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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 27, 2003
COMMISSION FILE NUMBER 0-6966
ESCALADE, INCORPORATED
(Exact name of registrant as specified in its charter)
Indiana 13-2739290
(State of incorporation) (IRS EIN)
251 Wedcor Ave, Wabash, Indiana 46992
(Address of principal executive office)
(260) 569-7233
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act
NONE
Securities registered pursuant to Section 12(g) of the Act
Common Stock, No Par Value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. yes |X| no | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of 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. |X|
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12 b-2 of the Act). yes |X| no | |
Aggregate market value of voting stock held by nonaffiliates of the registrant
as of July 12, 2003: $70,831,571
The number of shares of Registrant's common stock (no par value) outstanding as
of February 28, 2004: 6,481,866
Documents Incorporated by Reference
Certain portions of the registrant's Proxy Statement relating to its annual
meeting of stockholders scheduled to be held on April 24, 2004 are incorporated
by reference into Part III of this Report.
Index to exhibits is found on page 16.
ESCALADE, INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business 3
Item 2. Properties 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 7
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 7. A. Quantitative and Qualitative Disclosures About Market Risk 13
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 14
Item 9. A. Controls and Procedures 14
PART III
Item 10. Directors and Executive Officers of the Registrant 14
Item 11. Executive Compensation 14
Item 12. Security Ownership of Certain Beneficial Owners and Management 15
Item 13. Certain Relationships and Related Transactions 15
Item 14. Principal Accounting Fees and Services 15
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 16
2
PART I
ITEM 1--BUSINESS
GENERAL
Escalade, Incorporated ("Escalade" or "Company") operates in two business
segments: sporting goods and office products. Escalade and its predecessors have
manufactured and sold sporting goods products for over 75 years and Office
Products for over 65 years.
Escalade is the successor to a manufacturer and retailer of women's and
children's footwear formed in 1922. Through a series of acquisitions commencing
in the 1970's, the Company has transitioned into the two industries it now
operates in.
The following table presents the percentages contributed to Escalade's net sales
by each of its business segments:
2003 2002 2001
---- ---- ----
Sporting goods 63% 82% 80%
Office/graphic arts 37 18 20
--- --- ---
Total net sales 100% 100% 100%
=== === ===
For additional segment information, see the notes to consolidated financial
statements.
SPORTING GOODS
Headquartered in Evansville, Indiana, Escalade Sports manufactures and
distributes widely recognized brands in family game room and outdoor sporting
goods products through traditional department stores, mass merchandise retailers
and sporting goods specific retailers. Escalade is the world's largest producer
of table tennis tables, the world's largest unit producer of pool tables, and
the largest game table importer in the United States. Some of the Company's most
recognized brands include:
Product Segment Brand Names
- --------------- -----------
Table Tennis Ping-Pong(R), STIGA(R)
Pool Tables and accessories Mizerak(TM), Murrey(R), Mosconi(TM), Black Widow(TM)
Basketball Backboards and Goals Goalrilla(TM), Goaliath(R), Silverback(TM)
Game Tables (Air Hockey and Soccer) Harvard Game(R), Rhino(TM), Murrey Game(TM)
Archery Fred Bear(R), Indian Archery(R), Jennings(R)
Fitness The STEP(R), USWeight(TM)
The largest sporting goods customer is Sears Roebuck & Co. ("SEARS"), which
accounted for 38%, 47% and 46% of total sporting goods revenues in 2003, 2002
and 2001, respectively. On a consolidated basis, SEARS accounted for 24%, 38%
and 37% of Escalade revenues in 2003, 2002 and 2001, respectively. No other
customer accounted for more than 10% of sporting goods revenues or consolidated
revenues. Escalade Sports has been a preferred supplier of sporting goods
products to SEARS for more than 30 years, winning numerous awards for delivering
outstanding products and service. Although the Company does not have long-term
supplier contracts with SEARS, the strong relationship with SEARS supports the
Company's belief that SEARS will continue to be a significant customer far into
the future.
Escalade Sports manufactures in the U.S.A., Mexico, and imports game table
product from China, where the Company employs a number of contract
manufacturers.
Certain products produced by Escalade Sports are subject to regulation by the
Consumer Product Safety Commission. The Company believes it is in full
compliance with all applicable regulations.
3
OFFICE PRODUCTS
Operating under the Martin Yale name, the office product business gained a
worldwide presence with the 2003 acquisition of Schleicher & Co. International,
AG, a manufacturer and distributor of data shredding equipment headquartered in
Germany. In addition to data shredding equipment and accessories, Martin Yale
products include: paper trimmers, folding machines, paper drills, collators,
bursting machines, letter openers, and office related products such as keyboard
drawers and hole punches. Martin Yale brands include Martin Yale(TM),
Premier(R), Master(TM), Mead Hatcher(TM), Intimus(R), Paper Monster(R), and
VacuShred(TM).
Martin Yale manufactures product in the United States, Mexico, Germany and
China. In addition to the sales offices located at manufacturing plants, Martin
Yale also has offices in the United Kingdom and France. Products are sold
throughout the world to office products retailers, wholesalers and catalog
distributors. No single customer accounted for more than 10% of sales during
2003.
MARKETING AND PRODUCT DEVELOPMENT
In both the sporting goods and office product business segments, Escalade has
rigorously developed strategic plans to enhance and promote product branding.
The Company constantly evaluates the quality-to-price paradigm of its customers,
and then designs and redesigns its products to achieve the best fit. Marketing
efforts are then initiated through its retail partners in the form of
advertising and other promotion allowances. In general, the Company does not
directly advertise to end-users.
In order to meet customer needs, each operating segment conducts its own
independent research and development efforts to design new products and enhance
already existing products. On a consolidated basis, the Company incurred
research and development costs of approximately $2,947 thousand, $1,520 thousand
and $2,150 thousand in 2003, 2002 and 2001, respectively.
COMPETITION
Escalade is subject to competition with various manufacturers of each product
line produced or sold by Escalade. The Company is not aware of any other single
company that is engaged in both the same industries as Escalade or that produces
the same range of products as Escalade within such industries. Nonetheless,
competition exists for many Escalade products within both the sporting goods and
office product industries and some competitors are larger and have substantially
greater resources than the Company. Escalade believes that its long-term success
depends on its ability to strengthen its relationship with existing customers,
attract new customers and develop new products that satisfy the quality and
price requirements of sporting goods and office product customers.
LICENSES, TRADEMARKS AND BRAND NAMES
Escalade Sports has an agreement and contract with Sweden Table Tennis AB for
the exclusive right and license to distribute and produce table tennis equipment
under the brand name STIGA(R) for the United States and Canada. Escalade Sports
has a non-exclusive, non-transferable license to use the trademark PSE(R); only
and specifically for the purpose of applying to juvenile archery equipment and
approved archery accessories retailing up to $79.99.
Escalade is the owner of several registered trademarks and brand names. In the
sporting goods segment, the Company holds the Ping-Pong(R), Harvard(R),
Accudart(R), Indian Archery(R) and Goaliath(R), registered trademarks and
utilizes the Goalrilla(TM), Silverback(TM), Rhino Play(TM), U. S. Weight(TM),
The Step(R), Murrey(R), Mosconi(R), Mizerak(R) and PSE(R) brand names. In the
office/graphic arts segment, the Company owns the Premier(R) and Intimus(R)
registered trademark the Martin Yale(TM), Master Products(TM), Mead Hatcher(TM),
Taros(TM), Paper Monster(TM) and VacuShred(TM) brand names.
4
BACKLOG AND SEASONALITY
Sales are primarily pursuant to standard purchase orders. In most cases products
are shipped within the same month received. Unshipped orders at the end of the
fiscal year (backlog), were not material, and therefore not an indicator of
future results. Consumer demand for sporting goods is extremely seasonal and
driven by Christmas season demand. Over the past three years approximately 74%
of sporting goods sales have come in the second half of the year. The Company
expects sporting goods sales to continue to be seasonal in the future. Demand
for Office Products has not been seasonal and is not expected to be so in the
future.
EMPLOYEES
The number of full time employees at December 27, 2003 and December 28, 2002 for
each business segment were as follows:
2003 2002
----- ----
Sporting Goods
USA 404 285
Mexico 192 134
----- ---
596 419
Office/Graphic Arts
USA 137 107
Mexico 95 96
Europe 202 --
----- ---
434 203
----- ---
Total 1,030 622
===== ===
The International Union of Electronic, Electrical, Salaried, Machine and
Furniture Workers AFL-CIO represent hourly rated employees at the Escalade
Sports' Evansville, Indiana factory; approximately 120 employees at December 27,
2003. The current 3-year contract expires in April 2006.
Escalade believes that its employee relations are satisfactory.
SOURCES OF SUPPLIES
Raw materials for Escalade's various product lines consist of wood,
particleboard, slate, standard grades of steel, steel tubing, plastic, vinyl,
steel cables, fiberglass and packaging. Escalade relies upon suppliers in Europe
and Brazil for its requirement of billiard balls and slate utilized in the
production of home pool tables and upon various Asian manufacturers for certain
of its table tennis needs and other items. Escalade sources some of its game
table product line in China.
The Company believes that these sources will continue to provide adequate
supplies as needed. All other materials needed for the Company's various
operations are available in adequate quantities from a variety of domestic and
foreign sources.
SEC REPORTS
Our Internet site (www.escaladeinc.com) makes available to interested parties
our annual report on Form 10-K, quarterly reports on Form 10-Q, and current
reports on Form 8-K, and all amendments to those reports, as well as all other
reports and schedules we file electronically with the Securities and Exchange
Commission (the "Commission"), as soon as reasonably practicable after such
material is electronically filed with or furnished to the Commission. Interested
parties may also find reports, proxy and information statements and other
information on issuers that file electronically with the Commission at the
Commission's Internet site (http://www.sec.gov).
5
ITEM 2--PROPERTIES
At December 27, 2003, the Company operated from the following locations:
SQUARE OWNED OR
LOCATION FOOTAGE LEASED USE
- -------- ------- -------- ---
Sporting Goods
Evansville, Indiana, USA 346,000 Owned Manufacturing and distribution; sales
and marketing; administration
Evansville, Indiana, USA 132,000 Leased Warehousing
Olney, Illinois, USA 100,000 Leased Manufacturing and distribution
Gainesville, Florida, USA 155,000 Owned Manufacturing and distribution
National City, California, USA 51,000 Leased Warehousing and distribution
Tijuana, Mexico 83,000 Owned Manufacturing and distribution
Tijuana, Mexico 83,000 Leased Manufacturing
Ensenada, Mexico 33,000 Leased Manufacturing
Office Products
Wabash, Indiana, USA 141,000 Owned Manufacturing and distribution; sales
and marketing; administration
Sanford, N. Carolina, USA 50,000 Leased Sales and marketing
Tijuana, Mexico 84,000 Leased Manufacturing and distribution
Markdorf, Germany 70,000 Owned Manufacturing and distribution; sales
and marketing; administration
Paris, France 13,000 Leased Distribution; sales and marketing
Crawley, UK 17,000 Leased Sales and marketing
The Company has no idle facilities, and believes that its facilities are in
excellent condition and suitable for their respective operations. The Company
also believes that it is in compliance with all applicable environmental
regulations and is not subject to any proceeding by any federal, state or local
authorities regarding such matters. The Company provides regular maintenance and
service on its plants and machinery as required.
