1
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, 1999
Commission File Number 0-6966
ESCALADE, INCORPORATED
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(Exact name of registrant as specified in its charter)
Indiana 13-2739290
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(State of incorporation) (I.R.S. EIN)
817 Maxwell Avenue, Evansville, Indiana 47717
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(Address of principal executive office)
812-467-1200
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(Registrant's Telephone Number)
Securities registered pursuant to Section 12(b) of the Act
NONE
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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
--- ---
The number of shares of Registrant's common stock (no par value)
outstanding as of October 20, 1999 : 2,945,613
2
INDEX
Page No.
Part I. Financial Information:
Item 1 - Financial Statements:
Consolidated Condensed Balance Sheet (Unaudited)
October 2, 1999, October 3, 1998, and
December 26, 1998 3
Consolidated Condensed Statement of Income (Unaudited)
Three Months and Nine Months Ended
October 2, 1999 and October 3, 1998 4
Consolidated Condensed Statement of Cash Flows (Unaudited)
Nine Months Ended October 2, 1999 and October 3, 1998 5
Notes to Consolidated Condensed Financial Statements 6 - 9
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations: 10 - 12
Part II. Other Information 13
Signatures 13
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ESCALADE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET (UNAUDITED)
(Dollars in Thousands) October 2, October 3, December 26,
1999 1998 1998
ASSETS ------------------------------------------------------------
Current assets:
Cash $ 163 $ 294 $ 340
Receivables, less allowances of
$556, $936 and $582 16,237 17,461 30,792
Inventories 16,010 20,330 12,647
Prepaid expense 258 468 130
Deferred income tax benefit 1,097 1,138 1,002
------- ------- -------
TOTAL CURRENT ASSETS 33,765 39,691 44,911
Property, plant, and equipment 35,694 35,684 35,443
Accum. depr. and amortization (26,449) (25,317) (25,339)
------- ------- -------
9,245 10,367 10,104
Goodwill 6,988 5,721 5,630
Other assets 3,961 2,363 2,844
------- ------- -------
$53,959 $58,142 $63,489
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - bank $10,625 $ 7,000 $ 7,800
Current portion of long-term debt 300 2,300 2,300
Trade accounts payable 4,862 4,241 2,959
Accrued liabilities 7,368 8,868 11,643
Federal income tax payable 755 540 1,324
Dividends payable -- -- 3,122
------- ------- -------
TOTAL CURRENT LIABILITIES 23,910 22,949 29,148
Other Liabilities:
Long-term debt 2,400 6,900 6,400
Deferred compensation 1,246 1,142 1,166
Deferred income tax liability -- 359 73
------- ------- -------
3,646 8,401 7,639
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 - 2,945,613,
3,107,983, and 3,097,357 at
10-02-99, 10-03-98, and 12-26-98 3,186 6,283 6,073
Retained earnings 22,957 20,369 20,388
Accumulated other comprehensive
income 260 140 241
------- ------- -------
26,403 26,792 26,702
------- ------- -------
$53,959 $58,142 $63,489
======= ======= =======
See notes to Consolidated Condensed Financial Statement.
4
ESCALADE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF INCOME (UNAUDITED)
(Dollars in Thousands, except per share amounts)
Three Months Ended Nine Months Ended
Oct. 2, Oct. 3, Oct. 2, Oct. 3,
1999 1998 1999 1998
----------------------------------------------------------
Net sales $ 21,296 $ 22,178 $ 51,360 $ 57,038
Costs, expenses and other income:
Cost of products sold 14,435 14,455 35,263 39,104
Selling, administrative and
general expenses 3,636 3,918 11,029 11,704
Interest 156 263 409 851
Amortization of Goodwill 134 91 359 308
Other (income) expense 47 (70) (33) (259)
Gain on Disposal of Escalade
International -- -- (103) --
-------- -------- -------- --------
18,408 18,657 46,924 51,708
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 2,888 3,521 4,436 5,330
Provision for income taxes 1,165 1,449 1,867 2,335
-------- -------- -------- --------
NET INCOME $ 1,723 $ 2,072 $ 2,569 $ 2,995
======== ======== ======== ========
Per share data:
Basic earnings per share $ .57 $.67 $ .84 $ .97
Diluted earning per share $ .57 $.66 $ .84 $ .96
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
NET INCOME $ 1,723 $ 2,072 $ 2,569 $ 2,995
UNREALIZED GAIN (LOSS)
ON SECURITIES, NET OF TAX (31) (143) 19 (107)
-------- -------- -------- --------
COMPREHENSIVE INCOME $ 1,692 $ 1,929 $ 2,588 $ 2,888
======== ======== ======== ========
See notes to Consolidated Condensed Financial Statements.
