<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to _______________________
Commission File Number: 0-24583
ADAMS GOLF, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2320087
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
300 Delaware Avenue, Suite 572, Wilmington, Delaware 19801
(Address of principal executive offices) (Zip Code)
(302) 427-5892
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
The number of outstanding shares of the registrant's common stock, par value
$.001 per share, was 22,480,071 on November 14, 2000.
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I FINANCIAL STATEMENTS Page
----
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 2000 (unaudited) and December 31, 1999 3
Unaudited Condensed Consolidated Statements of Operations -
Three and nine months ended September 30, 2000 and 1999 4
Unaudited Condensed Consolidated Statement of Stockholders' Equity -
Nine months ended September 30, 2000 5
Unaudited Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 2000 and 1999 6
Notes to Unaudited Condensed Consolidated Financial
Statements 7-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-21
Item 3. Quantitative and Qualitative Disclosures About Market Risk N/A
PART II OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds N/A
Item 3. Defaults Upon Senior Securities N/A
Item 4. Submissions of Matters to a Vote of Security Holders N/A
Item 5. Other Information N/A
Item 6. Exhibits and Reports on Form 8-K 22
</TABLE>
2
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- -------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................... $ 8,347 $ 2,786
Marketable securities (note 2) .......................... 15,954 18,464
Trade receivables, net of allowance for doubtful accounts
of $1,945 (unaudited) and $966 in 2000 and 1999,
respectively ......................................... 9,460 11,012
Inventories (note 3) .................................... 16,531 19,101
Prepaid expenses ........................................ 1,357 884
Income tax receivable ................................... -- 4,836
Deferred income tax assets .............................. 999 660
Other current assets .................................... 471 621
-------------- -------------
Total current assets ................................. 53,119 58,364
Property and equipment, net ................................ 6,312 7,565
Marketable securities (note 2) ............................. -- 8,456
Professional services agreement (notes 4 and 10) ........... 7,678 8,438
Other assets, net .......................................... 1,602 387
-------------- -------------
$ 68,711 $ 83,210
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................ $ 2,065 $ 1,981
Accrued expenses ........................................ 4,031 2,516
-------------- -------------
Total current liabilities ............................ 6,096 4,497
Deferred income tax liabilities ............................ -- 342
Capitalized lease obligation ............................... 82 --
-------------- -------------
Total liabilities .................................... 6,178 4,839
-------------- -------------
Stockholders' equity:
Preferred stock, $0.01 par value; authorized 5,000,000
shares; none issued .................................. -- --
Common stock, $.001 par value; authorized
50,000,000 shares; 23,137,571 shares issued and
22,480,071 shares outstanding ........................ 23 23
Additional paid-in capital .............................. 86,038 85,919
Common stock subscription ............................... (22) (22)
Deferred compensation ................................... (366) (476)
Accumulated other comprehensive loss .................... (294) (44)
Accumulated deficit ..................................... (19,710) (3,893)
Treasury stock, 657,500 shares, at cost ................. (3,136) (3,136)
-------------- -------------
Total stockholders' equity ........................... 62,533 78,371
-------------- -------------
Contingencies (note 9)
$ 68,711 $ 83,210
============== =============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
3
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales .......................................... $ 8,485 $ 9,027 $ 36,450 $ 43,100
Cost of goods sold ................................. 4,015 2,673 12,727 13,883
---------- ---------- ---------- ----------
Gross profit ............................... 4,470 6,354 23,723 29,217
Operating expenses:
Research and development expenses ............... 521 567 1,701 1,548
Selling and marketing expenses .................. 6,710 10,683 30,107 32,753
General and administrative expenses:
Provision for bad debts ...................... 1,498 244 2,214 444
Other ........................................ 2,327 2,275 7,781 6,860
---------- ---------- ---------- ----------
Total operating expenses ................... 11,056 13,769 41,803 41,605
---------- ---------- ---------- ----------
Operating loss ............................. (6,586) (7,415) (18,080) (12,388)
Other income (expense):
Interest income ................................. 365 463 987 1,360
Other income (expense) .......................... 11 (108) 155 (124)
---------- ---------- ---------- ----------
Loss before income taxes ................... (6,210) (7,060) (16,938) (11,152)
Income tax expense (benefit) ....................... 23 (3,224) (1,121) (4,912)
---------- ---------- ---------- ----------
Net loss ................................... $ (6,233) $ (3,836) $ (15,817) $ (6,240)
========== ========== ========== ==========
Loss per common share-basic and diluted (note 5) ... $ (0.28) $ ( 0.17) $ (0.70) $ (0.28)
========== ========== ========== ==========
</TABLE>
See accompanying notes to unaudited condensed
consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
ADAMS GOLF, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
SHARES OF ADDITIONAL COMMON ACCUMULATED OTHER
COMMON COMMON PAID-IN STOCK DEFERRED COMPREHENSIVE
STOCK STOCK CAPITAL SUBSCRIPTION COMPENSATION LOSS
----- ----- ------- ------------ ------------ ----
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 ... 23,137,571 $ 23 $ 85,919 $ (22) $ (476) $ (44)
Comprehensive income (loss):
Net loss .................. -- -- -- -- -- --
Other comprehensive
income (loss):
Unrealized gain on
marketable securities . -- -- -- -- -- 29
Foreign currency translation -- -- -- -- -- (279)
Comprehensive loss ........... -- -- -- -- -- --
Stock option forfeiture ...... -- -- (52) -- 52 --
Issuance of stock options .... -- -- 171 -- (171) --
Amortization of deferred
compensation ............... -- -- -- -- 229 --
------------ ------------ ------------ ------------ ------------ ------------
Balance, September 30, 2000 .. 23,137,571 $ 23 $ 86,038 $ (22) $ (366) $ (294)
============ ============ ============ ============ ============ ============
<CAPTION>
COST OF TOTAL
ACCUMULATED COMPREHENSIVE TREASURY STOCKHOLDERS'
DEFICIT LOSS STOCK EQUITY
------- ---- ----- ------
Balance, December 31, 1999 ... $ (3,893) $ -- $ (3,136) $ 78,371
Comprehensive income (loss):
Net loss .................. (15,817) (15,817) -- (15,817)
Other comprehensive
income (loss):
Unrealized gain on
marketable securities . -- 29 -- 29
Foreign currency translation -- (279) (279)
------------
Comprehensive loss ........... -- $ (16,067) -- --
============
Stock option forfeiture ...... -- -- --
Issuance of stock options .... -- -- --
