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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITES
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.)
incorporation or 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:
Title of Class
--------------
Common Stock $.001 Par Value
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 15, 1999, the aggregate market value of the Registrant's Common Stock
held by nonaffiliates of the Registrant was $38,941,431 based on the closing
sales price of $3 11/16 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 22,479,282 on March 15, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the Registrant's
definitive proxy statement for the annual meeting of stockholders to be held on
May 5, 1999, which proxy statement was filed with the Securities and Exchange
Commission on April 7, 1999.
ITEM 1. BUSINESS
GENERAL
Adams Golf, Inc. (the "Company" or "Adams Golf") designs, manufactures and
markets premium quality, technologically innovative golf clubs. Adams Golf's
primary products include the Tight Lies line of fairway woods, SC Series
Titanium drivers, Assault-VMI Irons, and the Faldo Series wedges. The Company
was incorporated in Texas in 1987 and reincorporated 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 (fairway woods,
custom fitted clubs, drivers, wedges).
The Company currently offers the following products:
FAIRWAY WOODS - The Tight Lies line of fairway woods has an innovative upright
trapezoidal or "upside down" head shape that incorporates a distinctive shallow
face and a low center of gravity. The Company believes that this club is 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.
CUSTOM FITTED CLUBS - The Company's custom fitted clubs consist primarily of the
Assault-VMI irons which are perimeter-weighted, cavity-backed, slightly offset
irons incorporating the Company's patented variable moment of inertia ("VMI")
design formula producing consistent swing feel across an entire set of clubs.
The Company markets the Assault-VMI irons to professional and avid golfers
exclusively through its network of over 100 certified custom fitting accounts.
The Company believes that its custom fitting activities provide an in-depth
understanding of golf club design and credibility in the golf industry.
DRIVERS - In January 1999, the Company introduced the SC Series Titanium 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
bulge design which incorporates precisely controlled relationships between the
curvature of the face and the center of gravity.
WEDGES - In January 1999, the Company also introduced the Faldo Series wedges
featuring a classic style with a unique asymmetric sole designed to deliver
three different wedge shots - pitch, sand, and open-face finesse from a single
club. Utilizing input from Nick Faldo, a professional golfer, regarding his own
wedge play, the sole of the Faldo Series wedges have been designed to provide
maximum playability from a variety of lies, giving golfers the confidence to
execute even the toughest wedge shots.
The following table sets forth the contribution to net sales attributable to the
product groups for the years indicated. Because the SC Series Titanium drivers
and the Faldo Series wedges were not introduced by the Company until fiscal
1999, these product groups are not referenced in the table. Historical
percentages may not be indicative of the Company's future product mix.
PERCENTAGE OF NET SALES BY PRODUCT GROUP
1996 1997 1998
---- ---- ----
Fairway Woods 47.2% 94.3% 96.5%
Custom Fitted Clubs 52.8% 5.7% 3.5%
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
The Company supports each of its products with a two year warranty. The warranty
provides for repair or replacement of the golf club, except in the case of
abuse. The Company has not experienced material amounts of warranty claims with
respect to its golf clubs.
1
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; Richard H. Murtland, Vice President-Research and Development;
Adams Golf's in-house design development team, Nick Faldo and independent
consultants, Robert R. Bush and Dr. Michael M. Carroll. Mr. Bush has over 30
years of experience in golf club development, most notably as Director of
Technical Services for True Temper Sports, a leading shaft manufacturer, where
from 1966 to 1993, he was responsible for testing all golf club shafts. Mr. Bush
was instrumental in the development of "Iron Byron," the industry standard for
the mechanical testing of golf clubs and balls. Mr. Bush is currently a member
of the Technical Advisory Panel for GOLF DIGEST. Dr. Michael M. Carroll is Dean
of the George R. Brown School of Engineering at Rice University in Houston,
Texas. Dr. Carroll holds doctorate degrees in both physics and mathematics and
is an avid golfer. Dr. Carroll has worked with the Company's design and
development team since April 1, 1998 and is responsible for the scientific
analysis of each new product under development by the Company.
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 Nick Faldo will continue 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 USGA. Although the standards set by the
USGA only apply 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
materials 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 6 to 8 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 4 to 6 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 an independent mechanical
test facility in Fort Worth, Texas for comparative performance testing. In
addition, prototypes are also tested for performance and player preferences by
Nick Faldo. 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 4 to 6 months of additional development time.
The Company's research and development expenses were approximately $51,000,
$557,000 and $1,532,000 during 1996, 1997 and 1998, respectively.
2
MARKETS AND METHODS OF DISTRIBUTION
The Company sells its products through on- and off-course golf shops and
selected sporting goods retailers, direct sales to consumers, international
distributors and the Company's custom fitting accounts.
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, 1998, sales to retailers accounted
for approximately 73% of the Company's total sales.
Despite the Company's efforts to limit its distribution to selected retailers,
Adams Golf products have been found in a certain membership warehouse club,
which the Company believes has obtained the products through the use of
unauthorized distribution channels. Adams Golf has taken steps to limit this
unauthorized distribution through the serialization of all Adams Golf club heads
but does not believe the gray marketing of its products can be totally
eliminated.
Adams Golf maintains an inside sales department that at March 15, 1999
consisted of 23 employees who are in regular contact with the Company's
retail accounts (over 7,000 retailers). These sales representatives are
supported by 18 field-based regional account coordinators who maintain
personal contact with the Company's retailers nationwide. The Company
generally has been successful in delivering product to its retailers within
one week of a placed order. The Company believes its prompt delivery of
products enables its retail accounts to maintain smaller quantities of
inventory than may be required with other golf equipment manufacturers.
CUSTOMER SUPPORT AND DIRECT SALES - Adams Golf believes that superior customer
service can significantly enhance its marketing efforts. Accordingly, the
Company maintains an in-house customer call center whose representatives provide
technical assistance to its customers and field calls resulting from the
Company's direct response advertising. The Company also outsources a portion of
its call center activities. The Company provides its staff with computerized
access to its retailer database enabling call center representatives to guide
consumers to their nearest Adams Golf retailer.
INTERNATIONAL SALES - International sales are made in 41 countries (primarily
Japan, Canada and the United Kingdom) through approximately 34 independent
distributors. The international distributors sell to retailers for end sale to
the consumer. International sales have increased from $0.6 million for 1996,
$0.9 million for 1997, to $11.0 million for 1998.
CUSTOM FITTING SALES - The Company employs six sales representatives who manage
the Company's custom fitting sales and support division and administer its
custom fitting training program for golf professionals. The Company's custom
fitting training program has received PGA certification and provides continuing
education credits for PGA Member Professionals. Since 1992, the Company has
certified in excess of 300 golf professionals to custom fit its Assault-VMI
irons, which are sold exclusively through its over 100 custom fitting accounts.
Custom fitters measure data relating to swing and ball flight characteristics.
Based on the interpretation of the data, a set of clubs is manufactured that is
specifically tailored to that golfer.
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 direct response and traditional image-based advertising,
engages in promotional activities and capitalizes on its relationship with Nick
Faldo and other well known golf personalities.
3
ADVERTISING - The Company uses a combination of direct response and traditional
image-based advertising.
- DIRECT RESPONSE ADVERTISING - The Company intends to continue
to build brand awareness and stimulate product demand through
its direct response advertising, which includes a variety of
mediums including television, radio, print and direct mail.
Direct response advertising, in which consumers may order
products directly from the Company by calling a toll-free
telephone number, provides a cost-effective vehicle enabling
the Company to communicate a compelling product story and
build brand recognition. The Company's direct response
advertising serves to introduce the Company's products to
consumers, many of whom will subsequently purchase the
Company's clubs from retailers. During early 1998, the Company
continued to air the original Tight Lies 30-minute infomercial
that was introduced in early 1997. In October 1998, the
Company began to air a refreshed version of the original Tight
Lies infomercial routinely running it on The Golf Channel,
regional sports stations, national networks and local,
market-specific broadcast stations. In addition, the Company
continues to utilize 30- and 60-second direct response
television commercials as well as radio advertising. The
Company advertises regularly in major golf and industry
publications, general consumer magazines and local newspapers
nationwide. These include GOLF DIGEST, GOLF MAGAZINE, SPORTS
ILLUSTRATED, THE WALL STREET JOURNAL and USA TODAY. Finally,
the Company engages in regularly scheduled direct mail
advertising campaigns.
