SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended October 2, 2004
Commission File Number 0-6966
ESCALADE, INCORPORATED
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Indiana 13-2739290
------------------------ ------------
(State of incorporation) (I.R.S. EIN)
251 Wedcor Avenue, Wabash, Indiana 46992
----------------------------------------
(Address of principal executive office)
260-569-7208
-------------------------------
(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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act
Yes [X] No [ ]
The number of shares of Registrant's common stock (no par value) outstanding as
of October 20, 2004: 13,031,064
INDEX
Page
No.
Part I. Financial Information:
Item 1 - Financial Statements:
Consolidated Condensed Balance Sheets (Unaudited) as
of October 02, 2004, October 04, 2003, and December 27, 2003 3
Consolidated Condensed Statements of Income (Unaudited)
for the Three Months and Nine Months Ended October 02, 2004
and October 04, 2003 4
Consolidated Condensed Statements of Comprehensive
Income (Unaudited) for the Three Months and Nine Months
Ended October 02, 2004 and October 04, 2003 4
Consolidated Condensed Statements of Cash Flows (Unaudited)
for the Nine Months Ended October 02, 2004 and October 04, 2003 5
Notes to Consolidated Condensed Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 12
Item 4 - Controls and Procedures 13
Part II. Other Information
Item 6 - Exhibits and Reports on Form 8-K 13
Signatures 14
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ESCALADE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
(All amounts in thousands except share information)
October 02, October 04, December 27,
2004 2003 2003
------------ ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 491 $ 554 $ 648
Receivables, less allowance of
$1,543; $1,313; and $1,991;
respectively 59,003 64,183 45,073
Inventories 43,011 42,477 29,853
Prepaid expenses 1,215 1,592 1,611
Deferred income tax benefit 2,422 1,608 2,434
------------ ------------ ------------
TOTAL CURRENT ASSETS 106,142 110,414 79,619
Property, plant and equipment 51,524 46,954 48,844
Accumulated depreciation and
amortization (35,605) (29,376) (31,307)
------------ ------------ ------------
15,919 17,578 17,537
Intangible assets 7,965 8,936 9,026
Goodwill 17,399 17,946 18,777
Other assets 9,680 7,657 9,478
------------ ------------ ------------
$ 157,105 $ 162,531 $ 134,437
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 27,837 $ 28,939 $ 21,568
Current portion of long-term debt 354 354 354
Trade accounts payable 18,202 22,730 8,139
Accrued liabilities 24,812 22,347 23,321
Income tax payable 367 2,677 1,580
------------ ------------ ------------
TOTAL CURRENT LIABILITIES 71,572 77,047 54,962
Other Liabilities:
Long-term debt 16,960 29,766 15,729
Interest rate swap agreement 629 685 1,055
Deferred compensation 1,510 1,387 1,408
------------ ------------ ------------
19,099 31,838 18,192
Minority Interest -- 377 --
Stockholders' equity:
Preferred stock:
Authorized 1,000,000 shares; no par
value, none issued
Common stock:
Authorized 30,000,000 shares; no
par value, Issued and outstanding -
13,031,064; 12,848,012; and 12,854,162;
respectively 13,031 12,848 12,854
Retained Earnings 51,448 39,704 46,182
Accumulated other comprehensive income 1,955 717 2,247
------------ ------------ ------------
66,434 53,269 61,283
------------ ------------ ------------
$ 157,105 $ 162,531 $ 134,437
============ ============ ============
See notes to Consolidated Condensed Financial Statements.
