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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITES EXCHANGE ACT OF 1934
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COMMISSION FILE NUMBER: 0-24583
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ADAMS GOLF, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 75-2320087
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
300 DELAWARE AVENUE, SUITE 572, WILMINGTON, DELAWARE 19801
(Address of principal executive offices) (Zip Code)
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(302) 427-5892
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF CLASS
Common Stock $.001 Par Value
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. /X/ Yes / / No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
At March 20, 2000, the aggregate market value of the Registrant's Common
Stock held by nonaffiliates of the Registrant was $22,647,592 based on the
closing sales price of $1 13/16 per share of the Registrant's Common Stock on
the Nasdaq Stock Market's National Market.
The number of outstanding shares of the Registrant's Common Stock, par value
$.001 per share, was 22,480,071 on March 20, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the Registrant's
definitive proxy statement, dated April 5, 2000, for the annual meeting of
stockholders to be held on May 3, 2000.
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ITEM 1. BUSINESS
GENERAL
Adams Golf, Inc. (the "Company" or "Adams Golf") designs, manufactures and
markets premium quality, technologically innovative golf clubs. Adams Golf's
products include the Tight Lies lines of fairway woods and drivers, SC Series
Titanium drivers, Assault-VMI Irons, and the Faldo Series wedges. The Company
was incorporated in Texas in 1987 and reincorporated in Delaware in 1990. The
Company completed an internal reorganization in 1997 and now conducts its
operations through several direct and indirect wholly owned subsidiaries.
SEGMENTS AND PRODUCTS
The Company operates in a single segment (golf clubs) within the golf
industry and within that segment offers more than one class of product.
The Company currently offers the following products:
FAIRWAY WOODS--The Tight Lies line of fairway woods has an innovative
upright trapezoidal or "upside down" head shape, that incorporates a distinctive
shallow face and a low center of gravity. The Company believes that these clubs
are ideal for getting the ball airborne quickly and efficiently with optimum
spin to maximize distance from virtually any lie on the course including the
rough, hard pan, fairway bunkers and divots. As an extension to the original
Tight Lies line of fairway woods, the Company introduced the Tight Lies Tour
line and Tight Lies 2 line of fairway woods in June and October 1999,
respectively. Each of these lines of fairway woods incorporate similar design
and technology characteristics of the original Tight Lies line of fairway woods,
with the Tight Lies 2 line of fairway woods utilizing the asymmetrical face
curvature developed in the SC Series Titanium drivers. The Tight Lies Tour line
is designed and manufactured according to the standards demanded by professional
golfers.
DRIVERS--In January 1999, the Company introduced the SC Series Titanium
drivers which have been designed to achieve a specific ball flight objective:
longer and straighter tee shots resulting from reduced side spin and increased
forward momentum. These qualities are achieved through a complex patented
asymmetrical face curvature design which incorporates precisely controlled
relationships between the curvature of the face and the center of gravity. In
February 2000, the Company introduced the Tight Lies 2 driver which complements
the Tight Lies 2 line of fairway woods and utilizes the same technology as the
fairway woods.
WEDGES--In January 1999, the Company introduced the Faldo Series wedges
featuring a classic style and a unique asymmetrical sole designed to deliver
three different wedge shots--pitch, sand, and open-face finesse--from a single
club. Utilizing input from Nick Faldo, a professional golfer, regarding his own
wedge play, the sole of the Faldo Series wedges has been designed to provide
maximum playability from a variety of lies, giving golfers the confidence to
execute even the toughest wedge shots.
CUSTOM FITTED CLUBS--The Company's custom fitted clubs consist primarily of
the Assault-VMI irons which are perimeter-weighted, cavity-backed, slightly
offset irons incorporating the Company's patented variable moment of inertia
("VMI") design formula producing consistent swing feel across an entire set of
clubs. The Company markets the Assault-VMI irons to professional and avid
golfers exclusively through its network of over 100 certified custom fitting
accounts. The Company believes that its custom fitting activities provide an
in-depth understanding of golf club design and credibility in the golf industry.
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The following table sets forth the contribution to net sales attributable to
the product groups for the years indicated. Historical percentages may not be
indicative of the Company's future product mix.
PERCENTAGE OF NET SALES BY PRODUCT GROUP
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1997 1998 1999
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Fairway Woods..................................... 94.3% 96.5% 63.6%
Drivers........................................... -- -- 32.5
Wedges............................................ -- -- 3.0
Irons and Other................................... 5.7 3.5 0.9
----- ----- -----
Total........................................... 100.0% 100.0% 100.0%
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The Company's continued growth and success depend, 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 the Company will be able to continue to design, manufacture and introduce
new products that will meet with market acceptance. Failure by the Company to
identify and develop innovative new products that achieve widespread market
acceptance would adversely affect the Company's future growth and profitability.
Additionally, successful technologies, designs and product concepts are likely
to be copied by competitors. Accordingly, the Company's operating results could
fluctuate as a result of the amount, timing and market acceptance of new product
introductions by the Company or its competitors.
DESIGN AND DEVELOPMENT
The Company's design and development team is responsible for developing,
testing and introducing new technologies and product designs. This team is
currently led by Barney Adams, the founder of the Company and inventor of the
Tight Lies fairway wood; Richard H. Murtland, Vice President-Research and
Development; Adams Golf's in-house design development team; Nick Faldo; Tom
Watson and independent consultant, Robert R. Bush. Mr. Bush has over 30 years of
experience in golf club development, most notably as Director of Technical
Services for True Temper Sports, a leading shaft manufacturer, where from 1966
to 1993, he was responsible for testing all golf club shafts. Mr. Bush was
instrumental in the development of "Iron Byron," the industry standard for the
mechanical testing of golf clubs and balls. Mr. Bush is currently a member of
the Technical Advisory Panel for GOLF DIGEST.
The design and development team engages in a five-step process to create new
products.
CONCEPT DEVELOPMENT--During concept development, Adams Golf's design and
development team identifies specific desirable ball flight objectives. In
addition, the Company considers new ideas from professional golfers, inventors,
distributors and others. The Company expects that Nick Faldo and Tom Watson will
continue to play a significant role in future concept development.
DESIGN SPECIFICATIONS--The Company's product design and development team
determines design specifications for the club, including shaft length, flex and
weight, head design, loft and overall club weight. Throughout the design
specifications process, the Company refers to and incorporates the golf
equipment standards developed by the U.S. Golf Association ("USGA"). Although
the standards set by the USGA only apply to competitive events sanctioned by
that organization, the Company believes it is critical for new clubs to comply
with these standards. At this time, the product design and development team also
determines the optimal materials to use in the club. The Company will not use
higher cost materials, such as titanium or other alloys, unless such expensive
materials provide meaningful performance benefits. This stage of product
development typically takes 6 to 8 weeks after a concept has been clearly
identified.
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PATENT REVIEW--The Company considers patent protection for its technologies
and product designs to be an important part of its development strategy. The
Company and its patent attorneys conduct a search of prior art and existing
products to determine whether a new product idea may be covered by an existing
patent. Patent review, depending upon the complexity and novelty of the design
involved, generally requires between 3 to 18 months to complete, however, this
stage of product development typically occurs in conjunction with one or more of
the other steps.
PRODUCT DESIGN AND ENGINEERING REVIEW--If a product concept continues past
the patent review stage, the Company translates design parameters into working
designs. When appropriate, these designs are developed using computer aided
design software and modeled using in-house rapid prototyping systems. Once
modeled the prototype is subjected to rigorous engineering review to validate
the effectiveness of the technology or design. The Company estimates that it
takes between 4 to 6 months to successfully complete product design and
engineering review.
TESTING--Once a specific design has been decided upon, the Company creates
and tests one or more prototypes. The Company has a product testing facility at
the Hank Haney Golf Ranch in McKinney, Texas and utilizes independent mechanical
test facilities in Texas, California and Florida for both mechanical and player
preference testing. In addition, prototypes are also tested for performance and
player preferences by Nick Faldo, Tom Watson and other professional golfers
associated with the Company. As part of the testing process, the Company
records, analyzes and interprets data associated with each prototype including
ball flight, distance, spin and accuracy. Using feedback from these tests, the
Company modifies its designs to achieve its performance objective. Additionally,
the Company applies for official USGA approval of the resulting club at this
time. Upon approval of a new product from the USGA, it becomes considered for
commercial release. The Company believes that in order to properly field test a
new product, it must expect between 4 to 6 months of additional development
time.
The Company's research and development expenses were approximately $557,000,
$1,532,000 and $2,092,000 during 1997, 1998 and 1999, respectively.
MARKETS AND METHODS OF DISTRIBUTION
The Company sells its products through on- and off-course golf shops and
selected sporting goods retailers, direct sales to consumers, international
distributors and the Company's custom fitting accounts.
SALES TO RETAILERS--The Company sells a majority of its products to selected
retailers. To maintain its high quality reputation and generate retailer
loyalty, the Company currently does not sell its products through price
sensitive general discount warehouses, department stores or membership clubs.
The Company believes its selective retail distribution strategy helps its
retailers maintain profitable margins and maximize sales of the Company's
products. For the year ended December 31, 1999, sales to retailers accounted for
approximately 77% of the Company's total net sales.
Adams Golf maintains a field sales staff that at March 10, 2000 consisted of
27 employee sales representatives and 10 independent sales representatives who
are in regular personal contact with the Company's retail accounts
(approximately 7,000 retailers). These sales representatives are supported by 16
inside sales representatives who maintain contact with the Company's retailers
nationwide. The Company generally has been successful in delivering product to
its retailers within one week of a placed order. The Company believes its prompt
delivery of products enables its retail accounts to maintain smaller quantities
of inventory than may be required with other golf equipment manufacturers.
CUSTOMER SUPPORT AND DIRECT SALES--Adams Golf believes that superior
customer service can significantly enhance its marketing efforts. Accordingly,
the Company maintains an in-house customer support department whose
representatives primarily provide customer support, technical assistance to its
customers and field certain calls resulting from the Company's direct response
advertising. The Company
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outsources a significant portion of its direct sales activities. The Company
provides its staff with computerized access to its retailer database enabling
customer support representatives to guide consumers to their nearest Adams Golf
retailer. For the year ended December 31, 1999, sales direct to consumer
accounted for approximately 7% of the Company's total net sales.
INTERNATIONAL SALES--International sales are made primarily in the United
Kingdom, Japan and Canada. International sales in the United Kingdom are made
through a wholly owned subsidiary of the Company. For the year ended
December 31, 1999, international sales in Japan, Canada and all other countries
were made through a network of 34 independent distributors. In January 2000, the
Company terminated its agreement with its distributor in Japan and established a
wholly owned subsidiary, the purpose of which is to distribute the Company's
product in Japan. For the year ended December 31, 1999, international sales
accounted for approximately 14% of the Company's net sales.
CUSTOM FITTING SALES--The Company employs six sales representatives who
manage the Company's custom fitting sales and support division and administer
its custom fitting training program for golf professionals. The Company's custom
fitting training program has received PGA certification and provides continuing
education credits for PGA Member Professionals. Since 1992, the Company has
certified in excess of 300 golf professionals to custom fit its Assault-VMI
irons, which are sold exclusively through its over 100 custom fitting accounts.
Custom fitters measure data relating to swing and ball flight characteristics.
Based on the interpretation of the data, a set of clubs is manufactured that is
specifically tailored to that golfer. For the year ended December 31, 1999,
custom fitting sales accounted for approximately 3% of the Company's total net
sales.
WEB SITE--The Company maintains a web site at www.adamsgolf.com, which
allows the visitor to access certain information about the Company's products
and to locate retailers and custom fitting locations. The web site also provides
access to public filings, press releases and the Company's investor relations
department. The Company does not currently sell its products via its web site.
UNAUTHORIZED DISTRIBUTION AND COUNTERFEIT CLUBS
Despite the Company's efforts to limit its distribution to selected
retailers, some quantities of the Company's products have been found in
unapproved outlets or distribution channels. The existence of a "gray market" in
the Company's products can undermine authorized retailers and foreign wholesale
distributors who promote and support the Company's products, and can injure the
Company's image in the minds of its customers and consumers. Adams Golf makes
efforts to limit 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.
MARKETING
The goals of the Company's marketing efforts are to build its brand identity
and drive sales through its retail distribution channel. To accomplish these
goals, Adams Golf utilizes traditional image-based advertising and direct
response advertising, engages in promotional activities and capitalizes on its
relationships with Nick Faldo, Tom Watson and other well known golf
personalities.
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ADVERTISING--The Company uses a combination of traditional image-based
advertising and direct response.
- TRADITIONAL IMAGE-BASED ADVERTISING--The Company's primary advertising
efforts focus on traditional image-based advertising. This advertising
includes a series of commercials which run during major golf tournaments
and golf related and other programs; newspaper, magazine and radio ad
campaigns; sponsorship of a developmental professional tour; sponsorship
of selected golf tournaments; exclusive sponsorship of The Golf Channel's
weekly instructional program, "LIVING ROOM LESSONS", and the Company's web
site.
- DIRECT RESPONSE ADVERTISING--The Company also builds brand awareness and
stimulates product demand through its direct response advertising, which
includes a variety of mediums including television, radio, print and
direct mail. Direct response advertising, in which consumers may order
products directly from the Company by calling a toll-free telephone
number, provides a cost-effective vehicle enabling the Company to
communicate a compelling product story and build brand recognition. The
Company's direct response advertising serves to introduce the Company's
products to consumers, many of whom will subsequently purchase the
Company's clubs from retailers. The Company produces infomercials for its
new products and refreshes infomercials on a routine basis for existing
products. In addition, the Company continues to utilize 30- and 60-second
direct response television commercials as well as radio advertising. The
Company advertises regularly in major golf and industry publications,
general consumer magazines and local newspapers nationwide. These include
GOLF DIGEST, GOLF MAGAZINE, SPORTS ILLUSTRATED, THE WALL STREET JOURNAL
and USA TODAY. Finally, the Company engages in regularly scheduled direct
mail advertising campaigns.
PROMOTIONAL ACTIVITIES--The Company engages in a variety of promotional
activities to sell and market its products. Such activities have included
consumer sweepstakes; promotional giveaways with certain purchases, including
items such as instructional videos, gift packaging and golf bags; and
promotional campaigns, such as the "30-Day Challenge," in which the Company
advertises its 30-day return policy.
RELATIONSHIPS WITH PROFESSIONAL GOLFERS
- NICK FALDO--In May 1998, the Company formed a lifetime relationship with
Nick Faldo, an internationally recognized professional golfer and winner
of numerous U.S. and international championships, including three Masters
Tournaments and three British Open Championships. Mr. Faldo led the
Official World Golf Ranking for 81 weeks during 1993 and 1994. The Company
expects Nick Faldo to continue to be actively and directly involved in the
design, testing and development of new technologies and products.
Mr. Faldo is noted for his precise play as a golfer and his reputation as
a perfectionist. The Company believes that by aligning itself with
Mr. Faldo, it can further promote the Adams Golf brand, while at the same
time demonstrating the Company's ability to deliver golf clubs that
satisfy the specific and demanding requirements of tour professionals.
Mr. Faldo's agreement with the Company included a stock grant of 900,000
shares of Common Stock in May 1998 and calls for royalty payments based
upon international sales for each of the first ten full years of the
agreement. The agreement also provides for escalating minimum annual
royalty payments of $1.5 million in 1999 increasing ratably to
$4.0 million over ten years, if certain sales thresholds are not met.
During the year ended December 31, 1999, the Company paid to Mr. Faldo the
minimum royalty amount provided for in his agreement with the Company.
- TOM WATSON--In August 1999, the Company entered into a five year
endorsement agreement with Tom Watson, an internationally recognized
professional golfer. Mr. Watson has won eight major championships,
including five British Open Championships, two Masters Tournaments and an
U.S. Open Championship.
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The Company expects Mr. Watson to be actively involved in the development
of products. Mr. Watson's agreement with the Company calls for an annual
endorsement fee in addition to royalties on specified products which
Mr. Watson assists in developing for the Company.
- HANK HANEY--The Company has also obtained endorsements from Hank Haney.
Mr. Haney was named the 1993 PGA Teacher of the Year and is a five-time
recipient of the Northern Texas Section PGA Teacher of the Year Award.
Mr. Haney has instructed over 100 touring professionals from the PGA,
LPGA, European, Japanese and Asian Tours along with several top rated
junior golfers. Mr. Haney is a member of the advisory staff for GOLF
DIGEST.
- OTHER PROFESSIONALS--The Company, from time to time, enters into
endorsement agreements with professional golfers who compete on the
various tours in the United States and internationally. None of these
relationships are material to the Company.
RAW MATERIALS, MANUFACTURING AND ASSEMBLY
The Company manages all stages of manufacturing, from sourcing to assembly,
in order to maintain a high level of product quality and consistency. The
Company establishes product specifications, selects the materials used to
produce the components and tests the specifications of all components received
by the Company. In addition, the Company has redundant sources of supply for
each of the component parts used in the manufacture of its fairway woods and
irons and has established a quality assurance program at those manufacturing
facilities located in Taiwan and China that are collectively responsible for
producing substantially all of the Company's performance fairway wood and iron
club heads. With regard to the Company's SC Series Titanium drivers, the Company
utilizes one source of supply in Australia for the club head and redundant
sources of supply for the remaining component parts. Upon arrival at the
Company's manufacturing facilities in Plano, Texas, each component used in the
Company's clubs is again checked to ensure consistency with strict design
specifications. Components are then sorted to identify variations in
characteristics, such as head weight and shaft flexibility, that, although
within the specified range, may affect club performance. Golf clubs are then
built by the Company's manufacturing personnel using the appropriate component
parts and the Company's patented VMI technology.
The Company could in the future experience shortages of components or
periods of increased price pressures, which could have a material adverse effect
on the Company's business, operating results or financial condition. In
addition, failure to obtain adequate supplies or fulfill customer orders on a
timely basis could have a material adverse effect on the Company's business,
results of operations, financial position or liquidity.
PATENTS
The Company's ability to compete effectively in the golf club market will
depend, in large part, on the ability of the Company to maintain the proprietary
nature of its technologies and products. The Company currently holds nine U.S.
patents relating to certain of its products and proprietary technologies and has
seven patent applications pending. Assuming timely payment of maintenance fees,
if any, the Company expects that the nine currently issued patents will expire
on various dates between 2009 and 2016. The Company has been awarded patents
with respect to the design of the Tight Lies fairway wood, the VMI design
formula and the Faldo Series wedge. There can be no assurance, however, as to
the degree of protection afforded by these or any other patents held by the
Company or as to the likelihood that patents will be issued from the pending
patent applications. Moreover, these patents may have limited commercial value
or may lack sufficient breadth to adequately protect the aspects of the
Company's products to which the patents relate. The Company does not hold any
foreign patents and no foreign patent applications are pending. The U.S. patents
held by the Company do not preclude competitors from developing or marketing
products similar to the Company's products in international markets.
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There can be no assurance that competitors, many of which have substantially
greater resources than the Company and have made substantial investments in
competing products, will not apply for and obtain patents that will prevent,
limit or interfere with the Company's ability to make and sell its products. The
Company is aware of numerous patents held by third parties that relate to
products competitive to the Company's. There is no assurance that these patents
would not be used as a basis to challenge the validity of the Company's patent
rights, to limit the scope of the Company's patent rights or to limit the
Company's ability to obtain additional or broader patent rights. A successful
challenge to the validity of the Company's patents may adversely affect the
Company's competitive position. Moreover, there can be no assurance that such
patent holders or other third parties will not claim infringement by the Company
with respect to current and future products. Because U.S. patent applications
are held and examined in secrecy, it is also possible that presently pending
U.S. applications will eventually issue with claims that will be infringed by
the Company's products or technologies. The defense and prosecution of patent
suits is costly and time-consuming, even if the outcome is favorable. This is
particularly true in foreign countries where the expenses associated with such
proceedings can be prohibitive. An adverse outcome in the defense of a patent
suit could subject the Company to significant liabilities to third parties,
require the Company and others to cease selling products or require disputed
rights to be licensed from third parties. Such licenses may not be available on
satisfactory terms, or at all.
Despite the Company's efforts to protect its patent and other intellectual
property rights, unauthorized parties have attempted and are expected to
continue to attempt to copy all, or certain aspects of, the Company's products.
Policing unauthorized use of the Company's intellectual property rights can be
difficult and expensive, and while the Company takes appropriate action whenever
it discovers any of its products or designs have been copied, knock-offs and
counterfeit products are a persistent problem in the performance-oriented golf
club industry. There can be no assurance that the Company's means of protecting
its patent and other intellectual property rights will be adequate.
INDUSTRY SPECIFIC REQUIREMENTS
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) are 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
$13,312,000 and $19,101,000 at December 31, 1998 and 1999, respectively,
representing an increase of 43%. The Company expects its inventory level to
decline during 2000 from the December 31, 1999 balance, although there can be no
assurance that this decline will occur.
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MAJOR CUSTOMERS
The Company is not currently dependent on a single or small number of
customers, the loss of which would have a material adverse effect on
consolidated revenues.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Golf generally is regarded as a warm weather sport and sales of golf
equipment 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.
BACKLOG
The amount of the Company's backlog orders at any particular time is
affected by a number of factors, including seasonality and scheduling of the
manufacturing and shipment of products. At March 10, 2000, the Company did not
have a significant level of orders on backlog and does not anticipate that a
significant level of orders will not be filled within the current fiscal year.
In addition, the Company believes that the amount of its backlog is not an
appropriate indicator of levels of future production.
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 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
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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.
DOMESTIC AND FOREIGN OPERATIONS
Domestic and foreign net sales for the years ended December 31, 1997, 1998
and 1999 are comprised as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Domestic..................... $35,808,000 97.6% $73,580,000 87.0% $46,612,000 86.3%
Foreign...................... 882,000 2.4 11,031,000 13.0 7,388,000 13.7
----------- ----- ----------- ----- ----------- -----
Total...................... $36,690,000 100.0% $84,611,000 100.0% $54,000,000 100.0%
=========== ===== =========== ===== =========== =====
</TABLE>
In addition, no one customer contributed greater than 10% of the Company's
consolidated net sales in any one of the years identified.
