-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NUbdrjP6barIgOp16C3yZCMVT59LApLRWddNETIT301pFrb15b+RZYyfuxwgnDvx YAp3hij06BQ0NkTjbPJtcQ== 0000927025-96-000097.txt : 19961202 0000927025-96-000097.hdr.sgml : 19961202 ACCESSION NUMBER: 0000927025-96-000097 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960831 FILED AS OF DATE: 19961127 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: RAWLINGS SPORTING GOODS CO INC CENTRAL INDEX KEY: 0000921915 STANDARD INDUSTRIAL CLASSIFICATION: [3949] IRS NUMBER: 431674348 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-24450 FILM NUMBER: 96673416 BUSINESS ADDRESS: STREET 1: 1859 INTERTECH DR CITY: FENTON STATE: MO ZIP: 63026 BUSINESS PHONE: 3143493500 MAIL ADDRESS: STREET 1: 1859 INTERTECH DR CITY: FENTON STATE: MO ZIP: 63026 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended August 31, 1996. Commission File Number: 0-24450 RAWLINGS SPORTING GOODS COMPANY, INC. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 43-1674348 (I.R.S. Employer Identification No.) 1859 Intertech Drive, Fenton, Missouri 63026 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (314) 349-3500 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share (Title of class) 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 the filing requirements for at least the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting Common Stock held by nonaffiliates of the registrant as of September 9, 1996 was $76,975,270. The number of shares of the registrant's Common Stock, $.01 par value, outstanding as of September 9, 1996, was 7,697,527 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's 1996 Annual Report are incorporated by reference into Item 1 of Part I and Items 5, 6, 7, and 8 of Part II of this report. Portions of the registrant's proxy statement for the annual meeting are incorporated by reference into Items 10, 11, 12 and 13 of Part III of this report. TABLE OF CONTENTS Page PART I Item 1. Business 1 Item 2. Properties 16 Item 3. Legal Proceedings 17 Item 4. Submission of Matters to a Vote of Security Holders 19 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 19 Item 6. Selected Financial Data 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 20 Item 8. Financial Statements and Supplementary Data 20 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 20 PART III Item 10. Directors and Executive Officers of the Registrant 21 Item 11. Executive Compensation 21 Item 12. Security Ownership of Certain Beneficial Owners and Management 21 Item 13. Certain Relationships and Related Transactions 21 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 22 PART I ITEM 1. BUSINESS. General Rawlings Sporting Goods Company, Inc. ("Rawlings" or the "Company" is a leading supplier of team sports equipment in North America and, through its licensee, of baseball equipment and uniforms in Japan. Under the RAWLINGS (Registered Trademark) brand name, the Company provides an extensive line of equipment and team uniforms for the sports of baseball, basketball and football. The Company's products are sold through a variety of distribution channels, including mass merchandisers, sporting goods retailers and institutional sporting goods dealers. The Company has the exclusive right, for which it pays royalty fees, to use the logos of certain sports organizations and events on selected products, including the logos of baseball's National and American Leagues, All-Star Game and World Series games and the National Collegiate Athletic Association (the "NCAA") for the sports of football and basketball. In addition, Rawlings' products are endorsed by more than 80 college coaches, more than 18 major sports organizations and numerous athletes, including more than 116 Major League Baseball players. These persons or entities have entered into agreements with the Company under which they are paid or provided products for endorsing Rawlings' products or for permitting the Company to use their names or logos. Rawlings was founded in 1887 and since then, the Company has established a long-standing tradition of innovation in team sports equipment and uniforms, including the development and introduction of the first football shoulder pads in 1902, the original deep pocket baseball glove in 1920 and double knit nylon and cotton uniforms for Major League Baseball in 1970. More recently, the Company introduced new more flexible hockey protective equipment in 1996, an improved one size fits all batter's helmet in 1995 and the "Jammer" (Registered Trademark) basketball warm-up jacket in 1991. Today, Rawlings manufactures and distributes a broad array of team sports equipment and products, including baseball gloves, baseballs, baseball bats, batter's helmets, catcher's and umpire's protective gear, basketballs, footballs, football shoulder pads and other protective gear, hockey gloves and protective gear, team uniforms and various team sports accessories. In addition, licensees of the Company sell numerous products including athletic shoes, retail active wear apparel, socks and golf equipment, using the RAWLINGS(Registered Trademark) brand name and logo. Since 1977, the Company has been the exclusive supplier of baseballs to the National and American Leagues, the All Star Game and the World Series games, with agreements expiring in 2000. In 1996, Rawlings agreed in principle to extend its exclusive rights to the All Star Game and World Series games through 2000. As part of the extension of the licensing agreements for the All Star and World Series games from 1996 to 2000, Rawlings received additional exclusive rights to the Divisional Playoffs, League Championship Series, Interleague play and nonexclusive rights to vinyl baseballs with Club logos and for the above outlined events. In 1994, Rawlings obtained the exclusive right to sell baseballs to each of the 18 Minor Leagues. In 1996, Rawlings and Major League Baseball agreed in principle to extend the exclusive right to sell baseballs to each of the 18 Minor Leagues through 2000. The Company is the leading supplier of baseball gloves to Major and Minor League players Since 1986, Rawlings has been the exclusive supplier of basketballs for the NCAA Men's and Women's Division I, II and III tournament championship games, including the Final Four. In 1996, Rawlings' rights as the exclusive supplier of basketballs for the NCAA Men's and Women's Division I, II and III tournament championship games including the Final Four, was extended through 2002. Since 1987, Rawlings has been the exclusive supplier of footballs for the NCAA Division IAA, II and III championship games with a contract expiring in 2001. Between 1967 and July 1994, the business of Rawlings (the "Rawlings Business") was conducted as a division of Figgie International, Inc. (the "former parent"). In July 1994, the former parent transferred the net assets of the Rawlings Business to the Company in exchange for $35.0 million in cash and the net cash proceeds generated from the initial public offering of the Company's stock. Unless otherwise indicated, references to Rawlings or the Company include its predecessor. Products and Markets The following is a summary of net revenues for the principal product lines and licensing arrangements of the Rawlings Business during the two fiscal years ended August 31, 1996, the twelve months ended August 31, 1994 and the eight months ended August 31, 1994: Net Revenues by Principal Product Line (amounts in millions) (unaudited) Eight Months Ended August 31, Years Ended August 31, 1996 /1/ 1995 /1/ 1994 /1/ 1994 Equipment Baseball $ 88.3 $ 86.9 $ 82.8 $44.3 Basketball 24.2 23.3 20.5 13.9 and football Apparel 14.3 10.2 8.3 5.1 International 7.7 9.5 9.5 7.6 Licensing 6.9 6.2 6.6 5.6 Miscellaneous 8.3 8.0 8.3 4.7 Net Revenues $149.7 $144.1 $136.0 $81.2 _______________ /1/ The Company changed its fiscal year end from December 31, to August 31 after its initial public offering in July 1994. Equipment Baseball. The Company is a leading supplier of baseball equipment in North America and, through its licensee, in Japan. The Company's products in this area include baseball gloves, baseballs, batter's helmets, catcher's and umpire's protective equipment, aluminum and wood baseball bats, batter's gloves and miscellaneous accessories. Rawlings believes it is the leading supplier and offers the broadest selection of baseball gloves in North America. The Company offers more than 100 styles, which are often customized to meet customer preferences. Its gloves range in retail price from $5.99 for beginners to more than $159.99 for the HEART OF THE HIDE(Registered Trademark) series, which are used by more Major League Baseball players than any other brand. Rawlings developed the original deep pocket glove in 1920. The Company designed this glove in consultation with Bill Doak, a spitball throwing southpaw with the St. Louis Cardinals, establishing the Company's tradition of developing innovative products in consultation with players and coaches. Rawlings has continued to be a leader in baseball glove design and innovation and has patented a number of designs, including the TRAP-EZE(Registered Trademark) pocket design featuring a modified web giving the appearance of a six-finger glove, the FASTBACK(Registered Trademark) closed back design, the BASKET-WEB(Registered Trademark) pocket design which features interwoven strips forming a natural break on the back to assist in closing the glove and, most recently, in 1994, the Pad Lock design which uses an adjustable inner cushion pad and velcro wrist strap to stabilize the hand inside the glove. Rawlings believes it is the leading supplier of baseballs in North America. It offers 14 types of baseballs, which differ by their design and the materials used in their construction, including different types of centers, winding materials and covers which can be made of rubber, vinyl or different qualities of leather. Rawlings' baseballs range from lower-priced rubber balls to the professional baseballs that are sold to National and American League teams. Rawlings' baseballs are systematically weighed, measured, tested and inspected to ensure that they meet Rawlings' quality standards. The National League, American League, All Star and World Series baseballs are covered with alum-tanned leather produced at Rawlings' leather tannery in Tullahoma, Tennessee and hand-sewn at Rawlings' manufacturing facility in Turrialba, Costa Rica. The Company manufactures its professional baseballs in strict accordance with the rigorous specifications established by Major League Baseball to ensure comparability of players' statistics over time. Since 1977, Rawlings has sold the official baseballs used in all National and American League games and has furnished the official baseballs for the All-Star Game and the World Series games on an exclusive basis. As the official baseball of the major leagues, Rawlings' baseballs are in demand from consumers in the collectors' and memorabilia market. The value of an autographed baseball is enhanced if it is an official National or American League baseball. Effective in 1994, Rawlings received the exclusive right to sell the official baseball to all of the Minor League teams. Rawlings also sells an official baseball, in certain cases on an exclusive basis, to a number of leagues including the National Junior College Athletic Association, the National Association of Intercollegiate Athletics, the Men's Senior Baseball League, Little League Baseball and a number of international baseball organizations. Rawlings believes that it is the leading supplier of baseball protective equipment in North America. In 1995, the Company introduced a one size fits all batter's helmet that received the award for most innovative product design at the 1995 National Sporting Goods Association trade show. Rawlings believes that it is the second leading supplier of wood baseball bats sold in North America. The Company sells bats to a number of Major League and Minor League teams. The Rawlings line of bats is manufactured at its Dolgeville, New York facility under the RAWLINGS(Registered Trademark) and ADIRONDACK(Registered Trademark) names. The Company also introduced a line of aluminum baseball bats in fiscal 1996. Basketball, Football and Hockey. Rawlings sells 19 different types of basketballs, including full-grain, composite and synthetic leather and rubber basketballs for men and women in both the youth and adult markets. Since 1986, Rawlings has been the exclusive supplier of basketballs for the NCAA Men's and Women's Division I, II and III championship games (including the Final Four). In 1996, the Company and the NCAA agreed in principle to extend the basketball contract through 2002. In 1992, Rawlings became an official sponsor of the Women's Basketball Coaches Association in an effort to capitalize on the growth in women's team sports. The Company is also the official supplier of basketballs to the National Junior College Athletic Association and the National Association of Intercollegiate Athletics. Rawlings sells 20 different types of footballs, including full-grain and split leather, vinyl and rubber for both the youth and adult markets. In addition, the Company sells professional and college football shoulder pads, other protective gear (other than football helmets) and accessories. Since 1987, Rawlings has been the exclusive supplier of footballs to the NCAA Division IAA, II and III championships games. The football contract with the NCAA expires in 2001. Rawlings also supplies the official football to the National Association of Intercollegiate Athletics. In 1996, the Company developed a full line of protective hockey equipment. The Company's hockey products are intended to be marketed to consumers of ice, roller and street hockey products. Rawlings also sells 12 models of hockey gloves. In January 1994, the Company introduced The Zipper hockey glove featuring a replaceable palm that reduces the need to repair or replace the glove. Historically, the Company had sold hockey gloves only in Canada; as such, revenues from hockey gloves sold in Canada are included in the international net revenues. In 1994, Rawlings began selling its hockey glove line in the United States with these net revenues included in miscellaneous in the net revenues by principal product line table on page 3. Apparel Rawlings has been selling team uniforms for approximately 100 years. Several Major League Baseball teams and players purchase their uniforms from the Company. Apparel comprised 9.6% of the net revenues of the Company in the year ended August 31, 1996. The Company believes it has significant growth opportunities related to apparel. The Company believes it will continue to increase sales to institutional customers, particularly high school, collegiate and amateur sports organizations. The Company believes that the reorganization of its manufacturing capabilities underway at its apparel facility in Licking, Missouri and the relocation of production of certain stock products to Costa Rica will enable the Company to improve its service and delivery, while reducing costs. In late 1996, the Company committed to a contract to expand its stock clothing capacity in Costa Rica. This expansion is expected to result in further cost reduction and margin improvement in stock apparel. International The Company's international net revenues (which excludes licensing revenue and includes sales in Puerto Rico) constituted approximately 5.1% of its total net revenues in the year ended August 31, 1996. Rawlings currently distributes its products in more than 45 countries primarily through independent distributors. Of the Company's international net revenues in the year ended August 31, 1996, approximately 64% came from direct sales in Canada. The Company works closely with foreign sports organizations to build participation levels in American team sports outside of the United States. The Company supplies baseball, basketball and football equipment and team uniforms to international sports organizations, including the Federation of International Basketball Associations, the International Little League and the International Baseball Association, and to leagues in a number of non U.S. countries including those where Rawlings supplies baseballs (Australia, Spain, Germany and Puerto Rico), basketballs (Finland, Germany, Greece and Puerto Rico) and footballs (Switzerland). Rawlings also assists sports federations outside the United States by advising them on growth strategies and, in certain instances, participating on the boards of such federations. Due to the growing international