3
ESCALADE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(All amounts in thousands, except per share amounts)
------------------------------------------------------------
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
October 02, October 04, October 02, October 04,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net Sales $ 78,492 $ 73,660 $ 168,397 $ 152,600
Costs, expenses and other income:
Cost of products sold 56,738 53,552 118,381 103,371
Selling, general and
administrative expenses 12,223 11,619 35,690 35,941
Interest 489 700 1,427 1,800
Other expense (income) (245) (1,124) (546) (1,084)
Restructuring costs 1,412 -- 1,412 --
Goodwill impairment loss 1,312 -- 1,312 --
------------ ------------ ------------ ------------
71,929 64,747 157,676 140,028
Net income before income taxes and
minority interest 6,563 8,913 10,721 12,572
Net Income in subsidiary allocated
to minority interest -- (9) -- (5)
Provision for income taxes 2,233 2,779 3,840 4,182
------------ ------------ ------------ ------------
Net income $ 4,330 $ 6,125 $ 6,881 $ 8,385
============ ============ ============ ============
Per Share Data:
Basic earnings per share $ 0.33 $ 0.48 $ 0.53 $ 0.65
Diluted earnings per share $ 0.33 $ 0.47 $ 0.52 $ 0.64
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Net income $ 4,330 $ 6,125 $ 6,881 $ 8,385
Unrealized gain on securities, net
of tax 41 5 48 74
Foreign currency translation
adjustment (1) 426 (617) 1,353
Unrealized gain (loss) on interest
rate swap agreement net
of deferred tax expense of $155 161 43 276 (685)
------------ ------------ ------------ ------------
Comprehensive income $ 4,531 $ 6,599 $ 6,588 $ 9,127
============ ============ ============ ============
See notes to Consolidated Condensed Financial Statements.
4
ESCALADE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(All amounts in thousands)
Nine Months Ended
------------------------------------
October 02, 2004 October 04, 2003
---------------- ----------------
Operating Activities:
Net income $ 6,881 $ 8,385
Depreciation and amortization 4,832 3,996
Gain on Debt Extinguishment -- (699)
Net income 1,312 --
Adjustments necessary to reconcile
net income to net cash provided
by operating activities (18,275) (17,018)
---------------- ----------------
Net cash used by operating
activities (5,250) (5,336)
Investing Activities:
Purchase of property and equipment (1,397) (1,827)
Purchase of certain assets of
North American Archery Group -- (11,432)
Acquisition of majority interest
in Schleicher & Co.
International AG -- (12,587)
Equity investment in Sweden Table
Tennis AB -- (187)
Step(R) product license buyout -- (875)
---------------- ----------------
Net cash used by investing
activities (1,397) (26,908)
Financing Activities:
Net increase in notes payable -
Bank 8,315 31,371
Net decrease in long-term debt (167) (167)
Proceeds from exercise of stock
options 1,103 266
Purchase of common stock (984) (1,999)
Dividends Paid (1,556) --
Foreign Currency Translation (221) (43)
---------------- ----------------
Net cash provided by financing
activities 6490 29,428
---------------- ----------------
Net decrease in cash and cash
equivalents (157) (2,816)
Cash and cash equivalents, beginning
of period 648 3,370
---------------- ----------------
Cash and cash equivalents, end of
period $ 491 $ 554
================ ================
See notes to Consolidated Condensed Financial Statements.
5
ESCALADE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Note A - Basis of Presentation
- --------------------------------------------------------------------------------
The significant accounting policies followed by the Company and its wholly owned
subsidiaries for interim financial reporting are consistent with the accounting
policies followed for annual financial reporting. All adjustments that are of a
normal recurring nature and are in the opinion of management necessary for a
fair statement of the results for the periods reported have been included in the
accompanying consolidated condensed financial statements. The condensed
consolidated balance sheet of the Company as of December 27, 2003 has been
derived from the audited consolidated balance sheet of the Company as of that
date. Certain information and note disclosures normally included in the
Company's annual financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted. These condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto included in the Company's Form 10-K annual report for 2003 filed with
the Securities and Exchange Commission.
Note B - Seasonal Aspects
- --------------------------------------------------------------------------------
The results of operations for the nine-month periods ended October 02, 2004 and
October 04, 2003 are not necessarily indicative of the results to be expected
for the full year.
Note C - Stock Split
- --------------------------------------------------------------------------------
On May 28, 2004, the Company completed a two-for-one split on Escalade common
stock to all shareholders of record as of May 11, 2004. All earnings per share
data in these consolidated financial statements and notes to the consolidated
financial statements have been restated retroactively to reflect the stock
split. The stock split resulted in 6,518 thousand additional shares. The Company
has capitalized this transaction by recording a transfer from retained earnings
to common stock to allow common stock to remain at $1 per share.
