UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31, 2008
OR
¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from _____ to _____
Commission
File Number: 0-24583
ADAMS
GOLF, INC.
(Exact
name of registrant as specified in its charter)
DELAWARE
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75-2320087
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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2801
E. Plano Pkwy, Plano, Texas
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75074
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(Address
of principal executive offices)
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(Zip
Code)
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(302)
427-5892
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(Registrant's
telephone number, including area code)
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Securities
registered pursuant to Section 12(b) of the Act:
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None
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Securities
registered pursuant to Section 12(g) of the Act:
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Common
Stock $.001 Par Value
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
¨
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.
¨
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 ¨ 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, a non-accelerated filer, or a smaller reporting
company. See definition of "large accelerated filer," "accelerated
filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act (Check
one)
Large
accelerated filer ¨ Accelerated
filer¨ Non-accelerated
filer x Smaller
reporting company ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
¨
Yes x No
The
aggregate market value of the Registrant's common stock held by nonaffiliates of
the Registrant at June 30, 2008 was $24,386,713 based on the closing sales price
of $5.49 per share of the Registrant's common stock on the Nasdaq Capital
Market.
The
number of outstanding shares of the Registrant's common stock, par value $.001
per share, was 6,508,304 on March 5, 2009.
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, 2009, for the Annual
Meeting of Stockholders to be held on or about May 28, 2009.
ADAMS
GOLF, INC.
FORM
10-K
TABLE
OF CONTENTS
PART
I
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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
18
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Item
3.
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Legal
Proceedings
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Page
18
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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N/A
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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
21
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Item
6.
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Selected
Financial Data
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Page
23
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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
24
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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Page
32
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Item
8.
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Financial
Statements and Supplementary Data
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Page
32
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Item
9A(T).
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Controls
and Procedures
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Page
33
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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
34
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Item
11
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Executive
Compensation
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Page
34
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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
34
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Item
13
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Certain
Relationships and Related Transactions
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Page
34
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Item
14
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Principal
Accounting Fees and Services
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Page
34
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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
35
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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, including,
without limitation, in the notes to the consolidated financial statements
included in this Annual Report and under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and elsewhere in
this Annual Report. Any and all statements contained in this Annual
Report that are not statements of historical fact may be deemed forward-looking
statements. The statements include, but are not limited to:
statements regarding the effect of unauthorized sales of our clubs and sales of
counterfeit clubs, 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," "might," "will," "would," "should," "could," "project," "pro forma,"
"predict," "potential," "strategy," "attempt," "develop," "continue,"
"future," "expect," "intend," "estimate," "anticipate," "plan,"
"seek" or "believe." Such statements reflect our 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:
—
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The
ability to maintain historical growth in revenue and
profitability;
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—
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Product
development difficulties;
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—
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Product
approval and conformity to governing body
regulations;
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—
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Patent
infringement risks;
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—
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Uncertainty
of the ability to protect intellectual property
rights;
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—
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Market
demand and acceptance of products;
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—
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The
impact of changing economic
conditions;
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—
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The
global economic uncertainty;
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—
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The
future market for our capital
stock;
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—
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The
uncertainty in the debt and equity
markets;
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—
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The
success of our marketing strategy;
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—
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The
success of our tour strategy;
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—
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Our
dependence on one supplier for a majority of our inventory
products;
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—
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Our
dependence on suppliers who are concentrated in one geographic
region;
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—
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Our
dependence on a limited number of
customers;
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—
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Business
conditions in the golf industry;
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—
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Solvency
of, and reliance on third parties, including suppliers, and freight
transporters;
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—
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The
actions of competitors, including pricing, advertising and product
development risks concerning future
technology;
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—
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Investor
audience, interest or valuation;
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—
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The
management of sales channels and
re-distribution;
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—
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The
uncertainty of the results of pending
litigation;
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—
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The
adequacy of the allowance for doubtful accounts, obsolete inventory and
warranty reserves;
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—
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The
risk associated with events that may prove unrecoverable under existing
insurance policies; and
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—
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The
impact of operational restructuring on operating results and liquidity and
one-time events and other factors detailed under Risk Factors, Item
1A.
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Although
we believe that the expectations reflected in such forward-looking statements
are reasonable, we 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, we undertake
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 us or persons acting on our behalf are expressly qualified in
their entirety by the applicable cautionary statements.
Item
1. Business
General
We
design, assemble, market and distribute premium quality, technologically
innovative golf clubs for all skill levels. Our recently launched
products include Speedline drivers and hybrid fairway woods, Idea Tech a4 and a4
OS I-woods and irons, Idea a3 and a3 OS I-woods and irons, Idea Pro Gold I-woods
and irons and Insight Tech a4 and a4 OS drivers and hybrid-fairway
woods. We also continue to develop new products for certain of our
older product lines that include RPM family drivers and fairway woods and irons,
the Ovation family of drivers, fairway woods and irons, Tom Watson signature
wedges and under the name of Women's Golf Unlimited, the Lady Fairway and Square
2 brands. We continue to sell certain older product lines including
the Insight XTD A3 & A3 OS drivers and hybrid-fairway woods, Idea a2 and a2
OS irons, Idea Tech OS I-woods and irons, Idea a2 and a2 OS, the Tight Lies
family of fairway woods, the Puglielli series of wedges, and certain
accessories.
We were
incorporated in 1987 and re-domesticated in Delaware in 1990. We
completed an internal reorganization in 1997, and we now conduct our operations
through several direct and indirect wholly-owned subsidiaries, agencies and
distributorships.
Products
Adams
Golf operates in a single segment within the golf industry (golf clubs and
accessories). Specifically, we offer multiple classes of products
within our business:
Irons
In
September 2008 we launched the Idea Tech a4 and a4OS hybrid irons sets and
hybrid irons and integrated sets. The a4 irons feature six forged
cavity back irons integrated with two graphite-shafted hybrids. The
a4 and a4 OS sets both won a Gold designation in the 2009 Golf Digest Hot
List. The Tech a4 OS irons are offered in three different eight piece
configurations—one for men, one for women, and one for seniors. All
sets have seven hybrid irons integrated into the set. The a4 OS set
of irons won a Gold designation in the 2009 Golf Digest Hot List and was also
the category leader in “Outstanding Function” in the iron
category. We also offer the Tech a4 OS Women’s 13 piece designer set
with a bag by Keri Golf. The set includes a 460cc titanium driver,
two fairway woods, an eight piece Women’s Idea a4 OS iron set with seven hybrid
irons integrated into the set, a gap wedge and a
putter.
In June
2007 we launched our Idea a3 line of hybrid iron sets and in September 2007 we
launched our Idea a3 OS line of hybrid irons and integrated sets. The
a3 irons are offered in an eight piece men’s, women's and senior's sets, with
three graphite-shafted hybrid irons integrated into each set. The a3
set of irons won a Gold designation in the 2008 Golf Digest Hot List and was
also the category leader in “Outstanding Technology” in the iron
category. The Idea a3 OS irons are offered in three different eight
piece configurations—one for men, one for women, and one for
seniors. The a3 OS set of irons won a Gold designation in the 2008
Golf Digest Hot List and was also the category leader in “Outstanding Function”
in the iron category. We also offer multiple different color versions
of the Idea a3 OS Women’s 13 piece set that includes a 460cc titanium driver,
two fairway woods, an eight piece Women’s Idea a3 OS iron set with six hybrid
irons integrated into the set, a gap wedge, a putter and a
bag.
Drivers
We
currently offer a variety of different driver models based on the shape, size
and material used in the club head. Our current driver heads are
made of titanium, alloy and/or carbon fiber, depending on the
model. The shafts of our drivers are generally
graphite. During the first quarter of 2009, we are launched the
Speedline driver line. The patent pending, aerodynamic shaping of the
Speedline drivers lessen drag and airflow turbulence, resulting in faster club
head speed and more distance. The driver was tested in wind tunnels
and through computational fluid dynamics (CFD) testing to confirm its drag and
club head speed characteristics. The Speedline driver has already
been in the winners' bags at two Champions tour events and one LPGA
event. The Speedline driver is offered in standard and draw
variations with a variety of lofts and shaft flexes. In February 2008
we introduced our new Insight XTD series of drivers. These drivers
feature our proprietary Boxer Technology and an expanded impact zone of the
face. This driver has won a silver designation in the 2008 Golf
Digest Hot List.
Fairway
Woods
During
the first quarter of 2009, we launched the Speedline hybrid fairway woods
line. The Speedline hybrid-fairway woods feature the playability of a
hybrid and the distance of a fairway wood. By utilizing Boxer
technology, the forgiving Speedline hybrid-fairway woods offer a moment of
inertia that is higher than conventional fairway woods. The Speedline
hybrid-fairway woods are offered in standard and draw variations with a variety
of lofts and shaft flexes. In February 2008 we introduced the Insight
XTD hybrid-fairway woods which won a Gold designation in the 2008 Golf Digest
Hot List and were the category leader in “Outstanding Technology” in the fairway
wood category. We offer a variety of individual hybrids
in the recently introduced Idea Tech a4, a4 OS, Idea a3, a3 OS, and Idea Pro
Gold lines. These individual hybrids are designed to be easier to hit
than conventional long irons. The Idea a4 and a4 OS hybrid irons won
a Gold designation in the 2009 Golf Digest Hot List and were the category leader
in “Innovation” in the hybrid category. The Idea a3 and a3 OS hybrid
irons won a Gold designation in the 2008 Golf Digest Hot List and were the
category leader in “Outstanding Technology and Function” in the hybrid
category. Adams Golf hybrids were the most played hybrids on the 2008
PGA, Nationwide and Champions tours.
Wedges
and Other
As a
complement to the Idea irons, we offer the Tom Watson signature wedges with a
classic profile and the Puglielli wedges. We also offer a line of
golf bags, hats and other accessories.
Percentage
of Net Sales by Product Class
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2008
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2007
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2006
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Irons
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62.5 |
% |
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66.9 |
% |
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67.9 |
% |
Fairway
Woods
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24.4 |
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19.5 |
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19.5 |
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Drivers
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12.3 |
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11.1 |
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9.6 |
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Wedges
and Other
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0.8 |
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2.5 |
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3.0 |
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Total
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100.0 |
% |
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100.0 |
% |
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100.0 |
% |
Design
and Development
Our
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 our 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.
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, our management team, in conjunction with
the design and development team, performs an evaluation of the current golf
market to determine which particular product classes we will pursue for concept
development. As a part of the market evaluation, we analyze our
current product offerings against current and anticipated competitor products
with respect to consumer preferences. To attempt to determine
consumer preferences, we utilize our 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 our 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 - We consider
patent protection for our technologies and product designs to be an important
part of our development strategy; however, we may elect not to seek patent
protection for some of our technologies or product designs. We, in
conjunction with our 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
the development steps of the design and development process.
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 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.
Our
research and development expenses were approximately $3,758,000, $3,698,000 and
$2,607,000 for the years ended December 31, 2008, 2007 and 2006,
respectively.
Patents
Our
ability to compete effectively in the golf club market may depend on our ability
to maintain the proprietary nature of our technologies and
products. As of the date hereof, we hold 26 U.S. patents relating to
certain products and proprietary technologies and we have 18 patent applications
pending. We expect that the 26 currently issued patents will expire
on various dates between 2009 and 2024. We hold patents with respect
to the design of the Insight, RPM, Redline, Ovation, and Tight Lies fairway
woods, the SC Series driver, the Idea and GT irons, including our 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 we hold or as to the
likelihood that patents will be issued from the pending patent
applications. Moreover, our patents may have limited commercial value
or may lack sufficient breadth to adequately protect the aspects of our products
to which the patents relate. The U.S. patents we hold do not
preclude competitors from developing or marketing products similar to our
products in international markets.
There can
be no assurance that competitors, many of whom have substantially greater
resources than we do and have made substantial investments in competing
products, will not apply for and obtain patents that will prevent, limit or
interfere with our ability to make and sell our products. We are
aware of numerous patents held by third parties that relate to products
competitive to us. There is no assurance that these patents would not
be used as a basis to challenge the validity of our patent rights, to limit the
scope of our patent rights, or to limit our ability to obtain additional or
broader patent rights. A successful challenge to the validity of our
patents may adversely affect our competitive position. Moreover,
there can be no assurance that such patent holders or other third parties will
not claim infringement by us 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 our 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 us to significant liabilities to third parties,
require us 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
our efforts to protect our patent and other intellectual property rights,
unauthorized parties have attempted and are expected to continue to attempt to
copy all, or certain aspects of, our products. Policing unauthorized
use of our intellectual property rights can be difficult and expensive, and
while we generally take appropriate action whenever we discover any of our
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 our means of protecting our
patent and other intellectual property rights will be adequate.
Raw
Materials, Manufacturing and Assembly
We manage
all stages of manufacturing, from sourcing to assembly, in order to maintain a
high level of product quality and consistency. We establish product
specifications, select the material used to produce the components and test the
specifications of components we receive.
As part
of our quality control program, we review the quality assurance programs at the
manufacturing facilities of our component part suppliers to monitor adherence to
design specifications. In addition to the quality assurance conducted
by the suppliers at their facilities, we also conduct random sampling and
perform testing of products received from the suppliers or produced at our
facility to ensure consistency with our design specifications. Golf clubs are
then built by our assembly personnel using the appropriate component
parts.
We have
put into place a purchasing procedure that strives to negotiate effective terms
with various vendors while continuing to ensure the quality of our
components. We are frequently re-evaluating existing vendors while
testing potential new vendors for all the various product lines we
offer. At any time, we may purchase a substantial majority of our
volume of a specific component part from a single vendor, but we continually
strive to maintain primary and secondary suppliers for each component
part. Substantially all of our iron, fairway wood, driver, i-wood,
wedge and putter component parts are manufactured in China. A
significant portion of our inventory purchases are from one supplier in China;
we purchased approximately 48% and 46% of our total inventory purchased for the
years ended December 31, 2008 and 2007, respectively, from this one Chinese
supplier.
We could,
in the future, experience shortages of components or periods of increased price
pressures, which could have a material adverse effect on our business, results
of operations, financial position and/or liquidity. To date, we have
not experienced any material interruptions in supply from any sole
supplier.
Marketing
The goals
of our marketing efforts are to build our brand identity and drive sales through
our retail distribution channels. To accomplish these goals, we
currently use golf-specific advertising, engage in promotional activities, and
capitalize on our relationships with well known professional
golfers.
Endemic Advertising - Our
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. We also
sponsor developmental professional tours and selected golf
tournaments.
Promotional Activities - We
engage in a variety of promotional activities to sell and market our
products. Such activities have included consumer sweepstakes and
promotional giveaways with certain purchases.
Relationships with Professional
Golfers – We have entered into endorsement contracts with professional
golfers on the PGA, Champions PGA, Nationwide and LPGA Tours and believe that
having a presence on these tours promotes the image of our product lines and
builds brand awareness. On the PGA Tour we have entered into
endorsement agreements with professionals such as Aaron Baddeley, Chad Campbell
, Tommy "Two Gloves" Gainey and Gary Woodland. On the Champions Tour,
we have entered into endorsement agreements with Tom Watson, Bernard Langer,
Scott Hoch, Brad Bryant, D.A. Weibring, Allen Doyle, Des Smyth, R.W. Eaks, Dana
Quigley, Jerry Pate and Bruce Vaughn. On the LPGA Tour, we have
entered into endorsement agreements with Yani Tseng, Brittney Lincicome,
Brittany Lang, Lindsay Wright and Taylor Leon. On the Nationwide
tour, we have agreements with various players. All of the above
contracts have various dates of expiration through 2011 and require the use of
certain of our products.
Markets
and Methods of Distribution
Our 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 our current
products or the introduction of new products will allow us to achieve historical
levels of sales in the future.
Sales to Retailers - We sell
a majority of our products to selected retailers. We believe our
selective retail distribution strategy helps our retailers maintain profitable
margins and maximize sales of our products. For the year ended
December 31, 2008, sales to U.S. specialty retailers, mass merchants, sporting
goods retailers, and on course accounts accounted for approximately 80% of our
total net sales, which decreased slightly from the prior year ended December 31,
2007 at 83% of total net sales. 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.
We
maintain a field sales staff that at February 22, 2009, consisted of 68
independent sales representatives, one senior vice president, two regional vice
presidents, a key accounts director and three regional sales managers, who are
in regular personal contact with our retail accounts (approximately 4,000
retailers). These sales representatives, sales managers and regional
vice presidents are supported by 13 inside sales representatives who maintain
contact with our retailers nationwide. The inside sales
representatives also serve in a customer service capacity as we believe that
superior customer service can significantly enhance our marketing
efforts.
International Sales -
International sales are made primarily in Europe, Canada, South Africa, Japan
and other Asian regions. International sales in Canada are made
through an agency relationship. International sales to other
countries throughout the world are made through a network of approximately 35
independent distributors. For the years ended December 31, 2008, 2007
and 2006, international sales accounted for approximately 19.8%, 16.9% and
17.1%, respectively, of our net sales.
Website - We maintain a
Website at www.adamsgolf.com, which allows the visitor to access certain
information about our products and heritage, locate retailers, inquire into
careers, access corporate information related to corporate governance and news
releases, and inquire about contacting us directly. We also maintain
www.ladyfairway.com
and www.squaretwo.com for
information about our Women's Golf Unlimited product lines. We do not
currently sell our products via our Websites.
Unauthorized
Distribution and Counterfeit Clubs
Despite
our efforts to limit our distribution to selected retailers, some quantities of
our 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 our products can undermine
the sales of authorized retailers, our agents and our foreign wholesale
distributors who promote and support our products and can injure our image in
the minds of our customers and consumers. We make efforts to limit or
deter unauthorized distribution of our products, but do not believe the
unauthorized distribution of our products can be totally
eliminated. We do not believe that the unauthorized distribution of
our clubs has had, or will have, a material adverse effect on our results of
operations, financial condition or competitive position, although there can be
no assurance as to future effects resulting from the unauthorized distribution
of our products.
