<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 26, 1998
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) (IRS 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
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. X
---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
---
Aggregate market value of voting stock held by nonaffiliates of the registrant
as of February 26, 1999: $37,447,614
The number of shares of Registrant's common stock (no par value) outstanding as
of February 26, 1999: 3,119,825
Documents Incorporated by Reference
Certain portions of the registrant's Proxy Statement relating to its annual
meeting of stockholders scheduled to be held on April 24, 1999 are incorporated
by reference into Part III of this Report.
Index to Exhibits is found on page 15.
<PAGE> 2
ESCALADE, INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
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Page
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Part I
<S> <C> <C>
Item 1 Business 1
Item 2 Properties 6
Item 3 Legal Proceedings 6
Item 4 Submission of Matters to a Vote of Security Holders 6
Part II
Item 5 Market for the Registrant's Common Equity and Related
Stockholder Matters 7
Item 6 Selected Financial Data 8
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 7. A Quantitative and Qualitative Disclosures About Market Risk 13
Item 8 Financial Statements and Supplementary Data 13
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 13
Part III
Item 10 Directors and Executive Officers of the Registrant 14
Item 11 Executive Compensation 14
Item 12 Security Ownership of Certain Beneficial Owners and Management 14
Item 13 Certain Relationships and Related Transactions 14
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 15
</TABLE>
<PAGE> 3
PART I
ITEM 1--BUSINESS
GENERAL
Escalade, Incorporated (Escalade or Company) is a diversified company engaged in
the manufacture and sale of sporting goods products and office and graphic arts
products. Escalade and its predecessors have produced sporting goods products
for over 70 years and have produced office and graphic arts products for over 40
years.
Escalade is the successor to The Williams Manufacturing Company, an Ohio-based
manufacturer and retailer of women's and children's footwear formed in 1922.
Through a series of acquisitions commencing in the 1970's, the Company has
diversified its business. The Company currently manufactures sporting goods
products in Evansville, Indiana and Tijuana, Mexico and manufactures office and
graphic arts products in Wabash, Indiana, Los Angeles, California and Tijuana,
Mexico.
In 1972, the Company merged with Martin Yale Industries, Inc. (Martin Yale), an
Illinois manufacturer of office and graphic arts products and leisure time items
such as toys and hobby and craft items. In 1973, the Company acquired both
Indian Industries, Inc. (Indian), an Indiana manufacturer of archery equipment
and table tennis tables, and Harvard Table Tennis, Inc., a Massachusetts
manufacturer of table tennis accessories. Escalade discontinued the Williams
Manufacturing footwear operations in 1976 and sold Martin Yale's leisure time
product line to an unaffiliated party in 1979. In 1980, the Company purchased
Harvard Sports, Inc. (formerly Crown Recreation (West), Inc.), a California
manufacturer of table tennis tables and home pool tables. In 1983, the Company
closed Harvard Table Tennis, Inc. and consolidated it with Harvard Sports, Inc.
(Harvard).
Escalade has diversified within both the sporting goods products and office and
graphic arts products industries, principally through the introduction of new
product lines and acquisitions of related assets and businesses. Escalade
expanded its sporting goods business in 1982 with the introduction of basketball
backboards, goals and poles. In 1988, the Company acquired the business machine
division assets of Swingline, Inc., further expanding the range of products
offered within the office machine and equipment product lines. In 1989, the
Company started limited manufacturing in Tijuana, Mexico under a shelter program
known as "maquiladora". In 1990, the Company built a new manufacturing and
office facility in Wabash, Indiana and consolidated the manufacturing of office
and graphic arts products into the new facility. In 1992, the Company
established a European distribution office and warehouse based in the United
Kingdom under the name of Escalade International, Limited which was discontinued
in 1998. In 1994, the Company purchased certain assets of Data-Link Corporation
which manufactured products to apply postage and other stamps. In 1997, the
Company purchased Master Products Manufacturing Company, Inc. (Master Products),
a manufacturer of paper punches and catalog rack systems.
Escalade's sporting goods products are produced by Indian and Harvard and are
sold through a single consolidated sales and marketing group, Escalade Sports.
Escalade's office and graphic arts products are produced by Martin Yale and
Master Products and are sold through a single consolidated sales and marketing
group, Martin Yale.
<PAGE> 4
The following table presents the percentages contributed to Escalade's net sales
by each of its business segments:
<TABLE>
<CAPTION>
Fiscal Year 1998 1997 1996
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<S> <C> <C> <C>
Sporting goods 66% 72% 79%
Office and graphic arts products 34 28 21
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Total net sales 100% 100% 100%
=====================================================
</TABLE>
For additional segment information, see the notes to consolidated financial
statements.
SPORTING GOODS
Escalade manufactures and sells a variety of sporting goods such as table tennis
tables and accessories, archery equipment, home pool tables and accessories,
combination bumper pool and card tables, game tables, basketball backboards,
goals, poles and portables, darts, and dart cabinets. Some of Escalade's
domestic sporting goods shipments are made from National City, California, which
primarily services the Company's U. S. Western marketing region, but most of
such shipments are made from Evansville, Indiana, which primarily serves the
rest of the United States. The majority of foreign shipments are made through
Escalade FSC Inc., a foreign sales corporation established by the Company in
1994.
Escalade produces and sells sporting goods under the Indian, Harvard, Xi, Ping
Pong and Stiga brand names. Escalade also manufactures various sporting goods
under private label for Sears Roebuck & Co. (Sears) and various other customers.
Many of Escalade's products are sold to Sears, Escalade's largest customer,
which accounted for approximately 38% of Escalade's sporting goods item net
sales in 1998. No other customer accounted for more than 10% of Escalade's
sporting goods net sales in 1998.
Certain of the Company's sporting goods products are subject to the regulation
of the Consumer Product Safety Commission. The Company believes that it is in
compliance with such regulations.
In October 1997, the Company retained CIBC Oppenheimer Corp. (CIBC) to assist in
exploring potential opportunities to enhance stockholder value through
transactions involving the Company's sporting goods operations, including a
possible sale. No transaction was completed in 1998 and the Company has
abandoned plans to sell its sporting goods 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. Accordingly, Escalade
International, Limited is reported as a discontinued operation for the years
ended December 26, 1998, December 27, 1997 and December 28, 1996. Net assets of
the discontinued operation at December 26, 1998 consist primarily of accounts
receivable, inventory and property, plant and equipment.
The estimated loss on the disposal of Escalade International, Limited is
$1,222,279 including a provision of $250,000 for operating losses during
phaseout. The divestiture period is expected to run into the fourth quarter of
1999.
(2)
<PAGE> 5
OFFICE AND GRAPHIC ARTS PRODUCTS
Escalade's office and graphic arts products include paper trimmers, paper
folding machines, paper drills, collators, decollators, bursting machines,
letter openers, paper joggers, checksigners, stamp affixers, paper shredders,
paper punches, paper cutters, catalog rack systems, bindery carts, business card
slitters, thermography machines and related accessories. Escalade's office and
graphic arts products business is conducted through Martin Yale and Master
Products.
In 1986, the Company introduced a combination checksigner and bursting machine,
which automatically imprints facsimile signatures on payroll checks and then
separates each check for distribution. The Company also further diversified its
office equipment product lines by its August 1988 purchase of the business
machine division assets of Swingline, Inc. consisting primarily of a line of
forms handling equipment including decollators, bursters and checksigners and a
line of shredders and other products, by its 1994 purchase of certain assets of
Data-Link Corporation consisting primarily of products which apply postage and
other stamps, by its 1997 purchase of Master Products, a manufacturer of paper
punches and catalog rack systems and by its 1998 purchase of certain assets of
Steele Industries consisting primarily of its line of business card slitters and
thermography machines.
Escalade produces and sells office and graphic arts products under the Martin
Yale brand name, the Premier(R) trademark, the Master Products brand name and
the Steele/Hurricane brand name. The Company also manufactures various office
and graphic arts products under private label for original equipment
manufacturers.
RELATIONSHIP WITH SEARS
The Company has supplied sporting goods to Sears for over 30 years beginning
with sales of archery equipment by Indian to Sears. Sears currently purchases
for resale a wide variety of Escalade's sporting goods. Sales to Sears accounted
for approximately 25% in 1998 and 24% in both 1997 and 1996 of Escalade's
consolidated sales. Even though the Company has no long-term contracts with
Sears, the Company believes that sales to Sears will continue and that relations
with Sears are good.
Escalade has been recognized by Sears for its outstanding service in ten of the
last 13 years and in 20 of the last 26 years. Sears has awarded Escalade the
Sears "Partners in Progress Award" during those years based upon quality,
service and product innovation. Sears makes this award to less than 80 suppliers
each year. During this period, Sears had more than 10,000 suppliers. In 1987,
Sears further recognized the Company by awarding Escalade the Sears 1986 "Source
of the Year Award" in the recreation-automotive group.
(3)
<PAGE> 6
MARKETING AND PRODUCT DEVELOPMENT
Escalade has developed its existing product lines to adapt to changing
conditions. Escalade believes that it is prepared to react to changing market
and economic developments primarily by continuing the quality/price structure of
the Company's product lines and by conducting ongoing research and development
of new products. Escalade is committed to being customer focused.
For many of its sporting goods products, Escalade offers its customers a choice,
based on quality and price, of its line of "good, better and best" items. Such
products are priced in relation to their quality which enables the Company to
sell its goods through a variety of department stores, mass merchandisers,
wholesale clubs, catalog showrooms, discount houses, general sporting goods
stores, specialty sporting goods stores and hardware chains. As a result of such
quality/price structure, Escalade is able to meet the quality/price objectives
of the consumers served by such retail channels.
