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, 2004 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the transition period from _______ to ________.
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
As of November 10, 2004, there were 4,706,373 shares of the registrant's Common
Stock outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE SPORTSMAN'S GUIDE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands of dollars, except share amounts)
September 30, December 31,
2004 2003
-------- -------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 715 $32,054
Accounts receivable - net 2,725 3,034
Inventory 38,439 18,874
Promotional material 3,999 2,565
Prepaid expenses and other 2,650 1,871
Income taxes receivable 1,505 --
Deferred income taxes 951 3,176
-------- -------
Total current assets 50,984 61,574
PROPERTY AND EQUIPMENT - NET 2,691 2,248
OTHER ASSETS
Goodwill 17,219 --
Trade and domain name 10,200 --
Other 714 --
-------- -------
Total other assets 28,133 --
-------- -------
Total assets $ 81,808 $63,822
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable and bank overdrafts $ 10,216 $ --
Accounts payable 20,657 18,950
Accrued expenses 4,463 5,891
Income taxes payable 368 3,107
Deferred revenue 5,141 4,623
Returns reserve 2,194 2,240
Customer deposits and other liabilities 2,663 2,016
-------- -------
Total current liabilities 45,702 36,827
LONG-TERM LIABILITIES
Note payable - bank 10,000 --
Other 267 187
-------- -------
Total long-term liabilities 10,267 187
-------- -------
Total liabilities 55,969 37,014
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' EQUITY
Common Stock-$.01 par value; 36,800,000 shares authorized;
4,695,373 shares issued and outstanding at September 30,
2004 and 4,826,321 shares issued and outstanding at
December 31, 2003 47 48
Additional paid-in capital 7,626 11,616
Accumulated comprehensive loss (11) --
Retained earnings 18,177 15,144
-------- -------
Total shareholders' equity 25,839 26,808
-------- -------
Total liabilities & shareholders' equity $ 81,808 $63,822
======== =======
See accompanying notes to consolidated financial statements
2
THE SPORTSMAN'S GUIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
For the Three Months and Nine Months Ended
September 30, 2004 and 2003
(In thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Sales $ 56,554 $ 41,213 $ 140,009 $ 123,003
Cost of sales 40,139 28,672 97,329 84,321
---------- ---------- ---------- ----------
Gross profit 16,415 12,541 42,680 38,682
Selling, general and administrative expenses 14,564 11,424 37,839 35,056
---------- ---------- ---------- ----------
Earnings from operations 1,851 1,117 4,841 3,626
Interest expense 168 -- 168 --
Other income (expense), net -- (10) 80 (14)
---------- ---------- ---------- ----------
Earnings before income taxes 1,683 1,107 4,753 3,612
Income tax expense 614 397 1,720 1,299
---------- ---------- ---------- ----------
Net earnings $ 1,069 $ 710 $ 3,033 $ 2,313
========== ========== ========== ==========
Net earnings per share:
Basic $ .23 $ .15 $ .64 $ .49
========== ========== ========== ==========
Diluted $ .20 $ .13 $ .57 $ .44
========== ========== ========== ==========
Weighted average common and common
equivalent shares outstanding:
Basic 4,701 4,801 4,719 4,769
========== ========== ========== ==========
Diluted 5,312 5,355 5,320 5,241
========== ========== ========== ==========
See accompanying notes to consolidated financial statements
3
THE SPORTSMAN'S GUIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended
September 30, 2004 and 2003
(In thousands of dollars)
2004 2003
----------- -----------
Cash flows from operating activities:
Net earnings $ 3,033 $ 2,313
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization 1,079 985
Deferred income taxes 2,336 112
Tax benefit related to exercise of stock options 832 --
Other -- 16
Changes in assets and liabilities, net of acquisition:
Accounts receivable 389 1,161
Inventory (13,300) (9,117)
Promotional material (1,264) (1,380)
Prepaid expenses and other (630) (891)
Accounts payable (2,916) 2,233
Accrued expenses (1,719) (678)
Income taxes payable (4,244) (1,326)
Customer deposits and other liabilities 662 1,165
Other long term liabilities (46) --
----------- -----------
Cash flows used in operating activities (15,788) (5,407)
Cash flows from investing activities:
Purchases of property and equipment (464) (640)
Business acquisition (30,478) --
Other -- 14
----------- -----------
Cash flows used in investing activities (30,942) (626)
Cash flows from financing activities:
Proceeds from term loan 12,500 --
Net proceeds from revolving line of credit and bank overdrafts 7,716 --
Payments on capital lease (2) --
Proceeds from exercise of stock options 907 616
