<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number: 0-24583
ADAMS GOLF, INC
(Exact name of registrant as specified in its charter)
DELAWARE 75-2320087
(State or other jurisdiction (I.R.S. Employer or
of incorporation organization) Identification No.)
300 Delaware Avenue, Suite 548, Wilmington, Delaware 19801
(Address of principal executive offices) (Zip Code)
(302) 427-5892
(Registrant's telephone number, including area code)
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
The number of outstanding shares of the registrant's common stock, par value
$.001 per share, was 22,479,282 on November 10, 1998.
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets -
December 31, 1997 and September 30, 1998 (unaudited) 3
Unaudited Condensed Consolidated Statements of Operations -
Three months and nine months ended September 30, 1997
and September 30, 1998 4
Unaudited Condensed Consolidated Statements of Stockholders'
Equity - Nine months ended September 30, 1998 5
Unaudited Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 1997 and September 30, 1998 6
Notes to Unaudited Condensed Consolidated Financial
Statements 7-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-14
Item 3. Quantitative and Qualitative Disclosures about Market Risk N/A
PART II OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities N/A
Item 4. Submissions of Matters to a Vote of Security Holders N/A
Item 5. Other Information N/A
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
2
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
(UNAUDITED)
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ 1,956 $ 29,196
Marketable securities (note 3). . . . . . . . . - 8,120
Trade receivables, net of allowance for
doubtful accounts of $698 and $1,444
(unaudited) in 1997 and 1998, respectively . 7,671 12,899
Inventories (note 4). . . . . . . . . . . . . . 4,487 10,879
Prepaid expenses. . . . . . . . . . . . . . . . 509 1,074
Income tax receivable . . . . . . . . . . . . . - 1,431
Deferred income tax assets. . . . . . . . . . . 390 866
Other current assets. . . . . . . . . . . . . . 937 908
------- --------
Total current assets . . . . . . . . . . . . 15,950 65,373
Property and equipment, net. . . . . . . . . . . . 604 3,524
Marketable securities (note 3) . . . . . . . . . . - 26,263
Deferred income tax assets . . . . . . . . . . . . 183 -
Professional services agreement (note 5) . . . . . - 9,703
Other assets, net. . . . . . . . . . . . . . . . . 623 1,800
------- --------
$17,360 $106,663
------- --------
------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to shareholder . . . . . . . . . . $ - $ 535
Accounts payable. . . . . . . . . . . . . . . . 378 438
Federal income taxes payable. . . . . . . . . . 1,021 -
Accrued expenses. . . . . . . . . . . . . . . . 7,636 7,000
------- --------
Total current liabilities. . . . . . . . . . 9,035 7,973
Deferred income tax liabilities. . . . . . . . . . - 3,182
------- --------
Total liabilities. . . . . . . . . . . . . . 9,035 11,155
------- --------
Stockholders' equity:
Common stock, $.001 par value. Authorized
50,000,000 shares; 15,719,338 and 23,136,782
(unaudited) shares issued and outstanding at
December 31, 1997 and September 30, 1998,
respectively . . . . . . . . . . . . . . . . 16 23
Additional paid-in capital. . . . . . . . . . . 14,123 85,891
Common stock subscription . . . . . . . . . . . - (22)
Deferred compensation . . . . . . . . . . . . . - (1,303)
Accumulated other comprehensive income. . . . . - 87
Retained earnings (accumulated deficit) . . . . (5,814) 10,832
------- --------
Total stockholders' equity . . . . . . . . . 8,325 95,508
Commitments (note 6)
$17,360 $106,663
------- --------
------- --------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
3
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . $14,236 $22,987 $19,685 $81,315
Cost of goods sold . . . . . . . . . . . . . 3,603 6,001 5,745 19,626
------- ------- ------- -------
Gross profit . . . . . . . . . . . . 10,633 16,986 13,940 61,689
------- ------- ------- -------
Operating expenses:
Research and development expenses . . . . 260 454 298 1,118
Selling and royalty expenses. . . . . . . 5,568 7,296 7,854 24,683
General and administrative expenses . . . 376 2,443 1,214 8,820
