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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 OCTOBER 3, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 333-72343
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TRUE TEMPER SPORTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3949 52-2112620
(STATE OF OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
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 [ ].
As of October 3, 1999 the Registrant had 100 shares of Common Stock, $0.01
par value per share, outstanding.
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TRUE TEMPER SPORTS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Operations for the three and nine
month periods ended October 3, 1999 (Unaudited) and
September 29, 1998 (Unaudited).............................. 3
Condensed Balance Sheets as of October 3, 1999 (Unaudited)
and December 31, 1998....................................... 4
Condensed Statements of Cash Flows for the nine month
periods ended October 3, 1999 (Unaudited) and September 29,
1998 (Unaudited)............................................ 5
Notes to Condensed Financial Statements (Unaudited)......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 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
</TABLE>
2
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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)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
--------------------------- ---------------------------
OCTOBER 3, SEPTEMBER 29, OCTOBER 3, SEPTEMBER 29,
1999 1998 1999 1998
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Net sales................................... $20,506 $19,022 $71,056 $ 71,892
Cost of sales............................... 12,196 12,254 43,119 45,308
------- ------- ------- --------
GROSS PROFIT........................... 8,310 6,768 27,937 26,584
Selling, general and administrative
expenses.................................. 3,665 3,191 11,785 11,209
Amortization of goodwill.................... 675 616 2,026 1,848
Write-off of goodwill....................... -- -- -- 40,000
Restructuring costs......................... 222 -- 600 --
------- ------- ------- --------
OPERATING INCOME (LOSS)................ 3,748 2,961 13,526 (26,473)
Interest expense............................ 3,554 -- 10,871 --
Other expenses (income), net................ 18 16 (11) 75
------- ------- ------- --------
INCOME (LOSS) BEFORE INCOME TAXES...... 176 2,945 2,666 (26,548)
Income taxes................................ 328 1,353 1,810 5,814
------- ------- ------- --------
NET INCOME (LOSS)...................... $ (152) $ 1,592 $ 856 $(32,362)
======= ======= ======= ========
</TABLE>
See accompanying notes to condensed financial statements
3
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TRUE TEMPER SPORTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TRUE TEMPER CORPORATION)
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
OCTOBER 3, DECEMBER 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 8,043 $ 2,265
Receivables, net.......................................... 12,886 12,591
Inventories............................................... 12,093 10,986
Prepaid expenses and other current assets................. 1,294 1,611
-------- --------
Total current assets................................... 34,316 27,453
Property, plant and equipment, net.......................... 20,719 21,991
Goodwill, net............................................... 77,707 79,733
Deferred tax assets......................................... 54,101 55,822
Other assets................................................ 4,690 4,627
-------- --------
Total assets........................................... $191,533 $189,626
======== ========
LIABILITIES & STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Current portion of long-term debt......................... $ 1,275 $ 900
Accounts payable.......................................... 4,873 7,785
Accrued interest payable.................................. 4,084 1,450
Accrued expenses and other liabilities.................... 8,006 6,111
-------- --------
Total current liabilities.............................. 18,238 16,246
Long-term debt less the current portion..................... 135,449 136,406
Other liabilities........................................... 2,111 2,095
-------- --------
Total liabilities...................................... 155,798 154,747
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
Accumulated deficit....................................... (4,591) (5,447)
-------- --------
Total stockholder's equity............................. 35,735 34,879
-------- --------
Total liabilities and stockholder's equity............. $191,533 $189,626
======== ========
</TABLE>
See accompanying notes to condensed financial statements
4
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TRUE TEMPER SPORTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TRUE TEMPER CORPORATION)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
---------------------------
OCTOBER 3, SEPTEMBER 29,
1999 1998
---------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $ 856 $(32,362)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 4,546 4,332
