I've Got A Secret Callaway spent years, and millions, covertly developing the new Rule 35 ball. No wonder the company panicked when a man who knew too much quit to join the competition

Talk about your bunker mentality. We're in a dimly lit
windowless room in the heart of a brand-new factory in Carlsbad,
Calif. We're with three anxious men: Ely Callaway, Steve
McCracken and Chuck Yash. They are anxious because they are
principals of the Callaway Golf Ball Co., which as of this day,
Oct. 12, 1999, has spent three years and $150 million developing
a new ball but has yet to sell a single one. To make matters
worse, the company's sales and marketing chief, Mark King,
recently defected to rival Taylor Made-Adidas, carrying
Callaway's secrets in his cranium.

Ely Callaway, the octogenarian who built the world's biggest
golf-equipment company in what should have been his retirement
years, is worried. But not because the departed King knows
Callaway's plans for golf clubs. "We're already successful in
clubs," Callaway says. "If he's stolen that, it would damage us,
but it would not compare with the way he could hurt us with the
golf balls. We are zero in golf balls at this time."

We ask if there is any evidence that King actually stole
anything--say, in the briefcase he carried from the ball factory
on Aug. 16, the day he resigned to become president of Taylor
Made. "It's in his head," says Yash, president of Callaway Golf.
"It doesn't have to be on paper."

Some of Callaway's secrets are on display in the small strategy
room. The packaging: translucent sleeves of five balls each, a
dramatic departure from the industry standard of three per box.
The name: Rule 35, because golf has 34 rules. (Callaway's new
rule: Enjoy the game.) The product: a three-piece premium ball
with only two options--soft feel and firm feel.

The other secrets would require explication by a scientist or
engineer: the new ball's chemical formula; its computer-tested
aerodynamic dimple pattern; the quality-control system that
connects every mixer, extruder and molding machine to a central
computer. The ball factory itself, a 225,000-square-foot
behemoth packed with the most modern technology, is a kind of
secret. When it was under construction, a rival ball maker
rented a helicopter and took aerial photos of the foundation.

So much is at stake. In 1996, when Callaway announced its plans
to manufacture balls, the golf-equipment business was drunk on
record sales. Then came the hangover: an industry-wide crash in
which Callaway's revenues dropped 15% and its stock fell from an
alltime high of $38 5/8 a share in October '97 to a low of $9
5/16 in August '99. Ask industry insiders if they know what the
Callaway ball looks like, and they say, "Sure, it's a cube with
dots on the sides."

Of course, Callaway's chairman and CEO sees it differently.
"We've got eight million people playin' our golf clubs, and most
people like 'em!" Ely says in his Georgia twang. "Eighty percent
of those people will try the ball."

Maybe so, but it's October, and the ball won't be launched until
Feb. 4, 2000, when the industry gathers in Orlando for the PGA
Merchandise Show. Meanwhile the three men in the room are mired
in an effort to get a San Diego County Superior Court judge to
enforce the noncompete and nondisclosure clauses in King's
Callaway contract, which runs through Dec. 31, 2000. "We're
going to survive," Callaway says. "This isn't a mortal blow.
It's just a damaging blow." The odd thing is, the damage the men
talk about the most can never be expressed in a financial
statement. The room echoes with words such as trust, loyalty,
commitment, temptation and betrayal. "This is not a golf story,"
Callaway says. "It's a human nature story."

It is certainly human nature to change one's mind. On Jan. 14,
with the PGA Show looming, Callaway gave up the fight and
reached a settlement with King. Under its terms, King can remain
as Taylor Made president providing that until Dec. 31 he have
nothing to do with the company's neophyte ball division, which
commands about 2 1/2% of the ball market. In a press release
Callaway said, "We feel this settlement...adequately protects
our important golf-ball trade secrets."

"It's a clear victory for Taylor Made-Adidas," says a
knowledgeable industry source. "Callaway must have decided it
couldn't win in California, where historically the courts don't
enforce employment contracts." However, the same source believes
that Callaway didn't have to win the case to accomplish some of
its goals: "By taking King to court, Callaway neutralized him.
Mark couldn't use any of his Callaway knowledge at Taylor Made,
because some judge might see it as evidence of his guilt."

Then there was the hassle factor. Callaway punished King with a
string of court filings, depositions and public charges. "Mark
has never been through anything like this," says the industry
source. "He's gulping Maalox at his desk."

So when the buyers jam the aisles this weekend at Orlando's
Orange County Convention Center, the buzz will be about
Callaway's new ball and Taylor Made's SuperSteel metal woods.
But at night, at watering holes along International Drive,
industry tongues will loosen. Everyone wants to know what really
happened between Callaway and King.

