Callaway 2006 Annual Report Download - page 42

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“Share-Based Payments,” which requires the measurement and recognition of compensation expense for all
share-based payment awards to employees and directors based on estimated fair values. The Company uses the
Black Scholes option valuation model to estimate the fair value of its stock options at the date of grant. 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 transferable. The Company’s employee stock options, however, have
characteristics significantly different from those of traded options. For example, employee stock options are
generally subject to vesting restrictions and are generally not transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected stock price volatility, the expected life
of an option and the number of awards ultimately expected to vest. Changes in 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 an employee. The Company uses historical data
to estimate the expected price volatility, the expected option life and the expected forfeiture rate. The risk-free
rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option. If
actual results are not consistent with the Company’s assumptions and judgments used in estimating the key
assumptions, the Company may be required to increase or decrease compensation expense, which could be
material to its results of operations.
In accordance with SFAS 123R, the Company records compensation expense for Restricted Stock Awards
based on the estimated fair value of the award on the date of grant. The estimated fair value is determined based
on the closing price of the Company’s Common Stock on the award date multiplied by the number of awards
expected to vest. The number of awards expected to vest is based on the number of awards granted adjusted by
estimated forfeiture rates. The total compensation cost is then recognized ratably over the vesting period. 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.
During 2006, the Company granted Performance Units to certain employees under the Company’s 2004
Equity Incentive Plan. Performance Units are a form of share-based award in which the number of shares
ultimately received depends on the Company’s performance against specified performance targets over a three
year period ending December 31, 2008. The estimated fair value of the Performance Units is determined based
on the closing price of the Company’s Common Stock on the award date multiplied by the expected number of
shares to be issued at the end of the performance period. The compensation cost is then amortized straight-line
over the performance period. The Company uses forecasted performance metrics to estimate the number of
shares that will ultimately be issued. If actual results are not consistent with the Company’s assumptions and
judgments used in estimating the forecasted metrics, the Company may be required to increase or decrease
compensation expense, which could be material to its results of operations.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is contained in Note 2 to the Consolidated
Financial Statements, which is incorporated herein by this reference.
Tour Golf Group Asset Acquisition
On April 25, 2006, the Company acquired certain assets of Tour Golf Group, Inc. (“TGG”). Over the last
four years, prior to the acquisition, TGG sourced, marketed and sold golf shoes bearing Callaway Golf’s
trademarks through licensing agreements. In early 2006, TGG informed the Company that it was having financial
difficulty. The Company acquired the TGG assets to ensure the continued flow of product and the fulfillment of
orders. The Company now designs and sells footwear directly.
The acquisition of certain assets from TGG was accounted for as a purchase in accordance with SFAS
No. 141, “Business Combinations.” Under SFAS No. 141, the estimated aggregate cost of the acquired assets is
$7.7 million, which includes cash paid of approximately $1.2 million, transaction costs of approximately
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