Escalade sells its office and graphic arts products through office machine
dealers, office supply houses and office product catalogs. Certain of Escalade's
office products, such as paper trimmers and paper folders, are marketed in a
quality/price range designed to accommodate customer needs. Lower cost items are
generally intended for light duty office applications, whereas higher cost items
are more rugged or more sophisticated, and are intended for use in heavy duty or
commercial applications.
Escalade conducts much of its marketing efforts through a network of independent
sales representatives in the office and graphic arts industries. Marketing
efforts in the sporting goods business are coordinated through a marketing
department as well as through a network of Company and independent sales
representatives.
The Company engaged in ongoing research and development activities for new
products in each of its business segments. Escalade spent approximately
$1,500,000 in 1998, $1,400,000 in 1997, and $2,300,000 in 1996 for research and
development activities.
COMPETITION
Escalade is subject to competition with various manufacturers of each product
line produced or sold by Escalade. The Company is not aware of any other single
company that is engaged in both the same industries as Escalade or that produces
the same range of products as Escalade within such industries. Nonetheless,
competition exists for many Escalade products within both the sporting goods and
office and graphic arts industries and some competitors are larger and have
substantially greater resources than the Company. Escalade believes that its
long-term success depends on its ability to strengthen its relationship with
existing customers, to attract new customers and to develop new products that
satisfy the quality and price requirements of sporting goods and office and
graphic arts customers.
(4)
<PAGE> 7
LICENSES, TRADEMARKS AND BRAND NAMES
Escalade Sports has an agreement and contract with Sweden Table Tennis AB for
the exclusive right and license to distribute and produce table tennis equipment
under the brand name STIGA for the United States and Canada.
Escalade is the owner of several registered trademarks and brand names. For its
sporting goods, the Company holds the Ping-Pong(R), and Harvard(R) registered
trademarks and utilizes the Indian, Indian Archery and Indian Xi brand names.
The Company permits limited uses of the Ping-Pong(R) trademark by other
manufacturers pursuant to various licensing agreements. The Company also owns
the Premier(R) registered trademark for its office and graphic arts products, in
addition to manufacturing such products under the Martin Yale, Master Products
and Steele/Hurricane brand names.
SEASONALITY
The backlog of unshipped orders by industry segment is shown below at the
Company's 1998, 1997, and 1996 fiscal year end. All orders in backlog at year
end are generally shipped during the following year. The backlog includes all
orders received but not shipped. Escalade's sporting goods business is seasonal
and, therefore, the backlog is subject to fluctuations.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 26, DECEMBER 27
and DECEMBER 28 1998 1997 1996
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<S> <C> <C> <C>
Orders received but not shipped
Sporting goods $1,266,400 $4,375,600 $2,592,800
Office and graphic arts products 438,000 570,100 419,300
</TABLE>
EMPLOYEES
The Company employs between 550 and 725 employees, consisting of between 200 and
325 people at Indian's Evansville, Indiana facilities, between 100 and 150 at
Harvard's National City, California and Tijuana, Mexico facilities,
approximately 125 employees at Martin Yale's Wabash, Indiana facilities and
approximately 125 at Master Products' Los Angeles, California and Tijuana,
Mexico facilities. All hourly rated employees at Evansville are represented by
the International Union of Electronic, Electrical, Salaried, Machine and
Furniture Workers AFL-CIO, whose contract expires April 30, 2000.
Escalade believes that its employee relations are satisfactory.
SOURCES OF SUPPLIES
Raw materials for Escalade's various product lines consist of wood, particle
board, slate, standard grades of steel, steel tubing, plastic vinyl, steel
cables, fiberglass and packaging. Escalade relies upon European suppliers for
its requirement of billiard balls and slate utilized in the production of home
pool tables and upon various Asian manufacturers for certain of its table tennis
needs and other items.
The Company believes that these sources will continue to provide adequate
supplies as needed. All other materials needed for the Company's various
operations are available in adequate quantities from a variety of domestic and
foreign sources.
(5)
<PAGE> 8
<TABLE>
<CAPTION>
ITEM 2--PROPERTIES
The Company operates the following facilities:
LOCATION SIZE LEASED OR OWNED
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<S> <C> <C>
Evansville, Indiana (1) 346,000 sq. ft. Owned
National City, California (1) 34,039 sq. ft. Leased
Tijuana, Mexico (1) 50,000 sq. ft. Owned
Swansea, United Kingdom (1) 13,500 sq. ft. Owned
Wabash, Indiana (2) 141,000 sq. ft. Owned
Los Angeles, California (2) 72,312 sq. ft. Owned
Tijuana, Mexico (2) 15,000 sq. ft. Leased
(1) Sporting goods facilities
(2) Office products facilities
</TABLE>
The Company leases its National City, California facilities at a rate of $11,573
per month. The Company has a five-year option to extend the lease. The lease
rate ranges from $11,920 per month in year one to $13,025 per month in year five
of the extension period. The Company also shares in common area expenses not to
exceed 8(cent) per sq. ft. per month. The lease expires March 31, 2003.
The Company's Wabash facilities are held subject to a mortgage financed by
Economic Development Revenue Bonds. The 141,000 square foot facility is a
pre-engineered metal building supported by structured steel and concrete block
consisting of 21,000 square feet warehousing, 6,000 square feet office and
114,000 square feet manufacturing.
The Company leases space in Tijuana, Mexico for its office products operations
for $61,000 per year.
The Company rents additional space in Tijuana, Mexico for its sporting goods
operations for $2,010 per month.
The Company believes that its facilities are in excellent condition and suitable
for their respective operations. The Evansville, Wabash and Tijuana sites also
contain several undeveloped acres which could be utilized for expansion.
The Company believes that all of its facilities are in compliance with
applicable environment regulations and is not subject to any proceeding by any
federal, state or local authorities regarding such matter. The Company provides
regular maintenance and service on its plants and machinery as required.
ITEM 3--LEGAL PROCEEDINGS
The Company is involved in litigation arising in the normal course of its
business. The Company does not believe that the disposition or ultimate
resolution of such claims or lawsuits will have a material adverse affect on the
business or financial condition of the Company.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
(6)
<PAGE> 9
Part II
ITEM 5--MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's common stock is traded under the symbol "ESCA" on the Nasdaq
National Market System. The following table sets forth, for the calendar periods
indicated, the high and low sales prices of the Common Stock as reported by the
Nasdaq National Market System:
<TABLE>
<CAPTION>
PRICES HIGH LOW
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<S> <C> <C>
1998
First quarter ended March 21, 1998 $19.88 $14.00
Second quarter ended July 11, 1998 25.25 19.38
Third quarter ended October 3, 1998 25.50 18.50
Fourth quarter ended December 26, 1998 22.13 16.00
1997
First quarter ended March 22, 1997 $12.63 $ 8.25
Second quarter ended July 12, 1997 10.88 9.38
Third quarter ended October 4, 1997 12.25 9.50
Fourth quarter ended December 27, 1997 14.75 10.88
</TABLE>
The closing market price on February 26, 1999 was $18.00 per share.
In the fourth quarter of 1998, on December 21, 1998, the Company announced that
Escalade's Board of Directors declared a special cash dividend of $1.00 per
share to shareholders of record January 8, 1999, payable January 22, 1999. The
dividend was declared at Escalade's Regular Board Meeting, December 19, 1998.
In the fourth quarter of 1997, the Company announced its offer to purchase up to
1,000,000 shares of its common stock at a price of $11 to $14 per share.
Pursuant to such offer, the Company purchased 117,766 shares of its common stock
at $14 per share in December 1997.
There were approximately 325 holders of record of the Company's Common Stock at
February 26, 1999. The approximate number of stockholders, including those held
by depository companies for certain beneficial owners, was 850.
(7)
<PAGE> 10
<TABLE>
<CAPTION>
ITEM 6--SELECTED FINANCIAL DATA (In thousands, except per share data)
December 26, December 27, December 28, December 30, December 31,
AT AND FOR YEARS ENDED 1998 1997 1996 1995 1994
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INCOME STATEMENT DATA (2)
<S> <C> <C> <C> <C> <C>
Net sales
Sporting goods $60,184 $63,699 $70,651 $71,219 $83,221
Office and graphic
arts products 30,486 24,836 19,132 17,321 17,276
Total net sales 90,670 88,535 89,783 88,540 100,497
Income from continuing
operations 7,778 7,449 5,736 856 (2,178)
Net income (loss) 6,136 6,361 5,247 448 (2,403)
Weighted average shares 3,095 3,110 3,850 4,134 4,129
PER SHARE DATA (1)
Basic earnings per share
from continuing operations $2.51 $2.40 $1.49 $.21 $(.53)
Basic earnings per share 1.98 2.05 1.36 .11 (.58)
Cash dividends 1.00 0 0 0 0
BALANCE SHEET DATA
Working capital 15,763 15,478 13,309 17,069 16,837
Total assets 63,489 66,145 54,430 57,767 75,883
Short-term debt 10,100 14,075 13,675 16,732 31,215
Long-term debt 6,400 10,700 5,500 6,266 9,148
Total stockholders' equity 26,702 23,501 19,305 23,338 22,889
</TABLE>
(1) Basic earnings per common share are based on average shares outstanding
adjusted to reflect the Company's 15% stock dividend declared on February
19, 1994.
(2) Restated for discontinued operations.
(8)
<PAGE> 11
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1998 COMPARED to 1997
In 1998, net sales increased 2.4%, or $2,135,000 to $90,670,000 from $88,535,000
in 1997.