In
addition, we are occasionally made aware of the existence of counterfeit copies
of our golf clubs, particularly in foreign markets. We take action in
these situations through local authorities and legal counsel where
practical. We do not believe that the availability of counterfeit
clubs has had or will have a material adverse effect on our results of
operations, financial condition and/or competitive position, although there can
be no assurance as to future effects resulting from the counterfeiting of our
products.
Industry
Specific Requirements
We
perform ongoing credit evaluation of our wholesale customers' financial
condition and generally provide credit without the requirement of collateral
from these customers. We measure 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, industry
communications, the portion of the customer’s balance that is past due and other
various items. We also look at the overall aging of the receivables
in total and relative to prior periods to determine the appropriate 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. We believe we have adequate reserves for
potential credit losses, but we cannot be sure how the current global economic
recession and credit crisis will affect our customers and in turn, our reserves
for potential credit losses. Due to industry sensitivity to consumer
buying trends and available disposable income, we have 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 our 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 our brand name and to assure adequate product availability
often to coincide with planned promotions or advertising
campaigns. Although a significant amount of our sales are not
affected by these terms, the extended terms do have a negative impact on our
financial position and liquidity. We expect to continue to
selectively offer extended payment terms in the future, depending upon known
industry trends and our financial condition. The loss of a
significant individual customer or a combination of significant customers would
have a material adverse effect on our consolidated revenues, results of
operations, financial condition and competitive market position.
In
addition to extended payment terms, the nature of the industry also requires
that we carry a substantial level of inventory due to the lead times associated
with purchasing components overseas coupled with the seasonality of customer
demand. Our inventory balances were approximately $33,611,000 and
$28,745,000 at December 31, 2008 and 2007, respectively. The increase
in inventory levels over these dates is primarily a result of improved on time
delivery by suppliers as well as incremental purchasing of inventory for
recently introduced product lines. A significant portion of our
inventory purchases are from suppliers who are located predominately in
China. We do not anticipate any changes in the relationships with our
suppliers; however, if such change were to occur, we believe we would have
alternative sources available, although replacing product could take six to nine
months.
Major
Customers
We are
currently dependent on four customers, which collectively comprised
approximately 24.4% of net revenues for the year ended December 31,
2008. Of these customers, two customers represented greater than 5%
but less than 10% of net revenues for the year ended December 31, 2008, while no
customer represented greater than 10% of net revenues for the year ended
December 31, 2008. For the year ended December 31, 2007, four
customers comprised approximately 25.5% of net revenues. Of these
customers, one customer individually represented greater than 5% but less then
10% of net revenues, while one customer represented greater than 10% but less
than 15% of net revenues for the year ended December 31, 2007, while no
customers were greater than 15% of net revenues. For the year ended
December 31, 2006, four customers comprised approximately 25.2% of net
revenues. Of these customers, three customers individually
represented greater than 5% but less then 10% of net revenues, while no customer
represented greater than 10% of net revenues for the year ended December 31,
2006. The loss of one of these customers or a combination of these
customers would have a material adverse effect on our 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 us 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 such as the current economic downturn. Recent decreases in
consumer spending generally could result in decreased spending on golf
equipment, which could have a material adverse effect on our business, operating
results and/or financial condition. In addition, our future results
of operations could be affected by a number of other factors, such as
unseasonable weather patterns and natural disasters such as hurricanes, which
could interrupt our sales patterns and could generate hardships for customers in
the affected area; demand for and market acceptance of our existing and future
products; new product introductions by our 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 us or result in us failing to achieve
our expectations as to future sales or operating results.
Because
most operating expenses are relatively fixed in the short term, we 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 us to invest significantly
greater resources than anticipated in research and development or sales and
marketing efforts, our business, operating results and/or financial condition
could be materially adversely affected. Accordingly, we believe that
period-to-period comparisons of our 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 our results of operations
may be below the expectations of public market analysts or
investors. In such event, the market price of our common stock could
be materially adversely affected.
Backlog
The
amount of our order backlog at any particular time is affected by a number of
factors, including seasonality and scheduling of the manufacturing and shipment
of products. At February 22, 2009, we had current backorders of $2,275,000,
or 2.5% of total net sales for the year ended December 31, 2008, and orders to
be fulfilled at a future date, not to exceed the current year, of $7,466,000, or
8.2% of total net sales for the year ended December 31,
2008. At February 22, 2008, we had current backorders of
$3,238,000, or 3.4% of total net sales for the year ended December 31, 2007, and
orders to be fulfilled at a future date, not to exceed the current year, of
$10,634,000, or 11.2% of total net sales for the year ended December 31,
2007. The current decrease in backorders is primarily due to our
being in a favorable inventory position on this year's Speedline woods product
line relative to last year's Insight XTD product line and a downturn in forward
purchasing by our customers which we associate with the general downturn in
market activity. We do not anticipate that a significant level of
orders will remain unfilled within the current fiscal year. In
addition, we believe that the amount of our backlog is not an appropriate
indicator of future sales levels.
Competition
The golf
club market is highly competitive. We compete with a number of
established golf club manufacturers, some of which have greater financial and
other resources than us. Our 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. We compete primarily on the basis of performance, brand
name recognition, quality and price. We believe that our ability to
market our products through multiple distribution channels, including on- and
off- course golf shops and other retailers, is important to the manner in which
we compete. 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. We 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 our business, operating results and/or
financial condition. There can be no assurance that we will be able
to compete successfully against current and future sources of competition or
that our business, operating results and/or financial condition will not be
adversely affected by increased competition in the markets in which we
operate.
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. More recently, several
competitors have introduced hybrid iron sets that compete directly with our
hybrid irons sets. Should our recently introduced product lines
achieve widespread market success, it is reasonable to expect that our current
and future competitors would move quickly to introduce similar products that
would directly compete with the new product lines. We 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 our image, and could have a material
adverse effect on our business, results of operations, financial position and/or
liquidity.
The
introduction of new products by us or our 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 Idea a4 and a4
OS product line of irons and the Speedline product lines were introduced and the
Idea a3 and a3 OS irons and Tech a4 and a4 OS drivers and fairway woods were
recently launched, older product lines such as the Idea a2 and a2 OS irons,
Insight XTD, RPM and Redline 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, 2008, 2007 and 2006 were
comprised as follows:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$ |
73,375,000 |
|
|
|
80.2 |
% |
|
$ |
78,623,000 |
|
|
|
83.1 |
% |
|
$ |
63,016,000 |
|
|
|
82.9 |
% |
Foreign
|
|
|
18,076,000 |
|
|
|
19.8 |
|
|
|
15,981,000 |
|
|
|
16.9 |
|
|
|
13,014,000 |
|
|
|
17.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
91,451,000 |
|
|
|
100.0 |
% |
|
$ |
94,604,000 |
|
|
|
100.0 |
% |
|
$ |
76,030,000 |
|
|
|
100.0 |
% |
Foreign
net sales are generated in various regions including, but not limited to, Canada
(a majority of our foreign sales), Europe, Japan, Australia, South Africa, and
South America. A change in our relationship with one or more of the
customers or distributors could negatively impact the volume of foreign
sales.
Our
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 (which
determine the prices at which we purchase components and the prices at which our
foreign business partners price our products). Recent foreign events,
including, without limitation, continuing U.S. military operations in Iraq and
Afghanistan, could potentially cause a delay in imports or exports due to
heightened security with customs.
Employees
At
February 22, 2009, we had 144 full-time employees including 29 engaged in
production, 21 in order fulfillment, 30 in research and development and quality
control, 14 in sales support, 24 in sales and marketing and 26 in management and
administration. Our employees are not unionized. We
believe that our relations with our employees are good.
Item
1A. Risk Factors.
The
financial statements contained in this report and the related discussions
describe and analyze our financial performance and condition for the periods
indicated. For the most part, this information is historical. Our
prior results are not necessarily indicative of our future performance or
financial condition. We, therefore, have included in this report a
discussion of certain factors which could affect our future performance or
financial condition. These factors could cause our future performance or
financial condition to differ materially from our prior performance or financial
condition or from our expectations or estimates of our future performance or
financial condition.
Global
Recession and Impact on Consumers and Retail
Our
operations and performance depend significantly on worldwide economic conditions
and their impact on levels of consumer spending, which have recently
deteriorated significantly in many countries and regions, including without
limitation the United States, and may remain depressed for the foreseeable
future. For example, some of the factors that could influence the
levels of consumer spending include but are not limited to conditions in the
residential real estate and mortgage markets, labor and healthcare costs, access
to credit, fuel and energy costs, consumer confidence and other macroeconomic
factors affecting consumer spending behavior. These and other
economic factors could have a material adverse effect on demand for our products
and on our financial condition and operating results. The global
economy is currently experiencing a significant contraction, with an almost
unprecedented lack of availability of business and consumer
credit. This current decrease and any future decrease in
economic activity in the United States or in other regions of the world in which
we do business could significantly and adversely affect our results of
operations and financial condition in a number of ways. Any decline
in economic conditions may reduce the purchases of our products, thereby
reducing our revenues and earnings. Bankruptcies or similar events by
retailers may cause us to incur bad debt expense at levels higher than
historically experienced. Credit risk includes the risk that our
retail customers will not pay their bills, which may lead to a reduction in
liquidity and an eventual increase in bad debt. Our retail customers’
credit risk is determined by numerous factors including, but not limited to,
each individual customer’s business borrowings and credit availability, the
overall level of economic activity in our various markets and the prices of
products and services provided. Several of our larger customers have
taken on additional debt recently, and that additional debt could lead to
increased pressure by our customers’ lenders to take action to enhance their
credit position, including but not limited to decreasing inventory
purchases. Additionally, increased promotional and closeout activity
by our competitors in response to the current global recession could adversely
impact the health of our customers and increase our credit risk.
Dependence
on New Product Introductions; Uncertain Consumer Acceptance
Our
ultimate success depends, in large part, on our 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 we previously introduced have not met the
level of consumer acceptance anticipated by management. No assurance
can be given that our current or future products will be met with consumer
acceptance. Failure by us to timely identify and develop innovative
new products that achieve widespread market acceptance would adversely affect
our continued success and viability. Additionally, successful
technologies, designs and product concepts are likely to be copied by
competitors. Accordingly, our operating results could fluctuate as a
result of the amount, timing, and market acceptance of new product introductions
by us or our competitors. If we are 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 our business and results of
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, we believe that it is critical for our future success that new
clubs we introduce comply with USGA standards. We invest 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 with USGA standards could reduce margins and adversely
affect the results of operations.
Possible Decreasing Amount of Golf Played by
Consumers
Our
revenues are completely driven from sales of golf related products and the
demand for these products is directly related to the number of golfers and
rounds of golf being played each year and overall popularity of
golf. As a result of the current economic recession and the resulting
decrease in consumer spending and increase in unemployment, golfers may decrease
the number of rounds they play. If golf participation or the number
of rounds of golf played decreases, sales of our products may be adversely
affected.
Increasing Competition
The golf
club market is highly competitive. We compete with a number of
established golf club manufacturers, some of which have greater financial and
other resources than we have. Our 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. We compete primarily on the basis of performance, brand
name recognition, quality and price. We believe that our ability to
market our products through multiple distribution channels, including on- and
off- course golf shops and other retailers, is important to the manner in which
we compete. 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. We 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 our business, operating results and/or
financial condition. There can be no assurance that we will be able
to compete successfully against current and future sources of competition or
that our business, operating results and/or financial condition will not be
adversely affected by increased competition in the markets in which we
operate.
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. More recently, several
competitors have introduced hybrid iron sets that compete directly with our
hybrid irons sets. Should our recently introduced product lines
achieve widespread market success, it is reasonable to expect that our current
and future competitors would move quickly to introduce similar products that
would directly compete with the new product lines. We 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 our image, and could have a material
adverse effect on our business, results of operations, financial position and/or
liquidity.
The
introduction of new products by us or our 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 Idea a4 and a4
OS product line of irons and the Speedline product lines were introduced and the
Idea a3 and a3 OS irons and Tech a4 and a4 OS drivers and fairway woods were
recently launched, older product lines such as the Idea a2 and a2 OS irons,
Insight XTD, RPM and Redline fairway woods and drivers experienced reductions in
price at both wholesale and retail levels.
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 our products without infringing on our
copyrights, patents, trademarks or trade dress. Many of our
competitors have obtained patent, trademark, copyright or other protection of
intellectual property rights pertaining to golf clubs. No assurance
can be given that we will not be adversely affected by the assertion by
competitors that our 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 us to enter into royalty or licensing agreements, any or
all of which could have a material adverse effect on our business, operating
results and financial condition. We have had to defend against
infringement claims in the past and will likely be subject to such claims in the
future. Such claims could result in alteration or withdrawal of our
existing products and delayed introduction of new products.
Our
attempts to maintain the secrecy of our confidential business information,
include but are not limited to, 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 our confidential
business information will be adequately protected in all
instances. The unauthorized use of our confidential business
information could adversely affect us.
Uncertainty
Regarding Continuation of Profitability
While we
generated net income in each of the five fiscal years from 2003 to 2007, we were
not profitable for the year ending December 31, 2008 nor consistently prior to
the fiscal year of 2003, and we experienced significant losses prior to the year
ended December 31, 2003. There can be no assurance that we 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 to
operate profitably could jeopardize our 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 and Unprecedented Levels of Market
Volatility
No
assurances can be given that we will have sufficient cash resources beyond
twelve months or to fund our operations over a length of time. Historically, we
have funded capital expenditures for operations through cash flow from
operations. To the extent our cash requirements or assumptions
change, we may have to raise additional capital and/or further curtail our
operating expenses, including further operational restructurings. If
we need to raise additional funds through the issuance of equity securities, the
percentage ownership of the stockholders of our Company would be reduced,
stockholders could experience additional dilution, and/or such equity securities
could have rights, preferences or privileges senior to our Company's common
stock.
The
capital and credit markets have been experiencing extreme volatility and
disruption for more than 12 months. In recent months, the volatility
and disruption have reached unprecedented levels. In some cases, the
markets have exerted downward pressure on stock prices and credit capacity for
certain issuers. Further, many lenders and institutional investors
have reduced, and in some cases, ceased to provide funding to
borrowers. Therefore, given the current market price for our
Company's common stock and the state of the capital markets generally, we do not
expect that we would be able to raise funds through the issuance of our capital
stock in the foreseeable future, and we may also find it difficult to secure
additional debt financing beyond our current credit facility. There
can be no assurance that financing will be available if needed or if available
on terms favorable to us, 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 $15.0 million of borrowings available under our revolving
credit facility, assuming that such revolving credit facility continues to be
available and that we continue to meet the covenants and conditions precedent to
borrowing, which cannot be assured.
Dependence
on Key Personnel and Endorsements
Our
success depends to an extent upon the performance of our management team, which
includes our Chief Executive Officer and President, Oliver G. (Chip) Brewer,
III, who participates in all aspects of our operations, including product
development and sales efforts. The loss or unavailability of Mr.
Brewer could adversely affect our business and prospects. In
addition, Mr. Tim Reed joined the management team in 2000 in the capacity of
Vice President of Research and Development. If Mr. Reed is unable to
continue to lead his team to develop innovative products, it could also
adversely affect our business. With the exception of our Company's
Chairman of the Board of Directors, B.H. (Barney) Adams, Mr. Brewer, Mr. Reed
and our Chief Financial Officer, Eric Logan, none of our Company's officers and
employees are bound by employment agreements, and the relations of such officers
and employees are, therefore, at will. We 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
us 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 our business, operating results and/or financial condition.
On the
PGA Tour we have entered into endorsement agreements with professionals such as
Aaron Baddeley, Chad Campbell , Tommy "Two Gloves" Gainey and Gary
Woodland. On the Champions Tour, we have entered into endorsement
agreements with Tom Watson, Bernard Langer, Scott Hoch, Brad Bryant, D.A.
Weibring, Allen Doyle, Des Smyth, R.W. Eaks, Dana Quigley, Jerry Pate and Bruce
Vaughn. On the LPGA Tour, we have entered into endorsement agreements
with Yani Tseng, Brittney Lincicome, Brittany Lang, Lindsay Wright and Taylor
Leon. On the Nationwide tour, we have agreements with various
players. All of the above contracts have various dates of expiration
through 2011 and require the use of certain of our products. The loss
of one or more of these endorsement arrangements could adversely affect our
marketing and sales efforts and, accordingly, our business, operating results
and/or financial condition. From time to time, we negotiate with and
sign 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
exclusively our golf clubs at all times during the terms of the respective
agreements, including, in certain circumstances, at times when we are required
to make payments to them. The failure of certain individuals to use
our products on one or more occasions has resulted in negative publicity
involving us. No assurance can be given that our business would not
be adversely affected in a material way by negative publicity or by the failure
of our known professional endorsers to carry and use our products.
Effectiveness
of our Marketing Strategy
We have
designed our 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, 2008, 2007
and 2006, we spent approximately $6.6 million, $5.7 million and $5.6 million,
respectively, on the above listed marketing efforts. There can be no
assurances that our marketing strategy will be effective or that increases in
the levels of investments in advertising spending will result in material
fluctuations in the sales of our products.
Source
of Supply
A
significant portion of our inventory purchases are from one supplier in China;
we purchased approximately 48% and 46% of our total inventory purchased for the
years ended December 31, 2008 and 2007, respectively, from this one Chinese
supplier. Substantially all of our fairway wood, driver, iron,
i-wood, wedge and putter component parts are manufactured in China and
Taiwan. We could, in the future, experience shortages of components
for reasons including but not limited to the supplier’s production capacity or
materials shortages, or periods of increased price pressures, or bankruptcy or
similar material adverse effect on its operations and business, which could have
a material adverse effect on our business, results of operations, financial
position and/or liquidity.