popularity of American team sports, the Company believes that opportunities exist to increase its international net revenues. In particular, the Company believes there is an opportunity to increase sales of its baseball and basketball equipment in Latin America and intends to increase its sales and marketing efforts in that region. In 1995, the Company opened a sales office in Miami, Florida to target Latin American markets. Net revenues in Latin America increased approximately 30% in the year ended August 31, 1996. Licensing In the year ended August 31, 1996, the Company generated $6.9 million of licensing revenues on approximately $175 million of sales made by third parties in Japan and the United States of products on which the RAWLINGS(Registered Trademark) brand name appeared under licensing agreements with the Company. Rawlings has licensed the use of its brand name since the mid-1970s when it licensed a Japanese company to use the RAWLINGS(Registered Trademark) brand name on clothing sold in Japan. Since then, Rawlings has licensed its name to Asics Corporation, a leading Japanese sporting goods company, for use on all types of baseball equipment, team uniforms and practice clothing sold in Japan. The Company also licenses to another Japanese company the use of the RAWLINGS(Registered Trademark) brand name on retail active wear sold in Japan. In the United States, Rawlings currently has licensing agreements with 14 companies which are using the RAWLINGS(Registered Trademark) brand name on various products including sportswear, shoes, golf clubs, golf accessories, sports bags, socks and infant and toddler games. The Company retains the right under its licensing agreements to sample and inspect all licensed products to ensure that products bearing the RAWLINGS(Registered Trademark) brand name meet the Company's quality standards. The Company intends to aggressively license the RAWLINGS(Registered Trademark) brand name to strategically extend the name to other related quality products and to new geographic areas. The Company believes that such strategic licensing will enhance the Company's image, consumer recognition and sales of all of its products. Miscellaneous Rawlings derives net revenues from its five outlet stores and from its leather tanning facility. The outlet stores sell seconds, irregular quality and discontinued items. Approximately 74% of the items sold at the Company's outlet stores are Rawlings' products and the balance are sports-related products purchased from third parties. Approximately 39% of the leather tanned at Rawlings' tanning facility is sold to third parties for use in a variety of products. Sales, Marketing and Distribution Rawlings' products are sold worldwide. In the United States, Rawlings sells directly to approximately 3,800 customers including local sporting goods stores, institutional dealers (entities that service the sports equipment needs of high school, collegiate and amateur sports organizations), regional sporting goods chains (such as Dick's and Modell's), national sporting goods chains (such as Oshman's Sporting Goods), sporting goods megastores (such as Sports Authority and Sportmart) and mass merchandisers (such as K-Mart and Wal-Mart). In recent years, sales to sporting goods megastores and mass merchandisers have accounted for an increasing amount of the net revenues of Rawlings. Sales to the ten largest customers of Rawlings constituted approximately 29% of the total net revenues of Rawlings in the year ended August 31, 1996 including one customer (Wal-Mart) which accounted for approximately 11% of 1996 revenues. The Company has 32 direct sales employees and 70 manufacturers' representatives who sell its products in the United States and Canada. The Company has two separate sales forces, one to service national accounts and one to service institutional dealers and local sporting goods stores. The southeast region of the United States is handled by a manufacturer's representatives organization. In addition, three employees service professional and college teams, coaches and athletes. The Company primarily utilizes distributors to sell products overseas, except in Japan, which is covered by licensing agreements. Rawlings' products are distributed from its warehouse in Springfield, Missouri and public warehouses in Southern California and Ontario, Canada. The Company utilizes a variety of promotional techniques to build brand awareness. Since 1958, Rawlings has annually presented the RAWLINGS GOLD GLOVE AWARD(Registered Trademark) to the best fielder at each position in each of the National and American Leagues. The RAWLINGS GOLD GLOVE AWARD(Registered Trademark) is the most prestigious award a baseball player can receive for his fielding abilities. In addition, Rawlings promotes its products through the Rawlings Sports Caravan. The Rawlings Sports Caravan is comprised of a tandem tractor trailer containing exhibits on the evolution of baseball, basketball and football equipment and uniforms, and a workshop in which demonstrations on the manufacture and repair of baseball gloves, balls and bats are performed. The Rawlings Sports Caravan is available to the Company's retail customers for promotional activities such as new store openings. In addition, the Caravan appears at sports events such as spring training, opening day games, the All-Star Game, the World Series games and the Baseball Hall of Fame induction ceremony. The Company also promotes its products through product endorsements by numerous professional athletes, coaches and sports organizations. The Company makes available to retailers various co-op advertising programs and participates in selected joint marketing and advertising programs. Affiliations and Endorsements Rawlings has the right to use the logos of several professional and amateur sports organizations and events on certain of its products. These arrangements include: The National League of Professional Baseball Clubs (National League games); The American League of Professional Baseball Clubs (American League games); Major League Baseball Promotional Corporation (All-Star, World Series, Divisional Playoffs, League Championship Series and Interleague play games); the NCAA (basketball and football championships and Final Four games); the 18 Minor Leagues (Minor League games); the Women's Basketball Coaches Association; the National Association of Intercollegiate Athletics; the National Junior College Athletic Association; and the Men's Senior Baseball League. In addition, the Company's products are endorsed by numerous athletes, including more than 100 Major League Baseball players such as Albert Belle, Ken Griffey, Jr., Randy Johnson and Cal Ripken, Jr. The Company's products also carry endorsements from approximately 80 college coaches including football's Terry Bowden and Pat Sullivan and basketball's Denny Crum, Rick Pitino, Nolan Richardson, Marian Washington and Kay Yow. The Company's products are also endorsed by Steve Young of the San Francisco 49ers. The Company believes that endorsements by professional athletes and college coaches and affiliations with sports organizations enhance the Company's image and improve sales of its products. The Company's strategy is to obtain a broad array of endorsements and affiliations from national and regional sports organizations, college coaches and professional athletes in order to position its products to appeal to regional customer preferences, as well as to achieve national recognition. The Company believes this strategy is more effective than seeking more expensive endorsements from fewer athletes and coaches. The licensing agreements with Major League Baseball Promotional Corporation and the 18 Minor Leagues, under which Rawlings is licensed to produce the baseballs used in the All-Star, World Series, Divisional Playoffs, League Championships Series and Interleague play games, the official baseballs for the Minor League games and the NCAA basketball contract, provide that the Agreements will be subject to termination upon a change of control of Rawlings, as defined in the agreements, unless the change of control is approved by the Major League Baseball Promotional Corporation, the Minor Leagues or the NCAA. Manufacturing, Product Procurement and Raw Materials Sales of Rawlings manufactured products constituted approximately 40% of its net revenues in the year ended August 31, 1996 and the balance derived from the sale of product manufactured by third parties in Asia and from licensing fees. The third party sourced products are manufactured according to the Company's specifications by third-party manufacturers located outside the United States, including the Philippines, China, Thailand, Taiwan, Korea and Indonesia. The Company's five largest suppliers accounted for 54% of all of the raw materials and finished goods purchased by Rawlings in the year ended August 31, 1996. The Company seeks to establish and build close working relationships with its third-party manufacturers that emphasize service, quality, reliability, loyalty and commitment. The Company continually monitors its sourced products to ensure they meet the Company's quality standards. The Company's arrangements with its non U.S. suppliers are subject to the risks of doing business abroad. The Company believes that the loss of any one or more of its non U.S. manufacturers would not have a long-term material adverse effect on the Company's business and results of operations because other manufacturers are available to fulfill the Company's requirements. Rawlings operates five manufacturing facilities in the United States and Costa Rica where it makes baseballs, apparel, baseball gloves, footballs, injection molded accessories, tanned leather and wood baseball bats. In late 1994 the Company began relocating production of stock apparel to its Costa Rica factory to reduce operating costs. In late 1996, the Company committed to expansion of capacity of its Costa Rica facility for additional stock apparel manufacturing. The increased off-shore production will help the Company reduce costs over the next few years in the apparel product category. Rawlings obtains its raw materials from various sources which it considers to be adequate for fulfilling its requirements. To assure access to the highest quality leather for its baseballs, the Company acquired its Tennessee leather tanning facility in 1985. The Company depends upon a limited number of vendors for leather for its HEART OF THE HIDE(Registered Trademark) baseball gloves and full-grain footballs. If any of these sources of raw materials were unavailable to the Company, the Company's operations could be adversely affected until alternative sources were found in the necessary quantities. Trademarks and Patents The RAWLINGS(Registered Trademark) brand name and logo and the red "R"(Registered Trademark) logo as well as a number of product trademarks, including FINEST IN THE FIELD(Registered Trademark), RAWLINGS GOLD GLOVE AWARD(Registered Trademark) and THE MARK OF A PRO (Registered Trademark), are considered material to Rawlings' business. As of August 31, 1996, Rawlings held 42 U.S. and non U.S. patents, and had 6 U.S. patent applications and 54 non U.S. patent applications pending. Although Rawlings believes that collectively its patents are important to its business, the loss of any one patent would not have a material adverse effect on the Company's business and results of operations. Competition Rawlings competes with numerous national and international companies which manufacture and distribute broad lines of sporting goods and related equipment and sports clothing as well as numerous manufacturers and suppliers of a limited variety of such products. Certain of the Company's competitors offer sports equipment not sold by the Company. Some of the Company's competitors are larger, and have substantially greater financial and other resources, than Rawlings. The Company's principal competitors include Wilson Sporting Goods Company (a wholly owned subsidiary of Amer Group Ltd.), Diamond Baseball Company, the Spalding Division of Spalding & Evenflo Companies, Inc. and Mizuno Company Limited in the baseball product line; Wilson Sporting Goods Company, the Spalding Division of Spalding_& Evenflo Companies, Inc. and Riddell Sports Inc. in the basketball and football lines; and Russell Corporation in the apparel line. While Rawlings is one of the leading manufacturers and distributors of team sports equipment in North America, competition in the sporting goods industry is intense and is based upon quality, price, product features and brand recognition. In addition, the competitive barriers to entry into the sporting goods industry in general are not significant. Seasonality Information on seasonality is incorporated by reference from the Management Discussion and Analysis Section on 12 through 16 of the Company's 1996 Annual Report to stockholders. Employees As of August 31, 1996, Rawlings employed approximately 1,808 people on a full-time basis, of whom 744 were based in the United States and 1,064 were based in Costa Rica. Of the total number of employees, approximately 1,645 were engaged in manufacturing, 122 were engaged in marketing and sales and 41 were engaged in administration. Approximately 393 of Rawlings' domestic employees are represented by the Amalgamated Clothing & Textile Workers Union AFL-CIO-CLC or the Local 682 of the International Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America, under collective bargaining agreements which expire in 1996 and 1997, respectively. Rawlings believes that relations with its employees are good and that the collective bargaining agreements will be extended without material changes from the current contract. CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS, FINANCIAL CONDITION OR BUSINESS In order to take advantage of the safe harbor provisions for forward-looking statements adopted by the Private Securities Litigation Reform Act of 1995, the Company is hereby identifying important risks, uncertainties and other factors that could affect the Company's actual results of operations, financial condition or business and could cause the Company's actual results of operations, financial condition or business to differ materially from its historical results of operations, financial condition or business, or the results of operations, financial condition or business contemplated by forward-looking statements made herein or elsewhere orally or in writing, by, or on behalf of, the Company. Except for the historical information contained herein, the statements made in this Report on Form 10-K are forward-looking statements that involve such risks, uncertainties and other factors that could cause or contribute to such differences including, but not limited to, those described below. Dependency on Baseball. Sales of baseball-related products constituted approximately 59% of the total net revenues of Rawlings in the year ended August 31, 1996. Adverse publicity or news coverage regarding professional or amateur baseball, strikes or other stoppages in play by athletes or umpires could create fan disaffection that could have a material adverse effect on the Company's sales. Similarly, poor weather conditions during baseball season could have a material adverse effect on the Company's sales. Dependence on Foreign Manufacturing. The Company's dependence on foreign manufacturing is described above under "Manufacturing, Product Procurement and Raw Materials" which is subject to the risks of doing business abroad, such as changes in import duties, trade restrictions, work stoppages, labor laws, political instability, foreign currency fluctuations and other factors which could have a material adverse effect on the Company's business and results of operations. Seasonality. Customers historically have placed orders with the Company for baseball-related products beginning in July for shipment beginning in October (pre-season orders). 