<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 June 30, 2000
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 August 14, 2000.
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ADAMS GOLF, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I FINANCIAL STATEMENTS Page
----
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 2000 (unaudited) and December 31, 1999 3
Unaudited Condensed Consolidated Statements of Operations -
Three and six months ended June 30, 2000 and 1999 4
Unaudited Condensed Consolidated Statement of Stockholders' Equity -
Six months ended June 30, 2000 5
Unaudited Condensed Consolidated Statements of Cash Flows -
Six months ended June 30, 2000 and 1999 6
Notes to Unaudited Condensed Consolidated Financial
Statements 7-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-21
Item 3. Quantitative and Qualitative Disclosures about Market Risk N/A
PART II OTHER INFORMATION
Item 1. Legal Proceedings 22
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 23
Item 5. Other Information N/A
Item 6. Exhibits and Reports on Form 8-K 23
</TABLE>
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ADAMS GOLF, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS
JUNE 30, DECEMBER 31,
2000 1999
---- ----
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 9,449 $ 2,786
Marketable securities (note 2)............................ 9,570 18,464
Trade receivables, net of allowance for doubtful accounts
of $1,271 (unaudited) and $966 in 2000 and 1999,
respectively........................................... 13,947 11,012
Inventories (note 3)...................................... 17,624 19,101
Prepaid expenses.......................................... 1,351 884
Income tax receivable..................................... - 4,836
Deferred income tax assets................................ 786 660
Other current assets...................................... 730 621
------- -------
Total current assets................................... 53,457 58,364
Property and equipment, net.................................. 6,762 7,565
Marketable securities (note 2)............................... 6,958 8,456
Professional services agreement (note 4) .................... 7,931 8,438
Other assets, net............................................ 1,885 387
------- -------
$76,993 $83,210
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,287 $ 1,981
Accrued expenses.......................................... 5,704 2,516
------- -------
Total current liabilities.............................. 7,991 4,497
Deferred income tax liabilities.............................. - 342
Capitalized lease obligation................................. 98 -
------- -------
Total liabilities...................................... 8,089 4,839
------- -------
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; 23,137,571 shares issued and
22,480,071 shares outstanding.......................... 23 23
Additional paid-in capital................................ 86,042 85,919
Common stock subscription................................. (22) (22)
Deferred compensation..................................... (439) (476)
Accumulated other comprehensive loss...................... (87) (44)
Accumulated deficit....................................... (13,477) (3,893)
Treasury stock, 657,500 shares, at cost .................. (3,136) (3,136)
------- -------
Total stockholders' equity............................. 68,904 78,371
------- -------
Contingencies (note 9)
$76,993 $83,210
======= =======
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
3
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ADAMS GOLF, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- -------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales..................................... $12,255 $25,516 $27,965 $34,074
Cost of goods sold............................ 4,524 8,019 8,712 11,210
------- ------- ------- -------
Gross profit.......................... 7,731 17,497 19,253 22,864
------- ------- ------- -------
Operating expenses:
Research and development expenses.......... 541 511 1,180 980
Selling and marketing expenses............. 11,982 13,162 23,397 22,070
General and administrative expenses:
Provision for bad debts................. 509 100 716 200
Other................................... 2,626 2,597 5,454 4,585
------- ------- ------- -------
Total operating expenses.............. 15,658 16,370 30,747 27,835
------- ------- ------- -------
Operating income (loss)............... (7,927) 1,127 (11,494) (4,971)
Other income (expense):
Interest income............................ 260 355 622 900
Other income (expense)..................... 125 (10) 144 (20)
------- ------- ------- -------
Income (loss) before income taxes..... (7,542) 1,472 (10,728) (4,091)
Income tax expense (benefit) ................. - 562 (1,144) (1,688)
------- ------- ------- -------
Net income (loss)..................... $(7,542) $ 910 $(9,584) $(2,403)
======= ======= ======= =======
Income (loss) per common share-basic and
diluted (note 5).......................... $ (0.34) $ 0.04 $ (0.43) $ (0.11)
======= ======= ======= =======
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
4
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ADAMS GOLF, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SIX MONTHS ENDED JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
SHARES OF ADDITIONAL COMMON OTHER
COMMON COMMON PAID-IN STOCK DEFERRED COMPREHENSIVE
STOCK STOCK CAPITAL SUBSCRIPTION COMPENSATION LOSS
----- ----- ------- ------------ ------------ ----
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999..... 23,137,571 $ 23 $ 85,919 $ (22) $ (476) $ (44)
Comprehensive income (loss):
Net loss ................... - - - - - -
Other comprehensive
income (loss): .............
Unrealized gain on
marketable securities .. - - - - - 5
Foreign currency
translation ............ (48)
Comprehensive loss ............ - - - - - -
Stock option forfeiture ....... - - (48) - 48 -
Issuance of stock options ..... - - 171 - (171) -
Amortization of deferred
compensation ............... - - - - 160 -
-------------- -------- ------------ --------- ------------ ------------
Balance, June 30, 2000 ....... 23,137,571 $ 23 $ 86,042 $ (22) $ (439) $ (87)
============== ======== ============ ========= ============ ============
<CAPTION>
COST OF TOTAL
ACCUMULATED COMPREHENSIVE TREASURY STOCKHOLDERS'
DEFICIT LOSS STOCK EQUITY
------- ---- ----- ------
<S> <C> <C> <C> <C>
Balance, December 31, 1999..... $ (3,893) $ - $ (3,136) $ 78,371
Comprehensive income (loss):
Net loss ................... (9,584) (9,584) - (9,584)
Other comprehensive
income (loss): .............
