TRUE TEMPER SPORTS INC - 10-K Annual Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 333-72343

TRUE TEMPER SPORTS, INC.

(Exact name of registrant as specified in its charter)

Delaware	3949	52-2112620
(State of other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification Number)

8275 Tournament Drive Suite 200 Memphis, Tennessee 38125 Telephone: (901) 746-2000
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)



Securities registered pursuant to section 12(b) of the Act: None

Securities registered pursuant to section 12(g) of the Act: None

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 ý No o

Indicate by checkmark if disclosure by delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

As of June 29, 2003 the Registrant had 100 shares of Common Stock, $0.01 par value per share, outstanding. All of the Registrant’s outstanding shares were held by True Temper Corporation, the Registrant’s parent company, as of June 29, 2003.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes o No ý

Documents Incorporated by Reference:

Part IV incorporates certain information by reference from the Registrant’s Registration Statement on Form S-4, as filed with the Securities & Exchange Commission on June 7, 1999, and declared effective on June 10, 1999.

TRUE TEMPER SPORTS, INC.

ANNUAL REPORT ON FORM 10-K

For the Fiscal Year Ended December 31, 2003

INDEX

PART I
Item 1		Business
Item 2		Properties
Item 3		Legal Proceedings
Item 4		Submission of Matters to a Vote of Security Holders
PART II
Item 5		Market for Registrant’s Common Equity and Related Stockholder Matters
Item 6		Selected Financial Data
Item 7		Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A		Quantitative and Qualitative Disclosures About Market Risk
Item 8		Financial Statements and Supplementary Data
Item 9		Changes in and Disagreements With Accountants on Accounting and Financial Disclosures
Item 9A		Controls and Procedures
PART III
Item 10		Directors and Executive Officers of the Registrant
Item 11		Executive Compensation
Item 12		Security Ownership of Certain Beneficial Owners and Management
Item 13		Certain Relationships and Related Transactions
Item 14		Principal Accountants Fees and Services
PART IV
Item 15		Exhibits, Financial Statements Schedule, and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX

PART I

Item 1. Business

General

We are the world’s leading designer, manufacturer and marketer of golf shafts. Since the 1930s, we have manufactured golf shafts under the widely recognized True Temper brand. In 2003, over 70% of our net sales were generated through the sale of steel golf shafts. We believe that our share of the worldwide steel shaft market was approximately 68% in 2003 and that our share is more than three times greater than the share of the next largest market participant. We are a leading supplier of premium steel shafts to top domestic golf club original equipment manufacturers and distributors, including Callaway, Cleveland, Golfsmith, Golf Works, Mizuno, Nike, PING, TaylorMade, Titleist and Wilson. From 1987 to 2003, our steel shafts were played by the winners of 57 of the PGA’s 68 major championships, including 16 of the last 17 Masters champions. We are also one of the world’s largest manufacturers of premium graphite (carbon fiber based composites) golf shafts, with an estimated share of approximately 9% of this highly fragmented market. In addition to golf shafts, through our Performance Sports business, we also design, manufacture and market products such as steel alloy bicycle frames, composite bicycle components, such as forks and handlebars, and graphite hockey shafts for the growing premium bicycle and hockey components markets. In 2003, we generated net sales of $116.2 million and net income of $10.9 million.

Our golf shaft products include over 1,000 proprietary models (with our customers’ brand name, label or trademark affixed to the shaft) and 2,000 branded models (with the True Temper and / or Grafalloy brand name, label or trademark affixed to the shaft), including a full range of premium and commercial grade steel shafts and a full line of premium graphite shafts. We design, manufacture and market approximately 275 lines of steel shafts, including:

• Dynamic Gold, which has been a leading steel shaft on the PGA Tour for nearly 25 years;

• Sensicore, which is equipped with patented vibration-damping technology that, when inserted into our steel shafts, can eliminate up to 70% of vibration at impact to combine the feel of graphite with the consistency of steel;

• Dynalite Gold, which features a light-weight, soft tip design that promotes a higher ball flight to optimize trajectory for low-ball hitters;

