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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.20549
---------------------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-24583
ADAMS GOLF, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2320087
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporationor organization)
300 Delaware Avenue, Suite 572, Wilmington, Delaware 19801
(Address of principal executive offices) (Zip Code)
(302) 427-5892
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.001 Par Value
TITLE OF CLASS
--------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. /X/ Yes / / No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K / /
At March 19, 2001, the aggregate market value of the Registrant's Common Stock
held by nonaffiliates of the Registrant was $9,762,599 based on the closing
sales price of $1 1/16 per share of the Registrant's Common Stock on the Nasdaq
Stock Market's National Market.
The number of outstanding shares of the Registrant's Common Stock, par value
$.001 per share, was 22,480,071 on March 19, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the Registrant's
definitive proxy statement, dated April 4, 2001 for the annual meeting of
stockholders to be held on May 2, 2001.
ITEM 1. BUSINESS
GENERAL
Adams Golf, Inc. (the "Company" or "Adams Golf") designs, manufactures and
markets premium quality, technologically innovative golf clubs. The Company's
products include the Tight Lies(R) ST fairway woods and drivers, Tight Lies GT
i-Woods, Tight Lies GT irons, Tom Watson GT wedges, SC Series(R) Spin Control
drivers, Tight Lies 2 fairway woods and drivers, Tight Lies Tour fairway woods
and Tight Lies fairway woods. The Company was incorporated in Texas in 1987 and
re-domesticated in Delaware in 1990. The Company completed an internal
reorganization in 1997 and now conducts its operations through several direct
and indirect wholly-owned subsidiaries.
SEGMENTS AND PRODUCTS
The Company operates in a single segment (golf clubs) within the golf industry
and within that segment offers more than one class of product.
The Company currently offers the following products:
TIGHT LIES ST FAIRWAY WOODS AND DRIVERS
In January 2001, the Company introduced the Tight Lies ST fairway woods and
drivers which feature a new head design made of 17-4 stainless steel and
titanium that encompasses the "upside down" head shape of the original Tight
Lies. The new head has also been specifically designed to optimize performance
with the new Bi-Matrx shafts from True Temper Sports which incorporate
multi-material shaft design through the bonding of graphite and steel. The
design of the Tight Lies ST fairway woods and drivers assist players in their
ability to square the club face at impact for consistently straighter shots
without sacrificing distance.
TIGHT LIES GT I-WOODS
In January 2001, the Company introduced the Tight Lies GT i-Wood as a utility
club which features the proprietary GT shaft design found in the Tight Lies GT
irons coupled with the "upside down" head shape of the original Tight Lies. The
Tight Lies GT i-Wood provides an alternative to difficult hard to hit long irons
providing the player with a club for tough long approach shots to the green
without sacrificing distance or accuracy.
TIGHT LIES GT IRONS
In November 2000, the Company introduced the Tight Lies GT irons which
incorporate a multi-material shaft that combines a proprietary steel shaft with
a specially designed graphite tip. The innovative multi-material shaft design
coupled with an "upside down" head design produces straighter shots, reduced
vibration, and easy to hit playability.
TOM WATSON GT WEDGES
In January 2001, the Company introduced the Tom Watson GT Wedges which encompass
a classic profile shape with a high toe and shallow heel coupled with the
proprietary GT shaft design delivered in the Tight Lies GT irons. The result is
a product that reduces friction at impact while providing extra dynamic bounce
without sacrificing feel and playability.
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SC SERIES SPIN CONTROL DRIVERS
In January 1999, the Company introduced the SC Series Spin Control drivers which
have been designed to achieve a specific ball flight objective: longer and
straighter tee shots resulting from reduced side spin and increased forward
momentum. These qualities are achieved through a complex patented asymmetrical
curvature design which incorporates precisely controlled relationships between
the curvature of the face and the center of gravity.
TIGHT LIES 2 FAIRWAY WOODS AND DRIVERS
In October 1999, the Company introduced the Tight Lies 2 line of fairway woods
and drivers which incorporate the "upside down" head design of the Company's
original Tight Lies fairway wood with the asymmetrical face curvature developed
in the SC Series Spin Control drivers. The result is a product that provides the
player with a higher level or directional control and the ability to get the
ball airborne quickly from virtually any lie on the course.
TIGHT LIES TOUR FAIRWAY WOODS
In June 1999, the Company introduced the Tight Lies Tour fairway woods as an
extension of the Tight Lies line of fairway woods in that the product
incorporates the innovative upright trapezoidal or "upside down" head shape
which encompass club design characteristics demanded by professional golfers.
TIGHT LIES FAIRWAY WOODS
The Tight Lies line of fairway woods ("original Tight Lies") has an innovative
upright trapezoidal or "upside down" head shape that incorporates a distinctive
shallow face and low center of gravity. The Company believes that these clubs
are ideal for getting the ball airborne quickly and efficiently with optimum
spin to maximize distance from virtually any lie on the course including the
rough, hard pan, fairway bunkers, and divots.
The following table sets forth the contribution to net sales attributable to the
Company's primary product groups for the years indicated. Historical percentages
may not be indicative of the Company's future product mix.
PERCENTAGE OF NET SALES BY PRODUCT GROUP
2000 1999 1998
-------- -------- ------
Fairway Woods 70.5% 63.6% 96.5%
Drivers 22.8 32.5 -
Irons, wedges and other 6.7 3.9 3.5
-------- -------- ------
Total 100.0% 100.0% 100.0%
======== ======== ======
The Company's continued growth and success depends, in large part, on its
ability to successfully develop and introduce new products accepted in the
marketplace. Historically, a large portion of new golf club technologies and
product designs have been met with consumer rejection. Certain products
previously introduced by the Company have not met the level of consumer
acceptance anticipated by management. No assurance can be given that the Company
will be able to continue to design, manufacture and introduce new products that
will meet with market acceptance. Failure by the Company to identify and develop
innovative new products that achieve widespread market acceptance would
adversely affect the Company's future growth and profitability. Additionally,
successful technologies, designs and product concepts are likely to be copied by
competitors. Accordingly, the Company's operating results have fluctuated and
could continue to fluctuate as a result of the amount, timing and market
acceptance of new product introductions by the Company or its competitors.
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DESIGN AND DEVELOPMENT
The Company's design and development team is responsible for developing, testing
and introducing new technologies and product designs. This team is currently led
by Barney Adams, the founder of the Company and inventor of the Tight Lies
fairway wood; Adams Golf's in-house design development team headed by Tim Reed,
Vice President-Research and Development; professional golfer, Tom Watson and
independent consultant, Robert R. Bush. Prior to joining the Company, Mr. Reed,
spent over 18 years in the golf industry and most notably, was responsible for
all new product introductions at TearDrop Golf Company which included Teardrop
putters and Tommy Armour and Ram brand golf clubs. Mr. Bush has over 30 years of
experience in golf club development and was instrumental in the development of
"Iron Byron," the industry standard for the mechanical testing of golf clubs and
balls.
The design and development team engages in a five-step process to create new
products.
CONCEPT DEVELOPMENT-During concept development, Adams Golf's design and
development team identifies specific desirable ball flight objectives. In
addition, the Company considers new ideas from professional golfers, inventors,
distributors and others. The Company expects that Tom Watson to play a
significant role in future concept development.
DESIGN SPECIFICATIONS-The Company's product design and development team
determines design specifications for the club, including shaft length, flex and
weight, head design, loft and overall club weight. Throughout the design
specifications process, the Company refers to and incorporates the golf
equipment standards developed by the U.S. Golf Association ("USGA"). Although
the standards set by the USGA apply only to competitive events sanctioned by
that organization, the Company believes it is critical for new clubs to comply
with these standards. At this time, the product design and development team also
determines the optimal material to use in the club. The Company will not use
higher cost materials, such as titanium or other alloys, unless such expensive
materials provide meaningful performance benefits. This stage of product
development typically takes six to eight weeks after a concept has been clearly
identified.
PATENT REVIEW-The Company considers patent protection for its technologies and
product designs to be an important part of its development strategy. The Company
and its patent attorneys conduct a search of prior art and existing products to
determine whether a new product idea may be covered by an existing patent.
Patent review, depending upon the complexity and novelty of the design involved,
generally requires between 3 to 18 months to complete, however, this stage of
product development typically occurs in conjunction with one or more of the
other steps.
PRODUCT DESIGN AND ENGINEERING REVIEW-If a product concept continues past the
patent review stage, the Company translates design parameters into working
designs. When appropriate, these designs are developed using computer aided
design software and modeled using in-house rapid prototyping systems. Once
modeled the prototype is subjected to rigorous engineering review to validate
the effectiveness of the technology or design. The Company estimates that it
takes between four to six months to successfully complete product design and
engineering review.
TESTING-Once a specific design has been decided upon, the Company creates and
tests one or more prototypes. The Company has a product testing facility at the
Hank Haney Golf Ranch in McKinney, Texas and utilizes independent mechanical
test facilities in Texas, California and Florida for both mechanical and player
preference testing. Recently, with the design and development of the Tight Lies
GT irons, the Company distributed samples to consumers and requested objective
feedback with respect to performance and preferences as compared to competitors'
products through the completion of a questionnaire. In addition, prototypes are
also tested for performance and player preferences by Tom Watson and other
professional golfers associated with the Company. As part of the testing
process, the Company records, analyzes and interprets data associated with each
prototype including ball flight, distance, spin and accuracy. Using feedback
from these tests, the Company modifies its designs to achieve its performance
objective. Additionally, the Company applies for official USGA approval of the
resulting club at this time. Upon approval of a new product from the USGA, it
becomes considered for commercial release. The Company believes that in order to
properly field test a new product, it must expect between four to six months of
additional development time.
3
The Company's research and development expenses were approximately $2,083,000,
$2,092,000 and $1,532,000 during 2000, 1999, and 1998, respectively.
PATENTS
The Company's ability to compete effectively in the golf club market will
depend, in large part, on its ability to maintain the proprietary nature of its
technologies and products. The Company currently holds 15 U.S. patents relating
to certain of its products and proprietary technologies and has seven patent
applications pending. Assuming timely payment of maintenance fees, if any, the
Company expects that the fifteen currently issued patents will expire on various
dates between 2009 and 2019. The Company has been awarded patents with respect
to the design of the Tight Lies fairway wood, the VMI design formula, the SC
Series driver, the Tight Lies GT shaft and the Tight Lies ST fairway wood and
driver heads. There can be no assurance, however, as to the degree of protection
afforded by these or any other patents held by the Company or as to the
likelihood that patents will be issued from the pending patent applications.
Moreover, these patents may have limited commercial value or may lack sufficient
breadth to adequately protect the aspects of the Company's products to which the
patents relate. The Company currently holds 4 foreign patents and has 10 foreign
patent applications pending. The U.S. patents held by the Company do not
preclude competitors from developing or marketing products similar to the
Company's products in international markets.
There can be no assurance that competitors, many of which have substantially
greater resources than the Company and have made substantial investments in
competing products, will not apply for and obtain patents that will prevent,
limit or interfere with the Company's ability to make and sell its products. The
Company is aware of numerous patents held by third parties that relate to
products competitive to the Company's. There is no assurance that these patents
would not be used as a basis to challenge the validity of the Company's patent
rights, to limit the scope of the Company's patent rights, or to limit the
Company's ability to obtain additional or broader patent rights. A successful
challenge to the validity of the Company's patents may adversely affect the
Company's competitive position. Moreover, there can be no assurance that such
patent holders or other third parties will not claim infringement by the Company
with respect to current and future products. Because U.S. patent applications
are held and examined in secrecy, it is also possible that presently pending
U.S. applications will eventually issue with claims that will be infringed by
the Company's products or technologies. The defense and prosecution of patent
suits is costly and time-consuming, even if the outcome is favorable. This is
particularly true in foreign countries where the expenses associated with such
proceedings can be prohibitive. An adverse outcome in the defense of a patent
suit could subject the Company to significant liabilities to third parties,
require the Company and others to cease selling products, or require disputed
rights to be licensed from third parties. Such licenses may not be available on
satisfactory terms, or at all.
Despite the Company's efforts to protect its patent and other intellectual
property rights, unauthorized parties have attempted and are expected to
continue to attempt to copy all, or certain aspects of, the Company's products.
Policing unauthorized use of the Company's intellectual property rights can be
difficult and expensive, and while the Company takes appropriate action whenever
it discovers any of it products or designs have been copied, knock-offs and
counterfeit products are a persistent problem in the performance-oriented golf
club industry. There can be no assurance that the Company's means of protecting
its patent and other intellectual property rights will be adequate.
RAW MATERIALS, MANUFACTURING AND ASSEMBLY
The Company manages all stages of manufacturing, from sourcing to assembly,
in order to maintain a high level of product quality and consistency. The
Company establishes product specifications, selects the material used to
produce the components and tests the specifications of all components
received by the Company. In addition, the Company has redundant sources of
supply for each of the component parts used in the manufacture of the Tight
Lies, Tight Lies Tour and Tight Lies 2 product lines. Certain components of
the Tight Lies ST fairway woods and drivers, Tight Lies GT i-Woods, Tight
Lies GT irons, and the Tom Watson GT Wedges have redundant sources of supply
with the exception of the multi-material shafts for which the Company has a
single source of supply (True Temper Sports). Substantially all of the
Company's fairway wood, driver, and iron club heads are manufactured in
Taiwan and China. As a part of the Company's quality control program,
4
the Company has established a quality assurance program at those
manufacturing facilities to monitor adherence to design specifications. Upon
arrival at the Company's manufacturing facilities in Plano, Texas, the
components used in the Company's clubs are again checked to ensure
consistency with strict design specifications. Golf clubs are then built by
the Company's manufacturing personnel using the appropriate component parts.
The Company could, in the future, experience shortages of components or periods
of increased price pressures, which could have a material adverse effect on the
Company's business, results of operations, financial position or liquidity. In
addition, failure to obtain adequate supplies or fulfill customer orders on a
timely basis could have material adverse effect on the Company's business,
results of operations, financial position or liquidity.
MARKETING
The goals of the Company's marketing efforts are to build its brand identity and
drive sales through its retail distribution channel. To accomplish these goals,
Adams Golf utilizes traditional image-based advertising, engages in promotional
activities, and capitalizes on its relationships with Tom Watson and other well
known golf personalities.
TRADITIONAL IMAGE-BASED ADVERTISING-The Company's primary advertising efforts
focus on traditional image-based advertising. This advertising includes a series
of commercials which run during major golf tournaments and golf related and
other programs; newspaper, magazine and radio ad campaigns; sponsorship of a
developmental professional tour; sponsorship of selected golf tournaments;
exclusive sponsorship of The Golf Channel's weekly instructional program,
"LIVING ROOM LESSONS", and the Company's Web site.
PROMOTIONAL ACTIVITIES-The Company engages in a variety of promotional
activities to sell and market its products. Such activities have included
consumer sweepstakes; promotional giveaways with certain purchases, including
items such as instructional videos, gift packaging and golf bags; and
promotional campaigns, such as the "30-Day Money Back Guarantee," in which the
Company advertises a 30-day "no questions asked" return policy.
RELATIONSHIPS WITH PROFESSIONAL GOLFERS- The Company has entered into
endorsement contracts with professional golfers on the PGA and Senior PGA Tours
and believes that having a presence on these tours promotes the validity of its
product lines and builds brand awareness.
TOM WATSON-In August 1999, the Company entered into a five year
endorsement agreement with Tom Watson, an internationally recognized
professional golfer. Mr. Watson has won eight major championships,
including five British Open Championships, two Masters Tournaments and
a U.S. Open Championship.
The Company expects Mr. Watson to continue to be actively involved in
the development of products. Mr. Watson's agreement with the Company
calls for an annual endorsement fee in addition to royalties on
specified products which Mr. Watson assists in developing for the
Company.
