<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(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, 1999
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 of (I.R.S. Employer
incorporation or organization) Identification No.)
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)
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 22,480,071 on December 6, 1999.
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I FINANCIAL STATEMENTS Page
----
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1998 and September 30, 1999 (unaudited) 3
Unaudited Condensed Consolidated Statements of Operations -
Three and nine months ended September 30, 1998 and 1999 4
Unaudited Condensed Consolidated Statement of Stockholders' Equity -
Nine months ended September 30, 1999 5
Unaudited Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 1998 and 1999 6
Notes to Unaudited Condensed Consolidated Financial
Statements 7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-15
Item 3. Quantitative and Qualitative Disclosures About Market Risk N/A
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds N/A
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 16
</TABLE>
2
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
-------------- ---------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents .............................................. $ 23,688 $ 9,601
Marketable securities (note 2) ......................................... 13,084 20,796
Trade receivables, net of allowance for doubtful accounts
of $1,294 and $1,210 (unaudited) in 1998 and 1999,
respectively ........................................................ 2,022 9,026
Inventories (note 3) ................................................... 13,312 18,244
Prepaid expenses ....................................................... 885 1,011
Income tax receivable .................................................. 2,088 5,275
Deferred income tax assets ............................................. 2,386 838
Other current assets ................................................... 1,287 1,182
-------- --------
Total current assets ................................................ 58,752 65,973
Property and equipment, net ............................................... 3,468 7,713
Marketable securities (note 2) ............................................ 21,291 8,500
Professional services agreement (note 4) .................................. 9,450 8,691
Other assets, net ......................................................... 3,945 445
-------- --------
$ 96,906 $ 91,322
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to shareholder ............................................ $ 175 $ -
Accounts payable ....................................................... 1,152 2,161
Accrued expenses ....................................................... 4,418 3,825
-------- --------
Total current liabilities ........................................... 5,745 5,986
Deferred income tax liabilities ........................................... 2,971 2,619
-------- --------
Total liabilities ................................................... 8,716 8,605
-------- --------
Stockholders' equity:
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; 23,136,782 and 23,137,571 shares
issued and 22,479,282 and 22,480,071 shares
outstanding at December 31, 1998 and September 30,
1999, respectively .................................................. 23 23
Additional paid-in capital ............................................. 85,183 85,954
Common stock subscription .............................................. (22) (22)
Deferred compensation .................................................. (704) (556)
Accumulated other comprehensive income (loss) .......................... 150 (2)
Retained earnings ...................................................... 6,696 456
Treasury stock, 657,500 shares, at cost ................................ (3,136) (3,136)
-------- --------
Total stockholders' equity .......................................... 88,190 82,717
Contingencies (note 8)
-------- --------
$ 96,906 $ 91,322
======== ========
</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,
------------------------ -----------------------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales ............................... $22,987 $ 9,027 $81,315 $43,100
Cost of goods sold ...................... 6,001 2,673 19,626 13,883
------ ------ ------ ------
Gross profit .................... 16,986 6,354 61,689 29,217
------ ------ ------ ------
Operating expenses:
Research and development expenses .... 454 567 1,118 1,548
Selling and royalty expenses ......... 7,296 10,683 24,683 32,753
General and administrative expenses:
Provision for bad debts ........... 568 244 1,214 444
Other ............................. 2,443 2,275 8,820 6,860
------ ------ ------ ------
Total operating expenses ........ 10,761 13,769 35,835 41,605
------ ------ ------ ------
Operating income (loss) ......... 6,225 (7,415) 25,854 (12,388)
Other income (expense):
Interest income ...................... 668 463 702 1,360
Other expense ........................ (17) (108) (162) (124)
------ ------ ------ ------
Income (loss) before income taxes 6,876 (7,060) 26,394 (11,152)
Income tax expense (benefit) ............ 2,530 (3,224) 9,748 (4,912)
------ ------ ------ ------
Net income (loss) ............... $ 4,346 $(3,836) $16,646 $(6,240)
====== ====== ====== ======
Income (loss) per common share (note 5):
Basic ................................ $ 0.19 $ (0.17) $ 0.84 $ (0.28)
====== ====== ====== ======
Diluted .............................. $ 0.19 $ (0.17) $ 0.83 $ (0.28)
====== ====== ====== ======
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
4
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES OF ADDITIONAL COMMON
COMMON COMMON PAID-IN STOCK DEFERRED
STOCK STOCK CAPITAL SUBSCRIPTION COMPENSATION
----- ----- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 23,136,782 $ 23 $ 85,183 $ (22) $ (704)
Comprehensive income:
Net loss................... - - - - -
Other comprehensive income,
net of tax
Unrealized loss on
marketable securities.... - - - - -
Comprehensive loss............ - - - - -
Stock option forfeiture....... - - (3) - 3
Exercise of stock options..... 789 - 2 - -
Tax benefit from exercise of
stock options.............. - - 772 - -
Amortization of deferred
compensation............... - - - - 145
---------- ---------- ---------- ----------- ------------
Balance, September 30, 1999... 23,137,571 $ 23 $ 85,954 $ (22) $ (556)
========== ========== ========== =========== ============
ACCUMULATED COST OF TOTAL
COMPREHENSIVE RETAINED COMPREHENSIVE TREASURY SHAREHOLDERS'
INCOME (LOSS) EARNINGS INCOME STOCK EQUITY
------------- -------- ------ ----- ------
Balance, December 31, 1998 $ 150 $6,696 $ - $(3,136) $88,190
Comprehensive income:
Net loss................... - (6,240) (6,240) - (6,240)
Other comprehensive income,
net of tax
Unrealized loss on
marketable securities.... (152) - (152) - (152)
--------------
Comprehensive loss............ - - $ (6,392) -
==============
Stock option forfeiture....... - - - -
Exercise of stock options..... - - - 2
Tax benefit from exercise of
stock options.............. - - - 772
Amortization of deferred
compensation............... - - - 145
------------ ------------ ------------- ------------
Balance, September 30, 1999... $ (2) $ 456 $(3,136) $82,717
============ ============ ============= ============
</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,
-----------------------
1998 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) .................................. $ 16,646 $ (6,240)
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 ............... 1,495 2,411
Loss on retirement of fixed assets .............. 101 -
Amortization of deferred compensation ........... 589 145
Deferred income taxes ........................... 2,889 1,278
Allowance for doubtful accounts ................. 746 (84)
Changes in assets and liabilities:
Trade receivables ............................. (5,974) (6,920)
Inventories ................................... (6,392) (4,932)
Prepaid expenses .............................. (565) (126)
Income tax receivable ......................... (1,431) (2,415)
Other current assets .......................... 29 105
Other assets .................................. (1,394) (235)
Accounts payable .............................. 60 1,009
Federal income taxes payable .................. (1,021) -
Accrued expenses .............................. (636) (593)
-------- --------
Net cash provided by (used in) operating
activities .............................. 5,142 (16,597)
-------- --------
Cash flows from investing activities:
Purchases of marketable securities.................. (34,251) (33,688)
Sales of marketable securities...................... -- 31,201
Maturities of marketable securities ................ -- 7,333
Purchases of equipment ............................. (3,922) (2,163)
-------- --------
Net cash provided by (used in)
investing activities .................... (38,173) 2,683
-------- --------
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 ..... 7,135 -
Repayment of line of credit borrowings ............. (6,000) -
Repayment of notes payable ......................... (600) -
Repayment of note payable to shareholder .......... - (175)
Issuance of common stock ........................... 908 2
-------- --------
Net cash provided by (used in)
financing activities..................... 60,271 (173)
-------- --------
Net increase (decrease) in cash and cash equivalents .. 27,240 (14,087)
Cash and cash equivalents at beginning of period ...... 1,956 23,688
-------- --------
Cash and cash equivalents at end of period ............ $ 29,196 $ 9,601
======== ========
Supplemental disclosure of cash flow information:
Interest paid ...................................... $ 34 $ 33
======== ========
Income taxes paid .................................. $ 11,916 $ 26
======== ========
Supplemental disclosure of non-cash financing activity:
Stock issued for professional services agreement ... $ 10,125 $ -
======== ========
Tax benefit from exercise of stock options ......... $ - $ 772
======== ========
</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, 1998
and 1999 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 unaudited condensed consolidated financial
statements should be read in conjunction with the notes to the consolidated
financial statements contained in the Company's 1998 Annual Report on Form 10-K
filed with the SEC on March 29, 1999.
