Here’s a great story from investor Jay Schembs about Adams Golf Inc (NASDAQ:ADGF), which will be familiar to anyone who has spent some time sifting through net net screens for the last few years. Jay has had a position in ADGF since late 2008. After sitting through one too many conference calls listening to platitudes from CEO Chip Brewer about “shareholder value,” Jay decided to send a letter to ADGF’s largest shareholders pointing out the perfect inverse correlation between management’s equity grants and share price performance. Here’s Jay’s letter:

Dr. John Gregory
Mr. Joseph Gregory
SJ Strategic Investments
340 Martin Luther King Blvd., Suite 200
Bristol, Tennessee 37620

Mr. Roland Casati
Continental Offices, Ltd.
2700 River Road, Suite 211
Des Plaines, Illinois 60018

RE: Adams Golf

Dear Messrs. Gregory and Mr. Casati,

I am writing to voice serious concern regarding the alignment of management and shareholders of Adams Golf, Inc. (ADGF).

First and foremost, we as shareholders are suffering a slow death, quarter after quarter, as we endure a consistent erosion of ownership. From December 31, 2006 to September 30, 2011, due to equity grants given to management (primarily CEO Chip Brewer) fully diluted shares have increased 31%. During that time, the company’s share price has decreased 31% and shareholders have received zero cash distributions. How that performance should entitle management to ongoing equity compensation for a “job well done” is beyond me.

One of the primary concerns with regards to measuring management performance is the use of EBITDA. From ADGF’s 2010 proxy statement:

Our Annual Management Incentive Compensation Plan provides our named executive officers and key employees an opportunity to earn a semi-annual cash bonus for achieving specified performance-based goals established for the fiscal year. In 2009, 2010, and 2011 the Compensation Committee has established performance objectives for the named executive officers based on targeted levels of revenue growth and EBITDA (earnings before interest, taxes, depreciation and amortization). We believe that focusing on revenue growth is important because there are distinct advantages to revenue and profitability scale in the golf equipment business, such as the ability to advertise on network-televised golf events, to sponsor professional tour pros, and the ability to compete for strong research and development talent. We believe that focusing on EBITDA is important because it is the most widely accepted metric for the cash flow generated by a business. The performance objectives allow the named executive officers to earn a cash bonus up to a specified percentage of their base salary if Adams Golf achieves at least a specified threshold of the above metrics.

Read the rest here-http://greenbackd.com/2011/12/05/action-at-adams-golf-inc-nasdaqadgf/

Disclosure: No Position