Adams Golf would have seen flat operating income in the first quarter without a $965,000 reimbursement from its insurance company related to the embezzlement of $970,000 by a former employee. The loss had been expensed in the years when the activity occurred. ADGO’s crime policy carried a $5,000 deductible.

With the previously announced payment in hand, ADGO posted a 38.9% increase in net income to $3.5 million, or 13 cents per diluted share, compared to $2.5 million, or 10 cents per diluted share, in the year-ago period.

The gain from the reimbursement hides a 5.6% decline in total net sales to $16.8 million for the quarter, compared to $18.8 million in Q1 last year. The decline was entirely due to a 31.6% decrease in the Fairway Woods category.

Sales in the Fairway Woods category, which comprised only 31.2% of total sales for the period versus 42.4% of sales in Q1 last year, were $5.2 million in the 2005 quarter, compared to $7.6 million in the year-ago period. The decline was attributed to “slower than anticipated sales” of the Redline RPM product that was launched in Q4 as compared to strong sales of the Ovation fairway woods in Q1 last year. The decline in fairway Woods overshadowed a strong sales performance in the Drivers category, which jumped 51.5% to $5.0 million for the quarter, or 29.8% of total net sales, from $3.3 million, or 18.5% of total net sales, for the comparable period of 2004. Strength in both the RPM and Ovation driver product lines was cited here. Sales of Irons inched up 1.8% for the period to $5.7 million.

Gross margins declined 200 basis points to 52.7% of sales, due in part to lower average selling prices of “certain wood product lines”.

Adams saw inventories increase 19.8% to $13.4 million at period-end versus $11.2 million at the comparable period last year, an increase that was attributed to “increased purchasing related to the newly released product lines launched in fourth quarter 2004 and first quarter 2005 in addition to improved payment terms negotiated with key vendors.”