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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended
September 30, 2000 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934. For the transition period from
to . ------
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Commission File No. 015767
THE SPORTSMAN'S GUIDE, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1293081
(State or other jurisdiction (I.R.S. Employer I.D. Number)
of incorporation or organization)
411 FARWELL AVE., SO. ST. PAUL, MINNESOTA 55075
(Address of principal executive offices)
(651) 451-3030
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
As of November 15, 2000, there were 4,748,810 shares of the registrant's Common
Stock outstanding.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE SPORTSMAN'S GUIDE, INC.
BALANCE SHEETS
(In thousands of dollars)
ASSETS September 30, December 31,
2000 1999
---- ----
(unaudited)
CURRENT ASSETS
Accounts receivable - net $ 1,976 $ 4,944
Inventory 35,026 37,403
Promotional material 5,265 4,435
Prepaid expenses 3,041 759
--------- ---------
Total current assets 45,308 47,541
PROPERTY AND EQUIPMENT - NET 5,300 5,764
OTHER ASSETS 191 191
--------- ---------
Total assets $ 50,799 $ 53,496
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Checks written in excess of bank balances $ 1,632 $ 2,425
Note payable - bank 17,971 12,598
Current maturities of long-term debt 30 30
Accounts payable 13,364 16,068
Accrued expenses 1,213 1,809
Customer deposits and other liabilities 1,890 3,342
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Total current liabilities 36,100 36,272
LONG-TERM LIABILITIES
Long-term debt 2 40
Deferred income taxes 170 170
--------- --------
Total liabilities 36,272 36,482
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Common Stock-$.01 par value; 36,800,000 shares
authorized; 4,748,810 and 4,747,810 shares issued
and outstanding at September 30, 2000 and
December 31, 1999
47 47
Additional paid-in capital 11,565 11,562
Retained earnings 2,915 5,405
--------- --------
Total shareholders' equity 14,527 17,014
--------- --------
Total liabilities & shareholders' equity $ 50,799 $ 53,496
========= ========
See accompanying condensed notes to financial statements
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THE SPORTSMAN'S GUIDE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months and Nine Months Ended
September 30, 2000 and 1999
(In thousands, except per share data)
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----
Sales $ 29,640 $ 40,019 $ 95,930 $ 122,373
Cost of sales 19,639 26,850 63,909 80,437
-------- -------- -------- ---------
Gross profit 10,001 13,169 32,021 41,936
Selling, general and administrative
expenses 10,677 14,547 34,617 42,158
-------- -------- -------- ---------
Loss from operations (676) (1,378) (2,596) (222)
Interest expense (427) (376) (1,253) (690)
Miscellaneous income, net 5 4 22 19
-------- -------- -------- ---------
Loss before income taxes (1,098) (1,750) (3,827) (893)
Income tax benefit (406) (604) (1,337) (308)
--------- -------- -------- ---------
Net loss $ (692) $ (1,146) $ (2,490) $ (585)
========= ======== ========= =========
Net loss per share:
Basic $ (.15) $ (.24) $ (.52) $ (.12)
========= ========= ========= =========
Diluted $ (.15) $ (.24) $ (.52) $ (.12)
========= ========= ========= =========
Weighted average common and common
equivalent shares outstanding:
Basic 4,749 4,748 4,749 4,748
========= ========= ========= =========
Diluted 4,749 4,748 4,749 4,748
========= ========= ========= =========
See accompanying condensed notes to financial statements
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THE SPORTSMAN'S GUIDE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended
September 30, 2000 and 1999
(In thousands of dollars)
2000 1999
---- ----
Cash flows from operating activities:
Net loss $ (2,490) $ (585)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,608 1,336
Other (13) (12)
Changes in assets and liabilities:
Accounts receivable 2,968 143
Inventory 2,377 (19,748)
Promotional material (830) (1,733)
Prepaid expenses (2,282) (528)
Checks written in excess of bank balances (793) 2,611
Accounts payable (2,704) 2,738
Accrued expenses (596) (206)
Customer deposits and other liabilities (1,452) (50)
-------- --------
Cash flows used in operating activities (4,207) (16,034)
Cash flows from investing activities:
Purchases of property and equipment (1,144) (2,306)
-------- --------
Cash flows used in investing activities (1,144) (2,306)
Cash flows from financing activities:
Net proceeds from revolving credit line 5,373 16,055
Payments on long-term debt (25) (25)
Proceeds from exercise of stock options
and warrants 3 7
-------- --------
Cash flows provided by financing activities 5,351 16,037
-------- --------
Decrease in cash and cash equivalents -- (2,303)
Cash and cash equivalents at beginning of the period -- 2,303
-------- --------
Cash and cash equivalents at end of the period $ -- $ --
======== ========
Supplemental disclosure of cash flow information
Cash paid during the periods for:
Interest $ 1,222 $ 544
Income taxes $ 71 $ 161
See accompanying condensed notes to financial statements
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THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Note 1: Basis of Presentation
The accompanying financial statements are unaudited and reflect all
adjustments which are normal and recurring in nature, and which, in
the opinion of management, are necessary for a fair presentation
thereof. Reclassifications have been made to prior year financial
information wherever necessary to conform to the current year
presentation. Results of operations for the interim periods are not
necessarily indicative of full-year results.
