-----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, D7n3NlWDZtYFa0cp6ULsA7DYrO4n+ELZ5S9vOXA4gx/YDu5FEUPLiotIT6NVH8hF 8RHNGN1GmTw4JAkaaqkU/w== 0000927025-97-000180.txt : 19971127 0000927025-97-000180.hdr.sgml : 19971127 ACCESSION NUMBER: 0000927025-97-000180 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970831 FILED AS OF DATE: 19971126 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: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-24450 FILM NUMBER: 97728993 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, DC 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, 1997. Commission File Number: 0-24450 RAWLINGS SPORTING GOODS COMPANY, INC. (Exact name of registrant as specified in its charter) Delaware 43-1674348 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) 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 4, 1997 was $85,005,217. The number of shares of the registrant's Common Stock, $.01 par value, outstanding as of October 15, 1997, was 7,727,747. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's 1997 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Item 1. Business. . . . . . . . . . . . . . . . . . . . .1 Item 2. Properties. . . . . . . . . . . . . . . . . . . 13 Item 3. Legal Proceedings.. . . . . . . . . . . . . . . 15 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . 16 Part II. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . 16 Item 6. Selected Financial Data . . . . . . . . . . . . 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . 17 Item 8. Financial Statements and Supplementary Data . . 17 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . 17 PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Item 10. Directors and Executive Officers of the Registrant. . . . . . . . . . . . . . . . . . . 17 Item 11. Executive Compensation. . . . . . . . . . . . . 18 Item 12. Security Ownership of Certain Beneficial Owners and Management. . . . . . . . . . . . . . . . . 18 Item 13. Certain Relationships and Related Transactions. 18 Part IV. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . . . . 18 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 the National and American Leagues, All-Star Game and World Series games for baseballs and the National Collegiate Athletic Association (the "NCAA") for the sports of football and basketball. In addition, Rawlings' products are endorsed by more than 56 college coaches, more than 20 major sports organizations and numerous athletes, including approximately 120 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 a new power forged aluminum bat and a speed sensing baseball in fiscal 1997 with delivery of these new products expected to begin in the first half of fiscal 1998. 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, volleyballs, soccer balls, football shoulder pads and other protective gear, hockey sticks, hockey gloves, hockey protective and goalie 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, golf equipment and sport drinks, using the Rawlings 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 and League Championship Series and nonexclusive rights to vinyl baseballs with Club logos and for the above outlined events. Since 1994, the Company has been the exclusive supplier of baseballs to each of the 18 Minor Leagues with the agreement expiring in 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 with an agreement expiring in 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 1999. In September 1997, the Company acquired the net assets of the Victoriaville hockey business which includes the Vic, Victoriaville and McMartin brands. Victoriaville has approximately $14.0 million in annual revenues and National Hockey League (NHL) on ice exposure including sticks and protective gear with over 150 professional hockey players. Products and Markets The following is a summary of net revenues for the principal product lines and licensing arrangements of Rawlings during the three fiscal years ended August 31, 1997: Net Revenues by Principal Product line (amounts in millions) (unaudited) Years Ended August 31, 1997 1996 1995 Equipment Baseball $80.8 $88.3 $86.9 Basketball, football and volleyball 28.7 24.2 23.3 Apparel 16.4 14.3 10.2 International 7.5 7.7 9.5 Licensing 6.5 6.9 6.2 Miscellaneous 7.7 8.3 8.0 Net revenues $147.6 $149.7 $144.1 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 125 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 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 1996, the Company introduced the pony tail batter's helmet for women. 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 and Adirondack names. The Company also introduced a line of power forged aluminum baseball and softball bats in fiscal 1997 with delivery expected to commence in the first half of 1998. Basketball and Football Rawlings sells 20 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). The basketball contract with the NCAA expires in 2002. The Company is also the official supplier of basketballs to the National Association of Intercollegiate Athletics. Rawlings sells 22 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 championship games. The football contract with the NCAA expires in 1999. Rawlings also supplies the official football to the National Association of Intercollegiate Athletics. Hockey 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. In September 1997, the Company acquired the net assets of the Victoriaville hockey business which includes the Vic, Victoriaville and McMartin brands. Victoriaville has approximately $14.0 million in annual revenues and major products include hockey sticks, hockey protective equipment and goalie protective equipment. The acquisition of the Victoriaville business is expected to significantly increase the size of the Company's hockey business. 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 11.1% of the net revenues of the Company in the year ended August 31, 1997. 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 1997, the Company completed a 21,000 square foot expansion of its Costa Rica facility in order to expand its stock clothing capacity. 