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 and
drivers that are marketed under the trademarks "Tight Lies," "Tight Lies 2" and
"SC Series," respectively.
2. MARKETABLE SECURITIES
Marketable securities, primarily consisting of commercial paper and governmental
and corporate bonds, are managed under agreements with investment managers. The
agreements provide terms related to the quality, diversification and maturities
of the investments in the managed portfolios. The investments are classified as
available-for-sale and are carried at fair value, with unrealized gains and
losses, net of the related tax effect, reported as other comprehensive income in
the consolidated statement of stockholders' equity. The balance sheet
classification of the Company's marketable securities is based upon the
contractual maturity date of such securities.
Marketable securities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------------------
UNREALIZED FAIR
COST GAINS VALUE
---------------- ---------------- ----------------
<S> <C> <C> <C>
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
================ ================ ================
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
(UNAUDITED)
-------------------------------------------------------
UNREALIZED FAIR
COST GAINS/(LOSSES) VALUE
---------------- ---------------- ----------------
<S> <C> <C> <C>
Commercial paper $ 11,762 $ (7) $ 11,755
Governmental bonds 13,485 - 13,485
Corporate bonds 4,052 4 4,056
---------------- ---------------- ----------------
29,299 (3) 29,296
Less current amounts (20,799) 3 (20,796)
---------------- ---------------- ----------------
Long-term marketable securities $ 8,500 $ - $ 8,500
================ ================ ================
</TABLE>
During the nine months ended September 30, 1999, there were approximately
$7,333,000 in proceeds received from maturities of available-for-sale securities
and $33,688,000 in purchases of securities. In addition, there were
approximately $31,201,000 in proceeds received from sales of available-for-sale
securities which included realized gains of $4,365 and realized losses of
$101,582. All marketable securities mature within two years.
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
----------------- -----------------
(UNAUDITED)
<S> <C> <C>
Finished goods $ 2,880 $ 6,304
Component parts 10,432 11,940
------- -------
$13,312 $18,244
======= =======
</TABLE>
4. 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 is being amortized over ten years, which represents the estimated
period during which the Company will realize benefits under the agreement.
5. INCOME (LOSS) PER SHARE
The weighted average common shares used for determining basic income (loss) per
common share were 22,695,478 and 22,480,071 for the three months ended September
30, 1998 and 1999, respectively, and 19,714,997 and 22,479,862 for the nine
months ended September 30, 1998 and 1999, respectively. The effect of dilutive
stock options added 53,045 and 296,803 shares for the three and nine months
ended September 30, 1998, respectively, for the computation of diluted income
per common share. The effect of stock options in 1999 was antidilutive.
8
<PAGE>
6. GEOGRAPHIC SEGMENT AND DATA
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 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------ -------------------------------------
1998 1999 1998 1999
--------------- ------------- --------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
United States $ 19,687 $ 7,416 $ 72,515 $ 36,894
Rest of World 3,300 1,611 8,800 6,206
--------------- ------------- --------------- -------------
$ 22,987 $ 9,027 $ 81,315 $ 43,100
=============== ============= =============== =============
</TABLE>
7. NEW ACCOUNTING PRONOUNCEMENTS
The Company is 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 was amended by SFAS No. 137
and will be effective for financial statements for fiscal years beginning after
June 15, 2000. 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 2001.
8. CONTINGENCIES
Beginning in June 1999, the first of seven purported class actions was filed
against the Company and certain of its officers and directors and the three
underwriters of the Company's initial public offering ("IPO") in the United
States District Court for the District of Delaware. The complaints allege
violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as
amended, in connection with the Company's IPO. In particular, the complaints
allege, among other things, that the Company made materially false and
misleading statements and omissions in the registration statement and
incorporated prospectus, which became effective July 9, 1998, concerning
inventory and distribution of its products. The Company believes these actions
are without merit and intends to defend against each of them vigorously.
The Company has directors' and officers' and corporate liability insurance to
cover risks associated with securities claims filed against the Company or its
directors and officers and has notified its insurers of the complaints filed
against the Company.
The above mentioned complaints are at an early stage. Consequently, at this time
it is not possible to predict whether the Company will incur any liability or to
estimate the damages, or the range of damages, that the Company might incur in
connection with such actions. The Company is also not able to estimate the
amount, if any, of reimbursements that it would receive from insurance policies
should damages with respect to the above actions be incurred.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following 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 for the year ended December 31, 1998.
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 fairway wood and, over the next three
years, extended the Tight Lies line to include the Tight Lies Strong 2 Tour
Brassie, Strong 3, Strong 5, Strong 7, Strong 9 and Strong 11. During 1999, the
Company introduced the SC Series Titanium driver (SC driver), the Faldo Series
wedge, the Tight Lies Tour fairway woods, and the Tight Lies 2 fairway woods.
The Company's net sales are primarily derived from sales to on-and off-course
golf shops and selected sporting goods retailers and, to a lesser extent,
international distributors, direct sales to consumers, and the Company's custom
fitting accounts. No assurances can be given that demand for the Company's
current products or the introduction of new products will allow the Company to
achieve historical levels of sales in the future.