Sporting goods net sales decreased by $3,515,000 from $63,699,000 to
$60,184,000. This decrease was mainly in game parlor which includes table
tennis, pool and game tables and accessories and was due to a decrease in units
sold.
Office and graphic arts machines and equipment net sales increased by $5,650,000
or 22.7%, to $30,486,000 from $24,836,000. Most of this increase was due to the
acquisition of Master Products.
Cost of sales of $60,526,000 as a percentage of net sales was 66.8% in 1998 as
compared to $59,168,000, or 66.9% in 1997.
Selling, administrative and general expenses in 1998 were $15,834,000, or 17.5%,
of net sales as compared to $16,103,000, or 18.2%, in 1997. This decrease as a
percentage of net sales was mainly in the office and graphic arts machines and
equipment segment. Consolidation of some sales, marketing and administrative
functions was the reason for the decrease in these expenses as a percentage of
net sales.
Interest expense in 1998 was $1,118,000 as compared to $1,065,000 in 1997, an
increase of $53,000, or 5.0%. This increase in interest expense was due to
slightly higher borrowing levels in 1998.
The Company incurred expenses totaling $427,315 relating to the potential sale
of Escalade Sports. The Company terminated its plans to sell Escalade Sports.
The income tax provision for 1998 was $4,791,000 for an effective rate of 38.1%.
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. Accordingly, Escalade
International, Limited is reported as a discontinued operation for the years
ended December 26, 1998, December 27, 1997 and December 28, 1996. Net assets of
the discontinued operation at December 26, 1998 consist primarily of accounts
receivable, inventory and property, plant and equipment. The estimated loss on
the disposal of Escalade International, Limited is $1,222,279 including a
provision of $250,000 for operating losses during phaseout. The divestiture
period is expected to run into the fourth quarter of 1999.
The income for the year was $6,136,000 as compared to $6,361,000 in 1997. This
decrease in net income was primarily due to the loss on disposal of Escalade
International, Limited of $1,222,279.
(9)
<PAGE> 12
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1997 COMPARED to 1996
In 1997, net sales decreased 1.4%, or $1,248,000 to $88,535,000 from $89,783,000
in 1996.
Sporting goods net sales decreased by $6,952,000 from $70,651,000 to
$63,699,000. Of this decrease, 36% was due to discontinued product or product
lines and the remaining 64% was due to a decrease in units sold. The decrease in
units sold was mainly caused by excess inventory carryover from the prior year
by several large customers.
Office and graphic arts machines and equipment net sales increased by
$5,704,000, or 29.8%, to $24,836,000 from $19,132,000. Of this increase, 95% was
due to the acquisition of Master Products and the other 5% was mainly due to
increased export sales.
Cost of sales of $59,168,000 as a percentage of net sales was 66.9% in 1997 as
compared to $64,089,000, or 71.4%, in 1996. This decrease in cost of sales as a
percentage of net sales was in the sporting goods segment. This decrease in cost
of goods sold was in factory expense, primarily in depreciation, product
development, salaries and management services.
Selling, administrative and general expenses in 1997 were $16,103,000, or 18.2%,
of net sales as compared to $15,496,000, or 17.3%, in 1996. This increase as a
percentage of net sales was in the office and graphic arts machines and
equipment segment. Professional services, travel, customer allowances and bad
debts increased. Also, this segment's selling, general and administrative
expenses are higher than sporting goods as a percentage of net sales and this
segment's sales are increasing as a percentage of total sales.
Interest expense in 1997 was $1,065,000 as compared to $1,239,000 in 1996, a
decrease of $174,000, or 14.0%. This decrease in interest expense was due to
lower average borrowing levels in 1997 than in 1996.
The income tax provision for 1997 was $4,689,000 for an effective rate of 38.6%.
Net income for the year was $6,361,000 as compared to $5,247,000 in 1996. This
increase in net income was from sporting goods and was primarily due to
increased margins as a result of lower factory expenses.
(10)
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
The Company's net cash provided by operating activities was $8,605,551,
$8,784,231, and $15,266,154 in 1998, 1997 and 1996. Inventory management
provided (used) cash of $(10,009), $272,909 and $3,699,263 in 1998, 1997 and
1996. Accounts receivable used cash of $561,035, $2,113,236 and $2,439,220 in
1998, 1997 and 1996.
INVESTING ACTIVITIES
The Company's net cash used by investing activities was $1,429,546, $10,651,115
and $1,891,594 in 1998, 1997 and 1996. The Company used $1,067,546, $1,597,055
and $1,902,127 in 1998, 1997 and 1996 to purchase property and equipment. In
1997, the Company used $8,958,745 for the purchase of certain assets of Master
Products, net of cash acquired.
FINANCING ACTIVITIES
Net cash provided (used) by financing activities in 1998, 1997 and 1996 was
$(8,082,003), $1,793,961 and $(13,301,909). In 1998, the Company paid $7,800,000
on long-term debt. At year end, the short-term debt had decreased $475,000 from
last year.
The Company's working capital requirements are funded by cash flow from
operations and a domestic short-term line of credit. The maximum amount that
could be drawn under its domestic line of credit at year end was $12,000,000, of
which $7,800,000 was used. The domestic line of credit has been paid down to
zero as of February 4, 1999.
The Company paid no cash dividends during the two fiscal years ended 1997. In
the fourth quarter of 1998, on December 21, 1998, the Company announced that
Escalade's Board of Directors declared a special cash dividend of $1.00 per
share to shareholders of record January 8, 1999, payable January 22, 1999. The
dividend was declared at Escalade's Regular Board Meeting, December 19, 1998.
EFFECT OF INFLATION
The Company cannot accurately determine the precise effects of inflation;
however, there were some increases in sales and costs due to inflation in 1998.
The Company attempts to pass on increased costs and expenses through price
increases when necessary. The Company is working on reducing expense levels,
improving manufacturing technologies and redesigning products to keep these
costs under control.
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.
(11)
<PAGE> 14
Escalade Sports has also substantially completed the evaluation, conversion and
testing of its business and manufacturing equipment to prepare for the year
2000. The Company believes that such process will be completed in its entirety
by the end of the first quarter of 1999. Escalade Sports has also requested year
2000 compliance assurances from its customers, vendors and other third parties
such as utility companies. Responses from these third parties have been slow to
date. Escalade is uncertain whether it will receive responses from all such
parties and whether all such responses will be satisfactory.
Martin Yale completed the evaluation phase for year 2000 compatibility on
January 18, 1999 and conversion of software codes commenced on January 25, 1999.
Martin Yale expects that all necessary conversion and testing should be
completed in the fourth quarter of 1999. Outside third parties are anticipated
to work with Martin Yale employees in preparing for the year 2000. Martin Yale
will also seek year 2000 compliance assurances from its customers, vendors and
other third parties, such as utility companies.
As of the end of its fourth quarter of 1998, the Company had incurred
approximately $100,000 in connection with preparing for the year 2000. The
Company expects to incur approximately another $150,000 of year 2000 expenses by
the end of 1999. The Company estimates that its actual and future expenditures
in this area are 75% attributable to internal costs and external fees for
conversion of systems. The remaining 25% of year 2000 expenses are attributable
to new software and equipment. The Company is funding 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 are continuing to
implement their year 2000 plans but have not yet completed those actions. 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 the 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. As the Company continues to complete its evaluation,
conversion and testing, the Company will assess 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 prior to the end of 1999.
(12)
<PAGE> 15
ITEM 7.A.--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by Item 8 are set forth
in Part IV, Item 14.
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
(13)
<PAGE> 16
PART III
ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required under this item with respect to Directors and Executive
Officers is contained in the registrant's Proxy Statement relating to its annual
meeting of stockholders scheduled to be held on April 24, 1999 under the
captions "Certain Beneficial Owners" and "Election of Directors" and is
incorporated herein by reference.
ITEM 11--EXECUTIVE COMPENSATION
Information required under this item is contained in the registrant's Proxy
Statement relating to its annual meeting of stockholders scheduled to be held on
April 24, 1999 under the caption "Executive Compensation" and is incorporated
herein by reference, except that the information required by Items 402(k) and
(l) of Regulation S-K which appear within such caption under the sub-headings
"Compensation and Stock Option Committees" and "Financial Performance" are
specifically not incorporated by reference into this Form 10-K or into any other
filing by the registrant under the Securities Act of 1933 or the Securities
Exchange Act of 1934.
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this item is contained in the Registrant's Proxy
Statement relating to its annual meeting of stockholders scheduled to be held on
April 24, 1999 under the caption "Certain Beneficial Owners" and is incorporated
herein by reference.
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
(14)
<PAGE> 17
Part IV
ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) Documents filed as a part of this report:
(1) FINANCIAL STATEMENTS
Independent Auditor's Report
Consolidated financial statements of Escalade, Incorporated and subsidiaries:
Consolidated balance sheet--December 26, 1998 and December 27, 1997
Consolidated statement of income--fiscal years ended December 26, 1998,
December 27, 1997 and December 28, 1996
Consolidated statement of stockholders' equity--fiscal years ended
December 26,1998, December 27, 1997 and December 28, 1996
Consolidated statement of cash flows--fiscal years ended December 26,
1998, December 27, 1997 and December 28, 1996
Notes to consolidated financial statements
(2) FINANCIAL STATEMENT SCHEDULES
Independent Auditor's Report on financial statement schedule
For the three-year period ended December 26, 1998:
Schedule II--Valuation and qualifying accounts
All other schedules are omitted because of the absence of
conditions under which they are required or because the required
information is given in the consolidated financial statements or
notes thereto.