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, 1997. Rawlings currently distributes its products in more than 36 countries primarily through independent distributors. Of the Company's international net revenues in the year ended August 31, 1997, approximately $4.4 million 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 U.S. The Company supplies baseball, basketball and football equipment and team uniforms to international sports organizations, and to leagues in a number of non U.S. countries including those where Rawlings supplies baseballs (Argentina, Spain and Puerto Rico), basketballs (Finland, Germany, Italy and Puerto Rico). 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. The September 1997 acquisition of the Victoriaville hockey business will contribute to international growth. Historic annual international revenues of the Victoriaville hockey business are approximately $9 million and management believes that opportunities exist for growth beyond this level. Licensing In the year ended August 31, 1997, the Company generated $6.5 million of licensing revenues on approximately $160 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 16 companies which are using the Rawlings (Registered Trademark) brand name on various products including sportswear, shoes, golf clubs, golf accessories, sports bags, socks, beverages 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 continue to 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 other net revenues from its four outlet stores and from its leather tanning facility. The outlet stores sell seconds, irregular quality and discontinued items. Approximately 62% 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 40% 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 4,100 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 Champs), sporting goods megastores (such as Sports Authority and Jumbo Sports) and mass merchandisers (such as Wal-Mart and K-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 30% of the total net revenues of Rawlings in the year ended August 31, 1997 including one customer (Wal-Mart) which accounted for approximately 12% of 1997 revenues. The Company has 32 direct sales employees and 46 manufacturers' representatives who sell its products in the United States and Canada. The Company has two separate sales forces, one to serve 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, four 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 Victoriaville hockey business primarily uses manufacturers representatives in the United States and Canada and distributors in other countries. Subsequent to the September 1997 purchase of the Victoriaville hockey business by the Company a combination of manufacturers representatives and members of Rawlings sales force are being used to sell Victoriaville products. The Victoriaville hockey business products are distributed from the Company's warehouses in Dolgeville, New York and Daveluyville, Quebec. 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. In November 1997 the Company entered into a five year strategic marketing alliance with Host Communication, Inc. (HCI), a sports marketing company. Under this agreement, Rawlings and HCI will jointly market and sell Rawlings' products primarily through corporate promotions, grass roots events and international 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 and League Championship Series games); the NCAA (basketball and football championships and Final Four games); the 18 Minor Leagues (Minor League games); 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 approximately 120 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 56 college coaches including basketball's Denny Crum, Lute Olson, Nolan Richardson and Marian Washington. The Company's products are also endorsed by Brett Favre of the Green Bay Packers and Steve Young of the San Francisco 49ers. The products related to the Victoriaville hockey business are endorsed by numerous professional hockey players. 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 and League Championship Series games, the official baseballs for the Minor League games and the NCAA basketball and football contracts, 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 25% of its net revenues in the year ended August 31, 1997 and the balance derived from the sale of product manufactured by third parties in Asia, Mexico 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, Indonesia and Mexico. Three suppliers Trion Corporation, Cortina International, Inc., and Samyang Tongsang Company Limited each account for more than 10% of the Company's raw material and finished goods purchases. The Company does not maintain formal supply contracts with these suppliers. 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 1994 the Company began relocating production of stock apparel to its Costa Rica factory to reduce operating costs. In 1997, the Company completed an 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. The Victoriaville hockey business acquired in September 1997 includes three manufacturing facilities located in Canada. 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 and The Mark of a Pro (Registered Trademark), are considered material to Rawlings' business. As of August 31, 1997, Rawlings held 29 U.S. and 10 non U.S. patents, and had 10 U.S. patent applications and one non U.S. patent application 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 and Wilson Sporting Goods Company 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 pages 13 and 14 of the Company's 1997 Annual Report to Stockholders. Employees As of August 31, 1997, Rawlings employed approximately 1,420 people on a full-time basis, of whom 731 were based in the United States; 3 in Canada and 686 were based in Costa Rica. Of the total number of employees, approximately 1,261 were engaged in manufacturing, 118 were engaged in marketing and sales and 41 were engaged in administration. Approximately 377 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 November 1999 and February 2000, 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 55% of the total net revenues of Rawlings in the year ended August 31, 1997. 