The Company does not currently manufacture the components required to assemble
its golf clubs, relying instead on various component suppliers. Golf club
components are generally available from multiple suppliers. Currently, however,
certain components for the SC Series Titanium drivers, Tight Lies 2 fairway
woods and the Faldo Series wedges are produced by single suppliers. Costs of the
Company's fairway woods, 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.
10
<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,
-------------------------- ---------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 26.1 29.6 24.1 32.2
----------- ----------- ----------- -----------
Gross profit 73.9 70.4 75.9 67.8
Operating expenses 46.8 152.5 44.1 96.5
----------- ----------- ----------- -----------
Operating income (loss) 27.1 (82.1) 31.8 (28.7)
Interest income 2.8 5.1 0.9 3.1
Other expense - (1.2) (0.2) (0.3)
----------- ----------- ----------- -----------
Income (loss) before income taxes 29.9 (78.2) 32.5 (25.9)
Income tax expense (benefit) 11.0 (35.7) 12.0 (11.4)
----------- ----------- ----------- -----------
Net income (loss) 18.9% (42.5)% 20.5% (14.5)%
=========== =========== =========== ===========
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
Net sales decreased to $9.0 million for the three months ended September 30,
1999 from $23.0 million for the comparable period of 1998. The decrease was
primarily attributable to a lower volume of fairway woods being sold due to
competition from similar products produced by other equipment manufacturers and
the implementation at the beginning of 1999 of a new pricing structure that
resulted in lower suggested retail prices and consequently lower wholesale
prices to retail customers. The decline in revenues from the sale of fairway
woods was partially offset by revenues generated from the sale of the SC
drivers. See "Certain Business Considerations" below. Net sales of fairway woods
were $5.5 million, or 60.9% of net sales, for the three months ended September
30, 1999 compared to $22.1 million, or 96.1% of net sales, for the three months
ended September 30, 1998. Net sales of the SC drivers for the three months ended
September 30, 1999 were $3.0 million or 32.9% of net sales. Net sales of the
Company's products outside the U.S. decreased to $1.6 million for the three
months ended September 30, 1999 from $3.3 million for the three months ended
September 30, 1998, but increased as a percentage of net sales to 17.8% from
14.3%, respectively.
Cost of goods sold decreased to $2.7 million for the three months ended
September 30, 1999 from $6.0 million for the comparable period of 1998 and
increased as a percentage of net sales to 29.6% from 26.1%, respectively. The
increase as a percentage of sales is primarily due to lower average selling
prices of the Tight Lies line of fairway woods during the three months ended
September 30, 1999 resulting from a change in the suggested retail pricing
structure at the beginning of 1999, the introduction of new products in 1999
with a higher per unit cost which, in turn, increased costs as a percentage of
sales and due to costs associated with the serialization of all fairway woods
and drivers.
Operating expenses are comprised 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 $10.7 million
for the three months ended September 30, 1999 from $7.3 million for the
comparable period of 1998, primarily as a result of hiring new outside sales
representatives and increased marketing and advertising efforts. General and
administrative expenses, including provisions for bad debts, decreased to $2.5
million, or 27.9% of net sales, for the three months ended September 30, 1999
from $3.0 million, or 13.1% of net sales, for the comparable period ended
September 30, 1998, primarily due to a decrease in the
11
<PAGE>
use of outside services and a reduction in bad debt expense as a result of
increased collection efforts. Research and development expenses, primarily
consisting of costs associated with development of new products, for the
three months ended September 30, 1999 increased to $0.6 million compared to
$0.5 million for the same period in 1998, and increased as a percentage of
net sales to 6.3% from 2.0%.
As a result of the above, operating loss was $7.4 million for the three months
ended September 30, 1999 compared to operating income of $6.2 million for the
comparable period of 1998.
The effective tax rate for the three months ended September 30, 1999 was 45.7%
compared to 36.8% for the comparable period in the prior year. The income tax
benefit of $3.2 million for the three months ended September 30, 1999 results
primarily from the estimated benefits associated with the Company's net
operating loss and utilization of research and development tax credits.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Net sales decreased to $43.1 million for the nine months ended September 30,
1999 from $81.3 million for the comparable period of 1998. The decrease was
primarily attributable to a lower volume of fairway woods being sold due to
competition from similar products produced by other equipment manufacturers and
the implementation at the beginning of 1999 of a new pricing structure that
resulted in lower suggested retail prices and consequently lower wholesale
prices to retail customers. The decline in revenues from the sale of fairway
woods was partially offset by revenues generated from the sale of the SC
drivers. See "Certain Business Considerations" below. Net sales of fairway woods
were $25.6 million, or 59.4% of net sales, for the nine months ended September
30, 1999 compared to $78.7 million, or 96.8% of net sales, for the nine months
ended September 30, 1998. Net sales of the SC drivers for the nine months ended
September 30, 1999 were $16.2 million or 37.6% of net sales. Net sales of the
Company's products outside the U.S. decreased to $6.2 million for the nine
months ended September 30, 1999 from $8.8 million for the nine months ended
September 30, 1998, but increased as a percentage of net sales to 14.4% from
10.8%, respectively.
Cost of goods sold decreased to $13.9 million for the nine months ended
September 30, 1999 from $19.6 million for the comparable period of 1998, and
increased as a percentage of net sales to 32.2% from 24.1%, respectively. The
increase as a percentage of sales is primarily due to lower average selling
prices of the Tight Lies line of fairway woods during the nine months ended
September 30, 1999 resulting from a change in the suggested retail pricing
structure at the beginning of 1999, the introduction of new products in 1999
with higher per unit costs which, in turn, increased costs as a percentage of
sales, increased costs resulting from a larger, leased production facility and
due to costs associated with the serialization of all fairway woods and drivers.
Selling and royalty expenses increased to $32.8 million for the nine months
ended September 30, 1999 from $24.7 million for the comparable period of 1998,
primarily as a result of hiring additional employees and increased marketing and
advertising efforts. During the nine months ended September 30, 1999, the
Company advertised extensively utilizing both television and print media in
order to promote the introduction of the SC driver and to promote sell-through
of the Tight Lies fairway woods at retailers. General and administrative
expenses, including provisions for bad debts, decreased to $7.3 million, or
16.9% of net sales, for the nine months ended September 30, 1999 from $10.0
million, or 12.3% of net sales, for the comparable period ended September 30,
1998, primarily due to a decrease in the use of outside services, reduction in
incentive compensation, and a reduction in bad debt expense as a result of
increased collection efforts. Research and development expenses for the nine
months ended September 30, 1999 increased to $1.5 million compared to $1.1
million for the same period in 1998, and increased as a percentage of net sales
to 3.6% from 1.4%.
