UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
0For
the fiscal year ended December 31, 2005
OR
o
|
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 incorporation or organization)
|
(I.R.S.
Employer 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)
|
|
Securities
registered pursuant to Section 12(b) of the Act:
|
None
|
|
Securities
registered pursuant to Section 12(g) of the Act:
|
Common
Stock $.001 Par Value
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
o
Yes x No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
o
Yes x
No
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 o
No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. x
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one)
Large
accelerated filer o Accelerated
filer o Non-accelerated
filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
o
Yes
x
No
The
aggregate market value of the Registrant's common stock held by nonaffiliates
of
the Registrant at June 30, 2005 was $19,201,210 based on the closing sales
price
of $1.43 per share of the Registrant's common stock on the OTC Bulletin
Board.
The
number of outstanding shares of the Registrant's common stock, par value $.001
per share, was 22,844,153 on March 15, 2006.
DOCUMENTS
INCORPORATED BY REFERENCE
Part
III
incorporates certain information by reference from the Registrant's definitive
proxy statement, which will be filed on or before April 30, 2006, for the Annual
Meeting of Stockholders to be held on or about May 17, 2006.
ADAMS
GOLF, INC.
FORM
10-K
TABLE
OF CONTENTS
PART
I
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|
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Item
1.
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Business
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Page
3
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Item
1A.
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Risk
Factors
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Page
11
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Item
2.
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Properties
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Page
16
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Item
3.
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Legal
Proceedings
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Page
17
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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Page
17
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PART
II
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Item
5.
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Market
for Registrant's Common Equity and Related Stockholders Matters and
Issuer
Purchases of Equity Securities
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Page
18
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Item
6.
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Selected
Financial Data
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Page
19
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Item
7.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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Page
20
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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Page
28
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Item
8.
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Financial
Statements and Supplementary Data
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Page
29
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Item
9A.
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Controls
and Procedures
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Page
29
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PART
III
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Item
10
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Directors
and Executive Officers of the Registrant
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Page
30
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Item
11
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Executive
Compensation
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Page
30
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Item
12
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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Page
30
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Item
13
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Certain
Relationships and Related Transactions
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Page
30
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Item
14
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Principal
Accounting Fees and Services
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Page
30
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PART
IV
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Item
15
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Exhibits
and Financial Statement Schedules
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Page
31
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Forward
Looking Statements
This
Annual Report contains "forward-looking statements" made under the "safe harbor"
provisions of the Private Securities Litigation Reform Act of
1995. The statements include, but are not limited to: statements
regarding pending litigation, statements regarding liquidity and our ability
to
increase revenues or achieve satisfactory operational performance, statements
regarding our ability to satisfy our cash requirements and our ability to
satisfy our capital needs, including cash requirements during the next twelve
months, statements regarding our ability to produce products commercially
acceptable to consumers and, statements using terminology such as "may," "will,"
"expect," "intend," "estimate," "anticipate," "plan," "seek" or
"believe". Such statements reflect the Company's current view with
respect to future events and are subject to certain risks, uncertainties and
assumptions related to certain factors including, without limitation, the
following:
--Product
development difficulties;
--Product
approval and conformity to governing body regulations;
--Assembly
difficulties;
--Product
introductions;
--Patent
infringement risks;
--Uncertainty
of the ability to protect intellectual property rights;
--Market
demand and acceptance of products;
--The
impact of changing economic conditions;
--The
future market for our capital stock;
--The
success of our marketing strategy;
--Our
dependence on a limited number of customers;
--Business
conditions in the golf industry;
--Reliance
on third parties, including suppliers;
--The
impact of market peers and their respective products;
--The
actions of competitors, including pricing, advertising and product development
risks concerning
future
technology;
--The
management of sales channels and re-distribution;
--The
uncertainty of the results of pending litigation;
--The
adequacy of the allowance for doubtful accounts, obsolete inventory and warranty
reserves;
--The
risk associated with the events unrecoverable under existing insurance policies;
and
--The
impact of operational restructuring on operating results and liquidity and
one-time events and other
factors
detailed in this Annual Report under "Risk Factors" in Item 1A,
below.
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 be 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. Except as required by federal securities laws,
Adams Golf undertakes no obligation to publicly update or revise any written
or
oral forward-looking statements, whether as a result of new information, future
events, changed circumstances or any other reason after the date of this Annual
Report. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the applicable cautionary
statements.
Item
1. Business
General
Founded
in 1987, Adams Golf, Inc. (the “Company” or “Adams Golf”) initially operated as
a component supplier and contract manufacturer. Thereafter, the
Company established its custom fitting operation. Today it designs,
assembles, markets and distributes premium quality, technologically innovative
golf clubs, including the RPM drivers and fairway woods, Ovation drivers and
fairway woods, the Idea A2 and A2 OS irons, and Idea A2 I-woods, Idea, A1 and
A1
Pro Irons and Idea i-Woods, the Tight Lies family of fairway woods, the Redline
family of fairway woods and drivers, the Tight Lies GT and GT2 irons and
i-Woods, the Tom Watson signature and Puglielli series of wedges, and certain
accessories. The Company was incorporated in 1987 and re-domesticated in
Delaware in 1990. The Company completed an internal reorganization in
1997 and now conducts its operations through several direct and indirect
wholly-owned subsidiaries, agencies and distributorships.
Segments
and Products
Adams
Golf operates in a single segment within the golf industry (golf clubs and
accessories) and offers more than one class of product within that
segment. The Company currently offers the following classes of
products:
Drivers
The
Company currently offers a variety of different driver models based on the
shape, size and material used in the club head. The Company's current
driver heads are made of titanium, stainless steel and carbon fiber depending
on
the model. In November 2004, the Company introduced the Redline RPM
series of drivers, which offers a 460cc titanium head with a carbon fiber
crown. In March of 2005, the Company introduced the Redline RPM 430 Q
driver. This driver has a 430 cc titanium head, a carbon fiber crown and 4
movable weights. In June of 2005, the Company introduced the Redline RPM 460
Dual driver. This driver has a 460 cc titanium head, a carbon fiber
crown and 2 movable weights. Both of these driver heads are designed to maximize
the distance, forgiveness and accuracy of the drive. The Redline RPM
driver series is available in a variety of lofts and with a 60-gram graphite
shaft. In addition to the new Redline RPM series, Adams Golf
continues to offer the GT2 series of drivers.
Fairway
Woods
In
November 2004, the Company introduced its new Redline RPM series of fairway
woods, which is available in a titanium or stainless steel head and a carbon
fiber crown. The Redline RPM fairway wood series provides a high
performance face designed to offer maximum distance and ease in hitting from
all
lies. Redline RPM Fairway woods are offered in a variety of lofts
with a 75-gram graphite shaft. The Company offers a variety of
individual hybrid irons in the recently introduced A2 and A2 OS line. These
individual hybrid clubs are designed to combine the distance of a long iron
with
the playability of a fairway wood. The Company also offers the GT2 stainless
steel fairway woods line. The Company continues to offer the Tight
Lies Idea i-Wood and the GT i-Wood. The Company also continues to
offer its Ovation and original Tight Lies fairway woods.
Irons
In
September 2005, the Company launched its newest line of Idea Irons, A2 and
A2
OS. The A2 irons are offered in an 8 piece men’s set, with two graphite-shafted
hybrid irons integrated into the set. The A2 OS irons are offered in 3 different
8 piece configurations—one for men, one for women, and one for seniors. The
Company also offers a 12 piece women’s set in the A2 OS line, which includes a
460 cc titanium driver, 2 fairway woods, an 8 piece women’s A2 OS iron set, a
putter and a bag. A2 and A2 OS iron sets utilize A2 and A2 OS i-Woods -- a
hybrid club that is part iron and part wood -- for long irons. A2 and
A2 OS i-Woods are designed to combine the distance of a long iron with the
playability of a fairway wood. Oversized hollow back irons are
utilized for the mid irons. The center of gravity of hollow backed
irons is placed low and to the back to deliver distance and
accuracy. The short irons are oversized cavity back irons, which are
designed for maximum control and feel. This hybrid set of A2 and A2
OS irons was designed to be truly easy to hit. The Company continues to sell
several sets of irons under the Original Idea brand name.
Wedges
and Other
As
a
complement to the Idea irons, Adams Golf offers the Tom Watson signature wedges
with a classic profile and the newest line of wedges, Puglielli wedges, launched
in September of 2005 . The Company also offers a line of golf bags,
hats and other accessories.
Percentage
of Net Sales by Product Class
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Drivers
|
|
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27.8
|
%
|
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19.6
|
%
|
|
21.6
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%
|
Fairway
Woods
|
|
|
25.8
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|
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38.1
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|
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34.0
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|
Irons
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|
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42.4
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|
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39.7
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|
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39.9
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|
Wedges
and Other
|
|
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4.0
|
|
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2.6
|
|
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4.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
The
Company's growth and ultimate success depends, in large part, on its ability
to
develop and introduce new products that are accepted by consumers in the
marketplace. Historically, a large portion of new golf club
technologies and product designs have been met with consumer
rejection. Certain products introduced by the Company have not met
the level of consumer acceptance anticipated by management. No
assurance can be given that the Company will be able to continue to design,
manufacture and introduce new products that will meet with market
acceptance. Failure by the Company to identify and develop innovative
new products that achieve widespread market acceptance would adversely affect
the Company's future growth and viability. Additionally, successful
technologies, designs and product concepts are likely to be copied by
competitors. Certain of the Company's products and technologies have
been copied by competitors in the past, resulting in, among other things, the
diversion of management's attention, confusion in the marketplace and
price/margin erosion. The Company's operating results have fluctuated
and could continue to fluctuate as a result of the number, timing and market
acceptance of new product introductions by the Company and its
competitors.
Design
and Development
The
Company's design and development team is responsible for developing, testing
and
introducing new technologies and product designs. This team is
currently led by Tim Reed, Vice President-Research and
Development. Prior to joining the Company, Mr. Reed spent over 18
years in the golf industry and, most notably, was responsible for all new
product introductions at TearDrop Golf Company, which included TearDrop Putters
and Tommy Armour and Ram brand golf clubs. Barney Adams, the
Company's founder, non-executive Chairman and inventor of the Tight Lies fairway
woods, consults with Adams Golf's in-house design development team.
Together
with management, the design and development team engages in a four-step process
to create new products.
Market
Evaluation -
Prior to
development of any potential concepts, the Company's management team, in
conjunction with the design and development team, performs an extensive
evaluation of the current golf market to determine which particular product
classes the Company will pursue for concept development. As a part of
the market evaluation, the Company analyzes its current product offerings
against current and anticipated competitor products with respect to consumer
preferences. To determine consumer preferences, the Company utilizes
its independent sales force, consumer surveys and market intelligence tools
that
solicit product and design characteristics desired by consumers. Once
the consumer product and design characteristics are determined and evaluated,
management and the design and development team determine the product classes
and
types of products that will be pursued for the upcoming season.
Performance
Characteristics -
For the
product classes and the types of products to be offered within those classes,
management evaluates the target market for its new concepts and the performance
characteristics that are commensurate with the target
market. Performance characteristics are always predicated on
producing high quality, high performance products. Certain
performance characteristics that are evaluated include easy playability, ball
flight and spin objectives, desired weight and feel of the product and
conformity to U.S. Golf Association ("USGA") golf equipment
standards.
Patent
Review
- The
Company considers patent protection for its technologies and product designs
to
be an important part of its development strategy; however, the Company may
not
seek patent protection for some of its technologies or product
designs. The Company and its patent attorneys conduct a search of
prior art and existing products to determine whether a new product idea may
be
covered by an existing patent. Patent review, depending upon the
complexity of the design involved, generally requires between one and six months
to complete; however, this stage of product development typically occurs in
conjunction with one or more of the other three R&D steps.
Development
-
Concurrent with the patent review process, the design and development team
begins to develop computer generated working designs incorporating the desired
performance characteristics, which are then modeled using in-house rapid
prototyping systems. During the development phase, substantial
consideration is also given to optimal shaft performance, cosmetics and sound
characteristics. Once prototypes are developed, they are subjected to
stringent iterative testing requirements to determine if the product will
deliver the desired performance. In certain circumstances, prototypes
are distributed to consumers to solicit feedback with respect to specific
product performance characteristics and intangible consumer
perception. Using consumer feedback, subsequent modifications are
made to the products to achieve the performance requirements desired by the
identified target market.
Historically,
the entire process from Market Evaluation through Development has taken from
six
to twelve months to complete.
The
Company's research and development expenses were approximately $2,285,000,
$1,847,000 and $1,721,000 for the years ended December 31, 2005, 2004 and 2003,
respectively.
Patents
The
Company's ability to compete effectively in the golf club market may depend
on
its ability to maintain the proprietary nature of its technologies and
products. As of the date hereof, the Company holds 19 U.S. patents
relating to certain of its products and proprietary technologies and has five
patent applications pending. Assuming timely payment of maintenance
fees, if any, the Company expects that the 19 currently issued patents will
expire on various dates between 2009 and 2021. The Company holds
patents with respect to the design of the Tight Lies fairway wood, the SC Series
driver, the Tight Lies Idea and GT irons, including the Company's graphite
tipped (GT) shaft, and the Tight Lies ST fairway wood and driver
heads. There can be no assurance, however, as to the degree of
protection afforded by these or any other patents held by the Company or as
to
the likelihood that patents will be issued from the pending patent
applications. Moreover, the Company's patents may have limited
commercial value or may lack sufficient breadth to adequately protect the
aspects of the Company's products to which the patents relate. As of
the date hereof, the Company holds four foreign patents and has two foreign
patent applications pending. The U.S. patents held by the Company do
not preclude competitors from developing or marketing products similar to the
Company's products in international markets.
There
can
be no assurance that competitors, many of whom have substantially greater
resources than the Company and have made substantial investments in competing
products, will not apply for and obtain patents that will prevent, limit or
interfere with the Company's ability to make and sell its
products. The Company is aware of numerous patents held by third
parties that relate to products competitive to the Company's. There
is no assurance that these patents would not be used as a basis to challenge
the
validity of the Company's patent rights, to limit the scope of the Company's
patent rights, or to limit the Company's ability to obtain additional or broader
patent rights. A successful challenge to the validity of the
Company's patents may adversely affect the Company's competitive
position. Moreover, there can be no assurance that such patent
holders or other third parties will not claim infringement by the Company with
respect to current and future products. Because U.S. patent
applications are held and examined in secrecy, it is also possible that
presently pending U.S. applications will eventually issue with claims that
may
be infringed by the Company's products or technologies. The defense
and prosecution of patent suits is costly and time-consuming, even if the
outcome is favorable. This is particularly true in foreign countries
where the expenses associated with such proceedings can be
prohibitive. An adverse outcome in the defense of a patent suit could
subject the Company to significant liabilities to third parties, require the
Company and others to cease selling products, or require disputed rights to
be
licensed from third parties. Such licenses may not be available on
satisfactory terms, if at all.
Despite
the Company's efforts to protect its patent and other intellectual property
rights, unauthorized parties have attempted and are expected to continue to
attempt to copy all, or certain aspects of, the Company's
products. Policing unauthorized use of the Company's intellectual
property rights can be difficult and expensive, and while the Company generally
takes appropriate action whenever it discovers any of its products or designs
have been copied, knock-offs and counterfeit products are a persistent problem
in the performance-oriented golf club industry. There can be no
assurance that the Company's means of protecting its patent and other
intellectual property rights will be adequate.
Raw
Materials, Manufacturing and Assembly
The
Company manages all stages of manufacturing, from sourcing to assembly, in
order
to maintain a high level of product quality and consistency. The
Company establishes product specifications, selects the material used to produce
the components, and tests the specifications of components received by the
Company.
As
part
of the Company's quality control program, the Company reviews the quality
assurance programs at the manufacturing facilities of its component part
suppliers to monitor adherence to design specifications. In addition
to the quality assurance conducted by the suppliers at their facilities, the
Company also conducts random samples and performs testing of products received
from the suppliers or produced at the Company's facility to ensure consistency
with the Company's design specifications. Golf clubs are then built by the
Company's assembly personnel using the appropriate component parts.
The
Company has put into place a purchasing procedure that strives to negotiate
effective terms with various vendors while continuing to ensure quality of
components. The Company is continually re-evaluating existing vendors
while testing potential new vendors for all the various product lines offered
by
the Company. At any time, the Company may purchase a substantial
majority of its volume of a specific component part from a single vendor, but
the Company continually strives to maintain a primary and several secondary
suppliers for each component part. Substantially all of the Company's
fairway wood, driver, iron, i-wood, wedge and putter component parts are
manufactured in China and Taiwan. Since many of our available
component suppliers are located in close proximity in Asia, this concentration
could adversely effect our ability to obtain components resulting from negative
events such as, but not limited to, foreign government relations, import and
export control, political unrest, disruptions or delays in shipments and changes
in economic conditions and fluctuation in exchange rates.
The
Company could, in the future, experience shortages of components or periods
of
increased price pressures, which could have a material adverse effect on the
Company's business, results of operations, financial position and/or
liquidity. To date, the Company has not experienced any material
interruptions in supply from any sole supplier.
Marketing
The
goals
of the Company's marketing efforts are to build its brand identity and drive
sales through its retail distribution channels. To accomplish these
goals, Adams Golf currently uses golf-specific advertising, engages in
promotional activities, and capitalizes on its relationships with well known
professional golfers.
Endemic
Advertising
- The
Company's primary advertising efforts focus on golf-specific advertising, which
include advertising with television commercials that run during golf tournaments
and advertising in golf-related magazines and certain newspapers. The
Company also sponsors developmental professional tours and selected golf
tournaments.
Promotional
Activities
- The
Company engages in a variety of promotional activities to sell and market its
products. Such activities have included consumer sweepstakes and
promotional giveaways with certain purchases.
Relationships
with Professional Golfers
- The
Company has entered into endorsement contracts with professional golfers on
the
PGA and Champions PGA Tours and believes that having a presence on these tours
promotes the image of its product lines and builds brand
awareness. In January 2005, the Company entered into a five year
endorsement agreement with Tom Watson, which will expire on December 31,
2009. Under the terms of the agreement, Mr. Watson is entitled to an
annual retainer and bonuses contingent on the levels of his performance in
golf
events. In exchange for the compensation noted above, Mr. Watson must
meet and maintain certain performance requirements, which include, but are
not
limited to, exclusive use of the Company's products, participation in a minimum
number of events and feedback on performance of the Company's
products. In addition to the agreement with Mr. Watson, the Company
has entered into endorsement agreements with other well-known professionals
such
as Bubba Dickerson, D.A. Weibring, Dana Quigley, Allen Doyle, Tom Jenkins,
Des
Smyth, Jerry Pate, R.W. Eaks and Jose Maria Canizares, which expire at various
dates through 2009 and require the use of certain of the Company's
products.
Markets
and Methods of Distribution
The
Company's net sales are primarily derived from sales to on- and off- course
golf
shops, sporting goods retailers, mass merchants and, to a lesser extent,
international distributors. 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.
Sales
to Retailers
- The
Company sells a majority of its products to selected retailers. The
Company believes its selective retail distribution strategy helps its retailers
maintain profitable margins and maximize sales of the Company's
products. For the year ended December 31, 2005, sales to U.S.
specialty retailers, mass merchants, sporting goods retailers, and on course
accounts accounted for approximately 86% of the Company's total net sales,
as
compared to approximately 89% for the year ended December 31,
2004. As products mature, they may be sold to alternative channels of
distribution, which are not in direct competition with selected retailers for
premier product lines.
Adams
Golf maintains a field sales staff that at February 24, 2006 consisted of 47
independent sales representatives, one senior vice president, two regional
vice
presidents, a key accounts director and two regional sales managers, who are
in
regular personal contact with the Company's retail accounts (approximately
4,000
retailers). These sales representatives, sales managers and regional
vice presidents are supported by eight inside sales representatives who maintain
contact with the Company's retailers nationwide. The inside sales
representatives also serve in a customer service capacity as the Company
believes that superior customer service can significantly enhance its marketing
efforts.