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. Dependency 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. Acquisition of Net Assets of Victoriaville Hockey Business. In September 1997, the Company acquired the Victoriaville hockey business with historical net revenues of approximately $14.0 million. The Company is in the process of integrating certain portions of the Victoriaville business into its existing business. While the Company believes the opportunity exists for increased hockey revenues and a smooth integration, a significant loss of Victoriaville's historical revenues or unanticipated integration issues could have a material adverse effect on the Company's sales and earnings. Seasonality. Customers generally place orders with the Company for baseball-related products beginning in August for shipment beginning in November (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 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 30% of the total net revenues of Rawlings in the year ended August 31, 1997, including one customer, Wal-Mart, which accounted for approximately 12% of 1997 revenues. Although the Company has long-established relationships with 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 periodically subjected to product liability claims and proceedings involving its patents and other legal proceedings 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 Howard B. Keene 55 Chief Executive Officer and President Paul E. Martin 37 Chief Financial Officer Randy D. Black 45 Vice President, Marketing Ted C. Sizemore 52 Vice President, Baseball Development and International Sales J. Michael Thompson 40 Vice President, Sales Jonathan C. Hodgins 33 President, Hockey Division In October 1997, the Board of Directors accepted the resignation of Carl Shields, who had led the Company since mid-1994. A search is now under way to select his successor. Until then, board member Andrew Baur will serve as Rawlings' Chairman, and Howard B. Keene has been named Chief Executive Officer and President. Howard B. Keene has served as Chief Executive Officer and President since October 1997. From April 1995 to October 1997 Mr. Keene served as Chief Operating Officer. 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 public company that manufactured packaging materials with $50 million in revenues. 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. Jonathan C. Hodgins has served as President, Hockey Division since September 1997. From September 1996 until joining the Company, Mr. Hodgins served as President and Chief Executive Officer of USA Skate, Inc., the previous owner of the Victoriaville hockey business. From 1990 to 1996 Mr. Hodgins was employed by CCM/Sports Maska, Inc. in various management and executive capacities. From 1986 to 1990 Mr. Hodgins was employed by Canstar Sports Group in product management. ITEM 2. PROPERTIES. The following table sets forth certain information as of August 31, 1997 relating to Rawlings' principal properties: Approximate Owned or Location Purpose/Products Size (sq. ft.) Leased Ava, Missouri Manufacturing of 90,000 Leased (two adjoining baseball 60,000 Leased facilities) gloves, batter's helmets, footballs and injection molded accessories Dolgeville, New York Manufacturing of 80,500 Owned (three properties) wood baseball bats Fenton, Missouri Corporate 25,000 Leased headquarters (for a term expiring in 2001) Licking, Missouri Manufacturing of 55,400 Owned (two facilities) apparel 55,000 Leased Springfield, Warehouse/ 83,500 Owned Missouri distribution center Tullahoma, Leather tanning 69,000 Owned Tennessee Turrialba, Manufacturing of 54,000 Owned Costa Rica baseballs and apparel *Daveluyville, Hockey sticks 74,000 Owned Quebec Canada *Montreal, Hockey Protective 9,600 Leased Quebec Canada *London, Goaltender 5,000 Leased Ontario Equipment Canada *Acquired September 1997 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 four outlet stores. Rawlings also leases space for four 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 Like similar manufacturing companies, 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. Pursuant to a consent order with the New York State Department of Environmental Conservation (the "NYSDEC"), several years ago the Company completed a drum removal project in the vicinity of the kiln operations at its Adirondack facility in Dolgeville, New York (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 the drum removal 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. Recently, the Company filed a petition to delist the Adirondack Facility entirely from the state Superfund list, and the NYSDEC has informed the Company that the Adirondack Facility has been removed from the list. Other than as set forth in this paragraph, the Company has not been identified as a potentially responsible party under the federal Superfund law or 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. In consultation with NYSDEC, the Company has addressed certain issues 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. All underground storage tank removal activities have been completed by the Company to the satisfaction of NYSDEC. With regard to the former retort facility, which was operated by a third party unrelated to Rawlings before Rawlings began its operations at the Adirondack Facility, the Company plans to conduct certain environmental remedial activities pursuant to a Voluntary Agreement with the NYSDEC, and the Company is conducting final negotiations with NYSDEC regarding the details of the Voluntary Agreement. While the Company's share of the cost of investigating and remediating the contamination at the Adirondack Facility from the former retort operation described above cannot be finally determined until the contemplated remedial activities have been completed, overall based on the Company's accrual of $0.9 million as of August 31, 1997 it is unlikely that expenses beyond that amount will be incurred in connection with environmental investigation and remediation issues, including those regarding the retort facility. Based upon work that has been completed, the Company believes that the remaining investigatory, remediation and monitoring costs will be incurred over the next year. 