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 3, 1998 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) 817 Maxwell Avenue, Evansville, Indiana 47717 --------------------------------------------- (Address of principal executive office) 812-467-1200 ------------- (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 --- --- The number of shares of Registrant's common stock (no par value) outstanding as of October 22, 1998 : 3,108,358
2 INDEX <TABLE> <CAPTION> Page No. <S> <C> <C> Part I. Financial Information: Item 1 - Financial Statements: Consolidated Condensed Balance Sheet (Unaudited) October 3, 1998, October 4, 1997, and December 27, 1997 3 Consolidated Condensed Statement of Income (Unaudited) Three Months and Nine Months Ended October 3, 1998 and October 4, 1997 4 Consolidated Condensed Statement of Cash Flows (Unaudited) Nine Months Ended October 3, 1998 and October 4, 1997 5 Notes to Consolidated Condensed Financial Statements 6 - 9 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations: 10 - 11 Part II. Other Information 12 Signatures 13 Exhibit 10.21 Exhibit 10.32 Exhibit 10.33 </TABLE>
3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ESCALADE, INCORPORATED AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEET (UNAUDITED) <TABLE> <CAPTION> (Dollars in Thousands) October 3, October 4, December 27, 1998 1997 1997 ASSETS ------------------------------------------------- <S> <C> <C> <C> Current assets: Cash $ 294 $ 76 $ 1,246 Receivables, less allowances of $936, $1,002 and $893 17,461 16,687 30,602 Inventories 20,330 22,693 12,637 Prepaid expense 468 402 237 Deferred income tax benefit 1,138 1,311 1,205 ------- ------- ------- TOTAL CURRENT ASSETS 39,691 41,169 45,927 Property, plant, and equipment 35,684 37,839 34,995 Accum. depr. and amortization (25,317) (26,939) (23,356) ------- ------- ------- 10,367 10,900 11,639 Goodwill 5,721 5,869 6,157 Other assets 2,363 1,818 2,422 Deferred income tax benefit --- 519 --- ------- ------- ------- $58,142 $60,275 $66,145 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable - bank $ 7,000 $ 6,075 $ 8,275 Current portion of long-term debt 2,300 2,300 5,800 Trade accounts payable 4,241 5,291 2,696 Accrued liabilities 8,868 10,867 12,128 Federal income tax payable 540 929 1,550 ------- ------- ------- TOTAL CURRENT LIABILITIES 22,949 25,462 30,449 Other Liabilities: Long-term debt 6,900 12,200 10,700 Deferred compensation 1,142 1,080 1,066 Deferred income tax liability 359 --- 429 ------- ------- ------- 8,401 13,280 12,195 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 - 3,107,983, 3,130,613, and 3,050,691 at 10-03-98, 10-04-97, and 12-27-97 6,283 8,472 5,880 Retained earnings 20,369 13,061 17,374 Net unrealized gain on securities available for sale 140 --- 247 ------- ------- ------- 26,792 21,533 23,501 ------- ------- ------- $58,142 $60,275 $66,145 ======= ======= ======= </TABLE> 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) <TABLE> <CAPTION> Three Months Ended Nine Months Ended Oct. 3, Oct. 4, Oct. 3, Oct. 4, 1998 1997 1998 1997 ----------------------------------------------------------- <S> <C> <C> <C> <C> Net sales $22,178 $22,716 $57,038 $53,183 Costs, expenses and other income: Cost of products sold 14,455 14,845 39,104 36,694 Selling, administrative and general expenses 3,918 4,345 11,704 11,934 Interest 263 378 851 849 Amortization of Goodwill 91 92 308 125 Other income (70) (126) (259) (242) ------- ------- ------- ------- 18,657 19,534 51,708 49,360 ------- ------- ------- ------- INCOME BEFORE INCOME TAXES 3,521 3,182 5,330 3,823 Provision for income taxes 1,449 1,389 2,335 1,775 ------- ------- ------- ------- NET INCOME $ 2,072 $ 1,793 $ 2,995 $ 2,048 ======= ======= ======= ======= Per share data: Basic earnings per share $ .67 $ .57 $ .97 $ .66 Diluted earning per share $ .66 $ .55 $ .96 $ .64 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED) NET INCOME $ 2,072 $ 1,793 $ 2,995 $ 2,048 UNREALIZED GAIN (LOSS) ON SECURITIES, NET OF TAX (143) --- (107) --- ------- ------- ------- ------- COMPREHENSIVE INCOME $ 1,929 $ 1,793 $ 2,888 $ 2,048 ======= ======= ======= ======= </TABLE> See notes to Consolidated Condensed Financial Statements.