- TRADITIONAL IMAGE-BASED ADVERTISING - The Company's direct
response sales revenue has enabled Adams Golf to broaden its
advertising efforts to include traditional image-based
advertising. This advertising includes a series of 30-second
commercials which run during major golf tournaments and golf
related programs; newspaper, magazine and radio ad campaigns;
sponsorship of selected golf tournaments; exclusive
sponsorship of The Golf Channel's weekly instructional
program, "LIVING ROOM LESSONS", and a recently updated and
professionally redesigned web site located at
www.adamsgolf.com.
PROMOTIONAL ACTIVITIES - The Company engages in a variety of promotional
activities to sell and market its products. Such activities include (i) consumer
sweepstakes such as the Company's "Ramble in the Bramble," where the winner
received an all expense paid, luxury tour for two to Scotland's most legendary
golf courses; (ii) promotional giveaways with certain purchases, including items
such as instructional videos, audio tapes, and golf bags; and (iii) promotional
campaigns like the "90-Day Challenge," in which the Company advertises its
90-day return policy.
RELATIONSHIP WITH NICK FALDO AND OTHERS - In May 1998, the Company formed a
lifetime relationship with Nick Faldo, an internationally recognized
professional golfer and winner of numerous U.S. and international championships,
including three Masters (1989, 1990 and 1996) and three British Opens (1987,
1990 and 1992). Mr. Faldo led the Official World Golf Ranking for 81 weeks
during 1993 and 1994. Mr. Faldo also has made the most Ryder Cup appearances in
the history of golf. The Company expects Nick Faldo to continue to be actively
and directly involved in the design, testing and development of new technologies
and products. Mr. Faldo is noted for his precise play as a golfer and his
reputation as a perfectionist. The Company believes that by aligning itself with
Mr. Faldo, it can further promote the Adams Golf brand, while at the same time
demonstrating the Company's ability to deliver golf clubs that satisfy the
specific and demanding requirements of tour professionals.
In addition, the Company has also obtained endorsements from Hank Haney. Mr.
Haney was named the 1993 PGA Teacher of the Year and is a five-time recipient of
the Northern Texas Section PGA Teacher of the Year Award. 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.
4
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 materials 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 its fairway woods and irons and
has established a quality assurance program at those manufacturing facilities
located in Taiwan and China that are collectively responsible for producing
substantially all of the Company's performance fairway and iron club heads. With
regard to the Company's SC Series Titanium drivers, the Company utilizes one
source of supply in Australia for the club head and redundant sources of supply
for the remaining component parts. Upon arrival at the Company's manufacturing
facilities in Plano, Texas, each component used in the Company's clubs is again
checked to ensure consistency with strict design specifications. Components are
then sorted to identify variations in characteristics, such as head weight and
shaft flexibility, that, although within the specified range, may affect club
performance. Golf clubs are then built by the Company's manufacturing personnel
using the appropriate component parts and the Company's patented VMI technology.
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 or 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, results of
operations, financial position or liquidity.
PATENTS
The Company's ability to compete effectively in the golf club market will
depend, in large part, on the ability of the Company to maintain the proprietary
nature of its technologies and products. The Company currently holds seven U.S.
patents relating to certain of its products and proprietary technologies and has
three patent applications pending. Assuming timely payment of maintenance fees,
if any, the Company expects that the seven currently issued patents will expire
on various dates between 2009 and 2013. The Company has been awarded patents
with respect to the design of the Tight Lies fairway wood and the VMI design
formula. 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 does not hold any foreign patents and no foreign
patent applications are 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, including products competitive with the
Tight Lies fairway woods. 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.
5
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 its 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.
INDUSTRY SPECIFIC REQUIREMENTS
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) are dependent on
the Company's relationship with the customer and payment history. In addition to
extended payments terms, the nature of the industry also requires that the
Company carry a higher level of inventory due to the lead times associated with
purchasing components overseas coupled with the seasonality of customer demand.
MAJOR CUSTOMERS
Currently, the Company does not have dependence on a single or small number of
major customers for which the loss of one or all would have a material adverse
effect on consolidated revenues.
SEASONALITY
Golf generally is regarded as a warm weather sport and sales of golf equipment
historically have been strongest during the second and third quarters, with the
weakest sales occurring during the fourth quarter. 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 unseasonal 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 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. 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 would be materially adversely affected.
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 15, 1999, the Company did not have a
significant level of orders on backlog and does 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.
6
COMPETITION
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-Salomon AG (Taylor Made),
Fortune Brands, Inc. (Titleist and Cobra) and Orlimar Golf Company, 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 through direct
response advertising, is important to its ability to compete.
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 similar products. The buying decisions of many
purchasers of golf clubs are often the result of highly subjective
preferences, which can be influenced by many factors, including, among
others, advertising media, promotions and product endorsements. 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.
FOREIGN AND DOMESTIC OPERATIONS
For the years ended December 31, 1996, 1997 and 1998 approximately $2,900,000,
$35,808,000 and $73,580,000, respectively, of the Company's net sales were
derived from operations within the United States. In addition, no one customer
contributed greater than 10% of the Company's consolidated net revenues in any
one of the years identified.
For the years ended December 31, 1996, 1997 and 1998 approximately $600,000,
$882,000 and $11,031,000, respectively, of the Company's net sales were derived
from operations outside the United States. In addition, no one customer
contributed greater than 10% of the Company's consolidated net revenues in any
one of the years identified.
EMPLOYEES
At March 15, 1999, the Company had 248 full-time employees, including 86 engaged
in manufacturing and assembly, 14 in research and development and quality
control, 88 in sales support and 60 in management and administration. Adams
Golf' 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 98,000 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 1999.
ITEM 3. LEGAL PROCEEDINGS
Adams Golf is a party to certain lawsuits and administrative proceedings
arising in the ordinary course of its business. Adams Golf evaluates such
lawsuits and proceedings on a case-by-case basis, and its policy is to
vigorously contest any such claims which it believes are without merit. Based
upon information presently available to the Company, management believes that
the ultimate resolution of such pending matters will not materially adversely
affect the Company's business, financial position, results of operations or
liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
7
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.
Fiscal year ended December 31, 1998 HIGH LOW
---- ---
Third Quarter (beginning July 10, 1998) $18 7/8 $3 7/8
Fourth Quarter 5 3/16 3
On March 15, 1999, the last reported sale price of the common stock on The
Nasdaq Stock Market's National Market was $3 11/16 per share.
At March 15, 1999, Adams Golf, Inc. had approximately 7,000 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.
8
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, 1995, 1996,
1997 and 1998, 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,
------------------------------------------------
1995 1996 1997 1998
------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Consolidated Statements of Operations Data(1):
Net sales.................................... $1,125 $ 3,522 $36,690 $84,611
Operating income (loss)...................... (244) 9 (3,969) 18,500
Net income (loss)............................ $ (243) $ 13 $(4,654) $12,510
====== ======= ======= =======
Income (loss) per common share(2):
Basic..................................... $(0.05) $ - $ (0.37) $ 0.61
====== ======= ======= =======
Diluted................................... $(0.05) $ - $ (0.37) $ 0.61
====== ======= ======= =======
Weighted average common shares(2):
Basic..................................... 4,423 11,238 12,519 20,435
====== ======= ======= =======
Diluted................................... 4,423 11,238 12,519 20,677
====== ======= ======= =======
DECEMBER 31,
------------------------------------------------
1995 1996 1997 1998
------ ------ ------ ------
(IN THOUSANDS)
Consolidated Balance Sheet Data(1):
Total assets................................ $ 658 $2,559 $17,360 $96,906
Total debt (including current maturities)... - 230 - 175
Stockholders' equity........................ 615 1,978 8,325 88,190
(1) This table excludes summary financial information for the fiscal year ended
December 31, 1994 because operations in that year were not comparable in
size or scope to current operations.