Amortization of deferred
compensation ............... -- -- 229
------------ ------------ ------------
Balance, September 30, 2000 .. $ (19,710) $ (3,136) $ 62,533
============ ============ ============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
5
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2000 1999
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss .......................................... $ (15,817) $ (6,240)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization of property and
equipment and intangible assets .............. 2,957 2,411
Amortization of deferred compensation .......... 229 145
Deferred income taxes .......................... (1,144) 1,278
Allowance for doubtful accounts ................ 979 (84)
Changes in assets and liabilities:
Trade receivables ............................ 573 (6,920)
Inventories .................................. 2,570 (4,932)
Prepaid expenses ............................. (473) (126)
Income tax receivable ........................ 4,836 (2,415)
Other current assets ......................... 150 105
Other assets ................................. (1,233) (235)
Accounts payable ............................. 84 1,009
Accrued expenses ............................. 1,455 (593)
---------- -----------
Net cash used in operating activities ..... (4,834) (16,597)
---------- -----------
Cash flows from investing activities:
Purchase of equipment ............................. (614) (2,163)
Purchases of marketable securities ................ (9,047) (33,688)
Maturities of marketable securities ............... 14,100 7,333
Sales of marketable securities .................... 5,999 31,201
---------- -----------
Net cash provided by investing
activities .............................. 10,438 2,683
---------- -----------
Cash flows from financing activities:
Repayment of note payable to shareholder ...... -- (175)
Principal payments under capital lease
obligation ..................................... (43) --
Issuance of common stock ....................... -- 2
---------- -----------
Net cash used in financing
activities .............................. (43) (173)
---------- -----------
Net increase (decrease) in cash and cash
equivalents .................................... 5,561 (14,087)
Cash and cash equivalents at beginning of period ..... 2,786 23,688
---------- -----------
Cash and cash equivalents at end of period ........... $ 8,347 $ 9,601
========== ===========
Supplemental disclosure of cash flow information:
Interest paid ..................................... $ 9 $ 33
========== ===========
Income taxes paid ................................. $ 23 $ 26
========== ===========
Supplemental disclosure of non-cash investing and
financing activities:
Equipment financed with capital lease ........... $ 186 $ --
========== ===========
Tax benefit from exercise of stock options ...... $ -- $ 772
========== ===========
</TABLE>
See accompanying notes to unaudited condensed
consolidated financial statements.
6
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of Adams Golf, Inc.
(the "Company") for the three and nine month periods ended September 30, 2000
and 1999 have been prepared by the Company, pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). The information
furnished herein reflects all adjustments (consisting only of normal recurring
accruals and adjustments) which are, in the opinion of management, necessary to
fairly state the operating results for the respective periods. However, these
operating results are not necessarily indicative of the results expected for
the full fiscal year. Certain information and footnote disclosures normally
included in annual consolidated financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to SEC
rules and regulations. The notes to the unaudited condensed consolidated
financial statements should be read in conjunction with the notes to the
consolidated financial statements contained in the Company's 1999 Annual Report
on Form 10-K filed with the SEC on March 28, 2000.
The Company, founded in 1987, designs, manufactures, markets, and distributes
premium quality, technologically innovative golf clubs and provides custom golf
club fitting technology. The Company's primary products are fairway woods,
drivers and irons that are marketed under the trademarks "Tight Lies," "Tight
Lies 2" and "SC Series".
2. MARKETABLE SECURITIES
Marketable securities, primarily consisting of governmental and corporate
bonds, are managed under agreements with investment managers. The agreements
provide terms related to the quality, diversification and maturities of the
investments in the managed portfolios. The investments are classified as
available-for-sale and are carried at fair value, with unrealized gains and
losses, net of the related tax effect, reported as other comprehensive income
in the consolidated statement of stockholders' equity. The balance sheet
classification of the Company's marketable securities is based upon the
contractual maturity date of such securities.
Marketable securities consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
(UNAUDITED)
-------------------------------------------------------
UNREALIZED FAIR
COST LOSSES VALUE
---------------- ---------------- ----------------
<S> <C> <C> <C>
Commercial paper $ 3,474 $ (1) $ 3,473
Governmental bonds 10,500 (19) 10,481
Corporate bonds 2,000 - 2,000
---------------- ---------------- ----------------
$ 15,974 $ (20) $ 15,954
Less current amounts (15,974) 20 (15,954)
---------------- ---------------- ----------------
Long-term marketable securities $ - $ - $ -
================ ================ ================
</TABLE>
7
<PAGE>
<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 nine months ended September 30, 2000, there were approximately
$14,100,000 in proceeds received from maturities of available-for-sale
securities, and $9,047,000 in purchases of securities. In addition, there were
approximately $5,999,000 in proceeds received from sales of available-for-sale
securities which included realized gains of approximately $79,000 and realized
losses of approximately $67,000 using the specific identification method. All
marketable securities mature within one year from September 30, 2000.
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
Finished goods $ 5,532 $ 6,208
Component parts 10,999 12,893
------- -------
$16,531 $19,101
======= =======
</TABLE>
4. PROFESSIONAL SERVICES AGREEMENT
The professional services agreement consists of a contract entered into by
Adams Golf, Ltd. and Nicholas A. Faldo ("Faldo"), a professional golfer, which
provides for Faldo's endorsement and use of the Company's products, as well as
the design, development and testing of new technologies and products. As
consideration for such services, Faldo received 900,000 shares of the Company's
common stock, which were valued at the fair market value of the stock ($11.25
per share) as of May 1, 1998, the effective date of the agreement. The value of
the stock has been amortized over a ten year period. Subsequent to September
30, 2000, Adams Golf, Ltd. announced that Faldo was in material breach of his
contract (see note 10). As a result, Adams Golf, Ltd. believes that it will no
longer realize benefits from this agreement and, accordingly, expects to write-
off the remaining unamortized portion of the professional service agreement in
the fourth quarter of 2000.
