Attached files
file | filename |
---|---|
EX-21.1 - ADAMS GOLF INC | v176553_ex21-1.htm |
EX-31.2 - ADAMS GOLF INC | v176553_ex31-2.htm |
EX-23.1 - ADAMS GOLF INC | v176553_ex23-1.htm |
EX-31.1 - ADAMS GOLF INC | v176553_ex31-1.htm |
EX-23.2 - ADAMS GOLF INC | v176553_ex23-2.htm |
EX-32.1 - ADAMS GOLF INC | v176553_ex32-1.htm |
EX-10.10 - ADAMS GOLF INC | v176553_ex10-10.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x |
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the fiscal year ended December 31, 2009
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from _____ to _____
Commission
File Number: 0-24583
ADAMS
GOLF, INC.
(Exact
name of registrant as specified in its charter)
DELAWARE
|
75-2320087
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
2801
E. Plano Pkwy, Plano, Texas
|
75074
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(972)
673-9000
|
(Registrant's
telephone number, including area code)
|
Securities
registered pursuant to Section 12(b) of the Act:
|
None
|
Securities
registered pursuant to Section 12(g) of the Act:
|
Common
Stock $.001 Par Value
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. o
Yes x No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. o
Yes x No
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
x Yes o No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this
chapter)during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files)
x Yes o No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, 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 o
|
Accelerated
filer o
|
Non-accelerated
filer x
|
Smaller
reporting company o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
o Yes x No
The
aggregate market value of the Registrant's common stock held by nonaffiliates of
the Registrant at June 30, 2009 was $11,080,355 based on the closing sales price
of $2.41 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 6,991,872 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, 2010, for the Annual
Meeting of Stockholders to be held on or about May 25, 2010.
ADAMS
GOLF, INC.
FORM
10-K
TABLE
OF CONTENTS
PART
I
|
|||
Item
1.
|
Business
|
Page
3
|
|
Item
1A.
|
Risk
Factors
|
Page
9
|
|
Item
2.
|
Properties
|
Page
17
|
|
Item
3.
|
Legal
Proceedings
|
Page
17
|
|
PART
II
|
|||
Item
4.
|
Reserved
|
n/a
|
|
Item
5.
|
Market
for Registrant's Common Equity and Related Stockholders Matters and Issuer
Purchases of Equity Securities
|
Page
19
|
|
Item
6.
|
Selected
Financial Data
|
Page
21
|
|
Item
7.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
Page
22
|
|
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Page
30
|
|
Item
8.
|
Financial
Statements and Supplementary Data
|
Page
30
|
|
Item
9A(T).
|
Controls
and Procedures
|
Page
31
|
|
PART
III
|
|||
Item
10
|
Directors
and Executive Officers of the Registrant
|
Page
32
|
|
Item
11
|
Executive
Compensation
|
Page
32
|
|
Item
12
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
Page
32
|
|
Item
13
|
Certain
Relationships and Related Transactions
|
Page
32
|
|
Item
14
|
Principal
Accounting Fees and Services
|
Page
32
|
|
PART
IV
|
|||
Item
15
|
Exhibits
and Financial Statement Schedules
|
Page
33
|
1
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:
--The
ability to maintain historical growth in revenue and profitability;
--The
impact of changing economic conditions;
--The
global economic uncertainty;
--Business
conditions in the golf industry;
--Product
development difficulties;
--The
uncertainty of the results of pending litigation;
--The
adequacy of the allowance for doubtful accounts, obsolete inventory and warranty
reserves;
--Product
approval and conformity to governing body regulations;
--Assembly
difficulties;
--Product
introductions;
--Patent
infringement risks;
--Uncertainty
of the ability to protect intellectual property rights;
--Market
demand and acceptance of products;
--The
future market for our capital stock;
--The
uncertainty in the debt and equity markets;
--The
success of our marketing strategy;
--The
success of our tour strategy;
--Our
dependence on one supplier for a majority of our inventory
products;
--Our
dependence on suppliers who are concentrated in one geographic
region;
--Our
dependence on a limited number of customers;
--Solvency
of, and reliance on third parties, including suppliers, and freight
transporters;
--The
actions of competitors, including pricing, advertising and product development
risks concerning future technology;
--Investor
audience, interest or valuation;
--The
management of sales channels and re-distribution;
--The
risk associated with events that may prove unrecoverable under existing
insurance policies; and
--The
impact of operational restructuring on operating results and liquidity and
one-time events and other factors detailed under Risk Factors, Item
1A.
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.
2
Item
1. Business
General
Adams
Golf, Inc. (together with its subsidiaries, “we”, “us”, “Adams Golf”, or the
“Company”) designs, assembles, markets and distributes premium quality,
technologically innovative golf clubs for all skill levels. Our
recently launched products include Idea a7 and a7 OS irons and
hybrids, Speedline Fast 10 and Speedline 9032 drivers, Speedline Fast
10 hybrid fairway woods, Idea Pro Black I-woods and irons, Idea Tech a4 and a4
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 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 Idea a3 and a3 OS I-woods and irons, 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.
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.
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 July
2009, we launched our Idea a7 line of hybrid iron sets and, in August 2009, we
launched our Idea a7 OS line of hybrid irons and integrated sets. The
a7 irons are offered in an eight piece men’s and senior's sets, with two
graphite-shafted hybrid irons integrated into each set. The a7 set of
irons won a Gold designation in the 2010 Golf Digest Hot List. The
Idea a7 OS irons are offered in three different eight piece configurations all
including three hybrids—one for men, one for women, and one for
seniors. The a7 OS set of irons won a Gold designation in the 2010
Golf Digest Hot List and was also the category leader in “Performance” in the
iron category. We also offer multiple different color versions of the
Idea a7 OS Women’s 14 piece set that includes a 460cc titanium driver, three
fairway woods, an eight piece Women’s Idea a7 OS iron set with three i-woods
integrated into the set, a putter and a bag. Additionally, we offer
the Idea a7 OS Max irons which are offered in an all hybrid eight piece men’s,
women’s and senior’s set. The a7OS Max set of irons won a Gold designation
in the 2010 Golf Digest Hot List and was also the category leader in
“Outstanding Innovation” in the iron category.
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 Idea Tech a4 OS irons are offered in three different eight
piece configurations—one for men, one for women, and one for
seniors. These 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.
3
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 summer of 2009 we launched the Speedline 9032
drivers and then in January 2010, we launched the third generation of Speedline
drivers called the Speedline Fast 10 drivers. The Speedline Fast 10
driver won a Gold designation in the 2010 Golf Digest Hot List. We
continue to use the patent pending, aerodynamic shaping of the Speedline drivers
(from our original Speedline driver launched in the first quarter of 2009),
which 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 family of drivers has already
been in the winners' bags at eight different tour events since their
introductions in 2009. The Speedline Fast 10 driver is offered in
standard and draw variations with a variety of lofts and shaft
flexes.
Fairway
Woods
During
the first quarter of 2010, we launched the Speedline Fast 10 fairway
woods. The Speedline fairway woods feature milled sole plates and the
design of strategically placing weight pads to match the swing characteristics
of various golfers. The Speedline Fast 10 fairway woods are offered in
standard and draw variations with a variety of lofts and shaft
flexes. We offer a variety of individual hybrids in the recently
introduced Idea a7 and a7 OS, Idea Pro Black, 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 a7 and a7 OS
hybrid irons won a Gold designation in the 2010 Golf Digest Hot List and were
the category leader in “Innovation” in the hybrid category. 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. Additionally, Adams
Golf hybrids were the most played hybrids on the 2009 PGA, Nationwide and
Champions tours.
Wedges
and Other
As a
complement to the Idea irons, we offer the Tom Watson signature wedges and the
Puglielli wedges. We also offer a line of golf bags, hats and other
accessories.
Percentage
of Net Sales by Product Class
2009
|
2008
|
2007
|
||||||||||
Irons
|
67.7 | % | 62.5 | % | 66.9 | % | ||||||
Fairway
Woods
|
19.4 | 24.4 | 19.5 | |||||||||
Drivers
|
12.5 | 12.3 | 11.1 | |||||||||
Wedges
and Other
|
0.4 | 0.8 | 2.5 | |||||||||
Total
|
100.0 | % | 100.0 | % | 100.0 | % |
4
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. Prior to
developing new products, we 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 $2,816,000, $3,758,000 and
$3,698,000 for the years ended December 31, 2009, 2008 and 2007,
respectively.
5
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 February 22, 2010, we held 51 U.S. patents relating
to certain products and proprietary technologies and we had 13 patent
applications pending. We expect that the 51 currently issued patents
will expire on various dates between 2010 and 2027. We hold patents
with respect to the design and/or utility of various products
lines.
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
continuing 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.
For risks
relating to our patents, see below, “Risks Associated with Intellectual Property
Protection” contained in Item 1A.
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 materials 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 and
testing potential new vendors for 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 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, and a significant
portion of our inventory purchases are from one supplier in China. We
purchased approximately 45% and 48% of our total inventory purchased for the
years ended December 31, 2009 and 2008, respectively, from this one Chinese
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 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 Chad Campbell, Aaron Baddeley,
Kris Blanks, Steve Wheatcroft and Omar Uresti. On the Champions Tour,
we have entered into endorsement agreements with Tom Watson, Bernard Langer,
Tommy Armour III, Scott Hoch, Mike Goodes, Gene Jones, Des Smyth, and Dana
Quigley. 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 2012 and require the professionals use certain of our
products.
6
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.
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 years ended
December 31, 2009 and 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. 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, as of February 22, 2010, consisted of 63
independent sales representatives, one senior vice president, one U.S. national
sales vice president, one regional vice president, two regional sales directors
and two regional sales managers, who are in regular contact with our retail
accounts (approximately 4,000 retailers). These sales
representatives, sales managers and regional vice presidents are supported by
nine inside sales representatives who maintain contact with our retailers
nationwide. The inside sales representatives also serve in a customer
service capacity because 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, while sales to other countries throughout the
world are made through a network of approximately 32 independent
distributors. For the years ended December 31, 2009, 2008 and 2007,
international sales accounted for approximately 20.0%, 19.8% and 16.9%,
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 in general. 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.
