Back to GetFilings.com
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 SEPTEMBER 28, 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 November 12, 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 Consolidated Statements of Operations for the
three and nine month periods ended September 28, 2003
(Unaudited) and September 29, 2002 (Unaudited)............................... 1
Condensed Consolidated Balance Sheets as of September 28, 2003 (Unaudited)
and December 31, 2002 (Unaudited)............................................ 2
Condensed Consolidated Statements of Cash Flows for the nine month periods
ended September 28, 2003 (Unaudited) and September 29, 2002 (Unaudited)...... 3
Notes to Condensed Consolidated 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...................................................... 11
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 CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
------------------------------ ------------------------------
SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29,
2003 2002 2003 2002
----------- ----------- ----------- ------------
Net sales..................................... $ 24,667 $ 22,010 $ 88,759 $ 81,264
Cost of sales................................. 13,820 13,305 52,772 48,976
----------- ----------- ----------- -----------
GROSS PROFIT............................... 10,847 8,705 35,987 32,288
Selling, general and administrative expenses.. 3,704 3,245 11,383 10,477
Business development and start-up costs....... 175 37 459 180
Loss on early extinguishment of long-term debt -- -- -- 20
----------- ----------- ----------- -----------
OPERATING INCOME........................... 6,968 5,423 24,145 21,611
Interest expense, net of interest income...... 3,242 2,978 9,893 9,147
Other expenses, net........................... 72 2 118 10
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES................. 3,654 2,443 14,134 12,454
Income taxes.................................. 1,355 990 5,500 4,884
----------- ----------- ----------- -----------
NET INCOME................................. $ 2,299 $ 1,453 $ 8,634 $ 7,570
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements
1
TRUE TEMPER SPORTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TRUE TEMPER CORPORATION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
SEPTEMBER 28, DECEMBER 31,
2003 2002
----------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................................................... $ 18,313 $ 7,070
Receivables, net............................................................. 14,489 15,083
Inventories.................................................................. 15,345 15,055
Prepaid expenses and other current assets.................................... 1,964 1,764
----------- -----------
Total current assets.................................................... 50,111 38,972
Property, plant and equipment, net.............................................. 14,711 14,561
Goodwill, net................................................................... 71,506 71,506
Deferred tax assets, net........................................................ 49,421 54,832
Other assets.................................................................... 3,195 3,509
----------- -----------
Total assets............................................................ $ 188,944 $ 183,380
=========== ===========
LIABILITIES & STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Current portion of long-term debt............................................ $ 4,375 $ 4,000
Accounts payable............................................................. 4,369 5,999
Accrued expenses and other current liabilities............................... 11,567 7,075
----------- -----------
Total current liabilities............................................... 20,311 17,074
Long-term debt less the current portion......................................... 117,355 120,730
Other liabilities............................................................... 2,787 2,508
----------- -----------
Total liabilities....................................................... 140,453 140,312
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............................................................ 8,440 3,145
Accumulated other comprehensive loss, net of taxes........................... (275) (403)
----------- -----------
Total stockholder's equity.............................................. 48,491 43,068
----------- -----------
Total liabilities and stockholder's equity.............................. $ 188,944 $ 183,380
=========== ===========
See accompanying notes to condensed consolidated financial statements
2
TRUE TEMPER SPORTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TRUE TEMPER CORPORATION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
FOR THE NINE
MONTHS ENDED
---------------------------
SEPTEMBER 28, SEPTEMBER 29,
2003 2002
----------- ------------
OPERATING ACTIVITIES
Net income...................................................................... $ 8,634 $ 7,570
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization............................................. 2,179 2,478
Amortization of deferred financing costs.................................. 676 523
Loss on disposal of property, plant and equipment......................... 82 9