ITEM 3--LEGAL PROCEEDINGS
The Company is involved in litigation arising in the normal course of its
business. The Company does not believe that the disposition or ultimate
resolution of such claims or lawsuits will have a material adverse affect on the
business or financial condition of the Company.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
6
PART II
ITEM 5--MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded under the symbol "ESCA" on the Nasdaq
National Market. The following table sets forth, for the calendar periods
indicated, the high and low sales prices of the Common Stock as reported by the
Nasdaq National Market:
PRICES HIGH LOW
- ------ ---- ---
2003
Fourth quarter ended December 27, 2003 $ 29.67 $ 21.25
Third quarter ended October 4, 2003 24.70 15.75
Second quarter ended July 12, 2003 19.05 12.15
First quarter ended March 22, 2003 20.01 12.13
2002
Fourth quarter ended December 28, 2002 $ 20.09 $ 19.49
Third quarter ended October 5, 2002 19.85 19.16
Second quarter ended July 13, 2002 22.48 21.27
First quarter ended March 23, 2002 19.91 19.30
The closing market price on February 28, 2004 was $38.77 per share.
On February 18, 2004, The Company announced the payment of an annual dividend of
$0.24 per share to all shareholders of record on March 5, 2004, payable on March
12, 2004.
On February 23, 2002, the Board of Directors declared a 3 for 1 stock split
payable to stockholders of record on March 15, 2002, which was distributed on
March 28, 2002. All per share amounts have been adjusted to reflect the 3 for 1
stock split.
There were approximately 351 holders of record of the Company's Common Stock at
February 28, 2004. The approximate number of stockholders, including those held
by depository companies for certain beneficial owners, was 850.
7
ITEM 6--SELECTED FINANCIAL DATA
(In thousands, except per share data)
DECEMBER 27, December 28, December 29, December 30, December 25,
AT AND FOR YEARS ENDED 2003 2002 2001 2000 1999
- ---------------------- ------------ ------------ ------------ ------------ ------------
INCOME STATEMENT DATA
Net sales
Sporting goods $139,285 $126,745 $118,867 $ 79,948 $52,767
Office and graphic
arts products 82,443 28,710 29,986 36,133 33,407
Total net sales 221,728 155,455 148,853 116,081 86,174
Net income 14,850 11,138 11,139 8,100 6,100
Weighted-average shares 6,484 6,486 6,447 7,083 9,114
PER SHARE DATA
Basic earnings per share $ 2.29 $ 1.72 $ 1.73 $ 1.14 $ 0.67
Cash dividends 0 0 0 0 0
BALANCE SHEET DATA
Working capital 24,657 27,041 13,574 12,485 14,899
Total assets 134,437 96,788 76,111 69,476 66,850
Short-term bank debt 21,568 11,223 9,770 13,267 11,570
Long-term bank debt 15,020 16,700 6,800 12,700 10,700
Total stockholders' equity 61,283 45,875 34,396 23,960 29,438
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following section should be read in conjunction with Item 1: Business; Item
6: Selected Financial Data; and Item 8: Financial Statements and Supplementary
Data.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements relating to present or future
trends or factors that are subject to risks and uncertainties. These risks
include, but are not limited to, the impact of competitive products and pricing,
product demand and market acceptance, new product development, the continuation
and development of key customer and supplier relationships, Escalade's ability
to control costs, general economic conditions, fluctuation in operating results,
changes in the securities market and other risks detailed from time to time in
Escalade's filings with the Securities and Exchange Commission. Escalade's
future financial performance could differ materially from the expectations of
management contained herein. Escalade undertakes no obligation to release
revisions to these forward-looking statements after the date of this report.
OVERVIEW
Escalade, Incorporated ("Escalade" or "Company") manufactures and distributes
products for two industries: Sporting Goods and Office Products. Within these
industries the Company has successfully built a commanding market presence in
niche markets. This strategy is heavily dependent on brand recognition and
excellent customer service. The Company's strategic advantage is established
relationships with major retailers. This allows the Company to bring new product
to the market in a very cost effective manner. In addition to strategic customer
relations, the Company has over 75 years of manufacturing experience that enable
it to be a low cost supplier.
Because the Company has a strong market position in many of its product lines,
significant internal growth is not anticipated. To enable rapid growth the
Company has developed a strategy of growth through strategic acquisition. Under
this scenario the Company acquires product lines with strong brand recognition
and then takes them to market through its established distribution channels
building on the Company's market leader position. Significant synergies are
achieved through assimilation into the existing company structure. Management
believes that
8
key indicators in measuring the success of this strategy are revenue growth and
earnings growth. The following table sets for the percentage growth in revenues
and net income over the prior years:
2003 2002 2001
------ ------ ------
Net revenue 42.6% 4.4% 28.2%
Net Income 33.3% 0.0% 37.5%
RESULTS OF OPERATIONS
The following schedule sets forth certain consolidated statement of income data
as a percentage of net revenue for the periods indicated:
2003 2002 2001
------ ------ ------
NET REVENUE 100.0% 100.0% 100.0%
Cost of products sold 69.6% 71.5% 71.8%
------ ------ ------
GROSS MARGIN 30.4% 28.5% 28.2%
Selling, administrative and general expenses 20.9% 16.9% 14.7%
------ ------ ------
OPERATING INCOME 9.5% 11.6% 13.5%
====== ====== ======
CONSOLIDATED REVENUE AND GROSS MARGIN
Revenues for 2003 were 42.6% higher than the prior year due primarily to two
acquisitions. In Sporting Goods the Company acquired substantially all of the
assets of North American Archery Group, LLC, a manufacturer of archery
equipment. The product lines acquired in this acquisition contributed roughly
$10 million in net revenues. In the Office Products business, the Company
acquired 100% of the outstanding shares of Schleicher & Co. International, AG, a
manufacturer and distributor of data shredder products headquartered in Germany.
The data shredder product line added approximately $54 million in net revenues.
As a result of the change in product mix generated by the two acquisitions, the
consolidated gross margin ratio for 2003 improved over 2002. The archery product
line acquired in Sporting Goods has significantly higher gross margin ratios
than existing Sporting Goods products, resulting in a slight improvement in the
overall Sporting Goods gross margin ratio compared to the prior year. As the
archery product line grows, the overall gross margin ratio in Sporting Goods
will continue to improve. In contrast, the overall gross margin ratio in the
Office Products business dropped in comparison to the prior year because the
gross margin ratios on data shredder products is less than the combined gross
margin ratio on other Office Products. However, because this reduced Office
Product gross margin ratio is still significantly higher than the Sporting Goods
gross margin ratio, it has an elevating effect on the consolidated gross margin
ratio because Office Products became a higher percentage of overall revenues.
The Company has taken actions to improve the gross margin ratios on data
shredder equipment and expects to report improvements late in 2004.
Revenues for 2002 were 4% above 2001 revenues; increased revenues in the
Sporting Goods segment were partially offset by declines in the Office Products
segment. The full effect of Sporting Goods acquisitions in 2001 was the primary
reason for the 6% revenue growth in Sporting Goods over 2001. Continued
sluggishness in the U.S. economy and stiff price competition from overseas
vendors resulted in lower Office Products sales compared to 2001.
The overall gross margin ratio in 2002 was marginally better than the 2001 gross
margin ratio. The increase is attributed to the effect of the 2001 acquisitions
in Sporting Goods. The gross margin ratio in Office Products was unchanged from
the prior year.
9
CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The overall ratio of selling, general and administrative expenses as a
percentage of net revenues increased in 2003 compared to 2002. However, the
ratio in each business segment remained relatively unchanged from 2002. The
increase in the consolidated ratio is directly related to the increased size of
the Office Products segment in relation to the consolidated group. The expense
ratio in the Office Products segment is roughly twice as high as the
corresponding ratio in the Sporting Goods segment; primarily due to traditional
program and catalog costs associated with the office supply retail channel. As a
result of the data shredder acquisition, Management has identified several areas
where synergies will result in cost reductions in selling, general and
administrative costs. Management expects modest cost reductions in 2004, with
the full impact to be realized in 2005.
In 2002, the ratio of selling, general and administrative expense to net
revenues increased in comparison to 2001 as a direct result of increased costs
in the Sporting Goods business segment resulting from the West Coast
Longshoreman lockout. The disruption in shipping resulted in significant
expediting costs to meet customer requirements.
SPORTING GOODS
The revenue and net income for the Sporting Goods business segment for the three
years ended December 27, 2003 were as follows:
In Thousands 2003 2002 2001
------------ -------- -------- --------
Revenues $139,285 $126,745 $118,867
Net income $ 9,720 $ 8,400 $ 6,721
Revenues increased 10% in 2003 compared to 2002, primarily due to the archery
acquisition, which added approximately $10 million in revenues. Excluding this
effect, revenues were only slightly better than 2002. This was an expected
outcome because several major customers had unusually high inventory levels of
the Company's products at the end of 2002 as a direct result of shipping delays
caused by the West Coast Longshoreman Lockout just before the 2002 Christmas
season. As expected, sales to the Company's largest customer, Sears Roebuck &
Co. (SEARS) were lower than 2002, representing 38% of net sales in 2003 compared
to 47% in 2002. Increased placement in retailers other than SEARS allowed the
Company to compensate for the decline in sales to SEARS. Sales reports from
SEARS indicate that "sell-through" of the Company's products was strong during
the 2003 Christmas season and that year-end inventory levels of the Company's
products were normal. The lack of excess inventory at customers, strong
"sell-through" at the retail level and increased placement indicate a bright
outlook for 2004.
As a direct result of higher sales at a slightly better gross margin, net income
in 2003 increased 16% over 2002. Both the increased sales volume and increased
gross margin ratio are directly attributed to the archery acquisition.
Revenues in 2002 were 7% higher than 2001. This increase is attributed to the
full effect of strategic acquisitions made in 2001.
Net income in 2002 increased 25% over 2001 primarily due to the increased gross
margin associated with new products acquired in 2001.
10
OFFICE PRODUCTS
The revenue and net income for the Office Products business segment for the
three years ended December 27, 2003 were as follows:
In Thousands 2003 2002 2001
------------ ------- ------- -------
Revenues $82,443 $28,710 $29,986
Net income $ 4,223 $ 3,029 $ 3,534
As a direct result of the data shredder acquisition, revenues in 2003 increased
187% over 2002. Revenues from data shredder sales were approximately $54 million
in 2003. Excluding data shredder sales, Office Product revenues were relatively
unchanged from the prior year, indicating a halt to the declining sales trend
experienced in previous years; an improved U.S. economy and access to European
markets as a result of the data shredder acquisition, appear to be the primary
factors for this change. Increased data security awareness and an improving
global economy are key factors in Management's optimistic outlook for 2004.
Net income increased 39% over 2002; primarily due to a one-time gain of
approximately $1.4 million related to the forgiveness of European bank debt
assumed in the data shredder acquisition and subsequently forgiven by the bank
in negotiations independent of the acquisition. This gain was recorded in other
income on the consolidated income statement. Excluding this gain, the Office
Products business segment would have reported lower net income compared to 2002
because the data shredder business was not profitable in 2003. Management has
initiated actions to ensure the profitability of the data shredder business and
expects the data shredder business to contribute to net income in 2004, but the
full effect of these actions will not materialize until 2005.
Revenues in 2002 were lower than 2001 as a result of the depressed U.S. economy
and tough price competition from foreign imports. This decline in revenue and
the absence of a one-time real estate gain recorded in 2001, resulted in lower
2002 net income compared to 2001.