In
addition, we are occasionally made aware of the existence of counterfeit copies
of our golf clubs, particularly in foreign markets. When practical,
we take action in these situations through local authorities and legal
counsel.
7
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 Experian and 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 and often coincides 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.
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 $19,721,000 and
$33,611,000 at December 31, 2009 and 2008, respectively. The decrease
in inventory levels over this period was primarily a result of improved
inventory management practices as well as reduced overall demand. 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 changes 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 two customers, which collectively comprised approximately
23.5% of net revenues for the year ended December 31, 2009. Of these
customers, one customers represented greater than 5% but less than 10% of net
revenues for the year ended December 31, 2009, and one customer represented
greater than 10% but less than 20% of net revenues, while no customers
represented greater than 20% of net revenues for the year ended December 31,
2009. For the year ended December 31, 2008, four customers
comprised approximately 24.4% of net revenues. Of these customers,
two 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, 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, and 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.
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. 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.
8
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, 2010, we had current backorders of $2,345,000,
or 3.1% of total net sales for the year ended December 31, 2009, and orders to
be fulfilled at a future date, not to exceed the current year, of $16,934,000,
or 22.2% of total net sales for the year ended December 31, 2009. 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 then current year, of $7,466,000, or 8.2% of
total net sales for the year ended December 31, 2008. The year
over year backorder is relatively flat. The balance is comprised of
various product lines including Speedline Fast 10 and Idea integrated irons
sets. The future orders have significantly increased as a result of
more forward looking planning by select retailers as well as, to a lesser
extent, some increased overall demand from the retailers as we are entering the
golf season and beginning to see signs of moving away from the recent economic
constraints. 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.
For risks
relating to Competition, see below, “Increasing Competition” contained in Item
1A.
Domestic
and Foreign Operations
Domestic
and foreign net sales for the years ended December 31, 2009, 2008 and 2007 were
comprised as follows:
2009
|
2008
|
2007
|
||||||||||||||||||||||
Domestic
|
$ | 60,927,000 | 80.0 | % | $ | 73,375,000 | 80.2 | % | $ | 78,623,000 | 83.1 | % | ||||||||||||
Foreign
|
15,212,000 | 20.0 | 18,076,000 | 19.8 | 15,981,000 | 16.9 | ||||||||||||||||||
Total
|
$ | 76,139,000 | 100.0 | % | $ | 91,451,000 | 100.0 | % | $ | 94,604,000 | 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.
Employees
At
February 22, 2010, we had 120 full-time employees including 31 engaged in
production and quality control, 18 in order fulfillment, 17 in research and
development, 9 in sales support, 23 in sales and marketing and 22 in management
and administration. Our employees are not
unionized.
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.
9
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 and could negatively impact overall
revenues. 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.
Source
of Supply
A
significant portion of our inventory purchases are from one supplier in China;
we purchased approximately 45% and 48% of our total inventory purchased for the
years ended December 31, 2009 and 2008, 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.
Concentration
of the Company’s Customer Base
Although
no one customer that distributes the Company’s products accounted for more than
20% of the Company’s revenues in 2009, several of our customers still represent
a large portion of our revenues each year and the loss of one or more of the
Company’s top customers could have a significant negative impact on the
Company’s performance. For the year ended December 31, 2009, one
customer represented greater than 10% but less than 20% of net
sales. Any decline in or loss of business or the inability of this
customer or any of our other large customers to timely pay their obligations,
could have a materially adverse effect upon the Company’s net sales and
financial performance.
10
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 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 products 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 the overall popularity of
golf. Golf products are recreational in nature and are therefore
discretionary purchases for customers. Consumers are generally more
willing to make discretionary purchases of golf products during favorable
economic conditions and when consumers are feeling confident and
prosperous. 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 as well as the amount of
golf-related products they purchase. 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, lower sales, or increased promotional expenditures,
any 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.
11
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 have introduced
similar products. 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, promotions or other discounting of existing inventories at both
the wholesale and retail levels. Such closeouts, promotions or
discounting 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 a7 and a7 OS product line
of irons and the Speedline product lines were launched in the current year,
older product lines such as Idea a3 and a3 OS irons and Tech a4 and a4 OS irons
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. 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 be able to successfully sell golf clubs that imitate our
products without infringing on our copyrights, patents, trademarks or trade
dress, or apply for and obtain patents that will prevent, limit or interfere
with our ability to make and sell our products. There are 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 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. We have had to defend against infringement claims in
the past and 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. 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 of which could have a material adverse effect on our business,
operating results and financial condition.
There can
be no assurance 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.
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.
12
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 years ending December 31, 2009 or 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 that we will be able 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 and/or such equity securities could have rights,
preferences or privileges senior to our Company's common
stock.
The
capital and credit markets have and are experiencing extreme volatility and
disruption since December 2008. 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 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 will be 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 Chairman of
the Board of Directors, B.H. (Barney) Adams, Mr. Brewer and Mr. Reed, 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.
13
On the
PGA Tour we have entered into endorsement agreements with professionals such as
Chad Campbell, Aaron Baddeley, Kris Blanks, Steve Wheatcroft and Omar
Uresti. On the Champions Tour, we have entered into endorsement
agreements with Tom Watson, Bernard Langer, Tommy Armour III, Scott Hoch, Mike
Goodes, Gene Jones, Des Smyth, and Dana Quigley. 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 2012 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 can result in and has resulted in, negative
publicity. Alternatively, poor decisions by professionals sponsored
by us could result in negative publicity. No assurance can be given
that our business would not be adversely affected in a material way by such
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, 2009, 2008
and 2007, we spent approximately $3.9 million, $6.6 million and $5.7 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.
Sufficient
Inventory Levels
The
nature of the golf industry 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 $19,721,000 and $33,611,000 at December 31, 2009 and
December 31, 2008, respectively. Due to the frequency of new product
releases by us and/or our competitors, our existing inventory may be subject to
a significant and rapid decline in the market value. Because our
inventories are valued at the lower of cost or market, a decline in the market
value of our existing inventory may necessitate a substantial write down of our
inventory balance, negatively impacting our financial
performance. Furthermore, if we are unable to maintain sufficient
inventory to meet customer demand on a timely basis or provide 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 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, the current global economic
crisis may cause our customer base to shrink and increase credit risk, both of
which could adversely affect our net sales and overall financial
condition.
14
Seasonality
and Quarterly Fluctuations
Golf is
generally 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, 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 our production facility,
increase purchasing of raw materials or finished goods, increase the size of our
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 a reserve 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 in general. 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. When practical,
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.
15
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 years ended December 31, 2009 and 2008. 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 changes in foreign
exchange rates among the countries which may materially adversely affect our
financial condition. Furthermore, a change in our relationship with
one or more of the customers or distributors could negatively impact the volume
of foreign sales.
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 using UPS Supply Chain
Solution. If there were a significant interruption in services from
one or more of these providers, we may be unable to engage alternative suppliers
to deliver our products or to 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 available to, or held
by, the Company.
Risks
Associated with the Price of our Common Stock
The
Securities and Exchange Commission (“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, impacting the liquidity of the market for our
shares and may affect the ability of investors to sell their
shares.
16
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 in close proximity to our existing administration
and assembly facility. This facility is leased by us pursuant to a
lease agreement expiring in December 2010. We believe that our
current facilities encompassing both locations will be sufficient for the
foreseeable future.
Item
3. Legal Proceedings.
On
October 29, 2009, the Company reached a settlement in principle regarding the
consolidated securities class action filed in June 1999 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 and sought rescissory or
compensatory damages in an unspecified amount. In particular, the
complaints alleged that our prospectus, which became effective July 9, 1998, was
materially false and misleading. The settlement remains subject
to preliminary and final Court approval, shareholder
class approval, and appeal. The proposed settlement provides
for a total payment to the class of $16.5 million in cash and a payment of the
first $1.25 million, after attorneys fees and costs, actually received (if any)
by the Company in connection with the Company’s litigation against its former
insurance broker (Thilman & Filipini, LLC (“T&F”)) and it’s former
insurance carrier, Zurich American Insurance Company ("Zurich"). Of
the $16.5 million cash settlement amount, $5 million will be paid by the
Company, which the Company recorded as a charge during the quarter ended
September 30, 2009. If approved, the settlement will lead to a
dismissal with prejudice of all claims against all defendants in the
litigation. As part of the settlement, the underwriters for the IPO
have agreed to release the Company from any indemnification
obligation. Although defendants continue to deny plaintiffs'
allegations, the Company believes it is in the best interests of its
stockholders to proceed with this settlement.
17
The
Company maintains 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 ("Zurich"), 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, T&F, asserting various causes of
action arising out of 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 and T&F have engaged in preliminary written
discovery efforts, but substantial discovery remains to be
completed. On November 16, 2009, we filed a Second Amended Complaint
reasserting our causes of action against the previously-named
Defendants. The Second Amended
Complaint also added Zurich as a Defendant to the lawsuit,
asserting various causes of action against it arising out of its denial of
coverage for the class action lawsuit.
Beginning
April 2008, we received communications from the Estate of Anthony Antonious
alleging that our products infringed a patent of Anthony Antonious 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 for damage and injunctive relief 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 were stayed pending the outcome
of the USPTO's reexamination proceeding. On October 9, 2009, the
USPTO issued a Notice of Intent to Issue Ex Parte Reexamination Certificate
concerning claims amended during the reexamination procedure. A
Reexamination Certificate was issued on January 5, 2010 and litigation has now
resumed in the New Jersey action and is expected to resume shortly in the Ohio
action. At this point in the legal proceedings, we cannot predict the
outcome of the matter with any certainty, per the guidance FASB ASC 450, 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.