5 ESCALADE, INCORPORATED AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED) (Dollars in Thousands) <TABLE> <CAPTION> Nine Months Ended Oct. 3, 1998 Oct. 4, 1997 Operating Activities: ---------------------------------------- <S> <C> <C> Net Income $ 2,995 $ 2,048 Depreciation and amortization 2,282 2,020 Adjustments necessary to reconcile net income to net cash provided by operating activities 2,641 3,686 ------- ------- Net cash provided by operating activities 7,918 7,754 ------- ------- Investing Activities: Purchase of 100% of the stock of Master Product Manufacturing, Inc. --- (9,118) Purchase of property and equipment (698) (1,459) ------- ------- Net cash (used) by investing activities (698) (10,577) ------- ------- Financing Activities: Net inc.(dec.) in notes pay.- bank (1,275) 2,200 Net inc.(dec.) in long-term debt (7,300) (800) Proceeds from exercise of stock options 403 188 Purchase of Common Stock - Dutch Auction & Open Market --- (8) ------- ------- Net cash provided (used) by financing activities (8,172) 1,580 ------- ------- (Decrease) in cash (952) (1,243) Cash, beginning of period 1,246 1,319 ------- ------- Cash, end of period $ 294 $ 76 ======= ======= </TABLE> See notes to Consolidated Condensed Financial Statements.
6 ESCALADE, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) Note A - Basis of Presentation - ------------------------------ In the opinion of the Company, the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position of the company as of October 3, 1998, October 4, 1997, and December 27, 1997 and the results of operations and changes in financial position for the nine months ended October 3, 1998 and October 4, 1997. The balance sheet at December 27, 1997 was derived from the audited balance sheet included in the 1997 annual report to shareholders. Note B - Seasonal Aspects - ------------------------- The results of operations for the nine month periods ended October 3, 1998 and October 4, 1997 are not necessarily indicative of the results to be expected for the full year. Note C - Inventories (Dollars in Thousands) - ------------------------------------------- <TABLE> <CAPTION> 10-3-98 10-4-97 12-27-97 ------- ------- -------- <S> <C> <C> <C> Raw Materials $ 6,711 $ 5,854 $ 3,560 Work In Process 3,946 4,030 3,412 Finished Goods 9 673 12,809 5,665 ------- ------- ------- $20,330 $22,693 $12,637 ======= ======= ======= </TABLE> Note D - Income Taxes - --------------------- The provision for income taxes was computed based on financial statement income.
