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, 1999
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)
(636) 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 30, 1999: 7,874,180 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,
1999 1998 1999 1998
Net revenues. .......... $46,614 $46,204 $138,145 $140,129
Cost of goods sold...... 32,179 31,285 93,968 96,428
Aluminum bat recall
(see Note 6) ......... 1,600 - 1,600 -
Gross profit ......... 12,835 14,919 42,577 43,701
Selling, general and
administrative
expenses ............. 12,514 10,497 35,480 30,091
Unusual charges......... - 975 - 1,475
Operating income ..... 321 3,447 7,097 12,135
Interest expense, net .. 1,344 1,164 3,577 3,259
Other expense, net...... 52 33 119 104
Income (loss) before
income taxes.......... (1,075) 2,250 3,401 8,772
Provision (benefit) for
income taxes.......... (398) 843 1,258 3,289
Net income (loss)..... $ (677) $ 1,407 $ 2,143 $ 5,483
Net income (loss)
per common share:
Basic................. ($0.09) $0.18 $0.27 $0.71
Diluted............... ($0.09) $0.18 $0.27 $0.70
Shares used in computing per
share amounts:
Basic................. 7,870 7,792 7,839 7,770
Assumed exercise of stock
options............... 16 66 28 36
Diluted............... 7,886 7,858 7,867 7,806
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,
1999 1998
ASSETS
Current Assets:
Cash and cash equivalents...................... $ 1,815 $ 862
Accounts receivable, net of allowance of
$2,469 and $2,043 respectively............... 44,565 40,352
Inventories.................................... 46,685 43,573
Prepaid expenses............................... 764 673
Deferred income taxes.......................... 4,946 4,946
Total current assets......................... 98,775 90,406
Property, plant and equipment, net............... 13,009 12,911
Other assets..................................... 634 568
Deferred income taxes............................ 18,157 20,321
Goodwill, net.................................... 8,166 8,326
Total assets................................. $ 138,741 $ 132,532
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.............. $ 64 $ 61
Accounts payable............................... 11,376 9,047
Accrued liabilities............................ 13,735 12,547
Total current liabilities.................... 25,175 21,655
Long-term debt, less current maturities.......... 58,699 57,048
Other long-term liabilities...................... 7,366 9,577
Total liabilities............................ 91,240 88,280
Stockholders' equity:
Preferred stock, none issued................... - -
Common stock, 7,871,712 and 7,794,483
shares issued and outstanding,
respectively................................. 79 78
Additional paid-in capital..................... 30,236 29,479
Stock subscription receivable.................. (1,421) (1,421)
Cumulative translation adjustment.............. (1,233) (1,581)
Retained earnings.............................. 19,840 17,697
Stockholders' equity........................... 47,501 44,252
Total liabilities and stockholders'
equity....................................... $ 138,741 $ 132,532
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,
1999 1998
Cash flows from operating activities:
Net income ........................................ $ 2,143 $ 5,483
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization.................... 1,895 1,216
Deferred income taxes............................ 2,164 2,811
Changes in operating assets and liabilities:
Accounts receivable, net......................... (4,213) (9,356)
Inventories...................................... (3,112) (10,870)
Prepaid expenses................................. (91) (8)
Other assets..................................... (151) (113)
Accounts payable................................. 2,329 1,104
Accrued liabilities and other ................... (694) (954)
Net cash provided by (used in) operating
activities ........................................ 270 (10,687)
Cash flows from investing activities:
Capital expenditures............................... (1,729) (2,523)
Acquisition of business............................ - (14,098)
Net cash used in investing activities................ (1,729) (16,621)
Cash flows from financing activities:
Borrowings of long-term debt....................... 41,750 99,950
Repayments of long-term debt....................... (40,096) (73,349)
Issuance of common stock........................... 758 614
Issuance of warrants............................... - 1,271
Net cash provided by financing activities............ 2,412 28,486
Net increase in cash and cash equivalents............ 953 1,178
Cash and cash equivalents, beginning of period....... 862 732
Cash and cash equivalents, end of period............. $ 1,815 $ 1,910
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, 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 nine months ended May 31, 1999 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,
1999 1998
Raw materials . . . . . . . . . . . . $ 9,905 $9,552
Work in process . . . . . . . . . . . 1,949 2,497
Finished goods. . . . . . . . . . . . 34,831 31,524
$46,685 $43,573
Note 3: Long Term Debt
As of May 31, 1999 the Company was not in compliance with its
debt covenants to maintain a ratio of average debt to adjusted
EBITDA of 5.50 to 1.0 and the fixed charge ratio of 1.50 to 1.0.