In response to the Financial Accounting Standards Board's Emerging
Task Force Consensus Opinion Issue 00-10 "Accounting for Shipping and
Handling Fees," the Company reclassified shipping and handling
revenues to Sales from Cost of Sales in the third quarter. For the
three months and nine months ended September 30, 2000, $4.1 million
and $13.8 million of shipping and handling revenues were reclassified
to Sales. For the three and nine months ended September 30, 1999, $5.3
million and $16.7 million of shipping and handling revenues were
reclassified to Sales.
The Company's fiscal quarter ends on the Sunday nearest September 30
for 2000 and 1999, but for clarity of presentation, all periods are
described as if the three and nine month periods end September 30.
Fiscal third quarters 2000 and 1999 consisted of thirteen weeks. The
three fiscal quarters 2000 and 1999 consisted of thirty-nine weeks.
Note 2: Net Loss Per Share
The Company's basic net loss per share amounts have been computed by
dividing net loss by the weighted average number of outstanding common
shares.
For the three months and nine months ended September 30, 2000, no
common share equivalents were included in the computation of diluted
net loss per share. If the Company would have reported net income in
the three months ended September 30, 2000, no common share equivalents
would have been included in the computation of diluted net earnings
per share. If the Company would have reported net income in the nine
months ended September 30, 2000, 16,610 common share equivalents would
have been included in the computation of diluted net earnings per
share.
For the three months and nine months ended September 30, 1999, no
common share equivalents were included in the computation of diluted
net loss per share. If the Company would have reported net income in
the three months and nine months ended September 30, 1999, the common
share equivalents that would have been included in the computation of
diluted net earnings per share were 74,230 and 86,290.
Options and warrants to purchase 694,669 and 502,039 shares of common
stock with a weighted average exercise price of $5.79 and $6.83 were
outstanding during the three months ended September 30, 2000 and 1999,
but were not included in the computation of diluted net earnings per
share because to do so would have been anti-dilutive.
Options and warrants to purchase 640,232 and 460,996 shares of common
stock with a weighted average exercise price of $6.11 and $6.92 were
outstanding
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during the nine months ended September 30, 2000 and 1999, but were not
included in the computation of diluted net earnings per share because
to do so would have been anti-dilutive.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three months and nine months ended September 30, 2000 compared to three months
and nine months ended September 30, 1999
SALES. Sales for the three months and nine months ended September 30, 2000 of
$29.6 million and $95.9 million were $10.4 million or 26.0% lower and $26.5
million or 21.7% lower than sales of $40.0 million and $122.4 million during
the same periods last year. The decrease in sales for the third quarter and
year to date were primarily due to a planned decrease in catalog circulation
combined with lower than anticipated customer response rates and average order
size. The Company's plan for 2000 was to improve profitability by reducing the
number of catalog mailings through the elimination of unprofitable specialty
catalog editions and monthly main catalog mailings to unprofitable segments of
the house customer file. This strategy will yield lower sales compared to the
prior year. The Company expected sales to decrease at a lower rate than
advertising costs, producing a higher level of profitability through improved
customer response rates.
The catalog circulation plan for the third quarter and the first nine months
was down approximately 38% and 27%, respectively, compared to the same periods
last year. With the elimination of unprofitable catalog editions and customer
segments, overall customer response rates were expected to improve over the
prior year. Actual customer response rates in the third quarter and the first
nine months were much lower than anticipated causing a significant shortfall
to the projected sales level. Management believes that customer response rates
during the first nine months were negatively impacted by late and undelivered
catalogs by the United States Postal Service and unseasonably warm weather.
At the end of the second quarter of 2000, the Company took additional actions
to return the catalog to profitability. Certain organizational changes,
largely reduction in headcount, were made which will reduce expenses by over
$1.0 million on an annual basis. In addition, the Company's strategy was
changed to refocus on the product/value relationship, increase catalog product
density, enhance the value proposition and increase the membership of the
Company's buyers' club. The majority of these changes will be implemented in
the fourth quarter of 2000.
