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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 29, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 333-72343
TRUE TEMPER SPORTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 3949 52-2112620
(STATE OF OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
8275 TOURNAMENT DRIVE
SUITE 200
MEMPHIS, TENNESSEE 38125
TELEPHONE: (901) 746-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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. Yes [X] No [ ].
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act) Yes [ ] No [X].
As of August 13, 2003 the Registrant had 100 shares of Common
Stock, $0.01 par value per share, outstanding.
TRUE TEMPER SPORTS, INC.
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Operations for the three and six month periods ended
June 29, 2003 (Unaudited) and June 30, 2002 (Unaudited)...................... 1
Condensed Balance Sheets as of June 29, 2003 (Unaudited) and
December 31, 2002 (Unaudited)................................................ 2
Condensed Statements of Cash Flows for the six month periods ended
June 29, 2003 (Unaudited) and June 30, 2002 (Unaudited)...................... 3
Notes to Condensed Financial Statements (Unaudited).......................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................. 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk................... 11
Item 4. Controls and Procedures...................................................... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................ 13
Item 2. Changes in Securities and Use of Proceeds.................................... 13
Item 3. Defaults Upon Senior Securities.............................................. 13
Item 4. Submission of Matters to a Vote of Security Holders.......................... 13
Item 5. Other Information............................................................ 13
Item 6. Exhibits and Reports on Form 8-K............................................. 13
Signatures.................................................................................... 15
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRUE TEMPER SPORTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TRUE TEMPER CORPORATION)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
-------------------- --------------------
JUNE 29, JUNE 30, JUNE 29, JUNE 30,
2003 2002 2003 2002
------- ------- ------- -------
Net sales .................................... $32,491 $29,892 $64,092 $59,254
Cost of sales ................................ 19,199 16,907 38,952 35,671
------- ------- ------- -------
GROSS PROFIT .............................. 13,292 12,985 25,140 23,583
Selling, general and administrative expenses . 3,605 3,799 7,679 7,375
Business development and start-up costs ...... 159 -- 284 --
Loss on early extinguishment of long-term debt -- -- -- 20
------- ------- ------- -------
OPERATING INCOME .......................... 9,528 9,186 17,177 16,188
Interest expense, net of interest income ..... 3,323 3,067 6,651 6,169
Other expenses, net .......................... 41 4 46 8
------- ------- ------- -------
INCOME BEFORE INCOME TAXES ................ 6,164 6,115 10,480 10,011
Income taxes ................................. 2,413 2,374 4,145 3,894
------- ------- ------- -------
NET INCOME ................................ $ 3,751 $ 3,741 $ 6,335 $ 6,117
======= ======= ======= =======
See accompanying notes to condensed financial statements
TRUE TEMPER SPORTS, INC.
1
(A WHOLLY-OWNED SUBSIDIARY OF TRUE TEMPER CORPORATION)
CONDENSED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
JUNE 29, DECEMBER 31,
2003 2002
--------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................................... $ 14,687 $ 7,070
Receivables, net ............................................ 17,958 15,083
Inventories ................................................. 13,750 15,055
Prepaid expenses and other current assets ................... 1,909 1,764
--------- ---------
Total current assets ................................... 48,304 38,972
Property, plant and equipment, net ............................. 14,424 14,561
Goodwill, net .................................................. 71,506 71,506
Deferred tax assets, net ....................................... 50,759 54,832
Other assets ................................................... 3,412 3,509
--------- ---------
Total assets ........................................... $ 188,405 $ 183,380
========= =========
LIABILITIES & STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Current portion of long-term debt ........................... $ 4,250 $ 4,000
Accounts payable ............................................ 5,571 5,999
Accrued expenses and other current liabilities .............. 8,641 7,075
--------- ---------
Total current liabilities .............................. 18,462 17,074