5
ESCALADE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
(Dollars in Thousands)
Nine Months Ended
Oct. 2, 1999 Oct. 3, 1998
Operating Activities: ---------------------------------
Net Income $ 2,569 $ 2,995
Depreciation and amortization 2,253 2,282
Adjustments necessary to reconcile
net income to net cash provided by
operating activities 5,948 2,641
-------- --------
Net cash provided by
operating activities 10,770 7,918
-------- --------
Investing Activities:
Purchase of property and equipment (1,763) (698)
-------- --------
Net cash used by investing activities (1,763) (698)
-------- --------
Financing Activities:
Net inc.(dec.) in notes pay.- bank 2,825 (1,275)
Net decrease in long-term debt (6,000) (7,300)
Proceeds from exercise of stock options 279 403
Purchase of common stock (3,166) --
Payment of special cash dividend (3,122) --
-------- --------
Net cash used by
financing activities (9,184) (8,172)
-------- --------
Decrease in cash (177) (952)
Cash, beginning of period 340 1,246
-------- --------
Cash, end of period $ 163 $ 294
======== ========
See notes to Consolidated Condensed Financial Statements.
6
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
which 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.
Note B - Seasonal Aspects
- -------------------------
The results of operations for the nine month periods ended October 2,
1999 and October 3, 1998 are not necessarily indicative of the results to be
expected for the full year.
Note C - Inventories (Dollars in Thousands)
- -------------------------------------------
10-2-99 10-3-98 12-26-98
------- ------- --------
Raw Materials $ 4,210 $ 6,711 $ 3,488
Work In Process 3,253 3,946 3,442
Finished Goods 8,547 9,673 5,717
------- -------- -------
$16,010 $20,330 $12,647
======= ======= =======
Note D - Income Taxes
- ---------------------
The provision for income taxes was computed based on financial
statement income.
Note E - Discontinued Operations
- --------------------------------
In December 1998, the Company adopted a plan to discontinue its
distribution operations. Those operations were performed by Escalade
International, Limited, a foreign subsidiary located in the United Kingdom. The
Company's other subsidiaries are all manufacturing operations. On July 8, 1999
the Company completed a transaction to sell 50% of the stock of Escalade
International to an investment group who assumed responsibility for running the
day to day operations. The sale was for $500,000 with $50,000 cash paid and
Notes Receivable of $450,000. The estimated loss on the disposal of Escalade
International was $1,222,279 including a provision of $250,000 for operating
losses during phase out. The actual loss on the sale was $1,118,892 which
included $213,057 in operating losses up to the time of sale. The financial
statements show a profit of $103,387 which was the amount the reserve for loss
on this transaction was greater than actual. Since only 50% was sold, the
operations are not considered discontinued and the statements have been revised
to eliminate discontinued operations. Going forward the Company's ownership
value in Escalade International of $500,000 will be shown as an investment and
will be accounted for under the equity method.
7
Note F - Acquisition
- --------------------
On June 21, 1999, Martin Yale, the Company's office and graphic arts
products subsidiary, acquired certain assets of Mead Hatcher. The purchased
assets include all of Mead Hatcher's manufactured products consisting of
keyboard drawers, computer storage, copyholders, media retention systems, and
posting trays along with all associated tooling and production machinery
necessary to manufacture the products. The purchase price was $3,481,170. Martin
Yale will relocate the manufacturing of these products to its Los Angeles,
California facility. It is estimated that annual sales of these products will be
approximately $6,000,000.