HANK HANEY-The Company has also obtained endorsements from Hank Haney.
Mr. Haney was previously named PGA Teacher of the Year. Mr. Haney has
instructed over 100 touring professionals from the PGA, LPGA, European,
Japanese and Asian Tours along with several top rated junior golfers.
Mr. Haney is a member of the advisory staff for GOLF DIGEST MAGAZINE.
OTHER PROFESSIONALS-The Company, from time to time, enters into
endorsement agreements with professional golfers who compete on the
various professional golf tours in the United States and
internationally.
5
MARKETS AND METHODS OF DISTRIBUTION
The Company sells its products through on- and off-course golf shops, selected
sporting goods retailers and through its international subsidiaries and
distributor network.
SALES TO RETAILERS-The Company sells a majority of its products to selected
retailers. To maintain its high quality reputation and generate retailer
loyalty, the Company currently does not sell its products through price
sensitive general discount warehouses, department stores or membership clubs.
The Company believes its selective retail distribution strategy helps its
retailers maintain profitable margins and maximize sales of the Company's
products. For the year ended December 31, 2000, sales to retailers accounted for
approximately 82% of the Company's total net sales.
Adams Golf maintains a field sales staff that at March 19, 2001 consisted of 33
employee sales representatives, five independent sales representatives and seven
regional sales managers who are in regular personal contact with the Company's
retail accounts (approximately 4,000 retailers). These sales representatives and
regional sales managers are supported by ten inside sales representatives who
maintain contact with the Company's retailers nationwide. The inside sales
representatives also serve in a customer service capacity as the Company
believes that superior customer service can significantly enhance its marketing
efforts.
INTERNATIONAL SALES-International sales are made primarily in the United
Kingdom, Japan and Canada. International sales in the United Kingdom and Japan
are made through wholly-owned subsidiaries of the Company, whereas sales in
Canada are made through an agency relationship established in the latter part of
2000. International sales to all other countries throughout the world are made
through a network of 40 independent distributors. For the year ended December
31, 2000, international sales accounted for approximately 15.8% of the Company's
net sales.
WEB SITE-The Company maintains a Web site at www.adamsgolf.com, which allows the
visitor to access certain information about the Company's products and to locate
retailers. The Company does not currently sell its products via its Web site.
UNAUTHORIZED DISTRIBUTION AND COUNTERFEIT CLUBS
Despite the Company's efforts to limit its distribution to selected retailers,
some quantities of the Company's products have been found in unapproved outlets
or distribution channels. The existence of a "gray market" in the Company's
products can undermine authorized retailers and foreign wholesale distributors
who promote and support the Company's products, and can injure the Company's
image in the minds of its customers and consumers. Adams Golf makes efforts to
limit or deter unauthorized distribution of its products, but does not believe
the unauthorized distribution of its products can be totally eliminated. The
Company does not believe that the unauthorized distribution of its clubs has had
or will have a material adverse effect on the Company's results of operations,
financial condition or competitive position, although there can be no assurance
as to future results.
In addition, the Company is periodically made aware of the existence of
counterfeit copies of its golf clubs, particularly in foreign markets. The
Company takes action on these situations through local authorities and legal
counsel where practical. The Company does not believe that the availability of
counterfeit golf clubs had or will have a material adverse effect on the
Company's results of operations, financial condition or competitive position,
although there can be no assurance as to future results.
INDUSTRY SPECIFIC REQUIREMENTS
The Company performs ongoing credit evaluations of its retail customers'
financial condition and generally requires no collateral from these customers.
The Company believes it has adequate reserves for potential credit losses.
However, future weakness in the retail golf equipment market may result in
delinquent or uncollectible accounts for some of the Company's significant
retail customers. Accordingly, there can be no assurance that the Company's
results of operations or cash flows will not be adversely impacted by the
failure of its customers to meet their obligations to the Company. Due to
industry sensitivity to consumer buying trends and available
6
disposable income, the Company has in the past extended payment terms or granted
terms with specific due dates for certain retail customers. Issuance of these
terms (i.e., greater than 30 days or specific dating) are dependent on the
Company's relationship with the customer and the customer's payment history. The
Company extends payment terms in order to promote the Company's brand name and
to assure adequate product availability, often to coincide with planned
promotions or advertising campaigns. Although a significant amount of the
Company's sales are not affected by these terms, the extended terms do have a
negative impact on the Company's financial position and liquidity. The Company
expects to continue to selectively offer extended payment terms in the future,
depending upon known industry trends and the Company's financial plans.
In addition to extended payment terms, the nature of the industry also requires
that the Company carry a substantial level of inventory due to the lead times
associated with purchasing components overseas coupled with the seasonality of
customer demand. The Company's inventory balances were $13,779,000 and
$19,101,000 at December 31, 2000 and 1999, respectively. The Company expects its
inventory level in the future will remain at reduced levels as compared to
historical trends, although no assurance can be given that actual results will
coincide.
MAJOR CUSTOMERS
The Company is currently dependent on a small number of customers which
collectively comprise approximately 24% of net revenues for the year ended
December 31, 2000. Of these customers, two customers individually represent
greater than 5% of net revenues for the year ended December 31, 2000. The loss
of an individual or a combination of these customers would have a material
adverse effect on consolidated revenues.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Golf generally is regarded as a warm weather sport and sales of golf equipment
have been historically strongest for the Company during the first and second
quarters which ensures adequate levels of inventory at retail for the upcoming
season. In addition, sales of golf clubs are dependent on discretionary consumer
spending, which may be affected by general economic conditions. A decrease in
consumer spending generally could result in decreased spending on golf
equipment, which could have a material adverse effect on the Company's business,
operating results and financial condition. In addition, the Company's future
results of operations could be affected by a number of other factors, such as
unseasonable weather patterns; demand for and market acceptance of the Company's
existing and future products; new product introductions by the Company's
competitors; competitive pressures resulting in lower than expected average
selling prices; and the volume of orders that are received and that can be
fulfilled in a quarter. Any one or more of these factors could adversely affect
the Company or result in the Company failing to achieve its expectations as to
future sales or net income.
Because most operating expenses are relatively fixed in the short term, the
Company may be unable to adjust spending sufficiently in a timely manner to
compensate for any unexpected sales shortfall, which could materially adversely
affect quarterly results of operations and liquidity. If technological advances
by competitors or other competitive factors require the Company to invest
significantly greater resources than anticipated in research and development or
sales and marketing efforts, the Company's business, operating results or
financial condition could be materially adversely affected. Accordingly, the
Company believes that period-to-period comparisons of its results of operations
should not be relied upon as an indication of future performance. In addition,
the results of any quarter are not indicative of results to be expected for a
full fiscal year. As a result of fluctuating operating results or other factors
discussed above and below, in certain future quarters the Company's results of
operations may be below the expectations of public market analysts or investors.
In such event, the market price of the Company's common stock could be
materially adversely affected.
7
BACKLOG
The amount of the Company's backlog orders at any particular time is affected by
a number of factors, including seasonality and scheduling of the manufacturing
and shipment of products. At March 19, 2001, the Company had $1,516,000 of
orders on backlog. We do not anticipate that a significant level of orders will
not be filled within the current fiscal year. In addition, the Company believes
that the amount of its backlog is not an appropriate indicator of levels of
future production.
COMPETITION
The market for golf clubs is highly competitive. The Company competes with a
number of established golf club manufacturers, some of which have great
financial and other resources. The Company's competitors include Callaway Golf
Company, adidas-Salomon AG (Taylor Made - adidas Golf), Fortune Brands, Inc.
(Titleist and Cobra) and Karsten Manufacturing Company (PING), among others. The
Company competes primarily on the basis of performance, brand name recognition,
quality and price. The Company believes that its ability to market its products
through multiple distribution channels, including on- and off-course golf shops,
selected sporting goods retailers, and international subsidiaries and
distributors is important to the manner in which the Company competes. The
purchasing decisions of many golfers are often the result of highly subjective
preferences, which can be influenced by many factors, including, among others,
advertising, media, promotions and product endorsements. These preferences may
also be subject to rapid and unanticipated changes. The Company could face
substantial competition from existing or new competitors that introduce and
successfully promote golf clubs that achieve market acceptance. Such competition
could result in significant price erosion or increased promotional expenditures,
either of which could have a material adverse effect on the Company's business,
operating results or financial condition. There can be no assurance that Adams
Golf will be able to compete successfully against current and future sources of
competition or that its business, operating results or financial condition will
not be adversely affected by increased competition in the markets in which it
operates.
The golf club industry is generally characterized by rapid and widespread
imitation of popular technologies, designs and product concepts. Due to the
success of the Tight Lies fairway woods, the Company has experienced several
competitors introducing products similar to the Tight Lies fairway woods. The
Company may face competition from manufacturers introducing other new or
innovative products or successfully promoting golf clubs that achieve market
acceptance. The failure to compete successfully in the future could result in a
material deterioration of customer loyalty and the Company's image, and could
have a material adverse effect on the Company's business, results of operations,
financial position or liquidity.
The introduction of new products by the Company or its competitors can result in
closeouts of existing inventories at both the wholesale and retail levels. Such
closeouts are likely to result in reduced margins on the sale of older products,
as well as reduced sales of new products given the availability of older
products at lower prices.
DOMESTIC AND FOREIGN OPERATIONS
Domestic and foreign net sales for the year ended December 31, 2000, 1999 and
1998 are comprised as follows:
2000 1999 1998
--------------------------- ---------------------------- --------
Domestic $ 35,743,000 84.2 % $ 47,175,000 86.3 % $ 74,778,000 87.0 %
Foreign 6,706,000 15.8 7,477,000 13.7 11,211,000 13.0
-------------- ---------- -------------- ---------- ------------- ------
Total(1) $ 42,449,000 100.0 % $ 54,652,000 100.0 % $ 85,989,000 100.0 %
============ ======= ============ ======= ============ =======
- ------------------------------------
(1) All periods presented reflect the reclassification of shipping and handling
revenues to net sales from operating expenses under the provisions of
Emerging Issues Task Force (EITF) Issue No. 00-10.
No one customer contributed greater than 10% of the Company's consolidated net
sales in any one of the years identified.
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EMPLOYEES
At March 19, 2001, the Company had 224 full-time employees, including 108
engaged in manufacturing and assembly, 5 in research and development and quality
control, 72 in sales support and 39 in management and administration. The
Company's employees are not unionized. Management believes that its relations
with its employees are good.
ITEM 2. PROPERTIES
The Company's administrative offices and manufacturing facilities currently
occupy approximately 86,000 square feet of space in Plano, Texas. This facility
is leased by the Company pursuant to a lease agreement expiring in 2004 and may
be extended for an additional five years. The Company maintains the right to
terminate the lease if it moves to a larger facility owned by the current
lessor. The Company believes that these facilities will be sufficient through at
least the end of 2001.
ITEM 3. LEGAL PROCEEDINGS
Beginning in June 1999, the first of seven class action lawsuits was filed
against the Company, certain of its current and former officers and directors,
and the three underwriters of the Company's initial public offering (IPO) in the
United States District Court for the District of Delaware. The complaints allege
violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as
amended, in connection with the Company's IPO. In particular, the complaints
allege that the Company's prospectus, which became effective July 9, 1998, was
materially false and misleading in at least two areas. Plaintiffs allege that
the prospectus failed to disclose that unauthorized distribution of the
Company's products (gray market sales) allegedly threatened the Company's long
term profits. Plaintiffs also allege that the prospectus failed to disclose that
the golf equipment industry suffered from an oversupply of inventory at the
retail level which had an adverse impact on the Company's sales. On May 17,
2000, these cases were consolidated into one amended complaint, and a lead
plaintiff was appointed. The plaintiffs are seeking unspecified amounts of
compensatory damages, interests and costs, including legal fees. On July 5, 2000
the Company filed a motion to dismiss the consolidated, amended complaint. The
motion is now fully briefed and under submission with the court. The Company
denies the allegations in the complaint and intends to defend it vigorously.
The Company maintains directors' and officers' and corporate liability insurance
to cover risks associated with these securities claims filed against the Company
or its directors and officers.
At this time it is not possible to predict whether the Company will incur any
liability or to estimate the damages, or the range of damages, that the Company
might incur in connection the action. The Company is also not able to estimate
the amount, if any, of reimbursements that it would receive from insurance
policies should damages with respect to the above actions be incurred.
In January 2001, the Company was notified that it was part of an investigation
by the Federal Trade Commission concerning practices surrounding manufacturers'
minimum advertised price policies and Internet retailers. As it is too early to
determine the impact or scope of this investigation, the Company is not able to
estimate the amount, if any, of any potential liability. Pending the results of
the investigation, no assurance can be given that the findings of the commission
will not have a material adverse effect on the Company's results of operations,
financial condition or competitive position.
In May 1998, Adams Golf, Ltd. entered into an agreement with Nicholas A. Faldo.
The agreement provided that Mr. Faldo provide a variety of services to Adams
Golf, Ltd. including endorsement and use of certain of Adams Golf Ltd.'s
products. This agreement required Adams Golf, Ltd. to make certain payments to
Mr. Faldo, whether or not his endorsement results in increased sales of Adams
Golf Ltd.'s products. Specifically, Mr. Faldo was entitled to receive a royalty
of 5% of the net sales price of all Adams Golf's clubs (other than certain
specialty items for which the royalty equals 10% of the net sales price) sold
outside the U.S. throughout the term of the agreement. The agreement provided
for a minimum royalty of $1,875,000 in 2000 escalating to $4,000,000, for the
years 2004 through 2008. From 2009 through 2014 , the agreement did not provide
a minimum royalty. On November 6, 2000, Adams Golf Ltd. announced that Mr. Faldo
was in material breach of
9
this contract and that it had ceased making all royalty payments. Although Mr.
Faldo has not asserted claim against the Company as a result of these actions,
we believe that it is reasonably likely that he will do so. A claim from Mr.
Faldo could require the Company to spend significant time and money in
litigation. As a result, the cessation of this relationship with Mr. Faldo could
have a material adverse effect on the Company's business, operating results or
financial conditions.
From time to time the Company is engaged in various legal proceedings in the
normal course of business. The ultimate liability, if any, for the aggregate
amounts claimed cannot be determined at this time. However, the Company, based
on consultation with legal counsel, is of the opinion that there are not matters
pending or threatened which are expected to have a material adverse effect on
the Company's financial condition, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed and traded on the Nasdaq Stock Market's
National Market under the symbol "ADGO". The prices in the table below
represent, for the periods indicated, the quarterly high and low sales price for
Adams Golf, Inc. common stock as reported by the Nasdaq Stock Market. All price
quotations represent prices between dealers, without retail mark-ups, mark-downs
or commissions and may not represent actual transactions.
HIGH LOW
----------- ----------
2000
First Quarter $ 2 5/8 $ 1 17/32
Second Quarter 2 13/16
Third Quarter 1 23/32 31/32
Fourth Quarter 1 1/2 1/4
1999
First Quarter $ 5 9/16 $ 2 15/16
Second Quarter 4 5/8 2
Third Quarter 3 3/4 2 1/32
Fourth Quarter 3 3/16 1 9/16
On March 19, 2001, the last reported sale price of the common stock on the
Nasdaq Stock Market's National Market was $1 1/16 per share. At March 19, 2001
Adams Golf, Inc. had approximately 6,500 stockholders based on the number of
holders of record and an estimate of the number of individual participants
represented by security position listings.
No dividends have been declared or paid relating to the Company's common stock.
