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News > Companies
Outlaw golf club ups sales
April 6, 2001: 8:21 a.m. ET

Callaway's ERC II banned by USGA, selling well in U.S. and abroad
By Staff Writer Hope Hamashige
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NEW YORK (CNNfn) - Technically, the latest golf club introduced by Callaway Golf is an outlaw. Banned from the game of golf in the 50 states and south of the border, it has inspired the wrath of the United States Golf Association and started the biggest brouhaha the game of golf has seen in recent memory.

Callaway calls the club the ERC II and it's a driver like none other. Made of titanium forged in Australia, the technologically advanced club was introduced to the U.S. last October and immediately stirred up controversy.

Like other golf clubs that promise greater distance and accuracy, the ERC's proprietary engineering and the thinnest of titanium sheets make it the longest driver Callaway has ever offered. But the company, which built its name on the "Big Bertha" line of oversized metal woods, may have bent the rules with its latest creation.

At least the USGA thinks so. That sliver of a titanium face creates too much "spring" when it smacks golf balls, according to golf's governing body, and the club was immediately banned from competition in the U.S.

So while plenty of pros, like Scotland's Colin Montgomerie, will tee off with Callaway drivers at this week's Masters tournament, none will be using the ERC II.

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Perhaps outlaw is something of an overstatement. The technical term is "nonconforming," graphicand this is what it means: It can't be used in competition on courses in the U.S. and Mexico. And the USGA has a pretty loose definition of competition: any game where someone is keeping score, which includes friendly games among weekend golfers.

In other words, they don't really want anyone using it at all, which has ignited a loud and lengthy war of words as golfers, sports commentators, Callaway and the USGA have taken sides over the ERC II.

The sparring has been so heated in fact, even Arnold Palmer, perhaps golf's most revered player, got into hot water when he said he thought the ERC II was OK for recreational use. Palmer's remarks really irked the USGA, where he is honorary chair of the members program. The USGA has said it disagrees with Palmer over the golf legend's use of the word "recreational." If someone is keeping score, according to the USGA, they are playing competitively.

Not everyone is upset over the controversy. At least a few Wall Street analysts are pretty happy about both it and the sales figures Callaway's racked up since the controversial golf club made its debut.

"People will buy it (conforming or not) because they just want to hit the ball farther," said analyst Joe Yurman, of Bear Stearns.

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Certainly, sales of Callaway (ELY: Research, Estimates) clubs are up in recent quarters. For the year ended Dec. 31, 2000, sales were up 16 percent over the previous year, from $719 million in 1999 to $837.6 million in 2000. Net income for the year rose to $81 million, or $1.13 a share, from $55.3 million, or 78 cents a share, in 1999. The ERC II was introduced in October, the beginning of the fourth quarter.

Yet, Callaway spokesman Larry Dorman said the company believes the USGA went too far when it banned the ERC II. Dorman said the company believes the ban has hurt sales of the ERC II and by the company's estimates, sales would be nearly twice as high as they are now if the USGA had not declared it nonconforming.

"We're selling a lot of ERC IIs in spite of the USGA ban because the club is that good," said Dorman. "But we feel they're damaging our brand name by implying that we are helping people cheat."

Failure to conform

Dorman pointed out that Callaway has marketed the club for "recreational purposes" only in the United States, meaning not for professional-level play. The company believes the club will make the sport more fun for those people who simply want to play a better game.

The driver's face is larger than most and created with an adjusted center of gravity. The combination of elements gives a golfer greater potential to hit the ball longer and also decreases the possibility they will hit wildly off-center drives.

Those same properties caused it to fail the USGA's test of the club's "springlike graphiceffect." The "springlike effect" tests evaluate the level of bounce off the club's face when a ball is hurled at it going 109 miles per hour. If the rebound is higher than .83, it does not conform to USGA regulations and cannot be used in USGA-sanctioned events.

Callaway created the club with average golfers in mind, said Dorman. And at a time when golf's growth has slowed, Dorman said the company was surprised by the vehemence with which the USGA opposed its introduction.

"We think it's a good way to get people involved in the game," said Dorman. "Golf is a hard game and anything that makes it more enjoyable brings more people into the game."

In addition to banning it on the professional circuit, the USGA said it will not record scores for handicap on rounds of golf that have been played with the ERC II. The USGA, explained spokesman Marty Parkes, sets the rules for the game of golf as it is played in the U.S. and part of that includes setting standards on equipment. Those standards must apply in both USGA professional-level play and when amateur golfers are playing for handicap scores that are recorded by the USGA.

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"We have a difference of philosophy," said Parkes. "We don't make a distinction between competitive and recreational play."

The rules-making body that governs professional golf in the rest of the world, the Royal and Ancient Golf Club, allows the ERC II on the professional circuit. It has already become the most popular driver on the European Tour, where 50 of them were in play at last week's event.

It's not clear whether the spat between Callaway and the USGA will ever clear up. Parkes said the USGA is always adjusting its rules and regulations, but that it doesn't intend to change its rules about the "springlike effect" any time in the near future.

After the USGA banned Ping Eye 2 irons in the late 1980s for creating grooves on the clubs that imparted too much backspin, the company sued the USGA and settled out of court. Dorman said Callaway does not want to litigate the issue, but added that "it almost always has to be considered when damage is being done."

At least Wall Street's happy

Whatever the USGA's feelings about Callaway, Wall Street is having a love affair with the San Diego company. Bear Stearns upgraded Callaway stock to an "attractive" rating from a "neutral" rating in November, just a month after the ERC II hit the U.S. market.

graphicMerrill Lynch analyst Hayley Kissel said Callaway is doing a lot of things right this year, beyond the ERC II. She said a lot of new products, including new lines of metal woods, have been strong additions to the company's offerings. She added that Callaway has resolved some manufacturing problems at its new golf ball factory that have been a drag on earnings. Last year was the company's first in the golf ball business and Kissel said Callaway may lose money again in 2001 on golf balls. Soon, however, she expects that product to be another moneymaker for Callaway.

Yurman also complemented the company's management team, which he said is working hard to restore investor confidence. He also likes the company's commitment to developing new business on the strength of innovative products to propel earnings at a time when they can't rely on organic growth in the industry.

"Golf is not a growing industry," said Yurman. "They're betting on technological advances and hoping that each next generation of product warrants you running out to spend $400 extra bucks." graphic





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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.