Long-term debt less the current portion ........................ 118,480 120,730
Other liabilities .............................................. 2,705 2,508
--------- ---------
Total liabilities ...................................... 139,647 140,312
STOCKHOLDER'S EQUITY
Common stock--par value $0.01 per share;
authorized 1,000 shares; issued and outstanding 100 shares -- --
Additional paid in capital .................................. 40,326 40,326
Retained earnings ........................................... 8,804 3,145
Accumulated other comprehensive loss, net of taxes .......... (372) (403)
--------- ---------
Total stockholder's equity ............................. 48,758 43,068
--------- ---------
Total liabilities and stockholder's equity ............. $ 188,405 $ 183,380
========= =========
See accompanying notes to condensed financial statements
2
TRUE TEMPER SPORTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TRUE TEMPER CORPORATION)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
FOR THE SIX
MONTHS ENDED
-----------------------
JUNE 29, JUNE 30,
2003 2002
-------- --------
OPERATING ACTIVITIES
Net income ............................................ $ 6,335 $ 6,117
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ................... 1,463 1,657
Amortization of deferred financing costs ........ 445 349
Loss on disposal of property, plant and equipment 28 9
Loss on early extinguishment of long-term debt .. -- 20
Deferred taxes .................................. 4,073 3,798
Changes in operating assets and liabilities, net (339) 498
-------- --------
Net cash provided by operating activities ..... 12,005 12,448
INVESTING ACTIVITIES
Purchase of property, plant and equipment .......... (1,354) (567)
-------- --------
Net cash used in investing activities ......... (1,354) (567)
FINANCING ACTIVITIES
Principal payments on bank debt .................... (2,000) (3,537)
Repurchase of Senior Subordinated Notes ............ -- (282)
Principal payments on capital leases ............... -- (12)
Payment of debt issuance costs ..................... (273) --
Dividends paid ..................................... (676) (1,779)
Other financing activity ........................... (85) (59)
-------- --------
Net cash used in financing activities ......... (3,034) (5,669)
Net increase in cash .................................. 7,617 6,212
Cash at beginning of period ........................... 7,070 8,177
-------- --------
Cash at end of period ................................. $ 14,687 $ 14,389
======== ========
See accompanying notes to condensed financial statements
3
TRUE TEMPER SPORTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TRUE TEMPER CORPORATION)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)
1) BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of True
Temper Sports, Inc. ("True Temper" or the "Company") have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission ("SEC") for quarterly reports on Form 10-Q and consequently do not
include all the disclosures required by accounting principles generally accepted
in the United States of America. It is suggested that these financial statements
be read in conjunction with the audited financial statements and the notes
thereto for the year ended December 31, 2002. In the opinion of management, the
financial statements include all adjustments which are necessary for the fair
presentation of results for interim periods.
The Company's fiscal year begins on January 1 and ends on December 31
of each year. During the course of the year the Company closes its books on a
monthly and quarterly basis following a 4,4,5 week closing calendar. Since the
Company uses Sunday as the last day of each period (with the exception of
December) the number of days in the first and fourth quarters of any given year
can vary depending on which day of the week January 1st falls on.
2) INVENTORIES
JUNE 29, DECEMBER 31,
2003 2002
------- ------------
Raw materials ................ $ 1,481 $ 1,751
Work in process .............. 1,907 2,445
Finished goods ............... 10,362 10,859
------- -------
Total ........................ $13,750 $15,055
======= =======
3) SEGMENT REPORTING
The Company operates in two reportable business segments: golf shafts
and performance sports. The Company's reportable segments are based on the type
of product manufactured and the application of that product in the marketplace.
The golf shaft segment manufactures and sells steel, composite, and
multi-material golf club shafts for use exclusively in the golf industry. The
performance sports segment manufactures and sells high strength, tight tolerance
component parts for bicycle, hockey and other recreational sport markets. The
Company evaluates the performance of these segments based on segment sales and
gross profit. The Company has no inter-segment sales.