Sufficient
Inventory Levels
In
addition to extended payment terms to our customers, the nature of the industry
also requires that we carry a substantial level of inventory due to the lead
times associated with purchasing components overseas coupled with the
seasonality of customer demand. Our inventory balances were
approximately $33,611,000 and $28,745,000 at December 31, 2008 and December 31,
2007, respectively. If we were unable to maintain sufficient
inventory to meet customer demand on a timely basis or provide have sufficient
capacity to assemble the products at our facility, the effect could result in
cancellation of customer orders, loss of customers, and damage to our
reputation. In addition, carrying a substantial level of inventory
has an adverse effect on our financial position and liquidity.
Accounts
Receivable Customer Terms
Due to
industry sensitivity to consumer buying trends and available disposable income,
we have 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 our 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 our financial
position and liquidity. In addition, the reserves we establish may
not be adequate in the event that the customer's financial strength weakens
significantly, including but not limited to, as a result of the current global
recession and credit crisis. In addition, given the current global
economic crisis, the customer base may shrink and thus could adversely affect
our net sales along with increased credit risk that could adversely affect our
financial condition.
Seasonality
and Quarterly Fluctuations
Golf
generally is regarded as a warm weather sport, and net sales of golf equipment
have been historically strongest for us 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 such as the current economic downturn. Recent decreases in
consumer spending generally could result in decreased spending on golf
equipment, which could have a material adverse effect on our business, operating
results and/or financial condition. In addition, our future results
of operations could be affected by a number of other factors, such as
unseasonable weather patterns and natural disasters such as hurricanes, which
could interrupt the sales patterns and could generate hardships for customers in
the effected area, demand for and market acceptance of our existing and future
products; new product introductions by our 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 us or result in us failing to achieve
our expectations as to future sales or operating results.
Because
most operating expenses are relatively fixed in the short term, we 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 us to invest significantly
greater resources than anticipated in research and development or sales and
marketing efforts, our business, operating results and/or financial condition
could be materially adversely affected. Accordingly, we believe that
period-to-period comparisons of our 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 our results of operations
may be below the expectations of public market analysts or
investors. In such event, the market price of our common stock could
be materially adversely affected.
Rapid
Growth, Increased Demand for Product
If we are
successful in obtaining rapid market growth for various golf clubs, we may be
required to deliver large volumes of quality products to customers on a timely
basis which could potentially require us to increase the production facility,
increase purchasing of raw materials or finished goods, increase the size of the
workforce, expand our 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 our
operations and financial position.
Adequate Product Warranty
Reserves
We
provide a limited one year product warranty on all of our golf
clubs. Significant increases in the incidence of such claims may
adversely affect our sales and our reputation with consumers. We
establish reserves for warranty claims. There can be no assurance
that this reserve will be sufficient if we were to experience an unexpectedly
high incidence of problems with our products.
Unauthorized
Distribution and Counterfeit Clubs
Some
quantities of our 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 our products can
undermine the sales of authorized retailers and foreign wholesale distributors
who promote and support our products and can injure our image in the minds of
our customers and consumers. We do not believe the unauthorized
distribution of our products can be totally eliminated. There can be
no assurances that unauthorized distribution of our clubs will not have a
material adverse effect on our results of operations, financial condition and/or
competitive position.
In
addition, we are occasionally made aware of the existence of counterfeit copies
of our golf clubs, particularly in foreign markets. We take 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 our results of operations,
financial condition and/or competitive position.
Certain
Risks of Conducting Business Abroad
Our
Company imports a significant portion of our component parts, including heads,
shafts, headcovers, and grips from companies in China and Taiwan. In
addition, we sell our products to certain distributors located outside the
United States. Our international business is currently centered in
Canada, Europe, South Africa and Asia, and our management is currently focusing
our international efforts through agency and distributor
relationships. International sales accounted for approximately 20%
of our net sales for the year ended December 31, 2008 and approximately 17% of
our net sales for the year ended December 31, 2007. Our 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 we purchase
components or sell our 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. In addition, by conducting
business abroad, we could be adversely affected by the change in foreign
exchange rates amongst the countries and the result could adversely affect our
financial condition.
Reliance
on Third Parties for Delivery
We use
United Parcel Services (UPS) for substantially all outbound shipments of our
products in the United States. We use other freight lines and larger air
carriers for large domestic shipments and international shipments. In
addition, many of the components we use to build our products are shipped via
air and ocean carriers from overseas. If there were a significant
interruption in services from one or more of these providers, we might be unable
to engage alternative suppliers to deliver our products or timely provide the
necessary components for production in a cost efficient manner. This
interruption could have a material adverse effect on our financial
results.
Risks
of Adequate Insurance Coverage
We
procure various insurance policies to cover different aspects of our business,
including but not limited to, property, commercial liability, workers
compensation, business interruption, foreign liabilities, auto, crime,
employment practices and directors' and officers' Insurance. Although
we obtain various insurance policies, unforeseen situations or events may arise
that could limit the amount or types of insurance coverage.
Currently,
we have potential exposure in our directors' and officers' insurance policy
covering the time period of the class action lawsuit described in Item 3, below,
where our third layer of coverage for the $5 million layer between $15 million
and $20 million is currently being denied by Zurich, as they claim that we did
not notify them timely in the class action lawsuit. On August 7,
2007, TIG Insurance Co ("TIG"), which provided insurance coverage totaling $7.5
million for the layer of exposure between $7.5 million and $15 million, informed
us that it was reserving its rights to deny coverage, based on, among other
things, certain exclusions in the policy and recent legal authority holding that
damages and settlements arising out of Section 11 claims are uninsured
losses. Additionally, our directors' and officers' insurance policy
covering the time period of the class action lawsuit has an endorsement that
limits the defense costs covered under the policy for the underwriters of the
IPO to $1 million, and at this time the underwriters' attorneys have exhausted
this $1 million sublimit. As of March 5, 2009, the total amount of
outstanding underwriter defense costs was just less than $1.4
million. To the extent that our Company is liable for any material
amounts denied under or in excess of our directors' and officers' insurance, or
any other insurance policy for that matter, it could have a material effect on
our business and our results of operations.
Risks
Associated with the Price of our Common Stock
The SEC
has adopted regulations which generally define a "penny stock" to be an equity
security that has a market price of less than $5.00 per share or an exercise
price of less than $5.00 per share, subject to specific
exemptions. The market price of our common stock currently is less
than $5.00 per share and therefore is designated as a "penny stock" according to
SEC rules. Such designation requires any broker or dealer selling
such securities to disclose certain information concerning the transaction,
obtain a written agreement from the purchaser and determine that the purchaser
is reasonably suitable to purchase the securities. These rules may
restrict the ability of brokers or dealers to sell our common stock and may
affect the ability of investors to sell their shares.
Anti-Takeover
Provisions
Our
Certificate of Incorporation and Amended and Restated Bylaws contain, among
other things, provisions establishing a classified Board of Directors,
authorizing shares of preferred stock with respect to which our Board of
Directors have 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,
we are subject to the anti-takeover provisions of Section 203 of the Delaware
General Corporation Law. 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 our Company that
some or a majority of our stockholders might consider to be in their 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, 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. We have not issued and currently have no
plans to issue shares of preferred stock.
Item
2. Properties.
Our
administrative offices and assembly facilities currently occupy approximately
65,000 square feet of space in Plano, Texas. This facility is leased
by us pursuant to a lease agreement expiring in 2013 and may be extended for an
additional five years. We maintain the right to terminate the lease
if we move to a larger facility owned by the current
lessor. Additionally, we have a second location for our warehouse
facilities occupying another 53,000 square feet of warehouse space in Plano,
Texas, conveniently located to our existing administration and assembly
facility. This facility is leased by us pursuant to a lease agreement
expiring in 2010. We believe that our current facilities encompassing
both locations 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 us,
certain of our current and former officers and directors, and the three
underwriters of our 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 our IPO. In particular, the complaints
alleged that our prospectus, which became effective July 9, 1998, was materially
false and misleading. The operative complaint was filed on January
24, 2006, and it alleges that the prospectus failed to disclose that
unauthorized distribution of our products (gray market sales) threatened our
long-term profits and that we engaged in questionable sales practices (including
double shipping and unlimited rights of return), which threatened post-IPO
financial results. Discovery closed on August 11, 2006. On
November 21, 2006, all summary-judgment briefing was completed. On
December 13, 2006, we learned that the Delaware District Court judge whom the
case was set before was elevated to the United States Court of Appeals for the
Third Circuit. On December 15, 2006, we were notified that our case
was assigned to the vacant judicial position and that all proceedings had been
postponed until a new judge was confirmed. On February 7, 2008, we
were notified that our case was reassigned to Chief Judge Gregory M.
Sleet. The parties participated in a mediation on April 8, 2008, but
no resolution has been reached at this time. The Court heard oral
argument on Defendant’s summary-judgment motions on February 20,
2009. A hearing on the parties’ Daubert motions has been set
for May 29, 2009. The Court set a trial date of October 13,
2009.
The
underwriters for the IPO, including Lehman Brothers Holdings Inc. ("LBHI"), are
also defendants in the securities class action. On September 15,
2008, counsel for LBHI advised the District Court that earlier that day
defendant LBHI filed a voluntary petition under Chapter 11 of the Bankruptcy
Code in the Bankruptcy Court for the Southern District of New
York. Counsel for LBHI also advised the District Court that the
automatic-stay provision of Section 362 of the Bankruptcy Code was in effect,
enjoining all judicial proceedings against LBHI that were initiated before the
Chapter 11 case began. On September 16, 2008, the District Court
administratively closed the case, ordering it to be reopened for further
proceedings upon motion by any party to the case no later than thirty days
following a disposition of the bankruptcy case. On September 30,
2008, plaintiffs filed a motion in the District Court to lift the order for
administrative closure and lift the stay as to all defendants except
LBHI. The court granted plaintiffs’ motion on November 17,
2008.
We
maintain directors' and officers' ("D&O") and corporate liability insurance
to cover certain risks associated with these securities claims filed against us
or our directors and officers. During the period covering the class
action lawsuit, we maintained insurance from multiple carriers, each insuring a
different layer of exposure, up to a total of $50 million. In
addition, we have met the financial deductible of our directors' and officers'
insurance policy for the period covering the time the class action lawsuit was
filed. On March 30, 2006, Zurich American Insurance Company, which
provided insurance coverage totaling $5 million for the layer of exposure
between $15 million and $20 million, notified us that it was denying coverage
due to the fact that it was allegedly not timely notified of the class action
lawsuit. On October 11, 2007, we filed a suit against our former insurance
broker, Thilman & Filipini, LLC ("T&F"), asserting various causes of
action arising out of the T&F's alleged failure to notify Zurich of the
class action lawsuit. On March 18, 2008, the suit against T&F was
amended to also name as Defendants certain alleged successor entities to
T&F. All of the Defendants moved to dismiss our lawsuit on the
basis that our suit was premature in that we had not been damaged by the alleged
conduct of the Defendants because we had not paid any sums in satisfaction of a
judgment or settlement of the class action securities
litigation. Those motions were denied pursuant to a Memorandum
Opinion and Order dated September 26, 2008. T&F's successor
entities also moved to dismiss the claims brought against them on the grounds
that, as purchasers of solely T&F's assets, they could not be held liable
for the T&F debts or liabilities. The Court struck our complaint
solely against the successor entity Defendants on the grounds that we had not
alleged sufficient facts triggering an exception to the general rule that the
purchaser of an entity's assets is not liable for the entity's liabilities and
ordered us to replead our claims against the successor entity
Defendants. We must replead our claims before April 7,
2009. We and T&F have engaged in some preliminary written
discovery efforts, but substantial discovery remains to be done. No
trial date has been set.
Depending
on the outcome of this proceeding, based on the previously disclosed agreement
with Chubb & Son ("Chubb"), a division of Federal Insurance Company
("Federal"),which is described below, we could be required to pay Zurich's $5
million limit of liability in cash before the layers of insurance coverage
excess to the Zurich layer attach. We previously disclosed that Chubb
had notified us that coverage under the Federal policy, which provided insurance
coverage totaling $10 million for the layer of exposure between $20 million and
$30 million, and the Executive Risk Indemnity Inc. ("ERII") policy, which
provided insurance coverage totaling $10 million for the layer of exposure
between $40 million and $50 million, would attach only if the underlying limits
are exhausted by payment from the underlying insurance carriers. On
June 18, 2007, Chubb notified us that Federal and ERII will not require that
Zurich pay the full amount of its limit of liability before the Federal and ERII
policies attach, and it confirmed that Chubb will accept payment in cash by our
Company of Zurich's limit of liability to satisfy this requirement, so long as
such payment is for covered loss. All of the excess insurance
carriers (other than Zurich, which has denied coverage) have reserved their
rights to deny coverage on various grounds. At this point in the
legal proceedings, we cannot predict with any certainty the outcome of the
matter, per the guidance in SFAS 5, and thus can not reasonably estimate future
liability on the conclusion of the events, if any.
As
mentioned above, the underwriters for the IPO are also defendants in the
securities class action. The underwriting agreement that we entered
into with the underwriters in connection with the IPO contains an
indemnification clause, providing for indemnification against any loss,
including defense costs, arising out of the IPO. After the first
lawsuit was filed, the underwriters requested indemnification under the
agreement. Our D&O insurance policy included an endorsement
providing $1 million to cover indemnification of the
underwriters. Our D&O insurer has notified the underwriters of
the exhaustion of the $1 million sublimit. We believe that we have no
current obligation to pay the underwriters' defense costs. We believe
that the applicable case law provides that the earliest possible time that an
obligation to indemnify might exist is after a court has decided conclusively
that the underwriters are without fault under the federal securities
laws. The litigation is not at that stage yet. As of March
5, 2009, the total amount of outstanding underwriter defense costs was just less
than $1.4 million. At this time, the underwriters are not able to
predict with certainty the amount of defense costs they expect to incur going
forward, but it is likely they will incur additional costs before this matter is
concluded. At this time, we cannot predict with any certainty the
outcome of this indemnification issue, per the guidance in SFAS 5, and thus
cannot reasonably estimate future liability on the conclusion of the events, if
any.
Beginning
April 2008, we received communications from the Estate of Anthony Antonious that
our products infringed an Anthony Antonious patent concerning an aerodynamic
metal wood golf club head. On May 28, 2008, we filed a declaratory
judgment lawsuit against the Anthony Antonious Trust in the United States
District Court for the Southern District of the State of Ohio, alleging
non-infringement of the Antonious patent. On June 30, 2008, the Estate of
Anthony Antonious filed a lawsuit against us in the United States District Court
in the State of New Jersey alleging infringement of the patent. On
September 2, 2008 we filed a Request for Ex Parte Reexamination with the United
States Patent and Trademark Office (USPTO) requesting that the USPTO reexamine
the Antonious patent at issue. The USPTO issued an Order granting our
Request for Ex Parte Reexamination on November 7, 2008 after finding that a
substantial new question of patentability affecting the claims had been raised
.. As a result, both the Ohio lawsuit and the New Jersey lawsuit have
been stayed pending the outcome of the USPTO’s reexamination
proceeding. At this point in the legal proceedings, we cannot predict
the outcome of the matter with any certainty, per the guidance in SFAS 5, and
thus cannot reasonably estimate future liability on the conclusion of the
events, if any.
From time
to time, we are 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.
PART
II
Item
5. Market for Registrant's Common Equity and Related
Stockholder Matters.
Our
common stock is currently listed and traded on the Nasdaq Capital Market under
the symbol "ADGF" The prices in the table below represent the
quarterly high and low sales price for our common stock as reported by the
Nasdaq and, for the periods prior to February 19, 2008, the OTC Bulletin
Board. All price quotations represent prices between dealers, without
retail mark-ups, mark-downs or commissions and may not represent actual
transactions.
|
|
High
|
|
|
Low
|
|
2008
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
10.20 |
|
|
$ |
8.08 |
|
Second
Quarter
|
|
|
8.80 |
|
|
|
5.20 |
|
Third
Quarter
|
|
|
7.42 |
|
|
|
4.40 |
|
Fourth
Quarter
|
|
|
5.08 |
|
|
|
2.65 |
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
9.00 |
|
|
$ |
7.00 |
|
Second
Quarter
|
|
|
9.64 |
|
|
|
7.44 |
|
Third
Quarter
|
|
|
8.80 |
|
|
|
7.64 |
|
Fourth
Quarter
|
|
|
9.16 |
|
|
|
7.60 |
|
On
February 19, 2008 we completed a one-for-four reverse stock split resulting in
our total shares issued and outstanding and outstanding stock options decreasing
in a one-to-four ratio. Our symbol then changed from "ADGO.OB" to
"ADGF". The above table represents values restated as a result of the
reverse stock split. On March 5, 2009, the last reported sale price
of the common stock on Nasdaq was $2.90 per share. At March 5, 2009,
we had approximately 890 stockholders based on the number of holders of record
and an estimate of the number of individual participants represented by security
position listings.
Given the
current market price for our common stock and the state of the capital markets
generally, we do not expect that we would be able to raise funds through the
issuance of our capital stock. No dividends have been declared or
paid relating to our common stock, nor do we anticipate declaring dividends in
the foreseeable future. The current credit facility does not limit
the declaring or payment of dividends unless we are in default of the
facility.
Equity Plan Compensation
Information:
The
following table sets forth information at December 31, 2008, regarding
compensation plans under which our 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
|
|
|
892,982 |
|
|
$ |
0.19 |
|
|
|
891,160 |
|
Equity
compensation plans not approved by security holders
|
|
|
— |
|
|
|
n/a |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
892,982 |
|
|
$ |
0.19 |
|
|
|
891,160 |
|
Performance
Graph
The
following performance graph compares the performance of our common stock to the
Standard and Poor’s Small Cap 600 index and an industry peer group, selected in
good faith, for the period from December 31, 2003, through December 31,
2008. The graph assumes that the value of the investment in our
common stock and each index was $100 at December 31, 2003 and that all dividends
were reinvested. We have paid no dividends. Performance data is
provided for the last trading day closest to year end for each 2003, 2004, 2005,
2006, 2007, and 2008.
