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, 2001
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Commission file number 0-24450
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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
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Number of shares outstanding of the issuer's Common Stock, par value
$0.01 per share, as of December 31, 2001: 8,030,249 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)
Three Months Ended
November 30,
------------------------------
2001 2000
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Net revenues....................................................................... $33,408 $36,839
Cost of goods sold................................................................. 23,963 26,208
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Gross profit.................................................................. 9,445 10,631
Selling, general and administrative expenses....................................... 10,029 9,960
Unusual (income) item.............................................................. - (1,054)
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Operating income (loss)....................................................... (584) 1,725
Interest expense................................................................... 634 1,176
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Income (loss) before income taxes............................................. (1,218) 549
Provision (benefit) for income taxes............................................... (420) 203
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Net income (loss) ............................................................ $ (798) $ 346
============= =============
Net income (loss) per common share, basic and diluted $(0.10) $0.04
============= =============
Shares used in computing per share amounts:
Basic......................................................................... 8,080 7,999
Assumed exercise of stock options............................................. - 2
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Diluted....................................................................... 8,080 8,001
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The accompanying notes are an integral part of these consolidated statements.
2
Rawlings Sporting Goods Company, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands, except share data)
November 30,
2001 August 31,
(Unaudited) 2001
-------------------- ------------------
Assets
Current Assets:
Cash and cash equivalents.................................. $913 $921
Accounts receivable, net of allowance of
$3,055 and $2,871 respectively.......................... 31,500 27,750
Inventories................................................ 42,476 33,379
Deferred income taxes...................................... 4,277 4,277
Prepaid expenses........................................... 462 606
-------------------- ------------------
Total current assets................................... 79,628 66,933
Property, plant and equipment................................. 7,446 7,271
Deferred income taxes......................................... 22,816 22,367
Other assets.................................................. 2,054 1,970
-------------------- ------------------
Total assets........................................... $111,944 $98,541
==================== ==================
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt and
revolving credit agreement............................. $42,122 $34,684
Accounts payable........................................... 17,475 10,178
Accrued liabilities........................................ 8,465 8,740
-------------------- ------------------
Total current liabilities.............................. 68,062 53,602
Long-term debt, less current maturities....................... 3,975 4,242
Other long-term liabilities................................... 9,291 9,291
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Total liabilities...................................... 81,328 67,135
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Stockholders' equity:
Preferred stock, none issued............................... - -
Common stock, $0.01 par value, 50,000,000
shares authorized, 8,030,249 and 8,011,145
shares issued and outstanding, respectively............ 80 80
Additional paid-in capital................................. 31,216 31,151
Stock subscription receivable.............................. (1,421) (1,421)
Cumulative other comprehensive loss........................ (1,549) (1,492)
Retained earnings.......................................... 2,290 3,088
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Stockholders' equity....................................... 30,616 31,406
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Total liabilities and stockholders' equity............. $111,944 $98,541
==================== ==================
The accompanying notes are an integral part of these consolidated
balance sheets.
3
Rawlings Sporting Goods Company, Inc. and Subsidiaries
Consolidated Statements of Cash Flow
(Amounts in thousands)
(Unaudited)
Three Months Ended
November 30,
---------------------------------------
2001 2000
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Cash flows from operating activities:
Net income (loss)..................................................... $(798) $346
Adjustments to reconcile net income (loss)
to net cash used in continuing operations:
Depreciation and amortization..................................... 463 517
Gain on sale of Springfield distribution center................... - (1,115)
Changes in operating assets and liabilities:
Accounts receivable............................................... (3,750) (5,160)
Inventories....................................................... (9,097) (12,757)
Accounts payable.................................................. 7,297 9,979
Other........................................................... (702) (630)
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Net cash used in continuing operations..................................... (6,587) (8,820)
Net cash provided by discontinued segment.................................. - 897
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Net cash used in operating activities...................................... (6,587) (7,923)
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Cash flows from investing activities:
Capital expenditures of continuing operations......................... (657) (224)
Capital expenditures of discontinued segment.......................... - (18)
Proceeds from sale of Springfield distribution center................. - 2,376
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Net cash provided by (used in) investing activities........................ (657) 2,134
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Cash flows from financing activities:
Net increase in revolving credit agreement............................ 7,438 7,677
Repayments of long-term debt.......................................... (267) (2,143)
Issuance of common stock.............................................. 65 65
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Net cash provided by financing activities.................................. 7,236 5,599
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Net decrease in cash and cash equivalents.................................. (8) (190)
Cash and cash equivalents, beginning of period............................. 921 1,424
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Cash and cash equivalents, end of period................................... $913 $1,234
================= ==================
The accompanying notes are an integral part of these consolidated statements.