In order to remain listed on either the National Market or Small Cap Market of
the Nasdaq Stock Market, the Company must continue to satisfy numerous
maintenance requirements, including a minimum bid price of $1.00 per share. If
the minimum bid price for the Company's common stock is less than $1.00 for over
30 consecutive trading days, or if the Company was otherwise unable to meet
Nasdaq's standards, the Company's common stock would be delisted from the Nasdaq
National Market System. Typically in that scenario a company receives a letter
from Nasdaq raising a concern regarding its continued listing on the Nasdaq
National Market System and advising the Company that its common stock failed to
maintain a minimum bid price greater than or equal to $1.00 over the previous 30
consecutive trading days, as required by applicable Nasdaq rules. Generally, a
company is then provided 90 calendar days to regain compliance with the minimum
bid price rule and if, at any time before the expiration of the 90 days, the bid
price of the shares of common stock is equal to or greater than $1.00 for a
minimum of ten consecutive trading days, Nasdaq will determine whether the
company has complied with the rule. If a company was unable to demonstrate
compliance with the requirement on or before the expiration of the 90-day
period, Nasdaq would provide the Company with written notification that Nasdaq
had determined to delist the common stock. The Company would then be entitled to
request a review of that determination.
11
If the Company's common stock was delisted, it would be eligible to trade on the
electronic bulletin board, rather than either the Nasdaq National Market or
Small Cap Systems. The inability to maintain a listing on the Nasdaq Stock
Market could adversely affect the ability or willingness of investors to
purchase the common stock, which, in turn, would likely severely affect the
market liquidity of the Company's securities. In January 2001, the Company was
notified by Nasdaq that it had failed to maintain a minimum $1.00 bid price for
30 consecutive trading days. Nasdaq initiated a 90 calendar day "cure period"
for which the Company's stock would need to satisfy the minimum bid requirement
of $1.00 per share for ten consecutive trading days. On January 29, 2001 the
minimum bid for the Company's stock was $1.50 per share completing the tenth
consecutive day of minimum bid prices greater than $1.00. On February 1, 2001,
Nasdaq notified the Company it had resolved its non-compliance with Nasdaq's
minimum listing requirements.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below are derived from the Company's
consolidated financial statements for the years ended December 31, 2000, 1999,
1998, 1997 and 1996, respectively. The data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", the consolidated financial statements and related notes, and other
financial information included elsewhere in this document.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ---------- ---------- ----------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Consolidated Statements of Operations Data:
Net sales(1) $ 42,449 $ 54,652 $ 85,989 $ 37,330 $ 3,522
Operating income (loss) (38,509) (18,735) 18,500 (3,969) 9
Net income (loss) $ (37,241) $ (10,589) $ 12,510 $ (4,654) $ 13
========== ========== ========= ========== ========
Income (loss) per common share(2) -
basic and diluted $ (1.66) $ (0.47) $ 0.61 $ (0.37) $ -
========== ========== ========= ========== ========
Weighted average common shares(2):
Basic 22,480 22,480 20,435 12,519 11,238
========== ========== ========= ========== ========
Diluted 22,480 22,480 20,677 12,519 11,238
========== ========== ========= ========== ========
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ---------- ---------- ----------- -------
(IN THOUSANDS)
Consolidated Balance Sheet Data:
Total assets $ 47,786 $ 83,210 $ 96,906 $ 17,360 $ 2,559
Total debt (including current maturities) - - 175 - 230
Stockholders' equity 41,252 78,371 88,190 8,325 1,978
- ------------------------------------
(1) All periods presented reflect the reclassification of shipping and handling
revenues to net sales from operating expenses under the provisions of
Emerging Issues Task Force (EITF) Issue No. 00-10.
(2) See Note 1 of Notes to Consolidated Financial Statements for information
concerning the calculation of income (loss) per common share and weighted
average common shares outstanding.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company designs, manufactures, markets and distributes premium quality,
technologically innovative golf clubs. Founded in 1987, the Company operated
initially as a components supplier and contract manufacturer. The Company
established its custom fitting operation and now its core business is the
manufacture and distribution of mass produced fairway woods, drivers, irons and
wedges. The Company currently offers a variety of golf equipment products
primarily in the fairway wood, driver, iron and wedge categories. These products
are marketed primarily under the names Tight Lies ST, Tight Lies GT i-Wood,
Tight Lies 2, Tight Lies Tour and Tight Lies in the fairway wood category; Tight
Lies ST, Tight Lies 2, and SC Series in the driver category; and Tight Lies GT
in the iron and wedge categories.
The Company's net sales are primarily derived from sales to on-and-off-course
golf shops and selected sporting goods retailers and, to a lesser extent,
international distributors. No assurances can be given that demand for the
Company's current products or the introduction of new products will allow the
Company to achieve historical levels of sales in the future.
The Company does not currently manufacture the components required to assemble
its golf clubs, relying instead on various component suppliers. Golf club
components are generally available from multiple suppliers. However, the shafts
included in the Tight Lies ST fairway woods and drivers, Tight Lies GT i-Wood,
Tight Lies GT irons and Tom Watson GT wedges are only available from a single
supplier (True Temper Sports). Costs of the Company's clubs consist primarily of
component parts, including the head shaft and grip. To a lesser extent the
Company's cost of goods sold includes labor and occupancy costs in connection
with the inspection, testing and assembly of component parts at its facility in
Plano, Texas.
RESULTS OF OPERATIONS
The following table sets forth operating results expressed as a percentage of
net sales for the periods indicated.
YEARS ENDED DECEMBER 31,
----------------------------------------
2000 1999 1998
----------- ----------- --------
Net sales (1) 100.0% 100.0% 100.0%
Cost of goods sold (1) 46.4 33.9 26.4
----------- ----------- --------
Gross profit 53.6 66.1 73.6
Operating expenses:
Research and development expenses 4.9 3.8 1.8
Selling and marketing expenses (1) 87.5 76.4 36.5
General and administrative expenses:
Provision for bad debts 10.5 3.1 1.7
Other 23.5 17.1 12.1
Write-off of prepaid professional services agreement 17.9 - -
----------- ----------- --------
Total operating expenses 144.3 100.4 52.1
----------- ----------- --------
Operating income (loss) (90.7) (34.3) 21.5
Interest income, net 3.2 3.1 1.5
Other income (expense), net 0.4 - (0.1)
----------- ----------- --------
Income (loss) before income taxes (87.1) (31.2) 22.9
Income tax expense (benefit) 0.6 (11.8) 8.4
----------- ----------- --------
Net income (loss) (87.7)% (19.4)% 14.5%
=========== =========== ========
- ------------------------------------
(1) All periods presented reflect the reclassification of shipping and handling
revenues and costs to net sales and cost of goods sold, respectively, from
selling and marketing expenses under the provisions of Emerging Issues Task
Force (EITF) Issue No. 00-10.
13
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Net sales decreased 22.3% to $42.4 million for the year ended December 31, 2000
from $54.7 million for 1999, primarily due to a lower volume of fairway woods
and SC Series drivers being sold as a result of competition from other equipment
manufacturers. Net sales of fairway woods decreased 14.0% from $34.8 million for
the year ended December 31, 1999 to $29.9 million for the year ended December
31, 2000. The decrease is primarily the result of significantly reduced volumes
of the original Tight Lies line coupled with reduction in the wholesale selling
price for this product line. These factors are partially offset by increased
volume of the Tight Lies 2 line, which was introduced in October 1999. Net sales
of drivers decreased 45.5% to $9.7 million for year ended December 31, 2000 from
$17.8 million in 1999. The decrease in overall driver sales is due primarily to
a 38% overall reduction in the wholesale selling price and reduced volumes
resulting from increased competition in the driver category. Net sales for year
ended December 31, 2000 was positively impacted by the Company entering the iron
category with the introduction of the Tight Lies GT irons in November of 2000.
Net sales of the iron and wedge category increased 106.9% from $1.6 million for
the year ended December 31, 1999 to $3.4 million for 2000. Net sales of the
Company's products outside the U.S. decreased to $6.7 million from $7.5 million
for the years ended December 31, 2000 and 1999, respectively, but increased as a
percentage of net sales to 15.8% from 13.7%.
Cost of goods sold increased to $19.7 million or 46.4% of net sales from $18.5
or 33.9% of net sales for the years ended December 31, 2000 and 1999,
respectively. The increase as a percentage of net sales is partially due to cost
of goods sold for the year ended December 31, 2000 including $2.5 million of
additional expense associated with the write down of inventories of SC Series
drivers, Tight Lies and Tight Lies 2 product lines to their estimated net
realizable value which approximated 5.9% of net sales. In addition, during 2000
the Company initiated a program with retailers whereby one additional SC Series
driver was given for every four held by retailers as compensation for reductions
in the suggested retail selling price. The effect of the program was to increase
cost of goods sold by 1.6% of net sales. Additionally, the increase in cost of
goods sold as a percentage of net sales is also attributable to the reduction in
the suggested retail selling price of the SC Series driver and the original
Tight Lies lines which as compared to the year ended December 31, 1999 resulted
in a 9.5% reduction in gross margin in the 2000. These factors were partially
offset by the positive impact of changes in the revenue mix to higher margin
products. The positive impact of the change in the revenue mix was approximately
4.0%. The Company anticipates that cost of goods sold as a percentage of net
sales will continue at higher levels than experienced in prior years due
primarily to the Company entering into new equipment categories coupled with
newly introduced products that incorporate new technology in shaft and head
design resulting in higher component costs.
For the year ended December 31, 2000, operating expenses were comprised
primarily of selling and marketing expenses, general and administrative
expenses, the write-off of a prepaid professional service agreement and to a
lesser extent, research and development expenses. Selling and marketing expense
decreased to $37.1 million from $41.7 million for the years ended December 31,
2000 and 1999, respectively. The decrease in selling and marketing expense is
primarily the result of reduced advertising costs of $8.7 million associated
with television and print media. For the year ended December 31, 1999, the
Company utilized these mediums extensively to promote the introduction of the SC
Series driver, Faldo wedge and to promote sell-through of the Tight Lies fairway
woods at retailers. In addition, the Company has experienced a $0.4 million
decrease in creative costs associated with infomercials as compared to the year
ended December 31, 1999. The reduction in these expense categories was partially
offset by an increase of $1.9 million associated with the full operation of the
Company's subsidiaries in the United Kingdom and Japan, a $1.8 million increase
in sales promotion expenses, $0.7 million in additional payroll costs relating
to the addition of experienced field sales personnel, and a $0.6 million
increase in endorsement expense primarily associated with the agreement with Tom
Watson.
14
General and administrative expenses, including provisions for bad debts,
increased to $14.5 million or 34.1% of net sales for the year ended December 31,
2000 from $11.0 million or 20.2% of net sales for the comparable period ended
December 31, 1999. The increase is primarily attributable to an increase in the
provision for bad debts of $2.7 million resulting from a general downturn in the
sales of golf equipment retailers and attendant bankruptcies and financial
difficulties experienced by certain customers. In addition, the Company also
experienced an increase in costs of $1.0 million associated with the operations
of its subsidiaries in the United Kingdom and Japan for year ended December 31,
2000 as compared to the year ended December 31, 1999.
Research and development expenses, primarily consisting of costs associated with
the development of new products, remained consistent at $2.1 million for each of
the years ended December 31, 2000 and 1999. Research and development expense
includes amortization of compensation resulting from stock granted to Nicholas
A. Faldo in accordance with his professional service agreement. The impact of
the amortization is $0.8 million for the year ended December 31, 2000 as
compared to $1.0 million for the year ended December 31, 1999. As Adams Golf,
Ltd. has announced that Mr. Faldo is in material breach of his contract,
research and development expense will be at reduced levels in the future as the
remaining unamortized value of the stock granted to Mr. Faldo has been
written-off as a charge to operations in the year ended December 31, 2000.
The write-off of a prepaid professional service agreement of $7.6 million
represents a charge resulting from Mr. Faldo having been declared in material
breach of his contract. The amount represents the remaining unamortized portion
of compensation resulting from stock granted in accordance with his professional
service agreement. As the Company does not believe the agreement will provide a
future benefit to the Company, the remaining unamortized portion has been
written-off as a charge to operations in the year ended December 31, 2000.
As a result of the above, the Company's operating loss was $38.5 million for the
year ended December 31, 2000 compared $18.7 million for the year ended December
31, 1999.
The effective tax rate for the year ended December 31, 2000 was 0.6% compared to
37.9% for the year ended December 31, 1999. The effective tax rate for the year
ended December 31, 2000 was impacted by a valuation allowance of $13.6 million
recorded to fully reserve net deferred tax assets as the Company is unable to
conclude, based on a weighting of objective evidence, that it is more likely
than not that the net deferred tax assets will be realized.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net sales decreased 36.4% to $54.7 million for the year ended December 31, 1999
from $86.0 million for 1998, primarily due to a lower volume of fairway woods
being sold as a result of competition from other equipment manufacturers and the
implementation at the beginning of 1999 of a new pricing structure, that
resulted in lower wholesale prices to retail customers. Net sales were
positively impacted by sales of new products, particularly the SC Series Spin
Control drivers and the Faldo Series wedges which were introduced in 1999. Net
sales of fairway woods decreased to $34.8 million for the year ended December
31, 1999 from $82.9 million for 1998, and decreased as a percentage of net sales
to 63.6% from 96.5%, respectively. Net sales of the SC Series drivers for the
year ended December 31, 1999 were $17.8 million or 32.5% of net sales. Net sales
of other product lines, primarily irons and wedges decreased to $2.1 million for
the year ended December 31, 1999 from $3.0 million for 1998, but increased as a
percentage of net sales to 3.9% from 3.5%. Net sales of the Company's products
outside the U.S. decreased to $7.5 million for the year ended December 31, 1999
from $11.2 million for the year ended December 31, 1998, but increased as a
percentage of net sales to 13.7% from 13.0%, respectively.
Cost of goods sold decreased to $18.5 million for the year ended December 31,
1999 from $22.7 million for 1998, but increased as a percentage of net sales to
33.9% from 26.4%, respectively. The increase as a percentage of net sales is
primarily due to lower average selling prices of the original Tight Lies line of
fairway woods resulting from a new suggested retail pricing structure, the
introduction of new products, such as the SC Series driver with a higher per
unit cost, which, in turn, increased costs as a percentage of net sales and
increased sales of all product groups to retailers compared to sales made
directly to consumers.
15
Selling and marketing expenses increased to $41.7 million for the year ended
December 31, 1999 from $31.4 million for 1998 and increased as a percentage of
sales to 76.4% from 36.5%. The increase in selling and marketing expenses is
primarily attributable to a $2.8 million increase in personnel and related
expenses as a result of hiring additional outside sales representatives and
marketing personnel, a $5.2 million increase in advertising resulting from
additional television and print advertising related to the launch of new
products during 1999 and to promote sell-through of the original Tight Lies
fairway woods at retailers, and $1.4 million related to the production of two
new infomercials and several new television commercials during the year.
General and administrative expenses, including provision for bad debts,
decreased to $11.0 million, but increased as a percent of net sales to 20.2% for
the year ended December 31, 1999 from $11.9 million, or 13.8% as a percent of
net sales for the same period of 1998. The decrease in general and
administrative expenses, in absolute dollars, is primarily attributable to a
$1.8 million decrease in professional services relating to costs associated with
implementation of the Company's information system in 1998. This decrease was
partially offset by a $0.7 million increase in payroll related costs due to the
hiring of additional information technology and other employees and a $0.2
million increase in bad debt expense. During the fourth quarter of 1999, the
Company discovered that excess trade credits of approximately $1.0 million had
been offset against certain trade accounts receivable. After further review, the
Company concluded that receivables affected by this activity were no longer
collectible, and, accordingly, the amount was charged to bad debt expense.
Management believes that the issues giving rise to these credits have been
addressed and that processes and controls have been implemented to prevent such
issues from arising in the future.
