14. Share-Based Employee Compensation

As of June 30, 2012, the Company had one shareholder approved stock plan under which shares were available for equity-based awards: the Callaway Golf Company Amended and Restated 2004 Incentive Plan. From time to time, the Company grants stock options, restricted stock units, phantom stock units, stock appreciation rights and other awards under this plan.

The table below summarizes the amounts recognized in the financial statements for the three and six months ended June 30, 2012 and 2011 for share-based compensation, including expense for phantom stock units and cash settled stock appreciation rights granted to employees (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Cost of sales	$	67		$	180		$	147		$	343
Operating expenses		944			5,640			3,729			8,191

Total cost of employee share-based compensation included in income (loss), before income tax		1,011			5,820			3,876			8,534
Amount of income tax recognized in earnings		(389	)		(2,383	)		(1,492	)		(3,284	)

Amount charged against net income (loss)	$	622		$	3,437		$	2,384		$	5,250

Impact on net income per common share:
Basic	$	(0.01	)	$	(0.05	)	$	(0.04	)	$	(0.08	)
Diluted	$	(0.01	)	$	(0.05	)	$	(0.03	)	$	(0.08	)

Stock Options

During the six months ended June 30, 2012 and 2011, the Company granted 5,000 and 1,731,000 shares underlying stock options, respectively, at a weighted average grant-date fair value of $2.63 and $2.94 per share, respectively. There were no stock options granted during the second quarter of 2012 and 2011. 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. During the three and six months ended June 30, 2011, the Company recognized $962,000 and $1,817,000, 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, 2012 and 2011.


	Six Months Ended June 30,
	2012		2011
Dividend yield		1.2%		1.4%
Expected volatility		50.6%		48.5%
Risk free interest rate		0.8%		2.0%
Expected life		4.9 years		5.0 years

Restricted Stock Units

During the three months ended June 30, 2012 and 2011, the Company granted 83,000 and 58,000 shares underlying restricted stock units, respectively, at a weighted average grant-date fair value of $6.01 and $6.94 per share, respectively. The Company granted 383,000 and 61,000 shares underlying restricted stock units during the six months ended June 30, 2012 and 2011, respectively, at a weighted average grant-date fair value of $6.38 and $7.01 per share, respectively. Total compensation expense recognized for restricted stock units during the three months ended June 30, 2012 and 2011 was $488,000 and $688,000, respectively. Total compensation expense recognized for restricted stock units during the six months ended June 30, 2012 and 2011 was $839,000 and $1,328,000, respectively. At June 30, 2012, the Company had $3,063,000 of total unrecognized compensation expense related to non-vested shares granted to employees and non-employees related to restricted stock units. 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”) are a form of share-based awards that are indexed to the Company’s common stock and are settled in cash. PSUs are accounted for as liabilities and are remeasured based on the closing price of the Company’s common stock at the end of each interim period through the settlement date of the awards. PSUs vest over two and three year periods and compensation expense is recognized on a straight-line basis over these vesting periods.

During the three and six months ended June 30, 2012, the Company granted 117,000 and 401,000 shares underlying PSUs, respectively, at a weighted average grant date fair value of $5.60 and $6.37 per share, respectively. During the three months ended June 30, 2011, the Company granted 679,000 shares underlying PSUs with a grant date fair value of $7.51 per share. There were no PSUs granted during the second quarter of 2011. At June 30, 2012 and 2011, the fair value of total PSUs outstanding was $2,084,000 and $8,313,000, respectively.

Compensation expense recognized for PSUs outstanding was $138,000 and $995,000, during the three and six months ended June 30, 2012, respectively, and $1,216,000 and $1,633,000 during the three and six month ended June 30, 2011, respectively. In connection with the PSUs, at June 30, 2012 and December 31, 2011, the Company accrued $1,162,000 and $1,325,000, respectively, in accrued employee compensation and benefits, and $923,000 and $594,000, respectively, in long-term other liabilities in the accompanying consolidated condensed balance sheets.

Stock Appreciation Rights

During the three and six months ended June 30, 2012, the Company granted 289,000 and 3,400,000 of cash settled stock appreciation rights (“SARs”), respectively, at a weighted average grant date fair value of $1.78 and $2.07 per share, respectively. The Company records compensation expense for SARs based on the estimated fair value using the Black Scholes option-pricing model. SARs are remeasured based on a revised Black Scholes value at each interim reporting period until they reach the expected term date. The Company reversed $236,000 and recognized $985,000 in compensation expense related to these awards during the three and six months ended June 30, 2012. The Company accrued $922,000 and $321,000 at June 30, 2012 and December 31, 2011, respectively, in accrued employee compensation and benefits in the accompanying consolidated condensed balance sheets. At June 30, 2012, the Company accrued $385,000 in long-term other liabilities in the accompanying consolidated condensed balance sheet. There was no accrual in long-term other liabilities at December 31, 2011.

In connection with an employment agreement with a former executive officer of the Company, the Company was contractually obligated to grant $11,730,000 in the form of various share-based awards over the service period stipulated in the agreement. As a result, the total contractual obligation related to these equity awards was recognized on a straight-line basis over the contract term. In connection with the resignation of the executive officer in June 2011, the Company recognized a total of $2,852,000 and $3,551,000 during the three and six months ended June 30, 2011, respectively.