10-Q 1 escalade_q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended October 1, 2005 Commission File Number 0-6966 ESCALADE, INCORPORATED ------------------------------------------------------ (Exact name of registrant as specified in its charter) Indiana 13-2739290 ------------------------ ------------ (State of incorporation) (I.R.S. EIN) 251 Wedcor Avenue, Wabash, Indiana 46992 ------------------------------------------ (Address of principal executive office) 260-569-7208 ------------------------------- (Registrant's Telephone Number) Securities registered pursuant to Section 12(b) of the Act NONE Securities registered pursuant to section 12(g) of the Act Common Stock, No Par Value -------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act Yes [X] No [ ] The number of shares of Registrant's common stock (no par value) outstanding as of October 19, 2005: 13,003,743 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No INDEX Page No. Part I. Financial Information: Item 1 - Financial Statements: Consolidated Condensed Balance Sheets as of October 1, 2005 (Unaudited), October 2, 2004 (Unaudited), and December 25, 2004 3 Consolidated Condensed Statements of Income (Unaudited) for the Three Months and Nine Months Ended October 1, 2005 and October 2, 2004 4 Consolidated Condensed Statements of Comprehensive Income (Unaudited) for the Three Months and Nine Months Ended October 1, 2005 and October 2, 2004 4 Consolidated Condensed Statements of Cash Flows (Unaudited) for the Nine Months Ended October 1, 2005 and October 2, 2004 5 Notes to Consolidated Condensed Financial Statements 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3 - Quantitative and Qualitative Disclosures about Market Risk 12 Item 4 - Controls and Procedures 13 Part II. Other Information Item 2 - Issuer Purchases of Equity Securities 14 Item 6 - Exhibits 14 Signatures 15 2
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ESCALADE, INCORPORATED AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (All amounts in thousands except share information) October 1, October 2, December 25, 2005 2004 2004 ------------ ------------ ------------ (Unaudited) (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 3,028 $ 491 $ 3,050 Receivables, less allowance of $2,449; $1,543; and $2,510; respectively 50,682 59,003 44,363 Inventories 37,443 43,011 30,482 Prepaid expenses 1,479 1,215 3,011 Deferred income tax benefit 1,923 2,422 2,496 ------------ ------------ ------------ TOTAL CURRENT ASSETS 94,555 106,142 83,402 Property, plant and equipment, net 18,245 15,919 16,498 Intangible assets 6,866 7,965 8,019 Goodwill 17,234 17,399 17,888 Investments 6,120 6,145 6,446 Other assets 2,432 3,535 2,846 ------------ ------------ ------------ $ 145,452 $ 157,105 $ 135,099 ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 10,590 $ 27,837 $ 11,638 Trade accounts payable 10,835 18,202 8,034 Accrued liabilities 24,245 25,166 27,792 Income tax payable 517 367 142 ------------ ------------ ------------ TOTAL CURRENT LIABILITIES 46,187 71,572 47,606 Other Liabilities: Long-term debt 25,338 16,960 15,896 Interest rate swap agreement (60) 629 386 Deferred compensation 1,320 1,510 1,233 ------------ ------------ ------------ 26,598 19,099 17,515 Stockholders' equity: Preferred stock: Authorized 1,000,000 shares; no par value, none issued Common stock: Authorized 30,000,000 shares; no par value, issued and outstanding - 13,010,733; 13,031,064; and 13,031,064; respectively 13,011 13,031 13,031 Retained earnings 58,327 51,448 52,394 Accumulated other comprehensive income 1,329 1,955 4,553 ------------ ------------ ------------ 72,667 66,434 69,978 ------------ ------------ ------------ $ 145,452 $ 157,105 $ 135,099 ============ ============ ============
See notes to Consolidated Condensed Financial Statements. 3
ESCALADE, INCORPORATED AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED) (All amounts in thousands, except per share amounts) ----------------------------------- --------------------- Three Months Ended Nine Months Ended --------------------------- --------------------------- October 1, October 2, October 1, October 2, 2005 2004 2005 2004 ------------ ------------ ------------ ------------ Net sales $ 63,557 $ 75,203 $ 140,890 $ 161,377 Costs, expenses and other income: Cost of products sold 46,148 56,738 99,355 118,381 Selling, general and administrative expenses 8,935 8,934 27,414 28,670 Restructuring costs -- 1,412 -- 1,412 Goodwill impairment loss -- 1,312 -- 1,312 ------------ ------------ ------------ ------------ Operating income 8,474 6,807 14,121 11,602 Interest expense, net 345 489 1,125 1,427 Other expense (income) (225) (245) (632) (546) ------------ ------------ ------------ ------------ Income before income taxes 8,354 6,563 13,628 10,721 Provision for income taxes 2,902 2,233 4,767 3,840 ------------ ------------ ------------ ------------ Net income $ 5,452 $ 4,330 $ 8,861 $ 6,881 ============ ============ ============ ============ Per share data: Basic earnings per share $ 0.42 $ 0.33 $ 0.68 $ 0.53 Diluted earnings per share $ 0.41 $ 0.33 $ 0.67 $ 0.52 Cash dividend declared -- -- $ 0.15 $ 0.13 CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) Net income $ 5,452 $ 4,330 $ 8,861 $ 6,881 Unrealized gain (loss) on securities, net of tax (31) 41 (27) 48 Foreign currency translation adjustment 30 (1) (3,486) (617) Unrealized gain on interest rate swap agreement, net of tax 99 161 290 276 ------------ ------------ ------------ ------------ Comprehensive income $ 5,550 $ 4,531 $ 5,638 $ 6,588 ============ ============ ============ ============
See notes to Consolidated Condensed Financial Statements. 4
ESCALADE, INCORPORATED AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (All amounts in thousands) Nine Months Ended --------------------------- October 1, October 2, 2005 2004 ------------ ------------ Operating Activities: Net income $ 8,861 $ 6,881 Depreciation and amortization 3,651 4,832 Goodwill impairment charge -- 1,312 Adjustments necessary to reconcile net income to net cash provided by operating activities (9,774) (18,442) ------------ ------------ Net cash provided (used) by operating activities 2,738 (5,417) Investing Activities: Purchase of property and equipment (5,166) (1,397) Proceeds from asset disposition 68 -- Acquisition of assets (3,213) -- ------------ ------------ Net cash used by investing activities (8,311) (1,397) Financing Activities: Net increase in notes payable and long-term debt 8,780 8,315 Proceeds from exercise of stock options 403 1,103 Purchase of common stock (1,391) (984) Dividends paid (1,961) (1,556) ------------ ------------ Net cash provided by financing activities 5,831 6,878 Effect of exchange rate changes on cash (280) (221) ------------ ------------ Net decrease in cash and cash equivalents (22) (157) Cash and cash equivalents, beginning of period 3,050 648 ------------ ------------ Cash and cash equivalents, end of period $ 3,028 $ 491 ============ ============
See notes to Consolidated Condensed Financial Statements. 5 ESCALADE, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) Note A - Basis of Presentation -------------------------------------------------------------------------------- The significant accounting policies followed by the Company and its wholly owned subsidiaries for interim financial reporting are consistent with the accounting policies followed for annual financial reporting. All adjustments that are of a normal recurring nature and are in the opinion of management necessary for a fair statement of the results for the periods reported have been included in the accompanying consolidated condensed financial statements. The condensed consolidated balance sheet of the Company as of December 25, 2004 has been derived from the audited consolidated balance sheet of the Company as of that date. Certain information and note disclosures normally included in the Company's annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Form 10-K annual report for 2004 filed with the Securities and Exchange Commission. Note B - Recently Issued Accounting Pronouncements -------------------------------------------------------------------------------- In November 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 151, Inventory Costs, which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. SFAS No. 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not believe the adoption of SFAS No. 151 will have a material impact on our financial statements. Note C - Seasonal Aspects -------------------------------------------------------------------------------- The results of operations for the nine month periods ended October 1, 2005 and October 2, 2004 are not necessarily indicative of the results to be expected for the full year. Note D - Inventories -------------------------------------------------------------------------------- (All amounts in thousands) October 1, October 2, December 25, 2005 2004 2004 ----------- ----------- ----------- Raw materials $ 7,076 $ 10,853 $ 8,562 Work in progress 8,090 7,010 5,142 Finished goods 22,277 25,148 16,778 ----------- ----------- ----------- $ 37,443 $ 43,011 $ 30,482 =========== =========== =========== Note E - Property, Plant and Equipment -------------------------------------------------------------------------------- (All amounts in