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 1, 2005
Commission File Number 0-6966
ESCALADE, INCORPORATED
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(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 at least 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 19, 2005: 13,003,743
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
INDEX
Page
No.
Part I. Financial Information:
Item 1 - Financial Statements:
Consolidated Condensed Balance Sheets as of October 1, 2005
(Unaudited), October 2, 2004 (Unaudited), and December 25, 2004 3
Consolidated Condensed Statements of Income (Unaudited)
for the Three Months and Nine Months Ended October 1, 2005
and October 2, 2004 4
Consolidated Condensed Statements of Comprehensive
Income (Unaudited) for the Three Months and Nine Months
Ended October 1, 2005 and October 2, 2004 4
Consolidated Condensed Statements of Cash Flows (Unaudited)
for the Nine Months Ended October 1, 2005 and October 2, 2004 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 2 - Issuer Purchases of Equity Securities 14
Item 6 - Exhibits 14
Signatures 15
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ESCALADE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(All amounts in thousands except share information)
October 1, October 2, December 25,
2005 2004 2004
------------ ------------ ------------
(Unaudited) (Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 3,028 $ 491 $ 3,050
Receivables, less allowance of
$2,449; $1,543; and $2,510;
respectively 50,682 59,003 44,363
Inventories 37,443 43,011 30,482
Prepaid expenses 1,479 1,215 3,011
Deferred income tax benefit 1,923 2,422 2,496
------------ ------------ ------------
TOTAL CURRENT ASSETS 94,555 106,142 83,402
Property, plant and equipment, net 18,245 15,919 16,498
Intangible assets 6,866 7,965 8,019
Goodwill 17,234 17,399 17,888
Investments 6,120 6,145 6,446
Other assets 2,432 3,535 2,846
------------ ------------ ------------
$ 145,452 $ 157,105 $ 135,099
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 10,590 $ 27,837 $ 11,638
Trade accounts payable 10,835 18,202 8,034
Accrued liabilities 24,245 25,166 27,792
Income tax payable 517 367 142
------------ ------------ ------------
TOTAL CURRENT LIABILITIES 46,187 71,572 47,606
Other Liabilities:
Long-term debt 25,338 16,960 15,896
Interest rate swap agreement (60) 629 386
Deferred compensation 1,320 1,510 1,233
------------ ------------ ------------
26,598 19,099 17,515
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 - 13,010,733;
13,031,064; and 13,031,064;
respectively 13,011 13,031 13,031
Retained earnings 58,327 51,448 52,394
Accumulated other comprehensive income 1,329 1,955 4,553
------------ ------------ ------------
72,667 66,434 69,978
------------ ------------ ------------
$ 145,452 $ 157,105 $ 135,099
============ ============ ============
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 1, October 2, October 1, October 2,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net sales $ 63,557 $ 75,203 $ 140,890 $ 161,377
Costs, expenses and other
income:
Cost of products sold 46,148 56,738 99,355 118,381
Selling, general and
administrative expenses 8,935 8,934 27,414 28,670
Restructuring costs -- 1,412 -- 1,412
Goodwill impairment loss -- 1,312 -- 1,312
------------ ------------ ------------ ------------
Operating income 8,474 6,807 14,121 11,602
Interest expense, net 345 489 1,125 1,427
Other expense (income) (225) (245) (632) (546)
------------ ------------ ------------ ------------
Income before income taxes 8,354 6,563 13,628 10,721
Provision for income taxes 2,902 2,233 4,767 3,840
------------ ------------ ------------ ------------
Net income $ 5,452 $ 4,330 $ 8,861 $ 6,881
============ ============ ============ ============
Per share data:
Basic earnings per share $ 0.42 $ 0.33 $ 0.68 $ 0.53
Diluted earnings per share $ 0.41 $ 0.33 $ 0.67 $ 0.52
Cash dividend declared -- -- $ 0.15 $ 0.13
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Net income $ 5,452 $ 4,330 $ 8,861 $ 6,881
Unrealized gain (loss) on
securities, net of tax (31) 41 (27) 48
Foreign currency translation
adjustment 30 (1) (3,486) (617)
Unrealized gain on interest rate
swap agreement, net of tax 99 161 290 276
------------ ------------ ------------ ------------
Comprehensive income $ 5,550 $ 4,531 $ 5,638 $ 6,588
============ ============ ============ ============
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 1, October 2,
2005 2004
------------ ------------
Operating Activities:
Net income $ 8,861 $ 6,881
Depreciation and amortization 3,651 4,832
Goodwill impairment charge -- 1,312
Adjustments necessary to reconcile net income
to net cash provided by operating activities (9,774) (18,442)
------------ ------------
Net cash provided (used) by operating activities 2,738 (5,417)
Investing Activities:
Purchase of property and equipment (5,166) (1,397)
Proceeds from asset disposition 68 --
Acquisition of assets (3,213) --
------------ ------------
Net cash used by investing activities (8,311) (1,397)
Financing Activities:
Net increase in notes payable and long-term debt 8,780 8,315
Proceeds from exercise of stock options 403 1,103
Purchase of common stock (1,391) (984)
Dividends paid (1,961) (1,556)
------------ ------------
Net cash provided by financing activities 5,831 6,878
Effect of exchange rate changes on cash (280) (221)
------------ ------------
Net decrease in cash and cash equivalents (22) (157)
Cash and cash equivalents, beginning of period 3,050 648
------------ ------------
Cash and cash equivalents, end of period $ 3,028 $ 491
============ ============
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 25, 2004 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 consolidated condensed 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 2004 filed with
the Securities and Exchange Commission.