18
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 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
|
|||||||
2009
|
||||||||
First
Quarter
|
$ | 3.50 | $ | 2.22 | ||||
Second
Quarter
|
3.20 | 2.41 | ||||||
Third
Quarter
|
3.25 | 2.30 | ||||||
Fourth
Quarter
|
3.35 | 2.93 | ||||||
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 |
On March
3, 2010, the last reported sale price of the common stock on Nasdaq was $3.05
per share. At March 3, 2010, we had approximately 820 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 Compensation
Plan Information:
The
following table sets forth information at December 31, 2009, 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
|
891,044 | $ | 0.52 | 415,655 | ||||||||
Equity
compensation plans not approved by security holders
|
--- | n/a | --- | |||||||||
Total
|
891,044 | $ | 0.52 | 415,655 |
19
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, 2004, through December 31,
2009. The graph assumes that the value of the investment in our
common stock and each index was $100 at December 31, 2004 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 2004, 2005, 2006,
2007, 2008, and 2009.
COMPARISON
OF CUMULATIVE TOTAL RETURNS
Assumes
Initial Investment of $100
December
2009
Company
|
December
2004
|
December
2005
|
December
2006
|
December
2007
|
December
2008
|
December
2009
|
||||||||||||||||||
Adams
Golf, Inc.
|
100.00 | 85.72 | 140.72 | 160.74 | 53.58 | 52.68 | ||||||||||||||||||
S&P
Small Cap 600
|
100.00 | 107.68 | 123.96 | 123.59 | 85.19 | 106.98 | ||||||||||||||||||
Peer
Group A (1)
|
100.00 | 110.29 | 111.32 | 136.16 | 71.19 | 59.51 |
(1)
|
Peer
Group consists of Callaway Golf Company and
Aldila.
|
Purchase of Equity
Securities:
There
were no shares repurchased during the year ended December 31, 2009.
20
Item
6. Selected Financial Data.
The
selected financial data presented below is derived from our consolidated
financial statements for the years ended December 31, 2009, 2008, 2007, 2006 and
2005, 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,
|
||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
(in
thousands, except per share data)
|
||||||||||||||||||||
Consolidated
Statements of Operations Data:
|
||||||||||||||||||||
Net
sales
|
$ | 76,139 | $ | 91,451 | $ | 94,604 | $ | 76,030 | $ | 56,424 | ||||||||||
Operating
income / (loss)
|
(12,075 | ) | (1,422 | ) | 4,106 | 3,440 | 2,045 | |||||||||||||
Net
income / (loss)
|
$ | (12,188 | ) | $ | (1,459 | ) | $ | 9,401 | $ | 9,000 | $ | 3,240 | ||||||||
Income / (loss) per common share (1) : | ||||||||||||||||||||
Basic
|
$ | (1.82 | ) | $ | (0.23 | ) | $ | 1.54 | $ | 1.54 | $ | 0.57 | ||||||||
Diluted
|
$ | (1.82 | ) | $ | (0.23 | ) | $ | 1.32 | $ | 1.24 | $ | 0.47 | ||||||||
Weighted
average common shares (1):
|
||||||||||||||||||||
Basic
|
6,689 | 6,413 | 6,095 | 5,830 | 5,684 | |||||||||||||||
Diluted
|
6,689 | 6,413 | 7,134 | 7,232 | 6,951 | |||||||||||||||
Consolidated
Balance Sheet Data:
|
||||||||||||||||||||
Total
assets
|
$ | 57,219 | $ | 67,056 | $ | 71,186 | $ | 55,603 | $ | 44,102 | ||||||||||
Total
debt (including current maturities)
|
-- | -- | -- | -- | -- | |||||||||||||||
Stockholders'
equity
|
$ | 40,510 | $ | 50,314 | $ | 53,299 | $ | 41,869 | $ | 32,127 |
______________________
(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.
|
21
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 six months 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
--Orders
shipped on time
--Expenses
by department
--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.
22
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,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Net
sales
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
Cost
of goods sold
|
70.5 | 59.0 | 57.7 | |||||||||
Gross
profit
|
29.5 | 41.0 | 42.3 | |||||||||
Operating
expenses:
|
||||||||||||
Research
and development expenses
|
3.7 | 4.1 | 3.9 | |||||||||
Selling
and marketing expenses
|
26.2 | 28.6 | 25.1 | |||||||||
General
and administrative expenses
|
8.9 | 9.8 | 8.9 | |||||||||
Settlement
expense
|
6.6 | -- | -- | |||||||||
Total
operating expenses
|
45.4 | 42.5 | 37.9 | |||||||||
Operating
income / (loss)
|
(15.9 | ) | (1.5 | ) | 4.4 | |||||||
Interest
income, net
|
(0.1 | ) | 0.0 | 0.3 | ||||||||
Other
income / (loss), net
|
0.0 | (0.1 | ) | 0.2 | ||||||||
Income
before income taxes
|
(16.0 | ) | (1.6 | ) | 4.9 | |||||||
Income
tax expense (benefit)
|
0.0 | 0.0 | (5.0 | ) | ||||||||
Net
income / (loss)
|
(16.0 | )% | (1.6 | )% | 9.9 | % |
Year
Ended December 31, 2009 Compared to Year Ended December 31, 2008
Total net
sales decreased to $76.1 million for the year ended December 31, 2009 from $91.5
million for the comparable period of 2008. Our sales were primarily
driven by the product sales of Idea a7 and a7 OS irons and hybrids, Speedline
drivers and hybrid-fairway woods, the Idea a3 and a3 OS Irons, the Tech a4 and
a4 OS irons, hybrids, drivers and hybrid-fairway woods and integrated iron
sets. 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 six months to
three years. The decline in net sales for the year ended December 31,
2009 was primarily due to reduced demand by customers caused by a less than
favorable economic environment in the United States and abroad.
Net sales
of irons decreased to $51.5 million, or 67.7% of total net sales for the year
ended December 31, 2009 from $57.1 million, or 62.4% of total net sales, for the
comparable period of 2008. Current period iron net sales primarily
resulted from sales of the Idea a7 and a7 OS irons, Tech a4 and a4 OS Irons,
Idea a3 and a3 OS irons coupled with a smaller portion of sales of the
integrated iron sets, while the comparable period of 2008 net sales primarily
resulted from sales of the Idea a3 and a3 OS irons coupled with a smaller
portion of sales of the Tech a4 and a4 OS irons and integrated iron
sets.
Net sales
of fairway woods decreased to $14.8 million, or 19.4% of total net sales, for
the year ended December 31, 2009, from $22.3 million, or 24.4% of total net
sales, for the comparable period of 2008. Net sales for the year
ended December 31, 2009 primarily were generated from sales of Idea a7 and a7 OS
hybrids, Speedline hybrid-fairway woods, Tech a4 and a4 OS hybrids and
hybrid-fairway woods, Idea a3 and a3 OS and Idea Pro Gold
I-woods. Net sales for the year ended December 31, 2008 primarily
were generated from sales of Insight XTD fairway woods and Tech a4 and a4 OS,
Idea a3 and a3 OS, Idea Pro and Tech OS I-woods.
23
Net sales
of drivers decreased to $9.5 million, or 12.5% of total net sales, for the year
ended December 31, 2009 from $11.3 million, or 12.3% of total net sales, for the
comparable period of 2008. A large portion of the driver net sales
for the year ended December 31, 2009 was generated by sales of the Speedline
driver, which was launched in the first quarter of 2009 along with the Speedline
9032 driver launched in the second quarter of 2009, coupled with the Tech a4 and
a4 OS drivers, which were introduced in the third quarter of 2008, while in the
comparable period of 2008, net sales were primarily driven by sales of the
Insight XTD driver, which was launched in the first quarter of 2008 and the Tech
a4 and a4 OS drivers, which were introduced in the third quarter of
2008.
We were
dependent on two customers, which collectively comprised approximately 23.5% of
net sales, for the year ended December 31, 2009. 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 20% of net sales for
this period. Should these customers or our other customers fail to
meet their obligations to us, or cease doing business with us altogether, our
results of operations and cash flows would be adversely impacted.
Net sales
of our products outside the United States decreased to $15.2 million, or 20.0%
of total net sales, from $18.1 million, or 19.8% of total net sales, for the
years ended December 31, 2009 and 2008, respectively. Net sales
resulting from countries outside the United States and Canada decreased to 6.2%
of total net sales for the year ended December 31, 2009 from 6.5% for the
comparable period of 2008.
Cost of
goods sold decreased to $53.7 million, or 70.5% of total net sales, for the year
ended December 31, 2009 from $54.0 million, or 59.0% of total net sales, for the
comparable period of 2008. The increase as a percentage of total net
sales was primarily due to the inventory write down to lower of cost or market
and an increase in inventory reserve for obsolescence totaling $3.6 million
taken during the second quarter coupled with changes in the product mix and
increased promotional programs and discounting during the year.
Selling
and marketing expenses decreased to $19.9 million for the year ended December
31, 2009 from $26.2 million for the comparable period in 2008. The
decrease was primarily the result of decreases in marketing and tour expense of
$3.7 million, a decrease in commission expense of $1.5 million, a decrease in
compensation expense of $0.7 million, as well as other cost saving initiatives
in various areas.
General
and administrative expenses decreased to $6.8 million for the year ended
December 31, 2009 from $8.9 million for the comparable period in
2008. The decrease was primarily the result of a decrease in
compensation expense of $0.9 million along with other cost saving initiatives in
various areas.
Research
and development expenses, primarily consisting of costs associated with the
development of new products, decreased to $2.8 million for the year ended
December 31, 2009 from $3.8 million for the comparable period in
2008. The decrease was primarily the result of a decrease in
compensation expense along with other cost saving initiatives in various
areas.
Our net
accounts receivable balances were approximately $13.1 million and $14.7 million
at December 31, 2009 and December 31, 2008, respectively. The
decrease was primarily due to timing of product launches as well as slower sales
resulting from the sluggish economy during the year ended December 31, 2009
coupled with increased collections during the fourth quarter 2009.
Our
inventory balances were approximately $19.7 million and $33.6 million at
December 31, 2009 and December 31, 2008, respectively. The decrease
in inventory levels was primarily due to the inventory write down to lower of
cost or market and an increase in inventory reserve for obsolescence totaling
$3.6 million during the second quarter of 2009, lower sales resulting from a
sluggish economy which resulted in lower purchases during the year, additional
sales of closeout products and improved inventory management
practices.
Our
accounts payable balances were approximately $5.5 million and $9.5 million at
December 31, 2009 and December 31, 2008, respectively. The decrease
in accounts payable is primarily associated with lower purchases of inventory
resulting from lower sales coupled with continued expense savings in other areas
of the business.
