UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended February 28, 1998
Commission file number 0-24450
RAWLINGS SPORTING GOODS COMPANY, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 43-1674348
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1859 Intertech Drive, Fenton, Missouri 63026
(Address of Principal Executive Offices) (Zip Code)
(314) 349-3500
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Number of shares outstanding of the issuer's Common Stock,
par value $0.01 per share, as of March 9, 1998: 7,781,801
shares.
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Rawlings Sporting Goods Company, Inc. and Subsidiaries
Consolidated Statements of Income
(Amounts in thousands, except per share data)
(Unaudited)
Quarter Ended Six Months Ended
February 28, February 28,
1998 1997 1998 1997
Net revenues $61,822 $52,859 $93,925 $81,118
Cost of goods sold 42,404 35,803 65,143 55,244
Gross profit 19,418 17,056 28,782 25,874
Selling, general
and
administrative
expenses 10,590 9,258 20,094 17,400
Operating income 8,828 7,798 8,688 8,474
Interest expense,
net 1,215 948 2,095 1,686
Other expense,
net 30 68 71 98
Income before
income taxes 7,583 6,782 6,522 6,690
Provision for
income taxes 2,844 2,543 2,446 2,509
Net income $4,739 $ 4,239 $4,076 $ 4,181
Net income per
common share:
Basic $0.61 $0.55 $0.53 $0.54
Diluted $0.61 $0.55 $0.52 $0.54
Shares used in
computing per
share amounts:
Basic 7,783 7,708 7,759 7,704
Assumed exercise
of stock
options 28 19 24 14
Diluted 7,811 7,727 7,783 7,718
The accompanying notes are an integral part of these consolidated
statements.
<PAGE>
Rawlings Sporting Goods Company, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands, except share data)
(Unaudited)
February 28, August 31,
1998 1997
Assets
Current Assets:
Cash and cash equivalents $ 594 $ 732
Accounts receivable,
net of allowance of
$1,981 and $1,627 respectively 67,529 32,968
Inventories 42,215 29,781
Prepaid expenses 839 935
Deferred income taxes 4,083 4,083
Total current assets 115,260 68,499
Property, plant and equipment,
net 12,334 9,802
Other assets 943 760
Deferred income taxes 20,151 22,203
Goodwill, net 8,432 -
Total assets 157,120 $ 101,264
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of
long-term debt $ 60 $ 59
Accounts payable 14,652 7,856
Accrued liabilities 11,187 9,901
Total current liabilities 25,899 17,816
Long-term debt, less current
maturities 75,979 32,614
Other long-term
liabilities 9,435 10,637
Total liabilities 111,313 61,067
Stockholders' equity:
Preferred stock, none issued - -
Common stock, 7,781,801
and 7,725,814 shares
issued and outstanding,
respectively 78 77
Additional paid-in capital 29,314 26,083
Stock subscription receivable (1,421) -
Cumulative translation adjustment (277) -
Retained earnings 18,113 14,037
Stockholders' equity 45,807 40,197
Total liabilities and
stockholders' equity $ 157,120 $ 101,264
The accompanying notes are an integral part of these consolidated
balance sheets.
<PAGE>
Rawlings Sporting Goods Company, Inc. and Subsidiaries
Consolidated Statements of Cash Flow
(Amounts in thousands)
(Unaudited)
Six Months Ended
February 28,
1998 1997
Cash flows from operating activities:
Net income $ 4,076 $ 4,181
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization. 799 606
Deferred income taxes 2,052 2,274
Changes in operating assets and liabilities:
Accounts receivable, net (30,919) (27,339)
Inventories (9,250) (4,102)
Prepaid expenses 113 794
Other assets (231) (42)
Accounts payable 5,624 622
Accrued liabilities and other (1,782) 795
Net cash used in operating activities (29,518) (22,211)
Cash flows from investing activities:
Capital expenditures (1,699) (1,334)
Acquisition of business (14,098) -
Net cash used in investing activities (15,797) (1,334)
Cash flows from financing activities:
Net borrowings of long-term debt 43,366 23,500
Issuance of warrants 1,271 -
Issuance of common stock 540 138
Net cash provided by financing activities 45,177 23,638
Net (decrease) increase in cash and
cash equivalents (138) 93
Cash and cash equivalents,
beginning of period 732 789
Cash and cash equivalents, end of period $ 594 $ 882
The accompanying notes are an integral part of these consolidated
statements.
<PAGE>
Rawlings Sporting Goods Company, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Summary of Significant Accounting Policies.