Note B - Recently Issued Accounting Pronouncements
- --------------------------------------------------------------------------------
In November 2004, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 151, Inventory Costs, which clarifies the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material.
SFAS No. 151 will be effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. We do not believe the adoption of SFAS No. 151
will have a material impact on our financial statements.
Note C - Seasonal Aspects
- --------------------------------------------------------------------------------
The results of operations for the nine month periods ended October 1, 2005 and
October 2, 2004 are not necessarily indicative of the results to be expected for
the full year.
Note D - Inventories
- --------------------------------------------------------------------------------
(All amounts in thousands) October 1, October 2, December 25,
2005 2004 2004
----------- ----------- -----------
Raw materials $ 7,076 $ 10,853 $ 8,562
Work in progress 8,090 7,010 5,142
Finished goods 22,277 25,148 16,778
----------- ----------- -----------
$ 37,443 $ 43,011 $ 30,482
=========== =========== ===========
Note E - Property, Plant and Equipment
- --------------------------------------------------------------------------------
(All amounts in thousands) October 1, October 2, December 25,
2005 2004 2004
----------- ----------- -----------
Land $ 1,729 $ 1,760 $ 1,853
Building and leasehold
improvements 15,613 15,587 15,799
Machinery and equipment 38,068 34,177 34,562
----------- ----------- -----------
Total Cost 55,410 51,524 52,214
Accumulated depreciation
and amortization (37,165) (35,605) (35,716)
----------- ----------- -----------
$ 18,245 $ 15,919 $ 16,498
=========== =========== ===========
6
Note F - Notes Payable
- --------------------------------------------------------------------------------
On June 27, 2005 the Company executed a fifth amendment to the revolving term
agreement that effectively increased the current available borrowing limit by
$10 million to $31 million and extended the termination date of the agreement by
two months to May 2008. All other terms of the agreement were unchanged. As of
October 1, 2005 the outstanding balance on this line was $22.6 million.
Note G - Income Taxes
- --------------------------------------------------------------------------------
The provision for income taxes was computed based on financial statement income.
Note H - Dividend Payment
- --------------------------------------------------------------------------------
On March 18, 2005, the Company paid a dividend of $0.15 per common share to all
shareholders of record on March 11, 2005. The total amount of the dividend was
$2 million and was charged against retained earnings.
Note I - Restructuring Costs
- --------------------------------------------------------------------------------
In 2004 the Company initiated a facility consolidation plan and involuntary
employee terminations in the Office Products segment in order to reduce costs
and increase the competitiveness of the Company. Under these plans no additional
costs were incurred during the quarter ended October 1, 2005. Liabilities under
these plans are as follows:
Balance at
(All amounts in thousands) Balance at Non-Cash Cash October 1,
July 7, 2005 Charges Payments 2005
------------ ------------ ------------ ------------
Severance and benefit costs $ 1,062 $ -- $ 108 $ 956
Facility closure costs 34 -- (8) 42
------------ ------------ ------------ ------------
$ 1,096 $ -- $ 98 $ 998
============ ============ ============ ============
7
Note J - 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 1, October 2,
(All amounts in thousands) 2005 2004
------------ ------------
Weighted average common shares
outstanding 13,055 13,041
Dilutive effect of stock options 153 241
------------ ------------
Weighted average common shares
outstanding, assuming dilution 13,208 13,282
============ ============
Nine Months Ended
---------------------------
October 1, October 2,
(All amounts in thousands) 2005 2004
------------ ------------
Weighted average common shares
outstanding 13,065 13,024
Dilutive effect of stock options 165 195
------------ ------------
Weighted average common shares
outstanding, assuming dilution 13,230 13,219
============ ============
Options that are determined to be anti-dilutive are not included in the
calculation of dilutive earnings per share. In 2004, 168,800 employee stock
options and 4,126 director options were determined to be anti-dilutive as to
earnings per share. In 2005, 167,800 employee stock options and 6,893 director
options were determined to be anti-dilutive as to earnings per share.