Research and development expenses for the year ended December 31, 1999 increased
to $2.1 million from $1.5 million for 1998, and increased as a percent of net
sales to 3.8% from 1.8%, primarily due to increased salaries and tooling
expenses associated with the development of new products.
As a result of the above, the Company's operating loss was approximately $18.7
million for the year ended December 31, 1999 compared to operating income of
approximately $18.5 million for 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased to $6.5 million at December 31, 2000 from
$2.8 million at December 31, 1999, primarily as a result of $8.2 million used in
operations and offset by $11.9 million provided from investing activities. The
cash flows used in operations was primarily a result of the net loss of $37.2
million, partially offset by an decrease in trade receivables of $5.7 million,
resulting from reduced levels of sales and increased collections in 2000 as
compared to 1999, a decrease in income tax receivable of $4.8 million relating
to the recovery of taxes paid in prior years made available through the
carry-back of current net operating losses to prior years, a decrease in
inventories of $2.8 million due to the reduction of component part purchasing
for certain product lines, and non-cash expenses of approximately $15.0 million.
Cash provided by investing activities of $11.9 million for the year ended
December 31, 2000, is primarily related to sales and maturities of marketable
securities of $35.1 million, offset by purchases of marketable securities of
$22.5 million and purchases of computer equipment and software of $0.7 million.
Working capital totaled $34.5 million at December 31, 2000 compared to $53.9
million at December 31, 1999.
On June 30, 2000, the Company executed a $5.0 million revolving credit facility
with Legacy Bank of Texas, which was to expire on June 1, 2001. The revolving
credit facility was secured by certain of the Company's accounts receivable and
finished goods inventories. On January 31, 2001, the Company terminated the
agreement prior to its renewal date in favor of a new financing arrangement.
On March 27, 2001, the Company executed a $10.0 million revolving credit
facility with General Electric Capital Corporation, which expires on March 27,
2004. The revolving credit facility is secured by certain of the Company's
eligible accounts receivable and inventories. Borrowings under the revolving
credit facility are payable on demand and bear interest at the GE Capital
Commercial Paper Rate plus 3.75% per year. At March 23, 2001, the GE Capital
Commercial Paper Rate was 4.91%. The unused portion of the revolving credit
facility is subject to a commitment fee of 0.25% per year. The credit facility
requires the Company to maintain
16
compliance with certain financial ratio covenants, including, among other
things, minimum tangible net worth, fixed charge coverage ratio, net
borrowing availability and cash balances. In addition, the Company will be
subject to limitations on capital expenditures and net losses. Currently, the
Company does not have any outstanding borrowings under the facility.
The Company expects to meet future liquidity requirements through cash flows
generated from operations, cash reserves, maturities or sales of marketable
securities, and utilization of its credit facility. It is anticipated that
operating cash flows, current cash reserves, sales and maturities of marketable
securities and the Company's credit facility will also fund capital expenditure
programs. These capital expenditure programs can be suspended or delayed at any
time with minimal disruption to the Company's operations if cash is needed in
other areas of the Company's operations. In addition, cash flows from
operations, cash reserves and the credit facility will be utilized to support
purchasing of component parts for the new product lines introduced during the
first quarter of 2001. It is anticipated that cash requirements to support the
proposed purchasing efforts will be at increased levels in the future as
compared to historical trends as the Company has introduced new technologies
which result in higher component costs. In addition, the Company has entered new
equipment categories (i.e. irons) which generally produce lower margins as
compared to fairway woods and drivers. With regard to advertising efforts, the
Company anticipates requiring less cash flow to support discretionary programs
as the Company continues to reduce its expenditures in this category as compared
to historical trends. The expected operating cash flow, current cash reserves
and the Company's credit facility are expected to allow the Company to meet
working capital requirements during periods of low cash flows resulting from the
seasonality of the industry.
During the past two years the Company has experienced declining sales and
increasing operating losses. Should this trend continue, it may be necessary to
secure additional financing to continue operations. There can be no assurance
that any additional financing will be available on acceptable terms. Should the
Company be unable to obtain additional financing, it may be required to halt
capital expenditure programs, reduce costs associated with its current
infrastructure, and decrease the level of expenditures necessary to support
marketing efforts and advertising campaigns, which could further reduce sales.
Capital expenditures for the three years ended December 31, 2000, 1999, and 1998
were approximately $0.7 million, $2.6 million and $4.3 million, respectively.
The expenditures were primarily associated with development of information
systems and reporting technologies to adequately monitor business operations.
Capital expenditures in the future are not expected to include expenditures
outside the ordinary course of business.
Management believes that sufficient resources will be available to meet the
Company's cash requirements through the next twelve months. Cash requirements
beyond twelve months are dependent on the Company's ability to introduce
products which gain market acceptance and manage working capital requirements.
The Company has introduced new products and has taken other steps to increase
market acceptance and therefore resulting sales and revenues during 2001.
However, there can be no assurance that the Company's projected cash resources
will be sufficient to fund the Company's cash requirements after 2001.
Accordingly, to remain viable after 2001, the Company must substantially
increase revenues, raise additional capital, and/or substantially reduce its
operations, notwithstanding the liquidity provided by the Company's revolving
credit facility. Thus, the Company may need to raise additional funds through
the issuance of equity securities, in which case the percentage ownership of the
stockholders of the Company will be reduced, stockholders may experience
additional dilution, or such equity securities may have rights, preferences or
privileges senior to common stock. Further, there can be no assurance that
additional financing will be available when needed on terms favorable to the
Company or at all. If adequate funds are not available or not available on
acceptable terms, the Company may be unable to continue operations, develop,
enhance, and market products, retain qualified personnel, take advantage of
future opportunities, or respond to competitive pressures, any of which could
have a material adverse effect on the Company's business, operating results,
financial condition or liquidity.
17
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued SFAS No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This statement establishes
accounting and reporting standards for derivative instruments and hedging
activities. The statement was amended by SFAS No. 137, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF SFAS NO.
133 and SFAS No. 138, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES AND AMENDMENT OF SFAS NO. 133 and will be effective for financial
statements for fiscal years beginning after June 15, 2000. The Company believes
SFAS No. 133 as amended, will not have a material impact on its financial
statements. The Company will adopt the provisions of SFAS No. 133 in the first
quarter of 2001.
BUSINESS RISKS
As indicated below, this Annual Report contains forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements. Factors
that may cause such a difference include, but are not limited to, those
discussed in this section and elsewhere throughout this Form 10-K.
DEPENDENCE ON NEW PRODUCT INTRODUCTIONS; UNCERTAIN CONSUMER ACCEPTANCE
Through the first quarter of 2001, the Company's net sales were derived
primarily from the sale of fairway woods (original Tight Lies and Tight Lies 2).
During the year ended December 31, 2000, the Company's fairway woods represented
70.5% of net sales whereas, for the year ended December 31, 1999, the Company's
fairway woods represented 63.6% of net sales. To date, although certain of the
Company's new product introductions have experienced modest success, we continue
to be heavily dependent on sales of our fairway woods. The Company's ultimate
success depends, in large part, on its ability to successfully develop and
introduce new products accepted in the marketplace. Historically, a large
portion of new golf club technologies and product designs have been met with
consumer rejection. Certain products previously introduced by the Company have
not met the level of consumer acceptance anticipated by management. No assurance
can be given that the products introduced by the Company after the original
Tight Lies fairway woods will increase in consumer acceptance or that the
Company will be able to design, manufacture and introduce new products that will
meet with market acceptance. Failure by the Company to identify and develop
innovative new products that achieve widespread market acceptance would
adversely affect the Company's future growth and profitability. Additionally,
successful technologies, designs and product concepts are likely to be copied by
competitors. Accordingly, the Company's operating results could fluctuate as a
result of the amount, timing and market acceptance of new product introductions
by the Company or its competitors. The design of new golf clubs is also greatly
influenced by the rules and interpretations of the USGA. Although the golf
equipment standards established by the USGA generally apply only to competitive
events sanctioned by that organization, the Company believes that it is critical
for its future success that new clubs introduced by the Company comply with USGA
standards.
LIMITED HISTORY OF PROFITABILITY
The Company has a limited history of profitability. Although the Company
generated net income during the year ended December 31, 1996 and the year ended
December 31, 1998, it has historically experienced net losses from operations.
For the years ended December 31, 1999 and 2000 the Company has experienced
declining sales and increasing operating losses. There can be no assurance that
the Company will be able to regain profitability on a quarterly or annual basis
in the future. The Company has introduced new products and has taken other steps
to increase market acceptance and therefore resulting sales and revenues during
2001. However, there can be no assurance that the Company's projected cash
resources will be sufficient to fund the Company's cash requirements after 2001.
Accordingly, to remain viable after 2001, the Company must substantially
increase revenues, raise additional capital, and/or substantially reduce its
operations, notwithstanding the liquidity provided by the Company's revolving
credit facility. Thus, the Company may need to raise additional funds through
the issuance of equity securities, in which case the percentage ownership of the
stockholders of the Company will be reduced, stockholders may experience
additional dilution, or such equity securities may have rights, preferences or
privileges senior to common stock. Further, there can be no
18
assurance that additional financing will be available when needed on terms
favorable to the Company or at all. If adequate funds are not available or
not available on acceptable terms, the Company may be unable to continue
operations, develop, enhance and market products, retain qualified personnel,
take advantage of future opportunities, or respond to competitive pressures,
any of which could have a material adverse effect on the Company's business,
operating results, financial condition or liquidity.
COMPETITION
The market for golf clubs is highly competitive. The Company competes with a
number of established golf club manufacturers, some of which have greater
financial and other resources. The Company's competitors include Callaway Golf
Company, adidas-Saloman AG (Taylor Made - adidas Golf), Fortune Brands, Inc.
(Titleist and Cobra) and Karsten Manufacturing Company (PING), among others. The
Company competes primarily on the basis of performance, brand name recognition,
quality and price. The Company believes that its ability to market its products
through multiple distribution channels, including on- and off-course golf shops
and selected sporting goods retailers is important to the manner in which the
Company competes. The purchasing decisions of many golfers are often the result
of highly subjective preferences, which can be influenced by many factors
including, among others, advertising, media, promotions and product
endorsements. These preferences may also be subject to rapid and unanticipated
changes. The Company could face substantial competition from existing or new
competitors that introduce and successfully promote golf clubs that achieve
market acceptance. Such competition could result in significant price erosion or
increased promotional expenditures, either of which could have a material
adverse effect on the Company's business, operating results and financial
condition, There can be no assurance that Adams Golf will be able to compete
successfully against current and future sources of competition or that its
business, operating results or financial condition will not be adversely
affected by increased competition in the markets in which it operates.
The golf club industry is generally characterized by rapid and widespread
imitation of popular technologies, designs and product concepts. Due to the
success of the Tight Lies fairway woods, the Company has experienced several
competitors introducing products similar to the Tight Lies fairway woods. The
Company may face competition from manufacturers introducing other new or
innovative products or successfully promoting golf clubs that achieve market
acceptance. The failure to compete successfully in the future could result in a
material deterioration of customer loyalty and the Company's image, and could
have a material adverse effect on the Company's business, results of operations,
financial position or liquidity.
The introduction of new products by the Company or its competitors can result in
closeouts of existing inventories at both the wholesale and retail levels. Such
closeouts are likely to result in reduced margins on the sale of older products,
as well as reduced sales of new products given the availability of older
products at lower prices.
DEPENDENCE ON KEY PERSONNEL AND ENDORSEMENTS
The Company's success depends to a significant extent upon the performance of
its senior management team, particularly the Company's founder, Chief Executive
Officer and President, B.H (Barney) Adams. In addition to his direction and
supervision of the day-to-day affairs of the Company, Mr. Adams spearheads the
Company's product development efforts. The loss or unavailability of Mr. Adams
would adversely affect the Company's business and prospects. None of the
Company's officers or employees, including Mr. Adams, is bound by an employment
agreement and the relations of such officers and employees are, therefore, at
will. The Company has a $4.0 million key man life insurance policy on the life
of Mr. Adams; however, there can be no assurance that the proceeds of such
policy could adequately compensate the Company for the loss of his services. In
addition, there is strong competition for qualified personnel in the golf club
industry, and the inability to continue to attract, retain and motivate other
key personnel could adversely affect the Company's business, operating results
or financial condition.
The Company has entered into endorsement arrangements with certain members of
the PGA Tour and the Senior PGA Tour including Tom Watson. As is typical in the
golf industry generally, the agreements with these professional golfers do not
necessarily require that they use our golf clubs at all times during the terms
thereof, including, in certain circumstances, at times when the Company is
required to make payments to them. The
19
failure of certain of these individuals to use the Company's products on one
or more occasions has resulted in negative publicity involving the Company.
While the Company does not believe this publicity has resulted in any
significant erosion in the sales of the Company's products to date, no
assurance can be given that the Company's business would not be adversely
affected in a material way by further such publicity or by the failure of its
professional endorsers to carry and use its products.
HISTORICAL DEPENDENCE ON TELEVISION ADVERTISING
Over the past two years, the Company has significantly increased its use of
traditional image-based advertising with a steady migration away from its
original infomercial based approach. Sales of the Company's product at the
retail level has been and may continue to be, highly dependent on the success of
the Company's traditional image-based approach. The Company believes that its
current television advertising strategy, like other advertising campaigns, will
reach a point of diminishing return and will therefore need continued
modification. No assurance can be given that another advertising strategy can be
timely developed or that , if developed, such alternative strategy will achieve
the same level of success as was previously enjoyed by the Company's original or
current advertising strategy. A decline in effectiveness of the Company's
marketing strategy could have a material adverse effect on the Company's
business, operating results or financial condition.
SOURCES OF SUPPLY
The Company relies on a limited number of suppliers for a significant portion of
the component parts used in the manufacture of its golf clubs. In addition, the
Company is currently dependent on a single supplier (True Temper Sports) for the
multi-material shafts used in the recently introduced Tight Lies ST and GT
product lines. The Company could in the future experience shortages of
components or periods of increased price pressures, which could have a material
adverse effect on the Company's business, operating results and financial
condition. In addition, failure to obtain adequate supplies or fulfill customer
orders on a timely basis could have a material adverse effect on the Company's
business, operating results, or financial condition.
PRODUCT WARRANTIES
The Company supports all of its golf clubs with a limited one year product
warranty with the exception of the newly introduced GT shaft included in the
Tight Lies GT irons, Tight Lies GT i-Wood, and Tom Watson GT wedge, and the ST
shaft included in the Tight Lies ST fairway woods and drivers. These shafts
carry a five year warranty on defects in quality and workmanship. The Company
closely monitors the level and nature of warranty claims, and, where
appropriate, seeks to incorporate design and production changes to assure its
customers of the highest quality available in the market. Significant increases
in the incidence of such claims may adversely affect the Company's sales and
reputation with golfers. The Company establishes a reserve for warranty claims
which it believes is sufficient to meet future claims. However, there can be no
assurance that these reserves will be sufficient if the Company were to
experience an unusually high incidence of problems with its products.
RISKS ASSOCIATED WITH INTELLECTUAL PROPERTY
Imitation of popular club designs is widespread in the industry. No assurance
can be given that other golf club manufacturers will not be able to successfully
sell golf clubs that imitate the Company's products without infringing on the
Company's copyrights, patents, trademarks or trade dress. Many of the Company's
competitors have obtained patent, trademark, copyright or other protection of
intellectual property rights pertaining to golf clubs. No assurance can be given
that the Company will not be adversely affected by the assertion of intellectual
property rights violations by competitors. This effect could include alteration
or withdrawal of existing products and delayed introduction of new products.