Loss on early extinguishment of long-term debt............................ -- 20
Deferred taxes............................................................ 5,411 4,722
Changes in operating assets and liabilities, net.......................... 3,384 2,990
----------- -----------
Net cash provided by operating activities............................... 20,366 18,312
INVESTING ACTIVITIES
Purchase of property, plant and equipment.................................... (2,411) (892)
----------- -----------
Net cash used in investing activities................................... (2,411) (892)
FINANCING ACTIVITIES
Principal payments on bank debt.............................................. (3,000) (3,537)
Repurchase of Senior Subordinated Notes...................................... -- (282)
Principal payments on capital leases......................................... -- (18)
Payment of debt issuance costs............................................... (273) --
Dividends paid............................................................... (3,339) (2,684)
Other financing activity..................................................... (100) (91)
----------- -----------
Net cash used in financing activities................................... (6,712) (6,612)
Net increase in cash............................................................ 11,243 10,808
Cash at beginning of period..................................................... 7,070 8,177
----------- -----------
Cash at end of period........................................................... $ 18,313 $ 18,985
=========== ===========
See accompanying notes to condensed consolidated financial statements
3
TRUE TEMPER SPORTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TRUE TEMPER CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)
1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated 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
SEPTEMBER 28, DECEMBER 31,
2003 2002
----------- ------------
Raw materials........................................................... $ 1,567 $ 1,751
Work in process......................................................... 2,047 2,445
Finished goods.......................................................... 11,731 10,859
----------- -----------
Total................................................................... $ 15,345 $ 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 NINE
MONTHS ENDED MONTHS ENDED
--------------------------- ----------------------------
SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29,
2003 2002 2003 2002
----------- ----------- ----------- ------------
Net sales:
Golf shafts............................ $ 23,324 $ 21,046 $ 84,190 $ 78,053
Performance sports..................... 1,343 964 4,569 3,211
----------- ----------- ----------- -----------
Total............................... $ 24,667 $ 22,010 $ 88,759 $ 81,264
=========== =========== =========== ===========
Gross profit:
Golf shafts............................ $ 10,494 $ 8,502 $ 34,746 $ 31,458
Performance sports..................... 353 203 1,241 830
----------- ----------- ----------- -----------
Total............................... $ 10,847 $ 8,705 $ 35,987 $ 32,288
=========== =========== =========== ===========
4
TRUE TEMPER SPORTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TRUE TEMPER CORPORATION)
NOTES TO CONDENSED CONSOLIDATED 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 NINE
MONTHS ENDED MONTHS ENDED
---------------------------- ----------------------------
SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29,
2003 2002 2003 2002
----------- ----------- ----------- ------------
Total reportable segment gross profit..... $ 10,847 $ 8,705 $ 35,987 $ 32,288
Less:
Selling, general & administrative expenses 3,704 3,245 11,383 10,477
Business development and start-up costs... 175 37 459 180
Loss on early extinguishment of
long-term debt...................... -- -- -- 20
Interest expense, net of interest income 3,242 2,978 9,893 9,147
Other expenses, net.................... 72 2 118 10
----------- ----------- ----------- -----------
Total Company income before income taxes $ 3,654 $ 2,443 $ 14,134 $ 12,454
=========== =========== =========== ============
4) COMPREHENSIVE INCOME
Total comprehensive income and its components for the periods covered by
this report are as follows:
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
--------------------------- ---------------------------
SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29,
2003 2002 2003 2002
----------- ----------- ----------- ------------
Net Income................................ $ 2,299 $ 1,453 $ 8,634 $ 7,570
Mark to market adjustment on derivative
instruments, net of taxes........... 97 -- 128 --
----------- ----------- ----------- -----------
Total comprehensive income................ $ 2,396 $ 1,453 $ 8,762 $ 7,570
=========== =========== =========== ===========
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 the leading designer,
manufacturer and marketer of steel, composite, and multi-material golf club
shafts for original equipment manufacturers ("OEMs") 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%. During the third quarter and first nine
months of 2003 performance sports revenues increased to 5% as a percentage of
total revenues.