EMPLOYEES
At March 10, 2000, the Company had 243 full-time employees, including 73
engaged in manufacturing and assembly, 16 in research and development and
quality control, 95 in sales support and 59 in management and administration.
The Company's employees are not unionized. Management believes that its
relations with its employees are good.
ITEM 2. PROPERTIES
The Company's administrative offices and manufacturing facilities currently
occupy approximately 86,000 square feet of space in Plano, Texas. This facility
is leased by the Company pursuant to a lease agreement expiring in 2004 and may
be extended for an additional five years. The Company maintains the right to
terminate the lease if it moves to a larger facility owned by the current
lessor. The Company believes that these facilities will be sufficient through at
least the end of 2000.
9
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Beginning in June 1999, the first of seven class action lawsuits (as of the
date of this Form 10-K) 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. 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. Specifically, the proceedings pending are as follows:
KENNETH F. SHOCKLEY V. ADAMS GOLF, INC. et al, Civil Action No. 99-371 (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
plaintiffs 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 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
10
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed and traded on the Nasdaq Stock Market's
National Market under the symbol "ADGO". The prices in the table below
represent, for the periods indicated, the quarterly high and low sales price for
Adams Golf, Inc. Common Stock as reported by The Nasdaq Stock Market. All price
quotations represent prices between dealers, without retail mark-ups, mark-downs
or commissions and may not represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
------------ ------------
<S> <C> <C>
1999
First Quarter............................................... $ 5 9/16 $2 15/16
Second Quarter.............................................. 4 5/8 2
Third Quarter............................................... 3 3/4 2 1/32
Fourth Quarter.............................................. 3 3/16 1 9/16
1998
Third Quarter (beginning July 10, 1998)..................... $18 7/8 $3 7/8
Fourth Quarter.............................................. 5 3/16 3
</TABLE>
On March 20, 2000, the last reported sale price of the Common Stock on The
Nasdaq Stock Market's National Market was $1 13/16 per share.
At March 20, 2000, Adams Golf, Inc. had approximately 7,300 stockholders
based on the number of holders of record and an estimate of the number of
individual participants represented by security position listings.
No dividends have been declared or paid relating to the Company's Common
Stock.
In order to remain listed on either the National Market or SmallCap Market
of the Nasdaq Stock Market, the Company must continue to satisfy numerous
maintenance requirements, including a minimum bid price of $1.00 per share. The
inability to maintain a listing on the Nasdaq Stock Market could adversely
affect the ability or willingness of investors to purchase the Common Stock,
which, in turn, would likely severely affect the market liquidity of the
Company's securities.
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below are derived from the Company's
consolidated financial statements for the years ended December 31, 1995, 1996,
1997, 1998, and 1999, respectively. The data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", the consolidated financial statements and related notes and other
financial information included elsewhere in this document.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of Operations Data:
Net sales..................................... $1,125 $3,522 $36,690 $84,611 $ 54,000
Operating income (loss)....................... (244) 9 (3,969) 18,500 (18,735)
Net income (loss)............................. $ (243) $ 13 $(4,654) $12,510 $(10,589)
====== ====== ======= ======= ========
Income (loss) per common share(1):
Basic and diluted............................. $(0.05) $ -- $ (0.37) $ 0.61 $ (0.47)
====== ====== ======= ======= ========
Diluted....................................... $(0.05) $ -- $ (0.37) $ 0.61 $ (0.47)
====== ====== ======= ======= ========
Weighted average common shares(1):
Basic......................................... 4,423 11,238 12,519 20,435 22,480
====== ====== ======= ======= ========
Diluted....................................... 4,423 11,238 12,519 20,677 22,480
====== ====== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data(1):
Total assets..................................... $658 $2,559 $17,360 $96,906 $83,210
Total debt (including current maturities)........ -- 230 -- 175 --
Stockholders' equity............................. 615 1,978 8,325 88,190 78,371
</TABLE>
- ------------------------
(1) See Note 1 of Notes to Consolidated Financial Statements for information
concerning the calculation of income (loss) per common share and weighted
average common shares outstanding.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company designs, manufactures, markets and distributes premium quality,
technologically innovative golf clubs. Founded in 1987, the Company operated
initially as a components supplier and contract manufacturer. 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 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.
12
<PAGE>
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, 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.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net sales......................................... 100.0% 100.0% 100.0%
Cost of goods sold................................ 27.2 25.3 32.5
----- ----- -----
Gross profit.................................... 72.8 74.7 67.5
Operating expenses:
Research and development expenses............... 1.5 1.8 3.9
Selling and marketing expenses.................. 35.7 36.9 77.9
General and administrative expenses:
Provision for bad debts....................... 2.0 1.8 3.2
Other......................................... 3.9 12.3 17.2
Stock compensation and bonus award............ 40.5 -- --
----- ----- -----
Total operating expenses........................ 83.6 52.8 102.2
----- ----- -----
Operating income (loss)......................... (10.8) 21.9 (34.7)
Interest income (expense), net.................... (0.2) 1.5 3.1
Other income (expense), net....................... (0.1) (0.1) --
----- ----- -----
Income (loss) before income taxes............... (11.1) 23.3 (31.6)
Income tax expense (benefit)...................... 1.6 8.5 (12.0)
----- ----- -----
Net income (loss)................................. (12.7)% 14.8% (19.6)%
===== ===== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net sales increased 131% to $84.6 million for the year ended December 31,
1998 from $36.7 million for 1997, primarily due to the continued market
acceptance of the Company's Tight Lies line of fairway woods, and, to a lesser
extent, the introduction of the Strong 2 Tour Brassie and the Strong 11 in late
August 1998. Net sales for 1998 were reduced by a $4.3 million unconditional
credit ("Net-down Credit") given to retailers during the fourth quarter in
connection with the Company's new suggested retail pricing structure for its
original Tight Lies fairway woods. The Net-down Credit was determined based on
the estimated number of original Tight Lies fairway woods which the Company's
retail customers had in their inventory at December 31, 1998. Each customer
having such inventory on hand at December 31, 1998 was issued a credit to be
applied against future purchases or account balances otherwise due to the
Company. Net sales of the Tight Lies line of fairway woods increased to
$81.6 million for the year ended December 31, 1998 from $34.6 million for 1997,
and increased as a percentage of net sales to 96.5% from 94.3%, respectively.
Sales of the Tight Lies fairway woods increased subsequent to the Company's
introduction of an infomercial marketing its original Tight Lies fairway wood in
the second quarter of 1997. Net sales of other product lines for the year ended
December 31, 1998 increased to $3.0 million from $2.1 million for 1997, but
decreased as a percentage of net sales to 3.5% from 5.7%, respectively. Net
sales of the Company's products outside the U.S. increased to $11.0 million for
the year ended December 31,
13
<PAGE>
1998 from $0.9 million for the year ended December 31, 1997, and increased as a
percentage of net sales to 13.0% from 2.4%, respectively. The increase in
international sales was due to increased market acceptance of the Tight Lies
fairway woods and expanded international marketing efforts beginning in the last
half of 1997.
Cost of goods sold increased to $21.4 million for the year ended
December 31, 1998 from $10.0 million for 1997, and decreased as a percentage of
net sales to 25.3% from 27.2%, respectively, primarily due to an increased
percentage of net sales attributable to the higher margin Tight Lies fairway
woods and the inherent cost savings associated with buying components in large
volumes and assembling them on a substantially increased scale. Offsetting the
above factors were lower average selling prices during the second half of 1998
resulting primarily from the sale of the Company's inventory of "demo" clubs, an
increase of sales to retailers compared to sales to direct consumers and the
$4.3 million credit given to retailers.
Operating expenses are composed primarily of selling and marketing expenses,
general and administrative expenses, and to a lesser extent, research and
development expenses. Selling and marketing expenses increased to $31.2 million
for the year ended December 31, 1998 from $13.1 million for 1997 primarily as a
result of increased royalty expense of $1.8 million, increased personnel costs
of $1.7 million from hiring additional employees, incurring increased levels of
services provided by independent contractors resulting in additional expenses of
$2.2 million and increased marketing and advertising efforts resulting in
increased costs of $11.2 million in 1998. Selling and marketing expenses
increased as a percent of net sales for the year ended 1998 to 36.9% from 35.7%.
General and administrative expenses, including provisions for bad debts,
increased to $11.9 million, or 14.1% as a percent of sales, for the year ended
December 31, 1998 from $2.2 million, or 6.0% as a percent of net sales,
excluding stock compensation and bonus awards for the year ended December 31,
1997. This increase is primarily due to increased personnel costs of
$2.5 million from the hiring of additional employees, use of outside services
resulting in additional costs of $2.5 million, higher occupancy costs of
$1.1 million, and additional bad debt expense of $0.7 million. For the year
ended December 31, 1997, the Company incurred $14.8 million, or 40.5% as a
percent of net sales, relating to stock compensation and bonus awards to the
Company's Chairman and Chief Executive Officer. Research and development
expenses for the year ended December 31, 1998 increased to $1.5 million from
$0.6 million for 1997, and increased as a percent of net sales to 1.8% from
1.5%, primarily due to increased salaries, consulting, and tooling expenses
associated with the development of new products.
Operating income increased to $18.5 million for the year ended December 31,
1998 from a loss of $4.0 million for 1997.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Net sales decreased 36.2% to $54.0 million for the year ended December 31,
1999 from $84.6 million for 1998, primarily due to a lower volume of fairway
woods being sold as a result of competition from other equipment manufacturers
and the implementation at the beginning of 1999 of a new pricing structure, that
resulted in lower wholesale prices to retail customers. Net sales were
positively impacted by sales of recently introduced products, particularly the
SC Series Titanium drivers and the Faldo Series wedge which were introduced in
1999. Net sales of the Tight Lies lines of fairway woods decreased to
$34.4 million for the year ended December 31, 1999 from $81.6 million for 1998,
and decreased as a percentage of net sales to 63.6% from 96.5%, respectively.
Net sales of the SC Series drivers for the year ended December 31, 1999 were
$17.4 million or 32.5% as a percentage of net sales. Net sales of the Faldo
Series wedges for the year ended December 31, 1999 were $1.6 million or 3.0% as
a percentage of net sales. Net sales of other product lines decreased to
$0.5 million for the year ended December 31, 1999 from $3.0 million for 1998 and
decreased as a percentage of net sales to 0.9% from 3.5%. Net sales of the
Company's products outside the U.S. decreased to $7.4 million for the year ended
December 31, 1999 from $11.0 million for the year ended December 31, 1998, but
increased as a percentage of net sales to 13.7% from 13.0%, respectively.
14
<PAGE>
Cost of goods sold decreased to $17.6 million for the year ended
December 31, 1999 from $21.4 million for 1998, but increased as a percentage of
net sales to 32.5% from 25.3%, respectively. The increase as a percentage of net
sales is primarily due to lower average selling prices of the original Tight
Lies line of fairway woods resulting from the Company's new suggested retail
pricing structure, the introduction of new products, such as the SC Series
driver with a higher per unit cost, which, in turn, increased costs as a
percentage of sales and increased sales of all product groups to retailers
compared to sales direct to consumers.
Selling and marketing expenses increased to $42.0 million for the year ended
December 31, 1999 from $31.2 million for 1998 and increased as a percentage of
sales to 77.9% from 36.9%. The increase in selling and marketing expenses is
primarily attributable to a $2.8 million increase in personnel and related
expenses as a result of hiring additional outside sales representatives and
marketing personnel, a $5.2 million increase in advertising resulting from
additional television and print advertising related to the launch of new
products during 1999 and to promote sell-through of the original Tight Lies
fairway woods at retailers, and $1.4 million related to the production of two
new infomercials and several new television commercials during the year.
General and administrative expenses, including provisions for bad debts,
decreased to $11.0 million, but increased as a percent of net sales to 20.4%,
for the year ended December 31, 1999 from $11.9 million, or 14.1% as a percent
of net sales for the same period of 1998. The decrease in general and
administrative expenses, in absolute dollars, is primarily attributable to a
$1.8 million dollar decrease in professional services relating to costs
associated with implementation of the Company's information system in 1998. This
decrease was partially offset by a $0.7 million increase in employee and related
costs due to the hiring of additional information technology and other employees
and a $0.2 million increase in bad debt expense. During the fourth quarter of
1999, the Company discovered that excess trade credits of approximately
$1.0 million had been offset against certain trade accounts receivable. After
further review, the Company concluded that receivables affected by this activity
were no longer collectible, and, accordingly, the amount was charged to bad debt
expense. Management believes that the issues giving rise to these credits have
been addressed and that processes and controls have been implemented to prevent
such issues from arising in the future.
Research and development expenses for the year ended December 31, 1999
increased to $2.1 million from $1.5 million for 1998, and increased as a percent
of net sales to 3.9% from 1.8%, primarily due to increased salaries and tooling
expenses associated with the development of new products.
As a result of the above, the Company's operating loss was approximately
$18.7 million for the year ended December 31, 1999 compared to operating income
of approximately $18.5 million for 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased to $2.8 million at December 31, 1999
from $23.7 million at December 31, 1998, primarily as a result of $25.5 million
used in operations and $0.2 million used in financing activities offset by
$4.7 million provided from investing activities. For the year ended
December 31, 1998, cash provided by operations was approximately $3.7 million.
The increase in cash flows used in operations was primarily a result of a net
loss of $10.6 million, an increase in trade receivables of $8.7 million,
relating primarily to the increased level of sales in the fourth quarter of 1999
versus the comparable quarter of 1998, an increase in income tax receivable of
$2.7 million relating to the carry-back of net operating losses to prior years
and an increase in inventories of $5.8 million due to increases in Tight Lies 2
and SC Series driver component parts.
Cash provided by investing activities of $4.7 million for the year ended
December 31, 1999, is primarily related to sales and maturities of marketable
securities, offset by purchases of computer equipment and software of
$2.6 million.
15
<PAGE>
Working capital totaled $53.9 million at December 31, 1999 compared to
$53.0 million at December 31, 1998.
The Company has a $10.0 million revolving credit facility, which expires on
May 31, 2000. The Company is currently negotiating to extend the facility;
however, there can be no assurance that such extension can be attained under
terms comparable to those of the existing facility or under terms acceptable to
the Company. At December 31, 1999, the Company had no outstanding borrowings
under its facility. During the first quarter of 1998, the Company borrowed
approximately $1.1 million in the form of a note payable to the Company's
Chairman and Chief Executive Officer to be used for working capital purposes.
The note bore interest at 5.39% and had a balance of $175,000 at December 31,
1998 which was paid in April 1999.
The Company expects to meet future liquidity requirements through cash flows
generated from operations and to a lesser extent cash reserves and maturities or
sales of marketable securities. It is anticipated that operating cash flows and
current cash reserves will also adequately fund capital expenditure programs
which will include continued upgrade of the newly integrated information systems
and expansion of web site capabilities. 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 2000. The expected operating
cash flows and current cash reserves allow the Company to meet working capital
requirements during periods of low cash flows resulting from the seasonality of
the industry.
Capital expenditures for the three years ended December 31, 1997, 1998 and
1999 were approximately $0.8 million, $4.3 million and $2.6 million,
respectively. The expenditures made were primarily associated with development
of information systems and reporting technologies to adequately monitor business
operations. Capital expenditures in the future are not expected to include
expenditures outside the ordinary course of business.
The Company is not aware of any event or trend that would potentially affect
its liquidity. In the event such a trend should develop, the Company believes
that the cash flows from operations and current cash reserves would be
sufficient to meet operating needs and capital expenditures for the foreseeable
future.
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, as amended, is 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. The Company will adopt the provisions of SFAS No. 133 in the first
quarter of 2001.
BUSINESS RISKS
As indicated below, this Annual Report contains forward-looking statements
that involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements. Factors
that may cause such a difference include, but are not limited to, those
discussed in this section and elsewhere throughout this Form 10-K.
DEPENDENCE ON NEW PRODUCT INTRODUCTIONS; UNCERTAIN CONSUMER ACCEPTANCE
Through the first quarter of 2000, the Company's net sales were derived
primarily from the sale of fairway woods (original Tight Lies and Tight Lies 2),
SC Series and Tight Lies 2 drivers, and Faldo Series wedges. During the year
ended December 31, 1999, the Company's fairway woods represented 63.6% of
16
<PAGE>
net sales whereas, for the year ended December 31, 1998, the Company's fairway
woods represented 96.5% 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 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 the products introduced by
the Company after the original Tight Lies fairway woods will increase in
consumer acceptance or that the Company will be able to design, manufacture and
introduce new products that will meet with market acceptance. Failure by the
Company to identify and develop innovative new products that achieve widespread
market acceptance would adversely affect the Company's future growth and
profitability. Additionally, successful technologies, designs and product
concepts are likely to be copied by competitors. Accordingly, the Company's
operating results could fluctuate as a result of the amount, timing and market
acceptance of new product introductions by the Company or its competitors. The
design of new golf clubs is also greatly influenced by the rules and
interpretations of the USGA. Although the golf equipment standards established
by the USGA generally apply only to competitive events sanctioned by that
organization, the Company believes that it is critical for its future success
that new clubs introduced by the Company comply with USGA standards.
LIMITED HISTORY OF PROFITABILITY
The Company has a limited history of profitability. Although the Company
generated net income during the year ended December 31, 1996 and the year ended
December 31, 1998, it has historically experienced net losses from operations.
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.
ABILITY TO MANAGE GROWTH
Over the past three years, the Company has experienced a period of rapid
growth 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 expand, 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, Chief
Executive Officer and President, B.H. (Barney) Adams. In addition to his
direction and supervision of the day-to-day affairs of the Company, Mr. Adams
17
<PAGE>
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.
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 $1.5 million in 1999 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 further such 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 Adams SC Series Titanium 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
18
<PAGE>
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 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 intends
to focus its international expansion efforts in Japan and the United Kingdom
and, to a lesser extent, in South Africa and Australia. The Company's business
is subject to the risks generally associated with doing business abroad, such as
foreign government regulations, foreign consumer preferences, import and export
control, political unrest, disruptions or delays in shipments and changes in
economic conditions and exchange rates in countries in which the Company
purchases components or sells its products.
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, hold an aggregate of
13,381,115 shares of Common Stock as of the date of this annual 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.
19
<PAGE>
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
business, operating results or financial condition.
FORWARD-LOOKING STATEMENTS
This Annual Report contains "forward-looking statements" made under the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements are based on the beliefs of the Company's
management as well as assumptions made by and information currently available to
the Company's management. When used in this report, the words "anticipate,"
"believe," "expect" and words or phrases of similar import, as they relate to
the Company or Company management, are intended to identify forward-looking
statements. Such statements reflect the current view of the Company with respect
to future events and are subject to certain risks, uncertainties and assumptions
related to certain factors including, without limitation, product development;
product introductions; market demand and acceptance of products; the impact of
changing economic conditions; business conditions in the golf industry; reliance
on third parties including suppliers; the impact of market peers and their
products; the actions of competitors, including pricing, 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.
20
<PAGE>
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company, in the normal course of doing business, is exposed to market
risk through changes in interest rates with respect to its cash equivalents and
available-for-sale marketable securities. All of the Company's cash equivalents
and available-for-sale marketable securities are fixed rate state government,
municipal or corporate bonds. At December 31, 1999, the cost and market value of
such cash equivalents and marketable securities was approximately $27,070,000
and $27,001,000, respectively. A significant increase in interest rates would
result in a decrease in the bond prices. The Company's investment policy sets
minimum standards related to the quality, maturity and liquidity of such
investments.
The table below presents principal amounts and related weighted-average
interest rates by year of maturity for the Company's investment portfolio (in
thousands, except percentages).
<TABLE>
<CAPTION>
FAIR
2000 2001 TOTAL VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash equivalents:
Fixed rate...................... $ 81 $ -- $ 81 $ 81
Average interest rate........... 4.9% -- 4.9%
Marketable securities:
Fixed rate...................... $18,489 $8,500 $26,989 $26,920
Average interest rate........... 6.7% 6.4% 6.6%
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are set forth herein under Item 14 commencing on
page F-1. Schedule II to the financial statement is set forth herein under Item
14 on page S-1. In addition, quarterly financial data is not required as the
Company has not met the requirements of net income after taxes, but before
extraordinary items and cumulative effect of any change in accounting of
$250,000 for each year in the three year period ended December 31, 1999, or
total assets at December 31, 1999 of $200 million.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
21
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference from
pages 3 through 7, inclusive, of the Company's Proxy Statement dated April 5,
2000 for the annual meeting of stockholders on May 3, 2000 (the "2000 Proxy
Statement") under the respective captions, "Election of Directors", "Stock
Ownership--Section 16(a) Beneficial Ownership Reporting Compliance" and
"Management--Executive Officers".
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from
pages 7 through 9, inclusive, of the Company's 2000 Proxy Statement under the
caption "Management--Compensation of Executive Officers".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from page
6 of the Company's 2000 Proxy Statement under the caption "Stock
Ownership--Beneficial Ownership of Certain Stockholders, Directors and Executive
Officers".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from
pages 9 through 10, inclusive, of the Company's 2000 Proxy Statement under the
captions "Management--Employment Contracts and Change in Control Agreements,"
"--Compensation Committee Interlocks and Insider Participation" and "--Certain
Transactions".
22
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
(1) CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----------
<S> <C>
Index to Consolidated Financial Statements and Related
Financial Statement Schedule.............................. F-1
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998, and 1999......................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1998, and 1999............. F-5 - F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998, and 1999......................... F-7
Notes to Consolidated Financial Statements.................. F-8 - F-19
</TABLE>
(2) FINANCIAL STATEMENT SCHEDULE
The following financial statement schedule of the Company for the years
ended December 31, 1997, 1998, and 1999 is filed as part of this Annual Report
and should be read in conjunction with the Consolidated Financial Statements of
the Company. All other schedules have been omitted because said schedules are
not required under the related instructions or are not applicable or because the
information required is included in the Company's consolidated financial
statements or the notes thereto.
