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 November 30, 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 December 22, 1998: 7,804,765
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)
Three Months Ended
November 30,
1998 1997
Net revenues $34,123 $32,103
Cost of goods sold 22,710 22,739
Gross profit 11,413 9,364
Selling, general and administrative expenses 10,681 9,004
Unusual charge - 500
Operating income (loss) 732 (140)
Interest expense, net 1,047 880
Other expense, net 37 41
Loss before income taxes 352) (1,061)
Benefit for income taxes (130) (398)
Net loss $(222) $(663)
Net loss per common share:
Basic $(0.03) $(0.09)
Diluted $(0.03) $(0.09)
Shares used in computing per share amounts:
Basic 7,809 7,739
Assumed exercise of stock options 12 18
Diluted 7,821 7,757
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)
November 30, August 31,
1998 1998
Assets
Current Assets:
Cash and cash equivalents $ 686 $ 862
Accounts receivable, net of
allowance of $2,191 and
$2,043 respectively 43,416 40,352
Inventories 52,040 43,573
Prepaid expenses 786 673
Deferred income taxes 4,946 4,946
Total current assets 101,874 90,406
Property, plant and equipment, net 12,970 12,911
Other assets 545 568
Deferred income taxes 19,397 20,321
Goodwill, net 8,272 8,326
Total assets $143,058 $132,532
Liabilities and Stockholders'
Equity
Current liabilities:
Current portion of long-term
debt $ 61 $ 61
Accounts payable 10,271 9,047
Accrued liabilities 13,140 12,547
Total current liabilities 23,472 21,655
Long-term debt, less current
maturities 67,282 57,048
Other long-term liabilities 8,061 9,577
Total liabilities 98,815 88,280
Stockholders' equity:
Preferred stock, none issued - -
Common stock, 7,802,665 and
7,794,483 shares issued
and outstanding, respectively 78 78
Additional paid-in capital 29,562 29,479
Stock subscription receivable (1,421) (1,421)
Cumulative translation
adjustment (1,451) (1,581)
Retained earnings 17,475 17,697
Stockholders' equity 44,243 44,252
Total liabilities and
stockholders' equity $143,058 $132,532
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)
Three Months Ended
November 30,
1998 1997
Cash flows from operating activities:
Net loss $(222) $ (663)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 610 390
Deferred income taxes 924 (444)
Changes in operating assets and
liabilities:
Accounts receivable, net (3,064) (2,978)
Inventories (8,467) (9,876)
Prepaid expenses (113) (81)
Other assets (2) (138)
Accounts payable 1,224 2,289
Accrued liabilities and other (800) (1,218)
Net cash used in operating activities (9,910) (12,719)
Cash flows from investing activities:
Capital expenditures (583) (726)
Acquisition of business - (14,493)
Net cash used in investing activities (583) (15,219)
Cash flows from financing activities:
Borrowings of long-term debt 16,534 67,330
Repayments of long-term debt (6,300) (41,000)
Issuance of common stock 83 454
Issuance of warrants - 1,271
Net cash provided by financing activities 10,317 28,055
Net (decrease) increase in cash and cash
equivalents (176) 117
Cash and cash equivalents,
beginning of period. 862 732
Cash and cash equivalents, end of period $686 $849
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,
1998. 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 three months
ended November 30, 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):
November 30, August 31,
1998 1998
Raw materials $ 9,408 $ 9,552
Work in process 1,438 2,497
Finished goods 41,194 31,524
$52,040 $43,573
Note 3: Reclassification
Certain reclassifications have been made to the prior year
financial statements to conform with the current year
presentation.
<PAGE>
Note 4: Comprehensive Income
In June 1997, the Financial Accounting Standards Board
issued SFAS No. 130, "Reporting Comprehensive Income" which
establishes standards for reporting and disclosure of
comprehensive income and its components. Effective September 1,
1998, the Company adopted SFAS No. 130. For the three months
ended November 30, 1998 and 1997, comprehensive income (loss) was
($92,000) and ($787,000), respectively.
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
RESULTS OF OPERATIONS
Quarter Ended November 30, 1998 Compared
with Quarter Ended November 30, 1997
Net revenues for the quarter ended November 30, 1998 were
$34,123,000 or 6.3 percent higher than net revenues of
$32,103,000 for the same quarter last year. Increased net
revenues from wood baseball bats and apparel partially offset by
lower basketball net revenues were primarily responsible for the
increase. The increase in net revenues from wood baseball bats
was primarily driven by memorabilia sales related to the 1998
home run chase and to a lesser extent renewed interest in wood
baseball bats as the NCAA and other governing bodies evaluate bat
specifications. The increase in apparel net revenues is
primarily the result of increased special order volume and net
revenues related to a new line of outerwear apparel introduced
during the second quarter of fiscal 1998. The decrease in
basketball net revenues is primarily related to decreased sales
at several large mass merchandisers related to the NBA players'
strike, lower premium revenues and the overall soft condition of
the basketball category.
