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 July 11, 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 July 30, 1998: 3,107,420
2 INDEX Page No. Part I. Financial Information: Item 1 - Financial Statements: Consolidated Condensed Balance Sheet -- July 11, 1998, July 12, 1997, and December 27, 1997 3 Consolidated Condensed Statement of Income -- Three Months and Six Months Ended July 11, 1998 and July 12,1997 4 Consolidated Condensed Statement of Cash Flows -- Six Months Ended July 11, 1998 and July 12, 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 12 Exhibit 10.21 13-15
3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ESCALADE, INCORPORATED AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEET (UNAUDITED) <TABLE> <CAPTION> (Dollars in Thousands) July 11, July 12, December 27, 1998 1997 1997 ASSETS ---------------------------------------------- <S> <C> <C> <C> Current assets: Cash $ 115 $ 742 $ 1,246 Receivables, less allowances of $927, $772 and $893 10,838 12,065 30,602 Inventories 16,004 17,384 12,637 Prepaid expense 210 491 237 Deferred income tax benefit 1,138 1,298 1,205 -------- -------- -------- TOTAL CURRENT ASSETS 28,305 31,980 45,927 Property, plant, and equipment 35,447 37,790 34,995 Accum. depr. and amortization (24,725) (26,428) (23,356) -------- -------- -------- 10,722 11,362 11,639 Goodwill 5,811 5,962 6,157 Other assets 2,592 1,848 2,422 Deferred income tax benefit -- 431 -- -------- -------- -------- $ 47,430 $ 51,583 $ 66,145 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable - bank $ 1,875 $ 2,700 $ 8,275 Current portion of long-term debt 2,300 2,300 5,800 Trade accounts payable 3,032 3,496 2,696 Accrued liabilities 6,370 9,594 12,128 Federal income tax payable 43 31 1,550 -------- -------- -------- TOTAL CURRENT LIABILITIES 13,620 18,121 30,449 Other Liabilities: Long-term debt 7,400 12,700 10,700 Deferred compensation 1,115 1,115 1,066 Deferred income tax liability 453 -- 429 -------- -------- -------- 8,968 13,815 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 - 3,105,250 3,107,941, and 3,050,691 at 7-11-98, 7-12-97, and 12-27-97 6,262 8,379 5,880 Retained earnings 18,297 11,268 17,374 Net unrealized gain on securities available for sale 283 -- 247 -------- -------- -------- 24,842 19,647 23,501 -------- -------- -------- $ 47,430 $ 51,583 $ 66,145 ======== ======== ======== </TABLE> See notes to Consolidated Condensed Financial Statements.
4 ESCALADE, INCORPORATED AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF INCOME (UNAUDITED) (Dollars in Thousands, except per share amounts) <TABLE> <CAPTION> Three Months Ended Six Months Ended July 11, July 12, July 11, July 12, 1998 1997 1998 1997 ------------------------------------------------------------ <S> <C> <C> <C> <C> Net sales $ 19,077 $ 17,765 $ 34,860 $ 30,467 Costs, expenses and other income: Cost of products sold 13,783 12,744 24,649 21,849 Selling, administrative and general expenses 4,253 4,469 7,786 7,589 Interest 311 254 588 471 Amortization of Goodwill 123 33 217 33 Other income (121) (56) (189) (116) -------- -------- -------- -------- 18,349 17,444 33,051 29,826 INCOME BEFORE INCOME TAXES 728 321 1,809 641 Provision for income taxes 390 217 886 386 -------- -------- -------- -------- NET INCOME $ 338 $ 104 $ 923 $ 255 ======== ======== ======== ======== Per share data: Basic earnings per share $ .11 $ .03 .30 $ .08 Diluted earning per share $ .11 $ .03 .30 $ .08 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED) NET INCOME $ 338 $ 104 $ 923 $ 255 UNREALIZED GAIN (LOSS) ON SECURITIES, NET OF TAX (.22) -- 36 -- -------- -------- -------- -------- COMPREHENSIVE INCOME $ 316 $ 104 $ 959 $ 255 ======== ======== ======== ======== </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> Six Months Ended July 11,1998 July 12,1997 Operating Activities: ----------------------------- <S> <C> <C> Net Income $ 923 $ 255 Depreciation and amortization 1,599 1,343 Adjustments necessary to reconcile net income to net cash provided by operating activities 9,626 9,440 -------- -------- Net cash provided by operating activities 12,148 11,038 -------- -------- Investing Activities: Purchase of 100% of the stock of Master Product Manufacturing, Inc. -- (9,118) Purchase of property and equipment (461) (1,109) -------- -------- Net cash used by investing activities (461) (10,227) -------- -------- Financing Activities: Net decrease in notes pay.- bank (6,400) (1,175) Net reduction of long-term debt (6,800) (300) Proceeds from exercise of stock options 382 95 Purchase of Common Stock -- (8) -------- -------- Net cash used by financing activities (12,818) (1,388) -------- -------- Decrease in cash (1,131) (577) Cash, beginning of period 1,246 1,319 -------- -------- Cash, end of period $ 115 $ 742 ======== ======== </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 July 11, 1998, July 12, 1997, and December 27, 1997 and the results of operations and changes in financial position for the six months ended July 11,1998 and July 12, 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 six month periods ended July 11, 1998 and July 12, 1997 are not necessarily indicative of the results to be expected for the full year. Note C - Inventories (Dollars in Thousands) - ------------------------------------------- 7-11-98 7-12-97 12-27-97 ------- ------- -------- Raw Materials $ 4,977 $ 5,773 $ 3,560 Work In Process 3,672 3,587 3,412 Finished Goods 7,355 8,024 5,665 ------- ------- ------- $16,004 $17,384 $12,637 ======= ======= ======= 