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 historically recognized between November 1 and April 30, which may shift in the future due to the trends discussed in "Management's Discussion and Analysis of Results of Operations and Financial Condition -- Seasonality." Reliance on Certain Customers. Sales to the ten largest customers of Rawlings constituted approximately 29% of the total net revenues of Rawlings in the year ended August 31, 1996, including one customer, Wal-Mart, which accounted for approximately 11% of 1996 revenues. Although the Company has long-established relationships which many of its customers, the Company does not have long-term supply contracts with them. A decrease in business from any of its major customers could have a material adverse effect on the Company's results of operations and financial condition. Litigation. Like similar manufacturing companies, the Company is subject to various federal, state and local environmental laws relating to air emissions, water discharges and the storage, handling, disposal and remediation of petroleum and hazardous substances. In addition, the Company is from time to time subject to product liability claims and proceedings involving its patents which have not historically had a material adverse effect on the Company. See "Legal Proceedings." Credit Agreement Restrictions. The Company's Credit Agreement with its existing lenders contains certain restrictions on the Company, including requirements as to the maintenance of net worth and certain financial ratios, payment of cash dividends, incurrence of additional indebtedness and the limitation of capital expenditures and there can be no assurance that the Company will be able to achieve and maintain compliance with those restrictions or obtain waivers to any non-compliance. See "Management's Discussion and Analysis of Results of Operations and Financial Condition -- Liquidity and Capital Resources." Additional Factors. Additional risks and uncertainties that may affect future results of operations, financial condition or business of the Company include, but are not limited to: (i) interest in collectible sports memorabilia and the financial condition of memorabilia resellers; (ii) demand for the Company's products; (iii) the effect of economic and industry conditions on prices for the Company's products and its cost structure; (iv) negative reports by brokerage firms, industry and financial analysts regarding the Company or its products which may have the effect of reducing the reputation, goodwill or customer demand for, or confidence in, the Company's products; and (v) the ability to attract and retain capital for growth and operations on competitive terms. EXECUTIVE OFFICERS OF THE REGISTRANT Name Age Position Carl J. Shields 55 Chairman of the Board, Chief Executive Officer and President Howard B. Keene 54 Chief Operating Officer Paul E. Martin 36 Chief Financial Officer Randy D. Black 44 Vice President, Marketing Ted C. Sizemore 51 Vice President, Baseball Development and International Sales J. Michael Thompson 38 Vice President, Sales Carl J. Shields has served as President of the Company since February 1994 and as Chairman of the Board and Chief Executive Officer of the Company since July 8, 1994. From September 1993 to February 1994, Mr. Shields served as Vice President, Sales/Marketing of Rawlings. From 1988 to September 1993, Mr. Shields served as Vice President, Sales for Rawlings. From 1986 to 1988, Mr. Shields was Director of Marketing for DeLong Sportswear. From 1985 to 1986, Mr. Shields served as Vice President, Sales and Marketing for Loudon Sportswear. From 1980 to 1985, Mr. Shields served as Director of Sales for Bike Athletic Company. From 1976 to 1980, Mr. Shields served as Northeast and Midwest Regional Sales Manager for Russell Corporation. Howard B. Keene has served as Chief Operating Officer since April 1995. From November 1992 to March 1995, Mr. Keene served as Vice President, Foreign Activity and Procurement of Rawlings. From February 1990 to November 1992, Mr. Keene served as International Purchasing Consultant for all divisions of Figgie International, Inc. He was President of Rawlings from 1987 to February 1990. From 1973 to 1987, Mr. Keene held various positions at Rawlings, primarily in product procurement. Paul E. Martin has served as Chief Financial Officer of the Company since June 1995. From February 1993 to May 1995, Mr. Martin served as Director of External Reporting and Analysis for Pet Incorporated, a public company that manufactured prepared foods with $1.5 billion in revenues. From January 1992 to January 1993, Mr. Martin served as Chief Financial Officer of CPC-Rexcel, Inc., a highly leveraged public company that manufactured packaging materials with $50 million in revenues. During Mr. Martin's tenure the company attempted to restructure its substantial debt levels. The company decided to discontinue its efforts to restructure the debt and filed for bankruptcy protection in November 1992. From 1982 to 1991, Mr. Martin was employed in progressively responsible positions, including Senior Audit Manager, by Arthur Andersen LLP. Randy D. Black has served as Vice President, Marketing of Rawlings since July 1994. From November 1993 to July 1994, Mr. Black headed the sports apparel division for the Pro-Line Cap Company, where he was responsible for establishing a new brand of sportswear distributed through sporting goods dealers. From December 1992 to November 1993, Mr. Black served as President of Varsity Excellence, a division of Dougherty Manufacturing Company, Inc. Prior to December 1992, Mr. Black held a variety of marketing and management positions during his seventeen years at Bike Athletic Company most recently as Vice President of Sales and Marketing. Ted C. Sizemore has served as Vice President, Baseball Development and International Sales of Rawlings since 1984, with primary responsibility for maintaining and strengthening the Company's relationship with sports organizations, players and coaches. Prior to 1984, Mr. Sizemore was a Major League Baseball player who played second base for a number of teams, including the Los Angeles Dodgers, the St. Louis Cardinals and the Philadelphia Phillies. Mr. Sizemore received Rookie of the Year honors with the Los Angeles Dodgers in 1969. J. Michael Thompson has served as Vice President, Sales of Rawlings since July 1994. Mr. Thompson joined Rawlings in 1984 as a sales representative and was promoted in 1989 to western regional sales manager. ITEM 2. PROPERTIES. The following table sets forth certain information as of August 31, 1996 relating to Rawlings' principal properties: Approximate Owned or Location Purpose/Products Size (sq. ft.) Leased Ava, Missouri (two adjoining Manufacturing of baseball 90,000 Leased facilities) gloves, batter's helmets, 60,000 Leased footballs and injection molded accessories Dolgeville, New York (three properties) Manufacturing of wood 80,500 Owned baseball bats and footballs Fenton, Missouri Corporate headquarters 25,000 Leased (For a term expiring in 2001) Licking, Missouri (two facilities) Manufacturing of team 55,400 Owned uniforms 55,000 Leased (On a month to month basis) Springfield, Warehouse/distribution 83,500 Owned Missouri center Tullahoma, Leather tanning 69,000 Owned Tennessee Turrialba, Manufacturing of baseballs 33,000 Owned Costa Rica In August 1996, the Company committed to an expansion of the Turrialba, Costa Rica facility. This expansion when completed will increase the size of the Turrialba, Costa Rica facility to approximately 52,000 square feet. In addition, Rawlings leases approximately 5,600 square feet of office space in Fenton, Missouri for research and development activities and an average of 5,000 square feet for each of its five outlet stores. Rawlings also leases space for its five regional sales offices. The Company believes that its facilities are suitable for their present and intended purposes and adequate for the Company's current and expected levels of operations. ITEM 3. LEGAL PROCEEDINGS. Environmental Matters The Company is subject to various federal, state and local environmental laws, including those relating to air emissions, water discharges, and the storage, handling, disposal and remediation of petroleum and hazardous substances. The Company has not been identified as a potentially responsible party under the federal Superfund law or, except with respect to a completed drum removal action described below, comparable state laws at any of its properties or in connection with its shipments of waste from any of its facilities to off-site disposal locations. Pursuant to a consent order with the New York State Department of Environmental Conservation (the "NYSDEC"), the Company has completed a drum removal project in the vicinity of the kiln operations at its Adirondack facility in Dolgeville, New York (the "Adirondack Facility"). The Company currently makes wood baseball bats at the Adirondack Facility. The presence of the drums resulted in the listing of the Adirondack Facility on the NYSDEC's registry of inactive hazardous waste disposal sites. Upon completion of this project, the NYSDEC declared the matter closed and reclassified the Adirondack Facility as a site for which no further remedial action or monitoring is required under the state Superfund law. The Company plans to take action to delist the Adirondack Facility entirely from the state Superfund list. In consultation with NYSDEC, the Company is now in the process of addressing contamination relating to past petroleum and waste storage practices at the Adirondack Facility. To date, activities have included drum and underground storage tank removal projects and the investigation of releases of wood pitch into the surrounding soil and surface water from a retort facility that is no longer operational. The retort operation was conducted by a third party unrelated to Rawlings before Rawlings began its operations at the Adirondack Facility. The NYSDEC's Bureau of Spill Prevention and Response approved the Company's work plan to delineate the extent of soil and groundwater contamination detected after removal of certain of the aforementioned underground storage tanks and a work plan to determine the source and extent of the contamination resulting from releases of the wood pitch. The Company has completed on-site work under these approved work plans and NYSDEC has notified the Company that no further work needs to be done in connection with three of the former underground storage tank areas. One other former underground storage tank area is still being reviewed by NYSDEC and the Company is aggressively pursuing closure of that remaining former underground storage tank site as well as the former retort area. While the Company's share of the cost of investigating and remediating the contamination at the Adirondack Facility described above cannot be finally determined until the nature of any future required work is better defined, the Company accrued $1.6 million in the year ended December 31, 1993 relating to environmental investigation and remediation, based upon discussions with the Company's environmental consultants. It is possible but unlikely that additional expenses may be incurred, but the Company is unable to estimate any additional amount beyond that already accrued because there are a number of options regarding the remaining open areas, depending upon future negotiations between NYSDEC and the Company. The Company believes that any additional expenses beyond the amount accrued will not have a material adverse effect on the Company's financial condition, results of operation or cash flow. Based upon work that has been completed, the Company believes that the remaining accrued investigatory, remediation and monitoring costs will be incurred over the next several years. Under the relevant environmental laws, the Company is potentially liable as an owner of the property for the entire costs of investigating and remediating the environmental issues at the Adirondack Facility. While the Company believes that other parties including insurers may be liable for some or all of those costs, there can be no assurance that such parties will bear these costs and therefore the Company has not assumed any recovery from such third parties in estimating its potential liabilities. The Company has applied for and obtained certain appropriate environmental permits applicable to the ongoing operations at its Adirondack Facility, after substantial discussions with NYSDEC and other environmental regulatory authorities. Based on these discussions and the Company's review of the NYSDEC enforcement policies and practices, the Company believes it is unlikely that any penalties or fines will be imposed for past unpermitted operations. In addition, pursuant to an informal agreement with the NYSDEC, the Company is in the process of removing an on-site accumulation of wood shavings. The Company believes that the agreed upon removal may obviate any potentially applicable solid waste permit requirements. Litigation and Other Liabilities 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. The complaint also names as defendants Mr. Carl J. Shields, Chairman, CEO and President of the Company, and Howard B. Keene, Chief Operating Officer of the Company. The complaint alleges, 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 plaintiff seeks an unspecified amount of damages, reimbursement of costs and expenses of the litigation, including attorney fees, and other unspecified relief. The nature of the Company's products has subjected it to product liability claims from time to time which have not had a material adverse effect on the Company. In addition, the Company is from time to time subject to proceedings involving its patents which have not had a material adverse effect on the Company. The Company expects that it will be subject to product liability claims and proceedings involving its patents in the future due to the nature of its products. The Company did not assume any litigation or product liability of the Rawlings Business relating to incidents that occurred prior to July 8, 1994. A possibility exists, however, that the Company could be liable for liabilities of the Rawlings Business not assumed by the company in the July 8, 1994 net asset transfer under a theory of successor liability. While the former parent has agreed to indemnify the Company for such liabilities, as well as certain other obligations that relate to the assets and liabilities of the Rawlings Business, there can be no assurance that the former parent will be able to fulfill these indemnification obligations to the Company if required to do so. The Company intends to vigorously defend the shareholder litigation and all product liability matters. The Company believes that these matters will not have a material adverse effect on the Company's financial condition, results of operations or cash flow. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no matters submitted to a vote of security holders through the solicitation of proxies or otherwise during the quarter ended August 31, 1996. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information regarding the market for the Company's common stock, quarterly marked price ranges, dividends declared and shareholders of record is incorporated by reference from page 25 of the Company's 1996 Annual Report to Stockholders. The information regarding dividend restrictions is incorporated by reference from pages 21 and 22 of the Company's 1996 Annual Report to Stockholders. ITEM 6. SELECTED FINANCIAL DATA. The information required by Item 6 is incorporated by reference from the Selected Financial Data section on page 11 of the Company's 1996 Annual Report to Stockholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information required by Item 7 is incorporated by reference from the Management Discussion and Analysis Section on pages 12 to 15 of the Company's 1996 Annual Report to Stockholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required by Item 8 is incorporated by reference from the "Consolidated Statements of Income", "Consolidated Balance Sheets", "Consolidated Statements of Stockholders' Equity", "Consolidated Statements of Cash Flows", "Notes to Consolidated Financial Statements" and "Report of Independent Public Accountants" on pages 16 to 19 of the Company's 1996 Annual Report to Stockholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. (a) Identification of Directors Information with respect to the members of the Board of Directors is set forth under the caption "Election of Directors" in the Company's proxy statement to be filed pursuant to Regulation 14A, which information is incorporated herein by reference. (b) Identification of Executive Officers Information with respect to the executive officers of the Company is set forth under the caption "Executive Officers of the Registrant" contained in Part I, Item 1 of this report, which information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. Information required by Item 11 is set forth under the captions "Compensation of Directors" and "Executive Compensation" in the Company's proxy statement to be filed pursuant to Regulation 14A, which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information required by Item 12 is set forth under the captions "Principal Stockholders" and "Stock Ownership of Directors, Nominees for Directors and Executive Officers" in the Company's proxy statement to be filed pursuant to Regulation 14A, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information required by this Item is set forth under the caption "Certain Transactions" in the Company's proxy statement to be filed pursuant to Regulation 14A, which information is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)(1) Financial Statements: The financial statements filed as a part of this report are listed in Part II, Item 8. (a)(2) Financial Statement Schedules: None. (a)(3) Exhibits 3.1 Certificate of Incorporation, included as Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File No. 33-77906), is hereby incorporated herein by reference. 