Provision for bad debts . . . . . . . . . 217 568 293 1,214
------- ------- ------- -------
Total operating expenses . . . . . . 6,421 10,761 9,659 35,835
------- ------- ------- -------
Operating income . . . . . . . . . . 4,212 6,225 4,281 25,854
Other:
Interest income . . . . . . . . . . . . . - 668 2 702
Interest expense. . . . . . . . . . . . . (27) (15) (48) (58)
Other income (expense). . . . . . . . . . 39 (2) 44 (104)
------- ------- ------- -------
Income before income taxes . . . . . 4,224 6,876 4,279 26,394
Income tax expense . . . . . . . . . . . . . 1,080 2,530 1,094 9,748
------- ------- ------- -------
Net income . . . . . . . . . . . . . $ 3,144 $ 4,346 $ 3,185 $16,646
------- ------- ------- -------
------- ------- ------- -------
Income per common share (note 7):
Basic . . . . . . . . . . . . . . . . . . $ 0.26 $ 0.19 $ 0.27 $ 0.84
------- ------- ------- -------
------- ------- ------- -------
Diluted . . . . . . . . . . . . . . . . . $ 0.26 $ 0.19 $ 0.27 $ 0.83
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
4
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES OF ADDITIONAL COMMON ACCUMULATED OTHER
COMMON COMMON PAID-IN STOCK DEFERRED COMPREHENSIVE
STOCK STOCK CAPITAL SUBSCRIPTION COMPENSATION INCOME
----- ----- ------- ------------ ------------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1997 . . . . . . . . . . . . . 15,719,338 $ 16 $ 14,123 $ - $ - $-
Issuance of common stock . . . . . 4,037,500 4 58,824 - - -
Issuance of stock options. . . . . - - 2,027 - (2,027) -
Stock option forfeiture. . . . . . - - (135) - 135 -
Exercise of stock options. . . . . 2,479,944 2 928 (230) - -
Payment of stock subscription. . . - - - 208 - -
Grant of stock (note 5). . . . . . 900,000 1 10,124 - - -
Deferred compensation
amortization. . . . . . . . . . . - - - - 589 -
Comprehensive income:
Net income. . . . . . . . . . . . - - - - - -
Other comprehensive
income, net of tax -
unrealized gains on
marketable securities . . . . . . - - - - - 87
Comprehensive income . . . . . . . - - - - - -
---------- ----- -------- ----- -------- --------
Balance, September 30, 1998. . . . 23,136,782 $ 23 $ 85,891 $(22) $ (1,303) $ 87
---------- ----- -------- ----- -------- --------
---------- ----- -------- ----- -------- --------
<CAPTION>
RETAINED EARNINGS TOTAL
(ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
DEFICIT) INCOME EQUITY
-------- ------ -----
<S> <C> <C> <C>
Balance, December 31,
1997 . . . . . . . . . . . . . $ (5,814) $ - $ 8,325
Issuance of common stock . . . . . - - 58,828
Issuance of stock options. . . . . - - -
Stock option forfeiture. . . . . . - - -
Exercise of stock options. . . . . - - 700
Payment of stock subscription. . . - - 208
Grant of stock (note 5). . . . . . - - 10,125
Deferred compensation
amortization. . . . . . . . . . . - - 589
Comprehensive income:
Net income. . . . . . . . . . . . 16,646 16,646 16,646
Other comprehensive
income, net of tax -
unrealized gains on
marketable securities . . . . . . - 87 87
-------
Comprehensive income . . . . . . . - $16,733 -
-------
-------
-------- --------
Balance, September 30, 1998. . . . $ 10,832 $ 95,508
-------- --------
-------- --------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
5
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1997 1998
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income. . . . . . . . . . . . . . . . . . . . . $ 3,185 $16,646
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization of property and
equipment and intangible assets . . . . . . . . 164 1,495
Loss on retirement of fixed assets. . . . . . . . - 101
Amortization of deferred compensation . . . . . . - 589
Deferred income taxes . . . . . . . . . . . . . . - 2,889
Allowance for doubtful accounts . . . . . . . . . 446 746
Changes in assets and liabilities:
Trade receivables . . . . . . . . . . . . . . . (6,648) (5,974)
Inventories . . . . . . . . . . . . . . . . . . (2,016) (6,392)
Prepaid expenses . . . . . . . . . . . . . . . (381) (565)
Income tax receivable . . . . . . . . . . . . . - (1,431)
Other current assets. . . . . . . . . . . . . . (103) 29
Other assets. . . . . . . . . . . . . . . . . . 53 (1,394)
Accounts payable. . . . . . . . . . . . . . . . 698 60
