**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 1, 2006**                                                                                                                                                                                                                                                                                                                                                                                                    |
| ** ** | **or**                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **o**      | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE**                                                                                                                                                                                                                                                                                                                                                                               |
| ** ** | **SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                                                                                                                                   |
| ** ** | **For the transition period from                                     to                                  ** |

 

**Commissionfile number 333-72343**

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**TRUE TEMPER SPORTS, INC.**

(Exact name of registrantas specified in its charter)

| **Delaware**                                 |   | **52-2112620**          |
|----------------------------------------------|--------|-------------------------|
| (State or other  jurisdiction of             |   | (I.R.S. Employer        |
| incorporation or  organization)              |   | Identification  Number) |
| **8275 Tournament Drive**                    |   |                    |
| **Suite 200**                           |   |                    |
| **Memphis, Tennessee**                       |   | **38125**               |
| **(Address of principal executive offices)** |   | (Zip Code)              |

 

**Telephone: (901) 746-2000**

**(Registrant’s telephone number, including area code)**

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes x No o.

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.

Large acceleratedfiler   o     Acceleratedfiler   o     Non-acceleratedfiler   x

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct). Yes o No x

As of November 15, 2006the Registrant had 100 shares of Common Stock, $0.01 par value per share,outstanding.

 

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**TRUE TEMPER SPORTS,INC.**

**INDEX**

|              | ** **         | ** **             | ** ** | ** **                                                                                  | **Page** |
|--------------|--------------------|------------------------|------------|---------------------------------------------------------------------------------------------|----------|
| PART I  |               | FINANCIAL  INFORMATION |       |                                                                                        |
|         |               | Item 1.           |       | Financial  Statements                                                                       |     | 1 |
|         |               |                   |       | Condensed Consolidated Statements of Operations  (Unaudited)                                |     | 1 |
|         |               |                   |       | Condensed  Consolidated Balance Sheets (Unaudited)                                          |     | 2 |
|         |               |                   |       | Condensed Consolidated Statements of Cash Flows  (Unaudited)                                |     | 3 |
|         |               |                   |       | Notes  to Condensed Consolidated Financial Statements (Unaudited)                           |     | 4 |
|         |               | Item 2.           |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations |     | 9 |
|         |               | Item 3.           |       | Quantitative and Qualitative Disclosures About Market  Risk                                 |     | 17 |
|         |               | Item 4.                |       | Controls and Procedures                                                                     |     | 17 |
| PART II | OTHER  INFORMATION |                   |       |
|         |               | Item 1.           |       | Legal  Proceedings                                                                          |     | 18 |
|         |               | Item 1A.          |       | Risk  Factors                                                                               |     | 18 |
|         |               | Item 2.           |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                |     | 18 |
|         |               | Item 3.           |       | Defaults Upon Senior Securities                                                             |     | 18 |
|         |               | Item 4.           |       | Submission of Matters to a Vote of Security Holders                                         |     | 18 |
|         |               | Item 5.           |       | Other  Information                                                                          |     | 18 |
|         |               | Item 6.           |       | Exhibits                                                                                    |     | 18 |
| Signatures   |               | 19                     |
|              |                    |                        |            |                                                                                             |          |  |  |  |

 

i

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**PART I.FINANCIAL INFORMATION**

**Item 1.**                        *Financial Statements*

**TRUE TEMPER SPORTS,INC. AND SUBSIDIARIES(A wholly-owned subsidiary of True Temper Corporation)**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)(Dollars in thousands)**

| ** **                                                 | ** ** | **Quarter Ended**    | ** ** | **Year-To-Date**          | ** ** |
|------------------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                                                 | ** ** | **October 1,  2006** | ** ** | **October 2,  2005** | ** ** | **October 1,  2006** | ** ** | **October 2,  2005** | ** ** |
| **NET  SALES**                                             |       |                      | **$**      | **21,491**                | ** ** |   |   | **$** | **25,520** | ** ** |   |   | **$** | **83,824** | ** ** |   |   | **$** | **90,188** |   |   |
| Cost of sales                                              |       |                      | 14,701     |                      |       |   | 15,077 | ** ** |   |   | 54,616 |   |   |   | 53,625 |   |   |
| **GROSS PROFIT**                                           |       |                      | **6,790**  | ** **                |       |   | **10,443** | ** ** |   |   | **29,208** | ** ** |   |   | **36,563** |   |   |
| Selling, general and administrative expenses               |       |                      | 3,277      |                      |       |   | 3,598 | ** ** |   |   | 10,760 |   |   |   | 11,733 |   |   |
| Amortization of  intangible assets                         |       |                      | 3,768      |                      |       |   | 3,456 | ** ** |   |   | 10,695 |   |   |   | 10,368 |   |   |
| Business  development, start-up costs and transition costs |       |                      | 1,040      |                      |       |   | 37 | ** ** |   |   | 2,163 |   |   |   | 172 |   |   |
| **OPERATING INCOME (LOSS)**                                |       |                      | **(1,295** | **)**                     |       |   | **3,352** | ** ** |   |   | **5,590** | ** ** |   |   | **14,290** |   |   |
| Interest expense, net                                      |       |                      | 5,299      |                      |       |   | 4,408 | ** ** |   |   | 15,162 |   |   |   | 13,934 |   |   |
| Other expenses  (income), net                              |       |                      | 15         |                      |       |   | (66 | **)** |   |   | 63 |   |   |   | (33 | ) |   |
| **INCOME (LOSS) BEFORE INCOME TAXES**                      |       |                      | **(6,609** | **)**                     |       |   | **(990** | **)** |   |   | **(9,635** | **)** |   |   | **389** |   |   |
| Income tax expense (benefit)                               |       |                      | (2,463     | )                         |       |   | (329 | **)** |   |   | (3,514 | ) |   |   | 296 |   |   |
| **NET  INCOME (LOSS)**                                     |       |                      | **$**      | **(4,146**                | **)**      |   |   | **$** | **(661** | **)** |   |   | **$** | **(6,121** | **)** |   |   | **$** | **93** |   |   |

 

See accompanying notes to condensed consolidated financial statements

1

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**TRUE TEMPER SPORTS,INC. AND SUBSIDIARIES(A wholly-owned subsidiary of True Temper Corporation)**