• TX-90, which at only 90 grams, is one of the lightest steel shafts available and was designed for players seeking consistent performance using a lighter alternative to traditional steel shafts;

• TX Tour, a newly introduced tour version of TX-90 which offers a Superlite steel iron shaft with playing characteristics targeted towards the low handicap golfer;

• Crossfire, a newly introduced ultra light alloy shaft which was developed specifically for hybrid clubs and fairway woods;

• TT Lite, which was designed for the custom club builders and offers a standard weight and mid-flex design which allows for various trimming options for a truly custom fit; and

• numerous co-branded products, including Callaway’s Memphis 10, Nike’s Speedstep, Ping’s JZ and ZZ Lite and Wilson’s Fat Shaft.

We also design, manufacture and market approximately 75 lines of premium graphite shafts under the True Temper and Grafalloy brand names. Our graphite shafts have a strong presence at the professional level and

have been played by winners on each of the professional tours, including the PGA, LPGA, Champions and Nationwide Tours. Our most popular graphite shaft brands include:

• Grafalloy ProLite, which is one of the leading ultra light driver shafts on the professional level and accounts for more than 35% of all the ultra light driver shafts played on the PGA and Champions Tours;

• Grafalloy Blue, which is a new breakthrough graphite shaft designed specifically for today’s oversized metal woods;

• Grafalloy ProLaunch, a newly introduced graphite shaft designed with today’s high performance heads and low-spin balls to help players achieve optimal launch conditions to reduce ball spin and maximize distance;

• Grafalloy ProLogic, which is designed for use in irons as a graphite alternative to steel and is manufactured with tight tolerances to provide consistent feel and improved shot making; and

• True Temper EI-70, which is a premium graphite driver shaft with a mid-flex design for a lower, piercing ball flight, and which was played by the winners of five titles on the PGA Tour in 2003.

We believe that we are the only golf shaft company in the world which is capable, within its own facilities, of manufacturing both steel and graphite golf shafts in large volumes. This unique competitive advantage allowed us to design, develop, manufacture and sell the first commercially viable multi-material golf shaft combining both steel and graphite into one shaft. Our BiMatrx and BiMatrx Rocket shafts utilize a patented multi-material technology to combine the torsional stability and consistent performance benefits of steel with the light-weight flexible benefits of graphite into one shaft.

Through our Performance Sports business, we have utilized the capabilities developed in our golf shaft business to pursue other branded recreational sports equipment markets that have similar competitive dynamics and manufacturing requirements. We focus on the premium segment of the bicycle market where quality and branding are highly valued by the consumer, and products are often customized to suit the individual consumer’s specific requirements. Our value-added premium bicycle component products generally have higher margins than component parts made for bicycles sold in mass channel retail stores. In the hockey components market, we focus on the composite shafts used in a variety of original equipment manufacturers’ one-piece and composite sticks.

The Golf Club Shaft Industry

The golf equipment industry is estimated to be a $4.6 billion industry, with golf clubs making up the largest portion at approximately 61%, or $2.8 billion. Spending in the golf equipment industry is highly concentrated among avid golfers (golfers that play more than 25 rounds of golf per year) who account for approximately 58% of the total spending on golf equipment despite only accounting for approximately 23% of the golfing population.

There are three basic components needed to manufacture a golf club: the shaft, the club head and the grip. The shaft is critical to the performance of a golf club as it controls the consistency and distance of a golf shot. While branded premium shafts are critical to the performance and marketing of golf clubs, these shafts represent a relatively small portion of the overall cost of a golf club, typically under 10% of the retail sales price.

The golf shaft market is comprised primarily of steel and graphite shafts. We believe that in 2003 the three largest participants in the worldwide steel shaft market comprised an aggregate market share of more than 80%. We believe that the concentration in the steel shaft market is due to the high barriers to entry created by the technical expertise and capital investment necessary to participate in the market as well as the customized manufacturing process required for the production of premium steel shafts. The production of graphite shafts is

less capital intensive and requires less technical expertise. Although recently there has been some consolidation among graphite shaft manufacturers, the graphite shaft industry is fragmented, with the top five market participants representing approximately 52% of the worldwide market in 2003. We believe that the relatively lower barriers to entry account for this fragmentation.