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 the 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. Pursuant to an informal agreement with the NYSDEC, the Company is in the process of removing an on-site accumulation of wood shavings at the Adirondack Facility. The Company believes that the agreed upon removal may obviate any potentially applicable solid waste permit requirements. Litigation and Other Liabilities 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 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, 1997. 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 market price ranges, dividends declared and shareholders of record is incorporated by reference from page 25 of the Company's 1997 Annual Report to Stockholders. In November 1997 the Company sold warrants for 925,804 shares for approximately $3.07 per warrant. These warrants have a four year term, and enable the holder to purchase approximately 925,804 shares of the Company's common stock, an exercise price of $12.00 per share but are exercisable only if Rawlings' stock closes at or above $16.50 for twenty consecutive trading days during the four year term. The information regarding dividend restrictions is incorporated by reference from page 21 of the Company's 1997 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 21 of the Company's 1997 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 1997 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 24 of the Company's 1997 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, the 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 2.1 Asset Purchase Agreement, dated September 10, 1997 among Les Equipments Sportif Davtec, Inc. USA Skate Corporation, California Pro Sports, Inc., Rawlings Canada, Inc. and the Company, included as Exhibit 2.1 to the Company's Form 8-K filed on October 21, 1997 is hereby incorporated herein by reference. 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 included as exhibit 3.3 to the Company's Form 10-K for the fiscal year ended August 31, 1996, is hereby incorporated herein by reference. 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 Amendment of Rights Agreement dated November 21, 1997 between the Company, Boatmen's Trust Company and Chase Mellon Shareholder Services, Inc., included as Exhibit 4.2 to the Company's Form 8-K dated November 21, 1997 is hereby incorporated herein by reference. 4.3 Common Stock Purchase Warrant dated November 21, 1997 issued by the Company to Bull Run Corporation included as Exhibit 4.1 to the Company's Form 8-K dated November 21, 1997 is hereby incorporated herein by reference. 10.1 Amended and Restated Credit Agreement dated as of September 12, 1997 among the Company, The First National Bank of Chicago, as agent, and certain lenders named therein included as Exhibit 99.1 to the Company's Form 8-K filed on October 21, 1997 is hereby incorporated herein by reference. 10.2 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. 10.3 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. 10.4 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. *10.5 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. *10.6 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. 10.7 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. *10.8 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. *10.9 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. 10.10 Investment Purchase Agreement dated November 21, 1997 between the Company and Bull Run Corporation, included as Exhibit 99.1 to the Company's Form 8-K dated November 21, 1997 is hereby incorporated herein by reference. 10.11 Standstill Agreement dated November 21, 1997 between the Company and Bull Run Corporation, included as Exhibit 99.2 to the Company's Form 8-K dated November 21, 1997 is hereby incorporated herein by reference. 10.12 Registration Rights Agreement dated November 21, 1997 between the Company and Bull Run Corporation, included as Exhibit 99.3 to the Company's Form 8-K dated November 21, 1997 is hereby incorporated herein by reference. * Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to the Item 14(c) of this report. 13. Annual Report to Stockholders for the Fiscal Year Ended August 31, 1997. 21. Subsidiaries of the Company 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, 1997. 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 20, 1997 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/ Howard B. Keene November 20, 1997 Howard B. Keene Chief Executive Officer and President (Principal Executive Officer) By: /s/ Paul E. Martin November 20, 1997 Paul E. Martin Chief Financial Officer (Principal Financial Officer and Accounting Officer) By: /s/ Andrew N. Baur November 20, 1997 Andrew N. Baur Chairman of the Board and Director By: /s/ Linda L. Griggs November 20, 1997 Linda L. Griggs Director By: /s/ Michael McDonnell November 20, 1997 Michael McDonnell Director By: /s/ Michael J. Roarty November 20, 1997 Michael J. Roarty Director By: /s/ William C. Robinson November 20, 1997 William C. Robinson Director EX-13.1 2 EXHIBIT 13.1 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, 1997, 1996 and 1995, the eight months ended August 31, 1994 and each of the two years ended December 31, 1993. Eight Months Ended Years Ended (Amounts in Years Ended August 31, August 31, December 31, thousands except per 1997 1996 1995 1994 1993 1992 share date) INCOME STATEMENT DATE:/1/ Net revenues $147,600 $149,735 $144,141 $81,174 $139,615 $135,810 Operating income 11,880 11,666 11,598 2,935 7,138 12,400 Net income 5,470 5,272 4,584 1,335 3,922 7,112 Net income per share 0.71 0.69 0.60 N/A N/A N/A BALANCE SHEET DATA: Total assets $101,264 $102,252 $97,783 $93,752 $67,616 $71,097 Long-term debt, including current maturities 32,673 38,700 43,900 39,480 1,262 1,762 (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. NET