(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.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company, which participates in the highly competitive golf industry,
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. Thereafter, the Company
established its custom fitting operation, which currently services a network of
over 100 certified custom fitting accounts. In the fall of 1995, the Company
introduced the original Tight Lies fairway wood and, in December 1996, the
Company extended the Tight Lies line to include the Tight Lies Strong 3, Strong
5 and Strong 7, with the Tight Lies Strong 9 being introduced in January 1998.
Sales of the Tight Lies line of products increased significantly subsequent to
the second quarter of 1997 when the Company launched an infomercial relating to
the original Tight Lies fairway wood. To further enhance the Tight Lies line of
products, the Company introduced the Strong 2 Tour Brassie and the Strong 11 in
late August 1998. 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, direct sales to consumers, international distributors and the
Company's custom fitting accounts.
The Company believes that during the second half of 1998, the golf industry
experienced declining sales. Despite the industry trend of declining sales, the
Company has experienced significant positive sales growth over prior years.
However, the Company's ability to continue to generate positive sales trends
into 1999 is dependent upon the successful introduction of new products and the
continued acceptance of its Tight Lies line of fairway woods. No assurances can
be given that demand for the Company's current products or the introduction of
new products will allow the Company to continue its trend of increasing sales,
or to maintain historical levels of sales in the future. The Company introduced
the SC Series Titanium drivers and the Faldo Series wedges in January 1999, and,
accordingly, no sales for these products were recorded in the years ended
December 31, 1996, 1997 and 1998.
The Company does not currently manufacture the components required to assemble
its golf clubs, relying instead on various component suppliers. Fairway wood
components are each available from multiple suppliers. Currently, certain
components for the new SC Series Titanium drivers and the Faldo Series wedges
are produced by a single supplier. Costs of the Company's current Tight Lies
line of fairway woods, new SC Series Titanium drivers and Faldo Series wedges
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,
----------------------------------------
1996 1997 1998
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 45.1 27.2 25.3
----- ----- -----
Gross profit 54.9 72.8 74.7
Operating expenses 54.6 83.6 52.8
----- ----- -----
Operating income (loss) 0.3 (10.8) 21.9
Interest income (expense), net - (0.2) 1.5
Other income (expense), net 0.1 (0.1) (0.1)
----- ----- -----
Income (loss) before income taxes 0.4 (11.1) 23.3
Income tax expense - 1.6 8.5
----- ----- -----
Net income (loss) 0.4% (12.7)% 14.8%
===== ===== =====
10
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net sales increased to $36.7 million for 1997 from $3.5 million for 1996,
primarily due to increased market acceptance of the Company's Tight Lies fairway
woods. Net sales of the Tight Lies fairway woods increased to $34.6 million for
1997, from $1.7 million for 1996, and increased as a percentage of net sales to
94.3% from 47.2%, respectively. Net sales of other product lines increased to
$2.1 million for 1997 compared to $1.8 million for 1996, but decreased as a
percentage of net sales to 5.7% for 1997 from 52.8% for 1996.
Gross profit increased to $26.7 million for 1997 from $1.9 million for 1996, and
increased as a percentage of net sales to 72.8% from 54.9%, respectively. Gross
profit for 1997 was favorably affected by an increased percentage of sales
attributable to the higher margin Tight Lies fairway woods and the inherent cost
savings associated with buying components in large volumes and assembling them
on a substantially increased scale.
The Company experienced an operating loss of $4.0 million for 1997 as compared
to operating income of $9,000 for 1996. Total operating expenses increased to
$30.7 million for 1997 from $1.9 million for 1996. Of the $30.7 million of
operating expenses for 1997, $14.8 million, or 48.4% of expenses related to
stock compensation and bonus awards to the Company's Chairman, Chief Executive
Officer and President. See "Certain Transactions" and Note 13 of Notes to
Consolidated Financial Statements. The expense recognized in 1996 in conjunction
with these awards was $0.2 million, or 11.1% of operating expenses. In 1997, the
Company also incurred higher expenses for selling and royalties and provision
for bad debts, in each case due principally to increased sales of the Tight Lies
fairway woods. General and administrative expenses and research and development
expenses also increased in 1997 due to the hiring of additional employees.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net sales increased 131% to $84.6 million for the year ended December 31, 1998
from $36.7 million for 1997, primarily due to the continued market acceptance of
the Company's Tight Lies line of fairway woods, and, to a lesser extent, the
introduction of the Strong 2 Tour Brassie and the Strong 11 in late August 1998.
Net sales for 1998 have been reduced by a $4.3 million unconditional credit
given to retailers during the fourth quarter in connection with the Company's
new suggested retail pricing structure. The Company does not expect changes to
its suggested retail pricing structure during 1999. Net sales of the Tight Lies
line of fairway woods increased to $81.6 million for the year ended December 31,
1998 from $34.6 million for 1997, and increased as a percentage of net sales to
96.5% from 94.3%, respectively. Sales of the Tight Lies fairway woods increased
subsequent to the Company's introduction of an infomercial marketing its
original Tight Lies fairway wood in the second quarter of 1997. Net sales of
other product lines for the year ended December 31, 1998 increased to $3.0
million from $2.1 million for 1997, but decreased as a percentage of net sales
to 3.5% from 5.7%, respectively. Net sales of the Company's products outside the
U.S. increased to $11.0 million for the year ended December 31, 1998 from $0.9
million for the year ended December 31, 1997, and increased as a percentage of
net sales to 13.0% from 2.5%, respectively. The increase in international sales
was due to increased market acceptance of the Tight Lies fairway woods and
expanded international marketing efforts beginning in the last half of 1997.
Net sales for 1999 are expected to be positively impacted by the introductions
of the SC Series Titanium drivers and the Faldo Series wedges. However, the
Company believes that declining sales in the golf equipment industry and
increased competition in the fairway wood segment will diminish the growth trend
of sales experienced over the past two years.
Cost of goods sold increased to $21.4 million for the year ended December 31,
1998 from $10.0 million for 1997, and decreased as a percentage of net sales to
25.3% from 27.2%, respectively, primarily due to an increased percentage of net
sales attributable to the higher margin Tight Lies fairway woods and the
inherent cost savings associated with buying components in large volumes and
assembling them on a substantially increased scale. Offsetting the above factors
were lower average selling prices during the second half of 1998 resulting
primarily from the sale of the Company's inventory of "demo" clubs, an increase
of sales to retailers compared to sales to direct consumers and the $4.3 million
credit given to retailers. The introduction of the new product lines (i.e., SC
Series Titanium drivers and the Faldo Series wedges) combined with the new
suggested retail pricing structure for the Tight Lies fairway woods is expected
to increase cost of sales as a percentage of net sales in future periods.
11
Operating expenses are composed primarily of selling and royalty expenses,
general and administrative expenses, and to a lesser extent, research and
development expenses. Selling and royalty expenses increased to $31.2 million
for the year ended December 31, 1998 from $13.1 million for 1997 as a result of
hiring additional employees, incurring increased levels of services provided by
independent contractors and increased marketing and advertising efforts. Selling
and royalty expenses increased as a percent of net sales for the year ended 1998
to 36.9% from 35.7%, respectively, primarily due to the increased advertising
initiatives which included a revised infomercial, television commercials and
print advertising. Selling and royalty expenses also include the costs
associated with a golf bag giveaway promotion conducted during the fourth
quarter of 1998. General and administrative expenses, including provisions for
bad debts, increased to $11.9 million, or 14.1% as a percent of sales, for the
year ended December 31, 1998 from $2.2 million, or 6.0% as a percent of net
sales, excluding stock compensation and bonus awards for the year ended December
31, 1997, primarily due to the hiring of additional employees, use of additional
outside services, higher occupancy costs and additional bad debt expense related
to increased revenues. For the year ended December 31, 1997, the Company
incurred $14.8 million, or 40.5% as a percent of net sales, relating to stock
compensation and bonus awards to the Company's Chairman and Chief Executive
Officer. Research and development expenses for the year ended December 31, 1998
increased to $1.5 million from $0.6 million for 1997, and increased as a percent
of net sales to 1.8% from 1.5%, primarily due to increased salaries, consulting,
and tooling expenses associated with the development of new products.