Note G - Earnings Per Share
- -----------------------------
Earnings per share were computed as follows:
Three Months Ended
October 2, 1999
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Weighted
Average Per Share
Income Shares Amount
------- --------- ----------
Net Income $ 1,723
-------
Basic Earnings per Share
Income available to common
stockholders 1,723 3,038 $.57
=======
Effect of Dilutive Securities
Stock options 4
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Diluted Earnings Per Share
Income available to common
stockholders and assumed
conversions $ 1,723 3,042 $.57
======= ======== =======
Three Months Ended
October 3, 1998
------------------------------------------------------
Weighted
Average Per Share
Income Shares Amount
------- --------- ----------
Net Income $ 2,072
- -------
Basic Earnings per Share
Income available to common
stockholders 2,072 3,107 $.67
=======
Effect of Dilutive Securities
Stock options 21
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Diluted Earnings Per Share
Income available to common
stockholders and assumed
conversions $ 2,072 3,128 $.66
======= ======= =======
8
Note G - Earnings Per Share (Continued)
- ---------------------------------------
Earnings per share were computed as follows:
Nine Months Ended
October 2, 1999
-------------------------------------------------------
Weighted
Average Per Share
Income Shares Amount
------- --------- ----------
Net Income $ 2,569
-------
Basic Earnings per Share
Income available to common
stockholders 2,569 3,069 $.84
=======
Effect of Dilutive Securities
Stock options 4
------- --------
Diluted Earnings Per Share
Income available to common
stockholders and assumed
conversions $ 2,569 3,073 $.84
======= ======= =======
Nine Months Ended
October 3, 1998
-------------------------------------------------------
Weighted
Average Per Share
Income Shares Amount
------- --------- ----------
Net Income $ 2,995
-------
Basic Earnings per Share
Income available to common
stockholders 2,995 3,091 $.97
=======
Effect of Dilutive Securities
Stock options .19
------- -------
Diluted Earnings Per Share
Income available to common
stockholders and assumed
conversions $ 2,995 3,110 $.96
======= ======= =======
9
Note H - Segment Information
- -----------------------------
As of and for the Nine Months Ended
October 2, 1999
----------------------------------------------------------
Office and
Sporting Graphic
Goods Arts Corporate Total
-------- ---------- --------- ---------
Revenues from external customers $25,668 $25,692 $ --- $ 51,360
Net income (loss) (11) 2,524 56 2,569
Assets $26,340 $23,565 $4,054 $ 53,959
As of and for the Nine Months Ended
October 3, 1998
----------------------------------------------------------
Office and
Sporting Graphic
Goods Arts Corporate Total
-------- ---------- --------- ---------
Revenues from external customers $33,432 $23,606 $ --- $ 57,038
Net income (loss) 664 2,343 (12) 2,995
Assets $34,928 $19,913 $3,301 $ 58,142
10
ESCALADE, INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is Management's discussion and analysis of certain
significant factors which have affected the Company's earnings during the
periods included in the accompanying consolidated condensed statements of
income.
RESULTS OF OPERATIONS
THIRD QUARTER COMPARISON 1999 vs. 1998
Net sales were $21,296,000 in the third quarter of 1999 as compared to
$22,178,000 in the third quarter of 1998, a decrease of $882,000 or 4.0%. Sales
of sporting goods decreased $2,884,000, or 18.7% and sales of office and graphic
arts products increased $2,002,000 or 29.5%.
The decrease in sporting goods net sales was mainly in units of game
parlor products which include table tennis tables, pool tables, game tables and
accessories. The increase in office and graphic arts products net sales was
mainly in computer accessory products from the Mead Hatcher acquisition on June
21, 1999.
Cost of sales was $14,435,000 in the third quarter of 1999 as compared
to $14,455,000 in the third quarter of 1998.