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
-------------------- --------------------
JUNE 29, JUNE 30, JUNE 29, JUNE 30,
2003 2002 2003 2002
------- ------- ------- -------
Net sales:
Golf shafts ...... $30,636 $28,693 $60,866 $57,007
Performance sports 1,855 1,199 3,226 2,247
------- ------- ------- -------
Total ......... $32,491 $29,892 $64,092 $59,254
======= ======= ======= =======
Gross profit:
Golf shafts ...... $12,805 $12,654 $24,252 $22,956
Performance sports 487 331 888 627
------- ------- ------- -------
Total ......... $13,292 $12,985 $25,140 $23,583
======= ======= ======= =======
4
TRUE TEMPER SPORTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TRUE TEMPER CORPORATION)
NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
Following is a reconciliation of total reportable segment gross profit
to total Company income before income taxes:
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
-------------------- --------------------
JUNE 29, JUNE 30, JUNE 29, JUNE 30,
2003 2002 2003 2002
------- ------- ------- -------
Total reportable segment gross profit ....... $13,292 $12,985 $25,140 $23,583
Less:
Selling, general & administrative expenses 3,605 3,799 7,679 7,375
Business development and start-up costs .. 159 -- 284 --
Loss on early extinguishment of
long-term debt ........................ -- -- -- 20
Interest expense, net of interest income . 3,323 3,067 6,651 6,169
Other expenses, net ...................... 41 4 46 8
------- ------- ------- -------
Total Company income before income taxes .... $ 6,164 $ 6,115 $10,480 $10,011
======= ======= ======= =======
4) COMPREHENSIVE INCOME
Total comprehensive income and its components for the periods covered
by this report are as follows:
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
------------------------------------------
JUNE 29, JUNE 30, JUNE 29, JUNE 30,
2003 2002 2003 2002
------ ------ ------ ------
Net Income ............................... $3,751 $3,741 $6,335 $6,117
Mark to market adjustment on derivative
instruments, net of taxes .......... 81 -- 31 --
------ ------ ------ ------
Total comprehensive income ............... $3,832 $3,741 $6,366 $6,117
====== ====== ====== ======
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the more
detailed information in our 2002 Annual Financial Statements, including the
notes thereto, appearing most recently in our 2002 Annual Report on Form 10-K,
filed with the SEC on March 27, 2003.
COMPANY OVERVIEW
True Temper Sports, Inc. ("True Temper" or the "Company"), a wholly
owned subsidiary of True Temper Corporation ("TTC"), is a leading designer,
manufacturer and marketer of steel, composite, and multi-material golf club
shafts for original equipment manufacturers ("OEM's") and distributors in the
golf equipment industry. In addition, True Temper produces and sells a variety
of performance sports products that offer high strength and tight tolerance
component parts to the bicycle, hockey and other recreational sports markets. In
calendar 2002, golf shaft sales represented 96% of total revenues, and
performance sports sales represented 4%. This sales split has shifted to
approximately 6% performance sports during the second quarter of 2003, and 5%
performance sports for the entire first half of 2003.
RESULTS OF OPERATIONS
The following table sets forth the components of net income as a
percentage of net sales for the periods indicated:
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
--------------------- ------------------
JUNE 29, JUNE 30, JUNE 29, JUNE 30,
2003 2002 2003 2002
-------- --------- -------- -------
Net sales ............................. 100.0% 100.0% 100.0% 100.0%
Cost of sales ......................... 59.1 56.6 60.8 60.2
Gross profit .......................... 40.9 43.4 39.2 39.8
SG&A expenses ......................... 11.1 12.7 12.0 12.4
Business development and start-up costs 0.5 0.0 0.4 0.0
Loss on early extinguishment of
long-term debt ................... 0.0 0.0 0.0 0.0
Operating income ................... 29.3 30.7 26.8 27.3
Interest expenses ..................... 10.2 10.3 10.4 10.4
Other expenses, net ................... 0.1 0.0 0.1 0.0
Income before income taxes ......... 19.0 20.5 16.4 16.9
Income taxes .......................... 7.4 7.9 6.5 6.6
Net income ......................... 11.5% 12.5% 9.9% 10.3%
SECOND QUARTER ENDED JUNE 29, 2003 COMPARED TO THE SECOND QUARTER ENDED JUNE 30,
2002
NET SALES for the second quarter of 2003 increased $2.6 million, or
8.7%, to $32.5 million from $29.9 million in the second quarter of 2002. Golf
shaft sales increased $1.9 million, or 6.8%, to $30.6 million in the second
quarter of 2003 from $28.7 million in the second quarter of 2002. This increase
was driven primarily by (i) increased sales volume for premium grade steel
shafts as more golf OEM's introduced lightweight steel shafts as the stock
component shaft in their new product launches, and (ii) increased sales volume
for the recently introduced Grafalloy Blue(TM) graphite shafts for drivers and
fairway woods.