The Company attempts to maintain the secrecy of its confidential business
information including the practice of having prospective vendors and suppliers
sign confidentiality agreements. No assurance can be given that the Company's
confidential business information will be adequately protected in all instances.
The unauthorized use of the Company's confidential business information could
adversely affect the Company.
20
UNAUTHORIZED DISTRIBUTION AND COUNTERFEIT CLUBS
Despite the Company's efforts to limit its distribution to selected retailers,
some quantities of the Company's products have been found in unapproved outlets
or distribution channels. The existence of a "gray market" in the Company's
products can undermine authorized retailers and foreign wholesale distributors
who promote and support the Company's products, and can injure the Company's
image in the minds of its customers and consumers. Adams Golf makes efforts to
limit or deter unauthorized distribution of its products, but does not believe
the unauthorized distribution of its products can be totally eliminated. The
company does not believe that the unauthorized distribution of its clubs has had
or will have a material adverse effect on the Company's results of operations,
financial condition or competitive position, although there can be no assurance
as to future results.
In addition, the Company is occasionally made aware of the existence of
counterfeit copies of its golf clubs, particularly in foreign markets. The
Company takes action in these situations through local authorities and legal
counsel where practical. The Company does not believe that the availability of
counterfeit golf clubs has had or will have a material adverse effect on the
Company's results of operations, financial condition or competitive position,
although there can be no assurance as to future results.
INDUSTRY SPECIFIC REQUIREMENTS
The Company performs ongoing credit evaluations of its retail customers'
financial condition and generally requires no collateral from these customers.
The Company believes it has adequate reserves for potential credit losses.
However, because the Company has recently experienced an increase in
bankruptcies and financial difficulties of certain of its retail customers, this
trend may result in additional delinquent or uncollectible accounts for some of
the Company's significant customers. Additionally, approximately 24% of the
Company's net sales for the year ended December 31, 2000 were derived from a
small number of customers. Accordingly, there can be no assurance that the
Company's results of operations or cash flows will not be adversely impacted by
the failure of these customers or its other customers to meet their obligations
to the Company. Due to industry sensitivity to consumer buying trends and
available disposable income, the Company has in the past extended payment terms
for specific retail customers. Issuance of these terms (i.e., greater than 30
days or specific dating) is dependent on the Company's relationship with the
customer and the customer's payment history. Payment terms are extended to
selected customers typically during off-peak times in the year in order to
promote the Company's brand name and to assure adequate product availability,
often to coincide with planned promotions or advertising campaigns. Although a
significant amount of the Company's sales are not affected by these terms, the
extended terms do have a negative impact on the Company's financial position and
liquidity. The Company expects to continue to selectively offer extended payment
terms in the future, depending upon known industry trends and the Company's
financial plans.
In addition to extended payment terms, the nature of the industry also requires
that the Company carry a substantial level of inventory due to the lead times
associated with purchasing components overseas coupled with the seasonality of
customer demand. The Company's inventory balances were $13,779,000 and
$19,101,000 at December 31, 2000 and 1999, respectively. The Company expects its
inventory level in the future will remain at reduced levels as compared to
historical trends, although no assurance can be given that actual results will
coincide with expectations.
CERTAIN RISKS OF CONDUCTING BUSINESS ABROAD
The Company imports a significant portion of its component parts, including
heads, shafts, headcovers and grips, from companies in Taiwan, China, Australia
and Mexico. In addition, the Company sells its products to certain distributors
located outside of the United States. The Company's international business is
currently centered in Canada, Japan and the United Kingdom. The Company intends
to focus its international expansion efforts in Canada, Japan and the United
Kingdom and, to a lesser extent, in South Africa and Australia. The Company's
business is subject to the risks generally associated with doing business
abroad, such as foreign government regulations, foreign consumer preferences,
import and export control, political unrest, disruptions or delays in shipments
and changes in economic conditions and exchange rates in countries in which the
Company purchases components or sells its products.
21
SEASONALITY AND QUARTERLY FLUCTUATIONS
Golf generally is regarded as a warm weather sport and sales of golf equipment
have been historically strongest for the Company during the first and second
quarters which ensures adequate levels of inventory at retail for the upcoming
season. In addition, sales of golf clubs are dependent on discretionary consumer
spending, which may be affected by general economic conditions. A decrease in
consumer spending generally could result in decreased spending on golf
equipment, which could have a material adverse effect on the Company's business,
operating results and financial condition. In addition, the Company's future
results of operations could be affected by a number of other factors, such as
unseasonable weather patterns; demand for and market acceptance of the Company's
existing and future products; new product introductions by the Company's
competitors; competitive pressures resulting in lower than expected average
selling prices; and the volume of orders that are received and that can be
fulfilled in a quarter. Any one or more of these factors could adversely affect
the Company or result in the Company failing to achieve its expectations as to
future sales or net income.
Because most operating expenses are relatively fixed in the short term, the
Company may be unable to adjust spending sufficiently in a timely manner to
compensate for any unexpected sales shortfall, which could materially adversely
affect quarterly results of operations and liquidity. If technological advances
by competitors or other competitive factors require the Company to invest
significantly greater resources than anticipated in research and development or
sales and marketing efforts, the Company's business, operating results or
financial condition could be materially adversely affected. Accordingly, the
Company believes that period-to-period comparisons of its results of operations
should not be relied upon as an indication of future performance. In addition,
the results of any quarter are not indicative of results to be expected for a
full fiscal year. As a result of fluctuating operating results or other factors
discussed above and below, in certain future quarters the Company's results of
operations may be below the expectations of public market analysts or investors.
In such event, the market price of the Company's common stock could be
materially adversely affected.
ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation and Amended and Restated Bylaws (the
"Bylaws") contain, among other things, provisions establishing a classified
Board of Directors, authorizing shares of preferred stock with respect to which
the Board of Directors of the Company has the power to fix the rights,
preferences, privileges and restrictions without any further vote or action by
the stockholders, requiring that all stockholder action be taken at a
stockholders' meeting and establishing certain advance notice requirements in
order for stockholder proposals or director nominations to be considered at such
meetings. In addition, the Company is subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law (the "DGCL"). In general
this statue prohibits a publicly-held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
Such provision could delay, deter or prevent a merger, consolidation, tender
offer, or other business combination or change of control involving the Company
that some or a majority of the Company's stockholders might consider to be in
its best interest, including offers or attempted takeovers that might otherwise
result in such stockholders receiving a premium over the market price for the
common stock. The potential issuance of preferred stock may have the effect of
delaying, deferring or preventing a change of control of the Company, may
discourage bids for the common stock at a premium over the market price of the
common stock and adversely affect the market price of and voting and other
rights of the holders of the common stock. The Company has not issued, and
currently has no plans to issue, shares of preferred stock.
RISKS ASSOCIATED WITH ACQUISITIONS
The Company may make acquisitions of complementary services, technologies,
product designs or businesses in the future. There can be no assurance that any
future acquisition will be completed or that, if completed, any such acquisition
will be effectively assimilated into the Company's business. Acquisitions
involve numerous risks, including among others, loss of key personnel of the
acquired company, the disruption of the Company's ongoing business, the
maintenance of uniform standards, controls, procedures and policies, and the
impairment of the Company's reputation and relationships with employees and
customers. In addition, any future
22
acquisitions could result in the issuance of dilutive equity securities, the
incurrence of debt or contingent liabilities, and amortization expenses
related to goodwill and other intangible assets, any of which could have a
material adverse effect on the Company business, operating results or
financial condition.
TERMINATION OF FALDO CONTRACT
In May 1998, Adams Golf, Ltd. entered into an agreement with Nicholas A. Faldo.
The agreement provided that Mr. Faldo provide a variety of services to Adams
Golf, Ltd. including endorsement and use of certain of Adams Golf Ltd.'s
products. This agreement required Adams Golf, Ltd. to make certain payments to
Mr. Faldo, whether or not his endorsement results in increased sales of Adams
Golf Ltd.'s products. Specifically, Mr. Faldo was entitled to receive a royalty
of 5% of the net sales price of all Adams Golf's clubs (other than certain
specialty items for which the royalty equals 10% of the net sales price) sold
outside the U.S. throughout the term of the agreement. The agreement provided
for a minimum royalty of $1,875,000 in 2000 escalating to $4,000,000 for the
years 2004 through 2008. From 2009 through 2014 , the agreement did not provide
a minimum royalty. On November 6, 2000 Adams Golf Ltd. announced that Mr. Faldo
was in material breach of this contract and has ceased making all royalty
payments. Although Mr. Faldo has not filed suit against the Company as a result
of these actions, we believe that it is reasonably likely that he will do so. A
claim from Mr. Faldo could require the Company to spend significant time and
money in litigation. As a result, the cessation of this relationship with Mr.
Faldo could have a material adverse effect on the Company's business, operating
results or financial conditions.
FORWARD-LOOKING STATEMENTS
This Annual Report contains "forward-looking statements" made under the "safe
Harbor" provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are based on the beliefs of the Company's
management as well as assumptions made by and information currently available to
the Company's management. When used in this report, the words "anticipate,"
"believe," "expect" and words or phrases of similar import, as they relate to
the Company or Company management, are intended to identify forward-looking
statements. Such statements reflect the current view of the Company with respect
to future events and are subject to certain risks, uncertainties and assumptions
related to certain factors including, without limitation, product development
difficulties; manufacturing difficulties; product introductions; market demand
and acceptance of products; the impact of changing economic conditions; business
conditions in the golf industry; reliance on third parties including suppliers;
the impact of market peers and their products; the actions of competitors,
including pricing, advertising and product development; risks concerning future
technology; and one-time events and other factors detailed in this report under
"Business Risks". Although the Company believes that the expectations reflected
in such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to have been correct. Based upon changing
conditions, should any one or more of these risks or uncertainties materialize,
or should any underlying assumptions prove incorrect, actual results may vary
materially from those described herein. The Company does not intend to update
these forward-looking statements. Except as required by federal securities laws,
Adams Golf undertakes no obligation to publicly update or revise any written or
oral forward-looking statements, whether as a result of new information, future
events, changed circumstances or any other reason after the date of this report.
All subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the applicable cautionary statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company, in the normal course of doing business, is exposed to market risk
through changes in interest rates with respect to its cash equivalents and
available-for-sale marketable securities. All of the Company's cash equivalents
and available-for-sale marketable securities are fixed rate state government,
municipal or corporate bonds. At December 31, 2000 and 1999, the cost and market
value of such cash equivalents and marketable securities was approximately
$20,978,000 and $29,706,000, respectively. A significant increase in interest
rates would result in a decrease in the bond prices. The Company's investment
policy sets minimum standards related to the quality, maturity and liquidity of
such investments.
23
The table below presents principal amounts and related weighted-average interest
rates by year of maturity for the Company's investment portfolio at December 31,
2000 (in thousands, except percentages). It should be noted that all instruments
in the Company's investment portfolio mature in the year ended December 31,
2001.
FAIR
2001 VALUE
---------- ---------
Cash equivalents:
Fixed rate $ 3,001 $ 3,001
Average interest rate 6.1%
Marketable securities:
Fixed rate $ 14,481 $ 14,489
Average interest rate 6.5%
ITEM. 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are set forth herein under Item 14 commencing on
page F-1. Schedule II to the financial statements is set forth herein under
Item 14 on page S-1. In addition, supplementary financial information is
required pursuant to the provisions of Regulation S-K, Item 302, and is set
forth herein under Item 14, note 15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference from pages 3
through 8, inclusive, of the Company's Proxy Statement dated April 4, 2001 for
the Annual Meeting of Stockholders on May 2, 2001 ("the 2001 Proxy Statement")
under the respective captions, "Election of Directors", "Stock
Ownership--Section 16(a) Beneficial Ownership Reporting Compliance" and
"Management--Executive Officers".
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from pages 8
through 11, inclusive, of the Company's 2001 Proxy Statement under the caption
"Management--Compensation of Executive Officers".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from page 6
through 7 of the Company's 2001 Proxy Statement under the caption "Stock
Ownership--Beneficial Ownership of Certain Stockholders, Director and Executive
Officers".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from pages 8
through 11, inclusive, of the Company's 2001 Proxy Statement under the captions
"Management--Employment Contracts and Change in Control Agreements,"
"--Compensation Committee Interlocks and Insider Participation" and "--Certain
Transactions".
25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
(1) CONSOLIDATED FINANCIAL STATEMENTS
ITEM PAGE
---- ----
Index to Consolidated Financial Statements and Related Financial Statement Schedule F-1
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-3
Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and
1998 F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31,
2000, 1999 and 1998 F-5-F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and
1998 F-7
Notes to Consolidated Financial Statements F-8-F-22
(2) FINANCIAL STATEMENT SCHEDULE
The following financial statement schedule of the Company for the years
ended December 31, 2000, 1999, and 1998 is filed as part of this Annual
Report and should be read in conjunction with the Consolidated Financial
Statements of the Company. All other schedules have been omitted because
said schedules are not required under the related instructions or are not
applicable, or because the information required is included in the
Company's consolidated financial statements or the notes thereto.
Schedule II--Valuation and Qualifying Accounts S-1
(3) EXHIBITS
The exhibits listed below are filed as a part of or incorporated by
reference in this Annual Report. Where such filing is made by
incorporation by reference to a previously filed document, such document
is identified in parenthesis. See the Index of Exhibits included with the
exhibits filed as part of this Annual Report.
EXHIBIT DESCRIPTION LOCATION
------- ----------- --------
Exhibit 3.1 Amended and Restated Certificate of Incorporated by reference to Form S-1
Incorporation (Exhibit 3.1)
Exhibit 3.2 Amended and Restated By-laws Incorporated by reference to Form S-1
(Exhibit 3.2)
Exhibit 4.1 1998 Stock Incentive Plan of the Incorporated by reference to Form S-8
Company dated February 26, 1998, as (Exhibit 4.1)
amended.
Exhibit 4.2 1996 Stock Option Plan dated April 10, Incorporated by reference to Form S-1
1998 (Exhibit 4.2)
Exhibit 4.3 Adams Golf, Ltd. 401(k) Retirement Plan Incorporated by reference to Form S-1
(Exhibit 4.3)
Exhibit 4.4 1999 Non-Employee Director Plan of Incorporated by reference to 1999 Form
Adams Golf, Inc. 10-K (Exhibit 4.4)
26
Exhibit 4.5 1999 Stock Option Plan for Outside Incorporated by reference to 1999 Form
Consultants of Adams Golf, Inc. 10-K (Exhibit 4.5)
Exhibit 10.1 Agreement between the Registrant and Incorporated by reference to Form S-1
Nick Faldo, dated April 22, 1998 (Exhibit 10.1)
Exhibit 10.2 Amended and Restated Revolving Credit Incorporated by reference to Exhibit 10.2 to
Agreement dated February 26, 1999, the Annual Report on Form 10-K for the year
between Adams Golf Direct year ended December 31, 1998
Response, Ltd. and NationsBank of
Texas N.A. and related promissory
note and guarantee
Exhibit 10.3 Commercial Lease Agreement dated Incorporated by reference to Form S-1
December 5, 1997, between (Exhibit 10.3)
Jackson-Shaw Technology Center II,
Ltd. and the Company
Exhibit 10.4 Commercial Lease Agreement dated Incorporated by reference to Form S-1
April 6, 1998, between Jackson-Shaw (Exhibit 10.4)
Technology Center, Ltd. and the
Company
Exhibit 10.5 Letter agreement dated April 13, 1998 Incorporated by reference to Form S-1
Between the Company and Darl P. (Exhibit 10.5)
Hatfield
Exhibit 10.6 Amendment to Amended and Restated Incorporated by reference to Exhibit 10.6 to
Revolving Credit Agreement dated the Quarterly Report on Form 10-Q for the
August 13, 1999 between Adams Golf quarter ended September 30, 1999
Direct Response, Ltd, Adams Golf,
Ltd. And Bank of America, N. A.