4
Rawlings Sporting Goods Company, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 Form 10-K
for the year ended August 31, 2001 filed on November 28, 2001. 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, 2001 are not necessarily indicative of the results that may be
expected for a full fiscal year.
Note 2: Discontinued Segment
On June 26, 2000 the Company made a strategic decision to seek a buyer
for its Vic hockey business. Vic provided an extensive line of equipment for
hockey teams including hockey sticks, hockey protective equipment and goalie
protective equipment. The sale of the Vic hockey business was completed during
the quarter ended May 31, 2001 under substantially the same terms as originally
provided. Proceeds from the sale totaled $2,494,000 including cash of $1,474,000
at closing and $1,019,000 of 7% notes to be received through May 2004 which are
included in Other Assets on the Consolidated Balance Sheet. Net revenues of the
discontinued segment for the three months ended November 30, 2000 were
$1,505,000.
Note 3: Unusual (Income) Item
In connection with the relocation of distribution facilities to a new
single location in Washington, Missouri, the Springfield, Missouri distribution
center was sold in September 2000. The move to Washington was completed in the
fourth quarter of fiscal 2001. The gain on the sale of Springfield of $1,115,000
offset by $61,000 of transition costs incurred during the move to Washington has
been included as unusual income in the Consolidated Statement of Income for the
three months ended November 30, 2000.
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Note 4: Inventories
Inventories consisted of the following (in thousands):
November 30, August 31,
2001 2001
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Raw materials............................. $6,703 $6,629
Work in process........................... 411 531
Finished goods............................ 35,362 26,219
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Total inventories......................... $42,476 $33,379
===================== ====================
Note 5: Debt
On December 28, 1999, the Company refinanced its credit facility by
entering into a five-year credit agreement expiring December 1, 2004 with a
financial institution. Actual availability is based on the Company's outstanding
receivables and inventories. The facility also allows for a $3,000,000 seasonal
advance from August through February. Borrowings under the agreement are based
on an interest rate of LIBOR plus 2.50 percent. A commitment fee of 0.50 percent
is charged on any unused portion of the facility.
The credit facility includes various covenants, including requirements
that the Company achieve certain EBITDA levels as defined in the agreement,
maintain a fixed charge ratio, limit capital expenditures and restrict the
payment of dividends. The Company has amended the EBITDA covenants for the
second and third quarters of fiscal 2002 to $6,700,000 and $7,500,000,
respectively and the fixed charge ratio for the same periods is 1.0 to 1.0. The
EBITDA calculation includes the unusual items. The Company believes its cash
position and current credit facility are adequate to provide for its operations.
Note 6: Comprehensive Loss
For the three months ended November 30, 2001 and 2000 comprehensive
loss was $855,000 and $51,000 respectively.
Note 7: Operating Segments
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. The Company has identified operating segments based on internal
management reports.
6
Aggregation of similar operating segments into a single reportable operating
segment is permitted if the businesses are considered to have similar long-term
economic characteristics. The Company has four operating segments based on its
product categories, which in applying the aggregation criteria have been
aggregated into two reportable segments: Sports Equipment and Licensing.
The sports equipment segment manufactures and distributes sports
equipment and uniforms for team sports including baseball, basketball and
football. The licensing segment licenses the Rawlings brand name on products
sold by other companies and includes products such as footwear and activewear.
There are no significant determinable operating expenses or interest costs for
the licensing segment. The accounting policies of the segments are the same as
those for the Company. The revenues generated and long-lived assets located
outside the United States are not significant for separate presentation.