International
Sales
-
International sales are made primarily in Europe, Canada, Japan and other Asian
regions. International sales in Canada are made through an agency
relationship. Commencing January 1, 2002, sales in Japan are made
through an independent distributor. Prior to that date, sales were
made through a wholly-owned subsidiary of the Company. Commencing
November 1, 2002, sales in the United Kingdom are made through an independent
distributor. International sales to other countries throughout the
world are made through a network of approximately 30 independent
distributors. For the years ended December 31, 2005, 2004 and 2003,
international sales accounted for approximately 14.1%, 11.4% and 12.5%,
respectively, of the Company's net sales.
Web
Site
- The
Company maintains a Web site at www.adamsgolf.com,
which
allows the visitor to access certain information about the Company's products
and heritage, locate retailers, inquire into careers, access corporate
information related to corporate governance and news releases, and inquire
about
contacting the Company directly. The Company does not currently sell
its products via its Web site.
Unauthorized
Distribution of Counterfeit Clubs
Despite
the Company's efforts to limit its distribution to selected retailers, some
quantities of the Company's products have been found in unapproved outlets
or
distribution channels, including unapproved retailers conducting business on
common internet auction sites. The existence of a "gray market" in
the Company's products can undermine the sales of authorized retailers and
foreign wholesale distributors who promote and support the Company's products
and can injure the Company's image in the minds of its customers and
consumers. Adams Golf makes efforts to limit or deter unauthorized
distribution of its products, but does not believe the unauthorized distribution
of its products can be totally eliminated. The Company does not
believe that the unauthorized distribution of its clubs has had, or will have,
a
material adverse effect on the Company's results of operations, financial
condition or competitive position, although there can be no assurance as to
future effects resulting from the unauthorized distribution of its
products.
In
addition, the Company is occasionally made aware of the existence of counterfeit
copies of its golf clubs, particularly in foreign markets. The
Company takes action in these situations through local authorities and legal
counsel where practical. The Company does not believe that the
availability of counterfeit clubs has had or will have a material adverse effect
on the Company's results of operations, financial condition and/or competitive
position, although there can be no assurance as to future effects resulting
from
the unauthorized distribution of its products.
Industry
Specific Requirements
The
Company performs ongoing credit evaluation of its wholesale customers' financial
condition and generally provides credit without the requirement of collateral
from these customers. The Company measures each customer's financial
strength using various key aspects such as, but not limited to, the customer's
overall credit risk (via Dun and Bradstreet reports), payment history, track
record for meeting payment plans, industry communications, the portion of the
customer’s balance that is past due and other various items. The
Company also looks at the overall aging of the receivables in total and relative
to prior periods to determine the necessary reserve requirements.
Periods will fluctuate depending on the strength of the customers and the change
in mix of customer and their respective strength could affect the reserve
disproportionately compared to the total change in the accounts receivable
balance. The
Company believes it has adequate reserves for potential credit
losses. Due to industry sensitivity to consumer buying trends and
available disposable income, the Company has in the past extended payment terms
for specific retail customers. Issuance of these terms (i.e. greater
than 30 days or specific dating) is dependent on the Company's relationship
with
the customer and the customer's payment history. Payment terms are
extended to selected customers typically during off-peak times in the year
in
order to promote the Company's brand name and to assure adequate product
availability often to coincide with planned promotions or advertising
campaigns. Although a significant amount of the Company's sales are
not affected by these terms, the extended terms do have a negative impact on
the
Company's financial position and liquidity. The Company expects to
continue to selectively offer extended payment terms in the future, depending
upon known industry trends and the Company's financial condition.
In
addition to extended payment terms, the nature of the industry also requires
that the Company carry a substantial level of inventory due to the lead times
associated with purchasing components overseas coupled with the seasonality
of
customer demand. The Company's inventory balances were approximately
$16,151,000 and $11,558,000 at December 31, 2005, and 2004,
respectively. The increase in inventory levels over these dates is
primarily a result of incremental purchasing of inventory for recently
introduced product lines. A significant portion of the Company's
inventory purchases are from one supplier representing approximately 52% and
60%
for the year ended December 31, 2005 and 2004, respectively. This
supplier and many other industry suppliers are located predominately in
China. The Company does not anticipate any changes in the
relationships with its suppliers; however, if such change were to occur, the
Company has alternative sources available.
Major
Customers
The
Company is currently dependent on five customers, which collectively comprised
approximately 26.0% of net revenues for the year ended December 31,
2005. Of these customers no individual customer represented greater
than 5% but less than 10% of net revenues for the year ended December 31, 2005,
and one customer represented greater than 10% but less than 15% of net revenues
for the year ended December 31, 2005. For the year ended December 31, 2004,
six customers comprised approximately 26.4% of net revenues for the year ended
December 31, 2004. Of these customers one customer individually
represented greater than 5% of net revenues for the year ended December 31,
2004, and no customers represented greater than 10% of net revenues for the
year
ended December 31, 2004. For the year ended December 31, 2003, eight
customers comprised approximately 24.9% of net revenue, of which only one
customer represented greater than 5% but less than 10%. The loss of
an individual customer or a combination of these customers would have a material
adverse effect on the Company's consolidated revenues, results of operations,
financial condition and competitive market position.
Seasonality
and Quarterly Fluctuations
Golf
generally is regarded as a warm weather sport, and net sales of golf equipment
have been historically strongest for the Company during the first and second
quarters. In addition, net 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/or financial
condition. In addition, the Company's future results of operations
could be affected by a number of other factors, such as unseasonable weather
patterns such as hurricanes, which interrupts our sales patterns and could
generate hardships for customers in the effected area, 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 selling prices; and the volume of orders that are received
and which can be fulfilled in a quarter. Any one or more of these
factors could adversely affect the Company or result in the Company failing
to
achieve its expectations as to future sales or operating results.
Because
most operating expenses are relatively fixed in the short term, the Company
may
be unable to adjust spending sufficiently in a timely manner to compensate
for
any unexpected sales shortfall that could materially adversely affect quarterly
results of operations and liquidity. If technological advances by
competitors or other competitive factors require the Company to invest
significantly greater resources than anticipated in research and development
or
sales and marketing efforts, the Company's business, operating results and/or
financial condition could be materially adversely
affected. Accordingly, the Company believes that period-to-period
comparisons of its results of operations should not be relied upon as an
indication of future performance. In addition, the results of any
quarter are not indicative of results to be expected for a full fiscal
year. As a result of fluctuating operating results or other factors
discussed in this report, in certain future quarters the Company's results
of
operations may be below the expectations of public market analysts or
investors. In such event, the market price of the Company's common
stock could be materially adversely affected.
Backlog
The
amount of the Company's backlog orders at any particular time is affected by
a
number of factors, including seasonality and scheduling of the manufacturing
and
shipment of products. At February 24, 2006, the Company had current
backorders of $1,901,000, or 3.4% of total net sales for 2005, and orders to
be
fulfilled at a future date, not to exceed the current year, of $6,823,000,
or
12.1% of total net sales for 2005. At February 25, 2005, the Company
had current backorders of $449,000, or 0.8% of total net sales for 2004, and
orders to be fulfilled at a future date, not to exceed the then current year,
of
$2,411,000, or 4.2% of total net sales for 2004. The current increase
in backorders is a result of increased product demand for our most recent
product introduction, the RPM low profile fairway wood, which was launched
in
the first quarter of 2006. Management has concluded that, for this
purpose, a backorder of greater than 10% of total annual net sales would be
significant. The increase in orders to be fulfilled at a future date
is a result of the recent product introductions of Idea A2 and A2 OS irons
and
RPM low profile fairway woods. Management does not anticipate that a
significant level of orders will remain unfilled within the current fiscal
year. In addition, the Company believes that the amount of its
backlog is not an appropriate indicator of levels of future sales.
Competition
The
golf
club market is highly competitive. The Company competes with a number
of established golf club manufacturers, some of which have greater financial
and
other resources than the Company. The Company's competitors include
Callaway Golf Company, adidas-Salomon AG (Taylor Made - adidas Golf), Nike,
Inc.
(Nike Golf), Fortune Brands, Inc. (Titleist and Cobra) and Karsten Assembly
Company (PING), among others. The Company competes primarily on the
basis of performance, brand name recognition, quality and price. The
Company believes that its ability to market its products through multiple
distribution channels, including on- and off- course golf shops and other
retailers, is important to the manner in which the Company
competes. The purchasing decisions of many golfers are often the
result of highly subjective preferences, which can be influenced by many
factors, including, among others, advertising, media, promotions and product
endorsements. These preferences may also be subject to rapid and
unanticipated changes. The Company could face substantial competition
from existing or new competitors who introduce and successfully promote golf
clubs that achieve market acceptance. Such competition could result
in significant price erosion or increased promotional expenditures, either
of
which could have a material adverse effect on the Company's business, operating
results and/or financial condition. There can be no assurance that
Adams Golf will be able to compete successfully against current and future
sources of competition or that its business, operating results and/or financial
condition will not be adversely affected by increased competition in the markets
in which it operates.
The
golf
club industry is generally characterized by rapid and widespread imitation
of
popular technologies, designs and product concepts. Due to the
success of the Tight Lies fairway woods, several competitors introduced products
similar to the Tight Lies fairway woods. Should the Company's
recently introduced product lines achieve widespread market success, it is
reasonable to expect that the Company's current and future competitors would
move quickly to introduce similar products that would directly compete with
the
new product lines. The Company may face competition from
manufacturers introducing other new or innovative products or successfully
promoting golf clubs that achieve market acceptance. The failure to
successfully compete in the future could result in a material deterioration
of
customer loyalty and the Company's image, and could have a material adverse
effect on the Company's business, results of operations, financial position
and/or liquidity.
The
introduction of new products by the Company or its competitors can be expected
to result in closeouts of existing inventories at both the wholesale and retail
levels. Such closeouts are likely to result in reduced margins on the
sale of older products, as well as reduced sales of new products given the
availability of older products at lower prices. As the new RPM
product line of fairway woods and drivers were introduced, older product lines
such as the original Tight Lies, Redline fairway woods and drivers and Tight
Lies GT fairway woods and drivers experienced reductions in price at both
wholesale and retail levels.
Domestic
and Foreign Operations
Domestic
and foreign net sales for the years ended December 31, 2005, 2004 and 2003
were
comprised as follows:
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
Domestic
|
|
$
|
48,496,000
|
|
|
85.9
|
%
|
$
|
50,301,000
|
|
|
88.6
|
%
|
$
|
44,538,000
|
|
|
87.5
|
%
|
Foreign
|
|
|
7,928,000
|
|
|
14.1
|
|
|
6,461,000
|
|
|
11.4
|
|
|
6,341,000
|
|
|
12.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
56,424,000
|
|
|
100.0
|
%
|
$
|
56,762,000
|
|
|
100.0
|
%
|
$
|
50,879,000
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
net sales are generated in various regions including, but not limited to, Canada
(a majority of the Company's foreign sales), Europe, Japan, Australia, and
South
America. A change in the Company’s relationship with one or more of
the customers or distributors could negatively impact the volume of foreign
sales.
The
Company's business is subject to the risks generally associated with doing
business abroad, such as foreign government relations, foreign consumer
preferences, import and export control, political unrest disruptions or delays
in shipments and changes in economic conditions and fluctuation in exchange
rates in which the Company purchases components or sells it
products. Recent foreign events, including, without limitation,
continuing U.S. military operations and the resulting instability in Iraq,
could
potentially cause a delay in imports or exports due to heightened security
with
customs.
Employees
At
February 24, 2006, the Company had 124 full-time employees including 62 engaged
in order fulfillment, 15 in research and development and quality control, 8
in
sales support and 39 in management and administration. The Company's
employees are not unionized. Management believes that its relations
with its employees are good.
Item
1A. Risk Factors
The
financial statements contained in this report and the related discussion
describe and analyze the Company’s financial performance and condition for the
periods indicated. For the most part, this information is historical. The
Company’s prior results are not necessarily indicative of the Company’s future
performance or financial condition. The Company therefore has included in this
report a discussion of certain factors which could affect the Company’s future
performance or financial condition. These factors could cause the Company’s
future performance or financial condition to differ materially from its prior
performance or financial condition or from management’s expectations or
estimates of the Company’s future performance or financial condition.
Dependence
on New Product Introductions; Uncertain Consumer Acceptance
The
Company's ultimate success depends, in large part, on its ability to
successfully develop and introduce new products widely accepted in the
marketplace. Historically, a large portion of new golf club
technologies and product designs have been met with consumer
rejection. Certain products previously introduced by the Company have
not met the level of consumer acceptance anticipated by
management. No assurance can be given that the Company's current or
future products will be met with consumer acceptance. Failure by the
Company to timely identify and develop innovative new products that achieve
widespread market acceptance would adversely affect the Company's continued
success and viability. Additionally, successful technologies, designs
and product concepts are likely to be copied by
competitors. Accordingly, the Company's operating results could
fluctuate as a result of the amount, timing, and market acceptance of new
product introductions by the Company or its
competitors. If the Company is unable to develop new
products that will ultimately be widely accepted by a wide range of customers,
it will have a material adverse effect on the Company’s business and results
from operations.
The
design of new golf clubs is also greatly influenced by the rules and
interpretations of the USGA. Although the golf equipment standards
established by the USGA generally apply only to competitive events sanctioned
by
the organization, the Company believes that it is critical for its future
success that new clubs introduced by the Company comply with USGA
standards. The Company invests significant resources in the
development of new products and efforts to comply with USGA standards may hinder
or delay development of the product and adversely effect revenues and customer
demand. Additionally, increased costs associated with complying to
USGA standards could reduce margins and adversely effect the results of
operations.
Uncertainty
Regarding Continuation of Profitability
While
the
Company generated net income during the years ended December 31, 2003, 2004
and
2005, it has not done so historically on a consistent basis. There
can be no assurance that the Company will be able to increase or maintain
revenues or continue such profitability on a quarterly or annual basis in the
future. An inability to continue such improvements in the Company's
financial performance could jeopardize the Company's ability to develop,
enhance, and market products, retain qualified personnel, and take advantage
of
future opportunities or respond to competitive pressures.
Need
for Additional Capital
No
assurances can be given that the Company will have sufficient cash resources
beyond twelve months or to fund our operations over a length of
time. Historically, the Company has funded capital expenditures for
operations through cash flow from operations. To the extent our cash
requirements or assumptions change, the Company may have to raise additional
capital and/or further curtail its operating expenses, including further
operational restructurings. If the Company needs to raise additional
funds through the issuance of equity securities, the percentage ownership of
the
stockholders of the Company would be reduced, stockholders could experience
additional dilution, and/or such equity securities could have rights,
preferences or privileges senior to the Company's common
stock. Nevertheless, given the current market price for the Company's
common stock and the state of the capital markets generally, the Company does
not expect that it would be able to raise funds through the issuance of its
capital stock in the foreseeable future. The Company may also find it
difficult to secure additional debt financing beyond the current credit
facility. There can be no assurance that financing will be
available if needed on terms favorable to the Company, or at
all. Accordingly, it is possible that the only sources of funding are
current cash reserves, projected cash flows from operations and up to $10.0
million of borrowings available under the Company's revolving credit
facility.
Increasing Competition
The
golf
club market is highly competitive. The Company competes with a number
of established golf club manufacturers, some of which have greater financial
and
other resources than the Company. The Company's competitors include
Callaway Golf Company, adidas-Salomon AG (Taylor Made - adidas Golf), Nike,
Inc.
(Nike Golf), Fortune Brands, Inc. (Titleist and Cobra) and Karsten Assembly
Company (PING), among others. The Company competes primarily on the
basis of performance, brand name recognition, quality and price. The
Company believes that its ability to market its products through multiple
distribution channels, including on- and off- course golf shops and other
retailers, is important to the manner in which the Company
competes. The purchasing decisions of many golfers are often the
result of highly subjective preferences, which can be influenced by many
factors, including, among others, advertising, media, promotions and product
endorsements. These preferences may also be subject to rapid and
unanticipated changes. The Company could face substantial competition
from existing or new competitors who introduce and successfully promote golf
clubs that achieve market acceptance. Such competition could result
in significant price erosion or increased promotional expenditures, either
of
which could have a material adverse effect on the Company's business, operating
results and/or financial condition. There can be no assurance that
Adams Golf will be able to compete successfully against current and future
sources of competition or that its business, operating results and/or financial
condition will not be adversely affected by increased competition in the markets
in which it operates.
The
golf
club industry is generally characterized by rapid and widespread imitation
of
popular technologies, designs and product concepts. Due to the
success of the Tight Lies fairway woods, several competitors introduced products
similar to the Tight Lies fairway woods. Should the Company's
recently introduced product lines achieve widespread market success, it is
reasonable to expect that the Company's current and future competitors would
move quickly to introduce similar products that would directly compete with
the
new product lines. The Company may face competition from
manufacturers introducing other new or innovative products or successfully
promoting golf clubs that achieve market acceptance. Accordingly, the
Company's operating results could fluctuate as a result of amount, timing and
market acceptance of new products introduced by the Company or the Company's
competitors. The failure to successfully compete in the future could
result in a material deterioration of customer loyalty and the Company's image,
and could have a material adverse effect on the Company's business, results
of
operations, financial position and/or liquidity.
The
introduction of new products by the Company or its competitors can be expected
to result in closeouts of existing inventories at both the wholesale and retail
levels. Such closeouts are likely to result in reduced margins on the
sale of older products, as well as reduced sales of new products given the
availability of older products at lower prices. As the new Idea A2
and A2 OS Irons and the Redline RPM product line of fairway woods and drivers
were introduced, older product lines such as the original Tight Lies, Redline
fairway woods and drivers, Ovation and Tight Lies GT fairway woods and drivers
experienced reductions in price at both wholesale and retail
levels.
Dependence
on Key Personnel and Endorsements
The
Company's success depends to an extent upon the performance of its management
team, which includes the Company's Chief Executive Officer and President, Oliver
G. (Chip) Brewer, III, who participates in all aspects of the Company's
operations, including product development and sales efforts. The loss
or unavailability of Mr. Brewer could adversely affect the Company's business
and prospects. In addition, Mr. Tim Reed joined the management team
in 2001 in the capacity of Vice President of Research and
Development. Mr. Reed's inability to continue to lead his team to
develop innovative products could also adversely affect the Company's
business. With the exception of the Company's Chairman of the Board
of Directors, B.H. (Barney) Adams, and Mr. Brewer, none of the Company's
officers and employees are bound by employment agreements, and the relations
of
such officers and employees are, therefore, at will. The Company
established key-men life insurance policies on the lives of Mr. Brewer and
Mr.
Reed; however, there can be no assurance that the proceeds of these policies
could adequately compensate the Company for the loss of their
services. In addition, there is strong competition for qualified
personnel in the golf club industry, and the inability to continue to attract,
retain and motivate other key personnel could adversely affect the Company's
business, operating results and/or financial condition.
In
the
past, the Company has entered into endorsement arrangements with certain members
of the PGA Tour and the Champions PGA Tour, including Tom Watson, Bubba
Dickerson, D.A. Weibring, Dana Quigley, Allen Doyle, and other notable
players. The loss of one or more of these endorsement arrangements
could adversely affect the Company's marketing and sales efforts and,
accordingly, its business, operating results and/or financial
condition. From time to time, the Company negotiates with and signs
endorsement contracts with either existing or new tour players. As is
typical in the golf industry generally, the agreements with these professional
golfers do not necessarily require that they use the Company's golf clubs at
all
times during the terms of the respective agreements, including, in certain
circumstances, at times when the Company is required to make payments to
them. The failure of certain individuals to use the Company's
products on one or more occasions has resulted in negative publicity involving
the Company. No assurance can be given that the Company's business
would not be adversely affected in a material way by negative publicity or
by
the failure of its known professional endorsers to carry and use the Company's
products.
Effectiveness
of Marketing Strategy
The
Company has designed it's marketing strategy to include advertising efforts
in
multiple media avenues such as television airtime on golf related events,
product education for the consumer through an internet website, publications
including periodicals and brochures, and in store media such as point of
purchase displays and product introduction fact sheets. For the years
ended December 31, 2005, 2004 and 2003, the Company spent approximately $5.0
million, $5.1 million and $3.5 million, respectively, on golf related events,
publications and other methods of media. There can be no assurances
that a fluctuation in the levels of investments in advertising spending will
not
result in material fluctuations in the sales of the Company's
products.