24
Our
accrued liabilities balances were approximately $11.2 million and $7.3 million
at December 31, 2009 and December 31, 2008, respectively. The
increase in accrued liabilities was primarily due to the accrual for the
settlement of the stockholder class action lawsuit, pursuant to which we have
agreed to contribute $5 million in conjunction with the settlement to cover the
layer of exposure on our directors' and officers' corporate liability insurance
that our former insurance carrier will not cover at this time. See
the Legal Proceedings section of this Form 10-K for further
details.
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.
25
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.
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 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 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.
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
summarizes our contractual obligations at December 31, 2009, 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
|
16,377 | 13,791 | 2,586 | -- | -- | |||||||||||||||
Operating
Lease Obligations
|
1,970,216 | 651,548 | 1,029,324 | 289,344 | -- | |||||||||||||||
Purchase
Obligations
|
-- | -- | -- | -- | -- | |||||||||||||||
Other
Long-term Liabilities
Reflected
on the Registrant's
Balance
sheet under GAAP
|
5,000,000 | 5,000,000 | -- | -- | -- | |||||||||||||||
Total
|
$ | 6,986,593 | $ | 5,665,339 | $ | 1,031,910 | $ | 289,344 | -- |
26
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 increased to $12.6 million at December 31, 2009 compared to
$6.0 million at December 31, 2008. During the period, the primary
changes were a decrease in inventory of $13.9 million and a decrease in accounts
receivable of $1.6 million.
In
November 2007, we signed a revolving credit agreement, which expires November
2012 with Wachovia Bank, NA to provide up to $15.0 million in short term
debt. 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. This agreement
was amended in June 2009 so that the ratio is only calculated when we have less
than $5.0 million in availability on the facility, and it was further amended in
December 2009 to provide that our debt covenant ratio is only calculated if we
have less than $2.0 million in availability on the facility between March and
June of each year. Interest on outstanding balances accrues at a rate
of LIBOR plus 2.50% and is payable monthly. As of December 31, 2009
and March 5, 2010, we had no outstanding borrowings on our credit facility and
we were in compliance with the terms of our agreement. In 2008, Wells
Fargo Bank, NA acquired Wachovia Bank, NA. As a result, Wells Fargo
Bank, NA, as successor to Wachovia Bank, NA, has become our lender under
our existing line of credit and is subject to all of the terms
and conditions thereof.
Working
capital decreased at December 31, 2009 to $29.1 million compared to $38.5
million at December 31, 2008. Approximately 29% of our current
assets were comprised of accounts receivable at December 31,
2009. 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 such 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.
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 also will 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.
27
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 the ability to collect is
reasonably assured. The ability to collect 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 the ability to collect 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 under the deferred revenue
program is paid for and all revenue recognition criteria have been met, we
record revenue.
28
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 Experian and Dun & 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 of our customers' financial strength.
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 FASB ASC 740, Income Taxes.
FASB ASC 740 prescribes the use of the liability method where by 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 that some portion or all
of the deferred income tax assets will be realized. The ultimate
realization of deferred income tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. Due to 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 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. We file tax returns with
the U.S. federal jurisdictions and are no longer subject to income tax
examinations for years before 2006.
29
Impairment
of Long-Lived Assets
We review
long-lived assets 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, 2009 and 2008, there was no impairment 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, 2009, were $12,562,000. The average
interest rate earned for the year end December 31, 2009, was
0.21%.
Additionally,
we are exposed to interest rate risk from our Line of Credit (see Item 6 -
Management Discussion and Analysis, Liquidity and Capital Resources).
Outstanding borrowings accrue interest, at the Libor rate plus 2.50%. Our
company would then be exposed to changes in the Libor rate. As of
March 5, 2010, we had no 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 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. 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 14 commencing on page
F-1. Schedule II to the consolidated financial statements is set
forth herein under Item 14 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 14, note 14 of the notes to
Consolidated Financial Statements.
30
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 Interim Chief Financial Officer,
our management conducted an assessment of our internal controls over financial
reporting as of December 31, 2009, 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,
2009, 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, 2009, 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 Interim
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 Interim 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.
31
This
Annual Report does not include an attestation report of the Company's
independent 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 SEC that permit the Company to provide only
the 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
25, 2010, to be distributed to the stockholders on or before April 30, 2010
("the 2010 Proxy Statement") under the respective captions, "Executive
Officerss”, “Proposal No. 1 - Election of Directors," "Stock Ownership - Section
16(a) Beneficial Ownership Reporting Compliance" and "Board Structure and
Committee Membership."
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 on 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 2010 Proxy
Statement under the caption "Executive Compensation”, “Board Structure and
Committee Membership – Compensation Committee Interlocks and Insider
Participation” and ”Compensation Committee Report."
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 2010 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 2010 Proxy
Statement under the captions "Executive Compensation-Employment Contracts and
Change in Control Arrangements," “Board Structure and Committee Membership –
Compensation Committee Interlocks and Insider Participation” and "Transactions
with Related Persons."
Item
14. Principal Accounting Fees and Services.
The
information required by this Item is incorporated by reference to our 2010 Proxy
Statement under "Proposal No. 2 – Ratification of Independent Registers Public
Accounting Firm."
32
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
|
Page
|
|
Index
to Consolidated Financial Statements and Related Financial Statement
Schedule
|
F-1
|
|
Reports
of Independent Registered Public Accounting Firms
|
F-2
– F-3
|
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
F-4
|
|
Consolidated
Statements of Operations for the Years ended December 31, 2009, 2008
and
2007
|
F-5
|
|
Consolidated
Statements of Stockholders' Equity for the Years ended December 31,
2009,
2008 and 2007
|
F-6,
F-7
|
|
Consolidated
Statements of Cash Flows for the Years ended December 31, 2009, 2008
and
2007
|
F-8
|
|
Notes
to Consolidated Financial Statements
|
F-9
- F-25
|
(2) Financial
Statement Schedule
|
||
Our
financial statement schedule for the years ended December 31, 2009, 2008
and 2007 is filed as part of this Annual Report and should be read in
conjunction with our Consolidated Financial
Statements.
|
||
Report
of Independent Registered Public Accounting Firm
|
S-1
|
|
Schedule
II - Valuation and Qualifying Accounts
|
S-2
|
|
All
other schedules are have been omitted because such schedules are not
required under the related instructions, or are not applicable, or because
the information is not present, or is not present in amounts sufficient to
require submission of the schedule, or because the information required is
included in the consolidated financial statements and notes
thereto.
|
(3) Exhibits
|
|
The
exhibits listed below are filed as a part of or incorporated by reference
in this Annual Report. Where such filing is made by
incorporation by reference to a previously filed document, such document
is identified in parenthesis. See the Index of Exhibits
included with the exhibits filed as a part of this Annual
Report.
|
Exhibit
|
Description
|
Location
|
||
Exhibit
3.1
|
Amended
and Restated Certificate of Incorporation
|
Incorporated
by reference to Form S-1 File No. 333-51715 (Exhibit
3.1)
|
||
Exhibit
3.2
|
Certificate
of Amendment to the Restated Certificate of Incorporation filed on
February 14, 2008
|
Incorporated
by reference to 2007 Form 10-K (Exhibit 3.2)
|
||
Exhibit
3.3
|
Amended
and Restated By-laws
|
Incorporated
by reference to Form S-1 File No. 333-51715 (Exhibit
3.2)
|
||
Exhibit
4.1
|
1998
Stock Incentive Plan of the Company dated February 26, 1998, as
amended
|
Incorporated
by reference to Form S-8 File No. 333-68129 (Exhibit
4.1)
|
||
Exhibit
4.2
|
1996
Stock Option Plan dated April 10, 1998
|
Incorporated
by reference to Form S-1 File No.333-51715 (Exhibit
4.2)
|
33
Exhibit
4.3
|
Adams
Golf, Ltd. 401(k) Retirement Plan
|
Incorporated
by reference to Form S-1 File No.333-51715 (Exhibit
4.3)
|
||
Exhibit
4.4
|
1999
Non-Employee Director Plan of Adams Golf, Inc.
|
Incorporated
by reference to 1999 Form 10-K (Exhibit 4.4)
|
||
Exhibit
4.5
|
1999
Stock Option Plan for Outside Consultants of Adams Golf,
Inc.
|
Incorporated
by reference to Form S-8 File No. 333-37320 (Exhibit
4.5)
|
||
Exhibit
4.6
|
2002
Stock Incentive Plan for Adams Golf, Inc.
|
Incorporated
by reference to Annex A of the 2002 Proxy Statement (Annex
A)
|
||
Exhibit
4.7
|
Form
of Option Agreement under the 2002 Stock Option Plan of Adams Golf,
Inc.
|
Incorporated
by reference to Form S-8 File No. 333-112622 (Exhibit
4.7)
|
||
Exhibit
10.1
|
Amendment
dated September 1, 2003 to the Commercial Lease Agreement dated April 6,
1998, between Jackson-Shaw Technology Center II and the
Company
|
Incorporated
by reference to 2003 Form 10-K (Exhibit 10.12)
|
||
Exhibit
10.2*
|
Golf
Consultant Agreement - Thomas S. Watson
|
Incorporated
by reference to 2004 Form 10-K (Exhibit 10.17)
|
||
Exhibit
10.3*
|
Asset
Purchase Agreement of Women’s Golf Unlimited
|
Incorporated
by reference to 2006 Form 10-K (Exhibit 10.11)
|
||
Exhibit
10.4
|
Revolving
Line of Credit between Adams Golf, Inc and Wachovia Bank, National
Association
|
Incorporated
by reference to the Report on Form 8-K dated November 13, 2007 (Exhibit
10.1)
|
||
Exhibit
10.5
|
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
10.6
|
Commercial
Lease Agreement dated April 10, 2008, between CLP Properties Texas, L.P.
and the Company
|
Incorporated
by reference to the Report on Form 8-K dated April 15, 2008 (Exhibit
10.1)
|
||
Exhibit
10.7
|
Employment
Agreement - Byron (Barney) H. Adams
|
Incorporated
by reference to the Report on Form 8-K dated January 12, 2009 (Exhibit
10.1)
|
||
Exhibit
10.8
|
Employment
Agreement - Oliver G. (Chip) Brewer
|
Incorporated
by reference to the Quarterly Report on Form 10-Q for the quarter ended
March 31, 2009 File No. 001-33978 (Exhibit 10.9)
|
||
Exhibit
10.9
|
Amendment
to Revolving line of Credit between Adams Golf, Inc and Wachovia Bank,
National Association
|
Incorporated
by reference to Third quarter 2009 Form 10-Q File No 001-33978 (Exhibit
10.9)
|
||
Exhibit
10.10
|
Stipulation
of Settlement of In Re Adams Golf, Inc. Securities Litigation, dated
December 9, 2009
|
Included
in this filing
|
34
Exhibit
21.1
|
Subsidiaries
of the Registrant
|
Included
in this filing
|
||
Exhibit
23.1
|
Consent
of BKD LLP
|
Included
in this filing
|
||
Exhibit
23.2
|
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)
35
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
9, 2010
|
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
9, 2010
|
By: |
/S/ B.H. (BARNEY)
ADAMS
|
B.H. (Barney) Adams, Chairman of the Board | ||
Date: March
9, 2010
|
By: |
/S/ OLIVER G.