<TABLE>
<S> <C>
Schedule II--Valuation and Qualifying Accounts.............. S-1
</TABLE>
(3) EXHIBITS
The exhibits listed below are filed as a part of or incorporated by
reference in this Annual Report. Where such filing is made by incorporation by
reference to a previously filed document, such document is identified in
parenthesis. See the Index of Exhibits included with the exhibits filed as part
of this Annual Report.
<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 Incorporated by reference to Form S-1
Company dated February 26, 1998 (Exhibit 4.1)
Exhibit 4.2 1996 Stock Option Plan dated April 10, Incorporated by reference to Form S-1
1998 (Exhibit 4.2)
Exhibit 4.3 Adams Golf, Ltd. 401(k) Retirement Plan Incorporated by reference to Form S-1
(Exhibit 4.3)
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION LOCATION
- ------- ----------- --------
<S> <C> <C>
Exhibit 4.4 1999 Non-Employee Director Plan of Included in this filing
Adams Golf, Inc.
Exhibit 4.5 1999 Stock Option Plan for Outside Included in this filing
Consultants of Adams Golf, Inc.
Exhibit 10.1 Agreement between the Registrant and Incorporated by reference to Form S-1
Nick Faldo, dated April 22, 1998 (Exhibit 10.1)
Exhibit 10.2 Amended and Restated Revolving Credit Incorporated by reference to
Agreement dated February 26, 1999, Exhibit 10.2 to the Annual Report on
between Adams Golf Direct Form 10-K for the year ended
Response, Ltd., Adams Golf, Ltd. and December 31, 1998
NationsBank of Texas N.A. and related
promissory note and guaranty.
Exhibit 10.3 Commercial Lease Agreement dated Incorporated by reference to Form S-1
December 5, 1997, between Jackson- (Exhibit 10.3)
Shaw Technology Center II, Ltd. and
the Company
Exhibit 10.4 Commercial Lease Agreement dated Incorporated by reference to Form S-1
April 6, 1998, between Jackson-Shaw (Exhibit 10.4)
Technology Center II, Ltd. and the
Company
Exhibit 10.5 Letter agreement dated April 13, 1998, Incorporated by reference to Form S-1
between the Company and Darl P. (Exhibit 10.5)
Hatfield
Exhibit 10.6 Amendment to Amended and Restated Incorporated by reference to
Revolving Credit Agreement dated Exhibit 10.6 to the Quarterly Report
August 13, 1999 between Adams Golf on Form 10-Q for the quarter ended
Direct Response, Ltd., Adams September 30, 1999
Golf, Ltd. and Bank of America, N.
A.
Exhibit 21.1 Subsidiaries of the Registrant Included in this filing
Exhibit 23.1 Consent of KPMG LLP Included in this filing
Exhibit 27.1 Financial Data Schedule Included in this filing
</TABLE>
(B) REPORTS ON FORM 8-K
None
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
ADAMS GOLF, INC, a Delaware corporation
Date: March 24, 2000 By: /s/ B. H. (BARNEY) ADAMS
-----------------------------------------
B. H. (Barney) Adams,
CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER AND PRESIDENT
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
Date: March 24, 2000 /s/ B. H. (BARNEY) ADAMS
----------------------------------------------------
B. H. (Barney) Adams,
CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER AND PRESIDENT
(PRINCIPAL EXECUTIVE OFFICER)
Date: March 24, 2000 /s/ DARL P. HATFIELD
----------------------------------------------------
Darl P. Hatfield,
SENIOR VICE PRESIDENT--FINANCE AND ADMINISTRATION
AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL
OFFICER)
Date: March 24, 2000 /s/ BRIAN K. GLAZE
----------------------------------------------------
Brian K. Glaze
DIRECTOR, FINANCIAL SERVICES
(PRINCIPAL ACCOUNTING OFFICER)
Date: March 24, 2000 /s/ PAUL F. BROWN, JR.
----------------------------------------------------
Paul F. Brown, Jr.,
DIRECTOR
Date: March 24, 2000 /s/ MARK R. MULVOY
----------------------------------------------------
Mark R. Mulvoy
DIRECTOR
</TABLE>
25
<PAGE>
<TABLE>
<S> <C>
Date: March 24, 2000 /s/ RICHARD H. MURTLAND
----------------------------------------------------
Richard H. Murtland,
VICE PRESIDENT--RESEARCH AND DEVELOPMENT,
SECRETARY, TREASURER AND DIRECTOR
Date: March 24, 2000 /s/ STEPHEN R. PATCHIN
----------------------------------------------------
Stephen R. Patchin
DIRECTOR
Date: March 24, 2000 /s/ JOHN S. SIMPSON
----------------------------------------------------
John S. Simpson
DIRECTOR
Date: March 24, 2000 /s/ ROBERT F. MACNALLY
----------------------------------------------------
Robert F. MacNally
DIRECTOR
</TABLE>
26
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND RELATED FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE
CONSOLIDATED FINANCIAL STATEMENTS ----------
<S> <C>
Independent Auditors' Report............................ F-2
Consolidated Balance Sheets as of December 31, 1998 and
1999.................................................. F-3
Consolidated Statements of Operations for the years
ended December 31, 1997, 1998 and 1999................ F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1998 and 1999.......... F-5 - F-6
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1998 and 1999................ F-7
Notes to Consolidated Financial Statements.............. F-8 - F-19
</TABLE>
FINANCIAL STATEMENT SCHEDULE
The following financial statement schedule of the Company for the years
ended December 31, 1997, 1998 and 1999 is filed as part of this Report and
should be read in conjunction with the Consolidated Financial Statements of the
Company.
<TABLE>
<S> <C>
Schedule II--Valuation and Qualifying Accounts.......... S-1
</TABLE>
All other schedules are omitted since the required information is not
present, or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements and notes thereto.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Adams Golf, Inc.:
We have audited the consolidated financial statements of Adams Golf, Inc.
and subsidiaries as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we have also audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Adams
Golf, Inc. and its subsidiaries as of December 31, 1998 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999 in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG LLP
Dallas, Texas
January 28, 2000
F-2
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $23,688 $ 2,786
Marketable securities (note 2)............................ 13,084 18,464
Trade receivables, net (note 3)........................... 2,022 11,012
Inventories (note 4)...................................... 13,312 19,101
Prepaid expenses.......................................... 885 884
Income tax receivable..................................... 2,088 4,836
Deferred income tax assets (note 12)...................... 2,386 660
Other current assets...................................... 1,287 621
------- -------
Total current assets.................................... 58,752 58,364
Property and equipment, net (note 5)........................ 3,468 7,565
Marketable securities (note 2).............................. 21,291 8,456
Professional services agreement (note 6).................... 9,450 8,438
Other assets, net (note 7).................................. 3,945 387
------- -------
$96,906 $83,210
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to shareholder (note 11)..................... $ 175 $ --
Accounts payable.......................................... 1,152 1,981
Accrued expenses (note 8)................................. 4,418 2,516
------- -------
Total current liabilities............................... 5,745 4,497
Deferred income tax liabilities (note 12)................... 2,971 342
------- -------
Total liabilities....................................... 8,716 4,839
------- -------
Stockholders' equity (note 13):
Preferred stock, $0.01 par value; authorized 5,000,000
shares; none issued..................................... -- --
Common stock, $.001 par value; authorized 50,000,000
shares; 23,136,782 shares issued and 22,479,282 shares
outstanding at December 31, 1998 and 23,137,571 shares
issued and 22,480,071 shares outstanding at
December 31, 1999....................................... 23 23
Additional paid-in capital................................ 85,183 85,919
Common stock subscription................................. (22) (22)
Deferred compensation..................................... (704) (476)
Accumulated other comprehensive income (loss)............. 150 (44)
Retained earnings (accumulated deficit)................... 6,696 (3,893)
Treasury stock, 657,500 shares at cost.................... (3,136) (3,136)
------- -------
Total stockholders' equity.............................. 88,190 78,371
------- -------
Commitments and contingencies (notes 6 and 9)............... $96,906 $83,210
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net sales (note 3).......................................... $36,690 $84,611 $ 54,000
Cost of goods sold.......................................... 9,991 21,441 17,571
------- ------- --------
Gross profit.......................................... 26,699 63,170 36,429
------- ------- --------
Operating expenses:
Research and development expenses......................... 557 1,532 2,092
Selling and marketing expenses............................ 13,093 31,239 42,047
General and administrative expenses:
Stock compensation and bonus award (note 13)............ 14,842 -- --
Provision for bad debts................................. 739 1,464 1,709
Other................................................... 1,437 10,435 9,316
------- ------- --------
Total operating expenses.............................. 30,668 44,670 55,164
------- ------- --------
Operating income (loss)............................... (3,969) 18,500 (18,735)
Other income (expense):
Interest income........................................... 15 1,367 1,714
Interest expense.......................................... (70) (71) (37)
Other..................................................... (48) (103) --
------- ------- --------
Income (loss) before income taxes..................... (4,072) 19,693 (17,058)
Income tax expense (benefit) (note 12)...................... 582 7,183 (6,469)
------- ------- --------
Net income (loss)..................................... $(4,654) $12,510 $(10,589)
======= ======= ========
Income (loss) per common share:
Basic..................................................... $ (0.37) $ 0.61 $ (0.47)
======= ======= ========
Diluted................................................... $ (0.37) $ 0.61 $ (0.47)
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
ACCUMULATED RETAINED
SHARES OF ADDITIONAL COMMON OTHER EARNINGS
COMMON COMMON PAID-IN STOCK DEFERRED COMPREHENSIVE (ACCUMULATED
STOCK STOCK CAPITAL SUBSCRIPTION COMPENSATION INCOME DEFICIT)
---------- -------- ---------- ------------ ------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996..................... 11,873,234 $12 $ 3,126 $ -- $ -- $ -- $(1,160)
Net loss................... -- -- -- -- -- -- (4,654)
Stock compensation award
(note 13)................ 2,000,000 2 9,998 -- -- -- --
Exercise of stock
options.................. 946,104 1 550 -- -- -- --
Exchange of debt for common
common stock (note 13)... 900,000 1 449 -- -- -- --
---------- --- ------- ----- ------- ---- -------
Balance, December 31,
1997..................... 15,719,338 $16 $14,123 $ -- $ -- $ -- $(5,814)
Comprehensive income:
Net income................. -- -- -- -- -- -- 12,510
Other comprehensive income,
net of tax--unrealized
gains on marketable
securities............... -- -- -- -- -- 150 --
Comprehensive income....... -- -- -- -- -- -- --
Issuance of common stock... 4,037,500 4 58,468 -- -- -- --
Issuance of stock
options.................. -- -- 2,027 -- (2,027) -- --
Stock option forfeiture.... -- -- (487) -- 487 -- --
Exercise of stock
options.................. 2,479,944 2 928 (230) -- -- --
Payment of stock
subscription............. -- -- -- 208 -- -- --
Grant of stock (note 6).... 900,000 1 10,124 -- -- -- --
Treasury stock purchases
(657,500 shares)......... -- -- -- -- -- -- --
Amortization of deferred
compensation............. -- -- -- -- 836 -- --
---------- --- ------- ----- ------- ---- -------
Balance, December 31,
1998..................... 23,136,782 $23 $85,183 $ (22) $ (704) $150 $ 6,696
---------- --- ------- ----- ------- ---- -------
<CAPTION>
COST OF TOTAL
COMPREHENSIVE TREASURY STOCKHOLDERS'
INCOME (LOSS) STOCK EQUITY
-------------- -------- -------------
<S> <C> <C> <C>
Balance, December 31,
1996..................... $ -- $ 1,978
Net loss................... $(4,654) -- (4,654)
=======
Stock compensation award
(note 13)................ -- 10,000
Exercise of stock
options.................. -- 551
Exchange of debt for common
common stock (note 13)... -- 450
------- -------
Balance, December 31,
1997..................... $ -- $ 8,325
Comprehensive income:
Net income................. $12,510 -- 12,510
Other comprehensive income,
net of tax--unrealized
gains on marketable
securities............... 150 -- 150
-------
Comprehensive income....... $12,660 -- --
=======
Issuance of common stock... -- 58,472
Issuance of stock
options.................. -- --
Stock option forfeiture.... -- --
Exercise of stock
options.................. -- 700
Payment of stock
subscription............. -- 208
Grant of stock (note 6).... -- 10,125
Treasury stock purchases
(657,500 shares)......... (3,136) (3,136)
Amortization of deferred
compensation............. -- 836
------- -------
Balance, December 31,
1998..................... $(3,136) $88,190
------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
(continued)
F-5
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
RETAINED
SHARES OF ADDITIONAL COMMON ACCUMULATED OTHER EARNINGS
COMMON COMMON PAID-IN STOCK DEFERRED COMPREHENSIVE (ACCUMULATED
STOCK STOCK CAPITAL SUBSCRIPTION COMPENSATION INCOME (LOSS) DEFICIT)
---------- -------- ---------- ------------ ------------- ------------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1998................. 23,136,782 $23 $85,183 $(22) $(704) $150 $ 6,696
Comprehensive loss:
Net loss............. -- -- -- -- -- -- (10,589)
Other comprehensive
loss, net of tax--
unrealized loss on
marketable
securities......... -- -- -- -- -- (194) --
Comprehensive loss... -- -- -- -- -- -- --
Stock option
forfeiture........... -- -- (38) -- 38 -- --
Exercise of stock
options.............. 789 -- 2 -- -- -- --
Tax benefit from
exercise of stock
options.............. -- -- 772 -- -- -- --
Amortization of
deferred
compensation......... -- -- -- -- 190 -- --
---------- --- ------- ---- ----- ---- -------
Balance, December 31,
1999................. 23,137,571 $23 $85,919 $(22) $(476) $(44) $(3,893)
========== === ======= ==== ===== ==== =======
<CAPTION>
COST OF TOTAL
COMPREHENSIVE TREASURY STOCKHOLDERS'
INCOME (LOSS) STOCK EQUITY
-------------- -------- -------------
<S> <C> <C> <C>
Balance, December 31,
1998................. $(3,136) $ 88,190
Comprehensive loss:
Net loss............. (10,589) -- (10,589)
Other comprehensive
loss, net of tax--
unrealized loss on
marketable
securities......... (194) -- (194)
--------
Comprehensive loss... $(10,783) -- --
========
Stock option
forfeiture........... -- --
Exercise of stock
options.............. -- 2
Tax benefit from
exercise of stock
options.............. -- 772
Amortization of
deferred
compensation......... -- 190
------- --------
Balance, December 31,
1999................. $(3,136) $ 78,371
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1998 1999
-------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $(4,654) $ 12,510 $ (10,589)
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.................................. 302 2,204 3,447
Loss on retirement of property and equipment............ 134 111 --
Stock compensation and bonus award...................... 10,000 -- --
Amortization of deferred compensation................... -- 836 190
Deferred income taxes................................... (573) 1,077 (903)
Allowance for doubtful accounts......................... 672 596 (328)
Changes in assets and liabilities:
Trade receivables..................................... (8,067) 5,053 (8,662)
Inventories........................................... (3,812) (8,825) (5,789)
Prepaid expenses...................................... (481) (376) 1
Income tax receivable................................. -- (2,088) (2,748)
Other current assets.................................. (716) (350) 666
Other assets.......................................... (390) (3,567) 326
Accounts payable...................................... 360 774 829
Federal income taxes payable.......................... 1,021 (1,021) --
Accrued expenses...................................... 7,304 (3,218) (1,902)
------- -------- ---------
Net cash provided by (used in) operating
activities.......................................... 1,100 3,716 (25,462)
------- -------- ---------
Cash flows from investing activities:
Purchases of marketable securities........................ -- (34,145) (143,471)
Sales of marketable securities............................ -- -- 69,900
Maturities of marketable securities....................... -- -- 80,939
Purchases of equipment.................................... (770) (4,258) (2,635)
------- -------- ---------
Net cash provided by (used in) investing
activities.......................................... (770) (38,403) 4,733
------- -------- ---------
Cash flows from financing activities:
Proceeds from initial public offering..................... -- 60,078 --
Initial public offering costs............................. -- (1,606) --
Purchase of treasury stock................................ -- (3,136) --
Proceeds from notes payable and line of credit............ 1,050 7,135 --
Repayment of line of credit borrowings.................... (800) (6,000) --
Repayment of notes payable................................ (30) -- --
Repayment of notes payable to shareholder................. -- (960) (175)
Issuance of common stock.................................. 551 908 2
------- -------- ---------
Net cash provided by (used in) financing
activities.......................................... 771 56,419 (173)
------- -------- ---------
Net increase (decrease) in cash and cash equivalents........ 1,101 21,732 (20,902)
Cash and cash equivalents at beginning of year.............. 855 1,956 23,688
------- -------- ---------
Cash and cash equivalents at end of year.................... $ 1,956 $ 23,688 $ 2,786
======= ======== =========
Supplemental disclosure of cash flow information:
Interest paid............................................. $ 70 $ 27 $ 3
======= ======== =========
Income taxes paid, net of refunds......................... $ 356 $ 9,298 $ (3,094)
======= ======== =========
Supplemental disclosure of non-cash investing and financing
activities:
Stock issued for professional services agreement (note
6)...................................................... $ -- $ 10,125 $ --
======= ======== =========
Exchange of debt for common stock......................... $ 450 $ -- $ --
======= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, 1998 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) GENERAL
Adams Golf, Inc. (the "Company") was founded in 1987. The Company designs,
manufactures, markets and distributes premium quality, technologically
innovative golf clubs and provides custom golf club fitting technology. The
Company's primary products are fairway woods and drivers that are marketed under
the trademarks "Tight Lies," "Tight Lies 2" and "SC Series".
The consolidated financial statements include the accounts of Adams
Golf, Inc. and its subsidiaries, all of which are wholly owned. All significant
intercompany accounts and transactions have been eliminated in consolidation.
(b) MARKETABLE SECURITIES
Marketable securities, primarily consisting of commercial paper and
governmental and corporate bonds, are managed under agreements with investment
managers. The agreements provide terms related to the quality, diversification
and maturities of the investments in the managed portfolios. The investments are
classified as available-for-sale and are carried at fair value, with unrealized
gains and losses, net of the related tax effect, reported as other comprehensive
income in the consolidated statements of stockholders' equity. The balance sheet
classification of the Company's marketable securities is based upon the
contractual maturity date of such securities.
(c) INVENTORIES
Inventories are valued at the lower of cost or market and primarily consist
of completed golf clubs and component parts. Cost is determined using the
first-in, first-out method.
(d) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Enterprise resource planning
software system costs have been capitalized in accordance with AICPA Statement
of Position 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR
OBTAINED FOR INTERNAL USE, which was adopted by the Company on January 1, 1998.
Depreciation and amortization are calculated using the straight-line method over
the estimated useful lives of the respective assets, which range from three to
seven years.
(e) REVENUE RECOGNITION
The Company records revenue as earned, which generally occurs when the
product is shipped.
(f) OTHER ASSETS AND RELATED AMORTIZATION EXPENSE
Other assets consist primarily of goodwill, costs of obtaining patents and
various deposits. Goodwill is being amortized over five years. Patent
amortization is computed using the straight-line method over the estimated
useful lives of the assets, which range from 5 to 15 years.
(g) RESEARCH AND DEVELOPMENT
Research and development costs consist of all costs incurred in planning,
designing and testing of golf equipment, including salary costs related to
research and development, and are expensed as incurred.
F-8
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, 1998 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(h) ADVERTISING COSTS
Advertising costs, other than direct response (infomercial) costs, are
expensed as incurred and aggregated approximately $8,651,000, $17,083,000 and
$24,606,000 in 1997, 1998 and 1999, respectively.
(i) PRODUCT WARRANTY
The Company's golf equipment is sold under warranty against defects in
material and workmanship for a period of one year. In addition, the Company has
a 30 day "no questions asked" return policy applicable to direct response sales.
An allowance for estimated future warranty and sales return costs is recorded in
the period products are sold.
(j) INCOME TAXES
The Company accounts for income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted rates expected to apply to taxable income
in the years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
(k) INCOME (LOSS) PER SHARE
The weighted average common shares used for basic net income (loss) per
common share were 12,519,392, 20,434,775 and 22,479,915 for 1997, 1998 and 1999,
respectively. The effect of dilutive stock options added 241,520 shares for 1998
for the computation of diluted income per common share. Options to purchase
2,521,000, 100,000 and 986,000 shares of common stock which were outstanding
during 1997, 1998 and 1999, respectively, were not included in the computation
of diluted earnings per share as their effect would have been antidilutive.
(l) FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable, and accrued expenses approximate fair value, due to the short
maturity of these instruments. The carrying amount of marketable securities is
based on quoted market prices.
(m) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
F-9
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, 1998 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(n) COMPREHENSIVE INCOME
Comprehensive income consists of net income and unrealized gains and losses,
net of related tax effect, on marketable securities classified as
available-for-sale and is presented in the consolidated statement of
stockholders' equity.
(o) STATEMENTS OF CASH FLOWS
The Company considers all short-term highly liquid instruments, with an
original maturity of three months or less, to be cash equivalents.
(p) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(2) MARKETABLE SECURITIES
Marketable securities consist of the following:
<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>
<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 year ended December 31, 1999, there were approximately
$80,939,000 in proceeds received from maturities of available-for-sale
securities and approximately $143,471,000 in purchases of
F-10
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, 1998 AND 1999
(2) MARKETABLE SECURITIES (CONTINUED)
securities. In addition, there were approximately $69,900,000 in proceeds
received from sales of available-for-sale securities which included realized
gains of approximately $1,197,000 and realized losses of approximately $92,000
using the specific identification method. All marketable securities mature
within two years.
(3) TRADE RECEIVABLES
Trade receivables consist of the following at December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Trade receivables......................................... $ 3,316 $11,978
Allowance for doubtful accounts........................... (1,294) (966)
------- -------
$ 2,022 $11,012
======= =======
</TABLE>
During the fourth quarter of 1998, the Company provided retailers with a
credit ("Net-down Credit") in connection with a change in the Company's
suggested retail pricing structure for its original Tight Lies fairway woods.