**CONDENSED CONSOLIDATED BALANCE SHEETS(Unaudited)(Dollars in thousands)**

| ** **                                                                                                    | ** **   | **October 1,  2006** | ** **  | **December 31,  2005** | ** **  |
|---------------------------------------------------------------------------------------------------------------|--------------|----------------------|-------------|-----------------------------|-------------|
| **ASSETS**                                                                                                    |         | ** **           |        |                        |        |   |   |
| **CURRENT ASSETS**                                                                                            |         |                 |        |                        |        |   |   |
| Cash and cash equivalents                                                                                     |    | $                    | 962         |                   |        | $ | 4,733 |   |   |
| Receivables, net                                                                                              |         | 15,671               |        |                        | 17,949      |   |   |
| Inventories                                                                                                   |         | 25,233               |        |                        | 19,633      |   |   |
| Prepaid expenses and other current assets                                                                     |         | 3,517                |        |                        | 3,830       |   |   |
| **Total current assets**                                                                                      | ** **   | **45,383**           |        | ** **                  | **46,145**  |   |   |
| Property, plant and equipment, net                                                                            |         | 14,772               |        |                        | 12,210      |   |   |
| Goodwill                                                                                                      |         | 150,883              |        |                        | 150,883     |   |   |
| Intangible assets, net                                                                                        |         | 136,887              |        |                        | 132,629     |   |   |
| Other assets                                                                                                  |         | 6,480                |        |                        | 6,188       |   |   |
| **Total assets**                                                                                              | ** **   | **$**                | **354,405** |                        | ** **  | **$** | **348,055** |   |   |
| **LIABILITIES AND  STOCKHOLDER’S EQUITY**                                                           |         |                 |        |                        |        |   |   |
| **CURRENT LIABILITIES**                                                                                       |         |                 |        |                        |        |   |   |
| Current portion of long-term debt                                                                             |         | $                    | 1,257       |                        |        | $ | 245 |   |   |
| Accounts payable                                                                                              |         | 8,378                |        |                        | 4,410       |   |   |
| Accrued expenses and other current liabilities                                                                |         | 7,806                |        |                        | 9,896       |   |   |
| **Total current liabilities**                                                                                 | ** **   | **17,441**           |        | ** **                  | **14,551**  |   |   |
| Deferred tax liabilities                                                                                      |         | 855                  |        |                        | 4,531       |   |   |
| Long-term debt, net of current portion                                                                        |         | 234,463              |        |                        | 220,480     |   |   |
| Other liabilities                                                                                             |         | 8,005                |        |                        | 8,729       |   |   |
| **Total liabilities**                                                                                         | ** **   | **260,764**          |        | ** **                  | **248,291** |   |   |
| **STOCKHOLDER’S  EQUITY**                                                                                |         |                 |        |                        |        |   |   |
| Common stock—par value $0.01 per share; authorized  1,000 shares; issued and outstanding 100 shares |         | —               |        |                        | —      |   |   |
| Additional paid-in capital                                                                                    |         | 111,943              |        |                        | 111,943     |   |   |
| Accumulated deficit                                                                                           |         | (17,051              | )           |                        | (10,930     | ) |   |
| Accumulated other comprehensive loss, net of taxes                                                            |         | (1,251               | )           |                        | (1,249      | ) |   |
| **Total stockholder’s equity**                                                                           | ** **   | **93,641**           |        | ** **                  | **99,764**  |   |   |
| Commitments and contingent liabilities                                                                        |         | —               |        |                        | —      |   |   |
| **Total  liabilities and stockholder’s equity**                                                          | ** **   | **$354,405**         |        | ** **                  | **$**       | **348,055** |   |   |

 

See accompanying notes to condensed consolidated financial statements

2

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**TRUETEMPER SPORTS, INC. AND SUBSIDIARIES(A wholly-owned subsidiary of True Temper Corporation)**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)(Dollars in thousands)**

| ** **                                                                                | ** **   | **Year-To-Date**          | ** **   |
|-------------------------------------------------------------------------------------------|--------------|---------------------------|--------------|
| ** **                                                                                | ** **   | **October 1,  2006** | ** **   | **October 2,  2005** | ** ** |
| **OPERATING ACTIVITIES**                                                                  |         |                      |         |   |   |
| Net income (loss)                                                                         |         | $                         | (6,121       | ) | $ | 93 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |         |                      |         |   |   |
| Depreciation and amortization                                                             |         | 1,766                     |         | 2,025 |   |
| Amortization of deferred financing costs                                                  |         | 1,015                     |         | 1,088 |   |
| Amortization of intangible assets                                                         |         | 10,695                    |         | 10,368 |   |
| Loss (gain) on disposal of property, plant and  equipment                                 |         | 25                        |         | (57 | ) |
| Deferred income taxes                                                                     |         | (3,676                    | )            | 99 |   |
| Changes in operating assets and liabilities, net                                          |         | (1,043                    | )            | (3,107 | ) |
| **Net cash provided by operating activities**                                             | ** **   | **2,661**                 |         | **10,509** |   |
| **INVESTING  ACTIVITIES**                                                                 |         |                      |         |   |   |
| Purchase of property, plant, equipment and certain  assets                                |         | (19,803                   | )            | (1,898 | ) |
| Proceeds from sale of property, plant and equipment                                       |    | —                    |    | 784 |    |
| Other investing activity                                                                  |         | (103                      | )            | — |    |
| **Net cash used in investing activities**                                                 | ** **   | **(19,906**               | )            | **(1,114** | ) |
| **FINANCING ACTIVITIES**                                                                  |         |                      |         |   |   |
| Proceeds from issuance of bank debt                                                       |         | 18,000                    |         | — |   |
| Principal payments on bank debt                                                           |         | (3,005                    | )            | (10,000 | ) |
| Payment of debt issuance costs                                                            |         | (1,057                    | )            | — |   |
| Other financing activity                                                                  |         | (464                      | )            | (187 | ) |
| **Net cash provided by (used in) financing  activities**                                  | ** **   | **13,474**                |         | **(10,187** | ) |
| Net decrease in cash and cash equivalents                                                 |         | (3,771                    | )            | (792 | ) |
| Cash and cash  equivalents at beginning of period                                         |         | 4,733                     |         | 3,337 |   |
| **Cash and cash equivalents at  end of period**                                           | ** **   | **$**                     | **962**      |   | **$** | **2,545** |   |

 

See accompanying notes to condensed consolidated financial statements

3

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**TRUE TEMPER SPORTS, INC. AND SUBSIDIARIES (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 financialstatements of True Temper Sports, Inc. and subsidiaries (“True Temper” orthe “Company”) have been prepared in accordance with the rules andregulations of the Securities and Exchange Commission (“SEC”) for quarterlyreports on Form 10-Q and consequently do not include all thedisclosures required by U.S. generally accepted accounting principles. It issuggested that these financial statements be read in conjunction with theaudited financial statements and the notes thereto included in the Company’sannual report on Form 10-K for the year ended December 31, 2005. In theopinion of management, the unaudited condensed consolidated financialstatements as of and for the periods ended October 1, 2006 and October 2,2005 include all adjustments, consisting of only normal recurring adjustments,which are necessary for the fair presentation of results for interim periods.

The Company’s fiscal year begins on January 1 andends on December 31 of each year. During the course of the year theCompany closes its books on a monthly and quarterly basis following a4,4,5 week closing calendar. Since the Company uses Sunday as the last dayof each period (with the exception of December) the number of days in the firstand fourth quarters of any given year can vary depending on which day of theweek January 1st falls on.

On January 30, 2004, TTS Holdings LLC, a companyformed by Gilbert Global Equity Partners, L.P. and its affiliated funds (“GilbertGlobal”), entered into a stock purchase agreement with the Company’s directparent company, True Temper Corporation (“TTC”), pursuant to which TTS HoldingsLLC and certain of the Company’s senior management purchased all of theoutstanding shares of TTC. In connection with this acquisition, and effectiveon March 15, 2004, the Company repaid all of its outstanding 2002 seniorcredit facility, redeemed all of its 107¤8% seniorsubordinated notes due 2008, and made certain payments of the net remainingequity of the predecessor company to the selling shareholders. These paymentswere financed with the net proceeds of a new senior credit facility and new 83¤8%senior subordinated notes due 2011.

This transaction wasaccounted for by TTC using the purchase method of accounting. As the Company isa wholly owned subsidiary of True Temper Corporation, the Company has “pusheddown” the effect of the purchase method of accounting to the financialstatements of True Temper Sports, Inc.