Source
of Supply
The
Company has put into place a purchasing procedure that strives to negotiate
effective terms with various vendors while continuing to ensure the quality
of
components. The Company is continually re-evaluating existing vendors
while testing potential new vendors for all the various product lines offered
by
the Company. At any time, the Company may purchase a substantial
majority of its volume of a specific component part from a single vendor, but
the Company continually strives to maintain a primary and several secondary
suppliers for each component part. Substantially all of the Company's
fairway wood, driver, iron, i-wood, wedge and putter component parts are
manufactured in China and Taiwan. The Company could, in the future,
experience shortages of components for reasons including but not limited to
the
suppliers production capacity or materials shortages, or periods of increased
price pressures, which could have a material adverse effect on the Company's
business, results of operations, financial position and/or
liquidity.
The
Company’s products require specific materials to meet design specification which
include but are not limited to steel, titanium alloys, carbon fiber and rubber.
The Company does not make these materials itself, and must rely on its
supplier’s ability to obtain adequate quantities of the materials necessary for
manufacturing and production. There can be no assurance that the
Company will be able to do so at a reasonable price. An interruption in the
supply of the materials used by the Company or a significant change in costs
could have a material adverse effect on the Company.
Adequate Product
Warranty Reserves
The
Company provides a limited one year product warranty on all of its golf clubs
with the exception of the graphite tip (GT) and BiMatrx steel tip (ST) shafts
used in a variety of the Company's product lines. These shafts carry
a five year warranty for defects in quality and workmanship. The
Company closely monitors the level and nature of warranty claims, and, where
appropriate, seeks to incorporate design and production changes to assure its
customers of the highest quality available in the market. Significant
increases in the incidence of such claims may adversely affect the Company's
sales and its reputation with consumers. The Company establishes a
reserve for warranty claims. There can be no assurance that this
reserve will be sufficient if the Company were to experience an unusually high
incidence of problems with its products.
Risks
Associated with Intellectual Property Protection
Imitation
of popular club design is widespread in the golf industry. No
assurance can be given that other golf club manufacturers will not be able
to
successfully sell golf clubs that imitate the Company's products without
infringing on the Company's copyrights, patents, trademarks or trade
dress. Many of the Company's competitors have obtained patent,
trademark, copyright or other protection of intellectual property rights
pertaining to golf clubs. No assurance can be given that the Company
will not be adversely affected by the assertion by competitors that the
Company's designs infringe on such competitor's intellectual property
rights. Litigation in respect to patents or other intellectual
property matters, whether with or without merit, could be time-consuming to
defend, result in substantial costs and diversion of management and other
resources, cause delays or other problems in the marketing and sales of our
products, or require the Company to enter into royalty or licensing agreements,
any or all of which could have a material adverse effect on the business,
operating results and financial condition. This effect could also
include alteration or withdrawal of the Company's existing products and delayed
introduction of new products.
The
Company attempts to maintain the secrecy of its confidential business
information, including engaging in the practice of having prospective vendors
and suppliers sign confidentiality agreements when producing components of
new
technology. No assurance can be given that the Company's confidential
business information will be adequately protected in all
instances. The unauthorized use of the Company's confidential
business information could adversely affect the Company.
Unauthorized
Distribution and Counterfeit Clubs
Some
quantities of the Company's products have been found in unapproved outlets
or
distribution channels, including unapproved retailers conducting business on
common internet auction sites. The existence of a "gray market" in
the Company's products can undermine the sales of authorized retailers and
foreign wholesale distributors who promote and support the Company's products
and can injure the Company's image in the minds of its customers and
consumers. The Company does not believe the unauthorized distribution
of its products can be totally eliminated. There can be no assurances
that unauthorized distribution of the Company's clubs will not have a material
adverse effect on the Company's results of operations, financial condition
and/or competitive position.
In
addition, the Company is occasionally made aware of the existence of counterfeit
copies of its golf clubs, particularly in foreign markets. The
Company takes action in these situations through local authorities and legal
counsel where practical. However, the inability to effectively deter
counterfeit efforts could have a material adverse effect on the Company's
results of operations, financial condition and/or competitive
position.
Accounts
Receivable Customer Terms
Due
to
industry sensitivity to consumer buying trends and available disposable income,
the Company has in the past extended payment terms for specific retail
customers. Issuance of these terms (i.e. greater than 30 days or
specific dating) is dependent on the Company's relationship with the customer
and the customer's payment history typically during off-peak times in the
year. These extended terms do have a negative impact on the Company's
financial position and liquidity. In addition, the reserves
established by the Company may not be adequate in the event that the customer's
financial strength weakens significantly.
Sufficient
Inventory Levels
In
addition to extended payment terms to our customers, the nature of the industry
also requires that the Company carry a substantial level of inventory due to
the
lead times associated with purchasing components overseas coupled with the
seasonality of customer demand. The Company's inventory balances were
approximately $16,151,000 and $11,558,000 at December 31, 2005 and December
31,
2004, respectively. If the Company were unable to maintain sufficient
inventory to meet customer demand on a timely basis, the effect could result
in
cancellation of customer orders, loss of customers, and damage to the Company's
reputation. In addition, carrying a substantial level of inventory
has an adverse effect on the Company's financial position and
liquidity.
Certain
Risks of Conducting Business Abroad
The
Company imports a significant portion of its component parts, including heads,
shafts, headcovers, and grips from companies in China, Taiwan and
Mexico. In addition, the Company sells its products to certain
distributors located outside the United States. The Company's
international business is currently centered in Canada, Europe and Asia, and
management intends to focus its international efforts through agency and
distributor relationships. International sales accounted for 14% of
the Company’s net sales for the year ended December 31, 2005. The
Company's business is subject to the risks generally associated with doing
business abroad, such as foreign government relations, foreign consumer
preferences, import and export control, political unrest, disruptions or delays
in shipments and changes in economic conditions and exchange rates in countries
in which the Company purchases components or sells its
products. Recent foreign events, including, without limitation,
continuing U.S. military operations and the resulting instability in Iraq,
could
potentially cause a delay in imports or exports due to heightened security
with
customs.
Seasonality
and Quarterly Fluctuations
Golf
generally is regarded as a warm weather sport, and net sales of golf equipment
have been historically strongest for the Company during the first and second
quarters. In addition, net 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/or financial
condition. In addition, the Company's future results of operations
could be affected by a number of other factors, such as unseasonable weather
patterns such as hurricanes, which interrupt the sales patterns and could
generate hardships for customers in the effected area, 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 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 adversely affect the Company or result in the Company failing
to
achieve its expectations as to future sales or operating results.
Because
most operating expenses are relatively fixed in the short term, the Company
may
be unable to adjust spending sufficiently in a timely manner to compensate
for
any unexpected sales shortfall that could materially adversely affect quarterly
results of operations and liquidity. If technological advances by
competitors or other competitive factors require the Company to invest
significantly greater resources than anticipated in research and development
or
sales and marketing efforts, the Company's business, operating results and/or
financial condition could be materially adversely
affected. Accordingly, the Company believes that period-to-period
comparisons of its results of operations should not be relied upon as an
indication of future performance. In addition, the results of any
quarter are not indicative of results to be expected for a full fiscal
year. As a result of fluctuating operating results or other factors
discussed in this report, in certain future quarters the Company's results
of
operations may be below the expectations of public market analysts or
investors. In such event, the market price of the Company's common
stock could be materially adversely affected.
Rapid
Growth, increased demand for product
If
the
Company is successful in obtaining rapid market growth for various golf clubs,
the Company may be required to deliver large volumes of quality products to
customers on a timely basis which could potentially require the Company to
increase the production facility, increase purchasing of raw materials or
finished goods, increase the size of the workforce, expand the quality control
capabilities, or incur additional expenses associated with sudden increases
in
demand. Any combination of one or more of the listed factors could
have a materially adverse effect on the Company’s operations and financial
position.
Anti-Takeover
Provisions
The
Company's Certificate of Incorporation and Amended and Restated Bylaws (the
"Bylaws") contain, among other things, provisions establishing a classified
Board of Directors, authorizing shares of preferred stock with respect to which
the Board of Directors of the Company has the power to fix the rights,
preferences, privileges and restrictions without any further vote or action
by
the stockholders, requiring that all stockholder action be taken at a
stockholders' meeting and establishing certain advance notice requirements
in
order for stockholder proposals or director nominations to be considered at
such
meetings. In addition, the Company is subject to the anti-takeover
provisions of Section 203 of the Delaware General Corporation Law (the
"DGCL"). In general this statute prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction
in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. Such provision could
delay, deter or prevent a merger, consolidation, tender offer, or other business
combination or change of control involving the Company that some or a majority
of the Company's stockholders might consider to be in its best interest,
including offers or attempted takeovers that might otherwise result in such
stockholders receiving a premium over the market price for the common
stock. The potential issuance of preferred stock may have the effect
of delaying, deferring or preventing a change of control of the Company, may
discourage bids for the common stock at a premium over the market price of
the
common stock and may adversely affect the market price of and voting and other
rights of the holders of the common stock. The Company has not issued
and currently has no plans to issue shares of preferred stock.
Item
2. Properties
The
Company's administrative offices and assembly facilities currently occupy
approximately 65,000 square feet of space in Plano, Texas. This
facility is leased by the Company pursuant to a lease agreement expiring in
2008
and may be extended for an additional five years. The Company
maintains the right to terminate the lease if it moves to a larger facility
owned by the current lessor. The Company believes that its current
facilities will be sufficient for the foreseeable future.
Item
3. Legal Proceedings
Beginning
in June 1999, the first of seven class action lawsuits was filed against the
Company, certain of its current and former officers and directors, and the
three
underwriters of the Company's initial public offering ("IPO") in the United
States District Court of the District of Delaware. The complaints
alleged 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 alleged that the Company's prospectus, which became
effective July 9, 1998, was materially false and misleading in at least two
areas. Plaintiffs alleged that the prospectus failed to disclose that
unauthorized distribution of the Company's products (gray market sales)
threatened the Company's long-term profits. Plaintiffs also alleged that the
prospectus failed to disclose that the golf equipment industry suffered from
an
oversupply of inventory at the retail level, which had an adverse impact on
the
Company's sales. On May 17, 2000, these cases were consolidated into
one amended complaint, and a lead plaintiff was appointed. The
plaintiffs were seeking unspecified amounts of compensatory damages, interest
and costs, including legal fees. On December 10, 2001, the United
States District Court for the District of Delaware dismissed the consolidated,
amended complaint. Plaintiffs appealed. On August 25,
2004, the appellate court affirmed the dismissal of plaintiffs' claims relating
to oversupply of retail inventory, while reversing the dismissal of the claims
relating to the impact of gray market sales and remanding those claims for
further proceedings. This case is now in the discovery phase in the
district court. As of February 1, 2006, the Company has participated
in mediation and at this time no resolution has been reached.
The
Company maintains directors' and officers' and corporate liability insurance
to
cover certain risks associated with these securities claims filed against the
Company or its directors and officers. The Company has met the
financial deductible of its directors' and officers' insurance policy for the
period covering the time the class action lawsuit was filed. At this
point in the legal proceedings, the Company cannot predict with any certainty,
per the guidance in SFAS 5, that the events will conclude in the Company's
favor
and thus can not reasonably estimate any future liability.
On
March
16, 2006, the Company became aware of a lawsuit filed against it in U.S.
District Court in the Southern District of California by TaylorMade, a division
of Adidas-Salomon AG. As of March 20, 2006, the Company has not been formally
served with the lawsuit. The lawsuit alleges generally that the Company violated
three patents held by TaylorMade (one design patent and two utility patents)
in
the manufacture of recent drivers. The design patent relates to ornamental
aspects of the skirt and sole of certain TaylorMade clubs. The utility patents
relate to 1) shallow grooves in a circular pattern on the face of certain
TaylorMade metal woods and 2) a metal wood construction method attaching
a
composite crown to a club head body containing multiple ledges, a surface
veil
and a face plate. The Company is reviewing the allegations, and while it
is too
early to determine the final outcome or materiality of this matter, based
on the
information available at this time, the Company does not believe it has
infringed any valid claims of TaylorMade and intends to strongly defend its
technology and market positions. Adams Golf respects the valid
intellectual property of all its competitors and expects the same in return.
We are disappointed that TaylorMade has chosen to litigate. We have been
discussing patent issues with TaylorMade for nearly a year. We had hoped
to amicably resolve these issues and had recently provided TaylorMade with
information in support of our positions. However, rather than address that
information in private dialogue, TaylorMade has chosen to litigate. We
intend to defend our positions aggressively and will strive to continue to
manufacture innovative product that we hope is superior in the eyes of the
consumer and thereby attracts the attention of our
competitors.
From
time
to time, the Company is engaged in various other legal proceedings in the normal
course of business. The ultimate liability, if any, for the aggregate
amounts claimed cannot be determined at this time.
Item
4. Submission of Matters to a Vote of Security
Holders
None
PART
II
Item
5. Market for Registrant's Common Equity and Related
Stockholder Matters
The
Company's common stock is currently listed and traded on the OTC Bulletin Board
("OTCBB") under the symbol "ADGO.OB." The prices in the table below
represent the quarterly high and low sales price for the Company’s common stock
as reported by the OTCBB. All price quotations represent prices
between dealers, without retail mark-ups, mark-downs or commissions and may
not
represent actual transactions.
|
|
High
|
|
Low
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
1.70
|
|
$
|
1.27
|
|
Second
Quarter
|
|
|
1.49
|
|
|
1.12
|
|
Third
Quarter
|
|
|
1.56
|
|
|
1.25
|
|
Fourth
Quarter
|
|
|
1.39
|
|
|
1.14
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
1.40
|
|
$
|
0.72
|
|
Second
Quarter
|
|
|
1.75
|
|
|
1.19
|
|
Third
Quarter
|
|
|
1.35
|
|
|
1.00
|
|
Fourth
Quarter
|
|
|
1.44
|
|
|
1.03
|
|
On
March
15, 2006, the last reported sale price of the common stock on the OTCBB was
$1.35 per share. At March 15, 2005 Adams Golf, Inc. had approximately
5,000 stockholders based on the number of holders of record and an estimate
of
the number of individual participants represented by security position
listings.
The
Company's listing on the OTCBB could adversely affect the ability or willingness
of investors to purchase the common stock, which, in turn, would likely severely
affect the market liquidity of the Company's securities. Given the
current market price for the Company's common stock and the state of the capital
markets generally, the Company does not expect that it would be able to raise
funds through the issuance of our capital stock.
No
dividends have been declared or paid relating to the Company's common stock,
nor
does the Company anticipate declaring dividends in the foreseeable
future. The current credit facility does not limit the declaring or
payment of dividends unless the Company were in default of the
facility.
Equity
Plan Compensation Information:
The
following table sets forth information at December 31, 2005 regarding
compensation plans under which the Company's equity securities are authorized
for issuance.
Plan
Category
|
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
(a)
|
|
Weighted-average
exercise price of outstanding options, warrants and
rights
(b)
|
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
(c)
|
|
Equity
compensation plans approved by security holders
|
|
|
7,170,806
|
|
$
|
0.03
|
|
|
1,134,632
|
|
Equity
compensation plans not approved by security holders
|
|
|
---
|
|
|
n/a
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7,170,806
|
|
$
|
0.03
|
|
|
1,134,632
|
|
|
|
|
|
|
|
|
|
|
|
|
Item
6. Selected Financial Data
The
selected financial data presented below is derived from the Company's
consolidated financial statements for the years ended December 31, 2005, 2004,
2003, 2002 and 2001, respectively. The data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the consolidated financial statements and related
notes, and other financial information included elsewhere in this
document.
|
|
Year
Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
(in
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
56,424
|
|
$
|
56,762
|
|
$
|
50,879
|
|
$
|
37,917
|
|
$
|
47,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
2,045
|
|
|
3,100
|
|
|
2,137
|
|
|
(8,903
|
)
|
|
(13,185
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
3,240
|
|
$
|
3,078
|
|
$
|
2,003
|
|
$
|
(8,925
|
)
|
$
|
(13,409
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per common share (1) :
Basic
|
|
$
|
0.14
|
|
$
|
0.14
|
|
$
|
0.09
|
|
$
|
(0.40
|
)
|
$
|
(0.60
|
)
|
Diluted
|
|
$
|
0.12
|
|
$
|
0.12
|
|
$
|
0.08
|
|
$
|
(0.40
|
)
|
$
|
(0.60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
22,734
|
|
|
22,554
|
|
|
22,480
|
|
|
22,480
|
|
|
22,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
27,804
|
|
|
26,144
|
|
|
24,533
|
|
|
22,480
|
|
|
22,480
|
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
44,102
|
|
$
|
38,378
|
|
$
|
30,054
|
|
$
|
26,438
|
|
$
|
34,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
debt (including current maturities)
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
$
|
32,127
|
|
$
|
26,438
|
|
$
|
22,228
|
|
$
|
19,476
|
|
$
|
27,622
|
|
______________________
|
|
(1)
|
See
Note 1 (k) of Notes to Consolidated Financial Statements for information
concerning the calculation of income (loss) per common share and
weighted
average common shares outstanding.
|
Item
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
Founded
in 1987, Adams Golf, Inc. (the “Company” or “Adams Golf”) initially operated as
a component supplier and contract manufacturer. Thereafter, the
Company established its custom fitting operation. Today it designs,
assembles, markets and distributes premium quality, technologically innovative
golf clubs, including the RPM drivers and fairway woods, Ovation drivers and
fairway woods, the Idea A2 and A2 OS irons, and Idea A2 I-woods, Idea, A1 and
A1
Pro Irons and Idea i-Woods, the Tight Lies family of fairway woods, the Redline
family of fairway woods and drivers, the Tight Lies GT and GT2 irons and
i-Woods, the Tom Watson signature and Puglielli series of wedges, and certain
accessories. The Company was incorporated in 1987 and re-domesticated in
Delaware in 1990. The Company completed an internal reorganization in
1997 and now conducts its operations through several direct and indirect
wholly-owned subsidiaries, agencies and distributorships.
The
Company's net sales are primarily derived from sales to on- and off- course
golf
shops and sporting goods retailers and, to a lesser extent, international
distributors and mass merchandisers. 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 manages all stages of manufacturing, from sourcing to assembly, in
order
to maintain a high level of product quality and consistency. The
Company establishes product specifications, selects the material used to produce
the components, and tests the specifications of components received by the
Company.
As
part
of the Company's quality control program, the Company periodically reviews
the
quality assurance programs at the manufacturing facilities of its component
part
suppliers to monitor adherence to design specifications. Upon arrival
at the Company's facilities in Plano, Texas, the components used in the
Company's clubs are again checked to ensure consistency with the Company's
design specifications. Golf clubs are then assembled using the
appropriate component parts.
The
Company has put into place a purchasing procedure that strives to negotiate
effective terms with various vendors while continuing to ensure quality of
components. The Company is continually re-evaluating existing vendors
while testing potential new vendors for all the various product lines offered
by
the Company. At any time, the Company may purchase a substantial
majority of its volume of a specific component part from a single vendor, but
the Company strives to maintain a primary and several secondary suppliers for
each component part. Substantially all of the Company's fairway wood,
driver, iron, i-wood, wedge and putter component parts are manufactured in
China
and Taiwan. Since many of our available component suppliers are
located in close proximity in Asia, this concentration could adversely effect
our ability to obtain components resulting from negative events such as, but
not
limited to, foreign government relations, import and export control, political
unrest, disruptions or delays in shipments and changes in economic conditions
and fluctuation in exchange rates.
The
Company could, in the future, experience shortages of components or periods
of
increased price pressures, which could have a material adverse effect on the
Company's business, results of operations, financial position and/or
liquidity. To date, the Company has not experienced any material
interruptions in supply from any supplier.