The Net-down Credit was determined based on the estimated number of original
Tight Lies fairway woods which the Company's retail customers had in their
inventory at December 31, 1998. Each customer having such inventory on hand at
December 31, 1998 was issued a credit to be applied against future purchases or
account balances otherwise due to the Company. The aggregate Net-down Credit of
$4,300,000 was shown as a reduction of net sales and accounts receivable in the
consolidated financial statements as of and for the year ended December 31,
1998.
During the second quarter of 1999, the Company provided retailers another
credit for a change in the suggested retail price of the Company's SC Series
Titanium drivers. During this quarter, the Company also adjusted its estimate of
the cost for the program associated with its original Tight Lies fairway woods.
The net effect of these programs in 1999 was an increase in net sales of
approximately $600,000.
(4) INVENTORIES
Inventories consist of the following at December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Finished goods............................................ $ 2,880 $ 6,208
Component parts........................................... 10,432 12,893
------- -------
$13,312 $19,101
======= =======
</TABLE>
(5) PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following at December 31, 1998 and
1999:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Manufacturing equipment.................................... $ 244 $ 514
Office equipment........................................... 4,112 10,095
Accumulated depreciation and amortization.................. (888) (3,044)
------ -------
$3,468 $ 7,565
====== =======
</TABLE>
F-11
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, 1998 AND 1999
(6) PROFESSIONAL SERVICES AGREEMENT
The professional services agreement consists of a contract entered into by
the Company and Nicholas A. Faldo ("Faldo"), a professional golfer, which
provides, among other things, for Faldo's endorsement and use of the Company's
products, as well as the design, development and testing of new technologies and
products. As consideration for such services, Faldo received 900,000 shares of
the Company's common stock, which were valued at the fair market value of the
stock ($11.25 per share) as of May 1, 1998, the effective date of the agreement.
The value of the stock is being amortized on a straight-line basis over ten
years, which represents the estimated period during which the Company will
realize benefits under the agreement.
In addition, Faldo receives royalty payments representing 5% of net sales
outside the U.S., with a minimum annual amount of $1,500,000 in 1999, increasing
ratably to $4,000,000 in 2004. The Company paid to Faldo the minimum royalty
amount in 1999.
(7) OTHER ASSETS, NET
Other assets, net, consist of the following at December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Enterprise resource planning software....................... $3,618 $ --
Goodwill, net............................................... -- 204
Deposits, including amounts for fixed assets purchased...... 274 16
Patents..................................................... 7 5
Other....................................................... 46 162
------ ----
$3,945 $387
====== ====
</TABLE>
(8) ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Payroll and commissions..................................... $ 476 $ 191
Royalties................................................... 506 454
Advertising................................................. 1,661 321
Product warranty expense and sales returns.................. 736 530
Professional services....................................... 605 121
Accrued software and licensing costs........................ -- 228
Other....................................................... 434 671
------ ------
$4,418 $2,516
====== ======
</TABLE>
F-12
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, 1998 AND 1999
(9) COMMITMENTS AND CONTINGENCIES
The Company is obligated under certain noncancelable operating leases for
manufacturing, warehouse and office space. A summary of the minimum rental
commitments under noncancellable leases is as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
- ------------
<S> <C>
2000........................................................ $ 701
2001........................................................ 675
2002........................................................ 699
2003........................................................ 684
------
$2,759
======
</TABLE>
Rent expense was approximately $104,000, $472,000 and $947,000 for the years
ended December 31, 1997, 1998 and 1999, respectively.
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 denies the allegations
in the complaints 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.
(10) RETIREMENT PLAN
In February 1998, the Company adopted the Adams Golf, Ltd. 401(k) Retirement
Plan (the "Plan"), which covers substantially all employees. The Company matches
50% of employee contributions up to a maximum of 6% of the employee's
compensation. For the years ended December 31, 1998 and 1999, the Company
contributed approximately $74,000 and $162,000 respectively, to the Plan.
(11) DEBT
On February 27, 1998, the Company entered into a $10,000,000 revolving
credit facility (the "Facility") bearing interest, payable monthly, at the
bank's prime rate minus 25 basis points (7.50% at December 31,
F-13
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, 1998 AND 1999
(11) DEBT (CONTINUED)
1998) or LIBOR plus 1.75%, which expired December 31, 1998. Subsequent to
December 31, 1998, the Company amended the Facility's maturity date to May 31,
2000 and the interest rate to the bank's prime rate of interest minus 50 basis
points or LIBOR plus 1.00%. At December 31, 1998 and 1999, there were no amounts
outstanding under the Facility. The Company pays a commitment fee on the unused
portion of the Facility of one-eighth of one percent per annum.
During the first quarter of 1998, the Company borrowed $1,135,000 in the
form of an unsecured note payable to the Chief Executive Officer. The note bore
interest at 5.39% and had a balance of $175,000 outstanding at December 31, 1998
which was paid in April 1999.
(12) INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1997, 1998 and
1999 consists of the following;
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Federal--current................................... $1,021 $5,486 $(5,671)
Federal--deferred.................................. (573) 1,077 (798)
State--current..................................... 134 620 --
------ ------ -------
$ 582 $7,183 $(6,469)
====== ====== =======
</TABLE>
Actual income tax expense differs from the "expected" income tax expense
(benefit) (computed by applying the U.S. federal corporate tax rate of 34% for
1997 and 35% for 1998 and 1999 to income (loss) before income taxes) for the
years ended December 31, 1997, 1998 and 1999 as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit)......... $(1,384) $6,892 $(5,970)
State income taxes, net of federal tax benefit.... 89 403 --
Non-taxable interest income....................... -- (286) (350)
Stock compensation and bonus award................ 2,159 -- --
Change in valuation allowance for deferred tax
assets.......................................... (338) (50) --
Other............................................. 56 (224) (149)
------- ------ -------
$ 582 $7,183 $(6,469)
======= ====== =======
</TABLE>
F-14
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, 1998 AND 1999
(12) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31 are presented below:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Allowance for bad debts................................... $ 453 $ 338
Research and development costs............................ 160 116
Net-down credit........................................... 1,505 --
Rebate allowance.......................................... -- 69
Product warranty and sales returns........................ 258 231
Obsolete inventory reserve................................ 77 9
Other reserves............................................ 93 17
Research and development tax credit carryforwards......... -- 556
Unrealized loss on marketable securities.................. -- 25
Net operating loss carryforwards.......................... 275 1,910
------ ------
Net deferred tax assets............................... 2,821 3,271
------ ------
Deferred tax liabilities:
Prepaid professional services............................. 3,308 2,953
Tax/book depreciation difference.......................... 17 --
Unrealized gain on marketable securities.................. 81 --
------ ------
Total gross deferred tax liabilities.................. 3,406 2,953
------ ------
Net deferred tax assets (liabilities)................. $ (585) $ 318
====== ======
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
income tax assets will not be realized. The ultimate realization of deferred
income tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible.
The valuation allowance for deferred tax assets at December 31, 1997 was
$50,000. The net change in the total valuation allowance for the year ended
December 31, 1998 was a decrease of $50,000. There was no change in the
valuation allowance for the year ended December 31, 1999.
At December 31, 1999, the Company has net operating loss and tax credit
carryforwards for federal income tax purposes of approximately $5,457,000 and
$556,000, respectively, which are available to offset future federal taxable
income through 2019. The availability of approximately $714,000 of the net
operating loss carryforwards to reduce future taxable income is limited to
approximately $71,000 per year for the remaining life of the net operating
losses, as a result of a change in ownership.
F-15
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, 1998 AND 1999
(13) STOCKHOLDERS' EQUITY
(a) INITIAL PUBLIC OFFERING
The Company completed the sale of 4,000,000 shares of common stock through
an initial public offering (the "Offering") on July 15, 1998. The Offering
resulted in net proceeds to the Company of approximately $58,000,000 after
deducting offering expenses, discounts and commissions. On July 20, 1998, the
Company completed the sale of an additional 37,500 shares of common stock in
connection with the underwriters' exercise of their option to cover
over-allotments, resulting in net proceeds of $500,000.
(b) EMPLOYEE STOCK OPTION PLANS
In April 1996, the Company adopted the 1996 Stock Option Incentive Plan (the
1996 Stock Option Plan), pursuant to which stock options covering an aggregate
of 800,000 shares of the Company's common stock may be granted. Options awarded
under the 1996 Stock Option Plan (i) are generally granted at prices that equate
to or are above fair market value on the date of the grant; (ii) generally
become exercisable over a period of one to four years; and (iii) generally
expire five years subsequent to award.
At December 31, 1999, there were 140,310 shares available for grant under
the 1996 Stock Option Plan. The per share weighted-average fair value of stock
options granted during 1996 was $0.06, on the date of grant using the Black
Scholes option-pricing model with the following weighted-average assumptions:
Risk-free interest rate, 6%; expected life, two--five years and expected
dividend yield, 0%. For the years ended December 31, 1997, 1998 and 1999 there
were no stock options granted, nor does the Company intend to make future
grants, under the 1996 Stock Option Plan.
In connection with an employment agreement entered into in September 1995
with the Company's Chief Executive Officer, the Company granted options to
acquire 1,520,766 shares of common stock at $0.375 per share. Vesting of the
stock options was conditioned upon meeting certain revenue and earnings
requirements, which were met during 1996 and 1997. Also, the agreement provided
for a bonus to be paid to the Chief Executive Officer in an amount equal to the
exercise price of the options plus any related income tax due by the Chief
Executive Officer upon exercise of the options. The Chief Executive Officer
notified the Company of his intent to exercise the options in December 1997 and
the shares were issued in January 1998. Compensation expense of approximately
$2,300,000 was charged to operations in 1997 to recognize the bonus due to the
Chief Executive Officer.
In conjunction with a 1996 stock purchase agreement, the Company granted
options to a shareholder to acquire an aggregate of 942,632 shares of common
stock at option exercise prices ranging from $0.375 to $0.625 per share. During
1997, the shareholder exercised the options for an aggregate exercise price of
approximately $550,000.
In February 1998, the Company adopted the 1998 Stock Incentive Plan ("the
1998 Stock Option Plan"), pursuant to which stock options covering an aggregate
of 1,800,000 shares (of which 900,000 were utilized as a direct stock grant to
Faldo (see note 6)) of the Company's common stock may be granted. At
December 31, 1999, 144,050 shares remain available for grant, including
forfeitures. For financial statement reporting purposes, the 1998 grants were
deemed to have fair market values ranging from $3.75 to $11.25 per share at the
date of grant. Accordingly, the Company has recorded deferred compensation of
approximately $704,000 and $476,000, net of amounts amortized and forfeited, at
December 31, 1998 and
F-16
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, 1998 AND 1999
(13) STOCKHOLDERS' EQUITY (CONTINUED)
1999, respectively. The deferred compensation is being amortized to expense over
the vesting period of the options. The 1999 grants were made at fair market
value, and, accordingly, no additional deferred compensation was recorded.
In May 1999, the shareholders of the Company adopted the 1999 Non-employee
Director Plan of Adams Golf, Inc. (the "Director Plan") which allows for 200,000
shares of the Company's stock to be issued to non-employee directors. At
December 31, 1999, 10,000 options had been granted to a board member at an
exercise price of $4.75, the fair market value of the Company's common stock on
the date of grant. These options vest equally on each of the first four
anniversary dates from date of grant and expire five years from the date of
grant.
In November 1999, the Company adopted the 1999 Stock Option Plan for Outside
Consultants (the "Consultant Plan"). The Consultant Plan allows for the granting
of up to 1,000,000 shares of the Company's common stock. At December 31, 1999,
224,800 shares were outstanding under the Consultant Plan.
The Company accounts for the Director Plan and Consultant Plan under SFAS
No. 123. Compensation expense for the options granted under these plans for the
year ended December 31, 1999 was not material. The Company applies Accounting
Principles Board Opinion No. 25 in accounting for its 1998 Stock Option Plan,
and for those stock options granted at fair market value, no compensation cost
has been recognized in the consolidated financial statements. Had the Company
determined compensation cost based on the fair value at the grant date for its
stock options under SFAS No. 123, the Company's net income (loss) would have
been the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net income (loss):
As reported................................... $(4,654) $12,510 $(10,589)
Pro forma..................................... (4,744) 12,445 (10,780)
Diluted income (loss) per common share:
As reported................................... $ (0.37) $ 0.61 $ (0.47)
Pro forma..................................... (0.38) 0.60 (0.48)
</TABLE>
The per share weighted-average fair value of stock options granted during
1998 and 1999 was $5.22 and $0.83 on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions: Risk-free
interest rate, 6%; expected life, 5 years; expected dividend yield, 0%;
volatility, 1.5% and 7.4% in 1998 and 1999, respectively.
Pro forma net income (loss) reflects only options granted in 1997, 1998 and
1999. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income (loss)
amounts presented above.
F-17
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, 1998 AND 1999
(13) STOCKHOLDERS' EQUITY (CONTINUED)
A summary of stock option activity follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
---------- --------------
<S> <C> <C>
Options outstanding at December 31, 1996............. 3,467,714 $0.44
Options exercised.................................... (946,104) 0.583
---------- -----
Options outstanding at December 31, 1997............. 2,521,610 0.375
Options granted...................................... 467,700 3.39
Options exercised.................................... (2,479,944) 0.375
Options forfeited.................................... (151,304) 1.91
---------- -----
Options outstanding at December 31, 1998............. 358,062 3.67
Options granted...................................... 741,050 3.22
Options exercised.................................... (789) 2.50
Options forfeited.................................... (108,360) 4.37
---------- -----
Options outstanding at December 31, 1999............. 989,963 $3.24
========== =====
</TABLE>
At December 31, 1999, the exercise prices ranged from $2.27 to $11.25 per
share, and the weighted-average remaining contractual life of outstanding
options is approximately 4 years.
At December 31, 1998 and 1999, the number of options exercisable was 45,000
and 121,728, respectively, and the per share weighted-average exercise price of
those options was $2.50 and $3.18, respectively. At December 31, 1999, the
remaining contractual life of options exercisable was 3.33 years.
(c) STOCK COMPENSATION AWARD
In December 1997, the Board of Directors of the Company approved a stock
compensation award of 2,000,000 shares of common stock to the Chief Executive
Officer of the Company. In addition, the Company agreed to pay all income taxes
due by the Chief Executive Officer relating to such stock award and related tax
bonus. Aggregate compensation of $12,542,000 (including $2,542,000 for estimated
taxes) was recorded by the Company during the year ended December 31, 1997 based
on the fair market value of the stock.
(d) NOTE WITH SHAREHOLDER CONVERTED TO STOCK
The Company borrowed $200,000 from a shareholder in October 1996 and an
additional $250,000 from the same shareholder in 1997. The aggregate notes
payable balance of $450,000 was converted into 900,000 shares of the Company's
stock in September 1997.
(e) STOCK SPLIT AND AUTHORIZED CLASSES OF STOCK
Effective April 29, 1998, the stockholders of the Company authorized a
two-for-one stock split for holders of record on May 1, 1998. The stock split
has been reflected in the accompanying consolidated financial statements and,
accordingly, all applicable dollar, share and per share amounts have been
F-18
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, 1998 AND 1999
(13) STOCKHOLDERS' EQUITY (CONTINUED)
restated to reflect the stock split. In addition, the stockholders of the
Company also approved an increase in the number of authorized shares of Common
Stock to 50,000,000 and established a class of preferred stock with a par value
of $.01 per share and authorized shares of 5,000,000.
(f) COMMON STOCK REPURCHASE PROGRAM
In October 1998, the Board of Directors approved a plan whereby the Company
is authorized to repurchase from time to time on the open market up to 2,000,000
shares of its common stock. At December 31, 1998, the Company had repurchased
657,500 shares of common stock at an average price per share of $4.77 for a
total cost of approximately $3,136,000 and the repurchased shares are held in
treasury. No shares were repurchased during the year ended December 31, 1999.
(14) 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 for the years ended December 31, 1997, 1998, and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
United States.................................... $35,808 $73,580 $46,612
Rest of World.................................... 882 11,031 7,388
------- ------- -------
$36,690 $84,611 $54,000
======= ======= =======
</TABLE>
At December 31, 1999, the Company has approximately $20,000 in long-lived
assets outside of the United States.
F-19
<PAGE>
SCHEDULE II
ADAMS GOLF, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS(1) PERIOD
- ----------- ---------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1997......... $ 26 739 -- 67 698
Year ended December 31, 1998......... $ 698 1,464 -- 868 1,294
Year ended December 31, 1999......... $1,294 1,709 -- 2,037 966
Product Warranty and Sales Returns:
Year ended December 31, 1997......... $ -- 1,808 -- 1,359 449
Year ended December 31, 1998......... $ 449 5,476 -- 5,189 736
Year ended December 31, 1999......... $ 736 1,877 -- 2,083 530
</TABLE>
- ------------------------
(1) Represents uncollectable accounts charged against the allowance for doubtful
accounts and actual costs incurred for warranty repairs and sales returns.
S-1
<PAGE>
1999 NON-EMPLOYEE DIRECTOR PLAN OF
ADAMS GOLF, INC.
1. PURPOSE. The purpose of this Plan is to advance the interests of Adams
Golf, Inc., a Delaware corporation (the "Company"), by providing an additional
incentive to attract and retain qualified and competent directors, upon whose
efforts and judgment the success of the Company is largely dependent, through
the encouragement of stock ownership in the Company by such persons.
2. DEFINITIONS. As used herein, the following terms shall have the meaning
indicated:
(a) "Board" shall mean the Board of Directors of Adams Golf, Inc.
(b) "Committee" shall mean the committee, if any, appointed by the
Board pursuant to Section 12 hereof.
(c) "Common Stock" shall mean the common stock, par value one tenth
of one cent ($0.001) of the Company.
(d) "Date of Grant" shall mean the date on which an Option is
granted to an Eligible Person pursuant to this Plan.
(e) "Director" shall mean a member of the Board.
(f) "Eligible Person(s)" shall mean those persons who are Directors of
the Company and who are not employees of the Company or a Subsidiary.
(g) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(h) "Fair Market Value" of a Share on any date means the closing price
on the business day immediately preceding such date. For this purpose, the
closing price of a Share on any business day shall be (i) if the Common
Stock is listed or admitted for trading on any United States national
securities exchange, the last reported sale price of the Common Stock on
such exchange, as reported in any newspaper of general circulation, (ii) if
actual transactions in the Common Stock are included in the Nasdaq National
Market or are reported on a consolidated transaction reporting system, the
closing sales price of the Common Stock on such system, (iii) if the Common
Stock is otherwise quoted on the Nasdaq system, or any similar system of
automated dissemination of quotations of securities prices in common use,
the mean between the closing high bid and low asked quotations for such day
of the Common Stock on such system, (iv) if none of clause (i), (ii) or
(iii) is applicable, the mean between the high bid and low asked quotations
for the Common Stock as reported by the National Daily Quotation Service
if at least two securities dealers have inserted both bid and asked
quotations for the Common Stock on at least five (5) of the ten (10)
preceding days and (v) if none of clause (i), (ii), (iii) or (iv) is
applicable, the price determined by the Board in the exercise of its
good faith discretion.
<PAGE>
(i) "Internal Revenue Code" or "Code" shall mean the Internal Revenue
Code of 1986, as it now exists or may be amended from time to time.
(j) "Non-Employee Director" shall have the meaning set forth in Rule
16b-3 of the Exchange Act or any successor provision thereof.
(k) "Nonqualified Stock Option" shall mean an option that is not an
incentive stock option as defined in Section 422 of the Internal Revenue
Code.
(l) "Option" (when capitalized) shall mean any option granted under
Section 4 of this Plan.
(m) "Optionee" shall mean a person to whom an Option is granted under
this Plan or any successor to the rights of such person under this Plan by
reason of the death of such person.
(n) "Plan" shall mean this 1999 Non-Employee Director Plan of Adams
Golf, Inc.
(o) "Share(s)" shall mean a share or shares of the Common Stock.
(p) "Subsidiary" shall mean any corporation or other entity, whether
domestic or foreign, in which the Company has or obtains, directly or
indirectly, a proprietary interest of more than fifty percent (50%) by
reason of stock ownership or otherwise.
Other terms shall have the meanings set forth elsewhere herein.
3. SHARES AND OPTIONS.
(a) The maximum number of Shares to be issued pursuant to Options
under this Plan, shall be Two Hundred Thousand (200,000) Shares. Shares
issued pursuant to Options granted under this Plan may be issued from
Shares held in the Company's treasury or from authorized and unissued
Shares. If any Option granted under this Plan shall terminate, expire, or
be canceled or surrendered as to any Shares, new Options may thereafter be
granted covering such Shares.
(b) Each Option granted hereunder shall be evidenced by an option
agreement (an "Option Agreement") and shall contain such terms as are
not inconsistent with this Plan or any applicable law. Any person who
files with the Committee, in a form satisfactory to the Committee, a
written waiver of eligibility to receive any Option under this Plan
shall not be eligible to receive any Option under this Plan for the
duration of such waiver. Any Option granted hereunder shall be a
Nonqualified Stock Option.
(c) Neither the Plan nor any Option granted under the Plan shall
confer upon any person any right to continue to serve as a Director.
-2-
<PAGE>
4. DISCRETIONARY GRANTS OF OPTIONS.
(a) At any time and from time to time during the term of this Plan and
subject to the provisions herein, Options may be granted by the Committee
to any Eligible Person for such number of Shares as the Committee in its
discretion shall deem to be in the best interest of the Company and which
will serve to further the purposes of the Plan. Upon the grant of an
Option, the Company shall promptly deliver to such Eligible Person an
Option Agreement. Options granted pursuant to this Section 4(a) shall vest
according to the vesting schedule provided in the Option Agreement and
shall be exercisable for the term provided in the Option Agreement. In the
event no term is provided in the Option Agreement, such term shall be ten
(10) years.
(b) The Options granted to Directors pursuant to Section 4(a) herein
shall be in addition to any other benefits with respect to the Director's
position with the Company or its Subsidiaries.
5. OPTION PRICE. The option price per Share of any Option granted pursuant
to this Plan shall be one hundred percent (100%) of the Fair Market Value per
Share on the Date of Grant.