Amortization of deferred financing costs............... 441 --
Write-off of goodwill.................................. -- 40,000
Gain on disposal of property, plant and equipment...... (9) --
Deferred taxes......................................... 1,721 --
Changes in operating assets and liabilities, net....... 768 (3,734)
------- --------
Net cash provided by operating activities............ 8,323 8,236
INVESTING ACTIVITIES
Purchase of property, plant and equipment................. (1,392) (1,844)
Proceeds from the sales of property, plant and
equipment.............................................. 48 --
------- --------
Net cash used in investing activities................ (1,344) (1,844)
FINANCING ACTIVITIES
Principal payments on bank debt........................... (582) --
Principal payments on capital leases...................... (93) --
Payment of debt issuance costs............................ (195) --
Other..................................................... (331) --
Net proceeds to former parent company..................... -- (6,607)
------- --------
Net cash used in financing activities................ (1,201) (6,607)
Net increase (decrease) in cash............................. 5,778 (215)
Cash at beginning of period................................. 2,265 1,299
------- --------
Cash at end of period....................................... $ 8,043 $ 1,084
======= ========
</TABLE>
See accompanying notes to condensed financial statements
5
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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 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 generally accepted accounting principles. 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, 1998. In the
opinion of management, the financial statements include all adjustments
(consisting only of normal recurring accruals) 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) RECENT ACCOUNTING PRONOUNCEMENT
In June 1999, FASB Statement 137, "Accounting for Derivative Instruments
and Hedging Activity-Deferral of the Effective Date of FASB Statement 133", was
issued. This Statement shall be effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. The Company has only limited involvement
with derivative financial instruments, and does not use them for trading
purposes. This new accounting statement is not expected to have a material
impact on the Company's financial statements.
3) 1998 RESTRUCTURING PROGRAM
In December 1998, the Company announced a restructuring program, the
principal component of which is the consolidation of the Company's Olive Branch,
Mississippi composite manufacturing operations into its El Cajon, California
facility. The El Cajon facility was acquired in connection with the Company's
acquisition of substantially all the assets of Grafalloy Corporation on October
26, 1998. In the second quarter of 1999 the Company completed its shutdown of
the Olive Branch facility and its expansion of the El Cajon facility by
approximately 25,000 square feet. The remainder of the restructuring program,
which is being undertaken to reduce overhead and better leverage the investment
the Company has in the composite business, was substantially completed during
the third quarter. The final phase of the restructuring involves the sale of the
Olive Branch plant. The Company has listed the facility with a real estate
agency, but at present no formal offers have been received to purchase the
building.
In the fourth quarter of 1998, as part of the restructuring program
described above, an accrual of $1,350 was established, in accordance with EITF
94-3, primarily to cover costs associated with exiting the Olive Branch,
Mississippi facility. As of October 3, 1999, direct charges to this accrual
totaled $243, of which $110 was recorded during the third quarter of 1999.
In addition, the Company recorded restructuring expenses of $133, $245 and
$222 during the first, second and third quarters of 1999, respectively, related
to compensation, moving and other integration costs incurred as a result of the
transition of manufacturing operations from the Olive Branch facility to the El
Cajon facility.
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TRUE TEMPER SPORTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TRUE TEMPER CORPORATION)
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
4) INVENTORIES
<TABLE>
<CAPTION>
OCTOBER 3, DECEMBER 31,
1999 1998
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<S> <C> <C>
Raw materials............................................... $ 1,712 $ 2,395
Work in process............................................. 2,550 2,460
Finished goods.............................................. 7,831 6,131
------- -------
Total....................................................... $12,093 $10,986
======= =======
</TABLE>
5) SEGMENT REPORTING
The Company operates in two reportable business segments: golf shafts and
performance tubing. 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 and composite golf club shafts
for use exclusively in the golf industry. The performance tubing segment
manufactures and sells high strength, high tolerance tubular components for
bicycle, automotive and 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.