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 NINE
MONTHS ENDED MONTHS ENDED
--------------------------- ---------------------------
SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29,
2003 2002 2003 2002
----------- ----------- ----------- ------------
Net sales.................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales.............................. 56.0 60.4 59.5 60.3
Gross profit............................... 44.0 39.6 40.5 39.7
SG&A expenses.............................. 15.0 14.9 12.8 13.1
Business development and start-up costs.... 0.7 0.0 0.5 0.0
Loss on early extinguishment of
long-term debt........................ 0.0 0.0 0.0 0.0
Operating income........................ 28.2 24.6 27.2 26.6
Interest expenses.......................... 13.1 13.5 11.1 11.3
Other expenses, net........................ 0.3 0.0 0.1 0.0
Income before income taxes.............. 14.8 11.1 15.9 15.3
Income taxes............................... 5.5 4.5 6.2 6.0
Net income.............................. 9.3% 6.6% 9.7% 9.3%
THIRD QUARTER ENDED SEPTEMBER 28, 2003 COMPARED TO THE THIRD QUARTER ENDED
SEPTEMBER 29, 2002
NET SALES for the third quarter of 2003 increased $2.7 million, or 12.1%,
to $24.7 million from $22.0 million in the third quarter of 2002. Golf shaft
sales increased $2.3 million, or 10.8%, to $23.3 million in the third quarter of
2003 from $21.0 million in the third quarter of 2002. This increase was driven
primarily by (i) increased sales volume for premium grade steel shafts as more
golf OEMs 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 approximately $0.4 million, or 39.3%,
to $1.3 million in the third quarter of 2003 from $1.0 million in the third
quarter of 2002. This increase was driven primarily by growth in sales of
composite bicycle components, hockey stick shafts, and other tubing products
within the segment.
6
Net sales to international customers increased $0.3 million, or 3.7%, to
$8.0 million in the third quarter of 2003 from $7.7 million in the third 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 third quarter of 2003 increased $2.1 million, or
24.6%, to $10.8 million from $8.7 million in the third quarter of 2002. Gross
profit as a percentage of net sales increased to 44.0% in the third quarter of
2003 from 39.6% in the third quarter of 2002. This increase in gross profit as a
percentage of net sales was driven by several factors, including (i) an improved
sales mix towards higher margin products, (ii) the favorable impact from foreign
currency exchange rates in the United Kingdom, Japan, and Australia and (iii)
favorable leverage on fixed manufacturing costs from increased sales volume.
These favorable factors were somewhat offset by increased costs for natural gas
and employee health care benefits.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") for the third
quarter of 2003 increased $0.5 million, or 14.1%, to $3.7 million from $3.2
million in the third quarter of 2002. SG&A as a percentage of net sales
increased to 15.0% in the third quarter of 2003 from 14.7% in the third quarter
of 2002. This increase was due primarily to (i) an increase in expenses for
management programs and (ii) increased personnel and travel cost to support the
Company's global sales initiatives.
BUSINESS DEVELOPMENT AND START-UP COSTS for the third quarter of 2003
increased to $0.2 million from a nominal amount in the third quarter of 2002.
These costs are comprised of travel, professional and legal fees, personnel
compensation, facility rent and other start-up business costs relating to the
opening of a composite manufacturing operation in southern China.
OPERATING INCOME for the third quarter of 2003 increased by $1.5 million,
or 28.5%, to $7.0 million from $5.4 million in the third quarter of 2002.
Operating income as a percentage of net sales increased to 28.2% in the third
quarter of 2003 from 24.6% in the third quarter of 2002. 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 third quarter of 2003 increased to $3.2 million
from $3.0 million in the third 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 ("TTC").
In turn, TTC used the dividends to reduce its outstanding debt.
INCOME TAXES for the third quarter of 2003 increased to $1.4 million from
$1.0 million in the third quarter 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 third quarter of 2003 increased by approximately $0.8
million to $2.3 million from $1.5 million in the third quarter of 2002. This
increase is reflective of the profit impact from the items described above.
NINE MONTH PERIOD ENDED SEPTEMBER 28, 2003 COMPARED TO THE NINE MONTH PERIOD
ENDED SEPTEMBER 29, 2002
NET SALES for the first nine months of 2003 increased $7.5 million, or
9.2%, to $88.8 million from $81.3 million in the first nine months of 2002. Golf
shaft sales increased $6.1 million, or 7.9%, to $81.2 million in the first nine
months of 2003 from $78.1 million in the first nine months of 2002. This
increase was driven primarily by (i) increased sales volume for premium grade
steel shafts as more golf OEMs 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.
7
Performance sports sales increased approximately $1.4 million, or 42.3%,
to $4.6 million in the first nine months of 2003 from $3.2 million in the first
nine months of 2002. This increase was driven primarily by growth in sales of
composite bicycle components, hockey stick shafts, and other tubing products
within the segment.