The accompanying unaudited interim consolidated financial
statements have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission pertaining
to interim financial information and do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. These
financial statements should be read in conjunction with the
consolidated financial statements and accompanying notes included
in the Company's Annual Report for the year ended August 31,
1997. In the opinion of management, all adjustments consisting
only of normal recurring adjustments considered necessary for a
fair presentation of financial position and results of operations
have been included therein. The results for the six months ended
February 28, 1998 are not necessarily indicative of the results
that may be expected for a full fiscal year.
Note 2: Inventories
Inventories consisted of the following (in thousands):
February 28, August 31,
1998 1997
Raw materials $ 8,094 $ 5,571
Work in process 2,511 2,027
Finished goods 31,610 22,183
$ 42,215 $29,781
<PAGE>
Note 3: Warrants
In November 1997, the Company issued warrants to purchase 925,804
shares of common stock at $12.00 to Bull Run Corporation for
$3.07 per warrant. The warrants expire in November 2001 and are
exercised only if the Company's common stock closes above $16.50
for twenty consecutive trading days. One half of the purchase
price of the warrants was paid in cash with the other half
payable with interest at 7% at the time of exercise or expiration
of the warrants. The receivable for the unpaid portion of the
warrants is classified as a stock subscription receivable in the
accompanying balance sheet. These warrants are not considered
common stock equivalents until the point in time that the
warrants become exercisable.
Note 4: Acquisition
On September 12, 1997 the Company acquired the net assets of the
Victoriaville hockey business. The acquisition was accounted for
under the purchase method and accordingly, the results of
operations were included in the Company's consolidated statement
of income from the date of acquisition. The purchase price, paid
in cash, has been allocated to the assets and liabilities on a
preliminary basis and the excess of cost over the fair value of
net assets acquired is being amortized over a forty year period
on a straight-line basis. The preliminary purchase price
allocation is as follows:
Net Assets $ 5,568
Goodwill 8,530
Total Purchase Price $14,098
Note 5: Long-Term Debt
In September 1997, the Company amended and restated the unsecured
credit agreement with a bank group which, among other matters,
increased the facility to $90,000 and extended the maturity date
to September 2002. The amended and restated credit agreement,
among other matters, requires the Company to meet certain
financial covenants including a minimum fixed charge coverage, a
required ratio of maximum total debt to total capitalization, a
minimum net worth and restrictions on the Company's ability to
pay cash dividends to 50% of the Company's net income for the
<PAGE>
preceding year. The available borrowings under the amended
credit agreement decline $4,000, $5,000, $6,000 and $7,000 on
September 1, 1998, 1999, 2000 and 2001, respectively.
In October 1997, the Company entered into a two-year interest
rate swap agreement with a commercial bank under which the
Company receives a floating rate based on three month LIBOR
through October 1999 on $30,000 and pays a fixed rate of 6.75% to
7.00%. The transaction effectively converts a portion of the
Company's debt from a floating rate to a fixed rate.
Note 6: Commitments and Contingencies
The Company has been conducting ongoing environmental
investigation and remediation activities at its Dolgeville, New
York facility (the "Site") with respect to the release of wood
pitch into surrounding soil and surface water. In November 1997,
the Company entered into a Voluntary Agreement with the New York
State Department of Environmental Conservation (the "NYSDEC") to
conduct certain environmental remediation activities related to
the presence of wood pitch in the soils at the Site. The wood
pitch was generated as a result of the former operation of a
retort facility by a third party unrelated to Rawlings before
Rawlings' ownership of the Site. In December 1997, an
environmental consulting firm retained by Rawlings initiated
remediation activities under the oversight of the NYSDEC. In
conducting the remediation activities under the Voluntary
Agreement, it was discovered that the actual volume of wood pitch
substantially exceeded the amount originally estimated by the
environmental consulting firm. Much of the unanticipated,
additional wood pitch has been remediated in accordance with the
requirements of the Voluntary Agreement. The Company believes
that a portion of the unanticipated, additional volume of wood
pitch remaining at the Site may be outside the scope of the
current Voluntary Agreement. However, in order to ensure that
the Company receives all of the benefits of the Voluntary
Agreement as expeditiously as possible, the Company may be
required to address such additional wood pitch through an
amendment to the Voluntary Agreement. Consequently, the
Company's environmental consultants have been asked to thoroughly
investigate the amount of the remaining unanticipated, additional
wood pitch at the Site and to provide the Company with specific
recommendations regarding how such additional wood pitch should
be managed, along with cost estimates. These recommendations and
estimates are expected to be delivered to the Company by late
April 1998. The Company's accrual for remediation costs as of
February 28, 1998, was <PAGE> approximately $668,000, and, in the
Management's view, this amount is adequate to cover the
remediation activities under the current scope of the Voluntary
Agreement. Although the currently unknown costs to address the
unanticipated, additional wood pitch could exceed the Company's
accrued remediation costs, Management believes, based on
preliminary discussions with the environmental consultants, that
any additional accrual that may be required would not have a
material adverse effect on the Company's financial condition or
cash flows. However, any additional accrued remediation costs
that may be required could have a material adverse effect on the
Company's quarterly and/or annual results of operations in the
period such accrual is recognized.