Note K - 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
---------------------------
(In Thousands Except October 1, October 2,
Per Share Amounts) 2005 2004
------------ ------------
Net income, as reported $ 5,452 $ 4,330
Less: Total stock-based employee
compensation cost determined
under the fair value based
method, net of income taxes (279) (194)
------------ ------------
Pro forma net income $ 5,173 $ 4,136
============ ============
Earnings per share
Basic--as reported $ 0.42 $ 0.33
============ ============
Basic--pro forma $ 0.40 $ 0.32
============ ============
Diluted--as reported $ 0.41 $ 0.33
============ ============
Diluted--pro forma $ 0.39 $ 0.31
============ ============
8
Nine Months Ended
---------------------------
(In Thousands Except October 1, October 2,
Per Share Amounts) 2005 2004
------------ ------------
Net income, as reported $ 8,861 $ 6,881
Less: Total stock-based employee
compensation cost determined
under the fair value based
method, net of income taxes (837) (583)
------------ ------------
Pro forma net income $ 8,024 $ 6,298
============ ============
Earnings per share
Basic--as reported $ 0.68 $ 0.53
============ ============
Basic--pro forma $ 0.61 $ 0.48
============ ============
Diluted--as reported $ 0.67 $ 0.52
============ ============
Diluted--pro forma $ 0.61 $ 0.48
============ ============
Note L - Segment Information
- --------------------------------------------------------------------------------
As of and for the Nine Months
Ended October 1, 2005
---------------------------------------------------------
Sporting Office
In thousands Goods Products Corp. Total
------------ ------------ ------------ ------------
Revenues from external customers $ 92,326 $ 48,564 $ -- $ 140,890
Operating income (loss) 10,116 5,617 (1,612) 14,121
Net income (loss) 5,747 3,325 (211) 8,861
Total assets $ 88,702 $ 44,489 $ 12,261 $ 145,452
As of and for the Nine Months
Ended October 2, 2004
---------------------------------------------------------
Sporting Office
In thousands Goods Products Corp. Total
------------ ------------ ------------ ------------
Revenues from external customers $ 104,328 $ 57,049 $ -- $ 161,377
Operating income (loss) 12,568 948 (1,914) 11,602
Net income (loss) 7,434 (125) (428) 6,881
Total assets $ 86,108 $ 59,565 $ 11,432 $ 157,105
Note M - Reclassifications
- --------------------------------------------------------------------------------
Certain reclassifications have been made to the 2004 financial statements to
conform to the 2005 financial statement presentation.
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
9
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. Management believes the key indicators in measuring
the success of this strategy are revenue and earnings growth. A key strategic
advantage is the Company's established relationships with major customers that
allow the Company to bring new products to the market in a very cost effective
manner while maintaining a diversified product line and wide customer base. 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
Although revenues declined, consolidated net income for the three months and
nine months ended October 1, 2005, increased 25.9% and 28.8%, respectively. The
primary factor in achieving increased profitability has been the turn-around in
the Office Products business; a direct result of the restructuring efforts
initiated during 2004. Compared to the same periods last year, net income
attributed to the Sporting Goods business declined 19% and 22.7% for the three
months and nine months ended October 1, 2005, respectively, due to lower sales
volume.
As discussed below, management anticipates the Sporting Goods business to end
2005 with lower sales than were achieved in 2004. Consequently, net income from
the Sporting Goods segment is expected to be lower for fiscal 2005 compared to
fiscal 2004. Management expects this decline in profits from the Sporting Goods
business to be offset by increased profits from the Office Products business
such that consolidated net income for fiscal 2005 will be better than fiscal
2004.