Federal income taxes payable. . . . . . . . . . 875 (1,021)
Other current liabilities . . . . . . . . . . . 2,016 -
Accrued expenses. . . . . . . . . . . . . . . . 985 (636)
-------- -------
Net cash provided by (used in) operating
activities. . . . . . . . . . . . . . . . (726) 5,142
-------- -------
Cash flows from investing activities:
Purchases of marketable securities. . . . . . . . . - (34,251)
Purchase of equipment . . . . . . . . . . . . . . . (382) (3,922)
-------- -------
Net cash used in investing activities . . . . (382) (38,173)
-------- -------
Cash flows from financing activities:
Proceeds from initial public offering . . . . . . . - 60,078
Initial public offering costs . . . . . . . . . . . - (1,250)
Proceeds from notes payable and line of credit. . . 250 7,135
Repayment of line of credit borrowings. . . . . . . (30) (6,000)
Repayment of notes payable. . . . . . . . . . . . . (450) (600)
Issuance of common stock. . . . . . . . . . . . . . 1,000 908
-------- -------
Net cash provided by financing activities . . 770 60,271
-------- -------
Net increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . . . . . . (338) 27,240
Cash and cash equivalents at beginning of period. . . 855 1,956
-------- -------
Cash and cash equivalents at end of period. . . . . . $ 517 $29,196
-------- -------
-------- -------
Supplemental disclosure of cash flow information:
Interest paid . . . . . . . . . . . . . . . . . . . $ 48 $ 34
-------- -------
-------- -------
Income taxes paid . . . . . . . . . . . . . . . . . $ - $11,916
-------- -------
-------- -------
Supplemental disclosure of non-cash investing
activity - change in unrealized holding
gains and losses on investment securities
available for sale, net of taxes. . . . . . . . . $ - $ 87
-------- -------
-------- -------
Supplemental disclosure of non-cash financing
activity:
Stock issued for professional services
agreement (note 5). . . . . . . . . . . . . . . . $ - $10,125
-------- -------
-------- -------
Exchange of debt for common stock . . . . . . . . . $ 450 $ -
-------- -------
-------- -------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
6
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of Adams Golf, Inc.
(the "Company") for the three and nine month periods ended September 30, 1997
and 1998 have been prepared by the Company, pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). The
information furnished herein reflects all adjustments (consisting only of
normal recurring accruals and adjustments) which are, in the opinion of
management, necessary to fairly state the operating results for the
respective periods. However, these operating results are not necessarily
indicative of the results expected for the full fiscal year. Certain
information and footnote disclosures normally included in annual consolidated
financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to SEC rules and
regulations. The notes to the condensed consolidated financial statements
should be read in conjunction with the notes to the consolidated financial
statements contained in the Company's registration statement on Form S-1 (the
"S-1") declared effective by the SEC on July 9, 1998.
The Company, founded in 1987, 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 that are marketed under the trademark Tight Lies-Registered Trademark-.
2. 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 $58.3 million 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 $0.5 million.
3. MARKETABLE SECURITIES
Marketable securities, consisting of commercial paper, governmental and
corporate bonds and other high quality debt securities, 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 comprehensive income in the statement of
stockholders' equity.
4. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
---- ----
(UNAUDITED)
<S> <C> <C>
Finished goods $ 2,064 $ 2,851
Component parts 2,423 8,028
-------- --------
$ 4,487 $ 10,879
-------- --------
-------- --------
</TABLE>
7
<PAGE>
5. 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 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 will be amortized over ten years, which
represents the estimated period during which the Company will realize
benefits under the agreement.