The bank group has waived these debt compliance requirements as of
May 31, 1999 by entering into the third amendment of the credit
facility. The Company and the bank group have also amended the
loan agreement to convert the facility to an asset based lending
program based on a percentage of accounts receivable, inventories
and property, plant and equipment. The Company believes it will
successfully negotiate a new long-term loan agreement and new
covenants during the fourth quarter and accordingly it has
classified the debt as long-term on the balance sheet as of May 31,
1999.
Note 4: Reclassification
Certain reclassifications have been made to the prior year
financial statements to conform with the current year presentation.
Note 5: 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 May 31, 1999 the
comprehensive loss was $518,000 and for the three months ended May
31, 1998, comprehensive income was $970,000. Comprehensive income
for the nine months ended May 31, 1999 and 1998 was $2,491,000 and
$4,769,000, respectively.
Note 6: Aluminum Bat Recall
In May 1999, the Company recorded a $1,600,000 provision to
cover known and anticipated costs associated with the voluntary
recall of its slow pitch softball aluminum bats. The bats were
recalled to prevent injuries because of reported instances of the
tops of the bat, which have a screwed in end weight, shearing off
during use. The Company is not aware of any injuries resulting
from their bats. The provision covers the anticipated costs
associated with the return of the bats and the write-down of bats
remaining in inventory. Slow pitch softball aluminum bats are not
a major product line for the Company.
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Statements made in this report that are not historical in
nature, or that state the Company's or management's intentions,
hopes, beliefs, expectations, or predictions of the future, for
example, the intent of the Company to restructure operations and to
finalize a multi-year business plan, are "forward-looking
statements" under the Private Securities Litigation Reform Act of
1995, and involve risks and uncertainties. The words "should",
"will be", "intended", "continue", "believe", "may", "expect",
"hope", "anticipate", "goal", "forecast" and similar expressions
are intended to identify such forward-looking statements. It is
important to note that any such forward-looking statements are not
guarantees of future performance, and the Company's actual results,
financial condition or business could differ materially from those
expressed in such forward-looking statements. Factors that could
cause or contribute to such differences include, but are not
limited to, those discussed below under the caption "Cautionary
Factors That May Affect Future Results or the Financial Condition
of the Business", as well as those discussed elsewhere in the
Company's reports filed with the Securities and Exchange
Commission. The Company undertakes no obligation to update or
revise forward-looking statements to reflect changed assumptions,
the occurrence of unanticipated events or changes in future
operating results over time.
RESULTS OF OPERATIONS
Quarter Ended May 31, 1999 Compared
with Quarter Ended May 31, 1998
Net revenues for the quarter ended May 31, 1999 were
$46,614,000, which was .9 percent higher than net revenues of
$46,204,000 for the same quarter last year. Increased net
revenues in basketballs (up $788,000), apparel (up $689,000),
baseball memorabilia (up $450,000), and baseballs (up $335,000)
were offset by a decrease in net revenues of speed-sensing
baseballs (down $1,755,000). The basketball net revenues
increase for the quarter was due to shipments being later this
year partly due to the NBA players' strike which lowered sales in
the February 28, 1999 quarter. Increased apparel net revenues
were the result of sales of the new line of outer garments.
Increased net revenues of baseball memorabilia reflect a sell-off
of closeout items. Sales of the speed-sensing baseball were
higher in the May 31, 1998 quarter due to the initial
introduction of this product compared to a relatively soft market
for this product in the May 31, 1999 quarter.
Gross margin in the quarter ended May 31, 1999 was 27.5
percent, 4.8 margin points lower than the comparable quarter last
year. The May 31, 1999 quarter cost of sales included a
$1,600,000 provision for a voluntary slow pitch softball aluminum
bat recall for safety reasons. Excluding that provision, gross
margin was 30.9 percent, 1.4 margin points lower than the
comparable quarter last year. This decline in gross margins was
due to lower net revenues of the higher margin speed-sensing
baseballs and increased net revenues of the lower margin apparel
category. Offsetting these declines was an increase in margins
for professional baseballs and wood bats due to manufacturing
efficiencies and increased sales of memorabilia wood bats, which
have a higher gross margin.
Selling, general and administrative (SG&A) expenses in the
quarter ended May 31, 1999 were $12,514,000 (26.8 percent of net
revenues) compared to SG&A expenses of $10,497,000 (22.7 percent
of net revenues) in the comparable prior year quarter. Higher
advertising and promotion, salaries and wages, professional fees
and royalties accounted for the increase. The higher advertising
costs were due primarily to increased media activity directed at
the end consumer. The increase in SG&A expenses reflects the
Company's investment in anticipation of increased net revenues
which have not yet developed.