thousands) October 1, October 2, December 25, 2005 2004 2004 ----------- ----------- ----------- Land $ 1,729 $ 1,760 $ 1,853 Building and leasehold improvements 15,613 15,587 15,799 Machinery and equipment 38,068 34,177 34,562 ----------- ----------- ----------- Total Cost 55,410 51,524 52,214 Accumulated depreciation and amortization (37,165) (35,605) (35,716) ----------- ----------- ----------- $ 18,245 $ 15,919 $ 16,498 =========== =========== =========== 6 Note F - Notes Payable -------------------------------------------------------------------------------- On June 27, 2005 the Company executed a fifth amendment to the revolving term agreement that effectively increased the current available borrowing limit by $10 million to $31 million and extended the termination date of the agreement by two months to May 2008. All other terms of the agreement were unchanged. As of October 1, 2005 the outstanding balance on this line was $22.6 million. Note G - Income Taxes -------------------------------------------------------------------------------- The provision for income taxes was computed based on financial statement income. Note H - Dividend Payment -------------------------------------------------------------------------------- On March 18, 2005, the Company paid a dividend of $0.15 per common share to all shareholders of record on March 11, 2005. The total amount of the dividend was $2 million and was charged against retained earnings. Note I - Restructuring Costs -------------------------------------------------------------------------------- In 2004 the Company initiated a facility consolidation plan and involuntary employee terminations in the Office Products segment in order to reduce costs and increase the competitiveness of the Company. Under these plans no additional costs were incurred during the quarter ended October 1, 2005. Liabilities under these plans are as follows:
Balance at (All amounts in thousands) Balance at Non-Cash Cash October 1, July 7, 2005 Charges Payments 2005 ------------ ------------ ------------ ------------ Severance and benefit costs $ 1,062 $ -- $ 108 $ 956 Facility closure costs 34 -- (8) 42 ------------ ------------ ------------ ------------ $ 1,096 $ -- $ 98 $ 998 ============ ============ ============ ============
7 Note J - Earnings Per Share -------------------------------------------------------------------------------- The shares used in computation of the Company's basic and diluted earnings per common share are as follows: Three Months Ended --------------------------- October 1, October 2, (All amounts in thousands) 2005 2004 ------------ ------------ Weighted average common shares outstanding 13,055 13,041 Dilutive effect of stock options 153 241 ------------ ------------ Weighted average common shares outstanding, assuming dilution 13,208 13,282 ============ ============ Nine Months Ended --------------------------- October 1, October 2, (All amounts in thousands) 2005 2004 ------------ ------------ Weighted average common shares outstanding 13,065 13,024 Dilutive effect of stock options 165 195 ------------ ------------ Weighted average common shares outstanding, assuming dilution 13,230 13,219 ============ ============ Options that are determined to be anti-dilutive are not included in the calculation of dilutive earnings per share. In 2004, 168,800 employee stock options and 4,126 director options were determined to be anti-dilutive as to earnings per share. In 2005, 167,800 employee stock options and 6,893 director options were determined to be anti-dilutive as to earnings per share. Note K - Employee Stock Option Plan -------------------------------------------------------------------------------- The Company has two stock-based compensation plans. The Company accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation. Three Months Ended --------------------------- (In Thousands Except October 1, October 2, Per Share Amounts) 2005 2004 ------------ ------------ Net income, as reported $ 5,452 $ 4,330 Less: Total stock-based employee compensation cost determined under the fair value based method, net of income taxes (279) (194) ------------ ------------ Pro forma net income $ 5,173 $ 4,136 ============ ============ Earnings per share Basic--as reported $ 0.42 $ 0.33 ============ ============ Basic--pro forma $ 0.40 $ 0.32 ============ ============ Diluted--as reported $ 0.41 $ 0.33 ============ ============ Diluted--pro forma $ 0.39 $ 0.31 ============ ============ 8 Nine Months Ended --------------------------- (In Thousands Except October 1, October 2, Per Share Amounts) 2005 2004 ------------ ------------ Net income, as reported $ 8,861 $ 6,881 Less: Total stock-based employee compensation cost determined under the fair value based method, net of income taxes (837) (583) ------------ ------------ Pro forma net income $ 8,024 $ 6,298 ============ ============ Earnings per share Basic--as reported $ 0.68 $ 0.53 ============ ============ Basic--pro forma $ 0.61 $ 0.48 ============ ============ Diluted--as reported $ 0.67 $ 0.52 ============ ============ Diluted--pro forma $ 0.61 $ 0.48 ============ ============ Note L - Segment Information --------------------------------------------------------------------------------