Note 7: Statement of Financial Accounting Standard No. 128
Footnote Disclosure
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, Earnings Per
Share ("SFAS 128"), effective for financial statements for both
interim and annual periods ending after December 15, 1997. The
Company has adopted the provisions of SFAS 128 during the quarter
ended February 28, 1998, and all prior period earnings per share
data has been presented on this basis.
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
RESULTS OF OPERATIONS
Quarter Ended February 28, 1998 Compared
with Quarter Ended February 28, 1997
Net revenues in the quarter ended February 28, 1998 were
$61,822,000 or 17.0 percent higher than net revenues of
$52,859,000 for the same quarter last year. Increased net
revenues in all major product categories excluding licensing
resulted in the overall increase. The largest increases in net
revenues occurred in baseball-related equipment, basketball,
football and volleyball equipment, apparel and hockey equipment.
Net revenues increased 14.6 percent excluding the impact of the
acquisition of the Vic hockey business.
Demand for the Company's new products, including the radar speed-
sensing baseball and the power forged aluminum bats, is strong.
<PAGE>
The net revenues generated from these new products along with the
net revenues related to the Vic hockey business acquired last
September have the Company on track to generate $170.0 to $175.0
million in net revenues in the fiscal year ending August 31,
1998, a 15 to 19 percent increase over the prior fiscal year.
Gross margin in the quarter ended February 28, 1998 was 31.4
percent, .9 margin points lower than the comparable quarter last
year. Gross margin declined from the comparable prior year
quarter primarily as a result of lower domestic and international
licensing revenues and a reduction in the gross margin of
baseball gloves. Domestic licensing revenues declined primarily
related to footwear and socks while international licensing
revenues declined primarily as a result of unfavorable currency
exchange rates between the dollar and the Japanese yen. The
gross margin on baseball gloves declined primarily as a result of
a shift in mix to lower price point units which typically have
lower margins.
Selling, general and administrative (SG&A) expenses in the
quarter ended February 28, 1998 were $10,590,000 (17.1% of net
revenues) compared to SG&A expenses of $9,258,000 (17.5% of net
revenues) in the comparable prior year quarter. The SG&A
expenses in the quarter ended February 28, 1998 include expenses
related to the Vic hockey business acquired in September 1997.
Interest expense for the quarter ended February 28, 1998 was
$1,215,000 or 28.2 percent higher than interest expense of
$948,000 in the comparable quarter last year. Higher average
borrowings, primarily as a result of the acquisition of the Vic
hockey business and higher working capital levels were primarily
responsible for the increase.
Six Months Ended February 28, 1998 Compared
with the Six Months Ended February 28, 1997
Net revenues for the six months ended February 28, 1998 were
$93,925,000, or 15.8 percent higher than net revenues of
$81,118,000 in the comparable six month period last year. Higher
net revenues in all major product categories other than licensing
were responsible for the increase. The largest increases in net
revenues occurred in baseball-related equipment, basketball,
football and volleyball equipment, hockey equipment and apparel.
Net revenues of baseball-related equipment increased as a result
of increased glove net revenues and net revenues from new
products <PAGE> including the radar speed-sensing baseball and the power
forged aluminum bats. Net revenues increased 11.7 percent
excluding the impact of the acquisition of the Vic hockey
business.
Gross margin for the six months ended February 28, 1998 was 30.6
percent, 1.3 margin points lower than the comparable period last
year. Lower licensing revenues, lower net revenues from higher
margin memorabilia products and a lower gross margin on baseball
gloves were primarily responsible for the decrease.
SG&A expenses for the six months ended February 28, 1998 were
$20,094,000 compared to SG&A expenses of $17,400,000 in the
comparable prior year period. SG&A expenses in the six months
ended February 28, 1998, include approximately $500,000 of
severance and related benefits, legal costs and search firm fees
associated with changes in the Chief Executive Officer's
position. SG&A expenses for the six months ended February 28,
1998 also include expenses related to the Vic hockey business
since its acquisition in September 1997. SG&A expenses excluding
the one time charge associated with changes in the Chief
Executive Officer's position were 20.9 percent of net revenues in
the six months ended February 28, 1998 compared with 21.5 percent
in the comparable prior year period.