The May 1998 quarter included an unusual charge of $975,000
related to environmental remediation activities with respect to
the presence of wood pitch in the soils at the company's
Dolgeville, New York facility.
Interest expense for the quarter ended May 31, 1999 was
$1,344,000 or 15.5 percent higher than interest expense of
$1,164,000 in the comparable prior year quarter. Total debt at
May 31, 1999 was $58,763,000, which was $511,000 lower than the
total debt at May 31, 1998. The increase in interest expense was
primarily due to higher interest rates and slightly higher
average borrowings.
Nine Months Ended May 31, 1999 Compared
with Nine Months Ended May 31, 1998
Net revenues for the nine months ended May 31, 1999 were
$138,145,000 or 1.4 percent lower than net revenues of
$140,129,000 in the comparable nine month period last year. Net
revenues declined in basketballs, footballs, and total baseball
equipment. Partially offsetting was an increase in net revenues
from apparel. Basketball net revenues were down $1,152,000 or
7.4 percent due to the continued overall soft condition of the
basketball category. Total football net revenues were down
$1,039,000 or 10.7 percent due primarily to lower net revenues of
the protective equipment product line. Total baseball equipment
net revenues were down $916,000 or 1.1 percent due to lower sales
volume of baseball gloves, down $1,938,000 or 5.3 percent, speed-sensing
baseballs down $929,000 or 32.2 percent and aluminum bats
down $475,000 or 15.0 percent offset by an increase of $2,595,000
or 91.0 percent in wood bats. The increase in net revenues from
wood bats reflects sales of Mark McGwire bats and the movement of
the NCAA to wood bats from aluminum bats. Year-to-date net
revenues from the apparel product line were up $1,671,000 or 11.1
percent due to higher sales of outer garments.
Gross margin for the nine months ended May 31, 1999 was 30.8
percent, .4 margin points lower than the comparable period last
year. The May 31, 1999 quarter cost of sales included a
$1,600,000 provision for a voluntary slow pitch aluminum softball
bat recall for safety reasons. Excluding that provision gross
margin would have been 32.0 percent, an increase of .8 margin
points over the prior year. The gross margin improvement is
primarily a result of increased net revenues from higher margin
memorabilia wood bats. Partially offsetting was memorabilia
baseballs where sell-off of older items at reduced prices
resulted in lower margins.
SG&A expenses for the nine months ended May 31, 1999 were
$35,480,000, or 17.9 percent, higher than SG&A expenses of
$30,091,000 in the comparable prior year period. The increase is
primarily related to increases in salaries and wages, advertising
and promotion, royalties, depreciation and endorsement contracts.
SG&A expenses were 25.7 percent of net revenues, up 4.2 points
from the comparable period in the prior year. The increase in
SG&A expenses reflects the Company's investment in anticipation
of increased net revenues which have not yet developed.
The comparable prior year period included an unusual charge
of $975,000 related to environmental remediation activities with
respect to the presence of wood pitch in the soils at the
Company's Dolgeville, New York facility. Also included was an
unusual charge of $500,000 related to changes in the Chief
Executive Officer's position.
Interest expense for the nine months ended May 31, 1999 was
$3,577,000, or 9.8 percent, higher than interest expense of
$3,259,000 in the comparable prior year period. Higher average
borrowings as a result of higher working capital levels and
increased interest rates in the May 1999 quarter 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 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 Readiness Disclosure
Many software applications, hardware and equipment and chip
systems identify dates using only the last two digits of the
year. These products may be unable to distinguish between dates
in the Year 2000 and dates in the Year 1900. That inability
(referred to as the "Year 2000" issue), if not addressed, could
cause applications, equipment or systems to fail or provide
incorrect information after December 31, 1999, or when using
dates after December 31, 1999. This in turn could have an
adverse effect on the Company due to the Company's direct
dependence on its own applications, equipment and systems and
indirect dependence on those of other entities with which the
Company must interact.
The Company has initiated a comprehensive program to replace
its computer systems and applications with a Year 2000 compliant
enterprise-wide system. To date, all of the Company's mission
critical processes have been successfully integrated to the new
system and implementation of the new system is substantially
complete. The Company has incurred capital expenditures,
including hardware, software, outside consultants and other
expenses, of approximately $2.9 million on its new enterprise-wide
system and expects that full implementation of the system
may require an additional $100,000 over the next year. In
addition, the Company incurred approximately $300,000 in software
selection and training costs that have been expensed since the
beginning of fiscal 1997.