REVENUES BY PRINCIPAL PRODUCT LINE (UNAUDITED) Eight Months Ended Years Ended (Amounts in Years Ended August 31, August 31, December 31, millions) 1997 1996 1995 1994 1993 1992 Equipment: $80.8 $88.3 $86.9 $44.3 $83.7 $83.5 Baseball 28.7 24.2 23.2 13.9 21.7 19.7 Basketball, football and volleyball 16.4 14.3 10.2 5.1 9.9 9.3 Apparel 7.5 7.7 9.5 7.6 9.5 9.2 International 6.5 6.9 6.2 5.6 4.5 4.3 Licensing 7.7 8.3 8.0 4.7 10.3 9.8 Net revenues 147.6 $149.7 $144.1 $81.2 $139.6 $135.8 FINANCIAL CONTENTS Financial Highlights Consolidated Statements of Cash Flows Management's Discussion and Notes to Consolidated Analysis of Results of Operations Financial Statements and Financial Condition Consolidated Statements of Income Report of Independent Public Accountants Consolidated Balance Sheets Stockholders Information Consolidated Statements of Stockholders' Equity MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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 1997 Annual Report on Form 10-K. YEAR ENDED AUGUST 31, 1997 COMPARED TO THE YEAR ENDED AUGUST 31, 1996 Results of Operations Net revenues for the year ended August 31, 1997 (1997) were $147,600,000, or 1.4 percent below net revenues of $149,735,000 for the year ended August 31, 1996 (1996). Lower net revenues from baseball-related products, partially offset by higher net revenues from basketball, football and volleyball equipment and apparel were primarily responsible for the decrease. Net revenues of baseball-related products decreased 8.5 percent resulting from a) lower sales of baseball gloves as a result of significant reductions at two major warehouse club chains who decided to stop selling baseball-related products and to a reduction in net revenues at a third major account, which entered the selling season with excess inventory and b) lower sales of baseballs primarily as a result of reduced net revenues from memorabilia baseballs. In early fiscal 1998, one of the warehouse clubs decided to re-enter the baseball category and has placed an order for shipment in the first quarter of fiscal 1998. Net revenues for basketball, football and volleyball equipment increased 18.6 percent as a result of higher net revenues related to major corporate promotions and increased back-to-school programs. Apparel net revenues increased 14.7 percent as a result of increases in both the custom and stock uniform business. The Company expects continued double digit growth in the apparel category. In September, 1997, the Company purchased the assets of the Victoriaville hockey business which has approximately $14.0 million in annual revenues. The purchase of the Victoriaville hockey business and continued improvement in the overall health of the sport of baseball indicates that double digit growth in net revenues is possible in 1998. Gross margin in 1997 was 30.8 percent, down 0.2 of a point from the 1996 gross margin of 31.0 percent. Increased net revenues of lower margin products including basketball, football and volleyball equipment and apparel were primarily responsible for the decrease. The Company achieved continued improvement in the gross margin on apparel products in 1997 and expects further improvement in 1998. Selling, general and administrative (SG&A) expenses for 1997 of $33,609,000 were $1,141,000, or 3.3 percent below SG&A expense of $34,750,000 in 1996. As a percent of net revenues, the SG&A expenses in 1997 were 22.8 percent compared to 23.2 percent in 1996. Lower royalties, commissions and advertising and promotion costs were primarily responsible for the decrease. Interest expense of $3,115,000 in 1997 decreased 14.8 percent from $3,656,000 in 1996 as a result of lower average borrowings and average interest rates. The effective tax rate of 37.0 percent in 1997 was 4.9 points higher than the effective tax rate of 32.1 percent in 1996. The increase in the effective tax rate is the result of 1996 including an adjustment for the lower foreign effective tax rates on a portion of the Company's income generated and indefinitely reinvested in Costa Rica. The Company expects the 1998 effective tax rate, based on its current mix of domestic and foreign earnings, to be between 37.0 percent and 38.0 percent. YEAR ENDED AUGUST 31, 1996 COMPARED TO THE YEAR ENDED AUGUST 31, 1995 Results of Operations Net revenues for 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 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 resulting from reduced popularity of baseball in Canada. In addition, overall retail sales in Canada were slow as a result of less favorable economic conditions than the United States. The other international growth was primarily concentrated in Latin America. 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. 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 he 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. Seasonality Net revenues of baseball equipment and team uniforms are highly seasonal. Customers generally place orders with the Company for baseball-related products beginning in August for shipment beginning in November (pre-season orders). These pre- season orders from customers historically represented approximately 65 percent to 75 percent of the customers' anticipated needs for the entire baseball season. The amount of these pre-season orders generally determine the Company's net revenues and profitability between November 1 and March 31. The Company then receives additional orders (fill-in orders) which depend upon customers' actual sales of products during the baseball season (sell-through). Fill-in orders are typically received by the Company between February and May. These orders generally represent approximately 25 to 35 percent of the Company's sales of baseball-related products during a particular season. Pre-season orders for certain baseball-related products from certain customers are not required to be paid until early spring. These extended terms increase the risk of collectibility of accounts receivable. An increasing number of customers are on automatic replenishment systems therefore more orders are received on a ship-at-once basis. This