BREWER III
|
Oliver G. (Chip) Brewer III | ||
Chief Executive Officer, President and Director | ||
Date: March
9, 2010
|
By: |
/S/ PAMELA
HIGH
|
Pamela J. High | ||
Interim Chief Financial Officer | ||
(Principal Financial Officer) | ||
Date: March
9, 2010
|
By: |
/S/ MARK R.
MULVOY
|
Mark R. Mulvoy | ||
Director | ||
Date: March
9, 2010
|
By: |
/S/ ROBERT D.
ROGERS
|
Robert D. Rogers | ||
Director | ||
Date: March
9, 2010
|
By: |
/S/ RUSSELL L.
FLEISCHER
|
Russell L. Fleischer | ||
Director | ||
Date: March
9, 2010
|
By: |
/S/ JOSEPH R.
GREGORY
|
Joseph R. Gregory | ||
Director | ||
Date: March
9, 2010
|
By: |
/S/ JOHN M.
GREGORY
|
John M. Gregory | ||
Director | ||
36
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
AND
RELATED FINANCIAL STATEMENT SCHEDULE
Page
|
|
Consolidated
Financial Statements
|
|
Reports
of Independent Registered Public Accounting Firms
|
F-2
– F-3
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
F-4
|
Consolidated
Statements of Operations for the Years ended December 31, 2009, 2008 and
2007
|
F-5
|
Consolidated
Statements of Stockholders' Equity for the Years ended December 31,
2009, 2008 and 2007
|
F-6
- F-7
|
Consolidated
Statements of Cash Flows for the Years ended December 31, 2009, 2008
and 2007
|
F-8
|
Notes
to Consolidated Financial Statements
|
F-9
- F-25
|
Financial
Statement Schedule
Our
financial statement schedule for the years ended December 31, 2009, 2008 and
2007 is filed as part of this Report and should be read in conjunction with our
Consolidated Financial Statements.
Report
of Independent Registered Public Accounting Firm
|
|
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.
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Audit Committee, Board of Directors and Stockholders of Adams Golf,
Inc.
We have
audited the accompanying consolidated balance sheet of Adams Golf, Inc. and
subsidiaries (the “Company”) as of December 31, 2009 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. The Company’s management is responsible for
these consolidated financial statements. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We
conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. 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 audit provides 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, 2009 and the consolidated results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of
America.
/S/
BKD LLP
|
Dallas,
Texas
|
March
9, 2010
|
F-2
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 sheet of Adams Golf, Inc. and
subsidiaries (the “Company”) as of December 31, 2008 and the related
consolidated statements of operations, stockholders' equity and cash flows for
years ended December 31, 2008 and 2007. 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 years ended December 31,
2008 and 2007. 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 the consolidated results of their
operations and their cash flows for the years ended December 31, 2008 and 2007,
in conformity with accounting principles generally accepted in the United States
of America. Also, in our opinion, the related financial statement
schedule for the years ended December 31, 2008 and 2007, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth
therein.
/S/
KBA GROUP LLP
|
Dallas,
Texas
|
March
9, 2010
|
F-3
ADAMS
GOLF, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except share and per share amounts)
ASSETS
|
||||||||
December 31,
|
||||||||
2009
|
2008
|
|||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 12,562 | $ | 5,960 | ||||
Trade
receivables, net
|
13,136 | 14,743 | ||||||
Inventories,
net
|
19,721 | 33,611 | ||||||
Prepaid
expenses
|
378 | 908 | ||||||
Other
current assets
|
22 | 29 | ||||||
Total
current assets
|
45,819 | 55,251 | ||||||
Property
and equipment, net
|
934 | 1,210 | ||||||
Deferred
tax asset, net – non current
|
10,228 | 10,228 | ||||||
Other
assets
|
238 | 367 | ||||||
$ | 57,219 | $ | 67,056 | |||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 5,479 | $ | 9,471 | ||||
Accrued
expenses and other current liabilities
|
11,228 | 7,253 | ||||||
Total
current liabilities
|
16,707 | 16,724 | ||||||
Other
liabilities
|
2 | 18 | ||||||
Total
liabilities
|
16,709 | 16,742 | ||||||
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; 7,387,309 and
6,909,866 shares issued and 6,976,372 and 6,498,929 shares outstanding at
December 31, 2009 and 2008, respectively
|
7 | 7 | ||||||
Additional
paid-in capital
|
93,576 | 92,701 | ||||||
Accumulated
other comprehensive income
|
2,074 | 565 | ||||||
Accumulated
deficit
|
(50,393 | ) | (38,205 | ) | ||||
Treasury
stock, 410,937 common shares at December 31, 2009 and December 31, 2008,
at cost
|
(4,754 | ) | (4,754 | ) | ||||
Total
stockholders' equity
|
40,510 | 50,314 | ||||||
Commitments
and contingencies
|
||||||||
$ | 57,219 | $ | 67,056 |
See
accompanying notes to consolidated financial statements
F-4
ADAMS
GOLF, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands, except per share amounts)
Years Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Net
sales
|
$ | 76,139 | $ | 91,451 | $ | 94,604 | ||||||
Cost
of goods sold
|
53,714 | 53,981 | 54,608 | |||||||||
Gross
profit
|
22,425 | 37,470 | 39,996 | |||||||||
Operating
expenses:
|
||||||||||||
Research
and development expenses
|
2,816 | 3,758 | 3,698 | |||||||||
Selling
and marketing expenses
|
19,911 | 26,205 | 23,772 | |||||||||
General
and administrative expenses
|
6,773 | 8,929 | 8,420 | |||||||||
Settlement
expense
|
5,000 | -- | -- | |||||||||
Total
operating expenses
|
34,500 | 38,892 | 35,890 | |||||||||
Operating
income/(loss)
|
(12,075 | ) | (1,422 | ) | 4,106 | |||||||
Other
income (expense):
|
||||||||||||
Interest
income
|
8 | 122 | 286 | |||||||||
Interest
expense
|
(87 | ) | (100 | ) | (1 | ) | ||||||
Other
|
34 | (63 | ) | 264 | ||||||||
Income/(loss)
before income taxes
|
(12,120 | ) | (1,463 | ) | 4,655 | |||||||
Net
income tax expense (benefit)
|
68 | (4 | ) | (4,746 | ) | |||||||
Net
income/(loss)
|
$ | (12,188 | ) | $ | (1,459 | ) | $ | 9,401 | ||||
Net income/(loss) per common share: | ||||||||||||
Basic
|
$ | (1.82 | ) | $ | (0.23 | ) | $ | 1.54 | ||||
Diluted
|
$ | (1.82 | ) | $ | (0.23 | ) | $ | 1.32 |
See
accompanying notes to consolidated financial statements
F-5
ADAMS
GOLF, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
(in
thousands, except share amounts)
Years
ended December 31, 2009, 2008 and 2007
Shares
of
|
Additional
|
Accumulated
Other
|
Cost
of
|
Total
|
||||||||||||||||||||||||||||
Common
|
Common
|
Paid-in
|
Comprehensive
|
Accumulated
|
Comprehensive
|
Treasury
|
Stockholders'
|
|||||||||||||||||||||||||
Stock
|
Stock
|
Capital
|
Income
(Loss)
|
Deficit
|
Income
(Loss)
|
Stock
|
Equity
|
|||||||||||||||||||||||||
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 | |||||||||||||||||||||||
Comprehensive
loss:
|
||||||||||||||||||||||||||||||||
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 |
(continued)
|
F-6
ADAMS
GOLF, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
(in
thousands, except share amounts)
Years
ended December 31, 2009, 2008 and 2007
Shares
of
|
Additional
|
Accumulated
Other
|
Cost
of
|
Total
|
||||||||||||||||||||||||||||
Common
|
Common
|
Paid-in
|
Comprehensive
|
Accumulated
|
Comprehensive
|
Treasury
|
Stockholders'
|
|||||||||||||||||||||||||
Stock
|
Stock
|
Capital
|
Income (Loss)
|
Deficit
|
Income
/(Loss)
|
Stock
|
Equity
|
|||||||||||||||||||||||||
Balance,
December 31, 2008
|
6,909,866 | $ | 7 | $ | 92,701 | $ | 565 | $ | (38,205 | ) | $ | (4,754 | ) | $ | 50,314 | |||||||||||||||||
Comprehensive
loss:
|
||||||||||||||||||||||||||||||||
Net
loss
|
-- | -- | -- | -- | (12,188 | ) | $ | (12,188 | ) | -- | (12,188 | ) | ||||||||||||||||||||
Other
comprehensive income, net of tax:
|
||||||||||||||||||||||||||||||||
Unrealized
gain on foreign currency translation
|
-- | -- | -- | 1,509 | -- | 1,509 | -- | 1,509 | ||||||||||||||||||||||||
Comprehensive
loss
|
-- | -- | -- | -- | -- | $ | (10,679 | ) | -- | -- | ||||||||||||||||||||||
Stock
options exercised
|
101,938 | -- | 4 | -- | -- | -- | 4 | |||||||||||||||||||||||||
Issuance
of restricted stock
|
375,505 | -- | -- | -- | -- | -- | -- | |||||||||||||||||||||||||
Amortization
of deferred compensation
|
-- | -- | 871 | -- | -- | -- | 871 | |||||||||||||||||||||||||
Balance,
December 31, 2009
|
7,387,309 | $ | 7 | $ | 93,576 | $ | 2,074 | $ | (50,393 | ) | $ | (4,754 | ) | $ | 40,510 |
See
accompanying notes to consolidated financial statements
F-7
ADAMS
GOLF, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
Years Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
income/(loss)
|
$ | (12,188 | ) | $ | (1,459 | ) | $ | 9,401 | ||||
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
|
609 | 578 | 460 | |||||||||
Amortization
of deferred compensation
|
871 | 956 | 1,046 | |||||||||
Provision
for doubtful accounts
|
1,173 | 1,539 | 316 | |||||||||
Provision
for deferred income taxes
|
-- | -- | (4,826 | ) | ||||||||
Provision
for inventory reserve
|
1,848 | 24 | 36 | |||||||||
Changes
in operating assets and liabilities:
|
||||||||||||
Trade
receivables
|
434 | 1,727 | (4,772 | ) | ||||||||
Inventories
|
12,042 | (4,890 | ) | (4,130 | ) | |||||||
Prepaid
expenses
|
530 | (165 | ) | (57 | ) | |||||||
Other
current assets
|
7 | 52 | (61 | ) | ||||||||
Other
assets
|
-- | 557 | 531 | |||||||||
Accounts
payable
|
(3,991 | ) | 266 | 2,934 | ||||||||
Accrued
expenses and other current liabilities
|
3,975 | (1,449 | ) | 1,242 | ||||||||
Net
cash provided by (used in) operating activities
|
5,310 | (2,264 | ) | 2,120 | ||||||||
Cash
flows from investing activities:
|
||||||||||||
Purchase
of property and equipment
|
(184 | ) | (552 | ) | (653 | ) | ||||||
Purchase
of intangible assets
|
-- | -- | (600 | ) | ||||||||
Net
cash used in investing activities
|
(184 | ) | (552 | ) | (1,253 | ) | ||||||
