-----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, DvlRDMiMc4oAAaES1/FvFW8fHRjOMmA002r1zJZDiklisnLzfwEhSGNbd4wDIbQ9 wAcBv4lzD4V8RDwGc8KvPg== 0001047469-99-020612.txt : 19990517 0001047469-99-020612.hdr.sgml : 19990517 ACCESSION NUMBER: 0001047469-99-020612 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 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: 99623670 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 March 31, 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 May 10, 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 March 31, 1999 (unaudited) 3 Unaudited Condensed Consolidated Statements of Operations - Three months ended March 31, 1998 and 1999 4 Unaudited Condensed Consolidated Statement of Stockholders' Equity - Three months ended March 31, 1999 5 Unaudited Condensed Consolidated Statements of Cash Flows - Three months ended March 31, 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 10-14 Item 3. Quantitative and Qualitative Disclosures about Market Risk N/A PART II OTHER INFORMATION Item 1. Legal Proceedings 15 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 15
2 ADAMS GOLF, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ASSETS
DECEMBER 31, MARCH 31, 1998 1999 ------------ ----------- (UNAUDITED) Current assets: Cash and cash equivalents ................................................. $ 23,688 $ 15,493 Marketable securities (note 2) ............................................ 13,084 14,473 Trade receivables, net of allowance for doubtful accounts of $1,294 and $1,023 (unaudited) in 1998 and 1999, respectively ........................................................... 2,022 3,633 Inventories (note 3) ...................................................... 13,312 13,561 Prepaid expenses .......................................................... 885 1,926 Income tax receivable ..................................................... 2,088 2,371 Deferred income tax assets ................................................ 2,386 1,484 Other current assets ...................................................... 1,287 1,498 -------- -------- Total current assets ................................................... 58,752 54,439 Property and equipment, net .................................................. 3,468 7,851 Marketable securities (note 2) ............................................... 21,291 23,345 Professional services agreement (note 4) ..................................... 9,450 9,197 Other assets, net ............................................................ 3,945 312 -------- -------- $ 96,906 $ 95,144 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Note payable to shareholder ............................................... $ 175 $ 175 Accounts payable .......................................................... 1,152 2,777 Accrued expenses .......................................................... 4,418 4,497 -------- -------- Total current liabilities .............................................. 5,745 7,449 Deferred income tax liabilities .............................................. 2,971 2,784 -------- -------- Total liabilities ...................................................... 8,716 10,233 -------- -------- 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 March 31, 1999, respectively ........................................................... 23 23 Additional paid-in capital ................................................ 85,183 85,182 Common stock subscription ................................................. (22) (22) Deferred compensation ..................................................... (704) (636) Accumulated other comprehensive income .................................... 150 118 Retained earnings ......................................................... 6,696 3,382 Treasury stock, 657,500 shares, at cost ................................... (3,136) (3,136) -------- -------- Total stockholders' equity ............................................. 88,190 84,911 -------- -------- $ 96,906 $ 95,144 ======== ========
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 March 31, ------------------------- 1998 1999 -------- -------- Net sales .................................. $ 24,511 $ 8,558 Cost of goods sold ......................... 5,863 3,191 -------- -------- Gross profit ....................... 18,648 5,367 -------- -------- Operating expenses: Research and development expenses ....... 197 469 Selling and royalty expenses ............ 6,248 8,908 General and administrative expenses: Provision for bad debts .............. 466 100 Other ................................ 2,865 1,988 -------- -------- Total operating expenses ........... 9,776 11,465 -------- -------- Operating income (loss) ............ 8,872 (6,098) Other income (expense): Interest income ......................... 10 544 Interest expense ........................ (9) (10) Other ................................... (100) - -------- -------- Income (loss) before income taxes .. 8,773 (5,564) Income tax expense (benefit) ............... 3,130 (2,250) -------- -------- Net income (loss) .................. $ 5,643 $ (3,314) ======== ======== Income (loss) per common share (note 5): Basic ................................... $ 0.32 $ (0.15) ======== ======== Diluted ................................. $ 0.31 $ (0.15) ======== ========