FINANCIAL CONDITION AND LIQUIDITY
The financial condition of the Company remains strong. The current ratio, a
basic measure of liquidity (current assets divided by current liabilities),
declined from 1.8 as of December 28, 2002 to 1.4 as of December 27, 2003;
comparable to 1.4 at December 29, 2001. The higher current ratio at December 28,
2002 was the result of unusually high inventory and accounts receivable balances
due to the shipping delays caused by the 2002 West Coast Longshoreman Lockout.
At December 27, 2003, inventory and accounts receivable balances are at
historically normal levels. The Company's strong earnings in 2003, coupled with
this conversion of current assets into cash, enabled the Company to finance two
significant acquisitions and reduce bank debt by $1.7 million. As a percentage
of stockholders' equity, long-term bank debt has decreased from 37% at December
28, 2002 to 26% at December 27, 2003.
In 2003, operations generated $27 million in cash compared to $4 million in 2002
and $20 million in 2001. Cash was provided by net income adjusted for non-cash
related items. Approximately $9 million of the cash generated in 2003 came from
reductions in accounts receivable and inventory that were unusually high at
December 28, 2002.
The Company used $24 million for investing activities in 2003, compared to $13
million in 2002 and $11 million in 2001. In 2003, the Company invested
approximately $10 million each, in the archery and data shredder acquisitions,
and another $1.5 million increasing its ownership interest in STIGA Table Tennis
and acquiring additional assets in the STEP product line. The Company used
approximately $10 million for acquisitions in 2002, and $9 million in 2001. As
opportunities present themselves, the Company will continue to make strategic
investments.
In 2003, the Company used approximately $6 million for financing activities,
compared to generating $12 million in 2002 and using $9 million in 2001. The
Company used approximately $4 million to reduce debt and $2 million to
11
acquire its own stock. In contrast, the Company increased debt by $11 million in
2002 after reducing debt by $9 million in 2001. In the absence of additional
acquisitions, the Company anticipates cash generated by operations to further
reduce outstanding debt in 2004.
The Company's working capital requirements are primarily funded from cash flows
from operations and revolving credit agreements with its banks. During 2003, the
Company's maximum borrowings under its primary revolving credit lines aggregated
$75 million and the Company met all its debt covenants. A favorable interest
rate climate and the Company's strong financial condition resulted in lower
borrowing costs on the Company's primary bank debt; the average effective
interest rate in 2003 was 3.3%. The Company's relationship with its primary
lending bank remains strong and the Company expects to have access to the same
level of revolving credit that was available in 2003. In addition, the Company
believes it can quickly reach agreement with alternative lending institutions to
increase available credit should the need arise.
On February 18, 2004, the Company's Board of Directors announced the payment of
an annual dividend of $0.24 per share to all shareholders of record on March 5,
2004, payable on March 12, 2004.
NEW ACCOUNTING PRONOUNCEMENTS
There have been no new accounting pronouncements that are expected to impact the
Company at this time.
OFF BALANCE SHEET FINANCING ARRANGEMENTS
The Company has no financing arrangements that are not recorded on the Company's
balance sheet.
CONTRACTUAL OBLIGATIONS
The following schedules summarizes the Company's contractual obligations as of
December 27, 2003:
Payments Due by Period
----------------------------------------------------------------------
Less than 1 More than 5
Contractual Obligations Total year 1 - 3 years 3 - 5 years years
------- ----------- ----------- ----------- -----------
Long-term debt $16,083 $ 354 $ 709 $12,320 $2,700
Operating Leases 4,577 1,611 1,572 965 429
Minimum payments under
royalty agreements 1,815 315 700 700 100
------- ------ ------ ------- ------
Total $22,475 $2,280 $2,981 $13,985 $3,229
======= ====== ====== ======= ======
CRITICAL ACCOUNTING ESTIMATES
The methods, estimates and judgments used in applying the Company's accounting
policies have a significant impact on the results reported in its financial
statements. Some of these accounting policies require difficult and subjective
judgments, often as a result of the need to make estimates of matters that are
inherently uncertain. The most critical accounting estimate includes assessing
the degree to which outstanding accounts receivable will be collectible. The
Company has other policies that are considered key policies, but these do not
meet the definition of critical accounting estimates because they do not
generally require estimates or judgments that are difficult or subjective.
Allowance for doubtful accounts
The Company maintains a reserve to absorb probable losses relating to bad debts
arising from uncollectible accounts receivable. The allowance for doubtful
accounts is maintained at a level the Company considers to be adequate to absorb
probable bad debts inherent in the accounts receivable balance and is based on
ongoing assessments and evaluations of the collectibility, historical loss
experience of accounts receivable and the financial status of customers with
accounts receivable balances. Bad debts are charged and recoveries are credited
to the
12
reserve. Provision for bad debts are based on the Company's review of the
historical loss experience and such factors, which in management's judgment,
deserve consideration under existing economic conditions in estimating probable
losses.
The Company utilizes credit reporting services specializing in its business
segments, participates in credit management associations pertaining to its
business segments, monitors accounts closely for current financial information
and performs internal risk analysis when making large credit decisions. The
Company has not substantively changed any aspect to its overall approach in the
determination of the allowance for bad debts. There have been no material
changes in assumptions or estimation techniques as compared to prior periods
that impacted the determination of the current period allowance.
Based on the procedures discussed above, management is of the opinion that the
reserve of $2.0 million was adequate, but not excessive, to absorb estimated
credit losses associated with the accounts receivable balance at December 27,
2003.
EFFECT OF INFLATION
The Company cannot accurately determine the precise effects of inflation;
however, there were some increases in sales and costs due to inflation in 2003.
The Company attempts to pass on increased costs and expenses through price
increases when necessary. The Company is working on reducing expense levels,
improving manufacturing technologies and redesigning products to keep these
costs under control.
CAPITAL EXPENDITURES
As of December 27, 2003, the Company had no material commitments for capital
expenditures.
ITEM 7. A. -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to financial market risks, including changes in currency
exchange rates, interest rates and marketable equity security prices. To
mitigate these risks, the Company utilizes derivative financial instruments,
among other strategies. At the present time, the only derivative financial
instrument used by the company is an interest rate swap. The Company does not
use derivative financial instruments for speculative purposes.
A substantial majority of revenue, expense and capital purchasing activities are
transacted in U.S. dollars. However, the Company's foreign subsidiaries enter
into transactions in other currencies, primarily the Euro. To protect against
reductions in value and the volatility of future cash flows caused by changes in
currency exchange rates, the Company carefully considers the use of transaction
and balance sheet hedging programs. Such programs reduce, but do not entirely
eliminate, the impact of currency exchange rate changes. Presently the Company
does not employ currency exchange hedging financial instruments, but has
adjusted transaction and cash flows to mitigate adverse currency fluctuations.
Historical trends in currency exchanges indicate that it is reasonably possible
that adverse changes in exchange rates of 20% for the Euro could be experienced
in the near term. Such adverse changes would not have resulted in a material
impact on income before taxes for the year ended December 27, 2003.
A substantial portion of the Company's debt is based on U.S. prime and LIBOR
interest rates. In an effort to lock-in current low rates and mitigate the risk
of unfavorable interest rate fluctuations the Company has entered into an
interest rate swap agreement. This agreement effectively converted a portion of
its variable rate debt into fixed rate debt.
An adverse movement of equity market prices would have an impact on the
Company's long-term marketable equity securities that are included in other
assets on the consolidated balance sheet. At December 27, 2003 the aggregate
book value of long-term marketable equity securities was $1.5 million. Due to
the unpredictable nature of the equity market the Company has not employed any
hedge programs relative to these investments.
13
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by Item 8 are set forth
in Part IV, Item 14.
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9. A. -- CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to the Company's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure based closely on the definition of "disclosure
controls and procedures" in Rule 13a-14(c). In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Also, the Company has
investment in certain unconsolidated entities. As the Company does not control
or manage these entities, its disclosure controls and procedures with respect to
such entities are necessarily substantially more limited than those it maintains
with respect to its consolidated subsidiaries.
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and the Company's Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures as of the end of the period covered by this report. Based on the
foregoing, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were effective.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date the Company completed its evaluation. Therefore, no corrective
actions were taken.
PART III
ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required under this item with respect to Directors and Executive
Officers is contained in the registrant's Proxy Statement relating to its annual
meeting of stockholders scheduled to be held on April 24, 2004 under the
captions "Certain Beneficial Owners," "Election of Directors," and "Executive
Officers of the Registrant" and is incorporated herein by reference.
ITEM 11--EXECUTIVE COMPENSATION
Information required under this item is contained in the registrant's Proxy
Statement relating to its annual meeting of stockholders scheduled to be held on
April 24, 2004 under the caption "Executive Compensation" and is incorporated
herein by reference, except that the information required by Items 402(k) and
(l) of Regulation S-K which appear within such caption under the sub-headings
"Compensation and Stock Option Committees", "Report of Audit Committee" and
"Financial Performance" are specifically not incorporated by reference into this
Form 10-K or into any other filing by the registrant under the Securities Act of
1933 or the Securities Exchange Act of 1934.
14
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Except for the information required by Item 201(d) of Regulation S-K, which is
included below, information required by this item is contained in the
registrant's proxy statement relating to its annual meeting of stockholders
scheduled to be held on April 24, 2004 under the caption "Certain Beneficial
Owners" and is incorporated herein by reference.
EQUITY COMPENSATION PLAN INFORMATION
Number of Weighted-Average
Securities to be Issued Exercise Price Number of
Upon Exercise of of Outstanding Options, Securities Remaining
Outstanding Options, Warrants Available for Future
Plan Category Warrants and Rights and Rights Issuance
- ------------- ----------------------- ----------------------- --------------------
Equity compensation plans approved by
security holders (1) 319,695 11.19 661,706
Equity compensation plans not approved by
security holders -- --
------- -------
Total 319,695 661,706
======= =======
(1) These plans are the Company's 1997 Incentive Stock Option Plan and the
1997 Director Stock Option Plan.
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14 -- PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is contained in the registrant's proxy
statement relating to its annual meeting of stockholders scheduled to be held on
April 24, 2004 under the caption "Principal Accounting Firm Fees" and is
incorporated herein by reference.
15
PART IV
ITEM 15--EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS A PART OF THIS REPORT:
(1) FINANCIAL STATEMENTs
Independent Accountants' Report
Consolidated financial statements of Escalade, Incorporated and
subsidiaries:
Consolidated balance sheets--December 27, 2003 and
December 28, 2002
Consolidated statements of income--fiscal years ended
December 27, 2003, December 28, 2002 and
December 29, 2001
Consolidated statements of stockholders' equity--fiscal years
ended December 27, 2003, December 28, 2002 and
December 29, 2001
Consolidated statements of cash flows--fiscal years ended
December 27, 2003, December 28, 2002 and
December 29, 2001
Notes to consolidated financial statements
(2) FINANCIAL STATEMENT SCHEDULES
Independent Accountants' Report on financial statement schedule
For the three-year period ended December 27, 2003:
Schedule II--Valuation and qualifying accounts
All other schedules are omitted because of the absence of conditions
under which they are required or because the required information is
given in the consolidated financial statements or notes thereto.
