Share-Based Employee Compensation

As of June 30, 2013, 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 and the 2013 Non-Employee Directors Stock Incentive Director Plan. From time to time, the Company grants stock options, restricted stock units, phantom stock units, stock appreciation rights and other awards under these plans.

The table below summarizes the amounts recognized in the financial statements for the three and six months ended June 30, 2013 and 2012 for share-based compensation, including expense for phantom stock units and cash settled stock appreciation rights (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Cost of sales	$	65	$	67	$	145	$	147
Operating expenses	986		944		2,225		3,729
Total cost of share-based compensation included in income, before income tax	$	1,051	$	1,011	$	2,370	$	3,876

Stock Options

During the three and six months ended June 30, 2013 the Company granted 59,000 and 1,843,000 shares underlying stock options, respectively, at a weighted average grant-date fair value of $2.84 and $2.47 per share, respectively. Total compensation expense recognized for stock options during the three and six months ended June 30, 2013 was $469,000 and $848,000, respectively.

During the six months ended June 30, 2012, the number of shares underlying stock options granted was nominal and no stock options were granted during the second quarter of 2012. Total compensation expense recognized for stock options during the three and six months ended June 30, 2012 was $621,000 and $1,056,000, 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 table below summarizes the weighted average Black-Scholes fair value assumptions used in the valuation of stock options granted during the six months ended June 30, 2013 and 2012.



	Six Months Ended June 30,
	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

Restricted Stock Units

The Company granted 72,000 and 441,000 shares underlying restricted stock units during the three and six months ended June 30, 2013 respectively, at a weighted average grant-date fair value of $6.69 and $6.55, respectively. Total compensation expense recognized for restricted stock units during the three and six months ended June 30, 2013 was $443,000 and $822,000, respectively.

During the three and six months ended June 30, 2012 the Company granted 83,000 and 383,000 shares underlying restricted stock units, respectively, at a weighted average grant-date fair value of $6.01 and $6.38, respectively. Total compensation expense recognized for restricted stock units during the three and six months ended June 30, 2012 was $488,000 and $839,000, respectively.

At June 30, 2013, the Company had $4,371,000 of total unrecognized compensation expense related to non-vested restricted stock units under the Company’s share-based payment plans. 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 condensed statement of operations due to the application of forfeiture rates.

Phantom Stock Units

Phantom stock units (“PSUs”) awarded under the 2004 Plan are a form of share-based award that are indexed to the Company’s stock and are settled in cash. Because PSUs 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. PSUs generally cliff vest at the end of a three year period.

During the three and six months ended June 30, 2012, the Company granted 117,000 and 401,000 shares of PSUs, respectively, with a grant date fair value of $654,000 and $2,554,000, respectively. The Company did not grant PSUs in the first six months of 2013. Compensation expense recognized during the three and six months ended June 30, 2013 was $252,000 and $517,000, respectively and $138,000 and $995,000 during the three and six months ended June 30, 2012. Accrued compensation expense for PSUs for the three months ended June 30, 2013 was $1,841,000, of which $1,022,000 and $819,000 was recorded in accrued employee compensation and benefits and long-term other liabilities, respectively, in the accompanying consolidated condensed balance sheets. At December 31, 2012, the Company accrued $1,324,000 in long-term other liabilities in the accompanying consolidated condensed balance sheet. There was no accrual in accrued employee compensation and benefits at December 31, 2012.

Stock Appreciation Rights

The Company records compensation expense for cash settled stock appreciation rights (“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.

During the three and six months ended June 30, 2012, the Company granted 289,000 and 3,400,000 SARs, respectively. The Company did not grant SARs in the first six months of 2013. During the three months ended June 30, 2013 and 2012, the Company reversed $114,000 and $236,000, respectively, in compensation expense related to these awards, and recognized $182,000 and $985,000, respectively, in compensation expense during the six months ended June 30, 2013 and 2012.

At June 30, 2013, the Company accrued compensation expense of $2,729,000, of which $2,308,000 and $421,000 was included in accrued employee compensation and benefits and long-term incentive compensation and other, respectively, in the accompanying consolidated condensed balance sheets. At December 31, 2012, the Company accrued compensation expense of $2,607,000, of which $1,819,000 and $788,000 was included in accrued employee compensation and benefits and long-term incentive compensation and other, respectively, in the accompanying consolidated condensed balance sheets.