Cash
flows from financing activities:
|
||||||||||||
Principal
payments under capital lease obligation
|
(16 | ) | (11 | ) | (22 | ) | ||||||
Proceeds
from exercise of stock options
|
4 | 8 | 43 | |||||||||
Treasury
stock purchase
|
-- | (500 | ) | (728 | ) | |||||||
Debt
financing costs
|
(21 | ) | 4 | (35 | ) | |||||||
Net
cash used in financing activities
|
(33 | ) | (499 | ) | (742 | ) | ||||||
Effects
of exchange rate changes
|
1,509 | (1,990 | ) | 1,668 | ||||||||
Net
increase (decrease) in cash and cash equivalents
|
6,602 | (5,305 | ) | 1,793 | ||||||||
Cash
and cash equivalents at beginning of the year
|
5,960 | 11,265 | 9,472 | |||||||||
Cash
and cash equivalents at end of the year
|
$ | 12,562 | $ | 5,960 | $ | 11,265 | ||||||
Supplemental
disclosure of cash flow information:
|
||||||||||||
Interest
paid
|
$ | 87 | $ | 101 | $ | 1 | ||||||
Income
taxes paid
|
$ | 68 | $ | 9 | $ | 65 | ||||||
Supplemental
disclosure of non-cash investing and financing activities Equipment
financed with capital lease
|
$ | -- | $ | 44 | $ | -- |
See
accompanying notes to consolidated financial statements.
F-8
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
(Tables
in thousands, except share and per share amounts)
(1)
|
Summary
of Significant Accounting Policies
|
|
(a) General
|
|
We
design, assemble, market and distribute premium quality, technologically
innovative golf clubs for all skill levels. Our recently
launched products include Idea a7 and a7 OS irons and
hybrids, Speedline Fast 10 and Speedline 9032 drivers,
Speedline Fast 10 hybrid fairway woods, Idea Pro Black I-woods and irons,
Idea Tech a4 and a4 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 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 Idea a3 and a3 OS I-woods and irons, 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.
|
|
(b) Inventories
|
|
Inventories
are valued at the lower of cost or market and primarily consist of
finished golf clubs and component parts. Cost is determined
using the first-in, first-out method. The inventory balance,
which includes material, labor and assembly overhead costs, is recorded
net of an estimated allowance for obsolete inventory. The
estimated allowance for obsolete inventory is based upon management's
understanding of market conditions and forecasts of future product
demand. 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.
|
|
(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 Experian and 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.
|
F-9
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
(Tables
in thousands, except share and per share amounts)
(1)
|
Summary
of Significant Accounting Policies
(continued)
|
|
(d) Revenue
Recognition
|
|
We
recognize revenue when the product is shipped. At that time,
the title and risk of loss transfer to the customer and the ability to
collect is reasonably assured. The ability to collect 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 the
ability to collect 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 for sales that have extended payment terms and
a right of return of the product under a specified
program. Once the product under the deferred revenue program is
paid for and all revenue recognition criteria have been met, we record
revenue.
|
|
(e) 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.
|
|
(f) New
Accounting Pronouncements
|
|
There
were no new accounting pronouncements during the period that had a
material impact on the Company's 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 $2,816,000, $3,758,000 and $3,698,000 for the years ended
December 31, 2009, 2008 and 2007,
respectively.
|
|
(h) Advertising
Costs
|
|
Advertising
costs, included in selling and marketing expenses on the accompanying
consolidated statements of operations, other than direct commercial costs,
are expensed as incurred and totaled approximately $3,922,000, $6,559,000
and $5,732,000 for the years ended December 31, 2009, 2008 and 2007,
respectively.
|
F-10
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
(Tables
in thousands, except share and per share amounts)
(1)
|
Summary
of Significant Accounting Policies (continued)
|
|
(i) 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 allowances 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, 2009
|
$ | 522 | (474 | ) | 317 | $ | 365 | |||||||||
Year
ended December 31, 2008
|
$ | 337 | (697 | ) | 882 | $ | 522 |
|
(j) Income
Taxes
|
|
We
account for income taxes in accordance with FASB ASC 740, Income
Taxes. FASB ASC 740 prescribes the use of the liability
method whereby 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 that
some portion or all of the deferred income tax assets will be
realized. The ultimate realization of deferred income tax
assets is dependent upon the generation of future taxable income during
the periods in which those temporary differences become
deductible. Due to 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 and other deferred
tax assets will be realized. However, due to our earnings
history over the past years and projected future earnings, 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. Our estimate of the realizability of the net
deferred tax assets is a significant estimate that is subject to change in
the near term. We file tax returns with the U.S. federal
jurisdictions and are no longer subject to income tax examinations for
years before 2006.
|
F-11
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
(Tables
in thousands, except share and per share amounts)
(1)
|
Summary
of Significant Accounting Policies
(continued)
|
|
(k) Net
income/(Loss) Per Share
|
|
The
weighted average common stock outstanding used for determining basic and
diluted loss per common share were 6,688,762 for the year ended December
31, 2009. The effect of all options to purchase shares of our
common stock for the year ended December 31, 2009 were excluded from the
calculation of dilutive shares as the effect of inclusion would have been
antidilutive.
|
|
The
weighted average common stock outstanding 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 stock outstanding 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.
|
|
(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
review long-lived assets 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, 2009, 2008 and 2007,
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.
|
F-12
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
(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
Compensation
cost related to stock-based compensation is estimated based on the grant date
fair value of the award and is recognized as expense over the stock award's
requisite service/vesting period.
(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 U. S. 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.
F-13
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
(Tables
in thousands, except share and per share amounts)
(2)
|
Trade
Receivables, net
|
Trade
receivables consisted of the following at December 31, 2009 and
2008:
2009
|
2008
|
|||||||
Trade
receivables
|
$ | 14,761 | $ | 16,064 | ||||
Allowance
for doubtful accounts
|
(1,625 | ) | (1,321 | ) | ||||
$ | 13,136 | $ | 14,743 |
(3)
|
Inventories,
net
|
Inventories
consisted of the following at December 31, 2009 and 2008:
2009
|
2008
|
|||||||
Finished
goods
|
$ | 13,057 | $ | 20,423 | ||||
Component
parts
|
8,708 | 13,385 | ||||||
Allowance
for inventory obsolescence
|
(2,044 | ) | (197 | ) | ||||
$ | 19,721 | $ | 33,611 |
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
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 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 the end of the second
quarter of 2009, we recognized an inventory write-down of $3.6 million as a
result of a reduction to a lower of cost or market value and increase to
inventory obsolescence reserves. At December 31, 2009 and 2008,
inventories included $708,000 and $821,000 of consigned inventory,
respectively.
(4)
|
Property
and Equipment, net
|
Property
and equipment consisted of the following at December 31, 2009 and
2008:
2009
|
2008
|
|||||||
Equipment
|
$ | 2,555 | $ | 2,442 | ||||
Computers
and software
|
7,782 | 7,716 | ||||||
Furniture
and fixtures
|
944 | 940 | ||||||
Leaseholds
improvements
|
183 | 182 | ||||||
Accumulated
depreciation and amortization
|
(10,530 | ) | (10,070 | ) | ||||
$ | 934 | $ | 1,210 |
F-14
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
(Tables
in thousands, except share and per share amounts)
(5)
|
Other
Current and Non-Current Assets
|
Other
current assets, consisted of the following at December 31, 2009 and
2008:
2009
|
2008
|
|||||||
Maintenance
agreements
|
$ | 22 | $ | 29 |
Other
assets, consisted of the following at December 31, 2009 and 2008:
2009
|
2008
|
|||||||
Deposits
|
$ | 6 | $ | 6 | ||||
Other,
including intangible assets purchased
|
232 | 361 | ||||||
$ | 238 | $ | 367 |
(6)
|
Accrued
Expenses and Other Current
Liabilities
|
Accrued
expenses and other current liabilities consisted of the following at December
31, 2009 and 2008:
2009
|
2008
|
|||||||
Payroll
and commissions
|
$ | 284 | $ | 447 | ||||
Product
warranty expense and sales returns
|
2,209 | 1,641 | ||||||
Professional
services
|
25 | 7 | ||||||
Accrued
inventory
|
65 | 1,021 | ||||||
Accrued
settlement expense
|
5,000 | -- | ||||||
Accrued
sales promotions
|
1,060 | 274 | ||||||
Deferred
revenue
|
1,273 | 1,429 | ||||||
Other
|
1,312 | 2,434 | ||||||
$ | 11,228 | $ | 7,253 |
F-15
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
(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,
|
||||
2010
|
$ | 652 | ||
2011
|
588 | |||
2012
|
441 | |||
2013
|
289 | |||
2014
|
-- | |||
$ | 1,970 |
Rent
expense was approximately $765,000, $703,000 and $650,000 for the years ended
December 31, 2009, 2008 and 2007, respectively.