6. EXERCISE OF OPTIONS. Options may be exercised at any time after the date
on which the Options, or any portion thereof, are vested until the Option
expires pursuant to Section 7; provided, however, that at least six months must
elapse from the date of the acquisition of the Option to the date of disposition
of the Option (other than upon exercise or conversion) or the underlying Shares.
An Option shall be deemed exercised when (i) the Company has received written
notice of such exercise in accordance with the terms of the Option Agreement,
(ii) full payment of the aggregate option price of the Shares as to which the
Option is exercised has been made and (iii) arrangements that are satisfactory
to the Committee in its sole discretion have been made for the Optionee's
payment to the Company of the amount, if any, that the Committee determines to
be necessary for the Company to withhold in accordance with applicable federal
or state income tax withholding requirements. Pursuant to procedures approved by
the Committee, tax withholding requirements, at the option of an Optionee, may
be met by withholding Shares otherwise deliverable to the Optionee upon the
exercise of an Option. Unless further limited by the Committee in any Option
Agreement, the Option price of any Shares purchased shall be paid solely in
cash, by certified or cashier's check, by money order, with Shares (but with
Shares that have been owned by the Optionee for at least six months and only if
permitted by the Option Agreement or otherwise permitted by the Committee in its
sole discretion at the time of exercise) or by a combination of the above;
provided, however, that the Committee in its sole discretion may accept a
personal check in full or partial payment of any Shares. If the exercise price
is paid in whole or in part with Shares, the value of the Shares surrendered
shall be their Fair Market Value on the date the Shares are received by the
Company. An Option shall not at any time be exercisable with respect to less
than 100 Shares unless the remaining Shares covered by the Option are less than
100 Shares.
7. TERMINATION OF OPTION PERIOD. The unexercised portion of an Option shall
automatically and without notice terminate and become null and void at the time
of the earliest to occur of the following:
-3-
<PAGE>
(a) sixty (60) days after the date that an Optionee ceases to be a
Director regardless of the reason therefor other than as a result of such
termination by death of the Optionee;
(b) one (1) year after the date that an Optionee ceases to be a
Director by reason of death of the Optionee or six (6) months after the
Optionee shall die if that shall occur during the sixty-day period
described in Subsection 7(a) herein; or
(c) the expiration date of the term of such Option.
8. ADJUSTMENT OF PROVISIONS.
(a) If at any time while this Plan is in effect or unexercised Options
are outstanding, (1) there shall be any increase or decrease in the number
of issued and outstanding Shares through the declaration of a stock
dividend, stock split, combination of shares or through any
recapitalization resulting in a stock split-up, spin-off, combination or
exchange of Shares or (2) the value of the outstanding shares of Common
Stock of the Company is reduced by reason of an extraordinary cash
dividend, then and in each such event:
(i) appropriate adjustment shall be made in the maximum number of
Shares then subject to being optioned under this Plan, so that the
same proportion of the Company's issued and outstanding Shares shall
continue to be subject to being so optioned; and
(ii) appropriate adjustment shall be made in the number of Shares
and the exercise price per Share thereof then subject to any
outstanding Option, so that the same proportion of the Company's
issued and outstanding Shares shall remain subject to purchase at the
same aggregate exercise price.
(b) Except as otherwise expressly provided herein, the issuance by the
Company of shares of its capital stock of any class, or securities
convertible into shares of capital stock of any class, either in connection
with a direct sale or upon the exercise of rights or warrants to subscribe
therefor, or upon conversion of shares or obligations of the Company
convertible into such shares or other securities, shall not affect, and no
adjustment by reason thereof shall be made with respect to, the number of
or exercise price of Shares then subject to outstanding Options granted
under this Plan.
(c) Without limiting the generality of the foregoing, the existence of
outstanding Options granted under this Plan shall not affect in any manner
the right or power of the Company to make, authorize or consummate (i) any
or all adjustments, recapitalizations, reorganizations or other changes in
the Company's capital structure or its business; (ii) any merger or
consolidation of the Company; (iii) any issue by the Company of debt
securities, or preferred or preference stock that would rank above the
Shares subject to outstanding Options; (iv) the dissolution or liquidation
of the Company; (v) any sale, transfer or assignment of all or any part of
the assets or business of the Company; or (vi) any other corporate act or
proceeding, whether of a similar character or otherwise.
-4-
<PAGE>
9. REORGANIZATIONS.
(a) Notwithstanding anything contained in this Plan or any Option
Agreement to the contrary, in the event of a Change of Control, as defined
below, all or any of the following may, in the sole discretion of the
Committee, occur with respect to any and all Options outstanding as of such
Change of Control:
(i) automatic acceleration of the vesting of such Options so that
such Options may be immediately exercised in full on or before the
relevant date fixed in the Option Agreement;
(ii) upon exercise of an Option during the 60-day period from and
after the date of a Change of Control, the Optionee exercising the
Option may in lieu of the receipt of Shares upon the exercise of the
Option, elect by written notice to the Company to receive an amount in
cash equal to the excess of the aggregate Value (as defined below) of
the Shares covered by the Option or portion thereof surrendered
determined on the date the Option is exercised, over the aggregate
exercise price of the Option (such excess is referred to herein as the
"Aggregate Spread"); provided, however, and notwithstanding any other
provision of this Plan, if the end of such 60-day period from and
after the date of a Change of Control is within six months of the Date
of Grant, such Option shall be canceled in exchange for a cash payment
to the Optionee equal to the Aggregate Spread on the day which is six
months and one day after the Date of Grant of such Option. As used in
this Section 9(a), the term "Value" means the higher of (i) the
highest Fair Market Value during the 60-day period from and after the
date of a Change of Control and (ii) if the Change of Control is the
result of a transaction or series of transactions described in
paragraphs (i) or (iii) of the definition of Change of Control, the
highest price per share of the Common Stock paid in such transaction
or series of transactions (which in the case of paragraph (i) shall be
the highest price per Share as reflected in a Schedule 13D filed by
the person having made the acquisition);
(iii) if an Optionee ceases to be a Director regardless of the
reason therefor other than death following a Change of Control, any
Option held by such Optionee may be exercised by such Optionee until
the earlier of sixty (60) days after the Optionee ceases to be a
Director or the expiration date of such Option;
(iv) all Options become non-cancelable;
(v) if the Option shall remain exercisable after any such Change
of Control, from and after such Change of Control, any such Option
shall be exercisable only for the kind and amount of securities and/or
other property, or the cash equivalent thereof, receivable as a result
of such Change of Control by the holder of a number of shares of stock
for which such Option could have been exercised immediately prior to
such Change of Control.
-5-
<PAGE>
(b) "Change of Control" of the Company shall be deemed to have occurred
upon the happening of any of the following events:
(i) the acquisition, other than from the Company, by any individual,
entity or group (within the meaning of Section 13(d)(3) of the Exchange
Act) other than Royal Holding Company, Inc. or B. H. Adams of beneficial
ownership of thirty percent (30%) or more of either the then outstanding
shares of Common Stock of the Company or the combined voting power of the
then outstanding voting securities of the Company entitled to vote
generally in the election of directors;
(ii) individuals who, as of January 1, 1999, constitute the Board as
of the date thereof (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board, provided that any individual
becoming a Director subsequent to such date whose election, or nomination
for election by the Company's stockholders, was approved by a vote of at
least a majority of the Directors then comprising the Incumbent Board shall
be considered as though such individual were a member of the Incumbent
Board, but excluding, for this purpose, any such individual whose initial
assumption of office is in connection with an actual or threatened election
contest relating to the election of the Directors (as such terms are used
in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act);
(iii) approval by the stockholders of the Company of a reorganization,
merger or consolidation of the Company, in each case, with respect to which
the individuals and entities who were the respective beneficial owners of
the Common Stock and voting securities of the Company immediately prior to
such reorganization, merger or consolidation do not, following such
reorganization, merger or consolidation, beneficially own, directly or
indirectly, more than sixty percent (60%) of, respectively, the then
outstanding shares of Common Stock and the combined voting power of the
then outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the Company resulting from
such reorganization, merger or consolidation;
(iv) consummation by the Company of the sale or other disposition by
the Company of all or substantially all of the Company's assets; or
(v) approval by the stockholders of the Company or any order by a
court of competent jurisdiction of a plan of liquidation of the Company.
(c) If the Company shall consummate any merger, consolidation or other
reorganization not involving a Change of Control (a "Reorganization") in which
holders of shares of Common Stock are entitled to receive in respect of such
shares any securities, cash or other consideration (including, without
limitation, a different number of shares of Common Stock), each Option
outstanding under this Plan shall thereafter be exercisable, in accordance with
this Plan, only for the kind and amount of securities, cash and/or other
consideration receivable upon such Reorganization by a holder of the same
-6-
<PAGE>
number of shares of Common Stock as are subject to that Option immediately prior
to such Reorganization, and any adjustments will be made to the terms of the
Option in the sole discretion of the Committee as it may deem appropriate to
give effect to the Reorganization.
10. TRANSFERABILITY OF OPTIONS. Each Option Agreement shall provide that
such Option shall not be transferable by the Optionee otherwise than by will or
the laws of descent and distribution or pursuant to a qualified domestic
relations order and that so long as an Optionee lives, only such Optionee or his
or her guardian or legal representative shall have the right to exercise the
related Option.
11. ISSUANCE OF SHARES. No person shall be, or have any of the rights or
privileges of, a stockholder of the Company with respect to any of the Shares
subject to an Option unless and until certificates representing such Shares
shall have been issued and delivered to such person. As a condition of any
transfer of the certificate for Shares, the Committee may obtain such agreements
or undertakings, if any, as it may deem necessary or advisable to assure
compliance with any provision of this Plan, any Option Agreement or any law or
regulation, including, but not limited to, the following:
(i) A representation, warranty or agreement by the Optionee to
the Company, at the time any Option is exercised, that he or she is
acquiring the Shares to be issued to him or her for investment and not
with a view to, or for sale in connection with, the distribution of
any such Shares; and
(ii) A representation, warranty or agreement to be bound by any
legends that are, in the opinion of the Committee, necessary or
appropriate to comply with the provisions of any securities law deemed
by the Committee to be applicable to the issuance of the Shares and
are endorsed upon the Share certificates.
Share certificates issued to an Optionee who is a party to any stockholder
agreement or a similar agreement shall bear the legends contained in such
agreements.
12. ADMINISTRATION OF THE PLAN.
(a) This Plan shall be administered by a stock option committee (the
"Committee") consisting of not fewer than two (2) Non-Employee Directors;
provided, however, that if no Committee is appointed, the full Board shall
administer this Plan and in such case all references to the Committee shall
be deemed to be references to the Board. The Committee shall have all of
the powers of the Board with respect to this Plan. Any member of the
Committee may be removed at any time, with or without cause, by resolution
of the Board, and any vacancy occurring in the membership of the Committee
may be filled by appointment by the Board.
(b) The Committee, from time to time, may adopt rules and regulations
for carrying out the purposes of this Plan. The Committee may at any time
terminate this Plan or make such modification or amendment thereof as it
deems advisable. Termination or any modification or amendment of this Plan
shall not, without consent of
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<PAGE>
the Optionee, affect his rights under an Option previously granted to him.
The determinations and the interpretation and construction of any provision
of this Plan by the Committee shall be final and conclusive.
(c) Any and all decisions or determinations of the Committee shall be
made either (i) by a majority vote of the members of the Committee at a
meeting or (ii) without a meeting by the written approval of all of the
members of the Committee.
13. INTERPRETATION.
(a) If any provision of this Plan is held invalid for any reason, such
holding shall not affect the remaining provisions hereof, but instead this
Plan shall be construed and enforced as if such provision had never been
included in this Plan.
(b) THIS PLAN SHALL BE GOVERNED BY THE SUBSTANTIVE LAWS OF THE STATE
OF DELAWARE, WITHOUT REFERENCE TO DELAWARE CONFLICT OF LAW PROVISIONS.
(c) Headings contained in this Plan are for convenience only and shall
in no manner be construed as part of this Plan.
(d) Any reference to the masculine, feminine or neuter gender shall be
a reference to such other gender as is appropriate.
14. SECTION 83(b) ELECTION. If as a result of exercising an Option an
Optionee receives Shares that are subject to a "substantial risk of forfeiture"
and are not "transferable" as those terms are defined for purposes of Section
83(a) of the Code, then such Optionee may elect under Section 83(b) of the Code
to include in his gross income, for his taxable year in which the Shares are
transferred to such Optionee, the excess of the Fair Market Value of such Shares
at the time of transfer (determined without regard to any restriction other than
one which by its terms will never lapse), over the amount paid for the Shares.
If the Optionee makes the Section 83(b) election described above, the Optionee
shall (i) make such election in a manner that is satisfactory to the Committee,
(ii) provide the Company with a copy of such election, (iii) agree to promptly
notify the Company if any Internal Revenue Service or state tax agent, on audit
or otherwise, questions the validity or correctness of such election or of the
amount of income reportable on account of such election, and (iv) agree to such
withholding as the Committee may reasonably require in its sole and absolute
discretion.
15. EFFECTIVE DATE AND TERMINATION DATE. The effective date of this Plan is
February 3, 1999 and the effective date of any amendment to this Plan is the
date on which the Board adopted such amendment; provided, however, if this Plan
is not approved by the stockholders of the Company within twelve (12) months
after the effective date, then, in such event, this Plan and all Options granted
pursuant to this Plan shall be null and void. This Plan shall terminate on
February 2, 2009, and any Option outstanding on such date will remain
outstanding until it has either expired or has been exercised.
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<PAGE>
STOCK OPTION AGREEMENT
UNDER
1999 NON-EMPLOYEE DIRECTOR PLAN
OF
ADAMS GOLF, INC.
STOCK OPTION AGREEMENT (this "Agreement") entered into this ____ day of
___________, ____, between ADAMS GOLF, INC., a Delaware corporation (the
"Corporation"), and __________________, a member of the Board of Directors of
the Corporation (the "Optionee," which term as used herein shall be deemed to
include any successor to the Optionee by will or by the laws of descent and
distribution, unless the context shall otherwise require).
Pursuant to the Corporation's 1999 Non-Employee Director Plan (the "Plan"),
the Corporation, acting through its Compensation/Plan Committee of the Board of
Directors (the "Committee"), approved the issuance to the Optionee, effective as
of the date set forth above, of a nonqualified stock option to purchase up to an
aggregate of ____________ shares of common stock, par value $.001, of the
Corporation (the "Common Stock"), at the price of $____ per share (the "Option
Price") which represents not less than 100% of the fair market value of a share
of Common Stock determined in accordance with the Plan, upon the terms and
conditions hereinafter set forth. (Capitalized terms used herein but not defined
herein shall have the meaning ascribed to them in the Plan).
NOW, THEREFORE, in consideration of the mutual premises and undertakings
hereinafter set forth, the parties hereto agree as follows:
1. OPTION; OPTION PRICE. On behalf of the Corporation, the Committee hereby
grants as of the date of this Agreement to the Optionee the option (the
"Option") to purchase, subject to the terms and conditions of this Agreement and
the provisions of the Plan (which is incorporated by reference herein and which
in all cases shall control in the event of any conflict with the terms,
definitions and provisions of this Agreement), _______________ shares of Common
Stock of the Corporation at an exercise price per share equal to the Option
Price. A copy of the Plan as in effect on the date hereof has been supplied to
the Optionee, and the Optionee by executing this Agreement hereby acknowledges
receipt thereof.
2. TERM. The term (the "Option Term") of the Option shall commence on the
date of this Agreement and shall terminate on the fifth anniversary of the date
of this Agreement, unless such Option shall theretofore have been terminated in
accordance with the terms hereof or the provisions of the Plan.
3. VESTING; CHANGE OF CONTROL; RESTRICTIONS ON EXERCISE.
(a) Subject to the provisions of Sections 5 and 8 hereof, and unless
accelerated, as set forth in the Plan or as provided herein, the Option granted
hereunder shall vest and become exercisable for the number of shares set forth
opposite the dates noted below (the "Option Vesting Schedule").
<PAGE>
Cumulative
Date(s) Number of Vested Shares
------- -----------------------
(b) Notwithstanding the provisions of Paragraph 3(a) above, upon a Change
in Control (as hereinafter defined):
(i) the Option shall become fully vested and shall become
immediately exercisable with respect to all shares subject to the Option;
(ii) upon exercise of the Option during the 60-day period from and
after the date of a Change of Control, the Optionee may in lieu of the
receipt of Common Stock upon the exercise of the Option, elect by written
notice to the Corporation to receive an amount in cash equal to the excess
of the aggregate Value (as defined below) of the shares of Common Stock
covered by the Option or portion thereof surrendered determined on the date
the Option is exercised, over the aggregate exercise price of the Option
(such excess is referred to herein as the "Aggregate Spread"); provided,
however, if the end of such 60-day period from and after the date of a
Change of Control is within six months of the date of grant of the Option,
the Option shall be cancelled in exchange for a cash payment to the
Optionee equal to the Aggregate Spread on the day which is six months and
one day after the date of grant of the Option. As used in this Section
3(b)(ii), the term "Value" means the higher of (1) the highest Fair Market
Value (as defined below) during the 60-day period from and after the date
of a Change of Control and (2) if the Change of Control is the result of a
transaction or series of transactions described in paragraphs (i) or (iii)
of the definition of Change of Control, the highest price per share of the
Common Stock paid in such transaction or series of transactions (which in
the case of paragraph (i) shall be the highest price per share of the
Common Stock as reflected in a Schedule 13D filed by the person having made
the acquisition) and the term "Fair Market Value" means the "Fair Market
Value" of the Common Stock on any date of reference shall be the closing
price on the business day immediately preceding such date. For this
purpose, the closing price of the Common Stock on any business day shall be
(i) if the Common Stock is listed or admitted for trading on any United
States national securities exchange, the last reported sale price of the
Common Stock on such exchange, as reported in any newspaper of general
circulation, (ii) if actual transactions in the Common Stock are included
in the Nasdaq National Market or are reported on a consolidated transaction
reporting system, the closing sales price of the Common Stock on such
system, (iii) if the Common Stock is otherwise quoted on the Nasdaq system,
or any similar system of automated dissemination of quotations of
securities prices in common use, the mean between the closing high bid and
low asked quotations for such day of the Common Stock on such system, (iv)
if none of clause (i), (ii) or (iii) is applicable, the mean between the
high bid and low asked quotations for the Common Stock as reported by the
National Daily Quotation Service if at least two securities dealers have
inserted both bid and asked
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<PAGE>
quotations for the Common Stock on at least five (5) of the ten (10)
preceding days and (v) if none of clause (i), (ii), (iii) or (iv) is
applicable, the most recent valuation price for the Common Stock as
adjusted by the Board in the exercise of its good faith discretion;
(iii) if the Optionee ceases to be a Director regardless of the
reason therefor other than death following a Change of Control, the
Option may be exercised by the Optionee until the earlier of sixty (60)
days after the Optionee ceases to be a Director or the expiration date
of the Option;
(iv) the Option becomes non-cancelable; and
(v) if the Option shall remain exercisable after any such Change
of Control, from and after such Change of Control, the Option shall be
exercisable only for the kind and amount of securities and/or other
property, or the cash equivalent thereof, receivable as a result of such
Change of Control by the holder of a number of shares of stock for which
the Option could have been exercised immediately prior to such Change of
Control.
(c) For purposes of this Agreement, a Change in Control of the Corporation
shall be deemed to have occurred upon the happening of any of the following
events:
(i) the acquisition, other than from the Corporation, by any
individual, entity or group (within the meaning of Section 13(d)(3) or
14(d)(2) of the Exchange Act) other than Royal Holding Company, Inc. or B.
H. Adams of beneficial ownership of thirty percent (30%) or more of either
the then outstanding shares of Common Stock of the Corporation or the
combined voting power of the then outstanding voting securities of the
Corporation entitled to vote generally in the election of directors;
provided, however, that any acquisition by the Corporation or any
corporation or other entity, whether domestic or foreign, in which the
Corporation has or obtains, directly or indirectly, a proprietary interest
of more than fifty percent (50%) by reason of stock ownership or otherwise
("Subsidiary"), or any employee benefit plan (or related trust) of the
Corporation or its Subsidiaries, or any corporation with respect to which,
following such acquisition, more than fifty percent (50%) of, respectively,
the then outstanding shares of common stock of such corporation and the
combined voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or substantially all of
the individuals and entities who were the beneficial owners, respectively,
of the Common Stock and voting securities of the Corporation immediately
prior to such acquisition in substantially the same proportion as their
ownership, immediately prior to such acquisition, of the then outstanding
shares of Common Stock of the Corporation or the combined voting power of
the then outstanding voting securities of the Corporation entitled to vote
generally in the election of directors, as the case may be, shall not
constitute a Change of Control;
(ii) individuals who constitute the Board of Directors of the
Corporation as of January 1, 1999 (the "Incumbent Board") cease for any
reason to constitute at least a majority of the Board of Directors of the
Corporation, provided that any individual
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<PAGE>
becoming a director subsequent to such date whose election, or nomination
for election by the Corporation's stockholders, was approved by a vote of
at least a majority of the directors then comprising the Incumbent Board
shall be considered as though such individual were a member of the
Incumbent Board, but excluding, for this purpose, any such individual whose
initial assumption of office is in connection with an actual or threatened
election contest relating to the election of the directors of the
Corporation (as such terms are used in Rule 14a-11 of Regulation 14A
promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"));
(iii) approval by the stockholders of the Corporation of a
reorganization, merger or consolidation of the Corporation, in each case,
with respect to which the individuals and entities who were the respective
beneficial owners of the Common Stock and voting securities of the
Corporation immediately prior to such reorganization, merger or
consolidation do not, following such reorganization, merger or
consolidation, beneficially own, directly or indirectly, more than sixty
percent (60%) of, respectively, the then outstanding shares of Common Stock
and the combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors, as the case may
be, of the corporation resulting from such reorganization, merger or
consolidation;
(iv) consummation by the Corporation of the sale or other
disposition by the Corporation of all or substantially all of the
Corporation's assets; or
(v) approval by the stockholders of the Corporation or any order
by a court of competent jurisdiction of a plan of liquidation of the
Corporation.