Note D - Inventories
- --------------------------------------------------------------------------------
October 02, October 04, December 27,
(All amounts in thousands) 2004 2003 2003
-----------------------------------------------------------------------
Raw materials $ 10,853 $ 10,909 $ 7,300
Work in progress 7,010 5,662 5,133
Finished goods 25,148 25,906 17,420
------------ ------------ ------------
$ 43,011 $ 42,477 $ 29,853
============ ============ ============
Note E - Short-Term Debt
- --------------------------------------------------------------------------------
In September 2004, the Company executed a fourth amendment to the revolving term
loan agreement which added a Euro 2.5 million revolving term loan and an
overdraft facility of 1.0 million Euro and 0.5 million British Pounds. The
amendment did not alter the terms on the existing debt. The interest rate on the
Euro revolving term loan is tied to the Euribor rate and matures on July 15,
2006. The interest rate on the overdraft facilities is Libor plus 2%. At October
02, 2004, the Company had no borrowings under either instrument.
6
Note F - Notes Payable
- --------------------------------------------------------------------------------
On July 15, 2004 the Company's directly owned subsidiary, Indian-Martin, Inc.,
renewed its 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. The terms of the amended agreement remain essentially unchanged
with a new expiration date of July 15, 2006. Subject to limitations, the
aggregate borrowing under the revolving credit line is $45 million. At October
02, 2004, outstanding borrowings were $19.8 million utilizing the prime interest
rate option at an effective rate of 3.25%.
Note G - Restructuring Costs
- --------------------------------------------------------------------------------
On August 01, 2004, as a result of continued declines in office product sales
and increased competition, the Company initiated a facility consolidation plan
for North America and involuntary employee terminations throughout the office
product business in order to align the business with market conditions and
better position the business to compete against imports from Asia. Under this
plan the Company will close two facilities in North America and reduce its
workforce by 102 people. Accordingly, a restructuring charge of $1.4 million
($1.2 million, net of tax) has been recorded in the third quarter consisting of
$1.0 million related to involuntary severance and employee benefits; and $0.4
million associated with the write-down of fixed assets.
Note H - Goodwill Impairment Loss
- --------------------------------------------------------------------------------
One product line in the office product business segment is almost exclusively
manufactured in a facility slated to be closed as a result of the facility
consolidation plans initiated by the Company. Continued sales declines in this
product line and the planned closure of the associated manufacturing plant have
necessitated an impairment evaluation of the goodwill specifically allocated to
this product line. In accordance with the provisions of FASB Statement No. 142
Goodwill and Other Intangible Assets, the Company prepared a discounted cash
flow analysis which indicated that the book value of the product line
significantly exceeded its estimated fair value and that goodwill impairment had
occurred. Accordingly, the Company has recognized a non-cash impairment loss of
$1.3 million ($0.8 million, net of tax) in the third quarter.
Note I - Income Taxes
- --------------------------------------------------------------------------------
The provision for income taxes was computed based on financial statement income.
Note J - Dividend Payment
- --------------------------------------------------------------------------------
On March 12, 2004, the Company paid a dividend of $0.24 per common share to all
shareholders of record on March 5, 2004. The total amount of the dividend was
$1.6 million and was charged against retained earnings.
7
Note K - Segment Information
- --------------------------------------------------------------------------------
As of and for the Nine Months
Ended October 02, 2004
-----------------------------------------------------------
Office -
Sporting Graphic
In thousands Goods Arts Corp. Total
------------------------------------------------------------------------------------
Revenues from external
customers $ 107,795 $ 60,602 $ -- $ 168,397
Net Income (Loss) 7,434 (125) (428) 6,881
Total Assets $ 86,108 $ 59,565 $ 11,432 $ 157,105
As of and for the Nine Months
Ended October 04, 2003
-----------------------------------------------------------
Office -
Sporting Graphic
In thousands Goods Arts Corp. Total
------------------------------------------------------------------------------------
Revenues from external
customers $ 91,870 $ 60,730 $ -- $ 152,600
Net Income (Loss) 5,930 2,663 (208) 8,385
Total Assets $ 96,032 $ 56,934 $ 9,565 $ 162,531
Note L - Earnings Per Share
- --------------------------------------------------------------------------------
The shares used in computation of the Company's basic and diluted earnings per
common share are as follows:
Three Months Ended
---------------------------
October 02, October 04,
In thousands 2004 2003
------------------------------------------------------------------
Weighted average common shares
outstanding 13,041 12,854
Dilutive effect of stock options 241 314
------------ ------------
Weighted average common shares
outstanding, assuming dilution 13,282 13,168
============ ============
Nine Months Ended
---------------------------
October 02, October 04,
In thousands 2004 2003
------------------------------------------------------------------
Weighted average common shares
outstanding 13,024 12,962
Dilutive effect of stock options 195 314
------------ ------------
Weighted average common shares
outstanding, assuming dilution 13,219 13,276
============ ============
8
Note M - Employee Stock Option Plan
- --------------------------------------------------------------------------------
The Company has two stock-based compensation plans. 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.
