Callaway 2001 Annual Report Download - page 54

Callaway Golf Company
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During 2001 and 2000, the Company, at its discretion, extended the expira-
tion terms or accelerated the vesting of 1,422,000 and 622,000 options,
respectively, held by certain employees and officers. Also, during 1999, the
Company, at its discretion, extended the expiration terms of 1,532,000
options held by certain employees and officers. At the time of the modifica-
tions, the exercise prices of the options were in excess of the then-current
market price and accordingly these actions did not result in compensation
expense for the Company. Also during 2001, the Company, at its discretion,
indirectly re-priced 17,000 options and recognizes compensation expense
related to these options in accordance with variable plan accounting.
Shareholders’ Rights Plan 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
purchase 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 substantially 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 outstanding 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 with a fair value of $31 per share to 26
officers of the Company. Of these shares, 80,250 shares have been canceled
due to the service requirement not being met. During 1998, the Company, at
its discretion, accelerated the vesting of 20,000 shares and recorded related
compensation expense of $618,000. The remaining 29,750 shares, which are
restricted as to sale or transfer until vesting, will vest on January 1, 2003. The
net compensation expense of $922,000 related to the remaining shares 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 had an Employee Stock
Purchase Plan (“ESPP”) whereby eligible employees purchased shares of
Common Stock at 85% of the lower of the fair market value on the first day
of a two year offering period or the last day of each six month exercise peri-
od. Eligible employees authorized the Company to withhold compensation
during an offering period, subject to certain limitations. In May 1999, the
Company’s shareholders approved a new ESPP (the “1999 ESPP”) with sub-
stantially the same terms as the ESPP. This plan was effective February 1, 2000
upon the termination of the ESPP.
During 2001, 2000 and 1999, approximately 506,000, 412,000 and 378,000
shares, respectively, of the Company’s Common Stock were purchased under
the 1999 ESPP or the ESPP. As of December 31, 2001, 1,277,000 shares were
reserved for future issuance under the 1999 ESPP.
Compensation Expense During 2001, 2000 and 1999, the Company record-
ed $342,000, $2,157,000 and $1,390,000, respectively, in compensation
expense for Restricted Common Stock and certain options to purchase shares
of Common Stock granted to employees, officers, professional endorsers and
consultants of the Company. The valuation of options 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
valuation methods described above. These amounts are amortized over the
vesting period. The unamortized portion of unearned compensation is
shown as a reduction of shareholders’ equity in the accompanying consoli-
dated balance sheet.
Pro Forma Disclosures If the Company had elected to recognize compen-
sation expense based upon the fair value at the grant date for employee
awards under these plans, the Company’s net income and earnings per share
would be changed to the pro forma amounts indicated below:
(in thousands, except per share data) Year Ended December 31,
2001 2000 1999
Net income:
As reported $ 58,375 $ 80,999 $ 55,322
Pro forma $ 43,948 $ 58,761 $ 34,422
Earnings per Common Share:
As reported
Basic $ 0.84 $ 1.16 $ 0.79
Diluted $ 0.82 $ 1.13 $ 0.78
Pro forma
Basic $ 0.63 $ 0.84 $ 0.49
Diluted $ 0.62 $ 0.83 $ 0.48
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 following
assumptions:
Year Ended December 31,
2001 2000 1999
Dividend yield 1.6% 1.1% 1.4%
Expected volatility 53.9% 53.0% 45.6%
Risk free interest rates 3.81% - 4.22% 5.18% - 5.56% 5.36% - 6.24%
Expected lives 3 - 4 years 3 - 4 years 3 - 4 years
The weighted-average grant-date fair value of options granted during 2001,
2000 and 1999 was $6.98, $6.91 and $3.57 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 trans-
ferable. In addition, option valuation models require the input of highly sub-
jective assumptions including the expected stock price volatility. Because the
Company’s employee stock options have characteristics significantly different
from those of traded options, and because changes in subjective input
assumptions can materially affect the fair value estimates, in management’s
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of grants under the Company’s employee stock-
based compensation plans.
NOTE 9
Employee Benefit Plans
The Company has a voluntary deferred compensation plan under Section
401(k) of the Internal Revenue Code (the “401(k) Plan”) for all employees
who satisfy the age and service requirements under the 401(k) Plan. Each par-
ticipant may elect to contribute up to 15% of annual compensation, up to the
maximum permitted under Federal law, and the Company is obligated to con-
tribute annually an amount equal to 100% of the participant’s contribution
up to 6% of that participant’s annual compensation. Employees contributed