3.2 By-Laws, included as Exhibit 3.2 to the Company's Registration Statement on Form S-1 (File No. 33-77906), is hereby incorporated herein by reference. 3.3 By-Law amendment. 4.1 Rights Agreement dated as of July 1, 1994 between the Company and Boatmen's Trust Company as Rights Agent, included as Exhibit 4.1 to the Company's Form 10-Q for the quarter ended June 30, 1994, is hereby incorporated herein by reference. 4.2 Credit Agreement dated as of July 8, 1994 among the Company, The First National Bank of Chicago, as agent, and certain lenders named therein, included as Exhibit 4.2 to the Company's Form 10-Q for the quarter ended June 30, 1994, is hereby incorporated herein by reference. 4.3 Amendment No. 1 dated March 24, 1995 to the Credit Agreement by and among Rawlings Sporting Goods Company, Inc., The First National Bank of Chicago, as agent, and certain lenders named therein, included as Exhibit 4.1 to the Company's Form 10-Q for the quarter ended February 28, 1995, is hereby incorporated herein by reference. 4.4 Amendment No. 2 dated August 31, 1995 to the Credit Agreement by and among Rawlings Sporting Goods Company, Inc., The First National Bank of Chicago, as agent, and certain lenders named therein included as Exhibit 4.3 to the Company's Form 10-K for the year ended August 31, 1995 is hereby incorporated herein by reference. 4.5 Amendment No. 3 dated September 23, 1996 to the Credit Agreement by and among Rawlings Sporting Goods Company, Inc., The First National Bank of Chicago, as agent, and certain lenders named therein. 10.1 Assets Transfer Agreement dated as of July 8, 1994 by and among Figgie, Figgie Licensing Corporation, Figgie International Real Estate, Inc., Figgie Properties, Inc. and the Company, included as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended June 30, 1994, is hereby incorporated herein by reference. 10.2 Transitional Services Agreement dated as of July 8, 1994 between Figgie and the Company, included as Exhibit 10.2 to the Company's Form 10-Q for the quarter ended June 30, 1994, is hereby incorporated herein by reference. 10.3 Tax Sharing and Separation Agreement dated July 8, 1994 between the Company and Figgie, included as Exhibit 10.3 to the Company's Form 10-Q for the quarter ended June 30, 1994, is hereby incorporated herein by reference. *10.4 The Company's 1994 Long-Term Incentive Plan, included as Exhibit A to the Company's proxy statement dated December 9, 1994, is hereby incorporated herein by reference. *10.5 The Company's 1994 Non-Employee Directors' Stock Plan, included as Exhibit B to the Company's proxy statement dated December 9, 1994, is hereby incorporated herein by reference. 10.6 Amendment Agreement between Rawlings Sporting Goods Company and Asics Corporation, dated January 21, 1991, included as Exhibit 10.6 to the Company's Registration Statement on Form S-1 (File No. 33-77906), is hereby incorporated herein by reference. *10.7 Form of Indemnity Agreement entered into with Directors and executive officers, included as Exhibit 10.7 to the Company's Form 10-K for the fiscal year ended August 31, 1994, is hereby incorporated herein by reference. *10.8 Form of Severance Agreement entered into with executive officers included as Exhibit 10.8 to the Company's Form 10-K for the year ended August 31, 1995 is hereby incorporated herein by reference. 13. Annual Report to Stockholders for the Fiscal Year Ended August 31, 1996. 21. Subsidiaries of the Company included as Exhibit 21 to the Company's Form 10-K for the fiscal year ended August 31, 1994 is incorporated herein by reference. 23. Consent of Arthur Andersen LLP. (b) Reports on Form 8-K There are no reports filed on Form 8-K for the quarter ended August 31, 1996. *Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of this report. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RAWLINGS SPORTING GOODS COMPANY, INC. Date: November 26, 1996 By: \s\ Paul E. Martin Paul E. Martin Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Company and in the capacities and on the date indicated. SIGNATURE DATE By: \s\ Carl J. Shields November 26, 1996 Carl J. Shields Chairman, CEO and President By: \s\ Andrew N. Baur November 26, 1996 Andrew N. Baur Director By: \s\ Linda L. Griggs November 26, 1996 Linda L. Griggs Director By: \s\ Michael McDonnell November 26, 1996 Michael McDonnell Director By: \s\ Michael J. Roar November 26, 1996 Michael J. Roarty Director By: \s\ William C. Robinson November 26, 1996 William C. Robinson Director EX-3.3 2 AMENDMENTS TO THE BYLAWS OF RAWLINGS SPORTING GOODS COMPANY, INC. On October 24, 1996, the Board of Directors of Rawlings Sporting Goods Company, Inc., a Delaware corporation (the "Corporation") adopted the following resolutions which amended the Bylaws of the Corporation: RESOLVED, that the Bylaws of the Corporation are hereby amended by inserting the following new Section 2.11 immediately after the present Section 2.10: SECTION 2.11. CONDUCT OF MEETINGS. The date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced at the meeting by the person presiding over the meeting. The Board of Directors of the Corporation may, to the extent not prohibited by law, adopt by resolution such rules and regulations for the conduct of the meetings or any meeting of stockholders as it shall deem appropriate. Except to the extent inconsistent with such rules and regulations, the chairman of the meeting of stockholders may prescribe such rules, regulations and procedures and do all such acts as, in the judgment of such chairman, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the Board of Directors or prescribed by the chairman of the meeting, may, to the extent not prohibited by law, include, without limitation, the following: (i) the establishment of an agenda for the meeting; (ii) the maintenance of order at the meeting; (iii) limitations on attendance at or participation in the meeting to stockholders of record of the Corporation, their duly authorized proxies and such other persons as shall be determined by the chairman of the meeting or the Board of Directors; (iv) restrictions on entry to the meeting after a specified time; (v) limitations on the time allotted to questions or comments by participants, and (vi) the matters addressed by Section 3.03(c). Unless otherwise determined by the Board of Directors or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with any rules of parliamentary procedure. Unless otherwise determined by the Board of Directors, the chairman of the meeting shall be the Chairman of the Board of Directors. * * * WHEREAS, the Board of Directors of the Corporation desire to amend the Bylaws of the Corporation with respect to the advance notification requirements pertaining to matters brought before an annual meeting of stockholders by the stockholders of the Corporation; and WHEREAS, the Board of Directors believe that an amendment to the Bylaws of this nature should not become effective until after proper notice thereof is provided to the stockholders of the Corporation, which notice will be provided in the proxy statement for the Annual Meeting of Stockholders to be held on January 16, 1997, NOW, THEREFORE, BE IT RESOLVED, that effective upon the adjournment of the Annual Meeting of Stockholders to be held January 16, 1997, that the Bylaws of the Corporation are hereby amended by (i) deleting the second paragraph of present Section 3.02 in its entirety and (ii) deleting the section heading of present Section 3.02 in its entirety and substituting in lieu thereof the following section heading: SECTION 3.02. NUMBER, QUALIFICATIONS AND TERM OF OFFICE. FURTHER RESOLVED, that effective upon the adjournment of the Annual Meeting of Stockholders to be held January 16, 1997, the Bylaws of the Corporation are hereby amended by inserting the following new Section 3.03 immediately after the present Section 3.02 and by appropriately renumbering the sections currently designated as Sections 3.03 through 3.14: SECTION 3.03. NOMINATION OF DIRECTORS AND PRESENTATION OF BUSINESS AT ANNUAL STOCKHOLDER MEETINGS. (a) Nominations of persons for election to the Board of Directors and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (i) pursuant to the Corporation's notice of meeting, (ii) by or at the direction of the Board of Directors, or (iii) by any stockholder who was a stockholder of record at the time of the giving of notice provided for in this Section 3.03, who is entitled to vote thereon at the meeting and who complied with the notice procedures set forth in this Section 3.03. (b) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of paragraph (a) of this Section 3.03, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not less than sixty (60) days prior to the first anniversary of the preceding year's annual meeting; PROVIDED, that in the event that the date of the annual meeting is advanced by more than thirty (30) days or delayed by more than sixty (60) days from such anniversary date, notice by the stockholder to be timely must be so delivered not later than the close of business on the later of (i) the 60th day prior to such annual meeting, or (ii) the 10th day following the date on which public announcement of the date of such meeting is first made. Such stockholder's notice shall set forth as to each person whom the stockholder proposes to nominate for election or reelection as a director: (i) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (ii) a representation that such stockholder is a holder of record of stock of the Corporation entitled to vote in the election of directors at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (iii) the name and address of such stockholder, as it appears on the Corporation's books, and of the beneficial owner (as such term is defined in 17 C.F.R. Section 240.13d-3 ("Rule 13d-3") under the Securities Exchange Act of 1934 ("Exchange Act")), if any, on whose behalf the nomination is made; (iv) the class and number of shares of the Corporation which are owned beneficially (as such term is defined in Rule 13d-3 under the Exchange Act) and of record by the nominating stockholder and each nominee proposed by such stockholder; (v) a description of all arrangements or understandings between the stockholder and each nominee and any other person (naming such persons) pursuant to which the nomination or nominations are to be made by the stockholder; (vi) such other information regarding each nominee proposed by such stockholder as would have been required to be included in a proxy statement filed pursuant to 17 C.F.R. Section 240.14a-1 ET SEQ. ("Regulation 14A") as then in effect under the Exchange Act had the nominee been nominated, or intended to be nominated, by the Board of Directors; and (vii) the consent of each nominee to serve as a director of the Corporation if so elected. As to any other business that the stockholder proposes to bring before the meeting, a stockholder's notice to the Secretary shall set forth as to each matter: (i) a brief description of the business desired to be brought before the annual meeting; (ii) a representation that such stockholder is a holder of record of stock entitled to vote on the business proposed by such stockholder and intends to appear in person or by proxy at the meeting to present the proposed business to be brought before the meeting; (iii) the name and address of the stockholder proposing such business, as it appears on the Corporation's books, and of the beneficial owner (as such term is defined in Rule 13d-3 under the Exchange Act), if any, on whose behalf the business is proposed; (iv) the class and number of shares of the Corporation which are owned beneficially (as such term is defined in Rule 13d-3 under the Exchange Act) and of record by the stockholder; (v) the reason for conducting such business at the meeting and any material interest of the stockholder or such beneficial owner in such business; and (vi) all other information with respect to each such matter as would have been required to be included in a proxy statement filed pursuant to Regulation 14A as then in effect under the Exchange Act had proxies been solicited by the Board of Directors with respect thereto. Notwithstanding anything in this paragraph (b) to the contrary, in the event that the number of directors to be elected to the Board of Directors is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Corporation at least seventy (70) days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the Corporation. (c) Only such persons who are nominated in accordance with the procedures set forth in this Section 3.03 shall be eligible to serve as directors, and only such business shall be conducted at an annual meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 3.03. The chairman of the meeting of stockholders shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with the procedures set forth in this Section 3.03 and, if any proposed nomination or business is not in compliance with this Section 3.03, to declare that such defective nominations or proposal shall be disregarded. (d) For purposes of this Section 3.03, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of the Exchange Act. (e) Notwithstanding the foregoing provisions of this Section 3.03, (i) if any class or series of stock has the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, such directors shall be nominated and elected pursuant to the terms of such class or series of stock; and (ii) a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 3.03. To the extent this Section 3.03 shall be deemed by the Board of Directors or the Securities and Exchange Commission, or adjudged by a court of competent jurisdiction, to be inconsistent with the rights of shareholders to request inclusion of a proposal in the Corporation's proxy statement pursuant to 17 C.F.R. Section 240.14a-8 ("Rule 14a-8") under the Exchange Act, such rule shall prevail. # # # EX-4.5 3 AMENDMENT NO. 3 TO CREDIT AGREEMENT This Amendment No. 3 to Credit Agreement (the "Amendment Agreement") is entered into as of September 23, 1996 by and among Rawlings Sporting Goods Company, Inc. (the "Borrower"), the undersigned lenders (the "Lenders") and The First National Bank of Chicago, as agent (the "Agent"). W I T N E S S E T H: WHEREAS, the Borrower, the Lender and the Agent entered into that certain Credit Agreement dated as of July 8, 1994 and amended as of March 24, 1995 and August 31, 1995 (the "Credit Agreement"); and WHEREAS, the Borrower, the Lenders and the Agent have agreed to further amend the Credit Agreement on the terms and conditions herein set forth. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. DEFINED TERMS. Capitalized terms used herein and not otherwise defined herein shall have the meanings attributed to such terms in the Credit Agreement, as amended hereby. 2. AMENDMENTS TO CREDIT AGREEMENT. 