As a result of the above, operating loss was $12.4 million for the nine months
ended September 30, 1999 compared to operating income of $25.9 million for the
comparable period of 1998.
12
<PAGE>
The effective tax rate for the nine months ended September 30, 1999 was 44.0%
compared to 36.9% for the comparable period in the prior year. The income tax
benefit of $4.9 million for the nine months ended September 30, 1999 results
primarily from the estimated benefits associated with the Company's net
operating loss and utilization of research and development tax credits.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased to $9.6 million at September 30, 1999 from
$23.7 million at December 31, 1998, primarily as a result of $16.6 million used
in operations. The decrease in cash flows provided by operations was primarily a
result of the net loss for the nine months ended September 30, 1999, increases
in trade receivables of $6.9 million, income tax receivables of $2.4 million
(due to tax losses), and inventories of $4.9 million (due to the increase in SC
driver and Tight Lies 2 component parts), which was offset by a $1.0 million
increase in accounts payable related to increased advertising expenditures. The
increase in trade receivables when compared to the balance at December 31, 1998
is due to the seasonality of the business and the application of a $4.3 million
unconditional credit against existing receivable balances at December 31, 1998.
During the fourth quarter of 1998, the Company granted to retailers an
unconditional credit in connection with the Company's new suggested retail
pricing structure of its Tight Lies fairway woods. The unconditional credit,
which was fully utilized by June 30, 1999, reduced cash flows from operations by
$2.9 million during the period then ended. At June 30, 1999, the Company granted
to retailers an unconditional credit in connection with the Company's new
suggested retail pricing structure for the SC Series Titanium driver. The
unconditional credit reduced cash flows by approximately $0.7 million during the
three months ended September 30, 1999.
Pursuant to the arbitration of certain contractual claims relating to the
consulting fees for the establishment of certain international distributorships,
the Company paid a third party consultant a percentage of the international
business generated from the efforts of the third party in a one-time payment. An
amount of approximately $1.0 million was paid in August 1999 to the third party
consultant which reduced cash flows during the three months ended September 30,
1999.
Cash provided by investing activities of $2.7 million for the nine months ended
September 30, 1999 is primarily related to proceeds from the sales and
maturities of marketable securities of approximately $38.5 million offset by
purchases of marketable securities and purchases of equipment which approximated
$33.7 million and $2.2 million, respectively. The Company anticipates making
capital expenditures in the ordinary course of business of approximately $0.5
million in the balance of 1999, which primarily includes additional information
system enhancements.
Working capital approximated $60.0 million at September 30, 1999 compared to
$53.0 million at December 31, 1998.
The Company's sources of liquidity include cash from operations, its cash and
cash equivalents, marketable securities and its credit facility, if needed. The
Company believes that such sources of liquidity are sufficient to meet operating
needs and capital expenditures for at least the next 12 months.
The Company has a $10.0 million revolving credit facility, which expires on May
31, 2000. At September 30, 1999, the Company had no outstanding borrowings under
this facility. Borrowings under the Company's revolving credit facility
agreement bear interest at 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 founder, Chief Executive Officer and President to be
used for working capital purposes. The remaining principal amount of the note
(approximately $175,000) was paid April 14, 1999 at an interest rate of 5.39%
per annum.
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 projected cash flows from operations, current cash reserves
13
<PAGE>
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, among other things, lower than expected average selling prices; the
Company's reliance on single source suppliers for some of its components,
which sources might not be easily replaced if it were necessary to do so; 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 period-to-period
comparisons of our operating results not being necessarily meaningful. See
"Forward-Looking Statements" below.
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, utilizing both internal
and external resources to identify, correct and test the systems for year
2000 compliance and to verify that material third parties are year 2000
compliant. The Company completed an inventory of all information technology
and non-information technology equipment (such as HVAC, security and club
serialization systems) as of December 31, 1998 and completed its remediation
plan on December 6, 1999. The Company's recently installed information system
has been certified as year 2000 compliant by the licensor thereof. In
addition, all non-information technology equipment critical to the conduct of
the Company's operations have also been certified as year 2000 compliant.
Based on these certifications and procedures performed by the Company to test
year 2000 readiness, the Company believes its information technology and
non-information technology systems are ready for year 2000.
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, information requests have been sent to the Company's material third
party vendors to obtain reasonable assurance that plans are being developed to
address the year 2000 issue. Information provided by vendors has been
assessed by the Company, and all material third party vendors have provided
the Company with satisfactory evidence of their readiness to handle year 2000
issues. However, to further protect the Company from interruptions resulting
from issues that material third party vendors may experience related to year
2000 compliance, the Company has acquired adequate inventory levels to meet
customer demand into early 2000. Furthermore, the seasonality of the Company's
business is such that business is at a low point of the year in January and
early February. Because of these factors, the Company believes it would not
experience a material impact on its financial position or results of
operations if vendor delays were encountered early in 2000. Accordingly, we
do not anticipate developing a contingency plan for any worst case scenario
related to year 2000 readiness.
As of December 6, 1999, the Company's costs related to the year 2000
compliance project approximated $25,000 and are not considered to be material
to its financial position or results of operations. Unanticipated failures by
material third party vendors could have a material adverse effect on the cost
of the project 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.
14
<PAGE>
CERTAIN BUSINESS CONSIDERATIONS
The Company's growth and success depend, in large part, on its ability to
successfully develop and introduce new products that are accepted in the
marketplace. Historically, a large portion of new golf club technologies and
product designs have been met with consumer rejection. No assurance can be given
that the Company's new Tight Lies 2 line of fairway woods, SC Series Titanium
drivers, Faldo Series wedges or other new products will meet with market
acceptance. Failure by the Company to identify and develop innovative new
products that achieve widespread market acceptance would adversely affect the
Company's future growth and profitability.
The Company's ability to compete effectively in the golf club market is also
dependent on its ability to maintain the proprietary nature of its technologies
and products. Although the Company currently has one or more patents pending
with respect to its new products and/or the proprietary technologies underlying
such products, no assurance can be given that patents will ultimately be issued
or of the benefits of protection afforded thereby. 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.
