Note 15. Share-Based Employee Compensation

The Company accounts for its share-based compensation arrangements in accordance with ASC Topic 718, which requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors based on estimated fair values. ASC Topic 718 further requires a reduction in share-based compensation expense by an estimated forfeiture rate. The forfeiture rate used by the Company is based on historical forfeiture trends. If actual forfeiture rates are not consistent with the Company’s estimates, the Company may be required to increase or decrease compensation expenses in future periods.

The Company uses the alternative transition method for calculating the tax effects of share-based compensation pursuant to ASC Topic 718. The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool (“APIC Pool”) related to the tax effects of employee share-based compensation, and to determine the subsequent impact on the APIC Pool and consolidated statements of cash flows of the tax effects of employee and director share-based awards that were outstanding upon adoption of ASC Topic 718.

Stock Plans

As of December 31, 2014, the Company had two shareholder approved stock plans under which shares were available for equity-based awards: the Callaway Golf Company Amended and Restated 2004 Incentive Plan (the "2004 Incentive Plan") and the 2013 Non-Employee Directors Stock Incentive Plan (the "2013 Directors Plan").

The 2004 Incentive Plan permits the granting of stock options, stock appreciation rights, restricted stock awards, restricted stock 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 Incentive Plan are discretionary, although no participant may receive awards in any one year in excess of 2,000,000 shares. The maximum number of shares issuable over the term of the 2004 Incentive Plan is 24,000,000.

The 2013 Directors Plan permits the granting of stock options, restricted stock awards and restricted stock units to eligible directors serving on the Company's Board of Directors. The Directors may receive a one-time grant upon their initial appointment to the Board and thereafter an annual grant upon being re-elected at each annual meeting of shareholders, not to exceed 50,000 shares within any calendar year. The maximum number of shares issuable over the term of the 2013 Directors Plan is 1,000,000.

The following table presents shares authorized, available for future grant and outstanding under each of the Company’s plans as of December 31, 2014:



	Authorized	Available	Outstanding⁽²⁾
	(In thousands)
2001 Directors Plan⁽¹⁾	500	—	36
2004 Incentive Plan	24,000	8,405	5,360
2013 Directors Plan	1,000	898	95
Total	25,500	9,303	5,491


(1)	The Company’s 2001 Non-Employee Directors Stock Incentive Plan (the "2001 Directors Plan") expired on December 31, 2011.


(2)	Includes accrued incremental dividend equivalent rights on outstanding shares underlying restricted stock units granted under the 2004 Incentive Plan and 2013 Directors Plan.

Stock Options

All stock option grants made under the 2004 Incentive 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 $1,907,000, $1,839,000 and $1,586,000 of compensation expense relating to outstanding stock options for the years ended December 31, 2014, 2013 and 2012, 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, and the expected dividend yield. Compensation expense for employee stock options is recognized over the vesting term and is reduced by an estimate for forfeitures, which is based on the Company’s historical forfeitures of unvested options and awards. The Company did not grant stock options during the year ended December 31, 2014. For the years ended December 31, 2013 and 2012, the weighted average estimated forfeiture rate used was 6.6% and 5.7%, respectively.

The table below summarizes the average fair value assumptions used in the valuation of stock options granted during the years ended December 31, 2013 and 2012.



	2013		2012
Dividend yield	0.6	%	1.2	%
Expected volatility	48.8	%	50.6	%
Risk-free interest rate	0.7	%	0.8	%
Expected life	4.3 years		4.9 years

The Company uses forecasted dividends to estimate the expected dividend yield. The expected volatility is based on the historical volatility of the Company’s stock. The risk-free interest rate is based on the U.S. Treasury yield curve at the date of grant with maturity dates approximately equal to the expected term of the options at the date of the grant. The expected life of the Company’s options is based on evaluations of historical employee exercise behavior, forfeitures, cancellations and other factors. The valuation model applied in this calculation utilizes highly subjective assumptions that could potentially change over time. Changes in the 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 the employee holding the option.

The following table summarizes the Company’s stock option activities for the year ended December 31, 2014 (in thousands, except price per share and contractual term):



Options	Number of Shares		Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1, 2014	4,492		$	9.42
Granted	—		$	—
Exercised	(302	)	$	7.57
Forfeited	—		$	—
Expired	(531	)	$	16.23
Outstanding at December 31, 2014	3,659		$	8.59	5.65	$	2,154
Vested and expected to vest in the future at December 31, 2014	3,612		$	8.61	5.62	$	2,100
Exercisable at December 31, 2014	2,501		$	9.54	4.51	$	806

The weighted-average grant-date fair value of options granted during the years ended December 31, 2013 and 2012 was $2.47 and $2.63 per share, respectively. There were no stock options granted during 2014.

At December 31, 2014, there was $1,581,000 of total unrecognized compensation expense related to options granted to employees under the Company’s share-based payment plans. That cost is expected to be recognized over a weighted-average period of 1.2 years. The amount of unrecognized compensation expense noted above does not necessarily represent the amount that will ultimately be realized by the Company in its consolidated statement of operations.

The total intrinsic value for options exercised during the years ended December 31, 2014, 2013 and 2012 was $569,000, $243,000 and $3,000, respectively. Cash received from the exercise of stock options for the years ended December 31, 2014, 2013 and 2012 was $2,291,000, $1,652,000 and $19,000, respectively.

Restricted Stock Units

Restricted stock units awarded under the 2004 Incentive Plan and the 2013 Directors Plan are recorded at the Company’s closing stock price on the date of grant. Restricted stock units generally vest at the end of a three year period. At December 31, 2014, 2013 and 2012, the weighted average grant-date fair value of restricted stock units granted was $8.21, $6.55 and $6.36, respectively. The Company recorded $2,530,000, $1,694,000 and $1,556,000 of compensation expense related to restricted stock units in 2014, 2013 and 2012, respectively.