2.1 Article I of the Credit Agreement is hereby amended by (a) deleting the definitions of "Aggregate Available Commitment", "Borrowing Date" and "Notes" in their entirety and replacing them with the following: "Aggregate Available Commitment" means, at any time, the Aggregate Revolving Credit Commitment at such time MINUS the Facility Letter of Credit Obligations outstanding at such time and the aggregate principal amount of the Swing Line Loans outstanding at such time. "Borrowing Date" means a date on which an Advance or a Swing Line Loan is made or a Facility Letter of Credit is issued hereunder. "Notes" means any one or more of the Revolving Credit Notes or the Swing Line Notes. and (b) adding the following definitions thereto: "Swing Line Bank" means First Chicago or any other Lender as a successor Swing Line Bank. "Swing Line Commitment" means the obligations of the Swing Line Bank to make Swing Line Loans up to a maximum principal amount of $5,000,000 at any one time outstanding. "Swing Line Loan" means a swing line loan made available to the Borrower by the Swing Line Bank pursuant to Section 2.21 hereof. "Swing Line Note" means a promissory note, in substantially the form of Exhibit E hereto, duly executed by the Borrower and payable to the order of the Swing Line Bank in the amount of its Swing Line Commitment, including any amendment, restatement, modification, renewal or replacement of such Swing Line Note. 2.2 Article II of the Credit Agreement is hereby amended as follows: (a) Section 2.1(b) is hereby amended by adding the following after the reference to "Revolving Credit Loans" on the second line thereof: ", Swing Line Loans" (b) Section 2.4(b) is hereby amended by adding the following at the end of the proviso thereto: PLUS (iii) the aggregate principal amount of the outstanding Swing Line Loans (c) Section 2.20.1(b) is hereby amended by deleting clause (iii) thereof in its entirety and replacing it with the following: (iii) the sum at any time of (A) the aggregate amount of Facility Letter of Credit Obligations, (B) the aggregate principal balance of outstanding Revolving Credit Advances and (C) the aggregate principal balance of Swing Line Loans exceed the amount of the Aggregate Revolving Credit Commitment; (d) Section 2.21 is hereby added as follows: 2.21. SWING LINE LOANS. 2.21.1 AMOUNT OF SWING LINE LOANS. Subject to the terms and conditions set forth in this Agreement, at any time prior to the earlier of (x) the Facility Termination Date and (y) the termination of the obligation of the Lenders to make Loans hereunder, the Swing Line Bank agrees to make swing line loans to the Borrower from time to time, in a minimum amount of $100,000 and in increments of $25,000 in excess thereof and in an aggregate amount not to exceed the Swing Line Commitment (each, individually, a "Swing Line Loan" and collectively, the "Swing Line Loans"); provided, however, that at no time shall the sum of (a) the principal amount of outstanding Revolving Credit Loans, PLUS (b) the outstanding Facility Letter of Credit obligations, PLUS (c) the principal amount of outstanding Swing Line Loans exceed the Aggregate Revolving Credit Commitment. Subject to the terms of this Agreement, the Borrower may borrow, repay and reborrow Swing Line Loans at any time prior to the earlier of (x) the Facility Termination Date and (y) the termination of the obligation of the Lenders to make Loans hereunder. 2.21.2 BORROWING NOTICE. The Borrower shall give the Agent and the Swing Line Bank telephonic notice, not later than 11:00 a.m. (Chicago Time) on the Borrowing Date of each Swing Line Loan, specifying (a) the applicable Borrowing Date (which shall be a Business Day), and (b) the aggregate amount of the requested Swing Line Loan. 2.21.3 MAKING OF SWING LINE LOANS. Not later than 1:30 p.m. (Chicago time) on the applicable Borrowing Date, the Swing Line Bank shall make available its Swing Line Loan, in funds immediately available in Chicago, to the Agent at its address specified on the signature pages to this Agreement; provided, that each of the conditions set forth in Section 4.2 shall be satisfied (with the making of a Swing Line Loan deemed to be an Advance for the purposes of such Section 4.2). The Agent will promptly make the funds so received from the Swing Line Bank available to the Borrower at the Agent's aforesaid address. 2.21.4 REPAYMENT OF SWING LINE LOANS. The Borrower may at any time pay, without penalty or premium, all outstanding Swing Line Loans upon notice to the Agent and the Swing Line Bank. In addition, the Agent (a) may at any time in its sole discretion with respect to any outstanding Swing Line Loan, or (b) shall on the fifth Business Day after the Borrowing Date of any Swing Line Loan which, after giving effect thereto, caused the aggregate principal amount of all outstanding Swing Line Loans to be greater than $500,000, require the Lenders (including the Swing Line Bank) to make Revolving Loans pursuant to Section 2.1 hereof to repay such outstanding Swing Line Loans. Not later than 1:30 p.m. (Chicago time) on the date of any notice received pursuant to this Section 2.21.4, each Lender shall make available its required Revolving Loan in funds immediately available in Chicago to the Agent at its address specified on the signature pages to this Agreement. Unless a Lender shall have notified the Swing Line Bank, prior to its making any Swing Line Loan, that any applicable condition precedent set forth in Section 4.1 or 4.2 had not then been satisfied, such Lender's obligation to make Revolving Loans pursuant to this Section 2.21.4 to repay Swing Line Loans shall be unconditional, continuing, irrevocable and absolute and shall not be affected by any circumstance, including, without limitation, (i) any set-off, counterclaim, recoupment, defense or any other rights which such Lender may have against the Agent, the Swing Line Bank or any other Person, (ii) the occurrence or continuance of a Default or Unmatured Default or any termination of the obligation of the Lenders to make Revolving Loans pursuant to Section 7.2 hereof or otherwise, (iii) any adverse change in the condition (financial or otherwise) of the Borrower, or (iv) any other circumstances, happening or event whatsoever. In the event that any Lender fails to make payment to the Agent of any amount due under this Section 2.21.4, the Agent shall be entitled to receive, retain and apply against such obligation the principal and interest otherwise payable to such Lender hereunder until the Agent received such payment from such Lender or such obligation is otherwise fully satisfied. In addition to the foregoing, if for any reason any Lender fails to make a Revolving Loan required to be made by it pursuant to this Section 2.21.4, such Lender shall be deemed, at the option of the Agent, to have unconditionally and irrevocably purchased from the Swing Line Bank, without recourse or warranty, an undivided interest and participation in the applicable Swing Line Loan in the amount of such Revolving Loan, and such interest and participation may be recovered from such Lender together with interest thereon at the Federal Funds Effective Rate for each day during the period commencing on the date of demand and ending on the date such amount is received. On the Facility Termination Date, the Borrower shall repay in full the outstanding principal balance of the Swing Line Loans. 2.21.5 RATE OPTIONS FOR SWING LINE LOANS. The Swing Line Loans shall at all times bear interest at the Floating Rate. 2.3 Article V of the Credit Agreement is hereby amended by deleting Section 5.8 in its entirety and replacing it with the following: 5.8. LITIGATION AND CONTINGENT OBLIGATIONS. There is no litigation, arbitration, proceeding, inquiry or governmental investigation (including, without limitation, by the Federal Trade Commission) pending or, to the knowledge of any of their officers, threatened against or affecting the Rawlings Business, the Borrower or any Subsidiary or any of their respective properties (a) as of the date of this Agreement, except as set forth on Schedule 5.8, and no such matter set forth herein could reasonably be expected to have a Material Adverse Effect or to prevent, enjoin or unduly delay the making of the Loans or Advances under this Agreement, or (b) after the date of this Agreement which could reasonably be expected to have a Material Adverse Effect or to prevent, enjoin or unduly delay the making of the Loans or Advances under this Agreement. As of the date of this Agreement, neither the Borrower nor any Subsidiary has any material contingent obligations except as set forth on Schedule 5.8. 2.4 Article VI of the Credit Agreement is hereby amended as follows: (a) Section 6.28.2 is hereby amended by deleting the table set forth therein in its entirety and replacing it with the following: PERIOD MAXIMUM RATIO Each Fiscal Quarter Ending November 30 or February 28 65% Each Fiscal Quarter Ending May 31 or August 31 55% (b) Section 6.28.3 is hereby amended by deleting such section in its entirety and replacing it with the following: 6.28.3. FIXED CHARGE COVERAGE RATIO. As of the last day of each Fiscal Quarter, maintain a Fixed Charge Coverage Ratio for the four Fiscal Quarters then ended of not less than the ratio set forth below for the corresponding measurement date: MEASUREMENT DATE MINIMUM RATIO 8/31/96 1.75:1 11/30/96 1.75:1 2/28/97 1.75:1 5/31/97 2.00:1 and the last day of each Fiscal Quarter thereafter 2.5 Exhibit E is hereby added in the form of the Exhibit E attached as Annex 1 hereto. 3. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. 3.1 The Borrower represents and warrants that the execution, delivery and performance by the Borrower of this Amendment Agreement have been duly authorized by all necessary corporate action and that this Amendment Agreement is a legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms, except as the enforcement thereof may be subject to (a) the effect of any applicable bankruptcy, insolvency, reorganization, moratorium or similar law affecting creditors' rights generally and (b) general principles of equity (regardless of whether such enforcement is sought in a proceeding in equity or at law). 3.2 The Borrower hereby certifies that each of the representations and warranties contained in the Credit Agreement is true and correct in all material respects on and as of the date hereof as if made on the date hereof, except to the extent that any such representation or warranty is stated to relate solely to an earlier date, in which case such representation or warranty shall be true and correct on and as of such earlier date. 4. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT. 4.1 Upon the effectiveness of this Amendment Agreement, each reference in the Credit Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like import and each reference to the Credit Agreement in each Loan Document shall mean and be a reference to the Credit Agreement as amended hereby. 4.2 Except as specifically amended above, all of the terms conditions and covenants of the Credit Agreement and the other Loan Documents shall remain unaltered and in full force and effect and shall be binding upon the Borrower in all respects and are hereby ratified and confirmed. 4.3 The execution, delivery and effectiveness of this Amendment Agreement shall not operate as a waiver of (a) any right, power or remedy of any Lender or the Agent under the Credit Agreement or any of the Loan Documents, or (b) any Default or Unmatured Default under the Credit Agreement. 5. COSTS AND EXPENSES. The Borrower agrees to pay on demand all reasonable fees and out-of-pocket expenses of counsel for the Agent in connection with the preparation, execution and delivery of this Amendment Agreement. 6. CHOICE OF LAW. THIS AMENDMENT AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF ILLINOIS, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS. 7. EXECUTION IN COUNTERPARTS. This Amendment Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. This Amendment Agreement shall become effective as of the date first above written; provided, that the Agent has received (a) counterparts of this Amendment Agreement duly executed by the Borrower and each Lender and (b) an executed copy of a Swing Line Note in favor of the initial Swing Line Bank. 8. HEADINGS. Section headings in this Amendment Agreement are included herein for convenience of reference only and shall not constitute a part of this Amendment Agreement for any other purposes. [signature pages to follow] IN WITNESS WHEREOF, the Borrower, the Agent and the Lenders have executed this Amendment Agreement as of the date first above written. RAWLINGS SPORTING GOODS COMPANY, INC. By: ______________________________ Name: Title: THE FIRST NATIONAL BANK OF CHICAGO, Individually and as Agent By: ______________________________ Name: Title: THE BANK OF NEW YORK By: ______________________________ Name: Title: THE BOATMEN'S NATIONAL BANK OF ST. LOUIS By: ______________________________ Name: Title: COMERICA BANK By: ______________________________ Name: Title: KEYBANK NATIONAL ASSOCIATION By: ______________________________ Name: Title: ANNEX 1 EXHIBIT E FORM OF SWING LINE NOTE $_________________ Dated: ____________ FOR VALUE RECEIVED, the undersigned (the "Borrower") HEREBY PROMISES TO PAY to the order of _______________________________ (the "Lender") the principal sum of ___ Million United States Dollars ($_______) or, if less, the aggregate unpaid principal amount of the Swing Line Loans made by the Lender to the Borrower pursuant to Section 2.21 of the Credit Agreement (as hereinafter defined), on or before the Facility Termination Date; together, in each case, with interest on any and all principal amounts remaining unpaid hereunder from time to time outstanding. Interest upon the unpaid principal amount hereof shall accrue at the rates, shall be calculated in the manner and shall be payable on the dates set forth in the Credit Agreement. After maturity, whether by acceleration or otherwise, accrued interest shall be payable upon demand. Both principal and accrued interest shall be payable in accordance with the Credit Agreement to The First National Bank of Chicago, as Agent (the "Agent") on behalf of the Lender, at its office set forth in the Credit Agreement in immediately available funds. The Swing Line Loans made by the Lender to the Borrower pursuant to the Credit Agreement and all payments on account of principal hereof shall be recorded by the Lender and, prior to any transfer thereof, endorsed on Schedule A attached hereto which is part of this Swing Line Note or otherwise in accordance with its usual practices; provided, however, that the failure to so record shall not affect the Borrower's obligations under this Swing Line Note. This Swing Line Note is a Note referred to in, and is entitled to the benefits of, the Credit Agreement dated as of July 8, 1994 and amended as of March 24, 1995, August 31, 1995 and September 23, 1996 by and among the Borrower, the financial institutions signatory thereto (including the Lender) and the Agent (as further amended, modified or supplemented from time to time, the "Credit Agreement") and the other Loan Documents. Capitalized terms used but not otherwise defined herein shall have the respective meanings ascribed thereto in the Credit Agreement. The Credit Agreement, among other things, contains provisions for acceleration of the maturity hereof upon the happening of certain stated events and also for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions therein specified. The Borrower hereby waives presentment, demand, protest or notice of any kind in connection with this Swing Line Note. THIS SWING LINE NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS, WITHOUT REGARD TO CONFLICT OF LAWS PROVISIONS, OF THE STATE OF ILLINOIS BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS. RAWLINGS SPORTING GOODS COMPANY, INC. By: __________________________ Name: Title: SCHEDULE A Swing Line Note dated _________________ payable to the order of [LENDER] PRINCIPAL PAYMENTS AMOUNT OF UNPAID PRINCIPAL PRINCIPAL NOTATION DATE REPAID BALANCE MADE BY EX-13 4 FINANCIAL HIGHLIGHTS The following table sets forth selected historical consolidated financial data for the business conducted by Rawlings Sporting Goods Company, Inc. (Rawlings or the Company) for the years ended August 31, 1996, 1995 and 1994, the eight months ended August 31, 1994 and each of the three years ended December 31, 1993. EIGHT MONTHS AMOUNTS IN YEARS ENDED AUGUST 31, ENDED THOUSANDS PRO AUGUST YEARS ENDED DECEMBER 31, EXCEPT PER FORMA 31, SHARE DATA 1996 1995 1994/2/ 1994 1993 1992 1991 (Unaudited) INCOME STATEMENT DATA: /1/ Net revenues $149,735 $144,141 $135,999 $81,174 $139,615 $135,810 $144,950 Operating income 11,666 11,598 13,500 2,935 7,138 12,400 10,325 Net income 5,272 4,584 6,223 1,335 3,922 7,112 5,895 Net income per share 0.69 0.60 0.81 N/A N/A N/A N/A BALANCE SHEET DATA: Total assets $102,252 $97,783 $93,752 $93,752 $67,616 $71,097 $69,958 Long-term debt, including current maturities 38,700 43,900 39,480 39,480 1,262 1,762 2,214 /1/ Net income per share has not been presented for each period because, prior to July 8, 1994, the Company's predecessor was a division of Figgie International, Inc. (the former parent) and had no separately issued equity securities. /2/ Prepared on a pro forma basis; see page 12 for detailed discussion of pro forma adjustments.