(3) EXHIBITS
3.1 Articles of incorporation of Escalade, Incorporated (a)
3.2 By-Laws of Escalade, Incorporated (a)
4.1 Form of Escalade, Incorporated's common stock certificate (a)
10.1 Licensing agreement between Sweden Table Tennis AB and Indian
Industries, Inc. dated January 1, 1995 (d)
10.2 Amended and Restated Credit Agreement dated October 24, 2001
between Escalade, Incorporated and Bank One, Indiana, N.A.
dated August 29, 2002 (g)
10.3 First Amendment to Amended and Restated Credit Agreement dated
October 24, 2001 between Escalade, Incorporated and Bank One,
Indiana, N.A. dated August 29, 2002 (h)
10.4 Third Amendment to amend and restate the credit agreement
between Escalade, Incorporated and Bank One, N.A. The
effective date is June 1, 2003 (i)
10.5 Credit Agreement dated as of September 5, 2003 by and between
Indian-Martin, Inc. and Bank One, National Association
(excluding exhibits and schedules not deemed to be material).
The effective date is September 7, 2003 (j)
10.6 Revolving Note dated as of September 5, 2003 in principal
amount of $45,000,000, executed by Indian-Martin, Inc. in
favor of Bank One, National Association (j)
10.7 Pledge Agreement dated as of September 5, 2003 by and between
Indian-Martin, Inc. and Bank One, National Association (j)
10.8 Collateral Assignment and Security Agreement dated as of
September 5, 2003 by and between Indian-Martin, Inc. and Bank
One, National Association (j)
10.9 Receivables Purchase Agreement dated as of September 5, 2003
by and between Indian-Martin, Inc. and Indian-Martin AG (j)
10.10 Receivables Purchase Agreement dated as of September 5, 2003
by and between Indian-Martin, Inc. and Indian Industries, Inc.
Substantially similar Receivables Purchase Agreements were
also entered into by Indian-Martin, Inc. and each of Escalade,
Incorporated's other domestic operating subsidiaries, Harvard
Sports, Inc., Martin Yale Industries, Inc., Master Products
Manufacturing Company, Inc., U.S. Weight, Inc. and Bear
Archery, Inc. (j)
16
10.11 Services Agreement dated as of September 5, 2003 by and
between Indian-Martin, Inc. and Martin Yale Industries, Inc.
Substantially similar Services Agreements were also entered
into by Indian-Martin, Inc. and each of Escalade,
Incorporated's other domestic operating subsidiaries, Harvard
Sports, Inc., Indian Industries, Inc., Master Products
Manufacturing Company, Inc., U.S. Weight, Inc. and Bear
Archery, Inc. (j)
10.12 Escalade Subordination Agreement dated as of September 5, 2003
between Escalade, Incorporated and Bank One, National
Association (j)
10.13 Offset Waiver Agreement dated as of September 5, 2003 between
Escalade, Incorporated, Bank One, National Association,
Indian-Martin, Inc., Harvard Sports, Inc., Indian Industries,
Inc., Martin Yale Industries, Inc., Master Products
Manufacturing Company, Inc., U.S. Weight, Inc. and Bear
Archery, Inc. (j)
10.14 Loan Agreement dated September 1, 1998 between Martin Yale
Industries, Inc. and City of Wabash, Indiana (f)
10.15 Trust Indenture between the City of Wabash, Indiana and Bank
One Trust Company, NA as Trustee dated September 1, 1998
relating to the Adjustable Rate Economic Development Revenue
Refunding Bonds, Series 1998 (Martin Yale Industries, Inc.
Project) (f)
(4) EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
10.16 The Harvard Sports/Indian Industries, Inc. 401(k) Plan as
amended and merged in 1993 (c)
10.17 Martin Yale Industries, Inc. 401(k) Retirement Plan as amended
in 1993 (c)
10.18 Incentive Compensation Plan for Escalade, Incorporated and its
subsidiaries (a)
10.19 Example of contributory deferred compensation agreement
between Escalade, Incorporated and certain management
employees allowing for deferral of compensation (a)
10.20 1997 Director Stock Compensation and Option Plan (e)
10.21 1997 Incentive Stock Option Plan (e)
21 Subsidiaries of the Registrant
23 Consent of BKD, LLP
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
(a) Incorporated by reference from the Company's Form S-2
Registration Statement, File No. 33-16279, as declared
effective by the Securities and Exchange Commission on
September 2, 1987
(b) Intentionally deleted
(c) Incorporated by reference from the Company's 1993 Annual
Report on Form 10-K
(d) Incorporated by reference from the Company's 1995 Annual
Report on Form 10-K
(e) Incorporated by reference from the Company's 1997 Proxy
Statement
(f) Incorporated by reference from the Company's 1998 Third
Quarter Report on Form 10-Q
(g) Incorporated by reference from the Company's 2001 Third
Quarter Report on Form 10-Q
(h) Incorporated by reference from the Company's 2002 Third
Quarter Report on Form 10-Q
(i) Incorporated by reference from the Company's 2003 Second
Quarter Report on Form 10-Q
(j) Incorporated by reference from the Company's 2003 Third
Quarter Report on Form 10-Q
(B) REPORTS ON FORM 8-K
(1) On October 24, 2003, Escalade filed a report on Form 8-K relating to
its financial information for the quarter ended October 4, 2003 and
forward-looking statements as presented in the shareholder message
and press release dated October 24, 2003.
17
ESCALADE, INCORPORATED AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
The following consolidated financial statements of the Registrant and its
subsidiaries and Independent Accountants' Report are submitted herewith:
Page
Independent Accountants' Report ........................................................ 19
Consolidated financial statements of Escalade, Incorporated and subsidiaries:
Consolidated balance sheets--December 27, 2003 and December 28, 2002 ................ 20
Consolidated statements of income--fiscal years ended December 27, 2003,
December 28, 2002 and December 29, 2001 ......................................... 21
Consolidated statements of stockholders' equity--fiscal years ended December 27,
2003, December 28, 2002 and December 29, 2001 ................................... 22
Consolidated statements of cash flows--fiscal years ended December 27, 2003,
December 28, 2002 and December 29, 2001 ......................................... 23
Notes to consolidated financial statements .......................................... 24
18
[BKD LLP LOGO]
INDEPENDENT ACCOUNTANTS' REPORT
To the Stockholders and Board of Directors
Escalade, Incorporated
Evansville, Indiana
We have audited the accompanying consolidated balance sheets of Escalade,
Incorporated and subsidiaries as of December 27, 2003 and December 28, 2002 and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 27, 2003. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Escalade, Incorporated and subsidiaries at December 27, 2003 and December 28,
2002 and the results of their operations and their cash flows for each of the
three years in the period ended December 27, 2003 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 5, in 2002 the Company changed its method of accounting for
goodwill and other intangible assets.
Evansville, Indiana
February 3, 2004
19
ESCALADE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 27, December 28,
All Amounts in Thousands Except Share Information 2003 2002
------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 648 $ 3,370
Receivables, less allowances of $1,991 and $550 45,073 34,141
Inventories 29,853 20,549
Prepaid expenses 1,611 542
Deferred income tax benefit 2,434 815
-------- --------
Total current assets 79,619 59,417
Property, plant and equipment 17,537 9,059
Intangible assets 9,026 6,492
Goodwill 18,777 13,351
Other assets 9,478 8,469
-------- --------
$134,437 $ 96,788
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable--bank $ 21,568 $ 11,223
Current portion of long-term debt 354 167
Trade accounts payable 8,139 2,793
Accrued liabilities 23,321 17,004
Income tax payable 1,580 1,189
-------- --------
Total current liabilities 54,962 32,376
-------- --------
Other liabilities
Long-term debt 15,729 17,200
Deferred compensation 1,408 1,337
Interest Rate Swap 1,055 --
-------- --------
18,192 18,537
-------- --------
Stockholders' equity
Preferred stock
Authorized--1,000,000 shares, no par value, none issued
Common stock
Authorized--10,000,000 shares, no par value
Issued and outstanding--2003--6,427,081 shares,
2002--6,508,856 shares 6,427 6,509
Retained earnings 52,609 38,709
Additional paid-in capital -- 681
Accumulated other comprehensive income (loss) 2,247 (24)
-------- --------
61,283 45,875
-------- --------
$134,437 $ 96,788
======== ========
See notes to consolidated financial statements.
20
ESCALADE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended
-------------------------------------------------
DECEMBER 27, December 28, December 29,
All Amounts in Thousands Except Per Share Data 2003 2002 2001
------------ ------------ ------------
Net Sales $ 221,728 $155,455 $148,853
Costs, Expenses and Other Income
Cost of products sold 154,365 111,164 106,921
Selling, administrative and general expenses 46,367 26,328 21,850
Amortization of goodwill -- -- 862
Interest 2,282 951 1,359
Other expense (income) (2,509) 69 430
--------- -------- --------
200,505 138,513 131,423
--------- -------- --------
Income Before Income Taxes 21,223 16,943 17,430
Provision for Income Taxes 6,373 5,804 6,292
--------- -------- --------
NET INCOME $ 14,850 $ 11,138 $ 11,139
========= ======== ========
Per Share Data
Basic earnings per share $ 2.29 $ 1.72 $ 1.73
========= ======== ========
Diluted earnings per share $ 2.25 $ 1.66 $ 1.68
========= ======== ========
See notes to consolidated financial statements.
21
ESCALADE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL COMPREHENSIVE
------------------ RETAINED PAID-IN INCOME
All Amounts in Thousands SHARES AMOUNT EARNINGS CAPITAL (LOSS) TOTAL
------ ------- --------- ---------- ------------- --------
BALANCES AT DECEMBER 30, 2000 2,166 $ 2,166 $ 21,492 $ 105 $ 197 $ 23,960
Comprehensive income
Net income 11,139 11,139
Unrealized losses on securities, net of tax (72) (72)
--------
11,067
Exercise of stock options 32 32 434 467
Stock issued under the Director Stock Option
Plan 6 6 102 108
Purchase of stock (63) (63) (777) (365) (1,206)
Stock split 4,283
Restatement of common stock to $1 per share 4,283 (4,283) --
------ ------- --------- --------- --------- --------
BALANCES AT DECEMBER 29, 2001 6,424 6,424 27,571 276 125 34,396
Comprehensive income
Net income 11,138 11,138
Unrealized losses on securities, net of tax (149) (149)
--------
10,989
Exercise of stock options 96 96 441 537
Stock issued under the Director Stock Option
Plan 12 12 68 80
Purchase of stock (23) (23) (104) (127)
------ ------- --------- --------- --------- --------
BALANCES AT DECEMBER 28, 2002 6,509 6,509 38,709 681 (24) 45,875
Comprehensive income
Net income 14,850 14,850
Unrealized Gain on securities, net of tax 103 103
Foreign Currency Translation Adjustment 2,853 2,853
Unrealized Loss on Interest Rate Swap
Agreement, net of tax (685) (685)
--------
17,121
Exercise of stock options 60 60 290 350
Stock issued under the Director Stock Option
Plan 2 2 49 51
Purchase of stock (144) (144) (950) (1,020) (2,114)
------ ------- --------- --------- --------- --------
BALANCES AT DECEMBER 27, 2003 6,427 $ 6,427 $ 52,609 $ -- $ 2,247 $ 61,283
====== ======= ========= ========= ========= ========
See notes to consolidated financial statements.
22
ESCALADE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All Amounts in Thousands)
YEARS ENDED DECEMBER 27, DECEMBER 28 AND DECEMBER 29 2003 2002 2001
-------- -------- --------
OPERATING ACTIVITIES
Net income $ 14,850 $ 11,138 $ 11,139
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 5,301 3,798 3,592
Provision for doubtful accounts 131 101 40
Deferred income taxes (1,042) (14) (314)
Provision for deferred compensation 121 117 112
Deferred compensation paid (50) (55) (35)
(Gain) loss on disposals of assets (25) (304) 135
Changes in
Accounts receivable 3,077 (6,974) (521)
Inventories 5,959 (1,004) 860
Prepaids 262 (378) (27)
Other assets (1,024) (500) (49)
Income tax payable (264) (493) (293)
Accounts payable and accrued expenses (770) (1,557) 4,979
-------- -------- --------
Net cash provided by operating activities 26,526 3,875 19,618
-------- -------- --------
INVESTING ACTIVITIES
Premiums paid for life insurance (32) (32) (32)
Change in cash surrender value, net of loans and premiums (121) 47 36
Purchase of property and equipment (2,564) (3,085) (2,739)
Purchase of long-term investments (846) (15) (60)
Purchase of Bear Archery assets (9,855) -- --
Purchase of certain additional Mead Hatcher assets -- (600) --
Purchase of Accudart -- -- (1,966)
Purchase of U. S. Weight -- -- (5,889)
Purchase of certain assets of Murrey and Sons -- (2,489) --
Purchase of certain assets of Steve Mizerak, Inc. -- (1,229) --
Purchase of all assets relating to The Step product line (875) (4,840) --
Proceeds from sale of property and equipment 207 1,699 --
Equity investment in Schleicher & Co. International AG (9,886) (2,557) --
-------- -------- --------
Net cash used by investing activities (23,972) (13,101) (10,650)
-------- -------- --------
FINANCING ACTIVITIES
Net increase (decrease) in notes payable--bank (2,270) 1,453 (3,497)
Proceeds from exercise of stock options 350 617 575
Reduction of long-term debt (1,848) (5,167) (5,900)
Purchase of stock (2,114) (127) (1,206)
Proceeds from long-term debt -- 14,900 833
-------- -------- --------
Net cash provided (used) by financing activities (5,882) 11,676 (9,195)
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 606 -- --
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,722) 2,450 (227)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,370 920 1,147
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 648 $ 3,370 $ 920
======== ======== ========
SUPPLEMENTAL CASH FLOWS INFORMATION
Interest paid $ 2,285 $ 952 $ 1,480
Income taxes paid, net 7,207 6,831 7,122
Fixed assets in accounts payable -- 68 --
See notes to consolidated financial statements.
23
ESCALADE, INCORPORATED
Notes to Consolidated Financial Statements
NOTE 1 -- NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Escalade, Incorporated and its wholly owned subsidiaries (the "Company") are
engaged in the manufacture and sale of sporting goods and office products. The
Company is headquartered in Wabash, Indiana and has manufacturing facilities in
the United States of America, Mexico, Germany and China. The Company sells
products to customers throughout the world.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Escalade,
Incorporated and its wholly-owned subsidiaries, Indian Industries, Inc., Martin
Yale Industries, Inc., Indian-Martin, Inc., Indian-Martin, AG, EIM Company,
Inc., and SOP Services, Inc. All material intercompany accounts and transactions
have been eliminated.
BASIS OF PRESENTATION
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
Company's fiscal year is a 52 or 53 week period ending on the last Saturday in
December. Fiscal 2003, 2002, and 2001 were each 52 weeks long ending on December
27, 2003, December 28, 2002, and December 29, 2001, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Highly liquid financial instruments with insignificant interest rate risk and
with original maturities of three months or less are classified as cash and cash
equivalents.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is based on the
first-in, first-out (FIFO) method.
ACCOUNTS RECEIVABLE
Accounts receivable are stated at the amount billed to customers. The Company
provides an allowance for doubtful accounts, which is based upon a review of
outstanding receivables, historical collection information and existing economic
conditions. Accounts receivable are ordinarily due between 30 and 60 days after
the issuance of the invoice. Accounts past due more than 90 days are considered
delinquent. Delinquent receivables are reserved or written off based on
individual credit evaluation and specific circumstances of the customer.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation and
amortization are computed for financial reporting purposes principally using the
straight-line method over the following estimated useful lives: buildings, 20-30
years; leasehold improvements, 4-8 years; machinery and equipment, 5-15 years;
and tooling, dies and molds, 2-4 years.
INVESTMENTS
Available for sale. Included in other assets on the consolidated balance sheet
are marketable equity securities recorded at fair value with unrealized gains
and losses, net of tax, reported in accumulated other comprehensive income.
24
ESCALADE, INCORPORATED
Notes to Consolidated Financial Statements
Non-Marketable Equity Securities and Other Investments. Also included in other
assets are non-marketable minority equity investments in companies strategically
related to the company's business. These investments are recorded at historical
cost or, if the company has significant influence over the investee, using the
equity method of accounting. The company's proportionate share of income or
losses from investments accounted for under the equity method are recorded in
other expense (income) on the consolidated statement of income.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values of cash equivalents approximate cost due to the short period of time
to maturity. Fair values of long-term investments, non-marketable debt
investments, short-term debt, long-term debt and swaps, are based on quoted
market prices or pricing models using current market rates. For the company's
portfolio of non-marketable equity securities, management believes that the
carrying value of the portfolio approximates the fair value at December 27,
2003. All of the estimated fair values are management's estimates; however,
there is no readily available market and the estimated fair value may not
necessarily represent the amounts that could be realized in a current
transaction, and these fair values could change significantly.
EMPLOYEE STOCK OPTION PLAN
The Company has two stock-based compensation plans, which are described more
fully in Note 8. The Company accounts for these plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock issued to
Employees, and related interpretations. The following table illustrates the
effect on net income and earnings per share if the Company had applied the fair
value provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.
(In Thousands Except Per Share Amounts) 2003 2002 2001
---------- ---------- ----------
Net income, as reported $ 14,850 $ 11,138 $ 11,139
Less: Total stock-based employee compensation cost
determined under the fair value based method, net of
income taxes (440) (404) (208)
---------- ---------- ----------
Pro forma net income $ 14,410 $ 10,734 $ 10,931
========== ========== ==========
Earnings per share
Basic--as reported $ 2.29 $ 1.72 $ 1.73
========== ========== ==========
Basic--pro forma $ 2.22 $ 1.65 $ 1.70
========== ========== ==========
Diluted--as reported $ 2.25 $ 1.66 $ 1.68
========== ========== ==========
Diluted--pro forma $ 2.18 $ 1.59 $ 1.65
========== ========== ==========
EMPLOYEE BENEFITS
The Company has an employee profit-sharing salary reduction plan, pursuant to
the provisions of Section 401(k) of the Internal Revenue Code, for non-union
employees. It is the Company's policy to fund costs accrued on a current basis.
INCOME TAXES
Income tax in the consolidated statement of income includes deferred income tax
provisions or benefits for all significant temporary differences in recognizing
income and expenses for financial reporting and income tax purposes.
INTANGIBLE ASSETS
The Company has various intangible assets including consulting agreements,
patents, trademarks, noncompetition agreements and goodwill. Amortization is
computed using the straight-line method over the following lives: consulting
agreements, the life of the agreement; non-compete agreements, the lesser of the
term or 5 years; and
25
ESCALADE, INCORPORATED
Notes to Consolidated Financial Statements
patents, 5 to 8 years. Trademarks are deemed to have indefinite useful lives and
according are not amortized, but evaluated on an annual basis to determine
whether any impairment in value has occurred.
PRODUCT WARRANTY
The Company provides limited warranties on certain of its products, for varying
periods. Generally, the warranty periods range from 90 days to one year.
However, some products carry extended warranties of seven-year, ten-year, and
lifetime warranties. The Company records an accrued liability and expense for
estimated future warranty claims based upon historical experience and
management's estimate of the level of future claims. Changes in the estimated
amounts recognized in prior years are recorded as an adjustment to the accrued
liability and expense in the current year. A reconciliation of the liability is
as follows:
In Thousands 2003 2002
------- -------
Beginning balance $ 1,324 $ 1,307
Liability assumed through acquisition 45 --
Changes in liability for product warranties issued 1,122 981
Changes in estimated liability for warranties issued in prior years 280 245
Payments made under warranties (1,137) (1,209)
------- -------
Ending balance $ 1,634 $ 1,324
======= =======
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred. Research and
development costs incurred during 2003, 2002 and 2001 were approximately $2,947
thousand, $1,520 thousand, and $2,150 thousand, respectively.
REVENUE RECOGNITION
Revenue from the sale of the Company's products is recognized as products are
shipped to customers.
SELF INSURANCE
The Company has elected to act as a self-insurer for certain costs related to
employee health and accident benefit programs. Costs resulting from non-insured
losses are charged to income when incurred. The Company has purchased insurance
which limits its exposure for individual claims and which limits its aggregate
exposure to $1,400,000.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2002 financial statements to
conform to the 2003 financial statement presentation. These reclassifications
had no effect on net earnings.
NEW ACCOUNTING PRONOUNCEMENTS
In January of 2003, the FASB issued Interpretation No. 46, (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of Accounting
Research Bulletin No. 51, and in December 2003 the FASB deferred certain
effective dates of Interpretation No. 46. For all variable interest entities
other than special purpose entities, the revised Interpretation is effective for
periods ending after March 15, 2004. For variable interest entities meeting the
definition of special purpose entities under earlier accounting rules, the
Interpretation remains effective for periods ending after December 31, 2003. The
Interpretation requires the consolidation of entities in which an enterprise
absorbs a majority of the entity's expected losses, receives a majority of the
entity's expected residual returns, or both, as a result of ownership,
contractual or other financial interests in the entity. Currently, entities are
generally consolidated by an enterprise when it has a controlling interest
through ownership of a majority voting interest in the entity. The Company has
determined that it has no such instruments.
26
ESCALADE, INCORPORATED
Notes to Consolidated Financial Statements
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This statement
establishes standards for how an issuer classifies and measures in its balance
sheet certain financial instruments with characteristics of both liabilities and
equity. The objective of this Statement is to require issuers to classify as
liabilities (or assets in some circumstances) three classes of freestanding
financial instruments that embody obligations for the issuer. This Statement is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise shall be effective at the beginning of the first interim period
beginning after June 15, 2003, except for mandatorily redeemable financial
instruments of a nonpublic company. For these instruments, this Statement is
effective for existing or new contracts for fiscal periods beginning after
December 15, 2003. Adoption of this Standard is not expected to have a material
effect on the Company.
In November 2002, the FASB issued Interpretation No. 45, (FIN 45), Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, which elaborates on the disclosures to be
made by a guarantor about its obligations under certain guarantees issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and measurement provisions of
this Interpretation apply on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure requirements in this
Interpretation are effective for periods ending after December 15, 2002. The
Company has product warranties that fall under the scope of FIN 45 and has
adopted the requirements of FIN 45.
NOTE 2 -- INVENTORIES
Inventories consist of the following:
In Thousands 2003 2002
-------- --------
Finished products $ 17,420 $ 10,263
Work in process 5,133 4,536
Raw materials and supplies 7,300 5,750
-------- --------
$ 29,853 $ 20,549
======== ========
NOTE 3 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
In Thousands 2003 2002
-------- --------
Land $ 1,773 $ 300
Buildings and leasehold improvements 15,596 10,071
Machinery and equipment 31,475 24,886
-------- --------
Total cost 48,844 35,257
Accumulated depreciation and amortization (31,307) (26,198)
-------- --------
$ 17,537 $ 9,059
======== ========
27
ESCALADE, INCORPORATED
Notes to Consolidated Financial Statements
NOTE 4 -- INVESTMENTS
Marketable equity securities available for sale were included in other assets as
follows:
In Thousands 2003 2002
------ -------
Cost Basis $1,413 $ 1,242
Unrealized Gain (Loss) 133 (40)
------ -------
Approximate Fair Market Value $1,546 $ 1,202
====== =======
NOTE 5 -- ACQUIRED INTANGIBLE ASSETS AND GOODWILL
The carrying basis and accumulated amortization of recognized intangible assets
were:
2003 2002
-----------------------------------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
In Thousands Amount Amortization Amount Amortization
-------- ------------ -------- ------------
Amortized intangible assets
Patents $ 6,078 $1,334 $4,720 $ 585
Consulting agreements 810 710 810 660
Non-compete agreements 1,700 1,180 1,700 880
Trademarks 3,783 121 1,509 121
------- ------ ------ ------
$12,371 $3,345 $8,739 $2,247
======= ====== ====== ======
Amortization expense was $1,098 thousand for 2003, $1,112 thousand for 2002 and
$361 thousand for 2001.
Estimated amortization expense for each reporting segment for each of the
following five years is:
In Thousands 2004 2005 2006 2007 2008 Thereafter
------ ------ ---- ---- ---- ----------
Sporting Goods $1,154 $1,114 $824 $824 $824 $624
Office/Graphic Arts -- -- -- -- -- --
------ ------ ---- ---- ---- ----
$1,154 $1,114 $824 $824 $824 $624
====== ====== ==== ==== ==== ====
The changes in the carrying amount of goodwill were:
In Thousands Sporting Goods Office Products Total
-------------- --------------- -------
Balance at December 29, 2001 $6,561 $ 6,200 $12,761
Acquired 590 -- 590
------ ------- -------
Balance at December 28, 2002 7,151 6,200 13,351
Acquired -- 4,566 4,566
Foreign Currency Translation Adjustment -- 860 860
------ ------- -------
Balance at December 27, 2003 $7,151 $11,626 $18,777
====== ======= =======
28
ESCALADE, INCORPORATED
Notes to Consolidated Financial Statements
Financial Accounting Standards Board Statement No. 142, Goodwill and Other
Intangibles, requires transitional disclosures regarding the change in
amortization and other treatment of goodwill and intangible assets for the year
ended December 29, 2001 as follows:
In Thousands 2001
-------
Reported net income $11,139
Add back: Goodwill amortization, net of tax 827
-------
Pro-Forma net income $11,966
=======
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 141, Business Combinations, which
requires that the purchase method of accounting be used for all business
combinations completed after June 30, 2001. SFAS No. 141 specifies that certain
acquired intangible assets in a business combination be recognized as assets
separately from goodwill. Additionally, it requires the Company to evaluate its
existing intangible assets and goodwill and to make any necessary
reclassifications in order to conform to the new separation requirements at the
date of adoption. Goodwill and intangible assets determined to have indefinite
useful lives that are acquired in a business combination completed after June
30, 2001 will not be amortized. Goodwill and intangible assets acquired in
business combinations completed before July 1, 2001 continued to be amortized
until December 29, 2001. The Company adopted the provisions of SFAS No. 141 on
December 30, 2001.
In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 requires that goodwill no longer be amortized but instead
be tested for impairment at least annually, and that intangible assets other
than goodwill should be amortized over their useful lives. The Company adopted
the provisions on December 30, 2001. The Company did not have any impairment of
goodwill or intangibles assets during 2003, 2002 or 2001.
NOTE 6 -- ACCRUED LIABILITIES
Accrued liabilities consist of the following:
In Thousands 2003 2002
------- -------
Employee compensation $10,443 $ 6,134
Customer Allowances 9,748 8,144
Other accrued items 3,130 2,726
------- -------
$23,321 $17,004
======= =======
NOTE 7 -- BORROWINGS
SHORT-TERM DEBT
Short-term debt at fiscal year-ends was as follows:
In Thousands 2003 2002
------- --------
Bank One Revolving line of credit $17,660 $ 11,223
Deutsche Bank Revolving credit line 2,623 --
Unsecured demand note 790 --
Other short-term debt 495 --
------- --------
$21,568 $ 11,223
======= ========
29
ESCALADE, INCORPORATED
Notes to Consolidated Financial Statements
The Company's directly owned subsidiary, Indian-Martin, Inc., has a revolving
line of credit under which it can borrow funds from time to time to purchase
eligible accounts receivable from the company's operating subsidiaries which
accounts are and will be pledged to secure those borrowings. At December 27,
2003, this line of credit aggregated $40 million, of which $17,660 thousand was
borrowed. At the company's option, borrowings can be made under the bank's prime
interest rate minus 1.25% or LIBOR plus 1.38%. At December 27, 2003, all
borrowings under this revolving line of credit were under the prime interest
rate option at an effective rate of 2.75%.
The Company's European subsidiaries have revolving credit line agreements with
Deutsche Bank that are secured by the Company's real estate holdings in Germany.
The combined amount available under these credit lines is 2.5 million Euros
(approximately $3.1 million US Dollars at December 27, 2003), of which 2.1
million Euros ($2.6 million US Dollars) was used at December 27, 2003.
Borrowings under these credit lines bear interest at 6.0%.
The liabilities of Schleicher & Co. International, AG (Schleicher), acquired in
2003, included a note payable to the founder of Schleicher in the amount of $790
thousand. This note is due on demand and bears interest at bank prime, 4% at
December 27, 2003. Interest is payable quarterly.
During 2003, the Company negotiated and executed a debt reduction plan with two
European banks wherein the banks agreed to forgive 1.2 million Euro
(approximately 1.4 million US Dollars) in debt, in exchange for early settlement
of the outstanding debt. The gain associated with this extinguishment of debt
was recorded in other income. This transaction was not considered an element of
the Schleicher acquisition because it was not contemplated until after the
acquisition was completed and it was not part of the acquisition decision
criteria.
LONG-TERM DEBT
Long-term debt at fiscal year-ends was as follows:
In Thousands 2003 2002
-------- --------
Revolving term loan of $35,000, the amount available under this revolving term
loan is reduced by $7,000 annually starting March 31, 2004, balance due March
31, 2008. At December 27, 2003, $2,320 of this revolving term loan had an
interest rate of prime minus .75% or 3.25% and $10,000 had an interest rate
of London Interbank Offered Rate (LIBOR) plus 1.00% or 2.62%, unsecured 12,320 14,000
Mortgage payable (Wabash, Indiana Adjustable Rate Economic Development Revenue
Refunding Bonds), annual installments are optional, interest varies with
short-term rates and is adjustable weekly based on market conditions,
maximum rate is 10.00%, current rate is 1.55%, due September 2028, secured
by plant facility, machinery and equipment, and stand-by letter of credit 2,700 2,700
Contract payable for Accudart acquisition, due $167 annually beginning February
1, 2002 through February 1, 2006, non-interest bearing, secured by a stand-by
letter of credit $ 500 $ 667
Contract Payable for acquisition of equity interest in Sweden Table Tennis, AB,
unsecured and non-interest bearing. Annual payments of $187 due March of
each year 563 --
-------- --------
16,083 17,367
Portion classified as current (354) (167)
-------- --------
$ 15,729 $ 17,200
======== ========
30
ESCALADE, INCORPORATED
Notes to Consolidated Financial Statements
Maturities of long-term debt outstanding at December 27, 2003 are as follows:
$354 thousand in 2004; $354 thousand in 2005; $355 thousand in 2006; $5,320
thousand in 2007; $7,000 thousand in 2008; and $2,700 thousand thereafter.
The mortgages payable and term loan agreements contain certain restrictive
covenants, of which the more significant include maintenance of specified net
worth and maintenance of specified ranges of debt service and leverage ratios.
INTEREST RATE SWAP AGREEMENT
In May 2003, the Company entered into an interest rate swap agreement having a
notional amount of $10 million and a maturity date of May 19, 2008. This swap
agreement is designated as a cash flow hedge, and effectively converts a portion
of the Company's variable rate debt to fixed rate debt with a weighted average
interest rate of 5.08%. The Company entered into this interest rate swap
agreement to manage interest costs and cash flows associated with variable
interest rates, primarily short-term changes in LIBOR; changes in the cash flows
of the interest rate swap offset changes in the interest payments on the covered
portion of the Company's revolving debt. In connection with this interest rate
swap agreement the Company recorded an after tax charge of $685 thousand in
Other Comprehensive Income (OCI). There was no impact on net income due to
ineffectiveness. The Company's exposure to credit loss on its interest rate swap
agreement in the event of non-performance by the counterparty is believed to be
remote due to the Company's requirement that the counterparty have a strong
credit rating.
NOTE 8 -- STOCK OPTIONS
At the Company's 1997 annual meeting, the stockholders approved two Stock Option
Plans reserving 900,000 common shares for issuance under an Incentive Stock
Option Plan (ISO) and 300,000 common shares for issuance under a Director Stock
Option Plan (DSO). The following table summarizes the option activity under the
two plans:
Incentive Stock Director Stock
Granted Outstanding Granted Outstanding
------- ----------- ------- -----------
2003 87,400 303,400 1,189 16,295
2002 77,100 280,200 5,713 18,175
2001 83,700 310,762 6,207 18,585
Under the Company's ISO, which is accounted for in accordance with Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations, the Company grants selected executives and other
key employees' stock option awards, which vest over four years of continued
employment. The exercise price of each option, which has a five-year life, was
equal to the market price of the Company's stock on the date of grant;
therefore, no compensation expense was recognized. Options are exercisable
commencing one year from the date of issuance to the extent vested.
Although the Company has elected to follow APB Opinion No. 25, Statement of
Financial Accounting Standards (SFAS) No. 123 requires pro forma disclosures of
net income and earnings per share as if the Company had accounted for its
employee stock options under that statement. The fair value of each option grant
was estimated
31
ESCALADE, INCORPORATED
Notes to Consolidated Financial Statements
on the grant date using an option-pricing model with the following assumptions:
2003 2002 2001
------- ------- -------
Risk-free interest rates 2.90% 4.65% 4.76%
Dividend yields 0% 0% 0%
Volatility factors of expected market price of common stock 46% 38% 95%
Weighted average expected life of the options 5 YEARS 5 years 5 years
Stock option transactions are summarized as follows:
2003 2002 2001
--------------------------------------------------------------------------------------------
Option Option Option
Shares Price Shares Price Shares Price
------ ------ ------ ------ ------ ------
Outstanding at beginning $4.83 to $3.29 to $3.29 to
of year 298,375 18.06 329,347 7.19 288,861 7.00
$13.97 to $7.59 to $5.83 to
Issued during year 88,589 21.35 82,813 18.06 89,907 7.19
Canceled or expired (6,950) (6,375) (10,571)
$4.83 to $3.29 to $3.29 to
Exercised during year (60,319) 18.06 (107,410) 7.19 (38,850) 7.00
------- -------- -------
$4.83 to $4.83 to $3.29 to
Outstanding at end of year 319,695 21.35 298,375 18.06 329,347 7.19
======= ======== =======
Exercisable at end of year 128,031 112,737 143,805
======= ======== =======
Weighted-average fair value
of options granted during
the year $14.07 $6.98 $5.36
======= ======== =======
The following table summarizes information about fixed stock options outstanding
at December 27, 2003:
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------------
Number of Weighted-Average Number of
Range of Shares Remaining Weighted-Average Shares Weighted-Average
Exercise Prices Contractual Life Exercise Price Exercise Price
--------- ---------------- ---------------- --------- ----------------
$ 4.83 - $7.59 156,681 1.0 years $ 6.28 109,206 $ 6.12
$13.97 - $18.06 161,825 3.7 years $15.88 18,825 $18.06
$21.35 1,189 4.3 years $21.35 -- --
------- -------
319,695 128,031
======= =======
Incentive stock options are exercisable at the rate of 25% over each of the four
years following the date of grant.
During fiscal year 2003, 1,189 Director Stock Options were issued at an option
price of $21.35 and can be exercised after April 28, 2004 with an expiration
date of April 27, 2008.
32
ESCALADE, INCORPORATED
Notes to Consolidated Financial Statements
NOTE 9 -- EARNINGS PER SHARE
The shares used in the computation of the company's basic and diluted earnings
per common share are as follows:
In Thousands 2003 2002 2001
----- ----- -----
Weighted average common shares outstanding 6,484 6,486 6,447
Dilutive effect of Stock options 124 231 171
----- ----- -----
Weighted average common shares outstanding, assuming dilution 6,608 6,717 6,618
===== ===== =====
Weighted average common shares outstanding, assuming dilution, includes the
incremental shares that would be issued upon the assumed exercise of stock
options outstanding.
NOTE 10 -- OPERATING LEASES
The Company leases warehouse and office space under non-cancelable operating
leases that expire at various dates through 2011. Terms of the leases, including
renewals, taxes, utilities, and maintenance, vary by lease. Total rental expense
included in the results of operations relating to non-cancelable leases with
terms of more than one year were $2,232 thousand, $1,133 thousand, and $715
thousand in 2003, 2002, and 2001, respectively.
At December 27, 2003, minimum rental payments under noncancelable leases with
terms of more than one year were as follows:
In Thousands AMOUNT
-------
2004 $ 1,611
2005 997
2006 575
2007 547
2008 418
2009 and beyond 429
-------
$ 4,577
=======
33
ESCALADE, INCORPORATED
Notes to Consolidated Financial Statements
NOTE 11 -- PROVISION FOR TAXES
Income before taxes and the provision for taxes consisted of the following:
In Thousands 2003 2002 2001
-------- -------- --------
Income before taxes:
United States of America (USA) $ 19,720 $ 16,943 $ 17,430
Non USA 1,503 -- --
-------- -------- --------
$ 21,223 $ 16,943 $ 17,430
======== ======== ========
Provision for taxes:
Current
Federal $ 5,802 $ 4,678 $ 5,384
State 1,073 459 549
International 539 681 673
-------- -------- --------
7,414 5,818 6,606
-------- -------- --------
Deferred
Federal (845) (10,862) (250)
State (196) (3,558) (64)
-------- -------- --------
(1,041) (14,420) (314)
-------- -------- --------
$ 6,373 $ 5,804 $ 6,292
======== ======== ========
The Company has not provided for USA deferred taxes or foreign withholding taxes
on undistributed earnings for non-USA subsidiaries. The company intends to
reinvest these earnings indefinitely in operations outside the USA.
The provision for income taxes was computed based on financial statement income.
A reconciliation of the provision for income taxes to the amount computed using
the statutory rate follows:
In Thousands 2003 2002 2001
------- ------- -------
Income tax at statutory rate $ 7,216 $ 5,760 $ 5,926
Increase (decrease) in income tax resulting from
Recurring permanent differences (dividend exclusion, non-deductible
officers' life insurance expense and foreign income) (6) (56) 76
State tax expense, net of federal effect 578 301 320
Effect of lower international tax rates (804) -- --
Research credit (111) (102) --
Foreign net operating loss carryforwards (101) -- --
Other (399) (98) (31)
------- ------- -------
Provision for income taxes recorded $ 6,373 $ 5,804 $ 6,292
======= ======= =======
34
ESCALADE, INCORPORATED
Notes to Consolidated Financial Statements
The components of the net deferred tax asset are as follows:
In Thousands 2003 2002
------- ------
Assets
Employee benefits $ 791 $ 852
Valuation reserves 2,070 536
Goodwill and intangible assets -- 65
Deferred compensation 525 497
Depreciation 200 316
Unrealized loss on securities available for sale -- 16
Unrealized loss on interest rate swap agreement 370 --
------- ------
Net operating loss carry forward 579 --
------- ------
Total assets 4,535 2,282
Liabilities
Unrealized gain on sale of securities available-for-sale (53) --
Goodwill and intangible assets (69) --
------- ------
Total assets (122) --
------- ------
$ 4,413 $2,282
======= ======
Deferred tax assets are included in the consolidation balance sheet as follows:
In Thousands 2003 2002
------ ------
Current-Deferred income tax benefit $2,434 $ 815
Long-Term-included in other assets 1,979 1,467
------ ------
$4,413 $2,282
====== ======
The Company has federal and state net operating loss carryforwards of
approximately $800 thousand that expire in various amounts through 2018.
NOTE 12 -- EMPLOYEE BENEFIT PLANS
The Company has an employee profit-sharing salary reduction plan, pursuant to
the provisions of Section 401(k) of the Internal Revenue Code, for non-union
employees. The Company's contribution is a matching percentage of the employee
contribution as determined by the Board of Directors annually. The Company's
expense for the plan was $487 thousand, $461 thousand, and $376 thousand for
2003, 2002 and 2001, respectively.
NOTE 13 -- VOLUNTARY EMPLOYEE BENEFITS ASSOCIATION TRUST (VEBA)
The Company established a VEBA as a tax-exempt organization to provide life,
medical, disability and other similar welfare benefits permitted pursuant to
Internal Revenue Code Section 501(c)(9) for its employees.
35
ESCALADE, INCORPORATED
Notes to Consolidated Financial Statements
NOTE 14 -- OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
The Company manufactures and sells products in two industries: sporting goods
and office products. Customers include retailers and wholesalers located
throughout the United States and Europe. The sporting goods operating segment's
products include: pool tables and accessories; table tennis tables and
accessories; soccer and hockey tables; archery equipment and accessories;
basketball goals; and fitness, arcade and darting products. The office/graphic
arts operating segment's products include: data shredders; folding machines;
paper trimmers and cutters; and other products used in the office environment.
In Thousands 2003 2002 2001
--------- --------- ---------
Sales to unaffiliated customers
Sporting goods $ 139,285 $ 126,745 $ 118,867
Office Products 82,443 28,710 29,986
--------- --------- ---------
Total consolidated $ 221,728 $ 155,455 $ 148,853
========= ========= =========
Segment profit
Sporting goods $ 9,720 $ 8,400 $ 6,721
Office Products 4,223 3,029 3,534
Corporate 907 (291) 884
--------- --------- ---------
Total consolidated $ 14,850 $ 11,138 $ 11,139
========= ========= =========
Interest expense
Sporting goods $ 906 $ 881 $ 1,078
Office Products 1,433 95 84
Corporate (57) (25) 197
--------- --------- ---------
Total consolidated $ 2,282 $ 951 $ 1,359
========= ========= =========
Gain (loss) on disposal of assets
Sporting goods $ (56) $ (128) $ (135)
Office Products 81 432 --
--------- --------- ---------
Total consolidated $ 25 $ 304 $ (135)
========= ========= =========
Identifiable assets
Sporting goods $ 64,627 $ 65,282 $ 47,762
Office Products 60,168 25,653 22,793
Corporate 9,642 5,853 5,556
--------- --------- ---------
Total assets $ 134,437 $ 96,788 $ 76,111
========= ========= =========
Depreciation and amortization
Sporting goods $ 3,314 $ 2,746 $ 2,115
Office Products 1,987 1,052 1,477
--------- --------- ---------
Total consolidated $ 5,301 $ 3,798 $ 3,592
========= ========= =========
Capital expenditures
Sporting goods $ 1,363 $ 2,450 $ 1,132
Office Products 1,201 635 1,607
--------- --------- ---------
$ 2,564 $ 3,085 $ 2,739
========= ========= =========
36
ESCALADE, INCORPORATED
Notes to Consolidated Financial Statements
Identifiable assets are principally those assets used in each industry.
Corporate assets are principally cash and cash equivalents; deferred tax assets;
marketable equity securities; investments; and the cash surrender value of life
insurance.
The company has one customer in the sporting goods segment who accounted for
24%, 38% and 37% of consolidated total revenues in 2003, 2002 and 2001,
respectively. Within the sporting goods segment this customer accounted for 38%,
47% and 46% of total revenues.
As of December 27, 2003, approximately 120 employees of the Company's labor
force were covered by a collective bargaining agreement that expires in April
27, 2006. Management acknowledges that differences between Company offers and
union demands during negotiations can occur, but has no reason to expect such
differences to result in protracted conflicts.
Raw materials for Escalade's various product lines consist of wood,
particleboard, slate, standard grades of steel, steel tubing, plastic, vinyl,
steel cables, fiberglass and packaging. Escalade relies upon suppliers in Europe
and Brazil for its requirement of billiard balls and slate utilized in the
production of home pool tables and upon various Asian manufacturers for certain
of its table tennis needs and other items. Escalade sources some of its game
table product line in China.
Revenues by geographic region/country were as follows:
In Thousands 2003 2002 2001
-------- -------- ---------
United States of America $187,021 $155,455 $ 148,853
Europe 28,719 -- --
Other 5,988 -- --
-------- -------- ---------
$221,728 $155,455 $ 148,853
======== ======== =========
Revenues are attributed to country based on location of customer and are for
continuing operations.
Identified assets by geographic region/country were as follows:
In Thousands 2003 2002
-------- -------
United States of America $ 99,881 $92,088
Europe 32,995 --
Other 1,561 4,700
-------- -------
$134,437 $96,788
======== =======
37
ESCALADE, INCORPORATED
Notes to Consolidated Financial Statements
NOTE 15 -- CERTAIN SIGNIFICANT ESTIMATES
Management's estimates that influence the financial statements are normally
based on knowledge and experience about past and current events and assumptions
about future events. The following estimates affecting the financial statements
are particularly sensitive because of their significance, and it is at least
reasonably possible that a change in these estimates will occur in the near
term:
Product warranty reserves--based on an analysis of customers' product
return histories, current status, sales volume and management's
expectations from new products introduced into the market.
Customer allowance reserves--based on agreements for customer purchase
rebates and shared advertising, and prior year's shipments.
Inventory valuation reserves--based on estimates of costs of inventory
amounts overstocked or obsolete in excess of realizable value.
NOTE 16 -- DEFERRED COMPENSATION PLAN
In October 1985, the Board of Directors approved the adoption of a Contributory
Deferred Compensation Plan pursuant to which some recipients of incentive
compensation could elect to defer receipt thereof. For each dollar of deferred
compensation, the Company provided a 75% matching amount. Amounts deferred earn
interest at the rate of 9%. Such amounts are not intended to be recognized for
tax purposes until receipt. All deferrals allowed under this plan have been
made. Participants have no vested rights in deferred amounts credited to their
accounts and are general creditors of the Company until such amounts are
actually paid.
NOTE 17 -- COMMITMENTS AND CONTINGENCIES
At December 27, 2003, the Company had standby letters of credit issued by a bank
in the amount of $500,001.
Additionally, the Company has obtained a letter of credit for the benefit of
certain mortgage holders. At December 27, 2003, the balance of the letter of
credit was $2,733,750. It is to be used in the event of a default in either
interest or principal payments.
The Company is involved in litigation arising in the normal course of its
business. The Company does not believe that the disposition or ultimate
resolution of existing claims or lawsuits will have a material adverse effect on
the business or financial condition of the Company.
The Company has entered into various agreements whereby it is required to make
royalty payments. At December 27, 2003, the Company had estimated minimum
royalty payments for each of the following five years as follows:
In Thousands Amount
------
2004 $ 315
2005 350
2006 350
2007 350
2008 350
Thereafter 100
------
$1,815
======
38
ESCALADE, INCORPORATED
Notes to Consolidated Financial Statements
NOTE 18 -- SUMMARY OF QUARTERLY RESULTS
In thousands, except per share data (unaudited) March 22 July 12 October 4 December 27
-------- ------- --------- -----------
2003
Net sales $ 29,103 $49,837 $73,660 $69,128
Gross profit 10,444 18,677 20,108 18,134
Net income 7 2,254 6,125 6,464
Basic earnings per share $ 0.00 $ 0.35 $ 0.95 $ 1.01
2002
Net sales $ 17,505 $32,202 $51,859 $53,889
Gross profit 5,171 10,623 15,173 13,324
Net income (68) 2,603 4,149 4,454
Basic earnings per share $ (0.01) $ 0.40 $ 0.64 $ 0.68
NOTE 19 -- ACQUISITIONS
All of the Company's acquisitions have been accounted for using the purchase
method of accounting.
2003
On December 30, 2002 the Company increased its ownership interest to 51.2% of
the outstanding shares of Schleicher & Co. International, AG ("Schleicher"), a
manufacturer and distributor of data shredding equipment headquartered in
Germany and publicly traded on the German Stock Exchange. Escalade then
initiated and successfully completed in April 2003, a tender offer for all the
remaining shares culminating in 100% ownership. The acquisition of Schleicher
increases the Company's product offering in the office product industry and
expands the Company's presence into Europe.
The value assigned to the Schleicher acquisition is the sum of the per share
amount paid to shareholders and amounts expended that directly relate to the
tender offer agreement. The per share price was based on the market price of the
Schleicher shares on the German stock exchange and valuation studies ordered by
the German securities regulators. The total price paid exceeded the fair market
value of Schleicher's net assets, resulting in goodwill of $4,566 thousand. No
portion of the recorded goodwill is deductible for income tax purposes.
The estimated fair values of the assets acquired and liabilities assumed as of
December 30, 2002 are as follows:
In thousands Amount
--------
Current assets (net of cash acquired) $ 21,211
Property, plant and equipment 5,679
Other assets 2,043
Goodwill 4,566
Investments 262
--------
Total assets acquired 33,761
Current liabilities (20,856)
Long-term debt (424)
--------
Total liabilities assumed (21,280)
--------
Net assets acquired $ 12,481
========
39
ESCALADE, INCORPORATED
Notes to Consolidated Financial Statements
In June 2003 the company acquired substantially all of the assets of North
American Archery Group, LLC (NAAG), a manufacturer and distributor of archery
equipment and accessories located in Gainesville, Florida. NAAG had been
operating under bankruptcy court protection since April 2002. This acquisition
increased the Company's distribution network for archery products, provided
access to significant brand names such as Fred Bear(R) and instantly added
archery production capability.
The estimated fair values of the assets acquired and liabilities assumed as of
June 19, 2003 are as follows:
In thousands Amount
--------
Current assets (net of cash acquired) $ 7,427
Property, plant and equipment 3,500
Other assets 484
--------
Total assets acquired 11,411
Current liabilities (1,556)
--------
Net assets acquired $ 9,855
========
The results of operations from the NAAG acquisition have been included in the
consolidated operating results for 2003 subsequent to the date of acquisition.
The following unaudited pro forma financial information presents results as if
the two acquisitions described above had occurred at the beginning of the
respective periods:
Unaudited; in thousands except per share amounts 2003 2002
----------- -----------
Net revenue $ 225,211 $ 211,724
Net income 13,829 15,435
Earnings per share - basic 2.13 2.38
Earnings per share - diluted $ 2.09 $ 2.30
These pro forma results have been prepared for comparative purposes only and
include certain adjustments such as additional depreciation and amortization
expenses as a result of identifiable tangible and intangible assets arising from
the acquisition. The pro forma results are not necessarily indicative either of
the results of operations that actually would have resulted had the acquisition
been in effect at the beginning the respective periods or of future results.
2002
On January 25, 2002, Escalade acquired substantially all of the assets relating
to The Step(R) product line from Bollinger Industries for cash. The Step(R) is
America's original aerobic step fitness system and is widely used by individuals
and at over 18,000 health clubs. The purchase price was $4,840,000. The assets
acquired include $120,000 of equipment and $4,720,000 of patents. The patents
are being amortized over an 8-year period.
On March 26, 2002, Escalade Sports acquired substantially all of the assets of
Steve Mizerak, Inc. The acquisition includes an exclusive line of billiard
equipment and intellectual property. The cost of the purchase was $1,229,000.
The assets acquired include inventory of $129,000, trademarks of $1,085,000 and
equipment of $15,000.
On May 28, 2002, Escalade Sports acquired certain assets and assumed certain
liabilities related to the manufacture and distribution of Murrey's exclusive
line of premium indoor and outdoor billiard and soccer tables marketed under the
Murrey brand name. The cost of the purchase was $2,489,000. The assets acquired
40
ESCALADE, INCORPORATED
Notes to Consolidated Financial Statements
included inventory of $1.2 million, machinery of $837,000, non-compete agreement
of $400,000, other assets of $127,000 and assumed liabilities of $75,000. The
non-compete agreement is being amortized over a 5-year period.
2001
On February 5, 2001, Escalade Sports acquired substantially all of the assets of
Accudart Corporation for cash. The purchased assets, included inventory,
equipment and intellectual property. Accudart is a leading name in darts. The
cost of the purchase was $1,966,341. Winmau(R), a leading name in dartboards,
will be distributed in the U.S.A. exclusively by Escalade Sports as part of the
purchase agreement.
On September 18, 2001, Escalade Sports acquired substantially all of the assets
of U. S. Weight, Inc., the only U. S. manufacturer of filled vinyl weights and
weight sets. The assets purchased were accounts receivable, inventory and
machinery and equipment. The cost of the purchase was $5,889,194. The
acquisition was accounted for as a purchase and the excess of cost over the fair
value of net assets acquired was $2,723,720.
The results of operations from the business combinations occurring in 2002 and
2001 have been included in the results of operations of the Company subsequent
to the date of the acquisitions and did not have a material effect on the
Company's financial statements.
NOTE 20 -- OTHER COMPREHENSIVE INCOME
The components of other comprehensive income and related tax effects were as
follows:
In Thousands 2003 2002 2001
------- ----- -----
Change in net unrealized value of available-from-sale investments
net of tax of $69, $(99), and $(48), in 2003, 2002 and 2001,
respectively $ 103 $(149) $ (72)
Change in foreign currency translation adjustment 2,853 -- --
Change in unrealized loss on interest rate swap agreement net of
$(370) in tax (685) -- --
------- ----- -----
$ 2,271 $(149) $ (72)
======= ===== =====
The components of accumulated other comprehensive income, net of tax, were as
follows:
In Thousands 2003 2002 2001
------- ----- -----
Accumulated gain (loss) on available for sale investments $ 79 $ (24) $(125)
Foreign currency translation adjustment 2,853 -- --
Unrealized loss on interest rate swap agreement (685) -- --
------- ----- -----
$ 2,247 $ (24) $(125)
======= ===== =====
NOTE 21 -- SUBSEQUENT EVENT
On February 18, 2004, The Company announced the payment of an annual dividend of
$0.24 per share to all shareholders of record on March 5, 2004, payable on March
12, 2004.
41
[BKD LLP LOGO]
INDEPENDENT ACCOUNTANTS' REPORT
To the Stockholders and Board of Directors
Escalade, Incorporated
Evansville, Indiana
We have audited the consolidated financial statements of Escalade, Incorporated
as of December 27, 2003 and December 28, 2002 and for each of the three years in
the period ended December 27, 2003 and have issued our report thereon dated
February 3, 2004; such consolidated financial statements and report are included
elsewhere in this Form 10-K. Our audits also included the consolidated financial
statement schedules of Escalade, Incorporated listed in Item 15. These
consolidated financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such consolidated financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole; present fairly in all material respects the information set forth
therein.
BKD, LLP
Evansville, Indiana
February 3, 2004
42
ESCALADE, INCORPORATED AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(All Amounts in Thousands)
COL. A COL. B COL. C COL. D COL. E
ADDITIONS
-----------------------------------
BALANCE AT CHARGED TO OTHER BALANCE
BEGINNING OF CHARGED TO COSTS ACCOUNTS - DEDUCTIONS - AT END
DESCRIPTION PERIOD AND EXPENSES DESCRIBE (3) DESCRIBE (2) OF PERIOD
------------ ---------------- ---------------- ------------ ---------
Allowance for doubtful accounts and discounts (1)
Fiscal year ended December 27, 2003 $ 550 $ 374 $ 1,822 $ 755 $1,991
Fiscal year ended December 28, 2002 514 101 65 550
Fiscal year ended December 29, 2001 611 41 138 514
Product warranty reserves
Fiscal year ended December 27, 2003 1,324 1,402 45 1,137 1,634
Fiscal year ended December 28, 2002 1,307 1,227 1,209 1,324
Fiscal year ended December 29, 2001 1,705 1,473 1,871 1,307
Customer allowance reserves
Fiscal year ended December 27, 2003 7,059 11,708 309 11,834 7,242
Fiscal year ended December 28, 2002 7,174 12,816 12,931 7,059
Fiscal year ended December 29, 2001 6,250 9,725 8,801 7,174
Inventory valuation reserves
Fiscal year ended December 27, 2003 1,182 2,574 2,955 1,246 5,465
Fiscal year ended December 28, 2002 1,120 685 622 1,182
Fiscal year ended December 29, 2001 800 1,941 1,621 1,120
(1) Deducted from related assets
(2) Accounts charged off, less recoveries
(3) Amounts acquired through acquisitions
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ESCALADE, INCORPORATED
By:
/s/ C.W. Bill Reed March 9, 2004
-------------------------------------
C.W. "Bill" Reed
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Chief Executive Officer and Director
/s/ C.W. Reed (Principal Executive Officer) March 9, 2004
-------------------------------------
C.W. Reed
/s/ Robert E. Griffin Chairman and Director March 9, 2004
-------------------------------------
Robert E. Griffin
Chief Financial Officer,
Secretary and Treasurer
(Principal Financial and
/s/ Terry Frandsen Accounting Officer) March 9, 2004
-------------------------------------
Terry Frandsen
/s/ Blaine E. Matthews, Jr. Director March 9, 2004
-------------------------------------
Blaine E. Matthews, Jr.
/s/ Keith P. Williams Director March 9, 2004
-------------------------------------
Keith P. Williams
/s/ Yale Blanc Director March 9, 2004
-------------------------------------
Yale Blanc
44