Operating income increased to $18.5 million for the year ended December 31, 1998
from a loss of $4.0 million for 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased to $23.7 million at December 31, 1998 from
$2.0 million at December 31, 1997, primarily as a result of $3.7 million
provided by cash flows from operations and $56.4 million provided from financing
activities, offset by $38.4 million used for investing activities. The increase
in cash flows provided by operations was primarily a result of increased net
income. Primary uses of operating cash flows were increases in inventory and
income taxes receivable of approximately $8.8 million and $2.1 million,
respectively, for the year ended December 31, 1998. The increase in inventory is
primarily the result of declining sales in the third and fourth quarter of 1998.
Cash used in investing activities of $38.4 million for the year ended December
31, 1998, is primarily related to purchases of marketable securities, computer
equipment and software, telephone systems, and furniture and fixtures. Capital
expenditures made in the ordinary course of business relating to the
implementation of a customer management information system and enterprise
resource planning system for the year ended December 31, 1998 approximated $4.3
million. Cash provided by financing activities of $56.4 million was primarily a
result of net proceeds of the initial public offering of $58.5 million.
Working capital totaled $53.0 million at December 31, 1998 compared to $6.9
million at December 31, 1997.
The Company has a $10.0 million revolving credit facility, which expires on May
31, 2000. At December 31, 1998, the Company had no outstanding borrowings under
its facility. Borrowings under the Company's revolving credit facility agreement
are at interest rates based on the lending bank's general refinance rate of
interest or certain LIBOR rates of interest. During the first quarter of 1998,
the Company borrowed approximately $1.1 million in the form of a note payable to
the Company's Chairman and Chief Executive Officer to be used for working
capital purposes. The remaining principal amount of the note (approximately
$175,000 at December 31, 1998) is payable on April 14, 1999 at an interest rate
of 5.39%.
12
The Company expects to meet future liquidity requirements primarily through cash
flows generated from operations. In 1999, cash flows from operations will be
affected by the impact of the Company's net-down program implemented in the
fourth quarter of 1998, which reduced accounts receivable by approximately $4.3
million. It is anticipated that operating cash flows and current cash reserves
will adequately fund capital expenditure programs which will include continued
upgrade of the newly integrated information systems. 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 will be utilized to support
purchasing of more expensive components associated with the SC Series Titanium
drivers. The expected net positive cash flows, current cash reserves and
flexibility regarding the Company's revolving credit facility allow the Company
to meet working capital requirements during periods of low cash flows resulting
from the seasonality of the industry.
Capital expenditures for the three years ended December 31, 1996, 1997 and 1998
were approximately $0.1 million, $0.8 million and $4.3 million, respectively.
The expenditures made 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.
The Company is not aware of any event or trend that would potentially affect
its liquidity. In the event such a trend should develop, the Company believes
that the cash flow from operations, current cash reserves and the revolving
credit facility would be sufficient to meet operating needs and capital
expenditures for at least the next 12 months.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Golf generally is regarded as a warm weather sport and sales of golf equipment
historically have been strongest during the second and third quarters, with the
weakest sales occurring during the fourth quarter. 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 unseasonal 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; reliance on third
parties including suppliers; and the volume of orders that are received and that
can be fulfilled in a quarter. Any one or more of these factors could result in
the Company failing to achieve its expectations as to future sales or net
income.
YEAR 2000 READINESS DISCLOSURE
The year 2000 will have a broad impact on the business environment in which the
Company operates due to the possibility that many computerized systems across
all industries will be unable to process information containing the dates
beginning in the year 2000. The Company relies on its internal information
technology systems in operating and monitoring many significant aspects of its
business, including financial systems, customer services, infrastructure and
network and telecommunications equipment. The Company also relies directly and
indirectly on the systems of external business enterprises such as suppliers,
customers, creditors, financial organizations and domestic and international
governments. The Company has established an enterprise-wide program to prepare
its computer systems and applications for the year 2000 and is utilizing both
internal and external resources to identify, correct and test the systems for
Year 2000 compliance. The Company's legacy information system, as well as the
information system currently being implemented, are certified as Year 2000
compliant. The Company has substantially completed an inventory of all
information technology and non-information technology equipment as of December
31, 1998 and anticipates that the majority of its remediation plan will be
completed by April 30, 1999. The Company expects that all systems critical to
the conduct of the Company's operations will be Year 2000 compliant prior to the
end of the 1999 calendar year.
13
The nature of the Company's business is such that the business risks associated
with the Year 2000 can be reduced by closely assessing the vendors supplying the
components used in assembling the Company's products. Because third party
failures could have a material impact on the Company's ability to conduct
business, questionnaires have been sent to the Company's significant vendors to
obtain reasonable assurance that plans are being developed to address the Year
2000 issue. The returned questionnaires are currently being assessed by the
Company, and are being categorized based upon readiness for the Year 2000 issues
and prioritized in order of significance to the business of the Company. To the
extent that vendors do not provide the Company with satisfactory evidence of
their readiness to handle Year 2000 issues, contingency plans will be developed
by July 31, 1999.
The Company does not believe the costs related to the Year 2000 compliance
project will be material to its financial position or results of operations.
However, the cost of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans, and
other factors. Unanticipated failures by critical vendors, as well as failure by
the Company to execute its own remediation efforts, could have a material
adverse effect on the cost of the project, its completion date, and the
Company's results of operations and financial position. As a result, there can
be no assurance that these forward-looking estimates will be achieved and the
actual cost and vendor compliance could differ materially from those plans,
resulting in material financial risk.
NEW ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 ("SOP 98-5"), REPORTING OF THE COSTS OF START-UP
ACTIVITIES, which is effective for financial statements issued for periods
beginning after December 15, 1998. SOP 98-5 requires costs of start-up
activities and organization costs to be expensed as incurred. The Company
believes SOP 98-5 will not have a material impact on its financial statements or
accounting policies. The Company will adopt the provisions of SOP 98-5 in the
first quarter of 1999.
The Company is also assessing the reporting and disclosure requirements of 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 is effective for financial
statements for fiscal years beginning after June 15, 1999. The Company believes
SFAS No. 133 will not have a material impact on its financial statements or
accounting policies. The Company will adopt the provisions of SFAS No. 133 in
the first quarter of 2000.
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;
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; risks concerning future
technology; and one-time events and other factors detailed in the Company's
prospectus and other Securities and Exchange Commission filings. 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. 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.
14
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, 1998, the cost and market value of
such cash equivalents and marketable securities was approximately $58,629,000
and $58,862,000, 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.
The table below presents principal amounts and related weighted-average interest
rates by year of maturity for the Company's investment portfolio (in thousands,
except percentages).
FAIR
1999 2000 2001 TOTAL VALUE
---- ---- ---- ----- -----
Cash equivalents:
Fixed rate $24,484 $ - $ - $24,484 $24,487
Average interest rate (1) 4.3% - - 4.3%
Marketable securities:
Fixed rate $13,019 $15,206 $5,920 $34,145 $34,375
Average interest rate (1) 3.5% 3.9% 3.8% 3.7%
(1) The majority of cash equivalents and marketable securities are
tax-exempt, resulting in a lower average interest rate than taxable
investments.