Unrealized gain on
marketable securities .. - 5 - 5
Foreign currency
translation ............ (48) - (48)
-----------
Comprehensive loss ............ - $ (9,627) -
===========
Stock option forfeiture ....... - - -
Issuance of stock options ..... - - -
Amortization of deferred ..... -
compensation ............... - - 160
----------- ----------- ----------
Balance, June 30, 2000 ....... $(13,477) $ (3,136) $ 68,904
=========== =========== ==========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
5
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ADAMS GOLF, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss .............................................. $ (9,584) $ (2,403)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization of property and
equipment and intangible assets .................. 2,055 1,614
Amortization of deferred compensation .............. 160 109
Deferred income taxes .............................. (1,144) 913
Allowance for doubtful accounts .................... 305 (269)
Changes in assets and liabilities:
Trade receivables ................................ (3,240) (10,880)
Inventories ...................................... 1,477 (1,020)
Prepaid expenses ................................. (467) 69
Income tax receivable ............................ 4,836 (15)
Other current assets ............................. (109) (598)
Other assets ..................................... (1,003) (265)
Accounts payable ................................. 306 1,023
Accrued expenses ................................. 3,128 3,004
-------- --------
Net cash used in operating activities ........ (3,280) (8,718)
-------- --------
Cash flows from investing activities:
Purchase of equipment ................................. (443) (1,869)
Purchases of marketable securities .................... (1,085) (3,596)
Maturities of marketable securities ................... 5,500 4,851
Sales of marketable securities ........................ 5,999 -
-------- --------
Net cash provided by (used in) investing
activities .................................. 9,971 (614)
-------- --------
Cash flows from financing activities:
Repayment of note payable to shareholder ............. - (175)
Principal payments under capital lease obligation ..... (28) -
Issuance of common stock .............................. - 2
-------- --------
Net cash used in financing activities ......... (28) (173)
-------- --------
Net increase (decrease) in cash and cash equivalents ..... 6,663 (9,505)
Cash and cash equivalents at beginning of period ......... 2,786 23,688
======== ========
Cash and cash equivalents at end of period ............... $ 9,449 $ 14,183
======== ========
Supplemental disclosure of cash flow information:
Interest paid ......................................... $ 6 $ 33
======== ========
Income taxes paid ..................................... $ - $ 26
======== ========
Supplemental disclosure of noncash investing and financing
activities-equipment financed with capital lease ...... $ 186 $ -
======== ========
</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 six month periods ended June 30, 2000 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 1999 Annual
Report on Form 10-K filed with the SEC on March 28, 2000.
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".
2. MARKETABLE SECURITIES
Marketable securities, primarily consisting of governmental and corporate
bonds, are managed under agreements with investment managers. The agreements
provide terms related to the quality, diversification and maturities of the
investments in the managed portfolios. The investments are classified as
available-for-sale and are carried at fair value, with unrealized gains and
losses, net of the related tax effect, reported as other comprehensive income
in the consolidated statement of stockholders' equity. The balance sheet
classification of the Company's marketable securities is based upon the
contractual maturity date of such securities.
Marketable securities consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 2000
(UNAUDITED)
-------------------------------------------------------
UNREALIZED FAIR
COST LOSSES VALUE
---------------- ---------------- ----------------
<S> <C> <C> <C>
Commercial paper $ 1,085 $ (1) $ 1,084
Governmental bonds 15,500 (56) 15,444
---------------- ---------------- ----------------
16,585 (57) 16,528
Less current amounts (9,585) 15 (9,570)
---------------- ---------------- ----------------
Long-term marketable securities $ 7,000 $ (42) $ 6,958
================ ================ ================
</TABLE>
7
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<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------------------------------------
UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
---------------- ---------------- ----------------
<S> <C> <C> <C>
Commercial paper $ 7,606 $ (154) $ 7,452
Governmental bonds 15,385 54 15,439
Corporate bonds 3,998 31 4,029
---------------- ---------------- ----------------
26,989 (69) 26,920
Less current amounts (18,489) 25 (18,464)
---------------- ---------------- ----------------
Long-term marketable securities $ 8,500 $ (44) $ 8,456
================ ================ ================
</TABLE>
During the six months ended June 30, 2000, there were approximately
$5,500,000 in proceeds received from maturities of available-for-sale
securities, and $1,085,000 in purchases of securities. In addition, there
were approximately $5,999,000 in proceeds received from sales of
available-for-sale securities which included realized gains of approximately
$79,000 and realized losses of approximately $67,000 using the specific
identification method. All marketable securities mature within two years.
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
Finished goods $ 6,098 $ 6,208
Component parts 11,526 12,893
------- -------
$17,624 $19,101
======= =======
</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 and diluted
income (loss) per common share were 22,480,071 for the three months ended June
30, 2000 and 1999, and 22,480,071 and 22,479,755 for the six months ended June
30, 2000 and 1999, respectively. The effect of stock options in 2000 and 1999
was either immaterial or antidilutive.
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
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distributed in both domestic and international markets. Net sales for these
markets consisted of the following (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------------- --------------------------------------------
2000 1999 2000 1999
----------------- ------------------ ------------------ --------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
United States $ 10,092 $ 22,184 $ 23,842 $ 29,478
Rest of World 2,163 3,332 4,123 4,596
----------------- ------------------ ------------------ --------------------
$ 12,255 $ 25,516 $ 27,965 $ 34,074
================= ================== ================== ====================
</TABLE>
7. INCOME TAXES
In assessing the realizability of deferred income tax assets, the Company
considers whether it is more likely than not that some portion or all of the
deferred income tax assets will not be realized. The ultimate realization of
deferred income tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Due to the historical operating results of the Company, management
is unable to conclude on a more likely than not basis that all deferred income
tax assets generated through operating losses through June 30, 2000 will be
realized. Accordingly, the Company has recognized a partial valuation
allowance to reduce the net deferred tax asset to an amount that management
believes will more likely than not be realized.
8. 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.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44, "Accounting for Certain Transactions involving Stock Compensation,"
which is generally effective July 1, 2000. This interpretation clarifies the
application of Accounting Principles Board Opinion No. 25. The Company
believes adoption of Interpretation No. 44 will have no material impact on its
financial statements.