Three Months Ended
---------------------------
October 02, October 04,
(In Thousands Except Per Share Amounts) 2004 2003
------------------------------------------------------------------------
Net income, as reported $ 4,330 $ 6,125
Less: Total stock-based employee
compensation cost determined under the
fair value based method, net of
income taxes (194) (110)
------------ ------------
Pro forma net income $ 4,136 $ 6,015
============ ============
Earnings per share
Basic--as reported $ 0.33 $ 0.48
============ ============
Basic--pro forma $ 0.32 $ 0.47
============ ============
Diluted--as reported $ 0.33 $ 0.47
============ ============
Diluted--pro forma $ 0.31 $ 0.46
============ ============
Nine Months Ended
---------------------------
October 02, October 04,
(In Thousands Except Per Share Amounts) 2004 2003
------------------------------------------------------------------------
Net income, as reported $ 6,881 $ 8,385
Less: Total stock-based employee
compensation cost determined under the
fair value based method, net of
income taxes (583) (330)
------------ ------------
Pro forma net income $ 6,298 $ 8,055
============ ============
Earnings per share
Basic--as reported $ 0.53 $ 0.65
============ ============
Basic--pro forma $ 0.48 $ 0.62
============ ============
Diluted--as reported $ 0.52 $ 0.64
============ ============
Diluted--pro forma $ 0.48 $ 0.61
============ ============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
9
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 significant market presence in
niche markets. This strategy is heavily dependent on brand recognition and
excellent customer service. Management believes the key indicators in measuring
the success of this strategy are revenue and earnings growth. One of the
Company's key strategic advantages is the Company's established relationships
with major retailers which enable the Company to bring new products to the
market in a timely and 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.
Results of Operations
Strong sales in the sporting goods segment during the third quarter resulted in
an increase in net sales of 6.6% compared to the same period last year. Building
on a strong first half, year-to-date net sales are 10.4% ahead of the same
period last year - all of the sales growth coming from the sporting goods
segment.
Due to non-recurring restructuring and goodwill impairment costs recorded in the
office products segment, net income for the third quarter was down 29.3%
compared to the prior year. The cumulative impact of these one-time charges was
$2.7 million, $2.1 million net of taxes. Since these are one-time charges not
reflective of continued operations, management believes that excluding these
charges affords a better comparison with past results. Excluding these
non-recurring charges, net income for the third quarter would have been $6.4
million - a 4.8% increase over the prior year. Net income for the nine months
was also negatively affected by these non-recurring charges reflecting a decline
of 17.9% over the same period last year. Excluding non-recurring charges,
year-to-date net income would be $9.0 million; an increase of 7.0% over the
prior year.
The following schedule sets forth certain consolidated statement of income data
as a percentage of net revenue for the periods indicated:
Three Months Nine Months
---------------------------------------------
2004 2003 2004 2003
---------------------------------------------------------------------------------
Net revenue 100.0% 100.0% 100.0% 100.0%
Cost of products sold 72.3% 72.7% 70.3% 67.7%
-------- -------- -------- --------
Gross margin 27.7% 27.3% 29.7% 32.3%
Selling, administrative and
general expenses 15.6 15.8% 21.2 23.6%
-------- -------- -------- --------
Operating income - excluding non-
recurring charges 12.1 11.5 8.5 8.7
Restructuring Costs 1.8 -- 0.8 --
-------- -------- -------- --------
Operating Income 10.3% 11.5% 7.7% 8.7%
======== ======== ======== ========
Consolidated Revenue and Gross Margin
Third quarter revenue growth of 13.3% in the sporting goods business was
partially offset by a 12.3% decline in the office products business.