Repurchase of common stock (5,730) (925)
----------- -----------
Cash flows provided by (used in) financing activities 15,391 (309)
----------- -----------
Decrease in cash and cash equivalents (31,339) (6,342)
Cash and cash equivalents at beginning of the period 32,054 17,152
----------- -----------
Cash and cash equivalents at end of the period $ 715 $ 10,810
=========== ===========
Supplemental disclosure of cash flow information
Cash paid during the periods for:
Interest $ 110 $ --
Income taxes $ 2,810 $ 2,513
See accompanying notes to consolidated financial statements
4
THE SPORTSMAN'S GUIDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1: Basis of Presentation
The Sportsman's Guide, Inc. (referred to in this report as the "Company")
is comprised of two separate companies namely, The Sportsman's Guide
("TSG") and The Golf Warehouse ("TGW"). TSG markets and sells value priced
outdoor gear and general merchandise through catalogs and two e-commerce
Web sites. TSG's offices and fulfillment center are located in South St.
Paul, Minnesota. TGW markets and sells golf equipment, apparel and
accessories primarily through one e-commerce Web site and catalogs. TGW's
offices and fulfillment center are located in Wichita, Kansas.
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.
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 preparing the Company's consolidated financial statements, management
is required to make estimates and assumptions that affect reported amounts
of assets and liabilities and related revenues and expenses. Actual
results could differ from the estimates used by management.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All intercompany balances
and transactions have been eliminated in consolidation.
The Company's fiscal quarter ends on the Sunday nearest September 30 for
2004 and 2003, but for clarity of presentation, all periods are described
as if the three and nine month periods end September 30. Each fiscal third
quarter of 2004 and 2003 consisted of 13 weeks.
Amounts billed to customers for shipping and handling are recorded in
revenues at the time of shipment. Sales include shipping and handling
revenues of $6.1 million and $5.3 million for the three months ended
September 30, 2004 and 2003 and $16.7 million and $16.1 million for the
nine months ended September 30, 2004 and 2003.
Note 2: Acquisition
On June 29, 2004, the Company acquired 100% of the outstanding membership
interests of The Golf Warehouse, LLC from Falconhead Capital LLC, a
private investment firm, and members of TGW management pursuant to a
Membership Interest Purchase Agreement dated as of June 29, 2004. The
purchase price for TGW was approximately $30.5 million, subject to
post-closing adjustments, and was funded from the Company's working
capital and borrowings under the Company's credit facility with Wells
Fargo Bank, National Association. The purchase price for TGW of $30.5
million consisted of $30 million for 100% of outstanding membership
interests and $0.5 million of transactions costs.
5
The acquisition of TGW has been accounted for using the purchase method of
accounting. The fair market value of the net assets acquired resulted in
the following purchase price allocation:
Net assets acquired, including:
Current assets $ 6,674
Property and equipment 1,013
Liabilities assumed (5,378)
-------------
Net assets acquired 2,309
Trade and domain name 10,200
Customer lists and non-compete agreements 750
Goodwill 17,219
-------------
Total purchase price $ 30,478
=============
Note 3: Debt
On June 29, 2004, we entered into an amended Credit Agreement with Wells
Fargo Bank, National Association, providing a revolving line of credit up
to $15.0 million and a term loan of $12.5 million, expiring September 30,
2007. The revolving line of credit is for working capital and letters of
credit and the proceeds from the term loan are for financing acquisitions
of other business operations. Letters of credit may not exceed $10.0
million at any one time. Funding under the line of credit if combined
borrowings under the line of credit and term loan exceed $20.0 million, is
limited to a collateral base of 50% of eligible inventory plus 75% of
eligible trade accounts receivable. Borrowings from the revolving line of
credit and term loan bear interest at the bank's prime rate less 0.15% or,
at our option, fixed term LIBOR plus 2.5 percentage points, provided
certain financial ratios are met. Repayments of the term loan are payable
annually each September as follows: $2,500,000 payable September 30, 2005,
$5,000,000 payable September 30, 2006 and $5,000,000 payable September 30,
2007. The revolving line of credit and the term loan are collateralized by
substantially all of our assets.