**2)  Stock Based Compensation**

On August 10, 2005 TTC issued, to certainemployees in return for service, a total of 525,400 stock options and stockappreciation rights (“Equity Incentive Awards”) to purchase common stock of TTCfor $13.56 per share. The Equity Incentive Awards have a term of ten years, andvest and become exercisable at various times and under various conditionsthrough August 10, 2012; with certain acceleration features based onperformance criteria.

On January 1,2006 the Company adopted Statement of Financial Accounting StandardsNo. 123 (revised 2004), *Share Based Payment*(“SFAS 123(R)”). All equity incentive awards issued subsequent toJanuary 1, 2006 will be accounted for using the guidance provided in thisstatement, which requires the measurement and recognition of compensationexpense for all share-based payment awards to employees and directors based onestimated fair values. As allowed by SFAS 123(R), the Company has elected tomake this adoption on a prospective basis because the Company meets thedefinition of a non-public 

4

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**TRUE TEMPER SPORTS, INC. AND SUBSIDIARIES**

**(A wholly-owned subsidiary of True Temper Corporation)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(Unaudited)**

**(Dollars in thousands unless otherwise indicated)**

entity.For equity incentive awards issued prior to January 1, 2006, the Companycontinues to apply the intrinsic-value-based method of accountingprescribed by Accounting Principles Board (APB) Opinion No. 25, *Accounting for Stock Issued to Employees*, and relatedinterpretations, including Financial Accounting Standards Board InterpretationNo. 44,*Accounting for Certain Transactions InvolvingStock Compensation, An Interpretation of APB Opinion No. 25*,issued in March 2000, to account for its fixed-plan Equity IncentiveAwards. Under this method, compensation expense is recorded on the date ofgrant only if the current market price of the underlying stock exceeded theexercise price of the Equity Incentive Award.

Priorto the adoption of SFAS 123(R), the Company determined the minimum value ofEquity Incentive Awards using the Black-Scholes option-pricing model with thefollowing weighted-average assumptions: dividend yield=0%; expected volatility=0%;risk-free interest rate=4%; expected term=5 years.

TTCand the Company have not granted any equity awards since August 2005. Therehave been no awards exercised or forfeited in 2006. The weighted averageremaining contractual life is nine years.

Inaddition, TTC has 468,000 equity awards which vest only upon a sale of TTC andachievement of certain other terms as described in the awards. As of October 1,2006 the events required for vesting of these awards are not expected to occurin the near term.

**3)  Inventories**

| ** **      | ** ** | **October 1  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------|------------|--------------------------|------------|-----------------------------|------------|
| Raw materials   |       |                     | $          | 6,240                       |       |   |   | $ | 4,556 |   |   |
| Work in process |       |                     | 3,272      |                        |       |   | 1,734 |   |   |
| Finished goods  |       |                     | 15,721     |                        |       |   | 13,343 |   |   |
| Total           |       |                     | $25,233    |                        |       |   | $ | 19,633 |   |   |

 

**4)  SegmentReporting**

The Company operates intwo reportable business segments: golf shafts and performance sports. TheCompany’s reportable segments are based on the type of product manufactured andthe application of that product in the marketplace. The golf shaft segmentmanufactures and sells steel, composite, and multi-material golf club shaftsfor use exclusively in the golf industry. The performance sports segmentmanufactures and sells high strength, tight tolerance tubular components forbicycle, hockey and other recreational sport markets. The Company evaluates theperformance of these segments based on segment sales and gross profit. TheCompany has no inter-segment sales.

5

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**TRUE TEMPER SPORTS, INC. AND SUBSIDIARIES**

**(A wholly-owned subsidiary of True Temper Corporation)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(Unaudited)**

**(Dollars in thousands unless otherwise indicated)**

 

| ** **         | ** ** | **Quarter Ended**    | ** ** | **Year-To-Date**          | ** ** |
|--------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **         | ** ** | **October 1,  2006** | ** ** | **October 2,  2005** | ** ** | **October 1,  2006** | ** ** | **October 2,  2005** | ** ** |
| Net sales:         |       |                      |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Golf shafts        |       |                      | $          | 19,428                    |       |   |   | $ | 23,837 |   |   |   | $ | 77,459 |   |   |   | $ | 85,269 |   |   |
| Performance sports |       |                      | 2,063      |                      |       |   | 1,683 |   |   |   | 6,365 |   |   |   | 4,919 |   |   |
| Total              |       |                      | $          | 21,491                    |       |   |   | $ | 25,520 |   |   |   | $ | 83,824 |   |   |   | $ | 90,188 |   |   |
| Gross profit:      |       |                      |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Golf shafts        |       |                      | $          | 6,413                     |       |   |   | $ | 10,091 |   |   |   | $ | 28,169 |   |   |   | $ | 35,476 |   |   |
| Performance sports |       |                      | 377        |                      |       |   | 352 |   |   |   | 1,039 |   |   |   | 1,087 |   |   |
| Total              |       |                      | $          | 6,790                     |       |   |   | $ | 10,443 |   |   |   | $ | 29,208 |   |   |   | $ | 36,563 |   |   |

 

Followingis a reconciliation of total reportable segment gross profit to total Companyincome (loss) before income taxes:

| ** **                                                      | ** ** | **Quarter Ended**    | ** ** | **Year-To-Date**          | ** ** |
|-----------------------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                                                      | ** ** | **October 1,  2006** | ** ** | **October 2,  2005** | ** ** | **October 1,  2006** | ** ** | **October 2,  2005** | ** ** |
| Total reportable segment  gross profit                          |       |                      | $          | 6,790                     |       |   |   | $ | 10,443 |   |   |   | $ | 29,208 |   |   |   | $ | 36,563 |   |   |
| Less:                                                           |       |                      |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general and  administrative expenses                   |       |                      | 3,277      |                      |       |   | 3,598 |   |   |   | 10,760 |   |   |   | 11,733 |   |   |
| Amortization of  intangible assets                              |       |                      | 3,768      |                      |       |   | 3,456 |   |   |   | 10,695 |   |   |   | 10,368 |   |   |
| Business development,  start-up costs and transition costs |       |                      | 1,040      |                      |       |   | 37 |   |   |   | 2,163 |   |   |   | 172 |   |   |
| Interest expense, net of  interest income                       |       |                      | 5,299      |                      |       |   | 4,408 |   |   |   | 15,162 |   |   |   | 13,934 |   |   |
| Other expense, net                                              |       |                      | 15         |                      |       |   | (66 | ) |   |   | 63 |   |   |   | (33 | ) |   |
| Total Company income  (loss) before income taxes                |       |                      | $          | (6,609                    | )          |   |   | $ | (990 | ) |   |   | $ | (9,635 | ) |   |   | $ | 389 |   |   |

 

**5)  Comprehensive Income (Loss)**

Totalcomprehensive income (loss) and its components for the periods covered by thisreport are as follows:

| ** **                                                              | ** ** | **Quarter Ended**    | ** ** | **Year-To-Date**          | ** ** |
|-------------------------------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                                                              | ** ** | **October 1,  2006** | ** ** | **October 2,  2005** | ** ** | **October 1,  2006** | ** ** | **October 2,  2005** | ** ** |
| Net income (loss)                                                       |       |                      | $          | (4,146                    | )          |   |   | $ | (661 | ) |   |   | $ | (6,121 | ) |   |   | $ | 93 |   |   |
| Mark to market adjustment on derivative instruments,  net of taxes |       |                      | (2         | )                         |       |   | (21 | ) |   |   | (2 | ) |   |   | (36 | ) |   |
| Total  comprehensive income (loss)                                      |       |                      | $          | (4,148                    | )          |   |   | $ | (682 | ) |   |   | $ | (6,123 | )   |   |   | $ | 57 |   |   |