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) THREE MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
Shares of Additional Common Accumulated Other Common Common Paid-in Stock Deferred Comprehensive Retained Stock Stock Capital Subscription Compensation Income Earnings ----- ----- ------- ------------ ------------ ------ -------- Balance, December 31, 1998.... 23,136,782 $ 23 85,183 $ (22) $ (704) $ 150 $ 6,696 Comprehensive income: Net loss .................. - - - - - - (3,314) Other comprehensive income, net of tax - unrealized loss on marketable securities ..... - - - - - (32) - Comprehensive loss ........... - - - - - - - Stock option forfeiture ...... - - (3) - 3 - - Exercise of stock options .... 789 - 2 - - - - Amortization of deferred compensation .............. - - - - 65 - - ---------- ------ ------- ------ ------- ------ -------- Balance, March 31, 1999 ...... 23,137,571 $ 23 $85,182 $ (22) $ (636) $ 118 $ 3,382 ========== ====== ======= ====== ======= ====== ======== Cost of Total Comprehensive Treasury Stockholders' Income Stock Equity ------ ----- ------ Balance, December 31, 1998.... $ - $ (3,136) $ 88,190 Comprehensive income: Net loss .................. (3,314) (3,314) Other comprehensive income, net of tax - unrealized loss on marketable securities ..... (32) (32) --------- Comprehensive loss ........... $ (3,346) - ========= Stock option forfeiture ...... - - Exercise of stock options .... - 2 Amortization of deferred compensation .............. - 65 -------- --------- Balance, March 31, 1999 ...... $ (3,136) $ 84,911 ======== =========
See accompanying notes to unaudited condensed consolidated financial statements. 5 ADAMS GOLF, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ------------------------- 1998 1999 -------- -------- Cash flows from operating activities: Net income (loss) ...................................... $ 5,643 $ (3,314) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization of property and equipment and intangible assets ................... 219 755 Loss on retirement of fixed assets .................. 100 - Amortization of deferred compensation ............... - 65 Deferred income taxes ............................... (138) 732 Allowance for doubtful accounts ..................... 1,127 (271) Changes in assets and liabilities: Trade receivables ................................. (8,164) (1,340) Inventories ....................................... (1,073) (249) Prepaid expenses .................................. (597) (1,041) Income tax receivable ............................. - (283) Other current assets .............................. 363 (211) Other assets ...................................... 249 (140) Accounts payable .................................. 992 1,625 Federal income taxes payable ...................... 1,919 - Accrued expenses .................................. (2,106) 79 -------- -------- Net cash used in operating activities ......... (1,466) (3,593) -------- -------- Cash flows from investing activities: Purchases of marketable securities ..................... - (3,492) Purchase of equipment .................................. (1,721) (1,112) -------- -------- Net cash used in investing activities .......... (1,721) (4,604) -------- -------- Cash flows from financing activities: Proceeds from notes payable and line of credit ......... 4,635 - Repayment of line of credit borrowings ................. (3,500) - Issuance of common stock ............................... 700 2 -------- -------- Net cash provided by financing activities ...... 1,835 2 -------- -------- Net decrease in cash and cash equivalents ................. (1,352) (8,195) Cash and cash equivalents at beginning of period .......... 1,956 23,688 -------- -------- Cash and cash equivalents at end of period ................ $ 604 $ 15,493 ======== ======== Supplemental disclosure of cash flow information: Interest paid .......................................... $ 9 $ 33 ======== ======== Income taxes paid ...................................... $ 1,294 $ 26 ======== ========
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 month periods ended March 31, 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" and "SC Series," respectively. 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):
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
MARCH 31, 1999 (UNAUDITED) ---------------------------------- UNREALIZED FAIR COST GAINS VALUE --------- ---------- --------- Governmental bonds $ 35,834 $ 180 $ 36,014 Corporate bonds 1,803 1 1,804 --------- ------ --------- 37,637 181 37,818 Less current amounts (14,430) (43) (14,473) --------- ------ --------- Long-term marketable securities $ 23,207 $ 138 $ 23,345 ========= ====== =========