It was on just such a night--Orlando, two years ago--that King
went table-hopping at the local branch of Morton's of Chicago.
At the time, the 38-year-old supersalesman and scratch golfer
was second in command at Taylor Made (which had not yet been
bought by Adidas), where he had worked since graduating in 1981
from Wisconsin-Green Bay. But King had been passed over for
company president. He was also sweating an internal audit of his
sales division, ordered up by George Montgomery, the man who had
gotten the job King craved. (The audit would reveal that King
had been overly generous with discounts and that he had
stretched company policy by diverting premium products to
cut-rate retailers.)

It was no accident, therefore, that King struck up a
conversation in the busy restaurant with Bruce Parker, then
Callaway's vice president of domestic sales. After a while,
Parker crossed the room to a table where Ely Callaway was seated
with some of his lieutenants. Leaning over, Parker told his
colleagues, "Mark King says he'd like to work for us."

Chuck Yash was immediately interested. Yash had been president
of Taylor Made for four years before joining Callaway in 1996.
He knew King to be an effective division leader with an
encyclopedic knowledge of the golf market and an ability to
inspire a sales force. Ely Callaway had never heard of King, but
he respected Yash's opinion. As Callaway remembers it, he simply
asked, "Is this fellow under contract? Is he a free agent?"

Parker went back to King, asked the questions and reported to
Callaway, "He says he has no contract, and he's free to leave."

A few days later King did have a contract--one naming him vice
president of sales for the nascent Callaway Golf Ball Company, a
wholly owned subsidiary of Callaway Golf. He cleaned out his
office at Taylor Made in the Carlsbad Office Park, taking his
desktop model of Green Bay's Lambeau Field and a floor display
of antique golf balls, and moved into his new space at the
Callaway ball plant, two minutes away by car. Fourteen months
later King signed a contract extension binding him to Callaway
through Dec. 31, 2000. (Ely Callaway wanted all his top
executives locked in through the year of the ball launch.) This
contract paid King a base salary of $275,000 and gave him
options on 75,000 shares of Callaway stock. The agreement
stipulated that he would "not directly or indirectly engage in
any business or venture directly or indirectly in competition
with" Callaway Golf Ball.

Nevertheless, last June--less than eight weeks after he had
signed his contract extension--King phoned Jim Stutts, who had
just been appointed CEO of Taylor Made by its new parent
corporation, Adidas-USA. On July 26 the two men met in a
Carlsbad coffee shop and explored King's possible return to
Taylor Made. "Given the feelings that some Taylor Made
executives had about me when I left," King testified later in an
affidavit, "both Jim and I found the idea...amusing."

Amusing or not, Stutts and King met several times to discuss the
presidency of Taylor Made, where Montgomery was struggling to
boost revenues in a slumping industry. Meanwhile King attended
Callaway strategy sessions, asked for and received details of
Callaway's new club designs, and even attended a high-level
meeting on a top-secret business initiative that Callaway execs
won't discuss--activities that would raise questions about
King's motives. Finally, on Aug. 15, King replaced Montgomery as
president of Taylor Made. The next day King cleaned out his
Callaway office. (Callaway alleged that King filled a briefcase
with documents. King denies that he took anything and says his
secretary packed the briefcase. Its contents were returned to
Callaway by lawyers for Taylor Made.) King then drove back
across the office park to resume his career at Taylor Made.

Under the terms of the Jan. 14 settlement, both sides in
Callaway v. King are to remain mum on the subject. However, in
December over lunch at Rancho Valencia, a luxurious hillside
retreat in Rancho Santa Fe, Calif., a feisty Ely Callaway
compared King's defection to adultery. "Taylor Made was Mark's
first love, his true love," Callaway said. "But it didn't work
out, so he married us. He got hitched!" Then, as Callaway told
it, Miss First Love made herself available again, and a smitten
King simply couldn't help himself. "I blame the company as much
as I blame Mark," said Callaway, acting the aggrieved spouse.

A source close to Taylor Made, hearing Callaway's take, can't
suppress a smile. "It's a very good analogy," the source says,
because King's nonbusiness life shows a similar tortured
indecisiveness. He married Debra in 1986. He separated from her
in 1994, when their first daughter was three and Debra was
pregnant with their second daughter. He established a second
domicile, rekindled his relationship with a high school
sweetheart living in Los Angeles and finally had a private
process server deliver divorce papers to Debra on a summer
evening in 1997. A divorce judgment was entered in August 1998,
six months into King's employment at Callaway.

King, while loath to discuss such matters, agrees that his
motives in yo-yoing between companies were emotional, not
mercenary. "I came back to Taylor Made because, first and
foremost, I love the company," he says. "I've spent 16 years of
my life building this. It's really no more complicated than
that." He adds that while Callaway treated him well, he didn't
fit in. "It's a nice company," he told Stutts in one of their
meetings, "but, hey, it's not Taylor Made."