 

6

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**TRUE TEMPER SPORTS, INC. AND SUBSIDIARIES**

**(A wholly-owned subsidiary of True Temper Corporation)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(Unaudited)**

**(Dollars in thousands unless otherwise indicated)**

**6)  Pension and Other Postretirement Benefits**

Thefollowing table reflects the Company’s net periodic pension benefit expense andcash contributions to its pension plan, as well as the net periodic postretirementbenefit expense related to its unfunded health care plan for retirees, for theperiods covered by this report:

| ** **                                   | ** ** | **Quarter Ended**    | ** ** | **Year-To-Date**          | ** ** |
|----------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                                   | ** ** | **October 1,  2006** | ** ** | **October 2,  2005** | ** ** | **October 1,  2006** | ** ** | **October 2,  2005** | ** ** |
| *Pension  Plan:*                             | * *   |                      | * *   | * *                  |       |   | * * | * * |   |   | * * | * * |   |   | * * | * * |   |
| Net periodic  pension benefit expense        |       |                      | $          | 114                       | * *   |   |   | $ | 183 | * * |   |   | $ | 342 | * * |   |   | $ | 480 | * * |   |
| Cash  contributions to the pension plan      |       |                      | $          | 103                       | * *   |   |   | $ | 193 | * * |   |   | $ | 251 | * * |   |   | $ | 239 | * * |   |
| *Postretirement  Health Plan:*               |       |                      |       | * *                  |       |   |   | * * |   |   |   | * * |   |   |   | * * |   |
| Net periodic  postretirement benefit expense |       |                      | $          | 78                        | * *   |   |   | $ | 54 | * * |   |   | $ | 234 | * * |   |   | $ | 234 | * * |   |

 

**7)  Acquisition of Certain Assets**

On June 8, 2006 theCompany acquired certain business assets of the former golf shaft manufacturerRoyal Precision, Inc. (“Royal Precision”) for approximately $17,850. Theassets acquired were comprised of (i) intellectual property includingpatents, trademarks, brand names and design technologies, (ii) intangibleassets including customer relationships, (iii) a portion of their golfshaft inventory, and (iv) certain steel golf shaft manufacturingequipment. The Company is currently in the process of finalizing the purchaseprice allocation. During the 2006 third quarter, the Company further refinedits preliminary purchase price allocation, resulting in a reclassificationbetween goodwill and identifiable intangible assets of approximately $4.3 million.

True Temper is in theprocess of integrating the machinery and equipment into its existing steel golfshaft facility in Amory, Mississippi, and intends to produce and distribute thebranded products formerly sold by Royal Precision.

The cash purchase pricefor the assets acquired is included in the investing section of the Company’sCondensed Consolidated Statement of Cash Flows for the nine month period ended October 1,2006. Machinery and equipment acquired will be depreciated over its estimatedremaining useful life, between five and ten years. Intangible assets acquiredwith determinable useful lives will be amortized over periods ranging fromeight to ten years.

Certain expenses wereincurred to acquire the assets and transition them to the Company’s existingmanufacturing sites. Of these costs approximately $1.8 million for the ninemonth period ended October 1, 2006 were recorded in the Company’sCondensed Consolidated Statement of Operations as Business development,start-up costs and transition costs. These costs include acquisition relatedfees and expenses, as well as transportation and integration expensesassociated with the transfer of production equipment and inventory to TrueTemper facilities.

**8)  Recent Accounting Pronouncements**

In June 2006, theFinancial Accounting Standards Board (“FASB”) issued FASB InterpretationNo. 48, *Accounting for Uncertainty in Income Taxes—anInterpretation of FASB Statement 109* (“FIN 48”). 

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**TRUE TEMPER SPORTS, INC. AND SUBSIDIARIES**

**(A wholly-owned subsidiary of True Temper Corporation)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(Unaudited)**

**(Dollars in thousands unless otherwise indicated)**

FIN 48clarifies the accounting for uncertainty in income taxes recognized in anenterprise’s financial statements in accordance with FASB StatementNo. 109, *Accounting for Income Taxes*. Thisinterpretation prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. FIN 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition. FIN 48 is effective for fiscal yearsbeginning after December 15, 2006. The Company is in the process ofevaluating the impact of FIN 48 on its financial position and results ofoperations.

In September 2006,the FASB issued Statement of Financial Accounting Standards No. 157, *Fair Value Measurements* (“SFAS 157”), which defines fairvalue, establishes a framework for measuring fair value in U.S. generallyaccepted accounting principles (“GAAP”), and expands disclosures about fairvalue measurements. SFAS 157 applies under other accounting pronouncements thatrequire or permit fair value measurements. Accordingly, FAS 157 does notrequire any new fair value measurements. SFAS 157 is effective for fiscal yearsbeginning after November 15, 2007. The Company expects to adopt SFAS 157as of January 1, 2008.

InSeptember 2006, the FASB issued SFAS No. 158, *Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendmentof FASB Statements No. 87, 88, 106, and 132(R)* (“SFAS 158”).SFAS 158 requires an employer to recognize the overfunded or underfunded statusof a single-employer defined benefit postretirement plan as an asset orliability in its statement of financial position and to recognize changes inthat funded status in the year in which the changes occur through comprehensiveincome. SFAS 158 also requires an employer to measure the funded status of aplan as of the date of its year-end statement of financial position, withlimited exceptions. For an employer without publicly traded equity securities,the requirement of SFAS 158 to recognize the funded status of a defined benefitpostretirement plan and to provide the required disclosures is effective as ofthe end of the fiscal year ending after June 15, 2007. However, anemployer without publicly traded equity securities is required to disclosecertain information in the notes to financial statements for a fiscal yearending after December 15, 2006, but before June 16, 2007, unless ithas applied the recognition provisions of SFAS 158 in preparing those financialstatements. The required disclosures in the notes to financial statements are:

a)     a brief description of the provisions of SFAS 158

b)     the date that adoption is required

c)     the date the employer plans to adopt the recognition provisionsof SFAS 158, if earlier

The requirement to measureplan assets and benefit obligations as of the date of the employer’s fiscalyear-end statement of financial position is effective for fiscal years endingafter December 15, 2008. The Company has not yet evaluated the effects ofthe application of SFAS 158 on its financial position and results ofoperations.

In September 2006, the SEC issued Staff AccountingBulletin No. 108, *Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements* (SAB 108), to address diversity in practice inquantifying financial statement misstatements. SAB 108 requires the quantificationof misstatements based on their impact to both the balance sheet and the incomestatement to determine materiality. The Company is in the process of evaluatingthe impact of SAB 108 on its results of operations and financial position.

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**Item 2.**                        *Management’s Discussion and Analysis of Financial Condition and Resultsof Operations*

The following discussion should be read in conjunctionwith the more detailed information in the True Temper Sports, Inc. 2005****annual financial statements, including the notes thereto,appearing in the 2005 Annual Report on Form 10-K, filed with the SECon March 28, 2006.

**Company Overview**

True Temper Sports, Inc. (“True Temper” or the“Company”), a wholly owned subsidiary of True Temper Corporation (“TTC”), is aleading designer, manufacturer and marketer of steel, composite, andmulti-material golf club shafts for original equipment manufacturers (“OEMs”)and distributors in the golf equipment industry. In addition, True Temperproduces and sells a variety of performance sports products that offer highstrength and tight tolerance tubular components to the bicycle, hockey andother recreational sports markets. In calendar 2005, golf shaft salesrepresented 94% of total net sales, and performance sports sales represented6%. During the third quarter andyear-to-date periods of 2006, net sales of performance sports productsincreased to represent 10% and 8% of total revenue, respectively.

**Purchase Agreementfor True Temper Corporation**

On January 30, 2004, TTS Holdings LLC, a companyformed by Gilbert Global Equity Partners, L.P. and its affiliated funds (“GilbertGlobal”), entered into a stock purchase agreement with the Company’s direct parent company, True Temper Corporation,pursuant to which TTS Holdings LLC and certain of the Company’s seniormanagement purchased all of the outstanding shares of TTC (“Gilbert GlobalAcquisition”). In connection with this acquisition, and effective on March 15,2004, the Company repaid all of its outstanding 2002 senior credit facility,redeemed all of its 107¤8%senior subordinated notes due 2008, and made certain payments of the net remaining equity of the predecessor company to theselling shareholders. These payments were financed with the net proceedsof a new senior credit facility and new 83¤8% seniorsubordinated notes due 2011.

The Gilbert Global Acquisition was accounted for by the Company’s parent company using thepurchase method of accounting. As the Company is a wholly owned subsidiary ofTTC, the Company has “pushed down” the effect of the purchase method ofaccounting to the consolidated financial statements of True Temper Sports, Inc.

**Results ofOperations**

Thefollowing table sets forth the components of net income (loss) as a percentageof net sales for the periods indicated:

| ** **                                                 | ** ** | **Quarter Ended**    | ** ** | **Year-To-Date**          | ** ** |
|------------------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                                                 | ** ** | **October 1,  2006** | ** ** | **October 2,  2005** | ** ** | **October 1,  2006** | ** ** | **October 2,  2005** | ** ** |
| Net sales                                                  |       |                      | 100.0      | %                         |       |   | 100.0 | % |   |   | 100.0 | % |   |   | 100.0 | % |   |
| Cost of sales                                              |       |                      | 68.4       |                      |       |   | 59.1 |   |   |   | 65.2 |   |   |   | 59.5 |   |   |
| Gross profit                                               |       |                      | 31.6       |                      |       |   | 40.9 |   |   |   | 34.8 |   |   |   | 40.5 |   |   |
| Selling, general  and administrative expenses              |       |                      | 15.2       |                      |       |   | 14.1 |   |   |   | 12.8 |   |   |   | 13.0 |   |   |
| Amortization of  intangible assets                         |       |                      | 17.5       |                      |       |   | 13.5 |   |   |   | 12.8 |   |   |   | 11.5 |   |   |
| Business development,  start-up costs and transition costs |       |                      | 4.8        |                      |       |   | 0.1 |   |   |   | 2.6 |   |   |   | 0.2 |   |   |
| Operating income (loss)                                    |       |                      | (6.0       | )                         |       |   | 13.1 |   |   |   | 6.7 |   |   |   | 15.8 |   |   |
| Interest expense,  net                                     |       |                      | 24.7       |                      |       |   | 17.3 |   |   |   | 18.1 |   |   |   | 15.4 |   |   |
| Other expenses  (income), net                              |       |                      | 0.1        |                      |       |   | (0.3 | ) |   |   | 0.1 |   |   |   | (0.0 | ) |   |
| Income (loss) before income taxes                          |       |                      | (30.8      | )                         |       |   | (3.9 | ) |   |   | (11.5 | ) |   |   | 0.4 |   |   |
| Income tax  expense (benefit)                              |       |                      | (11.5      | )                         |       |   | (1.3 | ) |   |   | (4.2 | ) |   |   | 0.3 |   |   |
| Net income (loss)                                          |       |                      | (19.3      | )%                        |       |   | (2.6 | )% |   |   | (7.3 | )% |   |   | 0.1 | % |   |

 

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***Third Quarter Ended October 1, 2006 Compared to the ThirdQuarter Ended October 2, 2005***

***Net Sales*********for the third quarter of 2006decreased approximately $4.0 million, or 15.8%, to $21.5 million from$25.5 million in the third quarter of 2005. Golf shaft sales decreased $4.4 million,or 18.5%, to $19.4 million compared to the $23.8 million realized inthe third quarter of 2005. This decline in net sales resulted from a reductionin the unit sales of premium steel golf shafts and stock OEM graphite golfshafts. The unit sales reduction in premium steel shafts was driven by severalfactors, but was predominantly impacted by the current lack of exciting newproduct introductions, particularly in the iron category, from leading golfequipment companies. The decline in unit sales of stock OEM graphite shaftsrelates primarily to the timing of certain OEM iron launches using theCompany’s proprietary graphite iron shafts.

Performance sports sales increased approximately $0.4 million,or 22.6%, to $2.1 million in the third quarter of 2006 from $1.7 millionin the third quarter of 2005. This increase is reflective of the Company’sproduct focus in leveraging its capabilities into non-golf sporting goods offerings,particularly in the growing bike and composite hockey markets where True Tempercontinues to build momentum for its new product offerings.

Net sales to international customers decreased $1.0 million,or 10.4%, to $8.9 million in the third quarter of 2006 from $10.0 millionin the same period of 2005. The decline in export sales for actual consumptionoutside the United States was relatively consistent with the decline in USdomestic sales, as these foreign markets experienced the same overall golfindustry drivers and True Temper specific issues described above. 

***Gross Profit***for the third quarter of 2006 decreased $3.7 million, or 35.0%, to $6.8 millionfrom $10.4 million in the third quarter of 2005. Gross profit as apercentage of net sales decreased to 31.6% in the third quarter of 2006 from 40.9%in the third quarter of 2005. The decrease in gross profit as a percentage of netsales was driven primarily by (i) an increase in the cost of raw materialsand energy sources, (ii) unfavorable fluctuations in foreign currencyexchange rates, and (iii) the expected decline in profit margins due tothe mix of products sold being more heavily weighted toward graphite golf andperformance sports. These factors were partially offset by increased sellingprices on the Company’s steel and graphite golf products, as well as itsperformance sports offerings, which were effective January 1, 2006.

***Selling, General and Administrative Expenses***(“SG&A”) for the third quarter of 2006 decreased approximately $0.3 million,or 8.9%, to $3.3 million from $3.6 million in the third quarter of2005.  SG&A as a percentage of netsales increased to 15.2% from 14.1%. During the third quarter, the Company continued its cost control actionsthat were initiated early in 2006.  Thesecost containment efforts, which encompass a variety of functional areas withinthe organization and are representative of both permanent cost savings as wellas the delay of certain non-essential business activities, were instituted inresponse to the decline in the gross profit.

***Amortization of Intangible Assets***increased during the third quarter of 2006 to $3.8 million from the $3.5 millionrecorded during the third quarter of 2005. Intangible assets were acquired inconnection with the Gilbert Global Acquisition in 2004 and the acquisition ofcertain assets from Royal Precision in 2006. Intangible assets with definitivelives are being amortized using a straight-line method over periods from 2 to59 years.

***BusinessDevelopment, Start-Up Costs and Transition Costs*** forthe third quarter of 2006 increased to $1.0 million from less than $0.1 millionin the third quarter of 2005. The increase in these costs relates primarily toexpenses associated with the acquisition of assets from a former competitor inthe steel golf shaft industry, Royal Precision. Costs include acquisition related fees and expenses, as well astransportation and integration expenses associated with the transfer ofproduction equipment and inventory to True Temper facilities.

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***Operating Income******(Loss)*** for the third quarter of 2006decreased approximately $4.6 million, to a loss of $1.3 million from incomeof $3.4 million in the third quarter of 2005. This decrease reflects thegross profit, SG&A and business development, start-up costs and transitioncost impact of the items described above.

***Interest Expense,Net*** for the thirdquarter of 2006 increased approximately $0.9 million, or 20.2%, to $5.3 millionfrom $4.4 million in the third quarter of 2005. An increase ininterest expense, driven primarily by an increase in the variable interest rateon the Company’s bank debt, was partially offset by the decrease in outstandingprincipal amounts of variable rate bank debt due to the voluntary and mandatoryprepayments recorded during 2005 and 2006.

***Income Tax Expense(Benefit)*** decreased in the third quarter of 2006to an income tax benefit of $2.5 million compared to an income tax benefitof $0.3 million in the third quarter of 2005. The effective tax rateduring these periods differs from a federal statutory rate of 34% due primarilyto the incremental tax rate for state and foreign income tax purposes.

***Net Income (Loss)*** for thethird quarter of 2006 decreased to a net loss of $4.1 million as comparedto a net loss of $0.7 million in the third quarter of 2005. This decreasereflects the profit impact of the items described above.

***Nine Month Period Ended October 1, 2006 Compared tothe Nine Month Period Ended October 2, 2005***

***Net Sales*********for the first nine months of 2006decreased approximately $6.4 million, or 7.1%, to $83.8 million from $90.2 millionin the first nine months of 2005. Golf shaft sales decreased $7.8 million,or 9.2%, to $77.5 million compared to the $85.3 million realized inthe first nine months of 2005. This decline in net sales resulted primarilyfrom a reduction in the sales of premium steel golf shafts. This unit salesreduction was driven by several factors, but was predominantly impacted by thecurrent lack of exciting new product introductions, particularly in the ironcategory, from leading golf equipment companies. Offsetting the sluggish marketenvironment for steel golf shafts, during the first nine months of 2006 theCompany achieved near record sales, in both dollars and units, of its graphitegolf shaft products. The increased unit volume in graphite golf shafts can beattributed to the continued success of branded products such as the Grafalloy ProLaunch, as well as continued momentum surrounding the Company’sstrategic expansion into the stock OEM graphite market.

Performance sports sales increased approximately $1.4 million,or 29.4%, to $6.4 million in the first nine months of 2006 from $4.9 millionin the first nine months of 2005. This increase is reflective of the Company’sproduct focus in leveraging its capabilities into non-golf sporting goodsofferings, particularly in the growing bike and composite hockey markets whereTrue Temper continues to build momentum for its new product offerings.

Net sales to international customers decreased $1.8 million,or 5.9%, to $29.2 million in the first nine months of 2006 from $31.0 millionin the same period of 2005. The decline in export sales for actual consumption outsidethe United States was relatively consistent with the decline in US domesticsales, as these foreign markets experienced the same overall golf industrydrivers and True Temper specific issues described above. Partially offsettingthis decline was an increase in international sales resulting primarily from ashift in unit sales from the United States to Southeast Asia as our customersdetermine on a quarterly basis where to have their finished clubs assembled. Inaddition, the Company experienced a decline in foreign sales of $0.6 milliondue to fluctuations in foreign currency levels in the British Pound, JapaneseYen and Australian Dollar.

***Gross Profit***for the first nine months of 2006 decreased $7.4 million, or 20.1%, to $29.2 millionfrom $36.6 million in the first nine months of 2005. Gross profit as apercentage of net sales decreased to 34.8% in the first nine months of 2006from 40.5% in the first nine months of 2005. The decrease in gross profit as apercentage of net sales was driven primarily by (i) an increase in thecost of raw materials and energy sources, (ii) unfavorable fluctuations inforeign currency exchange rates, and (iii) the expected decline in 

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profit margins due to themix of products sold being more heavily weighted toward graphite golf andperformance sports. These factors were partially offset by increased sellingprices on the Company’s steel and graphite golf products, as well as itsperformance sports offerings, which were effective January 1, 2006.

***Selling, Generaland Administrative Expenses*** (“SG&A”) for the firstnine months of 2006 decreased approximately $1.0 million, or 8.3%, to $10.8 millionfrom $11.7 million in the first nine months of 2005. SG&A as apercentage of net sales decreased to 12.8% in the first nine months of 2006from 13.0% in the first nine months of 2005. This decline in SG&A spendingbetween periods was in response to the decline in gross profit, as the Companyput specific expense controls in place to ensure the best possible read-throughto operating profit. These cost controls encompass a variety of functionalareas within the organization, and are representative of both permanent costsavings as well as the delay of certain non-essential business activities.

***Amortization ofIntangible Assets*** increased during the first ninemonths of 2006 to $10.7 million from $10.4 million during the firstnine months of 2005. Intangible assets were acquired in connection with theGilbert Global Acquisition in 2004 and the acquisition of certain assets fromRoyal Precision in 2006. Intangible assets with definitive lives are beingamortized using a straight-line method over periods from 2 to 59 years.

***BusinessDevelopment, Start-Up Costs and Transition Costs***for the first nine months of 2006 increased $2.0 million, to $2.2 millionfrom $0.2 million in the first nine months of 2005. The increase in thesecosts relates primarily to expenses associated with the acquisition of assetsfrom a former competitor in the steel golf shaft industry, RoyalPrecision.  Costs include acquisitionrelated fees and expenses, as well as transportation and integration expensesassociated with the transfer of production equipment and inventory to True Temperfacilities.

***Operating Income***for the first nine months of 2006 decreased approximately $8.7 million, or60.9%, to $5.6 million from $14.3 million in the first nine months of2005. This decrease reflects the gross profit, SG&A and businessdevelopment, start-up costs and transition cost impact of the items describedabove.

***Interest Expense,Net*** for the firstnine months of 2006 increased approximately $1.2 million, or 8.8%, to $15.2 millionfrom $13.9 million in the first nine months of 2005. An increase ininterest expense, driven primarily by an increase in the variable interest rateon the Company’s bank debt, was partially offset by the decrease in outstandingprincipal amounts of variable rate bank debt due to the voluntary and mandatoryprepayments recorded during 2005 and 2006.

***Income Tax Expense(Benefit)*** decreased in the first nine months of2006 to an income tax benefit of $3.5 million compared to an income taxexpense of $0.3 million in the first nine months of 2005. The effectivetax rate during these periods differs from a federal statutory rate of 34% dueprimarily to the incremental tax rate for state and foreign income taxpurposes.

***Net Income (Loss)*** for thefirst nine months of 2006 decreased to a net loss of $6.1 million ascompared to $0.1 million of net income in the first nine months of 2005.This decrease reflects the profit impact of the items described above.

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**Liquidity andCapital Resources**

***General***

As part of the Gilbert Global Acquisition the Companyentered into a new senior credit facility (the “2004 Senior Credit Facility”)which includes a $20.0 million non-amortizing revolving credit facility and a$110.0 million Term B loan (as amended from time to time). The term loanrequires cash interest payments and quarterly principal payments beginning June 30,2004 and continuing through March 15, 2011.

Also in conjunction with the Gilbert GlobalAcquisition the Company issued new 83¤8% SeniorSubordinated Notes due 2011 (the “83¤8%Notes”). The 83¤8%Notes require cash interest payments each March 15th and September 15thcommencing on September 15, 2004. The 83¤8% Notes areredeemable at the Company’s option, under certain circumstances and at certainredemption prices, beginning March 15, 2008.

The Company used the proceeds from the 2004 SeniorCredit Facility and the 83¤8% Notes to payoff the existing debt that was outstanding at closing on March 15, 2004,and to make a distribution of the net remaining equity to the selling shareholders.

On September 24, 2004, the Company executed anamendment to its 2004 Senior Credit Facility (the “Amendment”). The Amendmentprovided adjustments to certain specified financial ratios and tests includedin the 2004 Senior Credit Facility. As part of the Amendment, the margin adderon LIBOR based loans was increased from 2.50% to between 2.75% and 3.00%,depending on financial ratios, beginning September 24, 2004 and continuingthrough December 31, 2005.

On March 27, 2006, theCompany amended and restated its 2004 Senior Credit Facility (the “2006 RestatedCredit Facility”). The 2006 Restated Credit Facility includes additional termloans under the Company’s existing Senior Secured Credit Facilities ofapproximately $15.0 to $18.0 million, amendments that enable the Companyto pursue future acquisitions, and the flexibility to enable the Company toexecute on its global strategic and operational initiatives.

Both the 2006 Restated Credit Facility and the 83¤8%Notes contain covenants and events of default, including substantialrestrictions and provisions which, among other things, limit the Company’sability to incur additional indebtedness, make acquisitions and capitalexpenditures, sell assets, create liens or other encumbrances, make certainpayments and dividends, or merge or consolidate. The 2006 Restated CreditFacility also requires the Company to maintain certain specified financialratios and tests including minimum interest coverage and fixed charge coverageratios, and maximum leverage ratios. Furthermore, the 2006 Restated CreditFacility requires certain mandatory prepayments including payments from the netproceeds of certain asset sales and a portion of the Company’s excess cash flowas defined within the credit agreement.

At October 1, 2006, the Company was in compliancewith all of the covenants in both the 2006 Restated Credit Facility and the 83¤8%Notes.

***Nine Month Period Ended October 1, 2006 Compared tothe Nine Month Period Ended October 2, 2005***

Net cash provided by operating activities declinedapproximately $7.8 million between periods, which relates primarily to thedecrease in gross profit and additional costs for the acquisition andintegration of assets from Royal Precision, as described more fully above. Somewhatoffsetting these factors, overall working capital needs decreased by $2.1 millionduring the period ended October 1, 2006 as compared to the same period in 2005.Contributing to this improvement in working capital was a reduction in accountsreceivable during the first nine months of 2006 as compared to the same periodof 2005. Offsetting this reduction was a corresponding increase in inventories,as the Company purchased additional graphite raw material in anticipation offuture demand in a tight materials market.

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Net cash used in investing activities increased $18.8million during the first nine months of 2006, primarily as a result of theacquisition of certain assets from a former competitor in the steel golf shaftindustry, Royal Precision. Assets acquired include production equipment,inventory, intellectual property and customer-related intangible assets.

Net cash provided by financing activities totaled $13.5million during the first nine months of 2006, as compared to the first nine monthsof 2005 when the Company used $10.2 million in cash for financingactivities.  This increase relatesprimarily to (i) additional borrowings of term debt totaling $18.0 millionduring 2006, used primarily to finance the acquisition of certain assets fromRoyal Precision, (ii) a net decline in repayments of term debt between periodsof $7.0 million, and (iii) the payment of $1.1 million in debt issuance costsin 2006 related to the additional borrowings.

***Existing Contractual Cash Obligations***

Thefollowing table reflects the Company’s contractual cash obligations for principalpayments on long-term debt and capital and operating leases as of October 1,2006 (dollars in millions):

| ** **        | ** ** | **Total** | ** ** | **2006** | ** ** | **2007  through  2008** | ** ** | **2009  through  2010** | ** ** | **Thereafter** | ** ** |
|-------------------|------------|-----------|------------|----------|------------|-------------------------|------------|-------------------------|------------|----------------|------------|
| Long-Term Debt(1) |       | $         | 235.7      |     | $          | 0.3                     |       |                    | $          | 2.5            |       |   |   | $ | 91.8 |   |   |   | $ | 141.1 |   |   |
| Operating Leases  |       | 2.9       |       | 0.3      |       |                    | 1.9        |                    |       |           | 0.6        |   |   |   | 0.1 |   |   |
| Total(2)          |       | $         | 238.6      |     | $          | 0.6                     |       |                    | $          | 4.4            |       |   |   | $ | 92.4 |   |   |   | $ | 141.2 |   |   |

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(1)          The Company’s long-termdebt agreements contain customary change of control provisions that could,under certain circumstances, cause accelerated debt repayment.

(2)          This table does notinclude the Company’s future obligations related to the funding of its pensionbenefits.

***Future CashGeneration and Use***

Currentlythe Company’s intention is to use existing cash and cash provided from futureoperations, if any, as allowed within the covenants of the 2006 Restated CreditFacility and the 83¤8%Notes, to:

·       Repaythe principal on the 2006 Restated Credit Facility; and/or

·       Tomake additional investments in the business for growth, which may include,among other things, capital expenditures, business acquisitions, and/orexpenditures for business development and expansion.

In addition to the debt service obligations forprincipal and interest payments, the Company’s liquidity needs largely relateto working capital requirements and capital expenditures for machinery andequipment. The Company intends to fund its current and long-term workingcapital, capital expenditure and debt service requirements through cash flowgenerated from operations. However, since there can be no assurance of futureperformance, as of October 1, 2006 the Company has the $20.0 million revolvingcredit facility available for future cash requirements. The maximum amount theCompany may use of the $20.0 million revolving credit facility is limitedby the financial covenants contained within the 2006 Restated Credit Facilityand is reduced by any outstanding letters of credit.

In addition to the Company’s cash obligations forinterest and principal payments related to its debt obligations, the Companyalso has a management services agreement with an affiliate of Gilbert Global,which requires the payment of an annual advisory fee of $0.5 million.

Depending on the size, anyfuture acquisitions, joint ventures, capital expenditures or similartransactions may require significant capital resources in excess of cashprovided from operations, and potentially in excess of cash available under therevolving credit facility. There can be no assurance that the 

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Companywill be able to obtain the necessary capital, under acceptable terms, fromcreditors or other sources that will be sufficient to execute any such businessinvestment or capital expenditure.

**Recent AccountingPronouncements**

In June 2006, the Financial Accounting StandardsBoard (“FASB”) issued FASB Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes—an Interpretation of FASB Statement 109*(“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxesrecognized in an enterprise’s financial statements in accordance with FASBStatement No. 109, *Accounting for IncomeTaxes*. This interpretation prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. FIN 48also provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods, disclosure, and transition. FIN 48 iseffective for fiscal years beginning after December 15, 2006. The Companyis in the process of evaluating the impact of FIN 48 on its financial positionand results of operations.

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 157, *Fair ValueMeasurements* (“SFAS 157”), which defines fair value, establishes aframework for measuring fair value in generally accepted accounting principles(“GAAP”), and expands disclosures about fair value measurements. SFAS 157applies under other accounting pronouncements that require or permit fair valuemeasurements. Accordingly, FAS 157 does not require any new fair value measurements.SFAS 157 is effective for fiscal years beginning after November 15, 2007. TheCompany expects to adopt SFAS 157 as of January 1, 2008.

InSeptember 2006, the FASB issued SFAS No. 158, *Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans—anamendment of FASB Statements No. 87, 88, 106, and 132(R)* (“SFAS 158”).SFAS 158 requires an employer to recognize the overfunded or underfunded statusof a single-employer defined benefit postretirement plan as an asset orliability in its statement of financial position and to recognize changes inthat funded status in the year in which the changes occur through comprehensiveincome. SFAS 158 also requires an employer to measure the funded status of aplan as of the date of its year-end statement of financial position, withlimited exceptions. For an employer without publicly traded equity securities,the requirement of SFAS 158 to recognize the funded status of a defined benefitpostretirement plan and to provide the required disclosures is effective as ofthe end of the fiscal year ending after June 15, 2007. However, anemployer without publicly traded equity securities is required to disclosecertain information in the notes to financial statements for a fiscal year endingafter December 15, 2006, but before June 16, 2007, unless it hasapplied the recognition provisions of SFAS 158 in preparing those financialstatements. The required disclosures in the notes to financial statements are:

a)              a brief description of the provisions of SFAS 158

b)              the date thatadoption is required

c)               the date theemployer plans to adopt the recognition provisions of SFAS 158, if earlier

**The requirement to measure planassets and benefit obligations as of the date of the employer’s fiscal year-endstatement of financial position is effective for fiscal years ending afterDecember 15, 2008. The Company has not yet evaluated the effects of theapplication of SFAS 158 on its financial position and results of operations.**

In September 2006, the SECissued Staff Accounting Bulletin No. 108, *Considering the**Effects of Prior Year Misstatements whenQuantifying Misstatements in Current Year Financial Statements* (SAB108), to address diversity in practice in quantifying financial statementmisstatements. SAB 108 requires the quantification of misstatements based ontheir impact to both the balance sheet and the income statement to determinemateriality. The Company is in the process of evaluating the impact of SAB 108on its results of operations and financial position.

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**Forward-Looking Statements**

The Private Securities Litigation Reform Act of 1995(the “Act”) provides a safe harbor for forward-looking statements made by theCompany. This document contains forward-looking statements, including but notlimited to Item 2 “Management’s Discussion and Analysis of FinancialCondition and Results of Operations”. All statements which address futureoperating or financial performance, events or developments that the Companyexpects, plans, believes, hopes, wishes, forecasts, predicts, intends, oranticipates 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 onmanagement’s current views and assumptions regarding future events andoperating performance. However, there are many risk factors, including but notlimited to, the Company’s substantial leverage, the Company’s ability toservice its debt, the general state of the economy, the Company’s ability toexecute its plans, fluctuations in the price and availability of energy,fluctuations in the price and availability of raw materials, potentiallysignificant increases to employee health and welfare costs, competitivefactors, and other risks that could cause the actual results to differmaterially from the estimates or predictions contained in the Company’s forward-lookingstatements. Additional information concerning the Company’s risk factors iscontained from time to time in the Company’s public filings with the SEC; andmost recently in the Risk Factors section of Item 1A to Part 1 of theCompany’s 2005 Annual Report on Form 10-K filed with the SEC onMarch 28, 2006.

The Company’s views, estimates, plans and outlook asdescribed within this document may change subsequent to the release of thisstatement. The Company is under no obligation to modify or update any or all ofthe statements it has made herein despite any subsequent changes the Companymay make in its views, estimates, plans or outlook for the future.

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**Item 3.**                        *Quantitative and Qualitative Disclosures About Market Risk*

**Interest RateSensitivity**

Thetable below provides information about the Company’s debt obligations as of October1, 2006. The table presents cash flows from principal payments and relatedweighted average interest rates by expected maturity dates (dollars inmillions).

|                                                  | ** ** | **Expected Maturity Date** | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|--------------------------------------|------------|------------|------------|
| **LONG TERM DEBT**                     | ** ** | **2006**                             | ** ** | **2007**   | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **There-  after** | ** ** | **Total** | ** ** |
| Fixed-Rate 83¤8%  Senior Subordinated Notes |       | $—                              |       | $—    |       | $— |   | $— |   | $   — |   | $125.0 |   | $125.0 |   |
| Average Interest Rate                            |       |                                 |       |       |       |   |   |   |   |   |   |   |   | 8.38 | % |
| 2006 Restated  Credit Facility                   |       | $0.3                                 |       | $1.3       |       | $1.3 |   | $1.3 |   | $90.5 |   | $ 16.0 |   | $110.7 |   |
| Average Interest  Rate(a)                        |       |                                 |       |       |       |   |   |   |   |   |   |   |   | 8.39 | % |

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(a)           Term loans under the 2006 Restated CreditFacility provide for interest at the Company’s option at (1) the base rateof the bank acting as administrative agent plus 2.00%, or (2) under aLIBOR option with a borrowing rate of LIBOR plus 2.50% to 3.00%.

The Company’s operating results are affected bychanges in interest rates primarily as a result of borrowings under the 2006Restated Credit Facility. If interest rates increased by 25 basis points,interest expense would have increased by approximately $0.1 million forthe quarterly period ended October 1, 2006, based on balances outstandingduring the quarterly period then ended.

Information concerning theCompany’s market risks related to foreign exchange rates and commodities iscontained in the “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” section of the Company’s 2005 Annual Report on Form 10-K,as filed with the SEC on March 28, 2006. This information has been omittedfrom this report as there have been no material changes to the Company’s risksrelated to foreign exchange rates and commodities as of October 1, 2006.

**Item 4.**                        *Controls and Procedures*

**Evaluation ofDisclosure Controls and Procedures**

Evaluations required by Rule 13a-15of the Securities Exchange Act of 1934 of the effectiveness of the Company’sdisclosure controls and procedures (as defined in Rule 13a-15(e) underthe Securities Exchange Act of 1934) as of the end of the period covered bythis Report have been carried out under the supervision and with theparticipation of the Company’s management, including its Chief ExecutiveOfficer and Chief Financial Officer. Based upon such evaluations, the ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures were effective. There have been no changesin the Company’s internal control over financial reporting during the periodcovered by this Report that were identified in connection with the evaluationreferred to above that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

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**PART II. OTHERINFORMATION**

**Item 1.**                        *Legal Proceedings*

Variousclaims and legal proceedings generally incidental to the normal course ofbusiness are pending or threatened against the Company. While the Company cannotpredict the outcome of these matters, in the opinion of management, anyliability arising from these matters will not have a material adverse effect onthe Company’s business, financial condition or results of operations.

**Item 1A.**                *Risk Factors*

—Nochanges—

**Item 2.**                        *Unregistered Sales of Equity Securities and Use of Proceeds*

—Notapplicable—

**Item 3.**                        *Defaults Upon Senior Securities*

—None—

**Item 4.**                        *Submission of Matters to a Vote of Security Holders*

Therewere no matters submitted to a vote of security holders during the quarterended October 1, 2006.

**Item 5.**                        *Other Information*

—NotApplicable—

**Item 6.**                        *Exhibits*

| 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**  |
| 32.1 |   | Certification pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002.** |
| 32.2 |   | Certification pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002.** |

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*                    Incorporatedby reference.

**             Filed herewith

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized, on November 15, 2006.

|        | True Temper Sports, Inc. |
|--------|-------------------------------|
|   | By:                           | /s/ SCOTT C. HENNESSY |
|   | Name:                    | Scott C. Hennessy |
|   | Title:                        | President and Chief Executive Officer |
|   | By:                           | /s/ JASON A. JENNE |
|   | Name:                    | Jason A. Jenne |
|   | Title:                        | Vice President, Chief Financial Officer |
|   |                          | and Treasurer |
|        |                               |  |  |

 

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