We believe that from 1991 to 1995, graphite shafts gained share of the overall shaft market due to the light-weight, vibration-damping characteristics of graphite shafts, particularly for longer-shafted, larger-headed woods. Since 1995, however, the development of vibration damping materials for steel shafts such as our Sensicore insert, along with the introduction of lighter weight steel alloys in products such as our TX-90 shaft, have resulted in steel shafts that have the vibration damping and light-weight characteristics of graphite shafts together with the consistent performance and distance control qualities of steel shafts. We believe that these design improvements contributed to the growth of the share of steel shafts in the overall shaft market from approximately 52% in 1995 to approximately 64% in 2003.

Business Strategy

Our objective is to continue to grow net sales and cash flow by capitalizing on our position as the leading worldwide designer, manufacturer and marketer of technologically innovative, performance-oriented golf shafts and increasing our market share in the premium bicycle and hockey markets. Our strategy to achieve these objectives consists of the following elements:

Continue to Innovate and Introduce New Products. We intend to increase our share of the steel and graphite golf shaft markets by capitalizing on the True Temper and Grafalloy brands and continuing to introduce new products and technologies tailored to the specific needs of golfers and designed for the unique innovations in club head technology. We plan to continue to develop innovative premium steel golf shafts with performance characteristics and features that support above average selling prices and gross margins.

Promote the True Temper and Grafalloy Brands. We intend to maintain and build our brand name recognition, our reputation for quality and the goodwill of the True Temper and Grafalloy brands through the continuation of a marketing and communications program aimed at reaching golfers directly and targeting the top club pros, club fitters, and others who we believe have the ability to influence consumers in their local markets. We intend to continue supporting PGA Tour players with our Tour vans, which provide technical support and shaft installation. We also plan to continue our marketing efforts by advertising in leading publications, through cooperative advertising with customers and through product demonstrations and special promotional events.

Drive Continued International Sales Growth. Over the last two years we have experienced significant growth in international sales and we believe that markets outside the United States will be a significant contributor to our net sales growth in the future. To drive this growth, we will utilize our growing global network of sales offices and distribution centers on four continents to reach our customers in their local markets and provide inventory logistics to service their needs. Our new distribution center in Hong Kong and graphite manufacturing facility in China will support this global logistics strategy and enable us to expand our product offering to meet customer needs in all our markets around the world.

Grow Our Performance Sports Segment. We believe we are poised to realize significant growth in our Performance Sports business by capitalizing on the premium bicycle and hockey-stick markets’ shift away from traditional materials to lighter weight products produced with carbon fiber based graphite composites. In the hockey market, we are applying our composite materials knowledge developed over years in the graphite golf shaft business to develop the light-weight, high strength hockey sticks that many of the world’s professional players have already adopted. With an estimated 75% or more of the hockey-stick market still using wood sticks, we believe that our hockey business will experience significant growth as amateur and recreational players follow the conversion of professional players to graphite hockey sticks. Since our acquisition of AME, Inc. in 2001, we have utilized and combined its product design concepts, technology and know how with our engineering and manufacturing expertise to develop and introduce an expanded line of composite bicycle components, under the Alpha Q brand name, that we plan to market and sell to distributors and original equipment manufacturers in the

premium component bicycle market. We believe we produce the lightest all-carbon components available, including the Alpha Q Sub 3 bicycle fork, which is used by one of the world’s leading triathletes.

Products

We design, manufacture and market steel and graphite golf shafts, as well as a variety of high strength, high tolerance components for the hockey, bicycle and other recreational sports markets. Our proprietary shafts, which accounted for approximately 38% of our net sales in 2003, are custom designed, and frequently co-branded in partnership with our customers, to accommodate specific golf club head designs. As an example our proprietary models include co-branded products such as Callaway’s Memphis 10, Nike’s Speedstep, Ping’s JZ and ZZ Lite and Wilson’s Fat Shaft. Our branded products with the True Temper and/or Grafalloy names and designs are typically sold to golf club original equipment manufacturers, distributors and various custom club assemblers, and are used to either assemble new clubs or to replace the shafts in existing clubs.

