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 May 31, 1997 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 June 6, 1997: 7,718,826 shares. 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 Nine Months Ended May 31, May 31, 1997 1996 1997 1996 Net revenues $39,859 $39,107 $120,977 $125,963 Cost of goods sold 27,274 26,552 82,518 86,532 Gross profit 12,585 12,555 38,459 39,431 Selling, general and administrative expenses 8,462 8,715 25,862 26,274 Operating income 4,123 3,840 12,597 13,157 Interest expense, net 864 984 2,550 2,963 Other expense, net 53 50 151 211 Income before income taxes 3,206 2,806 9,896 9,983 Provision for income taxes 1,202 1,100 3,711 3,913 Net income $ 2,004 $ 1,706 $ 6,185 $ 6,070 Average number of common shares outstanding 7,715 7,686 7,708 7,676 Net income per common share $ 0.26 $ 0.22 $ 0.80 $ 0.79 The accompanying notes are an integral part of these consolidated statements. Rawlings Sporting Goods Company, Inc. and Subsidiaries Consolidated Balance Sheets (Amounts in thousands, except share data) (Unaudited) May 31, August 31, 1997 1996 Assets Current Assets: Cash and cash equivalents $ 1,216 $ 789 Accounts receivable, net of allowance of $1,414 and $1,498 respectively 35,527 30,090 Inventories 31,332 32,415 Prepaid expenses 432 1,472 Deferred income taxes 3,161 3,162 Total current assets 71,668 67,928 Property, plant and equipment, net 8,817 7,860 Other assets 576 698 Deferred income taxes 22,280 25,766 Total assets $ 103,341 $ 102,252 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 6,511 $ 9,119 Accrued liabilities 9,777 8,461 Total current liabilities 16,288 17,580 Long-term debt 35,000 38,700 Other long-term liabilities 11,204 11,508 Total liabilities 62,492 67,788 Stockholders' equity: Preferred stock, none issued - - Common stock, 7,718,826 and 7,697,527 shares issued and outstanding, respectively 77 77 Additional paid-in capital 26,020 25,820 Retained earnings 14,752 8,567 Stockholders' equity 40,849 34,464 Total liabilities and stockholders' equity $ 103,341 $ 102,252 The accompanying notes are an integral part of these consolidated balance sheets. Rawlings Sporting Goods Company, Inc. and Subsidiaries Consolidated Statements of Cash Flow (Amounts in thousands) (Unaudited) Nine Months Ended May 31, 1997 1996 Cash flows from operating activities: Net income $6,185 $ 6,070 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 912 837 Deferred income taxes 3,487 3,737 Changes in operating assets and liabilities: Accounts receivable, net (5,437) (12,768) Inventories 1,083 (2,327) Prepaid expenses 1,040 413 Other assets (18) 71 Accounts payable (2,608) 1,479 Accrued liabilities and other 1,024 2,609 Net cash provided by operating activities 5,668 121 Cash flows from investing activities: Capital expenditures (1,741) (973) Cash flows from financing activities: Net repayments of long-term debt (3,700) (400) Payment from former parent related to purchase price settlement - 275 Issuance of common stock 200 263 Net cash (used in) provided by financing activities (3,500) 138 Net increase (decrease) in cash and cash equivalents 427 (714) Cash and cash equivalents, beginning of period 789 1,337 Cash and cash equivalents, end of period $1,216 $ 623 The accompanying notes are an integral part of these consolidated statements. 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, 1996. 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 nine months ended May 31, 1997 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): May 31, August 31, 1997 1996 Raw materials $ 5,656 $ 5,624 Work in process 2,052 1,899 Finished goods 23,624 24,892 $31,332 $32,415 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition RESULTS OF OPERATIONS Quarter Ended May 31, 1997 Compared with Quarter Ended May 31, 1996 Net revenues in the quarter ended May 31, 1997 were $39,859,000, or 1.9 percent higher than net revenues of $39,107,000 in the comparable quarter last year. Improved net revenues from inflatables (basketballs, footballs and volleyballs) and apparel partially offset by lower net revenues from baseball-related products and licensing were primarily responsible for the increase. The increase in inflatables net revenues was primarily the result of a new volleyball product sold to a corporate customer for a promotion. Apparel net revenues improved during the quarter as revenues for both special order and stock apparel products improved. The decline in net revenues from baseball-related products was primarily confined to baseballs with most other baseball product categories showing increases. Gross margin in the quarter ended May 31, 1997 was 31.6 percent, .5 margin points lower than the gross margin of 32.1 percent in the comparable quarter last year. The lower gross margin was primarily the result of lower licensing revenues related to a domestic licensee. This licensee has indicated that it expects its results related to Rawlings' licensed products to improve in the fiscal fourth quarter. Selling, general and administrative (SG&A) expenses were $8,462,000 in the quarter ended May 31, 1997, or 2.9 percent lower than SG&A expenses of $8,715,000 in the comparable prior year quarter. As a percent of net revenues, SG&A expenses were 21.2 percent in the quarter ended May 31, 1997 compared with 22.3 percent in the comparable prior year quarter. Interest expense was $864,000 in the quarter ended May 31, 1997, or 12.2 percent lower than interest expense of $984,000 in the comparable prior year quarter. Lower average debt outstanding was primarily responsible for the decrease. Nine Months Ended May 31, 1997 Compared with the Nine Months Ended May 31, 1996 Net revenues for the nine months ended May 31, 1997 were $120,977,000, or 4.0 percent below net revenues of $125,963,000 in the comparable nine month period last year. Lower net revenues from baseball-related products, partially offset by higher net revenues from inflatables and apparel, were primarily responsible for the net revenues decline. Lower net revenues from baseball gloves primarily resulted from two major warehouse clubs exiting the baseball category and a decline at a major mass merchandiser who entered the 1997 selling season with excess inventory. Preliminary indications from this mass merchandiser