All borrowings are subject to various covenants (while the term loan
remains outstanding), which include funded debt to earnings before
interest, income taxes, depreciation and amortization ratio and a fixed
charge coverage ratio. The agreement also prohibits the payment of
dividends to shareholders, without the consent of the bank. As of
September 30, 2004, and December 31, 2003, we were in compliance with all
applicable covenants under the revolving line of credit agreement. We had
borrowings of $4.5 million against the revolving line of credit and $12.5
million against the term loan at September 30, 2004. We had no borrowings
against the revolving line of credit as of December 31, 2003. Outstanding
letters of credit were $0.7 million at September 30, 2004 compared to $2.5
million at December 31, 2003.
Note 4: Stock Options
Stock options issued to employees are accounted for under the intrinsic
value method. No stock-based compensation cost is reflected in the net
earnings, as all options granted had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following
table illustrates the effect on net earnings and earnings per share as if
the Company had applied the fair value method of accounting for stock
options (in thousands, except per share data):
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net earnings as reported $ 1,069 $ 710 $ 3,033 $ 2,313
Deduct: Total stock-based employee
compensation expense under the fair
value method for all awards, net of
related tax effects 376 116 866 349
---------- ---------- ---------- ----------
Pro-forma net earnings $ 693 $ 594 $ 2,167 $ 1,964
========== ========== ========== ==========
Earnings Per Share:
Basic - as reported $ .23 $ .15 $ .64 $ .49
Basic - pro-forma .15 .13 .48 .43
Diluted - as reported $ .20 $ .13 $ .57 $ .44
Diluted - pro-forma .14 .11 .42 .39
6
Note 5: Net Earnings Per Share
The Company's basic net earnings per share amounts have been computed by
dividing net earnings by the weighted average number of outstanding common
shares. Diluted net earnings per share amounts have been computed by
dividing net earnings by the weighted average number of outstanding common
shares and common share equivalents relating to the stock options and
warrants, when dilutive.
For the three months and nine months ended September 30, 2004, 611,053 and
600,478 share equivalents were included in the computation of diluted net
earnings per share.
All outstanding options during the three months ended September 30, 2004
were included in the computation of diluted earnings per share because the
average market price of the common shares during the period exceeded the
exercise price of the options.
Options to purchase 140,000 shares of common stock with a weighted average
exercise price of $20.55 were outstanding during the nine months ended
September 30, 2004, but were not included in the computation of diluted
net earnings per share because their exercise price exceeded the average
market price of the common shares during the period.
For the three months and nine months ended September 30, 2003, 553,867 and
472,005 share equivalents were included in the computation of diluted net
earnings per share.
All outstanding options during the three months and nine months ended
September 30, 2003 were included in the computation of diluted earnings
per share because the average market price of the common shares during the
period exceeded the exercise price of the options.
Note 6: Legal Proceedings
The Company has been notified by NCR Corporation that NCR believes some of
the Company's e-commerce website functions are covered by certain
"business method" patents owned by NCR. NCR has stated it is willing to
grant a patent license to the Company on commercially reasonable terms.
The Company is currently investigating the claims. At the present time,
the Company cannot predict the outcome of this matter or the potential
amount or range of loss or expense involved.