Internet sales for the third quarter and the first nine months were
approximately 16% and 14.5% of total sales, compared to 9.5% and 6.5%,
respectively, during the same period last year. The Company defines Internet
sales as those sales that are derived from our web sites and catalog orders
that are processed online on our web sites.
The Company mailed 11 catalog editions, including eight specialty editions,
during the three months ended September 30, 2000, compared to 15 editions,
including 12 specialty editions, during the same period last year. Year to
date, the Company has mailed 31 catalog editions, including 22 specialty
editions, compared to 39 editions, including 30 specialty editions, during the
same period last year.
Gross returns and allowances for the three months and nine months ended
September 30, 2000 were $2.2 million or 6.8% of gross sales and $8.1 million
or 7.7% of gross
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sales compared to $3.1 million or 7.2% of gross sales and $10.6 million or
8.0% of gross sales during the same periods last year.
GROSS PROFIT. Gross profit for the three months and nine months ended
September 30, 2000 was $10.0 million or 33.7% of sales and $32.0 million or
33.4% of sales compared to $13.2 million or 32.9% of sales and $41.9 million
or 34.3% of sales during the same periods last year.
The increase in the gross profit percentage for the third quarter of 2000 was
largely due to higher product and shipping & handling margins. In the third
quarter, product margins improved over the prior year primarily as a result of
lower inventory related costs due to lower inventory levels and the number of
stockkeeping units. The improvement in shipping & handling margins in the
third quarter of 2000 was largely due to lower levels of backorders compared
to the same period a year ago.
The decrease in the gross profit percentage for nine months ended September
30, 2000 was primarily due to higher distribution and merchandising costs,
especially in the first and second quarters, as a result of lower sales
volume.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months and nine months ended September
30, 2000 were $10.7 million or 36.0% of sales and $34.6 million or 36.1% of
sales, compared to $14.5 million or 36.4% of sales and $42.2 million or 34.5%
of sales for the same periods last year.
Selling, general and administrative expenses as a percentage of sales for the
third quarter were virtually unchanged from the same period one year ago. For
the third quarter of 2000, general and administrative expenses as a percentage
of sales were higher compared to last year due primarily to lower sales
volume. Selling expenses for the third quarter were lower as a percentage of
sales compared to last year primarily as a result of improved customer
response rates from eliminating unprofitable catalog editions and segments of
the customer file. Although customer response rates for the third quarter
improved over the prior year, overall response rates were not as high as
anticipated. Selling, general and administrative expenses as a percentage of
sales for the first nine months of 2000 were higher compared to last year due
primarily to lower sales volume.
Total catalog circulation during the third quarter and the first nine months
of 2000 was 12.2 million and 40.2 million catalogs compared to 19.6 million
and 55.0 million catalogs during the same periods last year. Advertising
expense for the third quarter and the first nine months of 2000 was $6.0
million or 20.1% of sales and $19.8 million or 20.7% of sales compared to $8.7
million or 21.8% of sales and $25.2 million or 20.6% of sales for the same
periods last year.
LOSS FROM OPERATIONS. Loss from operations for the three months and nine
months ended September 30, 2000 was ($676,000) and ($2.6) million compared to
($1.4) million and ($222,000) for the same periods last year.
INTEREST EXPENSE. Interest expense for the three months and nine months ended
September 30, 2000 was $427,000 and $1.3 million compared to $376,000 and
$690,000 for the same periods last year. The increase in interest expense for
the quarter and year to date was primarily due to higher levels of borrowing
as a result of the net losses incurred to date.
INCOME TAX BENEFIT. The income tax benefit for the three and nine month
periods ended September 30, 2000 and 1999 reflects the Company's anticipated
effective tax
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rate for the years ended December 31, 2000 and 1999, applied to the year to
date net loss.
NET LOSS. Net loss for the three months and nine months ended September 30,
2000 was ($692,000) and ($2.5) million compared to ($1.1) million and
($585,000) for the same periods last year.
SEASONALITY AND QUARTERLY RESULTS
The majority of the Company's sales historically occur during the second half
of the year. The seasonal nature of the Company's business is due to the
catalog's focus on outdoor merchandise and related accessories for the fall,
as well as winter apparel and gifts for the holiday season. The Company
expects this seasonality will continue in the future. In anticipation of
increased sales activity during the fourth fiscal quarter, the Company incurs
significant additional expenses for hiring employees and building inventory
levels.
The following table sets forth certain unaudited financial information for
each of the quarters shown.