6. COMMITMENTS
The Company had outstanding commitments (denominated in U.S. dollars) on
letters of credit of $803,000 at September 30, 1998 for the purchase of
inventory from foreign vendors.
7. INCOME PER SHARE
The weighted average common shares used for determining basic income per
common share were 12,156,878 and 22,695,478 for the three months ended
September 30, 1997 and 1998, respectively, and 11,968,472 and 19,714,997 for
the nine months ended September 30, 1997 and 1998, respectively. The effect
of dilutive stock options added 53,045 shares and 296,803 shares for the
three and nine months ended September 30, 1998, respectively, for the
computation of diluted income per common share. Stock options outstanding for
the three and nine months ended September 30, 1997 were not considered in the
computation of net income per common share because their effect is immaterial
or antidilutive.
8. NEW ACCOUNTING PRONOUNCEMENTS
The Company is assessing the reporting and disclosure requirements of SFAS
No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION.
This statement requires a public business enterprise to report financial and
descriptive information about its reportable operating segments. The
statement is effective for financial statements for periods beginning after
December 15, 1997, but is not required for interim financial statements in
the initial year of its application. The Company will adopt the provisions
of SFAS No. 131 in its December 31, 1998 consolidated financial statements.
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.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is management's representation of the
financial position as of September 30, 1998 and the results of operations of
the Company for the three months and nine months ended September 30, 1997 and
1998. This discussion and analysis should be read in conjunction with the
attached unaudited condensed consolidated financial statements and notes
thereto, and with the Company's consolidated financial statements and notes
thereto included in the S-1.
OVERVIEW
The Company designs, manufactures, markets and distributes premium quality,
technologically innovative golf clubs. Founded in 1987, the Company operated
initially as a components supplier and contract manufacturer. 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-Registered Trademark- fairway
wood and, in December 1996, the Company extended the Tight Lies-Registered
Trademark-line to include the Tight Lies-Registered Trademark- Strong 3,
Strong 5 and Strong 7, with the Tight Lies-Registered Trademark- Strong 9
being introduced in January 1998. Sales of the Tight Lies-Registered
Trademark- line of products increased significantly subsequent to the second
quarter of 1997 when the Company launched an infomercial relating to the
original Tight Lies-Registered Trademark- fairway wood. To further enhance
the Tight Lies-Registered Trademark- 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 does not currently manufacture the components required to
assemble its golf clubs, relying instead on various component suppliers.
Costs of the Company's Tight Lies-Registered Trademark- fairway woods 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.
9
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth operating results expressed as a percentage of
net sales for the periods indicated. All information is derived from the
accompanying unaudited condensed consolidated financial statements. Results
for any one or more periods are not necessarily indicative of annual results
or continuing trends. See "Seasonality and Quarterly Fluctuations" below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ---------------
1997 1998 1997 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 25.3 26.1 29.2 24.1
------ ------ ------ ------
Gross profit 74.7 73.9 70.8 75.9
Operating expenses 45.1 46.8 49.1 44.1
------ ------ ------ ------
Operating income 29.6 27.1 21.7 31.8
Interest income (expense), net (0.2) 2.8 (0.2) 0.8
Other income (expense) 0.3 0.0 0.2 (0.1)
------ ------ ------ ------
Income before income taxes 29.7 29.9 21.7 32.5
Income tax expense 7.6 11.0 5.5 12.0
------ ------ ------ ------
Net income 22.1 18.9 16.2 20.5
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
Net sales increased to $23.0 million for the three months ended September 30,
1998 from $14.2 million for the comparable period of 1997, primarily due to
the continued market acceptance of the Company's Tight Lies-Registered
Trademark-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 of
the Tight Lies-Registered Trademark- line of fairway woods increased to $22.1
million for the three months ended September 30, 1998 from $13.5 million for
the comparable period of 1997, and increased as a percentage of net sales to
96.1% from 95.1%, respectively. Sales of the Tight Lies-Registered
Trademark- fairway woods increased subsequent to the Company's introduction
of an infomercial marketing its original Tight Lies-Registered
Trademark-fairway wood in the second quarter of 1997. Net sales of other
product lines for the three months ended September 30, 1998 increased to $0.9
million from $0.7 million for the comparable period of 1997, but decreased as
a percentage of net sales to 3.9% from 4.9%, respectively. Net sales of the
Company's products outside the U.S. increased to $3.3 million for the three
months ended September 30, 1998 from $0.1 million for the three months ended
September 30, 1997, and increased as a percentage of net sales to 14.3% from
0.7%, respectively. The increase in international sales was due to increased
market acceptance of the Tight Lies-Registered Trademark-fairway woods and
expanded international marketing efforts beginning in the last half of 1997.