Exhibit 10.7 Revolving Credit Agreement between Incorporated by reference to Exhibit 10.7
Adams Golf, Ltd. and Legacy Bank of to the Quarterly Report on Form 10-Q for
Texas the quarter ended September 30, 2000
Exhibit 10.8 Termination Letter - Revolving Credit Included in this filing
Agreement between Adams Golf, Ltd. and
Legacy Bank of Texas
Exhibit 10.9 Revolving Credit Agreement between Included in this filing
Adams Golf, Ltd. and General Electric
Capital Corporation
Exhibit 10.10 Change of Control Agreement - Oliver G. Included in this filing
(Chip) Brewer
Exhibit 10.11 Change of Control Agreement - Russell Included in this filing
Fleischer
Exhibit 10.12 Change of Control Agreement - Terry Included in this filing
Marshall
Exhibit 10.13 Change of Control Agreement - Joseph Included in this filing
Wooster
Exhibit 10.14 Change of Control Agreement - Timothy Included in this filing
Reed
27
Exhibit 10.15 Change of Control Agreement - Henry Included in this filing
Lange
Exhibit 10.16 Change of Control Agreement - Cindy Included in this filing
Herington
Exhibit 10.17 Change of Control Agreement - Jon Included in this filing
Parsons
Exhibit 10.18 Amended Commercial Lease Agreement Included in this filing
dated April 6, 1998, between
Jackson-Shaw Technology Center, Ltd.
and the Company
Exhibit 21.1 Subsidiaries of the Registrant Included in this filing
Exhibit 23.1 Consent of KPMG LLP Included in this filing
(b) REPORTS ON FORM 8-K
On November 6, 2000, the Company filed a Current Report on Form 8-K disclosing a
press release where Adams Golf, Ltd. declared professional golfer Nick Faldo in
material breach of his contract.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ADAMS GOLF, INC., a Delaware corporation
Date: March 30, 2001 By: /s/ B. H. (BARNEY) ADAMS
------------------------------------
B.H. (Barney) Adams
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: March 30, 2001 By: /s/ B. H. (BARNEY) ADAMS
-----------------------------------
B.H. (Barney) Adams
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
Date: March 30, 2001 By: /s/ RUSSELL L. FLEISCHER
----------------------------------
Russell L. Fleischer,
CHIEF FINANCIAL OFFICER
AND TREASURER
(PRINCIPAL FINANCIAL OFFICER)
Date: March 30, 2001 By: /s/ GABRIEL J. NILL
-----------------------------------
Gabriel J. Nill
CONTROLLER AND MANAGER OF FINANCIAL
SERVICES, (PRINCIPAL ACCOUNTING
OFFICER)
Date: March 30, 2001 By: /s/ OLIVER G. BREWER
------------------------------------
Oliver G. Brewer
CHIEF OPERATING OFFICER,
PRESIDENT AND DIRECTOR
Date: March 30, 2001 By: /s/ MARK R. MULVOY
------------------------------------
Mark R. Mulvoy
DIRECTOR
29
Date: March 30, 2001 By: /s/ PAUL F. BROWN, JR.
-----------------------------------
Paul F. Brown, Jr.
DIRECTOR
Date: March 30, 2001 By: /s/ STEPHEN R. PATCHIN
----------------------------------
Stephen R. Patchin
DIRECTOR
Date: March 30, 2001 By: /s/ ROBERT F. MACNALLY
----------------------------------
ROBERT F. MACNALLY
DIRECTOR
30
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND RELATED FINANCIAL STATEMENT SCHEDULE
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-3
Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999
and 1998 F-5 - F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998 F-7
Notes to Consolidated Financial Statements F-8 - F-22
FINANCIAL STATEMENT SCHEDULE
The following financial statement schedule of the Company for the years ended
December 31, 2000, 1999 and 1998 is filed as part of this Report and should be
read in conjunction with the Consolidated Financial Statements of the Company.
Schedule II--Valuation and Qualifying Accounts S-1
All other schedules are omitted since the required information is not present,
or is not present in amounts sufficient to require submission of the schedule,
or because the information required is included in the consolidated financial
statements and notes thereto.
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Adams Golf, Inc.:
We have audited the consolidated financial statements of Adams Golf, Inc. and
subsidiaries as listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we have also audited the financial
statement schedule as listed in the accompanying index. The consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Adams Golf, Inc. and
subsidiaries as of December 31, 2000 and 1999 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2000 in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG LLP
Dallas, Texas
January 31, 2001, except as to
Note 11, which is as of March 27, 2001
F-2
ADAMS GOLF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31,
-----------------------
2000 1999
----------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 6,488 $ 2,786
Marketable securities (note 2) 14,489 18,464
Trade receivables, net (note 3) 4,701 11,012
Inventories (note 4) 13,779 19,101
Prepaid expenses 713 884
Income tax receivable 76 4,836
Deferred income tax assets (note 12) - 660
Other current assets 723 621
----------- ---------
Total current assets 40,969 58,364
Property and equipment, net (note 5) 5,733 7,565
Marketable securities (note 2) - 8,456
Professional services agreement (note 6) - 8,438
Other assets, net (note 7) 1,084 387
----------- ---------
$ 47,786 $ 83,210
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,255 $ 1,981
Accrued expenses (note 8) 5,213 2,516
----------- ---------
Total current liabilities 6,468 4,497
Deferred income tax liabilities (note 12) - 342
Other non-current liabilities 66 -
----------- ---------
Total liabilities 6,534 4,839
----------- ---------
Stockholders' equity (note 13):
Preferred stock, $0.01 par value; authorized 5,000,000 shares; none issued - -
Common stock, $0.001 par value; authorized 50,000,000 shares;
23,137,571 shares issued and 22,480,071 shares outstanding 23 23
Additional paid-in capital 86,037 85,919
Common stock subscription (22) (22)
Deferred compensation (221) (476)
Accumulated other comprehensive loss (295) (44)
Accumulated deficit (41,134) (3,893)
Treasury stock, 657,500 common shares at cost (3,136) (3,136)
----------- ---------
Total stockholders' equity 41,252 78,371
----------- ---------
Commitments and contingencies (notes 6 and 9)
$ 47,786 $ 83,210
=========== =========
See accompanying notes to consolidated financial statements
F-3
ADAMS GOLF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
-------------------------------------
2000 1999 1998
------------ ------------ --------
Net sales $ 42,449 $ 54,652 $ 85,989
Cost of goods sold (note 4) 19,680 18,528 22,705
------------ ------------ --------
Gross profit 22,769 36,124 63,284
------------ ------------ --------
Operating expenses:
Research and development expenses 2,083 2,092 1,532
Selling and marketing expenses 37,140 41,742 31,353
General and administrative expenses:
Provision for bad debts 4,441 1,709 1,464
Other 10,020 9,316 10,435
Write-off of prepaid professional service agreement (note 6) 7,594 - -
------------ ------------ --------
Total operating expenses 61,278 54,859 44,784
------------ ------------ --------
Operating income (loss) (38,509) (18,735) 18,500
Other income (expense):
Interest income 1,372 1,714 1,367
Interest expense (26) (37) (71)
Other 159 - (103)
------------ ------------ --------
Income (loss) before income taxes (37,004) (17,058) 19,693
Income tax expense (benefit) (note 12) 237 (6,469) 7,183
------------ ------------ --------
Net income (loss) $ (37,241) $ (10,589) $ 12,510
============ ============ ========
Income (loss) per common share
Basic and diluted $ (1.66) $ (0.47) 0.61
============ ============ ========
See accompanying notes to consolidated financial statements
F-4
ADAMS GOLF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
ACCUMULATED RETAINED
SHARES OF ADDITIONAL COMMON OTHER EARNINGS
COMMON COMMON PAID-IN STOCK DEFERRED COMPREHENSIVE (ACCUMULATED
STOCK STOCK CAPITAL SUBSCRIPTION COMPENSATION INCOME DEFICIT)
(LOSS)
----------- --------- ---------- ----------- ------------- ------------- -----------
Balance, December 31, 1997 15,719,338 $ 16 $ 14,123 $ - $ - $ - $ (5,814)
Comprehensive income:
Net income - - - - - - 12,510
Other comprehensive
income, net of tax -
Unrealized gain on
marketable securities - - - - - 150 -
Comprehensive income - - - - - - -
Issuance of common stock 4,037,500 4 58,468 - - - -
Issuance of stock options - - 2,027 - (2,027) - -
Forfeiture of stock - - (487) - 487 - -
options
Exercise of stock options 2,479,944 2 928 (230) - - -
Payment of stock - - - 208 - - -
subscription
Grant of stock (note 6) 900,000 1 10,124 - - - -
Treasury stock purchases
(657,500 shares) - - - - - - -
Amortization of deferred
compensation - - - - 836 - -
----------- --------- ---------- ----------- ------------- ------------- -----------
Balance, December 31, 23,136,782 $ 23 $ 85,183 $ (22) $ (704) $ 150 $ 6,696
1998
Comprehensive loss:
Net loss - - - - - - (10,589)
Other comprehensive
loss, net of tax -
Unrealized loss on
marketable securities - - - - - (194) -
Comprehensive loss - - - - - - -
Forfeiture of stock - - (38) - 38 - -
options
Exercise of stock options 789 - 2 - - - -
Tax benefit from exercise
of stock options - - 772 - - - -
Amortization of deferred
compensation - - - - 190 - -
----------- --------- ---------- ----------- ------------- ------------- -----------
Balance, December 31, 23,137,571 $ 23 $ 85,919 $ (22) $ (476) $ (44) $ (3,893)
1999
----------- --------- ---------- ----------- ------------- ------------- -----------
COST OF TOTAL
COMPREHENSIVE TREASURY STOCKHOLDERS'
INCOME (LOSS) STOCK EQUITY
--------------- -------- -------------
Balance, December 31, 1997 $ - $ 8,325
Comprehensive income:
Net income $ 12,510 - 12,510
Other comprehensive
income, net of tax -
Unrealized gain on
marketable securities 150 - 150
---------------
Comprehensive income $ 12,660 - -
===============
Issuance of common stock - 58,472
Issuance of stock options - -
Forfeiture of stock
options - -
Exercise of stock options - 700
Payment of stock 208
subscription -
Grant of stock (note 6) - 10,125
Treasury stock purchases
(657,500 shares) (3,136) (3,136)
Amortization of deferred
compensation - 836
--------- ----------
Balance, December 31, 1998 $(3,136) $ 88,190
Comprehensive loss:
Net loss (10,589) - (10,589)
Other comprehensive
loss, net of tax -
Unrealized loss on
marketable securities (194) - (194)
Comprehensive loss $ (10,783) - -
===============
Forfeiture of stock
options - -
Exercise of stock options - 2
Tax benefit from exercise
of stock options - 772
Amortization of deferred
compensation - 190
-------- ---------
Balance, December 31, 1999 $(3,136) $ 78,371
-------- ---------
(continued)
See accompanying notes to consolidated financial statements
F-5
ADAMS GOLF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
ACCUMULATED RETAINED
SHARES OF ADDITIONAL COMMON OTHER EARNINGS
COMMON COMMON PAID-IN STOCK DEFERRED COMPREHENSIVE (ACCUMULATED
STOCK STOCK CAPITAL SUBSCRIPTION COMPENSATION INCOME DEFICIT)
(LOSS)
----------- --------- ---------- ----------- ------------- ------------- -----------
Balance, December 31, 1999 23,137,571 $ 23 $ 85,919 $ (22) $ (476) $ (44) $ (3,893)
Comprehensive loss:
Net loss - - - - - - (37,241)
Other comprehensive
income (loss), net of
tax -
Unrealized gain on
marketable securities - - - - - 47 -
Unrealized loss on
foreign currency
translation - - - - - (298) -
Comprehensive loss - - - - - - -
Issuance of stock options - - 171 - (171) - -
Forfeiture of stock - - (53) - 53 - -
options
Amortization of deferred
compensation 373
----------- ---------- ----------- ------------ --------------- --------------- -------------
Balance, December 31, 2000 23,137,571 $ 23 $ 86,037 $ (22) $ (221) $ (295) $ (41,134)
=========== ========== =========== ============ =============== =============== =============
COST OF TOTAL
COMPREHENSIVE TREASURY STOCKHOLDERS'
INCOME (LOSS) STOCK EQUITY
--------------- -------- -------------
Balance, December 31, 1999 $ (3,136) $ 78,371
Comprehensive loss:
Net loss $ (37,241) - (37,241)
Other comprehensive
income (loss), net of
tax -
Unrealized gain on
marketable securities 47 - 47
Unrealized loss on
foreign currency
translation (298) - (298)
-------------
Comprehensive loss $ (37,492) - -
=============
Issuance of stock options - -
Forfeiture of stock - -
options
Amortization of deferred
compensation - - 373
--------- -------------
Balance, December 31, 2000 $ (3,136) $ 41,252
========== ==============
See accompanying notes to consolidated financial statements
F-6
ADAMS GOLF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
------------ ---------- ---------
Cash flows from operating activities:
Net income (loss) $ (37,241) $(10,589) $ 12,510
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization of property and equipment
and intangible assets 3,696 3,447 2,204
Loss on retirement of property and equipment - - 111
Loss on write-off of professional services agreement 7,594 - -
Adjustment of inventory to lower of cost or market 2,513 - -
Amortization of deferred compensation 373 190 836
Deferred income taxes 292 (903) 1,077
Allowance for doubtful accounts 565 (328) 596
Changes in assets and liabilities:
Trade receivables 5,746 (8,662) 5,053
Inventories 2,809 (5,789) (8,825)
Prepaid expenses 171 1 (376)
Income tax receivable 4,760 (2,748) (2,088)
Other current assets (103) 666 (350)
Other assets (1,249) 326 (3,567)
Accounts payable (726) 829 774
Federal income taxes payable - - (1,021)
Accrued expenses 2,635 (1,902) (3,218)
------------ ---------- ---------
Net cash provided by (used in) operating activities (8,165) (25,462) 3,716
------------ ---------- ---------
Cash flows from investing activities:
Purchases of marketable securities (22,481) (143,471) (34,145)
Sales of marketable securities 5,999 69,900 -
Maturities of marketable securities 29,100 80,939 -
Purchases of equipment (693) (2,635) (4,258)
----------- ---------- ---------
Net cash provided by (used in) investing activities 11,925 4,733 (38,403)
----------- ---------- ---------
Cash flows from financing activities:
Proceeds from initial public offering - - 60,078
Initial public offering costs - - (1,606)
Purchase of treasury stock - - (3,136)
Proceeds from notes payable and line of credit - - 7,135
Repayment of line of credit borrowings - - (6,000)
Repayment of notes payable to shareholder - (175) (960)
Issuance of common stock - 2 908
Principal payments under capital lease obligation (58) - -
----------- ---------- ---------
Net cash provided by (used in) financing activities (58) (173) 56,419
----------- ---------- ---------
Net increase (decrease) in cash and cash equivalents 3,702 (20,902) 21,732
Cash and cash equivalents at beginning of year 2,786 23,688 1,956
----------- ---------- ---------
Cash and cash equivalents at end of year $ 6,488 $ 2,786 $ 23,688
=========== ========== =========
Supplemental disclosure of cash flow information:
Interest paid $ 12 $ 3 $ 27
============ ========== =========
Income taxes paid, net of refunds $ (4,849) $ (3,094) $ 9,298
============ ========== =========
Supplemental disclosure of non-cash investing and financing activities:
Stock issued for professional services agreement (note 6) $ - $ - $ 10,125
============ ========== =========
Equipment financed with capital lease $ 186 $ - $ -
============ ========== =========
See accompanying notes to consolidated financial statements
F-7
ADAMS GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) GENERAL
Adams Golf, Inc. (the "Company") was founded in 1987. The Company
designs, manufactures, markets and distributes premium quality,
technologically innovative golf clubs, and provides custom golf club
fitting technology. These products are marketed primarily under the names
Tight Lies ST, Tight Lies GT i-Wood, Tight Lies 2, Tight Lies Tour, and
Tight Lies in the fairway wood category; Tight Lies ST, Tight Lies 2, and
SC Series in the driver category; and Tight Lies GT in the iron and wedge
categories.