COMPARISON
OF CUMULATIVE TOTAL RETURNS
Assumes
Initial Investment of $100
December
2008
Company
|
|
December
2003
|
|
|
December
2004
|
|
|
December
2005
|
|
|
December
2006
|
|
|
December
2007
|
|
|
December
2008
|
|
Adams
Golf, Inc.
|
|
|
100.00 |
|
|
|
197.15 |
|
|
|
169.00 |
|
|
|
277.43 |
|
|
|
316.90 |
|
|
|
105.63 |
|
S&P
Small Cap 600
|
|
|
100.00 |
|
|
|
122.65 |
|
|
|
132.07 |
|
|
|
152.03 |
|
|
|
151.59 |
|
|
|
104.47 |
|
Peer
Group A (1)
|
|
|
100.00 |
|
|
|
91.86 |
|
|
|
98.64 |
|
|
|
99.38 |
|
|
|
122.65 |
|
|
|
64.12 |
|
(1)
|
Peer
Group consists of Callaway Golf Company, Aldila, Inc. and Cutter &
Buck Inc.
|
Purchase of Equity
Securities:
The
following table furnishes information regarding our purchase of shares of our
common stock during the fourth quarter ended December 31, 2008.
|
|
Total
Number of
Shares
Repurchased
(1)
|
|
|
Average
Price
Paid
per
Share
|
|
|
Total
Number of
shares
Purchased as a
Part
of Publically
Announced
Plans
|
|
|
Maximum
Number
of
Shares that May
yet
be Purchased
Under
the Plan
|
|
October
1 to October 31, 2008
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
November
1 to November 30, 2008
|
|
|
6,794 |
|
|
$ |
3.51 |
|
|
|
— |
|
|
|
— |
|
December
1 to December 31, 2008
|
|
|
9,500 |
|
|
$ |
2.90 |
|
|
|
— |
|
|
|
— |
|
Total
|
|
|
16,294 |
|
|
$ |
3.15 |
|
|
|
— |
|
|
|
— |
|
(1) These
shares were purchased pursuant to our 2002 Equity Incentive Plan.
Item
6. Selected Financial Data.
The
selected financial data presented below is derived from our consolidated
financial statements for the years ended December 31, 2008, 2007, 2006, 2005 and
2004, 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,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(in
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
91,451 |
|
|
$ |
94,604 |
|
|
$ |
76,030 |
|
|
$ |
56,424 |
|
|
$ |
56,762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income / (loss)
|
|
|
(1,422 |
) |
|
|
4,106 |
|
|
|
3,440 |
|
|
|
2,045 |
|
|
|
3,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income / (loss)
|
|
$ |
(1,459 |
) |
|
$ |
9,401 |
|
|
$ |
9,000 |
|
|
$ |
3,240 |
|
|
$ |
3,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
/ (loss) per common share (1) : |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.23 |
) |
|
$ |
1.54 |
|
|
$ |
1.54 |
|
|
$ |
0.57 |
|
|
$ |
0.55 |
|
Diluted
|
|
$ |
(0.23 |
) |
|
$ |
1.32 |
|
|
$ |
1.24 |
|
|
$ |
0.47 |
|
|
$ |
0.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
6,413 |
|
|
|
6,095 |
|
|
|
5,830 |
|
|
|
5,684 |
|
|
|
5,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
7,368 |
|
|
|
7,134 |
|
|
|
7,232 |
|
|
|
6,951 |
|
|
|
6,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
67,056 |
|
|
$ |
71,186 |
|
|
$ |
55,603 |
|
|
$ |
44,102 |
|
|
$ |
38,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
debt (including current maturities)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
$ |
50,314 |
|
|
$ |
53,299 |
|
|
$ |
41,869 |
|
|
$ |
32,127 |
|
|
$ |
26,438 |
|
_______________________________
(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
We
design, assemble, market and distribute premium quality, technologically
innovative golf clubs for all skill levels. Our 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 our current
products or the introduction of new products will allow us to achieve historical
levels of sales in the future. Our net sales are typically driven by
product lifecycles. Several factors affect a product's life,
including but not limited to, customer acceptance, competition and
technology. As a result, each product family's life cycles generally
range from one to three years.
Our
business, financial condition, cash flows and results of operations are subject
to seasonality resulting from factors such as weather and spending
patterns. Due to the seasonality of our business, one quarter's
financial results are not indicative of the full fiscal year's expected
financial results. A majority of our revenue is earned in the first
and second quarters of the year and revenues generally decline in the third and
fourth quarters.
Costs of
our clubs consist primarily of component parts, including the head, shaft and
grip. To a lesser extent, our cost of goods sold includes labor,
occupancy and shipping costs in connection with the inspection, testing,
assembly and distribution of our products and certain promotional and
advertising costs given in the form of additional merchandise as consideration
to customers.
Key
Performance Indicators
Our
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
|
—
|
Market
share by product at retail
|
—
|
Inventory
share by product at retail
|
Tracking
these sales performance indicators on a regular basis allows us to understand
whether we are on target to achieve our 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
|
—
|
Inbound
and outbound freight cost by mode (dollars and dollars per
unit)
|
—
|
Inbound
freight utilization by mode (ocean vs
air)
|
—
|
Vendor
purchase order cycle time
|
Tracking
these operational performance indicators on a regular basis allows us to
understand whether we are on target to achieve our 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 us to
understand our 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,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Net
sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost
of goods sold
|
|
|
59.0 |
|
|
|
57.7 |
|
|
|
55.6 |
|
Gross
profit
|
|
|
41.0 |
|
|
|
42.3 |
|
|
|
44.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development expenses
|
|
|
4.1 |
|
|
|
3.9 |
|
|
|
3.4 |
|
Selling
and marketing expenses
|
|
|
28.6 |
|
|
|
25.1 |
|
|
|
26.0 |
|
General
and administrative expenses
|
|
|
9.8 |
|
|
|
8.9 |
|
|
|
10.4 |
|
Total
operating expenses
|
|
|
42.5 |
|
|
|
37.9 |
|
|
|
39.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income / (loss)
|
|
|
(1.5 |
) |
|
|
4.4 |
|
|
|
4.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income, net
|
|
|
0.0 |
|
|
|
0.3 |
|
|
|
0.2 |
|
Other
income / (loss), net
|
|
|
(0.1 |
) |
|
|
0.2 |
|
|
|
— |
|
Income
before income taxes
|
|
|
(1.6 |
) |
|
|
4.9 |
|
|
|
4.8 |
|
Income
tax expense (benefit)
|
|
|
0.0 |
|
|
|
(5.0 |
) |
|
|
(7.0 |
) |
Net
income / (loss)
|
|
|
(1.6 |
)% |
|
|
9.9 |
% |
|
|
11.8 |
% |
Year
Ended December 31, 2008 Compared to Year Ended December 31, 2007
Total net
sales decreased to $91.4 million for the year ended December 31, 2008 from $94.6
million for the comparable period of 2007. Our sales were primarily
driven by the product launches of the Insight XTD drivers and hybrid-fairway
woods, the Idea a3 and a3 OS irons and the recent launch of the Tech a4 and a4
OS irons, hybrids, drivers and hybrid-fairway woods. Several factors
affect a product's life, including but not limited to, customer acceptance,
competition and technology. As a result, each product family's life
cycles generally range from one to three years.
Net sales
of irons decreased to $57.1 million, or 62.5% of total net sales for the year
ended December 31, 2008 from $63.3 million, or 66.9% of total net sales, for the
comparable period of 2007. The decrease was primarily generated from
the decline in year over year net sales of the a2 and a2 OS irons and a decline
in the overall market activity. Current period iron net sales
primarily resulted from the Idea a3 and a3 OS irons coupled with a smaller
portion of sales resulting from the recently launched Tech a4 and a4 OS irons,
Tech OS irons and integrated iron sets while the prior period net sales
primarily resulted from the Idea a2 and a2 OS irons, Tech OS irons and
integrated iron sets.
Net sales
of drivers increased to $11.3 million, or 12.3% of total net sales, for the year
ended December 31, 2008 from $10.5 million, or 11.1% of total net sales, for the
comparable period of 2007. A large portion of the driver net sales
for the year ended December 31, 2008 were generated by the Insight XTD driver,
which was introduced in the first quarter of 2008 and the Tech a4 driver which
was launched in the third quarter of 2008, while prior period net sales were
driven by the Insight driver, which was launched in the first quarter of
2007.
Net sales
of fairway woods increased to $22.3 million, or 24.4% of total net sales, for
the year ended December 31, 2008, from $18.4 million, or 19.5% of total net
sales, for the comparable period of 2007. Net sales for the year
ended December 31, 2008 were generated from Insight Tech a4 and a4 OS hybrids
and hybrid-fairway woods, Insight XTD hybrid-fairway woods and Idea a3 and a3
OS, Idea a2 and a2 OS, Idea Pro Gold and Tech OS I-woods. Net sales
for the year ended December 31, 2007 were generated from Insight fairway woods
and Idea a2 and a2 OS, Idea Pro and Tech OS I-woods.
We were
dependent on four customers, which collectively comprised approximately 24% of
net sales for the year ended December 31, 2008. Of these, two
customers individually represented greater than 5% but less than 10% of net
sales and no customer represented greater than 10% of net
sales. Should these customers or our other customers fail to meet
their obligations to us, including, but not limited to, due to the effect of the
global economic recession and credit crisis on such customers, our results of
operations and cash flows would be adversely impacted.
Net sales
of our products outside the United States increased to $18.1 million, or 19.8%
of total net sales, from $16.0 million, or 16.9% of total net sales, for the
year ended December 31, 2008 and 2007, respectively. Net sales
resulting from countries outside the United States and Canada increased to 6.5%
of total net sales for the year ended December 31, 2008 from 6.0% for the
comparable period of 2007.
Cost of
goods sold increased to $54.0 million, or 59.0% of total net sales, for the year
ended December 31, 2008 from $54.6 million, or 57.7% of total net sales, for the
comparable period of 2007. The increase as a percentage of total net
sales is primarily due to changes in the product mix and increases in some
component pricing as well as increases in inbound raw material freight costs
driven by increased fuel costs over the majority of 2008.
Selling
and marketing expenses increased to $26.2 million for the year ended December
31, 2008 from $23.8 million for the comparable period in 2007. The
increase is primarily the result of an increase in marketing expenses of $0.8
million, tour player expenses of $1.8 million and a reduction in compensation
expense of $0.5 million.
General
and administrative expenses increased to $8.9 million for the year ended
December 31, 2008 from $8.4 million for the comparable period in 2007 primarily
related to increases in public company expenses and bad debt expenses of $1.2
million offset by a reduction in compensation expense of $1.3
million.
Research
and development expenses, primarily consisting of costs associated with
development of new products, increased to $3.8 million for the year ended
December 31, 2008 from $3.7 million for the comparable period in
2007.
Other
income decreased to $(0.1) million for the year ended December 31, 2008 from
$0.3 million for the comparable period in 2007, when we were awarded a breakup
fee from our participation in the bidding process for a potential acquisition of
a competitive golf club manufacturer.
Income
tax benefit decreased to $0 for the year ended December 31, 2008 from an income
tax benefit of $4.7 million for the comparable period in 2007. The
income tax benefit in 2007 was attributable to our management's assessment of
the realizability of our existing deferred tax asset and the recording of a
deferred tax benefit during 2007.
Due to
the changes in economic conditions of the industry as a whole, we are continuing
to look deeper into areas where expenditures can be potentially reduced to
levels relative to the revenues generated during these economic times in order
to better sustain our growth and financial position.
Our
inventory balances were approximately $33.6 million and $28.7 million at
December 31, 2008 and December 31, 2007, respectively. The increase
in inventory levels is primarily due to purchases received prior to the end of
the year related to the upcoming product launch for first quarter of 2009 along
with slower than anticipated sales resulting from a sluggish economy during the
year ended December 31, 2008.
Our net
accounts receivable balances were approximately $14.7 million and $18.0 million
at December 31, 2008 and December 31, 2007, respectively. The
decrease is primarily due to timing of product launches as well as slower than
anticipated sales resulting from the sluggish economy during the year ended
December 31, 2008.
Our
accounts payable balances were approximately $9.5 million and $9.2 million at
December 31, 2008 and December 31, 2007, respectively. The increase
in accounts payable is primarily associated with purchases of inventory made at
the end of the year related to the upcoming product launch for the first quarter
of 2009.
Our
accrued liabilities balances were approximately $7.3 million and $8.7 million at
December 31, 2008 and December 31, 2007, respectively. The decrease
in accrued liabilities is primarily associated with the seasonality of the
business of our advertising accruals, sales reserve accruals and deferred
revenues along with decreased compensation expenses.
Year
Ended December 31, 2007 Compared to Year Ended December 31, 2006
Total net
sales increased to $94.6 million for the year ended December 31, 2007 from $76.0
million for the comparable period of 2006 primarily resulting from the
introduction of our new product lines, including the Idea a3 and a3 OS irons and
Iwoods and Tech OS irons and Iwoods. Several factors affect a
product's life, including but not limited to, customer acceptance, competition
and technology. As a result, each product family's life cycle
generally ranges from one to three years.
Net sales
of irons increased to $63.3 million, or 66.9% of total net sales for the year
ended December 31, 2007 from $51.6 million, or 67.9% of total net sales, for the
comparable period of 2006. The increase was primarily generated from
the net sales of the recently launched Idea a3 and a3 OS irons coupled with the
continued sales of the Idea a2 and a2 OS irons and integrated iron sets while
the prior period net sales primarily resulted from the Idea a2 and a2 OS irons
and integrated iron sets.
Net sales
of drivers increased to $10.5 million, or 11.1% of total net sales, for the year
ended December 31, 2007 from $7.3 million, or 9.6% of total net sales, for the
comparable period of 2006. A large portion of the driver net sales
for the year ended December 31, 2007 were generated by the Insight driver, which
was introduced in the first quarter of 2007, while prior period net sales were
driven by the Redline RPM product line.
Net sales
of fairway woods increased to $18.4 million, or 19.5% of total net sales, for
the year ended December 31, 2007, from $14.8 million, or 19.5% of total net
sales, for the comparable period of 2006. Net sales for the year
ended December 31, 2007 were generated from Insight fairway woods and Idea a3
and a3 OS, Idea a2 and a2 OS, Idea Pro and Tech OS I-woods. Net sales
for the same period of 2006 were generated from RPM LP fairway woods, Idea a2
and a2 OS I-woods and Original Tight Lies fairway woods.
We were
dependent on four customers, which collectively comprised approximately 25.5% of
net sales for the year ended December 31, 2007. Of these, one
customer individually represented greater than 5% but less than 10% of net sales
and one customer represented greater than 10% but less than 15% of net
sales. No customer represented greater than 15% of net
sales. Should these customers or our other customers fail to meet
their obligations to us, our results of operations and cash flows would be
adversely impacted.
Net sales
of our products outside the U.S. increased to $16.0 million, or 16.9% of total
net sales, from $13.0 million, or 17.1% of total net sales, for the year ended
December 31, 2007 and 2006, respectively. Net sales resulting from
countries outside the U.S. and Canada decreased to 6.0% of total net sales for
the year ended December 31, 2007 from 6.7% for the comparable period of
2006.
Cost of
goods sold increased to $54.6 million, or 57.7% of total net sales, for the year
ended December 31, 2007 from $42.3 million, or 55.6% of total net sales, for the
comparable period of 2006. The increase as a percentage of total net
sales is primarily due to changes in the product mix, increases in some
component pricing, and increasing inbound freight costs related to fuel price
increases.
Selling
and marketing expenses increased to $23.8 million for the year ended December
31, 2007 from $19.8 million for the comparable period in 2006. The
increase is primarily the result of additional commission expense of $1.8
million as a result of the increased net sales during the period and an increase
in marketing and tour player expenses of $1.2 million and an increase in other
compensation expenses of $0.6 million.
General
and administrative expenses increased to $8.4 million for the year ended
December 31, 2007 from $7.9 million for the comparable period in 2006 primarily
related to increases in compensation expenses.
Research
and development expenses, primarily consisting of costs associated with
development of new products, increased to $3.7 million for the year ended
December 31, 2007 from $2.6 million for the comparable period in 2006 primarily
related to compensation expenses resulting from increased staffing
efforts.
Other
income increased to $0.3 million for the year ended December 31, 2007 from $0.0
million for the comparable period in 2006 as a result of a breakup fee awarded
to our company resulting from our participation in the bidding process for a
potential acquisition of a competitive golf club manufacturer.
Income
tax benefit decreased to $4.7 million for the year ended December 31, 2007 from
an income tax benefit of $5.3 million for the comparable period in
2006. The income tax benefit in each year is attributable to our
management's assessment of the realizability of our existing deferred tax asset
and the recording of a deferred tax benefit of $4.8 million and $5.4 million
during 2007 and 2006, respectively. This amount represents what we
believe to be an estimate of future usage of our carry back. The
remaining asset has a valuation allowance applied to it.
Our
inventory balances were approximately $28.7 million and $24.7 million at
December 31, 2007 and December 31, 2006, respectively. The increase
in inventory levels is primarily a result of the increased purchasing related to
the recently launched Idea a3 and a3 OS irons, which were launched in the second
quarter of 2007 and third quarter of 2007, respectively.
Our net
accounts receivable balances were approximately $18.0 million and $13.6 million
at December 31, 2007 and December 31, 2006, respectively. The
increase is primarily due to increasing annual revenue and the strengthening of
our existing product lines.