During the three months ended March 31, 1999, there were no proceeds from the sale of available-for-sale securities. All marketable securities mature within three years. 3. INVENTORIES Inventories consist of the following (in thousands):
DECEMBER 31, MARCH 31, 1998 1999 ----------- ----------- (UNAUDITED) Finished goods $2,880 $ 3,241 Component parts 10,432 10,320 ------ ------- $13,312 $13,561 ======= =======
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 will be 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 17,662,189 and 22,479,436 for the three months ended March 31, 1998 and 1999, respectively. The effect of dilutive stock options added 678,263 shares for the three months ended March 31, 1998, for the computation of diluted income per common share. The effect of stock options in 1999 was antidilutive. 6. GEOGRAPHIC SEGMENT AND DATA In 1998, the Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. This statement establishes standards for reporting information about operating segments and related disclosures about products and services, geographic areas and major customers. The Company generates substantially all revenues from the design, manufacturing, marketing and distribution of premium quality, technologically 8 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 MARCH 31, ---------------------------- 1998 1999 --------- -------- (UNAUDITED) United States $ 23,111 $ 7,294 Rest of World 1,400 1,264 --------- -------- $ 24,511 $ 8,558 ========= ========
At March 31, 1999, the Company has no assets outside of the United States. 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 is effective for financial statements for fiscal years beginning after June 15, 1999. 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 2000. 8. ACQUISITION On April 30, 1999, the Company acquired certain assets and assumed certain liabilities of its exclusive distributor for the United Kingdom, which was majority owned by Faldo. Consideration for these assets included approximately $229,000 in cash and a contingent cash payment of $200,000 due at the end of 1999 based upon the achievement of certain minimum levels of operating results. As the acquisition occurred subsequent to March 31, 1999, the condensed consolidated financial statements do not reflect any activity related to the acquisition. 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, in December 1996, the Company extended the Tight Lies line to include the Tight Lies Strong 3, Strong 5 and Strong 7, with the Tight Lies Strong 9 being introduced in January 1998. Sales of the Tight Lies line of products increased significantly subsequent to the second quarter of 1997 when the Company launched an infomercial relating to the original Tight Lies fairway wood. To further enhance the Tight Lies line of products, the Company introduced the Strong 2 Tour Brassie and the Strong 11 in late August 1998. The Company introduced the SC Series Titanium drivers and the Faldo Series wedges in January 1999. Sales of these new products were not significant during the three months ended March 31, 1999. 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, direct sales to consumers, international distributors and the Company's custom fitting accounts. The Company believes that during the second half of 1998, the golf industry experienced declining sales, which situation stabilized somewhat during the first quarter of 1999. 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. Fairway wood components are each available from multiple suppliers. Currently, however, certain components for the new SC Series Titanium drivers and the Faldo Series wedges are produced by a single supplier. Costs of the Company's current Tight Lies line of fairway woods, new 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 MARCH 31, -------------------- 1998 1999 ----- ----- Net sales 100.0% 100.0% Cost of goods sold 23.9 37.3 ----- ----- Gross profit 76.1 62.7 Operating expenses 39.9 134.0 ----- ----- Operating income (loss) 36.2 (71.3) Interest income - 6.2 Other income (0.4) - ----- ----- Income (loss) before income taxes 35.8 (65.1) Income tax expense (benefit) 12.8 (26.3) ===== ===== Net income (loss) 23.0 (38.8) ===== =====
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999 Net sales decreased to $8.6 million for the three months ended March 31, 1999 from $24.5 million for the comparable period of 1998, primarily due to high levels of Tight Lies fairway wood inventory at retailers and the implementation of a new pricing structure which resulted in lower suggested retail prices and consequently lower wholesale prices to retail customers. Management believes that by March 31, 1999 retail inventories had been reduced to levels appropriate for the Company's market share, a situation that should result in re-stocking orders during subsequent periods. Also, during the three months ended March 31, 1999, net sales do not include a material amount of revenues from the SC Series Titanium drivers due to delays in the manufacture