FORWARD-LOOKING STATEMENTS
This Quarterly Report, other than historical information, contains
"forwarding-looking statements" made under the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. Such statements reflect the
current view of the Company with respect to future events and are subject to
certain risks, uncertainties and assumptions which could cause actual results to
differ materially from those in the forward-looking statements, including but
not limited to the following: product development difficulties; manufacturing
difficulties; market and retailer demand and acceptance of current products as
well as new products; the impact of changing economic conditions; business
conditions in the golf industry; reliance on third party suppliers; the impact
of market peers and their products; the action of competitors, including
pricing; risks concerning future technology; the effect of an unforeseen,
unfavorable outcome of a lawsuit; the risk associated with the failure of the
Company or its customers or suppliers to successfully manage Year 2000
compliance; and one time events and other factors detailed in the Company
prospectus, Form 10-K, Forms 10-Q, and other Securities and Exchange Commission
filings.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Beginning in June 1999, the first of seven purported class action lawsuits,
as of the date of this Form 10-Q, was filed against the Company, certain of
its current and former directors and the three underwriters of the Company's
initial public offering (IPO) in the United States District Court for the
District of Delaware. The complaints allege violations of Sections 11,
12(a)(2) and 15 of the Securities Act of 1933, as amended, in connection with
the Company's IPO. In particular, the complaints allege that the Company's
prospectus, which became effective July 9, 1998, was materially false and
misleading in at least two areas. First, the prospectus allegedly failed to
disclose that unauthorized distribution of the Company's products (gray market
sales) allegedly threatened the Company's long term profits. Secondly, the
prospectus allegedly failed to disclose that the golf equipment industry
suffered from an oversupply of inventory at the retail level which allegedly
had an adverse impact on the Company's sales. Specifically, the proceedings
pending are as follows: KENNETH F. SHOCKLEY V. ADAMS GOLF, INC. et al, Civil
Action No. 99371 (D.Del.) filed on or about June 1999; MARK J. LANTZ V. ADAMS
GOLF, INC. et al, Civil Action No. 99-397 (D.Del.) filed on or about June 22,
1999; F. RICHARD MANSON V. ADAMS GOLF, INC. et al, Civil Action No. 99-421
(D.Del.) filed on or about July 2, 1999; SYLVIA J. DAUGHTRY V. ADAMS GOLF,
INC. et al, Civil Action No. 99-469 (D.Del.) filed on or about July 22, 1999;
ROBERT DOLIN V. ADAMS GOLF, INC. et al, Civil Action No. 99-498 (D.Del.) filed
on or about August 3, 1999; TINA NARDOLILLO V. ADAMS GOLF, INC. et al, Civil
Action No. 99-511 (D. Del.) filed on or about August 9, 1999; and ROBERT
PETRONGOLO V. ADAMS GOLF, INC. et al (D. Del.) filed on or about September 9,
1999. In each case, the plaintiff's are seeking unspecified amounts of
compensatory damages, interests and costs, including legal fees. The Company
denies the allegations in the complaints and intends to defend against each of
them vigorously. The Company expects that these cases will be consolidated,
and that it will file a motion to dismiss the consolidated, amended complaints.
The Company has directors' and officers' and corporate liability insurance to
cover risks associated with securities claims filed against the Company or its
directors and officers and has notified its insurers of the complaints filed
against the Company.
The above mentioned complaints are at an early stage. Consequently, at this time
it is not possible to predict whether the Company will incur any liability or to
estimate the damages, or the range of damages, that the Company might incur in
connection with such actions. The Company is also not able to estimate the
amount, if any, of reimbursements that it would receive from insurance policies
should damages with respect to the above actions be incurred.
ITEM 6(a). EXHIBITS
See exhibit index at page 18.
ITEM 6(b). REPORTS ON FORM 8-K
None.
16
<PAGE>
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: December 9, 1999 By: /s/ B. H. (Barney) Adams
--------------------------------------------
B. H. (Barney) Adams, Chairman of the Board,
Chief Executive Officer and President
Date: December 9, 1999 By: /s/ Darl P. Hatfield
---------------------------------------------
Darl P. Hatfield,
Senior Vice President - Finance and
Administration and Chief Financial Officer
17
<PAGE>
AMENDMENT TO
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
THIS AMENDMENT TO AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT (this
"AMENDMENT") is entered into to be effective as of August 13, 1999, between
ADAMS GOLF DIRECT RESPONSE, LTD., a Texas limited partnership, and ADAMS GOLF,
LTD., a Texas limited partnership (individually, a "BORROWER" and collectively,
"BORROWERS"), and BANK OF AMERICA, N.A., a national banking association,
formerly NationsBank, N.A., successor by merger to NationsBank of Texas, N.A.
("LENDER").
R E C I T A L S
- - - - - - - -
1. Borrowers and Lender are parties to that certain Amended and
Restated Revolving Credit Agreement dated as of February 26, 1999 (as modified,
amended, renewed, extended, and restated from time to time, the "CREDIT
AGREEMENT").
2. The parties hereto desire to amend the Credit Agreement subject to
the terms and conditions set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Borrowers and Lender agree as
follows:
1. TERMS AND REFERENCES. Unless otherwise stated in this Amendment
(a) terms defined in the Credit Agreement have the same meanings when used in
this Amendment, and (b) references to "SECTIONS" are to the Credit Agreement's
sections.
2. AMENDMENTS TO THE CREDIT AGREEMENT. The Credit Agreement is
hereby amended as follows:
(a) SECTION 1.1 is hereby amended to add the following definitions:
"CAPITAL EXPENDITURE" means any expenditure by a Person for an asset
which is properly classifiable in relevant financial statements of such Person
prepared in accordance with GAAP as a capital asset.
"CONSOLIDATED TANGIBLE NET WORTH" means, for any Person as of any date,
the total shareholder's equity of such Person LESS the aggregate book value of
Intangible Assets of such Person.
"ELIGIBLE BONDS" means corporate and municipal debt instruments and
corporate preferred stock which are (a) rated at least AA or the equivalent
thereof by Standard & Poor's Rating Group, a division of McGraw Hill, Inc., a
New York corporation or at least Aa or the equivalent thereof by Moody's
Investors Service, Inc., (b) regularly traded on a Public Market, and (c) not
subject to any federal or state securities laws or other laws which restrict or
limit their sale or transfer.
"ELIGIBLE GOVERNMENT SECURITIES" means obligations which are (a) issued
or guaranteed by the United States of America or any instrumentality thereof,
(b) regularly traded on a Public Market, and (c) not subject to any federal or
state securities laws or other laws which restrict or limit their sale or
transfer.
<PAGE>
"ELIGIBLE SECURITIES" means common stock equity securities that are
(a) regularly traded on a Public Market, and (b) not subject to any federal or
state securities laws or other laws which restrict or limit their sale or
transfer.
"INTANGIBLE ASSETS" of any Person means those assets of such Person which
are (a) deferred assets, OTHER THAN prepaid insurance and prepaid taxes,
(b) patents, copyrights, trademarks, tradenames, franchises, goodwill,
experimental expenses, and other similar assets which would be classified as
intangible assets on a balance sheet of such Person, (c) unamortized debt
discount and expense, and (d) assets located, and notes and receivables due from
obligors domiciled, outside of the United States of America.