9. CONTINGENCIES
Beginning in June 1999, the first of seven class action lawsuits was filed
against the Company, certain of its current and former officers and directors
and the three underwriters of the Company's initial public offering ("IPO") in
the United States District Court for the District of Delaware. The complaints
allege violations of Sections 11, 12(a)(2) and 15 of the Securities Act of
1933, as amended, in connection with the Company's IPO. In particular, the
complaints allege that the Company's prospectus, which became effective July
9, 1998, was materially false and misleading in at least two areas. Plaintiffs
allege that the prospectus failed to disclose that unauthorized distribution
of the Company's products (gray market sales) threatened the Company's long
term profits. Plaintiffs also allege that the prospectus failed to disclose
that the golf equipment industry suffered from an oversupply of inventory at
the retail level, which had an adverse impact on the Company's sales. On May
17, 2000, these cases were consolidated into one amended complaint, and a lead
plaintiff was appointed. The plaintiffs are seeking unspecified amounts of
compensatory damages, interests and costs, including legal fees. The Company
denies the allegations in the complaint and intends to defend it vigorously.
The above mentioned class action lawsuit is 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
9
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estimate the amount, if any, of reimbursements that it would receive from
insurance policies should damages with respect to the above actions be
incurred.
10
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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, 1999.
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 additional lofts. 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 recently further extended the Tight Lies line by
introducing the Tight Lies 2 driver in January 2000.
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 driver, the Tight Lies 2 line and the
Faldo Series wedges are produced by single suppliers. Costs of the Company's
clubs consist primarily of component parts, including the head, shaft and
grip. To a lesser extent, the Company's cost of goods sold includes labor and
occupancy costs in connection with the inspection, testing and assembly of
component parts at its facility in Plano, Texas.
RESULTS OF OPERATIONS
The following table sets forth operating results expressed as a percentage of
net sales for the periods indicated. 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 "Business Risks--Seasonality and Quarterly
Fluctuations" below.
11
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<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ---------------------------
2000 1999 2000 1999
------------ ---------- ------------- ----------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 36.9 31.4 31.2 32.9
------------ ---------- ------------- ----------
Gross profit 63.1 68.6 68.8 67.1
Operating expenses:
Research and development expenses 4.4 2.0 4.2 2.9
Sales and marketing expenses 97.8 51.6 83.7 64.7
General and administrative expenses:
Provision for bad debts 4.2 0.4 2.5 0.6
Other 21.4 10.2 19.5 13.5
------------ ---------- ------------- ----------
Total operating expenses 127.8 64.2 109.9 81.7
------------ ---------- ------------- ----------
Operating income (loss) (64.7) 4.4 (41.1) (14.6)
Interest income 2.2 1.4 2.2 2.6
Other income (expense) 1.0 - 0.5 (0.1)
------------ ---------- ------------- ----------
Income (loss) before income taxes (61.5) 5.8 (38.4) (12.1)
Income tax expense (benefit) - 2.2 (4.1) (5.0)
------------ ---------- ------------- ----------
Net income (loss) (61.5) 3.6 (34.3) (7.1)
============ ========== ============= ==========
</TABLE>
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Net sales deceased to $12.3 million for the three months ended June 30, 2000
from $25.5 million the comparable period of 1999. The decrease was primarily
attributable to a lower volume of SC drivers being sold in 2000 due to initial
sell-in of the product in 1999. Net sales of SC drivers for the three months
ended June 30, 2000 were $1.4 million compared to $13.7 million for the
comparable period in 1999. Net sales of fairway woods were $9.1 million or
74.6% of net sales for the three months ended June 30, 2000 as compared to
$11.2 million or 44.0% of net sales for the three months ended June 30, 1999.
These decreases were partially offset by $1.8 million of sales of the Tight
Lies 2 driver which was introduced in the first quarter of 2000. Net sales of
the Company's products outside the U.S. decreased to $2.2 million from $3.3
million for the three months ended June 30, 1999, but increased as a
percentage of net sales to 17.6% from 12.9%, respectively.
Cost of goods sold decreased to $4.5 million for the three months ended June
30, 2000 from $8.0 million for the comparable period of 1999, and increased as
a percentage of net sales to 36.9% from 31.4%, respectively. The increase as a
percentage of net sales is primarily attributable to reduction in the
suggested retail selling price of the SC drivers which became effective on May
1, 2000. In connection with this pricing change, the wholesale price of SC
drivers was reduced and retailers were given one additional SC driver at no
charge for every four units they were carrying in inventory at the time of the
change. The cost of these additional drivers, which resulted in a 4.4%
increase in cost of sales as a percentage of revenues, was charged to cost of
goods sold during the three month period ended June 30, 2000. To a lesser
extent, cost of sales was negatively impacted by a change in the mix of
products sold, as well as by a reduction in the average per unit selling price
across all product lines.
Operating expenses are comprised primarily of selling and marketing expenses,
general and administrative expenses, and, to a lesser extent, research and
development expenses. Selling and marketing expenses decreased to $12.0
million for the three months ended June 30, 2000 from $13.2 million for the
comparable period of 1999. The decrease is primarily a result of reduced
advertising costs of $2.7 million associated with television and print media.
During the three months ended June 30, 1999, the Company utilized these
mediums extensively to promote the introduction of the SC driver. In addition,
the decrease is attributed to a reduction in royalty expense of $0.6 million
associated with consulting services which were expensed in the
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comparable period in 1999. The reduction in these expense categories were
partially offset by an increase of $1.1 million associated with the operation
of the Company's subsidiaries in the United Kingdom and Japan, sales promotion
expenses of $0.5 million, additional payroll costs of $0.2 million, and a $0.2
million increase in tour player endorsement expense.
General and administrative expenses, including provisions for bad debts,
increased to $3.1 million or 25.6% of net sales, for the three months ended
June 30, 2000 from $2.7 million or 10.6% of net sales for the comparable
period ended June 30, 1999. The increase is primarily attributable to an
increase in the provision for bad debts resulting from certain customers
experiencing increased financial difficulty.
Research and development expenses, primarily consisting of costs associated
with development of new products, for the three months ended June 30, 2000
remained unchanged at $0.5 million compared to the same period in 1999, but
increased as a percentage of net sales to 4.4% from 2.0%.
As a result, the Company's operating loss was $7.9 million for the three
months ended June 30, 2000 compared to operating income of $1.1 million for
the comparable period of 1999.