The table below is a roll-forward of the activity for restricted stock units during the 12 months ended December 31, 2014 (in thousands, except fair value amounts):



Restricted Stock Units	Units		Weighted- Average Grant-Date Fair Value
Nonvested at January 1, 2014	873		$	6.49
Granted	425		8.21
Vested	(75	)	6.85
Forfeited	—		—
Nonvested at December 31, 2014	1,223		$	7.07

At December 31, 2014, there was $3,944,000 of total unrecognized compensation expense related to nonvested restricted stock units granted to employees under the Company’s share-based payment plans. That cost is expected to be recognized over a weighted-average period of 1.14 years.

Performance Share Units

Performance share units awarded under the 2004 Incentive Plan are stock-based awards in which the number of shares ultimately received depends on the Company's performance against specified metrics are measured over a one-year performance period from the date of grant. These performance metrics were established by the Company at the beginning of the performance period. At the end of the performance period, the number of shares of stock that could be issued is fixed based upon the degree of achievement of the performance goals. The number of shares that could be issued can range from 50% to 150% of the participant's target award. Performance share units are initially valued at the Company's closing stock price on the date of grant. Compensation expense is recognized over the vesting period and is reduced by an estimate for forfeitures, and will vary based on remeasurements during the performance period. If the performance metrics are not probable of achievement during the performance period, compensation expense would be reversed. The awards are forfeited if the performance metrics are achieved as of the end of the performance period. The performance units vest in full at the end of a three year period.

The Company granted 596,000 performance share units during the year ended December 31, 2014, inclusive of incremental shares that were issued as a result of the Company achieving the performance metrics as of December 31, 2014. The shares were granted at a weighted average grant-date fair value of $8.20 per share. There were no performance share units vested or forfeited during the year ended December 31, 2014. The Company did not grant performance share units during the years ended December 31, 2013 or 2012. During the year ended December 31, 2014, the Company recognized total compensation expense, net of estimated forfeitures, of $1,303,000 for performance share units. At December 31, 2014, unamortized compensation expense related to these awards was $3,840,000.

Phantom Stock Units

Phantom stock units awarded under the 2004 Incentive Plan are a form of share-based award that are indexed to the Company’s stock and are settled in cash. Because phantom stock units are settled in cash, compensation expense recognized over the vesting period will vary based on changes in fair value. Fair value is remeasured at the end of each interim reporting period based on the closing price of the Company’s stock. Phantom stock units vest at the end of a three year period.

The weighted average grant-date fair value per share of phantom stock units granted to employees during the years ended December 31, 2012 was $6.37. There were no phantom stock units granted in the years ended December 31, 2014 or 2013.

The table below is a roll-forward of the activity for phantom stock units during the 12 months ended December 31, 2014 (in thousands, except fair value amounts):



Phantom Stock Units	Units		Weighted- Average Grant-Date Fair Value
Nonvested at January 1, 2014	444		$	6.72
Granted	—		—
Vested	(180	)	7.40
Forfeited	—		—
Nonvested at December 31, 2014	264		$	6.25

In connection with these awards, the Company recognized compensation expense of $649,000, $1,635,000 and $1,724,000 for the years ended December 31, 2014, 2013 and 2012, respectively. At December 31, 2014, the Company accrued compensation expense of $1,898,000, which was included in accrued employee compensation and benefits in the accompanying consolidated balance sheets. Accrued compensation expense for phantom stock units was $2,830,000 at December 31, 2013, of which $1,439,000 was included in accrued employee compensation and benefits, and $1,391,000 was included in long-term incentive compensation and other in the accompanying consolidated balance sheets.

Stock Appreciation Rights

The Company records compensation expense for SARs based on the estimated fair value on the date of grant using the Black Scholes option-pricing model. SARs are subsequently remeasured at each interim reporting period based on a revised Black Scholes value until they are exercised. SARs vest over a three year period. As of December 31, 2014, the Company reversed $1,062,000 in compensation expense related to these awards, and recognized $3,016,000 and $2,285,000 in compensation expense related to these awards at December 31, 2013 and 2012, respectively. At December 31, 2014, the Company accrued compensation expense of $3,990,000, which was included in accrued employee compensation and benefits in the accompanying consolidated balance sheets. At December 31, 2013, the Company accrued compensation expense of $5,193,000, of which $4,200,000 was included in accrued employee compensation and benefits and $993,000 was included in long-term incentive compensation and other in the accompanying consolidated balance sheets.

The table below summarizes the total number of SARs granted to employees during the year ended December 31, 2014 (in thousands):



Stock Appreciation Rights	Units		Weighted- Average Exercise Price Per Share
Nonvested at January 1, 2014	2,475		$	6.39
Granted	—		—
Vested	(88	)	6.39
Forfeited	(15	)	6.69
Nonvested at December 31, 2014	2,372		$	6.39

Share-Based Compensation Expense

The table below summarizes the amounts recognized in the financial statements for the years ended December 31, 2014, 2013 and 2012 for share-based compensation, including expense for stock options, restricted stock units, phantom stock units and cash settled stock appreciation rights (in thousands):



	2014		2013		2012
Cost of sales	$	240	$	473	$	276
Operating expenses	5,087		7,711		6,874
Total cost of employee share-based compensation included in loss before income tax	$	5,327	$	8,184	$	7,150

In connection with the Cost Reduction Initiatives announced in July 2012 (see Note 3), the Company recognized $416,000 during the year ended December 31, 2012 in stock compensation expense as a result of the contractual acceleration of the vesting of certain stock options, restricted stock units and phantom stock units.