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
--------------------------- ---------------------------
OCTOBER 3, SEPTEMBER 29, OCTOBER 3, SEPTEMBER 29,
1999 1998 1999 1998
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Net sales:
Golf shafts......................... $19,433 $18,147 $67,959 $68,937
Performance tubing................ 1,073 875 3,097 2,955
------- ------- ------- -------
Total.......................... $20,506 $19,022 $71,056 $71,892
======= ======= ======= =======
Gross profit:
Golf shafts....................... $ 8,065 $ 6,484 $27,228 $25,635
Performance tubing................ 245 284 709 949
------- ------- ------- -------
Total.......................... $ 8,310 $ 6,768 $27,937 $26,584
======= ======= ======= =======
</TABLE>
Following is a reconciliation of total reportable segment gross profit to
total Company income (loss) before income taxes:
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
--------------------------- ---------------------------
OCTOBER 3, SEPTEMBER 29, OCTOBER 3, SEPTEMBER 29,
1999 1998 1999 1998
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Total reportable segment gross
profit............................ $8,310 $6,768 $27,937 $ 26,584
Less:
SG&A expenses..................... 3,665 3,191 11,785 11,209
Amortization of goodwill.......... 675 616 2,026 1,848
Write-off of goodwill............. -- -- -- 40,000
Restructuring costs............... 222 -- 600 --
Interest expense.................. 3,554 -- 10,871 --
Other expenses, net............... 18 16 (11) 75
------ ------ ------- --------
Total Company income (loss) before
income taxes...................... $ 176 $2,945 $ 2,666 $(26,548)
====== ====== ======= ========
</TABLE>
7
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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 1998 Annual Financial Statements, including the
notes thereto, appearing most recently in Amendment No. 4 to Form S-4 which was
filed with the SEC on June 7, 1999, and declared effective on June 10, 1999 (the
"Registration Statement").
RESULTS OF OPERATIONS
The following table sets forth the components of net income as a percentage
of net sales for the periods indicated:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
------------------------------ ------------------------------
OCTOBER 3, SEPTEMBER 29, OCTOBER 3, SEPTEMBER 29,
1999 1998 1999 1998
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Net sales..................... 100.0% 100.0% 100.0% 100.0%
Cost of sales................. 59.5 64.4 60.7 63.0
Gross profit.................. 40.5 35.6 39.3 37.0
SG&A expenses................. 17.9 16.8 16.6 15.6
Amortization of goodwill...... 3.3 3.2 2.9 2.6
Write-off of goodwill......... 0.0 0.0 0.0 55.6
Restructuring costs........... 1.1 0.0 0.8 0.0
Operating income
(loss)................. 18.3 15.6 19.0 (36.8)
Interest expenses............. 17.3 0.0 15.3 0.0
Other expenses, net........... 0.1 0.1 0.0 0.1
Income (loss) before
income taxes........... 0.9 15.5 3.8 (36.9)
Income taxes.................. 1.6 7.1 2.5 8.1
Net income (loss)........ (0.7)% 8.4% 1.2% (45.0)%
Other Information:
EBITDA........................ 26.7% 23.3% 26.3% 24.8%
Adjusted EBITDA............... 27.4% 23.3% 27.4% 24.8%
</TABLE>
(See definitions of EBITDA and Adjusted EBITDA located at the end of Item
2)
THIRD QUARTER ENDED OCTOBER 3, 1999 COMPARED TO THE THIRD QUARTER ENDED
SEPTEMBER 29, 1998
NET SALES for the third quarter of 1999 increased $1.5 million, or 7.8%, to
$20.5 million from $19.0 million in the third quarter of 1998. Golf shaft sales
increased $1.3 million, or 7.1%, to $19.4 million in the third quarter of 1999
from $18.1 million in the third quarter of 1998. This increase in sales was
driven by the incremental composite shaft volume from the purchase of Grafalloy,
offset somewhat by decreased unit sales for both the premium and commercial
steel shaft products. We attribute this decline in steel shaft sales to the
general softness in the entire golf equipment industry. Performance tubing sales
increased $0.2 million, or 22.6%, to $1.1 million in the third quarter of 1999
from $0.9 million in the third quarter of 1998.