No one was more shocked by King's defection from Callaway than
Yash, the highly regarded executive picked by Ely Callaway in
1996 to run the ball company and, more recently, to succeed him
as CEO of Callaway Golf. Yash, a U.S. Naval Academy graduate, is
described by coworkers as a fellow who can give orders but
prefers to manage by team-building. "This is a guy who used to
command a minesweeper," says Larry Dorman, Callaway's vice
president of advertising, press and public relations, "so he's
very careful and aware of pitfalls."

Only this time the skipper took a torpedo up the stern from his
own executive officer. It clearly embarrasses Yash that he
didn't recognize King's unhappiness. It embarrasses him even
more that King got the Callaway job on his recommendation. "I
haven't spoken to Mark since we met at a deposition," Yash said
in December. "That ended the relationship for me."

Ely Callaway is more interested in his relationship with the
26.5 million American golfers he hopes will try his Rule 35
ball. The U.S. ball market is dominated by Acushnet and
Spalding, which together control roughly 70% of the sales.
Callaway says the market for premium balls was $500 million (and
growing) in 1999, and he hopes to seize a 10% to 12% share out
of the chute and grow to 20% within four years. "We created a
ball business from nothing," he says. "There wasn't a soul in
this company four years ago who knew anything about the ball
business."

That kind of bravado thrills--or chills--investors, many of whom
wonder if this time Callaway's reach will exceed his grasp.
Manufacturing golf balls requires hefty capital expenditures for
machines and labor, and the finished product looks exactly like
the one the competition makes. Furthermore, performance claims
rarely sway the average golfer, who knows that the USGA requires
all balls to conform to strict standards.

For this reason companies that want to enter the ball market
usually look for a cheaper solution. In 1998 Taylor Made bought
a ball plant from struggling Ram Golf. Cobra and Nike simply
imprinted their names on balls manufactured by Acushnet and
Bridgestone, respectively. Callaway weighed those two options
and a third: buying Spalding for $400 million to $500 million.
In the end, Ely Callaway wanted a ball that was, as he says,
"pleasingly different," and for that he needed his own ball
plant. "The route that we chose," he acknowledges, "took the
longest and was the riskiest, the most full of uncertainties."

It was also, of necessity, the most secretive. When King bolted
in August, he had intimate knowledge of every aspect of
Callaway's ball operation. He knew, for instance, that Rule 35
was essentially a one-ball strategy, there being no performance
difference between the balls in the red (firm-feel) and blue
(soft-feel) sleeves. At Taylor Made he could either
countermarket ("Taylor Made comes in three compressions and four
spin types to fit your game!") or streamline his own ball product.

King flatly denies that he has used his knowledge to hurt
Callaway. "In no way," he says, "was I trying to, or even
thinking about, stealing any of Callaway's trade secrets. That's
ridiculous." King's lawyers noted that when he--and Yash before
him--left Taylor Made for Callaway, the Carlsbad giant assured
Taylor Made that it would make no use of trade secrets, and
apparently it did not. King's ultimate defense: "I believe I
have the right to work for any company that wants to employ me."

Ely Callaway disputes that, but he says, "If somebody doesn't
want to work with us, we don't want 'em. We're not talkin' about
slavery."

So it's over. The damage, as Ely Callaway intuited back in
October, turns out to be largely collateral--more personal than
corporate. Mark King operates on a leash and worries that his
reputation is permanently tarnished. George Montgomery, forced
out to make room for King, has left the golf business. Chuck
Yash has lost a golf partner and a friend. If there was a final
shot, it was fired last week by Jim Stutts, who said he had
hired a recently resigned, noncontract Callaway Ball employee to
be director of club manufacturing for Taylor Made. Joking,
Stutts said, "Maybe the story should be, Why are people leaving
Callaway?"

As for the ball secrets that Callaway was so desperate to
protect--most of them are now moot. "Trade secrets evaporate
over time," explains Steve McCracken, Callaway's chief legal
officer. "They eventually become public."

Callaway's, for instance, are now available in translucent
sleeves, at five for $20.

COLOR ILLUSTRATION: ILLUSTRATIONS BY TAVIS COBURN King says his secretary packed his briefcase when he left Callaway. The contents were returned by Taylor Made lawyers.

COLOR ILLUSTRATION: ILLUSTRATIONS BY TAVIS COBURN Leaning over the restaurant table, Parker told Callaway (center) and Yash (left) that "Mark King says he'd like to work for us."

COLOR ILLUSTRATION: ILLUSTRATIONS BY TAVIS COBURN While the plant was under construction, a rival ball maker rented a helicopter and took aerial photographs of the foundation.