During August and September 1998, the Company offered extended credit terms
to certain customers. See "Liquidity and Capital Resources."
Cost of goods sold increased to $6.0 million for the three months ended
September 30, 1998 from $3.6 million for the comparable period of 1997, and
increased as a percentage of net sales to 26.1% from 25.3%, respectively,
primarily due to lower average selling prices during the three months ended
September 30, 1998 resulting primarily from the sale of the Company's
inventory of "demo" clubs, and an increase of sales to retailers compared to
sales to direct consumers.
10
<PAGE>
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 $7.3 million
for the three months ended September 30, 1998 from $5.6 million for the
comparable period of 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
decreased as a percent of net sales to 31.7% from 39.1% respectively,
primarily due to the economies of scale of providing advertising for a
substantially higher volume of sales. General and administrative expenses,
including provisions for bad debts, increased to $3.0 million, or 13.1% as a
percent of sales, for the three months ended September 30, 1998 from $0.6
million, or 4.2% as a percent of sales, for the comparable period ended
September 30, 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. Research and development
expenses for the three months ended September 30, 1998 increased to $0.5
million from $0.3 million for the same period in 1997, and increased as a
percent of net sales to 2.0 % from 1.8 %, primarily due to increased
salaries, consulting, and tooling expenses associated with the development of
new products.
Operating income increased to $6.2 million for the three months ended
September 30, 1998 from $4.2 million for the comparable period of 1997, and
decreased as a percentage of net sales to 27.1% from 29.6%, respectively.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1998
Net sales increased to $81.3 million for the nine months ended September 30,
1998 from $19.7 million for the comparable period of 1997, primarily due to
the continued market acceptance of the Company's Tight Lies-Registered
Trademark-line of fairway woods, and, to a lesser extent, the introduction of
the Strong 2 Tour Brassie and the Strong 11, and a price increase effective
January 1, 1998. Net sales of the Tight Lies-Registered Trademark- line of
fairway woods increased to $78.7 million for the nine months ended September
30, 1998 from $18.0 million for the comparable period of 1997, and increased
as a percentage of net sales to 96.8% from 91.4%, respectively. Sales of the
Tight Lies-Registered Trademark- fairway woods increased subsequent to the
Company's introduction of an infomercial marketing its original Tight
Lies-Registered Trademark- fairway wood in the second quarter of 1997. Net
sales of other product lines for the nine months ended September 30, 1998
increased to $2.6 million from $1.7 million for the comparable period of
1997, but decreased as a percentage of net sales to 3.2% from 8.6%,
respectively. Net sales of the Company's products outside the U.S. increased
to $8.8 million for the nine months ended September 30, 1998 from $0.5
million for the nine months ended September 30, 1997, and increased as a
percentage of net sales to 10.8% from 2.5%, respectively. The increase in
international sales was due to increased market acceptance of the Tight
Lies-Registered Trademark- fairway woods and expanded international marketing
efforts beginning in the last half of 1997. During August and September 1998,
the Company offered extended credit terms to certain customers. See
"Liquidity and Capital Resources."
Cost of goods sold increased to $19.6 million for the nine months ended
September 30, 1998 from $5.7 million for the comparable period of 1997, but
decreased as a percentage of net sales to 24.1% from 29.2%, respectively,
primarily due to an increased percentage of net sales attributable to the
higher margin Tight Lies-Registered Trademark- fairway woods and the inherent
cost savings associated with buying components in large volumes and
assembling them on a substantially increased scale. The decrease in cost of
goods sold as a percentage of sales was partially offset by the effect of
lower average selling prices during the three months ended September 30, 1998.