(3) Exhibits
3.1 Articles of incorporation of Escalade, Incorporated (a)
3.2 By-Laws of Escalade, Incorporated (a)
4.1 Form of Escalade, Incorporated's common stock certificate (a)
10.3 Licensing agreement between Sweden Table Tennis AB and Indian
Industries, Inc. dated January 1, 1995 (d)
10.8 Federal trademark registration 283,766 for Ping-Pong(R)bats and rackets
(a)
10.9 Federal trademark registration 283,767 for Ping-Pong(R)balls (a)
10.10 Federal trademark registration 294,408 for Ping-Pong(R) tables and
parts (a)
10.11 Federal trademark registration 520,270 for Ping-Pong(R) game (a)
10.12 Federal trademark registration 1,003,289 for Mr. Table Tennis(R) table
tennis equipment (a)
10.13 Federal trademark registration 1,187,832 for Harvard(R)table tennis
equipment (a)
10.14 Federal trademark registration 1,442,274 for Mini Court(R)(a)
10.15 Federal trademark registration 1,292,167 for Premier(R)table tennis
tables and accessories (a)
10.16 Federal trademark registration 1,456,647 for Mini Pool(R) (a)
(15)
<PAGE> 18
(3) Exhibits (continued)
10.17 Trademark Assignment--Federal trademark registration 1,348,890 for
Sandmar(R) office machines(b)
10.18 Agreement dated April 28, 1997 between Indian Industries, Inc. and
International Union of Electronic, Electrical, Salaried, Machine and
Furniture Workers, AFL-CIO Local No. 848(e)
10.21 Amendment to credit agreement dated May 31, 1996 between Escalade,
Incorporated and Bank One, Indianapolis, National Association dated
September 30, 1998(g)
10.32 Loan agreement dated September 1, 1998 between Martin Yale Industries,
Inc. and City of Wabash, Indiana(g)
10.33 Trust Indenture between the City of Wabash, Indiana and Bank One Trust
Company, NA as Trustee dated September 1, 1998 relating to the
Adjustable Rate Economic Development Revenue Refunding Bonds, Series
1998 (Martin Yale Industries, Inc. Project)(g)
10.34 Real Estate Sales Contract dated September 17, 1990 between Martin Yale
Industries, Inc. and Fritkin-Jones Design Group, Inc.(c)
10.36 Stock purchase agreement dated June 17, 1997 between Martin Yale
Industries, Inc. and James Crean International, G.V. regarding the
purchase of Master Products Manufacturing Company, Inc.(e)
10.37 Asset Purchase Agreement dated June 26, 1998 by and among Jen Sports,
Inc., Sportcraft, Ltd. and Escalade, Incorporated to sell
substantially all of the assets of Escalade Sports.(h)
10.38 Termination Agreement dated November 25, 1998 by and among Jen Sports,
Inc., Sportcraft, Ltd. and Escalade, Incorporated to sell
substantially all of the assets of Escalade Sports. (i)
21 Subsidiaries of the Registrant
23 Consent of Olive LLP
27 Financial Data Schedule
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
10.24 The Harvard Sports/Indian Industries, Inc. 401(k) Plan as amended and
merged in 1993 (d)
10.26 Martin Yale Industries, Inc. 401(k) Retirement Plan as amended in 1993
(d)
10.27 Incentive Compensation Plan for Escalade, Incorporated and its
subsidiaries (a)
10.28 Escalade, Incorporated 1984 Incentive Stock Option Plan (a)
10.29 Example of contributory deferred compensation agreement between
Escalade, Incorporated and certain management employees allowing for
deferral of compensation (a)
10.30 1997 Director Stock Compensation and Option Plan (f)
10.31 1997 Incentive Stock Option Plan (f)
(16)
<PAGE> 19
(a) Incorporated by reference from the Company's Form S-2 Registration
Statement, File No. 33-16279, as declared effective by the Securities and
Exchange Commission on September 2, 1987
(b) Incorporated by reference from the Company's 1988 Annual Report on Form
10-K
(c) Incorporated by reference from the Company's 1990 Annual Report on Form
10-K
(d) Incorporated by reference from the Company's 1995 Annual Report on Form
10-K
(e) Incorporated by reference from the Company's 1997 Second Quarter Report on
Form 10-Q
(f) Incorporated by reference from the Company's 1997 Proxy Statement
(g) Incorporated by reference from the Company's 1998 Third Quarter Report on
Form 10-Q
(h) Incorporated by reference from the Company's 1998 Form 8-K filed July 8,
1998
(i) Incorporated by reference from the Company's 1998 Amended Form 8-K filed
December 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 Sporting Goods Asset Sale. This Form
8-K has subsequently been amended on August 25, 1998, September 23, 1998,
October 2, 1998, November 4, 1998, and December 1, 1998 to reflect ongoing
developments pending to the termination of the Asset Sale and the
cancellation of the special meeting of stockholders relating thereto.
(17)
<PAGE> 20
OLIVE
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
Escalade, Incorporated
Evansville, Indiana
We have audited the accompanying consolidated balance sheet of Escalade,
Incorporated and subsidiaries as of December 26, 1998 and December 27, 1997 and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 26, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Escalade, Incorporated and subsidiaries at December 26, 1998 and December 27,
1997 and the results of their operations and their cash flows for each of the
three years in the period ended December 26, 1998 in conformity with generally
accepted accounting principles.
OLIVE LLP
Evansville, Indiana
January 29, 1999
(F-1)
<PAGE> 21
<TABLE>
<CAPTION>
ESCALADE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 26 AND DECEMBER 27 1998 1997
- ----------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current assets
Cash $ 340,398 $ 1,246,396
Receivables, less allowances of $581,830
and $893,434 30,791,608 30,602,245
Inventories 12,647,354 12,637,345
Prepaid expenses 129,735 236,500
Deferred income tax benefit 1,002,064 1,205,196
----------------------------------------
Total current assets 44,911,159 45,927,682
Property, plant and equipment 10,103,690 11,638,686
Other assets 2,844,111 2,422,066
Goodwill 5,630,066 6,157,350
----------------------------------------
$63,489,026 $66,145,784
========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable--bank $ 7,800,000 $ 8,275,000
Current portion of long-term debt 2,300,000 5,800,000
Trade accounts payable 2,959,282 2,696,478
Accrued liabilities 11,642,828 12,128,256
Federal income tax payable 1,324,416 1,550,000
Dividends payable 3,121,718
----------------------------------------
Total current liabilities 29,148,244 30,449,734
----------------------------------------
Other liabilities
Long-term debt 6,400,000 10,700,000
Deferred compensation 1,165,969 1,065,973
Deferred income tax liability 72,647 429,412
----------------------------------------
7,638,616 12,195,385
----------------------------------------
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--3,097,357 and
3,050,691 shares 6,072,824 5,879,827
Retained earnings 20,387,917 17,373,846
Accumulated other comprehensive income 241,425 246,992
----------------------------------------
26,702,166 23,500,665
----------------------------------------
$63,489,026 $66,145,784
========================================
</TABLE>
See notes to consolidated financial statements.
(F-2)
<PAGE> 22
<TABLE>
<CAPTION>
ESCALADE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
YEARS ENDED DECEMBER 26, DECEMBER 27
AND DECEMBER 28 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $90,670,040 $88,535,483 $89,783,574
----------------------------------------------------
Costs, Expenses and Other Income
Cost of products sold 60,525,642 59,168,410 64,089,276
Selling, administrative and general expenses 15,834,259 16,103,281 15,495,934
Loss on terminated sporting goods sale 427,315
Amortization of goodwill 398,286 217,223
Interest 1,117,851 1,064,721 1,239,162
(Gain) loss on disposal of assets 207,687 319,066 (60,146)
Other income (410,252) (475,580) (230,520)
---------------------------------------------------------
78,100,788 76,397,121 80,533,706
Income From Continuing Operations
Before Income Taxes 12,569,252 12,138,362 9,249,868
Provision for Income Taxes 4,791,463 4,689,487 3,513,334
---------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 7,777,789 7,448,875 5,736,534
Loss from discontinued operations (419,721) (1,088,224) (489,417)
Loss from disposal of Escalade International,
Limited including provision of $250,000 for
operating losses during phaseout (1,222,279)
---------------------------------------------------------
NET INCOME $ 6,135,789 $ 6,360,651 $ 5,247,117
=========================================================
Per Share Data
Basic earnings per share from continuing operations $2.51 $2.40 $1.49
Diluted earnings per share from continuing operations $2.50 $2.37 $1.48
Basic earnings per share $1.98 $2.05 $1.36
Diluted earnings per share $1.97 $2.02 $1.35
</TABLE>
See notes to consolidated financial statements.
(F-3)
<PAGE> 23
ESCALADE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
-------------------------- OTHER
COMPREHENSIVE RETAINED COMPREHENSIVE
SHARES AMOUNT INCOME EARNINGS INCOME TOTAL
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1996 4,133,954 $17,572,397 $ 5,766,078 $23,338,475
Comprehensive income
Net income $5,247,117 5,247,117 5,247,117
-------------------
Comprehensive income $5,247,117
===================
Exercise of stock options 11,786 38,766 38,766
Purchase of stock (1,061,291) (9,319,647) (9,319,647)
-------------------------- ---------------------------------------------
BALANCES AT DECEMBER 28, 1996 3,084,449 8,291,516 11,013,195 19,304,711
Comprehensive income
Net income $6,360,651 6,360,651 6,360,651
Unrealized gains on securities,
net of tax 246,992 $246,992 246,992
===================
Comprehensive income $6,607,643
===================
Exercise of stock options 84,808 433,808 433,808
Purchase of stock (118,566) (1,656,368) (1,656,368)
Put option to retire warrants (1,189,129) (1,189,129)
-------------------------- ---------------------------------------------
BALANCES AT DECEMBER 27, 1997 3,050,691 5,879,827 17,373,846 246,992 23,500,665
Comprehensive income
Net income $6,135,789 6,135,789 6,135,789
Unrealized losses on (5,567) (5,567) (5,567)
securities,
net of tax
===================
Comprehensive income $6,130,222
===================
Stock issued under the Director
Stock Option Plan 6,638 65,550 65,550
Exercise of stock options 51,279 341,216 341,216
Purchase of stock (11,251) (213,769) (213,769)
Payment of dividend (3,121,718) (3,121,718)
-------------------------- ---------------------------------------------
BALANCES AT DECEMBER 26, 1998 3,097,357 $ 6,072,824 $20,387,917 $241,425 $26,702,166
========================== =============================================
</TABLE>
See notes to consolidated financial statements.