Interest expense for the six months ended February 28, 1998 was
$2,095,000 or 24.3 percent higher than interest expense of
$1,686,000 in the comparable prior year six month period. Higher
average borrowings as a result of the acquisition of the Vic
hockey business and higher working capital levels, were primarily
responsible for the increase.
Seasonality
Net revenues of baseball equipment and team uniforms are highly
seasonal. Customers generally place orders with the Company for
baseball-related products beginning in August for shipment
beginning in November (pre-season orders). These pre-season
orders from customers historically represented approximately 65
percent to 75 percent of the customers' anticipated needs for the
entire baseball season. The amount of these pre-season orders
generally determine the Company's net revenues and profitability
between November 1 and March 31. The Company then receives
additional orders (fill-in orders) which depend upon customers'
actual sales of products during the baseball season (sell-
through). Fill-in orders are typically received by the Company
between February and May. These orders generally represent
<PAGE>
approximately 25 percent to 35 percent of the Company's sales of
baseball-related products during a particular season. Pre-season
orders for certain baseball-related products from certain
customers are not required to be paid until early spring. These
extended terms increase the risk of collectibility of accounts
receivable. An increasing number of customers are on automatic
replenishment systems therefore more orders are received on a
ship-at-once basis. This change has resulted in shipments to the
customer closer to the time the products are actually sold. This
trend has and may continue to have the effect of shifting the
seasonality and quarterly results of the Company with higher
inventory and debt levels required to meet orders for immediate
delivery. The sell-through of baseball-related products also
affects the amount of inventory held by customers at the end of
the season which is carried over by the customer for sale in the
next baseball season. Customers typically adjust their pre-
season orders for the next baseball season to account for the
level of inventory carried over from the preceding baseball
season. Football equipment and team uniforms are both shipped by
the Company and sold by retailers primarily in the period between
March 1 and September 30. Hockey equipment and uniforms are
shipped by the Company primarily in the period from May 1 to
October 31. Basketballs and team uniforms generally are shipped
and sold throughout the year. Because the Company's sales of
baseball-related products exceed those of its other products,
Rawlings' business is seasonal, with its highest net revenues and
profitability recognized between November 1 and April 30.
Year 2000 Issue
Many existing computer programs, including those used by the
Company in its operations, use only two digits to identify a year
in the date field. These programs were designed and developed
without considering the impact of the upcoming change in the
century. If not corrected, many computer applications could fail
or create erroneous results by or at the year 2000. This
potential problem is often referred to as the "Year 2000 issue".
The Company has undertaken a thorough analysis of the costs of
addressing the Year 2000 issue and of the consequences of an
incomplete or untimely resolution of the Year 2000 issue and
determined that such costs are not likely to have a material
effect on the Company's future financial results. In addition,
while the Company has not completed its analysis of the measures
taken by its key suppliers to address the Year 2000 issue, the
Company is not aware of any key supplier whose lack of
<PAGE>
preparedness to address the Year 2000 issue could have a material
effect on the Company's future financial results.
Liquidity and Capital Resources
Working capital increased $38,678,000 for the six months ended
February 28, 1998 primarily the result of the seasonal increase
in accounts receivable and inventories and the working capital
acquired in connection with the Vic hockey acquisition.
Cash flows used in operating activities for the six months ended
February 28, 1998 were $29,518,000, or 32.9 percent higher than
the $22,211,000 used in the comparable prior year period. The
increase is primarily the result of a larger build in inventories
and accounts receivable partially offset by an increase in
accounts payable.
Capital expenditures were $1,699,000 for the six months ended
February 28, 1998 compared to $1,334,000 in the comparable prior
year period. The Company expects capital expenditures for fiscal
1998 to be approximately $3,500,000.
Investing activities included $14,098,000 use of cash related to
the acquisition of the Vic hockey business.
The Company had net borrowings of $43,366,000 in the six months
ended February 28, 1998. This resulted from $14,098,000 of
borrowings related to the acquisition of the Vic hockey business
and borrowings for seasonal working capital offset by proceeds
from the issuance of warrants and common stock of $1,811,000.
Total debt as of February 28, 1998 was $76,039,000, $13,839,000
or 22.2 percent higher than total debt as of February 28, 1997.
The increase is primarily the result of the Vic hockey
acquisition and higher working capital levels, partially offset
by operating cash flows.
Cautionary Factors that May Affect Future Results or the
Financial Condition of the Business.