Costs
of
the Company's clubs consist primarily of component parts, including the head,
shaft and grip. To a lesser extent, the Company's cost of goods sold
includes labor, occupancy and shipping costs in connection with the inspection,
testing, assembly and distribution of its products and certain promotional
and
advertising costs given in the form of additional merchandise as consideration
to customers.
Critical
Accounting Policies and Estimates
The
Company's discussion and analysis of its results of operations, financial
condition and liquidity are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these
financial statements requires the Company to make estimates and judgments that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period. The
Company bases its estimates on historical experience and on various other
assumptions that it believes to be reasonable under the
circumstances. Actual results may materially differ from these
estimates under different assumptions or conditions. On an on-going
basis, the Company reviews its estimates to ensure that the estimates
appropriately reflect changes in its business.
Inventories
Inventories
are valued at the lower of cost or market and primarily consist of finished
golf
clubs and component parts. Cost is determined using the first-in,
first-out method. The inventory balance, which includes material,
labor and assembly overhead costs, is recorded net of an estimated allowance
for
obsolete inventory. The estimated allowance for obsolete inventory is
based upon management's understanding of market conditions and forecasts of
future product demand. Accounting for inventories could result in
material adjustments if market conditions and future demand estimates are
significantly different than original assumptions, causing the reserve for
obsolescence to be materially adversely affected.
Revenue
Recognition
The
Company recognizes revenue when the product is shipped. At that time,
the title and risk of loss transfer to the customer, and collectability is
reasonably assured. Collectability is evaluated on an individual
customer basis taking into consideration historical payment trends, current
financial position, results of independent credit evaluations and payment
terms. Additionally, an estimate of product returns and warranty
costs are recorded when revenue is recognized. Estimates are based on
historical trends taking into consideration current market conditions, customer
demands and product sell through. The Company also records estimated
reductions in revenue for sales programs such as co-op advertising and spiff
incentives. Estimates in the sales program accruals are based on
program participation and forecast of future product demand. If actual
sales returns and sales programs significantly exceed the recorded estimated
allowances, the Company's sales would be adversely affected. The
Company recognizes deferred revenue as a result of sales that have extended
terms and a right of return of the product under a specified
program. Once the product is paid for, the Company then records
revenue.
Allowance
for Doubtful Accounts
The
Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to make required
payments. An estimate of uncollectable amounts is made by management
using an evaluation methodolgy involving both overall and specific
identification. The Company evaluates each individual customer and
measures various key aspects of the customer such as, but not limited to, their
overall credit risk (via Dun and Bradstreet reports), payment history, track
record for meeting payment plans, industry communications, the portion of the
customers balance that is past due and other various items. From an
overall perspective, the Company also looks at the aging of the receivables
in
total and aging relative to prior periods to determine the necessary reserve
requirements. Fluctuations in the reserve requirements will occur
from period to period as the change in customer mix or strength of the customers
could affect the reserve disproportionately compared to the total change in
the
accounts receivable balance. Based on management's assessment, the
Company provides for estimated uncollectable amounts through a charge to
earnings and a credit to the valuation allowance. Balances that
remain outstanding after the Company has used reasonable collection efforts
are
written off through a charge to the valuation allowance and a credit to accounts
receivable. The Company generally does not require
collateral. Accounting for an allowance for doubtful accounts could
be significantly affected as a result of a deviation in the Company's assessment
of any one or more customers' financial strength. While only one
customer represents greater than 10% but less than 15% and no customers
represent greater than 15% of the total revenues, if a combination of customers
were to become financially impaired, the financial results of the Company could
be severely affected.
Product
Warranty
The
Company's golf equipment is sold under warranty against defects in material
and
workmanship for a period of one year with the exception of the graphite tipped
(GT) and BiMatrx steel tipped (ST) shafts which carry a five year
warranty. An allowance for estimated future warranty costs is
recorded in the period products are sold. In estimating its future
warranty obligations, the Company considers various relevant factors, including
the Company's stated warranty policies, the historical frequency of claims,
and
the cost to replace or repair the product. Accounting for product
warranty reserve could be adversely affected if one or more of the Company's
products were to fail (i.e broken shaft, broken head, etc) to a significant
degree above and beyond the Company's historical product failure rates, which
determine the product warranty accruals.
Income
Taxes
The
Company accounts for income taxes using the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to the differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted rates recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. In assessing the realizability of
deferred income tax assets, the Company considers whether it is more likely
than
not that some portion or all of the deferred income tax assets will be
realized. The ultimate realization of deferred income tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Due to the
historical operating results of the Company, management is unable to conclude
on
a more likely than not basis that all deferred income tax assets generated
from
net operating losses through December 31, 2002 and other deferred tax assets
will be realized. Accordingly, the Company has recognized a
valuation allowance equal to the entire deferred income tax asset.
Impairment
of Long-Lived Assets
The
Company follows the guidance in SFAS ("Statement of Financial Accounting
Standards") 144 in reviewing long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
to
be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the
carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. During the year
ended December 31, 2005, there was no impairment of long-lived
assets.
Key
Performance Indicators
The
Company's management team has defined and tracks performance against several
key
sales, operational and balance sheet performance indicators. Key
sales performance indicators include, but are not limited to, the
following:
--Daily
sales by product group
--Daily
sales by geography
--Sales
by customer channel
--Gross
margin performance
Tracking
these sales performance indicators on a regular basis allows the Company to
understand whether it is on target to achieve its internal sales
plans.
Key
operational performance indicators include, but are not limited to, the
following:
--Product
returns (dollars and percentage of sales)
--Product
credits (dollars and percentage of sales)
--Units
shipped per man-hour worked
--Orders
shipped on time
--Expenses
by department
--Freight
cost by mode (dollars and dollars per unit)
Tracking
these operational performance indicators on a regular basis allows the Company
to understand whether it will achieve its expense targets and efficiently
satisfy customer demand.
Key
balance sheet performance indicators include, but are not limited to, the
following:
--Days
of sales outstanding
--Days
of inventory (at cost)
--Days
of payables outstanding
Tracking
these balance sheet performance indicators on a regular basis allows the Company
to understand its working capital performance and forecast cash flow and
liquidity.
Results
of Operations
The
following table sets forth operating results expressed as a percentage of net
sales for the periods indicated:
|
|
Years
Ended December
31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Net
sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost
of goods sold
|
|
|
53.7
|
|
|
50.4
|
|
|
53.6
|
|
Gross
profit
|
|
|
46.3
|
|
|
49.6
|
|
|
46.4
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Research
and development expenses
|
|
|
4.0
|
|
|
3.3
|
|
|
3.4
|
|
Selling
and marketing expenses
|
|
|
29.4
|
|
|
28.3
|
|
|
27.6
|
|
General
and administrative expenses
|
|
|
12.5
|
|
|
12.6
|
|
|
11.8
|
|
Settlement
expenses
|
|
|
(3.1
|
)
|
|
---
|
|
|
---
|
|
Restructuring
expense
|
|
|
(0.1
|
)
|
|
---
|
|
|
(0.5
|
)
|
Total
operating expenses
|
|
|
42.7
|
|
|
44.2
|
|
|
42.3
|
|
Operating
income
|
|
|
3.6
|
|
|
5.4
|
|
|
4.1
|
|
Interest
income, net
|
|
|
0.4
|
|
|
0.1
|
|
|
(0.0
|
)
|
Other
income, net
|
|
|
1.9
|
|
|
0.2
|
|
|
0.1
|
|
Income
before income taxes
|
|
|
5.9
|
|
|
5.7
|
|
|
4.2
|
|
Income
tax expense
|
|
|
0.2
|
|
|
0.3
|
|
|
0.3
|
|
Net
income
|
|
|
5.7
|
%
|
|
5.4
|
%
|
|
3.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2005 Compared to Year Ended December 31,
2004
Total
net
sales decreased to $56.4 million for the year ended December 31, 2005 from
$56.8
million for the same comparable period of 2004 primarily resulting from maturing
product lines which have decreased in overall sales coupled with a decrease
in
fairway wood revenue, partially offset by successful product introductions
of
the Idea A2 and A2 OS Irons and the RPM Dual series of
drivers. Overall, product family life cycles generally range from one
to three years and each product family varies in its life cycle as there are
multiple factors influencing the life, such as, but not limited to, customer
acceptance, competition and technology. Net sales of drivers
increased to $15.7 million, or 27.8% of total net sales, for the year ended
December 31, 2005 from $11.1 million, or 19.6% of total net sales, for the
comparable period of 2004. A large portion of the driver net sales
for the year ended December 31, 2005 was generated by the Redline RPM and RPM
Dual product lines, which were introduced in fourth quarter of 2004 and second
quarter of 2005, respectively, and Ovation drivers, which were introduced in
the
first quarter of 2005. This was offset by a decrease in maturing
product line sales specifically the Redline product family and Tight Lies GT
driver product family. Net sales of irons increased to $23.9 million,
or 42.4% of total net sales, from $21.1 million, or 37.2% of total net sales,
for the years ended December 31, 2005 and 2004, respectively. The
increase was primarily generated from sales of the Company's Idea A2 and A2
OS
irons, Original Idea irons and integrated iron sets while the prior period
was
primarily resulting from sales of the Original Idea irons and integrated iron
sets. Net sales of fairway woods decreased to $14.5 million, or 25.8%
of total net sales, from $21.6 million, or 38.1% of total net sales, for the
years ended December 31, 2005 and 2004, respectively. The prior
period's net sales were generated from Ovation fairway woods, Idea I-woods
and
Original Tight Lies fairway woods. This year the net sales were
generated from Redline RPM fairway woods, Idea A2 and original I-woods and
Original Tight Lies.
For
the
year ended December 31, 2005, no customers individually represented greater
than
5% but less than 10% of total net sales, while one customer individually
represented greater than 10% but less than 15% of total net sales.
Should this customer or the Company's other customers fail to meet their
obligations to the Company, the Company's results of operations and cash flows
would be adversely impacted.
Net
sales
of the Company's products outside the U.S. increased to $7.9 million, or 14.1%
of total net sales, from $6.5 million, or 11.4% of total net sales, for the
years ended December 31, 2005 and 2004, respectively.
Cost
of
goods sold increased to $30.3 million, or 53.7% of total net sales, for the
year
ended December 31, 2005 from $28.6 million, or 50.4% of total net sales, for
the
comparable period of 2004. The increase as a percentage of total net
sales is primarily due to changes in the product mix, coupled with decreases
in
fairway wood net pricing and increases in some component pricing.
Selling
and marketing expenses increased to $16.6 million for the year ended December
31, 2005 from $16.1 million for the comparable period in 2004. The
increase is primarily the result of additional personnel which resulted in
incremental compensation related costs of $0.7 million partially offset by
a
reduction in overall marketing expenses, including advertising, research and
direct commercial costs, of $0.3 million.
General
and administrative expenses, including provisions for bad debts, decreased
to
$7.1 million for the year ended December 31, 2005 from $7.2 million for the
comparable period in 2004. The decrease in administrative related
costs is attributable to an increase in compensation expenses of $1.0 million
offset by a decrease in bad debt expense of $1.0 million. The Company
measures each customer's financial strength using various key aspects such
as,
but not limited to, the customer's overall credit risk (via Dun and Bradstreet
reports), payment history, track record for meeting payment plans, industry
communications, the portion of the customer’s balance that is past due and other
various items. The Company also looks at the overall aging of the
receivables in total and relative to prior periods to determine the necessary
reserve requirements. Periods will fluctuate depending on the
strength of the customers and the change in mix of customers and their
respective strength could affect the reserve disproportionately compared to
the
total change in the accounts receivable balance.
Research
and development expenses, primarily consisting of costs associated with
development of new products, increased to $2.3 million from $1.8 million for
the
years ended December 31, 2005 and 2004, respectively, primarily resulting from
continued strengthening of the R&D function, which lead to an increase in
compensation expense of $0.4 million.
During
2005, the Company reversed settlement expense of $1.8 million, which is
attributable to the reversal of the accrued expenses for the settlement
agreement that was reached with Mr. Nick Faldo in regards to the dispute
regarding provisions of his prior professional services agreement with Adams
Golf. Because Mr. Faldo did not meet the conditions precedent to pay
in his contract, the Company is no longer due to make any future
payments.
Other
income increased to $1.1 million for the year ended December 31, 2005 from
$0.1
million for the comparable period in 2004 which is attributable to the one
time
receipt by the Company of a $965 thousand insurance claim paid by the Company's
insurance carrier in connection with the embezzlement which occured during
the
period from 2001 through 2004. This event was disclosed in the Annual
Report on Form 10-K for the year ended December 31, 2004.
The
Company's inventory balances were approximately $16.2 million and $11.6 million
at December 31, 2005 and 2004, respectively. The increase in
inventory levels is primarily a result of the increased purchasing related
to
the newly released A2 and A2 OS iron sets launched in the fourth quarter of
2005
and first quarter of 2006.
The
Company's net accounts receivable balances were approximately $14.2 million
and
$9.3 million at December 31, 2005 and 2004, respectively. The
increase is primarily due to the recent successful product launch of Idea A2
and
A2 OS Irons and extended terms offered to some customers in 2005.
The
Company's prepaid balances were approximately $0.8 million and $0.2 million
at
December 31, 2005 and 2004, respectively while the other assets balance was
approximately $1.6 million and $0.0 million at December 31, 2005 and 2004,
respectively. The increase in the prepaid and other assets is
primarily associated with the Company's decision to prepay certain strategic
marketing expenses. The short term portion of these marketing
expenses is in prepaids and the long term portion is in other
assets.
The
Company's accounts payable balances were approximately $4.7 million and $3.9
million at December 31, 2005 and 2004, respectively. The increase in
accounts payable is primarily associated with the extension of payment terms
with key vendors.
As
a
result of the above, the Company reported net income of $3.2 million for the
year ended December 31, 2005 compared to $3.1 million for the year ended
December 31, 2004.
Year
Ended December 31, 2004 Compared to Year Ended December 31,
2003
Total
net
sales increased to $56.8 million for the year ended December 31, 2004 from
$50.9
million for the comparable period of 2003 primarily resulting from successful
product introductions and customer acceptance of the Idea Irons, Ovation fairway
woods and Redline and Redline RPM woods and drivers. Net sales of
drivers increased to $11.1 million, or 19.6% of total net sales, for the year
ended December 31, 2004 from $11.0 million, or 21.6% of total net sales, for
the
comparable period of 2003. A large portion of the driver net sales
for the year ended December 31, 2004 was generated by the Redline product line,
introduced in January 2003, which was partially offset by lower sales of
maturing product lines. Net sales of irons increased to $21.1
million, or 37.2% of total net sales, from $20.3 million, or 39.9% of total
net
sales, for the years ended December 31, 2004 and 2003, respectively, primarily
generated from sales of the Company's Idea irons and integrated iron
sets. Net sales of fairway woods increased to $21.6 million, or 38.1%
of total net sales, from $17.3 million, or 34.0% of total net sales, for the
years ended December 31, 2004 and 2003, respectively, primarily resulting from
the net sales generated from the recently introduced Ovation fairway
woods.
For
the
year ended December 31, 2004, one customer individually represented greater
than
5% but less than 10% of total net sales. Should this customer or the Company's
other customers fail to meet their obligations to the Company, the Company's
results of operations and cash flows would be adversely impacted.
Net
sales
of the Company's products outside the U.S. increased to $6.5 million, or 11.4%
of total net sales, from $6.3 million, or 12.5% of total net sales, for the
years ended December 31, 2004 and 2003, respectively.
Cost
of
goods sold increased to $28.6 million, or 50.4% of total net sales, for the
year
ended December 31, 2004 from $27.3 million, or 53.6% of total net sales, for
the
comparable period of 2003. The decrease as a percentage of total net
sales is primarily due to changes in the product mix.
Selling
and marketing expenses increased to $16.1 million for the year ended December
31, 2004 from $14.0 million for the comparable period in 2003. The
increase is primarily the result of increased commissions expenses associated
with a 12% increase in revenues ($0.5 million) coupled with additional
advertising related costs of $1.5 million. Compensation expenses
(not related to commissions) were higher by $0.1
million.
General
and administrative expenses, including provisions for bad debts, increased
to
$7.2 million for the year ended December 31, 2004 from $6.0 million for the
comparable period in 2003. The increase in administrative related
costs is attributable to the increase in compensation expenses of $0.8 million
and an increase in bad debt reserves of $0.7 million. The Company
measures each customer's financial strength using various key aspects such
as,
but not limited to, the customer's overall credit risk (via Dun and Bradstreet
reports), payment history, track record for meeting payment plans, industry
communications, the portion of the customer’s balance that is past due and other
various items. The Company also looks at the overall aging of the
receivables in total and relative to prior periods to determine the necessary
reserve requirements. Periods will fluctuate depending on the
strength of the customers and the change in mix of customer and their respective
strength could affect the reserve disproportionately compared to the total
change in the accounts receivable balance. Although
collections on healthy accounts have improved, the risk of uncertainty in
collectablility of unfavorable accounts has resulted in an increase in bad
debt
reserves. Depreciation
expense also decreased by $0.7 million due to the fact that many of the
Company's fixed assets were purchased in 1998 and were fully depreciated by
2003.
Research
and development expenses, primarily consisting of costs associated with
development of new products, were $1.8 million and $1.7 million for the years
ended December 31, 2004 and 2003, respectively.
The
Company's inventory balances were approximately $11.6 million and $8.1 million
at December 31, 2004 and 2003, respectively. The increase in
inventory levels is primarily a result of the increased purchasing related
to
the newly released product lines launched in November 2004 and February 2005
in
addition to improved payment terms negotiated with key vendors.
The
Company's net accounts receivable balances were approximately $9.3 million
and
$10.4 million at December 31, 2004 and 2003, respectively. The
decrease is primarily due to improved collection efforts on healthy accounts,
partially offset by increased bad debt reserves on other unfavorable
accounts.
The
Company's accounts payable balances were approximately $3.9 million and $1.2
million at December 31, 2004 and 2003, respectively. The increase in
accounts payable is primarily associated with the extension of payment terms
with key vendors.
As
a
result of the above, the Company reported operating income of $3.1 million
for
the year ended December 31, 2004 compared to $2.1 million for the year ended
December 31, 2003.
Disclosure
of Contractual Obligations
The
Company is obligated to make future payments under various contracts, including
equipment capital leases and operating leases. The Company does not
have any long-term debt or purchase commitment obligations. The
following table summarized the Company's contractual obligations at December
31,
2005, reported by maturity of obligation.
Contractual
Obligations
|
|
Total
|
|
Less
than 1 year
|
|
1-3
years
|
|
3-5
years
|
|
More
than 5 years
|
|
Long-term
Debt Obligations
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
Capital
Lease Obligations
|
|
|
39,398
|
|
|
39,398
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Operating
Lease Obligations
|
|
|
1,151,719
|
|
|
473,987
|
|
|
677,732
|
|
|
--
|
|
|
--
|
|
Purchase
Obligations
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Other
Long-term Liabilities
Reflected on the
Registrant's
Balance sheet under GAAP
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,191,117
|
|
$
|
513,385
|
|
$
|
677,732
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity
and Capital Resources
Cash
and
cash equivalents decreased to $10.7 million at December 31, 2005 from $16.4
million at December 31, 2004. The decrease is primarily due to cash
used in operating activities. During the year, accounts receivable
increased $4.9 million, inventory increased $4.5 million, prepaids increased
$0.5 million, other current assets increased $1.6 million and other non-current
liabilities decreased $0.4 million. This was partially offset with an
increase in accrued expenses and accounts payable of $0.5 million.
Working
capital increased at December 31, 2005 to $29.9 million compared to $26.2
million at December 31, 2004.
In
February 2006, the Company signed a revolving credit agreement with Bank of
Texas to provide up to $10.0 million in short term debt. The
agreement is collateralized by all assets of the Company and requires, among
other things, the Company to maintain certain financial performance levels
relative to the cash flow leverage ratio and fixed charge coverage
ratio. Interest on outstanding balances varies depending on the
portion of the line that is used and accrues at a rate from prime less one
percent to prime and is due quarterly. The prime interest rate at
March 15, 2006 was 7.5%. As of March 15, 2006, the Company had no
outstanding loan against the credit facility.