On
October 29, 2009, the Company reached a settlement in principle regarding the
consolidated securities class action filed in June 1999 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 and sought rescissory or
compensatory damages in an unspecified amount. In particular, the
complaints alleged that our prospectus, which became effective July 9, 1998, was
materially false and misleading. The settlement remains subject
to preliminary and final Court approval, shareholder class
approval, and appeal. The proposed settlement provides for a total
payment to the class of $16.5 million in cash and a payment of the first $1.25
million, after attorneys fees and costs, actually received (if any) by the
Company in connection with the Company’s litigation against its former insurance
broker Thilman & Filipini, LLC (“T&F”) and it’s former insurance
carrier, Zurich American Insurance Company ("Zurich"). Of the $16.5
million cash settlement amount, $5 million will be paid by the Company, which
the Company accrued as a liability during the quarter ended September 30,
2009. If approved, the settlement will lead to a dismissal with
prejudice of all claims against all defendants in the litigation. As
part of the settlement, the underwriters for the IPO have agreed to release the
Company from any indemnification obligation. Although defendants
continue to deny plaintiffs' allegations, the Company believes it is in the best
interests of its stockholders to proceed with this
settlement.
F-16
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
(Tables
in thousands, except share and per share amounts)
(7)
|
Commitments
and Contingencies (continued)
|
|
The
Company maintains 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
("Zurich"), 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, T&F LLC, asserting
various causes of action arising out of 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 and T&F have engaged in preliminary
written discovery efforts, but substantial discovery remains to be
completed. On November 16, 2009, we filed a Second Amended
Complaint reasserting our causes of action against the previously-named
Defendants. The Second Amended
Complaint also added Zurich as a Defendant to the lawsuit,
asserting various causes of action against it arising out of its denial of
coverage for the class action
lawsuit.
|
|
Beginning
April 2008, we received communications from the Estate of Anthony
Antonious alleging that our products infringed a patent of Anthony
Antonious 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 for damage and injunctive relief 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 were stayed pending the outcome of the USPTO's
reexamination proceeding. On October 9, 2009, the USPTO issued
a Notice of Intent to Issue Ex Parte Reexamination Certificate concerning
claims amended during the reexamination procedure. A
Reexamination Certificate was issued on January 5, 2010 and litigation has
now resumed in the New Jersey action and is expected to resume shortly in
the Ohio action. At this point in the legal proceedings, we cannot
predict the outcome of the matter with any certainty, 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.
|
F-17
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
(Tables
in thousands, except share and per share amounts)
(8)
|
Retirement
Plan
|
|
In
February 1998, we adopted the Adams Golf, Ltd. 401(k) Retirement Plan,
which covers substantially all employees of the Company. During
April 2009, we discontinued the employer match. For the years
ended December 31, 2009, 2008 and 2007, we contributed approximately
$65,000, $251,000 and $134,000, respectively, to the 401(k) Retirement
Plan.
|
(9)
|
Liquidity
|
|
In
November 2007, we signed a revolving credit agreement, which expires
November 2012 with Wachovia Bank, NA to provide up to $15.0 million in
short term debt. 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. This agreement was amended in June 2009 so that the
ratio is only calculated when we have less than $5.0 million in
availability on the facility, and it was further amended in December 2009
to provide that our debt covenant ratio is only calculated if we have less
than $2.0 million in availability on the facility between March and June
of each year. Interest on outstanding balances accrues at a
rate of LIBOR plus 2.50% and is payable monthly. As of December
31, 2009 and March 5, 2010, we had no outstanding borrowings on our credit
facility and we were in compliance with the terms of our
agreement. In 2008, Wells Fargo Bank, NA acquired Wachovia
Bank, NA. As a result, Wells Fargo Bank, NA, as successor to
Wachovia Bank, NA, has become our lender under our existing line of
credit and is 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, current cash reserves, and available borrowings also
will 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.
|
F-18
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
(Tables
in thousands, except share and per share amounts)
(10)
|
Income
Taxes
|
Income
tax expense (benefit) for the years ended December 31, 2009, 2008 and 2007
consisted of the following:
2009
|
2008
|
2007
|
||||||||||
Federal-current
|
$ | - | $ | (13 | ) | $ | 79 | |||||
State-current
|
68 | 9 | 1 | |||||||||
Deferred
|
-- | -- | (4,826 | ) | ||||||||
$ | 68 | $ | (4 | ) | $ | (4,746 | ) |
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 (loss) before income taxes) for the years ended December 31, 2009, 2008
and 2007 as follows:
2009
|
2008
|
2007
|
||||||||||
Computed
"expected" tax (benefit) expense
|
$ | (4,242 | ) | $ | (511 | ) | $ | 1,629 | ||||
State
income taxes, net of federal
|
-- | (15 | ) | 47 | ||||||||
Change
in valuation allowance for deferred tax assets
|
4,399 | 680 | (6,809 | ) | ||||||||
Other
|
(89 | ) | (158 | ) | 387 | |||||||
$ | 68 | $ | (4 | ) | $ | (4,746 | ) |
The tax
effects of temporary differences that give rise to the deferred tax assets at
December 31, 2009 and 2008 are presented below:
2009
|
2008
|
|||||||
Deferred
tax assets:
|
||||||||
Allowance
for doubtful accounts receivable
|
$ | 569 | $ | 475 | ||||
Product
warranty and sales returns
|
773 | 591 | ||||||
Other
reserves
|
38 | 277 | ||||||
Deferred
compensation
|
621 | 312 | ||||||
263A
adjustment
|
13 | 51 | ||||||
Research
and development tax credit carryforwards
|
306 | 306 | ||||||
Net
operating loss carryforwards
|
17,435 | 13,344 | ||||||
Total
deferred tax assets
|
19,755 | 15,356 | ||||||
Valuation
allowance
|
(9,527 | ) | (5,128 | ) | ||||
Net
deferred tax assets
|
$ | 10,228 | $ | 10,228 |
F-19
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
(Tables
in thousands, except share and per share amounts)
(10)
|
Income
Taxes (continued)
|
Net
deferred tax assets recorded in consolidated balance sheets at December 31, 2009
and 2008:
2009
|
2008
|
|||||||
Current
|
$ | -- | $ | -- | ||||
Non-current
|
10,228 | 10,228 | ||||||
$ | 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 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, 2009, we could not determine based on a weighing of objective
evidence that it is more likely than not that all of our deferred tax
assets will be realized. As a result, as of December 31, 2009
and 2008, we have established a valuation allowance for a portion of our
deferred tax assets resulting in a net deferred tax asset of $10.2
million. This amount represents what we believe to be an
estimate of future usage of our net operating loss
carryfowards. The remaining asset has an existing valuation
allowance applied to it. The net change in the valuation
allowance for the years ended December 31, 2009 and 2008 was $4,399,000
and $680,000, respectively.
|
|
At
December 31, 2009, we had federal net operating loss carryforwards of
approximately $50,119,000 and tax credit carryforwards of $306,000, which
are available to offset future taxable income through
2029.
|
(11)
|
Stockholders'
Equity
|
|
(a) Employee
Stock Option Plans
|
|
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. On May 1, 2002,
four predecessor plans 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 are forfeited or expire
under the four predecessor plans, those shares become available under the
Plan. Since the initial transfer on May 1, 2002, an additional
201,510 shares were transferred to the Plan. At December 31,
2009, options to purchase 891,044 shares were outstanding with exercise
prices ranging from $0.04 to $4.80 per share at the date of
grant. The option vesting periods vary from six months to four
years and the options expire ten years from the date of
grant. At December 31, 2009, 415,655 shares remained available
for grant under the Plan, including
forfeitures.
|
F-20
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
(Tables
in thousands, except share and per share amounts)
(11)
|
Stockholders'
Equity (continued)
|
|
The
following is a summary of stock options outstanding as of December 31,
2009:
|
Weighted
|
|||||||||||||||||||
Average
|
Weighted
|
Weighted
|
|||||||||||||||||
Range
of
|
Remaining
|
Average
|
Average
Vested
|
||||||||||||||||
Exercise
|
Options
|
Contractual
|
Exercise
Price
|
Options
|
Exercise
Price
|
||||||||||||||
Prices
|
Outstanding
|
Life
|
per share
|
Exercisable
|
per share
|
||||||||||||||
$0.04
- $1.00
|
753,544 |
3.10
years
|
$ | 0.04 | 753,544 | $ | 0.04 | ||||||||||||
$1.01
- $3.00
|
12,500 |
3.12
years
|
1.24 | 12,500 | 1.24 | ||||||||||||||
$3.01
- $4.00
|
100,000 |
9.04
years
|
3.02 | -- | -- | ||||||||||||||
$4.01
- $5.00
|
25,000 |
5.26 years
|
4.76 | 21,875 | 4.76 | ||||||||||||||
|
|||||||||||||||||||
891,044 |
3.83
years
|
$ | 0.52 | 787,919 | $ | 0.19 |
The per
share weighted-average grant date fair value of stock options granted during
2009 was $2.70, while no options were granted during 2007 or
2008. The fair value of the 2009 option grants were estimated 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 expected volatility (estimated based on historical
volatility), 96.34%. We use historical data to estimate option
exercise and employee termination factors within the valuation
model.