Except for the historical information contained herein, the
matters outlined in the management's discussion and analysis are
forward looking statements that involve risks and uncertainties,
including quarterly fluctuations in results, ongoing customer
changes in buying patterns, retail sell rates for the Company's
products, demand and performance of the Company's new products,
which may result in more or less orders than those anticipated
and <PAGE> the impact of competitive products and pricing. In addition,
other risks and uncertainties are detailed from time to time in
the Company's SEC reports, including the report on Form 10-K for
the year ended August 31, 1997.
Item 3. Quantitative and Qualitative Disclosure about Market
Risk
Not Applicable.
Part II.
OTHER INFORMATION
Item 1. Legal Proceedings
The Company has been conducting ongoing environmental
investigation and remediation activities at its Dolgeville, New
York facility (the "Site") with respect to the release of wood
pitch into surrounding soil and surface water. In November 1997,
the Company entered into a Voluntary Agreement with the New York
State Department of Environmental Conservation (the "NYSDEC") to
conduct certain environmental remediation activities related to
the presence of wood pitch in the soils at the Site. The wood
pitch was generated as a result of the former operation of a
retort facility by a third party unrelated to Rawlings before
Rawlings' ownership of the Site. In December 1997, an
environmental consulting firm retained by Rawlings initiated
remediation activities under the oversight of the NYSDEC. In
conducting the remediation activities under the Voluntary
Agreement, it was discovered that the actual volume of wood pitch
substantially exceeded the amount originally estimated by the
environmental consulting firm. Much of the unanticipated,
additional wood pitch has been remediated in accordance with the
requirements of the Voluntary Agreement. The Company believes
that a portion of the unanticipated, additional volume of wood
pitch remaining at the Site may be outside the scope of the
current Voluntary Agreement. The Company's environmental
consultants have been asked to thoroughly investigate the amount
of the remaining unanticipated, additional wood pitch at the Site
and to provide the Company with specific recommendations
regarding how such additional wood pitch should be managed, along
with cost estimates. These recommendations and estimates are
expected to be delivered to the Company by late April 1998. The
Company's accrual for remediation costs as of February 28, 1998,
was <PAGE> approximately $668,000, and, the Company believes this
accrual is adequate to cover the remediation activities under the
current scope of the Voluntary Agreement. Although the currently
unknown costs to address the unanticipated, additional wood pitch
could exceed the Company's accrued remediation costs, the Company
believes, based on preliminary discussions with the environmental
consultants, that any additional accrual that may be required
would not have a material adverse effect on the Company's
financial condition or cash flows. However, any additional
accrued remediation costs that may be required could have a
material adverse effect on the Company's quarterly and/or annual
results of operations in the period such accrual is recognized.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults on Senior Securities
None.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
The annual Stockholder's Meeting was held on January 15,
1998. At the meeting the following nominees were elected
pursuant to the following votes:
Number of Number of
Nominee Votes for Votes Withheld
Andrew N. Baur 5,967,400 62,897
Robert S. Prather, Jr. 5,955,902 74,395
The following directors' term of office continued after the
meeting:
Linda L. Griggs
Michael McDonnell
Michael J. Roarty
William C. Robinson
The approval of the amendment of the Company's 1994 Long-
Term Incentive Plan increasing the total number of shares of
common stock available for issuance upon the exercise of options
granted under such plan by 500,000 shares to an aggregate of
1,125,000 shares of common stock was approved pursuant to the
following vote:
For Against Abstain
1,577,751 565,536 124,173
The approval of the amendment of the Company's Certificate
of Incorporation to increase the maximum number of individuals
who can be members of the Board of Directors from seven to ten
was approved pursuant to the following vote:
For Against Abstain
5,757,901 152,197 120,199
The approval of the Board of Directors' selection of Arthur
Andersen LLP as independent public accountants was approved
pursuant to the following vote:
For Against Abstain
5,978,231 29,099 22,967
<PAGE>
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
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.
RAWLINGS SPORTING GOODS COMPANY, INC.
Date: April 8, 1998 /s/ HOWARD B. KEENE
Howard B. Keene
Chief Executive Officer and
President
Date: April 8, 1998 /s/ PAUL E. MARTIN
Paul E. Martin
Chief Financial Officer
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-END> FEB-28-1998
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<RECEIVABLES> 69,510
<ALLOWANCES> 1,981
<INVENTORY> 42,215
<CURRENT-ASSETS> 115,260
<PP&E> 26,010
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<TOTAL-ASSETS> 157,120
<CURRENT-LIABILITIES> 25,899
<BONDS> 85,414
0
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<COMMON> 78
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<SALES> 93,925
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<TOTAL-COSTS> 65,143
<OTHER-EXPENSES> 20,094
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,095
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</TABLE>