As of and for the Nine Months Ended October 1, 2005 --------------------------------------------------------- Sporting Office In thousands Goods Products Corp. Total ------------ ------------ ------------ ------------ Revenues from external customers $ 92,326 $ 48,564 $ -- $ 140,890 Operating income (loss) 10,116 5,617 (1,612) 14,121 Net income (loss) 5,747 3,325 (211) 8,861 Total assets $ 88,702 $ 44,489 $ 12,261 $ 145,452
As of and for the Nine Months Ended October 2, 2004 --------------------------------------------------------- Sporting Office In thousands Goods Products Corp. Total ------------ ------------ ------------ ------------ Revenues from external customers $ 104,328 $ 57,049 $ -- $ 161,377 Operating income (loss) 12,568 948 (1,914) 11,602 Net income (loss) 7,434 (125) (428) 6,881 Total assets $ 86,108 $ 59,565 $ 11,432 $ 157,105
Note M - Reclassifications -------------------------------------------------------------------------------- Certain reclassifications have been made to the 2004 financial statements to conform to the 2005 financial statement presentation. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements This report contains forward-looking statements relating to present or future trends or factors that are subject to risks and uncertainties. These risks include, but are not limited to, the impact of competitive products and pricing, product demand and market acceptance, new product development, the continuation and development of key customer and supplier relationships, Escalade's ability to control costs, general economic conditions, fluctuation in operating results, changes in the securities market and other risks detailed from time to time in Escalade's filings with the Securities and Exchange Commission. Escalade's future financial performance could differ materially from the expectations of 9 management contained herein. Escalade undertakes no obligation to release revisions to these forward-looking statements after the date of this report. Overview Escalade, Incorporated ("Escalade" or "Company") manufactures and distributes products for two industries: Sporting Goods and Office Products. Within these industries the Company has successfully built a commanding market presence in niche markets. This strategy is heavily dependent on brand recognition and excellent customer service. Management believes the key indicators in measuring the success of this strategy are revenue and earnings growth. A key strategic advantage is the Company's established relationships with major customers that allow the Company to bring new products to the market in a very cost effective manner while maintaining a diversified product line and wide customer base. In addition to strategic customer relations, the Company has over 75 years of manufacturing experience that enable it to be a low cost supplier. Results of Operations Although revenues declined, consolidated net income for the three months and nine months ended October 1, 2005, increased 25.9% and 28.8%, respectively. The primary factor in achieving increased profitability has been the turn-around in the Office Products business; a direct result of the restructuring efforts initiated during 2004. Compared to the same periods last year, net income attributed to the Sporting Goods business declined 19% and 22.7% for the three months and nine months ended October 1, 2005, respectively, due to lower sales volume. As discussed below, management anticipates the Sporting Goods business to end 2005 with lower sales than were achieved in 2004. Consequently, net income from the Sporting Goods segment is expected to be lower for fiscal 2005 compared to fiscal 2004. Management expects this decline in profits from the Sporting Goods business to be offset by increased profits from the Office Products business such that consolidated net income for fiscal 2005 will be better than fiscal 2004. The following schedule sets forth certain consolidated statement of income data as a percentage of net revenue for the periods indicated:
Three Months Nine Months --------------------------- --------------------------- 2005 2004 2005 2004 ------------ ------------ ------------ ------------ Net revenue 100.0% 100.0% 100.0% 100.0% Cost of products sold 72.6% 75.4% 70.5% 73.3% ------------ ------------ ------------ ------------ Gross margin 27.4% 24.6% 29.5% 26.7% Selling and administrative 14.0% 11.9% 19.5% 17.8% Restructuring -- 1.8% -- 0.9% Goodwill Impairment -- 1.8% -- 0.8% ------------ ------------ ------------ ------------ Operating income 13.4% 9.1% 10.0% 7.2% Net Income 8.6% 5.8% 6.3% 4.3%
Consolidated Revenue and Gross Margin Consolidated net revenues for the three months and nine months ended October 1, 2005 declined 15.5% and 12.7%, respectively, compared to the same periods in 2004. Both business segments experienced lower sales volumes. Sporting Goods sales are very seasonal with the third quarter traditionally the strongest. Net sales for the three months and nine months ended October 1, 2005, were down 16.5% and 11.5%, respectively, compared to the same periods last year. The primary factor for the decline is lower sales to the Company's largest customer: SEARS. Sales to SEARS were lower due to two factors: a) a decision by SEARS to eliminate an arcade product introduced in 2004 that represented roughly $7 million in sales to SEARS in 2004, and b) an aggressive inventory control and pricing adjustment program initiated by SEARS in 2005 under which SEARS 10 increased retail pricing on certain products and substantially curtailed advertising campaigns. For the nine months ended October 1, 2005, the impact of these two factors has been a decline in sales to SEARS of roughly $12.5 million compared to the same period last year. The Company continues to have a very good relationship with SEARS, but it is not possible at this time to assess the impact of SEARS' new marketing strategies on the Company's future sales volume to SEARS. Based on results year-to-date, the Company anticipates fiscal 2005 sales to SEARS will be down $14 million to $18 million compared to fiscal 2004. The Company expects the fourth quarter to be comparable, or slightly down compared to the same period last year. Consequently, Sporting Goods sales for fiscal year 2005 are expected to be lower than fiscal 2004. Office Products sales were down 11.5% and 14.9% in the three months and nine months ended October 1, 2005, respectively, compared with the same periods last year. Approximately half of the decline is attributed to the planned elimination of non-core, low margin products primarily sold in Europe which are not manufactured by the Company. Anticipated excess inventories related to these products were fully reserved at the end of fiscal 2004. The remainder of the sales decline is attributed to discontinued sales to two retail customers in Europe where the Company could not negotiate profitable sales agreements and the loss of approximately $2 million in sales due to a disruption during the first quarter of fiscal 2005 relating to shredder products manufactured in China. Management changes announced during the third quarter of 2005 are designed to increase sales efforts; the results of which will not be fully realized until sometime in fiscal 2006. Consequently management expects the sales decline experienced during the nine months ended October 1, 2005 to be indicative of the outcome for the full year. The consolidated gross margin ratio for the three months and nine months ended October 1, 2005, was better than the same period last year as a result of improved gross margins in the Office Products business; one of the results of the restructuring activities initiated in 2004. Gross margin ratios in the Sporting Goods business were down 1% for the nine months ended October 1, 2005 as a result of product mix. Consolidated Selling, General and Administrative Expenses Consolidated selling, general and administrative expenses for the three months ended October 1, 2005 were relatively unchanged from the same period last year. However, they were down roughly $1.3 million for the nine months ended October 1, 2005 compared to the same period last year as a result of the lower sales volume in the Sporting Goods Business. As a percentage of net sales, selling, general and administrative costs increased for the three months and nine months ended October 1, 2005, compared to the same periods in 2004 due to the lower sales volume. Management continues to seek out ways to reduce these costs in each business segment. The Company believes that additional cost reduction synergies are possible as European distribution and administration in the Office Products business is consolidated, but results from these activities are not expected to materialize until 2006. Financial Condition and Liquidity The Company's financial condition remains strong and relatively unchanged from the beginning of the year. The current ratio, a basic measure of liquidity (current assets divided by current liabilities), remains relatively unchanged from the beginning of the year. Inventory and accounts receivable balances have increased during the nine months ended October 1, 2005 in response to the seasonal nature of the Sporting Goods business and are comperable to historical trends. 