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 statement is set forth herein under Item 14 on
page S-1. In addition, quarterly financial data is not required as the Company
has not met the requirements of net income after taxes, but before extraordinary
items and cumulative effect of any change in accounting of $250,000, for each
year in the three year period ended December 31, 1998, or total assets at
December 31, 1998 of $200 million.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
15
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 7, inclusive, of the Company's Proxy Statement dated April 7, 1999
for the annual meeting of shareholders on May 5, 1999 (the "1999 Proxy
Statement") under the respective captions, "Election of Directors", "Section
16(a) Beneficial Ownership Reporting Compliance" and "Executive Officers".
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from pages
8 through 10, inclusive, of the Company's 1999 Proxy Statement under the
caption "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 of the Company's 1999 Proxy Statement under the caption "Beneficial
Ownership of Certain Stockholders, Directors and Executive Officers".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from pages
10 through 12, inclusive, of the Company's 1999 Proxy Statement under the
captions "Employment Contracts and Change in Control Agreements" and
"Compensation Committee Interlocks and Insider Participation".
16
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, 1997 and 1998 F-3
Consolidated Statements of Operations for the years ended December 31, 1996, 1997, and 1998 F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1997, and 1998 F-5 - F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997, and 1998 F-7
Notes to Consolidated Financial Statements F-8 - F-20
(2) FINANCIAL STATEMENT SCHEDULE
The following financial statement schedule of the Company for the years
ended December 31, 1996, 1997, 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
17
(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 Company Incorporated by reference to Form S-1
dated February 26, 1998 (Exhibit 4.1)
Exhibit 10.1 Agreement between the Registrant and Nick Incorporated by reference to Form S-1
Faldo, dated April 22, 1998 (Exhibit 10.1)
Exhibit 10.2 Amended and Restated Revolving credit dated Included in this filing
dated February 26, 1999, between Adams
Golf Direct Response, Ltd., Adams Golf,
Ltd. and NationsBank of Texas N.A. and
related promissory note and guaranty.
Exhibit 10.3 Commercial Lease Agreement dated Incorporated by reference to Form S-1
December 5, 1997, between Jackson-Shaw (Exhibit 10.3)
Technology Center II, Ltd. and the Company
Exhibit 10.4 Commercial Lease Agreement dated April 6, Incorporated by reference to Form S-1
1998, between Jackson-Shaw Technology (Exhibit 10.4)
Center II, 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. Hatfield (Exhibit 10.5)
Exhibit 21.1 Subsidiaries of the Registrant Included in this filing
Exhibit 23.1 Consent of KPMG LLP Included in this filing
Exhibit 27.1 Financial Data Schedule Included in this filing
Exhibit 99.1 Proxy Statement of Registrant dated April 7, Incorporated by reference to the
1999 1999 Proxy Statement
(b) REPORTS ON FORM 8-K
None
18
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 29, 1999 By: /s/ B. H. (Barney) Adams
---------------------------------------
B. H. (Barney) Adams,
Chairman of the Board, Chief Executive
Officer and President
Date: March 29, 1999 By: /s/ Darl P. Hatfield
---------------------------------------
Darl P. Hatfield,
Senior Vice President - Finance and
Administration and Chief Financial
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 indicate.
Date: March 29, 1999 /s/ B. H. (Barney) Adams
---------------------------------------
B. H. (Barney) Adams, Chairman of the
Board, Chief Executive Officer and
President (Principal Executive Officer)
Date: March 29, 1999 /s/ Paul F. Brown, Jr.
---------------------------------------
Paul F. Brown, Jr.,
Director
Date: March 29, 1999 /s/ Roland E. Casati
---------------------------------------
Roland E. Casati,
Director
Date: March 29, 1999 /s/ Mark R. Mulvoy
---------------------------------------
Mark R. Mulvoy
Director
Date: March 29, 1999 /s/ Richard H. Murtland
---------------------------------------
Richard H. Murtland,
Vice President - Research and
Development Secretary, Treasurer and
Director
Date: March 29, 1999 /s/ Stephen R. Patchin
---------------------------------------
Stephen R. Patchin
Director
Date: March 29, 1999 /s/ John S. Simpson
---------------------------------------
John S. Simpson
Director
19
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND RELATED FINANCIAL STATEMENT SCHEDULE
CONSOLIDATED FINANCIAL STATEMENTS PAGE
- --------------------------------- ----
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 F-3
Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and 1998 F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1997 and 1998 F-5 - F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998 F-7
Notes to Consolidated Financial Statements F-8 - F20
FINANCIAL STATEMENT SCHEDULE
- ----------------------------
The following financial statement schedule of the Company for the years
ended December 31, 1996, 1997, 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. and subsidiaries:
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. These 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 generally accepted auditing
standards. 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
its subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles. 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 25, 1999
F-2
ADAMS GOLF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
DECEMBER 31,
---------------------------------
1997 1998
---------------------------------
Current assets:
Cash and cash equivalents................................. $1,956 $23,688
Marketable securities (note 2)............................ - 13,084
Trade receivables, net (note 3)........................... 7,671 2,022
Inventories (note 4)...................................... 4,487 13,312
Prepaid expenses.......................................... 509 885
Income tax receivable..................................... - 2,088
Deferred income tax assets (note 12)...................... 390 2,386
Other current assets...................................... 937 1,287
------- -------
Total current assets................................... 15,950 58,752
Property and equipment, net (note 5)......................... 604 3,468
Marketable securities (note 2)............................... - 21,291
Deferred income tax assets (note 12)......................... 183 -
Professional services agreement (note 6) .................... - 9,450
Other assets, net (note 7)................................... 623 3,945
------- -------
$17,360 $96,906
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to shareholder (note 11)..................... $ - $ 175
Accounts payable.......................................... 378 1,152
Income taxes payable...................................... 1,021 -
Accrued expenses (note 8)................................. 7,636 4,418
------- -------
Total current liabilities.............................. 9,035 5,745
Deferred income tax liabilities (note 12).................... - 2,971
------- -------
Total liabilities...................................... 9,035 8,716
------- -------
Stockholders' equity (note 13):
Preferred stock, $0.01 par value; authorized 5,000,000
shares; none issued and outstanding.................... - -
Common stock, $.001 par value; authorized
50,000,000 shares; 15,719,338 shares issued and
outstanding at December 31, 1997 and 23,136,782 shares
issued and 22,479,282 shares outstanding at
December 31, 1998...................................... 16 23
Additional paid-in capital................................ 14,123 85,183
Common stock subscription................................. - (22)
Deferred compensation..................................... - (704)
Accumulated other comprehensive income.................... - 150
Retained earnings (accumulated deficit) .................. (5,814) 6,696
Treasury stock, 657,500 shares at cost.................... - (3,136)
------- -------
Total stockholders' equity............................. 8,325 88,190
Commitments and contingencies (notes 6 and 9)
------- -------
$17,360 $96,906
======= =======
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,
------------------------------------------------
1996 1997 1998
---- ---- ----
Net sales (note 3) ............... $3,522 $36,690 $84,611
Cost of goods sold................. 1,590 9,991 21,441
------ ------- -------
Gross profit............... 1,932 26,699 63,170
------ ------- -------
Operating expenses:
Research and development 51 557 1,532
expenses.....................