The Company also faces Year 2000 problems relating to
embedded computer chips which control equipment used within the
business such as telephone equipment and a limited amount of
machinery. The Company has completed assessments of equipment
considered most susceptible to Year 2000 issues and repair or
replacement has been arranged for equipment found to have Year
2000 problems. The process of assessing the remaining equipment
remains ongoing.
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.
If a material disruption of the Company's business were to
occur it could have a material adverse impact on the Company's
results of operations, liquidity and financial condition. In an
effort to reduce the risk of such impact, 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 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 costs and completion dates are
based on presently available information and will be updated, as
additional information becomes available.
Readers are cautioned that forward-looking statements
contained in this Year 2000 Readiness Disclosure section should
be read in conjunction with the Company's cautionary notice
regarding forward-looking statements located in the first
paragraph of this Item 2.
Liquidity and Capital Resources
Working capital increased $4,849,000 during the nine months
ended May 31, 1999 primarily the result of the seasonal increase
in accounts receivable and inventories partially offset by higher
accounts payable and accrued liabilities. The current accounts
receivable and inventory levels maintained by the Company are
higher than what management believes is optimal. Management is
continuing to evaluate its existing terms and dating programs in
order to reduce the accounts receivable balance in the future.
Inventory reduction programs and improved inventory management
practices are also being initiated to reduce inventory levels and
improve cash flow.
Cash flows provided by operating activities for the nine
months ended May 31, 1999 were $270,000 compared to the
$10,687,000 used by operations in the comparable prior year
period. This improvement is primarily the result of smaller
increases in accounts receivable and inventory, partially offset
by a larger increase in accounts payable.
Capital expenditures were $1,729,000 for the nine months
ended May 31, 1999 compared to $2,523,000 in the comparable prior
year period.
Investing activities during the nine months ended May 31,
1998 included $14,098,000 use of cash related to the acquisition
of the Vic hockey business.
The Company incurred additional net borrowings, primarily
related to seasonal working capital needs, of $1,654,000 in the
nine months ended May 31, 1999. This resulted in total debt as
of May 31, 1999 of $58,763,000, which is $511,000, or .9 percent,
lower than the total debt as of May 31, 1998. The decrease in
total debt from last year is due primarily to lower working
capital at May 31, 1999 compared to May 31, 1998.
As of May 31, 1999 the Company was not in compliance with
its debt covenants to maintain a ratio of average debt to
adjusted EBITDA of 5.50 to 1.0 and the fixed charge ratio of 1.50
to 1.0. The bank group has waived these debt compliance
requirements as of May 31, 1999 by entering into the third
amendment of the credit facility. The Company and the bank group
have also amended the loan agreement to convert the facility to
an asset based lending program based on a percentage of accounts
receivable, inventories and property, plant and equipment. The
Company believes it will successfully negotiate a new long-term
loan agreement and new covenants during the fourth quarter and
accordingly it has classified the debt as long-term on the
balance sheet as of May 31, 1999. Management believes that the
amended loan agreement is sufficient to finance its existing and
future operations.
Cautionary Factors That May Affect Future Results or the
Financial Condition of the Business.
The factors that could cause the Company's actual results,
financial condition or business to differ materially from any
projections by the Company include, but are not limited to,
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, seasonal
demand volatility (discussed under Seasonality, above) 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 or changes in interest rates.
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
10.1 Amendment No. 2 to Amended and Restated
Credit Agreement by and between the
Company and the First National Bank of
Chicago, as agent and certain lenders
named therein, dated as of February 28,
1999.
10.2 Amendment No. 3 to Amended and Restated
Credit Agreement by and between the
Company and the First National Bank of
Chicago, as agent and certain lenders
named therein, dated as of July 14, 1999.
10.3 Pledge and Security Agreement by and
between the Company and the First National
Bank of Chicago, as agent and certain
lenders named therein, dated as of July
14, 1999.
10.4 Stock Pledge Agreement by and between the
Company and the First National Bank of
Chicago, as agent and certain lenders
named therein, dated as of July 14, 1999.
10.5 Intellectual Property Assignment of
Security Interest by and between the
Company and the First National Bank of
Chicago, as agent and certain lenders
named therein, dated as of July 14, 1999.
27 Financial Data Schedule.
(b) Reports on Form 8-K
Form 8-K filed on April 30, 1999.
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 14, 1999 /s/ STEPHEN M. O'HARA
Stephen M. O'Hara
Chairman of the Board and
Chief Executive Officer
Date: July 14, 1999 /s/ REXFORD K. PETERSON
Rexford K. Peterson
Chief Financial Officer