Steel Golf Shafts. We manufacture a wide range of steel golf shaft lines with unique design features and performance characteristics. Our steel golf shafts can be divided into the following two major product categories:

(1) Premium steel shafts; and

(2) Commercial grade steel shafts.

Premium steel shafts, such as our Dynamic Gold and TX-90 product lines, are high performance products with tighter design tolerances and quality specifications that sell for higher average selling prices and generate higher profit margins than commercial grade steel shafts. Our commercial grade steel shafts are manufactured to a different specification and sell for a lower average selling price to original equipment manufacturers who produce and sell opening price point golf club sets to entry-level players or lower income consumers who purchase their products through mass channel retail stores.

Graphite Golf Shafts. We manufacture a wide range of graphite golf shaft lines, which are offered in a variety of weights, torques and flexes. Our graphite golf shafts are currently being played by over 100 touring professionals on the PGA, LPGA, Champions and Nationwide Tours. Our graphite shafts are sold under the Grafalloy and True Temper brands. Similar to steel, graphite shafts can be placed in several categories of performance/quality and price. Most of the graphite golf shafts that we produce and sell are higher quality and higher priced premium grade shafts that are sold to golf equipment distributors, and to original equipment manufacturers for their custom product offerings.

Golf Shafts with Combined Materials. During the last several years we have been working to develop golf shafts that combine multiple materials such as steel and graphite into one shaft. Late in 2000 we introduced a proprietary custom iron product for a customer that combines a steel shaft with a graphite tip section to produce a shaft that provides a new feel for irons.

We used similar patented technology to introduce the True Temper branded product known as BiMatrx in January 2001. The BiMatrx shaft consists of a graphite shaft with a steel tip section that is currently designed for use in driver and fairway wood applications.

Performance Sports Products. We also manufacture and sell a wide variety of high performance components for the bicycle, hockey and other recreational sports markets. In 2003, we sold our performance sports products to a broad range of original equipment manufacturers and distributors.

Customers

We maintain long-standing relationships with a highly diversified customer base. We are a leading supplier of shafts to the top domestic golf club original equipment manufacturers and distributors, including Callaway, Cleveland, Golfsmith, Golf Works, Mizuno, Nike, Ping, TaylorMade, Titleist, and Wilson. In 2003, we

had in excess of 650 customers, including approximately 550 golf club manufacturers/retailers and approximately 90 distributors.

For many years we have maintained a broad and diversified customer base in the golf equipment market. In 2003, our top ten customers represented approximately 69% of our net sales, and our top two customers collectively accounted for approximately 25% of our net sales.

We believe that our close customer relationships and responsive service have been significant elements to our success and that our engineering and manufacturing expertise provide us with a strong competitive advantage in truly partnering with our customer base. We have developed and co-branded many proprietary shafts with our customers, as an example we produce proprietary customized steel shafts for Callaway, under the Memphis 10 brand; for Ping, under the JZ and ZZ Lite brands; for Nike, using the Speedstep brand; and for Wilson to produce the Fat Shaft line of clubs.

Competition

We operate in a highly competitive environment. We believe that we compete principally on the basis of:

• our ability to provide a broad range of high quality steel and graphite shafts at competitive prices;

• our ability to deliver customized products in large quantities on a timely basis through distribution channels around the world;

• the acceptance of steel and graphite shafts in general, and our shafts in particular, by professional and amateur golfers alike; and

• our ability to develop and produce innovative new products that provide performance features which benefit golfers of all skill levels.

We believe that our share of the worldwide steel shaft market was approximately 68% in 2003 and that our share is more than three times greater than the share of the next largest market participant. We believe that we primarily compete with four other steel golf shaft manufacturers: Royal Precision, Inc., a domestic based premium steel shaft manufacturer, Far East Machinery Co., Ltd., located in Taiwan which produces commercial grade products, Nippon Shaft Co., Ltd., a limited volume Japanese manufacturer of premium products, and Summit Sports World Wide Co., Ltd. which produces limited volumes of commercial grade steel shafts.

Unlike steel, the graphite shaft manufacturing industry is highly fragmented with a large number of suppliers selling to only a few customers. We believe there are up to eighty graphite shaft manufacturers worldwide. A few of these companies reside in North America and many are located in Far East Asia. We do not believe that there are any graphite suppliers currently with a market share in graphite that is comparable to the market share we have in steel. We believe we are one of the five largest producers of branded premium grade graphite shafts in the world and we estimate that our market share is approximately 9%. Our major competitors in the premium grade branded graphite shaft market include Aldila, Inc., United Sports Technologies, Inc., Graphite Design International, and Fujikura Composites.

We believe that we are the only golf shaft company in the world which is capable, within its own facilities, of manufacturing both steel and graphite golf shafts in large volumes.

Design & Development

We design and develop products for both proprietary/co-branded market applications and for the True Temper/Grafalloy branded product names.

The larger golf club manufacturers often request exclusively designed proprietary or co-branded steel and graphite golf shafts for their club systems, which require golf shafts, heads and grips engineered to work together. We are committed to serving this market by maintaining our role as a leader in innovative shaft designs for both steel and graphite materials technology. Shaft designs and modifications are frequently the direct result of our combined efforts with that of our customers to develop an exclusive shaft specifically designed for that customer’s clubs. We use a computer aided design analysis program to evaluate a new shaft’s design with respect to weight, torque, flex point, tip and butt flexibility, swing weight and other critical shaft design criteria.

In addition to our proprietary/co-branded product applications, we are very active in designing and developing new products under the True Temper and Grafalloy brand names that meet the performance needs of golfers of all ages and skill levels. We develop these branded products based upon our internal research and evaluation of consumer needs and preferences.

The materials typically used in production of our designs include several different high strength steel alloys and advanced composite systems of graphite and glass fibers with thermosetting epoxy resin systems.

Using computer aided design, we generate a design which is then analyzed by computer for stiffness and strength properties. Our research and development efforts focus on technology development and new materials as an essential precursor to successful new product development. Our design research focuses on improvements in shaft aesthetics since cosmetic appearance has become increasingly important to customers. To supplement our design and development we employ extensive testing that includes laboratory durability and stress tests, robotic testing and individual player evaluation.

In 2003, we opened a 14 acre test facility that enables us to better evaluate our products. We have our own private driving range where we perform qualitative player testing and quantitative mechanical testing with a Miya 5 swing robot. Our facility is designed with an Accushot data system which allows us to measure the distance and dispersion of each shot to provide an accurate assessment of product performance. We believe that we are the only shaft manufacturer with our own driving range that is capable of this type of product testing.

In addition, our pursuit of strategic vendor alliances complement our abilities and needs, an approach which allows us to exploit technical capabilities beyond our own while minimizing the risk and investment required to enter the market with new products.

Research and development costs for the years ended December 31, 2003, 2002 and 2001 were $1.5 million, $1.2 million and $1.6 million, respectively.

Manufacturing

We believe that our manufacturing expertise and production capabilities enable us to respond quickly to customers’ orders and provide sufficient quantities on a timely basis. We believe that our investment in capital equipment and personnel training has enabled us to establish a reputation as one of the leading manufacturers of steel and graphite shafts.

Steel Shaft Manufacturing Process. The process of manufacturing a steel shaft has many distinct phases. Generally, a large steel coil is unrolled and then formed lengthwise, welded and cut into cylinders. The tubing is then treated and fitted over a metal rod or “mandrel” that is used to determine the precise inside diameter of the cylinder as it is drawn. The tubing is stretched, cut into sections, and then weighed and balanced. Later, through a process that we pioneered, the sections are tapered to give each shaft model a particular flex and frequency. The shafts are cleaned, straightened, heat-treated and tempered. The shafts are straightened by machines designed and built by us. The shafts are plated with layers of nickel to prevent corrosion and then covered with a fine layer of chrome. Finally, shafts are dried, polished and inspected for cosmetic flaws before our name and logo is affixed to the shaft. It takes an average of 15 days to manufacture one of our True Temper steel shafts.

Graphite Shaft Manufacturing Process. There are two processes which are used to manufacture a graphite shaft: flag-wrapping and filament-winding. Most of our graphite shafts are produced using the flag-wrapping technique. The flag-wrapping method uses graphite fiber materials or “prepreg” in sheet form, which requires refrigeration until use. Each new roll of prepreg is allowed to reach room temperature before the material is cut into pennant-shaped patterns called flags for each particular shaft design. Layer by layer, various combinations of prepreg flags are wrapped around mandrels specified for each particular shaft design. The layered materials are then encased in thin layers of clear tape for compaction and heated at high temperatures to harden the material. At the end of the process, the shafts are painted and stylized using a variety of colors, patterns and designs. The filament-winding process, on the other hand, begins with a spool, rather than a sheet, of graphite fiber, which is fed onto the reel of a machine which then wraps the fiber around a mandrel by turning the mandrel and simultaneously moving the graphite fiber from one end of the mandrel to the other. Once the mandrel is wrapped, the process uses the same encasing and heating techniques as the flag wrapping process.

Raw Materials. We use several raw materials to produce steel golf shafts, including several steel alloys sourced from two or three primary vendors, nickel crowns and plating chemicals, Sensicore inserts and various sundry supplies, boxes and labels. Graphite shafts are produced with a variety of graphite fiber materials in both sheet and spool form that we source from several different vendors. In addition, graphite shafts are finished with a wide variety of paints, inks and heat transfer labels. We believe that there are adequate alternative suppliers of these materials, and, therefore, we do not believe that we are dependent on any one supplier.

In addition to the raw materials discussed above, we also use a substantial amount of natural gas and electricity in our manufacturing processes. Suppliers for these types of energy sources are limited, and prices are subject to general market and industry conditions.

Marketing & Promotion

Our marketing strategy is designed around new product development and targeted advertising and promotion programs. Through our ability to anticipate and address consumer trends in the golf equipment market, as well as the performance demands of professional golfers, we are able to successfully market our products to golf club manufacturers while strengthening brand awareness. During the last several years, our marketing efforts through the utilization of a wide variety of promotional channels, including mass media advertising, print and television, sponsorship of golf-related events, equipment endorsements from original equipment manufacturers and product demonstrations, have increased our overall exposure in the golf industry.

For example, we have maintained a strong presence among PGA Tour players, particularly since 1981, when we began sending our PGA Tour van to all major PGA events. The Tour van functions as a golf club custom shop on wheels, visiting over 35 professional tour events during 2003. Typically, the van is located near the practice tee and lends technical support to the tour professionals while simultaneously promoting the True Temper and Grafalloy brands to representatives of original equipment manufacturers. In 2003 we introduced a second tour van which we used to support the professional players and promote our products at 25 events collectively on the Champions and Nationwide Tours. In addition, we provide technical support to the players on the LPGA Tour as well as the European and Japanese PGA Tours.

Although we do not pay any professional golfer to endorse or play our shafts, we believe that the use of our products by professional golfers enhances our reputation for quality and performance while also promoting the use of our shafts. Due to our strong reputation and service, we estimate that nearly 75% of professional golfers around the world use our product in competition. We clearly recognize the influence that a professional golfer, or very low handicap golfer, can have on consumer preferences, so we also engage in special promotional efforts with local club and teaching professionals, and we contribute shafts to college athletic programs, to encourage the use of our product so they provide positive feedback on the True Temper and Grafalloy brands to their constituents.

Much of our advertising and promotional spending is dedicated to print and television advertising, including cooperative advertising with our customers. Additional advertising and promotional spending is

allocated to promotional events such as trade shows, consumer golf shows, PGA Tour activities and retail golf shop advertising displays.

Advertising and promotional costs for the years ended December 31, 2003, 2002 and 2001 were $3.1 million, $3.6 million and $5.0 million, respectively.

Distribution & Sales

We primarily sell our shafts to original equipment manufacturers, retailers and distributors. Typically, distributors resell our products to custom club assemblers, pro shops and individuals. Sales to golf club manufacturers/retailers accounted for approximately 80% of our net golf shaft sales in 2003, and sales to distributors represented approximately 20% of our 2003 net golf shaft sales.

We believe that we have one of the most experienced and respected sales staffs in the industry. Our sales and marketing department includes domestic sales managers, international sales managers, a customer service group and a team of design professionals who provide field support to our sales representatives. We believe that our international market presence, which comprised over 31% of our total 2003 net sales, provides an opportunity for future growth. We market our products in Japan, Europe, Australia and Southeast Asia and maintain a distribution operation in each region.

Employees

As of December 31, 2003, we had 712 full-time employees, including 24 in sales and marketing, 40 in research, development and manufacturing engineering, 564 in production and the balance in administrative and support roles. In addition, as of December 31, 2003, we had 70 individuals working in production at our El Cajon facility through a temporary employment agency. The El Cajon plant has historically used a certain portion of temporary workers in order to more effectively match the workforce level with the required production level at various times of the year.

The hourly employees at our steel plant in Amory, Mississippi are represented by the United Steel Workers of America. In June 2003, the United Steel Workers union at our Amory, Mississippi facility voted to accept a new collective bargaining agreement that covers a four year period beginning in July 2003 and expiring on June 30, 2007. We believe that our relationships with the union and our employees are good.

Intellectual Property

As of December 31, 2003, we held 39 patents worldwide relating to various products and proprietary technologies, including the Sensicore technology, and had 18 patent applications pending. We also hold numerous trademarks related to, among other things, our True Temper, Grafalloy and Alpha Q branded products. We do not believe that our competitive position is dependent solely on patent or trademark protection, or that our operations are dependent on any individual patent or trademark.

Environmental, Health And Safety Matters

We are subject to federal, state and local environmental and workplace health and safety laws and regulations, including requirements governing discharges to the air and water, the handling and disposal of solid and hazardous wastes, and the remediation of contamination associated with releases of hazardous substances. In December 2003, a review was conducted by independent environmental consultants and, based upon such report, we believe that we are currently in material compliance with environmental and workplace health and safety laws and regulations. Nevertheless, our manufacturing operations involve the use of hazardous substances and, as is the case with manufacturers in general, if a release of hazardous substances occurs or has occurred on or from our facilities, we may be held liable and may be required to pay the cost of remedying the condition. The amount of any such liability could be material.

We devote significant resources to maintaining compliance with, and believe we are currently in material compliance with, our environmental obligations. Despite such efforts, the possibility exists that instances of noncompliance could occur or be identified, the penalties or corrective action costs associated with which could be material.

Like any manufacturer, we are subject to the possibility that we may receive notices of potential liability, pursuant to CERCLA or analogous state laws, for cleanup costs associated with onsite or offsite waste recycling or disposal facilities at which waste associated with our operations have allegedly come to be located. Liability under CERCLA is strict, retroactive and joint and several. To our knowledge, no notices involving any material liability are currently pending.

We have made, and will continue to make, capital expenditures to comply with current and future environmental obligations. Because environmental requirements are becoming increasingly stringent, our expenditures for environmental compliance may increase in the future.

Business Risks

Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our obligations.

Our substantial indebtedness could adversely affect the financial health of our company. For example, it could:

• make it more difficult for us to satisfy our obligations with respect to our Senior Subordinated Notes;

• increase our vulnerability to increases in interest rates because our secured credit facility, under which our indebtedness was $14.0 million as of December 31, 2003, is subject to a variable interest rate;

• limit our ability to fund future working capital, capital expenditures, research and development costs, acquisitions and other general corporate requirements;

• require a substantial amount of our annual cash flow from operations for debt service, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, research and development efforts, acquisitions and other general corporate purposes;

• limit our flexibility to plan for, or react to, changes in our business and the industry in which we operate;

• place us at a competitive disadvantage compared to our competitors that have less debt; and

• limit our ability to borrow additional funds.

To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.

We may not be able to generate the cash we need to service our indebtedness. Our ability to make payments on and to refinance our indebtedness, and to fund planned capital expenditures and research and development efforts will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Based on our current level of operations, we believe our cash flow from operations, available cash and available borrowings under our senior bank facilities will be adequate to meet our future liquidity needs.

We cannot assure you, however, that our business will generate sufficient cash flow from operations, or that future borrowings will be available to us under our senior bank facilities in an amount sufficient to enable us to pay our indebtedness, or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness on or before maturity. We might not be able to refinance any of our indebtedness on commercially reasonable terms or at all.

Our success depends on the continued popularity of golf and the growth of the market for golf clubs.

We generate a substantial portion of our net revenues from the sale of golf shafts. The demand for our golf shafts is directly related to the popularity of golf, the number of golf participants and the number of rounds of golf being played by these participants. If golf participation decreases, sales of our products would be adversely affected. In addition, the popularity of golf organizations, such as the PGA, also affects the sales of our golf shafts. We depend on the exposure of our brands to increase brand recognition and reinforce the quality of our products. Any significant reduction in television coverage of PGA or other golf tournaments, or any other significant decreases in either attendance at golf tournaments or viewership of golf tournaments, will reduce the visibility of our brand and could adversely affect our sales.

A reduction in discretionary consumer spending could reduce sales of our products.

Sales of golf clubs are dependent on discretionary consumer spending which may be affected by general economic conditions and could result in a decrease in consumer spending on golf equipment. In addition, our future results of operations could be affected adversely by a number of other factors that influence discretionary consumer spending, including consumer concerns over international and military conflicts around the world, unseasonal weather patterns, demand for our existing and future products, new product introductions by our competitors, an overall decline in participation in golf activities, shifting consumer preferences between graphite and steel golf shafts or other materials that we currently do not produce, and competitive pressures that otherwise result in lower than expected average selling prices. Any one or more of these factors could result in our failure to achieve our expectations as to future sales or earnings. Because most operating expenses are relatively fixed in the short-term, we may be unable to adjust spending to compensate for any unexpected sales shortfall, which could adversely affect our results of operations.

Our new product development efforts may not be successful.

We may not be able to continue to develop competitive products, develop or use technology on a timely or competitive basis or otherwise respond to emerging market trends. Because the introduction of new golf shafts using steel, graphite or other composite and combined materials is critical to our future success, our continued growth will depend, in large part, on our ability to successfully develop and introduce new products in the marketplace. Should golf consumers prefer to use golf clubs made from materials other than steel or graphite, there could be a material adverse effect on the results of our operations. In addition, the design of new golf clubs is also greatly influenced by the rules and interpretations of the U.S. Golf Association, or USGA, and the Royal and Ancient Golf Club of St. Andrews, or St. Andrews. Although the golf equipment standards established by the USGA and St. Andrews generally apply to competitive events sanctioned by those organizations, we believe that it is critical for our future success that our new shafts comply with USGA and St. Andrews standards. New products that we introduce may not receive USGA or St. Andrews approval. In addition, existing USGA and St. Andrews standards may be changed in ways that adversely affect the sales of our current or future products.

We are subject to work stoppages at our facilities, which could seriously impact the profitability of our business.

If any labor disruption or work stoppages affect our employees, the results of our operation could be adversely affected. At December 31, 2003, we employed approximately 710 full-time individuals. Of these, approximately 417 hourly employees at our Amory, Mississippi facility are represented by the United Steel Workers of America. We recently entered into a new collective bargaining agreement with the United Steel Workers of America which became effective on July 1, 2003 and will expire on June 30, 2007. Nevertheless, we may be subject to work stoppages or other labor disruptions in the future. If such events were to occur, our results of operations may be materially adversely affected.