The Company established a valuation allowance of $2.7 million at June 30,
2000. For the three months ended June 30, 2000, the Company did not recognize
an income tax benefit because the Company believes that additional NOL
carryforwards may not be recoverable. In addition, the Company believes it is
more likely than not that the remaining net deferred tax assets at June 30,
2000 are recoverable from taxable income expected to be generated during the
NOL carryforward period.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Net sales decreased to $28.0 million for the six months ended June 30, 2000
from $34.1 million for the comparable period of 1999. The decrease was
primarily attributable to a lower volume of SC Series drivers being sold in
2000 due to initial sell-in of product occurring in the second quarter of
1999. Net sales of the SC drivers for the six months ended June 30, 2000 were
$3.0 million or 10.7% of net sales as compared to $14.7 million or 43.0% of
net sales for the six months ended June 30, 1999. Net sales of fairway woods
were $21.0 million, or 75.1% of net sales, for the six months ended June 30,
2000 compared to $18.8 million, or 55.1% of net sales, for the six months
ended June 30, 1999. Net sales of the Company's products outside the U.S.
decreased to $4.1 million for the six months ended June 30, 2000 from $4.6
million for the six months ended June 30, 1999, but increased as a percentage
of net sales to 14.7% from 13.5%, respectively.
Cost of goods sold decreased to $8.7 million for the six months ended June 30,
2000 from $11.2 million for the comparable period of 1999, and decreased as a
percentage of net sales to 31.2% from 32.9%, respectively. The decrease as a
percentage of sales is primarily due to the introduction of the Tight Lies 2
lines of fairway woods and drivers, which have a lower per unit cost than
other product lines, which, in turn, decreased costs as a percentage of sales.
The decrease is partially offset by a program initiated during the second
quarter of 2000 to reduce the suggested retail selling price of the SC drivers
at retail. In connection with this program, the Company provided one
additional SC driver for every four units which retailers had in their
inventory at the time of the change of the suggested retail price. The cost of
this program was charged to cost of goods sold, increasing this category as a
percentage of net sales by 1.9% for the six month period ended June 30, 2000.
Selling and marketing expenses increased to $23.4 million for the six months
ended June 30, 2000 from $22.1 million for the comparable period of 1999,
primarily as a result of additional payroll costs of $1.1 million, $0.9
million of sales promotion expense primarily related to the introduction of
new products, $0.5 million associated with the development of a Tight Lies 2
infomercial, $1.6 million associated with operating costs of the Company's
subsidiaries in the United Kingdom and Japan, and a $0.5 million increase in
tour player endorsement expense. A substantial portion of these increases were
offset by a decrease in advertising costs of $3.4 million resulting from
reduced spending related to television and print media. During the six months
ended June 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.
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General and administrative expenses, including provisions for bad debts,
increased to $6.2 million for the six months ended June 30, 2000 from $4.8
million for the comparable period ended June 30, 1999, primarily due to a $0.7
million increase in operating costs associated with the Company's subsidiaries
in the United Kingdom and Japan and a $0.5 million increase in the provision
for bad debts.
Research and development expenses for the six months ended June 30, 2000
increased to $1.2 million compared to $1.0 million for the same period in
1999, and increased as a percentage of net sales to 4.2% from 2.9%.
As a result of the above, operating loss was $11.5 million for the six months
ended June 30, 2000 compared to $5.0 million for the comparable period of 1999.
The effective tax rate for the six months ended June 30, 2000 was 10.7%
compared to 41.2% for the comparable period in the prior year. The effective
tax rate for the second quarter of 2000 was impacted by a valuation allowance
of $2.7 million recorded to reduce net deferred tax assets to an amount the
Company believes is more likely than not to be recoverable from taxable
income expected to be generated during the NOL carryforward period.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased to $9.4 million at June 30, 2000 from $2.8
million at December 31, 1999. During the period approximately $3.3 million was
used in operations primarily the result of the net loss of $9.6 million for
the six months ended June 30, 2000 and a $3.2 million increase in trade
receivables. These uses of cash were partially offset by the receipt of a $4.8
million tax refund, a $1.5 million reduction of inventories, and a $3.4
million increase in accounts payable and accrued liabilities primarily
attributable to advertising expenditures and provision for the distribution of
inventory in connection with a change in the suggested retail selling price of
the SC drivers.
Cash provided by investing activities of $10.0 million for the six months
ended June 30, 2000 is primarily related to sales and maturities of marketable
securities of $6.0 million and $5.5 million, respectively, offset by purchases
of marketable securities of $1.1 million and equipment of $0.4 million in the
ordinary course of business.
Working capital approximated $45.4 million at June 30, 2000 compared to $53.9
million at December 31, 1999.
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.
On June 30, 2000, the Company executed a $5.0 million revolving credit
facility, which expires on June 1, 2001. The revolving credit facility is
secured by certain of the Company's accounts receivables and finished goods
inventories. The Company had no outstanding borrowings under this facility or
a previous revolving credit facility which expired May 31, 2000. Borrowings
under the Company's revolving credit facility agreement bear interest at the
bank's prime rate.
The Company expects to meet future liquidity requirements through cash flows
generated from operations and cash reserves and maturities or sales of
marketable securities and its credit facility. It is anticipated that
operating cash flows and current cash reserves will also adequately fund
capital expenditure programs. These capital expenditure programs can be
suspended or delayed at any time with minimal disruption to the Company's
operations if cash is needed in other areas of the Company's operations. In
addition, cash flows from operations will be utilized to support purchasing of
component parts for new product introductions in the remainder of 2000 and the
first quarter of 2001. The expected operating cash flows and current cash
reserves are expected to allow the Company to meet working capital
requirements during periods of low cash flows resulting from the seasonality
of the industry.
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The Company is not aware of any event or trend which that could potentially
affect its liquidity. In the event such a trend would develop, the Company
believes that projected cash flows from operations, current cash reserves and
the revolving credit facility would be sufficient to meet operating needs and
capital expenditures for at least the next 12 months.
BUSINESS RISKS
As indicated below, this Form 10-Q contains forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements.