change has resulted in shipments to the customer closer to the time the products are actually sold. This trend has and may continue to have the effect of shifting the seasonality and quarterly results of the Company with higher inventory and debt levels required to meet orders for immediate delivery. The sell-through of baseball- related products also affects the amount of inventory held by customers at the and of the season which is carried over by the customer for sale in the next baseball season. Customers typically adjust their pre-season orders for the next baseball season to account for the level of inventory carried over from the preceding baseball season. Football equipment and team uniforms are both shipped by the Company and sold by retailers primarily in the period between March 1 and September 30. Hockey equipment and uniforms are shipped by the Company primarily in the period from May 1 to October 31. Basketballs and team uniforms generally are shipped and sold throughout the year. Because the Company's sales of baseball-related products exceed those of its other products, Rawlings' business is seasonal, with its highest net revenues and profitability recognized between November 1 and April 30. Interest Rate Management Activates 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 swaps as described in Note 8 to the financial statements. 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 Dolgevile, New York with respect to the release of wood pitch into surrounding soil and surface water. The final cost of investigating and remediating the contamination at the Adirondack facility described above cannot be determined until the remediation is complete. However, based on current estimates the Company believes the $893,000 accrued at August 31, 1997 is adequate. The Company further 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. Liquidity and Capital Resources The Company's primary sources of liquidity are cash provided by operating activities and the $90,000,000 amended and restated credit agreement with a bank group more fully described in Note 9 to the financial statements. 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, 1997 Operating cash flows of $8,551,000 were primarily the result of net income adjusted for non cash charges and lower inventory levels partially offset by lower accounts payable and higher accounts receivable. Operating cash flows were $3,321,000 higher than 1996 primarily as a result of lower inventory levels and a smaller increase in accounts receivable partially offset by a reduction in accounts payable in 1997 compared to an increased in 1996. Investing activities used cash of $2,844,000 primarily for capital expenditures for normal property and plant improvements, the upgrading of certain plants to improve production capacity and efficiency and to upgrade the Company's systems. With the ongoing upgrade of the Company's systems and other planned expenditures for improved production efficiencies the Company expects capital expenditures of $3,000,000 to $3,500,000 in 1998. Financing activities used cash of $5,764,000 which includes a net debt repayment of $6,027,000 partially offset by issuance of common stock of $263,000. 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, 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 primary 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. 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. 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. 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. CONSOLIDATED STATEMENTS OF INCOME Years Ended August 31, (Amounts in thousands, except per share date) 1997 1996 1995 Net revenues $147,600 $149,735 $144,141 Cost of goods sold 102,111 103,319 99,099 Gross profit 45,489 46,416 45,042 Selling, general and administrative expenses 33,609 34,750 33,444 Operating income 11,880 11,666 11,598 Interest expense 3,115 3,656 3,773 Other expense, net 83 250 285 Income before income taxes 8,682 7,760 7,540 Provision for income taxes 3,212 2,488 2,956 Net income $ 5,470 $ 5,272 $ 4,584 Net income per share $ 0.71 $ 0.69 $ 0.60 Average number of common shares outstanding 7,712 7,680 7,652 The accompanying notes are an integral part of these consolidated statements. CONSOLIDATED BALANCE SHEETS August 31, (Amounts in thousands, excepts share and per share data) 1997 1996 Assets Current assets: Cash and cash equivalents $ 732 $ 789 Accounts receivable, net of allowance of $1,627 and $1,498 respectively 32,968 30,090 Inventories 29,781 32,415 Prepaid expenses 935 1,472 Deferred income taxes 4,083 3,162 Total current assets 68,499 69,928 Property, plant and equipment, net 9,802 7,860 Other assets 760 698 Deferred income taxes 22,203 25,766 Total assets $101,264 $102,252 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 59 $ --- Accounts payable 7,856 9,119 Accrued liabilities 9,901 8,461 Total current liabilities 17,816 17,580 Long-term debt, less current maturities 32,614 38,700 Other long-term liabilities 10,637 11,508 Total liabilities 61,067 67,788 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, 7,725,814 and 7,697,527 shares issued and outstanding, respectively 77 77 Additional paid-in capital 26,083 25,820 Retained earnings 14,037 8,567 Stockholders' equity 40,197 34,464 Total liabilities and stockholders' equity $101,264 $102,252 The accompanying notes are an integral part of these consolidated balance sheets. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Common Stock (Amounts in thousands, Additional Retained except share Paid-in Earnings data) Shares Amount Capital (Deficit) Total 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 Net income -- -- -- 5,470 5,470 Issuance of common stock 28,287 -- 263 -- 263 BALANCE, AUGUST 31, 1997 7,725,814 $77 $26,083 $14,037 $40,197 The accompanying notes are an integral part of these consolidated statements. CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended August 31, (Amounts in thousands) 1997 1996 1995 Cash flows from operating activities: Net income $5,470 $5,272 $4,584 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,220 1,123 1,008 Gain on sale of equipment (150) -- -- Deferred taxes 2,642 1,857 2,418 Changes in operating assets and liabilities: Accounts receivable, net (2,878) (5,927) (871) Inventories 2,634 (1,069) (3,934) Prepaid expenses 537 135 (397) Other assets (242) 60 (348) Accounts payable (1,263) 2,731 1,097 Accrued liabilities and other 581 1,048 304 Net cash provided by operating activities 8,551 5,230 3,861 Cash flows from investing activities: Capital expenditures (2,994) (1,193) (2,119) Proceeds from sale of equipment 150 -- -- Net cash used in investing activities (2,844) (1,193) (2,119) Cash flows from financing activities: Net (repayments) borrowings of long-term debt (6,027) (5,200) 4,420 Issuance of common stock 263 340 82 Payment from (to) former parent related to purchase price settlement -- 275 (6,456) Net cash used in financing activities (5,764) (4,585) (1,954) Net decrease in cash and cash equivalents (57) (584) (212) Cash and cash equivalents, beginning of year 789 1,337 1,549 Cash and cash equivalents, end of year $ 732 $ 789 $ 1,337 Supplemental disclosures of cash flow information: Cash paid during the year for; Interest $3,159 $3,548 $3,899 Income taxes 383 247 459 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 Principles of Consolidation The consolidated financial statements include the accounts of Rawlings Sporting Goods Company, Inc. and all of its subsidiaries (Rawlings or the Company). All significant intercompany transactions have been eliminated. Cash and Cash Equivalents Cash equivalents consist of short-term, highly liquid investments with a 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 . . . . . . . . . . . 5-12 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 in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS No. 109). Financial Instruments The fair value of the Company's financial instruments approximate their carrying amounts. Fair value for all financial instruments other than long-term debt, for which no quoted market prices exist, were based on appropriate estimates. The value of the Company's long-term debt is estimated based on market prices for similar issues or on the current rates offered to the Company for debt of the same remaining maturities. Net Income Per Share Net income per share is based on the weighted average number of common shares outstanding during each year. 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 require the use of certain estimates by management, in determining the Company's assets, liabilities, revenues and expenses. Resolution of certain matters could differ significantly from the resolution that is currently expected. 2. Inventories Inventories consist of the following: August 31, 1997 1996 Raw materials $ 5,571 $ 5,624 Work in process 2,027 1,899 Finished goods 22,183 24,892 Inventories $29,781 $32,415 3. Property, Plant and Equipment, Net Property, plant and equipment consists of the following: August 31, 1997 1996 Buildings and improvements $ 5,926 $ 5,412 Machinery and equipment 14,350 12,709 Other 2,697 2,348 Total property, plant and equipment 22,973 20,469 Less - Accumulated depreciation (13,171) (12,609) Property, plant and equipment, net $ 9,802 $ 7,860 4. Supplemental Income Statement Information Set forth below is a comparative summary of certain net revenue and expense items: 1997 1996 1995 Licensing revenues $6,531 $6,880 $6,169 Operating lease expenses 2,300 2,426 2,172 Royalty and licensing expenses 5,028 5,536 4,986 Research and development expenses 54 238 540 5. Foreign Currency Transactions For 1997, 1996 and 1995, the foreign currency transaction gains (losses) included in determining net income were $(25), $(12) and $91, respectively. 6. Income Taxes The income tax provision (benefit) is as follows: 1997 1996 1995 Current: Federal $ 472 $ 564 $ 557 State and other 98 67 (19) Total current 570 631 538 Deferred: Federal 2,464 1,658 2,082 State and other 178 199 336 Total deferred 2,642 1,857 2,418 Total income tax provision $3,212 $2,488 $2,956 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: 1997 1996 1995 Amount % Amount % Amount % Expected provisions $3,039 35.0 $2,716 35.0 $2,369 35.0 at the statutory rate State and other taxes, net of federal tax benefit 365 4.2 326 4.2 317 4.2 Lower tax rates on foreign income (118) (1.4) (554) (7.1) -- -- Other (74) (0.8) -- -- -- -- Total income tax provision $3,212 37.0 $2,488 32.1 $2,956 39.2 The significant components of deferred taxes which are included in the accompanying balance sheets are as follows: 1997 1996 Deferred Deferred Deferred Deferred Tax Tax Tax Tax Assets Liabilities Assets Liabilities Intangible assets $23,837 $---- $25,348 $---- Operating loss carryforwards 128 ---- 2,141 ---- Foreign tax credits 1,042 ---- 748 ---- Allowance for doubtful accounts 647 ---- 596 --- Environmental reserve 346 ---- 391 --- Inventory 609 ---- 388 --- Other accruals 904 ---- -- --- Other -- ---- -- 684 Total $27,513 $1,227 $29,612 $ 684 The Company believes a valuation allowance against deferred income tax assets as of August 31, 1997 is not necessary. The company's net operating loss carryforwards expire in 2009 and 2010. Income taxes have not been provided on the undistributed income (approximately $1,700) of a foreign subsidiary which the Company does not intend to be remitted to the U.S. 7. Accrued Liabilities Accrued liabilities consist of the following: August 31, 1997 1996 Salary, benefits and other taxes $2,976 $3,487 Royalties 2,187 441 Payable to former parent 1,346 1,342 Environmental and other 3,392 3,191 Accrued liabilities $9,901 $8,461 8. Long-Term Debt Long-term debt consists of the following: August 31, 1997 1996 Credit agreement with banks due 1999, average interest rate of 6.78% and 6.86%, respectively $32,350 $38,700 Obligation under capital lease, average interest rate of 4.90% 323 --- Total debt 32,673 38,700 Less current maturities of long-term debt (59) --- Total long-term debt $32,614 $38,700 In 1997, the Company maintained a $72,000 variable rate unsecured credit agreement with a bank group. In September 1997, the Company amended and restated the unsecured credit agreement with a bank group which, among other matters, increased the facility to $90,000 and extended the maturity date to September 1, 2002. The amended and restated credit agreement, among other matters, requires the Company to meet certain financial covenants including a minimum fixed charge coverage, a required ratio of maximum total debt to total capitalization, a 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. The available borrowings under the amended credit agreement decline $4,000, $5,000, $6,000 and $7,000 on September 1, 1998, 1999, 2000 and 2001, respectively. As of August 31, 1997 the Company had outstanding letters of credit of $5,375 and available borrowing capacity of $34,275 under the credit agreement with banks. 