Net sales to international customers increased $0.2 million, or 6.6%, to
$3.6 million in the third quarter of 1999 from $3.4 million in the third quarter
of 1998. This increase was driven primarily by sales growth in Japan and Asia,
offset by a slight decline in Europe and flat sales in Australia.
GROSS PROFIT for the third quarter of 1999 increased $1.5 million, or
22.8%, to $8.3 million from $6.8 million in the third quarter of 1998. Gross
profit as a percentage of net sales increased to 40.5% in the third quarter of
1999 from 35.6% in the third quarter of 1998. This improvement in gross profit
as a percentage of net sales was driven by several factors. Although unit sales
for premium steel shafts were down between quarters, the average gross profit
margin for steel products sold in 1999 was greater than the products sold in
1998. Also, the average gross profit for composite shaft sales in 1999 was
greater than 1998. In addition, gross profit improved due to our ongoing cost
reduction efforts and the savings benefits from consolidating our composite
shaft manufacturing operations.
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SELLING, GENERAL AND ADMINISTRATIVE expenses increased $0.5 million, or
14.9%, to $3.7 million in the third quarter of 1999 from $3.2 million in the
third quarter of 1998. SG&A as a percentage of net sales increased to 17.9% in
the third quarter of 1999 from 16.8% in the third quarter of 1998. The increase
in SG&A spending reflects the impact of adding the Grafalloy operations, offset
primarily by the cost savings from restructuring and integration programs as
well as other cost reduction initiatives.
OPERATING INCOME for the third quarter of 1999 increased by approximately
$0.8 million, or 26.6%, to $3.7 million from $3.0 million in the third quarter
of 1998. Operating income as a percentage of net sales increased to 18.3% in the
third quarter of 1999 from 15.6% in the third quarter of 1998. In addition to
the impact on operating income from the gross profit and SG&A items discussed
above, the 1999 operating income was negatively impacted by restructuring costs
of $0.2 million related to the consolidation of our composite manufacturing
operations. Excluding the impact of these restructuring costs, operating income
would have increased by $1.0 million, or 34.0%, to $4.0 million in 1999 from
$3.0 million in 1998, and operating income as a percentage of net sales would
have increased to 19.4% from 15.6%.
INTEREST EXPENSE for the third quarter of 1999 increased to $3.6 million
from $0 in the third quarter of 1998. In 1998, while we were a subsidiary of
Black & Decker, none of Black & Decker's consolidated indebtedness was directly
attributable to the assets of True Temper, and accordingly no debt of Black &
Decker or related interest expense was allocated to True Temper. Subsequent to
our recapitalization on September 30, 1998, we began to record interest expense
related to our $100.0 million in senior subordinated notes and $37.5 million
senior credit facilities.
INCOME TAXES for the third quarter of 1999 decreased to $0.3 million from
$1.4 million in the third quarter of 1998. The effective tax rate during these
periods differs from a federal statutory rate of 34% due primarily to the
pre-tax income added back for the non-deductible portion of goodwill
amortization and the incremental tax rate for state and foreign income tax
purposes.
NET INCOME for the third quarter of 1999 decreased by $1.7 million to a net
loss of $0.2 million from net income of $1.6 million in the third quarter of
1998. This decrease is reflective of the profit impact from the items described
above. Excluding the impact of the restructuring costs, net income would have
decreased by $1.6 million to $0.0 million in 1999 from $1.6 million in 1998.
NINE MONTH PERIOD ENDED OCTOBER 3, 1999 COMPARED TO THE NINE MONTH PERIOD ENDED
SEPTEMBER 29, 1998
NET SALES for the first nine months of 1999 decreased $0.8 million, or
(1.2%), to $71.1 million from $71.9 million in the first nine months of 1998.