Performance sports sales increased $0.7 million, or 54.7%, to $1.9
million in the second quarter of 2003 from $1.2 million in the second quarter of
2002. This increase was driven primarily by growth in sales of composite bicycle
components, hockey stick shafts OEM's, and other tubing products within the
segment.
6
Net sales to international customers increased $1.5 million, or 23.3%,
to $9.0 million in the second quarter of 2003 from $7.3 million in the second
quarter of 2002. This increase was driven primarily by improved foreign currency
exchange rates in the United Kingdom, Japan and Australia; as well as an
increase in shipments into China as club assembly operations continue to grow
within that region.
GROSS PROFIT for the second quarter of 2003 increased approximately
$0.3 million, or 2.4%, to $13.3 million from $13.0 million in the second quarter
of 2002. Gross profit as a percentage of net sales decreased to 40.9% in the
second quarter of 2003 from 43.4% in the second quarter of 2002. This decrease
in gross profit as a percentage of net sales was driven by several factors,
including (i) increased costs for natural gas, (ii) increased costs for employee
healthcare benefits, and (iii) the impact of a ratification bonus paid to the
hourly employees represented by the United Steelworkers of America related to a
new four year collective bargaining agreement effective July 1, 2003. Excluding
the impact of this ratification bonus, gross profit as a percentage of net sales
decreased to 43.0% in the second quarter of 2003 from 43.4% in the second
quarter of 2002.
These unfavorable factors were somewhat offset by the favorable impact
from foreign currency exchange rates in the United Kingdom, Japan and Australia;
as well as the favorable leverage on fixed manufacturing costs from increased
sales volume.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") for the second
quarter of 2003 decreased $0.2 million, or 5.0%, to $3.6 million from $3.8
million in the second quarter of 2002. SG&A as a percentage of net sales
decreased to 11.1% in the second quarter of 2003 from 12.7% in the second
quarter of 2002. This decrease was driven primarily by a shift from television
advertising with a high concentration in the second quarter of 2002 to a print
advertising campaign that is more evenly distributed throughout the golf season.
BUSINESS DEVELOPMENT AND START-UP COSTS for the second quarter of 2003
totaled $0.2 million. No business development and start-up costs were incurred
during the second quarter of 2002. These costs are comprised of travel,
consulting, legal fees, personnel, recruiting and other start-up business costs
relating to the opening of a composite manufacturing operation in southern
China.
OPERATING INCOME for the second quarter of 2003 increased by $0.3
million, or 3.7%, to $9.5 million from $9.2 million in the second quarter of
2002. Operating income as a percentage of net sales decreased to 29.3% in the
second quarter of 2003 from 30.7% in the second quarter of 2002. Excluding the
impact of the ratification bonus paid during the second quarter of 2003,
operating income as a percentage of net sales would have increased to 31.4% in
the second quarter of 2003 from 30.7% in the second quarter of 2002. The
remainder of the change in operating income reflects the changes described above
in sales, gross profit, SG&A and business development and start-up costs.
INTEREST EXPENSE for the second quarter of 2003 increased to $3.3
million from $3.1 million in the second quarter of 2002. Although interest rates
have declined during the past year, interest expense increased as the Company
increased its outstanding bank debt between comparative quarters in order to
fund dividend payments to its parent company True Temper Corporation.
INCOME TAXES for the second quarter of 2003 remained relatively flat to
the second quarter of 2002 at $2.4 million. The effective tax rate during these
periods differs from a federal statutory rate of 34% due primarily to the
incremental tax rate for state and foreign income tax purposes.
NET INCOME for the second quarter of 2003 increased by approximately
$0.1 million to $3.8 million from $3.7 million in the second quarter of 2002.
This increase is reflective of the profit impact from the items described above.
SIX MONTH PERIOD ENDED JUNE 29, 2003 COMPARED TO THE SIX MONTH PERIOD ENDED JUNE
30, 2002
7
NET SALES for the first six months of 2003 increased $4.8 million, or
8.2%, to $64.1 million from $59.3 million in the first six months of 2002. Golf
shaft sales increased $3.9 million, or 6.8%, to $60.9 million in the first six
months of 2003 from $57.0 million in the first six months of 2002. This increase
was driven primarily by (i) increased sales volume for premium grade steel
shafts as more golf OEM's introduced lightweight steel shafts as the stock
component shaft in their new product launches, and (ii) increased sales volume
for the recently introduced Grafalloy Blue(TM) graphite shafts for drivers and
fairway woods.