NET REVENUES BY PRINCIPAL PRODUCT LINE (unaudited)
Eight Months Ended August (Amounts in Years Ended August 31, 31, Years Ended December 31, millions) 1996 1995 1994 1994 1993 1992 1991 Equipment: Baseball $88.3 $86.9 $82.8 $44.3 $83.7 $83.5 $78.4 Basketball and football 24.2 23.3 20.5 13.9 21.7 19.7 14.6 Apparel 14.3 10.2 8.3 5.1 9.9 9.3 22.0 International 7.7 9.5 9.5 7.6 9.5 9.2 15.6 Licensing 6.9 6.2 6.6 5.6 4.5 4.3 3.5 Miscellaneous 8.3 8.0 8.3 4.7 10.3 9.8 10.9 Net revenues $149.7 $144.1 $136.0 $81.2 $139.6 $135.8 $145.0
FINANCIAL CONTENTS Selected Financial Data 11 Management's Discussion and Analysis of Results of Operations and Financial Condition 12 Consolidated Statements of Income 16 Consolidated Balance Sheets 17 Consolidated Statements of Stockholders' Equity 18 Consolidated Statements of Cash Flows 19 Notes to Consolidated Financial Statements 20 Report of Independent Public Accountants 24 Stockholder Information 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION BASIS OF PRESENTATION In August 1994, Rawlings changed its fiscal year end from December 31 to August 31. Therefore, included herein is a discussion of: i) the actual results for the fiscal year ended August 31, 1996 compared to the actual results for the fiscal year ended August 31, 1995, ii) the actual results for the fiscal year ended August 31, 1995 compared to the pro forma results that estimate the Company's results as a stand-alone company for the twelve months ended August 31, 1994 and iii) the actual eight months ended August 31, 1994 compared to the actual eight months ended August 31, 1993. CAUTIONARY STATEMENTS Cautionary statements identifying important factors that could cause the Company's future results to differ materially from past results, or those contemplated by statements herein regarding matters other than historical fact (i.e., forward-looking statements), are described in, and incorporated by reference from, the Company's 1996 Annual Report on Form 10-K. YEAR ENDED AUGUST 31, 1996 COMPARED TO THE YEAR ENDED AUGUST 31, 1995 RESULTS OF OPERATIONS Net revenues for the year ended August 31, 1996 (1996) were $149,735,000, or 3.9 percent higher than net revenues of $144,141,000 for the year ended August 31, 1995 (1995). Higher apparel, baseball, basketball and football and licensing net revenues partially offset by lower international net revenues were primarily responsible for the increase. The 1.6 percent increase in baseball net revenues was the result of an increase in sales of baseballs and protective equipment offset by a decline in sales of baseball gloves. The increase in sales of baseballs was primarily the result of increased memorabilia sales including the Cal Ripken, Jr. and Mickey Mantle commemorative baseballs. The ability to expand or sustain this level of sales from the memorabilia market will depend on collector demand for new commemorative baseballs which, in turn, depends primarily on the level of interest by fans in professional baseball. The decline in net revenues from baseball gloves was primarily the result of poor retail sell-through in 1995 that resulted in lower orders and shipments of baseball gloves in 1996. Basketball and football net revenues increased 3.9 percent primarily as a result of expanded distribution and increased market share for basketballs. Licensing net revenues increased 11.3 percent as a result of increased sales by virtually every domestic and international licensee. International net revenues declined as a result of a 32.3 percent decline in net revenues in Canada, partially offset by a 26.5 percent increase in international net revenues in countries other than Canada. The decrease in Canada was primarily the result of lower baseball net revenues and an overall slow retail sales environment. The other international growth was primarily concentrated in Latin America. The retail sell-through of baseball-related products improved in 1996 compared to 1995. This has resulted in retailers generally carrying lower than prior year levels of inventory of key baseball-related products. While management believes the fans' disaffection with baseball has begun to subside, the retailers are approaching the 1997 selling season with caution. As a result, the Company expects the trend toward later receipt of retailer orders, the receipt of orders in smaller quantities with follow-up orders to meet demand and shipments closer to and during the selling season to continue. This may have the effect of shifting the seasonality and quarterly results of the Company. In addition, the portion of the Company's revenues represented by sales to major retailers continues to increase and their sell through and product mix is having a more pronounced impact on the predictability of the amount and timing of total revenues. Gross margin in 1996 was 31.0 percent, down 0.2 points from the 1995 gross margin of 31.2 percent. Increased net revenues of lower margin products including apparel and basketball and football, along with lower sales of baseball gloves, one of the Company's higher margin products, were primarily responsible for the decrease. The Company achieved improvement in the gross margins on apparel products in 1996 and expects further improvement in 1997. Selling, general and administrative (SG&A) expenses for 1996 were $34,750,000 or $1,306,000, or 3.9 percent, higher than 1995 SG&A expenses of $33,444,000. As a percent of net revenues, the SG&A expenses in 1996 and 1995 were 23.2 percent. Higher royalties and advertising and promotional costs, partially offset by lower total salaries and wages and professional fees, were primarily responsible for the increase in SG&A expenses. Interest expense of $3,656,000 decreased 3.1 percent as a result of lower average interest rates and lower average borrowings. The effective tax rate of 32.1 percent in 1996 was 7.1 points lower than the effective tax rate of 39.2 percent in 1995. 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, which reduced the income tax provision by $554,000. The Company expects its fiscal 1997 effective tax rate, based on its current mix of domestic and foreign earnings, to be approximately 38 percent. YEAR ENDED AUGUST 31, 1995 COMPARED TO PRO FORMA TWELVE MONTHS ENDED AUGUST 31, 1994 PRO FORMA FINANCIAL INFORMATION For the period September 1, 1993 to July 8, 1994, Rawlings was a division of the former parent, and its results were included in the consolidated totals of the former parent. The separate financial statements of the division included a charge from the former parent that reflected an allocation of various corporate level expenses. Assuming that the transactions effected on July 8, 1994, as more fully described in Note 13 to the consolidated financial statements, had been consummated as of September 1, 1993, the Company estimated net income of $ 6.2 million for the twelve months ended August 31, 1994 based upon the following pro forma adjustments: TWELVE MONTHS ENDED (AMOUNTS IN THOUSANDS) AUGUST 31, 1994 (Unaudited) Net income per historical financial statements $4,142 Add elimination of charge from former parent 6,603 Less: Additional cost of sales (105) Additional general and administrative expenses (813) Additional interest expense (2,217) Tax impact of adjustments (1,387) Pro forma net income $6,223 This unaudited pro forma financial information is for informational purposes only and may not necessarily reflect future results of operations or what the results of operations would actually have been had Rawlings operated as a stand-alone Company for the twelve months ended August 31, 1994. Financial data for the year ended August 31, 1995 and the twelve months ended August 31, 1994 on a pro forma basis is as follows: Pro Forma (Amounts in thousands, except per share data) 1995 1994 (Unaudited) Net revenues $144,141 $135,999 Gross profit 45,042 44,807 Selling, general and administrative expenses 33,444 30,832 Environmental expense - 475 Operating income 11,598 13,500 Interest expense 3,773 2,924 Other expense, net 285 205 Income before income taxes 7,540 10,371 Provision for income taxes 2,956 4,148 Net income 4,584 6,223 Net Income per share 0.60 0.81 RESULTS OF OPERATIONS Net revenues for 1995 were $144,141,000, 6.0 percent higher than pro forma net revenues for the twelve months ended August 31, 1994 (1994). Higher baseball-related, basketball and football equipment and apparel net revenues partially offset by lower licensing net revenues were primarily responsible for the increase. The poor sell-through of baseball-related products adversely affected the second half of 1995 and resulted in a number of retailers carrying unprecedented levels of inventory of key baseball products into the 1996 spring season. Gross margin for 1995 was 31.2 percent, down 1.7 margin points from 1994 pro forma results. The decrease in gross margin was primarily the result of a higher percentage of the net revenues being generated by lower margin product lines, freight on a new line of baseball gloves and lower licensing net revenues. SG&A expenses for 1995 were $33,444,000, $2,612,000, or 8.5 percent, higher than 1994 pro forma results. As a percent of net revenues, the SG&A expenses in 1995 were 23.2 percent, up 0.5 points from 1994 pro forma results. Higher advertising, promotional and royalty expenses were primarily responsible for the increase. In 1994, the Company recorded a $475,000 provision for environmental costs related to the Dolgeville, New York facility. No provision was required in 1995. In 1995, interest expense was $3,773,000, $849,000, or 29.0 percent, above pro forma 1994 results. The increase primarily reflects higher borrowings resulting from higher inventory levels. The effective tax rate of 39.2 percent in 1995 was 0.8 points lower than the pro forma effective tax rate for 1994, reflecting a lower state income tax provision based upon an estimated mix of state effective tax rates. EIGHT MONTHS ENDED AUGUST 31, 1994 COMPARED TO EIGHT MONTHS ENDED AUGUST 31, 1993 Financial data for the eight months ended August 31, 1994 and 1993 is as follows: (Amounts in thousands) 1994 1993 (Unaudited) Net revenues $81,174 $84,917 Gross profit 27,603 27,198 Selling, general and administrative expenses 20,340 19,105 Environmental expense - 1,084 Intercompany charge 4,328 4,624 Operating income 2,935 2,385 Interest expense 623 254 Other expense, net 87 215 Income before income taxes 2,225 1,916 Provision for income taxes 890 720 Net income 1,335 1,196 RESULTS OF OPERATIONS Net revenues decreased 4.4 percent, or $3,743,000, to $81,174,000 in the eight months ended August 31, 1994 from $84,917,000 in the eight months ended August 31, 1993. The decrease in net revenues was primarily due to lower sales of baseball equipment and apparel. The Company's operations were adversely affected by the significant liquidity constraints imposed on Rawlings by the former parent. As a result of the liquidity shortage, Rawlings was forced to delay payments to certain domestic suppliers and vendors. In response to these delays, some of the Company's domestic suppliers withheld deliveries of raw materials, forcing the Company to limit production of certain products and cancel certain customer orders. The Company believes that it received a lower level of orders in certain of its product lines as a result of the cash constraints under which it was operating. In addition, sales of baseball equipment declined due to lower pre-season orders from customers during the fall of 1993 for the 1994 baseball season. The Company's customers placed lower pre-season orders in anticipation of the 1994 baseball season because they generally held higher inventories of baseball-related products at the end of the 1993 baseball season due to abnormally wet weather conditions during the 1993 baseball season. These weather conditions reduced the amount of baseball played and, accordingly, retailers' sales of baseball-related equipment during the 1993 baseball season. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Although the Company's ability to produce certain products was adversely affected by the liquidity shortage of the former parent, this situation had little, if any, impact on the Company's ability to procure products from its foreign manufacturers. These products (which represented approximately 60 percent of its net revenues during the eight months ended August 31, 1994) were largely purchased pursuant to letters of credit that remained available to the Company even during the former parent's liquidity crisis. The Company believes that the liquidity constraints did not have an adverse effect on its long-term relationships with its customers, suppliers and vendors or on its business. Gross margin increased 1.5 percent, or $405,000, to $27,603,000 in the eight months ended August 31, 1994 from $27,198,000 in the comparable period of 1993. Gross margin increased to 34.0 percent from 32.0 percent during the same period. The improvement in gross margin was due to improved manufacturing efficiencies, a better product mix and increased licensing net revenues. SG&A in the eight months ended August 31, 1994 was $20,340,000, $1,235,000, or 6.5 percent, higher than in the eight months ended August 31, 1993. As a percent of net revenues in the eight months ended August 31, 1994 SG&A was 25.1 percent, up 2.6 points from the eight months ended August 31, 1993. The increase was primarily the result of higher advertising and royalty expenses. The Company recorded no environmental expenses in the eight months ended August 31, 1994 as compared to $1,084,000 in the eight months ended August 31, 1993. Intercompany charge in the eight months ended August 31, 1994 decreased by 6.4 percent, or $296,000, to $4,328,000 from $4,624,000 in the comparable period in 1993. As a result of the foregoing factors, operating income increased 23.1 percent, or $550,000, to $2,935,000 in the first eight months of 1994 from $2,385,000 in the first eight months of 1993. Interest and other expense increased $241,000 to $710,000 in the first eight months of 1994 from $469,000 in the first eight months of 1993. The Company's effective tax rate was 40.0 percent the first eight months of 1994 as compared to 37.6 percent for the comparable period in 1993. As a result of the foregoing factors, net income increased 11.6 percent, or $139,000, to $1,335,000 in the first eight months of 1994 from $1,196,000 in the comparable period in 1993. 