indicate that baseball glove purchases will be increased for the 1998 season. Gross margin for the nine months ended May 31, 1997 was 31.8 percent, .5 margin points higher than the comparable period last year. Higher margins from apparel and basketball products were primarily responsible for the improved margin. SG&A expenses for the nine months ended May 31, 1997 were $25,862,000, or 1.6 percent lower than SG&A expenses of $26,274,000 in the comparable prior year period. As a percent of net revenues, SG&A expenses were 21.4 percent in the nine months ended May 31, 1997, compared with 20.9 percent in the comparable prior year nine month period. The decline in net revenues and a large amount of fixed expenses resulted in the modest increase in SG&A as a percent of net revenues. Interest expense for the nine months ended May 31, 1997 was $2,550,000, or 13.9 percent lower than interest expense of $2,963,000 in the comparable nine month period last year. The decrease is primarily the result of lower average borrowings. The effective tax rate of 37.5 percent for the nine months ended May 31, 1997 was 1.7 points lower than the effective tax rate of 39.2 percent in the comparable prior year nine month period. The decrease in the effective tax rate is the result of lower foreign effective tax rates on a portion of the Company's income generated and indefinitely reinvested in Costa Rica. The Company expects its fiscal 1997 effective tax rate, based on its current mix of domestic and foreign earnings, to be approximately 37 to 38 percent. Seasonality Net revenues of baseball equipment and related team uniforms are highly seasonal. Customers historically have placed orders with the Company for baseball-related products beginning in July for shipment beginning in October (pre-season orders). These pre- season orders from customers historically represented approximately 75 percent to 80 percent of the customers' anticipated needs for the entire baseball season. The amount of these pre-season orders historically determined the Company's net revenues and profitability between October 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 historically represented approximately 20 percent to 25 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 collectability related to accounts receivable. In fiscal 1996 and 1997, customers have begun placing their pre-season orders later and a larger percentage of orders are fill-in orders. In addition, with an increasing number of customers on automatic replenishment systems more and 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 related team uniforms are both shipped by the Company and sold by retailers primarily in the period between March 1 and September 30. Basketballs and related 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. 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 fluctuation in results, retail sell rates for the Company's 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, 1996. Liquidity and Capital Resources Working capital increased $5,032,000 for the nine months ended May 31, 1997, primarily the result of the seasonal increase in accounts receivable. Cash flows provided by operating activities for the nine months ended May 31, 1997 were $5,668,000, or $5,547,000 higher than the $121,000 provided in the comparable prior year period. The increase is primarily the result of a smaller build in accounts receivable. Capital expenditures were $1,741,000 for the nine months ended May 31, 1997 compared to $973,000 in the comparable prior year period. With additional planned equipment purchases, the Company expects capital expenditures of approximately $2,700,000 in fiscal 1997. The Company had net repayment of debt of $3,700,000 in the nine months ended May 31, 1997. This resulted in total debt at May 31, 1997 of $35,000,000, $8,500,000, or 19.5 percent, below total debt as of May 31, 1996. Part II. OTHER INFORMATION Item 1. Legal Proceedings The Company previously reported that on November 22, 1995 a class action complaint was filed in the United States District Court for the Eastern Division of the Eastern District of Missouri by Henry G. Jakobe, Jr., against the Company, Mr. Carl J. Shields, Chairman, CEO and President of the Company, and Howard B. Keene, Chief Operating Officer of the Company. The complaint alleged, among other things, that the defendants violated the federal securities laws by making false and misleading statements regarding the impact of the Major League Baseball strike on the Company's business. The Company and the individual defendants denied, and continue to deny, all allegations in the litigation. On September 23, 1996, the District Court granted in part and denied in part the defendants' Motion to Dismiss. The dismissal order limited plaintiffs class claims to open market purchasers of the Company's common stock between March 17, 1995 and June 30, 1995. Subsequent to the dismissal order, the parties agreed to settle the litigation to avoid potentially protracted and costly litigation, and entered into a Settlement Agreement on January 13, 1997. By order dated February 13, 1997, the District Court approved a settlement class on behalf of open market purchasers of the Company's common stock during the period of March 17, 1995 through June 30, 1995 inclusive. Following a class settlement hearing on May 16, 1997, the District Court entered its Final Judgment and Order with Respect to Settlement Approval on May 23, 1997, effectively terminating the litigation. The Company's consideration for the settlement was not material and a substantial portion of the settlement consideration was paid by the Company's insurance company. Item 2. Material Modification of Rights of Registrant's Securities 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 10.1 Amendment No. 4 dated May 30, 1997 to the Credit Agreement by and among Rawlings Sporting Goods Company, Inc., The First National Bank of Chicago, as agents and certain lenders named therein. (b) Reports on Form 8-K None. 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: July 8, 1997 /s/ CARL J. SHIELDS Carl J. Shields Chairman, CEO and President Date: July 8, 1997 /s/ PAUL E. MARTIN Paul E. Martin Chief Financial Officer (Principal Accounting Officer)