Factors that may cause such a difference include, but are not limited to,
those discussed in this section and elsewhere throughout this Form 10-Q.
DEPENDENCE ON NEW PRODUCT INTRODUCTIONS; UNCERTAIN CONSUMER ACCEPTANCE
Through the second quarter of 2000, the Company's net sales were derived
primarily from the sale of fairway woods (original Tight Lies and Tight Lies
2), Tight Lies 2 and SC Series drivers, and Faldo Series wedges. During the
six months ended June 30, 2000, the Company's fairway woods represented 75.1%
of net sales whereas, for the six months ended June 30, 1999, the Company's
fairway woods represented 55.1% of net sales. To date, although certain of the
Company's new product introductions have experienced modest success, we
continue to be heavily dependent on sales of our Tight Lies and Tight Lies 2
fairway woods. The Company's ultimate success depends, in large part, on its
ability to successfully develop and introduce new products accepted in the
marketplace. Historically, a large portion of new golf club technologies and
product designs have been met with consumer rejection. No assurance can be
given that current products will increase in consumer acceptance or that the
Company will be able to design, manufacture and introduce new products that
will meet with market acceptance. Failure by the Company to identify and
develop innovative new products that achieve widespread market acceptance
would adversely affect the Company's future growth and profitability.
Additionally, successful technologies, designs and product concepts are likely
to be copied by competitors. Accordingly, the Company's operating results
could fluctuate as a result of the amount, timing and market acceptance of new
product introductions by the Company or its competitors. The design of new
golf clubs is also greatly influenced by the rules and interpretations of the
USGA. Although the golf equipment standards established by the USGA generally
apply only to competitive events sanctioned by that organization, the Company
believes that it is critical for its future success that new clubs introduced
by the Company comply with USGA standards.
LIMITED HISTORY OF PROFITABILITY
The Company has a limited history of profitability. Although the Company
generated net income during the years ended December 31, 1996 and December 31,
1998, it has historically experienced net losses from operations. There can be
no assurance that the Company will be able to sustain profitability on a
quarterly or annual basis in the future. The Company's prospects must be
considered in light of the significant risks, challenges and difficulties
frequently encountered by companies experiencing rapid growth. To address
these risks, the Company must, among other things, successfully increase the
scope of its operations, respond to competitive and technological
developments, continue to attract, retain and motivate qualified personnel and
continue to develop and obtain market acceptance of its products. There can be
no assurance that the Company will be successful in addressing these risks and
challenges.
COMPETITION
The market for golf clubs is highly competitive. The Company competes with a
number of established golf club manufacturers, some of which have greater
financial and other resources. The Company's competitors include Callaway Golf
Company, Adidas-Salomon AG (Taylor Made), Fortune Brands, Inc. (Titleist and
Cobra) and Orlimar Golf Company, among others. The Company competes primarily
on the basis of performance, brand name recognition, quality and price. The
Company believes that its ability to market its products through multiple
distribution channels, including on- and off-course golf shops, selected
sporting goods retailers and through direct response advertising, is important
to the manner in which the Company
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competes. The purchasing decisions of many golfers are often the result of
highly subjective preferences, which can be influenced by many factors,
including, among others, advertising, media, promotions and product
endorsements. These preferences may also be subject to rapid and unanticipated
changes. The Company could face substantial competition from existing or new
competitors that introduce and successfully promote golf clubs that achieve
market acceptance. Such competition could result in significant price erosion
or increased promotional expenditures, either of which could have a material
adverse effect on the Company's business, operating results and financial
condition. There can be no assurance that Adams Golf will be able to compete
successfully against current and future sources of competition or that its
business, operating results or financial condition will not be adversely
affected by increased competition in the markets in which it operates. The
golf club industry is generally characterized by rapid and widespread
imitation of popular technologies, designs and product concepts. Due to the
success of the Tight Lies fairway woods, the Company has experienced several
competitors introducing products similar to the Tight Lies fairway woods. The
buying decisions of many purchasers of golf clubs are often the result of
highly subjective preferences, which can be influenced by many factors,
including, among others, advertising media, promotions and product
endorsements. The Company may face competition from manufacturers introducing
other new or innovative products or successfully promoting golf clubs that
achieve market acceptance. The failure to compete successfully in the future
could result in a material deterioration of customer loyalty and the Company's
image and could have a material adverse effect on the Company's business,
results of operations, financial position or liquidity.
The introduction of new products by the Company or its competitors can result
in closeouts of existing inventories at both the wholesale and retail levels.
Such closeouts are likely to result in reduced margins on the sale of older
products, as well as reduced sales of new products, given the availability of
older products at lower prices.
ABILITY TO MANAGE GROWTH
Over the past three years, the Company has experienced a period of growth into
new product segments and distribution channels that has resulted in new and
increased responsibilities for management personnel. The Company's growth has
placed, and is expected to continue to place, a significant strain on the
Company's management and operating and financial systems. To accommodate this
growth and to compete effectively and manage future growth, if any, the
Company will be required to continue to implement and improve its operational,
financial and management information systems, procedures and controls on a
timely basis and to train, motivate and manage its workforce. The Company's
growth has required increasing amounts of working capital that, to date, have
been funded from current operations and cash reserves. There can be no
assurance that the Company's personnel, systems, procedures, controls and
working capital will be adequate to support its existing or future operations.
Any failure to implement and improve the Company's operational, financial and
management systems, to expand, train, motivate or manage employees or to
maintain adequate working capital could have a material adverse effect on the
Company's business, operating results or financial condition.
DEPENDENCE ON KEY PERSONNEL AND ENDORSEMENTS
The Company's success depends to a significant extent upon the performance of
its senior management team, particularly the Company's founder and Chief
Executive Officer, B.H. (Barney) Adams. In addition to his leadership in his
capacity of Chief Executive Officer of the Company, Mr. Adams spearheads the
Company's product development efforts. The loss or unavailability of Mr. Adams
would adversely affect the Company's business and prospects. None of the
Company's officers or employees, including Mr. Adams, is bound by an
employment agreement and the relationships of such officers and employees are,
therefore, at will. The Company has a $4.0 million key man life insurance
policy on the life of Mr. Adams; however, there can be no assurance that the
proceeds of such policy could adequately compensate the Company for the loss
of his services. In addition, there is strong competition for qualified
personnel in the golf club industry, and the inability to continue to attract,
retain and motivate other key personnel could adversely affect the Company's
business, operating results or financial condition.