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly-owned. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
(b) MARKETABLE SECURITIES
Marketable securities, primarily consisting of commercial paper and
governmental and corporate bonds, are managed under agreements with
investment managers. The agreements provide terms related to the quality,
diversification and maturities of the investments in the managed
portfolios. The investments are classified as available-for-sale and are
carried at fair value, with unrealized gains and losses, net of the
related tax effect, reported as other comprehensive income in the
consolidated statements of stockholders' equity. The balance sheet
classification of the Company's marketable securities is based upon the
contractual maturity date of such securities.
(c) INVENTORIES
Inventories are valued at the lower of cost or market and primarily
consist of finished golf clubs and component parts. Cost is determined
using the first-in, first-out method.
(e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Enterprise resource planning
software system costs have been capitalized in accordance with AICPA
Statement of Position 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
DEVELOPED OR OBTAINED FOR INTERNAL USE, which was adopted by the Company
on January 1, 1998. Depreciation and amortization are calculated using
the straight-line method over the estimated useful lives of the
respective assets, which range from three to seven years.
(e) REVENUE RECOGNITION
The Company records revenue as earned, which occurs when the product is
shipped.
(f) OTHER ASSETS AND RELATED AMORTIZATION EXPENSE
Other assets consist primarily of goodwill, costs of obtaining patents,
and various deposits. Goodwill is being amortized over five years. Patent
amortization is computed using the straight-line method over the
estimated useful lives of the assets, which range from five to 20 years.
F-8
ADAMS GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(g) RESEARCH AND DEVELOPMENT
Research and development costs consist of all costs incurred in planning,
designing and testing of golf equipment, including salary costs related
to research and development, and are expensed as incurred.
(h) ADVERTISING COSTS
Advertising costs, other than direct response (infomercial) costs, are
expensed as incurred and aggregated to approximately $16,547,000 and
$24,606,000 and $17,083,000 in 2000, 1999 and 1998, respectively.
(i) PRODUCT WARRANTY
The Company's golf equipment is sold under warranty against defects in
material and workmanship for a period of one year with the exception of
the GT and ST shafts which carry a five year warranty. An allowance for
estimated future warranty costs is recorded in the period products are
sold.
(j) INCOME TAXES
The Company accounts for income taxes using the asset and liability
method. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(k) INCOME (LOSS) PER SHARE
The weighted average common shares used for basic net income (loss) per
common share were 22,480,071, 22,479,915, and 20,434,775 for 2000, 1999
and 1998, respectively. The effect of dilutive stock options added
241,520 shares for 1998 for the computation of diluted income per common
share. Options to purchase 1,219,000, 986,000 and 100,000 shares of
common stock, which were outstanding during 2000, 1999 and 1998,
respectively, were not included in the computation of diluted earnings
per share as their effect would have been antidilutive.
(l) FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable, and accrued expenses approximate fair value due to the
short maturity of these instruments. The carrying amount of marketable
securities is based on quoted market prices.
F-9
ADAMS GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(m) IMPAIRMENT OF LONG-LIVED ASSETS TO BE DISPOSED OF
The Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to future net cash flows to be
generated by the asset. The cash flows would be discounted at a rate
equal to the Company's incremental borrowing rate. If such assets are
considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair
value of the assets. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell.
(n) COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consists of net income (loss), unrealized
gains and losses, net of related tax effect, on marketable securities
classified as available-for-sale and foreign currency translation gains
and losses and is presented in the consolidated statement of
stockholders' equity.
(o) STATEMENTS OF CASH FLOWS
The Company considers all short-term highly liquid instruments, with an
original maturity of three months or less, to be cash equivalents.
(p) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting periods. Actual results could differ from those
estimates.
(q) CLASSIFICATION OF SHIPPING AND HANDLING FEES AND COSTS
In July 2000, the Emerging Issues Task Force ("EITF") finalized its
consensus on Issue No. 00-10, "Accounting for Shipping and Handling Fees
and Costs" Pursuant to EITF Issue No. 00-10, all amounts billed to
customers for shipping and handling should be included in "net sales" and
costs incurred related to shipping and handling should be included in
"cost of goods sold." The Company has previously included shipping and
handling revenues and costs in "selling and marketing" expenses. The
Company's Statements of Operations for the years ended December 31, 2000,
1999 and 1998 have been reclassified to reflect the classification
required by EITF Issue No.00-10. For the years ended December 31, 2000,
1999 and 1998 net sales includes shipping and handling fees of $470,000,
$652,000 and $1,378,000, respectively. For the years ended December 31,
2000, 1999 and 1998 cost of goods sold includes shipping and handling
costs of $687,000, $957,000 and $1,264,000, respectively.
F-10
ADAMS GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(r) SEGMENT REPORTING
The Company is organized by functional responsibility and operates as a
single segment and within that segment offers more than one class of
product. The following table sets forth net sales by product class for
years ended December 31, 2000, 1999 and 1998:
2000 1999 1998
------------ ------------ --------
Fairway Woods $ 29,909 $ 34,759 $ 82,945
Drivers 9,687 17,762 -
Other (primarily irons and wedges) 2,853 2,131 3,044
------------- ------------ --------
Total $ 42,449 $ 54,652 $ 85,989
============= ============ ========
(2) MARKETABLE SECURITIES
Marketable securities consist of the following:
DECEMBER 31, 2000
------------------------------------------------
UNREALIZED
GAINS/ FAIR
COST (LOSSES) VALUE
------------ ------------ ---------------
Commercial paper $ 3,981 $ (1) $ 3,980
Governmental bonds 8,500 9 8,509
Corporate bonds 2,000 - 2,000
------------ ------------ ---------------
14,481 8 14,489
Less current amounts (14,481) (8) (14,489)
------------ ------------ ---------------
Long-term marketable securities $ - $ - $ -
============ ============ ===============
DECEMBER 31, 1999
------------------------------------------------
UNREALIZED
GAINS/ FAIR
COST (LOSSES) VALUE
------------ ------------ ---------------
Commercial paper $ 7,606 $ (154) $ 7,452
Governmental bonds 15,385 54 15,439
Corporate bonds 3,998 31 4,029
------------ ------------ ---------------
26,989 (69) 26,920
Less current amounts (18,489) 25 (18,464)
------------ ------------ ---------------
Long-term marketable securities $ 8,500 $ (44) $ 8,456
============ ============ ==============
During the year ended December 31, 2000, there were approximately
$29,100,000 in proceeds received from maturities of available-for-sale
securities and approximately $22,481,000 in purchases of securities. In
addition, there were approximately $5,999,000 in proceeds received from
sales of available-for-sale securities which included realized gains of
approximately $79,000 and realized losses of approximately $67,000 using
the specific identification method. All marketable securities as of
December 31, 2000 mature within one year.
F-11
ADAMS GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(3) TRADE RECEIVABLES
Trade receivables consist of the following at December 31, 2000 and 1999:
2000 1999
------------ --------
Trade receivables $ 6,232 $ 11,978
Allowance for doubtful accounts (1,531) (966)
------------ ----------
$ 4,701 $ 11,012
=========== ========
(4) INVENTORIES
Inventories consist of the following at December 31, 2000 and 1999:
2000 1999
------------ --------
Finished goods $ 4,407 $ 6,208
Component Parts 9,372 12,893
------------ - ---------
$ 13,779 $ 19,101
========== =========
During the fourth quarter of 2000, the Company adjusted the carrying
value of the finished good and component part inventories to net
realizable value. The impact of the adjustment reduced inventory and
increased cost of goods sold by $2,513,000.
(5) PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following at December 31, 2000 and
1999:
2000 1999
------------ --------
Equipment $ 1,000 $ 948
Computers and software 9,210 8,795
Furniture and fixtures 703 708
Leaseholds 249 158
Accumulated depreciation and amortization (5,429) (3,044)
------------ ----------
$ 5,733 $ 7,565
=========== =========
(6) PROFESSIONAL SERVICES AGREEMENT
The professional service agreement consisted of a contract entered into
by Adams Golf, Ltd. and Nicholas A. Faldo ("Faldo"), a professional
golfer, which provided, among other things, for Mr. Faldo's endorsement
and use of the Company's products, as well as the design, development and
testing of new technologies and products. As consideration for such
services Mr. Faldo received 900,000 shares of the Company's common stock,
which were valued at the fair market value of the stock ($11.25 per
share) as of May 1, 1998 the effective date of the agreement. The value
of the stock was being amortized on a straight-line basis over ten years,
which represented the estimated period during which the Company would
realize benefits under the agreement. In addition, Mr. Faldo was
receiving royalty payments representing 5% of net sales outside U.S. with
a minimum annual amount of $1,875,000 in 2000 increasing ratably to
$4,000,000 in 2004.
F-12
ADAMS GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(6) PROFESSIONAL SERVICES AGREEMENT (CONTINUED)
On November 6, 2000, Adams Golf, Ltd. announced that Mr. Faldo was in
material breach of his contract for failure to use certain of the
Company's products. Accordingly, the professional services agreement no
longer has future benefit to the Company and the remaining unamortized
balance of the value of the stock of $7,594,000 was written off as a
component of operating expenses in the current year. In addition, the
Company ceased making royalty payments as of March 31, 2000. See note 9
for additional information regarding the Faldo agreement.
(7) OTHER ASSETS, NET
Other assets, net, consist of the following at December 31, 2000 and
1999:
2000 1999
------------ --------
Goodwill, net of amortization of $227 and $25 $ 944 $ 204
Deposits, including amounts for fixed assets purchased 22 16
Other 118 167
-------------- ---------
$ 1,084 $ 387
============= =========
(8) ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 2000 and 1999:
2000 1999
------------ --------
Payroll and commissions $ 235 $ 191
Royalties 1,143 454
Advertising 1,238 321
Product warranty expense and sales returns 535 530
Professional services 85 121
Accrued software and licensing costs - 228
Other 1,977 671
------------- --------
$ 5,213 $2,516
============ ======
(9) COMMITMENTS AND CONTINGENCIES
The Company is obligated under certain noncancellable operating leases
for manufacturing, warehouse and office space. A summary of the minimum
rental commitments under noncancellable leases is as follows:
YEARS ENDING
DECEMBER 31,
------------
2001 $ 674
2002 697
2003 677
2004 85
------------
$ 2,133
============
F-13
ADAMS GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(9) COMMITMENTS AND CONTINGENCIES (CONTINUED)
Rent expense was approximately $710,000, $947,000 and $472,000 for the
years ended December 31, 2000, 1999, and 1998.
During the past two years the Company has experienced declining sales and
increasing operating losses. Should this trend continue, it may be
necessary to secure additional financing to continue operations. There
can be no assurance that any additional financing will be available on
acceptable terms. Should the Company be unable to obtain additional
financing, it may be required to halt capital expenditure programs,
reduce costs associated with its current infrastructure, and decrease the
level of expenditures necessary to support marketing efforts and
advertising campaigns, which could further reduce sales.
Beginning in June 1999, the first of seven class action lawsuits was
filed against the Company, certain of its current and former officers and
directors, and the three underwriters of the Company's initial public
offering ("IPO") in the United States District Court for the District of
Delaware. The complaints allege violations of Sections 11, 12(a)(2) and
15 of the Securities Act of 1933, as amended, in connection with the
Company's IPO. In particular, the complaints allege that the Company's
prospectus, which became effective July 9, 1998, was materially false and
misleading in at least two areas. Plaintiffs contend that the prospectus
failed to disclose that unauthorized distribution of the Company's
products (gray market sales) allegedly threatened the Company's long term
profits. Plaintiffs also allege that the prospectus failed to disclose
that the golf equipment industry suffered from an oversupply of inventory
at the retail level which had an adverse impact on the Company's sales.
On May 17, 2000, these cases were consolidated into one amended
complaint, and a lead plaintiff was appointed. The plaintiffs are seeking
unspecified amounts of compensatory damages, interests and costs,
including legal fees. On July 5, 2000 the Company filed a motion to
dismiss the consolidated, amended complaint. The motion is now fully
briefed and under submission with the court. The Company denies the
allegations in the complaint and intends to defend it vigorously.
The Company maintains directors' and officers' and corporate liability
insurance to cover risks associated with these securities claims filed
against the Company or its directors and officers.
At this time it is not possible to predict whether the Company will incur
any liability or to estimate damages, or the range of damages, that the
Company might incur in connection with such actions. The Company is also
not able to estimate the amount, if any, of reimbursements that it would
receive from insurance policies should damages with respect to the above
actions be incurred.
In January 2001, the Company was notified that it was part of an
investigation by the Federal Trade Commission concerning practices
surrounding manufacturers' minimum advertised price policies and Internet
retailers. As it is too early to determine the impact or scope of this
investigation, the Company is not able to estimate the amount, if any, of
any potential liability. Pending the results of the investigation, no
assurance can be given that the findings of the commission will not have
a material adverse affect on the Company's results of operations,
financial condition or competitive position.
F-14
ADAMS GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(9) COMMITMENTS AND CONTINGENCIES (CONTINUED)
In May 1998, Adams Golf, Ltd. entered into an agreement with Nicholas
A. Faldo. The agreement provided that Mr. Faldo provide a variety of
services to Adams Golf, Ltd. including endorsement and use of certain
of Adams Golf Ltd.'s products. This agreement required Adams Golf, Ltd.
to make certain payments to Mr. Faldo, whether or not his endorsement
results in increased sales of Adams Golf Ltd.'s products. Specifically,
Mr. Faldo was entitled to receive a royalty of 5% of the net sales
price of all Adams Golf's clubs (other than certain specialty items for
which the royalty equals 10% of the net sales price) sold outside the
U.S. throughout the term of the agreement. The agreement provided for a
minimum royalty of $1,875,000 in 2000 escalating to $4,000,000, for the
years 2004 through 2008. From 2009 through 2014, the agreement did not
provide a minimum royalty. On November 6, 2000 Adams Golf Ltd.
announced that Mr. Faldo was in material breach of his contract and has
ceased making all royalty payments. Although Mr. Faldo has not asserted
a claim against the Company as a result of these actions, we believe it
is reasonably likely that he will do so. A claim from Mr. Faldo could
require the Company to spend significant time and money in litigation.
As a result, the cessation of this relationship with Mr. Faldo could
have a material adverse effect on the Company's business, operating
results or financial condition.
From time to time the Company is engaged in various legal proceedings
in the normal course of business. The ultimate liability, if any, for
the aggregate amounts claimed cannot be determined at this time.
However, the Company, based on consultation with legal counsel, is of
the opinion that there are not matters pending or threatened which
could have a material adverse effect on the Company's financial
conditions, results of operations or liquidity.
(10) RETIREMENT PLAN
In February 1998, the Company adopted the Adams Golf, Ltd. 401(k)
Retirement Plan (the "Plan"), which covers substantially all employees.
The Company matches 50% of employee contributions up to a maximum of 6%
of the employee's compensation. For the years ended December 31, 2000,
1999 and 1998 the Company contributed approximately $184,000 and
$162,000 and $74,000 respectively, to the Plan.