11 The following schedule summarizes the Company's total debt: October 1, October 2, December 25, In thousands 2005 2004 2004 ------------ ------------ ------------ Notes payable short-term $ 10,590 $ 27,837 $ 11,638 Long term debt 25,338 16,960 15,896 ------------ ------------ ------------ Total debt $ 35,928 $ 44,797 $ 27,534 ============ ============ ============ Total debt increased 30.4% during the nine months ended October 1, 2005 as a direct result of the seasonal buildup of inventory and accounts receivable in the Sporting Goods Business. Total debt at October 1, 2005 is lower than the same period last year as a direct result of cash flow from operations and the absence of any sizable acquisitions. As a percentage of stockholders' equity, total debt has decreased from 68% at October 2, 2004, to 50% at October 1, 2005 reflecting the Company's ability to generate strong cash flow. During the nine months ended October 1, 2005, operations generated $2.7 million in cash compared to consuming $5.4 million for the same time period in 2004. The primary reason for the increase is higher net income and lower inventory and accounts receivable levels in 2005 as compared to 2004. Total cash used by investing activities during the nine months ended October 1, 2005 totaled $8.3 million. Approximately $3.2 million was expended to acquire certain assets of Child Life, Inc., a manufacturer of premium residential play systems. The balance, approximately $5.2 million, was expended for property and equipment. The largest component of this is the addition of a new manufacturing plant in Reynosa, Mexico which is expected to be operational at the end of the first quarter of 2006. The Company anticipates spending an additional $4.0 million to complete this project. The Company's working capital requirements are primarily funded from operating cash flows and revolving credit agreements with its banks. The Company's relationship with its primary lending bank remains strong and the Company expects to have access to the same level of revolving credit that was available in 2004. In addition, the Company believes it can quickly reach agreements to increase available credit should the need arise. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to financial market risks, including changes in currency exchange rates, interest rates and marketable equity security prices. To mitigate these risks, the Company utilizes derivative financial instruments, among other strategies. At the present time, the only derivative financial instrument used by the company is an interest rate swap. The Company does not use derivative financial instruments for speculative purposes. A substantial majority of revenue, expense and capital purchasing activities are transacted in U.S. dollars. However, the Company's foreign subsidiaries enter into transactions in other currencies, primarily the Euro. To protect against reductions in value and the volatility of future cash flows caused by changes in currency exchange rates, the Company carefully considers the use of transaction and balance sheet hedging programs. Such programs reduce, but do not entirely eliminate, the impact of currency exchange rate changes. Presently the Company does not employ currency exchange hedging financial instruments, but has adjusted transaction and cash flows to mitigate adverse currency fluctuations. Historical trends in currency exchanges indicate that it is reasonably possible that adverse changes in exchange rates of 20% for the Euro could be experienced in the near term. Such adverse changes would not have resulted in a material impact on income before taxes for the Nine Months ended October 1, 2005. A substantial portion of the Company's debt is based on U.S. prime and LIBOR interest rates. In an effort to lock-in current low rates and mitigate the risk of unfavorable interest rate fluctuations the Company has entered an interest rate swap agreement. This agreement effectively converted a portion of its variable rate debt into fixed rate debt. 12 An adverse movement of equity market prices would have an impact on the Company's long-term marketable equity securities that are included in Investments on the consolidated balance sheet. At October 1, 2005, the aggregate fair value of long-term marketable equity securities was $1.8 million. Due to the unpredictable nature of the equity market the Company has not employed any hedge programs relative to these investments. ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Escalade maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of "disclosure controls and procedures" in Rule 13a-14(c). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Also, the Company has investments in certain unconsolidated entities. As the Company does not control or manage these entities, its disclosure controls and procedures with respect to such entities are necessarily substantially more limited than those it maintains with respect to its consolidated subsidiaries. The Company has carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective. Changes in Internal Control over Financial Reporting Management of the Company has evaluated, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, changes in the Company's internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the third quarter of 2005. In connection with this evaluation and the evaluation performed in the fourth quarter of 2004, the Company identified deficiencies in internal controls over financial reporting relating to the Company's subsidiary in France. The Company continued remediation efforts begun in the fourth quarter of 2004, to eliminate the deficiencies identified. This will be accomplished by eliminating the accounting department in France and transferring those functions to the Company's German subsidiary during the fourth quarter of 2005. Other than the changes identified above, there have been no changes to the Company's internal control over financial reporting that occurred since the beginning of the Company's third quarter of 2005 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 13 PART II. OTHER INFORMATION Item 1. Not Required. Item 2. (c) ISSUER PURCHASES OF EQUITY SECURITIES
(d) Maximum Number (c) Total Number (or Approximate of Shares (or Dollar Value) of (a) Total (b) Average Units) Purchased Shares (or Units) Number of Price as Part that May Yet Be Shares (or Paid per of Publicly Purchased Under Units) Share (or Announced Plans the Plans Period Purchased Unit) or Programs or Programs ------------------------------- --------------- --------------- --------------- --------------- Shares purchases prior to 07/09/2005 under the current repurchase program 329,610 $ 8.25 329,610 $ 2,445,220 ------------------------------- --------------- --------------- --------------- --------------- Third quarter purchases: ------------------------------- --------------- --------------- --------------- --------------- 07/10/2005 - 08/06/2005 None None None None ------------------------------- --------------- --------------- --------------- --------------- 08/07/2005 - 09/03/2005 5,000 12.93 5,000 64,650 ------------------------------- --------------- --------------- --------------- --------------- 09/04/2005 - 10/01/2005 50,740 12.92 50,740 655,599 ------------------------------- --------------- --------------- --------------- --------------- Total share purchases under the current program 385,350 $ 8.92 385,350 $ 1,724,971 ------------------------------- --------------- --------------- --------------- ---------------
The Company has one stock repurchase program which was established in February 2003 by the Board of Directors and which authorized management to expend up to $3,000,000 to repurchase shares on the open market as well as in private negotiated transactions. The repurchase plan has no termination date. There have been no share repurchases that were not part of a publicly announced program. In February 2005, the Board of Directors increased the remaining amount on this plan to its original level of $3,000,000. Item 3,4 and 5 Not Required. Item 6. Exhibits (a) Exhibits Number Description ------ ----------- 31.1 Chief Executive Officer Rule 13a-14(a)/15d-14(a) Certification. 31.2 Chief Financial Officer Rule 13a-14(a)/15d-14(a) Certification. 32.1 Chief Executive Officer Section 1350 Certification. 32.2 Chief Financial Officer Section 1350 Certification. 14 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ESCALADE, INCORPORATED Date: October 19, 2005 /s/ C. W. (BILL) REED ---------------- ----------------------------------------- C. W. (Bill) Reed President and Chief Executive Officer Date: October 19, 2005 /s/ TERRY D. FRANDSEN ---------------- ----------------------------------------- Terry D. Frandsen Vice President and Chief Financial Officer 15