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In May 1998, the Company entered into an agreement with Nick Faldo, an
internationally recognized professional golfer and winner of numerous U.S. and
international championships. The agreement provides that Mr. Faldo will
provide a variety of services to the Company including endorsement of certain
of the Company's products. This agreement requires the Company to make certain
significant payments to Mr. Faldo, whether or not his endorsement results in
increased sales of the Company's products. Specifically, Mr. Faldo is entitled
to receive a royalty of 5% of the net sales price of all Adams golf clubs
(other than certain specialty items for which the royalty equals 10% of the
net sales price) sold outside the U.S. throughout the term of the agreement.
The agreement provides for a minimum royalty of $1.875 million in 2000
escalating to $4.0 million, for the years 2004 through 2008. From 2009 through
2014, the minimum royalty is $1.5 million, as adjusted for changes in the
consumer price index. After 2014, the agreement does not provide for a minimum
royalty. Commencing with 2009, however, the agreement provides for a maximum
royalty of $4.0 million, as adjusted for changes in the consumer price index.
Absent an early termination event, the agreement with Mr. Faldo continues
throughout his lifetime. The Company believes that the future success of its
marketing strategy may be affected by the continued professional success of
Mr. Faldo. The inability of the Company to maintain its relationship with Mr.
Faldo or the inability of Mr. Faldo to maintain an acceptable level of
professional success, could have a material adverse effect on the Company's
business, operating results or financial conditions.
In addition to Mr. Faldo, the Company has recently entered into endorsement
arrangements with certain members of the PGA Tour and the Senior PGA Tour,
including Tom Watson. As is typical in the golf industry generally, the
agreements with these professional golfers do not necessarily require that
they use our golf clubs at all times during the terms thereof, including, in
certain circumstances, at times when the Company is required to make payments
to them. The failure of certain of these individuals to use the Company's
products on one or more occasions has resulted in negative publicity involving
the Company. While the Company does not believe this publicity has resulted in
any significant erosion in the sales of the Company's products to date, no
assurance can be given that the Company's business would not be adversely
affected in a material way by such further publicity or by the failure of its
professional endorsers to carry and use its products.
HISTORICAL DEPENDENCE ON TELEVISION ADVERTISING
In April 1997, the Company debuted a 30-minute infomercial concerning the
original Tight Lies fairway wood, and, immediately thereafter, sales of this
product grew significantly. The Company stopped airing this infomercial in the
fall of 1998 and subsequently began airing a new Tight Lies infomercial in
early 1999. In addition, the Company produced and began airing two additional
infomercials, one for the SC driver and one for the Company's Faldo Series
wedge in 1999. Also, in the first quarter of 2000, the Company began airing a
new infomercial for the Tight Lies 2 fairway woods. Although the Company has
significantly increased its use of traditional image-based advertising over
this time period, sales of the Company's product at both the retail and
consumer levels have been, and may continue to be, highly dependent on the
success of the Company's infomercials. The Company believes that its current
television advertising strategy, like other advertising campaigns, will reach
a point of diminishing return and will therefore need continued modification.
No assurance can be given that another advertising strategy can be timely
developed or that, if developed, such alternative strategy will achieve the
same level of success as that previously enjoyed by the Company's original
advertising strategy. Further, certain companies have attempted to emulate the
Company's marketing strategy. To the extent the Company believes that
additional infomercials may have the effect of diluting the Company's message,
the Company may be forced to rely solely on image-based advertising. A decline
in effectiveness of the Company's marketing strategy could have a material
adverse effect on the Company's business, operating results or financial
condition.
SOURCES OF SUPPLY
The Company relies on a limited number of suppliers for a significant portion
of the component parts used in the manufacture of its golf clubs. The Company
could in the future experience shortages of components or periods of increased
price pressures, which could have a material adverse effect on the Company's
business, operating results or financial condition. In addition, failure to
obtain adequate supplies or fulfill customer
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orders on a timely basis could have a material adverse effect on the Company's
business, operating results or financial condition.
PRODUCT WARRANTIES
The Company supports all of its golf clubs with a limited one year product
warranty. The Company monitors closely the level and nature of warranty claims
and, where appropriate, seeks to incorporate design and production changes to
assure its customers of the highest quality available in the market.
Significant increases in the incidence of such claims may adversely affect the
Company's sales and image with golfers. The Company establishes a reserve for
warranty claims which it believes is sufficient to meet future claims.
However, there can be no assurance that these reserves will be sufficient if
the Company were to experience an unusually high incidence of problems with
its products.
CERTAIN RISKS OF CONDUCTING BUSINESS ABROAD
The Company imports a significant portion of its component parts, including
heads, shafts, headcovers and grips, from companies in Taiwan, China,
Australia and Mexico. In addition, the Company sells its products to certain
distributors located outside of the United States. The Company's international
business is currently centered in Canada, Japan and the United Kingdom. The
Company's business is subject to the risks generally associated with doing
business abroad, such as foreign government regulations, foreign consumer
preferences, import and export control, political unrest, disruptions or
delays in shipments and changes in economic conditions and exchange rates in
countries in which the Company purchases components or sells its products.
RISKS ASSOCIATED WITH INTELLECTUAL PROPERTY
Imitation of popular club designs is widespread in the industry. No assurance
can be given that other golf club manufacturers will not be able to
successfully sell golf clubs which imitate the Company's products without
infringing the Company's copyrights, patents, trademarks, or trade dress. Many
of the Company's competitors have obtained patent, trademark, copyright or
other protection of intellectual property rights pertaining to golf clubs. No
assurance can be given that the Company will not be adversely affected by the
assertion of intellectual property rights violations by competitors. This
effect could include alteration or withdrawal of existing products and delayed
introduction of new products.