The
Company's anticipated sources of liquidity over the next twelve months are
expected to be cash reserves, projected cash flows from operations, and
available borrowings under its credit facility. The Company
anticipates that operating cash flows and current cash reserves will also fund
capital expenditure programs. These capital expenditure programs can
be suspended or delayed at any time with minimal disruption to the Company's
operations if cash is needed in other areas of the Company's
operations. In addition, cash flows from operations and cash reserves
will be used to support ongoing purchases of component parts for the Company's
current and future product lines. The expected operating cash flow,
current cash reserves and borrowings available under its credit facility are
expected to allow the Company to meet working capital requirements during
periods of low cash flows resulting from the seasonality of the
industry.
Management
believes that sufficient resources will be available to meet the Company's
cash
requirements through the next twelve months. Cash requirements beyond
twelve months are dependent on the Company's ability to introduce products
that
gain market acceptance and to manage working capital
requirements. The Company has introduced new products and has taken
steps to increase the market acceptance of these and its other
products. If the Company's
products fail to achieve appropriate levels of market acceptance, it is possible
that the Company may have to raise additional capital and/or further reduce
its
operating expenses including further operational restructurings. If
the Company needs to raise additional funds through the issuance of equity
securities, the percentage ownership of the stockholders of the Company would
be
reduced, stockholders could experience additional dilution, or such equity
securities could have rights, preferences or privileges senior to the Company's
common stock. Nevertheless, given the current market price of the
Company's common stock and the state of the capital markets generally, the
Company does not expect that it will be able to raise funds through the issuance
of its capital stock in the foreseeable future. The Company may also
find it difficult to secure additional debt financing. There can be no assurance
that financing will be available when needed on terms favorable to the Company,
or at all. Accordingly, it is possible that the Company's only
sources of funding are current cash reserves, projected cash flows from
operations and up to $10.0 million of borrowings available under the Company's
revolving credit facility.
If
adequate funds are not available or not available on acceptable terms, the
Company may be unable to continue operations; develop, enhance and market
products; retain qualified personnel; take advantage of future opportunities;
or
respond to competitive pressures, any of which could have a material adverse
effect on the Company's business, operating results, financial condition and/or
liquidity.
New
Accounting Pronouncements
In
May
2005, the FASB issued SFAS No. 154, Accounting
Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB
Statement No. 3, which
requires all voluntary changes in accounting principles to be applied to the
current period and retrospective application to prior periods unless it is
impracticable to determine the period specific changes. The statement
also applies to changes required by an accounting pronouncement in the unusual
instance that a pronouncement does not include specific transition
provisions. The purpose by the FASB was to improve upon the
comparability of cross-border financial reporting with the International
Accounting Standards Board. This statement is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The Company will adopt the provisions of
this standard in the first quarter of 2006, and the Company believes that the
overall impact to the financial statements will not be material.
Item
7A. Quantitative and Qualitative Disclosures About Market
Risk
Interest
Rates
The
Company, in the normal course of doing business, is exposed to market risk
through changes in interest rates with respect to its cash
equivalents. Cash and Cash equivalents at December 31, 2005 were
$10,747,000. The average interest rate earned for the year end
December 31, 2005 was 3.12%.
Additionally,
the Company is exposed to interest rate risk from its Line of Credit (see Item
7
Management Discussion and Analysis, Liquidity and Capital Resources).
Outstanding borrowings accrue interest, based upon the Company’s consolidated
cash flow leverage ratio, ranging from the prime rate less one percent to prime
rate.
Foreign
Currency Fluctuations
In
the
normal course of business, the Company is exposed to foreign currency exchange
rate risks that could impact the Company’s results of operations. The
Company is exposed to foreign currency exchange rate risk inherent primarily
in
its sales commitments, anticipated sales and assets and liabilities denominated
in currencies other than the U.S. dollar. The Company transacts
business in several currencies worldwide, however all foreign transactions
are
transacted in U.S. dollar except for Canadian activities. The
functional currency of the Company's Canadian operations is Canadian
dollars. The accompanying consolidated financial statements have been
expressed in United States dollars, the reporting currency of the
Company. Reporting assets and liabilities of the Company's foreign
operations have been translated at the rate of exchange at the end of each
period. Revenues and expenses have been translated at the monthly
average rate of exchange in effect during the respective
period. Gains and losses resulting from translation are accumulated
in other comprehensive income (loss) in stockholders' equity. Gains
or losses resulting from transactions that are made in a currency different
from
the functional currency are recognized in comprehensive income as they
occur. Inventory purchases are invoiced by suppliers in U.S.
dollar.
Item
8. Financial Statements and Supplementary
Data
The
financial statements are set forth herein under Item 15 commencing on page
F-1. Schedule II to the consolidated financial statements is set
forth herein under Item 15 on page S-1. In addition, supplementary
financial information is required pursuant to the provisions of Regulation
S-K,
Item 302, and is set forth herein under Item 15, note 15 of the notes to
Consolidated Financial Statements.
Item
9A. Controls and Procedures
Introduction
"Disclosure
Controls and Procedures" are defined in Exchange Act Rules 13a -15(e) and 15d
-15 (e) as the controls and procedures of an issuer that are designed to ensure
that information required to be disclosed by the issuer in the reports that
it
files or submits under the Exchange Act is recorded, processed, summarized
and
reported, within the time period specified by the SEC's rules and
forms. Disclosure Controls and Procedures include, among other
things, controls and procedures designed to ensure that information required
to
be disclosed by us in the reports that we file or submit under the Exchange
Act
are accumulated and communicated to our management, including our principal
executive and principal financial officers, as appropriate, to allow timely
decisions regarding disclosure.
"Internal
Control Over Financial Reporting" is defined in Exchange Act Rules 13a -15(f)
and 15d -15(f) as a process designed by, or under the supervision of, an
issuer's principal executive and principal financial officers, or persons
performing similar functions, and effected by an issuer's board of directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. It includes those policies and procedures that (1)
pertain to the maintenance of records that in reasonable detail accurately
and
fairly reflect the transactions and disposition of an issuer; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the issuer are
being made only in accordance with authorizations of management and directors
of
the issuer; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the issuer's assets
that could have a material adverse effect on the financial
statements.
The
Company has endeavored to design its Disclosure Controls and Procedures and
Internal Controls Over Financial Reporting to provide reasonable assurances
that
their objectives will be met. All control systems are subject to
inherent limitations, such as resource constraints, the possibility of human
error, lack of knowledge or awareness, and the possibility of intentional
circumvention of these controls. Furthermore, the design of any
control system is based, in part, upon assumptions about the likelihood of
future events, which assumptions may ultimately prove to be
incorrect. As a result, no assurances can be made that the Company's
control system will detect every error or instance of fraudulent conduct, which
could have a material adverse impact on the Company's results of operations
or
financial condition.
Evaluation
of Disclosure Controls and Procedures
The
Company's management, with the participation of its Chief Executive Officer
and
Chief Financial Officer, has evaluated the effectiveness of its Disclosure
Controls and Procedures as of the end of the period covered by this
report. Based on this evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that the Company's Disclosure Controls
and Procedures as of the end of the period covered by this report were designed
to ensure that material information relating to the Company is made known to
the
Chief Executive Officer and Chief Financial Officer by others within the
Company, particularly during the period in which this report was being prepared,
and that the Company's Disclosure Controls and Procedures were
effective. There were no changes to the Company's Internal Controls
Over Financial Reporting during the year ended December 31, 2005 that has
materially affected or is reasonably likely to materially affect the Company's
Internal Controls Over Financial Reporting.
In
addition, it is the Company's policy to not participate in off-balance sheet
transactions, including but not limited to special purpose
entities.
PART
III
Item
10. Directors and Executive Officers of the
Registrant
The
information required by this Item is incorporated by reference to the Company's
Proxy Statement for the Annual Meeting of the Stockholders to be held on or
about May 17, 2006 to be distributed to the stockholders on or before April
30,
2006 ("the 2006 Proxy Statement") under the respective captions, "Elections
of
Directors," "Stock Ownership - Section 16(a) Beneficial Ownership Reporting
Compliance" and "Management-Executive Officers."
Item
11. Executive Compensation
The
information required by this Item is incorporated by reference to the Company's
2006 Proxy Statement under the caption "Management-Compensation of Executive
Officers."
Item
12. Security Ownership of Certain Beneficial Owners and
Management
The
information required by this Item is incorporated by reference to the Company's
2006 Proxy Statement under the caption "Stock Ownership-Beneficial Ownership
of
Certain Stockholders, Directors and Executive Officers."
Item
13. Certain Relationships and Related
Transactions
The
information required by this Item is incorporated by reference to the Company's
2006 Proxy Statement under the captions "Management-Employment Contracts and
Change in Control Agreements," "Compensation Committee Interlocks and Insider
Participation" and "Certain Transactions."
Item
14. Principal Accounting Fees and Services
The
information required by this Item is incorporated by reference to the Company's
2006 Proxy Statement under "Committees of Board of Directors;
Meetings."
PART
IV
Item
15. Exhibits, Financial Statement Schedules and Reports on Form
8-K.
(a) The
following documents are filed as a part of this report following the signature
page:
|
|
|
|
|
(1) Consolidated
Financial Statements
|
|
|
|
|
|
|
|
Item
|
|
Page
|
|
|
|
|
|
Index
to Consolidated Financial Statements and Related Financial Statement
Schedule
|
|
F-1
|
|
Reports
of Independent Registered Public Accounting Firms
|
|
F-2
- F-3
|
|
Consolidated
Balance Sheets as of December 31, 2005 and 2004
|
|
F-4
|
|
Consolidated
Statements of Operations for the Years ended December 31, 2005,
2004 and
2003
|
|
F-5
|
|
Consolidated
Statements of Stockholders' Equity for the Years ended December
31, 2005,
2004 and 2003
|
|
F-6
- F-7
|
|
Consolidated
Statements of Cash Flows for the Years ended December 31, 2005,
2004
and
2003
|
|
F-8
|
|
Notes
to Consolidated Financial Statements
|
|
F-9
- F-27
|
|
|
|
|
|
(2) Financial
Statement Schedules
|
|
|
|
|
|
The
financial statement schedule of the Company for the years ended December
31, 2005, 2004 and 2003 is filed as part of this Annual Report and
should
be read in conjunction with the Consolidated Financial Statements
of the
Company.
|
|
|
|
Schedule
II - Valuation and Qualifying Accounts
|
|
S-1
|
|
All
other schedules are have been omitted because such schedules are
not
required under the related instructions, or are not applicable, or
because
the information is not present, or is not present in amounts sufficient
to
require submission of the schedule, or because the information required
is
included in the consolidated financial statements and notes
thereto.
|
(3) Exhibits
|
|
The
exhibits listed below are filed as a part of or incorporated by
reference
in this Annual Report. Where such filing is made by
incorporation by reference to a previously filed document, such
document
is identified in parenthesis. See the Index of Exhibits
included with the exhibits filed as a part of this Annual
Report.
|
Exhibit
|
Description
|
Location
|
|
|
|
Exhibit
3.1
|
Amended
and Restated Certificate of Incorporation
|
Incorporated
by reference to Form S-1 File No. 333-51715 (Exhibit
3.1)
|
|
|
|
Exhibit
3.2
|
Amended
and Restated By-laws
|
Incorporated
by reference to Form S-1 File No. 333-51715 (Exhibit
3.2)
|
|
|
|
Exhibit
4.1
|
1998
Stock Incentive Plan of the Company dated February 26, 1998, as
amended
|
Incorporated
by reference to Form S-8 File No. 333-68129 (Exhibit
4.1)
|
|
|
|
Exhibit
4.2
|
1996
Stock Option Plan dated April 10, 1998
|
Incorporated
by reference to Form S-1 File No.333-51715 (Exhibit
4.2)
|
|
|
|
Exhibit
4.3
|
Adams
Golf, Ltd. 401(k) Retirement Plan
|
Incorporated
by reference to Form S-1 File No.333-51715 (Exhibit
4.3)
|
|
|
|
Exhibit
4.4
|
1999
Non-Employee Director Plan of Adams Golf, Inc.
|
Incorporated
by reference to 1999 Form 10-K (Exhibit 4.4)
|
|
|
|
Exhibit
4.5
|
1999
Stock Option Plan for Outside Consultants of Adams Golf,
Inc.
|
Incorporated
by reference to Form S-8 File No. 333-37320 (Exhibit
4.5)
|
|
|
|
Exhibit
4.6
|
2002
Stock Incentive Plan for Adams Golf, Inc.
|
Incorporated
by reference to Annex A of the 2002 Proxy Statement (Annex
A)
|
|
|
|
Exhibit
4.7
|
Form
of Option Agreement under the 2002 Stock Option Plan of Adams Golf,
Inc.
|
Incorporated
by reference to Form S-8 File No. 333-112622 (Exhibit
4.7)
|
|
|
|
Exhibit
10.1
|
Settlement
Agreement between Adams Golf, Ltd. And Nicholas A. Faldo
|
Incorporated
by reference to the Quarterly Report on Form 10-Q for the quarter
ended
September 30, 2001 (Exhibit 10.19)
|
|
|
|
Exhibit
10.2
|
Employment
Agreement - Byron H. (Barney) Adams
|
Incorporated
by reference to the Quarterly Report on Form 10-Q for the quarter
ended
June 30, 2003 (Exhibit 10.13)
|
|
|
|
Exhibit
10.3
|
Change
of Control Agreement - Eric Logan
|
Incorporated
by reference to the Quarterly Report on Form 10-Q for the quarter
ended
September 30, 2003 (Exhibit 10.14)
|
|
|
|
Exhibit
10.4
|
Amendment
dated September 1, 2003 to the Commercial Lease Agreement dated
April 6,
1998, between Jackson-Shaw Technology Center II and the
Company
|
Incorporated
by reference to 2003 Form 10-K (Exhibit 10.12)
|
|
|
|
Exhibit
10.5
|
Extension
of Revolving Line of Credit between Adams Golf, Inc and Bank of
Texas
|
Incorporated
by reference to 2004 Form 10-K (Exhibit 10.15)
|
|
|
|
Exhibit
10.6*
|
Employment
Agreement - Oliver G. (Chip) Brewer
|
Incorporated
by reference to 2004 Form 10-K (Exhibit 10.16)
|
|
|
|
Exhibit
10.7*
|
Golf
Consultant Agreement - Thomas S. Watson
|
Incorporated
by reference to 2004 Form 10-K (Exhibit 10.17)
|
|
|
|
Exhibit
10.8
|
Revolving
Line of Credit between Adams Golf, Inc and Bank of Texas
|
Included
in this filing
|
|
|
|
Exhibit
10.9
|
Employment
Agreement - Byron H. (Barney) Adams
|
Included
in this filing
|
|
|
|
Exhibit
21.1
|
Subsidiaries
of the Registrant
|
Included
in this filing
|
|
|
|
Exhibit
23.1
|
Consent
of KBA Group LLP
|
Included
in this filing
|
|
|
|
Exhibit
23.2
|
Consent
of KPMG, LLP
|
Included
in this filing
|
|
|
|
Exhibit
31.1
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
Included
in this filing
|
|
|
|
Exhibit
31.2
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
Included
in this filing
|
|
|
|
Exhibit
32.1
|
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
Included
in this filing
|
|
|
|
|
|
|
___________________
* Confidential
treatment has been requested with respect to certain provisions of this
agreement.
(b) Exhibits
See
Item
15(a)(3)
(c) Financial
Statement Schedules
See
Item
15(a)(2)
Signatures
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
|
|
ADAMS
GOLF, INC., a Delaware corporation
|
|
|
|
Date: March
22, 2006
|
|
By: /S/
B.H. (BARNEY)
ADAMS
|
|
|
B.H.
(Barney) Adams, Chairman of the Board
|
|
|
|
|
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Date: March
22, 2006
|
|
By: /S/
B.H. (BARNEY)
ADAMS
|
|
|
B.H.
(Barney) Adams, Chairman of the Board
|
|
|
|
Date: March
22, 2006
|
|
By: /S/
OLIVER G.
BREWER III
|
|
|
Oliver
G. (Chip) Brewer III
|
|
|
Chief
Executive Officer, President and Director
|
|
|
|
Date: March
22, 2006
|
|
By: /S/
ERIC
LOGAN
|
|
|
Eric
Logan
|
|
|
Chief
Financial Officer
|
|
|
(Principal
Financial Officer)
|
|
|
|
Date: March
22, 2006
|
|
By: /S/
PAMELA J.
HIGH
|
|
|
Pamela
J. High
|
|
|
Controller
|
|
|
(Principal
Accounting Officer)
|
|
|
|
Date: March
22, 2006
|
|
By: /S/
MARK R.
MULVOY
|
|
|
Mark
R. Mulvoy
|
|
|
Director
|
|
|
|
Date: March
22, 2006
|
|
By: /S/
PAUL F. BROWN,
JR.
|
|
|
Paul
F. Brown, Jr.
|
|
|
Director
|
|
|
|
Date: March
22, 2006
|
|
By: /S/
STEPHEN R.
PATCHIN
|
|
|
Stephen
R. Patchin
|
|
|
Director
|
|
|
|
Date: March
22, 2006
|
|
By: /S/
ROBERT D.
ROGERS
|
|
|
Robert
D. Rogers
|
|
|
Director
|
|
|
|
Date: March
22, 2006
|
|
By: /S/
RUSSELL L.
FLEISCHER
|
|
|
Russell
L. Fleischer
|
|
|
Director
|
|
|
|
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
AND
RELATED FINANCIAL STATEMENT SCHEDULE
|
Page
|
Consolidated
Financial Statements
|
|
|
|
Reports
of Independent Registered Public Accounting Firms
|
F-2
- F-3
|
|
|
Consolidated
Balance Sheets as of December 31, 2005 and 2004
|
F-4
|
|
|
Consolidated
Statements of Operations for the Years ended December 31, 2005, 2004
and
2003
|
F-5
|
|
|
Consolidated
Statements of Stockholders' Equity for the Years ended December 31,
2005, 2004
and 2003
|
F-6
- F-7
|
|
|
Consolidated
Statements of Cash Flows for the Years ended December 31, 2005, 2004
and 2003
|
F-8
|
|
|
Notes
to Consolidated Financial Statements
|
F-9
- F-27
|
|
|
Financial
Statement Schedule
The
financial statement schedule of the Company for the years ended December 31,
2005, 2004 and 2003 is filed as part of this Report and should be read in
conjunction with the Consolidated Financial Statements of the
Company.
Schedule
II - Valuation and Qualifying Accounts
|
S-1
|
|
|
All
other
schedules are have been omitted because such schedules are not required under
the related instructions, or are not applicable, or because the information
is
not present, or is not present in amounts sufficient to require submission
of
the schedule, or because the information required is included in the
consolidated financial statements and notes thereto.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors and Stockholders
Adams
Golf, Inc.:
We
have
audited the accompanying consolidated balance sheets of Adams Golf, Inc. and
subsidiaries as of December 31, 2005 and 2004 and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
then
ended. In connection with our audits of the consolidated financial
statements, we have also audited the financial statement schedule for the years
ended December 31, 2005 and 2004. The consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these consolidated financial statements and financial statement schedule based
on our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of
its
internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Adams Golf, Inc. and
subsidiaries as of December 31, 2005 and 2004 and the consolidated results
of
their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of
America. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/S/
KBA GROUP LLP
|
|
Dallas,
Texas
|
|
February
3, 2006, except for note 18 which is March 16, 2006
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors and Stockholders
Adams
Golf, Inc.:
We
have
audited the accompanying consolidated statements of operations, stockholder’s
equity and cash flows of Adams Golf, Inc. and subsidiaries for the year ended
December 31, 2003. In connection with our audit of the consolidated
financial statements, we have also audited the financial statement schedule
for
the year ended December 31, 2003. The consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these consolidated financial statements and financial statement schedule based
on our audits.