Our
accounts payable balances were approximately $9.2 million and $6.3 million at
December 31, 2007 and December 31, 2006, respectively. The increase
in accounts payable is primarily associated with increases in inventory
purchases associated with the purchasing cycle for recently launched
products.
Our
accrued liabilities balances were approximately $8.7 million and $7.5 million at
December 31, 2007 and December 31, 2006, respectively. The increase
in accrued liabilities is primarily associated with increases in our inventory
in transit and deferred revenue program.
Disclosure
of Contractual Obligations
We are
obligated to make future payments under various contracts, including equipment
capital leases and operating leases. We do not have any long-term
debt or purchase commitment obligations. The following table
summarized our contractual obligations at December 31, 2008, 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
|
|
|
32,824 |
|
|
|
14,616 |
|
|
|
18,208 |
|
|
|
— |
|
|
|
— |
|
Operating
Lease Obligations
|
|
|
2,556,165 |
|
|
|
640,722 |
|
|
|
1,198,958 |
|
|
|
716,485 |
|
|
|
— |
|
Purchase
Obligations
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other
Long-term Liabilities Reflected on the Registrant's Balance sheet under
GAAP
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
2,588,989 |
|
|
$ |
655,338 |
|
|
$ |
1,217,166 |
|
|
$ |
716,485 |
|
|
|
— |
|
Liquidity
and Capital Resources
Our
principal sources of liquidity are cash reserves, cash flows provided by
operations and our credit facilities in effect from time to
time. Cash inflows from operations are generally driven by
collections of accounts receivables from customers, which generally increase in
our second quarter and continue into the third quarter and then begin to
decrease during the fourth quarter. As necessary we could use our
credit facility to supplement our cash inflows from operations as well as effect
other investing activities such as potential future
acquisitions. Cash outflows are primarily tied to procurement of
inventory which typically begins to build during the fourth quarter and
continues heavily into the first and second quarters in order to meet demands
during the height of the golf season.
Cash and
cash equivalents decreased to $6.0 million at December 31, 2008 compared to
$11.3 million at December 31, 2007. During the period, accrued
expenses and accounts payable decreased $1.2 million partially coupled with an
increase in inventory of $4.9 million offset by a decrease in accounts
receivable of $1.7 million.
In
November 2007, we signed a revolving credit agreement with Wachovia Bank,
National Association to provide up to $15.0 million in short term debt with the
option to increase to $30 million. The agreement is collateralized by
all of our assets and requires us, among other things, to maintain certain
financial performance levels relative to the fixed charge coverage ratio, but
only when we have an outstanding balance on the facility. Interest on
outstanding balances accrues at a rate of Libor plus 1.75% and is payable
monthly. As of March 5, 2009, we had $2.0 million of outstanding
borrowings on our credit facility and are in compliance with terms of our
agreement. In October 2008, Wells Fargo announced plans to
acquire Wachovia Bank, NA. and closed the acquisition at the end of
2008. The transaction will result in the merger of Wachovia Bank into
Wells Fargo with Wells Fargo being the surviving institution. Wells Fargo,
as successor to Wachovia Bank, would become the lender under our existing
line of credit and be subject to all of the terms and
conditions thereof.
Working
capital decreased at December 31, 2008 to $38.5 million compared to $42.3
million at December 31, 2007. Approximately 27% of our current
assets were comprised of accounts receivable at December 31,
2008. Due to industry sensitivity to consumer buying trends and
available disposable income, we have in the past extended payment terms for
specific purchase transactions. Issuance of these terms (i.e. greater
than 30 days or specific dating) is dependent on our 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 our brand name and to assure adequate product availability and
to coincide with planned promotions or advertising
campaigns. Although a significant amount of our sales are not
affected by these terms, the extended terms do have a negative impact on our
financial position and liquidity. Given the current global economic
recession and credit crisis, we believe that more customers may request payment
terms and we expect to continue to selectively offer extended payment terms in
the future, depending upon known industry trends and our financial
condition. We generate cash flow from operations primarily by
collecting outstanding trade receivables. Because we have limited
cash reserves, if collections of a significant portion of trade receivables are
unexpectedly delayed, we would have a limited amount of funds available to
further expand production until such time as we could collect a significant
portion of the trade receivables. If our cash needs in the near term
exceed the available cash and cash equivalents on hand and the available
borrowing under our credit facility, we would be required to obtain additional
financing, which may not be available at all or in the full amounts necessary,
or limit expenditures to the extent of available cash on hand, all of which
could adversely effect our current growth plans and result in a material adverse
effect on our results of operations, financial condition and/or
liquidity.
Our
anticipated sources of liquidity over the next twelve months are expected to be
cash reserves, projected cash flows from operations, and available borrowings
under our credit facility. We anticipate that operating cash flows,
current cash reserves, and available borrowings will also fund capital
expenditure programs. These capital expenditure programs can be
suspended or delayed at any time with minimal disruption to our operations if
cash is needed in other areas of our operations. In addition, cash
flows from operations and cash reserves will be used to support ongoing
purchases of component parts for our current and future product
lines. The expected operating cash flow, current cash reserves and
borrowings available under our credit facility are expected to allow us to meet
working capital requirements during periods of low cash flows resulting from the
seasonality of the industry.
If
adequate funds are not available or not available on acceptable terms, we 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 our
business, operating results, financial condition and/or liquidity.
Critical
Accounting Policies and Estimates
Our
discussion and analysis of our results of operations, financial condition and
liquidity are based upon our 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
us 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. We base our estimates on historical experience and
on various other assumptions that we believe to be reasonable under the
circumstances. Actual results may materially differ from these
estimates under different assumptions or conditions. On an on-going
basis, we review our estimates to ensure that the estimates appropriately
reflect changes in our 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
We
recognize 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. If
collectability decreases significantly, including but not limited to, due to the
current global economic recession, our revenue would be adversely
affected. 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. We also record 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, our sales would be adversely affected. We recognize
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 and all revenue recognition criteria have been met, we record
revenue.
Allowance for
Doubtful Accounts
We
maintain an allowance for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. An estimate
of uncollectable amounts is made by management using an evaluation methodology
involving both overall and specific identification. We evaluate each
individual customer and measure 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, we also look at the aging
of the receivables in total and aging relative to prior periods to determine the
appropriate 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, we provide for estimated uncollectable amounts through
a charge to earnings and a credit to the valuation
allowance. Balances which remain outstanding after we have used
reasonable collection efforts are written off through a charge to the valuation
allowance and a credit to accounts receivable. We generally do not
require collateral. Accounting for an allowance for doubtful accounts
could be significantly affected as a result of a deviation in our assessment of
any one or more customers' financial strength. While only two
customers represent greater than 5% but less than 10% of net sales and no
customer represents greater than 10% of net sales for the year ended December
31, 2008, if a combination of customers were to become financially impaired, our
financial results could be severely affected.
Product
Warranty
Our golf
equipment is sold under warranty against defects in material and workmanship for
a period of one year. An allowance for estimated future warranty
costs is recorded in the period products are sold. In estimating our
future warranty obligations, we consider various relevant factors, including our
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 our products were to fail
(i.e. broken shaft, broken head, etc) to a significant degree above and beyond
our historical product failure rates, which determine the product warranty
accruals.
Income
Taxes
We
account for income taxes in accordance with FAS No. 109, "Accounting for Income
Taxes" ("FAS 109") as clarified by FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes ("FIN 48"). 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 expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date. In assessing the realizability of deferred income tax assets,
we consider whether it is "more likely than not," according to the criteria of
FAS 109, 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. FIN 48 requires
that we recognize the financial statement benefit of a tax position only after
determining that the relevant tax authority would more likely than not sustain
the position following an audit. For tax positions meeting the more
likely than not threshold, the amount recognized in the financial statements is
the largest benefit that has a greater than 50% likelihood of being realized
upon ultimate settlement with the relevant tax authority. Due to our
historical operating results, 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. However, due to our recent earnings history, we have
concluded that it is more likely than not that a portion of the deferred tax
asset will be realized. We have recognized a valuation allowance
equal to a portion of the deferred income tax asset for which realization is
uncertain.
Impairment
of Long-Lived Assets
We have
reviewed long-lived assets and certain identifiable intangibles according to the
guidance in SFAS ("Statement of Financial Accounting Standards") 144 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, 2008 and 2007, there were
no impairments of long-lived assets.
New
Accounting Pronouncements
Any new
accounting pronouncements have been listed in Note 1 (f) of the Consolidated
Financial Statements which is incorporated herein by this
reference.
Item
7A. Quantitative and Qualitative Disclosures About Market
Risk
Interest
Rates
In the
normal course of doing business, we are exposed to market risk through changes
in interest rates with respect to our cash equivalents. Cash and cash
equivalents at December 31, 2008, were $5,960,000. The average
interest rate earned for the year end December 31, 2008, was
3.79%.
Additionally,
we are exposed to interest rate risk from our Line of Credit (see Item 7 -
Management Discussion and Analysis, Liquidity and Capital Resources).
Outstanding borrowings accrue interest, at the Libor rate plus 1.75%. Our
company would then be exposed to changes in the Libor rate. As of
March 5, 2009, we had $2.0 million of outstanding borrowings on our credit
facility.
Foreign Currency
Fluctuations
In the
normal course of business, we are exposed to foreign currency exchange rate
risks that could impact our results of operations. We are exposed to
foreign currency exchange rate risk inherent primarily in our sales commitments,
anticipated sales and assets and liabilities denominated in currencies other
than the U.S. dollar. We transact business in several currencies
worldwide, however all foreign transactions are transacted in U.S. dollar except
for Canadian activities. The functional currency of our Canadian
operations is Canadian dollars. The accompanying consolidated
financial statements have been expressed in United States dollars, our reporting
currency. Reporting assets and liabilities of out 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.
dollars.
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(T). 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, without
limitation, 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.
We have
endeavored to design our Disclosure Controls and Procedures and Internal
Controls Over Financial Reporting to provide reasonable assurances that our
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 our control system will detect every error or
instance of fraudulent conduct, including an error or instance of fraudulent
conduct, which could have a material adverse impact on our operations or
results.
Evaluation
of Internal Controls over Financial Reporting and Disclosure Controls and
Procedure
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting for the Company. Under the
supervision of our Chief Executive Officer and Chief Financial Officer, our
management conducted an assessment of our internal controls over financial
reporting as of December 31, 2008, based on the framework and criteria
established in Internal
Control – Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO").
Based on
the results of the assessment, management concluded that as of December 31,
2008, our internal controls over financial reporting are effective.
There were no material changes to our Internal Controls Over
Financial Reporting during the year ended December 31, 2008, that have
materially affected or are reasonably likely to materially affect our Internal
Controls Over Financial Reporting.
Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, have evaluated the effectiveness of our Disclosure Controls
and Procedures as of the end of the period covered by this report and have
concluded that our Disclosure Controls and Procedures as of the end of the
period covered by this report were designed to ensure that material information
relating to us is made known to the Chief Executive Officer and Chief Financial
Officer by others within our Company, and were effective.
In
addition, it is our policy to not participate in off-balance sheet transactions,
including but not limited to special purpose entities.
This
Annual Report does not include an attestation report of the Company's registered
public accounting firm regarding Internal Controls Over Financial
Reporting. Management's report was not subject to attestation by the
Company's independent registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the Company to
provide only management's report in this annual report.
PART
III
Item
10. Directors, Executive Officers and Corporate
Governance.
The
information required by this Item is incorporated by reference to our Proxy
Statement for the Annual Meeting of the Stockholders to be held on or about May
28, 2009, to be distributed to the stockholders on or before April 30, 2009
("the 2008 Proxy Statement") under the respective captions, "Elections of
Directors," "Stock Ownership - Section 16(a) Beneficial Ownership Reporting
Compliance" and "Management-Executive Officers."
We have
adopted a code of ethics that applies to our chief executive officer, chief
financial officer, and to all of our other officers, directors, employees and
agents. A description of how to receive a copy of our code of ethics is posted
on our website, which is located at www.adamsgolf.com. We
intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding
an amendment to, or waiver from, a provision of this code of ethics by posting
such information on our website. Information contained in our
website, whether currently posted or posted in the future, is not part of this
document or the documents incorporated by reference in this
document.
Item
11. Executive Compensation.
The
information required by this Item is incorporated by reference to our 2009 Proxy
Statement under the caption "Management-Compensation of Executive
Officers."
Item
12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.
The
information required by this Item is incorporated by reference to our 2009 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 our 2009 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 our 2009 Proxy
Statement under "Committees of Board of Directors; Meetings."
PART
IV
Item
15. Exhibits, Financial Statement Schedule.
(a) The
following documents are filed as a part of this report following the signature
page:
(1) Consolidated
Financial Statements
Item
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Page
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Index
to Consolidated Financial Statements and Related Financial Statement
Schedule
|
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F-1
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Report
of Independent Registered Public Accounting Firm
|
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|
F-2 - F-3
|
|
Consolidated
Balance Sheets as of December 31, 2008 and 2007
|
|
|
F-4
|
|
Consolidated
Statements of Operations for the Years ended December 31, 2008, 2007 and
2006
|
|
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F-5
|
|
Consolidated
Statements of Stockholders' Equity for the Years ended December 31, 2008,
2007 and 2006
|
|
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F-6 - F-7
|
|
Consolidated
Statements of Cash Flows for the Years ended December 31, 2008, 2007 and
2006
|
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F-8
|
|
Notes
to Consolidated Financial Statements
|
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F-9 - F-26
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|
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|
(2) Financial
Statement Schedule
|
|
|
|
|
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|
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|
Our
financial statement schedule for the years ended December 31, 2008, 2007
and 2006 is filed as part of this Annual Report and should be read in
conjunction with our Consolidated Financial
Statements.
|
|
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Schedule
II - Valuation and Qualifying Accounts
|
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S-1
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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
|
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Description
|
|
Location
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Exhibit
3.1
|
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Amended
and Restated Certificate of Incorporation
|
|
Incorporated
by reference to Form S-1 File No. 333-51715 (Exhibit
3.1)
|
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Exhibit
3.2
|
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Certificate
of Amendment to the Restated Certificate of Incorporation filed on
February 14, 2008
|
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Incorporated
by reference to 2007 Form 10-K (Exhibit 3.2)
|
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Exhibit
3.3
|
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Amended
and Restated By-laws
|
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Incorporated
by reference to Form S-1 File No. 333-51715 (Exhibit
3.2)
|
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|
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Exhibit
4.1
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1998
Stock Incentive Plan of the Company dated February 26, 1998, as
amended
|
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Incorporated
by reference to Form S-8 File No. 333-68129 (Exhibit
4.1)
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Exhibit
4.2
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1996
Stock Option Plan dated April 10, 1998
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|
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)
|
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|
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Exhibit
4.4
|
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1999
Non-Employee Director Plan of Adams Golf, Inc.
|
|
Incorporated
by reference to 1999 Form 10-K (Exhibit 4.4)
|
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Exhibit
4.5
|
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1999
Stock Option Plan for Outside Consultants of Adams Golf,
Inc.
|
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Incorporated
by reference to Form S-8 File No. 333-37320 (Exhibit
4.5)
|
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Exhibit
4.6
|
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2002
Stock Incentive Plan for Adams Golf, Inc.
|
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Incorporated
by reference to Annex A of the 2002 Proxy Statement (Annex
A)
|
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Exhibit
4.7
|
|
Form
of Option Agreement under the 2002 Stock Option Plan of Adams Golf,
Inc.
|
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Incorporated
by reference to Form S-8 File No. 333-112622 (Exhibit
4.7)
|
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Exhibit
10.1
|
|
Amendment
dated September 1, 2003 to the Commercial Lease Agreement dated April 6,
1998, between Jackson-Shaw Technology Center II and the
Company
|
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Incorporated
by reference to 2003 Form 10-K (Exhibit 10.12)
|
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|
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Exhibit
10.2*
|
|
Golf
Consultant Agreement - Thomas S. Watson
|
|
Incorporated
by reference to 2004 Form 10-K (Exhibit 10.17)
|
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|
|
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Exhibit
10.3*
|
|
Asset
Purchase Agreement of Women’s Golf Unlimited
|
|
Incorporated
by reference to 2006 Form 10-K (Exhibit 10.11)
|
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|
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Exhibit
10.4
|
|
Change
of Control - Eric Logan
|
|
Incorporated
by reference to the Quarterly Report on From 10-Q for the quarter ended
June 30, 2007 (Exhibit 10.8)
|
|
|
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Exhibit
10.5
|
|
Revolving
line of Credit between Adams Golf, Inc and Wachovia Bank, National
Association
|
|
Incorporated
by reference to the Report on From 8-K dated November 13, 2007 (Exhibit
10.1)
|
|
|
|
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|
Exhibit
10.6*
|
|
Employment
Agreement - Oliver G. (Chip) Brewer
|
|
Incorporated
by reference to 2007 Form 10-K (Exhibit 10.8)
|
|
|
|
|
|
Exhibit
10.7
|
|
Commercial
Lease Agreement dated December 15, 2007, between MDN/JSC -II Limited and
the Company
|
|
Incorporated
by reference to 2007 Form 10-K (Exhibit 10.9)
|
|
|
|
|
|
Exhibit
10.8
|
|
Commercial
Lease Agreement dated April 10, 2008, between CLP Properties Texas, L.P.
and the Company
|
|
Incorporated
by reference to the Report on From 8-K dated April 15, 2008 (Exhibit
10.1)
|
|
|
|
|
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Exhibit
10.9
|
|
Employment
Agreement - Byron (Barney) H. Adams
|
|
Incorporated
by reference to the Report on From 8-K dated January 12, 2009 (Exhibit
10.1)
|
|
|
|
|
|
Exhibit
21.1
|
|
Subsidiaries
of the Registrant
|
|
Included
in this filing
|
|
|
|
|
|
Exhibit
23.1
|
|
Consent
of KBA Group 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 Schedule
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
11, 2009
|
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
11, 2009
|
By:
|
/S/ B.H. (BARNEY) ADAMS
|
|
B.H.