11
<PAGE>
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 $24.7 million
for the nine months ended September 30, 1998 from $7.9 million for the
comparable period in 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 decreased as a
percent of net sales to 30.4% from 39.9%, respectively, primarily due to the
economies of scale of providing advertising for a substantially higher volume of
sales. General and administrative expenses, including provisions for bad debts,
increased to $10.0 million, or 12.3% as a percent of sales, for the nine months
ended September 30, 1998 from $1.5 million, or 7.6% as a percent of sales, for
the comparable period ended September 30, 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. Research and
development expenses for the nine months ended September 30, 1998 increased to
$1.1 million from $0.3 million for the comparable period in 1997, primarily due
to outside consulting services and increased salaries in connection with new
product developments.
Operating income increased to $25.9 million for the nine months ended September
30, 1998 from $4.3 million for the comparable period of 1997, and increased as a
percentage of net sales to 31.8% from 21.7% respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased to $29.2 million at September 30, 1998 from
$2.0 million at December 31, 1997, primarily as a result of $5.1 million
provided by cash flows from operations and $60.3 million provided from financing
activities, less $38.2 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 trade
receivables and inventory of $6.0 million and $6.4 million, respectively, for
the nine months ended September 30, 1998. The increases in receivables and
inventory are primarily the result of continued sales growth.
During August and September 1998, the Company offered extended credit terms
(i.e. due dates in excess of 30 days) to certain customers in order to match
terms being offered by certain competitors. The extensions of these terms may
have a negative impact on results of operations and financial position during
the fourth quarter of 1998 as certain merchants may have accelerated orders as a
result of the terms offered. The Company does not expect to offer extended
credit terms in the fourth quarter of 1998.
Cash used in investing activities of $38.2 million for the nine months ended
September 30, 1998, is primarily related to purchases of marketable securities,
computer equipment and software, telephone systems, and furniture and fixtures.
The Company anticipates making capital expenditures in the ordinary course of
business of approximately $2.0 million in the balance of 1998, which includes
implementing a customer management information system and an enterprise resource
planning system. Cash provided by financing activities of $60.3 million was
primarily a result of net proceeds of the initial public offering of $58.8
million.
Working capital totaled $57.4 million at September 30, 1998 compared to $6.9
million at December 31, 1997.
The Company has a $10.0 million revolving credit facility, which expires on
December 31, 1998. At September 30, 1998, the Company had no outstanding
borrowings under this 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. Obligations under
the revolving credit facility loan agreement are collateralized by substantially
all of the accounts receivable, inventory and equipment of the Company. During
the first quarter of 1998, the Company borrowed approximately $1.1 million in
the form of a note payable to the Company's founder, Chief Executive Officer and
President to be used for working capital purposes. The remaining principal
amount of the note (approximately $535,000 at September 30, 1998) is payable in
two installments on December 15, 1998 and April 14, 1999 at an interest rate of
5.39%.
12
<PAGE>
The Company is not aware of any event or trend which would potentially affect
its liquidity. In the event such a trend would develop, the Company believes
that the cash flow from operations and the net proceeds of the Offering
(approximately $58.8 million) 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; 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 September
30, 1998 and anticipates that the majority of its remediation plan will be
completed by March 31, 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.
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.
13
<PAGE>
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.
FORWARD-LOOKING STATEMENTS
This Quarterly Report contains "forwarding-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
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to certain legal actions arising in the ordinary course
of business. Based upon information presently available to the Company,
management believes that the outcome of all matters currently pending will not
have a material adverse effect on the Company's results of operations or
financial position.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Use of Proceeds.
(1) On July 9, 1998 the Securities and Exchange Commission declared
effective the Company's Registration Statement on Form S-1 (File
No. 333-51715) and related Registration Statement on Form S-1
(333-58917) filed pursuant to Rule 462(b). Pursuant to the
offering made thereby, the Company derived $58,828,000 in net
proceeds which, pending final application thereof, have been
invested primarily in interest bearing marketable securities.