(F-4)
<PAGE> 24
<TABLE>
<CAPTION>
ESCALADE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 26, DECEMBER 27 AND DECEMBER 28 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $6,135,789 $ 6,360,651 $ 5,247,117
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 2,796,004 2,381,201 3,026,541
Provision for doubtful accounts 371,672 474,050 427,650
Deferred income taxes (153,633) 1,303,683 411,348
Provision for deferred compensation 99,996 98,183 101,955
(Gain) loss on disposals of assets 207,637 319,066 (60,146)
Change in cash surrender value, net of loans and premiums (36,000) (47,734)
Changes in
Accounts receivable (561,035) (2,113,236) (2,439,220)
Income tax refundable 275,000
Inventories (10,009) 272,909 3,699,263
Prepaids 106,765 96,969 44,920
Other assets 33,362 (89,397) 81,149
Income tax payable (225,584) 450,928 770,000
Accounts payable and accrued expenses (225,923) (734,776) 3,728,311
---------------------------------------------------
Net cash provided by operating activities 8,575,041 8,784,231 15,266,154
---------------------------------------------------
INVESTING ACTIVITIES
Premiums paid for life insurance (266,490) (65,800)
Purchase of property and equipment (1,067,546) (1,597,055) (1,902,127)
Proceeds from sale of property and equipment 76,333
Purchase of long-term investments (65,000) (95,315)
Purchase of certain Master Products assets,
net of cash acquired (8,958,745)
-----------------------------------------------------
Net cash used by investing activities (1,399,036) (10,651,115) (1,891,594)
-----------------------------------------------------
FINANCING ACTIVITIES
Net increase (decrease) in notes payable--bank (475,000) 3,120,650 (10,475,000)
Proceeds from exercise of stock options 406,766 433,808 38,766
Reduction of long-term debt (7,800,000) (10,300,000) (7,248,000)
Purchase of stock and warrants (213,769) (2,845,497) (9,319,647)
Proceeds from long-term debt 11,500,000 13,900,000
Deferred compensation paid (115,000) (198,028)
-----------------------------------------------------
Net cash provided (used) by financing activities (8,082,003) 1,793,961 (13,301,909)
-----------------------------------------------------
INCREASE (DECREASE) IN CASH (905,998) (72,923) 72,651
CASH, BEGINNING OF YEAR 1,246,396 1,319,319 1,246,668
-----------------------------------------------------
CASH, END OF YEAR $ 340,398 $ 1,246,396 $ 1,319,319
=====================================================
SUPPLEMENTAL CASH FLOWS INFORMATION
Interest paid $1,120,229 $ 1,302,577 $ 1,379,847
Income taxes paid, net 4,775,283 3,819,632 2,286,986
Fixed assets in accounts payable 31,954 35,253 126,884
Dividends payable 3,121,718
</TABLE>
See notes to consolidated financial statements.
(F-5)
<PAGE> 25
ESCALADE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Escalade, Incorporated (Company) is primarily engaged in the manufacture and
sale of sporting goods and office and graphic arts products. The Company is
located in Evansville, Indiana and has five manufacturing facilities, one in
Evansville, Indiana; Wabash, Indiana and Los Angeles, California and two in
Tijuana, Mexico. The Company sells products to customers throughout the United
States and provides foreign shipments of sporting goods through a foreign sales
corporation. The consolidated financial statements include the accounts of all
significant subsidiaries. Intercompany transactions have been eliminated.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is based on the
first-in, first-out method.
INVESTMENTS
The Company has long-term marketable equity securities, which are included in
other assets on the consolidated balance sheet and are recorded at fair value
with unrealized gains and losses reported, net of tax, in accumulated other
comprehensive income.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation and
amortization are computed by the straight-line and double declining balance
methods.
The estimated useful lives used in computing depreciation are as follows:
YEARS
- -----------------------------------------
Buildings 20-30
Leasehold improvements 4-8
Machinery and equipment 5-15
Tooling, dies and molds 2-4
The cost of maintenance and repairs are charged to income as incurred;
significant renewals and improvements are capitalized. When assets are retired
or otherwise disposed of, the costs and related accumulated depreciation are
removed from the accounts, and the resulting gains or losses are recognized in
income for the period.
(F-6)
<PAGE> 26
ESCALADE, INCORPORATED AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FINANCIAL INSTRUMENTS
The carrying values of all of the Company's financial instruments approximate
their fair values.
EARNINGS PER SHARE
Basic earnings per common share information is based on average shares
outstanding during each year.
FISCAL YEAR END
The Company's fiscal year ends on the Saturday nearest December 31, within the
calendar year.
BAD DEBTS
The Company uses the reserve method of accounting for bad debts on receivables.
PRODUCT WARRANTY
The Company provides for the estimated cost of its warranty obligations at the
time of the sale.
EMPLOYEE BENEFITS
The Company has an employee profit sharing salary reduction plan, pursuant to
the provisions of Section 401(k) of the Internal Revenue Code, for non-union
employees. It is the Company's policy to fund costs accrued on a current basis.
INCOME TAXES
Income tax in the consolidated statement of income includes deferred income tax
provisions or benefits for all significant temporary differences in recognizing
income and expenses for financial reporting and income tax purposes.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to income as incurred. The research
and development costs incurred during 1998, 1997 and 1996 were approximately
$1,500,000, $1,400,000 and $2,300,000.
REVENUE RECOGNITION
Revenue from the sale of the Company's products is recognized as products are
shipped to customers.
SELF INSURANCE
The Company has elected to act as a self-insurer for certain costs related to
employee health and accident benefit programs. Costs resulting from non-insured
losses are charged to income when incurred. The Company has purchased insurance
which limits its exposure for individual claims and which limits its aggregate
exposure to $1,100,000.
(F-7)
<PAGE> 27
<TABLE>
<CAPTION>
ESCALADE, INCORPORATED AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 2--INVENTORIES
Inventories consist of the following:
DECEMBER 26 AND DECEMBER 27 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
Finished products $ 5,717,096 $ 5,665,390
Work in process 3,442,410 3,412,443
Raw materials and supplies 3,487,848 3,559,512
---------------------------------------
$12,647,354 $12,637,345
=======================================
NOTE 3--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
DECEMBER 26 AND DECEMBER 27 1998 1997
- -----------------------------------------------------------------------------------
Land $ 757,210 $ 757,210
Buildings and leasehold improvements 10,733,231 10,649,336
Machinery and equipment 23,952,194 23,588,382
---------------------------------------
Total cost 35,442,635 34,994,928
Accumulated depreciation and amortization (25,338,945) (23,356,242)
---------------------------------------
$10,103,690 $11,638,686
=======================================
</TABLE>
NOTE 4--LINE OF CREDIT
The Company has an unsecured line of credit for short-term borrowings. The
line-of-credit arrangement is based upon a written agreement and can be
withdrawn at the banks' option. At December 26, 1998, the line of credit for
short-term borrowings aggregated $12,000,000, of which $7,800,000 was borrowed.
The interest rate on the line of credit is at the Bank One Indianapolis, N.A.
prime rate. A LIBOR option is also available to use for the interest rate. At
December 31, 1998, $1,300,000 of this line of credit was at a prime rate of
7.75% and $6,500,000 was at a LIBOR option rate of 6.28%. This line of credit is
subject to the same restrictive covenants as the long-term debt as discussed in
Note 5.
(F-8)
<PAGE> 28
<TABLE>
<CAPTION>
ESCALADE, INCORPORATED AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 5--LONG-TERM DEBT
DECEMBER 26 AND DECEMBER 27 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage payable, due in annual installments varying from
$300,000 in 1998 to $500,000 in 2005, interest currently
is 5.64%, due 2005, secured by plant facility, machinery and
equipment, and letter of credit $2,700,000 $ 3,000,000
Term loan, due in quarterly installments of $500,000, interest
varies from prime to London Interbank Offered Rate
(LIBOR) plus 1.75%, secured by equipment, inventory,
accounts receivable, general intangibles and securities 6,000,000 13,500,000
------------------------------------
8,700,000 16,500,000
Portion classified as current (2,300,000) (5,800,000)
------------------------------------
$6,400,000 $10,700,000
====================================
</TABLE>
Maturities of long-term indebtedness for the ensuing five years are: 1999,
$2,300,000; 2000, $2,300,000; 2001,
$2,400,000; 2002, $400,000; 2003, $400,000 and thereafter, $900,000.
The mortgages payable and term loan agreements contain certain restrictive
covenants, of which the more significant include maintenance of specified net
worth, restrictions on capital expenditures and dividends, and maintenance of
specified ranges of debt service and leverage ratios.