Performance sports sales increased $1.0 million, or 43.6%, to $3.2
million in the first six months of 2003 from $2.2 million in the first six
months of 2002. This increase was driven primarily by growth in sales of
composite bicycle components, hockey stick shafts OEM's, and other tubing
products within the segment.
Net sales to international customers increased $4.6 million, or 33.4%,
to $18.3 million in the first six months of 2003 from $13.7 million in the first
six months of 2002. This increase was driven primarily by improved foreign
currency exchange rates in the United Kingdom, Japan and Australia; as well as a
$4.0 million increase in shipments into China as club assembly operations
continue to grow within that region.
GROSS PROFIT for the first six months of 2003 increased $1.6 million,
or 6.6%, to $25.1 million from $23.6 million in the first six months of 2002.
Gross profit as a percentage of net sales decreased to 39.2% in the first six
months of 2003 from 39.8% in the first six months of 2002. This decrease in
gross profit as a percentage of net sales was driven by several factors,
including (i) increased costs for natural gas, (ii) increased costs for employee
healthcare benefits, and (iii) the impact of a ratification bonus paid to the
hourly employees represented by the United Steelworkers of America related to a
new four year collective bargaining agreement effective July 1, 2003. Excluding
the impact of this ratification bonus, gross profit as a percentage of net sales
increased to 40.3% in the first six months of 2003 from 39.8% in the first six
months of 2002.
These unfavorable factors were somewhat offset by the favorable impact
from foreign currency exchange rates in the United Kingdom, Japan and Australia;
as well as the favorable leverage on fixed manufacturing costs from increased
sales volume.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") for the first six
months of 2003 increased $0.3 million, or 4.1%, to $7.7 million from $7.4
million in the first six months of 2002. This increase occurred primarily due to
increased personnel and travel costs to support the company's new consumer
awareness sales program and new product initiatives. SG&A as a percentage of net
sales decreased to 12.0% in the first six months 2003 from 12.4% in the first
six months of 2002.
BUSINESS DEVELOPMENT AND START-UP COSTS for the first six months of
2003 totaled $0.3 million. No business development and start-up costs were
incurred during the first six months of 2002. These costs are comprised of
travel, consulting, legal fees, personnel, recruiting and other start-up
business costs relating to the opening of a composite manufacturing operation in
southern China.
OPERATING INCOME for the first six months of 2003 decreased by $1.0
million, or 6.1%, to $17.2 million from $16.2 million in the first six months of
2002. Operating income as a percentage of net sales decreased to 26.8% in the
first six months of 2003 from 27.3% in the first six months of 2002. Excluding
the impact of the ratification bonus paid during the second quarter of 2003,
operating income as a percentage of net sales would have increased to 27.9% in
the first six months of 2003 from 27.3% in the first six months of 2002. The
remainder of the change in operating income reflects the changes described above
in sales, gross profit, SG&A and business development and start-up costs.
INTEREST EXPENSE for the first six months of 2003 increased to $6.7
million from $6.2 million in the first six months of 2002. Although interest
rates have declined during the past year, interest expense increased as the
Company increased its outstanding bank debt between comparative periods in order
to fund dividend payments to its parent company True Temper Corporation.
8
INCOME TAXES for the first six months of 2003 increased to $4.1 million
from $3.9 million in the first six months of 2002. The effective tax rate during
these periods differs from a federal statutory rate of 34% due primarily to the
incremental tax rate for state and foreign income tax purposes.
NET INCOME for the first six months of 2003 increased by $0.2 million
to $6.3 million from $6.1 million in the first six months of 2002. This increase
is reflective of the profit impact from the items described above.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
At the beginning of 2002 we had a bank credit facility which included a
$20.0 million non-amortizing revolving credit facility with funds available on a
revolving basis through September 30, 2004, a $10.0 million term A loan due in
2004 and a $27.5 million term B loan due in 2005. At September 29, 2002 the
unpaid balance on the term A and term B loans was $13.0 million collectively. In
October 2002 the Company repaid the entire $13.0 million outstanding balance on
these term loans.