(d) If the Corporation shall consummate any merger, consolidation or other
reorganization not involving a Change of Control (a "Reorganization") in which
holders of shares of Common Stock are entitled to receive in respect of such
shares any securities, cash or other consideration (including, without
limitation, a different number of shares of Common Stock), the Option shall
thereafter be exercisable, in accordance with the Plan and this Agreement, only
for the kind and amount of securities, cash and/or other consideration
receivable upon such Reorganization by a holder of the same number of shares of
Common Stock as are subject to the Option immediately prior to such
Reorganization, and any adjustments will be made to the terms of the Option in
the sole discretion of the Committee as it may deem appropriate to give effect
to the Reorganization.
(e) Subject to the provisions of Sections 5 and 8 hereof, shares as to
which the Option becomes exercisable pursuant to the foregoing provisions may be
purchased at any time thereafter prior to the expiration or termination of the
Option.
4. TERMINATION OF OPTION.
(a) The unexercised portion of the Option shall automatically and without
notice terminate and become null and void at the time of the earliest to occur
of:
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<PAGE>
(i) sixty (60) days after the date that the Optionee ceases to be
a Director regardless of the reason therefor other than as a result of such
termination by death of the Optionee;
(ii) one (1) year after the date that the Optionee ceases to be a
Director by reason of death of the Optionee or six (6) months after the
Optionee shall die if that shall occur during the sixty-day period
described in Section 4(a)(i); or
(iii) the expiration date of the term of the Option.
5. PROCEDURE FOR EXERCISE.
(a) Subject to the requirements of Section 8, the Option may be exercised,
from time to time, in whole or in part (but for the purchase of a whole number
of shares only), by delivery of a written notice (the "Notice") from the
Optionee to the Secretary of the Corporation, which Notice shall:
(i) state that the Optionee elects to exercise the
Option;
(ii) state the number of shares with respect to which the Option is
being exercised (the "Optioned Shares");
(iii) state the date upon which the Optionee desires to consummate
the purchase of the Optioned Shares (which date must be prior to the
termination of such Option and no later than thirty (30) days after the
date of receipt of such Notice);
(iv) include any representations of the Optionee required under
Section 8(c); and
(v) if the Option shall be exercised pursuant to Section 10 by any
person other than the Optionee, include evidence to the satisfaction of the
Committee of the right of such person to exercise the Option.
(b) Payment of the Option Price for the Optioned Shares shall be made in
U.S. dollars by personal check, bank draft or money order payable to the order
of the Corporation or by wire transfer.
(c) The Corporation shall issue a stock certificate in the name of the
Optionee (or such other person exercising the Option in accordance with the
provisions of Section 10) for the Optioned Shares as soon as practicable after
receipt of the Notice and payment of the aggregate Option Price for such shares.
6. NO RIGHTS AS A STOCKHOLDER. The Optionee shall have no rights as a
stockholder of the Corporation with respect to any Optioned Shares until the
date the Optionee or his nominee (which, for purposes of this Agreement, shall
include any third party agent selected by the Committee to hold such Option
Shares on behalf of the Optionee), guardian or legal representative is the
holder of record of such Optioned Shares.
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<PAGE>
7. ADJUSTMENTS.
(a) If at any time while the Option is outstanding, (1) there shall be any
increase or decrease in the number of issued and outstanding shares of Common
Stock through the declaration of a stock dividend, stock split, combination of
shares or through any recapitalization resulting in a stock split-up, spin-off,
combination or exchange of shares of Common Stock or (2) the value of the
outstanding shares of Common Stock is reduced by reason of an extraordinary cash
dividend, then and in each such event appropriate adjustment shall be made in
the number of shares and the exercise price per share covered by the Option, so
that the same proportion of the Corporation's issued and outstanding shares of
Common Stock shall remain subject to purchase at the same aggregate exercise
price.
(b) Except as otherwise expressly provided herein, the issuance by the
Corporation of shares of its capital stock of any class, or securities
convertible into shares of capital stock of any class, either in connection with
a direct sale or upon the exercise of rights or warrants to subscribe therefor,
or upon conversion of shares or obligations of the Corporation convertible into
such shares or other securities, shall not affect, and no adjustment by reason
thereof shall be made with respect to, the number of or exercise price of shares
of Common Stock covered by the Option.
(c) Without limiting the generality of the foregoing, the existence of the
Option shall not affect in any manner the right or power of the Corporation to
make, authorize or consummate (i) any or all adjustments, recapitalizations,
reorganizations or other changes in the Corporation's capital structure or its
business; (ii) any merger or consolidation of the Corporation; (iii) any issue
by the Corporation of debt securities, or preferred or preference stock that
would rank above the shares of Common Stock covered by the Option; (iv) the
dissolution or liquidation of the Corporation; (v) any sale, transfer or
assignment of all or any part of the assets or business of the Corporation; or
(vi) any other corporate act or proceeding, whether of a similar character or
otherwise.
8. ADDITIONAL PROVISIONS RELATED TO EXERCISE.
(a) The Option shall be exercisable only in accordance with this
Agreement, including the provisions regarding the period when the Option may
be exercised and the number of shares of Common Stock that may be acquired
upon exercise.
(b) The Option may not be exercised as to less than one hundred (100)
shares of Common Stock at any one time unless less than one hundred (100) shares
of Common Stock remain to be purchased upon the exercise of the Option.
(c) To exercise the Option, the Optionee shall follow the provisions of
Section 5 hereof. Upon the exercise of the Option at a time when there is not in
effect a registration statement under the Securities Act of 1933, as amended
(the "Securities Act") relating to the shares of Common Stock issuable upon
exercise of the Option, the Committee in its discretion may, as a condition to
the exercise of the Option, require the Optionee (i) to represent in writing
that the shares of Common Stock received upon exercise of the Option are being
acquired for investment and not with a view to distribution and (ii) to make
such other representations and warranties as are deemed appropriate by counsel
to the Corporation. No Option may be exercised and no shares of Common Stock
shall be issued and delivered upon the exercise of the Option unless and until
the Corporation and/or the
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<PAGE>
Optionee shall have complied with all applicable federal or state registration,
listing and/or qualification requirements and all other requirements of law or
of any regulatory agencies having jurisdiction.
(d) Stock certificates representing shares of Common Stock acquired upon
the exercise of the Option that have not been registered under the Securities
Act shall, if required by the Committee, bear the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT").
THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES
UNDER THE ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION OR AN
OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH
REGISTRATION IS NOT REQUIRED."
(e) The exercise of each Option and the issuance of shares in connection
with the exercise of an Option shall, in all cases, be subject to each of the
following conditions: (i) the declaration of effectiveness by the Securities and
Exchange Commission ("SEC") of a registration statement relating to a primary
offering of the Common Stock, filed by the Corporation with the SEC under the
Securities Act, (ii) the satisfaction of withholding tax or other withholding
liabilities, (iii) the listing, registration or qualification of any
to-be-issued shares upon any securities exchange, any NASDAQ or other trading or
quotation system or under any federal or state law, (iv) the consent or approval
of any regulatory body, (v) the execution of a lock-up agreement with one or
more prospective underwriters, or (vi) the execution of a buy-sell or
shareholders agreement with other shareholders of the Corporation. The Committee
shall in its sole discretion determine whether one or more of these conditions
is necessary or desirable to be satisfied in connection with the exercise of an
Option and prior to the delivery or purchase of shares pursuant to the exercise
of an Option. The exercise of an Option shall not be effective unless and until
such condition(s) shall have been satisfied or the Committee shall have waived
such conditions, in its sole discretion.
9. RESTRICTION ON TRANSFER. The Option may not be assigned or transferred
except by will or by the laws of descent and distribution or pursuant to a
qualified domestic relations order as defined in the Code, and may be exercised
during the lifetime of the Optionee only by the Optionee or the Optionee's
guardian or legal representative or assignee pursuant to a qualified domestic
relations order. If the Optionee dies, the Option shall thereafter be
exercisable, during the period specified in Section 4(a)(ii), by his executors
or administrators or by a person who acquired the right to exercise such option
by bequest or inheritance to the full extent to which the Option was exercisable
by the Optionee at the time of his death. The Option shall not be subject to
execution, attachment or similar process. Any attempted assignment or transfer
of the Option contrary to the provisions hereof, and the levy of any execution,
attachment or similar process upon the Option, shall be null and void and
without effect.
10. NOTICES. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if (i) personally
delivered, (ii) sent by nationally-
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<PAGE>
recognized overnight courier or (iii) sent by registered or certified mail,
postage prepaid, return receipt requested, addressed as follows:
if to the Optionee, to the address set forth on the
signature page hereto; and
if to the Corporation, to:
Adams Golf, Inc.
300 Delaware Avenue, Suite 572
Wilmington, Delaware 19801
Attention: Secretary
with a copy to:
Adams Golf, Ltd.
c/o Adams Golf GP Corp.
2801 E. Plano Parkway
Plano, Texas 75225
Attention: President
or to such other address as the party to whom notice is to be given may have
furnished to each other party in writing in accordance herewith. Any such
communication shall be deemed to have been given (i) when delivered, if
personally delivered, (ii) on the first Business Day (as hereinafter defined)
after dispatch, if sent by nationally-recognized overnight courier and (iii) on
the third Business Day following the date on which the piece of mail containing
such communication is posted, if sent by mail. As used herein, "Business Day"
means a day that is not a Saturday, Sunday or a day on which banking
institutions in the city to which the notice or communication is to be sent are
not required to be open.
11. NO WAIVER. No waiver of any breach or condition of this Agreement
shall be deemed to be a waiver of any other or subsequent breach or condition,
whether of like or different nature.
12. OPTIONEE UNDERTAKING. The Optionee hereby agrees to take whatever
additional actions and execute whatever additional documents the Corporation or
its counsel may in their reasonable judgment deem necessary or advisable in
order to carry out or effect one or more of the obligations or restrictions
imposed on the Optionee pursuant to the express provisions of this Agreement.
13. MODIFICATION OF RIGHTS. The rights of the Optionee are subject to
modification and termination in certain events as provided in this Agreement and
the Plan.
14. GOVERNING LAW. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Delaware applicable to contracts made
and to be wholly performed therein.
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<PAGE>
15. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
16. ENTIRE AGREEMENT. This Agreement and the Plan constitute the entire
agreement between the parties with respect to the subject matter hereof, and
supersede all previously written or oral negotiations, commitments,
representations and agreements with respect thereto.
ADAMS GOLF, INC.
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
OPTIONEE:
---------------------------------------
Name:
----------------------------------
Adress:
--------------------------------
--------------------------------
--------------------------------
--------------------------------
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Ladies/Gentlemen:
I hereby exercise my Stock Option to purchase _________ shares of Common Stock
of ADAMS GOLF, INC. at the option price of $____ per share as provided in the
Stock Option Agreement dated the ___ day of ________________.
I acknowledge that I previously received a copy of the 1999 Non- Employee
Director Plan of Adams Golf, Inc. and executed a Stock Option Agreement, and I
have carefully reviewed both documents.
I have considered the federal tax implications of my option. I hereby tender my
personal check, bank draft or money order payable to ADAMS GOLF, INC. in the
amount of $____________ or, I have wire transferred $_______________ to ADAMS
GOLF, INC., which transfer shall be subject to the confirmation of receipt of
funds by the Corporation. [If payment is to be made by wire transfer, the
Optionee should contact the Corporation's Chief Financial Officer or Controller
in advance to obtain wiring instructions.]
- --------------------------
Optionee
- --------------------------
Date
<PAGE>
ADAMS GOLF, INC.
1999 STOCK OPTION PLAN
FOR
OUTSIDE CONSULTANTS
Adopted Effective August 30, 1999
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
<S> <C>
ARTICLE I PURPOSE OF PLAN 1
ARTICLE II EFFECTIVE DATE AND TERM OF PLAN 1
2.1 TERM OF PLAN 1
2.2 EFFECT ON STOCK OPTIONS 1
ARTICLE III SHARES SUBJECT TO PLAN 1
3.1 NUMBER OF SHARES 1
3.2 SOURCE OF SHARES 1
3.3 AVAILABILITY OF UNUSED SHARES 1
3.4 ADJUSTMENT PROVISIONS 2
3.5 RESERVATION OF SHARES 2
ARTICLE IV ADMINISTRATION OF PLAN 2
4.1 ADMINISTERING BODY 2
4.2 AUTHORITY OF ADMINISTERING BODY 3
4.3 NO LIABILITY 4
4.4 AMENDMENTS 4
4.5 OTHER COMPENSATION PLANS 4
4.6 PLAN BINDING ON SUCCESSORS 4
4.7 REFERENCES TO SUCCESSOR STATUTES, REGULATIONS
AND RULES 4
4.8 ISSUANCES FOR SERVICES 5
4.9 INVALID PROVISIONS 5
4.10 GOVERNING LAW 5
ARTICLE V GENERAL AWARD PROVISIONS 5
5.1 PARTICIPATION IN THE PLAN 5
5.2 STOCK OPTION DOCUMENTS 5
5.3 EXERCISE OF STOCK OPTIONS 5
5.4 PAYMENT FOR STOCK OPTIONS 6
5.5 NO CONTINUING SERVICE RIGHTS 6
5.6 RESTRICTIONS UNDER APPLICABLE LAWS AND REGULATIONS 7
5.7 ADDITIONAL CONDITIONS 7
5.8 NO PRIVILEGES OF STOCK OWNERSHIP 8
5.9 LIMITED ASSIGNABILITY 8
5.10 INFORMATION TO OPTIONEES 8
5.11 WITHHOLDING TAXES 9
5.12 LEGENDS ON STOCK OPTIONS AND STOCK CERTIFICATES 9
5.13 EFFECT OF TERMINATION OF ENGAGEMENT ON
STOCK OPTIONS 9
ARTICLE VI STOCK OPTIONS 10
6.1 NATURE OF STOCK OPTIONS 10
6.2 OPTION EXERCISE PRICE 10
6.3 OPTION PERIOD AND VESTING 10
ARTICLE VII REORGANIZATIONS 10
7.1 CORPORATE TRANSACTIONS NOT INVOLVING
A CHANGE IN CONTROL 10
7.2 CORPORATE TRANSACTIONS INVOLVING A CHANGE IN CONTROL 11
ARTICLE VIII DEFINITIONS 11
</TABLE>
<PAGE>
ADAMS GOLF, INC.
1999 STOCK OPTION PLAN FOR OUTSIDE CONSULTANTS
---------------------------------------------------------------
ARTICLE I
---------
PURPOSE OF PLAN
The Company has adopted this Plan to promote the interests of the Company
and its stockholders by using investment interests in the Company to attract,
retain and motivate non-employee, current and former tour professionals, golf
instructors, psychologists and other advisors acting as outside consultants,
to encourage and reward their contributions to the performance of the Company
and to align their interests with the interests of the Company's stockholders.
Capitalized terms not otherwise defined herein shall have the meanings
ascribed to them in Article VIII.
ARTICLE II
----------
EFFECTIVE DATE AND TERM OF PLAN
2.1 Term of Plan. This Plan became effective as of the Effective Date and
shall continue in effect until the Expiration Date, at which time this Plan
shall automatically terminate.
2.2 Effect on Stock Options. Stock Options may be granted during the Plan
Term, but no Stock Options may be granted after the Plan Term. Notwithstanding
the foregoing, each Stock Option properly granted under this Plan during the
Plan Term shall remain in effect after termination of this Plan until such
Stock Option has been exercised, terminated or expired in accordance with its
terms and the terms of this Plan.
ARTICLE III
-----------
SHARES SUBJECT TO PLAN
3.1 Number of Shares. The maximum number of shares of Common Stock that
may be issued pursuant to Stock Options granted under this Plan shall be
1,000,000, subject to adjustment as set forth in Section 3.4.
3.2 Source of Shares. The Common Stock to be issued under this Plan will
be made available, at the discretion of the Board, either from authorized but
unissued shares of Common Stock or from previously issued shares of Common
Stock reacquired by the Company, including without limitation shares purchased
on the open market.
3.3 Availability of Unused Shares. Shares of Common Stock subject to
unexercised portions of any Stock Option granted under this Plan that expire,
terminate or are canceled, and shares of Common Stock issued pursuant to Stock
Options under this Plan that are reacquired by
<PAGE>
the Company pursuant to the terms of the Stock Options under which such shares
were issued, will again become available for the grant of further Stock
Options under this Plan.
3.4 Adjustment Provisions.
(a) If (i) the outstanding shares of Common Stock of the Company are
increased, decreased or exchanged for a different number or kind of shares or
other securities, or if additional shares or new or different shares or other
securities are distributed in respect of such shares of Common Stock (or any
stock or securities received with respect to such Common Stock), through
merger, consolidation, sale or exchange of all or substantially all of the
assets of the Company, reorganization, recapitalization, reclassification,
stock dividend, stock split, reverse stock split, spin-off or other
distribution with respect to such shares of Common Stock (or any stock or
securities received with respect to such Common Stock), or (ii) the value of
the outstanding shares of Common Stock of the Company is reduced by reason of
an extraordinary cash dividend, an appropriate and proportionate adjustment
may be made in (1) the maximum number and kind of shares or securities subject
to this Plan as provided in Section 3.1, (2) the number and kind of shares or
other securities subject to then outstanding Stock Options and/or (3) the
price for each share or other unit of any other securities subject to then
outstanding Stock Options.
(b) No fractional interests will be issued under this Plan resulting from
any adjustments.
(c) To the extent any adjustments relate to stock or securities of the
Company, such adjustments shall be made by the Administering Body, whose
determination in that respect shall be final, binding and conclusive.
(d) The grant of Stock Options pursuant to this Plan shall not affect in
any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge or to consolidate or to dissolve, liquidate or sell, or
transfer all or any part of its business or assets.
3.5 Reservation of Shares. The Company will at all times reserve and
keep available such number of shares of Common Stock as shall equal at least
the number of shares of Common Stock subject to then outstanding Stock Options
issuable in shares of Common Stock under this Plan.
ARTICLE IV
----------
ADMINISTRATION OF PLAN
4.1 Administering Body.
(a) This Plan shall be administered by the Board or by the Consultants'
Plan Committee of the Board appointed pursuant to Section 4.1(b).
(b) (i) The Board in its sole discretion may from time to time appoint a
Consultants' Plan Committee of not less than two Board members to administer
this Plan and, subject to applicable law, to exercise all of the powers,
authority and discretion of the Board
-2-
<PAGE>
under this Plan. The Board may from time to time increase or decrease (but not
below two) the number of members of the Consultants' Plan Committee, remove
from membership on the Consultants' Plan Committee all or any portion of its
members, and/or appoint such person or persons as it desires to fill any
vacancy existing on the Consultants' Plan Committee, whether caused by
removal, resignation or otherwise. The Consultants' Plan Committee may, but
shall not be required to, consist of the same members as any other committee
administering a stock option plan for the Company. The Board may disband the
Consultants' Plan Committee at any time and revest in the Board the
administration of this Plan.
(ii) The Consultants' Plan Committee shall report to the Board the
names of Eligible Persons granted Stock Options, the number of shares of
Common Stock covered by each Stock Option and the terms and conditions of each
such Stock Option.
4.2 Authority of Administering Body.
(a) Subject to the express provisions of this Plan, the Administering
Body shall have the power to interpret and construe this Plan and any Stock
Option Documents or other documents defining the rights and obligations of the
Company and Optionees hereunder and thereunder, to determine all questions
arising hereunder and thereunder, to adopt and amend such rules and
regulations for the administration hereof and thereof as it may deem
desirable, and otherwise to carry out the terms of this Plan and such Stock
Option Documents and other documents. The interpretation and construction by
the Administering Body of any provisions of this Plan or of any Stock Option
shall be conclusive and binding. Any action taken by, or inaction of, the
Administering Body relating to this Plan or any Stock Options shall be within
the absolute discretion of the Administering Body and shall be conclusive and
binding upon all persons. Subject only to compliance with the express
provisions hereof, the Administering Body may act in its absolute discretion
in matters related to this Plan and any and all Stock Options.
(b) Subject to the express provisions of this Plan, the Administering
Body may from time to time in its discretion select the Eligible Persons to
whom, and the time or times at which, Stock Options shall be granted, the
number of shares of Common Stock that make up or underlie each Stock Option,
the period for the exercise of each Stock Option, and such other terms and
conditions applicable to each individual Stock Option as the Administering
Body shall determine. The Administering Body may grant at any time new Stock
Options to an Eligible Person who has previously received Stock Options
whether such prior Stock Options are still outstanding, have previously been
exercised as a whole or in part, or are canceled in connection with the
issuance of new Stock Options. The Administering Body may grant Stock Options
singly, in combination or in tandem with other Stock Options, as it determines
in its discretion. Any and all terms and conditions of the Stock Options,
including exercise price, may be established by the Administering Body without
regard to existing Stock Options.
(c) Any action of the Administering Body with respect to the
administration of this Plan shall be taken pursuant to a majority vote of the
authorized number of members of the Administering Body or by the unanimous
written consent of its members; provided, however, that (i) if the
Administering Body is the Consultants' Plan Committee and consists of two
members, then actions of the Administering Body must be unanimous and (ii) if
the
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<PAGE>
Administering Body is the Board, actions taken at a meeting of the Board shall
be valid if approved by directors constituting a majority of the required
quorum for such meeting.
4.3 No Liability. No member of the Board or the Consultants' Plan
Committee or any designee thereof will be liable for any action or inaction
with respect to this Plan or any Stock Option or any transaction arising under
this Plan or any Stock Option, except in circumstances constituting bad faith
of such member.
4.4 Amendments.
(a) The Administering Body may, insofar as permitted by applicable law,
rule or regulation, from time to time suspend or discontinue this Plan or
revise or amend it in any respect whatsoever, and this Plan as so revised or
amended will govern all Stock Options hereunder, including those granted
before such revision or amendment; provided, however, that no such revision or
amendment shall alter, impair or diminish any rights or obligations under any
Stock Option previously granted under this Plan, without the written consent
of the Optionee. Without limiting the generality of the foregoing, the
Administering Body is authorized to amend this Plan to comply with or take
advantage of amendments to applicable laws, rules or regulations, including
amendments to the Securities Act, Exchange Act or the IRC or any rules or
regulations promulgated thereunder. No stockholder approval of any amendment
or revision shall be required unless such approval is required by applicable
law, rule or regulation.