Three Months Ended
November 30,
2001 2000
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Net revenues
Sports equipment $32,234 $35,874
Licensing 1,174 965
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Consolidated net revenues $33,408 $36,839
=================== ====================
Operating income (loss)
Sports equipment $(1,758) $ 760
Licensing 1,174 965
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Consolidated operating income (loss) $(584) $ 1,725
=================== ====================
November 30, August 31,
2001 2001
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Total assets
Sports equipment $111,137 $98,222
Licensing 807 319
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Consolidated total assets $111,944 $98,541
=================== ====================
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Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
RESULTS OF OPERATIONS
Quarter Ended November 30, 2001 Compared
with Quarter Ended November 30, 2000
Net revenues for the quarter ended November 30, 2001 were $33,408,000
which was 9.3 percent below net revenues of $36,839,000 for the quarter ended
November 30, 2000. The decrease in net revenues was primarily due to lower sales
of baseball gloves, basketballs, and footballs.
The Company's gross profit for the three months ended November 30, 2001
was $9,445,000, or 11.2 percent, lower than the gross profit of $10,631,000 for
the same period last year. The gross profit margin for the quarter was 28.3
percent, 0.6 margin points lower than the comparable prior year quarter. The
decrease in gross profit was primarily due to the lower net revenues of baseball
gloves, basketballs, and footballs.
Selling, general and administrative (SG&A) expenses were $10,029,000 or
30.0 percent of net revenues compared to $9,960,000 or 27.0 percent of net
revenues in the prior year. Higher distribution costs and severance expense of
$175,000 accounted for the increase in SG&A expenses.
The unusual income item for the three months ended November 30, 2000
was comprised of the $1,115,000 gain on the sale of the Springfield, Missouri
distribution center, offset by $61,000 of transition costs incurred during the
move to Washington, Missouri.
Interest expense for the quarter ended November 30, 2001 was $634,000
or 46.1 percent lower than the interest expense of $1,176,000 for the comparable
prior year quarter. Lower average interest rates of 4.1 points and lower average
borrowings of $4,200,000 accounted for the decrease in interest expense.
Net loss for the quarter ended November 30, 2001 was $798,000 compared
to net income of $346,000 for the quarter ended November 30, 2000. Decreased net
revenues and the gain on the sale of the distribution center in the November
2000 quarter partially offset by lower interest expense were the primary reasons
for the decreased income.
New Accounting Pronouncements
The Financial Accounting Standards Board has issued SFAS No. 141,
"Business Combinations." SFAS No. 141 requires that all business combinations
initiated after June 30, 2001 be accounted for under the purchase method and
addresses the initial
8
recognition and measurement of goodwill and other intangible assets acquired in
a business combination.
The Financial Accounting Standards Board has issued SFAS No. 142,
"Goodwill and Other Intangible Assets." Under the new standard, entities will no
longer be required or permitted to amortize goodwill reflected on the balance
sheet. However, entities will be required to evaluate goodwill reflected on the
balance sheet to determine whether the goodwill is impaired under the guidelines
of the standard. If an entity determines that the goodwill is impaired, it will
be required to write-off all or a portion of the goodwill. Adoption of SFAS No.
142 in fiscal 2002 is not expected to impact our consolidated financial
position.
The Financial Accounting Standards Board has issued SFAS No. 143,
"Asset Retirement Obligations." The new standard requires entities to record the
fair value of a liability for an asset retirement obligation in the period in
which it is incurred. When the liability is initially recorded, the entity
capitalizes the cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the obligation
for its recorded amount or incurs a gain or loss upon settlement. The standard
is effective for fiscal years beginning after June 15, 2002. Adoption of SFAS
No. 143 is not expected to impact our consolidated financial position. The
Company will adopt SFAS No. 143 in fiscal 2003.
The Financial Accounting Standards Board has issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." The new
standard replaces FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The primary
objectives of this statement were to develop one accounting model, based on the
framework established in Statement 121, for long-lived assets to be disposed of
by sale and to address significant implementation issues. Statement 144 requires
that all long-lived assets, including discontinued operations, be measured at
the lower of carrying amount or fair value less cost to sell, whether reported
in continuing operations or in discontinued operations. The standard is
effective for fiscal years beginning after December 15, 2001. Adoption of SFAS
No. 144 is not expected to impact our consolidated financial position. The
Company will adopt SFAS No. 144 in fiscal 2003.