Golf shaft sales decreased approximately $1.0 million, or (1.4%), to $68.0
million in the first nine months of 1999 from $68.9 million in the first nine
months of 1998. This decrease in sales was driven by decreased unit sales for
both the premium and commercial steel shaft products. We attribute this decline
in steel shaft sales to the general softness in the entire golf equipment
industry. Composite shaft sales increased in the first nine months of 1999 with
the incremental volume from the purchase of Grafalloy. Performance tubing sales
increased $0.1 million, or 4.8%, to $3.1 million in the first nine months of
1999 from $3.0 million in the first nine months of 1998.
Net sales to international customers decreased $1.1 million, or (9.4%), to
$10.6 million in the first nine months of 1999 from $11.7 million in the first
nine months of 1998. This decrease was driven primarily by sales declines in
Europe and Australia, partially offset by sales increases in Japan and Asia.
While 1999 year to date sales remain slightly below 1998 sales for the same
period, the trend over the first nine months of 1999 has shown signs of
improvement. Net sales for the first quarter of 1999 decreased $1.8 million, or
(7.2%), from the same period in 1998; while net sales for the second quarter of
1999 decreased only $.5 million, or (1.8%), from the same period in 1998; and
net sales for the third quarter of 1999 increased $1.5 million, or 7.8%, from
the same period in 1998.
GROSS PROFIT for the first nine months of 1999 increased approximately $1.4
million, or 5.1%, to $27.9 million from $26.6 million in the first nine months
of 1998. Year to date gross profit as a percentage of net sales increased to
39.3% in 1999 from 37.0% in 1998. This improvement in gross profit as a
percentage of net sales was driven by several factors. Although unit sales for
premium steel shafts were down during the first
9
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nine months of 1999 as compared to the first nine months of 1998, the average
gross profit margin for steel products sold in 1999 was greater than the
products sold in 1998. Also, the average gross profit for composite shaft sales
in 1999 was greater than 1998. In addition, gross profit improved due to our
ongoing cost reduction efforts and the savings benefits from consolidating our
composite shaft manufacturing operations.
In the second quarter of 1999 we paid a ratification bonus of $0.4 million
to the union members at our steel golf shaft plant in Mississippi. This
ratification bonus was paid in conjunction with a new four-year collective
bargaining agreement that expires in June 2003. Excluding the impact of this
ratification bonus, gross profit for the first nine months of 1999 would have
increased approximately $1.8 million, or 6.6%, to $28.3 million from $26.6
million in the first nine months of 1998, and gross profit as a percentage of
net sales would have increased to 39.9% from 37.0%.
SELLING, GENERAL AND ADMINISTRATIVE expenses increased $0.6 million, or
5.1%, to $11.8 million in the first nine months of 1999 from $11.2 million in
the first nine months of 1998. Year to date SG&A as a percentage of net sales
increased to 16.6% in 1999 from 15.6% in 1998. The increase in SG&A spending
reflects the impact of adding the Grafalloy operations, offset primarily by the
cost savings from restructuring and integration programs.
OPERATING INCOME for the first nine months of 1999 increased by $40.0
million, to $13.5 million of operating income from an operating loss of $26.5
million in the first nine months of 1998. In addition to the impact on operating
income from the gross profit and SG&A items discussed above, the 1998 operating
income was negatively impacted by a $40.0 million write-off of True Temper's
goodwill. This write-off was recorded in January 1998 by Black & Decker (our
former parent company). Also, the 1999 operating income was negatively impacted
by restructuring costs of $0.6 million related to the consolidation of our
composite manufacturing operations. Excluding the impact of the 1998 goodwill
write-off, the 1999 restructuring costs and the 1999 union ratification bonus
(discussed above), operating income would have increased $1.0 million, or 7.4%,
to $14.5 million from $13.5 million in the first nine months of 1998, and
operating income as a percentage of net sales would have increased to 20.4% from
18.8%.
INTEREST EXPENSE for the first nine months of 1999 increased to $10.9
million from $0 in the first nine months of 1998. In 1998, while we were a
subsidiary of Black & Decker, none of Black & Decker's consolidated indebtedness
was directly attributable to the assets of True Temper, and accordingly no debt
of Black & Decker or related interest expense was allocated to True Temper.