"PUBLIC MARKET" means a nationally recognized United States public
exchange or market acceptable to Lender on which securities, debt instruments,
and/or mutual funds are regularly traded.
(b) SECTION 7.14 is hereby deleted in its entirety and replaced with
the following:
7.14 MINIMUM TANGIBLE NET WORTH. Borrowers shall not permit, as
of any date, the Consolidated Tangible Net Worth of the Companies, on a
consolidated basis, to be less than $67,500,000.00.
(c) The following SECTION is hereby added as SECTION 7.17:
7.17. LIMITATION ON CAPITAL EXPENDITURES. Borrowers shall not
permit the aggregate amount of all Capital Expenditures made by the
Companies during any fiscal year ending after the date hereof to exceed
$10,000,000.00.
(d) The following SECTION is hereby added as SECTION 7.18:
7.18 LIQUID ASSETS. Borrowers shall not, as of any date, permit
the ratio of (a) THE SUM OF (i) cash, (ii) Temporary Cash Investments,
and (iii) the fair market value of Eligible Bonds, Eligible Government
Securities, and Eligible Securities of the Companies, to (b) THE SUM OF
(i) all Indebtedness of the Companies, PLUS (ii) the Unused Commitment,
in each case as of such date, to be less 3.0 to 1.0.
(e) SECTION 8.1(c) is hereby deleted in its entirety and replaced with
the following:
(c) default shall occur in the performance of (i) any of the
covenants or agreements of any Company contained in SECTION 6.1 and
SECTION 7, or (ii) any other covenants or agreements of any Company
contained herein or in any of the other Loan Documents and, in the case
of (II), such failure shall continue for ten (10) days after written
notice thereof from Lender to Borrower; or
(f) EXHIBIT A is hereby deleted in its entirety and replaced with
EXHIBIT A attached hereto.
(g) SCHEDULE 5.10 is hereby deleted in its entirety and replaced with
SCHEDULE 5.10 attached hereto.
3. WAIVERS.
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<PAGE>
(a) Lender hereby waives any Potential Default or Event of Default
arising from Borrowers' failure to comply with the fixed charges ratio set forth
in SECTION 7.14 of the Credit Agreement as of the fiscal quarter ended June 30,
1999.
(b) The waiver hereby granted by Lender (i) is limited expressly as
written, (ii) does not impair Lender's rights to insist upon strict compliance
with the Credit Agreement and the other Loan Documents, and (iii) do not extend
to any other Loan Document.
4. AMENDMENTS TO OTHER LOAN DOCUMENTS.
(a) All references in the Loan Documents to the Credit Agreement shall
henceforth include references to the Credit Agreement, as modified and amended
hereby, and as may, from time to time, be further amended, modified, extended,
renewed, and/or increased.
(b) Any and all of the terms and provisions of the Loan Documents are
hereby amended and modified wherever necessary, even though not specifically
addressed herein, so as to conform to the amendments and modifications set forth
herein.
5. RATIFICATIONS. Each Borrower (a) ratifies and confirms all
provisions of the Loan Documents as amended by this Amendment, (b) ratifies and
confirms that all guaranties, assurances, and liens granted, conveyed, or
assigned to Lender under the Loan Documents are not released, reduced, or
otherwise adversely affected by this Amendment and continue to guarantee,
assure, and secure full payment and performance of the present and future Loans,
and (c) agrees to perform such acts and duly authorize, execute, acknowledge,
deliver, file, and record such additional documents, and certificates as Lender
may request in order to create, perfect, preserve, and protect those guaranties,
assurances, and liens.
6. REPRESENTATIONS. Each Borrower represents and warrants to Lender
that as of the date of this Amendment: (a) this Amendment and the other Loan
Documents to be delivered under this Amendment have been duly authorized,
executed, and delivered by Borrowers; (b) no action of, or filing with, any
governmental authority is required to authorize, or is otherwise required in
connection with, the execution, delivery, and performance by Borrowers of this
Amendment; (c) the Loan Documents, as amended by this Amendment, are valid and
binding upon Borrowers and are enforceable against Borrowers in accordance with
their respective terms; (d) the execution, delivery, and performance by
Borrowers of this Amendment do not require the consent of any other person and
do not and will not constitute a violation of any laws, agreements, or
understandings to which any Borrower is a party or by which any Borrower is
bound; (e) all representations and warranties in the Loan Documents (as amended
hereby) are true and correct in all material respects except to the extent that
(i) any of them speak to a different specific date, or (ii) the facts on which
any of them were based have been changed by transactions contemplated or
permitted by the Credit Agreement; and (f) after giving effect to this
Amendment, no Potential Default or Event of Default exists.
7. CONTINUED EFFECT. Except to the extent amended hereby, all terms,
provisions and conditions of the Credit Agreement and the other Loan Documents,
and all documents executed in connection therewith, shall continue in full force
and effect and shall remain enforceable and binding in accordance with their
respective terms.
8. CONDITIONS PRECEDENT. This Amendment shall not be effective
unless and until: (a) Lender receives a fully-executed copy of this Amendment,
and (b) the representations and warranties in the Loan
-3-
<PAGE>
Agreement, as amended by this Amendment, and each other Loan Document are
true and correct in all material respects on and as of the date of this
Amendment as though made as of the date of this Amendment.
9. MISCELLANEOUS. Unless stated otherwise (a) the singular number
includes the plural and VICE VERSA and words of any gender include each other
gender, in each case, as appropriate, (b) headings and captions may not be
construed in interpreting provisions, (c) this Amendment must be construed --
and its performance enforced -- under Texas law, (d) if any part of this
Amendment is for any reason found to be unenforceable, all other portions of it
nevertheless remain enforceable, and (e) this Amendment may be executed in any
number of counterparts with the same effect as if all signatories had signed the
same document, and all of those counterparts must be construed together to
constitute the same document.
10. ENTIRETIES. THE CREDIT AGREEMENT AS AMENDED BY THIS AMENDMENT
REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES ABOUT THE SUBJECT MATTER OF
THE CREDIT AGREEMENT AS AMENDED BY THIS AMENDMENT AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE
PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
11. PARTIES. This Amendment binds and inures to Borrowers and Lender,
and their respective successors and permitted assigns.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGES TO FOLLOW]
-4-
<PAGE>
EXECUTED as of the date first stated above.
BORROWERS:
ADAMS GOLF DIRECT RESPONSE, LTD.,
By: ADAMS GOLF GP CORP., a Delaware
corporation, General Partner
By:____________________________
Name:_______________________
Title:______________________
ADAMS GOLF, LTD., a Texas limited partnership
By: ADAMS GOLF GP CORP., a Delaware
corporation, General Partner
By:____________________________
Name:_______________________
Title:______________________
LENDER:
BANK OF AMERICA, N.A., a national banking
association, formerly NationsBank, N.A.,
successor by merger to NationsBank of Texas,
N.A.