Liquidity and Capital Resources
Working capital decreased by $1,765,000 during the three months ended
November 30, 2001 primarily as a result of increases in accounts payable and
short-term borrowings partially offset by a seasonal increase in accounts
receivable and inventories.
9
Net cash used in operating activities for the quarter ended November
30, 2001 was $6,587,000 compared to the $7,923,000 used in the comparable prior
year period. The improvement in cash used in operating activities was due to
smaller increases is accounts receivable and inventories, partially offset by a
smaller increase in accounts payable.
Capital expenditures were $657,000 for the quarter ended November 30,
2001 compared to $224,000 in the comparable prior year quarter. The Company
expects capital expenditures for fiscal 2002 to be approximately $1,500,000.
The Company had an increase in net borrowings, primarily related to
seasonal working capital needs, of $7,171,000 in the quarter ended November 30,
2001. This resulted in total debt as of November 30, 2001 of $46,097,000 or 9.8
percent lower than the total debt of $51,116,000 as of November 30, 2000.
On December 28, 1999, the Company refinanced its credit facility by
entering into a five-year credit agreement expiring December 1, 2004 with a
financial institution. Actual availability is based on the Company's outstanding
receivables and inventories. The facility also allows for a $3,000,000 seasonal
advance from August through February. Borrowings under the agreement are based
on an interest rate of LIBOR plus 2.50 percent. A commitment fee of 0.50 percent
is charged on any unused portion of the facility.
The credit facility includes various covenants, including requirements
that the Company achieve certain EBITDA levels as defined in the agreement,
maintain a fixed charge ratio, limit capital expenditures and restrict the
payment of dividends. The Company has amended the EBITDA covenants for the
second and third quarters of fiscal 2002 to $6,700,000 and $7,500,000,
respectively and the fixed charge ratio for the same periods is 1.0 to 1.0. The
EBITDA calculation includes the unusual items. The Company believes its cash
position and current credit facility are adequate to provide for its operations.
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
February 28. 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
10
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. To offset these
risks, the Company implemented for the Spring 2000 season a Port of Entry (POE)
program to encourage retailers to place and receive early orders, as well as
other changes in credit terms to reduce risk and debt levels. 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. 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.
Cautionary Factors That May Affect Future Results, Financial Condition or
Business
Statements made in this report, other reports and proxy statements
filed with the Securities and Exchange Commission, communications to
stockholders, press releases and oral statements made by representatives of the
Company that are not historical in nature, or that state the Company's or
management's intentions, hopes, beliefs, expectations, or predictions of the
future, are "forward-looking statements" within the meaning of Section 21E of
the Securities Exchange Act of 1934, as amended, 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 performance, and 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 in this document as
well as those discussed elsewhere in 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, financial condition
or business over time.
11
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company has certain market risk exposures related to interest
rates. The Company is exposed to market risks related to fluctuations in
interest rates for its variable rate borrowings of $46,049,000 as of November
30, 2001. A change in interest rates of 1% on the balance outstanding at
November 30, 2001 would cause a change in total annual pre-tax earnings and cash
flows of $460,000 assuming other factors are held constant.
Due to the relative size of the Company's foreign operations, the
Company believes it does not have any material exposure to foreign currency
fluctuations.
12
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 Employment Agreement, dated as of September
1, 2001, by and between Rawlings Sporting
Goods Company, Inc. and Ted Sizemore.
10.2 Amendment No. 7 to Credit Agreement, dated
as of November 27, 2001, among Rawlings
Sporting Goods Company, Inc., General
Electric Capital Corporation and the other
Credit Parties signatory thereto.
(b) Reports on Form 8-K
(i) A current report on Form 8-K, filed on
November 26, 2001, reporting under Item 9;
Regulation FD Disclosure (regarding Bull Run
Corp.).
13
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 9, 2002 /s/ STEPHEN M. O'HARA
-------------------------------------------
Stephen M. O'Hara
Chairman of the Board and
Chief Executive Officer
Date: January 9, 2002 /s/ WILLIAM F. LACEY
-------------------------------------------
William F. Lacey
Vice President and Chief Financial Officer
(Principal Accounting Officer)
14