We
conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the results of operations and the cash flows of Adams
Golf, Inc. for the year ended December 31, 2003 in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
|
/S/
KPMG LLP
|
|
|
Dallas,
Texas
|
|
January
28, 2004
|
|
ADAMS
GOLF, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except share and per share amounts)
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
10,747
|
|
$
|
16,367
|
|
Trade
receivables, net
|
|
|
14,171
|
|
|
9,317
|
|
Inventories,
net
|
|
|
16,151
|
|
|
11,558
|
|
Prepaid
expenses
|
|
|
754
|
|
|
234
|
|
Other
current assets
|
|
|
27
|
|
|
138
|
|
Total
current assets
|
|
|
41,850
|
|
|
37,614
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
630
|
|
|
720
|
|
Other
assets
|
|
|
1,622
|
|
|
44
|
|
|
|
$
|
44,102
|
|
$
|
38,378
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
Accounts
payable
|
|
$
|
4,691
|
|
$
|
3,876
|
|
Accrued
expenses
|
|
|
7,284
|
|
|
7,584
|
|
Total
current liabilities
|
|
|
11,975
|
|
|
11,460
|
|
Non-current
liabilities
|
|
|
--
|
|
|
480
|
|
Total
liabilities
|
|
|
11,975
|
|
|
11,940
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value; authorized 5,000,000 shares; none
issued
|
|
|
--
|
|
|
--
|
|
Common
stock, $.001 par value; authorized 50,000,000 shares; 23,471,653
and
23,257,653 shares issued and 22,814,153 and 22,600,153 shares outstanding
in 2005 and 2004, respectively
|
|
|
23
|
|
|
23
|
|
Additional
paid-in capital
|
|
|
92,069
|
|
|
90,261
|
|
Deferred
compensation
|
|
|
(2,570
|
)
|
|
(2,298
|
)
|
Accumulated
other comprehensive income (loss)
|
|
|
888
|
|
|
(25
|
)
|
Accumulated
deficit
|
|
|
(55,147
|
)
|
|
(58,387
|
)
|
Treasury
stock, 657,500 common shares, at cost
|
|
|
(3,136
|
)
|
|
(3,136
|
)
|
Total
stockholders' equity
|
|
|
32,127
|
|
|
26,438
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
$
|
44,102
|
|
$
|
38,378
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements
ADAMS
GOLF, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands, except per share amounts)
|
|
Years
Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
56,424
|
|
$
|
56,762
|
|
$
|
50,879
|
|
Cost
of goods sold
|
|
|
30,309
|
|
|
28,580
|
|
|
27,259
|
|
Gross
profit
|
|
|
26,115
|
|
|
28,182
|
|
|
23,620
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Research
and development expenses
|
|
|
2,285
|
|
|
1,847
|
|
|
1,721
|
|
Selling
and marketing expenses
|
|
|
16,571
|
|
|
16,061
|
|
|
14,027
|
|
General
and administrative expenses
|
|
|
7,063
|
|
|
7,174
|
|
|
5,994
|
|
Reversal
of settlement expenses (benefit)
|
|
|
(1,771
|
)
|
|
--
|
|
|
--
|
|
Reversal
of restructuring expense (benefit)
|
|
|
(78
|
)
|
|
--
|
|
|
(259
|
)
|
Total
operating expenses
|
|
|
24,070
|
|
|
25,082
|
|
|
21,483
|
|
Operating
income
|
|
|
2,045
|
|
|
3,100
|
|
|
2,137
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
236
|
|
|
81
|
|
|
9
|
|
Interest
expense
|
|
|
(6
|
)
|
|
(13
|
)
|
|
(51
|
)
|
Other
|
|
|
1,052
|
|
|
76
|
|
|
25
|
|
Income
before income taxes
|
|
|
3,327
|
|
|
3,244
|
|
|
2,120
|
|
Income
tax expense
|
|
|
87
|
|
|
166
|
|
|
117
|
|
Net
income
|
|
$
|
3,240
|
|
$
|
3,078
|
|
$
|
2,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
per common share :
Basic
|
|
$
|
0.14
|
|
$
|
0.14
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.12
|
|
$
|
0.12
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements
ADAMS
GOLF, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
(in
thousands, except share amounts)
Years
ended December 31, 2005, 2004 and 2003
|
|
Shares
of Common Stock
|
|
Common
Stock
|
|
Additional Paid-in Capital
|
|
Deferred
Compensation
|
|
Accumulated
Other Comprehensive Income (Loss)
|
|
Accumulated
Deficit
|
|
Comprehensive
Income
|
|
Cost
of Treasury Stock
|
|
Total
Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2002
|
|
|
23,137,571
|
|
|
23
|
|
$
|
87,381
|
|
$
|
(671
|
)
|
$
|
(653
|
)
|
$
|
(63,468
|
)
|
|
|
|
$
|
(3,136
|
)
|
$
|
19,476
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
2,003
|
|
$
|
2,003
|
|
|
--
|
|
|
2,003
|
|
Other
comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain on foreign currency translation
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
297
|
|
|
--
|
|
|
297
|
|
|
--
|
|
|
297
|
|
Comprehensive
income
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
$
|
2,300
|
|
|
--
|
|
|
--
|
|
Stock
option forfeitures
|
|
|
--
|
|
|
--
|
|
|
(65
|
)
|
|
65
|
|
|
--
|
|
|
--
|
|
|
|
|
|
--
|
|
|
--
|
|
Issuance
of stock options
|
|
|
--
|
|
|
--
|
|
|
219
|
|
|
(219
|
)
|
|
--
|
|
|
--
|
|
|
|
|
|
--
|
|
|
--
|
|
Amortization
of deferred compensation
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
452
|
|
|
--
|
|
|
--
|
|
|
|
|
|
--
|
|
|
452
|
|
Balance,
December 31, 2003
|
|
|
23,137,571
|
|
|
23
|
|
|
87,535
|
|
|
(373
|
)
|
|
(356
|
)
|
|
(61,465
|
)
|
|
|
|
|
(3,136
|
)
|
|
22,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
3,078
|
|
$
|
3,078
|
|
|
--
|
|
|
3,078
|
|
Other
comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain on foreign currency translation
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
331
|
|
|
--
|
|
|
331
|
|
|
--
|
|
|
331
|
|
Comprehensive
income
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
$
|
3,409
|
|
|
--
|
|
|
--
|
|
Stock
option forfeitures
|
|
|
--
|
|
|
--
|
|
|
(18
|
)
|
|
18
|
|
|
--
|
|
|
--
|
|
|
|
|
|
--
|
|
|
--
|
|
Stock
options exercised
|
|
|
120,082
|
|
|
--
|
|
|
8
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
|
|
|
--
|
|
|
8
|
|
Issuance
of stock options
|
|
|
--
|
|
|
--
|
|
|
2,736
|
|
|
(2,736
|
)
|
|
--
|
|
|
--
|
|
|
|
|
|
--
|
|
|
--
|
|
Amortization
of deferred compensation
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
793
|
|
|
--
|
|
|
--
|
|
|
|
|
|
--
|
|
|
793
|
|
Balance,
December 31, 2004
|
|
|
23,257,653
|
|
|
23
|
|
|
90,261
|
|
|
(2,298
|
)
|
|
(25
|
)
|
|
(58,387
|
)
|
|
|
|
|
(3,136
|
)
|
|
26,438
|
|
See
accompanying notes to consolidated financial statements
|
|
|
|
|
|
|
|
|
|
|
(continued)
|
ADAMS
GOLF, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
(in
thousands, except share amounts)
Years
ended December 31, 2005, 2004 and 2003
|
|
Shares
of Common Stock
|
|
Common
Stock
|
|
Additional
Paid-in Capital
|
|
Deferred
Compensation
|
|
Accumulated
Other Comprehensive Income
(Loss)
|
|
Accumulated
Deficit
|
|
Comprehensive
Income
|
|
Cost
of Treasury Stock
|
|
Total
Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2004
|
|
|
23,257,653
|
|
|
23
|
|
$
|
90,261
|
|
$
|
(2,298
|
)
|
$
|
(25
|
)
|
$
|
(58,387
|
)
|
|
|
|
$
|
(3,136
|
)
|
$
|
26,438
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
3,240
|
|
$
|
3,240
|
|
|
--
|
|
|
3,240
|
|
Other
comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain on foreign currency translation
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
913
|
|
|
--
|
|
|
913
|
|
|
--
|
|
|
913
|
|
Comprehensive
income
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
$
|
4,153
|
|
|
--
|
|
|
--
|
|
Stock
option forfeitures
|
|
|
--
|
|
|
--
|
|
|
(9
|
)
|
|
9
|
|
|
--
|
|
|
--
|
|
|
|
|
|
--
|
|
|
--
|
|
Stock
options exercised
|
|
|
214,000
|
|
|
--
|
|
|
40
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
|
|
|
--
|
|
|
40
|
|
Issuance
of stock options
|
|
|
--
|
|
|
--
|
|
|
1,777
|
|
|
(1,777
|
)
|
|
--
|
|
|
--
|
|
|
|
|
|
--
|
|
|
--
|
|
Amortization
of deferred compensation
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1,496
|
|
|
--
|
|
|
--
|
|
|
|
|
|
--
|
|
|
1,496
|
|
Balance,
December 31, 2005
|
|
|
23,471,653
|
|
|
23
|
|
$
|
92,069
|
|
$
|
(2,570
|
)
|
$
|
888
|
|
$
|
(55,147
|
)
|
|
|
|
$
|
(3,136
|
)
|
$
|
32,127
|
|
See
accompanying notes to consolidated financial statements
ADAMS
GOLF, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
|
|
Years
Ended December
31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
3,240
|
|
$
|
3,078
|
|
$
|
2,003
|
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization of property and equipment and intangible
assets
|
|
|
447
|
|
|
562
|
|
|
1,503
|
|
Amortization
of deferred compensation
|
|
|
1,496
|
|
|
793
|
|
|
452
|
|
Provision
for doubtful accounts
|
|
|
557
|
|
|
1,224
|
|
|
443
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Trade
receivables
|
|
|
(5,411
|
)
|
|
(108
|
)
|
|
(2,342
|
)
|
Inventories
|
|
|
(4,593
|
)
|
|
(3,500
|
)
|
|
1,069
|
|
Prepaid
expenses
|
|
|
(519
|
)
|
|
223
|
|
|
477
|
|
Income
tax receivable
|
|
|
--
|
|
|
--
|
|
|
18
|
|
Other
current assets
|
|
|
110
|
|
|
(131
|
)
|
|
127
|
|
Other
assets
|
|
|
(1,579
|
)
|
|
--
|
|
|
98
|
|
Accounts
payable
|
|
|
815
|
|
|
2,683
|
|
|
260
|
|
Accrued
expenses
|
|
|
(303
|
)
|
|
1,569
|
|
|
660
|
|
Other
non-current liabilities
|
|
|
(449
|
)
|
|
(79
|
)
|
|
(173
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
(6,189
|
)
|
|
6,314
|
|
|
4,595
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Purchase
of equipment
|
|
|
(338
|
)
|
|
(347
|
)
|
|
(308
|
)
|
Net
cash used in investing activities
|
|
|
(338
|
)
|
|
(347
|
)
|
|
(308
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Principal
payments under capital lease obligation
|
|
|
(43
|
)
|
|
(59
|
)
|
|
(35
|
)
|
Exercise
of stock options
|
|
|
39
|
|
|
8
|
|
|
--
|
|
Debt
financing costs
|
|
|
(2
|
)
|
|
(15
|
)
|
|
(24
|
)
|
Net
cash used in financing activities
|
|
|
(6
|
)
|
|
(66
|
)
|
|
(59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Effects
of exchange rate changes on cash and cash equivalents
|
|
|
913
|
|
|
331
|
|
|
296
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(5,620
|
)
|
|
6,232
|
|
|
4,524
|
|
Cash
and cash equivalents at beginning of the year
|
|
|
16,367
|
|
|
10,135
|
|
|
5,611
|
|
Cash
and cash equivalents at end of the year
|
|
$
|
10,747
|
|
$
|
16,367
|
|
$
|
10,135
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
6
|
|
$
|
13
|
|
$
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes paid
|
|
$
|
88
|
|
$
|
129
|
|
$
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash investing and financing activities - equipment
financed with capital lease
|
|
$
|
15
|
|
$
|
--
|
|
$
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2005 and 2004
(Tables
in thousands, except share and per share amounts)
(1) Summary
of Significant Accounting Policies
(a) General
Founded
in 1987, Adams Golf, Inc. (the “Company” or “Adams Golf”) initially operated as
a component supplier and contract manufacturer. Thereafter, the
Company established its custom fitting operation. Today it designs,
assembles, markets and distributes premium quality, technologically innovative
golf clubs, including the RPM drivers and fairway woods, Ovation drivers and
fairway woods, the Idea A2 and A2 OS irons, and Idea A2 I-woods, Idea, A1 and
A1
Pro Irons and Idea i-Woods, the Tight Lies family of fairway woods, the Redline
family of fairway woods and drivers, the Tight Lies GT and GT2 irons and
i-Woods, the Tom Watson signature and Puglielli series of wedges, and certain
accessories. The Company was incorporated in 1987 and re-domesticated
in Delaware in 1990. The Company completed an internal reorganization
in 1997 and now conducts its operations through several direct and indirect
wholly-owned subsidiaries, agencies, and distributorships.
The
consolidated financial statements include the accounts of the Company and its
subsidiaries, all of which are wholly-owned. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
(b) Inventories
Inventories
are valued at the lower of cost or market and primarily consist of finished
golf
clubs and component parts. Cost is determined using the first-in,
first-out method. The inventory balance, which includes material,
labor and assembly overhead costs, is recorded net of an estimated allowance
for
obsolete inventory. The estimated allowance for obsolete inventory is
based upon management's understanding of market conditions and forecasts of
future product demand. If the actual amount of obsolete inventory
significantly exceeds the estimated allowance, the Company's costs of goods
sold
and gross profit and resulting net income or loss would be significantly
adversely affected.
(c) Allowance
for Doubtful Accounts
The
Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to make required
payments. An estimate of uncollectable amounts is made by management
using an evaluation methodolgy involving both overall and specific
identification. The Company evaluates each individual customer and
measures various key aspects of the customer such as, but not limited to, their
overall credit risk (via Dun and Bradstreet reports), payment history, track
record for meeting payment plans, industry communications, the portion of the
customer’s balance that is past due and other various items. From an
overall perspective, the Company also looks at the aging of the receivables
in
total and aging relative to prior periods to determine the necessary reserve
requirements. Fluctuations in the reserve requirements will occur
from period to period as the change in customer mix or strength of the customers
could affect the reserve disproportionately compared to the total change in
the
accounts receivable balance. If a significant number of customers
with significant receivable balances in excess of the allowance fail to make
required payments, the Company's operating results would be significantly
adversely affected. Based on management's assessment, the Company
provides for estimated uncollectable amounts through a charge to earnings and
a
credit to the valuation allowance. Balances that remain outstanding
after the Company has used reasonable collection efforts are written off through
a charge to the valuation allowance and a credit to accounts
receivable. The Company generally does not require
collateral.
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2005 and 2004
(Tables
in thousands, except share and per share amounts)
(1) Summary
of Significant Accounting Policies (continued)
(d) Property
and Equipment
Property
and equipment are stated at cost. Depreciation and amortization are
calculated using the straight-line method over the estimated useful lives of
the
respective assets, which range from three to seven years. Maintenance
and repairs are expensed as incurred. Significant replacements and
betterments are capitalized.
(e) Revenue
Recognition
The
Company recognizes revenue when the product is shipped. At that time,
the title and risk of loss transfer to the customer, and collectability is
reasonably assured. Collectability is evaluated on an individual
customer basis taking into consideration historical payment trends, current
financial position, results of independent credit evaluations and payment
terms. Additionally, an estimate of product returns and warranty
costs are recorded when revenue is recognized. Estimates are based on
historical trends taking into consideration current market conditions, customer
demands and product sell through. The Company also records estimated
reductions in revenue for sales programs such as co-op advertising and spiff
incentives. Estimates in the sales program accruals are based on
program participation and forecast of future product demand. If actual
sales returns and sales programs significantly exceed the recorded estimated
allowances, the Company's sales would be adversely affected. The
Company recognizes deferred revenue as a result of sales that have extended
terms and a right of return of the product under a specified
program. Once the product is paid for, the Company then records
revenue.
(f) New
Accounting Pronouncement
In
May
2005, the FASB issued SFAS No. 154, Accounting
Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB
Statement No. 3, which
requires all voluntary changes in accounting principle to be applied to the
current period and retrospective application to prior periods unless it is
impracticable to determine the period specific changes. The statement
also applies to changes required by an accounting pronouncement in the unusual
instance that a pronouncement does not include specific transition
provisions. The purpose by the FASB was to improve upon the
comparability of cross-border financial reporting with the International
Accounting Standards Board. This statement is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The Company will adopt the provisions of
this standard in the first quarter of 2006, and the Company believes that the
overall impact to the financial statements will not be material.
(g) Research
and Development
Research
and development costs consist of all costs incurred in planning, designing
and
testing of golf equipment, including salary costs related to research and
development. These costs are expensed as incurred. The
Company's research and development expenses were approximately $2,285,000,
$1,847,000 and $1,721,000 for the years ended December 31, 2005, 2004 and 2003,
respectively.
(h) Advertising
Costs
Advertising
costs, included in selling and marketing expenses on the accompanying
consolidated statements of operations, other than direct commercial costs,
are
expensed as incurred and totaled approximately $4,980,000, $5,067,000 and
$3,478,000 for the years ended December 31, 2005, 2004 and 2003,
respectively.
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2005 and 2004
(Tables
in thousands, except share and per share amounts)
(1)
|
Summary
of Significant Accounting Policies
(continued)
|
(i) Product
Warranty
The
Company's golf equipment is sold under warranty against defects in material
and
workmanship for a period of one year with the exception of the graphite tipped
(GT) and BiMatrx steel tipped (ST) shafts, which carry a five year
warranty. An allowance for estimated future warranty costs is
recorded in the period products are sold. In estimating its future
warranty obligations, the Company considers various relevant factors, including
the Company's stated warranty policies, the historical frequency of claims,
and
the cost to replace or repair the product. If the actual amount of
warranty claims significantly exceeds the estimated allowance, the Company's
costs of goods sold and gross profit and resulting net income or loss would
be
significantly adversely affected.
|
|
Beginning
Balance
|
|
Changes
for payments made and estimated accruals (net)
|
|
Ending
Balance
|
|
Year
ended December 31, 2005
|
|
$
|
297
|
|
|
10
|
|
$
|
307
|
|
Year
ended December 31, 2004
|
|
$
|
285
|
|
|
12
|
|
$
|
297
|
|
(j) Income
Taxes
The
Company accounts for income taxes using the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to the differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted rates recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. In assessing the realizability of
deferred income tax assets, the Company considers whether it is more likely
than
not that some portion or all of the deferred income tax assets will be
realized. The ultimate realization of deferred income tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Due to the
historical operating results of the Company, management is unable to conclude
on
a more likely than not basis that all deferred income tax assets generated
from
net operating losses and other deferred tax assets through December 31, 2002
will be realized. Accordingly, the Company has recognized a valuation
allowance equal to the entire deferred income tax asset.
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2005 and 2004
(Tables
in thousands, except share and per share amounts)
(1) Summary
of Significant Accounting Policies (continued)
(k) Income
Per Share
The
weighted average common shares used for determining basic and diluted income
per
common share were 22,734,060 and 27,803,729, respectively, for the year ended
December 31, 2005. The effect of all warrants and options to purchase
shares of the Company's common stock for the year ended December 31, 2005
resulted in additional dilutive shares of 5,069,669.
The
weighted average common shares used for determining basic and diluted income
per
common share were 22,553,722 and 26,144,444, respectively, for the year ended
December 31, 2004. The effect of all warrants and options to purchase
shares of the Company's common stock for the year ended December 31, 2004
resulted in additional dilutive shares of 3,590,722. For the year
ended December 31, 2004, options exercisable for approximately 180,000 shares
of
common stock and warrants exercisable for 100,000 shares of common stock were
excluded from the calculation of dilutive shares, as the effect of inclusion
would have been antidilutive.