By:_________________________________
Curtis Anderson
Senior Vice President
-5-
<PAGE>
To induce Lender to enter into this Amendment, each of the undersigned
jointly and severally (a) consent and agree to the execution and delivery of
this Amendment, (b) ratify and confirm that all guaranties, assurances, and
liens granted, conveyed, or assigned to Lender under the Loan Documents are not
released, diminished, impaired, reduced, or otherwise adversely affected by this
Amendment and continue to guarantee, assure, and secure the full payment and
performance of all present and future Loans, (c) agree to perform such acts and
duly authorize, execute, acknowledge, deliver, file, and record such additional
guaranties, assignments, security agreements, deeds of trust, mortgages, and
other agreements, documents, instruments, and certificates as Lender may
reasonably deem necessary or appropriate in order to create, perfect, preserve,
and protect those guaranties, assurances, and liens, and (d) waive notice of
acceptance of this consent and agreement, which consent and agreement binds the
undersigned and their successors and permitted assigns and inures to Lender and
their respective successors and permitted assigns.
ADAMS GOLF, INC., a Delaware corporation
By: ____________________________________________
Name:_______________________________________
Title:______________________________________
ADAMS GOLF HOLDING CORP., a Delaware corporation
By: ____________________________________________
Name:_______________________________________
Title:______________________________________
ADAMS GOLF GP CORP., a Delaware corporation
By: ____________________________________________
Name:_______________________________________
Title:______________________________________
ADAMS GOLF MANAGEMENT CORP., a Delaware
corporation
By: ____________________________________________
Name:_______________________________________
Title:______________________________________
-6-
<PAGE>
ADAMS GOLF IP, L.P., a Delaware limited partnership
By: ADAMS GOLF GP CORP., a Delaware corporation,
General Partner
By: _______________________________________
Name:__________________________________
Title:_________________________________
ADAMS GOLF FOREIGN SALES CORPORATION, a
Barbados corporation
By: ______________________________________________
Name:_________________________________________
Title:________________________________________
ADAMS GOLF RAC CORP.,a Delaware corporation
By: ______________________________________________
Name:_________________________________________
Title:________________________________________
-7-
<PAGE>
EXHIBIT A
FORM OF COMPLIANCE CERTIFICATE
FOR PERIOD ENDED ________________________ (THE "SUBJECT PERIOD")
LENDER: Bank of America, N.A.
BORROWERS: Adams Golf Direct Response, Ltd. and Adams Golf, Ltd.
This certificate is delivered under the Amended and Restated Revolving
Credit Agreement (as modified, amended, renewed, extended, and restated from
time to time, the "CREDIT AGREEMENT") dated as of February 26, 1999, between
Borrowers and Lender. Capitalized terms when used in this certificate shall,
unless otherwise indicated, have the meanings set forth in the Credit Agreement.
The undersigned certify to Lender that, on the date of this certificate, (a) the
Financial Statements of the Companies attached to this certificate were prepared
in accordance with GAAP, and present fairly the financial condition and results
of operations of the Companies as of the end of and for the Subject Period,
(b) no Potential Default or Event of Default currently exists or has occurred
which has not been cured or waived by Lender, and (c) the status of compliance
by the Companies with certain covenants of the Credit Agreement as of the end of
the Subject Period is as set forth below:
<TABLE>
<CAPTION>
In Compliance as of
End of Subject Period
(Please Indicate)
<S> <C>
1. FINANCIAL STATEMENTS AND REPORTS.
(a) Provide annual audited FYE financial statements
within one hundred twenty (120) days after last
day of each fiscal year. Yes No
(b) Provide quarterly financial statements as required by
SECTION 6.1(a) of the Credit Agreement. Yes No
(c) Provide a Compliance Certificate and accounts receivable
aging contemporaneously with the delivery of the quarterly
financial statements described in (b) above. Yes No
2. ADDITIONAL INDEBTEDNESS.
None, except Indebtedness permitted by SECTION 7.1 of
the Credit Agreement. Yes No
3. LIENS AND ENCUMBRANCES; NEGATIVE PLEDGE AGREEMENTS.
None at any time, except as permitted by SECTION 7.2 of
the Credit Agreement. Yes No
-8-
<PAGE>
4. DIVIDENDS.
None except as permitted by SECTION 7.4 of
the Credit Agreement. Yes No
5. INVESTMENTS.
None, except as permitted by SECTION 7.5 of
the Credit Agreement. Yes No
6. AFFILIATE TRANSACTIONS.
None, except as permitted by SECTION 7.6 of the Credit
Agreement. Yes No
7. CHANGE IN EXECUTIVE PERSONNEL.
None except as permitted by SECTION 7.7 of
the Credit Agreement. Yes No
8. DISPOSAL OF MATERIAL ASSETS OTHER THAN IN THE ORDINARY
COURSE OF BUSINESS.
None. Yes No
9. SUBSIDIARIES.
None, except as permitted by SECTION 7.9 of the
Credit Agreement. Yes No
10. LIMITATION OF ACQUISITIONS AND MERGERS.
None, except as permitted by SECTION 7.10 of
the Credit Agreement. Yes No
11. CHANGES IN BUSINESS OF BORROWERS; CHANGES IN RECEIVABLES POLICY,
OTHER THAN IN THE ORDINARY COURSE OF BUSINESS.
None. Yes No
12. GUARANTIES OF THIRD PARTY INDEBTEDNESS.
None. Yes No
13. SALE AND LEASEBACK TRANSACTIONS.
None. Yes No
14. CONSOLIDATED TANGIBLE NET WORTH.
Minimum of $67,500,000.00 (defined as
total shareholder's equity less Intangible Assets). Yes No
(________________ - ___________________) = ____________
Shareholder's Intangible Assets
Equity
-9-
<PAGE>
15. DEBT TO EBITDA.
Maximum of 2.0 to 1.0
(Indebtedness to EBITDA)