Subsequent to our recapitalization on September 30, 1998, we began to record
interest expense related to our $100.0 million in senior subordinated notes and
$37.5 million senior credit facilities.
INCOME TAXES for the first nine months of 1999 decreased to $1.8 million
from $5.8 million in the first nine months of 1998. The effective tax rate
during these periods differs from a federal statutory rate of 34% due primarily
to the pre-tax income added back for the non-deductible portion of goodwill
amortization and the goodwill write-off, and the incremental tax rate for state
and foreign income tax purposes.
NET INCOME for the first nine months of 1999 increased by approximately
$33.2 million to net income of $0.9 million from a net loss of $32.4 million in
the first nine months of 1998. This increase is reflective of the profit impact
from the items described above. Excluding the impact of the 1998 goodwill
write-off, the 1999 restructuring costs and the 1999 union ratification bonus,
net income would have decreased by approximately $6.2 million to $1.5 million in
1999 from $7.6 million in 1998.
LIQUIDITY AND CAPITAL RESOURCES
NINE MONTH PERIOD ENDED OCTOBER 3, 1999 COMPARED TO THE NINE MONTH PERIOD
ENDED SEPTEMBER 29, 1998
In the first nine months of 1999, our cash provided by operating activities
increased by $0.1 million to $8.3 million from $8.2 million in the first nine
months of 1998. This increase was driven primarily by lower cash requirements
for working capital needs during the first nine months of 1999, offset by the
incremental cash interest payments required during 1999 on our senior
subordinated notes and senior credit facilities.
10
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The $8.3 million of cash provided from operations during the first nine
months of 1999 was generated from $7.6 million in earnings from operations and
approximately $0.8 million in decreased working capital levels. While the $8.2
million of cash provided from operations during the first nine months of 1998
was generated from $12.0 million in earnings from operations offset by $3.8
million in uses for working capital needs.
In addition, we used $1.4 million of cash to invest in property, plant and
equipment during the first nine months of 1999, compared to the $1.8 million we
spent in the first nine months of 1998.
We also repaid $0.6 million of the principal on our senior credit facility.
At this time we expect future cash provided by operating activities to fund our
current and long term cash requirements for working capital needs, investments
in machinery and equipment, and both the principal and interest payments on our
debt. However, since there can be no assurance of future performance, we have
the full amount of a $20.0 million revolving credit facility available for
future cash requirements.
Currently, our intention is to use existing cash and cash provided from
future operations, if any, to repay our senior credit facilities and/or to make
additional investments in the business for growth.
MANAGEMENT INFORMATION SYSTEMS AND THE IMPACT OF THE YEAR 2000
As discussed more fully in the section titled "MANAGEMENT INFORMATION
SYSTEMS AND THE IMPACT OF THE YEAR 2000" included in our Registration Statement,
we have developed a plan to minimize the impact of year 2000 ("Y2K") issues in
our business. The plan is designed to address the Y2K issues arising from
systems that are internal and external to our business operations. It includes
assessment, testing, remediation and subsequent re-testing and monitoring of
date sensitive systems and processes. Additionally, where it is deemed
necessary, contingency plans have been and continue to be developed for
specific, critical aspects of our operations that may be impacted by the Y2K
problem.
As of October 3, 1999, there have been no significant changes to the
schedule or timing for completion of our Y2K preparedness plan. No significant
concerns or issues have developed during the first nine months of 1999 that were
not considered in our original plan.
While we believe that we have adequately addressed the potential Y2K
problem, the fact remains that our Company may or may not incur a material
adverse impact to its business operations depending on the magnitude and
duration of any disruptions to our internal systems and/or the systems of our
trading partners. We believe that the diversity of our customer and vendor base
reduces the overall exposure and expect that the consequences of any
unsuccessful remediation will not be significant. However, there can be no
assurance that our efforts or those of other entities will be successful, or
that any potential failure would not have a material adverse effect on our
operating results or financial condition.
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 may
include forward-looking statements. 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 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 general state of the
economy, the Company's ability to execute its plans, 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 SEC filings; including but not limited to our
Registration Statement.
11
<PAGE> 12
NOTES
EBITDA represents operating income plus depreciation, amortization and
goodwill write-off.
ADJUSTED EBITDA represents operating income plus depreciation,
amortization, goodwill write-off, restructuring costs, management services fee
and the union ratification bonus.
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 1998 Annual Report, included in our Registration Statement.
This information has been omitted from this report as there have been no
material changes to our market risks as of October 3, 1999.
12
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-- Not applicable --
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
-- Not applicable --
ITEM 5. OTHER INFORMATION
-- Not Applicable --
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
<TABLE>
<C> <S>
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"), and incorporated herein by this reference).
2.2 Amendment No. 1 to Recapitalization Agreement dated August
1, 1998 (filed as exhibit 2.2 to Form S-4, and incorporated
herein by this reference).
2.3 Amendment No. 2 to Recapitalization Agreement dated
September 30, 1998 (filed as exhibit 2.3 to Form S-4, and
incorporated herein by this reference).
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, and incorporated
herein by this reference).
3.1 Amended and Restated Certificate of Incorporation of the
Company, dated September 29, 1998 (filed as Exhibit 3.1 to
Form S-4, and incorporated herein by this reference).
3.2 By-laws of the Company (filed as Exhibit 3.2 to Form S-4,
and incorporated herein by this reference).
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,
and incorporated herein by this reference).
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, and incorporated herein by this reference).
4.3 Registration Rights Agreement dated as of November 23, 1998
between the Company and Donaldson, Lufkin and Jenrette
(filed as Exhibit 4.3 to Form S-4, and incorporated herein
by this reference).
</TABLE>
13
<PAGE> 14
<TABLE>
<C> <S>
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, and incorporated herein by this reference).
10.2 Amendment to Management Services Agreement dated November
23, 1998 (filed as Exhibit 10.2 to Form S-4, and
incorporated herein by this reference.)
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, and incorporated herein by this
reference).
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, and incorporated herein by this
reference).
24.1 Powers of Attorney (included in Signature page) (filed as
Exhibit 24.1 to Form S-4, and incorporated herein by this
reference).
27.1 Financial Data Schedule
</TABLE>
b. Reports on Form 8-K
-- Not applicable --
14
<PAGE> 15
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 17, 1999.
True Temper Sports, Inc.
By: /s/ SCOTT C. HENNESSY
------------------------------------
Name: Scott C. Hennessy
Title: Chief Executive Officer
By: /s/ FRED H. GEYER
------------------------------------
Name: Fred H. Geyer
Title: Chief Financial Officer
15
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<C> <S>
27.1 Financial Data Schedule
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> OCT-03-1999 SEP-29-1998
<CASH> 8,043 1,084
<SECURITIES> 0 0
<RECEIVABLES> 13,541 11,996
<ALLOWANCES> 655 446
<INVENTORY> 12,093 8,964
<CURRENT-ASSETS> 34,316 21,793
<PP&E> 53,363 50,732
<DEPRECIATION> 32,644 29,671
<TOTAL-ASSETS> 191,533 118,460
<CURRENT-LIABILITIES> 18,238 10,663
<BONDS> 100,000 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 35,735 107,747
<TOTAL-LIABILITY-AND-EQUITY> 191,533 118,460
<SALES> 71,056 71,892
<TOTAL-REVENUES> 71,056 71,892
<CGS> 43,119 45,308
<TOTAL-COSTS> 57,530 88,285
<OTHER-EXPENSES> (11) 75
<LOSS-PROVISION> 92 39
<INTEREST-EXPENSE> 10,871 0
<INCOME-PRETAX> 2,666 (26,548)
<INCOME-TAX> 1,810 5,814
<INCOME-CONTINUING> 856 (32,362)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 856 (32,362)
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
</TABLE>