The
weighted average common shares used for determining basic and diluted income
per
common share were 22,480,071 and 24,532,959, respectively, for the year ended
December 31, 2003. The effect of all warrants and options to purchase
shares of the Company's common stock for the year ended December 31, 2003
resulted in additional dilutive shares of 2,052,888. For the year
ended December 31, 2003, options exercisable for approximately 1,823,730 shares
of common stock and warrants exercisable for 100,000 shares of common stock
were
excluded from the calculation of dilutive shares, as the effect of inclusion
would have been antidilutive.
(l) Financial
Instruments
The
carrying amounts of cash and cash equivalents, accounts receivable, accounts
payable, and accrued expenses approximate fair value due to the short maturity
of these instruments.
(m) Impairment
of Long-Lived Assets
The
Company follows the guidance in Statement of Financial Accounting Standards
SFAS
No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets,
in
reviewing long-lived assets and certain identifiable intangibles for impairment
whenever events or changes in circumstances indicate that the carrying amount
of
an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to
future net cash flows to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured
by
the amount by which the carrying amount of the assets exceeds the fair value
of
the assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. During the years
ended December 31, 2005, 2004 and 2003, there was no impairment of long-lived
assets.
(n) Comprehensive
Income
Comprehensive
income consists of net income and unrealized gains and losses, net of related
tax effect, on foreign currency translation adjustments and marketable
securities.
ADAMS
GOLF, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2005 and 2004
(Tables
in thousands, except share and per share amounts)
(1) Summary
of Significant Accounting Policies (continued)
(o) Cash
and Cash Equilivents
The
Company considers all short-term highly liquid instruments, with an original
maturity of three months or less, to be cash equivalents.
(p) Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those
estimates.
(q) Segment
Reporting
The
Company is organized by functional responsibility and operates as a single
segment and within that segment offers more than one class of product, in
accordance with SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information.
(r) Stock-Based
Compensation
At
December 31, 2005, the Company had one stock-based option plan that replaced
four predecessor plans. The Company accounts for the plan under the
recognition and measurement principles of APB Opinion No. 25, Accounting
for Stock Issued to Employees,
and
related interpretations. Under this method, compensation expense is
recorded on the date of grant to the extent that the current market price of
the
underlying stock exceeds the exercise price of the option. The
Company has elected to continue to apply the intrinsic value-based method of
accounting for employee stock option grants and complies with the disclosure
requirements of SFAS No. 123 "Accounting
for Stock-based Compensation" ("SFAS 123"), as
amended by SFAS No. 148 "Accounting
for Stock-based Compensation - Transition and Disclosure" ("SFAS
148"). Non-employee
option grants are accounted for using the fair-value based method.
The following table illustrates the effect on net income and income
per share if the Company had applied the fair value recognition provisions
of
SFAS 123 and SFAS 148 to stock-based employee compensation for the years ended
December 31, 2005, 2004 and 2003, respectively (in thousands, except for per
share amounts):
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2005 and 2004
(Tables
in thousands, except share and per share amounts)
Summary
of Significant Accounting Policies (continued)
(r) Stock
Compensation (continued)
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
3,240
|
|
$
|
3,078
|
|
$
|
2,003
|
|
Add:
Stock-based compensation expense included in reported net income, net
of related tax effects
|
|
|
1,496
|
|
|
793
|
|
|
452
|
|
Deduct:
Total stock-based compensation expense determined under the fair
value method
|
|
|
(1,505
|
)
|
|
(612
|
)
|
|
(479
|
)
|
Pro
forma
|
|
$
|
3,231
|
|
$
|
3,259
|
|
$
|
1,976
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income per common share:
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.14
|
|
$
|
0.14
|
|
$
|
0.09
|
|
Pro
forma
|
|
$
|
0.14
|
|
$
|
0.14
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income per common share:
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.12
|
|
$
|
0.12
|
|
$
|
0.08
|
|
Pro
forma
|
|
$
|
0.12
|
|
$
|
0.12
|
|
$
|
0.08
|
|
In
December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment, which
established accounting standards for transactions where the entity exchanges
equity instruments for goods and services. The revision of this
statement focuses on the accounting for transactions where the entity obtains
employee services in share-based payment transactions. This statement
revision eliminates the alternative use of APB 25 intrinsic value method and
requires that entities adopt the fair-value method for all share-based
transactions. The Company will adopt the provisions of this standard
on a modified prospective basis in the first quarter of 2006, and the Company
believes that the overall impact to the financial statements will not be
material.
(s) Foreign
Currency Translation and Transactions
The
functional currency of the Company's Canadian operations is Canadian
dollars. The accompanying consolidated financial statements have been
expressed in United States dollars, the reporting currency of the
Company. Reporting assets and liabilities of the Company's foreign
operations have been translated at the rate of exchange at the end of each
period. Revenues and expenses have been translated at the monthly
average rate of exchange in effect during the respective
period. Gains and losses resulting from translation are accumulated
in other comprehensive income (loss) in stockholders' equity. Gains
or losses resulting from transactions that are made in a currency different
from
the functional currency are recognized in earnings as they
occur. Inventory purchases are invoiced by suppliers in U.S.
dollars.
(t)
Reclassifications
Certain
prior period amounts have been reclassified to conform to current period
presentation.
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2005 and 2004
(Tables
in thousands, except share and per share amounts)
(2)
|
Trade
Receivables, net
|
Trade
receivables consist of the following at December 31, 2005 and 2004:
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Trade
receivables
|
|
$
|
15,123
|
|
$
|
10,063
|
|
Allowance
for doubtful accounts
|
|
|
(952
|
)
|
|
(746
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
14,171
|
|
$
|
9,317
|
|
(3) Inventories
Inventories
consist of the following at December 31, 2005 and 2004:
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Finished
goods
|
|
$
|
7,453
|
|
$
|
8,119
|
|
Component
parts
|
|
|
8,698
|
|
|
3,439
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,151
|
|
$
|
11,558
|
|
Inventory
is determined using the first-in, first-out method and is recorded at the lower
of cost or market value. The inventory balance is comprised of the
following: purchased raw materials or finished goods at their respective
purchase costs; labor, assembly and other G&A expenses capitalized into
overhead costs, which are then applied to each unit after work in process is
completed; retained costs representing the excess of manufacturing and other
G&A expenses that are not yet applied to finished goods; and an estimated
allowance for obsolete inventory. At December 31, 2005 and 2004,
inventories included $837,000 and $528,000 of consigned inventory, respectively,
and $215,000 and $474,000 of inventory reserves, respectively.
(4) Property
and Equipment, net
Property
and equipment consist of the following at December 31, 2005 and
2004:
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
1,937
|
|
$
|
1,789
|
|
Computers
and software
|
|
|
9,008
|
|
|
8,866
|
|
Furniture
and fixtures
|
|
|
712
|
|
|
662
|
|
Leaseholds
improvements
|
|
|
188
|
|
|
186
|
|
Accumulated
depreciation and amortization
|
|
|
(11,215
|
)
|
|
(10,783
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
630
|
|
$
|
720
|
|
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2005 and 2004
(Tables
in thousands, except share and per share amounts)
(5) Other
Assets
Other
assets, net, consist of the following at December 31, 2005 and
2004:
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Deposits
|
|
|
--
|
|
|
41
|
|
Long
Term Endorsements
|
|
|
1,620
|
|
|
--
|
|
Other
|
|
|
2
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,622
|
|
$
|
44
|
|
(6) Accrued
Expenses
Accrued
expenses consist of the following at December 31, 2005 and
2004:
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Payroll
and commissions
|
|
$
|
1,362
|
|
$
|
1,020
|
|
Advertising
|
|
|
130
|
|
|
130
|
|
Product
warranty expense and sales returns
|
|
|
1,546
|
|
|
1,120
|
|
Professional
services
|
|
|
43
|
|
|
59
|
|
Settlement
costs
|
|
|
--
|
|
|
1,322
|
|
Restructuring
costs
|
|
|
--
|
|
|
71
|
|
Deferred
revenue
|
|
|
1,895
|
|
|
1,317
|
|
Other
|
|
|
2,308
|
|
|
2,545
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,284
|
|
$
|
7,584
|
|
(7) Restructuring
During
2002, the Company executed an operational restructuring plan, which resulted
in
the closure of the Adams Golf UK, Limited wholly owned
subsidiary. The operational restructuring plan resulted in a
restructuring charge of $850,000 for severance, a write off of goodwill and
other related exit costs. Restructuring expense for 2003 and 2005
resulted in a benefit due to the release of liability from our previously
recorded building lease and accounting and legal fees for the Adams Golf, UK
subsidiary. The Company continues to sell its products in the UK
through a third party distributor.
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2005 and 2004
(Tables
in thousands, except share and per share amounts)
(8)
|
Professional
Services Agreement and Settlement
Expense
|
In
May
1998, Adams Golf, Ltd. entered into an agreement with Nicholas A.
Faldo. The agreement provided that Mr. Faldo provide a variety of
services to Adams Golf including endorsement and use of certain of Adams Golf
Ltd.'s products. On November 6, 2000, Adams Golf announced that Mr.
Faldo was in material breach of his contract for failure to use certain of
the
Company's products. From March 31, 2000 through November 6, 2000
(date declared in material breach), the Company ceased making royalty payments
under the professional services agreement during which time the Company
corresponded with Mr. Faldo in an attempt to cure his performance
deficiencies. On August 25, 2001, an agreement was reached with Mr.
Faldo in settlement of the dispute regarding provisions of his prior
professional services agreement with Adams Golf. Under the terms of
settlement, Mr. Faldo received $0.5 million upon execution and $0.5 million
on
July 15, 2002. In addition, Mr. Faldo was to receive a series of
annual installments for the years 2003 through 2011 aggregating to $2.0
million. As a result, the Company established a liability
representing the present value of the future obligation, which approximated
$2,673,000, utilizing the Company's incremental borrowing rate of
6.04%. In addition, Mr. Faldo is entitled to receive up to an
additional $2.0 million contingent on the Company reaching certain future
financial performance thresholds. In accordance with the terms of the
settlement, Mr. Faldo waived all future rights to accrued and unpaid royalties
of $1.1 million associated with his prior professional services agreement with
the Company. Therefore, $1,579,000 of settlement expense was incurred
during the year ended December 31, 2001. The Company owed two
$100,000 payments, one due at December 31, 2003 and one due at December 31,
2004. However, according to the terms of Mr. Faldo's contract, he
must play a specified number of PGA sanctioned events and keep his PGA
credentials. Because Mr. Faldo has failed to meet the contract
requirements, the payment was not made at December 31, 2003 or December 31,
2004. During September 2005, the Company determined that it was
appropriate to reverse the settlement liability previously accrued.
Accordingly, the Company reversed approximately $1,339,000 and $449,000 in
accrued expenses and other non-current liabilities.
(9)
|
Commitments
and Contingencies
|
The
Company is obligated under certain noncancellable operating leases for assembly,
warehouse and office space. A summary of the minimum rental
commitments under noncancellable leases is as follows:
Years
ending
|
|
|
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
$
|
474
|
|
2007
|
|
|
|
|
|
450
|
|
2008
|
|
|
|
|
|
228
|
|
2009
|
|
|
|
|
|
---
|
|
2010
|
|
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,152
|
|
|
|
|
|
|
|
|
|
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2005 and 2004
(Tables
in thousands, except share and per share amounts)
(9) Commitments
and Contingencies (continued)
Rent
expense was approximately $609,000, $473,000 and $515,000 for the years ended
December 31, 2005, 2004 and 2003, respectively.
Beginning
in June 1999, the first of seven class action lawsuits was filed against the
Company, certain of its current and former officers and directors, and the
three
underwriters of the Company's initial public offering ("IPO") in the United
States District Court of the District of Delaware. The complaints
alleged 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 alleged that the Company's prospectus, which became
effective July 9, 1998, was materially false and misleading in at least two
areas. Plaintiffs alleged that the prospectus failed to disclose that
unauthorized distribution of the Company's products (gray market sales)
threatened the Company's long-term profits. Plaintiffs also alleged that the
prospectus failed to disclose that the golf equipment industry suffered from
an
oversupply of inventory at the retail level, which had an adverse impact on
the
Company's sales. On May 17, 2000, these cases were consolidated into
one amended complaint, and a lead plaintiff was appointed. The
plaintiffs were seeking unspecified amounts of compensatory damages, interest
and costs, including legal fees. On December 10, 2001, the United
States District Court for the District of Delaware dismissed the consolidated,
amended complaint. Plaintiffs appealed. On August 25,
2004, the appellate court affirmed the dismissal of plaintiffs' claims relating
to oversupply of retail inventory, while reversing the dismissal of the claims
relating to the impact of gray market sales and remanding those claims for
further proceedings. This case is now in the discovery phase in the
district court. As of February 1, 2006, the Company has participated
in mediation and at this time no resolution has been reached.
The
Company maintains directors' and officers' and corporate liability insurance
to
cover certain risks associated with these securities claims filed against the
Company or its directors and officers. The Company has met the
financial deductible of its directors' and officers' insurance policy for the
period covering the time the class action lawsuit was filed. At this
point in the legal proceedings, the Company cannot predict with any certainty,
per the guidance in SFAS 5, that the events will conclude in the Company's
favor
and thus can not reasonably estimate any future liability.
On
March
16, 2006, the Company became aware of a lawsuit filed against it in U.S.
District Court in the Southern District of California by TaylorMade, a division
of Adidas-Salomon AG. As of March 20, 2006, the Company has not been formally
served with the lawsuit. The lawsuit alleges generally that the Company violated
three patents held by TaylorMade (one design patent and two utility patents)
in
the manufacture of recent drivers. The design patent relates to ornamental
aspects of the skirt and sole of certain TaylorMade clubs. The utility patents
relate to 1) shallow grooves in a circular pattern on the face of certain
TaylorMade metal woods and 2) a metal wood construction method attaching
a
composite crown to a club head body containing multiple ledges, a surface
veil
and a face plate. The Company is reviewing the allegations, and while it
is too
early to determine the final outcome or materiality of this matter, based
on the
information available at this time, the Company does not believe it has
infringed any valid claims of TaylorMade and intends to strongly defend its
technology and market positions. Adams Golf respects the valid
intellectual property of all its competitors and expects the same in return.
We are disappointed that TaylorMade has chosen to litigate. We have been
discussing patent issues with TaylorMade for nearly a year. We had hoped
to amicably resolve these issues and had recently provided TaylorMade with
information in support of our positions. However, rather than address that
information in private dialogue, TaylorMade has chosen to litigate. We
intend to defend our positions aggressively and will strive to continue to
manufacture innovative product that we hope is superior in the eyes of the
consumer and thereby attracts the attention of our
competitors.
From
time
to time, the Company is engaged in various other legal proceedings in the normal
course of business. The ultimate liability, if any, for the aggregate
amounts claimed cannot be determined at this time.
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2005 and 2004
(Tables
in thousands, except share and per share amounts)
(10) Retirement
Plan
In
February 1998, the Company adopted the Adams Golf, Ltd. 401(k) Retirement
Plan
(the "Plan"), which covers substantially all employees. The Company
matches 50% of employee contributions up to a maximum of 6% of the employee's
compensation. For the years ended December 31, 2005, 2004 and 2003,
the Company contributed approximately $135,000, $112,000 and $90,000,
respectively, to the Plan.
(11) Liquidity
In
February 2006, the Company signed a revolving credit agreement with Bank of
Texas to provide up to $10.0 million in short term debt. The
agreement is collateralized by all assets of the Company and requires, among
other things, the Company to maintain certain financial performance levels
relative to the cash flow leverage ratio and fixed charge coverage
ratio. Interest on outstanding balances varies depending on the
portion of the line that is used and accrues at a rate from prime less one
percent to prime and is due quarterly.
The
Company's anticipated sources of liquidity over the next twelve months are
expected to be cash reserves, projected cash flows from operations, and
available borrowings under its credit facility. The Company
anticipates that operating cash flows and current cash reserves will also fund
capital expenditure programs. These capital expenditure programs can
be suspended or delayed at any time with minimal disruption to the Company's
operations if cash is needed in other areas of the Company's
operations. In addition, cash flows from operations and cash reserves
will be used to support ongoing purchases of component parts for the Company's
current and future product lines. The expected operating cash flow,
current cash reserves and borrowings available under its credit facility are
expected to allow the Company to meet working capital requirements during
periods of low cash flows resulting from the seasonality of the
industry.
Management
believes that sufficient resources will be available to meet the Company's
cash
requirements through the next twelve months. Cash requirements beyond
twelve months are dependent on the Company's ability to introduce products
that
gain market acceptance and to manage working capital
requirements. The Company has introduced new products and has taken
steps to increase the market acceptance of these and its other
products. If the Company's products fail to achieve appropriate
levels of market acceptance, it is possible that the Company may have to raise
additional capital and/or further reduce its operating expenses including
further operational restructurings. If the Company needs to raise
additional funds through the issuance of equity securities, the percentage
ownership of the stockholders of the Company would be reduced, stockholders
could experience additional dilution, or such equity securities could have
rights, preferences or privileges senior to the Company's common
stock. Nevertheless, given the current market price of the Company's
common stock and the state of the capital markets generally, the Company does
not expect that it will be able to raise funds through the issuance of its
capital stock in the foreseeable future. The Company may also find it
difficult to secure additional debt financing. There can be no assurance that
financing will be available when needed on terms favorable to the Company,
or at
all. Accordingly, it is possible that the Company's only sources of
funding are current cash reserves, projected cash flows from operations and
up
to $10.0 million of borrowings available under the Company's revolving credit
facility.
If
adequate funds are not available or not available on acceptable terms, the
Company may be unable to continue operations; develop, enhance and market
products; retain qualified personnel; take advantage of future opportunities;
or
respond to competitive pressures, any of which could have a material adverse
effect on the Company's business, operating results, financial condition and/or
liquidity.
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2005 and 2004
(Tables
in thousands, except share and per share amounts)
(12) Income
Taxes
Income
tax expense (benefit) for the years ended December 31, 2005, 2004 and 2003
consists of the following:
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Federal-current
|
|
$
|
83
|
|
$
|
162
|
|
$
|
3
|
|
State-current
|
|
|
4
|
|
|
4
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
87
|
|
$
|
166
|
|
$
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
income tax expense differs from the "expected" income tax expense (computed
by
applying the U.S. federal corporate tax rate of 35% to income before income
taxes) for the years ended December 31, 2005, 2004 and 2003 as
follows:
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Computed
"expected" tax benefit
|
|
$
|
1,165
|
|
$
|
1,134
|
|
$
|
702
|
|
State
income taxes, net of federal tax expense
|
|
|
33
|
|
|
32
|
|
|
20
|
|
Change
in valuation allowance for deferred tax assets
|
|
|
(1,242
|
)
|
|
(1,204
|
)
|
|
(748
|
)
|
Other
|
|
|
131
|
|
|
204
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
87
|
|
$
|
166
|
|
$
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
The
tax
effects of temporary differences that give rise to the deferred tax assets
and
deferred tax liabilities at December 31, 2005 and 2004 are presented
below:
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
Allowance
for doubtful accounts receivable
|
|
$
|
343
|
|
$
|
269
|
|
Product
warranty and sales returns
|
|
|
557
|
|
|
403
|
|
Property
and equipment
|
|
|
63
|
|
|
31
|
|
Other
reserves
|
|
|
1,439
|
|
|
1,204
|
|
Settlement
reserve
|
|
|
--
|
|
|
638
|
|
263A
adjustment
|
|
|
128
|
|
|
146
|
|
Research
and development tax credit carryforwards
|
|
|
306
|
|
|
306
|
|
Net
operating loss carryforwards
|
|
|
15,458
|
|
|
16,546
|
|
|
|
|
|
|
|
|
|
Total
deferred tax assets
|
|
|
18,294
|
|
|
19,543
|
|
Valuation
allowance
|
|
|
(18,027
|
)
|
|
(19,269
|
)
|
|
|
|
|
|
|
|
|
Net
deferred tax assets
|
|
|
267
|
|
|
274
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
Other
|
|
|
267
|
|
|
274
|
|
|
|
|
|
|
|
|
|
Total
deferred tax liabilities
|
|
|
267
|
|
|
274
|
|
|
|
|
|
|
|
|
|
Net
deferred taxes assets
|
|
$
|
--
|
|
$
|
--
|
|
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2005 and 2004
(Tables
in thousands, except share and per share amounts)
(12) Income
Taxes (continued)
In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion of all of the deferred tax asset
will not be realized. The ultimate realization of deferred tax assets
is dependent upon the generation of future taxable income during the periods
in
which those temporary differences become deductible.