(b) The Administering Body may, with the written consent of an Optionee,
make such modifications in the terms and conditions of a Stock Option as it
deems advisable. Without limiting the generality of the foregoing, the
Administering Body may, in its discretion with the written consent of
Optionee, at any time and from time to time after the grant of any Stock
Option accelerate or extend the vesting or exercise period of any Stock Option
as a whole or in part, and adjust or reduce the exercise price of Stock
Options held by such Optionee by cancellation of such Stock Options and
granting of Stock Options at lower or exercise prices or by modification,
extension or renewal of such Stock Options.
(c) Except as otherwise provided in this Plan or in the applicable Stock
Option Document, no amendment, revision, suspension or termination of this
Plan will, without the written consent of the Optionee, alter, terminate,
impair or adversely affect any right or obligation under any Stock Option
previously granted under this Plan.
4.5 Other Compensation Plans. The adoption of this Plan shall not affect
any other stock option, incentive or other compensation plans in effect for
the Company, and this Plan shall not preclude the Company from establishing
any other forms of incentive or other compensation for employees, directors,
advisors or consultants of the Company, whether or not approved by
stockholders.
4.6 Plan Binding on Successors. This Plan shall be binding upon the
successors and assigns of the Company.
4.7 References to Successor Statutes, Regulations and Rules. Any
reference in this Plan to a particular statute, regulation or rule shall also
refer to any successor provision of such statute, regulation or rule.
-4-
<PAGE>
4.8 Issuances for Services. Options to Eligible Persons shall be granted
only in exchange for bona fide services rendered by such Eligible Persons, and
such services must not be in connection with the offer and sale of securities
in a capital- raising transaction.
4.9 Invalid Provisions. In the event that any provision of this Plan is
found to be invalid or otherwise unenforceable under any applicable law, such
invalidity or unenforceability shall not be construed as rendering any other
provisions contained herein invalid or unenforceable, and all such other
provisions shall be given full force and effect to the same extent as though
the invalid and unenforceable provision were not contained herein.
4.10 Governing Law. This Agreement shall be governed by and interpreted
in accordance with the internal laws of the State of Delaware, without giving
effect to the principles of the conflicts of laws thereof.
ARTICLE V
---------
GENERAL AWARD PROVISIONS
5.1 Participation in the Plan.
(a) A person shall be eligible to receive grants of Stock Options under
this Plan if, at the time of the grant of the Stock Option, such person is an
Eligible Person.
(b) Notwithstanding anything to the contrary herein, the Administering
Body may, in order to fulfill the purposes of this Plan, modify grants of
Stock Options to Recipients who are foreign nationals to recognize differences
in applicable law, tax policy or local custom.
5.2 Stock Option Documents.
(a) Each Stock Option granted under this Plan shall be evidenced by an
agreement duly executed on behalf of the Company and by the Recipient or, in
the Administering Body's discretion, a confirming memorandum issued by the
Company to the Recipient, setting forth such terms and conditions applicable
to the Stock Option as the Administering Body may in its discretion determine.
Stock Option Documents may but need not be identical and shall comply with and
be subject to the terms and conditions of this Plan, a copy of which shall be
provided to each Recipient and incorporated by reference into each Stock
Option Document. Any Stock Option Document may contain such other terms,
provisions and conditions not inconsistent with this Plan as may be determined
by the Administering Body.
(b) In case of any conflict between this Plan and any Stock Option
Document, this Plan shall control.
5.3 Exercise of Stock Options. No Stock Option shall be exercisable
except in respect of whole shares, and fractional share interests shall be
disregarded. Not less than 100 shares of Common Stock (or such other amount as
is set forth in the applicable Stock Option Documents) may be purchased at one
time and Stock Options must be exercised in multiples of 100 unless the number
purchased is the total number at the time available for purchase under the
terms of the Stock Option. A Stock Option shall be deemed to be exercised when
the Secretary or other designated official of the Company receives written
notice of such exercise from the
-5-
<PAGE>
Optionee, together with payment of the exercise price made in accordance with
Section 5.4 and any amounts required under Section 5.11. Notwithstanding any
other provision of this Plan, the Administering Body may impose, by rule
and/or in Stock Option Documents, such conditions upon the exercise of Stock
Options (including without limitation conditions limiting the time of exercise
to specified periods) as may be required to satisfy applicable regulatory
requirements.
5.4 Payment For Stock Options.
(a) The exercise price or other payment for a Stock Option shall be
payable upon the exercise of a Stock Option pursuant to a Stock Option granted
hereunder by delivery of legal tender of the United States or payment of such
other consideration as the Administering Body may from time to time deem
acceptable in any particular instance.
(b) In the discretion of the Administering Body, Stock Options may be
exercised by matured capital stock of the Company (i.e., owned longer than six
months) delivered in transfer to the Company by or on behalf of the person
exercising the Stock Option and duly endorsed in blank or accompanied by stock
powers duly endorsed in blank, with signatures guaranteed in accordance with
the Exchange Act if required by the Administering Body (valued at Fair Market
Value as of the exercise date), or such other consideration as the
Administering Body may from time to time in the exercise of its discretion
deem acceptable in any particular instance; provided, however, that the
Administering Body may, in the exercise of its discretion, (i) allow exercise
of Stock Options in a broker-assisted or similar transaction in which the
exercise price is not received by the Company until promptly after exercise,
and/or (ii) allow the Company to loan the exercise price to the Optionee, if
the exercise will be followed by a prompt sale of some or all of the
underlying shares and a portion of the sale proceeds is dedicated to full
payment of the exercise price and amounts required pursuant to Section 5.11.
5.5 No Continuing Service Rights. Nothing contained in this Plan (or in
Stock Option Documents or in any other documents related to this Plan or to
Stock Options granted hereunder) shall confer upon any Recipient any right to
continue providing services to the Company or any Affiliated Entity or
constitute any contract or agreement of engagement, or interfere in any way
with the right of the Company or any Affiliated Entity to terminate the
engagement of such Recipient, with or without cause, subject to any contract
rights between the parties. Except as expressly provided in this Plan or in
any statement evidencing the grant of Stock Options pursuant to this Plan, the
Company shall have the right to deal with each Recipient in the same manner as
if this Plan and any such statement evidencing the grant of Stock Options
pursuant to this Plan did not exist, including without limitation with respect
to all matters related to the conditions of the engagement of the Recipient.
Any questions as to whether and when there has been a termination of a
Recipient's engagement, the reason (if any) for such termination, and/or the
consequences thereof under the terms of this Plan or any statement evidencing
the grant of Stock Options pursuant to this Plan shall be determined by the
Administering Body, and the Administering Body's determination thereof shall
be final and binding.
-6-
<PAGE>
5.6 Restrictions Under Applicable Laws and Regulations.
(a) All Stock Options granted under this Plan shall be subject to the
requirement that, if at any time the Company shall determine, in its
discretion, that the listing, registration or qualification of the shares
subject to Stock Options granted under this Plan upon any securities exchange
or under any federal, state or foreign law, or the consent or approval of any
government regulatory body, is necessary or desirable as a condition of, or in
connection with, the granting of such Stock Options or the issuance, if any,
or purchase of shares in connection therewith, such Stock Options may not be
exercised as a whole or in part unless and until such listing, registration,
qualification, consent or approval shall have been effected or obtained free
of any conditions not acceptable to the Company. During the term of this Plan,
the Company will use its reasonable efforts to seek to obtain from the
appropriate regulatory agencies any requisite qualifications, consents,
approvals or authorizations in order to issue and sell such number of shares
of its Common Stock as shall be sufficient to satisfy the requirements of this
Plan. The inability of the Company to obtain from any such regulatory agency
having jurisdiction thereof the qualifications, consents, approvals or
authorizations deemed by the Company to be necessary for the lawful issuance
and sale of any shares of its Common Stock hereunder shall relieve the Company
of any liability in respect of the nonissuance or sale of such stock as to
which such requisite authorization shall not have been obtained.
(b) The Company shall be under no obligation to register or qualify the
issuance of Stock Options or underlying shares under the Securities Act or
applicable state securities laws. Unless the issuance of Stock Options and
underlying shares have been registered under the Securities Act and qualified
or registered under applicable state securities laws, the Company shall be
under no obligation to issue any Stock Options or underlying shares of Common
Stock covered by any Stock Options unless the Stock Options and underlying
shares may be issued pursuant to applicable exemptions from such registration
or qualification requirements. In connection with any such exempt issuance,
the Administering Body may require the Optionee to provide a written
representation and undertaking to the Company, satisfactory in form and scope
to the Company and upon which the Company may reasonably rely, that such
Optionee is acquiring such Stock Options and underlying shares for such
Optionee's own account as an investment and not with a view to, or for sale in
connection with, the distribution of any such shares of stock, and that such
person will make no transfer of the same except in compliance with any rules
and regulations in force at the time of such transfer under the Securities Act
and other applicable law, and that if shares of stock are issued without such
registration, a legend to this effect (together with any other legends deemed
appropriate by the Administering Body) may be endorsed upon the securities so
issued. The Company may also order its transfer agent to stop transfers of
such shares. The Administering Body may also require the Optionee to provide
the Company such information and other documents as the Administering Body may
request in order to satisfy the Administering Body as to the investment
sophistication and experience of the Optionee and as to any other conditions
for compliance with any such exemptions from registration or qualification.
5.7 Additional Conditions. Any Stock Option may also be subject to such
other provisions (whether or not applicable to any other Stock Option or
Optionee) as the Administering Body determines appropriate including without
limitation provisions to assist the Optionee in financing the purchase of
Common Stock through the exercise of Stock Options, provisions for the
forfeiture of or restrictions on resale or other disposition of shares of
Common Stock acquired under any form of benefit, provisions giving the Company
the right to repurchase
-7-
<PAGE>
shares of Common Stock acquired under any form of benefit in the event the
Optionee elects to dispose of such shares or upon such other terms as therein
specified, and provisions to comply with federal and state securities laws and
federal and state income tax withholding requirements.
5.8 No Privileges of Stock Ownership. Except as otherwise set forth
herein, an Optionee shall have no rights as a stockholder with respect to any
shares issuable or issued in connection with the Stock Option until the date
of the receipt by the Company of all amounts payable in connection with
exercise of the Stock Option and performance by the Optionee of all
obligations thereunder. Status as an Eligible Person shall not be construed as
a commitment that any Stock Option will be granted under this Plan to an
Eligible Person or to Eligible Persons generally. No person shall have any
right, title or interest in any fund or in any specific asset (including
shares of capital stock) of the Company by reason of any Stock Option granted
hereunder. Neither this Plan (or any documents related hereto) nor any action
taken pursuant hereto (or thereto) shall be construed to create a trust of any
kind or a fiduciary relationship between the Company and any Person. To the
extent that any Person acquires a right to receive Stock Options hereunder,
such right shall be no greater than the right of any unsecured general
creditor of the Company.
5.9 Limited Assignability. No Stock Option granted under this Plan shall
be assignable or transferable except (a) by will or by the laws of descent and
distribution, or (b) subject to the final sentence of this Section 5.9, upon
dissolution of marriage pursuant to a qualified domestic relations order or,
in the discretion of the Administering Body and under circumstances that would
not adversely affect the interests of the Company, pursuant to a nominal
transfer that does not result in a change in beneficial ownership; provided,
however, that the Administering Body may in the applicable Stock Option
Document evidencing Stock Options granted hereunder or at any time thereafter
provide that Stock Options granted hereunder may be transferred without
consideration by the Recipient, subject to such rules as the Administering
Body may adopt to preserve the purposes of the Plan, to one or more Permitted
Transferees; provided further, that the Recipient gives the Administering Body
advance written notice describing the terms and conditions of the proposed
transfer and the Administering Body notifies the Recipient in writing that
such transfer would comply with the requirements of the Plan and any
applicable Stock Option Document. The terms of any Stock Option transferred to
Permitted Transferees in accordance with the immediately preceding sentence
shall apply to the Permitted Transferee, except that (a) Permitted Transferees
shall not be entitled to transfer any Stock Options, other than by will or the
laws of descent and distribution; and (b) Permitted Transferees shall not be
entitled to exercise any transferred Stock Options unless there shall be in
effect a registration statement on an appropriate form covering the shares of
Common Stock to be acquired pursuant to the exercise of such Stock Option if
the Administering Body determines that such a registration statement is
necessary or appropriate. During the lifetime of an Optionee, Stock Options
shall be exercisable only by the Optionee or such person's guardian or legal
representative.
5.10 Information to Optionees.
(a) The Administering Body in its sole discretion shall determine what,
if any, financial and other information shall be provided to Optionees and
when such financial and other information shall be provided after giving
consideration to applicable federal and state laws,
-8-
<PAGE>
rules and regulations, including without limitation applicable federal and
state securities laws, rules and regulations.
(b) The furnishing of financial and other information that is
confidential to the Company shall be subject to the Optionee's agreement that
the Optionee shall maintain the confidentiality of such financial and other
information, shall not disclose such information to third parties, and shall
not use the information for any purpose other than evaluating an investment in
the Company's securities under this Plan. The Administering Body may impose
other restrictions on the access to and use of such confidential information
and may require an Optionee to acknowledge the Optionee's obligations under
this Section 5.10(b) (which acknowledgment shall not be a condition to the
Optionee's obligations under this Section 5.10(b)).
5.11 Withholding Taxes. Whenever the granting, vesting or exercise of any
Stock Option granted under this Plan, or the transfer of any shares issued
upon exercise of any Stock Option, gives rise to tax or tax withholding
liabilities or obligations, the Administering Body shall have the right to
require the Optionee to remit to the Company an amount sufficient to satisfy
any federal, state and local withholding tax requirements prior to issuance of
such shares. The Administering Body may, in the exercise of its discretion,
allow satisfaction of tax withholding requirements by accepting delivery of
stock of the Company (or by withholding a portion of the stock otherwise
issuable in connection with Stock Options).
5.12 Legends on Stock Options and Stock Certificates. Each Stock Option
Document and each certificate representing shares acquired upon exercise of
Stock Options shall be endorsed with all legends, if any, required by
applicable federal and state securities and other laws to be placed on the
Stock Option Document and/or the certificate. The determination of which
legends, if any, shall be placed upon Stock Option Documents or the
certificates shall be made by the Administering Body in its sole discretion
and such decision shall be final and binding.
5.13 Effect of Termination of Engagement on Stock Options.
(a) Termination. Subject to Section 5.13(b), and except as otherwise
provided in a written agreement between the Company and the Optionee which may
be entered into at any time before or after termination of engagement of the
Recipient, in the event of termination of Recipient's engagement, the
Optionee's Stock Options, whether or not vested, shall expire and become
unexercisable as of the earlier of (A) the date such Stock Options would
expire in accordance with their terms had the Recipient remained engaged by
the Company and (B) (i) six (6) months after Recipient's engagement is
terminated as a result of death or Permanent Disability and (ii) sixty (60)
days after Recipient's engagement is terminated for any other reason.
(b) Alteration of Vesting and Exercise Periods. Notwithstanding anything
to the contrary in Section 5.13(a), the Administering Body may in its
discretion designate shorter or longer periods to exercise Stock Options
following a Recipient's termination of engagement; provided, however, that any
shorter periods determined by the Administering Body shall be effective only
if provided for in the instrument that evidences the grant to the Optionee of
such
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<PAGE>
Stock Options or if such shorter period is agreed to in writing by the
Optionee. Notwithstanding anything to the contrary herein, Stock Options shall
be exercisable by an Optionee following such Optionee's termination of
engagement only to the extent that installments thereof had become exercisable
on or prior to the date of such termination; and provided, further, that the
Administering Body may, in its discretion, elect to accelerate the vesting of
all or any portion of any Stock Options that had not become exercisable on or
prior to the date of such termination.
ARTICLE VI
----------
STOCK OPTIONS
6.1 Nature of Stock Options. Stock Options shall be Nonqualified Stock
Options.
6.2 Option Exercise Price. The exercise price for each Stock Option shall
be determined by the Administering Body as of the date such Stock Option is
granted. The exercise price shall be no less than the Fair Market Value of the
Common Stock subject to the Option. The Administering Body may, with the
consent of the Optionee, amend the terms of any Stock Option to provide that
the exercise price of the shares remaining subject to the Stock Option shall
be reestablished at a price not less than 100% of the Fair Market Value of the
Common Stock on the effective date of the amendment. No modification of any
other term or provision of any Stock Option that is amended in accordance with
the foregoing shall be required, although the Administering Body may, in its
discretion, make such further modifications of any such Stock Option as are
not inconsistent with this Plan.
6.3 Option Period and Vesting. Stock Options granted hereunder shall vest
and may be exercised as determined by the Administering Body, except that
exercise of such Stock Options after termination of the Recipient's engagement
by the Company shall be subject to Section 5.13. Each Stock Option granted
hereunder and all rights or obligations thereunder shall expire on such date
as shall be determined by the Administering Body, but not later than 10 years
after the date the Stock Option is granted and shall be subject to earlier
termination as provided herein or in the Stock Option Document. The
Administering Body may, in its discretion at any time and from time to time
after the grant of a Stock Option, accelerate vesting of such Option as a
whole or in part by increasing the number of shares then purchasable, provided
that the total number of shares subject to such Stock Option may not be
increased. Except as otherwise provided herein, a Stock Option shall become
exercisable, as a whole or in part, on the date or dates specified by the
Administering Body and thereafter shall remain exercisable until the
expiration or earlier termination of the Stock Option.
ARTICLE VII
-----------
REORGANIZATIONS
7.1 Corporate Transactions Not Involving a Change in Control. If the
Company shall consummate any Reorganization not involving a Change in Control
in which holders of shares of Common Stock are entitled to receive in respect
of such shares any securities, cash or other consideration (including without
limitation a different number of shares of Common Stock), each Stock Option
outstanding under this Plan shall thereafter be exercisable, in accordance
with this Plan, only for the kind and amount of securities, cash and/or other
consideration receivable upon such Reorganization by a holder of the same
number of shares of
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<PAGE>
Common Stock as are subject to that Stock Option immediately prior to such
Reorganization, and any adjustments will be made to the terms of the Stock
Option in the sole discretion of the Administering Body as it may deem
appropriate to give effect to the Reorganization.
7.2 Corporate Transactions Involving a Change in Control. As of the
effective time and date of any Change in Control, this Plan and any then
outstanding Stock Options (whether or not vested) shall automatically
terminate unless (a) provision is made in writing in connection with such
transaction for the continuance of this Plan and for the assumption of such
Stock Options, or for the substitution for such Stock Options of new awards
covering the securities of a successor entity or an affiliate thereof, with
appropriate adjustments as to the number and kind of securities and exercise
prices, in which event this Plan and such outstanding Stock Options shall
continue or be replaced, as the case may be, in the manner and under the terms
so provided; or (b) the Board otherwise has provided or shall provide in
writing for such adjustments as it deems appropriate in the terms and
conditions of the then-outstanding Stock Options (whether or not vested),
including without limitation (i) accelerating the vesting of outstanding Stock
Options and/or (ii) providing for the cancellation of Stock Options and their
automatic conversion into the right to receive the securities, cash and/or
other consideration that a holder of the shares underlying such Stock Options
would have been entitled to receive upon consummation of such Change in
Control had such shares been issued and outstanding immediately prior to the
effective date and time of the Change in Control (net of the appropriate
option exercise prices). If, pursuant to the foregoing provisions of this
Section 7.2, this Plan and the Stock Options shall terminate by reason of the
occurrence of a Change in Control without provision for any of the actions
described in clause (a) or (b) hereof, then any Optionee holding outstanding
Stock Options shall have the right, at such time immediately prior to the
consummation of the Change in Control as the Board shall designate, to
exercise the Optionee's Stock Options to the full extent not theretofore
exercised, including any installments which have not yet become vested.
ARTICLE VIII
------------
DEFINITIONS
Capitalized terms used in this Plan and not otherwise defined shall have
the meanings set forth below:
"Administering Body" shall mean the Board as long as no Consultants' Plan
Committee has been appointed and is in effect and shall mean the Consultants'
Plan Committee as long as the Consultants' Plan Committee is appointed and in
effect.
"Affiliated Entity" means any Parent Corporation or Subsidiary
Corporation.
"Board" means the Board of Directors of the Company.
"Change in Control" means the following and shall be deemed to occur if
any of the following events occur:
(a) The acquisition, other than from the Company, by any Person other
than Royal Holding Company, Inc. or B.H. Adams of beneficial ownership of
thirty percent (30%) or more of either the then
-11-
<PAGE>
outstanding shares of Common Stock or the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally in the
election of directors; provided, however, that any acquisition by the Company
or any of its Subsidiaries, or any employee benefit plan (or related trust) of
the Company or its Subsidiaries, or any corporation with respect to which,
following such acquisition, more than fifty percent (50%) of, respectively,
the then outstanding shares of common stock of such corporation and the
combined voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or substantially all of the
individuals and entities who were the beneficial owners, respectively, of the
Common Stock and voting securities of the Company immediately prior to such
acquisition in substantially the same proportion as their ownership,
immediately prior to such acquisition, of the then outstanding shares of
Common Stock of the Company or the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally in the
election of directors, as the case may be, shall not constitute a Change in
Control;
(b) Individuals who, as of August 30, 1999, constitute the Board as of
the date thereof (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board, provided that any individual becoming a
director subsequent to such date whose election, or nomination for election by
the Corporation's stockholders, was approved by a vote of at least a majority
of the directors then comprising the Incumbent Board shall be considered as
though such individual were a member of the Incumbent Board, but excluding,
for this purpose, any such individual whose initial assumption of office is in
connection with an actual or threatened election contest relating to the
election of the directors of the Corporation (as such terms are used in Rule
14a-11 of Regulation 14A promulgated under the Exchange Act); or
(c) Approval by the stockholders of the Corporation of a reorganization,
merger or consolidation of the Corporation, in each case, with respect to
which the individuals and entities who were the respective beneficial owners
of the Common Stock and voting securities of the Corporation immediately prior
to such reorganization, merger or consolidation do not, following such
reorganization, merger or consolidation, beneficially own, directly or
indirectly, more than sixty percent (60%) of, respectively, the then
outstanding shares of Common Stock and the combined voting power of the then
outstanding voting securities entitled to vote generally in the election of
directors, as the case may be, of the corporation resulting from such
reorganization, merger or consolidation, or a complete liquidation or
dissolution of the Corporation or of the sale or other disposition of all or
substantially all of the assets of the Corporation.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the common stock of the Company, par value $.001 per
share, as constituted on the Effective Date of this Plan, and as thereafter
adjusted as a result of any one or more events requiring adjustment of
outstanding Stock Options under Section 3.4 above.