7 Note E - Earnings Per Share - ----------------------------- Earnings per share (EPS) were computed as follows: <TABLE> <CAPTION> Three Months Ended October 3, 1998 ------------------------------------------------------ Weighted Average Per Share Income Shares Amount ------- --------- --------- <S> <C> <C> <C> 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 ------- -------- Diluted Earnings Per Share Income available to common stockholders and assumed conversions $ 2,072 3,128 $.66 ======= ======= ======= </TABLE> <TABLE> <CAPTION> Three Months Ended October 4, 1997 ------------------------------------------------------- Weighted Average Per Share Income Shares Amount ------- --------- ---------- <S> <C> <C> <C> Net Income $ 1,793 ------- Basic Earnings per Share Income available to common stockholders 1,793 3,128 $.57 ===== Effect of Dilutive Securities Stock options .46 Warrants .65 ------- ------ Diluted Earnings Per Share Income available to common stockholders and assumed conversions $ 1,793 3,239 $.55 ======= ====== ====== </TABLE>
8 Note E - Earnings Per Share - ----------------------------- Earnings per share (EPS) were computed as follows: <TABLE> <CAPTION> Nine Months Ended October 3, 1998 ------------------------------------------------------- Weighted Average Per Share Income Shares Amount ------- --------- ---------- <S> <C> <C> <C> 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 ======= ======= ======= </TABLE> <TABLE> <CAPTION> Nine Months Ended October 4, 1997 -------------------------------------------------------- Weighted Average Per Share Income Shares Amount ------- --------- ---------- <S> <C> <C> <C> Net Income $ 2,048 ------- Basic Earnings per Share Income available to common stockholders 2,048 3,104 $.66 ===== Effect of Dilutive Securities Stock options .46 Warrants .65 ------- ------ Diluted Earnings Per Share Income available to common stockholders and assumed conversions $ 2,048 3,215 $.64 ======= ====== ===== </TABLE>
9 Note F - Segment Information - ----------------------------- <TABLE> <CAPTION> As of and for the Nine Months Ended October 3, 1998 ------------------------------------------------------------- Office and Sporting Graphic Goods Arts Corporate Total ------------ ---------- --------- --------- <S> <C> <C> <C> <C> Revenues from external customers $33,432 $23,606 $ --- $ 57,038 Net Income 664 2,343 (12) 2,995 Assets $34,928 $19,913 $3,301 $58,142 </TABLE> <TABLE> <CAPTION> As of and for the Nine Months Ended October 4, 1997 ------------------------------------------------------------- Office and Sporting Graphic Goods Arts Corporate Total ------------ ---------- --------- --------- <S> <C> <C> <C> <C> Revenues from external customers $35,008 $18,175 $ --- $ 53,183 Net Income 413 1,637 ( 2) 2,048 Assets $36,510 $20,238 $3,527 $60,275 </TABLE>
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 1998 vs. 1997 Net sales were $22,178,000 in the third quarter of 1998 as compared to $22,716,000 in the third quarter of 1997, a decrease of $538,000 or 2.4%. Sales of sporting goods decreased $278,000, or 1.8% and sales of office and graphic arts products decreased $260,000 or 3.7%. The small decreases in both sporting goods and office and graphic arts products net sales were the result of some small increases being offset by some small decreases in various product lines. Cost of sales was $14,455,000 in the third quarter of 1998 as compared to $14,845,000 in the third quarter of 1997, a decrease of $390,000 or 2.6%. Cost of sales as a percentage of net sales was 65.2% in the third quarter of 1998 as compared to 65.4% in the third quarter of 1997. Selling, general, and administrative expenses were $3,918,000 in the third quarter of 1998 as compared to $4,345,000 in the third quarter of 1997, a decrease of $427,000 or 9.8%. Selling, general and administrative expenses as a percentage of net sales was 17.7% in the third quarter of 1998 as compared to 19.1% in the third quarter of 1997. This decrease as a percentage of net sales was mainly due to lower compensation expenses, sales promotion expenses and bad debt expense. Interest expense decreased $115,000 or 30.4% from $378,000 last year to $263,000 this year because of reduced borrowing levels. Net income for the quarter this year was $2,072,000 as compared to $1,793,000 last year, an increase of $279,000 or 15.6%. This increase was basically 50% in sporting goods and 50% in office and graphic arts products. NINE MONTHS COMPARISON 1998 VS. 1997 Net sales were $57,038,000 in the first nine months of 1998 as compared to $53,183,000 in the first nine months of 1997, an increase of $3,855,000 or 7.2%. Sales of sporting goods decreased $1,576,000 or 4.7% and sales of office and graphic arts products increased $5,431,000 or 29.9%. The decrease in sporting goods net sales was due mainly to reduced volume in table tennis tables. The increase in net sales for the office and graphic arts product segment was mainly due to the Master Products acquisition in June of 1997. Cost of sales was $39,104,000 in the first nine months of 1998 as compared to $36,694,000 in 1997, an increase of $2,410,000 or 6.6%. Cost of sales as a percentage of net sales was 68.6% in the first nine months of 1998 as compared to 69.0% in the first nine months of 1997.