Selling and royalty expenses.... 626 13,093 31,239
General and administrative
expenses:
Stock compensation and bonus
award (note 13)............ 214 14,842 -
Provision for bad debts...... 51 739 1,464
Other........................ 981 1,437 10,435
------ ------- -------
Total operating expenses... 1,923 30,668 44,670
------ ------- -------
Operating income (loss).... 9 (3,969) 18,500
Other income (expense):
Interest income................. 4 15 1,367
Interest expense................ - (70) (71)
Other........................... - (48) (103)
------ ------- -------
Income (loss) before
income taxes............ 13 (4,072) 19,693
Income tax expense (note 12)....... - 582 7,183
------ ------- -------
Net income (loss).......... $ 13 $(4,654) $12,510
====== ======= =======
Income (loss) per common share:
Basic........................... $ - $ (0.37) $ 0.61
====== ======= =======
Diluted......................... $ - $ (0.37) $ 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, 1996, 1997 AND 1998
ACCUMULATED
SHARES OF ADDITIONAL COMMON OTHER
COMMON COMMON PAID-IN STOCK DEFERRED COMPREHENSIVE
STOCK STOCK CAPITAL SUBSCRIPTION COMPENSATION INCOME
---------- ------- ------- ------------ ------------ ------
Balance, December 31,
1995.............. 11,062,908 $ 11 $ 1,776 $ - $ - $ -
Net income............. - - - - - -
Sale of stock.......... 1,581,126 2 1,594 - - -
Common stock
repurchased
and retired
(note 13).......... (770,800) (1) (244) - - -
---------- --- ------- ---- ----- -----
Balance, December 31,
1996............... 11,873,234 12 3,126 - - -
Net loss................ - - - - - -
Stock compensation
award (note 13)..... 2,000,000 2 9,998 - - -
Exercise of stock
options............. 946,104 1 550 - - -
Exchange of debt for
common common stock
(note 13)........... 900,000 1 449 - - -
---------- --- ------- ---- ----- -----
Balance, December 31,
1997................ 15,719,338 $16 $14,123 $ - $ - $ -
---------- --- ------- ---- ----- -----
RETAINED
EARNINGS COST OF TOTAL
(ACCUMULATED COMPREHENSIVE TREASURY STOCKHOLDERS'
DEFICIT) INCOME STOCK EQUITY
-------- ------ ----- ------
Balance, December 31,
1995.............. $(1,173) $ - $ 614
Net income............. 13 $ 13 - 13
=======
Sale of stock.......... - - 1,596
Common stock
repurchased
and retired
(note 13).......... - - (245)
------- ----- -------
Balance, December 31,
1996............... (1,160) - 1,978
Net loss................ (4,654) $(4,654) - (4,654)
=======
Stock compensation
award (note 13)..... - - 10,000
Exercise of stock
options............. - - 551
Exchange of debt for
common common stock
(note 13)........... - - 450
------- ----- -------
Balance, December 31,
1997................ $(5,814) $ - $ 8,325
------- ----- -------
F-5 (continued)
ADAMS GOLF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
ACCUMULATED
SHARES OF ADDITIONAL COMMON OTHER
COMMON COMMON PAID-IN STOCK DEFERRED COMPREHENSIVE
STOCK STOCK CAPITAL SUBSCRIPTION COMPENSATION INCOME
---------- ------- ------- ------------ ------------ ------
Balance, December 31,
1997.................. 15,719,338 $ 16 $14,123 $ - $ - $ -
Comprehensive income:
Net income............ - - - - - -
Other comprehensive
income, net of tax -
unrealized gains on
marketable securities. - - - - - 150
Comprehensive income.. - - - - - -
Issuance of common
stock................. 4,037,500 4 58,468 - - -
Issuance of stock
options............... - - 2,027 - (2,027) -
Stock option forfeiture.. - - (487) - 487 -
Exercise of stock
options............... 2,479,944 2 928 (230) - -
Payment of stock
subscription.......... - - - 208 - -
Grant of stock
(note 6).............. 900,000 1 10,124 - - -
Treasury stock
purchases
(657,500 shares)...... - - - - - -
Amortization of
deferred
compensation.......... - - - - 836 -
---------- --- ------- ----- ------- ----
Balance, December 31,
1998.................. 23,136,782 $23 $85,183 $ (22) $ (704) $150
========== === ======= ===== ======= ====
RETAINED
EARNINGS COST OF TOTAL
(ACCUMULATED COMPREHENSIVE TREASURY STOCKHOLDERS'
DEFICIT) INCOME STOCK EQUITY
-------- ------ ----- ------
Balance, December 31,
1997.................. $(5,814) $ - $ 8,325
Comprehensive income:
Net income............ 12,510 $12,510 - 12,510
Other comprehensive
income, net of tax -
unrealized gains on
income, net of tax -
unrealized gains on
marketable securities. 150 - 150
-------
Comprehensive income.. - $12,660 - -
=======
Issuance of common
stock................. - - 58,472
Issuance of stock
options............... - - -
Stock option forfeiture.. - - -
Exercise of stock
options............... - - 700
Payment of stock
subscription.......... - - 208
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.................. $ 6,696 $(3,136) $88,190
======= ======= =======
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,
---------------------------------------------------
1996 1997 1998
---- ---- ----
Cash flows from operating activities:
Net income (loss).................................. $13 $(4,654) $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............... 19 302 2,204
Loss on retirement of fixed assets.............. - 134 111
Stock compensation and bonus award.............. - 10,000 -
Amortization of deferred compensation........... - - 836
Deferred income taxes........................... - (573) 1,077
Allowance for doubtful accounts................. 26 672 596
Changes in assets and liabilities:
Trade receivables............................. (374) (8,067) 5,053
Inventories................................... (476) (3,812) (8,825)
Prepaid expenses.............................. - (481) (376)
Income tax receivable......................... - - (2,088)
Other current assets.......................... - (716) (350)
Other assets.................................. (362) (390) (3,567)
Accounts payable.............................. (23) 360 774
Income taxes payable.......................... - 1,021 (1,021)
Accrued expenses.............................. 329 7,304 (3,218)
------ ------- --------
Net cash provided by (used in) operating
activities.............................. (848) 1,100 3,716
------ ------- --------
Cash flows from investing activities:
Purchases of marketable securities................. - - (34,145)
Purchase of equipment.............................. (121) (770) (4,258)
------ ------- --------
Net cash used in investing activities....... (121) (770) (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..... 230 1,050 7,135
Repayment of line of credit borrowings............. - (800) (6,000)
Repayment of notes payable......................... - (30) (960)
Issuance of common stock........................... 1,351 551 908
------ ------- --------
Net cash provided by financing activities.... 1,581 771 56,419
------ ------- --------
Net increase in cash and cash equivalents............. 612 1,101 21,732
Cash and cash equivalents at beginning of year........ 243 855 1,956
------ ------- --------
Cash and cash equivalents at end of year.............. $ 855 $ 1,956 $ 23,688
====== ======= ========
Supplemental disclosure of cash flow information:
Interest paid...................................... $ - $ 70 $ 27
====== ======= ========
Income taxes paid.................................. $ - $ 356 $ 9,298
====== ======= ========
Supplemental disclosure of non-cash financing
activity-stock issued for professional services
agreement (note 6)................................. $ - $ - $ 10,125
====== ======= ========
Exchange of debt for common stock.................. $ - $ 450 $ -
====== ======= ========
See accompanying notes to consolidated financial statements.
F-7
ADAMS GOLF, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Tables in thousands, except share amounts)
December 31, 1997 and 1998
(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. The Company's primary products are
fairway woods and drivers that are marketed under the trademarks
"Tight Lies" and "SC Series," respectively. The SC Series was
introduced in January 1999 and, accordingly, had no sales for the
three-year period ended December 31, 1998.
The consolidated financial statements include the accounts of
Adams Golf, Inc. 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 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 statement 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 completed golf clubs and component parts.
Cost is determined using the first-in, first-out method.
(D) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. 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 generally occurs when
the product is shipped.
F-8
ADAMS GOLF, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Tables in thousands, except share amounts)
December 31, 1997 and 1998
(F) OTHER ASSETS AND RELATED AMORTIZATION EXPENSE
Other assets consist primarily of the cost of implementing an
enterprise resource planning (ERP) software system, obtaining
patents, development costs of an infomercial and various deposits.
The ERP 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. These costs are
being amortized using the straight-line method over five years.
Patent amortization is computed using the straight-line method
over the estimated useful lives of the assets, which range from 5
to 15 years. Infomercial costs are amortized over a 6 to 24 month
period based on the estimated useful life and on revenues
generated compared to total estimated revenues resulting from the
airing of such infomercials.