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 July 11, 1998 ------------------------------------------------------- Weighted Average Per Share Income Shares Amount ------- --------- ---------- <S> <C> <C> <C> Net Income $ 338 ------- Basic Earnings per Share Income available to common stockholders 338 3,101 $.11 ======= Effect of Dilutive Securities Stock options 20 ------- -------- Diluted Earnings Per Share Income available to common stockholders and assumed conversions $ 338 3,121 $.11 ======= ======= ======= </TABLE> <TABLE> <CAPTION> Three Months Ended July 12, 1997 -------------------------------------------------------- Weighted Average Per Share Income Shares Amount ------- --------- ---------- <S> <C> <C> <C> Net Income $ 104 ------- Basic Earnings per Share Income available to common stockholders 104 3,097 $.03 ======= Effect of Dilutive Securities Stock options 47 Warrants 22 ------- ------- Diluted Earnings Per Share Income available to common stockholders and assumed conversions $ 104 3,166 $.03 ======= ======= ======= </TABLE>
8 Note E - Earnings Per Share - ----------------------------- Earnings per share (EPS) were computed as follows: <TABLE> <CAPTION> Six Months Ended July 11, 1998 -------------------------------------------------------- Weighted Average Per Share Income Shares Amount ------- --------- ---------- <S> <C> <C> <C> Net Income $ 923 ------- Basic Earnings per Share Income available to common stockholders 923 3,085 $.30 ======= Effect of Dilutive Securities Stock options 20 ------- -------- Diluted Earnings Per Share Income available to common stockholders and assumed conversions $ 923 3,105 $.30 ======= ======= ======= </TABLE> <TABLE> <CAPTION> Six Months Ended July 12, 1997 -------------------------------------------------------- Weighted Average Per Share Income Shares Amount ------- --------- ---------- <S> <C> <C> <C> Net Income $ 255 ------- Basic Earnings per Share Income available to common stockholders 225 3,094 $.08 ======= Effect of Dilutive Securities Stock options 47 Warrants 22 ------- ------- Diluted Earnings Per Share Income available to common stockholders and assumed conversions $ 255 3,163 $.08 ======= ======= ======= </TABLE>
9 Note F - Segment Information - ----------------------------- <TABLE> <CAPTION> As of and for the Six Months Ended July 11, 1998 ------------------------------------------------------------- Office and Sporting Graphic Goods Arts Corporate Total -------- ---------- --------- -------- <S> <C> <C> <C> <C> Revenues from external customers $18,041 $16,819 $ --- $ 34,860 Net Income (761) 1,587 97 923 Assets $24,739 $19,355 $3,336 $ 47,430 </TABLE> <TABLE> <CAPTION> As of and for the Six Months Ended July 12, 1997 ------------------------------------------------------------- Office and Sporting Graphic Goods Arts Corporate Total -------- ---------- --------- -------- <S> <C> <C> <C> <C> Revenues from external customers $19,339 $11,128 $ --- $ 30,467 Net Income (865) 1,183 (63) 255 Assets $27,118 $21,007 $3,458 $ 51,583 </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 SECOND QUARTER COMPARISON 1998 vs. 1997 Net sales were $19,077,000 in the second quarter of 1998 as compared to $17,765,000 in the second quarter of 1997 an increase of $1,312,000 or 7.4%. Sales of sporting goods decreased $1,354,000 or 12.1% and sales of office and graphic arts products increased $2,666,000 or 40.6%. Sporting goods sales decreased in table tennis, basketball and archery products, which was due to a decrease in units sold. The office and graphic arts machines and equipment sales increase was mainly due to the acquisition of Master Products in June of 1997. (About 95%) Cost of sales was $13,783,000 in the second quarter of 1998 as compared to $12,744,000 in the second quarter of 1997, an increase of $1,039,000 or 8.2%. Cost of sales as a percentage of net sales was 72.2% in the second quarter of 1998 as compared to 71.7% in the second quarter of 1997. Sporting goods cost of sales as a percentage of net sales increased 4.5% and office and graphic arts cost of sales as a percentage of net sales increased 3.9%. The increase in the sporting goods cost of sales percentage of net sales was due mainly to the lower sales level causing lower absorption of overhead expenses. The increase in office and graphic arts cost of sales percentage of net sales was due to increased labor costs and higher product development expenses. Selling, general, and administrative expenses were $4,253,000 in the second quarter of 1998 as compared to $4,469,000 in the second quarter of 1997, a decrease of $216,000 or 5.1%. Selling, general and administrative expenses as a percentage of net sales was 22.3% in the second quarter of 1998 as compared to 25.2% in the second quarter of 1997. This decrease as a percentage of net sales was mainly due to lower bad debt expense and reduced compensation expense. Interest expense increased $57,000 to $311,000 in 1998 from $254,000 in 1997, an increase of 22.4% due to higher borrowing levels. FIRST HALF COMPARISON 1998 VS. 1997 Net sales were $34,860,000 in the first half of 1998 as compared to $30,467,000 in the first half of 1997, an increase of $4,393,000 or 14.4%. Sales of sporting goods decreased $1,298,000 or 6.7% and sales of office and graphic arts products increased $5,691,000 or 51.1%. The decrease in sporting goods was mainly due to decreased volume in table tennis and archery. In the office and graphic arts products segment, the increase in sales is due mainly to the acquisition of Master Products. (About 90%).