In the fourth quarter of 2002 we decided to refinance our bank debt by
eliminating our existing senior credit facility, as described above, and obtain
a new senior credit facility. On December 31, 2002 we entered a new senior
credit facility which includes a $15.0 million non-amortizing revolving credit
facility and a $25.0 million term loan. Amounts under the revolving credit
facility are available on a revolving basis through December 31, 2007. The term
loan requires quarterly cash interest and principal payments beginning in March
2003 and continuing through December 2007.
We used the proceeds from this loan to pay a dividend to True Temper
Corporation ("TTC") in order that TTC could repay a portion of the outstanding
principal on its senior discount notes which carry a 13.25% PIK interest rate or
a 12.25% cash interest rate.
In addition, we have $99.7 million in 10 7/8% Senior Subordinated Notes
Due 2008 (the "Notes"). The Notes require cash interest payments each June 1 and
December 1, beginning June 1, 1999. The Notes are redeemable at our option,
under certain circumstances and at certain redemption prices, beginning December
1, 2003.
Both the new senior credit facility and the Notes contain covenants and
events of default, including substantial restrictions and provisions which,
among other things, limit our ability to incur additional indebtedness, make
acquisitions and capital expenditures, sell assets, create liens or other
encumbrances, make certain payments and dividends, or merge or consolidate. The
new senior credit facility also requires us to maintain certain specified
financial ratios and tests including minimum EBITDA levels, minimum interest
coverage and fixed charge coverage ratios, and maximum leverage ratios. At June
29, 2003 we were in compliance with all of the covenants in both the new senior
credit facility and the Notes. Furthermore, the new senior credit facility
requires certain mandatory prepayments including payments from the net proceeds
of certain asset sales and a portion of our excess cash flow.
SIX MONTHS ENDED JUNE 29, 2003 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2002
In the first six months of 2003 cash provided by operating activities
decreased by approximately $0.4 million to $12.0 million from $12.4 million in
the first six months of 2002. This decrease was driven by an increase in working
capital requirements to fund outstanding accounts receivable which grew with the
increase in first and second quarter sales compared to the prior year, and
growth in international export sales.
We used $1.4 million of cash to invest in property, plant and equipment
in the first six months of 2003, compared to the $0.6 million spent in the first
six months of 2002.
We repaid $2.0 million of the principal on our senior credit facility
during the first six months of 2003,
9
compared to the $3.5 million that we repaid during the first six months of 2002.
Also in the first quarter of 2002, we repurchased $0.3 million of our Notes.
Currently, our intention is to use existing cash and cash provided from
future operations, if any, as allowed within the covenants of our senior credit
facility and our Notes, to:
- Repay our senior credit facility, and/or
- Issue quarterly cash dividends to our parent company, True
Temper Corporation, for its use to pay cash interest and/or
principal amounts on its senior discount notes, and/or
- To make additional investments in the business for growth or
profit improvements, which may include, among other things,
capital expenditures, business acquisitions and/or
expenditures for business development and expansion in China.
In August 2003 we paid a dividend of $2.5 million to our parent
company, TTC. This dividend was used by TTC to retire a portion of the
outstanding principal balance of its senior discount notes, and to make cash
interest payments on the remaining balance.
In addition to the debt service obligations for principal and interest
payments created by the senior credit facility and the Notes described above,
our liquidity needs largely relate to working capital requirements and capital
expenditures for machinery and equipment. We intend to fund our current and long
term working capital, capital expenditure and debt service requirements through
cash flow generated from operations. However, since there can be no assurance of
future performance, as of June 29, 2003 we have the $15.0 million revolving
credit facility available for future cash requirements. The maximum amount we
may use of the $15.0 million revolving credit facility is limited by the
financial covenants contained within the senior credit facility. Information
concerning our senior credit facility is contained in the footnotes to the
financial statements of our 2002 Annual Report on Form 10-K, as filed with the
SEC on March 27, 2003.