Net sales to international customers increased $4.9 million, or 22.7%, to
$26.3 million in the first nine months of 2003 from $21.4 million in the first
nine months 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 first nine months of 2003 increased $3.7 million, or
11.5%, to $36.0 million from $32.3 million in the first nine months of 2002.
Gross profit as a percentage of net sales increased to 40.5% in the first nine
months of 2003 from 39.7% in the first nine months of 2002. This increase in
gross profit as a percentage of net sales was driven by several factors,
including (i) an improved sales mix towards higher margin products, (ii) the
favorable impact from foreign currency exchange rates in the United Kingdom,
Japan, and Australia, and (iii) favorable leverage on fixed manufacturing costs
from increased sales volume. These favorable factors were somewhat offset by the
unfavorable impact from (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 relating to a new four year collective bargaining agreement effective
July 1, 2003. Excluding the impact of the ratification bonus, gross profit as a
percentage of net sales increased to 41.3% in the first nine months of 2003 from
39.7% in the first nine months of 2002.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") for the first nine
months of 2003 increased $0.9 million, or 8.6%, to $11.4 million from $10.5
million in the first nine months of 2002. This increase was due primarily to (i)
an increase in expenses for management programs and (ii) increased personnel and
travel cost to support the Company's global sales initiatives. SG&A as a
percentage of net sales decreased to 12.8% in the first nine months 2003 from
12.9% in the first nine months of 2002.
BUSINESS DEVELOPMENT AND START-UP COSTS for the first nine months of 2003
totaled $0.5 million compared to $0.2 for the first nine months of 2002. These
costs are comprised of travel, professional and legal fees, personnel
compensation, facility rent and other start-up business costs relating to the
opening of a composite manufacturing operation in southern China.
OPERATING INCOME for the first nine months of 2003 increased by $2.5
million, or 11.7%, to $24.1 million from $21.6 million in the first nine months
of 2002. Operating income as a percentage of net sales increased to 27.2% in the
first nine months of 2003 from 26.6% in the first nine 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 28.0% in
the first nine months of 2003 from 26.6% in the first nine months of 2002. 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 nine months of 2003 increased to $9.9
million from $9.1 million in the first nine 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
("TTC"). In turn, TTC used the dividends to reduce its outstanding debt.
INCOME TAXES for the first nine months of 2003 increased to $5.5 million
from $4.9 million in the first nine 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.
8
NET INCOME for the first nine months of 2003 increased by $1.1
million to $8.6 million from $7.6 million in the first nine 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 our
parent company, 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 September 28, 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.
NINE MONTH PERIOD ENDED SEPTEMBER 28, 2003 COMPARED TO THE NINE MONTH PERIOD
ENDED SEPTEMBER 29, 2002
In the first nine months of 2003 cash provided by operating
activities increased by approximately $2.0 million to $20.3 million from $18.3
million in the first nine months of 2002. This increase was driven by an
increase in net income as well as a decrease in our working capital
requirements.
We used $2.4 million of cash to invest in property, plant and
equipment in the first nine months of 2003, compared to the $0.9 million spent
in the first nine months of 2002.
We repaid $3.0 million of the principal on our senior credit
facility during the first nine months of 2003, compared to the $3.5 million that
we repaid during the first nine months of 2002. Also in the first quarter of
2002, we repurchased $0.3 million of our Notes.
9
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 TTC, 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 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 September 28, 2003 we maintain a $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 was to be adopted for fiscal years
or interim periods beginning after June 15, 2003, however, on October 9, 2003,
the FASB issued FSP FIN 46-6, Effective date of FASB Interpretation 46,
Consolidation of Variable Interest Entities, which defers the effective date of
FIN 46 for public enterprises. 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.
10
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, potentially 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 September 28, 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 (as
certified in Rules 13-a--15(e) and 15d-15(e) under the Securities Exchange Act
of 1934, as amended (the "Exchange Act")). Based upon that evaluation, the
Company's Chief 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
11
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 September 28, 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).*
13
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
September 28, 2003.
- -------------------
* Incorporated by reference.
** Filed herewith.
14
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 November 12, 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
15