(Barney) Adams, Chairman of the Board
|
|
|
|
Date: March
11, 2009
|
By:
|
/S/ OLIVER G.
BREWER III
|
|
Oliver
G. (Chip) Brewer III
|
|
Chief
Executive Officer, President and Director
|
|
|
|
Date: March
11, 2009
|
By:
|
/S/ ERIC T. LOGAN
|
|
Eric
Logan
|
|
Chief
Financial Officer
|
|
(Principal
Financial Officer)
|
|
|
|
Date: March
11, 2009
|
By:
|
/S/ PAMELA J. HIGH
|
|
Pamela
J. High
|
|
Controller
|
|
(Principal
Accounting Officer)
|
|
|
|
Date: March
11, 2009
|
By:
|
/S/ MARK R. MULVOY
|
|
Mark
R. Mulvoy
|
|
Director
|
|
|
|
Date: March
11, 2009
|
By:
|
/S/ ROBERT D. ROGERS
|
|
Robert
D. Rogers
|
|
Director
|
|
|
|
Date: March
11, 2009
|
By:
|
/S/ RUSSELL L. FLEISCHER
|
|
Russell
L. Fleischer
|
|
Director
|
|
|
|
Date: March
11, 2009
|
By:
|
/S/ JOSEPH R. GREGORY
|
|
Joseph
R. Gregory
|
|
Director
|
|
|
|
Date: March
11, 2009
|
By:
|
/S/ JOHN M. GREGORY
|
|
John
M. Gregory
|
|
Director
|
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
AND
RELATED FINANCIAL STATEMENT SCHEDULE
|
|
Page
|
Consolidated
Financial Statements
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
F-2
|
|
|
|
Consolidated
Balance Sheets as of December 31, 2008 and 2007
|
|
F-3
|
|
|
|
Consolidated
Statements of Operations for the Years ended December 31, 2008, 2007 and
2006
|
|
F-4
|
|
|
|
Consolidated
Statements of Stockholders' Equity for the Years ended December 31,
2008, 2007 and 2006
|
|
F-5
- F-6
|
|
|
|
Consolidated
Statements of Cash Flows for the Years ended December 31, 2008, 2007
and 2006
|
|
F-7
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
F-8
- F-26
|
|
|
|
Financial
Statement Schedule |
|
|
|
|
|
Our
financial statement schedule for the years ended December 31, 2008, 2007
and 2006 is filed as part of this Report and should be read in conjunction
with our Consolidated Financial Statements. |
|
|
|
Schedule
II – Valuation and Qualifying Accounts
|
|
|
All other
schedules 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
To the
Board of Directors and Stockholders of Adams Golf, Inc.
We have
audited the accompanying consolidated balance sheets of Adams Golf, Inc. and
subsidiaries (the “Company”) as of December 31, 2008 and 2007 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31,
2008. In connection with our audits of the consolidated financial
statements, we have also audited the financial statement schedule appearing
under Item 15 for each of the years in the three-year period ended December 31,
2008. 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, 2008 and 2007 and the consolidated results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2008 in conformity with accounting principles
generally accepted in the United States of America. Also, in our
opinion, the related financial statement schedule for each of the years in the
three-year period ended December 31, 2008, 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.
As
discussed in Note 1 to the consolidated financial statements, effective January
1, 2006 the Company adopted Statement of Financial Accounting Standards No.
123R, "Share-Based Payment".
/S/
KBA GROUP LLP
|
Dallas,
Texas
|
March
11, 2009
|
ADAMS
GOLF, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except share and per share amounts)
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
ASSETS
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
5,960 |
|
|
$ |
11,265 |
|
Trade
receivables, net
|
|
|
14,743 |
|
|
|
18,009 |
|
Inventories,
net
|
|
|
33,611 |
|
|
|
28,745 |
|
Prepaid
expenses
|
|
|
908 |
|
|
|
743 |
|
Other
current assets
|
|
|
29 |
|
|
|
1,432 |
|
Total
current assets
|
|
|
55,251 |
|
|
|
60,194 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
1,210 |
|
|
|
1,046 |
|
Deferred
tax asset – non current
|
|
|
10,228 |
|
|
|
8,877 |
|
Other
assets
|
|
|
367 |
|
|
|
1,069 |
|
|
|
$ |
67,056 |
|
|
$ |
71,186 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
9,471 |
|
|
$ |
9,205 |
|
Accrued
expenses and other current liabilities
|
|
|
7,253 |
|
|
|
8,682 |
|
Total
current liabilities
|
|
|
16,724 |
|
|
|
17,887 |
|
Other
liabilities
|
|
|
18 |
|
|
|
-- |
|
Total
liabilities
|
|
|
16,742 |
|
|
|
17,887 |
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value; authorized 1,250,000 shares; none
issued
|
|
|
-- |
|
|
|
-- |
|
Common
stock, $.001 par value; authorized 12,500,000 shares; 6,909,866 and
6,547,847 shares issued and 6,498,929 and 6,221,724 shares outstanding at
December 31, 2008 and 2007, respectively
|
|
|
7 |
|
|
|
7 |
|
Additional
paid-in capital
|
|
|
92,701 |
|
|
|
91,737 |
|
Accumulated
other comprehensive income
|
|
|
565 |
|
|
|
2,555 |
|
Accumulated
deficit
|
|
|
(38,205 |
) |
|
|
(36,746 |
) |
Treasury
stock, 410,937 common shares at December 31, 2008 and 326,123 common
shares at December 31, 2007, at cost
|
|
|
(4,754 |
) |
|
|
(4,254 |
) |
Total
stockholders' equity
|
|
|
50,314 |
|
|
|
53,299 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
$ |
67,056 |
|
|
$ |
71,186 |
|
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,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
91,451 |
|
|
$ |
94,604 |
|
|
$ |
76,030 |
|
Cost
of goods sold
|
|
|
53,981 |
|
|
|
54,608 |
|
|
|
42,304 |
|
Gross
profit
|
|
|
37,470 |
|
|
|
39,996 |
|
|
|
33,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development expenses
|
|
|
3,758 |
|
|
|
3,698 |
|
|
|
2,607 |
|
Selling
and marketing expenses
|
|
|
26,205 |
|
|
|
23,772 |
|
|
|
19,800 |
|
General
and administrative expenses
|
|
|
8,929 |
|
|
|
8,420 |
|
|
|
7,879 |
|
Total
operating expenses
|
|
|
38,892 |
|
|
|
35,890 |
|
|
|
30,286 |
|
Operating
income/(loss)
|
|
|
(1,422 |
) |
|
|
4,106 |
|
|
|
3,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
122 |
|
|
|
286 |
|
|
|
201 |
|
Interest
expense
|
|
|
(100 |
) |
|
|
(1 |
) |
|
|
(3 |
) |
Other
|
|
|
(63 |
) |
|
|
264 |
|
|
|
35 |
|
Income/(loss)
before income taxes
|
|
|
(1,463 |
) |
|
|
4,655 |
|
|
|
3,673 |
|
Income
tax expense(benefit)
|
|
|
(4 |
) |
|
|
(4,746 |
) |
|
|
(5,327 |
) |
Net
income/(loss)
|
|
$ |
(1,459 |
) |
|
$ |
9,401 |
|
|
$ |
9,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss)
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.23 |
) |
|
$ |
1.54 |
|
|
$ |
1.54 |
|
Diluted
|
|
$ |
(0.23 |
) |
|
$ |
1.32 |
|
|
$ |
1.24 |
|
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, 2008, 2007 and 2006
|
|
Shares
of
|
|
|
|
|
|
Additional
|
|
|
Accumulated
Other
|
|
|
|
|
|
Cost
of
|
|
|
Total
|
|
|
|
Common
|
|
|
Common
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
Stockholders'
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Income
(Loss)
|
|
|
Deficit
|
|
|
Income
|
|
|
Stock
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2005
|
|
|
5,867,914 |
|
|
$ |
6 |
|
|
$ |
89,516 |
|
|
$ |
888 |
|
|
$ |
(55,147 |
) |
|
|
|
|
$ |
(3,136 |
) |
|
$ |
32,127 |
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
9,000 |
|
|
$ |
9,000 |
|
|
|
— |
|
|
|
9,000 |
|
Other
comprehensive income/(loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on foreign currency translation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
|
(1 |
) |
Comprehensive
income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
8,999 |
|
|
|
— |
|
|
|
— |
|
Stock
options exercised
|
|
|
355,893 |
|
|
|
— |
|
|
|
15 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
15 |
|
Treasury
stock purchased
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
(390 |
) |
|
|
(390 |
) |
Amortization
of deferred compensation
|
|
|
— |
|
|
|
— |
|
|
|
1,118 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
1,118 |
|
Balance,
December 31, 2006
|
|
|
6,223,807 |
|
|
|
6 |
|
|
|
90,649 |
|
|
|
887 |
|
|
|
(46,147 |
) |
|
|
|
|
|
|
(3,526 |
) |
|
|
41,869 |
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
9,401 |
|
|
$ |
9,401 |
|
|
|
— |
|
|
|
9,401 |
|
Other
comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain on foreign currency translation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,668 |
|
|
|
— |
|
|
|
1,668 |
|
|
|
— |
|
|
|
1,668 |
|
Comprehensive
income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
11,069 |
|
|
|
— |
|
|
|
— |
|
Stock
options exercised
|
|
|
324,040 |
|
|
|
1 |
|
|
|
42 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
43 |
|
Treasury
stock purchased
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
(728 |
) |
|
|
(728 |
) |
Amortization
of deferred compensation
|
|
|
— |
|
|
|
— |
|
|
|
1,046 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
1,046 |
|
Balance,
December 31, 2007
|
|
|
6,547,847 |
|
|
$ |
7 |
|
|
$ |
91,737 |
|
|
$ |
2,555 |
|
|
$ |
(36,746 |
) |
|
|
|
|
|
$ |
(4,254 |
) |
|
$ |
53,299 |
|
(continued)
ADAMS
GOLF, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
(in
thousands, except share amounts)
Years
ended December 31, 2008, 2007 and 2006
|
|
Shares
of
|
|
|
|
|
|
Additional
|
|
|
Accumulated
Other
|
|
|
|
|
|
|
|
|
Cost
of
|
|
|
Total
|
|
|
|
Common
|
|
|
Common
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
Stockholders'
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
(Loss)
|
|
|
Stock
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2007
|
|
|
6,547,847 |
|
|
$ |
7 |
|
|
$ |
91,737 |
|
|
$ |
2,555 |
|
|
$ |
(36,746 |
) |
|
|
|
|
$ |
(4,254 |
) |
|
$ |
53,299 |
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,459 |
) |
|
$ |
(1,459 |
) |
|
|
— |
|
|
|
(1,459 |
) |
Other
comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on foreign currency translation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,990 |
) |
|
|
— |
|
|
|
(1,990 |
) |
|
|
— |
|
|
|
(1,990 |
) |
Comprehensive
loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
(3,449 |
) |
|
|
— |
|
|
|
— |
|
Stock
options exercised
|
|
|
200,919 |
|
|
|
— |
|
|
|
8 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
8 |
|
Issuance
of restricted stock
|
|
|
161,365 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
Stock
retired
|
|
|
(265 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
Treasury
stock purchased
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
(500 |
) |
|
|
(500 |
) |
Amortization
of deferred compensation
|
|
|
— |
|
|
|
— |
|
|
|
956 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
956 |
|
Balance,
December 31, 2008
|
|
|
6,909,866 |
|
|
$ |
7 |
|
|
$ |
92,701 |
|
|
$ |
565 |
|
|
$ |
(38,205 |
) |
|
|
|
|
|
$ |
(4,754 |
) |
|
$ |
50,314 |
|
See
accompanying notes to consolidated financial statements
ADAMS
GOLF, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income/(loss)
|
|
$ |
(1,459 |
) |
|
$ |
9,401 |
|
|
$ |
9,000 |
|
Adjustments
to reconcile net income/(loss) to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization of property and equipment and intangible
assets
|
|
|
578 |
|
|
|
460 |
|
|
|
335 |
|
Amortization
of deferred compensation
|
|
|
956 |
|
|
|
1,046 |
|
|
|
1,118 |
|
Provision
for doubtful accounts
|
|
|
1,539 |
|
|
|
316 |
|
|
|
853 |
|
Provision
for deferred income taxes
|
|
|
— |
|
|
|
(4,826 |
) |
|
|
(5,402 |
) |
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
receivables
|
|
|
1,727 |
|
|
|
(4,772 |
) |
|
|
(236 |
) |
Inventories
|
|
|
(4,866 |
) |
|
|
(4,094 |
) |
|
|
(8,500 |
) |
Prepaid
expenses
|
|
|
(165 |
) |
|
|
(57 |
) |
|
|
68 |
|
Other
current assets
|
|
|
52 |
|
|
|
(61 |
) |
|
|
7 |
|
Other
assets
|
|
|
557 |
|
|
|
531 |
|
|
|
525 |
|
Accounts
payable
|
|
|
266 |
|
|
|
2,934 |
|
|
|
1,580 |
|
Accrued
expenses and other current liabilities
|
|
|
(1,449 |
) |
|
|
1,242 |
|
|
|
195 |
|
Other
liabilities
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Net
cash provided by (used in) operating activities
|
|
|
(2,264 |
) |
|
|
2,120 |
|
|
|
(457 |
) |
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of equipment
|
|
|
(552 |
) |
|
|
(653 |
) |
|
|
(403 |
) |
Purchase
of intangible assets
|
|
|
— |
|
|
|
(600 |
) |
|
|
— |
|
Net
cash used in investing activities
|
|
|
(552 |
) |
|
|
(1,253 |
) |
|
|
(403 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
payments under capital lease obligation
|
|
|
(11 |
) |
|
|
(22 |
) |
|
|
(35 |
) |
Exercise
of stock options
|
|
|
8 |
|
|
|
43 |
|
|
|
15 |
|
Treasury
stock purchase
|
|
|
(500 |
) |
|
|
(728 |
) |
|
|
(390 |
) |
Debt
financing costs
|
|
|
4 |
|
|
|
(35 |
) |
|
|
(4 |
) |
Net
cash used in financing activities
|
|
|
(499 |
) |
|
|
(742 |
) |
|
|
(414 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects
of exchange rate changes
|
|
|
(1,990 |
) |
|
|
1,668 |
|
|
|
(1 |
) |
Net
increase (decrease) in cash and cash equivalents
|
|
|
(5,305 |
) |
|
|
1,793 |
|
|
|
(1,275 |
) |
Cash
and cash equivalents at beginning of the year
|
|
|
11,265 |
|
|
|
9,472 |
|
|
|
10,747 |
|
Cash
and cash equivalents at end of the year
|
|
$ |
5,960 |
|
|
$ |
11,265 |
|
|
$ |
9,472 |
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
101 |
|
|
$ |
1 |
|
|
$ |
3 |
|
Income
taxes paid
|
|
$ |
9 |
|
|
$ |
65 |
|
|
$ |
75 |
|
Supplemental
disclosure of non-cash investing and financing activities Equipment
financed with capital lease
|
|
$ |
44 |
|
|
$ |
— |
|
|
$ |
23 |
|
See
accompanying notes to consolidated financial statements.
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2008 and 2007
(Tables
in thousands, except share and per share amounts)
(1) Summary
of Significant Accounting Policies
|
We
design, assemble, market and distribute premium quality, technologically
innovative golf clubs for all skill levels. Our recently
launched products include Speedline drivers and hybrid fairway woods, Idea
Tech a4 and a4 OS I-woods and irons, Idea a3 and a3 OS I-woods and irons,
Idea Pro Gold I-woods and irons and Insight Tech a4 and a4 OS drivers and
hybrid-fairway woods. We also continue to develop new products
for certain of our older product lines that include RPM family drivers and
fairway woods and irons, the Ovation family of drivers, fairway woods and
irons, Tom Watson signature wedges and under the name of Women's Golf
Unlimited, the Lady Fairway and Square 2 brands. We continue to
sell from certain older product lines the Insight XTD A3 & A3 OS
drivers and hybrid-fairway woods, Idea a2 and a2 OS irons, Idea Tech OS
I-woods and irons, Idea a2 and a2 OS, the Tight Lies family of fairway
woods, the Puglielli series of wedges, and certain
accessories.
|
|
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.
|
|
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, assembly overhead costs and inbound
freight, 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.
|
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2008 and 2007
(Tables
in thousands, except share and per share amounts)
(1) Summary
of Significant Accounting Policies (continued)
|
(c) Allowance
for Doubtful Accounts
|
|
We
maintain an allowance for doubtful accounts for estimated losses resulting
from the inability of our customers to make required
payments. An estimate of uncollectable amounts is made by
management using an evaluation methodology involving both overall and
specific identification. We evaluate each individual customer
and measure 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, we also look at the aging
of the receivables in total and aging relative to prior periods and
evaluate economic conditions to determine the appropriate 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, we provide for estimated uncollectable amounts
through a charge to earnings and a credit to the valuation
allowance. Balances which remain outstanding after we have used
reasonable collection efforts are written off through a charge to the
valuation allowance and a credit to accounts receivable. We
generally do not require collateral. The allowance for doubtful
accounts could be significantly affected as a result of a deviation in our
assessment of any one or more customers' financial
strength. While only two customers represent greater than 5%
but less than 10% of net sales and no customer represents greater than 10%
of net sales for the year ended December 31, 2008, if a combination of
customers were to become financially impaired, including, but not limited
to, due to the current global economic recession and credit crisis, our
financial results could be severely
affected.
|
|
(d) Property
and Equipment
|
|
Property
and equipment are stated at cost less accumulated depreciation and
amortization. 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.
|
|
We
recognize 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. If our assessment of
collectability decreases significantly , because of factors resulting from
the current global economic recession, our revenue would be adversely
affected. 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. We also record 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, our sales would be adversely affected. We
recognize 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 and all revenue
recognition criteria have been met, we record
revenue.
|
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2008 and 2007
(Tables
in thousands, except share and per share amounts)
(1)
Summary
of Significant Accounting Policies (continued)
|
(f) New
Accounting Pronouncements
|
|
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations - an
amendment of FASB Statement No. 141, which
defines the acquirer in a business combination and discusses reporting of
the acquisition method of accounting for transactions. We will
adopt the provisions of this standard in the first quarter of 2009; we
expect the adoption of this standard to have no impact on the consolidated
financial statements.
|
|
In
December 2007, the FASB issued SFAS No. 160, Accounting for Noncontrolling
Interests in Consolidated Financial Statements-an amendment of ARB No.