The Company attempts to maintain the secrecy of its confidential business
information including the practice of having prospective vendors and suppliers
sign confidentiality agreements. No assurance can be given that the Company's
confidential business information will be adequately protected in all
instances. The unauthorized use of the Company's confidential business
information could adversely affect the Company.
UNAUTHORIZED DISTRIBUTION AND COUNTERFEIT CLUBS
Despite the Company's efforts to limit its distribution to selected retailers,
some quantities of the Company's products have been found in unapproved
outlets or distribution channels. The existence of a "gray market" in the
Company's products can undermine authorized retailers and foreign wholesale
distributors who promote and support the Company's products, and can injure
the Company's image in the minds of its customers and consumers. Adams Golf
makes efforts to limit unauthorized distribution of its products, but does not
believe the gray marketing of its products can be totally eliminated. The
Company does not believe that the unauthorized distribution of its clubs had
or will have a material adverse effect on the Company's results of operations,
financial condition or competitive position, although there can be no
assurance as such.
In addition, the Company is periodically made aware of the existence of
counterfeit copies of its golf clubs, particularly in foreign markets. The
Company takes action on these situations through local authorities and legal
counsel where practical. The Company does not believe that the availability of
counterfeit golf clubs had or will have a material adverse effect on the
Company's results of operations, financial condition or competitive position,
although there can be no assurance as such.
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INDUSTRY SPECIFIC REQUIREMENTS
The Company performs ongoing credit evaluations of its customers' financial
condition and generally requires no collateral from these customers. The
Company believes it has adequate reserves for potential credit losses.
However, future weakness in the retail golf equipment market may result in
delinquent or uncollectible accounts for some of the Company's significant
customers. Accordingly, there can be no assurance that the Company's results
of operations or cash flows will not be adversely impacted by the failure of
its customers to meet their obligations to the Company. Due to industry
sensitivity to consumer buying trends and available disposable income, the
Company has in the past extended payment terms for specific retail customers.
Issuance of these terms (i.e., greater than 30 days) is dependent on the
Company's relationship with the customer and payment history. Payment terms
are extended to selected customers typically during off-peak times in the year
(i.e., generally the first and fourth quarters). The Company extends payment
terms during these times of the year in order to promote the Company's brand
name and assure adequate product availability, often to coincide with planned
promotions or advertising campaigns. Although a significant amount of the
Company's sales are not affected by these terms, the extended terms do have a
negative impact on the Company's financial position and liquidity. The Company
expects to continue to selectively offer extended payment terms in the future,
depending upon known industry trends and the Company's financial plans.
In addition to extended payments terms, the nature of the industry also
requires that the Company carry a substantial level of inventory due to the
lead times associated with purchasing components overseas coupled with the
seasonality of customer demand. The Company's inventory balances were
$17,624,000 at June 30, 2000 and $19,101,000 at December 31, 1999. The Company
expects its inventory level to decline by December 31, 2000 from the December
31, 1999 balance, although there can be no assurance that this decline will
occur.
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.
Because most operating expenses are relatively fixed in the short term, the
Company may be unable to adjust spending sufficiently in a timely manner to
compensate for any unexpected sales shortfall, which could materially
adversely affect quarterly results of operations. If technological advances by
competitors or other competitive factors require the Company to invest
significantly greater resources than anticipated in research and development
or sales and marketing efforts, the Company's business, operating results or
financial condition could be materially adversely affected. Accordingly, the
Company believes that period-to-period comparisons of its results of
operations should not be relied upon as an indication of future performance.
In addition, the results of any quarter are not indicative of results to be
expected for a full fiscal year. As a result of fluctuating operating results
or other factors discussed above and below, in certain future quarters the
Company's results of operations may be below the expectations of public market
analysts or investors. In such event, the market price of the Company's Common
Stock could be materially adversely affected.
SHARES ELIGIBLE FOR FUTURE SALE; ISSUANCE OF ADDITIONAL SHARES
Future sales of shares of Common Stock by the Company and its stockholders
could adversely affect the prevailing market price of the Common Stock. The
Company's directors, officers and certain stockholders,
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hold an aggregate of 9,993,294 shares of Common Stock as of the date of this
quarterly filing which are eligible for sale pursuant to Rule 144 promulgated
under the Securities Act of 1933 as amended.
Pursuant to its Amended and Restated Certificate or Incorporation (the
"Certificate of Incorporation"), the Company has the authority to issue
additional shares of Common Stock. The issuance of such shares could result in
the dilution of the voting power of the Company's Common Stock. Sales of
substantial amounts of Common Stock in the public market, or the perception
that such sales may occur, could have a material adverse effect on the market
price of the Common Stock.
ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation and Amended and Restated Bylaws
(the "Bylaws") contain, among other things, provisions establishing a
classified Board of Directors, authorizing shares of preferred stock with
respect to which the Board of Directors of the Company has the power to fix
the rights, preferences, privileges and restrictions without any further vote
or action by the stockholders, requiring that all stockholder action be taken
at a stockholders' meeting and establishing certain advance notice
requirements in order for stockholder proposals or director nominations to be
considered at such meetings. In addition, the Company is subject to the
anti-takeover provisions of Section 203 of the Delaware General Corporation
Law (the "DGCL"). In general, this statute prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. Such provisions could delay,
deter or prevent a merger, consolidation, tender offer, or other business
combination or change of control involving the Company that some or a majority
of the Company's stockholders might consider to be in its best interest,
including offers or attempted takeovers that might otherwise result in such
stockholders receiving a premium over the market price for the Common Stock.
The potential issuance of preferred stock may have the effect of delaying,
deferring or preventing a change of control of the Company, may discourage
bids for the Common Stock at a premium over the market price of the Common
Stock and adversely affect the market price of and voting and other rights of
the holders of the Common Stock. The Company has not issued, and currently has
no plans to issue, shares of preferred stock.
RISKS ASSOCIATED WITH ACQUISITIONS
The Company may make acquisitions of complementary services, technologies,
product designs or businesses in the future. There can be no assurance that
any future acquisition will be completed or that, if completed, any such
acquisition will be effectively assimilated into the Company's business.
