Callaway 2002 Annual Report Download - page 26

CALLAWAY GOLF COMPANY 23
United States despite the fact that it was ruled to be non-
conforming by the USGA. To the Company’s knowledge, it was
the first large, premium brand golf equipment company to sell
non-conforming equipment in the United States. By undertaking
this approach, the Company had hoped to expand participation
in the game of golf in the United States — the source of more
than half 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 believed that this was the best strategy for
the Company and its shareholders, and one that was good for
the game of golf as well, the strategy proved to be risky. The
USGA vigorously and openly opposed the sale or use of the ERC
II Driver. 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 II Driver, may not be posted for USGA
handicap purposes. That position was reinforced by further
announcements by the USGA.
As a result of the USGA’s actions, a significant number of U.S.
retailers declined to carry the ERC II Driver and a significant
number of U.S. golfers decided that they did not want to
purchase a driver that was non-conforming under USGA rules.
Retailer and/or consumer backlash against the introduction of a
non-conforming product hurt sales of ERC II Drivers in the
United States, and may have injured sales of other, conforming
products, or otherwise damaged the brand.
On May 9, 2002, the USGA announced that the USGA and the
R&A had reached a proposed compromise position with respect
to the COR of drivers. Under the compromise, the COR limit
would have been set at 0.860 under both the rules of the USGA
and the R&A effective January 1, 2003. There would have been
added to the Rules of Golf a new “condition of competition” that
would have permitted the adoption of 0.830 as the COR limit for
competitions involving elite golfers. Currently, all professional
tours in the United States play by the 0.830 limit. The R&A had
announced that it would adopt 0.830 as the COR limit in the
2003 British Open Championships. The PGA European Tour, the
Japan Golf Tour and the Asian Tour currently have no limits on
COR. In addition, as part of the compromise, the USGA and the
R&A stated that the COR limit under the Rules of Golf would
thereafter be reduced, from 0.860 to 0.830 on January 1, 2008.
On August 6, 2002, the USGA and the R&A announced that they
would not be implementing the May 9, 2002 proposal. Instead the
USGA announced that it would make no change to its Rules of
Golf, keeping the current COR limit of 0.830 in place in the United
States and other jurisdictions that follow the Rules of Golf as
published by the USGA. The R&A announced that effective
January 1, 2008 it would establish a COR limit of 0.830 under its
Rules of Golf. In addition, the R&A announced that it would adopt
a “condition of competition” effective January 1, 2003 for use at
competitions involving only highly skilled golfers (e.g., the British
Open Championship and competitions organized by major profes-
sional tours). Under this “condition of competition” driving clubs
would be limited to a COR of no higher than 0.830. Until January 1,
2008, there would be no limit on COR in R&A jurisdictions except
in those events where the “condition of competition” was applied.
In anticipation of the possible adoption of the proposed compro-
mise as announced on May 9, 2002, and in response to competitive
offerings by other manufacturers, the Company had promoted the
sale of its ERC II Driver in the United States and Canada beginning
in late July 2002. The ERC II Driver has a COR above the 0.830
limit, but would have been conforming under the new, higher limit
of 0.860 contained in the May 9, 2002 proposal. With the
announcement that the USGA would no longer be raising the COR
limit in its jurisdictions effective January 1, 2003, the Company
modified its promotion and has offered various exchange and
return privileges to consumers and retailers, respectively, who
purchased ERC II Drivers during the promotion in reliance upon a
change in the Rules of Golf by the USGA. Although the amount of
ERC II Drivers exchanged or returned was not significant, the
Company believes that the USGA’s reversal of its position has
resulted in confusion among consumers, causing them to
postpone or even forgo the purchase of new equipment.
The net effect of the reversal in position by the USGA regarding
the May 9, 2002 proposal is to leave the COR limitations for driving
clubs unchanged in the United States. The Company had
planned for this contingency, and has developed new driver
products for sale in USGA jurisdictions that conform to this limit
(e.g., Great Big Bertha II Titanium Drivers). In addition, the
Company has developed new driver products for sale in R&A
jurisdictions that take advantage of the absence of COR restric-
tions until January 1, 2008 (e.g., Great Big Bertha II+ Titanium