Callaway 2008 Annual Report Download - page 97

Directors Plan”). The 2004 Plan permits the granting of stock options, stock appreciation rights, restricted stock/
units, performance share units and other equity-based awards to the Company’s officers, employees, consultants
and certain other non-employees who provide services to the Company. All grants under the 2004 Plan are
discretionary, although no participant may receive awards in any one year in excess of 1,000,000 shares. The
2001 Directors Plan permits the granting of stock options, restricted stock and restricted stock units. Directors
receive an initial equity award grant not to exceed 20,000 shares upon their initial appointment to the Board and
thereafter an annual grant not to exceed 10,000 shares upon being re-elected at each annual meeting of
shareholders. The maximum number of shares issuable over the term of the 2004 Plan and the 2001 Directors
Plan is 12,250,000 and 500,000 shares, respectively.
The following table presents shares authorized, available for future grant and outstanding under each of the
Company’s plans as of December 31, 2008:
Authorized Available Outstanding(1)
(In thousands)
1991 Stock Incentive Plan ............................. 10,000 — 75
Promotion, Marketing and Endorsement Stock Incentive
Plan ............................................ 3,560 — 510
1995 Employee Stock Incentive Plan .................... 10,800 — 1,944
1996 Stock Option Plan ............................... 9,000 — 422
2001 Directors Plan .................................. 500 231 257
2004 Plan .......................................... 12,250 2,578 4,048
Employee Stock Purchase Plan ......................... 6,000 2,900 —
Non-Employee Directors Stock Option Plan .............. 840 — 16
Total .............................................. 52,950 5,709 7,272
(1) Outstanding shares do not include issued Restricted Stock awards that are subject to forfeitures.
Stock Options
All stock option grants made under the 2004 Plan and the 2001 Directors Plan are made at exercise prices no
less than the Company’s closing stock price on the date of grant. Outstanding stock options generally vest over a
three-year period from the grant date and generally expire up to 10 years after the grant date. The Company
recorded $3,351,000, $4,241,000 and $6,122,000 of compensation expense relating to outstanding stock options
for the years ended December 31, 2008, 2007 and 2006, respectively.
The Company records compensation expense for employee stock options based on the estimated fair value
of the options on the date of grant using the Black-Scholes option-pricing model. The model uses various
assumptions, including a risk-free interest rate, the expected term of the options, the expected stock price
volatility over the expected term of the options, and the expected dividend yield. Compensation expense for
employee stock options is recognized ratably over the vesting term and is reduced by an estimate for pre-vesting
forfeitures, which is based on the Company’s historical forfeitures of unvested options and awards. For the years
ended December 31, 2008, 2007 and 2006, the average estimated pre-vesting forfeiture rate used was 4.8%, 3.9%
and 5.6%, respectively. The table below summarizes the average fair value assumptions used in the valuation of
stock options granted during the years ended December 31, 2008, 2007 and 2006.
2008 2007 2006
Dividend yield ................................................... 1.9% 2.0% 2.0%
Expected volatility ................................................ 35.6% 37.4% 39.5%
Risk-free interest rate .............................................. 2.7% 4.7% 4.7%
Expected life .................................................... 4.1years 3.1 years 3.2 years
The dividend yield is based upon a three-year historical average. The expected volatility is based on the
historical volatility, among other factors, of the Company’s stock. The risk-free interest rate is based on the U.S.
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