Depending on the size, any future acquisitions, joint ventures, capital
expenditures or similar transactions may require significant capital resources
in excess of cash provided by operations, and potentially in excess of cash
available under the revolving credit facility. There can be no assurance that
the Company will be able to obtain the necessary capital under acceptable terms,
from creditors or other sources, that will be sufficient to execute any such
business investment or capital expenditure.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities ("Interpretation 46"). Interpretation 46 requires
all companies to consolidate the results of variable interest entities as
defined by the Interpretation for which the company has a majority variable
interest. Interpretation 46 is to be adopted for fiscal years or interim periods
beginning after June 15, 2003. Interpretation 46 requires certain disclosures in
the financial statement issued after January 31, 2003 if it is reasonably
possible that the company will consolidate or disclose information about
variable interest entities when the interpretation becomes effective. The
adoption of Interpretation 46 did not have a material effect on the Company's
consolidated financial condition or results of operations taken as a whole.
In April 2003, the FASB issued Statement No. 149, Amendment of
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities
("Statement 149"). Statement 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities under FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. Statement 149 is effective for contracts
entered into or modified after June 30, 2003. The impact of adopting Statement
149 is not expected to be material to the Company's consolidated financial
condition or results of operations taken as a whole.
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In May 2003, the FASB Issued Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity
("Statement 150"). Statement 150 requires issuers to classify as liabilities (or
assets in some circumstances) financial instruments within the scope of the
statement that embody obligations for the issuer. Statement 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The impact of adopting Statement 150 is not expected to be material to
the Company's consolidated financial condition or results of operations taken as
a whole.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Act of 1995 (the "Act") provides a
safe harbor for forward-looking statements made by our Company. This document
contains forward-looking statements, including but not limited to Item 2
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". All statements which address operating performance, events or
developments that we expect, plan, believe, hope, wish, forecast, predict,
intend, or anticipate will occur in the future, and other similar meanings or
phrases, are forward-looking statements within the meaning of the Act.
The forward-looking statements are based on management's current views
and assumptions regarding future events and operating performance. However,
there are many risk factors, including but not limited to, the Company's
substantial leverage, the Company's ability to service its debt, the general
state of the economy, the Company's ability to execute its plans, fluctuations
of energy prices and availability, fluctuations of raw material prices,
potential significant increases to employee medical benefit costs, competitive
factors, and other risks that could cause the actual results to differ
materially from the estimates or predictions contained in our Company's
forward-looking statements. Additional information concerning the Company's risk
factors is contained from time to time in the Company's public filings with the
SEC; and most recently in the Business Risks section of Item 1 to Part 1 of our
2002 Annual Report on Form 10-K filed with the SEC on March 27, 2003.
The Company's views, estimates, plans and outlook as described within
this document may change subsequent to the release of this statement. The
Company is under no obligation to modify or update any or all of the statements
it has made herein despite any subsequent changes the Company may make in its
views, estimates, plans or outlook for the future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information concerning our market risks is contained in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of our 2002 Annual Report on Form 10-K, as filed with the
SEC on March 27, 2003.
This information has been omitted from this report as there have been
no material changes to our market risks as of June 29, 2003.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company carried out an evaluation as of the end of the period
covered by this report, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer along with
the Company's Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13(a)-15(d) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Based upon that evaluation, the Company's Chief
11
Executive Officer along with the Company's Chief Financial Officer concluded
that as of the end of the period covered by this report the Company's disclosure
controls and procedures (1) were effective in alerting them, in a timely manner,
to material information relating to the Company required to be included in the
Company's periodic SEC filings and (2) were adequate to ensure that information
required to be disclosed by the Company in the reports filed or submitted by the
Company under the Exchange Act is recorded, processed and summarized and
reported within the time periods specified in the SEC's rules and forms.
CHANGES IN INTERNAL CONTROLS
There have been no significant changes in the Company's internal
control over financial reporting identified in connection with the evaluation,
that have materially affected or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Various claims and legal proceedings generally incidental to the normal
course of business are pending or threatened against us. While we cannot predict
the outcome of these matters, in the opinion of management, any liability
arising from these matters will not have a material adverse effect on our
business, financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
--Not applicable--
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
--None--
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the quarter ended June 29, 2003.