(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 approximately $34,000,
$8,651,000 and $17,083,000 in 1996, 1997 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 two years. In
addition, the Company has a 90 day "no questions asked" return
policy applicable to direct response sales. An allowance for
estimated future warranty and sales return 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 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.
F-9
ADAMS GOLF, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Tables in thousands, except share amounts)
December 31, 1997 and 1998
(K) INCOME (LOSS) PER SHARE
The weighted average common shares used for basic net income
(loss) per common share were 11,237,794, 12,519,392, and
20,434,775 for 1996, 1997 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 100,000 shares of common stock which were outstanding
during 1998 were not included in the computation of diluted
earnings per share as their effect would have been antidilutive.
Stock options outstanding in 1996 and 1997 were not considered in
the computation of net income (loss) per common share since their
effect is either immaterial or antidilutive.
(L) FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts
receivable, accounts payable, accrued expenses and note payable to
shareholder approximate fair value, due to the short maturity of
these instruments. The carrying amount of marketable securities
is based upon quoted market prices.
(M) IMPAIRMENT OF LONG-LIVED ASSETS AND 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 expected to be generated by the asset. 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 exceed 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
In 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, REPORTING COMPREHENSIVE INCOME. This
statement establishes rules for the reporting of comprehensive
income and its components. Comprehensive income consists of net
income and unrealized gains and losses, net of related tax effect,
on marketable securities classified as available-for-sale and is
presented in the consolidated statement of shareholders' equity.
F-10
ADAMS GOLF, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Tables in thousands, except share amounts)
December 31, 1997 and 1998
(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 revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(2) MARKETABLE SECURITIES
Marketable securities consist of the following at December 31, 1998:
UNREALIZED FAIR
COST GAINS VALUE
-------- ----- -----
Governmental bonds $ 32,342 $229 $ 32,571
Corporate bonds 1,803 1 1,804
-------- ---- --------
34,145 230 34,375
Less current amounts (13,019) (65) (13,084)
-------- ---- --------
Long-term marketable securities $ 21,126 $165 $ 21,291
======== ==== ========
During the year ended December 31, 1998, there were no proceeds from the
sale of available-for-sale securities. All marketable securities mature
within three years.
F-11
ADAMS GOLF, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Tables in thousands, except share amounts)
December 31, 1997 and 1998
(3) TRADE RECEIVABLES
Trade receivables consist of the following at December 31, 1997 and 1998:
1997 1998
------ ------
Trade receivables $8,369 $ 3,316
Allowance for doubtful accounts (698) (1,294)
------ -------
$7,671 $ 2,022
====== =======
During the fourth quarter of 1998, the Company provided retailers an
unconditional credit ("Net-down Credit") in connection with the Company's
new suggested retail pricing structure. The Net-down Credit, which
aggregated approximately $4,300,000, has been reflected as a reduction in
net sales and accounts receivable in the Company's consolidated financial
statements as of and for the year ended December 31, 1998.
(4) INVENTORIES
Inventories consist of the following at December 31, 1997 and 1998:
1997 1998
------ ------
Finished goods $2,064 $ 2,880
Component parts 2,423 10,432
------ -------
$4,487 $13,312
====== =======
(5) PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following at December 31, 1997 and
1998:
1997 1998
---- ----
Manufacturing equipment $ 142 $ 244
Office equipment 660 4,112
Accumulated depreciation and amortization (198) (888)
----- ------
$ 604 $3,468
===== ======
F-12
ADAMS GOLF, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Tables in thousands, except share amounts)
December 31, 1997 and 1998
(6) PROFESSIONAL SERVICES AGREEMENT
The professional services agreement consists of a contract entered into
by the Company and Nicholas A. Faldo ("Faldo"), a professional golfer,
which provides, among other things, for 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, 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 is
being amortized over ten years, which represents the estimated period
during which the Company will realize benefits under the agreement.
In addition, Faldo will receive royalty payments representing 5% of net
sales outside the U.S., with a minimum annual amount of $1,500,000
beginning in 1999 and increasing ratably to $4,000,000 in 2004.
(7) OTHER ASSETS, NET
Other assets, net, consist of the following at December 31, 1997 and
1998:
1997 1998
------- ------
Enterprise resource planning software $ - $3,618
Deposits, including amounts for fixed assets
purchased 381 274
Infomercial costs 233 -
Patents 9 7
Other - 46
------- ------
$ 623 $3,945
======= ======
(8) ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 1997 and 1998:
1997 1998
------ ------
Payroll, bonuses and commissions (see note 13) $5,576 $ 476
Royalties 393 506
Advertising 471 1,661
Product warranty expense and sales return 449 736
Professional services 340 605
Other 407 434
------ ------
$7,636 $4,418
====== ======
F-13
ADAMS GOLF, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Tables in thousands, except share amounts)
December 31, 1997 and 1998
(9) COMMITMENTS AND CONTINGENCIES
The Company is obligated under certain noncancelable 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,
-------------
1999 $687
2000 717
2001 732
2002 767
2003 785
Thereafter 262
Rent expense was approximately $46,000 $104,000 and $472,000 for the
years ended December 31, 1996, 1997 and 1998, respectively.
The Company had outstanding commitments on letters of credit of
approximately $144,000 at December 31, 1998, for the purchase of
inventory from foreign vendors.
From time to time, the Company is a party to various legal proceedings
arising from the ordinary course of business. While any proceeding has an
element of uncertainty, management believes that the final outcome of all
matters currently pending will not have a materially adverse effect on
the Company's financial position, 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 year ended December 31, 1998, the
Company contributed approximately $74,000 to the Plan.
F-14
ADAMS GOLF, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Tables in thousands, except share amounts)
December 31, 1997 and 1998
(11) DEBT
On February 27, 1998, the Company entered into a $10,000,000 revolving
credit facility (the "Facility") bearing interest payable monthly at the
bank's prime rate minus 25 basis points (7.50% at December 31, 1998) or
LIBOR plus 1.75%, which expired December 31, 1998. Subsequent to December
31, 1998, the Company amended the Facility's maturity date to May 31,
2000 and the interest rate to the bank's prime rate of interest minus 50
basis points or LIBOR plus 1.00%. At December 31, 1998, there were no
amounts outstanding under the Facility. The Company pays a commitment fee
on the unused portion of the Facility of one-eighth of one percent per
annum.
During the first quarter of 1998, the Company borrowed $1,135,000 in the
form of an unsecured note payable to the Chief Executive Officer. The
remaining principal balance of the note of $175,000, which bears interest
at 5.39%, is due on April 14, 1999.
(12) INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1997 and
1998 consists of the following;
1997 1998
------ ------
Federal - current $1,021 $5,486
Federal - deferred (573) 1,077
State - current 134 620
------ ------
$ 582 $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
34% for 1996 and 1997 and 35% for 1998 to income (loss) before income
taxes) for the years ended December 31, 1996, 1997 and 1998 as follows:
1996 1997 1998
---- ---- ----
Computed "expected" tax expense (benefit) $ 4 $(1,384) $6,892
State income taxes, net of federal tax benefit - 89 403
Non-taxable interest income - - (286)
Stock compensation and bonus award - 2,159 -
Change in valuation allowance for deferred
tax assets (4) (338) (50)
Other - 56 (224)
---- ------- ------
$ - $ 582 $7,183
==== ======= ======
F-15
ADAMS GOLF, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Tables in thousands, except share amounts)
December 31, 1997 and 1998
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31 are presented below:
1997 1998
---- ----
Deferred tax assets:
Allowance for bad debts $ 237 $ 453
Research and development costs 1 160
Net-down credit - 1,505
Product warranty and sales returns 153 258
Obsolete inventory reserve - 77
Other reserves - 93
Net operating loss carryforwards 311 275
----- ------
Total gross deferred tax assets 702 2,821
Less valuation allowance (50) -
----- ------
Net deferred tax assets 652 2,821
----- ------
Deferred tax liabilities:
Infomercial costs 79 -
Prepaid professional services - 3,308
Tax/book depreciation difference - 17
Unrealized gain on marketable securities - 81
----- ------
Total gross deferred tax liabilities 79 3,406
----- ------
Net deferred tax assets (liabilities) $ 573 $ (585)
===== ======
In assessing the realizability of deferred income tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred income tax assets will not be realized. The ultimate
realization of deferred income tax assets is dependent upon the
generation of future taxable income during the periods in which those
temporary differences become deductible.