In March 2003, the Company was notified by the Bureau of Industry, United
States Department of Commerce (BIS) that BIS has reason to believe the
Company violated Export Administration Regulations by exporting optical
sighting devices for firearms and associated parts to Canada and other
destinations without obtaining required authorization from BIS. BIS
asserts the Company committed 61 separate violations for shipments from
October 1999 to March 2002. The potential maximum civil penalty is up to
$11,000 for each violation. The Company is currently in discussions with
BIS to settle the matter prior to issuance of a charging letter. The BIS
has initially offered to settle the matter for a penalty of $207,500,
representing 32 violations at $1,500 per violation and 29 violations at
$5,500 per violation. The Company believes the settlement offer is
excessive based on civil penalties imposed in similar cases and intends to
continue negotiations with BIS. While the Company cannot predict the
outcome of this matter at this time, management believes the matter will
not have a material adverse impact on the Company.
Note 7: Repurchase of Common Stock
On May 13, 2004, the Company announced that its board of directors
authorized a plan to repurchase up to ten percent of its outstanding
common stock in the open market or in privately negotiated transactions
over the next 12 months. Under this plan 29,245 shares of common stock at
a total cost of $583,000 were repurchased during the three and nine months
ended September 30, 2004.
On May 5, 2003, the Company announced that its board of directors
authorized a plan to repurchase up to ten percent of its outstanding
common stock in the open market or in privately negotiated transactions
over the next 12 months. Under this plan no shares were repurchased during
the three months ended September 30, 2004 and 259,644 shares of common
stock at a total cost of $5,148,000 were repurchased during the nine
months ended September 30, 2004.
7
Note 8: Segment Information
The Company operates in two business segments. The Sportsman's Guide
("TSG") markets and sells value priced outdoor gear and general
merchandise, with a special emphasis on clothing, equipment and footwear
through main, specialty and Buyer's Club Advantage (TM) catalogs and two
e-commerce Web sites. The Golf Warehouse, Inc. ("TGW") markets and sells
golf equipment, apparel and accessories through one e-commerce Web site
and catalogs. On June 29, 2004, The Sportsman's Guide, Inc. acquired 100%
of the outstanding membership interests of The Golf Warehouse, LLC.
Business Segment Comparisons (in thousands):
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Sales
The Sportsman's Guide $ 44,505 $ 41,213 $ 127,960 $ 123,003
The Golf Warehouse 12,049 -- 12,049 --
---------- ---------- ---------- ----------
Total 56,554 41,213 140,009 123,003
Earnings From Operations
The Sportsman's Guide 1,480 1,117 4,470 3,626
The Golf Warehouse 371 -- 371 --
---------- ---------- ---------- ----------
Total 1,851 1,117 4,841 3,626
Depreciation and Amortization
The Sportsman's Guide 297 323 925 985
The Golf Warehouse 154 -- 154 --
---------- ---------- ---------- ----------
Total 451 323 1,079 985
Capital Expenditures
The Sportsman's Guide 205 179 398 640
The Golf Warehouse 66 -- 66 --
---------- ---------- ---------- ----------
Total 271 179 464 640
Business Segment Assets (in thousands):
As of September 30,
2004 2003
------ ------
Assets
The Sportsman's Guide 44,459 52,879
The Golf Warehouse 37,349 --
------ ------
Total 81,808 52,879
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Sportsman's Guide, Inc. (referred to in this report as the "Company") is
comprised of two separate companies namely, The Sportsman's Guide ("TSG") and
The Golf Warehouse ("TGW"). On June 29, 2004, the Company acquired 100% of the
outstanding membership interests of The Golf Warehouse, LLC. The third quarter
of 2004 is the first quarter for inclusion of TGW's sales, operations and
earnings.
TSG is a leading marketer of value priced outdoor gear and general merchandise,
with a special emphasis on outdoor clothing, equipment and footwear. TSG markets
and sells merchandise through main, specialty and Buyer's Club Advantage(TM)
catalogs and two e-commerce Web sites. TSG's catalogs as well as its Web sites
offer high quality products at low prices. TSG's catalogs are advertised as The
"Fun-to-Read" Catalog(R) and the primary Web site is advertised as the
"Fun-to-Browse" Website(R). TSG's Web sites include www.sportsmansguide.com, the
online retail store modeled on our print catalogs and www.bargainoutfitters.com,
our online liquidation outlet.