<TABLE>
<CAPTION>
NOTE 6--INVESTMENTS
GROSS APPROXIMATE
AMORTIZED UNREALIZED MARKET
COST GAINS VALUE
-----------------------------------------------
<S> <C> <C> <C>
DECEMBER 26, 1998
Available for sale
Marketable equity securities (included in
other assets) $755,486 $402,375 $1,157,861
===============================================
DECEMBER 27, 1997
Available for sale
Marketable equity securities (included in
other assets) $730,196 $411,653 $1,141,849
===============================================
</TABLE>
(F-9)
<PAGE> 29
ESCALADE, INCORPORATED AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 7--STOCK OPTIONS AND WARRANTS
A total of 24,707 options were outstanding at year end from the 1984 Stock
Option Plan (Plan). The date for granting options under this Plan expired on
October 26,1994 and the date for exercising options expires on September 26,
1999. At the Company's 1997 annual meeting, the stockholders approved two new
Stock Option Plans reserving 300,000 common shares for issuance under an
Incentive Stock Option Plan (ISO) and 100,000 common shares for issuance under a
Director Stock Option Plan (DSO). During 1998, there were 19,250 options granted
under the ISO and there were 42,424 options outstanding at year end under this
plan. During 1998, there were 3,319 options granted and outstanding under the
DSO.
Under the Company's ISO, which is accounted for in accordance with Accounting
Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES,
and related interpretations, the Company grants selected executives and other
key employees stock option awards which vest over four years of continued
employment. During 1998, the Company authorized the grant of options for up to
22,569 shares of the Company's common stock. The exercise price of each option,
which has a five-year life, was equal to the market price of the Company's stock
on the date of grant; therefore, no compensation expense was recognized. Options
are exercisable commencing one year from the date of issuance to the extent
vested.
Although the Company has elected to follow APB Opinion No. 25, Statement of
Financial Accounting Standards (SFAS) No. 123 requires pro forma disclosures of
net income and earnings per share as if the Company had accounted for its
employee stock options under that statement. The fair value of each option grant
was estimated on the grant date using an option pricing model with the following
assumptions:
<TABLE>
<CAPTION>
1998 1997
------------------------
<S> <C> <C>
Risk-free interest rates 4.75% 6%
Dividend yields 0% 0%
Volatility factors of expected market price of common stock 51% 49%
Weighted average expected life of the options 5 YEARS 5 years
</TABLE>
Under SFAS No. 123, compensation cost is recognized in the amount of the
estimated fair value of the options and amortized to expense over the options'
vesting period. The pro forma effect on net income and earnings per share of
this statement is as follows:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C> <C>
Net income As reported $6,135,789 $6,360,651
Pro forma 6,076,755 6,363,257
Basic earnings per share As reported 1.98 2.05
Pro forma 1.96 2.04
Diluted earnings per share As reported 1.97 2.02
Pro forma 1.95 2.02
</TABLE>
(F-10)
<PAGE> 30
<TABLE>
<CAPTION>
ESCALADE, INCORPORATED AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Stock option transactions are summarized as follows:
1998 1997 1996
--------------------------------------------------------------------------------------
OPTION Option Option
SHARES PRICE Shares Price Shares Price
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning $6.30 TO $3.26 to $3.26 to
of year 101,821 9.88 168,311 7.25 196,581 7.25
Issued during year $9.88 TO
22,569 18.75 25,000 9.88
Canceled or expired (2,661) (6,682) (16,485)
$3.26 TO $3.26 to
Exercised during year (51,279) 9.88 (84,808) 7.25 (11,785) $3.26
---------------- --------------------------------------------------------
$5.50 TO $6.30 to $3.26 to
Outstanding at end of year 70,450 18.75 101,821 9.88 168,311 7.25
================ ================ ================
Exercisable at end of year 30,297 63,113 120,699
================ ================ ================
Weighted-average fair value
of options granted during
the year $9.83 $4.99
================ ================
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 26, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -----------------------------------------------------------------------------------------------------------------------
RANGE OF NUMBER WEIGHTED-AVERAGE NUMBER
EXERCISE PRICES OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
AT 12/26/98 CONTRACTUAL LIFE EXERCISE PRICE AT 12/26/98 EXERCISE PRICE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$5.50 1,000 1.0 years $5.50 1,000 $5.50
7.25 23,707 1.0 7.25 23,707 7.25
9.88 26,493 3.4 9.88 5,590 9.88
18.75 19,250 4.2 18.75 18.75
------------------ --------------------
$5.50 to 18.75 70,450 2.8 11.36 30,297 7.68
================== ====================
</TABLE>
The incentive stock options granted in 1998 and 1997 are exercisable at the rate
of 25% over each of the four years beginning in 1999 and 1998.
3,319 Director Stock Options were issued during the year 1998 at an option price
of $9.88 and can be exercised after July 1, 1999 with an expiration date of June
30, 2002.
To acquire all of the common stock of Marcy Fitness Products, Inc., the Company
exchanged 272,112 Escalade warrants with an exercise price of $9.13 per share.
The warrants were exercisable until August 19, 1999. During 1997, these warrants
were put to the Company and retired at $13.50 per share for a total cost of
$1,189,129.
(F-11)
<PAGE> 31
ESCALADE, INCORPORATED AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 8--STOCKHOLDERS' EQUITY TRANSACTIONS
During 1997, the Company conducted a Dutch Auction self-tender offer whereby it
purchased 117,766 shares of its common stock at $14.00 per share. The Company
also conducted a Dutch Auction self-tender offer in 1996 whereby it purchased
approximately 1,000,000 shares of its common stock at a price of $8.875 per
share.
The Company paid no cash dividends during the two fiscal years ended 1997. In
the fourth quarter of 1998, on December 21, 1998, the Company announced that
Escalade's Board of Directors declared a special cash dividend of $1.00 per
share to shareholders of record January 8, 1999, payable January 22, 1999. The
dividend was declared at Escalade's Regular Board Meeting, December 19, 1998.
NOTE 9--EARNINGS PER SHARE
Earnings per share (EPS) were computed as follows:
<TABLE>
<CAPTION>
WEIGHTED PER
AVERAGE SHARE
YEAR ENDED DECEMBER 26, 1998 INCOME SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $6,135,789
-------------
Basic Earnings per Share
Income available to common stockholders 6,135,789 3,094,638 $1.98
Effect of Dilutive Securities
Stock options 18,741 ==============
Diluted Earnings Per Share -----------------------------
Income available to common stockholders and
assumed conversions $6,135,789 3,113,379 $1.97
================================================
YEAR ENDED DECEMBER 27, 1997
Net Income $6,360,651
Basic Earnings per Share -------------
Income available to common stockholders 6,360,651 3,109,514 $2.05
Effect of Dilutive Securities ================
Stock options
Diluted Earnings Per Share 35,328
Income available to common stockholders and ----------------------------
assumed conversions $6,360,651 3,144,842 $2.02
YEAR ENDED DECEMBER 28, 1996 -------------
Net Income $5,247,117
Basic Earnings per Share -------------
Income available to common stockholders 5,247,117 3,849,783 $1.36
Effect of Dilutive Securities ====================
Stock options 43,822
Diluted Earnings Per Share -----------------------------
Income available to common stockholders and
assumed conversions $5,247,117 3,893,605 $1.35
=================================================
</TABLE>
(F-12)
<PAGE> 32
ESCALADE, INCORPORATED AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Warrants to purchase 272,112 shares of common stock at $9.13 per share were
outstanding at December 28, 1996 and during a portion of the year ended December
27, 1997 but were not included in the computation of diluted EPS because the
warrants' exercise price was greater than the average market price of the common
shares.
Net loss per share from discontinuing operations:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------
<S> <C> <C> <C>
Basic $.53 $.35 $.13
Diluted $.53 $.35 $.13
</TABLE>
NOTE 10--OPERATING LEASES
The Company leases warehousing and office space at its National City, California
facilities for $11,573 per month through March 31, 1999. The Company has a
five-year option to extend the lease. The lease rate ranges from $11,920 per
month in year one to $13,025 per month in year five of the extension period. The
Company also shares in common area expenses not to exceed 8(cent) per sq. ft.
per month. The lease expires March 31, 2003.
The Company also leases warehousing space next to its Evansville facility for
$17,317 per month. The original lease expired on October 31, 1998. The Company
has four two-year renewal options followed by two five-year renewal options.
At December 26, 1998, the minimum rental payments under noncancelable leases
with terms of more than one year are as follows:
<TABLE>
<CAPTION>
YEARS ENDING AMOUNT
- -------------------------------------
<S> <C>
1999 $212,989
2000 146,264
2001 150,652
2002 155,171
2003 39,077
---------------
$704,153
===============
<CAPTION>
The following schedule shows the composition of total rental expense for
operating leases except those with terms of a month or less:
1998 1997 1996
--------------------------------------------------
<S> <C> <C> <C>
Rentals $469,650 $611,405 $656,082
==================================================
</TABLE>
(F-13)
<PAGE> 33
ESCALADE, INCORPORATED AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NOTE 11--INCOME TAXES
Provision for income taxes consists of the following:
YEARS ENDED DECEMBER 26, DECEMBER 27 AND
DECEMBER 28 1998 1997 1996
- ----------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $3,888,985 $3,435,532 $2,670,000
State 1,056,111 803,547 431,986
---------------------------------------------
4,945,096 4,239,079 3,101,986
---------------------------------------------
Deferred
Federal (121,668) 365,830 401,443
State (31,965) 84,578 9,905
---------------------------------------------
(153,633) 450,408 411,348
---------------------------------------------
$4,791,463 $4,689,487 $3,513,334
=============================================
</TABLE>
The provision for income taxes was computed based on financial statement income.