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 6.5%. In October 1997, 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 October 1999 on $30,000 and pays a fixed rate of 6.75%. These transactions effectively convert a portion of the Company's debt from a floating rate to a fixed rate. The Company uses interest rate swaps, with the objective of reducing exposure to increases in short-term interest rates, by fixing the interest rate on a portion of its debt for a period of time. The interest differential, to be paid or received on an interest rate swap, is recognized as an adjustment to interest expense as the differential occurs. 9. Other Long-Term Liabilities In July 1994, Figgie International, Inc. (the former parent) transferred the net assets of the Rawlings Business to the Company. The assets and liabilities transferred to Rawlings were 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. 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 not expected to be paid in the next year is included in other long-term liabilities. 10. 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 $242, $299 and $183 in 1997, 1996 and 1995, respectively. Multi-Employer Pension Plans Certain union employees participate in multi-employer defined benefit pension plans. Contributions to the plans were $1,017, $956 and $839 in 1997, 1996 and 1995, respectively. 11. 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. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards in 1997 and 1996 consistent with the provisions of this statement, the Company's net income and net income per share would have been as follows (in thousands, except net income per share): 1997 1996 Net income $4,910 $4,659 Net income per share $ 0.64 $ 0.61 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1997 and 1996; dividend yield of 0%, expected volatility of 54.0%, risk-free interest rate of 6.4% and 6.1% in 1997 and 1996, respectively and expected life based on exercise periods of six years. Option activity is as follows: 1997 1996 1995 Outstanding at beginning of period 483,185 346,610 313,266 Granted 160,378 192,125 84,886 Exercised (1,000) -- -- Cancelled (11,426) (55,550) (51,542) Outstanding at end of period 631,137 483,185 346,610 Shares exercisable 327,541 175,077 87,237 Price of stock options: Granted $8.31-$12.13 $7.88-$9.94 $9.63-$13.88 Exercised $8.00 -- -- Cancelled $9.00-$9.75 $9.00-$13.88 $12.00 Outstanding $7.88-$13.88 $7.88-$13.88 $9.63-$13.88 At August 31, 1997, 42,863 shares of Rawlings common stock were available for future awards under the plans. 12. 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 and $390 in 1996 and 1995, respectively. 13. Commitments and Contingencies Future minimum payments under noncancelable leases, royalty and licensing agreements as of August 31, 1997 are as follows: Royalty and Operating Licensing Leases Agreements Fiscal 1998 $1,368 $3,855 Fiscal 1999 878 2,979 Fiscal 2000 679 2,511 Fiscal 2001 251 2,482 Fiscal 2002 69 2,317 Thereafter -- 300 Total minimum lease payments $3,245 $14,444 One customer's purchases are 12%, 11% and 10% of net revenues of Rawlings for 1997, 1996 and 1995, 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. Rawlings believes that the environmental costs accrued as of August 31, 1997 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. Rawlings is periodically subjected to product liability claims and proceedings involving its patents and other legal proceedings; such proceedings have not had a material adverse effect on Rawlings. In the opinion of management, ultimate liabilities resulting from pending environmental matters and other legal proceedings will not have a material adverse effect on the financial condition or results of operations of Rawlings. 14. Subsequent Event In September 1997, the Company acquired the net assets of the Victoriaville hockey business for $14.5 million in cash and the assumption of approximately $2.5 million in current liabilities. The final purchase price is subject to a working capital adjustment based on a formula outlined in the asset purchase agreement. The acquisition will be accounted for under the purchase method. 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) as of August 31, 1997 and 1996 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended August 31, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP St. Louis, Missouri October 6, 1997 EX-21 3 EXHIBIT 21 RAWLINGS SPORTING GOODS COMPANY, INC. Rawlings Sporting Goods Company, Inc., a Delaware corporation (the "Company") is the parent. The subsidiaries of the Company, each of which is wholly-owned by the Company, are as follows: Jurisdiction of Incorporation or Name Organization Rawlings de Costa Rica Costa Rica Rawlings Sporting Goods Company of Missouri Missouri Rawlings Canada, Inc. Nova Scotia EX-23 4 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, 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 20, 1997 EX-27 5
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FORM 10-K FOR THE FISCAL YEAR ENDED AUGUST 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS AUG-31-1997 AUG-31-1997 732 0 34,595 1,627 29,781 68,499 22,973 13,171 101,264 17,816 43,251 0 0 77 40,120 101,264 147,600 147,600 102,111 102,111 33,609 0 3,115 8,682 3,212 5,470 0 0 0 5,470 .71 .71
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