5. LOSS PER COMMON SHARE
The weighted average common shares used for determining basic and diluted
(loss) per common share were 22,480,071 for the three months ended September
30, 2000 and 1999, and 22,480,071 and 22,479,862 for the nine months ended
September 30, 2000 and 1999, respectively. The effect of stock options in 2000
and 1999 was antidilutive.
8
<PAGE>
6. GEOGRAPHIC SEGMENT AND DATA
The Company generates substantially all revenues from the design,
manufacturing, marketing and distribution of premium quality, technologically
innovative golf clubs. The Company's products are distributed in both domestic
and international markets. Net sales for these markets consisted of the
following (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------- ------------------------------------------
2000 1999 2000 1999
----------------- ------------------ ------------------ ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
United States $ 6,928 $ 7,416 $ 30,769 $ 36,894
Rest of World 1,557 1,611 5,681 6,206
----------------- ------------------ ------------------ ------------------
$ 8,485 $ 9,027 $ 36,450 $ 43,100
================= ================== ================== ==================
</TABLE>
7. INCOME TAXES
In assessing the realizability of deferred income tax assets, the Company
considers whether it is more likely than not that some portion or all of the
deferred income tax assets will not be realized. The ultimate realization of
deferred income tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Due to the historical operating results of the Company,
management is unable to conclude on a more likely than not basis that all
deferred income tax assets generated through operating losses through
September 30, 2000 will be realized. Accordingly, the Company has recognized a
valuation allowance to reduce the net deferred tax asset to an amount that
management believes will more likely than not be realized.
8. NEW ACCOUNTING PRONOUNCEMENTS
The Company is assessing the reporting and disclosure requirements of SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This
statement establishes accounting and reporting standards for derivative
instruments and hedging activities. The statement was amended by SFAS No. 137,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE
EFFECTIVE DATE OF SFAS NO. 133 and SFAS No. 138, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES AN AMENDMENT OF SFAS NO. 133 and will be
effective for financial statements for fiscal years beginning after June 15,
2000. The Company believes SFAS No. 133 will not have a material impact on its
financial statements or accounting policies. The Company will adopt the
provisions of SFAS No. 133 in the first quarter of 2001.
In July 2000, the Emerging Issues Task Force (EITF) reached consensus on Issue
No. 00-10 (EITF 00-10), ACCOUNTING FOR SHIPPING AND HANDLING FEES AND COSTS,
which establishes standards for how companies should account for shipping and
handling fees billed to customers and the costs incurred by companies that
sell goods. The consensus reached was that all amounts billed to a customer
should be classified as revenue. No consensus was reached on classification of
costs, rather the EITF reinforced the requirement to disclose the policy for
accumulating and classifying shipping and handling costs. This consensus must
be applied no later than the fourth quarter of 2000. The Company will adopt
the provisions of this concensus in the fourth quarter of 2000 and does not
expect a material effect on the financial statements.
9
<PAGE>
9. CONTINGENCIES
Beginning in June 1999, the first of seven class action lawsuits was filed
against the Company, certain of its current and former officers and directors
and the three underwriters of the Company's initial public offering ("IPO") in
the United States District Court for the District of Delaware. The complaints
allege violations of Sections 11, 12(a)(2) and 15 of the Securities Act of
1933, as amended, in connection with the Company's IPO. In particular, the
complaints allege that the Company's prospectus, which became effective July 9,
1998, was materially false and misleading in at least two areas. Plaintiffs
contend that the prospectus failed to disclose that unauthorized distribution
of the Company's products (gray market sales) allegedly 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, and which the prospectus failed to dislose. On May 17, 2000, these cases
were consolidated into one amended complaint, and a lead plaintiff was
appointed. The plaintiffs are seeking unspecified amounts of compensatory
damages, interests and costs, including legal fees. On July 5, 2000 the Company
filed a motion to dismiss the consolidated, amended complaint. The motion is
now fully briefed and under submission with the court. The Company denies the
allegations in the complaint and intends to defend it vigorously.
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.
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. SUBSEQUENT EVENT
On November 6, 2000, Adams Golf, Ltd. announced that Nicholas A. Faldo was in
material breach of his contract as a result of declining to use certain
products sold by the Company. Accordingly, Adams Golf, Ltd. ceased making
payments under the agreement that required royalty payments of 5% of net sales
outside the U.S., with minimum annual amounts of $1,875,000 in 2000,
increasing to $4,000,000 in 2004. Although Mr. Faldo has not filed suit
against the Company as result of these actions, we believe that it is
reasonably likely that he will do so. A claim from Mr. Faldo could require us
to spend significant time and money in litigation. As a result, the cessation
of this relationship with Mr. Faldo could have a material adverse effect on
the Company's business, operating results or financial conditions.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
attached unaudited condensed consolidated financial statements and notes
thereto, and with the Company's consolidated financial statements and notes
thereto for the year ended December 31, 1999.
OVERVIEW
The Company designs, manufactures, markets and distributes premium quality,
technologically innovative golf clubs. Founded in 1987, the Company operated
initially as a components supplier and contract manufacturer. Thereafter, the
Company established its custom fitting operation, which currently services a
network of over 160 certified custom fitting accounts. The Company currently
offers a variety of golf equipment products primarily in the fairway wood,
driver, and iron categories. These products are marketed primarily under the
names Tight Lies, Tight Lies 2 and Tight Lies Tour in the fairway wood
category, SC Series and Tight Lies 2 in the driver category, and mostly
recently Tight Lies GT in the iron category.
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, and the Company's custom fitting accounts. No
assurances can be given that demand for the Company's current products or the
introduction of new products will allow the Company to achieve historical
levels of sales in the future.
The Company does not currently manufacture the components required to assemble
its golf clubs, relying instead on various component suppliers. Golf club
components are generally available from multiple suppliers. Currently, however,
certain components for the SC Series driver, the Tight Lies 2 line and the
Tight Lies GT irons are produced by single suppliers. Costs of the Company's
clubs consist primarily of component parts, including the head, shaft and grip.
To a lesser extent, the Company's cost of goods sold includes labor and
occupancy costs in connection with the inspection, testing and assembly of
component parts at its facility in Plano, Texas.
RESULTS OF OPERATIONS
The following table sets forth operating results expressed as a percentage of
net sales for the periods indicated. All information is derived from the
accompanying unaudited condensed consolidated financial statements. Results for
any one or more periods are not necessarily indicative of annual results or
continuing trends. See "Business Risks--Seasonality and Quarterly Fluctuations"
below.
11
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ------------------------------
2000 1999 2000 1999
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 47.3 29.6 34.9 32.2
------------ ------------ ------------- -------------
Gross profit 52.7 70.4 65.1 67.8
Operating expenses:
Research and development expenses 6.1 6.3 4.7 3.6
Sales and marketing expenses 79.1 118.3 82.6 76.0
General and administrative expenses:
Provision for bad debts 17.7 2.7 6.1 1.0
Other 27.4 25.2 21.3 15.9
------------ ------------ ------------- -------------
Total operating expenses 130.3 152.5 114.7 96.5
------------ ------------ ------------- -------------
Operating loss (77.6) (82.1) (49.6) (28.7)
Interest income 4.3 5.1 2.7 3.1
Other income (expense) 0.1 (1.2) 0.4 (0.3)
------------ ------------ ------------- -------------
Loss before income taxes (73.2) (78.2) (46.5) (25.9)
Income tax expense (benefit) 0.3 (35.7) (3.1) (11.4)
------------ ------------ ------------- -------------
Net loss (73.5) (42.5) (43.4) (14.5)
============ ============ ============= =============
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Net sales decreased to $8.5 million for the three months ended September 30,
2000 from $9.0 million for the comparable period of 1999. The decrease was
primarily attributable to a lower volume of SC drivers being sold in 2000 due
to initial introduction of the product in 1999. Net sales of SC drivers for the
three months ended September 30, 2000 were $1.1 million compared to $3.0
million for the comparable period in 1999. In addition, net sales of the Tight
Lies 2 driver, which began selling in October, 1999, were $0.7 million for the
three month period ended September 30, 2000. Net sales of fairway woods were
$6.1 million or 72.1% of net sales for the three months ended September 30,
2000 as compared to $5.5 million or 60.9% of net sales for the three months
ended September 30, 1999. Net sales of the Company's products outside the U.S.
remained unchanged at $1.6 million for the three months ended September 30,
2000 as compared to the same period in 1999, but increased as a percentage of
net sales to 18.4% from 17.8%, respectively.
Cost of goods sold increased to $4.0 million for the three months ended
September 30, 2000 from $2.7 million for the comparable period of 1999, and
increased as a percentage of net sales to 47.3% from 29.6%, respectively. The
increase as a percentage of net sales is primarily attributable to reduction in
the suggested retail selling price of the SC drivers and original Tight Lies
which became effective on May 1, 2000 and July 1, 2000, respectively. With
respect to cost of goods sold as a percentage of net sales, the Company
anticipates that this percentage will remain at higher levels than experienced
in previous quarters as the Company's sales are expected to migrate toward
higher cost products that incorporate new technologies and as the Company
begins to sell iron sets which generally deliver a lower gross profit than the
wood category.
Operating expenses are comprised primarily of selling and marketing expenses,
general and administrative expenses, and, to a lesser extent, research and
development expenses. Selling and marketing expenses decreased to $6.7 million
for the three months ended September 30, 2000 from $10.7 million for the
comparable period of 1999. The decrease is primarily a result of reduced
advertising costs of $4.1 million associated with television and print media.
During the three months ended September 30, 1999, the Company utilized these
mediums extensively to promote the introduction of the SC driver. The Company
anticipates continued reductions in advertising in future periods, but not to
the magnitude experienced during the current comparative three month period. In
addition, the decrease is attributed to a $0.5 million creative costs expensed
in the comparable period in 1999 associated with certain infomercials. The
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reduction in these expense categories was partially offset by an increase of
$0.4 million associated with the operation of the Company's subsidiaries in
the United Kingdom and Japan, $0.1 million of costs related to the
establishment of an agency relationship in Canada, and sales promotion
expenses of $0.3 million. In addition, the selling and marketing category
includes minimum royalty expense under a contract with Nicholas A. Faldo in
the amount of $0.5 million and $0.4 million for three month periods ending
September 30, 2000 and 1999, respectively. On November 6, 2000 Adams Golf,
Ltd. announced that Mr. Faldo was in material breach of his contract.
Accordingly, the Company does not expect to incur royalty expense related to
this contract beyond October 2000.
General and administrative expenses, including provisions for bad debts,
increased to $3.8 million or 45.1% of net sales, for the three months ended
September 30, 2000 from $2.5 million or 27.9% of net sales for the comparable
period ended September 30, 1999. The increase is primarily attributable to an
increase in the provision for bad debts resulting from a general downturn in
golf equipment retailers and the attendant bankruptcies and financial
difficulties experienced by certain customers.
Research and development expenses, primarily consisting of costs associated
with development of new products, for the three months ended September 30,
2000 was $ 0.5 million compared to $0.6 million for the same period in 1999,
and decreased as a percentage of net sales to 6.1% from 6.3%. In addition,
research and development expense includes amortization of compensation
resulting from stock granted to Nicholas A. Faldo in accordance with the terms
of his professional services agreement. The impact of the amortization is $0.3
million in each of the three month periods ended September 30, 2000 and 1999,
respectively. As Adams Golf, Ltd. has announced that Mr. Faldo is in material
breach of his contract, it is expected that the remaining unamortized
compensation associated with the professional services agreement of $7.7
million will be written-off in the fourth quarter of the year ended December
31, 2000.
As a result of the above, the Company had an operating loss of $6.6 million for
the three months ended September 30, 2000 compared to $7.4 million for the
comparable period of 1999.
The Company has established a deferred tax valuation allowance of $5.0 million
at September 30, 2000. The effective tax rate for the third quarter of 2000
was impacted by a valuation allowance recorded to reduce net deferred tax
assets to an amount the Company believes is more likely than not to be
recoverable from taxable income expected to be generated during the NOL
carryforward period.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1999
Net sales decreased to $36.5 million for the nine months ended September 30,
2000 from $43.1 million for the comparable period of 1999. The decrease was
primarily attributable to a lower volume of SC Series drivers being sold in
2000 due to initial sell-in of product occurring in the second quarter of 1999.
Net sales of the SC drivers for the nine months ended September 30, 2000 were
$4.1 million or 11.3% of net sales as compared to $16.2 million or 37.6% of net
sales for the nine months ended September 30, 1999. In addition, net sales of
the Tight Lies 2 driver which began selling in October, 1999, were $4.6 million
for the nine month period ended September 30, 2000. Net sales of fairway woods
were $27.1 million, or 74.4% of net sales, for the nine months ended September
30, 2000 compared to $25.6 million, or 59.4% of net sales, for the nine months
ended September 30, 1999. The increase in sales of fairway woods is primarily
the result of the expansion of the Tight Lies 2 line coupled with the reduction
in the wholesale selling price of the Original Tight Lies line resulting in
increased volume. Net sales of the Company's products outside the U.S.
decreased to $5.7 million for the nine months ended September 30, 2000 from
$6.2 million for the nine months ended September 30, 1999, but increased as a
percentage of net sales to 15.6% from 14.4%, respectively.
Cost of goods sold decreased to $12.7 million for the nine months ended
September 30, 2000 from $13.9 million for the comparable period of 1999, and
increased as a percentage of net sales to 34.9% from 32.2%, respectively. The
increase in cost of goods sold as a percentage of net sales is primarily
attributable to the overall reduction in the wholesale selling price of the
Original Tight Lies line of fairway woods coupled with a similar reduction for
the SC driver. The effect of these price reductions negatively impacted cost of
goods sold as a percentage of net sales by approximately 1.2%. In connection
with the sales program for the SC
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driver, the Company provided one additional SC driver for every four units
which retailers had in inventory at the time of the change in price. The cost
of this program was charged to cost of goods sold, and approximated 1.5% of net
sales for the nine months ended September 30, 2000. With respect to cost of
goods sold as a percentage of net sales, the Company anticipates that this
percentage will continue to increase in future periods as the Company sales are
expected to migrate toward higher cost products that incorporate new
technologies and the Company begins to sell iron sets which generally have
lower per unit selling prices when compared to fairway woods and drivers.
Selling and marketing expenses decreased to $30.1 million for the nine months
ended September 30, 2000 from $32.8 million for the comparable period of 1999,
primarily as a result a decrease in advertising costs of $7.4 million resulting
from reduced spending related to television and print media. During the nine
months ended September 30, 1999, the Company advertised extensively utilizing
both television and print media in order to promote the introduction of the SC
driver and to promote sell-through of the Tight Lies fairway woods at
retailers. The decrease in advertising expense was partially offset by
additional payroll costs of $1.1 million, $1.1 million of sales promotion
expense primarily related to the introduction of new products, $2.1 million
associated with operating costs of the Company's subsidiaries in the United
Kingdom and Japan, and a $0.5 million increase in tour player endorsement
expense. In addition, for the nine month period ended September 30, 2000 and
1999, selling and marketing expense included royalties of approximately $1.6
million and $1.9 million, respectively. The decrease in royalties expense is
due primarily to reduced royalties relating to infomercial contracts partially
offset by an increase in the minimum royalties owed to Nicholas A. Faldo in
accordance with his professional services agreement amounting to $1.4 million
and $1.1 for the nine month periods ending September 30, 2000 and 1999,
respectively. As Adams Golf, Ltd. has announced that Mr. Faldo is in material
breach of his contract, the Company does not expect to incur such royalty
expense beyond October 2000.
General and administrative expenses, including provisions for bad debts,
increased to $10.0 million for the nine months ended September 30, 2000 from
$7.3 million for the comparable period in 1999, primarily due to a $1.0 million
increase in operating costs associated with the Company's subsidiaries in the
United Kingdom and Japan and a $1.8 million increase in the provision for bad
debts resulting from certain customers declaring bankruptcy and others
experiencing increased financial difficulty.
Research and development expenses for the nine months ended September 30, 2000
increased to $1.7 million compared to $1.5 million for the same period in
1999, and increased as a percentage of net sales to 4.7% from 3.6%. Research
and development expense includes amortization of compensation resulting from
stock granted to Nicholas A. Faldo in accordance with the terms of his
professional services agreement. The impact of the amortization is $0.8
million in each of the nine month periods ending September 30, 2000 and 1999,
respectively. As Adams Golf, Ltd. has announced that Mr. Faldo is in material
breach of his contract, the remaining unamortized compensation associated with
the professional services agreement of $7.7 million is expected to be written
off in the fourth quarter of the year ended December 31, 2000.
As a result of the above, the Company had an operating loss of $18.1 million
for the nine months ended September 30, 2000 compared to $12.4 million for the
comparable period of 1999.
The effective tax rate for the nine months ended September 30, 2000 was 6.6%
compared to 44.0% for the comparable period in the prior year. The effective
tax rate for the second and third quarters of 2000 was impacted by a valuation
allowance of $5.0 million recorded to reduce net deferred tax assets to an
amount the Company believes is more likely than not to be recoverable from
taxable income expected to be generated during the NOL carryforward period.
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LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased to $8.3 million at September 30, 2000 from
$2.8 million at December 31, 1999. During the period approximately $4.8
million was used in operations primarily the result of the net loss of $15.8
million for the nine months ended September 30, 2000 and partially offset by a
$0.6 million decrease in trade receivables, the receipt of a $4.8 million tax
refund, a $2.6 million reduction of inventories, and a $1.5 million increase
in accounts payable and accrued liabilities primarily attributable to
advertising expenditures.
Cash provided by investing activities of $10.4 million for the nine months
ended September 30, 2000 is primarily related to sales and maturities of
marketable securities of $6.0 million and $14.1 million, respectively, offset
by purchases of marketable securities of $9.0 million and equipment of $0.6
million in the ordinary course of business.
Working capital approximated $47.0 million at September 30, 2000 compared to
$53.9 million at December 31, 1999.
On June 30, 2000, the Company executed a $5.0 million revolving credit
facility, which expires on June 1, 2001. The revolving credit facility is
secured by certain of the Company's accounts receivable and finished goods
inventories. The Company had no outstanding borrowings under this facility or a
previous revolving credit facility which expired May 31, 2000. Borrowings under
the Company's revolving credit facility agreement bear interest at the bank's
prime rate.
The Company expects to meet future liquidity requirements through cash flows
generated from operations and cash reserves and maturities or sales of
marketable securities and its credit facility. It is anticipated that operating
cash flows and current cash reserves will also fund capital expenditure
programs. These capital expenditure programs can be suspended or delayed at any
time with minimal disruption to the Company's operations if cash is needed in
other areas of the Company's operations. In addition, cash flows from
operations will be utilized to support purchasing of component parts for new
product introductions in the remainder of 2000 and the first quarter of 2001.
It is anticipated that cash requirements to support the proposed purchasing
efforts will be at increased levels in the future as compared to historical
trends as the Company has introduced new technologies which results in higher
component costs and has entered new equipment categories including the recent
introduction of irons. With regard to advertising efforts, the Company
anticipates requiring less cash flow to support discretionary programs as the
Company continues to reduce its expenditures in this category as compared to
historical trends. The expected operating cash flow, current cash reserves and
the Company's credit facility are expected to allow the Company to meet working
capital requirements during periods of low cash flows resulting from the
seasonality of the industry.
During the past two years the Company has experienced declining sales and
increasing operating losses. Should this trend continue, it may be necessary to
secure additional financing to continue operations. There can be no assurance
that any additional financing will be available on acceptable terms. Should the
Company be unable to obtain additional financing, it may be required to halt
capital expenditure programs, reduce costs associated with its current
infrastructure, and decrease the level of expenditures necessary to support
marketing efforts and advertising campaigns.
Management believes that sufficient resources will be available to meet the
Company's cash requirements through the next twelve months. Cash requirements
beyond twelve months are dependent on the Company's ability to introduce
products which gain market acceptance and manage working capital requirements.
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BUSINESS RISKS
As indicated below, this Form 10-Q contains forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements.
Factors that may cause such a difference include, but are not limited to, those
discussed in this section and elsewhere throughout this Form 10-Q.
DEPENDENCE ON NEW PRODUCT INTRODUCTIONS; UNCERTAIN CONSUMER ACCEPTANCE
Through the third quarter of 2000, the Company's net sales were derived
primarily from the sale of fairway woods (original Tight Lies and Tight Lies
2), Tight Lies 2 and SC Series drivers, and to a much lesser extent Faldo
Series wedges. During the nine months ended September 30, 2000, the Company's
fairway woods represented 74.4% of net sales whereas, for the nine months
ended September 30, 1999, the Company's fairway woods represented 59.4% of net
sales. To date, although certain of the Company's new product introductions
have experienced modest success, we continue to be heavily dependent on sales
of our Tight Lies and Tight Lies 2 fairway woods. The Company's ultimate
success depends, in large part, on its ability to successfully develop and
introduce new products accepted in the marketplace. Management believes that
the Company is particularly dependent on the success of the recently
introduced line of Tight Lies GT irons. Historically, a large portion of new
golf club technologies and product designs have been met with consumer
rejection. No assurance can be given that current products (including the
Tight Lies GT irons) will increase in consumer acceptance or that the Company
will be able to design, manufacture and introduce new products that will meet
with market acceptance. Failure by the Company to identify and develop
innovative new products that achieve widespread market acceptance would
adversely affect the Company's future growth and profitability. Additionally,
successful technologies, designs and product concepts are likely to be copied
by competitors. Accordingly, the Company's operating results could fluctuate
as a result of the amount, timing and market acceptance of new product
introductions by the Company or its competitors. The design of new golf clubs
is also greatly influenced by the rules and interpretations of the USGA.
Although the golf equipment standards established by the USGA generally apply
only to competitive events sanctioned by that organization, the Company
believes that it is critical for its future success that new clubs introduced
by the Company comply with USGA standards.
LIMITED HISTORY OF PROFITABILITY
The Company has a limited history of profitability. Although the Company
generated net income during the years ended December 31, 1996 and December 31,
1998, it has historically experienced net losses from operations. During the
year ended December 31, 1999 and for the nine month period ended September 30,
2000, the Company has experienced declining sales and increasing operating
losses. There can be no assurance that the Company will be able to achieve or
sustain profitability on a quarterly or annual basis in the future.
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 and selected
sporting goods retailers 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 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
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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
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.
DEPENDENCE ON KEY PERSONNEL AND ENDORSEMENTS
The Company's success depends to a significant extent upon the performance of
its senior management team, particularly the Company's founder and Chief
Executive Officer, B.H. (Barney) Adams. In addition to his leadership in his
capacity of Chief Executive Officer of the Company, Mr. Adams spearheads the
Company's product development efforts. The loss or unavailability of Mr. Adams
would adversely affect the Company's business and prospects. None of the
Company's officers or employees, including Mr. Adams, is bound by an employment
agreement and the relationships of such officers and employees are, therefore,
at will. The Company has a $4.0 million key man life insurance policy on the
life of Mr. Adams; however, there can be no assurance that the proceeds of such
policy could adequately compensate the Company for the loss of his services. In
addition, there is strong competition for qualified personnel in the golf club
industry, and the inability to continue to attract, retain and motivate other
key personnel could adversely affect the Company's business, operating results
or financial condition.
The Company has 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. No assurance can be given that the
Company's business would not be adversely affected in a material way by such
further publicity or by the failure of its professional endorsers to carry and
use its products.
HISTORICAL DEPENDENCE ON TELEVISION ADVERTISING
Over the past two years, the Company has significantly increased its use of
traditional image-based advertising with a steady migration away from its
original infomercial based approach. Sales of the Company's product at the
retail level has been, and may continue to be, highly dependent on the success
of the Company's traditional image-based approach. The Company believes that
its current television advertising strategy, like other advertising campaigns,
will reach a point of diminishing return and will therefore need continued
modification. No assurance can be given that another advertising strategy can
be timely developed or that, if developed, such alternative strategy will
achieve the same level of success as that previously enjoyed by the Company's
original or current advertising strategy. 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.
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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 on all its current products with the exception of the newly
introduced GT shaft included in the Tight Lies GT irons which carries a five
year warranty on defects in quality and workmanship. 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, and
Mexico. In addition, the Company sells its products to certain distributors
located outside of the United States. The Company's international business is
currently centered in Canada, Japan and the United Kingdom. The Company's
business is subject to the risks generally associated with doing business
abroad, such as foreign government regulations, foreign consumer preferences,
import and export control, political unrest, disruptions or delays in shipments
and changes in economic conditions and exchange rates in countries in which the
Company purchases components or sells its products.
RISKS ASSOCIATED WITH INTELLECTUAL PROPERTY
Imitation of popular club designs is widespread in the industry. No assurance
can be given that other golf club manufacturers will not be able to
successfully sell golf clubs which imitate the Company's products without
infringing the Company's copyrights, patents, trademarks, or trade dress. Many
of the Company's competitors have obtained patent, trademark, copyright or
other protection of intellectual property rights pertaining to golf clubs. No
assurance can be given that the Company will not be adversely affected by the
assertion of intellectual property rights violations by competitors. This
effect could include alteration or withdrawal of existing products and delayed
introduction of new products.
The Company attempts to maintain the secrecy of its confidential business
information including the practice of having prospective vendors and suppliers
sign confidentiality agreements. No assurance can be given that the Company's
confidential business information will be adequately protected in all
instances. The unauthorized use of the Company's confidential business
information could adversely affect the Company
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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.
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, because the Company has recently experienced an increase in
bankruptcies and financial difficulties of certain of its customers, this
trend my result in additional delinquent or uncollectible accounts for some of
the Company's significant customers. Accordingly, there can be no assurance
that the Company's results of operations or cash flows will not be adversely
impacted by the failure of its customers to meet their obligations to the
Company. Due to industry sensitivity to consumer buying trends and available
disposable income, the Company has in the past extended payment terms for
specific retail customers. Issuance of these terms (i.e., greater than 30
days) is dependent on the Company's relationship with the customer and payment
history. Payment terms are extended to selected customers typically during
off-peak times in the year (i.e., generally the first and fourth quarters).
The Company extends payment terms during these times of the year in order to
promote the Company's brand name and assure adequate product availability,
often to coincide with planned promotions or advertising campaigns. Although a
significant amount of the Company's sales are not affected by these terms, the
extended terms do have a negative impact on the Company's financial position
and liquidity. The Company expects to continue to selectively offer extended
payment terms in the future, depending upon known industry trends and the
Company's financial plans.
In addition to extended payments terms, the nature of the industry also
requires that the Company carry a substantial level of inventory due to the
lead times associated with purchasing components overseas coupled with the
seasonality of customer demand. The Company's inventory balances were
$16,531,000 at September 30, 2000 and $19,101,000 at December 31, 1999. The
Company expects its inventory level at December 31, 2000 to remain at a lower
amount as compared to the December 31, 1999 balance, although there can be no
assurance that this decline will remain at its current magnitude.
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
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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.
ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation and Amended and Restated Bylaws (the
"Bylaws") contain, among other things, provisions establishing a classified
Board of Directors, authorizing shares of preferred stock with respect to which
the Board of Directors of the Company has the power to fix the rights,
preferences, privileges and restrictions without any further vote or action by
the stockholders, requiring that all stockholder action be taken at a
stockholders' meeting and establishing certain advance notice requirements in
order for stockholder proposals or director nominations to be considered at
such meetings. In addition, the Company is subject to the anti-takeover
provisions of Section 203 of the Delaware General Corporation Law (the "DGCL").
In general, this statute prohibits a publicly-held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved
in a prescribed manner. Such provisions could delay, deter or prevent a merger,
consolidation, tender offer, or other business combination or change of control
involving the Company that some or a majority of the Company's stockholders
might consider to be in its best interest, including offers or attempted
takeovers that might otherwise result in such stockholders receiving a premium
over the market price for the Common Stock. The potential issuance of preferred
stock may have the effect of delaying, deferring or preventing a change of
control of the Company, may discourage bids for the Common Stock at a premium
over the market price of the Common Stock and adversely affect the market price
of and voting and other rights of the holders of the Common Stock. The Company
has not issued, and currently has no plans to issue, shares of preferred stock.
RISKS ASSOCIATED WITH ACQUISITIONS
The Company may make acquisitions of complementary services, technologies,
product designs or businesses in the future. There can be no assurance that any
future acquisition will be completed or that, if completed, any such
acquisition will be effectively assimilated into the Company's business.
Acquisitions involve numerous risks, including among others, loss of key
personnel of the acquired company, the difficulty associated with assimilating
the personnel and operations of the acquired company, the potential disruption
of the Company's ongoing business, the maintenance of uniform standards,
controls procedures and policies, and the impairment of the Company's
reputation and relationships with employees and customers. In addition, any
future acquisitions could result in the issuance of dilutive equity securities,
the incurrence of debt or contingent liabilities, and amortization expenses
related to goodwill and other intangible assets, any of which could have a
material adverse effect on the Company's business, operating results or
financial condition.
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TERMINATION OF FALDO CONTRACT
In May 1998, Adams Golf, Ltd. entered into an agreement with Nicholas A. Faldo.
The agreement provided that Mr. Faldo provide a variety of services to Adams
Golf, Ltd. including endorsement and use of certain of Adams Golf, Ltd.'s
products. This agreement required Adams Golf, Ltd. to make certain payments to
Mr. Faldo, whether or not his endorsement results in increased sales of Adams
Golf, Ltd.'s products. Specifically, Mr. Faldo was 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 provided for a minimum royalty of $1.875 million in 2000 escalating
to $4.0 million, for the years 2004 through 2008. From 2009 through 2014, the
minimum royalty was $1.5 million, as adjusted for changes in the consumer price
index. After 2014, the agreement did not provide for a minimum royalty. On
November 6, 2000 Adams Golf, Ltd. announced that Mr. Faldo was in material
breach of this contract and has ceased making all royalty payments. Although
Mr. Faldo has not filed suit against the Company as result of these actions, we
believe that it is reasonably likely that he will do so. A claim from Mr.
Faldo could require us to spend significant time and money in litigation. As
a result, the cessation of this relationship with Mr. Faldo could have a
material adverse effect on the Company's business, operating results or
financial conditions.
FORWARD-LOOKING STATEMENTS
This Quarterly Report contains "forward-looking statements" made under the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements are based on the beliefs of the
Company's management as well as assumptions made by and information currently
available to the Company's management. When used in this report, the words
"anticipate," "believe," "expect" and words or phrases of similar import, as
they relate to the Company or Company management, are intended to identify
forward-looking statements. Such statements reflect the current view of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions related to certain factors including, without
limitation, product development; product introductions; market demand and
acceptance of products; the impact of changing economic conditions; business
conditions in the golf industry; reliance on third parties including suppliers;
the impact of market peers and their products; the actions of competitors,
including pricing, advertising and product development; risks concerning future
technology; and one-time events and other factors detailed in this report under
"Business Risks". Although the Company believes that the expectations reflected
in such forward-looking statements are reasonable, it can give no assurance
that such expectations will prove to have been correct. Based upon changing
conditions, should any one or more of these or any other risks or uncertainties
materialize, or should any underlying assumptions prove incorrect, actual
results may vary materially from those described herein. All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by the
applicable cautionary statements.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Beginning in June 1999, the first of seven class action lawsuits was filed
against the Company, certain of its current and former officers and directors
and the three underwriters of the Company's initial public offering (IPO) in
the United States District Court for the District of Delaware. The complaints
allege violations of Sections 11, 12(a)(2) and 15 of the Securities Act of
1933, as amended, in connection with the Company's IPO. In particular, the
complaints allege that the Company's prospectus, which became effective July 9,
1998, was materially false and misleading in at least two areas. Plaintiffs
contend that the prospectus failed to disclose that unauthorized distribution
of the Company's products (gray market sales) allegedly 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, and which the prospectus failed to disclose. On May 17, 2000, these
cases were consolidated into one amended complaint, and a lead plaintiff was
appointed. The plaintiffs are seeking unspecified amounts of compensatory
damages, interests and costs, including legal fees. On July 5, 2000 the Company
filed a motion to dismiss the consolidated, amended complaint. The motion is
now fully briefed and under submission with the court. The Company denies the
allegations in the complaint and intends to defend it vigorously.
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.
At this time it is not possible to predict whether the Company will incur any
liability or to estimate the damages, or the range of damages, that the Company
might incur in connection with such actions. The Company is also not able to
estimate the amount, if any, of reimbursements that it would receive from
insurance policies should damages with respect to the above actions be incurred.
ITEM 6(a). EXHIBITS
See exhibit index at page 25.
ITEM 6(b). REPORTS ON FORM 8-K
None.
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<PAGE>
SIGNATURES:
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereonto duly authorized.
ADAMS GOLF, INC.
Date: November 14, 2000 By: /s/ B. H. (Barney) Adams
--------------------------------------------------
B. H. (Barney) Adams, Chairman of the Board and
Chief Executive Officer
Date: November 14, 2000 By: /s/ Darl P. Hatfield
--------------------------------------------------
Darl P. Hatfield,
Senior Vice President - Finance and Administration
and Chief Financial Officer (Principal Financial
Officer)
Date: November 14, 2000 By: /s/ Gabriel J. Nill
--------------------------------------------------
Gabriel J. Nill
Controller and Manager of Financial Services
(Principal Accounting Officer)
23
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit Description Location
------- ----------- --------
<S> <C> <C>
Exhibit 3.1 Amended and Restated Certificate of Incorporated by reference to Form S-1
Incorporation (Exhibit 3.1)
Exhibit 3.2 Amended and Restated By-laws Incorporated by reference to Form S-1
(Exhibit 3.2)
Exhibit 4.1 1998 Stock Incentive Plan of the Company Incorporated by reference to Form S-1
dated February 26, 1998 (Exhibit 4.1)
Exhibit 4.2 1996 Stock Option Plan dated April 10, 1998 Incorporated by reference to Form S-1
(Exhibit 4.2)
Exhibit 4.3 Adams Golf, Ltd. 401(k) Retirement Plan Incorporated by reference to Form S-1
(Exhibit 4.4)
Exhibit 4.4 1999 Non-Employee Director Plan of Incorporated by reference to the 1999
Adams Golf, Inc. Proxy Statement
Exhibit 4.5 1999 Stock Option Plan for Outside Incorporated by reference to Form S-8
Consultants of Adams Golf, Inc. (Exhibit 4.1)
Exhibit 10.1 Agreement between the Company and Nick Incorporated by reference to Form S-1
Faldo, dated April 22, 1998 (Exhibit 10.1)
Exhibit 10.2 Revolving Credit Agreement dated February
26, 1999, between Adams Golf Direct
Response, Ltd., Adams Golf, Ltd. and
NationsBank of Texas N.A. and related Incorporated by reference to Form 10-K
promissory note and guaranty (Exhibit 10.2)
Exhibit 10.3 Commercial Lease Agreement dated
December 5, 1997, between Jackson-Shaw Incorporated by reference to Form S-1
Technology Center II, Ltd. and the Company (Exhibit 10.3)
Exhibit 10.4 Commercial Lease Agreement dated April 6,
1998, between Jackson-Shaw Technology Incorporated by reference to Form S-1
Center II, Ltd. and the Company (Exhibit 10.4)
Exhibit 10.5 Letter agreement dated April 13, 1998, Incorporated by reference to Form S-1
between the Company and Darl P. Hatfield (Exhibit 10.5)
Exhibit 10.6 Amendment to Amended and Restated Incorporated by reference to Exhibit
Revolving Credit Agreement dated 10.6 to the Quarterly Report on Form
August 13, 1999 between Adams Golf Direct 10-Q for the quarter ended June 30, 1999
Response, Ltd., Adams Golf, Ltd. and
Bank of America, N. A.
Exhibit 10.7 Revolving Credit Agreement between Adams Incorporated by reference to Exhibit
Golf, Ltd. and Legacy Bank 10.7 to the Quarterly Report on Form
10-Q for the quarter ended June 30, 2000
Exhibit 11.1 Computation of Earnings Per Share Included in this filing
Exhibit 27.1 Financial Data Schedule Included in this filing
</TABLE>
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