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
--------------------------- ---------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net revenue 100.0% 100.0% 100.0% 100.0%
Cost of products sold 72.6% 75.4% 70.5% 73.3%
------------ ------------ ------------ ------------
Gross margin 27.4% 24.6% 29.5% 26.7%
Selling and administrative 14.0% 11.9% 19.5% 17.8%
Restructuring -- 1.8% -- 0.9%
Goodwill Impairment -- 1.8% -- 0.8%
------------ ------------ ------------ ------------
Operating income 13.4% 9.1% 10.0% 7.2%
Net Income 8.6% 5.8% 6.3% 4.3%
Consolidated Revenue and Gross Margin
Consolidated net revenues for the three months and nine months ended October 1,
2005 declined 15.5% and 12.7%, respectively, compared to the same periods in
2004. Both business segments experienced lower sales volumes.
Sporting Goods sales are very seasonal with the third quarter traditionally the
strongest. Net sales for the three months and nine months ended October 1, 2005,
were down 16.5% and 11.5%, respectively, compared to the same periods last year.
The primary factor for the decline is lower sales to the Company's largest
customer: SEARS. Sales to SEARS were lower due to two factors: a) a decision by
SEARS to eliminate an arcade product introduced in 2004 that represented roughly
$7 million in sales to SEARS in 2004, and b) an aggressive inventory control and
pricing adjustment program initiated by SEARS in 2005 under which SEARS
10
increased retail pricing on certain products and substantially curtailed
advertising campaigns. For the nine months ended October 1, 2005, the impact of
these two factors has been a decline in sales to SEARS of roughly $12.5 million
compared to the same period last year. The Company continues to have a very good
relationship with SEARS, but it is not possible at this time to assess the
impact of SEARS' new marketing strategies on the Company's future sales volume
to SEARS. Based on results year-to-date, the Company anticipates fiscal 2005
sales to SEARS will be down $14 million to $18 million compared to fiscal 2004.
The Company expects the fourth quarter to be comparable, or slightly down
compared to the same period last year. Consequently, Sporting Goods sales for
fiscal year 2005 are expected to be lower than fiscal 2004.
Office Products sales were down 11.5% and 14.9% in the three months and nine
months ended October 1, 2005, respectively, compared with the same periods last
year. Approximately half of the decline is attributed to the planned elimination
of non-core, low margin products primarily sold in Europe which are not
manufactured by the Company. Anticipated excess inventories related to these
products were fully reserved at the end of fiscal 2004. The remainder of the
sales decline is attributed to discontinued sales to two retail customers in
Europe where the Company could not negotiate profitable sales agreements and the
loss of approximately $2 million in sales due to a disruption during the first
quarter of fiscal 2005 relating to shredder products manufactured in China.
Management changes announced during the third quarter of 2005 are designed to
increase sales efforts; the results of which will not be fully realized until
sometime in fiscal 2006. Consequently management expects the sales decline
experienced during the nine months ended October 1, 2005 to be indicative of the
outcome for the full year.
The consolidated gross margin ratio for the three months and nine months ended
October 1, 2005, was better than the same period last year as a result of
improved gross margins in the Office Products business; one of the results of
the restructuring activities initiated in 2004. Gross margin ratios in the
Sporting Goods business were down 1% for the nine months ended October 1, 2005
as a result of product mix.
Consolidated Selling, General and Administrative Expenses
Consolidated selling, general and administrative expenses for the three months
ended October 1, 2005 were relatively unchanged from the same period last year.
However, they were down roughly $1.3 million for the nine months ended October
1, 2005 compared to the same period last year as a result of the lower sales
volume in the Sporting Goods Business. As a percentage of net sales, selling,
general and administrative costs increased for the three months and nine months
ended October 1, 2005, compared to the same periods in 2004 due to the lower
sales volume. Management continues to seek out ways to reduce these costs in
each business segment. The Company believes that additional cost reduction
synergies are possible as European distribution and administration in the Office
Products business is consolidated, but results from these activities are not
expected to materialize until 2006.
Financial Condition and Liquidity
The Company's financial condition remains strong and relatively unchanged from
the beginning of the year. The current ratio, a basic measure of liquidity
(current assets divided by current liabilities), remains relatively unchanged
from the beginning of the year. Inventory and accounts receivable balances have
increased during the nine months ended October 1, 2005 in response to the
seasonal nature of the Sporting Goods business and are comperable to historical
trends.
11
The following schedule summarizes the Company's total debt:
October 1, October 2, December 25,
In thousands 2005 2004 2004
------------ ------------ ------------
Notes payable short-term $ 10,590 $ 27,837 $ 11,638
Long term debt 25,338 16,960 15,896
------------ ------------ ------------
Total debt $ 35,928 $ 44,797 $ 27,534
============ ============ ============
Total debt increased 30.4% during the nine months ended October 1, 2005 as a
direct result of the seasonal buildup of inventory and accounts receivable in
the Sporting Goods Business. Total debt at October 1, 2005 is lower than the
same period last year as a direct result of cash flow from operations and the
absence of any sizable acquisitions. As a percentage of stockholders' equity,
total debt has decreased from 68% at October 2, 2004, to 50% at October 1, 2005
reflecting the Company's ability to generate strong cash flow.