Cost of sales as a percentage of net sales was 67.8% in the third
quarter of 1999 as compared to 65.2% in the third quarter of 1998. This increase
in cost of sales as a percentage of net sales was in sporting goods and was
mainly due to the lower sales volume causing less absorption of overhead
expenses.
Selling, general, and administrative expenses were $3,636,000 in the
third quarter of 1999 as compared to $3,918,000 in the third quarter of 1998, a
decrease of $282,000 or 7.2%.
Selling, general and administrative expenses as a percentage of net
sales were 17.1% in the third quarter of 1999 as compared to 17.7% in the third
quarter of 1998. This decrease as a percentage of net sales was mainly due to
lower compensation and sales promotion expenses in the sporting goods segment.
Interest expense decreased $107,000 or 40.7% from $263,000 last year
to $156,000 this year because of reduced borrowing levels.
Net income for the quarter this year was $1,723,000 as compared to
$2,072,000 last year, a decrease of $349,000 or 16.8%. This decrease was in
sporting goods and was due to the lower net sales.
NINE MONTHS COMPARISON 1999 VS. 1998
Net sales were $51,360,000 in the first nine months of 1999 as
compared to $57,038,000 in the first nine months of 1998, a decrease of
$5,678,000 or 10.0%. Sales of sporting goods decreased $7,764,000 or 23.2% and
sales of office and graphic arts products increased $2,086,000 or 8.8%.
About 74% of the decrease in sporting goods net sales was due to
reduced volume in domestic sales with the remaining 26% of the decrease due to
the elimination of Escalade International Limited sales. The increase in net
sales for the office and graphic arts product segment was mainly due to the Mead
Hatcher acquisition on June 21, 1999.
Cost of sales was $35,263,000 in the first nine months of 1999 as
compared to $39,104,000 in 1998, a decrease of $3,841,000 or 9.8%.
Cost of sales as a percentage of net sales was 68.6% in both periods.
11
Selling, general, and administrative expenses were $11,029,000 in the
first nine months of 1999 as compared to $11,704,000 in the first nine months of
1998, a decrease of $675,000 or 5.8%.
Selling, general, and administrative expenses as a percentage of net
sales were 21.5% in 1999 as compared to 20.5% in 1998. The increase in these
expenses as a percentage of net sales was mainly due to a higher percentage of
net sales being in the office and graphic arts segment which has higher selling,
general and administrative expenses as a percentage of net sales than the
sporting goods segment.
Interest expense was $409,000 in the first nine months of 1999 as
compared to $851,000 in the first nine months of 1998, a decrease of $442,000,
or 51.9% due to lower borrowing levels.
The net income in the first nine months of 1999 was $2,569,000 as
compared to $2,995,000 in the first nine months of 1998. This is a $426,000
decrease with sporting goods being down about $600,000 and office and graphic
arts products being up about $200,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash provided by operating activities was
$10,770,000 in the first nine months of 1999 as compared to $7,918,000 in the
first nine months of 1998. Most of the cash provided by operating activities in
1999 was from collection of the year end accounts receivable. The net accounts
receivable balance at the end of the year in 1998 was $30,792,000 and at the end
of the first nine months of 1999, the net accounts receivable balance was
$16,237,000. The Company's net cash used for investing activities was $1,763,000
in the first nine months of 1999 as compared to $698,000 in the first nine
months of 1998. This was used for the purchase of property and equipment. The
Company's net cash used by financing activities was $9,184,000 in the first nine
months of 1999 as compared to $8,172,000 in the first nine months of 1998. The
cash used in 1999 was mainly to pay down long term debt and pay the special cash
dividend.
The Company's working capital requirements are currently funded by
cash flow from operations and a domestic line of credit in the amount of
$15,000,000, which includes a letter of credit facility in the amount of
$2,000,000. The Company has purchased 181,768 shares of its common stock this
year at a total cost of $3,166,000.