51,
which establishes standards for reporting and comparability of
consolidated financial statements, specifically as it relates to
noncontrolling interests. We adopted the provisions of this
standard in the fourth quarter of 2008; the adoption of this standard had
no impact on the consolidated financial
statements.
|
|
In
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities- an amendment of FASB Statement No.
133, which
provides guidance on enhanced disclosures for derivative and hedging
activities. We adopted the provisions of this standard in the
fourth quarter of 2008; the adoption of this standard had no impact on the
consolidated financial statements.
|
|
(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. Our research and development expenses were
approximately $3,758,000, $3,698,000 and $2,607,000 for the years ended
December 31, 2008, 2007 and 2006,
respectively.
|
|
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 $6,559,000, $5,732,000
and $5,631,000 for the years ended December 31, 2008, 2007 and 2006,
respectively.
|
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2008 and 2007
(Tables
in thousands, except share and per share amounts)
(1) Summary
of Significant Accounting Policies (continued)
|
Our
golf equipment is sold under warranty against defects in material and
workmanship for a period of one year. An allowance for
estimated future warranty costs is recorded in the period products are
sold. In estimating our future warranty obligations, we
consider various relevant factors, including our 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 our products were to fail (i.e.
broken shaft, broken head, etc) to a significant degree above and beyond
our historical product failure rates, which determine the product warranty
accruals.
|
|
|
Beginning
Balance
|
|
|
Charges for
Warranty Claims
|
|
|
Estimated
Accruals
|
|
|
Ending
Balance
|
|
Year
ended December 31, 2008
|
|
$ |
337 |
|
|
|
(697 |
) |
|
|
882 |
|
|
$ |
522 |
|
Year
ended December 31, 2007
|
|
$ |
389 |
|
|
|
(543 |
) |
|
|
491 |
|
|
$ |
337 |
|
|
We
account for income taxes in accordance with FAS No. 109, "Accounting for
Income Taxes" ("FAS 109") as clarified by FASB Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes ("FIN 48").
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 expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes
the enactment date. In assessing the realizability of deferred
income tax assets, we consider whether it is "more likely than not",
according to the criteria of FAS 109, 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. FIN 48 requires that we
recognize the financial statement benefit of a tax position only after
determining that the relevant tax authority would more likely than not
sustain the position following an audit. For tax positions
meeting the more likely than not threshold, the amount recognized in the
financial statements is the largest benefit that has a greater than 50%
likelihood of being realized upon ultimate settlement with the relevant
tax authority. Due to our historical operating results,
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. However, due to our recent earnings history, we have
concluded that it is more likely than not that a portion of the deferred
tax asset will be realized. We have recognized a valuation
allowance equal to a portion of the deferred income tax asset for which
realization is uncertain
|
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2008 and 2007
(Tables
in thousands, except share and per share amounts)
(1) Summary
of Significant Accounting Policies (continued)
|
(k) Income/(Loss)
Per Share
|
|
The
weighted average common shares used for determining basic and diluted loss
per common share were 6,413,054 for the year ended December 31,
2008. The effect of all options to purchase shares of our
common stock for the year ended December 31, 2008 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 6,094,385 and 7,134,363, respectively, for
the year ended December 31, 2007. The effect of all options to
purchase shares of our common stock for the year ended December 31, 2007
resulted in additional dilutive shares of
1,039,978.
|
|
The
weighted average common shares used for determining basic and diluted
income per common share were 5,830,229 and 7,232,445, respectively, for
the year ended December 31, 2006. The effect of all options to
purchase shares of our common stock for the year ended December 31, 2006
resulted in additional dilutive shares of
1,402,216.
|
|
(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
|
|
We
follow 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 years ended December 31, 2008, 2007 and 2006,
there was no impairment of long-lived
assets.
|
|
(n) Comprehensive
Income / (Loss)
|
|
Comprehensive
income / (loss) consists of net income / (loss) and unrealized gains and
losses, net of related tax effect, on foreign currency translation
adjustments.
|
|
(o) Cash
and Cash Equivalents
|
|
We
consider all short-term highly liquid instruments, with an original
maturity of three months or less, to be cash
equivalents.
|
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2008 and 2007
(Tables
in thousands, except share and per share amounts)
(1) Summary
of Significant Accounting Policies (continued)
(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
We are
organized by functional responsibility and operate as a single segment and
within that segment offer more than one class of product.
(r) Stock-Based
Compensation
In May
2002, we adopted the 2002 Equity Incentive Plan (the “Plan”) for employees,
outside directors and consultants. The Plan allows for the granting
of up to 625,000 shares of our 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. At December 31, 2008, 892,982 outstanding options
had been granted with exercise prices ranging from $0.04 to $4.80 per share at
the date of grant. The requisite service periods for the options to
vest vary from six months to four years and the options expire ten years from
the date of grant. At December 31, 2008, 891,160 shares remain
available for grant, including forfeitures.
(s) Foreign
Currency Translation and Transactions
The
functional currency of our Canadian operations is Canadian
dollars. The accompanying consolidated financial statements have been
expressed in United States dollars, our reporting currency. Reporting
assets and liabilities of our 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)
Classification of Shipping and Handling Fees and Costs
Shipping
and handling fees and costs are included in net sales and cost of goods sold,
respectively.
(u)
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, 2008 and 2007
(Tables
in thousands, except share and per share amounts)
(2)
Trade
Receivables, net
Trade
receivables consist of the following at December 31, 2008 and 2007:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Trade
receivables
|
|
$ |
16,064 |
|
|
$ |
18,521 |
|
Allowance
for doubtful accounts
|
|
|
(1,321 |
) |
|
|
(512 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
14,743 |
|
|
$ |
18,009 |
|
|
Inventories
consist of the following at December 31, 2008 and
2007:
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
$ |
20,226 |
|
|
$ |
16,887 |
|
Component
parts
|
|
|
13,385 |
|
|
|
11,858 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
33,611 |
|
|
$ |
28,745 |
|
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 capitalizable overhead costs, which
are then applied to each unit after work in process is completed; retained costs
representing the excess of manufacturing and other overhead costs that are not
yet applied to finished goods; and an estimated allowance for obsolete
inventory. At December 31, 2008 and 2007, inventories included
$821,000 and $865,000 of consigned inventory, respectively, and $197,000 and
$189,000 of inventory obsolescence reserves,
respectively.
(4) Property
and Equipment, net
|
Property
and equipment consist of the following at December 31, 2008 and
2007:
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Equipment
|
|
$ |
2,442 |
|
|
$ |
2,296 |
|
Computers
and software
|
|
|
7,716 |
|
|
|
7,924 |
|
Furniture
and fixtures
|
|
|
940 |
|
|
|
770 |
|
Leaseholds
improvements
|
|
|
182 |
|
|
|
188 |
|
Accumulated
depreciation and amortization
|
|
|
(10,070 |
) |
|
|
(10,132 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
1,210 |
|
|
$ |
1,046 |
|
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2008 and 2007
(Tables
in thousands, except share and per share amounts)
(5) Other
Current and Non-Current Assets
Other
current assets, net, consist of the following at December 31, 2008 and
2007:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Maintenance
agreements
|
|
|
29 |
|
|
|
81 |
|
Deferred
tax asset
|
|
|
— |
|
|
|
1,351 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
29 |
|
|
$ |
1,432 |
|
|
We
have a deferred tax asset of $10.2 million recorded, of which the short
term portion has been reclassified as long term during the year ended
December 31, 2008 and reported as a deferred tax asset non-current in the
non-current asset section of the balance sheet. This amount
represents what we believe to be an estimate of future usage of our carry
back; the remaining asset has an existing valuation allowance applied to
it. At December 31, 2008, we had net operating loss
carryforwards for federal, foreign and state income tax purposes of
approximately $37 million and tax credit carryforwards of $0.3 million,
which are available to offset future taxable income through
2028.
|
Other
assets, net, consist of the following at December 31, 2008 and
2007:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Deposits
|
|
$ |
6 |
|
|
$ |
23 |
|
Long
term endorsements
|
|
|
— |
|
|
|
540 |
|
Other,
including intangible assets purchased
|
|
|
361 |
|
|
|
506 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
367 |
|
|
$ |
1,069 |
|
(6) Accrued
Expenses and Other Current Liabilities
|
Accrued
expenses and other current liabilities consist of the following at
December 31, 2008 and 2007:
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Payroll
and commissions
|
|
$ |
447 |
|
|
$ |
2,707 |
|
Product
warranty expense and sales returns
|
|
|
1,641 |
|
|
|
1,611 |
|
Professional
services
|
|
|
7 |
|
|
|
23 |
|
Accrued
inventory
|
|
|
1,021 |
|
|
|
971 |
|
Accrued
sales promotions
|
|
|
274 |
|
|
|
390 |
|
Deferred
revenue
|
|
|
1,429 |
|
|
|
1,538 |
|
Other
|
|
|
2,434 |
|
|
|
1,442 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,253 |
|
|
$ |
8,682 |
|
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2008 and 2007
(Tables
in thousands, except share and per share amounts)
(7) Commitments
and Contingencies
|
We
are 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,
|
|
|
|
|
|
|
|
2009
|
|
|
641 |
|
2010
|
|
|
629 |
|
2011
|
|
|
570 |
|
2012
|
|
|
430 |
|
2013
|
|
|
286 |
|
|
|
|
|
|
|
|
$ |
2,556 |
|
Rent
expense was approximately $703,000, $650,000 and $602,000 for the years ended
December 31, 2008, 2007 and 2006, respectively.
Beginning
in June 1999, the first of seven class action lawsuits was filed against us,
certain of our current and former officers and directors, and the three
underwriters of our 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 our IPO. In particular, the complaints
alleged that our prospectus, which became effective July 9, 1998, was materially
false and misleading. The operative complaint was filed on January
24, 2006, and it alleges that the prospectus failed to disclose that
unauthorized distribution of our products (gray market sales) threatened our
long-term profits and that we engaged in questionable sales practices (including
double shipping and unlimited rights of return), which threatened post-IPO
financial results. Discovery closed on August 11, 2006. On
November 21, 2006, all summary-judgment briefing was completed. On
December 13, 2006, we learned that the Delaware District Court judge whom the
case was set before was elevated to the United States Court of Appeals for the
Third Circuit. On December 15, 2006, we were notified that our case
was assigned to the vacant judicial position and that all proceedings had been
postponed until a new judge was confirmed. On February 7, 2008, we
were notified that our case was reassigned to Chief Judge Gregory M.
Sleet. The parties participated in a mediation on April 8, 2008, but
no resolution has been reached at this time. The Court heard oral
argument on Defendant’s summary-judgment motions on February 20,
2009. A hearing on the parties’ Daubert motions has been set
for May 29, 2009. The Court set a trial date of October 13,
2009.
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2008 and 2007
(Tables
in thousands, except share and per share amounts)
(7) Commitments
and Contingencies (continued)
The
underwriters for the IPO, including Lehman Brothers Holdings Inc. ("LBHI"), are
also defendants in the securities class action. On September 15,
2008, counsel for LBHI advised the District Court that earlier that day
defendant LBHI filed a voluntary petition under Chapter 11 of the Bankruptcy
Code in the Bankruptcy Court for the Southern District of New
York. Counsel for LBHI also advised the District Court that the
automatic-stay provision of Section 362 of the Bankruptcy Code was in effect,
enjoining all judicial proceedings against LBHI that were initiated before the
Chapter 11 case began. On September 16, 2008, the District Court
administratively closed the case, ordering it to be reopened for further
proceedings upon motion by any party to the case no later than thirty days
following a disposition of the bankruptcy case. On September 30,
2008, plaintiffs filed a motion in the District Court to lift the order for
administrative closure and lift the stay as to all defendants except
LBHI. The court granted plaintiffs’ motion on November 17,
2008.
We
maintain directors' and officers' ("D&O") and corporate liability insurance
to cover certain risks associated with these securities claims filed against us
or our directors and officers. During the period covering the class
action lawsuit, we maintained insurance from multiple carriers, each insuring a
different layer of exposure, up to a total of $50 million. In
addition, we have met the financial deductible of our directors' and officers'
insurance policy for the period covering the time the class action lawsuit was
filed. On March 30, 2006, Zurich American Insurance Company, which
provided insurance coverage totaling $5 million for the layer of exposure
between $15 million and $20 million, notified us that it was denying coverage
due to the fact that it was allegedly not timely notified of the class action
lawsuit. On October 11, 2007, we filed a suit against our former insurance
broker, Thilman & Filipini, LLC ("T&F"), asserting various causes of
action arising out of the T&F's alleged failure to notify Zurich of the
class action lawsuit. On March 18, 2008, the suit against T&F was
amended to also name as Defendants certain alleged successor entities to
T&F. All of the Defendants moved to dismiss our lawsuit on the
basis that our suit was premature in that we had not been damaged by the alleged
conduct of the Defendants because we had not paid any sums in satisfaction of a
judgment or settlement of the class action securities
litigation. Those motions were denied pursuant to a Memorandum
Opinion and Order dated September 26, 2008. T&F's successor
entities also moved to dismiss the claims brought against them on the grounds
that, as purchasers of solely T&F's assets, they could not be held liable
for the T&F debts or liabilities. The Court struck our complaint
solely against the successor entity Defendants on the grounds that we had not
alleged sufficient facts triggering an exception to the general rule that the
purchaser of an entity's assets is not liable for the entity's liabilities and
ordered us to replead our claims against the successor entity
Defendants. We must replead our claims before April 7,
2009. We and T&F have engaged in some preliminary written
discovery efforts, but substantial discovery remains to be done. No
trial date has been set.
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2008 and 2007
(Tables
in thousands, except share and per share amounts)
(7) Commitments
and Contingencies (continued)
Depending
on the outcome of this proceeding, based on the previously disclosed agreement
with Chubb & Son ("Chubb"), a division of Federal Insurance Company
("Federal"),which is described below, we could be required to pay Zurich's $5
million limit of liability in cash before the layers of insurance coverage
excess to the Zurich layer attach. We previously disclosed that Chubb
had notified us that coverage under the Federal policy, which provided insurance
coverage totaling $10 million for the layer of exposure between $20 million and
$30 million, and the Executive Risk Indemnity Inc. ("ERII") policy, which
provided insurance coverage totaling $10 million for the layer of exposure
between $40 million and $50 million, would attach only if the underlying limits
are exhausted by payment from the underlying insurance carriers. On
June 18, 2007, Chubb notified us that Federal and ERII will not require that
Zurich pay the full amount of its limit of liability before the Federal and ERII
policies attach, and it confirmed that Chubb will accept payment in cash by our
Company of Zurich's limit of liability to satisfy this requirement, so long as
such payment is for covered loss. All of the excess insurance
carriers (other than Zurich, which has denied coverage) have reserved their
rights to deny coverage on various grounds. At this point in the
legal proceedings, we cannot predict with any certainty the outcome of the
matter, per the guidance in SFAS 5, and thus can not reasonably estimate future
liability on the conclusion of the events, if any.
As
mentioned above, the underwriters for the IPO are also defendants in the
securities class action. The underwriting agreement that we entered
into with the underwriters in connection with the IPO contains an
indemnification clause, providing for indemnification against any loss,
including defense costs, arising out of the IPO. After the first
lawsuit was filed, the underwriters requested indemnification under the
agreement. Our D&O insurance policy included an endorsement
providing $1 million to cover indemnification of the
underwriters. Our D&O insurer has notified the underwriters of
the exhaustion of the $1 million sublimit. We believe that we have no
current obligation to pay the underwriters' defense costs. We believe
that the applicable case law provides that the earliest possible time that an
obligation to indemnify might exist is after a court has decided conclusively
that the underwriters are without fault under the federal securities
laws. The litigation is not at that stage yet. As of March
5, 2009, the total amount of outstanding underwriter defense costs was just less
than $1.4 million. At this time, the underwriters are not able to
predict with certainty the amount of defense costs they expect to incur going
forward, but it is likely they will incur additional costs before this matter is
concluded. At this time, we cannot predict with any certainty the
outcome of this indemnification issue, per the guidance in SFAS 5, and thus
cannot reasonably estimate future liability on the conclusion of the events, if
any.
Beginning
April 2008, we received communications from the Estate of Anthony Antonious that
our products infringed an Anthony Antonious patent concerning an aerodynamic
metal wood golf club head. On May 28, 2008, we filed a declaratory
judgment lawsuit against the Anthony Antonious Trust in the United States
District Court for the Southern District of the State of Ohio, alleging
non-infringement of the Antonious patent. On June 30, 2008, the Estate of
Anthony Antonious filed a lawsuit against us in the United States District Court
in the State of New Jersey alleging infringement of the patent. On
September 2, 2008 we filed a Request for Ex Parte Reexamination with the United
States Patent and Trademark Office (USPTO) requesting that the USPTO reexamine
the Antonious patent at issue. The USPTO issued an Order granting our
Request for Ex Parte Reexamination on November 7, 2008 after finding that a
substantial new question of patentability affecting the claims has been
raised. As a result, both the Ohio lawsuit and the New Jersey
lawsuit have been stayed pending the outcome of the USPTO’s reexamination
proceeding. At this point in the legal proceedings, we cannot predict
the outcome of the matter with any certainty, per the guidance in SFAS 5, and
thus cannot reasonably estimate future liability on the conclusion of the
events, if any.