of certain component parts. These manufacturing delays have been largely resolved, and the Company expects to eliminate the resulting backlog of orders for these new products during the second quarter of 1999. See "Certain Business Considerations" below. Net sales of the Tight Lies line of fairway woods were $7.6 million, or 88.4% of net sales, for the three months ended March 31, 1999 compared to $23.8 million, or 97.3% of net sales, for the three months ended March 31, 1998. Net sales of other product lines for the three months ended March 31, 1999 increased to $1.0 million from $0.7 million for the comparable period of 1998, and increased as a percentage of net sales to 11.6% from 2.9%, respectively. Net sales of the Company's products outside the U.S. decreased to $1.3 million for the three months ended March 31, 1999 from $1.4 million for the three months ended March 31, 1998, but increased as a percentage of net sales to 15.1% from 5.7%, respectively. Cost of goods sold decreased to $3.2 million for the three months ended March 31, 1999 from $5.9 million for the comparable period of 1998, and increased as a percentage of net sales to 37.3% from 23.9%, respectively, primarily due to lower average selling prices during the three months ended March 31, 1999 resulting from the Company's new suggested retail pricing structure and customer rebate program, an increase of sales to retailers compared to sales to direct consumers, increased overhead costs resulting from a larger, leased production facility 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 $8.7 million for the three months ended March 31, 1999 from $6.2 million for the comparable period of 1998 as a result of hiring additional employees and 11 increased marketing and advertising efforts. During the three months ended March 31, 1999, the Company advertised extensively utilizing both television and print media in order to promote the introduction of the SC Series Titanium driver and to promote sell-through of the Tight Lies inventory at retailers. General and administrative expenses, including provisions for bad debts, decreased to $2.1 million, or 24.4% as a percentage of net sales, for the three months ended March 31, 1999 from $3.3 million, or 13.5% as a percentage of net sales, for the comparable period ended March 31, 1998, primarily due to elimination of incentive compensation, a decrease in the use of outside services, and a reduction in bad debt expense as a result of increased collection efforts. Research and development expenses for the three months ended March 31, 1999 increased to $0.5 million from $0.2 million for the same period in 1998, and increased as a percentage of net sales to 5.5% from 1.0%, primarily due to the addition of employees and tooling expenses associated with the development of new products. As a result of the above changes, operating loss was $6.1 million for the three months ended March 31, 1999 compared to operating income of $8.9 million for the comparable period of 1998. The effective tax rate for the three months ended March 31, 1999 was 40.4% compared to 35.7% for the comparable period in the prior year. The income tax benefit of $2.2 million for the three months ended March 31, 1999 results primarily from tax losses, including non-taxable interest income, which are available to the Company. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents decreased to $15.5 million at March 31, 1999 from $23.7 million at December 31, 1998, primarily as a result of $3.6 million used in operations and $4.6 million used for investing activities. The decrease in cash flows provided by operations was primarily a result of the net loss. Primary uses of operating cash flows were increases in trade receivables and prepaid expenses of $1.3 million and $1.0 million, respectively, for the three months ended March 31, 1999, which was offset by a $1.6 million increase in accounts payable related to increased advertising expenditures. The increase in trade receivables is primarily the result of an increase in sales near the end of the three month period ended March 31, 1999, and the increase in prepaid expenses is the result of prepayments of advertising, inventory and insurance. During the fourth quarter of 1998, the Company granted to retailers an unconditional credit, which aggregated $4.3 million, in connection with the Company's new suggested retail pricing structure. The unconditional credit reduced cash flows from operations by $2.1 million during the three months ended March 31, 1999. Cash flows during the second quarter of 1999 will also be negatively impacted by the unconditional credit which the Company expects to be fully utilized by June 30, 1999. The Company does not expect additional changes to its wholesale pricing structure during the remainder of 1999. Cash used in investing activities of $4.6 million for the three months ended March 31, 1999 is primarily related to purchases of marketable securities, which approximated $3.5 million, and purchases of computer equipment and software, which approximated $1.1 million. The Company anticipates making capital expenditures in the ordinary course of business of approximately $1.0 million in the balance of 1999, which includes additional information system enhancements and additional research and development equipment. Working capital approximated $47.0 million at March 31, 1999 compared to $53.0 million at December 31, 1998. The Company has a $10.0 million revolving credit facility, which expires on May 31, 2000. At March 31, 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 at March 31, 1999) was paid April 14, 1999 at an interest rate of 5.39% per annum. 