granted to non-employees is
estimated using the Black-Scholes option pricing model.
Unearned compensation has been charged for the
value of options granted to both employees and non-
employees on the measurement date based on the valu-
ation methods described above. These amounts are
amortized over the vesting period. The unamortized
portion of unearned compensation is shown as a reduc-
tion of shareholders’ equity in the accompanying con-
solidated balance sheet.