(11) DEBT
On March 27, 2001, the Company executed a $10.0 million revolving
credit facility with General Electric Capital Corporation, which
expires on March 27, 2004. The revolving credit facility is secured by
certain of the Company's eligible accounts receivable and inventories.
Borrowings under the revolving credit facility are payable on demand
and bear interest at the GE Capital Commercial Paper Rate plus 3.75%
per year. At March 23, 2001, the GE Capital Commercial Paper Rate was
4.91%. The unused portion of the revolving credit facility is subject
to a commitment fee of 0.25% per year. The credit facility requires the
Company to maintain compliance with certain financial ratio covenants,
including, among other things, minimum tangible net worth, fixed charge
coverage ratio, net borrowing availability and cash balances. In
addition, the Company will be subject to limitations on capital
expenditures and net losses. Currently, the Company does not have any
outstanding borrowings under the facility.
F-15
ADAMS GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(12) INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 2000, 1999
and 1998 consists of the following:
2000 1999 1998
------------ ------------ --------
Federal - current $ - $ (5,671) $ 5,486
Federal - deferred 318 (798) 1,077
State - current (81) - 620
------------- ------------ ----------
$ 237 $ (6,469) $ 7,183
============ ============ ==========
Actual income tax expense differs from the "expected" income tax expense
(benefit) (computed by applying the U.S. federal corporate tax rate of
35% to income (loss) before income taxes) for the years ended December
31, 2000, 1999 and 1998 as follows:
2000 1999 1998
------------ ------------ --------
Computed "expected" tax expense (benefit) $ (12,951) $ (5,970) $ 6,892
State income taxes, net of federal tax benefit (364) - 403
Non-taxable interest income - (350) (286)
Change in valuation allowance for deferred tax 13,634 - (50)
assets
Other (82) (149) 224
------------- ------------- -----------
$ 237 $ (6,469) $ 7,183
============ =========== =========
F-16
ADAMS GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(12) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to the deferred
tax assets and deferred tax liabilities at December 31, 2000 and 1999 are
presented below:
2000 1999
------------ --------
Deferred tax assets:
Allowance for doubtful accounts receivable $ 551 $ 338
Research and development costs - 116
Rebate allowance 54 69
Product warranty and sales returns 193 231
Lower of cost or market inventory writedown 905 -
Other reserves 34 26
Research and development tax credit carryforwards 556 556
Unrealized loss on marketable securities - 25
Net operating loss carryforwards 11,345 1,910
------------ ---------
Total gross deferred tax assets 13,638 3,271
Valuation allowance (13,634) -
------------ ---------
Net deferred tax assets 4 3,271
------------ ---------
Deferred tax liabilities:
Prepaid professional services - 2,953
Unrealized gain on marketable securities 4 -
------------ ---------
Total gross deferred tax liabilities 4 2,953
------------ ---------
Net deferred tax assets $ - $ 318
============ =========
In assessing the realizablility of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible.
At December 31, 2000, the Company cannot determine based on a weighting
of objective evidence that it is more likely than not the remaining net
deferred tax assets will be realized. As a result, as of December 31,
2000, the Company has established a valuation allowance for the remaining
net deferred tax assets. The net change in the valuation allowance for
the years ended December 31, 2000 and 1999 was $13,634,000 and $0,
respectively
At December 31, 2000, the Company has net operating loss carryforwards
for federal foreign and state income tax purposes of approximately
$31,516,000 and tax credit carryforwards of $556,000 which are available
to offset future federal taxable income through 2020. The availability of
approximately $714,000 of the net operating loss carryforwards to reduce
future taxable income is limited to approximately $71,000 per year for
the remaining life of the net operating losses, as a result of a change
in ownership.
F-17
ADAMS GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(13) STOCKHOLDERS' EQUITY
(a) INITIAL PUBLIC OFFERING
The Company completed the sale of 4,000,000 shares of common stock
through an initial public offering (the "Offering") on July 15, 1998. The
Offering resulted in net proceeds to the Company of approximately
$58,000,000 after deducting offering expenses, discounts and commissions.
On July 20, 1998 the Company completed the sale of an additional 37,500
shares of common stock in connection with the underwriters' exercise of
their option to cover over-allotments, resulting in net proceeds of
$500,000.
(b) EMPLOYEE STOCK OPTION PLANS
In April 1996, the Company adopted the 1996 Stock Option Incentive Plan
(the "1996 Stock Option Plan"), pursuant to which stock options covering
an aggregate of 800,000 shares of the Company's common stock may be
granted. Options awarded under the 1996 Stock Option Plan (i) are
generally granted at prices that equate to or are above fair market value
on the date of grant; (ii) generally become exercisable over a period of
one to four years; and (iii) generally expire ten years subsequent to
award. At December 31, 2000, there were 140,310 shares available for
grant under the 1996 Stock Option Plan. For the years ended December 31,
2000, 1999, and 1998 there were no stock options granted, nor does the
Company intend to make future grants under the 1996 Stock Option Plan.
In connection with an employment agreement entered into in September 1995
with the Company's Chief Executive Officer, the Company granted options
to acquire 1,520,766 shares of common stock at $0.375 per share. Vesting
of the stock options was conditioned upon meeting certain revenue and
earnings requirements, which were met during 1996 and 1997. Also, the
agreement provided for a bonus to be paid to the Chief Executive Officer
in an amount equal to the exercise price of the options plus any related
income tax due by the Chief Executive Officer upon exercise of the
options. The Chief Executive Officer notified the Company of his intent
to exercise the options in December 1997, and the shares were issued in
January 1998.
In February 1998, the Company adopted the 1998 Stock Incentive Plan (the
"1998 Stock Option Plan"), pursuant to which stock options covering an
aggregate of 1,800,000 shares (of which 900,000 were utilized as a direct
stock grant to Mr. Faldo (see note 6)) of the Company's common stock may
be granted. In May 2000, the Company's shareholders approved a request to
increase the aggregate number of shares in the 1998 Stock Option Plan to
2,700,000. Options awarded under the Plan (i) are generally granted at
prices that equate to or are above fair market value on the date of
grant; (ii) generally become exercisable over a period of two to four
years; and (iii) generally expire five years subsequent to award. At
December 31, 2000, 616,714 shares remain available for grant, including
forfeitures. The 1998 grants were granted with exercise prices that were
less than the fair market values of the Company's stock by amounts
ranging from $3.75 to $11.25 per share at the date of grant. Accordingly,
the Company has recorded deferred compensation of approximately $221,000
and $476,000, net of amounts amortized and forfeited, at December 31,
2000 and 1999, respectively. The deferred compensation is being amortized
to expense over the vesting periods of the options. The 1999 and 2000
grants were made with exercise prices equal to the fair market value of
the Company's stock at the date of grant, and accordingly, no additional
deferred compensation was recorded.
F-18
ADAMS GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(13) STOCKHOLDERS' EQUITY (CONTINUED)
In May 1999, the shareholders of the Company adopted the 1999
Non-Employee Director Plan of Adams Golf, Inc. (the "Director Plan")
which allows for 200,000 shares of the Company's stock to be issued to
non-employee directors. At December 31, 2000, 10,000 options had been
granted to a board member at an exercise price of $4.75, which equaled
the fair market value of the Company's common stock on the date of grant.
These options vest equally on each of the first four anniversary dates
from the date of grant and expire five years from the date of grant.
In November 1999, the Company adopted the 1999 Stock Option Plan for
Outside Consultants (the "Consultant Plan"). The Consultant Plan allows
for the granting of up to 1,000,000 shares of the Company's common stock.
At December 31, 2000, 309,800 options had been granted with exercise
prices ranging from $1.06 to $2.27 per share at the date of grant. The
vesting period varies from two to four years with options vesting equally
on each of the anniversary dates from the date of grant and expire five
years from the date of grant. At December 31, 2000, 690,200 shares remain
available for grant, including forfeitures.
The following is a summary of stock options outstanding as of December
31, 2000:
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE OPTIONS CONTRACTUAL EXERCISE PRICE OPTIONS EXERCISE PRICE
PRICE OUTSTANDING LIFE PER SHARE EXERCISABLE PER SHARE
------------- ----------- ---- ------------- ----------- ------------
1.06 - 2.50 1,175,797 3.88 years $ 1.82 267,190 $ 2.39
3.57 - 5.50 316,500 2.99 years 4.35 100,375 4.57
11.25 10,000 2.33 years 11.25 5,000 11.25
----------- ---------- -------------- --------- --------------
1,502,297 3.68 years $ 2.41 372,565 $ 3.10
=========== ========== ============== ========= ==============
The Company accounts for the Director Plan and Consultant Plan under SFAS
No. 123. Compensation expense for the options granted under these plans
for the year ended December 31, 2000 was not material. The Company
applies Accounting Principles Board Opinion No. 25 in accounting for its
employee stock options, and for those stock options granted with exercise
prices equal to the fair market value, no compensation cost has been
recognized in the consolidated financial statements. Had the Company
determined compensation cost based on the fair value at the grant date
for its employee stock options under SFAS No. 123, the Company's net
income (loss) would have been the pro forma amounts indicated.
F-19
ADAMS GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(13) STOCKHOLDERS' EQUITY (CONTINUED)
2000 1999 1998
------------ ------------ --------
Net income (loss):
As reported $ (37,241) $ (10,589) $ 12,510
Pro forma (37,329) (10,650) 12,445
Diluted income (loss) per common share:
As reported $ (1.66) $ (0.47) $ 0.61
Pro forma (1.66) (0.47) 0.60
The per share weighted-average fair value of stock options granted during
2000, 1999 and 1998 was $0.63, $0.83 and $5.22, respectively, on the date
of grant using the Black Scholes option pricing model with the following
weighted-average assumptions: Risk-free interest rate, 6%; expected life,
5 years; expected dividend yield, 0%; volatility, 5.6%, 7.4% and 1.5% in
2000, 1999 and 1998 respectively.
A summary of stock option activity follows:
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
----------- --------------
Options outstanding at December 31, 1997 2,521,610 $ 0.38
Options granted 467,700 3.39
Options exercised (2,479,944) 0.38
Options forfeited (150,626) 1.91
----------- ------
Options outstanding at December 31, 1998 358,740 3.67
Options granted 741,050 3.17
Options exercised (789) 2.50
Options forfeited (119,894) 4.28
----------- ------
Options outstanding at December 31, 1999 979,107 3.22
Options granted 758,000 1.41
Options forfeited (234,810) 2.54
----------- -------
Options outstanding at December 31, 2000 1,502,297 $ 2.41
============ ======
(c) WARRANTS
In March 2000, the Company issued warrants to purchase 100,000 shares of
common stock at an exercise price of $1.69 per share for certain
advertising services provided by non-employees. These warrants are
immediately exercisable and will expire on the fifth anniversary of the
date of grant. The Company accounts for the warrants under SFAS No. 123.
Expense for these warrants for the year ended December 31, 2000 was not
material.
F-20
ADAMS GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(13) STOCKHOLDERS' EQUITY (CONTINUED)
(d) COMMON STOCK REPURCHASE PROGRAM
In October 1998, the Board of Directors approved a plan whereby the
Company is authorized to repurchase from time to time on the open market
up to 2,000,000 shares of its common stock. At December 31, 1998, the
Company had repurchased 657,500 shares of common stock at an average
price per share of $4.77 for a total cost of approximately $3,136,000.
The repurchased shares are held in treasury. No shares were repurchased
during the years ended December 31, 2000 or 1999.
(14) SEGMENT INFORMATION
The Company generates substantially all revenues from the design,
manufacturing, marketing and distribution of premium quality,
technologically innovative golf clubs. The Company's products are
distributed in both domestic and international markets. Net sales by
customer domicile for these markets consisted of the following for the
years ended December 31, 2000, 1999 and 1998:
2000 1999 1998
------------ ------------ --------
United States $ 35,743 $ 47,175 $ 74,778
Rest of world 6,706 7,477 11,211
------------ ----------- --------
$ 42,449 $ 54,652 $ 85,989
========== ========== ========
The Company is currently dependent on a small number of customers which
collectively comprised approximately 24% of net revenues for the year
ended December 31, 2000. Of these customers two customers individually
represent greater than 5% of net revenues for the year ended December 31,
2000. The loss of an individual or a combination of these customers would
have a material adverse effect on consolidated revenues.
At December 31, 2000, the Company has approximately $125,000 in
long-lived assets outside of the United States
F-21
ADAMS GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(15) QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Quarterly financial results for the years ended December 31, 2000 and
1999 are as follows:
2000
---------------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
------------ ------------- ------------ -------------
Net sales (1) $ 15,875 $ 12,400 $ 8,560 $ 5,615
============ ============= ============= =============
Gross profit (loss) (2)(3) $ 11,502 $ 7,666 $ 4,381 $ (780)
============ ============== ============= ==============
Net loss (4) $ (2,041) $ (7,542) $ (6,233) $ (21,425)
============ ============= ============= ==============
Loss per share - basic and
diluted (4) $ (0.09) $ (0.34) $ (0.28) $ (0.95)
============= ============== ============= ==============
1999
---------------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
------------ ------------- ------------ -------------
Net sales (1) $ 8,662 $ 25,711 $ 9,251 $ 11,029
============= ============ ============= ===========
Gross profit (2) $ 5,338 $ 17,340 $ 6,330 $ 7,116
============= ============ ============= ===========
Net Income (loss) $ (3,314) $ 910 $ (3,836) $ (4,349)
============ ============ ============ ===========
Earnings (loss) per share -
basic and diluted $ (0.15) $ 0.04 $ (0.17) $ (0.19)
============= ============ ============ ===========
(1) Reflects reclassification of shipping revenue (see Note 1(q))
(2) Reflects reclassification of shipping revenue and costs (see Note
1(q))
(3) The fourth quarter includes an adjustment of inventories to net
realizable value which reduced gross profit (loss) by $2,513,000 or
$(0.11) per share (see Note 4).
(4) The fourth quarter includes the write-off of a prepaid professional
services agreement (see Note 6), the adjustment of certain
inventories discussed in item 3 above, and the adjustment of
deferred tax assets to an amount more likely than not to be
realized (see Note 12). The impact of these items was to increase
the net loss by $7,594,000, $2,513,000 and $1,433,000 or $(0.34),
$(0.11) and $(0.06) per share, respectively. The aggregate impact
was an increase to net loss of $11,540,000 or $(0.51) per share.
F-22
SCHEDULE II
ADAMS GOLF, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(TABLE IN THOUSANDS)
ADDITIONS
-------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COST AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS(1) PERIOD
- ------------------------------------ ----------- ----------- ----------- ------------- -----------
Allowance for doubtful accounts:
Year ended December 31, 2000 $ 966 4,441 - 3,876 $ 1,531
Year ended December 31, 1999 $ 1,294 1,709 - 2,037 $ 966
Year ended December 31, 1998 $ 698 1,464 - 868 $ 1,294
Product warranty and sales returns:
Year ended December 31, 2000 $ 530 1,226 - 1,221 $ 535
Year ended December 31, 1999 $ 736 1,877 - 2,083 $ 530
Year ended December 31, 1998 $ 449 5,476 - 5,189 $ 736
Inventory obsolescence (2):
Year ended December 31, 2000 $ 25 2,532 - 27 $ 2,530
Year ended December 31, 1999 $ 221 1 - 197 $ 25
Year ended December 31, 1998 $ 54 167 - - $ 221
(1) Represents uncollectible accounts charged against the allowance for
doubtful accounts, actual costs incurred for warranty repairs, and sales
returns and inventory items deemed obsolete charged against the inventory
obsolescence reserve.
(2) For the year ended December 31, 2000 costs charged to expenses includes
$2,513,000 of expense associated with the write-down of certain inventories
to net realizable value.
S-1