A reconciliation of the provision for income taxes to the amount computed using
the statutory rate follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 26, DECEMBER 27
AND DECEMBER 28 1998 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax at statutory rate $4,273,546 $4,127,043 $3,144,955
Increase (decrease) in income tax resulting from
Recurring permanent differences (goodwill
amortization, dividend exclusion, and non-
deductible officers' life insurance expense) (76,770) 25,893 (24,279
State tax expense, net of federal effect 675,936 586,163 291,648
Other (81,249) (49,612) 101,010
-------------------------------------
Provision for income taxes recorded $4,791,463 $4,689,487 $3,513,334
=====================================
</TABLE>
At December 26, 1998, a cumulative deferred tax asset of $929,417 is included in
current assets and other liabilities. At December 27, 1997, a cumulative
deferred tax asset of $775,784 is included in current and other assets.
(F-14)
<PAGE> 34
ESCALADE, INCORPORATED AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
The components of the net deferred tax asset are as follows:
DECEMBER 26 AND DECEMBER 27 1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Employee benefits $ 429,186 $ 413,588
Valuation reserves 527,677 724,095
Goodwill 94,869 115,320
Deferred compensation 395,800 399,593
Lease expense 67,513
------------------------------
Total assets 1,447,532 1,720,109
------------------------------
LIABILITIES
Depreciation (357,165) (779,664)
Unrealized gain on securities available for sale (160,950) (164,661)
-------------------------------
Total liabilities (518,115) (944,325)
-------------------------------
$ 929,417 $ 775,784
===============================
</TABLE>
NOTE 12--EMPLOYEE BENEFIT PLANS
The Company has an employee profit sharing salary reduction plan, pursuant to
the provisions of Section 401(k) of the Internal Revenue Code, for non-union
employees. The Company's contribution is a matching percentage of the employee
contribution as determined by the Board of Directors annually. The Company's
expense for the plan was $316,155, $339,931 and $311,701 for 1998, 1997 and
1996.
NOTE 13--VOLUNTARY EMPLOYEE BENEFITS ASSOCIATION TRUST (VEBA)
The Company established a VEBA as a tax-exempt organization to provide life,
medical, disability and other similar welfare benefits permitted pursuant to
Internal Revenue Code Section 501(c)(9) for its employees.
(F-15)
<PAGE> 35
ESCALADE, INCORPORATED AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NOTE 14--SEGMENT INFORMATION AND CONCENTRATIONS
YEARS ENDED DECEMBER 26, DECEMBER 27
AND DECEMBER 28 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In Thousands)
Sales to unaffiliated customers
Sporting goods $ 60,184 $ 63,699 $70,651
Office and graphic arts products 30,486 24,836 19,132
---------------------------------------------
Total consolidated $ 90,670 $ 88,535 $89,783
=============================================
Operating profit
Sporting goods $ 7,295 $ 8,311 $ 6,476
Office and graphic arts products 7,442 5,244 4,103
Corporate (427) (291) (381)
---------------------------------------------
Total consolidated 14,310 13,264 10,198
Consolidated other income 410 475 231
---------------------------------------------
14,720 13,739 10,429
Consolidated interest expense 1,118 1,065 1,239
Consolidated (gain) loss on disposal of assets 208 319 (60)
Consolidated amortization of goodwill 398 217
Consolidated loss on terminated sporting goods sale 427
---------------------------------------------
Consolidated income from operations before
income taxes $ 12,569 $ 12,138 $ 9,250
=============================================
Identifiable assets
Sporting goods $ 39,819 $ 40,904 $40,543
Office and graphic arts products 20,770 21,815 10,199
Corporate 2,900 3,427 3,688
---------------------------------------------
Total assets $63,489 $ 66,146 $54,430
=============================================
Depreciation and amortization charged to operations
Sporting goods $ 1,207 $ 1,214 $ 2,123
Office and graphic arts products 1,589 1,167 904
---------------------------------------------
Total consolidated $ 2,796 $ 2,381 $ 3,027
=============================================
Capital expenditures
Sporting goods $ 699 $ 582 $ 1,262
Office and graphic arts products 372 923 757
---------------------------------------------
$ 1,071 $ 1,505 $ 2,019
=============================================
</TABLE>
(F-16)
<PAGE> 36
ESCALADE, INCORPORATED AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
The Company operates principally in two industries, sporting goods and office
and graphic arts products. The Company sells its products primarily to retailers
located throughout the United States. Operations in the sporting goods industry
consist of production and sale of table tennis tables and accessories, archery
equipment, home pool tables and accessories, combination bumper pool and card
tables, game tables, basketball backboards, goals, poles and portables, darts
and dart cabinets. Operations in the office and graphic arts products industry
consist of production and sale of paper trimmers, paper folding machines, paper
drills, collators, decollators, bursting machines, letter openers, paper
joggers, checksigners, stamp affixers, paper shredders, paper punches, paper
cutters, catalog rack systems, bindery carts, business card slitters,
thermography machines and related accessories.
Operating profit is total revenue less operating expenses. In computing
operating profit neither interest expense nor income taxes have been deducted.
Identifiable assets are principally those assets used in each industry.
Corporate assets are principally deferred taxes, marketable equity securities
and the cash surrender value of life insurance.
In 1998, 1997 and 1996, approximately 38% (25% of consolidated sales), 33% (24%
of consolidated sales) and 31% (24% of consolidated sales) of the sporting goods
were sold to Sears, Roebuck & Co. At December 26, 1998 and December 27, 1997,
accounts receivable included $16,328,252 and $12,609,120 due from Sears, Roebuck
& Co.
Approximately 31% of the Company's labor force is covered by a collective
bargaining agreement. Management acknowledges that there usually will be
differences between Company offers and union demands during negotiations.
However, management has no reason to expect such differences to result in
protracted conflict. The current contract expires in 2000.
Consolidated assets include approximately $4.0 million of assets located in the
United Kingdom and Mexico.
(F-17)
<PAGE> 37
ESCALADE, INCORPORATED AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 15--CERTAIN SIGNIFICANT ESTIMATES
Management's estimates that influence the financial statements are normally
based on knowledge and experience about past and current events and assumptions
about future events. The following estimates affecting the financial statements
are particularly sensitive because of their significance, and it is at least
reasonably possible that a change in these estimates will occur in the near
term:
Product warranty reserves--based on an analysis of customers' product
return histories, current status, sales volume and management's
expectations from new products introduced into the market.
Customer allowance reserves--based on agreements for customer purchase
rebates and shared advertising, and prior year's shipments.
Inventory valuation reserves--based on estimates of costs of inventory
amounts overstocked or obsolete in excess of realizable value.
NOTE 16--ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
DECEMBER 26 AND DECEMBER 27 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accrued Liabilities
Employees' compensation $ 3,758,290 $ 4,217,671
Payroll taxes and taxes withheld from employees'
compensation 257,331 298,214
Taxes other than taxes on income 646,692 378,805
Accrued interest 111,484 130,714
Customer volume discounts payable 4,059,848 3,914,060
Other accrued items 2,809,183 3,188,792
--------------------------------------------
$11,642,828 $12,128,256
============================================
</TABLE>
NOTE 17--DEFERRED COMPENSATION PLAN
In October 1985, the Board of Directors approved the adoption of a Contributory
Deferred Compensation Plan pursuant to which some recipients of incentive
compensation could elect to defer receipt thereof. For each dollar of deferred
compensation, the Company provided a 75% matching amount. Amounts deferred earn
interest at the rate of 9%. Such amounts are not intended to be recognized for
tax purposes until receipt. All deferrals allowed under this plan have been
made. Participants have no vested rights in deferred amounts credited to their
accounts and are general creditors of the Company until such amounts are
actually paid.
(F-18)
<PAGE> 38
ESCALADE, INCORPORATED AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 18--COMMITMENTS AND CONTINGENCIES
At December 26, 1998, standby letters of credit aggregated $189,800 of which the
Company was obligated in the amount of $39,800 relating to the purchase of
certain raw materials and finished goods from suppliers.
Additionally, the Company has obtained a letter of credit for the benefit of the
mortgage holders. At December 26, 1998, the balance of the letter of credit was
$2,733,750. It is to be used in the event of a default in either interest or
principal payments.
The Company is involved in litigation arising in the normal course of its
business. The Company does not believe that the disposition or ultimate
resolution of existing claims or lawsuits will have a material adverse effect on
the business or financial condition of the Company.
NOTE 19--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. Accordingly, Escalade
International, Limited is reported as a discontinued operation for the years
ended December 26, 1998, December 27, 1997 and December 28, 1996. Net assets of
the discontinued operation at December 26, 1998 consist primarily of accounts
receivable, inventory and property, plant and equipment.
The estimated loss on the disposal of Escalade International, Limited is
$1,222,279 including a provision of $250,000 for operating losses during
phaseout. The divestiture period is expected to run into the fourth quarter of
1999. Summarized results of Escalade International, Limited are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 2,888 $ 2,966 $3,426
-----------------------------------------------------
Loss from operations (420) (1,088) (489)
Loss from disposal (1,222)
-----------------------------------------------------
Total loss on discontinued operations $(1,642) $(1,088) $ (489)
=====================================================
</TABLE>
The loss from discontinued operations was not tax effected because the foreign
losses were not tax deductible.