11 ESCALADE, INCORPORATED AND SUBSIDIARIES RESULTS OF OPERATIONS CONTINUED Cost of sales was $24,649,000 in the first half of 1998 as compared to $21,849,000 in 1997, an increase of $2,800,000 or 12.8%. Cost of sales as a percentage of net sales was 70.7% in the first half of 1998 as compared to 71.7% in the first half of 1997. This cost of sales % is 1% lower in 1998 than 1997 mainly due to higher % of office product sales in the total sales dollars. Selling, general, and administrative expenses were $7,786,000 in the first half of 1998 as compared to $7,589,000 in the first half of 1997, an increase of $197,000 or 2.6%. Selling, general, and administrative expenses as a percentage of net sales were 22.3% in 1998 as compared to 24.9% in 1997. The decrease in these expenses as a percentage of net sales was mainly due to lower sales promotion related expenses. Interest expense was $588,000 in the first half of 1998 as compared to $471,000 in the first half of 1997, an increase of $117,000 or 24.8%. The increase was due to higher average borrowing levels in the first half of 1998. LIQUIDITY AND CAPITAL RESOURCES The Company's net cash provided by operating activities was $12,148,000 in the first half of 1998 as compared to $11,038,000 in the first half of 1997. Most of the cash provided by operating activities 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 half of 1998, the net accounts receivable balance was $10,838,000. The Company's net cash used for investing activities was $461,000 in the first half of 1998 as compared to $10,227,000 in the first half of 1997. 1997 included $9,118,000 for the acquisition of Master Products. The Company's net cash used by financing activities was $12,818,000 in the first half of 1998 as compared to $1,388,000 in the first half of 1997. In 1998, the cash used by financing activities paid down bank and long term debt while the Company's pay down of bank debt in the first half of 1997 was offset by an increase in bank debt from the Master Products purchase. The Company's working capital requirements are currently funded by cash flow from operations, a domestic line of credit in the amount of $7,000,000, which includes a letter of credit facility in the amount of $2,000,000. Inventories at the end of the first half of 1998 were $16,004,000 as compared to $17,384,000 at the end of the first half of 1997, a decrease of $1,380,000.
12 ESCALADE, INCORPORATED AND SUBSIDIARIES PART II. OTHER INFORMATION Item 1, 2, and 3. Not Required. Item 4. Submission of Matters to a Vote of Securities Holders. The annual meeting of the Registrant was held at Indianapolis, Indiana on April 25, 1998. Proxy materials had been circulated on March 20, 1998, proposing the election of eight members to the Board of Directors for a one year term, and the appointment of Geo. S. Olive & Co.LLC, to serve as independent auditors of the Company for the year 1998. The stockholders approved the election of Yale A. Blanc, Gerald J. Fox, Robert E. Griffin, Blaine E. Matthews, Jr., Robert D. Orr, C. W. ("Bill") Reed, A. Graves Williams, Jr., and Keith P. Williams to the Board of Directors, and the appointment of Geo. S. Olive & Co.LLC as the Company's independent auditors. Item 5. Not Required. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibit 10.21 - Fourth Amendment to amended and restated credit agreement dated as of May 31, 1998 with Bank One, Indianapolis. (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 to sell substantially all assets of the sporting goods business to JEN Sports, Inc., a wholly owned subsidiary of Sportcraft, Ltd., for $74.5 million subject to adjustments at the close. Consummation of the sale is subject to among other things, approval by Escalade shareholders. Additional information regarding the sale was included in the Form 8-K. 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: July 30, 1998 Robert E. Griffin -------------- --------------------------- Robert E. Griffin Chairman and Chief Executive Officer Date: July 30, 1998 John R. Wilson -------------- --------------------------- John R. Wilson Vice President and Chief Financial Officer