Inventories at the end of the first nine months of 1999 were
$16,010,000 as compared to $20,330,000 at the end of the first nine months of
1998, a decrease of $4,320.000.
YEAR 2000 COMPLIANCE
The Company's sporting goods division, Escalade Sports, has completed
the evaluation, conversion and testing of its critical business systems to
determine whether such systems will be able to properly process data for the
year 2000. Escalade Sports employees first reviewed the underlying software
codes for year 2000 compatibility, and then converted the codes where necessary
to allow years to be read using four digits rather than two digits. Escalade
Sports employees then tested the converted code to determine whether the
affected business system would operate without interruption when data using the
year 2000 was input. Based on these processes, the Company believes that
Escalade Sports' internal software systems are currently year 2000 compliant and
have so notified the customers of Escalade Sports where appropriate.
Escalade Sports has also substantially completed the evaluation,
conversion and testing of its business and manufacturing equipment to prepare
for the year 2000. Escalade Sports has requested year 2000 compliance assurances
from its customers, vendors and other third parties such as utility companies.
Escalade is uncertain whether it will receive responses from all such parties
and whether all such responses will be satisfactory.
12
Martin Yale completed the conversion and testing phase of its critical
business systems for year 2000 compatibility in the third quarter. Martin Yale
expects to install a couple of new software packages in the fourth quarter of
1999. Outside third parties worked with Martin Yale employees to prepare for the
year 2000. Martin Yale has also requested year 2000 compliance assurances from
its customers, vendors and other third parties, such as utility companies.
As of the end of the third quarter of 1999, the Company had incurred
approximately $525,000 in connection with preparing for the year 2000. The
Company does not expect to incur any material year 2000 expenses in the fourth
quarter of 1999. The Company estimates that its expenditures in this area are
80% attributable to internal costs and external fees for conversion of systems.
The remaining 20% of year 2000 expenses are attributable to new software and
equipment. The Company funded these expenses from working capital. To the extent
that the Company has utilized internal resources to remedy potential year 2000
problems, the Company has foregone evaluating and upgrading its systems that it
otherwise would have undertaken in the ordinary course of business. The Company
does not believe that such reallocation of its internal resources has had or
will have a material adverse effect on it.
The Company believes that all of its operations, including those of
Escalade Sports and Martin Yale, will timely meet all requirements necessary to
be year 2000 compliant. As indicated above, the Company's subsidiaries have
substantially implemented all of their year 2000 plans. In addition, the Company
and its subsidiaries will continue to request compliance assurances from its
major customers, vendors and other third parties. At this time, the Company
cannot provide any assurances that it will be fully year 2000 compliant,
although the Company does not believe it will be materially adversely affected
by year 2000 issues.
The most likely year 2000 problems that the Company may face appear to
arise from the possible noncompliance of third parties. Possible difficulties
could arise in interfacing with major customers and/or in receiving raw
materials from suppliers. The Company is continuing to work with its customers
to ensure that no material data transmission problems will arise. The Company
also has, and is continuing to develop, back up sources for material vendors.
Accordingly, the Company does not anticipate that any such third party problems
should have a material adverse effect on the Company. However, in the event that
the year 2000 would cause the widespread loss of power, telecommunications and
other utilities in the areas where the Company operates, the disruption to the
Company's business may be material depending upon he length of time it would
take such suppliers to restore service to normal levels.
At this time, the Company has not developed specific contingency plans
in preparation for the year 2000 other than for identifying back up sources for
its material vendors. The Company will continue to evaluate whether there are
any specific areas where a contingency plan could help alleviate possible
adverse effects from the year 2000. If so, the Company will develop contingency
plans in those areas.
13
PART II. OTHER INFORMATION
There were no reports on Form 8-K filed for the three months ended October 2,
1999.
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, 1999 C. W. (Bill) Reed
---------------- ----------------------------
C. W. (Bill) Reed
President and
Chief Executive Officer
Date: October 22, 1999 John R. Wilson
---------------- ----------------------------
John R. Wilson
Vice President and
Chief Financial Officer