At
December 31, 2005, the Company cannot determine based on a weighing of objective
evidence that it is more likely than not that the remaining net deferred tax
assets will be realized. As a result, as of December 31, 2005, the
Company has established a valuation allowance for the deferred tax assets in
excess of existing taxable temporary differences. The net change in
the valuation allowance for the years ended December 31, 2005 and 2004 was
a
reduction in deferred tax assets of $1,242,000 and $1,204,000, respectively.
At
December 31, 2005, the Company has net operating loss carryforwards for federal,
foreign and state income tax purposes of approximately $42,938,000 and tax
credit carryforwards of $306,000 which are available to offset future taxable
income through 2022. The availability of approximately $785,000 of
the net operating loss carryforwards to reduce future taxable income is limited
to approximately $71,000 per year for the remaining life of the net operating
losses, as a result of a change in ownership.
(13) Stockholders'
Equity
(a) Employee
Stock Option Plans
In
April
1996, the Company adopted the 1996 Stock Option Incentive Plan (the "1996 Stock
Option Plan"), pursuant to which stock options covering an aggregate of 800,000
shares of the Company's common stock may be granted. Options awarded
under the 1996 Stock Option Plan (i) were generally granted at prices that
equated to or were above fair market value on the date of grant; (ii) generally
became exercisable over a period of one to four years; and (iii) generally
expired ten years subsequent to award. Effective May 1, 2002, the
1996 stock option plan was terminated and the remaining 140,310 shares available
for grant under this plan, including forfeitures, were transferred to the 2002
Equity Incentive plan.
In
February 1998, the Company adopted the 1998 Stock Incentive Plan (the "1998
Stock Option Plan"), pursuant to which stock options covering an aggregate
of
1,800,000 shares (of which 900,000 shares were utilized as a direct stock grant
to Mr. Faldo) of the Company's common stock were subject to grant. In
May 2000, the Company's shareholders approved a request to increase the
aggregate number of shares in the 1998 Stock Option Plan to
2,700,000. Options awarded under the Plan (i) generally became
exercisable over a period of two to four years and (ii) generally expired five
years subsequent to award. At December 31, 2002, 540,240 options had
been granted at prices ranging from $0.75 to $5.50 of which 473,000 were made
with exercise prices equal to the fair market value of the Company's stock
at
the date of grant. The 1998 grants were granted with exercise prices
that were less than the fair market values of the Company's stock at $2.50
per
share at the date of grant. Effective May 1, 2002, the 1998 stock
option plan was terminated and the remaining 1,258,971 shares available for
grant under this plan, including forfeitures, were transferred to the 2002
Equity Incentive plan.
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2005 and 2004
(Tables
in thousands, except share and per share amounts)
(13) Stockholders'
Equity (continued)
In
May
1999, the shareholders of the Company adopted the 1999 Non-Employee Director
Plan of Adams Golf, Inc. (the "Director Plan"), which allowed for 200,000 shares
of the Company's stock to be issued to non-employee directors. At
December 31, 2001, 90,000 options had been granted to various board members
at
exercise prices ranging from $0.63 to $4.75, which equaled the fair market
value
of the Company's common stock on the date of grant. These options
vest equally on each of the first four anniversary dates from the date of grant
and expire five years from the date of grant. Effective May 1, 2002,
the Director Plan was terminated and the remaining 110,000 shares available
for
grant under this plan, including forfeitures, were transferred to the 2002
Equity Incentive plan.
In
November 1999, the Company adopted the 1999 Stock Option Plan for Outside
Consultants (the "Consultant Plan"). The Consultant Plan allowed for
the granting of up to 1,000,000 shares of the Company's common
stock. At December 31, 2001, 355,800 options had been granted with
exercise prices ranging from $0.38 to $2.27 per share at the date of
grant. The vesting period varies from two to four years with options
vesting equally on each of the anniversary dates from the date of grant and
expire five years from the date of grant. Effective May 1, 2002, the
Outside Consultants plan was terminated and the remaining 644,200 shares
available for grant under this plan, including forfeitures, were transferred
to
the 2002 Equity Incentive plan.
In
May
2002, the Company adopted the 2002 Equity Incentive Plan for employees, outside
directors and consultants. The plan allows for the granting of up to
2,500,000 shares of the Company's common stock at the inception of the plan,
plus all shares remaining available for issuance under all predecessor plans
on
the effective date of this plan, and additional shares as defined in the
plan. On May 1, 2002, the four predecessor plans described above were
terminated and a total of 2,153,481 shares available for issuance under these
predecessor plans were transferred to the Equity Incentive Plan. As
shares forfeit or expire under the four predecessor plans, those shares become
available under the 2002 Equity Incentive Plan. Since the initial
transfer on May 1, 2002, an additional 806,040 shares were transferred to the
Equity Incentive Plan. In addition, the plan automatically increases
1,000,000 shares available for granting on January 1 of each subsequent year
for
years 2003 through 2008. At December 31, 2005, 6,870,806 outstanding
options had been granted with exercise prices at $0.01 per share at the date
of
grant. The vesting periods vary from six months to four years and the
options expire ten years from the date of grant. At December 31,
2005, 1,134,632 shares remain available for grant, including
forfeitures.
The
following is a summary of stock options outstanding as of December 31,
2005:
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
Weighted
|
|
Range
of
|
|
|
|
Average
|
|
average
|
|
|
|
Average
Vested
|
|
Exercise
|
|
Options
|
|
Remaining
|
|
Exercise
price
|
|
Options
|
|
Exercise
price
|
|
Prices
|
|
Outstanding
|
|
Contractual
life
|
|
per
share
|
|
Exercisable
|
|
per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.01
- $0.30
|
|
|
6,870,806
|
|
|
8.03
years
|
|
$
|
0.01
|
|
|
4,354,786
|
|
$
|
0.01
|
|
$0.31
- $0.99
|
|
|
250,000
|
|
|
4.28
years
|
|
|
0.48
|
|
|
175,000
|
|
|
0.56
|
|
$1.00
- $1.97
|
|
|
50,000
|
|
|
8.40
years
|
|
|
1.20
|
|
|
12,500
|
|
|
1.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,170,806
|
|
|
7.91
years
|
|
$
|
0.03
|
|
|
4,542,286
|
|
$
|
0.03
|
|
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2005 and 2004
(Tables
in thousands, except share and per share amounts)
(13) Stockholders'
Equity (continued)
The
per
share weighted-average fair value of stock options granted during 2005, 2004
and
2003 was $1.38, $1.06 and $0.38, respectively, on the date of grant using the
Black Scholes option pricing model with the following weighted-average
assumptions: Risk free interest rate, 3.5%; expected life, 10 years;
expected dividend yield, 0%; and daily annualized volatility, 111.4%, 118.1%
and
120.0% in 2005, 2004 and 2003, respectively.
Operating
expenses included in the consolidated statements of operations for the years
ended December 31, 2005, 2004 and 2003 include total compensation expense
associated with stock options and warrants of $1,496,000, $793,000 and $452,000,
respectively, inclusive of compensation expense recorded under the provisions
of
SFAS No.123 of $0 for each of the years indicated.
A
summary
of stock option activity follows:
|
|
|
|
Weighted
|
|
|
|
Number
of
|
|
Average
|
|
|
|
Shares
|
|
Exercise
price
|
|
|
|
|
|
|
|
Options
outstanding at December 31, 2002
|
|
|
3,229,180
|
|
$
|
0.63
|
|
Options
granted
|
|
|
1,316,007
|
|
|
0.05
|
|
Options
forfeited (expired)
|
|
|
(135,000
|
)
|
|
0.38
|
|
Options
exercised
|
|
|
(2,000
|
)
|
|
0.38
|
|
|
|
|
|
|
|
|
|
Options
outstanding at December 31, 2003
|
|
|
4,408,187
|
|
|
0.46
|
|
Options
granted
|
|
|
2,745,413
|
|
|
0.03
|
|
Options
forfeited (expired)
|
|
|
(638,540
|
)
|
|
2.26
|
|
Options
exercised
|
|
|
(118,082
|
)
|
|
0.07
|
|
|
|
|
|
|
|
|
|
Options
outstanding at December 31, 2004
|
|
|
6,396,978
|
|
|
0.09
|
|
Options
granted
|
|
|
1,294,161
|
|
|
0.01
|
|
Options
forfeited (expired)
|
|
|
(306,333
|
)
|
|
1.32
|
|
Options
exercised
|
|
|
(214,000
|
)
|
|
0.18
|
|
|
|
|
|
|
|
|
|
Options
outstanding at December 31, 2005
|
|
|
7,170,806
|
|
$
|
0.03
|
|
(a) Common
Stock Repurchase Program
In
October 1998, the Board of Directors approved a plan whereby the Company is
authorized to repurchase from time to time on the open market up to 2,000,000
shares of its common stock. At December 31, 1998, the Company had
repurchased 657,500 shares of common stock at an average price per share of
$4.77 for a total cost of approximately $3,136,000. The repurchased
shares are held in treasury. No shares were repurchased during the
years ended December 31, 2005, 2004 or 2003.
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2005 and 2004
(Tables
in thousands, except share and per share amounts)
(13) Stockholders'
Equity (continued)
(b) Deferred
Compensation
Due
to
the passage of The American Jobs Creation Act and the subsequent IRS Section
409A rules, stock options that were issued at a strike price less than market
value at the date of grant will now be considered deferred compensation by
the
Internal Revenue Service and the individual who was granted the options will
incur adverse tax consequences, including but not limited to excise taxes,
unless the individual deems the future exercise date of the unvested stock
options at December 31, 2004 and makes this election before December 31,
2005. As a result of the compliance with the American Job Creation
Act, a summary of the elected future exercise dates is as follows:
Period
of Exercise
|
|
Total
Options to be exercised
|
|
|
|
|
|
2006
|
|
|
1,423,573
|
|
2007
|
|
|
1,194,667
|
|
2008
|
|
|
777,695
|
|
2009
|
|
|
360,000
|
|
2010
|
|
|
60,000
|
|
Beyond
2010
|
|
|
353,199
|
|
|
|
|
|
|
Total
Options
|
|
|
4,169,134
|
|
(14) Segment
Information
The
Company generates substantially all revenues from the design, marketing and
distribution of premium quality, technologically innovative golf
clubs. The Company's products are distributed in both domestic and
international markets. Net sales by customer domicile for these
markets consisted of the following for the years ended December 31, 2005, 2004
and 2003:
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
48,496
|
|
$
|
50,301
|
|
$
|
44,538
|
|
Rest
of world
|
|
|
7,928
|
|
|
6,461
|
|
|
6,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
56,424
|
|
$
|
56,762
|
|
$
|
50,879
|
|
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2005 and 2004
(Tables
in thousands, except share and per share amounts)
(14) Segment
Information (continued)
The
following table sets forth net sales by product class for the years ended
December 31, 2005, 2004 and 2003:
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Fairway
woods
|
|
$
|
14,539
|
|
$
|
21,630
|
|
$
|
17,315
|
|
Drivers
|
|
|
15,673
|
|
|
11,142
|
|
|
10,992
|
|
Irons
|
|
|
23,919
|
|
|
21,107
|
|
|
20,319
|
|
Wedges
and other
|
|
|
2,293
|
|
|
2,883
|
|
|
2,253
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
56,424
|
|
$
|
56,762
|
|
$
|
50,879
|
|
(15) Quarterly
Financial Results (unaudited)
Quarterly
financial results for the years ended December 31, 2005 and 2004 are as
follows:
|
|
2005
|
|
|
|
1st
Quarter
|
|
2nd
Quarter
|
|
3rd
Quarter
|
|
4th
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
16,798
|
|
$
|
19,792
|
|
$
|
10,180
|
|
$
|
9,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
$
|
8,853
|
|
$
|
9,029
|
|
$
|
4,153
|
|
$
|
4,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
3,490
|
|
$
|
1,182
|
|
$
|
(404
|
)
|
$
|
(1,028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
-
basic
|
|
$
|
0.15
|
|
$
|
0.05
|
|
$
|
(0.02
|
)
|
$
|
(0.04
|
)
|
-
diluted
|
|
|
0.13
|
|
|
0.04
|
|
|
(0.02
|
)
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
2nd
Quarter
|
|
|
3rd
Quarter
|
|
|
4th
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
17,798
|
|
$
|
19,695
|
|
$
|
10,950
|
|
$
|
8,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
$
|
9,736
|
|
$
|
9,793
|
|
$
|
4,951
|
|
$
|
3,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
2,513
|
|
$
|
2,061
|
|
$
|
61
|
|
$
|
(1,557
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
-
basic
|
|
$
|
0.11
|
|
$
|
0.09
|
|
$
|
0.00
|
|
$
|
(0.06
|
)
|
-
diluted
|
|
|
0.10
|
|
|
0.08
|
|
|
0.00
|
|
|
(0.06
|
)
|
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2005 and 2004
(Tables
in thousands, except share and per share amounts)
(16) Business
and Credit Concentrations
The
Company is currently dependent on five customers, which collectively comprised
approximately 26.0% of net sales for the year ended December 31,
2005. Of these, no customer individually represented greater than 5%
but less than 10% of net sales, while one customer individually represented
greater than 10% but less than 15% of net sales for the year ended December
31,
2005. For the year ended December 31, 2004, six customers
collectively comprised approximately 26.4% of net sales, of which one customer
individually represented greater than 5% of net sales and no customers
represented greater than 10% of net sales for the year ended December 31,
2004. For the year ended December 31, 2003, eight customers comprised
approximately 24.9% of net sales, of which only one customer represented greater
than 5% but less than 10% for the year ended December 31, 2003. The
loss of an individual or a combination of these customers would have a material
adverse effect on consolidated revenues, results of operations, financial
condition and competitive market position.
A
significant portion of the Company's inventory purchases are from one
supplier. That supplier represents approximately 52% and 60% of total
inventory purchases for the years ended December 31, 2005 and 2004,
respectively. This supplier and many other industry suppliers are
located in China. The Company does not anticipate any changes in the
relationships with its suppliers; however, if such change were to occur, the
Company has alternative sources available.
(17) Investigation
and Recovery Efforts Regarding Misappropriation of Funds
On
December 30, 2004, the Company reported through a Form 8-K filing that the
Company had uncovered evidence suggesting a former employee embezzled
approximately $970,000 between May, 2001 and November, 2004. The embezzled
funds
totaled approximately $286,000, $329,000, and $288,000 for the years ended
December 31, 2004, 2003 and 2002, respectively, and were expensed in the years
incurred. The Company involved its Audit Committee, its external
auditors and outside legal counsel and believes that the extent of the fraud
has
been identified. The Company's insurance carrier has processed the
claim under the Company's crime policy, and in March, 2005 the Company was
granted a full recovery, less the deductible of $5,000, totaling $965,000,
which
is included in Other Income on the Statement of Operations. The
Company received the funds on March 30, 2005 and recorded the recovery in the
financial results of the first quarter of 2005.
(18
) Subsequent Events
(a) Line
of Credit
In
February 2006, the Company signed a revolving credit agreement with Bank of
Texas to provide up to $10.0 million in short term debt The agreement
is collateralized by all assets of the Company and requires, among other things,
the Company to maintain certain financial performance levels relative to the
cash flow leverage ratio and fixed charge coverage ratio. Interest on
outstanding balances varies depending on the portion of the line that is used
and accrues at a rate from prime less one percent to prime and is due
quarterly.
(b) Employment
Agreement for Mr. Byron (Barney) H. Adams
In
February 2006, the Company entered into a new employment agreement with Mr.
Byron (Barney) H. Adams, the Company's Chairman of the Board of
Directors. The agreement term is January 1, 2006 through December 31,
2008 and Mr. Adams will receive an annual salary and other related employee
benefits. The full terms of the agreement are filed as an exhibit to
the Company's Form 10-K Annual Report filing.
(c) Suit
filed against AdamsGolf by
TaylorMade
On
March
16, 2006, the Company became aware of a lawsuit filed against it in U.S.
District Court in the Southern District of California by TaylorMade, a division
of Adidas-Salomon AG. As of March 20, 2006, the Company has not been formally
served with the lawsuit. The lawsuit alleges generally that the Company violated
three patents held by TaylorMade (one design patent and two utility patents)
in
the manufacture of recent drivers. The design patent relates to ornamental
aspects of the skirt and sole of certain TaylorMade clubs. The utility patents
relate to 1) shallow grooves in a circular pattern on the face of certain
TaylorMade metal woods and 2) a metal wood construction method attaching
a
composite crown to a club head body containing multiple ledges, a surface
veil
and a face plate. The Company is reviewing the allegations, and while it
is too
early to determine the final outcome or materiality of this matter, based
on the
information available at this time, the Company does not believe it has
infringed any valid claims of TaylorMade and intends to strongly defend its
technology and market positions. Adams Golf respects the valid
intellectual property of all its competitors and expects the same in return.
We are disappointed that TaylorMade has chosen to litigate. We have been
discussing patent issues with TaylorMade for nearly a year. We had hoped
to amicably resolve these issues and had recently provided TaylorMade with
information in support of our positions. However, rather than address that
information in private dialogue, TaylorMade has chosen to litigate. We
intend to defend our positions aggressively and will strive to continue to
manufacture innovative product that we hope is superior in the eyes of the
consumer and thereby attracts the attention of our
competitors.
ADAMS
GOLF, INC. AND SUBSIDIARIES
Valuation
and Qualifying Accounts
For
the years ended December 31, 2005, 2004 and 2003
(Table
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at
|
|
Charged
to
|
|
|
|
Balance
at
|
|
|
|
Beginning
|
|
cost
and other
|
|
|
|
end
of
|
|
Description
|
|
of
period
|
|
expenses
|
|
Deductions(1)
|
|
period
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2005
|
|
$
|
746
|
|
|
557
|
|
|
351
|
|
$
|
952
|
|
Year
ended December 31, 2004
|
|
$
|
332
|
|
|
1,510
|
|
|
1,096
|
|
$
|
746
|
|
Year
ended December 31, 2003
|
|
$
|
662
|
|
|
772
|
|
|
1,102
|
|
$
|
332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
warranty and sales returns:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2005
|
|
$
|
1,120
|
|
|
742
|
|
|
316
|
|
$
|
1,546
|
|
Year
ended December 31, 2004
|
|
$
|
1,015
|
|
|
437
|
|
|
332
|
|
$
|
1,120
|
|
Year
ended December 31, 2003
|
|
$
|
566
|
|
|
415
|
|
|
(34
|
)
|
$
|
1,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
obsolescence
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2005
|
|
$
|
474
|
|
|
--
|
|
|
259
|
|
$
|
215
|
|
Year
ended December 31, 2004
|
|
$
|
465
|
|
|
--
|
|
|
(9
|
)
|
$
|
474
|
|
Year
ended December 31, 2003
|
|
$
|
726
|
|
|
--
|
|
|
261
|
|
$
|
465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax asset/liability valuation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2005
|
|
$
|
19,269
|
|
|
(1,165
|
)
|
|
77
|
|
$
|
18,027
|
|
Year
ended December 31, 2004
|
|
$
|
20,472
|
|
|
(1,134
|
)
|
|
69
|
|
$
|
19,269
|
|
Year
ended December 31, 2003
|
|
$
|
21,219
|
|
|
(702
|
)
|
|
45
|
|
$
|
20,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents
uncollectible accounts charged against the allowance for doubtful
accounts, actual costs incurred for warranty repairs and sales returns,
and inventory items deemed obsolete charged against the inventory
obsolescence reserve.
|
|
|
|
|