"Company" means Adams Golf, Inc., a Delaware corporation.
"Consultants' Plan Committee" means the committee appointed by the Board
to administer this Plan pursuant to Section 4.1.
-12-
<PAGE>
"Effective Date" means August 30, 1999, which is the date this Plan was
adopted by the Board.
"Eligible Person" shall include only natural persons that are
non-employee, current or former tour professionals, golf instructors,
psychologists or other advisors acting as outside consultants to the Company
or any Affiliated Entity.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Expiration Date" means the tenth anniversary of the Effective Date,
specifically August 30, 2009.
"Fair Market Value" of a share of the Company's capital stock as of a
particular date shall be: (a) if the stock is listed on an established stock
exchange or exchanges (including for this purpose, The Nasdaq National
Market), the average of the highest and lowest sale prices of the stock quoted
for such date as reported in the transactions index of each such exchange, as
published in The Wall Street Journal and determined by the Administering Body,
or, if no sale price was quoted in any such index for such date, then as of
the next preceding date on which such a sale price was quoted; or (b) if the
stock is not then listed on an exchange or the Nasdaq National Market, the
average of the closing bid and asked prices per share for the stock in the
over-the-counter market as quoted on The Nasdaq Small Cap Market on such date
(in the case of (a) or (b), subject to adjustment as and if necessary and
appropriate to set an exercise price not less than 100% of the Fair Market
Value of the stock on the date an option is granted); or (c) if the stock is
not then listed on an exchange or quoted in the over-the-counter market, an
amount determined in good faith by the Administering Body; provided, however,
that (i) when appropriate, the Administering Body, in determining Fair Market
Value of capital stock of the Company, may take into account such other
factors as it may deem appropriate under the circumstances and (ii) if the
stock is traded on The Nasdaq Small Cap Market and both sales prices and bid
and asked prices are quoted or available, the Administering Body may elect to
determine Fair Market Value under either clause (i) or (ii) above.
"Immediate Family" means the Recipient's spouse, children or
grandchildren (including adopted and stepchildren and grandchildren).
"IRC" means the Internal Revenue Code of 1986, as amended.
"Non-qualified Stock Option" means a Stock Option that is not an
incentive stock option under Section 422 of the IRC, or any successor statute
thereto.
"Optionee" means a Recipient or the Recipient's successor in interest.
"Parent Corporation" means any "parent corporation" as defined in Section
424(e) of the IRC.
"Permanent Disability" shall mean that the Recipient becomes physically
or mentally incapacitated or disabled so that the Recipient is unable to
perform substantially the same services as the Recipient performed prior to
incurring such incapacity or disability (the Company, at its option and
expense, being entitled to retain a physician to confirm the existence
-13-
<PAGE>
of such incapacity or disability, and the determination of such physician to
be binding upon the Company and the Recipient), and such incapacity or
disability continues for a period of three consecutive months or six months in
any 12-month period or such other period(s) as may be determined by the
Consultants' Plan Committee with respect to any Stock Option.
"Person" means any person, entity or group, within the meaning of Section
13(d) or 14(d) of the Exchange Act, but excluding (a) the Company and its
subsidiaries, (b) any employee stock ownership or other employee benefit plan
maintained by the Company that is qualified under the Employee Retirement
Income Security Act of 1974, as amended, and (c) an underwriter or
underwriting syndicate that has acquired the Company's securities solely in
connection with a public offering thereof.
"Permitted Transferee" means (a) the Recipient's Immediate Family; (b) a
trust solely for the benefit of the Recipient and/or his or her Immediate
Family; or (c) a partnership or limited liability company the partners or
stockholders of which are limited to the Recipient and members of his or her
Immediate Family.
"Plan" means this 1999 Stock Option Plan for Outside Consultants of the
Company.
"Plan Term" means the period during which this Plan remains in effect
(commencing on the Effective Date and ending on the Expiration Date).
"Recipient" means a person who has received a Stock Option under this
Plan.
"Reorganization" means any merger, consolidation or other reorganization.
"Securities Act" means the Securities Act of 1933, as amended.
"Stock Option" means a right to purchase stock of the Company granted
under Article VI of this Plan to an Eligible Person.
"Stock Option Document" means the agreement or confirming memorandum
setting forth the terms and conditions of Stock Options.
"Subsidiary Corporation" means any "subsidiary corporation" as defined in
Section 424(f) of the IRC.
-14-
<PAGE>
STOCK OPTION AGREEMENT
UNDER
1999 STOCK OPTION PLAN FOR OUTSIDE CONSULTANTS
OF
ADAMS GOLF, INC.
STOCK OPTION AGREEMENT (this "Agreement") entered into this ____ day of
___________, ____, between ADAMS GOLF, INC., a Delaware corporation (the
"Corporation"), and ________________________________, an Eligible Person (as
that term is defined by the Corporation's 1999 Stock Option Plan for Outside
Consultants (the "Plan")) (the "Optionee," which term as used herein shall be
deemed to include any successor to the Optionee by will or by the laws of
descent and distribution, unless the context shall otherwise require, as
provided in the Plan).
Pursuant to the Plan, the Administering Body approved the issuance to the
Optionee, effective as of the date set forth above, of a Non-qualified Stock
Option to purchase up to an aggregate of ____________ shares of common stock,
par value $.001, of the Corporation (the "Common Stock"), at the price of
$____ per share (the "Option Price") which represents not less than 100% of
the Fair Market Value of a share of Common Stock determined in accordance with
the Plan, upon the terms and conditions hereinafter set forth. (Capitalized
terms used herein but not defined herein shall have the meaning ascribed to
them in the Plan).
NOW, THEREFORE, in consideration of the mutual premises and undertakings
hereinafter set forth, the parties hereto agree as follows:
1. Option; Option Price. On behalf of the Corporation, the Administering
Body hereby grants as of the date of this Agreement to the Optionee the option
(the "Option") to purchase, subject to the terms and conditions of this
Agreement and the provisions of the Plan (which is incorporated by reference
herein and which in all cases shall control in the event of any conflict with
the terms, definitions and provisions of this Agreement), _______________
shares of Common Stock of the Corporation at an exercise price per share equal
to the Option Price. A copy of the Plan as in effect on the date hereof has
been supplied to the Optionee, and the Optionee by executing this Agreement
hereby acknowledges receipt thereof.
2. Term. The term (the "Option Term") of the Option shall commence on
the date of this Agreement and shall terminate on the ______ anniversary of
the date of this Agreement, unless such Option shall theretofore have been
terminated in accordance with the terms hereof or the provisions of the Plan.
3. Vesting; Restrictions on Exercise.
(a) Subject to the provisions of Sections 5 and 8 hereof, and unless
accelerated, as set forth in the Plan or as provided herein, the Option
granted hereunder shall vest and become exercisable for the number of shares
set forth opposite the dates noted below (the "Option Vesting Schedule").
<PAGE>
Cumulative
Date(s) Number of Vested Shares
(b) If the Corporation shall consummate any merger, consolidation or
other reorganization not involving a Change in Control (a "Reorganization") in
which holders of shares of Common Stock are entitled to receive in respect of
such shares any securities, cash or other consideration (including, without
limitation, a different number of shares of Common Stock), the Option shall
thereafter be exercisable, in accordance with the Plan and this Agreement,
only for the kind and amount of securities, cash and/or other consideration
receivable upon such Reorganization by a holder of the same number of shares
of Common Stock as are subject to the Option immediately prior to such
Reorganization, and any adjustments will be made to the terms of the Option in
the sole discretion of the Administering Body as it may deem appropriate to
give effect to the Reorganization.
(c) Subject to the provisions of Sections 5 and 8 hereof, shares as to
which the Option becomes exercisable pursuant to the foregoing provisions may
be purchased at any time thereafter prior to the expiration or termination of
the Option.
4. Termination of Option.
(a) The unexercised portion of the Option shall automatically and without
notice terminate and become null and void at the time of the earliest to occur
of:
(i) six (6) months after the Optionee's engagement with the
Corporation is terminated as a result of death or Permanent Disability;
(ii) sixty (60) days after the Optionee's engagement with the Corporation is
terminated for any reason other than death or Permanent Disability;
(iii) the expiration date of the term of the Option; or
5. Procedure for Exercise.
(a) Subject to the requirements of Section 8, the Option may be
exercised, from time to time, in whole or in part (but for the purchase of a
whole number of shares only), by delivery of a written notice, a form of which
has been attached as Annex A hereto (the "Notice"), from the Optionee to the
Secretary of the Corporation, which Notice shall:
(i) state that the Optionee elects to exercise the Option;
-2-
<PAGE>
(ii) state the number of vested shares with respect to which the
Option is being exercised (the "Optioned Shares");
(iii) state the date upon which the Optionee desires to consummate the
purchase of the Optioned Shares (which date must be prior to the
termination of such Option and no later than thirty (30) days after the
date of receipt of such Notice);
(iv) include any representations of the Optionee required under
Section 8(c); and
(v) if the Option shall be exercised pursuant to Section 9 by any
person other than the Optionee, include evidence to the satisfaction of
the Administering Body of the right of such person to exercise the Option.
(b) Payment of the Option Price for the Optioned Shares shall be made in
U.S. dollars by personal check, bank draft or money order payable to the order
of the Corporation or by wire transfer.
(c) The Corporation shall issue a stock certificate in the name of the
Optionee (or such other person exercising the Option in accordance with the
provisions of Section 9) for the Optioned Shares as soon as practicable after
receipt of the Notice and payment of the aggregate Option Price for such
shares.
6. No Rights as a Stockholder. The Optionee shall have no rights as a
stockholder of the Corporation with respect to any Optioned Shares until the
date the Optionee or his nominee (which, for purposes of this Agreement, shall
include any third party agent selected by the Administering Body to hold such
Option Shares on behalf of the Optionee), guardian or legal representative is
the holder of record of such Optioned Shares.
7. Adjustments.
(a) If at any time while the Option is outstanding, (1) there shall be
any increase or decrease in the number of issued and outstanding shares of
Common Stock through the declaration of a stock dividend, stock split,
combination of shares or through any recapitalization resulting in a stock
split-up, spin-off, combination or exchange of shares of Common Stock or (2)
the value of the outstanding shares of Common Stock is reduced by reason of an
extraordinary cash dividend, then and in each such event appropriate
adjustment shall be made in the number of shares and the exercise price per
share covered by the Option, so that the same proportion of the Corporation's
issued and outstanding shares of Common Stock shall remain subject to purchase
at the same aggregate exercise price.
(b) Except as otherwise expressly provided herein, the issuance by the
Corporation of shares of its capital stock of any class, or securities
convertible into shares of capital stock of any class, either in connection
with a direct sale or upon the exercise of rights or warrants to subscribe
therefor, or upon conversion of shares or obligations of the Corporation
convertible into such shares
-3-
<PAGE>
or other securities, shall not affect, and no adjustment by reason thereof
shall be made with respect to, the number of or exercise price of shares of
Common Stock covered by the Option.
(c) Without limiting the generality of the foregoing, the existence of
the Option shall not affect in any manner the right or power of the
Corporation to make, authorize or consummate (i) any or all adjustments,
recapitalizations, reorganizations or other changes in the Corporation's
capital structure or its business; (ii) any merger or consolidation of the
Corporation; (iii) any issue by the Corporation of debt securities, or
preferred or preference stock that would rank above the shares of Common Stock
covered by the Option; (iv) the dissolution or liquidation of the Corporation;
(v) any sale, transfer or assignment of all or any part of the assets or
business of the Corporation; or (vi) any other corporate act or proceeding,
whether of a similar character or otherwise.
8. Additional Provisions Related to Exercise.
(a) The Option shall be exercisable only in accordance with this
Agreement and the terms of the Plan, including the provisions regarding the
period when the Option may be exercised and the number of shares of Common
Stock that may be acquired upon exercise.
(b) The Option may not be exercised as to less than one hundred (100)
shares of Common Stock at any one time unless less than one hundred (100)
shares of Common Stock remain to be purchased upon the exercise of the Option.
(c) To exercise the Option, the Optionee shall follow the provisions of
Section 5 hereof. Upon the exercise of the Option at a time when there is not
in effect a registration statement under the Securities Act of 1933, as
amended (the "Securities Act") relating to the shares of Common Stock issuable
upon exercise of the Option, the Administering Body in its discretion may, as
a condition to the exercise of the Option, require the Optionee (i) to
represent in writing that the shares of Common Stock received upon exercise of
the Option are being acquired for investment and not with a view to
distribution and (ii) to make such other representations and warranties as are
deemed appropriate by counsel to the Corporation. No Option may be exercised
and no shares of Common Stock shall be issued and delivered upon the exercise
of the Option unless and until the Corporation and/or the Optionee shall have
complied with all applicable federal or state registration, listing and/or
qualification requirements and all other requirements of law or of any
regulatory agencies having jurisdiction.
(d) Stock certificates representing shares of Common Stock acquired upon
the exercise of the Option that have not been registered under the Securities
Act shall, if required by the Administering Body, bear an appropriate legend
which may, at the discretion of the Administering Body, take the following
form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT").
THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE
SECURITIES UNDER THE ACT OR PURSUANT TO AN EXEMPTION FROM
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<PAGE>
REGISTRATION OR AN OPINION OF COUNSEL SATISFACTORY TO
THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED."
(e) The exercise of each Option and the issuance of shares in connection
with the exercise of an Option shall, in all cases, be subject to each of the
following conditions: (i) compliance with the terms of the Plan and this
Agreement, (ii) the satisfaction of withholding tax or other withholding
liabilities, (iii) as necessary, the listing, registration or qualification of
any to- be-issued shares upon any securities exchange, The Nasdaq Stock Market
or other trading or quotation system or under any federal or state law and
(iv) the consent or approval of any regulatory body. The Administering Body
shall in its sole discretion determine whether one or more of these conditions
is necessary or desirable to be satisfied in connection with the exercise of
an Option and prior to the delivery or purchase of shares pursuant to the
exercise of an Option. The exercise of an Option shall not be effective unless
and until such condition(s) shall have been satisfied or the Administering
Body shall have waived such conditions, in its sole discretion.
9. Restriction on Transfer. The Option may not be assigned or transferred
except by will or by the laws of descent and distribution or pursuant to a
qualified domestic relations order as defined in the IRC, and may be exercised
during the lifetime of the Optionee only by the Optionee or the Optionee's
guardian or legal representative or assignee pursuant to a qualified domestic
relations order. If the Optionee dies, the Option shall thereafter be
exercisable, during the period specified in Section 4(a)(i), by his executors
or administrators or by a person who acquired the right to exercise such
Option by bequest or inheritance to the full extent to which the Option was
exercisable by the Optionee at the time of his death. If the Optionee becomes
inflicted with a Permanent Disability, the Option shall thereafter be
exercisable, during the period specified in Section 4(a)(i), by his legal
representatives to the full extent to which the Option was exercisable by the
Optionee at the time of his Permanent Disability. The Option shall not be
subject to execution, attachment or similar process. Any attempted assignment
or transfer of the Option contrary to the provisions hereof, and the levy of
any execution, attachment or similar process upon the Option, shall be null
and void and without effect.
10. Notices. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if (i) personally
delivered, (ii) sent by nationally-recognized overnight courier or (iii) sent
by registered or certified mail, postage prepaid, return receipt requested,
addressed as follows:
if to the Optionee, to the address set forth on the signature page
hereto; and
if to the Corporation, to:
Adams Golf, Inc.
300 Delaware Avenue, Suite 572
Wilmington, Delaware 19801
Attention: Secretary
with a copy to:
Adams Golf, Ltd.
c/o Adams Golf GP Corp.
2801 E. Plano Parkway
Plano, Texas 75074
Attention: President
-5-
<PAGE>
or to such other address as the party to whom notice is to be given may have
furnished to each other party in writing in accordance herewith. Any such
communication shall be deemed to have been given (i) when delivered, if
personally delivered, (ii) on the first Business Day (as hereinafter defined)
after dispatch, if sent by nationally-recognized overnight courier and (iii)
on the third Business Day following the date on which the piece of mail
containing such communication is posted, if sent by mail. As used herein,
"Business Day" means a day that is not a Saturday, Sunday or a day on which
banking institutions in the city to which the notice or communication is to be
sent are not required to be open.
11. No Waiver. No waiver of any breach or condition of this Agreement
shall be deemed to be a waiver of any other or subsequent breach or condition,
whether of like or different nature.
12. Optionee Undertaking. The Optionee hereby agrees to take whatever
additional actions and execute whatever additional documents the Corporation
or its counsel may in their reasonable judgment deem necessary or advisable in
order to carry out or effect one or more of the obligations or restrictions
imposed on the Optionee pursuant to the express provisions of this Agreement.
13. Modification of Rights. The rights of the Optionee are subject to
modification and termination in certain events as provided in this Agreement
and the Plan.
14. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Delaware applicable to contracts
made and to be wholly performed therein.
15. Counterparts. This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original, but all of which together
shall constitute one and the same instrument.
16. Entire Agreement. This Agreement and the Plan constitute the entire
agreement between the parties with respect to the subject matter hereof, and
supersede all previously written or oral negotiations, commitments,
representations and agreements with respect thereto.
ADAMS GOLF, INC.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
OPTIONEE:
-----------------------------------
Name:
------------------------------
Address:
---------------------------
---------------------------
---------------------------
Annexes
Annex A - Form of Exercise Notice
-6-
<PAGE>
ANNEX A
EXERCISE NOTICE
Ladies/Gentlemen:
I hereby exercise my Stock Option to purchase _________ shares of Common Stock
of ADAMS GOLF, INC. at the option price of $____ per share as provided in the
Stock Option Agreement dated the ___ day of ________________.
I acknowledge that I previously received a copy of the 1999 Stock Option Plan
for Outside Consultants of Adams Golf, Inc. and executed a Stock Option
Agreement, and I have carefully reviewed both documents.
I have considered the tax implications of my option and the exercise thereof.
I hereby tender my personal check, bank draft or money order payable to ADAMS
GOLF, INC. in the amount of $____________ or, I have wire transferred
$_______________ to ADAMS GOLF, INC., which transfer shall be subject to the
confirmation of receipt of funds by the Corporation. [If payment is to be made
by wire transfer, the Optionee should contact the Corporation's Chief Financial
Officer or Controller in advance to obtain wiring instructions.]
- ------------------------------
Optionee
- ------------------------------
Date
<PAGE>
EXHIBIT 21.1
ADAMS GOLF, INC., A DELAWARE CORPORATION
SUBSIDIARIES
The Company conducts its operations through several direct and indirect
wholly-owned subsidiaries, including (i) Adams Golf Holding Corp., which
holds limited partnership interests of certain indirect subsidiaries of the
Company; (ii) Adams Golf GP Corp., which holds capital stock or general
partnership interests, as applicable, of certain indirect subsidiaries of the
Company; (iii) Adams Golf Direct Response, Ltd., which operates
direct-to-consumer sales and advertising activities; (iv) Adams Golf, Ltd.,
which operates the golf club design, assembly and retail sales business;
(v) Adams Golf IP, L.P., which holds the intellectual property rights of the
Company, and (vi) Adams Golf Management Corp., which provides management and
consulting services to certain of the Company's indirect subsidiaries. A
complete list of the Company's subsidiaries at March 20, 2000 is as follows:
Adams Golf, Ltd., a Texas limited partnership
Adams Golf Direct Response, Ltd., a Texas limited partnership
Adams Golf Holding Corp., a Delaware corporation
Adams Golf GP Corp., a Delaware corporation
Adams Golf Management Corp., a Delaware corporation
Adams Golf RAC Corp., a Delaware corporation
Adams Golf IP, L.P., a Delaware limited partnership
Adams Golf Foreign Sales Corporation, a Barbados, W.I. corporation
Adams Golf U.K., Ltd., a United Kingdom private limited company
Adams Golf Japan, Inc., a Japan kabushiki kaisha
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Adams Golf, Inc and Subsidiaries:
We consent to incorporation by reference in Registration Statement
Nos. 333-68129, 333-79495, 333-90391 on Form S-8 of Adams Golf, Inc. of our
report dated January 28, 2000 relating to the consolidated balance sheets of
Adams Golf, Inc. and subsidiaries as of December 31, 1998 and 1999 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1999,
and the related financial statement schedule, which report is included in the
December 31, 1999 Annual Report on Form 10-K of Adams Golf, Inc.
KPMG LLP
Dallas, Texas
March 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR ADAMS GOLF, INC. AND ITS SUBSIDIARIES FOR
THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,768
<SECURITIES> 18,464
<RECEIVABLES> 11,978
<ALLOWANCES> 966
<INVENTORY> 19,101
<CURRENT-ASSETS> 58,364
<PP&E> 10,609
<DEPRECIATION> (3,044)
<TOTAL-ASSETS> 83,210
<CURRENT-LIABILITIES> 4,497
<BONDS> 0
0
0
<COMMON> 23
<OTHER-SE> 78,348
<TOTAL-LIABILITY-AND-EQUITY> 83,210
<SALES> 54,000
<TOTAL-REVENUES> 54,000
<CGS> 17,571
<TOTAL-COSTS> 42,047
<OTHER-EXPENSES> 11,408
<LOSS-PROVISION> 1,709
<INTEREST-EXPENSE> 37
<INCOME-PRETAX> (17,058)
<INCOME-TAX> (6,469)
<INCOME-CONTINUING> (10,589)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,589)
<EPS-BASIC> (0.47)
<EPS-DILUTED> (0.47)
</TABLE>