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2000
Sales $35,946 $30,344 $29,640
Gross profit 11,591 10,429 10,001
Loss from operations (1,031) (889) (676)
Net loss (922) (876) (692)
1999
Sales $44,555 $37,799 $40,019 $65,700
Gross profit 15,314 13,453 13,169 22,948
Earnings (loss) from operations 765 391 (1,378) 1,348
Net earnings (loss) 428 133 (1,146) 597
LIQUIDITY AND CAPITAL RESOURCES
The Company meets its operating cash requirements through funds generated from
operations and borrowings under its revolving line of credit.
WORKING CAPITAL. The Company had working capital of $9.2 million as of September
30, 2000, compared to $11.3 million as of December 31, 1999. The decrease of
$2.1 million was primarily due to year to date net losses. The Company purchases
large quantities of manufacturers' close-outs and other individual product items
on an opportunistic or when-available basis, particularly in the case of
footwear and apparel. The seasonal nature of the merchandise or the time of
acquisition may require that it be held for several months before being offered
in a catalog. This can result in increased inventory levels thereby increasing
the Company's working capital requirements and related carrying costs.
The Company offers its customers an installment credit plan with no finance
fees, known as the "G.O. Painless 4-Pay Plan". Each of the four consecutive
monthly installments is billed directly to customers' credit cards. The Company
had installment receivables of $1.1 million at September 30, 2000 compared to
$4.1 million at December 31, 1999. The installment plan will continue to require
the allocation of working capital which the Company expects to fund from
operations and availability under its revolving credit facility.
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In December 1999, the Company entered into a Credit and Security Agreement with
Wells Fargo Bank Minnesota, National Association, f/k/a Norwest Bank Minnesota,
National Association, providing a revolving line of credit up to $25.0 million,
subject to an adequate borrowing base, expiring in December 2002. The revolving
line of credit is for working capital and letters of credit. Letters of credit
may not exceed $10.0 million at any one time. Funding under the credit facility
consists of a collateral base of 55% of eligible inventory plus 80% of eligible
trade accounts receivable. Borrowings bear interest at the bank's prime rate.
The revolving line of credit is collateralized by substantially all of the
assets of the Company.
All borrowings are subject to various covenants. The most restrictive covenants
include a limit on monthly pretax loss, quarterly measurement of year-to-date
earnings (loss), maximum debt to net worth ratio, maximum days inventory levels
(as defined) and maximum annual spending level for capital assets. The agreement
also prohibits the payment of dividends to shareholders. Effective August 2,
2000, the Credit and Security Agreement was amended to provide an additional
$2.0 million in availability over the borrowing base until November 15, 2000.
Borrowings under the seasonal over-advance component bear interest at the bank's
prime rate plus 2% to 4%. As of September 30, 2000, the Company was in
compliance with all applicable covenants under the revolving line of credit
agreement. As of September 30, 2000, the Company had borrowed $18.0 million
against the revolving credit line compared to $12.6 million at December 31,
1999. Outstanding letters of credit were $471,000 at September 30, 2000 compared
to $1.5 million at December 31, 1999.
OPERATING ACTIVITIES. Cash flows used in operating activities for the nine
months ended September 30, 2000 were $4.2 million compared to $16.0 million for
the same period last year. The decrease in cash flows used in operating
activities was primarily the result of the decrease in the inventory purchases.
INVESTING ACTIVITIES. Cash flows used in investing activities for the nine
months ended September 30, 2000 were $1.1 million compared to $2.3 million for
the same period last year. The Company plans to expend approximately $1.4
million for capital additions during 2000.
FINANCING ACTIVITIES. Cash flows provided by financing activities during the
nine months ended September 30, 2000 were $5.4 million compared to $16.0 million
during the same period last year. The change in cash flows provided by financing
activities during the nine months ended September 30, 2000 compared to the prior
year was largely due to the lower level of inventory purchases.
The Company believes that cash flow from operations and borrowing capacity under
its revolving credit facility will be sufficient to fund operations for the next
twelve months.
FORWARD-LOOKING STATEMENTS
This report may contain forward-looking statements within the meaning of the
federal securities laws. Actual results could differ materially from those
projected in the forward-looking statements due to a number of factors,
including general economic conditions, a changing market environment for the
Company's products and the market acceptance of the Company's catalogs and
Internet offerings as well as the factors set forth in Exhibit 99 "Risk Factors"
to the Company's Annual Report on Form 10-K for the year ended December 31, 1999
filed with the Securities and Exchange Commission.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Employment Agreement between the Company and Gary Olen dated
July 1, 2000
27. Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
September 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE SPORTSMAN'S GUIDE, INC.
Date: November 15, 2000 /s/Charles B. Lingen
--------------------
Charles B. Lingen
Executive Vice President of Finance
and Administration/CFO
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