EBITDA =____________+____________+____________+____________=____________
Consolidated Depreciation Cash Interest Taxes
Adjusted Net and Expense
Income Amortization
____ DIVIDED BY ____________ = ____________ Yes No
Indebtedness EBITDA
16. CHANGE OF BORROWERS' FISCAL YEARS.
None. Yes No
17. CHANGE OF THE COMPANIES' METHODS OF ACCOUNTING.
None. Yes No
18. CAPITAL EXPENDITURES.
Maximum of $10,000,000.00 in any fiscal year. Yes No
Capital Expenditures = $____________
19. LIQUID ASSETS TO INDEBTEDNESS.
Minimum of 3.0 to 1.0
(defined as the ratio of (a) cash, Eligible Bonds, Eligible Government
Securities, Eligible Securities, and Temporary Cash Investments,
to (b) Indebtedness plus Unused Commitment) Yes No
Cash $ ____________
Eligible Bonds ____________
Eligible Government Securities ____________
Eligible Securities ____________
Temporary Cash Investments ____________
Subtotal $ ____________(a)
Indebtedness ____________
Unused Commitment ____________
Subtotal ____________(b)
Ratio of (a) to (b) ____________
</TABLE>
-10-
<PAGE>
BORROWERS:
ADAMS GOLF DIRECT RESPONSE, LTD., a
Texas limited partnership
By: ADAMS GOLF GP, CORP., a Delaware
corporation, General Partner
By: ____________________________
Name:_______________________
Title:______________________
ADAMS GOLF, LTD., a Texas limited
partnership
By: ADAMS GOLF GP, CORP., a Delaware
corporation, General Partner
By: ____________________________
Name:_______________________
Title:______________________
-11-
<PAGE>
SCHEDULE 5.10
LITIGATION
1. C&A INTERNATIONAL, INC. d/b/a NICKENT GOLF EQUIPMENT, CHEN-CHIN HUANG AND
TATSUYA SAITO V. ADAMS GOLF, INC. AND WILLOUGHBY GOLF CENTER, INC. d/b/a
BOBICK GOLF PRO SHOP, CIVIL ACTION 1:98 CV 0166 filed January 23, 1998 in
the United States District Court for the Northern District of Ohio,
Eastern Division.
2. ADAMS V. BOST ENTERPRISES, INC. filed in the U.S. District Court -
Northern District of Texas. Adams Golf initiated this litigation on
March 3, 1998 against Bost Enterprises ("Bost") arising out of the sale
by Bost of so-called "knock-off" golf clubs. Adams Golf has asserted
claims for patent infringement, false advertisement and unfair
competition. In its lawsuit, Adams sought injunctive relief, as well as
damages for potential infringement and has participated in court-ordered
settlement discussions. No depositions have been taken. Bost filed a
motion for summary judgment, which is pending before the court. Adams
Golf has filed a motion for leave to file a second amended complaint,
which is pending before the court. In this proposed second amended
complaint, Adams Golf asserts claims for unfair competition (15 U.S.C.
Section 1125(a)), federal trademark infringement (15 U.S.C. Section
114), and common law unfair competition. The court has not yet issued
any decision on these motions. This case is set for trial on June 7,
1999.
3. Beginning in June 1999, the first of six purported class action lawsuits
was filed against Adams Golf, Inc. (the "Company"), certain of its
current and former directors and the three underwriters of the Company's
initial public offering ("IPO") in the United States District Court for
the District of Delaware. The complaints allege violations of
SECTIONS 11, 12(a)(2) and 15 of the Securities Act of 1933 in connection
with the Company's IPO. In particular, the complaints alleged that the
Company made materially false and misleading statements and omissions in
the registration statement and incorporated prospectus, which became
effective July 9, 1998, concerning inventory and distribution of its
products. In addition, certain of the complaints alleged other factors
occurring subsequent to the IPO. Specifically, the proceedings pending
are as follows: KENNETH P SHOCKLEY V. ADAMS GOLF, INC., et al., Civil
Action No. 99-371 (D.Del.) filed on June, 1999; MARK J. LANTZ V. ADAMS
GOLF, INC. et al., Civil Action No. 99-397 (D.Del.) filed on or about
June 22, 1999; F. RICHARD MANSON V. ADAMS GOLF, INC. et al., Civil Action
No. 99-421 (D.Del.) filed on or about July 2, 1999; SYLVIA J. DAUGHTRY V.
ADAMS GOLF, INC. et al., Civil Action No. 99-469 (D.Del.) filed on or
about July 22, 1999; ROBERT DOLIN V. ADAMS GOLF, INC. et al., Civil
Action No. 99-498 (D.Del.) filed on or about August 3, 1999; and TINA
NARDOLILLO V. ADAMS GOLF, INC. et al., Civil Action No. 99-511 (D.Del.)
filed on or about August 9, 1999. In each case, the plaintiffs are
seeking unspecified amounts of compensatory damages, interests, and
costs, including legal fees. The Company has denied the allegations in
the complaints and intends to defend against each of them vigorously.
-12-
<PAGE>
COMPUTATION OF EARNINGS PER SHARE - EXHIBIT 11.1
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
BASIC INCOME (LOSS) PER COMMON SHARE:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -----------------------------------
1998 1999 1998 1999
------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C>
Net income (loss) $ 4,346 $ (3,836) $ 16,646 $ (6,240)
============= ============== =============== ================
Weighted average shares
outstanding 22,695,478 22,480,071 19,714,997 22,479,862
------------- -------------- --------------- ----------------
Income (loss) per common share $ 0.19 $ (0.17) $ 0.84 $ (0.28)
============= ============== =============== ================
DILUTED INCOME (LOSS) PER COMMON SHARE:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- ----------------------------------
1998 1999 1998 1999
------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net income (loss) $ 4,346 $ (3,836) $ 16,646 $ (6,240)
============= =============== =============== ===============
Weighted average shares
outstanding 22,695,478 22,480,071 19,714,997 22,479,862
Effect of dilutive shares-stock
options 53,045 - 296,803 -
------------- --------------- --------------- ---------------
Total weighted average dilutive
shares 22,748,523 22,480,071 20,011,799 22,479,862
============= =============== =============== ===============
Income (loss) per common share $ 0.19 $ (0.17) $ 0.83 $ (0.28)
============= =============== =============== ===============
</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 SUBSIDIAIRIES FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED
IN ITS ENTIRETY TO SUCH UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 9,601
<SECURITIES> 20,796
<RECEIVABLES> 10,236
<ALLOWANCES> 1,210
<INVENTORY> 18,244
<CURRENT-ASSETS> 65,973
<PP&E> 10,138
<DEPRECIATION> 2,425
<TOTAL-ASSETS> 91,322
<CURRENT-LIABILITIES> 5,986
<BONDS> 0
0
0
<COMMON> 23
<OTHER-SE> 82,694
<TOTAL-LIABILITY-AND-EQUITY> 91,322
<SALES> 43,100
<TOTAL-REVENUES> 43,100
<CGS> 13,883
<TOTAL-COSTS> 32,753
<OTHER-EXPENSES> 8,408
<LOSS-PROVISION> 444
<INTEREST-EXPENSE> 27
<INCOME-PRETAX> (11,152)
<INCOME-TAX> (4,912)
<INCOME-CONTINUING> (6,240)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,240)
<EPS-BASIC> (0.28)
<EPS-DILUTED> (0.28)
</TABLE>