A summary
of stock option activity follows:
Aggregate
|
||||||||||||
Weighted
|
Intrinsic
|
|||||||||||
Number
of
|
Average
|
Value
of
|
||||||||||
Shares
|
Exercise price
|
options
|
||||||||||
Options
outstanding at December 31, 2006
|
1,424,308 | $ | 0.16 | |||||||||
Options
granted (resulting from the reverse split conversion of
existing options)
|
6 | 0.04 | ||||||||||
Options
forfeited (expired)
|
-- | -- | ||||||||||
Options
exercised
|
(324,040 | ) | 0.04 | $ | 2,557,468 | |||||||
Options
outstanding at December 31, 2007
|
1,100,274 | 0.16 | ||||||||||
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 | ||||||||||
Options
granted
|
100,000 | 3.02 | ||||||||||
Options
forfeited (expired)
|
-- | -- | ||||||||||
Options
exercised
|
(101,938 | ) | 0.04 | 291,133 | ||||||||
Options
outstanding at December 31, 2009
|
891,044 | $ | 0.52 | $ | 2,161,939 | |||||||
Options
exercisable at December 31, 2009
|
787,919 | $ | 0.19 | $ | 2,174,469 |
F-21
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
(Tables
in thousands, except share and per share amounts)
(11)
|
Stockholders'
Equity (continued)
|
|
During
2009, 100,000 shares of restricted stock was granted at fair market value
of $3.30, 50,000 at $3.20, 175,000 at $3.15 and 50,505 at
$3.02. During 2008, 150,000 shares of restricted stock were
granted at a fair market price of $8.15, and 11,365 were granted at a fair
market price of $8.60 and 50,000 shares vested. The per share
weighted-average fair value of restricted stock granted during 2009 was
$3.18 and $8.51 during 2008. The fair value of the restricted
stock grants were recorded using the fair market value at the date of
grant and expensed over the vesting period. Restricted stock
vesting periods vary from six months to four years from the date of
grant.
|
|
A
summary of restricted stock grant activity
follows:
|
Weighted
|
||||||||
Average
|
||||||||
Number
of
|
Grant date
|
|||||||
Shares
|
price
|
|||||||
Stock
unvested at December 31, 2008
|
111,365 | $ | 8.51 | |||||
Stock
granted
|
375,505 | 3.18 | ||||||
Stock
vested or exercised
|
150,000 | 5.03 | ||||||
Stock
unvested at December 31, 2009
|
336,870 | $ | 4.12 |
|
Operating
expenses included in the consolidated statements of operations for the
years ended December 31, 2009, 2008 and 2007 include total compensation
expense associated with stock options and restricted stock of $871,000,
$956,000 and $1,046,000,
respectively.
|
|
The
weighted average remaining contractual life of the options exercisable at
December 31, 2009 was 3.16 years and at December 31, 2008 was 4.35
years.
|
|
As
of December 31, 2009, compensation costs related to non-vested awards
totaled $1.5 million, which is expected to be recognized over a weighted
average period of 1.9 years.
|
|
(b) 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 at prices ranging 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 at prices ranging from $7.60 to $8.00 for a
total cost of approximately $728,000. During the year ended
December 31, 2008, we repurchased 84,814 shares at prices ranging from
$2.90 to $6.73 for a total cost of approximately
$500,000. During 2009, no shares were
repurchased. The repurchased shares are held in
treasury.
|
F-22
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
(Tables
in thousands, except share and per share amounts)
(11)
|
Stockholders'
Equity (continued)
|
(c) Deferred
Compensation
Due to
the passage of The American Jobs Creation Act and the subsequent IRS Section
409A rules, stock options that were issued with 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 elected to deem a 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
|
|||
2010
|
15,000 | |||
2011
|
27,500 | |||
2012
|
28,209 | |||
2013
|
13,750 | |||
Beyond
2013
|
15,000 | |||
|
||||
Total
Options
|
99,459 |
(12)
|
Segment
Information
|
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, 2009, 2008 and
2007:
2009
|
2008
|
2007
|
||||||||||
United
States
|
$ | 60,927 | $ | 73,375 | $ | 78,623 | ||||||
Rest
of world
|
15,212 | 18,076 | 15,981 | |||||||||
$ | 76,139 | $ | 91,451 | $ | 94,604 |
F-23
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
(Tables
in thousands, except share and per share amounts)
(12)
|
Segment
Information (continued)
|
|
The
following table sets forth net sales by product class for the years ended
December 31, 2009, 2008 and 2007:
|
2009
|
2008
|
2007
|
||||||||||
Fairway
woods
|
$ | 14,798 | $ | 22,289 | $ | 18,428 | ||||||
Drivers
|
9,509 | 11,276 | 10,472 | |||||||||
Irons
|
51,537 | 57,117 | 63,251 | |||||||||
Wedges
and other
|
295 | 769 | 2,453 | |||||||||
Total
|
$ | 76,139 | $ | 91,451 | $ | 94,604 |
(13)
|
Quarterly
Financial Results (unaudited)
|
|
Quarterly
financial results for the years ended December 31, 2009 and 2008 are as
follows:
|
2009
|
||||||||||||||||
1st Quarter
|
2nd Quarter
|
|
3rd Quarter
|
|
4th Quarter
|
|||||||||||
Net
sales
|
$ | 23,475 | $ | 23,254 | $ | 17,385 | $ | 12,025 | ||||||||
Gross
profit
|
$ | 9,008 | $ | 2,778 | $ | 6,329 | $ | 4,310 | ||||||||
Net
income (loss)
|
$ | 366 | $ | (5,206 | ) | $ | (5,471 | ) | $ | (1,877 | ) | |||||
Income
(loss) per share – basic
|
$ | 0.06 | $ | (0.78 | ) | $ | (0.82 | ) | $ | (0.28 | ) | |||||
–
diluted
|
0.05 | (0.78 | ) | (0.82 | ) | (0.28 | ) |
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 | ) |
F-24
ADAMS
GOLF, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
(Tables
in thousands, except share and per share amounts)
(14)
|
Business
and Credit Concentrations
|
|
We
are currently dependent on two customers, which collectively comprised
approximately 23.5% of net sales for the year ended December 31,
2009. Of these customers, one customer individually represented
greater than 5% but less than 10% of net sales, and one customer
individually represented greater than 10% but less than 20% of net sales,
while no customer represented greater than 20% of net sales for the year
ended December 31, 2009. For the year ended December 31, 2008,
four customers, which collectively comprised approximately 24.4% of net
sales, of which two 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,
2008. For the year ended December 31, 2007, four customers,
which collectively comprised approximately 25.5% of net
sales. Of these customers, 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. Additionally, we have
one customer with an outstanding accounts receivable balance that is
greater than 10% but less than 15% of total accounts receivable and no
customer greater than 15% of total accounts receivable at December 31,
2009. 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 of the
Company.
|
|
A
significant portion of our inventory purchases are from one supplier in
China; approximately 45% and 48% of our total inventory purchased for the
years ended December 31, 2009 and 2008, respectively, was 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 our 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.
|
F-25
|
ADAMS
GOLF, INC. AND SUBSIDIARIES
Report
of Independent Registered Public Accounting Firm
Audit
Committee, Board of Directors and Stockholders
Adams
Golf, Inc
Plano,
Texas
In
connection with our audit of the consolidated financial statements of Adams
Golf, Inc. and subsidiaries (the "Company") for the year ended December 31, 2009
we have also audited the following financial statement schedule. This
financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this
financial statement schedule based on our audit of the basic financial
statement. The schedule is presented for the purposes of complying
with the Securities and Exchange Commission's rule and regulations are not a
required part of the consolidated financial statements.
In our
opinion, the financial statement schedule referred to above, when considered in
relation to the basic consolidated financial statements taken as a whole,
presented fairly, in all material respects, the information required to be
included therein.
BKD,
LLP
Dallas,
Texas
March 9,
2010
S-1
Schedule
II
|
ADAMS
GOLF, INC. AND SUBSIDIARIES
Valuation
and Qualifying Accounts
For
the years ended December 31, 2009, 2008 and 2007
(Table
in thousands)
Charged
to
|
||||||||||||||||
Balance
at
|
Cost
and
|
Balance
at
|
||||||||||||||
Beginning
|
Other
|
End
of
|
||||||||||||||
Description
|
of Period
|
Expenses
|
Deductions(1)
|
Period
|
||||||||||||
Allowance
for doubtful accounts:
|
||||||||||||||||
Year
ended December 31, 2009
|
$ | 1,321 | 1,173 | 869 | $ | 1,625 | ||||||||||
Year
ended December 31, 2008
|
$ | 512 | 1,539 | 730 | $ | 1,321 | ||||||||||
Year
ended December 31, 2007
|
$ | 702 | 316 | 506 | $ | 512 | ||||||||||
Product
warranty and sales returns reserve:
|
||||||||||||||||
Year
ended December 31, 2009
|
$ | 1,641 | 241 | (327 | ) | $ | 2,209 | |||||||||
Year
ended December 31, 2008
|
$ | 1,611 | 885 | 855 | $ | 1,641 | ||||||||||
Year
ended December 31, 2007
|
$ | 2,040 | 545 | 974 | $ | 1,611 | ||||||||||
Inventory
obsolescence reserve:
|
||||||||||||||||
Year
ended December 31, 2009
|
$ | 197 | 3,610 | 1,369 | $ | 2,044 | ||||||||||
Year
ended December 31, 2008
|
$ | 189 | 8 | -- | $ | 197 | ||||||||||
Year
ended December 31, 2007
|
$ | 153 | 36 | -- | $ | 189 | ||||||||||
Deferred
tax asset valuation allowance:
|
||||||||||||||||
Year
ended December 31, 2009
|
$ | 5,128 | 4,399 | -- | $ | 9,527 | ||||||||||
Year
ended December 31, 2008
|
$ | 4,448 | 680 | -- | $ | 5,128 | ||||||||||
Year
ended December 31, 2007
|
$ | 11,257 | (6,809 | ) | -- | $ | 4,448 | |||||||||
(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.
|
S-2