ITEM 5. OTHER INFORMATION
--Not Applicable--
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
2.1 Reorganization, Recapitalization and Stock Purchase Agreement
dated as of June 29, 1998 by and between The Black & Decker
Corporation, True Temper Sports, Inc. and TTSI LLC
("Recapitalization Agreement") (filed as exhibit 2.1 to the
Company's Registration Statement on Form S-4 (No. 333-72343),
as filed with the Securities and Exchange Commission (the
"SEC") on February 12, 1999 (the "Form S-4")).*
2.2 Amendment No. 1 to Recapitalization Agreement dated August 1,
1998 (filed as exhibit 2.2 to Form S-4).*
2.3 Amendment No. 2 to Recapitalization Agreement dated September
30, 1998 (filed as exhibit 2.3 to Form S-4).*
2.4 Assignment and Assumption Agreement by and between True Temper
Corporation ("TTC") and the Company dated September 30, 1998
(filed as exhibit 2.4 to Form S-4).*
3.1 Amended and Restated Certificate of Incorporation of the
Company, dated September 29, 1998 (filed as Exhibit 3.1 to
Form S-4).*
3.2 By-laws of the Company (filed as Exhibit 3.2 to Form S-4).*
4.1 Indenture dated November 23, 1998 between the Company United
States Trust of New York (filed as Exhibit 4.1 to Form S-4).*
4.2 Purchase Agreement dated November 18, 1998 between the Company
and Donaldson, Lufkin and Jenrette (filed as Exhibit 4.2 to
Form S-4).*
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10.1 Management Services Agreement dated as of September 30, 1998
between the Company and Cornerstone Equity Investors, LLC
("Management Services Agreement") (filed as Exhibit 10.1 to
Form S-4).*
10.2 Amendment to Management Services Agreement dated November 23,
1998 (filed as Exhibit 10.2 to Form S-4).*
10.3 Credit Agreement dated as of September 30, 1998 among the
Company, various financial institutions, DLJ Capital Funding,
Inc. and The First National Bank of Chicago (filed as Exhibit
10.3 to Form S-4).*
10.4 Securities Purchase Agreement dated as of September 30, 1998
among TTC and the Purchase Party thereto (filed as Exhibit
10.4 to Form S-4).*
10.5 Amendment No. 1 to Credit Agreement dated June 11, 1999 (filed
as Exhibit 10.5 to the Company's 1999 Annual Report on Form
10-K, as filed with the SEC on March 30, 2000).*
10.6 True Temper Corporation 1998 Stock Option Plan (filed as
Exhibit 10.6 to the Company's 1999 Annual Report on Form 10-K,
as filed with the SEC on March 30, 2000).*
10.7 Shareholder's Agreement dated as of September 30, 1998 (filed
as Exhibit 10.7 to the Company's 1999 Annual Report on Form
10-K, as filed with the SEC on March 30, 2000).*
10.8 Amended and Restated Management Services Agreement dated March
27, 2000 (filed as Exhibit 10.8 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended April 2,
2000, as filed with the SEC on May 16, 2000).*
10.9 Amendment No. 2 to Credit Agreement dated November 17, 2000
(filed as Exhibit 10.9 to the Company's Annual Report on Form
10-K, as filed with the SEC on March 28, 2001).*
10.10 Amendment No 3 to Credit Agreement dated December 4, 2001
(filed as Exhibit 10.10 to the Company's Annual Report on Form
10-K, as filed with the SEC on April 1, 2002).*
10.11 Credit Agreement dated as of December 31, 2002 among the
Company, Antares Capital Corporation and Other Financial
Institutions Party Hereto (filed as Exhibit 10.11 to the
Company's Annual Report on Form 10-K, as filed with the SEC on
March 27, 2003).*
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.**
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.**
b. Reports on Form 8-K
No reports or Form 8-K were filed during the quarter ended
June 29, 2003.
- -----
* Incorporated by reference.
** Filed herewith.
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SIGNATURES
Pursuant to the requirements 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, in the City of Memphis, State of
Tennessee, on August 13, 2003.
True Temper Sports, Inc.
By:/s/ Scott C. Hennessy
----------------------------------
Name: Scott C. Hennessy
Title: President and Chief Executive
Officer
By:/s/ Fred H. Geyer
----------------------------------
Name: Fred H. Geyer
Title: Senior Vice President,
Chief Financial Officer and
Treasurer
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