The valuation allowance for deferred tax assets at December 31, 1997 was
$50,000. The net change in the total valuation allowance for the years
ended December 31, 1997 and 1998 was a decrease of $338,000 and $50,000,
respectively.
At December 31, 1998, the Company has net operating loss carryforwards
for federal income tax purposes of approximately $786,000 which are
available to offset future federal taxable income through 2010. The
availability of the net operating loss carryforwards to reduce future
taxable income is subject to certain limitations. As a result of a change
in ownership, utilization of its net operating loss carryforwards is
limited to approximately $71,000 per year for the remaining life of the
net operating losses.
F-16
ADAMS GOLF, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Tables in thousands, except share amounts)
December 31, 1997 and 1998
(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) 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 the grant; (ii) generally
become exercisable over a period of one to four years; and (iii)
generally expire five years subsequent to award.
At December 31, 1998, there were 140,310 shares available for
grant under the 1996 Stock Option Plan. The per share
weighted-average fair value of stock options granted during 1996
was $0.06, 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, two -
five years and expected dividend yield, 0%. For the years ended
December 31, 1997 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
with the shares issued in January 1998. Compensation expense of
approximately $214,000 and $2,300,000 was charged to operations in
1996 and 1997, respectively, to recognize the bonus due to the
Chief Executive Officer.
F-17
ADAMS GOLF, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Tables in thousands, except share amounts)
December 31, 1997 and 1998
In conjunction with a 1996 stock purchase agreement, the Company
granted options to a shareholder to acquire an aggregate of
942,632 shares of common stock at option exercise prices ranging
from $0.375 to $0.625 per share. During 1997, the shareholder
exercised the options for an aggregate exercise price of
approximately $550,000.
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 Faldo (see note
6)) of the Company's common stock may be granted. The Company
granted 467,700 options, which generally vest over four years, to
employees during 1998 at a weighted average price of $3.39 per
share. At December 31, 1998, 541,940 shares remain available for
grant, including forfeitures. For financial statement reporting
purposes, the 1998 grants were deemed to have fair market values
ranging from $3.75 to $11.25 per share at the date of grant.
Accordingly, the Company has recorded deferred compensation of
approximately $704,000, net of amounts amortized and forfeited, at
December 31, 1998. The deferred compensation is being amortized to
expense over the vesting period of the options.
The Company applies Accounting Principles Board Opinion 25 in
accounting for its stock plans, and no compensation cost is
recognized for its stock options in the consolidated financial
statements for those stock options granted at fair market value.
Had the Company determined compensation cost based on the fair
value at the grant date for its stock options under SFAS No. 123,
the Company's net income (loss) would have been the pro forma
amounts indicated below:
1996 1997 1998
------ ------ ------
Net income (loss):
As reported $ 13 $(4,654) $12,510
Pro forma (13) (4,744) 12,445
Diluted income (loss) per common share:
As reported $ - $ (0.37) $ 0.61
Pro forma - (0.38) 0.60
The per share weighted-averages fair value of stock options
granted during 1998 under the 1998 Stock Option Plan was $5.22 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; and expected dividend
yield, 0%.
F-18
ADAMS GOLF, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Tables in thousands, except share amounts)
December 31, 1997 and 1998
Pro forma net income (loss) reflects only options granted in 1996,
1997 and 1998. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not
reflected in the pro forma net income (loss) amounts presented
above because compensation cost is reflected over the respective
options vesting periods of up to four years.
A summary of stock option activity follows:
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
---------- --------------
Options outstanding at December 31, 1995 1,520,766 $0.375
Options granted 1,946,948 1.00
---------- ------
Options outstanding at December 31, 1996 3,467,714 0.44
Options exercised (946,104) 0.583
---------- ------
Options outstanding at December 31, 1997 2,521,610 0.375
Options granted 467,700 3.39
Options exercised (2,479,944) 0.375
Options forfeited (151,304) 1.91
---------- ------
Options outstanding at December 31, 1998 358,062 $3.67
========== ======
At December 31, 1998, the exercise prices ranged from $2.50 to
$11.25 per share, and the weighted-average remaining contractual
life of outstanding options is approximately 4.37 years.
At December 31, 1997 and 1998, the number of options exercisable
was 2,114,492 and 45,000, respectively, and the per share
weighted-average exercise price of those options was $0.375 and
$2.50, respectively. At December 31, 1998, the remaining
contractual life of options exercisable was 4.5 years.
(C) STOCK COMPENSATION AWARD
In December 1997, the Board of Directors of the Company approved a
stock compensation award of 2,000,000 shares of common stock to
the Chief Executive Officer of the Company. In addition, the
Company agreed to pay all income taxes due by the Chief Executive
Officer relating to such stock award and related tax bonus.
Aggregate compensation of $12,542,000 (including $2,542,000 for
estimated taxes) was recorded by the Company during the year
ended December 31, 1997 based on the fair market value of the
stock.
F-19
ADAMS GOLF, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Tables in thousands, except share amounts)
December 31, 1997 and 1998
(D) NOTE WITH SHAREHOLDER CONVERTED TO STOCK
The Company borrowed $200,000 from a shareholder in October 1996
and an additional $250,000 from the same shareholder in 1997. The
aggregate notes payable balance of $450,000 was converted into
450,000 shares of the Company's stock in September 1997.
(E) STOCK SPLIT AND AUTHORIZED CLASSES OF STOCK
Effective April 29, 1998, the stockholders of the Company
authorized a two-for-one stock split for holders of record on May
1, 1998. The stock split has been reflected in the accompanying
consolidated financial statements and, accordingly, all applicable
dollar, share and per share amounts have been restated to reflect
the stock split. In addition, the stockholders of the Company also
approved an increase in the number of authorized shares of Common
Stock to 50,000,000 and established a class of preferred stock
with a par value of $.01 per share and authorized shares of
5,000,000.
(F) 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 and the repurchased shares are
held in treasury.
(14) GEOGRAPHIC SEGMENT AND DATA
In 1998, the Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION. This statement establishes
standards for reporting information about operating segments and related
disclosures about products and services, geographic areas and major
customers.
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 for
these markets consisted of the following for the years ended December 31,
1996, 1997 and 1998:
1996 1997 1998
------ ------- -------
United States $2,922 $35,808 $73,580
Rest of World 600 882 11,031
------ ------- -------
$3,522 $36,690 $84,611
====== ======= =======
At December 31, 1998, the Company has no assets outside of the United
States.
(15) SUBSEQUENT EVENT
In February 1999, the Company signed a letter of intent to acquire
certain assets of its exclusive distributor for the United Kingdom, which
is majority owned by Faldo. Consideration will include approximately
$200,000 in cash and a contingent cash payment of $200,000 due at the end
of 1999 based upon the achievement of certain minimum levels of operating
results.
F-20
SCHEDULE II
ADAMS GOLF, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
(DOLLARS IN THOUSANDS)
ADDITIONS
---------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS(1) PERIOD
- -------------------------------- ----------- ----------- ------------ ------------- -----------
Allowance for doubtful accounts:
Year ended December 31, 1996 $ - 51 - 25 $ 26
Year ended December 31, 1997 26 739 - 67 698
Year ended December 31, 1998 698 1,464 - 868 1,294
Product Warranty and Sales Returns:
Year ended December 31, 1996 - 2 - 2 -
Year ended December 31, 1997 - 1,808 - 1,359 449
Year ended December 31, 1998 $449 5,476 - 5,189 $ 736
(1) Represents uncollectable accounts charged against the allowance for
doubtful accounts and actual costs incurred for warranty repairs and
sales returns.
S-1