(F-19)
<PAGE> 39
ESCALADE, INCORPORATED AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 20--SUMMARY OF QUARTERLY RESULTS
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
MARCH 21 JULY 11 OCTOBER 3 DECEMBER 26
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Net sales $15,266 $18,334 $21,452 $35,618
Gross profit 4,751 5,066 7,534 12,793
Net income 585 338 2,072 3,141
Basic earnings per share .19 .11 .67 1.01
1997
Net sales $11,887 $17,050 $21,983 $37,615
Gross profit 3,395 4,755 7,755 13,462
Net income 151 104 1,793 4,313
Basic earnings per share .05 .03 .57 1.38
</TABLE>
In December 1997, the Company completed a Dutch Auction self-tender offer and
purchased 117,766 shares. Since this transaction occurred late in the fourth
quarter, it caused the fourth quarter earnings per share to be less than the
first three quarters proportionately. Consequently, if the four quarters
earnings per share are added together, they are less than the actual earnings
per weighted average share for the year.
In 1996, a reduction in outstanding shares of approximately 1,000,000 shares, as
a result of the completion of a Dutch Auction self-tender offer in September,
caused the fourth quarter earnings per share to be greater than the first three
quarters proportionately. Consequently, if the four quarters earnings per share
are added together, they are greater than the actual earnings per weighted
average share for the year.
NOTE 21--ACQUISITIONS
ACQUISITION OF MASTER PRODUCTS MANUFACTURING COMPANY, INC.
On June 17, 1997, the Company's wholly-owned subsidiary, Martin Yale Industries,
Inc., acquired 100% of the stock of Master Products, a California corporation,
for a net cost of $9,951,813, which includes assumed liabilities of $833,813.
Master Products manufactures paper punches and catalog rack systems.
The acquisition was accounted for as a purchase and the excess of cost over the
fair value of net assets acquired was $6,374,573, which is being amortized over
15 years on the straight-line method. The Company's consolidated results of
operations include Master Products from June 17, 1997.
(F-20)
<PAGE> 40
ESCALADE, INCORPORATED AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
The following unaudited pro forma information shows the results of the Company's
operations as though the purchase of Master Products had been made at January 1,
1996. The pro forma results of operations are not necessarily indicative of the
actual results of operations that would have occurred had the purchase actually
been made at January 1, 1996, or the results which may occur in the future.
<TABLE>
<CAPTION>
DECEMBER 27 AND DECEMBER 28 1997 1996
- -----------------------------------------------------------------------------------------
(In Thousands, Except
per Share Data)
<S> <C> <C>
Net Sales $92,919 $100,013
Net Income 6,535 5,956
Basic Earnings per Share $2.10 $1.55
</TABLE>
NOTE 22--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. The Company believes that such process will be completed in its entirety
by the end of the first quarter of 1999. Escalade Sports has also requested year
2000 compliance assurances from its customers, vendors and other third parties
such as utility companies. Responses from these third parties have been slow to
date. Escalade is uncertain whether it will receive responses from all such
parties and whether all such responses will be satisfactory.
Martin Yale completed the evaluation phase for year 2000 compatibility on
January 18, 1999 and conversion of software codes commenced on January 25, 1999.
Martin Yale expects that all necessary conversion and testing should be
completed in the fourth quarter of 1999. Outside third parties are anticipated
to work with Martin Yale employees in preparing for the year 2000. Martin Yale
will also seek year 2000 compliance assurances from its customers, vendors and
other third parties, such as utility companies.
As of the end of its fourth quarter of 1998, the Company had incurred
approximately $100,000 in connection with preparing for the year 2000. The
Company expects to incur approximately another $150,000 of year 2000 expenses by
the end of 1999. The Company estimates that its actual and future expenditures
in this area are 75% attributable to internal costs and external fees for
conversion of systems. The remaining 25% of year 2000 expenses are attributable
to new software and equipment. The Company is funding 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.
(F-21)
<PAGE> 41
ESCALADE, INCORPORATED AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
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 are continuing to
implement their year 2000 plans but have not yet completed those actions. 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 the 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. As the Company continues to complete its evaluation,
conversion and testing, the Company will assess 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 prior to the end of 1999.
NOTE 23--OTHER COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
1998
-----------------------------------------------------
BEFORE-TAX TAX NET-OF-TAX
YEAR ENDED DECEMBER 31 AMOUNT BENEFIT AMOUNT
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized holding losses arising during the year $(9,278) $3,711 $(5,567)
=====================================================
1997
-----------------------------------------------------
BEFORE-TAX TAX NET-OF-TAX
YEAR ENDED DECEMBER 31 AMOUNT EXPENSE AMOUNT
- ----------------------------------------------------------------------------------------------------------------------------
Unrealized holding gains arising during the year $411,653 $(164,661) $246,992
=====================================================
</TABLE>
(F-22)
<PAGE> 42
[OLIVE LOGO]
INDEPENDENT AUDITOR'S REPORT
Stockholders and Board of Directors
Escalade, Incorporated
Evansville, Indiana
We have audited the consolidated financial statements of
Escalade, Incorporated as of December 26, 1998 and December
27, 1997 and for each of the three years in the period ended
December 26, 1998 and have issued our report thereon dated
January 29, 1999; such consolidated financial statements and
report are included elsewhere in this Form 10-K. Our audits
also included the consolidated financial statement schedules
of Escalade, Incorporated listed in Item 14. These
consolidated financial statement schedules are the
responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion,
such consolidated financial statement schedules, when
considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material
respects the information set forth therein.
OLIVE LLP
Evansville, Indiana
January 29, 1999
(S-1)
<PAGE> 43
ESCALADE, INCORPORATED AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- ----------------------------------------------------------------------------------------------------------------------------
ADDITIONS
----------------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER ACCOUNTS-- BALANCE
BEGINNING COSTS AND DESCRIBE DEDUCTIONS-- AT END
DESCRIPTION OF PERIOD EXPENSES DESCRIBE (2) OF PERIOD
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
and discounts (1)
Fiscal year ended December 26, 1998 $893,434 $371,672 $683,276 $581,830
Fiscal year ended December 27, 1997 681,606 474,050 262,222 893,434
Fiscal year ended December 28, 1996 726,352 427,650 472,396 681,606
</TABLE>
(1) Deducted from related assets
(2) Accounts charged off, less recoveries
(S-2)
<PAGE> 44
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ C. W. "Bill" Reed March 15, 1999
------------------------------------
C. W. "Bill" Reed
President and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
Chairman, Chief Executive Officer
and Director
/s/ Robert E. Griffin (Principal Executive Officer) March 15, 1999
- ----------------------------------------
Robert E. Griffin
Secretary and Treasurer
(Principal Financial and Accounting
/s/ John R. Wilson Officer) March 15, 1999
- ----------------------------------------
John R. Wilson
/s/ Blaine E. Matthews, Jr. Director March 15, 1999
- ----------------------------------------
Blaine E. Matthews, Jr.
/s/ A. Graves Williams, Jr. Director March 15, 1999
- ----------------------------------------
A. Graves Williams, Jr.
/s/ Gerald J. Fox Director March 15, 1999
- ----------------------------------------
Gerald J. Fox
/s/ Keith P. Williams Director March 15, 1999
- ----------------------------------------
Keith P. Williams
/s/ Yale Blanc Director March 15, 1999
- ----------------------------------------
Yale Blanc
/s/ Robert D. Orr Director March 15, 1999
- ----------------------------------------
Robert D. Orr
/s/ C. W. Reed Director March 15, 1999
- ----------------------------------------
C. W. Reed
</TABLE>
(S-3)
<PAGE> 1
Exhibit 21
ESCALADE, INCORPORATED AND SUBSIDIARIES
LIST OF SUBSIDIARIES AT DECEMBER 26, 1998
<TABLE>
<CAPTION>
STATE OF OTHER PERCENT OF VOTING
JURISDICTION OF SECURITIES OWNED
PARENT INCORPORATION BY PARENT
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Escalade, Incorporated Indiana
Subsidiaries
Indian Industries, Inc. (1) Indiana 100%
Martin Yale Industries, Inc. (1) Indiana 100%
Harvard Sports, Inc. (1) California 100%
Escalade, International Limited (1) United Kingdom 100%
Master Products Manufacturing
Company, Inc. (1) California 100%
</TABLE>
(1) Each subsidiary company so designated has been included in Consolidated
Financial Statements for all periods following its acquisition. See Notes
to Consolidated Financial Statements.
(S-4)
<PAGE> 1
Exhibit 23
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-16279, 333-52475, and 333-52477 of Escalade, Incorporated (Company) on Form
S-8 of our report dated January 29, 1999 on the consolidated financial
statements of the Company appearing in this Annual Report on Form 10-K for the
year ended December 26, 1998.
OLIVE LLP
Evansville, Indiana
March 15, 1999
(S-5)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFOMATION EXTRACTED FROM THE 10-K AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-26-1998
<PERIOD-START> DEC-28-1997
<PERIOD-END> DEC-26-1998
<CASH> 340
<SECURITIES> 0
<RECEIVABLES> 31,374
<ALLOWANCES> 582
<INVENTORY> 12,647
<CURRENT-ASSETS> 44,911
<PP&E> 35,443
<DEPRECIATION> 25,339
<TOTAL-ASSETS> 63,489
<CURRENT-LIABILITIES> 29,148
<BONDS> 6,400
0
0
<COMMON> 6,073
<OTHER-SE> 20,629
<TOTAL-LIABILITY-AND-EQUITY> 63,489
<SALES> 90,670
<TOTAL-REVENUES> 90,670
<CGS> 60,526
<TOTAL-COSTS> 76,360
<OTHER-EXPENSES> 623
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,118
<INCOME-PRETAX> 12,569
<INCOME-TAX> 4,791
<INCOME-CONTINUING> 7,778
<DISCONTINUED> 1,642
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,136
<EPS-PRIMARY> 1.98
<EPS-DILUTED> 1.97
</TABLE>