The Company's gross profit was $11,413,000 or 21.9 percent
above the gross profit of $9,364,000 for the comparable prior
year period. The gross profit margin for the quarter was 33.4
percent, 4.2 margin points higher than the comparable prior year
quarter. The gross margin improvement is primarily related to
increased net revenues of higher margin memorabilia wood baseball
bats and to a lesser extent continued improvement in the
Company's apparel gross margins, due to improved production
efficiencies. That improvement was partially offset by lower
licensing revenues related to the Company's domestic footwear
licensee.
The Company is continuing to look for further production
efficiencies in apparel and other categories and is currently
evaluating its manufacturing and distribution infrastructure to
determine what opportunities exist to improve customer service
and reduce the Company's overall cost structure. The Company
expects to complete these evaluations, including analysis of
asset realizability, before the end of fiscal 1999.
<PAGE>
Selling, general and administrative (SG&A) expenses were
$10,681,000 or 18.6 percent higher than SG&A expenses of
$9,004,000 in the comparable prior year period. The increase is
primarily related to increased selling expenses including
salaries and wages, royalties, advertising and promotion costs
and player endorsements. SG&A expenses were 31.3 percent of net
revenues, up 3.3 points from the comparable prior year quarter.
The comparable prior year period includes an unusual charge
of $500,000 related to changes in the Chief Executive Officer's
position. No unusual charges occurred in the quarter ended
November 30, 1998.
Interest expense was $1,047,000, or 19.0 percent higher than
interest expense of $880,000 in the comparable prior year period.
Higher average borrowings primarily related to higher inventory
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 generally represent approximately 50
percent to 65 percent of the customers' anticipated needs for the
entire baseball season. The amount of these pre-season orders
generally determines 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
approximately 35 percent to 50 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 <PAGE> 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 Issues
The Company has initiated a comprehensive program to replace
its computer systems and applications with a Year 2000 compliant
enterprise-wide system. The assessment phase of the Company's
system migrations is complete and the systems testing and
implementation stages are in progress. To date, a majority of the
Company's locations and processes have been successfully migrated
to the new system with completion expected by June 1999. The
Company has incurred capital expenditures, including hardware,
software, outside consultants and other expenses, of
approximately $2.7 million on its new enterprise-wide system and
expects that full implementation of the system will require an
additional $300,000 over the next year. In addition, the Company
incurred approximately $300,000 in software selection and
training costs that were expensed during fiscal 1998 and fiscal
1997.
The Company has formally communicated with its major vendors
and suppliers to determine the extent to which the Company may be
vulnerable to those third parties' failure to remediate their own
Year 2000 issues. The first phase, which included sending Year
2000 surveys and questionnaires to customers and vendors is
complete and the response evaluation phase is currently in
progress. The Company has not had sufficient response from
vendors to provide an estimate of the potential impact of non-
compliance on the part of such vendors. Management is currently
developing contingency plans which include, but are not limited
to, evaluating alternative vendors who are Year 2000 compliant
and evaluating inventory management plans. It is too early to
determine to what extent, if any, these contingency plans will
have to be implemented. Although the Company expects to be Year
2000 compliant by mid-1999 and does not expect to be materially
impacted by the external environment, such future events cannot
be known with certainty. Furthermore, the Company's estimates of
future migration costs and completion dates are based on
presently available information and will be updated, as
additional information becomes available.
Liquidity and Capital Resources
Working capital increased by $9,651,000 during the three
months ended November 30, 1998, primarily as a result of the
seasonal increase in accounts receivable and inventory. The
current inventory levels maintained by the Company are higher
than what management believes is optimal. Inventory reduction
programs and improved inventory management practices are being
initiated to reduce inventory levels and improve cash flow.
<PAGE>
Cash flows used in operating activities for the quarter
ended November 30, 1998 were $9,910,000, or 22.1 percent lower
than the $12,719,000 used in the comparable prior year period.
The decrease is primarily the result of a smaller increase in
inventory, a smaller net loss, higher depreciation and
amortization and a larger increase in accrued liabilities.
Capital expenditures were $583,000 for the quarter ended
November 30, 1998 compared to $726,000 in the comparable prior
year period. With the ongoing upgrade of the Company's computer
system and other planned expenditures for improved production and
distribution efficiencies the Company expects capital
expenditures of $2,500,000 to $3,000,000 in fiscal 1999.
The Company had net borrowings, primarily related to
seasonal working capital needs, of $10,234,000 in the quarter
ended November 30, 1998. This resulted in total debt as of
November 30, 1998 of $67,343,000, or 14.1 percent higher than the
total debt as of November 30, 1997. The increase in total debt is
primarily the result of higher inventory levels.
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 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, 1998.
Item 3. Quantitative and Qualitative Disclosure about Market
Risk
The Company has no material sensitivity to changes in
foreign currency exchange rates on its net exposed derivative
financial instrument position.
<PAGE>
Part II.
OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2 Changes in Securities and Use of Proceeds
None.
Item 3. Defaults on Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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: January 12, 1999 /s/ STEPHEN M. O'HARA
Stephen M. O'Hara
Chairman of the Board and
Chief Executive Officer
Date: January 12, 1999 /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 NOVEMBER 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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