Year-to-date, Sporting goods sales are ahead of the same period last year by
17.3% while office product sales are relatively unchanged.
Approximately 25% of the revenue growth in the sporting goods business is
attributed to inclusion for a full year of the archery business acquired in June
of last year. The remainder of the growth appears to come from earlier than
normal holiday season purchases by large retail customers. Overall revenue
growth in the sporting goods business for the year is anticipated to be modest
compared to the prior year.
The third quarter decline in office product revenues is primarily due to
shipping delays and lower shredder orders in North America. The Company believes
this decline is due to lost focus in the sales organization caused by
restructuring activities. Office product sales in North America declined $2.3
million or 20.3% in the third quarter compared to last year while European sales
10
during the same period remained unchanged. Total year-to-date revenues were
relatively unchanged from the same period last year although revenues in Europe
were up 12.9% and sales in North America declined 10.9%. Excluding the effect of
exchange rate fluctuations, European sales increased 3.6% year-to-date compared
to the prior year.
The consolidated gross margin rate for the third quarter increased from 27.3%
last year to 27.7% in the current year; primarily reflecting cost reduction
efforts and product price increases initiated in the office products business.
On a year-to-date basis, the gross margin rate declined from 32.3% last year to
29.7% in the current year primarily due to manufacturing inefficiencies
experienced earlier this year in the office product business and the adverse
effect of foreign currency on product manufactured in Germany and sold in North
America. The Company has initiated restructuring plans to increase manufacturing
efficiencies in Germany and implemented selling price increases to mitigate the
adverse foreign exchange effects. However, raw material costs in both business
segments continue to rise and may have future negative effects on the gross
margins in each business segment to the extent the Company cannot raise selling
prices and reduce costs. Year-to-date gross margin rates in the sporting goods
business are marginally higher than the same period last year as a result of the
archery business acquired in June of last year which has higher gross margin
rates than other sporting goods products. The year-to-date gross margin ratio in
the office product business is lower than last year, but expected to improve
through the remainder of this year as selling price increases become fully
implemented.
Consolidated Selling, General and Administrative Expenses
Consolidated selling, general and administrative costs ("SG&A") were slightly
higher in the third quarter compared to last year, but as a percentage of
revenues SG&A remained relatively unchanged from the same period last year. On a
year-to-date basis, total SG&A is relatively unchanged from the prior year, but
as a percent of revenues it decreased from 23.6% last year to 21.3% in the
current year. Efforts initiated this year to reduce SG&A in the office product
business are offset by increased SG&A costs incident to higher sales volume in
the sporting goods business.
Restructuring Costs
In July the Company formulated several restructuring activities to better align
the Company's office products business with current market conditions. In the
third quarter the Company recorded a restructuring charge of $1.4 million ($1.2
million net of taxes) to reflect involuntary employee reductions in Europe and
North America; and facility consolidations in North America. This restructuring
plan announced and initiated on August 01, 2004 includes involuntary workforce
reductions of approximately 100 employees. The restructuring charge includes
$1.0 million for employee severance and benefits; and $0.4 million related to
asset write-offs in conjunction with facility consolidations in North America.
Under the facility consolidation plan the Company will close its distribution
facility in North Carolina and its office product manufacturing facility in
Mexico. Management does not expect additional costs related to this
restructuring plan.
Goodwill Impairment Loss
The planned closure of the office product manufacturing plant in Mexico and the
continued sales decline of the product line manufactured from that location,
caused the Company to evaluate the goodwill specific to that plant and product
line. As a result of that evaluation the Company determined that a portion of
the goodwill had been permanently impaired and accordingly recorded an
impairment loss of $1.3 million ($0.8 million net of taxes) in the third
quarter. A portion of the product line manufactured in Mexico will be outsourced
to Asia and the remainder, mostly supplied by third parties, will be
consolidated with the Wabash, Indiana plant.
Financial Condition and Liquidity
The Company continues to enjoy strong financial health. The current ratio, a
basic measure of liquidity (current assets divided by current liabilities),
remains relatively unchanged from last year. Although the sales volume is higher
than last year, accounts receivable are down. Inventory levels are in line with
last year reflecting the seasonal buildup for the holiday sales season.
