Callaway 2000 Annual Report Download - page 26

Callaway Golf Company | 26
believed to be “conforming” under the Rules of Golf as published
by the USGA and RCGA. Although the ERCTM Drivers conform to all
existing R&A equipment rules, and most existing USGA and RCGA
equipment rules, they do not conform to the USGA’s so-called
“spring-like effect” test protocol. There is no assurance that new
designs will satisfy USGA and/or R&A standards, or that existing
USGA and/or R&A standards will not be altered in ways that
adversely affect the sales of the Company’s products.
On October 18, 2000, the Company announced that it intended
to sell its ERC IITM Forged Titanium Driver in the U.S. despite the
fact that it has been ruled to be non-conforming by the USGA. On
December 8, 2000, the USGA announced that scores in rounds
played with clubs that do not conform to USGA rules, such as the
ERC IITM Forged Titanium Driver, may not be posted for USGA
handicap purposes. To the Company’s knowledge, it is the first
large, premium brand golf equipment company to sell non-
conforming equipment in the U.S. By undertaking this approach,
the Company hopes to expand participation in the game of golf
in the United States-the source of approximately 55% of the
Company’s revenues-by making the game more enjoyable and
accessible for more people, including those people who play the
game primarily for fun, enjoyment and recreation.
While the Company believes that this is the best strategy for
the Company and its shareholders, and one that is good for the
game of golf as well, the strategy is not without risk. It is possi-
ble that a significant number of U.S. retailers may decline to carry
a non-conforming product such as the ERC IITM Driver. It is also pos-
sible that a significant number of U.S. golfers may decide that they
do not wish to purchase a driver that may not be used in compe-
titions in the U.S. played subject to the USGA’s rules or that may
not be used for handicap purposes. Retailer and/or consumer back-
lash against the introduction of a non-conforming product may
injure sales of other, conforming products, or otherwise damage
the brand. These negative effects, if they materialize, could mate-
rially reduce U.S. sales of ERC IITM Drivers and other products in
2001 and in future years, and could even negatively affect in a
material way the strength of the brand and the Company’s business
overseas despite the fact that the ERC IITM Driver fully conforms
with the R&A’s Rules. On the other hand, if the Company is correct
in its belief that there are a large number of American golfers who
do not play in tournaments subject to the USGA’s Rules and are
prepared to purchase an exceptional non-conforming driver for use
in recreational play, and/or the Company’s strategy is successful
over time in attracting more people to the game of golf in the U.S.,
then the beneficial effects could be significant.
Golf Professional Endorsements
The Company establishes relationships with professional golfers in
order to evaluate and promote Callaway Golf® and Odyssey®
branded products. The Company has entered into endorsement
arrangements with members of the various professional tours,
including the Senior PGA Tour, the PGA Tour, the LPGA Tour, the
PGA European Tour, the Japan Golf Tour and the buy.com Tour.
While most professional golfers fulfill their contractual obligations,
some have been known to stop using a sponsor’s products despite
contractual commitments. If certain of the Company’s professional
endorsers were to stop using the Company’s products contrary to
their endorsement agreements, the Company’s business could be
adversely affected in a material way by the negative publicity.
Golf Clubs. Many professional golfers throughout the world use
the Company’s golf clubs even though they are not contractually
bound to do so and do not grant any endorsement to the Com-
pany. The Company previously created cash pools that rewarded
such usage. In 2001, the Company is discontinuing these pools, as
it believes it is better to allocate these resources to other tour
programs. In addition, many other companies are aggressively
seeking the patronage of these professionals, and are offering
many inducements, including specially designed products and sig-
nificant cash rewards. In the past, the Company has experienced
an exceptional level of club usage on the world’s major profes-
sional tours, and the Company has heavily advertised that fact.
The Company’s lack of cash inducements for non-staff golfers
could result in a decrease in usage of the Company’s clubs by pro-
fessional golfers. While it is not clear to what extent professional
usage contributes to retail sales, it is possible that a decline in the
level of professional usage of the Company’s products could have
a material adverse effect on the Company’s sales and business.
Golf Balls. Many golf ball manufacturers, including the leading
U.S. manufacturer of premium golf balls, have focused a great deal
of their marketing efforts on promoting the fact that tour profes-
sionals use their balls. Some of these golf ball competitors spend
large amounts of money to secure professional endorsements, and
the market leader has obtained a very high degree of tour pene-
tration. While almost all of the Company’s staff professionals, as
well as other professionals who are not on the Company’s staff,
have decided to use the Company’s golf balls in play, there is no
assurance they will continue to do so. Furthermore, there are
many other professionals who are already under contract with
other golf ball manufacturers or who, for other reasons, may not
MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS