-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MhdqOCU7xwytJwTkMBzQAn3RUoID66/x6SXy3PCj87LtdqzGCxzxra3qXp0GxqZJ W6DJHry3qwWvK668P6CqBA== 0000912057-99-005360.txt : 19991115 0000912057-99-005360.hdr.sgml : 19991115 ACCESSION NUMBER: 0000912057-99-005360 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADAMS GOLF INC CENTRAL INDEX KEY: 0001059763 STANDARD INDUSTRIAL CLASSIFICATION: [3949] IRS NUMBER: 752320087 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24583 FILM NUMBER: 99750370 BUSINESS ADDRESS: STREET 1: 2801 EAST PLANO PARKWAY CITY: PLANO STATE: TX ZIP: 75074 BUSINESS PHONE: 9726739000 MAIL ADDRESS: STREET 1: 2801 EAST PLANO PARKWAY CITY: PLANO STATE: TX ZIP: 75074 10-Q 1 10-Q 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, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to ____________________ Commission File Number: 0-24583 ADAMS GOLF, INC. (Exact name of registrant as specified in its charter) DELAWARE 75-2320087 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 300 Delaware Avenue, Suite 572, Wilmington, Delaware 19801 (Address of principal executive offices) (Zip Code) (302) 427-5892 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No The number of outstanding shares of the registrant's common stock, par value $.001 per share, was 22,480,071 on November 12, 1999. ADAMS GOLF, INC. AND SUBSIDIARIES TABLE OF CONTENTS
PART I FINANCIAL STATEMENTS Page ---- Item 1. Financial Statements Condensed Consolidated Balance Sheets - December 31, 1998 and September 30, 1999 (unaudited) 3 Unaudited Condensed Consolidated Statements of Operations - Three and nine months ended September 30, 1998 and 1999 4 Unaudited Condensed Consolidated Statement of Stockholders' Equity - Nine months ended September 30, 1999 5 Unaudited Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 1998 and 1999 6 Notes to Unaudited Condensed Consolidated Financial Statements 7-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-15 Item 3. Quantitative and Qualitative Disclosures About Market Risk N/A PART II OTHER INFORMATION Item 1. Legal Proceedings 16 Item 2. Changes in Securities and Use of Proceeds N/A Item 3. Defaults Upon Senior Securities N/A Item 4. Submissions of Matters to a Vote of Security Holders N/A Item 5. Other Information N/A Item 6. Exhibits and Reports on Form 8-K 16
2 ADAMS GOLF, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ASSETS
DECEMBER 31, SEPTEMBER 30, 1998 1999 -------------- --------------- (UNAUDITED) Current assets: Cash and cash equivalents .............................................. $ 23,688 $ 9,601 Marketable securities (note 2) ......................................... 13,084 20,796 Trade receivables, net of allowance for doubtful accounts of $1,294 and $1,210 (unaudited) in 1998 and 1999, respectively ........................................................ 2,022 9,026 Inventories (note 3) ................................................... 13,312 18,244 Prepaid expenses ....................................................... 885 1,011 Income tax receivable .................................................. 2,088 5,275 Deferred income tax assets ............................................. 2,386 838 Other current assets ................................................... 1,287 1,182 -------- -------- Total current assets ................................................ 58,752 65,973 Property and equipment, net ............................................... 3,468 7,713 Marketable securities (note 2) ............................................ 21,291 8,500 Professional services agreement (note 4) .................................. 9,450 8,691 Other assets, net ......................................................... 3,945 445 -------- -------- $ 96,906 $ 91,322 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Note payable to shareholder ............................................ $ 175 $ - Accounts payable ....................................................... 1,152 2,161 Accrued expenses ....................................................... 4,418 3,825 -------- -------- Total current liabilities ........................................... 5,745 5,986 Deferred income tax liabilities ........................................... 2,971 2,619 -------- -------- Total liabilities ................................................... 8,716 8,605 -------- -------- Stockholders' equity: Preferred stock, $0.01 par value; authorized 5,000,000 shares; none issued and outstanding.................................. - - Common stock, $.001 par value; authorized 50,000,000 shares; 23,136,782 and 23,137,571 shares issued and 22,479,282 and 22,480,071 shares outstanding at December 31, 1998 and September 30, 1999, respectively .................................................. 23 23 Additional paid-in capital ............................................. 85,183 85,954 Common stock subscription .............................................. (22) (22) Deferred compensation .................................................. (704) (556) Accumulated other comprehensive income (loss) .......................... 150 (2) Retained earnings ...................................................... 6,696 456 Treasury stock, 657,500 shares, at cost ................................ (3,136) (3,136) -------- -------- Total stockholders' equity .......................................... 88,190 82,717 Contingencies (note 8) -------- -------- $ 96,906 $ 91,322 ======== ========
See accompanying notes to unaudited condensed consolidated financial statements. 3 ADAMS GOLF, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ----------------------- 1998 1999 1998 1999 ---- ---- ---- ---- Net sales ............................... $22,987 $ 9,027 $81,315 $43,100 Cost of goods sold ...................... 6,001 2,673 19,626 13,883 ------ ------ ------ ------ Gross profit .................... 16,986 6,354 61,689 29,217 ------ ------ ------ ------ Operating expenses: Research and development expenses .... 454 567 1,118 1,548 Selling and royalty expenses ......... 7,296 10,683 24,683 32,753 General and administrative expenses: Provision for bad debts ........... 568 244 1,214 444 Other ............................. 2,443 2,275 8,820 6,860 ------ ------ ------ ------ Total operating expenses ........ 10,761 13,769 35,835 41,605 ------ ------ ------ ------ Operating income (loss) ......... 6,225 (7,415) 25,854 (12,388) Other income (expense): Interest income ...................... 668 463 702 1,360 Other expense ........................ (17) (108) (162) (124) ------ ------ ------ ------ Income (loss) before income taxes 6,876 (7,060) 26,394 (11,152) Income tax expense (benefit) ............ 2,530 (3,224) 9,748 (4,912) ------ ------ ------ ------ Net income (loss) ............... $ 4,346 $(3,836) $16,646 $(6,240) ====== ====== ====== ====== Income (loss) per common share (note 5): Basic ................................ $ 0.19 $ (0.17) $ 0.84 $ (0.28) ====== ====== ====== ====== Diluted .............................. $ 0.19 $ (0.17) $ 0.83 $ (0.28) ====== ====== ====== ======
See accompanying notes to unaudited condensed consolidated financial statements. 4 ADAMS GOLF, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS) NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
SHARES OF ADDITIONAL COMMON COMMON COMMON PAID-IN STOCK DEFERRED STOCK STOCK CAPITAL SUBSCRIPTION COMPENSATION ----- ----- ------- ------------ ------------ Balance, December 31, 1998 23,136,782 $ 23 $ 85,183 $ (22) $ (704) Comprehensive income: Net loss................... - - - - - Other comprehensive income, net of tax Unrealized loss on marketable securities.... - - - - - Comprehensive loss............ - - - - - Stock option forfeiture....... - - (3) - 3 Exercise of stock options..... 789 - 2 - - Tax benefit from exercise of stock options.............. - - 772 - - Amortization of deferred compensation............... - - - - 145 ---------- ---------- ---------- ----------- ------------ Balance, September 30, 1999... 23,137,571 $ 23 $ 85,954 $ (22) $ (556) ========== ========== ========== =========== ============ ACCUMULATED COST OF TOTAL COMPREHENSIVE RETAINED COMPREHENSIVE TREASURY SHAREHOLDERS' INCOME (LOSS) EARNINGS INCOME STOCK EQUITY ------------- -------- ------ ----- ------ Balance, December 31, 1998 $ 150 $6,696 $ - $(3,136) $88,190 Comprehensive income: Net loss................... - (6,240) (6,240) - (6,240) Other comprehensive income, net of tax Unrealized loss on marketable securities.... (152) - (152) - (152) -------------- Comprehensive loss............ - - $ (6,392) - ============== Stock option forfeiture....... - - - - Exercise of stock options..... - - - 2 Tax benefit from exercise of stock options.............. - - - 772 Amortization of deferred compensation............... - - - 145 ------------ ------------ ------------- ------------ Balance, September 30, 1999... $ (2) $ 456 $(3,136) $82,717 ============ ============ ============= ============
See accompanying notes to unaudited condensed consolidated financial statements. 5 ADAMS GOLF, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ----------------------- 1998 1999 ---- ---- Cash flows from operating activities: Net income (loss) .................................. $ 16,646 $ (6,240) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization of property and equipment and intangible assets ............... 1,495 2,411 Loss on retirement of fixed assets .............. 101 - Amortization of deferred compensation ........... 589 145 Deferred income taxes ........................... 2,889 1,278 Allowance for doubtful accounts ................. 746 (84) Changes in assets and liabilities: Trade receivables ............................. (5,974) (6,920) Inventories ................................... (6,392) (4,932) Prepaid expenses .............................. (565) (126) Income tax receivable ......................... (1,431) (2,415) Other current assets .......................... 29 105 Other assets .................................. (1,394) (235) Accounts payable .............................. 60 1,009 Federal income taxes payable .................. (1,021) - Accrued expenses .............................. (636) (593) -------- -------- Net cash provided by (used in) operating activities .............................. 5,142 (16,597) -------- -------- Cash flows from investing activities: Purchases of marketable securities.................. (34,251) (33,688) Sales of marketable securities...................... -- 31,201 Maturities of marketable securities ................ -- 7,333 Purchases of equipment ............................. (3,922) (2,163) -------- -------- Net cash provided by (used in) investing activities .................... (38,173) 2,683 -------- -------- Cash flows from financing activities: Proceeds from initial public offering .............. 60,078 - Initial public offering costs ...................... (1,250) - Proceeds from notes payable and line of credit ..... 7,135 - Repayment of line of credit borrowings ............. (6,000) - Repayment of notes payable ......................... (600) - Repayment of note payable to shareholder .......... - (175) Issuance of common stock ........................... 908 2 -------- -------- Net cash provided by (used in) financing activities..................... 60,271 (173) -------- -------- Net increase (decrease) in cash and cash equivalents .. 27,240 (14,087) Cash and cash equivalents at beginning of period ...... 1,956 23,688 -------- -------- Cash and cash equivalents at end of period ............ $ 29,196 $ 9,601 ======== ======== Supplemental disclosure of cash flow information: Interest paid ...................................... $ 34 $ 33 ======== ======== Income taxes paid .................................. $ 11,916 $ 26 ======== ======== Supplemental disclosure of non-cash financing activity: Stock issued for professional services agreement ... $ 10,125 $ - ======== ======== Tax benefit from exercise of stock options ......... $ - $ 772 ======== ========
See accompanying notes to unaudited condensed consolidated financial statements. 6 ADAMS GOLF, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The unaudited condensed consolidated financial statements of Adams Golf, Inc. (the "Company") for the three and nine month periods ended September 30, 1998 and 1999 have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The information furnished herein reflects all adjustments (consisting only of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly state the operating results for the respective periods. However, these operating results are not necessarily indicative of the results expected for the full fiscal year. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to SEC rules and regulations. The notes to the unaudited condensed consolidated financial statements should be read in conjunction with the notes to the consolidated financial statements contained in the Company's 1998 Annual Report on Form 10-K filed with the SEC on March 29, 1999. The Company, founded in 1987, designs, manufactures, markets, and distributes premium quality, technologically innovative golf clubs and provides custom golf club fitting technology. The Company's primary products are fairway woods and drivers that are marketed under the trademarks "Tight Lies," "Tight Lies 2" and "SC Series," respectively. 2. MARKETABLE SECURITIES Marketable securities, primarily consisting of commercial paper and governmental and corporate bonds, are managed under agreements with investment managers. The agreements provide terms related to the quality, diversification and maturities of the investments in the managed portfolios. The investments are classified as available-for-sale and are carried at fair value, with unrealized gains and losses, net of the related tax effect, reported as other comprehensive income in the consolidated statement of stockholders' equity. The balance sheet classification of the Company's marketable securities is based upon the contractual maturity date of such securities. Marketable securities consist of the following (in thousands):
DECEMBER 31, 1998 ------------------------------------------------------- UNREALIZED FAIR COST GAINS VALUE ---------------- ---------------- ---------------- 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 ================ ================ ================
7
SEPTEMBER 30, 1999 (UNAUDITED) ------------------------------------------------------- UNREALIZED FAIR COST GAINS/(LOSSES) VALUE ---------------- ---------------- ---------------- Commercial paper $ 11,762 $ (7) $ 11,755 Governmental bonds 13,485 - 13,485 Corporate bonds 4,052 4 4,056 ---------------- ---------------- ---------------- 29,299 (3) 29,296 Less current amounts (20,799) 3 (20,796) ---------------- ---------------- ---------------- Long-term marketable securities $ 8,500 $ - $ 8,500 ================ ================ ================
During the nine months ended September 30, 1999, there were approximately $7,333,000 in proceeds received from maturities of available-for-sale securities and $33,688,000 in purchases of securities. In addition, there were approximately $31,201,000 in proceeds received from sales of available-for-sale securities which included realized gains of $4,365 and realized losses of $101,582. All marketable securities mature within two years. 3. INVENTORIES Inventories consist of the following (in thousands):
DECEMBER 31, SEPTEMBER 30, 1998 1999 ----------------- ----------------- (UNAUDITED) Finished goods $ 2,880 $ 6,304 Component parts 10,432 11,940 ------- ------- $13,312 $18,244 ======= =======
4. PROFESSIONAL SERVICES AGREEMENT The professional services agreement consists of a contract entered into by the Company and Nicholas A. Faldo ("Faldo"), a professional golfer, which provides for Faldo's endorsement and use of the Company's products, as well as the design, development and testing of new technologies and products. As consideration for such services, Faldo received 900,000 shares of the Company's common stock, which were valued at the fair market value of the stock ($11.25 per share) as of May 1, 1998, the effective date of the agreement. The value of the stock is being amortized over ten years, which represents the estimated period during which the Company will realize benefits under the agreement. 5. INCOME (LOSS) PER SHARE The weighted average common shares used for determining basic income (loss) per common share were 22,695,478 and 22,480,071 for the three months ended September 30, 1998 and 1999, respectively, and 19,714,997 and 22,479,862 for the nine months ended September 30, 1998 and 1999, respectively. The effect of dilutive stock options added 53,045 and 296,803 shares for the three and nine months ended September 30, 1998, respectively, for the computation of diluted income per common share. The effect of stock options in 1999 was antidilutive. 8 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):
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------ ------------------------------------- 1998 1999 1998 1999 --------------- ------------- --------------- ------------- (UNAUDITED) (UNAUDITED) United States $ 19,687 $ 7,416 $ 72,515 $ 36,894 Rest of World 3,300 1,611 8,800 6,206 --------------- ------------- --------------- ------------- $ 22,987 $ 9,027 $ 81,315 $ 43,100 =============== ============= =============== =============
7. NEW ACCOUNTING PRONOUNCEMENTS The Company is assessing the reporting and disclosure requirements of SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This statement establishes accounting and reporting standards for derivative instruments and hedging activities. The statement was amended by SFAS No. 137 and will be effective for financial statements for fiscal years beginning after June 15, 2000. The Company believes SFAS No. 133 will not have a material impact on its financial statements or accounting policies. The Company will adopt the provisions of SFAS No. 133 in the first quarter of 2001. 8. CONTINGENCIES Beginning in June 1999, the first of seven purported class actions was filed against the Company and certain of its officers and directors and the three underwriters of the Company's initial public offering ("IPO") in the United States District Court for the District of Delaware. The complaints allege violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as amended, in connection with the Company's IPO. In particular, the complaints allege, among other things, that the Company made materially false and misleading statements and omissions in the registration statement and incorporated prospectus, which became effective July 9, 1998, concerning inventory and distribution of its products. The Company believes these actions are without merit and intends to defend against each of them vigorously. The Company has directors' and officers' and corporate liability insurance to cover risks associated with securities claims filed against the Company or its directors and officers and has notified its insurers of the complaints filed against the Company. The above mentioned complaints are at an early stage. Consequently, at this time it is not possible to predict whether the Company will incur any liability or to estimate the damages, or the range of damages, that the Company might incur in connection with such actions. The Company is also not able to estimate the amount, if any, of reimbursements that it would receive from insurance policies should damages with respect to the above actions be incurred. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto, and with the Company's consolidated financial statements and notes thereto for the year ended December 31, 1998. OVERVIEW The Company designs, manufactures, markets and distributes premium quality, technologically innovative golf clubs. Founded in 1987, the Company operated initially as a components supplier and contract manufacturer. Thereafter, the Company established its custom fitting operation which currently services a network of over 100 certified custom fitting accounts. In the fall of 1995, the Company introduced the original Tight Lies fairway wood and, over the next three years, extended the Tight Lies line to include the Tight Lies Strong 2 Tour Brassie, Strong 3, Strong 5, Strong 7, Strong 9 and Strong 11. During 1999, the Company introduced the SC Series Titanium driver (SC driver), the Faldo Series wedge, the Tight Lies Tour fairway woods, and the Tight Lies 2 fairway woods. The Company's net sales are primarily derived from sales to on-and off-course golf shops and selected sporting goods retailers and, to a lesser extent, international distributors, direct sales to consumers, and the Company's custom fitting accounts. No assurances can be given that demand for the Company's current products or the introduction of new products will allow the Company to achieve historical levels of sales in the future. The Company does not currently manufacture the components required to assemble its golf clubs, relying instead on various component suppliers. Golf club components are generally available from multiple suppliers. Currently, however, certain components for the SC Series Titanium drivers, Tight Lies 2 fairway woods and the Faldo Series wedges are produced by single suppliers. Costs of the Company's fairway woods, SC Series Titanium drivers and Faldo Series wedges consist primarily of component parts, including the head, shaft and grip. To a lesser extent, the Company's cost of goods sold includes labor and occupancy costs in connection with the inspection, testing and assembly of component parts at its facility in Plano, Texas. 10 RESULTS OF OPERATIONS The following table sets forth operating results expressed as a percentage of net sales for the periods indicated. All information is derived from the accompanying unaudited condensed consolidated financial statements. Results for any one or more periods are not necessarily indicative of annual results or continuing trends. See "Seasonality and Quarterly Fluctuations" below.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- --------------------------- 1998 1999 1998 1999 ----------- ----------- ----------- ----------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of goods sold 26.1 29.6 24.1 32.2 ----------- ----------- ----------- ----------- Gross profit 73.9 70.4 75.9 67.8 Operating expenses 46.8 152.5 44.1 96.5 ----------- ----------- ----------- ----------- Operating income (loss) 27.1 (82.1) 31.8 (28.7) Interest income 2.8 5.1 0.9 3.1 Other expense - (1.2) (0.2) (0.3) ----------- ----------- ----------- ----------- Income (loss) before income taxes 29.9 (78.2) 32.5 (25.9) Income tax expense (benefit) 11.0 (35.7) 12.0 (11.4) ----------- ----------- ----------- ----------- Net income (loss) 18.9% (42.5)% 20.5% (14.5)% =========== =========== =========== ===========
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1999 Net sales decreased to $9.0 million for the three months ended September 30, 1999 from $23.0 million for the comparable period of 1998. The decrease was primarily attributable to a lower volume of fairway woods being sold due to competition from similar products produced by other equipment manufacturers and the implementation at the beginning of 1999 of a new pricing structure that resulted in lower suggested retail prices and consequently lower wholesale prices to retail customers. The decline in revenues from the sale of fairway woods was partially offset by revenues generated from the sale of the SC drivers. See "Certain Business Considerations" below. Net sales of fairway woods were $5.5 million, or 60.9% of net sales, for the three months ended September 30, 1999 compared to $22.1 million, or 96.1% of net sales, for the three months ended September 30, 1998. Net sales of the SC drivers for the three months ended September 30, 1999 were $3.0 million or 32.9% of net sales. Net sales of the Company's products outside the U.S. decreased to $1.6 million for the three months ended September 30, 1999 from $3.3 million for the three months ended September 30, 1998, but increased as a percentage of net sales to 17.8% from 14.3%, respectively. Cost of goods sold decreased to $2.7 million for the three months ended September 30, 1999 from $6.0 million for the comparable period of 1998 and increased as a percentage of net sales to 29.6% from 26.1%, respectively. The increase as a percentage of sales is primarily due to lower average selling prices of the Tight Lies line of fairway woods during the three months ended September 30, 1999 resulting from a change in the suggested retail pricing structure at the beginning of 1999, the introduction of new products in 1999 with a higher per unit cost which, in turn, increased costs as a percentage of sales and due to costs associated with the serialization of all fairway woods and drivers. Operating expenses are comprised primarily of selling and royalty expenses, general and administrative expenses, and to a lesser extent, research and development expenses. Selling and royalty expenses increased to $10.7 million for the three months ended September 30, 1999 from $7.3 million for the comparable period of 1998, primarily as a result of hiring new outside sales representatives and increased marketing and advertising efforts. General and administrative expenses, including provisions for bad debts, decreased to $2.5 million, or 27.9% of net sales, for the three months ended September 30, 1999 from $3.0 million, or 13.1% of net sales, for the comparable period ended September 30, 1998, primarily due to a decrease in the 11 use of outside services and a reduction in bad debt expense as a result of increased collection efforts. Research and development expenses, primarily consisting of costs associated with development of new products, for the three months ended September 30, 1999 increased to $0.6 million compared to $0.5 million for the same period in 1998, and increased as a percentage of net sales to 6.3% from 2.0%. As a result of the above, operating loss was $7.4 million for the three months ended September 30, 1999 compared to operating income of $6.2 million for the comparable period of 1998. The effective tax rate for the three months ended September 30, 1999 was 45.7% compared to 36.8% for the comparable period in the prior year. The income tax benefit of $3.2 million for the three months ended September 30, 1999 results primarily from the estimated benefits associated with the Company's net operating loss and utilization of research and development tax credits. NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1999 Net sales decreased to $43.1 million for the nine months ended September 30, 1999 from $81.3 million for the comparable period of 1998. The decrease was primarily attributable to a lower volume of fairway woods being sold due to competition from similar products produced by other equipment manufacturers and the implementation at the beginning of 1999 of a new pricing structure that resulted in lower suggested retail prices and consequently lower wholesale prices to retail customers. The decline in revenues from the sale of fairway woods was partially offset by revenues generated from the sale of the SC drivers. See "Certain Business Considerations" below. Net sales of fairway woods were $25.6 million, or 59.4% of net sales, for the nine months ended September 30, 1999 compared to $78.7 million, or 96.8% of net sales, for the nine months ended September 30, 1998. Net sales of the SC drivers for the nine months ended September 30, 1999 were $16.2 million or 37.6% of net sales. Net sales of the Company's products outside the U.S. decreased to $6.2 million for the nine months ended September 30, 1999 from $8.8 million for the nine months ended September 30, 1998, but increased as a percentage of net sales to 14.4% from 10.8%, respectively. Cost of goods sold decreased to $13.9 million for the nine months ended September 30, 1999 from $19.6 million for the comparable period of 1998, and increased as a percentage of net sales to 32.2% from 24.1%, respectively. The increase as a percentage of sales is primarily due to lower average selling prices of the Tight Lies line of fairway woods during the nine months ended September 30, 1999 resulting from a change in the suggested retail pricing structure at the beginning of 1999, the introduction of new products in 1999 with higher per unit costs which, in turn, increased costs as a percentage of sales, increased costs resulting from a larger, leased production facility and due to costs associated with the serialization of all fairway woods and drivers. Selling and royalty expenses increased to $32.8 million for the nine months ended September 30, 1999 from $24.7 million for the comparable period of 1998, primarily as a result of hiring additional employees and increased marketing and advertising efforts. During the nine months ended September 30, 1999, the Company advertised extensively utilizing both television and print media in order to promote the introduction of the SC driver and to promote sell-through of the Tight Lies fairway woods at retailers. General and administrative expenses, including provisions for bad debts, decreased to $7.3 million, or 16.9% of net sales, for the nine months ended September 30, 1999 from $10.0 million, or 12.3% of net sales, for the comparable period ended September 30, 1998, primarily due to a decrease in the use of outside services, reduction in incentive compensation, and a reduction in bad debt expense as a result of increased collection efforts. Research and development expenses for the nine months ended September 30, 1999 increased to $1.5 million compared to $1.1 million for the same period in 1998, and increased as a percentage of net sales to 3.6% from 1.4%. As a result of the above, operating loss was $12.4 million for the nine months ended September 30, 1999 compared to operating income of $25.9 million for the comparable period of 1998. 12 The effective tax rate for the nine months ended September 30, 1999 was 44.0% compared to 36.9% for the comparable period in the prior year. The income tax benefit of $4.9 million for the nine months ended September 30, 1999 results primarily from the estimated benefits associated with the Company's net operating loss and utilization of research and development tax credits. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents decreased to $9.6 million at September 30, 1999 from $23.7 million at December 31, 1998, primarily as a result of $16.6 million used in operations. The decrease in cash flows provided by operations was primarily a result of the net loss for the nine months ended September 30, 1999, increases in trade receivables of $6.9 million, income tax receivables of $2.4 million (due to tax losses), and inventories of $4.9 million (due to the increase in SC driver and Tight Lies 2 component parts), which was offset by a $1.0 million increase in accounts payable related to increased advertising expenditures. The increase in trade receivables when compared to the balance at December 31, 1998 is due to the seasonality of the business and the application of a $4.3 million unconditional credit against existing receivable balances at December 31, 1998. During the fourth quarter of 1998, the Company granted to retailers an unconditional credit in connection with the Company's new suggested retail pricing structure of its Tight Lies fairway woods. The unconditional credit, which was fully utilized by June 30, 1999, reduced cash flows from operations by $2.9 million during the period then ended. At June 30, 1999, the Company granted to retailers an unconditional credit in connection with the Company's new suggested retail pricing structure for the SC Series Titanium driver. The unconditional credit reduced cash flows by approximately $0.7 million during the three months ended September 30, 1999. Pursuant to the arbitration of certain contractual claims relating to the consulting fees for the establishment of certain international distributorships, the Company paid a third party consultant a percentage of the international business generated from the efforts of the third party in a one-time payment. An amount of approximately $1.0 million was paid in August 1999 to the third party consultant which reduced cash flows during the three months ended September 30, 1999. Cash provided by investing activities of $2.7 million for the nine months ended September 30, 1999 is primarily related to proceeds from the sales and maturities of marketable securities of approximately $38.5 million offset by purchases of marketable securities and purchases of equipment which approximated $33.7 million and $2.2 million, respectively. The Company anticipates making capital expenditures in the ordinary course of business of approximately $0.5 million in the balance of 1999, which primarily includes additional information system enhancements. Working capital approximated $60.0 million at September 30, 1999 compared to $53.0 million at December 31, 1998. The Company's sources of liquidity include cash from operations, its cash and cash equivalents, marketable securities and its credit facility, if needed. The Company believes that such sources of liquidity are sufficient to meet operating needs and capital expenditures for at least the next 12 months. The Company has a $10.0 million revolving credit facility, which expires on May 31, 2000. At September 30, 1999, the Company had no outstanding borrowings under this facility. Borrowings under the Company's revolving credit facility agreement bear interest at rates based on the lending bank's general refinance rate of interest or certain LIBOR rates of interest. During the first quarter of 1998, the Company borrowed approximately $1.1 million in the form of a note payable to the Company's founder, Chief Executive Officer and President to be used for working capital purposes. The remaining principal amount of the note (approximately $175,000) was paid April 14, 1999 at an interest rate of 5.39% per annum. The Company is not aware of any event or trend which would potentially affect its liquidity. In the event such a trend would develop, the Company believes that projected cash flows from operations, current cash reserves 13 and the revolving credit facility would be sufficient to meet operating needs and capital expenditures for at least the next 12 months. SEASONALITY AND QUARTERLY FLUCTUATIONS Golf generally is regarded as a warm weather sport and sales of golf equipment historically have been strongest during the second and third quarters, with the weakest sales occurring during the fourth quarter. In addition, sales of golf clubs are dependent on discretionary consumer spending, which may be affected by general economic conditions. A decrease in consumer spending generally could result in decreased spending on golf equipment, which could have a material adverse effect on the Company's business, operating results and financial condition. In addition, the Company's future results of operations could be affected by a number of other factors, such as unseasonal weather patterns; demand for and market acceptance of the Company's existing and future products; new product introductions by the Company's competitors; competitive pressures resulting in, among other things, lower than expected average selling prices; the Company's reliance on single source suppliers for some of its components, which sources might not be easily replaced if it were necessary to do so; and the volume of orders that are received and that can be fulfilled in a quarter. Any one or more of these factors could result in period-to-period comparisons of our operating results not being necessarily meaningful. See "Forward-Looking Statements" below. YEAR 2000 READINESS DISCLOSURE The year 2000 will have a broad impact on the business environment in which the Company operates due to the possibility that many computerized systems across all industries will be unable to process information containing the dates beginning in the year 2000. The Company relies on its internal information technology systems in operating and monitoring many significant aspects of its business, including financial systems, customer services, infrastructure and network and telecommunications equipment. The Company also relies directly and indirectly on the systems of external business enterprises such as suppliers, customers, creditors, financial organizations and domestic and international governments. The Company has established an enterprise-wide program to prepare its computer systems and applications for the year 2000 and is utilizing both internal and external resources to identify, correct and test the systems for Year 2000 compliance. The Company's recently installed information system has been certified as Year 2000 compliant by the licensor thereof. The Company substantially completed an inventory of all information technology and non-information technology equipment as of December 31, 1998 and anticipates that the majority of its remediation plan will be completed by November 30, 1999. The Company expects that all systems critical to the conduct of the Company's operations will be Year 2000 compliant prior to the end of the 1999 calendar year. The nature of the Company's business is such that the business risks associated with the Year 2000 can be reduced by closely assessing the vendors supplying the components used in assembling the Company's products. Because third party failures could have a material impact on the Company's ability to conduct business, questionnaires have been sent to the Company's significant vendors to obtain reasonable assurance that plans are being developed to address the Year 2000 issue. The returned questionnaires have been assessed by the Company and categorized based upon readiness for the Year 2000 issues and prioritized in order of significance to the business of the Company. To the extent that vendors have not provided the Company with satisfactory evidence of their readiness to handle Year 2000 issues, contingency plans have been developed. The Company does not believe the costs related to the Year 2000 compliance project will be material to its financial position or results of operations. However, the cost of the project and the date on which the Company plans to complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third party modification plans, and other factors. Unanticipated failures by critical vendors, as well as failure by the Company to execute its own remediation plans, could have a material adverse effect on the cost of the project, its completion date, and the Company's results of operations and financial position. As a result, there can be no assurance that these forward-looking estimates will be achieved and 14 the actual cost and vendor compliance could differ materially from those plans, resulting in material financial risk. CERTAIN BUSINESS CONSIDERATIONS The Company's growth and success depend, in large part, on its ability to successfully develop and introduce new products that are accepted in the marketplace. Historically, a large portion of new golf club technologies and product designs have been met with consumer rejection. No assurance can be given that the Company's new Tight Lies 2 line of fairway woods, SC Series Titanium drivers, Faldo Series wedges or other new products will meet with market acceptance. Failure by the Company to identify and develop innovative new products that achieve widespread market acceptance would adversely affect the Company's future growth and profitability. The Company's ability to compete effectively in the golf club market is also dependent on its ability to maintain the proprietary nature of its technologies and products. Although the Company currently has one or more patents pending with respect to its new products and/or the proprietary technologies underlying such products, no assurance can be given that patents will ultimately be issued or of the benefits of protection afforded thereby. Policing unauthorized use of the Company's intellectual property rights can be difficult and expensive, and while the Company takes appropriate action whenever it discovers any of its products or designs have been copied, knock-offs and counterfeit products are a persistent problem in the performance-oriented golf club industry. FORWARD-LOOKING STATEMENTS This Quarterly Report, other than historical information, contains "forwarding-looking statements" made under the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Such statements reflect the current view of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions which could cause actual results to differ materially from those in the forward-looking statements, including but not limited to the following: product development difficulties; manufacturing difficulties; market and retailer demand and acceptance of current products as well as new products; the impact of changing economic conditions; business conditions in the golf industry; reliance on third party suppliers; the impact of market peers and their products; the action of competitors, including pricing; risks concerning future technology; the effect of an unforeseen, unfavorable outcome of a lawsuit; the risk associated with the failure of the Company or its customers or suppliers to successfully manage Year 2000 compliance; and one time events and other factors detailed in the Company prospectus, Form 10-K, Forms 10-Q, and other Securities and Exchange Commission filings. 15 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Beginning in June 1999, the first of seven purported class action lawsuits, as of the date of this Form 10-Q, was filed against the Company, certain of its current and former directors and the three underwriters of the Company's initial public offering (IPO) in the United States District Court for the District of Delaware. The complaints allege violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as amended, in connection with the Company's IPO. In particular, the complaints allege, 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. Specifically, the proceedings pending are as follows: KENNETH F. SHOCKLEY V. ADAMS GOLF, INC. et al, Civil Action No. 99371 (D.Del.) filed on or about June 1999; MARK J. LANTZ V. ADAMS GOLF, INC. et al, Civil Action No. 99-397 (D.Del.) filed on or about June 22, 1999; F. RICHARD MANSON V. ADAMS GOLF, INC. et al, Civil Action No. 99-421 (D.Del.) filed on or about July 2, 1999; SYLVIA J. DAUGHTRY V. ADAMS GOLF, INC. et al, Civil Action No. 99-469 (D.Del.) filed on or about July 22, 1999; ROBERT DOLIN V. ADAMS GOLF, INC. et al, Civil Action No. 99-498 (D.Del.) filed on or about August 3, 1999; TINA NARDOLILLO V. ADAMS GOLF, INC. et al, Civil Action No. 99-511 (D. Del.) filed on or about August 9, 1999; and ROBERT PETRONGOLO V. ADAMS GOLF, INC. et al (D. Del.) filed on or about September 9, 1999. In each case, the plaintiff's are seeking unspecified amounts of compensatory damages, interests and costs, including legal fees. The Company denies the allegations in the complaints and intends to defend against each of them vigorously. The Company expects that these cases will be consolidated, and that it will file a motion to dismiss the consolidated, amended complaints. The Company has directors' and officers' and corporate liability insurance to cover risks associated with securities claims filed against the Company or its directors and officers and has notified its insurers of the complaints filed against the Company. The above mentioned complaints are at an early stage. Consequently, at this time it is not possible to predict whether the Company will incur any liability or to estimate the damages, or the range of damages, that the Company might incur in connection with such actions. The Company is also not able to estimate the amount, if any, of reimbursements that it would receive from insurance policies should damages with respect to the above actions be incurred. ITEM 6(a). EXHIBITS See exhibit index at page 18. ITEM 6(b). REPORTS ON FORM 8-K None. 16 SIGNATURES: Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereonto duly authorized. ADAMS GOLF, INC. Date: November 12, 1999 By: /s/ B. H. (Barney) Adams -------------------------------------------- B. H. (Barney) Adams, Chairman of the Board, Chief Executive Officer and President Date: November 12, 1999 By: /s/ Darl P. Hatfield --------------------------------------------- Darl P. Hatfield, Senior Vice President - Finance and Administration and Chief Financial Officer 17 EXHIBIT INDEX
Exhibit Description Location - ------- ----------- -------- 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 Revolving Credit Agreement dated August 13, 1999 between Adams Golf Direct Response, Ltd., Adams Golf, Ltd. and Bank of America, N.A. Included in this filing Exhibit 11.1 Computation of Earnings Per Share Included in this filing Exhibit 27.1 Financial Data Schedule Included in this filing
18 EX-10.6 2 EXHIBIT 10.6 AMENDMENT TO AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT THIS AMENDMENT TO AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT (this "AMENDMENT") is entered into to be effective as of August 13, 1999, between ADAMS GOLF DIRECT RESPONSE, LTD., a Texas limited partnership, and ADAMS GOLF, LTD., a Texas limited partnership (individually, a "BORROWER" and collectively, "BORROWERS"), and BANK OF AMERICA, N.A., a national banking association, formerly NationsBank, N.A., successor by merger to NationsBank of Texas, N.A. ("LENDER"). R E C I T A L S - - - - - - - - 1. Borrowers and Lender are parties to that certain Amended and Restated Revolving Credit Agreement dated as of February 26, 1999 (as modified, amended, renewed, extended, and restated from time to time, the "CREDIT AGREEMENT"). 2. The parties hereto desire to amend the Credit Agreement subject to the terms and conditions set forth herein. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrowers and Lender agree as follows: 1. TERMS AND REFERENCES. Unless otherwise stated in this Amendment (a) terms defined in the Credit Agreement have the same meanings when used in this Amendment, and (b) references to "SECTIONS" are to the Credit Agreement's sections. 2. AMENDMENTS TO THE CREDIT AGREEMENT. The Credit Agreement is hereby amended as follows: (a) SECTION 1.1 is hereby amended to add the following definitions: "CAPITAL EXPENDITURE" means any expenditure by a Person for an asset which is properly classifiable in relevant financial statements of such Person prepared in accordance with GAAP as a capital asset. "CONSOLIDATED TANGIBLE NET WORTH" means, for any Person as of any date, the total shareholder's equity of such Person LESS the aggregate book value of Intangible Assets of such Person. "ELIGIBLE BONDS" means corporate and municipal debt instruments and corporate preferred stock which are (a) rated at least AA or the equivalent thereof by Standard & Poor's Rating Group, a division of McGraw Hill, Inc., a New York corporation or at least Aa or the equivalent thereof by Moody's Investors Service, Inc., (b) regularly traded on a Public Market, and (c) not subject to any federal or state securities laws or other laws which restrict or limit their sale or transfer. "ELIGIBLE GOVERNMENT SECURITIES" means obligations which are (a) issued or guaranteed by the United States of America or any instrumentality thereof, (b) regularly traded on a Public Market, and (c) not subject to any federal or state securities laws or other laws which restrict or limit their sale or transfer. "ELIGIBLE SECURITIES" means common stock equity securities that are (a) regularly traded on a Public Market, and (b) not subject to any federal or state securities laws or other laws which restrict or limit their sale or transfer. "INTANGIBLE ASSETS" of any Person means those assets of such Person which are (a) deferred assets, OTHER THAN prepaid insurance and prepaid taxes, (b) patents, copyrights, trademarks, tradenames, franchises, goodwill, experimental expenses, and other similar assets which would be classified as intangible assets on a balance sheet of such Person, (c) unamortized debt discount and expense, and (d) assets located, and notes and receivables due from obligors domiciled, outside of the United States of America. "PUBLIC MARKET" means a nationally recognized United States public exchange or market acceptable to Lender on which securities, debt instruments, and/or mutual funds are regularly traded. (b) SECTION 7.14 is hereby deleted in its entirety and replaced with the following: 7.14 MINIMUM TANGIBLE NET WORTH. Borrowers shall not permit, as of any date, the Consolidated Tangible Net Worth of the Companies, on a consolidated basis, to be less than $67,500,000.00. (c) The following SECTION is hereby added as SECTION 7.17: 7.17. LIMITATION ON CAPITAL EXPENDITURES. Borrowers shall not permit the aggregate amount of all Capital Expenditures made by the Companies during any fiscal year ending after the date hereof to exceed $10,000,000.00. (d) The following SECTION is hereby added as SECTION 7.18: 7.18 LIQUID ASSETS. Borrowers shall not, as of any date, permit the ratio of (a) THE SUM OF (i) cash, (ii) Temporary Cash Investments, and (iii) the fair market value of Eligible Bonds, Eligible Government Securities, and Eligible Securities of the Companies, to (b) THE SUM OF (i) all Indebtedness of the Companies, PLUS (ii) the Unused Commitment, in each case as of such date, to be less 3.0 to 1.0. (e) SECTION 8.1(c) is hereby deleted in its entirety and replaced with the following: (c) default shall occur in the performance of (i) any of the covenants or agreements of any Company contained in SECTION 6.1 and SECTION 7, or (ii) any other covenants or agreements of any Company contained herein or in any of the other Loan Documents and, in the case of (II), such failure shall continue for ten (10) days after written notice thereof from Lender to Borrower; or (f) EXHIBIT A is hereby deleted in its entirety and replaced with EXHIBIT A attached hereto. (g) SCHEDULE 5.10 is hereby deleted in its entirety and replaced with SCHEDULE 5.10 attached hereto. 3. WAIVERS. -2- (a) Lender hereby waives any Potential Default or Event of Default arising from Borrowers' failure to comply with the fixed charges ratio set forth in SECTION 7.14 of the Credit Agreement as of the fiscal quarter ended June 30, 1999. (b) The waiver hereby granted by Lender (i) is limited expressly as written, (ii) does not impair Lender's rights to insist upon strict compliance with the Credit Agreement and the other Loan Documents, and (iii) do not extend to any other Loan Document. 4. AMENDMENTS TO OTHER LOAN DOCUMENTS. (a) All references in the Loan Documents to the Credit Agreement shall henceforth include references to the Credit Agreement, as modified and amended hereby, and as may, from time to time, be further amended, modified, extended, renewed, and/or increased. (b) Any and all of the terms and provisions of the Loan Documents are hereby amended and modified wherever necessary, even though not specifically addressed herein, so as to conform to the amendments and modifications set forth herein. 5. RATIFICATIONS. Each Borrower (a) ratifies and confirms all provisions of the Loan Documents as amended by this Amendment, (b) ratifies and confirms that all guaranties, assurances, and liens granted, conveyed, or assigned to Lender under the Loan Documents are not released, reduced, or otherwise adversely affected by this Amendment and continue to guarantee, assure, and secure full payment and performance of the present and future Loans, and (c) agrees to perform such acts and duly authorize, execute, acknowledge, deliver, file, and record such additional documents, and certificates as Lender may request in order to create, perfect, preserve, and protect those guaranties, assurances, and liens. 6. REPRESENTATIONS. Each Borrower represents and warrants to Lender that as of the date of this Amendment: (a) this Amendment and the other Loan Documents to be delivered under this Amendment have been duly authorized, executed, and delivered by Borrowers; (b) no action of, or filing with, any governmental authority is required to authorize, or is otherwise required in connection with, the execution, delivery, and performance by Borrowers of this Amendment; (c) the Loan Documents, as amended by this Amendment, are valid and binding upon Borrowers and are enforceable against Borrowers in accordance with their respective terms; (d) the execution, delivery, and performance by Borrowers of this Amendment do not require the consent of any other person and do not and will not constitute a violation of any laws, agreements, or understandings to which any Borrower is a party or by which any Borrower is bound; (e) all representations and warranties in the Loan Documents (as amended hereby) are true and correct in all material respects except to the extent that (i) any of them speak to a different specific date, or (ii) the facts on which any of them were based have been changed by transactions contemplated or permitted by the Credit Agreement; and (f) after giving effect to this Amendment, no Potential Default or Event of Default exists. 7. CONTINUED EFFECT. Except to the extent amended hereby, all terms, provisions and conditions of the Credit Agreement and the other Loan Documents, and all documents executed in connection therewith, shall continue in full force and effect and shall remain enforceable and binding in accordance with their respective terms. 8. CONDITIONS PRECEDENT. This Amendment shall not be effective unless and until: (a) Lender receives a fully-executed copy of this Amendment, and (b) the representations and warranties in the Loan -3- Agreement, as amended by this Amendment, and each other Loan Document are true and correct in all material respects on and as of the date of this Amendment as though made as of the date of this Amendment. 9. MISCELLANEOUS. Unless stated otherwise (a) the singular number includes the plural and VICE VERSA and words of any gender include each other gender, in each case, as appropriate, (b) headings and captions may not be construed in interpreting provisions, (c) this Amendment must be construed -- and its performance enforced -- under Texas law, (d) if any part of this Amendment is for any reason found to be unenforceable, all other portions of it nevertheless remain enforceable, and (e) this Amendment may be executed in any number of counterparts with the same effect as if all signatories had signed the same document, and all of those counterparts must be construed together to constitute the same document. 10. ENTIRETIES. THE CREDIT AGREEMENT AS AMENDED BY THIS AMENDMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES ABOUT THE SUBJECT MATTER OF THE CREDIT AGREEMENT AS AMENDED BY THIS AMENDMENT AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. 11. PARTIES. This Amendment binds and inures to Borrowers and Lender, and their respective successors and permitted assigns. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGES TO FOLLOW] -4- EXECUTED as of the date first stated above. BORROWERS: ADAMS GOLF DIRECT RESPONSE, LTD., By: ADAMS GOLF GP CORP., a Delaware corporation, General Partner By:____________________________ Name:_______________________ Title:______________________ ADAMS GOLF, LTD., a Texas limited partnership By: ADAMS GOLF GP CORP., a Delaware corporation, General Partner By:____________________________ Name:_______________________ Title:______________________ LENDER: BANK OF AMERICA, N.A., a national banking association, formerly NationsBank, N.A., successor by merger to NationsBank of Texas, N.A. By:_________________________________ Curtis Anderson Senior Vice President -5- To induce Lender to enter into this Amendment, each of the undersigned jointly and severally (a) consent and agree to the execution and delivery of this Amendment, (b) ratify and confirm that all guaranties, assurances, and liens granted, conveyed, or assigned to Lender under the Loan Documents are not released, diminished, impaired, reduced, or otherwise adversely affected by this Amendment and continue to guarantee, assure, and secure the full payment and performance of all present and future Loans, (c) agree to perform such acts and duly authorize, execute, acknowledge, deliver, file, and record such additional guaranties, assignments, security agreements, deeds of trust, mortgages, and other agreements, documents, instruments, and certificates as Lender may reasonably deem necessary or appropriate in order to create, perfect, preserve, and protect those guaranties, assurances, and liens, and (d) waive notice of acceptance of this consent and agreement, which consent and agreement binds the undersigned and their successors and permitted assigns and inures to Lender and their respective successors and permitted assigns. ADAMS GOLF, INC., a Delaware corporation By: ____________________________________________ Name:_______________________________________ Title:______________________________________ ADAMS GOLF HOLDING CORP., a Delaware corporation By: ____________________________________________ Name:_______________________________________ Title:______________________________________ ADAMS GOLF GP CORP., a Delaware corporation By: ____________________________________________ Name:_______________________________________ Title:______________________________________ ADAMS GOLF MANAGEMENT CORP., a Delaware corporation By: ____________________________________________ Name:_______________________________________ Title:______________________________________ -6- ADAMS GOLF IP, L.P., a Delaware limited partnership By: ADAMS GOLF GP CORP., a Delaware corporation, General Partner By: _______________________________________ Name:__________________________________ Title:_________________________________ ADAMS GOLF FOREIGN SALES CORPORATION, a Barbados corporation By: ______________________________________________ Name:_________________________________________ Title:________________________________________ ADAMS GOLF RAC CORP.,a Delaware corporation By: ______________________________________________ Name:_________________________________________ Title:________________________________________ -7- EXHIBIT A FORM OF COMPLIANCE CERTIFICATE FOR PERIOD ENDED ________________________ (THE "SUBJECT PERIOD") LENDER: Bank of America, N.A. BORROWERS: Adams Golf Direct Response, Ltd. and Adams Golf, Ltd. This certificate is delivered under the Amended and Restated Revolving Credit Agreement (as modified, amended, renewed, extended, and restated from time to time, the "CREDIT AGREEMENT") dated as of February 26, 1999, between Borrowers and Lender. Capitalized terms when used in this certificate shall, unless otherwise indicated, have the meanings set forth in the Credit Agreement. The undersigned certify to Lender that, on the date of this certificate, (a) the Financial Statements of the Companies attached to this certificate were prepared in accordance with GAAP, and present fairly the financial condition and results of operations of the Companies as of the end of and for the Subject Period, (b) no Potential Default or Event of Default currently exists or has occurred which has not been cured or waived by Lender, and (c) the status of compliance by the Companies with certain covenants of the Credit Agreement as of the end of the Subject Period is as set forth below:
In Compliance as of End of Subject Period (Please Indicate) 1. FINANCIAL STATEMENTS AND REPORTS. (a) Provide annual audited FYE financial statements within one hundred twenty (120) days after last day of each fiscal year. Yes No (b) Provide quarterly financial statements as required by SECTION 6.1(a) of the Credit Agreement. Yes No (c) Provide a Compliance Certificate and accounts receivable aging contemporaneously with the delivery of the quarterly financial statements described in (b) above. Yes No 2. ADDITIONAL INDEBTEDNESS. None, except Indebtedness permitted by SECTION 7.1 of the Credit Agreement. Yes No 3. LIENS AND ENCUMBRANCES; NEGATIVE PLEDGE AGREEMENTS. None at any time, except as permitted by SECTION 7.2 of the Credit Agreement. Yes No -8- 4. DIVIDENDS. None except as permitted by SECTION 7.4 of the Credit Agreement. Yes No 5. INVESTMENTS. None, except as permitted by SECTION 7.5 of the Credit Agreement. Yes No 6. AFFILIATE TRANSACTIONS. None, except as permitted by SECTION 7.6 of the Credit Agreement. Yes No 7. CHANGE IN EXECUTIVE PERSONNEL. None except as permitted by SECTION 7.7 of the Credit Agreement. Yes No 8. DISPOSAL OF MATERIAL ASSETS OTHER THAN IN THE ORDINARY COURSE OF BUSINESS. None. Yes No 9. SUBSIDIARIES. None, except as permitted by SECTION 7.9 of the Credit Agreement. Yes No 10. LIMITATION OF ACQUISITIONS AND MERGERS. None, except as permitted by SECTION 7.10 of the Credit Agreement. Yes No 11. CHANGES IN BUSINESS OF BORROWERS; CHANGES IN RECEIVABLES POLICY, OTHER THAN IN THE ORDINARY COURSE OF BUSINESS. None. Yes No 12. GUARANTIES OF THIRD PARTY INDEBTEDNESS. None. Yes No 13. SALE AND LEASEBACK TRANSACTIONS. None. Yes No 14. CONSOLIDATED TANGIBLE NET WORTH. Minimum of $67,500,000.00 (defined as total shareholder's equity less Intangible Assets). Yes No (________________ - ___________________) = ____________ Shareholder's Intangible Assets Equity -9- 15. DEBT TO EBITDA. Maximum of 2.0 to 1.0 (Indebtedness to EBITDA) EBITDA =____________+____________+____________+____________=____________ Consolidated Depreciation Cash Interest Taxes Adjusted Net and Expense Income Amortization ____ DIVIDED BY ____________ = ____________ Yes No Indebtedness EBITDA 16. CHANGE OF BORROWERS' FISCAL YEARS. None. Yes No 17. CHANGE OF THE COMPANIES' METHODS OF ACCOUNTING. None. Yes No 18. CAPITAL EXPENDITURES. Maximum of $10,000,000.00 in any fiscal year. Yes No Capital Expenditures = $____________ 19. LIQUID ASSETS TO INDEBTEDNESS. Minimum of 3.0 to 1.0 (defined as the ratio of (a) cash, Eligible Bonds, Eligible Government Securities, Eligible Securities, and Temporary Cash Investments, to (b) Indebtedness plus Unused Commitment) Yes No Cash $ ____________ Eligible Bonds ____________ Eligible Government Securities ____________ Eligible Securities ____________ Temporary Cash Investments ____________ Subtotal $ ____________(a) Indebtedness ____________ Unused Commitment ____________ Subtotal ____________(b) Ratio of (a) to (b) ____________
-10- BORROWERS: ADAMS GOLF DIRECT RESPONSE, LTD., a Texas limited partnership By: ADAMS GOLF GP, CORP., a Delaware corporation, General Partner By: ____________________________ Name:_______________________ Title:______________________ ADAMS GOLF, LTD., a Texas limited partnership By: ADAMS GOLF GP, CORP., a Delaware corporation, General Partner By: ____________________________ Name:_______________________ Title:______________________ -11- SCHEDULE 5.10 LITIGATION 1. C&A INTERNATIONAL, INC. d/b/a NICKENT GOLF EQUIPMENT, CHEN-CHIN HUANG AND TATSUYA SAITO V. ADAMS GOLF, INC. AND WILLOUGHBY GOLF CENTER, INC. d/b/a BOBICK GOLF PRO SHOP, CIVIL ACTION 1:98 CV 0166 filed January 23, 1998 in the United States District Court for the Northern District of Ohio, Eastern Division. 2. ADAMS V. BOST ENTERPRISES, INC. filed in the U.S. District Court - Northern District of Texas. Adams Golf initiated this litigation on March 3, 1998 against Bost Enterprises ("Bost") arising out of the sale by Bost of so-called "knock-off" golf clubs. Adams Golf has asserted claims for patent infringement, false advertisement and unfair competition. In its lawsuit, Adams sought injunctive relief, as well as damages for potential infringement and has participated in court-ordered settlement discussions. No depositions have been taken. Bost filed a motion for summary judgment, which is pending before the court. Adams Golf has filed a motion for leave to file a second amended complaint, which is pending before the court. In this proposed second amended complaint, Adams Golf asserts claims for unfair competition (15 U.S.C. Section 1125(a)), federal trademark infringement (15 U.S.C. Section 114), and common law unfair competition. The court has not yet issued any decision on these motions. This case is set for trial on June 7, 1999. 3. Beginning in June 1999, the first of six purported class action lawsuits was filed against Adams Golf, Inc. (the "Company"), certain of its current and former directors and the three underwriters of the Company's initial public offering ("IPO") in the United States District Court for the District of Delaware. The complaints allege violations of SECTIONS 11, 12(a)(2) and 15 of the Securities Act of 1933 in connection with the Company's IPO. In particular, the complaints alleged that the Company made materially false and misleading statements and omissions in the registration statement and incorporated prospectus, which became effective July 9, 1998, concerning inventory and distribution of its products. In addition, certain of the complaints alleged other factors occurring subsequent to the IPO. Specifically, the proceedings pending are as follows: KENNETH P SHOCKLEY V. ADAMS GOLF, INC., et al., Civil Action No. 99-371 (D.Del.) filed on June, 1999; MARK J. LANTZ V. ADAMS GOLF, INC. et al., Civil Action No. 99-397 (D.Del.) filed on or about June 22, 1999; F. RICHARD MANSON V. ADAMS GOLF, INC. et al., Civil Action No. 99-421 (D.Del.) filed on or about July 2, 1999; SYLVIA J. DAUGHTRY V. ADAMS GOLF, INC. et al., Civil Action No. 99-469 (D.Del.) filed on or about July 22, 1999; ROBERT DOLIN V. ADAMS GOLF, INC. et al., Civil Action No. 99-498 (D.Del.) filed on or about August 3, 1999; and TINA NARDOLILLO V. ADAMS GOLF, INC. et al., Civil Action No. 99-511 (D.Del.) filed on or about August 9, 1999. In each case, the plaintiffs are seeking unspecified amounts of compensatory damages, interests, and costs, including legal fees. The Company has denied the allegations in the complaints and intends to defend against each of them vigorously. -12- EX-11.1 3 EXHIBIT 11.1 COMPUTATION OF EARNINGS PER SHARE - EXHIBIT 11.1 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED)
BASIC INCOME (LOSS) PER COMMON SHARE: THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------- ----------------------------------- 1998 1999 1998 1999 ------------- -------------- --------------- ---------------- Net income (loss) $ 4,346 $ (3,836) $ 16,646 $ (6,240) ============= ============== =============== ================ Weighted average shares outstanding 22,695,478 22,480,071 19,714,997 22,479,862 ------------- -------------- --------------- ---------------- Income (loss) per common share $ 0.19 $ (0.17) $ 0.84 $ (0.28) ============= ============== =============== ================ DILUTED INCOME (LOSS) PER COMMON SHARE: THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------------- ---------------------------------- 1998 1999 1998 1999 ------------- --------------- --------------- --------------- Net income (loss) $ 4,346 $ (3,836) $ 16,646 $ (6,240) ============= =============== =============== =============== Weighted average shares outstanding 22,695,478 22,480,071 19,714,997 22,479,862 Effect of dilutive shares-stock options 53,045 - 296,803 - ------------- --------------- --------------- --------------- Total weighted average dilutive shares 22,748,523 22,480,071 20,011,799 22,479,862 ============= =============== =============== =============== Income (loss) per common share $ 0.19 $ (0.17) $ 0.83 $ (0.28) ============= =============== =============== ===============
EX-27.1 4 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR ADAMS GOLF, INC. AND ITS SUBSIDIAIRIES FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY TO SUCH UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 9,601 20,796 10,236 1,210 18,244 65,973 10,138 2,425 91,322 5,986 0 0 0 23 82,694 91,322 43,100 43,100 13,883 32,753 8,408 444 27 (11,152) (4,912) (6,240) 0 0 0 (6,240) (0.28) (0.28)
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