11
The following schedule summarizes the Company's total debt:
October 02, October 04, December 27,
In thousands 2004 2003 2003
---------------------------------------------------------------------------
Notes payable short-term $ 27,837 $ 28,939 $ 21,568
Current portion long-term debt 354 354 354
Long term debt 16,960 29,766 15,729
------------ ------------ ------------
Total debt $ 45,151 $ 59,059 $ 37,651
============ ============ ============
Total debt at October 02, 2004 was $13.9 million lower than the balance at
October 04, 2003. The decrease from last year represents the absence of any
significant acquisitions and the strong cash flows inherent in the business. As
a percentage of stockholders' equity, total debt has decreased from 111% at
October 04, 2003, to 68% at October 02, 2004.
During the nine months ended October 02, 2004, operations used $5.2 million in
cash, relatively unchanged from the same period last year. The absence of any
significant acquisition in the current year resulted in a significant reduction
in bank debt borrowings; $8.3 million in the current year compared to $31.2
million last year.
The Company's working capital requirements are primarily funded from operating
cash flows and revolving credit agreements with its banks. 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 to
increase available credit should the need arise.
ITEM 3. 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 nine months ended October 02, 2004.
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 entered an interest rate
swap agreement that 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 October 02, 2004 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.
12
ITEM 4. 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 has 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 II. OTHER INFORMATION
Item 1. Not Required.
Item 2.
(c) Issuer Purchases of Equity Securities
(c) Total (d) Maximum
Number of Number (or
Shares (or Approximate
Units) Dollar Value)
Purchased of Shares (or
(a) Total as Part of Units) that
Number of (b) Average Publicly May Yet Be
Shares Price Paid Announced Purchased
(or Units) per Share Plans or Under the Plans
Period Purchased (or Unit) Programs or Programs
- -------------------- ---------- ---------- ------------ --------------
07/11/2004 through
08/07/2004 None None None None
- -------------------- ---------- ---------- ------------ --------------
08/08/2004 through
09/04/2004 14,450(1) $ 11.423 286,610 $ 835,808
- -------------------- ---------- ---------- ------------ --------------
09/05/2004 through
10/02/2004 None None None None
- -------------------- ---------- ---------- ------------ --------------
Total 14,450 $ 11.423 286,610 $ 835,808
- -------------------- ---------- ---------- ------------ --------------
(1) The Company announced in February 2003 that the Board of Directors had
approved a share repurchase plan. Under the plan the Company is authorized
to expend up to $3,000,000 to repurchase shares on the open market as well
as in private negotiated transactions. The repurchase plan has no
expiration date.
Item 3, 4, 5. Not Required.
13
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
10.1 Fourth amendment to amended and restated credit agreement
dated June 1, 2003 by and between Escalade, Incorporated and
Bank One, N.A. a national banking association. The Effective
date of amendment was July 15, 2004.
10.2 Euro revolving note dated July 15, 2004, in principal amount
of (euro)2,500,000, executed by Escalade, Incorporated in
favor of Bank One, N.A., London branch.
10.3 Uncommitted overdraft facility not to exceed 1.0 million Euro
and 500 thousand pounds sterling between Escalade,
Incorporated and Bank One, N.A., London branch.
31.1 Chief Executive Officer Rule 13a-14(a)/15d-14(a)
Certification.
31.2 Chief Financial Officer Rule 13a-14(a)/15d-14(a)
Certification.
32.1 Chief Executive Officer Section 1350 Certification.
32.2 Chief Financial Officer Section 1350 Certification.
(b) Reports on Form 8-K
1. On July 30, 2004, Escalade filed a report on Form 8-K relating
to its financial information for the quarter ended July 10,
2004 and forward-looking statements as presented in the
shareholder message and press release dated July 30, 2004.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ESCALADE, INCORPORATED
Date: October 22, 2004 /s/ C. W. (BILL) REED
---------------- -------------------------------------
C. W. (Bill) Reed
President and Chief Executive Officer
Date: October 22, 2004 /s/ TERRY D. FRANDSEN
---------------- -------------------------------------
Terry D. Frandsen
Vice President and
Chief Financial Officer
14