During the nine months ended October 1, 2005, operations generated $2.7 million
in cash compared to consuming $5.4 million for the same time period in 2004. The
primary reason for the increase is higher net income and lower inventory and
accounts receivable levels in 2005 as compared to 2004.
Total cash used by investing activities during the nine months ended October 1,
2005 totaled $8.3 million. Approximately $3.2 million was expended to acquire
certain assets of Child Life, Inc., a manufacturer of premium residential play
systems. The balance, approximately $5.2 million, was expended for property and
equipment. The largest component of this is the addition of a new manufacturing
plant in Reynosa, Mexico which is expected to be operational at the end of the
first quarter of 2006. The Company anticipates spending an additional $4.0
million to complete this project.
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 2004. In addition, the Company believes it can quickly reach agreements 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 1, 2005.
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 an interest
rate swap agreement. This agreement effectively converted a portion of its
variable rate debt into fixed rate debt.
12
An adverse movement of equity market prices would have an impact on the
Company's long-term marketable equity securities that are included in
Investments on the consolidated balance sheet. At October 1, 2005, the aggregate
fair value of long-term marketable equity securities was $1.8 million. Due to
the unpredictable nature of the equity market the Company has not employed any
hedge programs relative to these investments.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Escalade 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
investments 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.
Changes in Internal Control over Financial Reporting
Management of the Company has evaluated, with the participation of the Company's
Chief Executive Officer and Chief Financial Officer, changes in the Company's
internal controls over financial reporting (as defined in Rule 13a-15(f) and
15d-15(f) of the Exchange Act) during the third quarter of 2005. In connection
with this evaluation and the evaluation performed in the fourth quarter of 2004,
the Company identified deficiencies in internal controls over financial
reporting relating to the Company's subsidiary in France. The Company continued
remediation efforts begun in the fourth quarter of 2004, to eliminate the
deficiencies identified. This will be accomplished by eliminating the accounting
department in France and transferring those functions to the Company's German
subsidiary during the fourth quarter of 2005.
Other than the changes identified above, there have been no changes to the
Company's internal control over financial reporting that occurred since the
beginning of the Company's third quarter of 2005 that have materially affected,
or are reasonably likely to materially affect, the Company's internal control
over financial reporting.
13
PART II. OTHER INFORMATION
Item 1. Not Required.
Item 2. (c) ISSUER PURCHASES OF EQUITY SECURITIES
(d) Maximum Number
(c) Total Number (or Approximate
of Shares (or Dollar Value) of
(a) Total (b) Average Units) Purchased Shares (or Units)
Number of Price as Part that May Yet Be
Shares (or Paid per of Publicly Purchased Under
Units) Share (or Announced Plans the Plans
Period Purchased Unit) or Programs or Programs
- ------------------------------- --------------- --------------- --------------- ---------------
Shares purchases prior to
07/09/2005 under the current
repurchase program 329,610 $ 8.25 329,610 $ 2,445,220
- ------------------------------- --------------- --------------- --------------- ---------------
Third quarter purchases:
- ------------------------------- --------------- --------------- --------------- ---------------
07/10/2005 - 08/06/2005 None None None None
- ------------------------------- --------------- --------------- --------------- ---------------
08/07/2005 - 09/03/2005 5,000 12.93 5,000 64,650
- ------------------------------- --------------- --------------- --------------- ---------------
09/04/2005 - 10/01/2005 50,740 12.92 50,740 655,599
- ------------------------------- --------------- --------------- --------------- ---------------
Total share purchases under the
current program 385,350 $ 8.92 385,350 $ 1,724,971
- ------------------------------- --------------- --------------- --------------- ---------------
The Company has one stock repurchase program which was established in February
2003 by the Board of Directors and which authorized management 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 termination date. There have
been no share repurchases that were not part of a publicly announced program. In
February 2005, the Board of Directors increased the remaining amount on this
plan to its original level of $3,000,000.
Item 3,4 and 5 Not Required.
Item 6. Exhibits
(a) Exhibits
Number Description
------ -----------
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.
14
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 19, 2005 /s/ C. W. (BILL) REED
---------------- -----------------------------------------
C. W. (Bill) Reed
President and Chief Executive Officer
Date: October 19, 2005 /s/ TERRY D. FRANDSEN
---------------- -----------------------------------------
Terry D. Frandsen
Vice President and
Chief Financial Officer
15