Information concerning the Company's Use of Proceeds is set forth
in its Quarterly Report on Form 10-Q for the quarter ended June
30, 1998 and will be updated as necessary.
ITEM 6(a). EXHIBITS
See exhibit index at page 16.
ITEM 6(b). REPORTS ON FORM 8-K
None
SIGNATURES:
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereonto duly authorized.
ADAMS GOLF, INC.
Date: November 12, 1998 By:
--------------------------------------------
B. H. (Barney) Adams, Chairman of the Board,
Chief Executive Officer and President
Date: November 12, 1998 By:
--------------------------------------------
Darl P. Hatfield,
Senior Vice President - Finance and
Administration and Chief Financial Officer
15
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description Location
- ------- ------------ --------
<S> <C> <C>
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 4.2 1996 Stock Option Plan dated April 10, 1998 Incorporated by reference to Form S-1
(Exhibit 4.2)
Exhibit 4.3 Registration Rights Agreement dated April 30,
1998, among the Company and certain Incorporated by reference to Form S-1
stockholders of the Company (Exhibit 4.3)
Exhibit 4.4 Adams Golf, Ltd. 401(k) Retirement Plan Incorporated by reference to Form S-1
(Exhibit 4.4)
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 Revolving credit agreement dated February
27, 1998, between Adams Golf Direct
Response, Ltd., Adams Golf, Ltd. And Incorporated by reference to Form S-1
NationsBank of Texas N.A. (Exhibit 10.2)
Exhibit 10.3 Commercial lease agreement dated December
5, 1997, between Jackson-Shaw Technology Incorporated by reference to Form S-1
Center II, Ltd. and the Company (Exhibit 10.3)
Exhibit 10.4 Commercial lease agreement dated April 6,
1998, between Jackson-Shaw Technology Incorporated by reference to Form S-1
Center II, Ltd. and the Company (Exhibit 10.4)
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 11.1 Computation of Per Share Earnings Included in this filing
Exhibit 27.1 Financial Data Schedule Included in this filing
</TABLE>
16
<PAGE>
EARNINGS PER SHARE - EXHIBIT 11.1
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
BASIC INCOME PER SHARE:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 3,144 $ 4,346 $ 3,185 $ 16,646
----------- ----------- ----------- -----------
Weighted average shares outstanding 12,156,878 22,695,478 11,968,472 19,714,997
----------- ----------- ----------- -----------
Income per share $ 0.26 $ 0.19 $ 0.27 $ 0.84
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
DILUTED INCOME PER SHARE:
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Net income $ 3,144 $ 4,346 $ 3,185 $ 16,646
----------- ----------- ----------- -----------
Weighted average shares outstanding 12,156,878 22,695,478 11,968,472 19,714,997
Effect of dilutive shares-stock options - 53,045 - 296,803
----------- ----------- ----------- -----------
Total weighted average dilutive shares 12,156,878 22,748,523 11,968,472 20,011,799
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Income per common share $ 0.26 $ 0.19 $ 0. 27 $ 0.83
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR ADAMS GOLF, INC. AND
ITS SUBSIDIARIES FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 29,196
<SECURITIES> 8,120
<RECEIVABLES> 14,343
<ALLOWANCES> 1,444
<INVENTORY> 10,879
<CURRENT-ASSETS> 65,373
<PP&E> 4,528
<DEPRECIATION> 1,004
<TOTAL-ASSETS> 106,663
<CURRENT-LIABILITIES> 7,973
<BONDS> 0
0
0
<COMMON> 23
<OTHER-SE> 95,485
<TOTAL-LIABILITY-AND-EQUITY> 106,663
<SALES> 81,315
<TOTAL-REVENUES> 81,315
<CGS> 19,626
<TOTAL-COSTS> 24,683
<OTHER-EXPENSES> 9,938
<LOSS-PROVISION> 1,214
<INTEREST-EXPENSE> 58
<INCOME-PRETAX> 26,394
<INCOME-TAX> 9,748
<INCOME-CONTINUING> 16,646
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,646
<EPS-PRIMARY> .84
<EPS-DILUTED> .83
</TABLE>