11 Selling, general, and administrative expenses were $11,704,000 in the first nine months of 1998 as compared to $11,934,000 in the first nine months of 1997, a decrease of $230,000 or 1.9%. Selling, general, and administrative expenses as a percentage of net sales were 20.5% in 1998 as compared to 22.4% in 1997. The decrease in these expenses as a percentage of net sales was mainly due to reduced compensation expenses, sales promotion expenses, and bad debt expense. Interest expense was $851,000 in the first nine months of 1998 as compared to $849,000 in the first nine months of 1997. The net income in the first nine months of 1998 was $2,995,000 as compared to $2,048,000 in the first nine months of 1997. This is a $947,000 increase with sporting goods being about 25% and office and graphic arts products 75% of the increase. LIQUIDITY AND CAPITAL RESOURCES The Company's net cash provided by operating activities was $7,918,000 in the first nine months of 1998 as compared to $7,754,000 in the first nine months of 1997. Most of the cash provided by operating activities in 1998 was from collection of the year end accounts receivable. The net accounts receivable balance at the end of the year in 1997 was $30,602,000 and at the end of the first nine months of 1998, the net accounts receivable balance was $17,461,000. The Company's net cash used for investing activities was $698,000 in the first nine months of 1998 as compared to $10,577,000 in the first nine months of 1997. This decrease of $9,879,000 was due to the acquisition of Master Products in 1997. The Company's net cash used by financing activities was $8,172,000 in the first nine months of 1998 as compared to $1,580,000 net cash provided by financing in the first nine months of 1997. The cash used in 1998 was mainly to pay down long term debt. The Company's working capital requirements are currently funded by cash flow from operations, a domestic line of credit in the amount of $12,000,000, which includes a letter of credit facility in the amount of $2,000,000. Inventories at the end of the first nine months of 1998 were $20,330,000 as compared to $22,693,000 at the end of the first nine months of 1997, a decrease of $2,363.000.
12 PART II. OTHER INFORMATION Item 1, 2, and 3. Not Required. Item 4. Submission of Matters to a Vote of Securities Holders. The Registrant convened a special meeting of its stockholders on September 15, 1998 at the Registrant's principal executive offices in Evansville, Indiana. Proxy materials for the special meeting had been mailed to all stockholders commencing on September 4, 1998 relating to the proposed sale of the Registrant's sporting goods assets to a subsidiary of Sportcraft, Ltd. (the "Asset Sale") and the related name change of the Registrant to Martin Yale Group, Inc. As reported in the Registrant's recent Form 8-K, as amended, upon the recommendation of the Registrant's management, the stockholders voted to adjourn the Special Meeting until September 29 in light of uncertainty regarding the Asset Sale. When the special meeting was reconvened on September 29, the Registrant's management again recommended that the special meeting be adjourned, this time until December 18, 1998 at 9:00 a.m. Central Time at the Registrant's principal executive offices in Evansville, Indiana, pending the outcome of ongoing discussions with Sportcraft regarding possible revisions to the terms of the Asset Sale. Accordingly, the stockholders have not yet voted on either of the two matters to be voted upon at the special meeting. If discussions with Sportcraft result in mutually acceptable revised terms upon which the Asset Sale could proceed, the Registrant expects that these matters will be voted upon when the special meeting is reconvened on December 18. Item 5. Not Required. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibit 10.21 - Fifth Amendment to amended and restated credit agreement dated as of September 30, 1998 with Bank One, Indiana. Exhibit 10.32 - Loan Agreement between City of Wabash, Indiana and Martin Yale Industries, Inc. Dated September 1, 1998. Exhibit 10.33 - Trust Indenture between City of Wabash, Indiana and Bank One Trust Company, NA dated September 1, 1998. (b) Reports on Form 8-K - There was a report on Form 8-K filed on July 8, 1998 reporting that on June 26, 1998 Escalade announced the signing of a definitive agreement providing for the Asset Sale. This Form 8-K has subsequently been amended on August 25, 1998, September 23, 1998 and October 2, 1998 to reflect ongoing developments relating to the Asset Sale and the special meeting of stockholders (as discussed in Item 4 above).
13 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 23, 1998 Robert E. Griffin -------------- ---------------------------- Robert E. Griffin Chairman and Chief Executive Officer Date: October 23, 1998 John R. Wilson -------------- ---------------------------- John R. Wilson Vice President and Chief Financial Officer