Acquisitions involve numerous risks, including among others, loss of key
personnel of the acquired company, the difficulty associated with assimilating
the personnel and operations of the acquired company, the potential disruption
of the Company's ongoing business, the maintenance of uniform standards,
controls procedures and policies, and the impairment of the Company's
reputation and relationships with employees and customers. In addition, any
future acquisitions could result in the issuance of dilutive equity
securities, the incurrence of debt or contingent liabilities, and amortization
expenses related to goodwill and other intangible assets, any of which could
have a material adverse effect on the Company's business, operating results or
financial condition.
FORWARD-LOOKING STATEMENTS
This Quarterly Report contains "forward-looking statements" made under the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements are based on the beliefs of the
Company's management as well as assumptions made by and information currently
available to the Company's management. When used in this report, the words
"anticipate," "believe," "expect" and words or phrases of similar import, as
they relate to the Company or Company management, are intended to identify
forward-looking statements. Such statements reflect the current view of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions related to certain factors including, without
limitation, product development; product introductions; market demand and
acceptance of products; the impact of changing economic conditions; business
conditions in the golf industry; reliance on third parties including
suppliers; the impact of market peers and their products; the actions of
competitors, including pricing,
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advertising and product development; risks concerning future technology; and
one-time events and other factors detailed in this report under "Business
Risks". Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Based upon changing conditions,
should any one or more of these risks or uncertainties materialize, or should
any underlying assumptions prove incorrect, actual results may vary materially
from those described herein. The Company does not intend to update these
forward-looking statements. 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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Beginning in June 1999, the first of seven class action lawsuits was filed
against the Company, certain of its current and former officers and directors
and the three underwriters of the Company's initial public offering (IPO) in the
United States District Court for the District of Delaware. The complaints allege
violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as
amended, in connection with the Company's IPO. In particular, the complaints
allege that the Company's prospectus, which became effective July 9, 1998, was
materially false and misleading in at least two areas. Plaintiffs allege that
the prospectus failed to disclose that unauthorized distribution of the
Company's products (gray market sales) threatened the Company's long term
profits. Plaintiffs also allege that the prospectus failed to disclose that the
golf equipment industry suffered from an oversupply of inventory at the retail
level which had an adverse impact on the Company's sales. On May 17, 2000, these
cases were consolidated into one amended complaint, and a lead plaintiff was
appointed. The plaintiffs are seeking unspecified amounts of compensatory
damages, interests and costs, including legal fees. The Company denies the
allegations in the complaint and intends to defend it vigorously. On July 5,
2000 the Company filed a motion to dismiss the consolidated, amended complaint.
The Company maintains directors' and officers' and corporate liability insurance
to cover risks associated with these securities claims filed against the Company
or its directors and officers 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.
22
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on May 3, 2000, the
following proposals were adopted by the margin indicated.
1. To elect two directors to serve until the 2003 Annual Meetings of
Stockholders.
<TABLE>
<CAPTION>
Number of Shares
Vote For Withheld
---------- --------
<S> <C> <C>
Richard H. Murtland 18,526,507 222,219
John S. Simpson 18,551,242 197,484
</TABLE>
2. To increase the number of shares available for issuance under Adams Golf's
Stock Incentive Plan by 900,000 shares.
<TABLE>
<CAPTION>
Number of Shares
Vote For Vote Against Abstained
---------- ---------------- ---------
<S> <C> <C>
18,197,728 507,031 43,967
</TABLE>
3. To ratify the appointment of KPMG LLP as the independent auditors of the
Company for the year ending December 31, 2000.
<TABLE>
<CAPTION>
Number of Shares
Vote For Vote Against Abstained
---------- ---------------- ---------
<S> <C> <C>
18,597,959 98,493 52,274
</TABLE>
ITEM 6(a). EXHIBITS
See exhibit index at page 25.
ITEM 6(b). REPORTS ON FORM 8-K
None.
23
<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: August 14, 2000 By: /s/ B. H. (Barney) Adams
----------------------------------------
B. H. (Barney) Adams, Chairman of the
Board, Chief Executive Officer and
President
Date: August 14, 2000 By: /s/ Darl P. Hatfield
----------------------------------------
Darl P. Hatfield,
Senior Vice President - Finance and
Administration and Chief Financial
Officer (Principal Financial Officer)
Date: August 14, 2000 By: /s/ Gabriel J. Nill
----------------------------------------
Gabriel J. Nill
Controller and Manager of Financial
Services (Principal Accounting Officer)
24
<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 Adams Golf, Ltd. 401(k) Retirement Plan Incorporated by reference to Form S-1
(Exhibit 4.4)
Exhibit 4.4 1999 Non-Employee Director Plan of Incorporated by reference to the 1999
Adams Golf, Inc. Proxy Statement
Exhibit 4.5 1999 Stock Option Plan for Outside Incorporated by reference to Form S-8
Consultants of Adams Golf, Inc. (Exhibit 4.1)
Exhibit 10.1 Agreement between the Company 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
26, 1999, between Adams Golf Direct
Response, Ltd., Adams Golf, Ltd. and
NationsBank of Texas N.A. and related Incorporated by reference to Form 10-K
promissory note and guaranty (Exhibit 10.2)
Exhibit 10.3 Commercial Lease Agreement dated
December 5, 1997, between Jackson-Shaw Incorporated by reference to Form S-1
Technology 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 10.6 Amendment to Amended and Restated Incorporated by reference to Exhibit
Revolving Credit Agreement dated 10.6 to the Quarterly Report on Form
August 13, 1999 between Adams Golf Direct 10-Q for the quarter ended June 30,
Response, Ltd., Adams Golf, Ltd. and Bank 1999
of America, N. A.
Exhibit 10.7 Revolving Credit Agreement between Adams
Golf, Ltd. and Legacy Bank Included in this filing
Exhibit 11.1 Computation of Earnings Per Share Included in this filing
Exhibit 27.1 Financial Data Schedule Included in this filing
</TABLE>
25