12 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 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 lower than expected average selling prices; and the volume of orders that are received and that can be fulfilled in a quarter. Any one or more of these factors could result in the Company failing to achieve its expectations as to future sales or net income. 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 legacy information system, as well as the information system currently being implemented, are certified as Year 2000 compliant. 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 June 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 are currently being assessed by the Company, and are being 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 do not provide the Company with satisfactory evidence of their readiness to handle Year 2000 issues, contingency plans will be developed by July 31, 1999. 13 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 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 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 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 contains "forwarding-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," "should" 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; manufacturing difficulties; market and retailer 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; risks concerning future technology; Year 2000 readiness and one time events and other factors detailed in the Company's prospectus and other Securities and Exchange Commission filings. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described herein. The Company does not intend to update these forward-looking statements. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the applicable cautionary statements. 14 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is a party to certain lawsuits and administrative proceedings arising in the ordinary course of business. The Company evaluates such lawsuits and proceedings on a case-by-case basis, and its policy is to vigorously contest any such claims which it believes are without merit. Based upon information presently available to the Company, management believes that the ultimate resolution of such pending matters will not materially adversely effect the Company's business, financial position, results of operations or liquidity. ITEM 6(a). EXHIBITS See exhibit index at page 16. ITEM 6(b). REPORTS ON FORM 8-K None. 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: May 14, 1999 By: /s/ B. H. (Barney) Adams -------------------------------------------------- B. H. (Barney) Adams, Chairman of the Board, Chief Executive Officer and President Date: May 14, 1999 By: /s/ Darl P. Hatfield -------------------------------------------------- Darl P. Hatfield, Senior Vice President - Finance and Administration and Chief Financial Officer
15 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 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 11.1 Computation of Earnings Per Share Included in this filing Exhibit 27.1 Financial Data Schedule Included in this filing
16 EX-11.1 2 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 MARCH 31, ------------------------ 1998 1999 ---------- ---------- Net income (loss) $ 5,643 $ (3,314) ========== ========== Weighted average shares outstanding 17,662,189 22,479,436 ========== ========== Income (loss) per common share $ 0.32 $ (0.15) ========== ========== DILUTED INCOME (LOSS) PER COMMON SHARE: THREE MONTHS ENDED MARCH 31, ------------------------ 1998 1999 ---------- ---------- Net income (loss) $ 5,643 $ (3,314) ========== ========== Weighted average shares outstanding 17,662,189 22,479,436 Effect of dilutive shares-stock options 678,263 - ---------- ---------- Total weighted average dilutive shares 18,340,452 22,479,436 ========== ========== Income (loss) per common share $ 0.31 $ (0.15) ========== ==========
EX-27.1 3 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR ADAMS GOLF, INC. AND ITS SUBSIDIARIES FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY TO SUCH UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 3-MOS DEC-31-1999 MAR-31-1999 15,493 14,473 4,656 1,023 13,561 54,439 9,242 1,391 95,144 7,449 0 0 0 23 84,888 95,144 8,558 8,558 3,191 8,908 2,457 100 10 (5,564) (2,250) (3,314) 0 0 0 (3,314) (.15) (.15)
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