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. INTEREST RATE MANAGEMENT ACTIVITIES The Company has engaged in interest rate management activities with the objective of limiting exposure to interest rate increases related to the Company's long-term debt and converting a portion of the Company's variable rate debt to a fixed rate. The interest rate management activity objectives are achieved through the use of interest rate caps and interest rate swaps as described in Note 8. ENVIRONMENTAL MATTERS The Company is subject to various federal, state and local environmental laws relating to air emissions, water discharges, and the storage, handling, disposal and remediation of petroleum and hazardous substances. Pursuant to these laws, the Company is conducting environmental investigation and remediation activities at its Adirondack facility in Dolgeville, New York with respect to past petroleum and waste storage practices and a release of wood pitch into surrounding soil and surface water. The cost of investigating and remediating the contamination at the Adirondack facility described above cannot be finally determined until the appropriate studies are complete. Accordingly, the Company is unable to estimate any additional amount beyond the $996,000 accrued at August 31, 1996. However, the Company believes that any additional expenses will not have a material adverse effect on the Company's financial condition, results of operation or cash flows. At this time, the Company does not anticipate incurring additional costs related to other environmental matters that will be material to its financial condition, results of operations or cash flows. LITIGATION 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. The complaint also names as defendants Mr. Carl J. Shields, Chairman, CEO and President of the Company, and Mr. Howard B. Keene, Chief Operating Officer of the Company. The complaint alleges, 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 plaintiff seeks an unspecified amount of damages, reimbursement of costs and expenses of the litigation, including attorney fees, and other unspecified relief. The Company intends to vigorously defend this action. The Company further believes that this matter will not have a material adverse effect on the Company's financial condition, results of operations or cash flow. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity are cash provided by operating activities and the $76,000,000 credit agreement with a bank group. The Company's primary use of cash is to fund its working capital needs, capital expenditures and debt service requirements. The Company's working capital requirements are seasonal with higher investments in working capital generally required in the period that begins in August and ends in April of the succeeding year. The change in the timing of orders and shipments to retailers closer to when the products are actually sold to the retailers' customers may increase the amount of working capital required by the Company and may increase required levels of long-term debt. Detailed information on the Company's cash flows is presented in the consolidated statements of cash flows. YEAR ENDED AUGUST 31, 1996 Operating cash flows of $5,230,000 were primarily the result of net income adjusted for non cash charges partially offset by increased accounts receivable and inventories. Operating cash flows were $1,369,000 higher than 1995 primarily as a result of higher net income and changes in various components of working capital. Investment activities used cash of $1,193,000 for capital expenditures for normal property and plant improvements and the upgrading of certain plants to improve production capacity and efficiency. With the planned expansion of the Company's Costa Rica facility the Company expects capital expenditures of $2,000,000 to $2,500,000 in 1997. Financing activities used cash of $4,585,000 which included a net debt repayment of $5,200,000 partially offset by issuance of common stock of $340,000 and a final purchase price settlement with the former parent of $275,000. The Company believes that cash flow from operations and unused borrowing capacity under the credit agreement should be sufficient to fund its anticipated working capital needs, capital expenditures and debt service requirements for the foreseeable future. However, because future cash flows and the availability of financing depend on a number of factors, including prevailing economic conditions and financial, business and other factors beyond the Company's control, no assurances can be given in this regard. YEAR ENDED AUGUST 31, 1995 Operating cash flows of $3,861,000 were primarily the result of net income adjusted for non cash charges partially offset by increased inventories and changes in other components of working capital. Operating cash flows were $6,588,000 higher than pro forma 1994 operating cash flows primarily as a result of changes in various components of working capital. Investing activities used cash of $2,119,000 for capital expenditures for normal property and plant improvements and the upgrading of certain company plants to improve production capacity and efficiency. Financing activities used cash of $1,954,000 which included a payment to the former parent of $6,456,000 partially offset by $4,420,000 of net additional borrowings under the credit agreement. EIGHT MONTHS ENDED AUGUST 31, 1994 AND THE YEAR ENDED DECEMBER 31, 1993 Immediately prior to the public offering of the Company's shares by the former parent, the Rawlings Business was owned by the former parent. The Company's primary sources of funds were cash flows from operations and borrowings from the former parent. Cash flows provided by operating activities decreased by $14,046,000 and cash flows used in financing activities decreased by $12,573,000 in the eight months ended August 31, 1994 as compared to the eight months ended August 31, 1993. Cash flows provided by operating activities increased by $3,996,000 in 1993 as compared to 1992, primarily from a decrease in accounts receivable and inventories. Capital expenditures were $112,000 for the eight months ended August 31, 1994 and $1,498,000 in 1993. Capital expenditures during these periods were used for equipment purchases, normal property and plant improvements and the upgrading of certain Company plants to improve production capacity and efficiencies. In addition, in 1994, capital expenditures were made related to the Company's conversion of certain of its facilities from line manufacturing to modular manufacturing. CONSOLIDATED STATEMENTS OF INCOME
Eight Months Ended Year Ended Years Ended August 31, August 31, December 31, 1996 1995 1994 1993 (Amounts in thousands, except per share data) Net revenues $149,735 $144,141 $81,174 $139,615 Cost of goods sold 103,319 99,099 53,571 95,235 Gross profit 46,416 45,042 27,603 44,380 Selling, general and administrative expenses 34,750 33,444 20,340 28,784 Environmental expense 1,559 Intercompany charge 4,328 6,899 Operating income 11,666 11,598 2,935 7,138 Interest expense 3,656 3,773 524 128 Interest to former parent 99 210 Other expense, net 250 285 87 206 Income before income taxes 7,760 7,540 2,225 6,594 Provision for income taxes 2,488 2,956 890 2,672 Net income $ 5,272 $ 4,584 $ 1,335 $ 3,922 Net income per share $ 0.69 $ 0.60 N/A N/A Average number of common shares outstanding 7,680 7,652 N/A N/A
The accompanying notes are an integral part of these consolidated statements. CONSOLIDATED BALANCE SHEETS August 31, 1996 1995 (Amounts in thousands, except share and per share data) ASSETS Current assets: Cash and cash equivalents $ 789 $ 1,337 Accounts receivable, net of allowance of $1,498 and $1,459 respectively 30,090 24,163 Inventories 32,415 31,346 Prepaid expenses 1,472 1,607 Deferred income taxes 3,162 3,369 Total current assets 67,928 61,822 Property, plant and equipment, net 7,860 7,601 Other assets 698 944 Deferred income taxes 25,766 27,416 Total assets $102,252 $97,783 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 9,119 $ 6,388 Accrued liabilities 8,461 7,399 Total current liabilities 17,580 13,787 Long-term debt 38,700 43,900 Other long-term liabilities 11,508 11,519 Total liabilities 67,788 69,206 Stockholders' equity: Preferred stock, $.01 par value per share, 10,000,000 shares authorized, no shares issued and outstanding Common stock, $.01 par value per share, 50,000,000 shares authorized, 7,697,527 and 7,656,908 shares issued and outstanding, respectively 77 77 Additional paid-in capital 25,820 25,205 Retained earnings 8,567 3,295 Stockholders' equity 34,464 28,577 Total liabilities and stockholders' equity $102,252 $97,783 The accompanying notes are an integral part of these consolidated balance sheets. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional Retained Investment Common Stock Paid-in Earnings by Former Shares Amount Capital (Deficit) Parent Total (Amounts in thousands, except share data) Balance, December 31, 1992 - $ - $ - $ -- $ 60,580 $ 60,580 Net income - - - - 3,922 3,922 Net return to former parent - - - - (8,903) (8,903) Balance, December 31, 1993 - - - - 55,599 55,599 Net income - - - (1,289) 2,624 1,335 Net return to former parent - - (35,000) - (16,251) (51,251) Issuance of common stock 7,650,081 77 41,895 - (41,972) - Establishment of net deferred taxes related to the assets transfer - - 18,228 - - 18,228 Balance, August 31, 1994 7,650,081 77 25,123 (1,289) - 23,911 Net income - - - 4,584 - 4,584 Issuance of common stock 6,827 - 82 - - 82 Balance, August 31, 1995 7,656,908 77 25,205 3,295 - 28,577 Net income - - - 5,272 - 5,272 Issuance of common stock 40,619 - 340 - - 340 Final settlement with former parent - - 275 - - 275 Balance, August 31, 1996 7,697,527 $77 $25,820 $8,567 $ - $34,464
The accompanying notes are an integral part of these consolidated statements. CONSOLIDATED STATEMENTS OF CASH FLOWS
Eight Year Months Ended Ended Years Ended August 31, August 31, December 31, (Amounts in thousands) 1996 1995 1994 1993 Cash flows from operating activities: Net income $ 5,272 $ 4,584 $ 1,335 $ 3,922 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,123 1,008 551 727 Deferred taxes 1,857 2,418 (847) - Changes in operating assets and liabilities: Accounts receivable, net (5,927) (871) 16,474 4,159 Inventories (1,069) (3,934) (10,293) 1,378 Prepaid expenses 135 (397) (246) (365) Other assets 60 (348) 20 (502) Accounts payable 2,731 1,097 (122) 725 Accrued liabilities and other 1,048 304 (856) 1,275 Net cash provided by operating activities 5,230 3,861 6,016 11,319 Cash flows from investing activities: Capital expenditures, net (1,193) (2,119) (112) (1,498) Cash flows from financing activities: Net (repayments) borrowings of long-term debt (5,200) 4,420 38,218 (500) Issuance of common stock 340 82 - - Payment from (to) former parent related to purchase price settlement 275 (6,456) 6,456 - Net return to former parent - - (16,251) (8,903) Transferred to former parent - - (35,000) - Net cash used in financing activities (4,585) (1,954) (6,577) (9,403) Net (decrease) increase in cash and cash equivalents (548) (212) (673) 418 Cash and cash equivalents, beginning of period 1,337 1,549 2,222 1,804 Cash and cash equivalents, end of period $ 789 $ 1,337 $ 1,549 $ 2,222 Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 3,548 $ 3,899 $ 187 $ 173 Income taxes 247 459 2,200 2,776
The accompanying notes are an integral part of these consolidated statements. Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share data) 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements include the assets, liabilities, revenues and expenses of the Rawlings Sporting Goods Company, Inc. and all of its subsidiaries (Rawlings or the Company). For periods prior to July 8, 1994 the consolidated financial statements include the assets, liabilities, revenues and expenses of the division and subsidiaries of Figgie International, Inc. (the former parent) that constitute the unincorporated Rawlings Business. As a result of the Rawlings Business being conducted through a division of the former parent, the Rawlings Business had no separately identifiable equity other than an amount equal to net assets entitled "Investment by Former Parent . All significant intercompany transactions have been eliminated. CHANGE IN FISCAL YEAR The Company changed its fiscal year end from December 31 to August 31 after the July 8, 1994 transfer of the Rawlings Business to the Company from the former parent was completed. The change resulted in a short period of eight months beginning January 1, 1994 and ending August 31, 1994. Information included in the footnotes to the financial statements for 1996 refers to the twelve months ended August 31, 1996, the information for 1995 refers to the twelve months ended August 31, 1995, the information for 1994 refers to the eight months ended August 31, 1994 and the information for 1993 refers to the twelve months ended December 31, 1993. CASH AND CASH EQUIVALENTS Cash equivalents consist of short-term, highly liquid investments with an average maturity when purchased of three months or less. INVENTORIES Inventories are valued at the lower of cost or net realizable value with cost principally determined on a first-in, first-out method. Cost includes materials, labor and overhead. PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment is stated at cost and depreciation is generally computed on a straight-line basis. The principal rates of depreciation are as follows: Buildings and improvements 20-30 years Machinery and equipment 7-12 years Other 4-10 years INCOME TAXES Deferred income taxes are recorded for temporary differences in reporting income and expenses for tax and financial statement purposes. The Company adopted Statement of Financial Accounting Standards No. 109, Accounting for Incomes Taxes (SFAS No. 109), on July 8, 1994. The provision for income taxes reflected in the consolidated financial statements prior to July 8, 1994 included the Rawlings Business share of the consolidated income tax expense of the former parent. FINANCIAL INSTRUMENTS The fair value of the Company's financial instruments approximate their carrying amounts. NET INCOME PER SHARE Net income per share for 1996 and 1995 is based on the weighted average number of common shares outstanding during the period. Net income per share data on a historical basis has been omitted for 1994 and 1993, as the Rawlings Business was a division of the former parent. SEGMENT REPORTING The Company is engaged principally in one line of business, the manufacturing, procurement and sale of sporting goods and related products. RECLASSIFICATION Certain reclassifications have been made to the prior year financial statements to conform with the current year presentation. USE OF ESTIMATES These financial statements have been prepared on the accrual basis of accounting, which required the use of certain estimates by management, in determining the Company's assets, liabilities, revenues and expenses. 2 INVENTORIES Inventories consist of the following: August 31, 1996 1995 Raw materials $ 5,624 $ 5,498 Work in process 1,899 1,940 Finished goods 24,892 23,908 Inventories $32,415 $31,346 3 PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment consists of the following: August 31, 1996 1995 Buildings and improvements $ 5,412 $ 5,249 Machinery and equipment 12,709 11,943 Other 2,348 1,998 Total property, plant and equipment 20,469 19,190 Less - Accumulated depreciation (12,609) (11,589) Property, plant and equipment, net $ 7,860 $ 7,601 4 FOREIGN CURRENCY TRANSACTIONS For 1996, 1995, 1994 and 1993, the foreign currency transaction gains (losses) included in determining net income were ($12), $91, ($274) and ($156), respectively. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5 SUPPLEMENTAL INCOME STATEMENT INFORMATION Set forth below is a comparative summary of certain net revenue and expense items:
1996 1995 1994 1993 Licensing revenues $6,880 $6,169 $5,593 $4,501 Operating lease expenses 2,426 2,172 1,404 1,531 Royalty and licensing expenses 5,536 4,986 2,634 3,784 Research and development expenses 238 540 143 519
6 INCOME TAXES Rawlings was included in the consolidated tax returns of the former parent prior to July 8, 1994. The provision for income taxes reflected in the consolidated financial statements prior to July 8, 1994 included the Rawlings Business's share of the consolidated income tax expense of the former parent. The provision approximates Rawlings' income tax expense under SFAS No. 109 which would have been incurred on a stand-alone basis. Prior to July 8, 1994, cash paid for income taxes included in the accompanying statements of cash flows represents the current portion of the Rawlings Business's provision for income taxes. The Company made no payments from July 9, 1994 to August 31, 1994. The income tax provision (benefit) is as follows:
1996 1995 1994 1993 Current: Federal $ 564 $ 557 $1,206 $2,428 State and other 67 (19) 237 348 Total current 631 538 1,443 2,776 Deferred: Federal 1,658 2,082 (482) (91) State and other 199 336 (71) (13) Total deferred 1,857 2,418 (553) (104) Total income tax provision $2,488 $2,956 $ 890 $2,672
A reconciliation between the provision for income taxes computed at the Federal statutory rate and the rate used for financial reporting purposes is as follows: 1996 1995 1994 1993 Amount % Amount % Amount % Amount %
Expected provision at the statutory rate $2,716 35.0 $2,639 35.0 $779 35.0 $2,308 35.0 State and other taxes, net of federal tax benefit 326 4.2 317 4.2 111 5.0 335 5.1 Lower effective tax rates on foreign income (554) (7.1) - - - - - - Other - - - - - - 29 .4 Total income tax provision $2,488 32.1 $2,956 39.2 $890 40.0 $2,672 40.5
The significant components of deferred taxes which are included in the accompanying balance sheets are as follows: 1996 1995 Deferred Deferred Deferred Deferred Tax Tax Tax Tax Assets Liabilities Assets Liabilities
Intangible assets $25,348 $- $26,451 $ - Operating loss carryforwards 2,141 - 2,191 - Foreign tax credits 748 - 272 - Allowance for doubtful accounts 596 - 579 - Environmental reserve 391 - 439 - Inventory 388 - 106 - Property, plant and equipment 220 - 939 - Other - 904 593 785 Total $29,832 $904 $31,570 $785
The Company believes a valuation allowance against deferred income tax assets as of August 31, 1996 is not necessary. The Company's net operating loss carryforwards expire in 2009 through 2010. Deferred taxes for 1994 resulted primarily from intangible assets, net operating loss carryforwards and accelerated depreciation. Deferred taxes for 1993 resulted principally from depreciation and provisions for estimated expenses. Income taxes have not been provided on the undistributed income (approximately $1,400) of Rawlings' foreign subsidiary which the Company does not intend to be remitted to the US. 7 ACCRUED LIABILITIES Accrued liabilities consist of the following: August 31, 1996 1995 Salary, benefits and other taxes $3,487 $2,536 Payable to former parent 1,342 2,003 Environmental and other 3,191 2,695 Royalties 441 165 Accrued liabilities $8,461 $7,399 8 LONG-TERM DEBT Long-term debt consists of the following: August 31, 1996 1995 Credit agreement with banks due 1999, average interest rate of 6.86% and 7.30%, respectively $38,700 $43,000 Industrial Revenue Bond, 8.75%, due 2000, repaid in 1996 - 900 Total long-term debt $38,700 $43,900 In July 1994 the Company entered into an $80,000 variable rate unsecured credit agreement with a bank group. The credit agreement was amended in March and August 1995 and September 1996. The September 1996 amendment modified, among other matters, certain financial covenants including the minimum fixed charge coverage and the required ratio of maximum total debt to total capitalization. The available borrowings under the amended credit agreement decline $4,000 and $5,000 as of July 8, 1997 and 1998, respectively. The committed line of credit is $76,000 as of August 31, 1996 after a scheduled $4,000 reduction on July 8, 1996. The Company is required under the amended credit agreement to meet certain financial covenants pertaining to minimum fixed charge coverage, incurrence of additional debt, maximum total debt as a percentage of total capitalization, minimum net worth and restrictions on the Company's ability to pay cash dividends to 50% of the Company's net income for the preceding year. The Company is in compliance with these covenants. As of August 31, 1996 the Company had outstanding letters of credit of $5,743 and available borrowing capacity of $31,557 under the credit agreement with banks. In July 1994 the Company entered into an interest rate cap at 9.25% for up to $15,000 in borrowings through July 1997. In October 1995 the Company entered into a two-year interest rate swap agreement with a commercial bank under which the Company receives a floating rate based on three month LIBOR through September 1997 on $25,000 and pays a fixed rate of 6.50%. This transaction effectively changes a portion of the Company's debt from a floating rate to a fixed rate. 9 EMPLOYEE BENEFITS COMPANY-SPONSORED DEFINED CONTRIBUTION PLANS Beginning December 1, 1994, substantially all US salaried employees and certain US hourly employees are covered by a defined contribution (Section 401(k)) plan that provides funding based on a percentage of compensation. The Company's contributions to the plan were $299 and $183 in 1996 and 1995, respectively. MULTI-EMPLOYER PENSION PLANS Certain union employees participate in multi-employer defined benefit pension plans. Contributions to the plans were $956, $839, $483 and $903 in 1996, 1995, 1994 and 1993, respectively. BENEFITS FROM FORMER PARENT The former parent has retained the obligation for accrued benefits attributable to employees and former employees of the Rawlings Business earned prior to July 8, 1994. The Rawlings Business participated in various employee benefit plans of the former parent prior to July 8, 1994. The cost allocated to the Rawlings Business, as determined by the plan administrator, for these plans was $387 and $856 in 1994 and 1993, respectively. 10 STOCK OPTIONS The 1994 Rawlings Long-Term Incentive Plan (the 1994 Incentive Plan) provides for the issuance of up to 625,000 shares of Rawlings common stock upon the exercise of stock options and stock appreciation rights, and as restricted stock, deferred stock, stock granted as a bonus or in lieu of other awards and other equity-based awards. The 1994 Non-Employee Directors Stock Plan (1994 Directors Stock Plan) provides for the issuance of up to 50,000 shares of Rawlings common stock to non-employee directors upon the exercise of stock options or in lieu of director's fees. Stock options granted under the 1994 Incentive Plan and the 1994 Directors Stock Plan have exercise prices equal to the market price on the date of grant, vest over three to four years from the date of grant and, once vested, are generally exercisable over ten years following the date of grant. Option activity is as follows: 1996 1995 1994 Outstanding at beginning of period 346,610 313,266 - Granted 192,125 84,886 313,266 Exercised - - - Cancelled (55,550) (51,542) - Outstanding at end of period 483,185 346,610 313,266 Shares exercisable 175,077 87,237 - Price of stock options: Granted $7.88-$9.94 $9.63-$13.88 $11.25-$12.00 Exercised - - - Cancelled $9.00-$13.88 $12.00 - Outstanding $7.88-$13.88 $9.63-$13.88 $11.25-$12.00 At August 31, 1996, 191,815 shares of Rawlings common stock were available for future awards under the plans. The Financial Accounting Standards Board has issued SFAS No. 123 "Accounting for Stock-Based Compensation, which is effective for fiscal years beginning after December 15, 1995. This statement recommends that companies account for stock option plans by recognizing the fair value of stock options granted over the vesting period of the option, but also permits companies to continue to account for employee stock options under Accounting Principles Board Opinion No. 25 (APB No. 25) "Accounting for Stock Issued to Employees. The Company will adopt SFAS No. 123 in its fiscal year ending August 31, 1997 but will continue to account for options under APB No. 25 and will disclose the pro forma net income and net income per share effect as if the Company had used the fair value-based method recommended under SFAS No. 123. 11 RELATED PARTY TRANSACTIONS The Company leased office space, through December 1995, from a partnership in which one of the Company's board of directors had a 40% ownership interest. In December 1995, the director sold his 40% ownership interest in the office space. Lease payments made during the period the outside director maintained an ownership interest in the building were $233, $390 and $257 in 1996, 1995 and 1994, respectively. 12 COMMITMENTS AND CONTINGENCIES Future minimum payments under noncancelable leases, royalty and licensing agreements as of August 31, 1996 are as follows: Royalty and Operating Licensing Leases Agreements Fiscal 1997 $1,860 $3,549 Fiscal 1998 1,400 1,239 Fiscal 1999 947 1,078 Fiscal 2000 663 73 Fiscal 2001 233 - Thereafter 57 225 Total minimum lease payments $5,160 $6,164 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS One customer's purchases are 11% 10%, 9% and 11% of net revenues of Rawlings for 1996, 1995, 1994 and 1993, respectively. No other customers' purchases were greater than 10% of net revenues. In the normal course of doing business, Rawlings is subject to various federal, state and local environmental laws. Rawlings currently is working with the New York State Department of Environmental Conservation in addressing contamination relating to past petroleum and waste storage practices at its facility in Dolgeville, New York. In 1993, Rawlings accrued $1,559 relating to estimated environmental investigation and remediation costs. Rawlings believes that the accrued environmental costs will be incurred over the next several years. Due to the uncertainty of recovery of costs from insurance carriers and other potentially liable third parties, Rawlings has not adjusted its accrual for environmental costs to reflect potential recoveries from third parties. 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. The complaint also names Mr. Carl J. Shields, Chairman, CEO and President of the Company, and Mr. Howard B. Keene, Chief Operating Officer of the Company. The complaint alleges, among other things, that the defendant's 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 plaintiff seeks unspecified amount of damages, reimbursement of costs and expenses of the litigation, including attorney fees, and other unspecified relief. The Company intends to vigorously defend this action. Rawlings is periodically subjected to product liability claims and proceedings involving its patents; such proceedings have not had a material adverse effect on Rawlings. In the opinion of management, ultimate liabilities resulting from pending environmental matters, the shareholder suit and other legal proceedings will not have a material adverse effect on the financial condition or results of operations of Rawlings. 13 TRANSACTIONS WITH FORMER PARENT NET ASSET TRANSFER In July 1994, the former parent transferred the net assets of the Rawlings Business to the Company in exchange for $35,000 in cash and the net cash proceeds generated from the initial public offering of the Company's stock. The purchase price was subject to a post-closing adjustment based on the investment by the former parent in the Rawlings Business as of June 30, 1994 as defined in the asset transfer agreement. In 1995, the Company paid the former parent $6,456 as a preliminary settlement of the post-closing adjustment. A final purchase settlement was reached in 1996 with the former parent paying the Company a final settlement of $275. The assets and liabilities transferred to Rawlings are recorded at the predecessor's cost for financial reporting purposes. For tax purposes, the transaction results in a step-up of the basis of the assets transferred determined by the fair value paid by the Company for the Rawlings Business. The recording of the deferred income tax asset related to the step-up in the tax basis of the assets results in a corresponding increase in additional paid-in capital. Under the terms of a tax sharing and separation agreement between the Company and the former parent, the Company is required to pay the former parent 43% of the tax benefits resulting from the step-up in the tax basis of the assets as the benefit of the step-up is realized. The obligation to pay the former parent was recorded as a liability and a corresponding reduction in additional paid-in capital. CHARGES FROM FORMER PARENT Prior to July 8, 1994, the former parent allocated corporate overhead and interest expense to the Company. The charge from the former parent to the Rawlings Business did not include expenses related to the Rawlings Business, such as insurance, pension, medical and health benefits and outside legal expenses. These expenses were charged directly to the Rawlings Business by the former parent and are reflected in the appropriate expense categories in the accompanying consolidated statements of income. These transactions did not occur subsequent to the July 8, 1994 transaction. Interest expense relating to the former parent's factoring of Rawlings' accounts receivable was $99 and $255 for 1994 and 1993, respectively. INVESTMENT BY FORMER PARENT The following is an analysis of the investment by the former parent: 1994 1993 Cash collected by former parent from the Rawlings Business operations $(82,291) $(144,585) Cash provided by former parent to fund the Rawlings Business operations 61,712 128,783 Corporate overhead and interest expense allocated by former parent to the Rawlings Business 4,328 6,899 Net investment return to former parent (16,251) (8,903) Net income 2,624 3,922 Net assets of Rawlings acquired (41,972) - Net change in investment by former parent (55,599) (4,981) Investment by former parent, beginning of period 55,599 60,580 Investment by former parent, end of period $ - $ 55,599 14 SUPPLEMENTAL TRANSITION PERIOD INFORMATION (unaudited) Eight Months Ended August 31, 1993 Net revenues $84,917 Gross profit 27,198 Operating income 2,385 Income before income taxes 1,916 Provision for income taxes 720 Net income 1,196 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE STOCKHOLDERS OF RAWLINGS SPORTING GOODS COMPANY, INC.: We have audited the accompanying consolidated balance sheets of Rawlings Sporting Goods Company, Inc. (a Delaware corporation) and subsidiaries (the Company or Rawlings) (successor to the Rawlings Sporting Goods Company, a division of Figgie International Inc. - see Note 1) as of August 31, 1996 and 1995 and the related consolidated statements of income, stockholders' equity and cash flows for each of the two years in the period ended August 31, 1996, the eight months ended August 31, 1994, and for the year ended December 31, 1993. These financial statements are the responsibility of Rawlings' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Rawlings Sporting Goods Company, Inc. and subsidiaries as of August 31, 1996 and 1995, and the results of their operations and their cash flows for each of the two years in the period ended August 31, 1996, the eight months ended August 31, 1994, and for the year ended December 31, 1993, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP St. Louis, Missouri October 11, 1996 EX-23 5 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountant's, we hereby consent to the incorporation by reference of our report included in this Form 10-K, into the Company's previously filed Registration Statement File No. 33-83958, dated September 14, 1994, and the Company's previously filed Registration Statement No. 33-86354, dated November 14, 1994. \s\ Arthur Andersen LLP St. Louis, Missouri, November 25, 1996 EX-27 6
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF RAWLINGS SPORTING GOODS CO., INC. CONTAINED IN ITS ANNUAL REPORT ON FORM 10-K FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS AUG-31-1996 AUG-31-1996 789 0 31,588 1,498 32,415 67,928 20,469 12,609 102,252 17,580 50,208 0 0 77 34,387 102,252 149,735 149,735 103,319 103,319 34,750 0 3,656 7,760 2,488 5,272 0 0 0 5,272 .69 .69
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