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2008 and 2007
(Tables
in thousands, except share and per share amounts)
(7) Commitments
and Contingencies (continued)
From time
to time, we are 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.
In
February 1998, we adopted the Adams Golf, Ltd. 401(k) Retirement Plan (the
"Plan"), which covers substantially all employees. We provide a safe
harbor match 100% of employee contributions up to a maximum of 4% of the
employee's compensation. For the years ended December 31, 2008, 2007
and 2006, we contributed approximately $251,000, $134,000 and $149,000,
respectively, to the Plan.
In
November 2007, we signed a revolving credit agreement with Wachovia Bank,
National Association to provide up to $15.0 million in short term debt with the
option to increase to $30 million. The agreement is collateralized by
all of our assets and requires us, among other things, to maintain certain
financial performance levels relative to the fixed charge coverage ratio, but
only when we have an outstanding balance on the facility. Interest on
outstanding balances accrues at a rate of Libor plus 1.75% and is payable
monthly. As of March 5, 2009, we had $2.0 million of outstanding
borrowings on our credit facility and are in compliance with terms of our
agreement. There was no outstanding balance at December 31, 2008 and
2007, respectively. In October 2008, Wells Fargo announced plans to
acquire Wachovia Bank, NA. and closed the acquisition at the end of
2008. The transaction resulted in the merger of Wachovia Bank into
Wells Fargo with Wells Fargo being the surviving institution. Wells Fargo,
as successor to Wachovia Bank, would become the lender under our existing
line of credit and be subject to all of the terms and
conditions thereof.
Our
anticipated sources of liquidity over the next twelve months are expected to be
cash reserves, projected cash flows from operations, and available borrowings
under our credit facility. We anticipate 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 our operations if cash is needed
in other areas of our operations. In addition, cash flows from
operations and cash reserves will be used to support ongoing purchases of
component parts for our current and future product lines. The
expected operating cash flows, current cash reserves and borrowings available
under our credit facility are expected to allow us to meet working capital
requirements during periods of low cash flows resulting from the seasonality of
the industry.
If
adequate funds are not available or not available on acceptable terms, we 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 our
business, operating results, financial condition and/or
liquidity.
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2008 and 2007
(Tables
in thousands, except share and per share amounts)
(10) Income
Taxes
Income
tax expense (benefit) for the years ended December 31, 2008, 2007 and 2006
consists of the following:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Federal-current
|
|
$ |
(13 |
) |
|
$ |
79 |
|
|
$ |
68 |
|
State-current
|
|
|
9 |
|
|
|
1 |
|
|
|
7 |
|
Deferred
|
|
|
— |
|
|
|
(4,826 |
) |
|
|
(5,402 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(4 |
) |
|
$ |
(4,746 |
) |
|
$ |
(5,327 |
) |
Actual
income tax expense (benefit) differs from the "expected" income tax expense
(benefit) (computed by applying the U.S. federal corporate tax rate of 35% to
income before income taxes) for the years ended December 31, 2008, 2007 and 2006
as follows:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Computed
"expected" tax benefit
|
|
$ |
(511 |
) |
|
$ |
1,629 |
|
|
$ |
1,286 |
|
State
income taxes, net of federal tax expense
|
|
|
(15 |
) |
|
|
47 |
|
|
|
37 |
|
Change
in valuation allowance for deferred tax assets
|
|
|
680 |
|
|
|
(6,809 |
) |
|
|
(6,770 |
) |
Other
|
|
|
(158 |
) |
|
|
387 |
|
|
|
120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(4 |
) |
|
$ |
(4,746 |
) |
|
$ |
(5,327 |
) |
The tax
effects of temporary differences that give rise to the deferred tax assets and
deferred tax liabilities at December 31, 2008 and 2007 are presented
below:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Allowance
for doubtful accounts receivable
|
|
$ |
475 |
|
|
$ |
184 |
|
Product
warranty and sales returns
|
|
|
591 |
|
|
|
580 |
|
Other
reserves
|
|
|
277 |
|
|
|
89 |
|
Deferred
compensation
|
|
|
312 |
|
|
|
166 |
|
263A
adjustment
|
|
|
51 |
|
|
|
106 |
|
Research
and development tax credit carryforwards
|
|
|
306 |
|
|
|
306 |
|
Net
operating loss carryforwards
|
|
|
13,344 |
|
|
|
13,245 |
|
|
|
|
|
|
|
|
|
|
Total
deferred tax assets
|
|
|
15,356 |
|
|
|
14,676 |
|
Valuation
allowance
|
|
|
(5,128 |
) |
|
|
(4,448 |
) |
|
|
|
|
|
|
|
|
|
Net
deferred tax assets
|
|
$ |
10,228 |
|
|
$ |
10,228 |
|
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2008 and 2007
(Tables
in thousands, except share and per share amounts)
(10) Income
Taxes (continued)
Amounts
recorded in consolidated balance sheets at December 31, 2008 and
2007:
|
|
2008
|
|
|
2007
|
|
Current
|
|
$ |
— |
|
|
$ |
1,351 |
|
Non-current
|
|
|
10,228 |
|
|
|
8,877 |
|
|
|
$ |
10,228 |
|
|
$ |
10,228 |
|
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, 2008, we cannot determine based on a weighing of objective evidence
that it is more likely than not that all of the remaining net deferred tax
assets will be realized. As a result, as of December 31, 2008, we
have established a valuation allowance for a portion of our net deferred tax
assets. We recorded a deferred tax asset of $10.2
million. This amount represents what we believe to be an estimate of
future usage of our carry back. The remaining asset has an existing
valuation allowance applied to it. The net change in the valuation
allowance for the years ended December 31, 2008 and 2007 was $(680,000) and
$6,809,000, respectively.
At
December 31, 2008, we have net operating loss carryforwards for federal, foreign
and state income tax purposes of approximately $37,068,000 and tax credit
carryforwards of $306,000 which are available to offset future taxable income
through 2028. The availability of approximately $142,000 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.
(11) Stockholders'
Equity
|
(a) Employee
Stock Option Plans
|
In May
2002, we adopted the 2002 Equity Incentive Plan for employees, outside directors
and consultants. The plan allows for the granting of up to 625,000
shares of our 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 in previous annual reports
were terminated and a total of 538,370 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 201,510 shares were transferred to the
Equity Incentive Plan. At December 31, 2008, 892,982 outstanding
options had been granted with exercise prices ranging from $0.04 to $4.80 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, 2008, 891,160 shares remain available for
grant, including forfeitures.
|
ADAMS
GOLF, INC. AND SUBSIDIARIES
|
|
Notes
to Consolidated Financial
Statements
|
|
December
31, 2008 and 2007
|
|
(Tables
in thousands, except share and per share
amounts)
|
(11) Stockholders'
Equity (continued)
The
following is a summry of stock options outstanding as of December 31,
2008:
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.04
- $4.00
|
|
|
867,982 |
|
4.29
years
|
|
$ |
0.06 |
|
|
|
866,420 |
|
|
$ |
0.06 |
|
$4.01
- $8.00
|
|
|
25,000 |
|
6.26 years
|
|
|
4.76 |
|
|
|
18,750 |
|
|
|
4.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
892,982 |
|
4.35 years
|
|
$ |
0.19 |
|
|
|
885,170 |
|
|
$ |
0.16 |
|
The per
share weighted-average fair value of stock options granted
during 2006 was $4.72, while no options were granted during 2007 or
2008. 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, 107.4% in 2006. We use historical data to estimate
option exercise and employee termination factors within the valuation
model.
Operating
expenses included in the consolidated statements of operations for the years
ended December 31, 2008, 2007 and 2006 include total compensation expense
associated with stock options and restricted stock of $956,000, $1,046,000 and
$1,118,000, respectively.
A summary
of stock option activity follows:
|
|
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Average
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Exercise price
|
|
|
Value of options
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding at December 31, 2005
|
|
|
1,792,701 |
|
|
|
0.12 |
|
|
|
|
Options
granted
|
|
|
12,500 |
|
|
|
4.72 |
|
|
|
|
Options
forfeited (expired)
|
|
|
(25,000 |
) |
|
|
2.96 |
|
|
|
|
Options
exercised
|
|
|
(355,893 |
) |
|
|
0.04 |
|
|
|
1,973,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding at December 31, 2006
|
|
|
1,424,308 |
|
|
|
0.16 |
|
|
|
11,003,577 |
|
Options
granted (resulting from the reverse split conversion of
existing options)
|
|
|
7 |
|
|
|
0.04 |
|
|
|
|
|
Options
forfeited (expired)
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Options
exercised
|
|
|
(324,041 |
) |
|
|
0.04 |
|
|
|
2,557,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding at December 31, 2007
|
|
|
1,100,274 |
|
|
|
0.16 |
|
|
|
9,725,455 |
|
Options
granted
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Options
forfeited (expired)
|
|
|
(6,373 |
) |
|
|
0.04 |
|
|
|
|
|
Options
exercised
|
|
|
(200,919 |
) |
|
|
0.04 |
|
|
|
1,429,703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding at December 31, 2008
|
|
|
892,982 |
|
|
|
0.19 |
|
|
|
2,510,227 |
|
Options
exercisable at December 31, 2008
|
|
|
885,170 |
|
|
$ |
0.16 |
|
|
|
2,516,352 |
|
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2008 and 2007
(Tables
in thousands, except share and per share amounts)
(11) Stockholders'
Equity (continued)
The
weighted average remaining contractual life of the options exercisable at
December 31, 2008 was 4.35 years and at December 31, 2007 was 5.30
years.
As of
December 31, 2008, compensation costs related to non-vested awards totaled $0.9
million, which is expected to be recognized over a weighted average period of
1.75 years.
|
(a) Common Stock Repurchase
Program
|
In
October 1998, the Board of Directors approved a plan whereby we are authorized
to repurchase from time to time on the open market up to 500,000 shares of its
common stock. At December 31, 1998, we had repurchased 164,375 shares
of common stock at an average price per share of $19.08 for a total cost of
approximately $3,136,000. During the year ended December 31, 2006, we
repurchased 69,782 shares of common stock that range from $5.40 to $5.76 price
per share for a total cost of approximately $390,000. During the year
ended December 31, 2007, we repurchased 91,966 shares ranging from $7.60 to
$8.00 costing a total of approximately $728,000 during the
year. During the year ended December 31, 2008, we repurchased 84,814
shares at prices ranging from $2.90 to $6.73 costing a total of approximately
$500,000 during the year. The repurchased shares are held in
treasury.
|
(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 deemed future exercise date of the unvested stock options
at December 31, 2004 and made 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
|
|
|
|
|
|
2009
|
|
|
90,000 |
|
2010
|
|
|
15,000 |
|
2011
|
|
|
27,500 |
|
2012
|
|
|
29,459 |
|
Beyond
2012
|
|
|
31,250 |
|
|
|
|
|
|
Total
Options
|
|
|
193,209 |
|
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2008 and 2007
(Tables
in thousands, except share and per share amounts)
We
generate substantially all revenues from the design, marketing and distribution
of premium quality, technologically innovative golf clubs. Our
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, 2008, 2007 and
2006:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
73,375 |
|
|
$ |
78,623 |
|
|
$ |
63,016 |
|
Rest
of world
|
|
|
18,076 |
|
|
|
15,981 |
|
|
|
13,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
91,451 |
|
|
$ |
94,604 |
|
|
$ |
76,030 |
|
|
The
following table sets forth net sales by product class for the years ended
December 31, 2008, 2007 and 2006:
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Fairway
woods
|
|
$ |
22,289 |
|
|
$ |
18,428 |
|
|
$ |
14,841 |
|
Drivers
|
|
|
11,276 |
|
|
|
10,472 |
|
|
|
7,323 |
|
Irons
|
|
|
57,117 |
|
|
|
63,251 |
|
|
|
51,649 |
|
Wedges
and other
|
|
|
769 |
|
|
|
2,453 |
|
|
|
2,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
91,451 |
|
|
$ |
94,604 |
|
|
$ |
76,030 |
|
|
ADAMS
GOLF, INC. AND SUBSIDIARIES
|
|
Notes
to Consolidated Financial
Statements
|
|
December
31, 2008 and 2007
|
|
(Tables
in thousands, except share and per share
amounts)
|
(13) Quarterly
Financial Results (unaudited)
|
Quarterly
financial results for the years ended December 31, 2008 and 2007 are as
follows:
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
|
2nd Quarter
|
|
|
3rd Quarter
|
|
|
4th Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
28,001 |
|
|
$ |
33,260 |
|
|
$ |
17,700 |
|
|
$ |
12,490 |
|
Gross
profit
|
|
$ |
12,111 |
|
|
$ |
13,736 |
|
|
$ |
6,763 |
|
|
$ |
4,860 |
|
Net
income (loss)
|
|
$ |
798 |
|
|
$ |
1,554 |
|
|
$ |
(1,163 |
) |
|
$ |
(2,647 |
) |
Income
(loss) per share – basic
|
|
$ |
0.13 |
|
|
$ |
0.24 |
|
|
$ |
(0.18 |
) |
|
$ |
(0.41 |
) |
–
diluted
|
|
|
0.11 |
|
|
|
0.21 |
|
|
|
(0.18 |
) |
|
|
(0.41 |
) |
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
|
2nd Quarter
|
|
|
3rd Quarter
|
|
|
4th Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
27,808 |
|
|
$ |
30,403 |
|
|
$ |
18,929 |
|
|
$ |
17,464 |
|
Gross
profit
|
|
$ |
12,195 |
|
|
$ |
13,302 |
|
|
$ |
7,740 |
|
|
$ |
6,760 |
|
Net
income (loss)
|
|
$ |
3,754 |
|
|
$ |
2,517 |
|
|
$ |
(327 |
) |
|
$ |
3,457 |
|
Income
(loss) per share – basic
|
|
$ |
0.63 |
|
|
$ |
0.42 |
|
|
$ |
(0.05 |
) |
|
$ |
0.57 |
|
–
diluted
|
|
|
0.49 |
|
|
|
0.33 |
|
|
|
(0.05 |
) |
|
|
0.49 |
|
|
ADAMS
GOLF, INC. AND SUBSIDIARIES
|
|
Notes
to Consolidated Financial
Statements
|
|
December
31, 2008 and 2007
|
|
(Tables
in thousands, except share and per share
amounts)
|
(14) Business
and Credit Concentrations
|
We
are currently dependent on four customers, which collectively comprised
approximately 24.4% of net sales for the year ended December 31,
2008. Of these, two customer individually represented greater
than 5% but less than 10% of net sales, while no customer individually
represented greater than 10% of net sales for the year ended December 31,
2008. For the year ended December 31, 2007, four customers,
which collectively comprised approximately 25.5% of net sales, of which
one 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,
2007. For the year ended December 31, 2006, four customers,
which collectively comprised approximately 25.2% of net sales, of which
three customers individually represented greater than 5% but less than 10%
of net sales, while no customer individually represented greater than 10%
of net sales for the year ended December 31, 2006. The loss of
an individual or a combination of these customers or a significant
impairment or reduction in such customers' business, including, but not
limited to, as a result of the current global economic recession and
credit crisis, would have a material adverse effect on consolidated
revenues, results of operations, financial condition and competitive
market position.
|
|
A
significant portion of our inventory purchases are from one supplier in
China; we purchased approximately 48% and 46% of our total inventory
purchased for the years ended December 31, 2008 and 2007, respectively,
from this one Chinese supplier. This supplier and many other
industry suppliers are located in China. We do not anticipate
any changes in the relationships with its suppliers. If such
change were to occur, we have alternative sources available; however, a
loss of our primary supplier or significant impairment to its business,
including, but not limited to, due to the global economic recession and
credit crisis, could adversely affect our business during the period in
which we would have to find an alternative source for such
supplies.
|
Schedule
II
ADAMS
GOLF, INC. AND SUBSIDIARIES
Valuation
and Qualifying Accounts
For
the years ended December 31, 2008, 2007 and 2006
(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, 2008
|
|
$ |
512 |
|
|
|
1,539 |
|
|
|
730 |
|
|
$ |
1,321 |
|
Year
ended December 31, 2007
|
|
$ |
702 |
|
|
|
316 |
|
|
|
506 |
|
|
$ |
512 |
|
Year
ended December 31, 2006
|
|
$ |
952 |
|
|
|
853 |
|
|
|
1,103 |
|
|
$ |
702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
warranty and sales returns:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2008
|
|
$ |
1,611 |
|
|
|
885 |
|
|
|
855 |
|
|
$ |
1,641 |
|
Year
ended December 31, 2007
|
|
$ |
2,040 |
|
|
|
545 |
|
|
|
974 |
|
|
$ |
1,611 |
|
Year
ended December 31, 2006
|
|
$ |
1,546 |
|
|
|
1,359 |
|
|
|
865 |
|
|
$ |
2,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
obsolescence:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2008
|
|
$ |
189 |
|
|
|
8 |
|
|
|
— |
|
|
$ |
197 |
|
Year
ended December 31, 2007
|
|
$ |
153 |
|
|
|
36 |
|
|
|
— |
|
|
$ |
189 |
|
Year
ended December 31, 2006
|
|
$ |
215 |
|
|
|
— |
|
|
|
62 |
|
|
$ |
153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax asset valuation allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2008
|
|
$ |
4,448 |
|
|
|
— |
|
|
|
680 |
|
|
$ |
5,128 |
|
Year
ended December 31, 2007
|
|
$ |
11,257 |
|
|
|
(6,809 |
) |
|
|
— |
|
|
$ |
4,448 |
|
Year
ended December 31, 2006
|
|
$ |
18,027 |
|
|
|
(6,770 |
) |
|
|
— |
|
|
$ |
11,257 |
|
(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.
|