8
TGW is a leading online and catalog retailer of golf equipment, apparel and
accessories. TGW markets and sells golf related merchandise primarily through
its Web site (www.TGW.com) and through several catalogs as well as one retail
outlet.
With the acquisition of TGW on June 29, 2004 and the continued growth of
Internet related sales for TSG, the Company continues to post strong growth in
sales and earnings for the third quarter of 2004.
FISCAL YEAR
Our fiscal quarter ends on the Sunday nearest September 30 for 2004 and 2003,
but for clarity of presentation, all periods are described as if the quarter end
is September 30. Each fiscal third quarter of 2004 and 2003 consisted of 13
weeks.
CRITICAL ACCOUNTING POLICIES
The critical accounting policies of both business segments, where applicable,
are the same as described in the following paragraphs.
Sales are recorded at the time of shipment along with a provision for
anticipated merchandise returns, net of exchanges, which is recorded based upon
historical experience and current expectations. Amounts billed to customers for
shipping and handling are recorded in sales at the time of shipment.
TSG's customers can purchase one year memberships in our Buyer's Club for a
$29.99 annual fee. TSG also offers two year memberships for $59.97. Club members
receive merchandise discounts of 10% on regularly priced items and 5% on
ammunition. Membership fees are deferred and recognized in income as the
individual members place orders and receive discounts. Any remaining deferred
membership fees are recognized in income after the expiration of the membership.
The cost of producing and mailing catalogs is deferred and expensed over the
estimated useful lives of the catalogs. Catalog production and mailing costs are
amortized over periods ranging from four to six months from the in-home date of
the catalog with the majority of the costs amortized within the first month of
the catalog's life cycle. We estimate the in-home date to be one week from the
known mailing date of the catalog. The ongoing cost of developing and
maintaining our customer list is charged to operations as incurred. All other
advertising costs are expensed as incurred.
Stock options issued to employees are accounted for under the intrinsic value
method. Pro-forma disclosures as if the fair value method were used are included
in Note 4 to the Consolidated Financial Statements.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information from our
Consolidated Statements of Earnings expressed as a percentage of sales:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2004 2003 2004 2003
----- ----- ----- -----
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 71.0 69.6 69.5 68.6
----- ----- ----- -----
Gross profit 29.0 30.4 30.5 31.4
Selling, general and administrative expenses 25.7 27.7 27.0 28.5
----- ----- ----- -----
Earnings from operations 3.3 2.7 3.5 2.9
Interest expense 0.3 -- 0.1 --
----- ----- ----- -----
Earnings before income taxes 3.0 2.7 3.4 2.9
Income tax expense 1.1 1.0 1.2 1.0
----- ----- ----- -----
Net earnings 1.9% 1.7% 2.2% 1.9%
===== ===== ===== =====
Three months ended September 30, 2004 compared to three months ended September
30, 2003
The Sportsman's Guide The Golf Warehouse Consolidated
------------------------------ ------------------------------ ------------------------------
2004 2003 2004 2003 2004 2003
------------ ------------ ------------ ------------ ------------ ------------
Net sales $ 44,505 $ 41,213 $ 12,049 $ -- $ 56,554 $ 41,213
Earnings from
operations $ 1,480 $ 1,117 $ 371 $ -- $ 1,851 $ 1,117
9
SALES. Consolidated sales for the three months ended September 30, 2004 of $56.6
million were $15.3 million or 37% higher than sales of $41.2 million during the
same period last year. The increase in sales for the third quarter of 2004 was
primarily a result of including the sales from the newly-acquired The Golf
Warehouse. The acquisition of The Golf Warehouse was effective June 29, 2004.
The third quarter of 2004 was the first quarter for inclusion of TGW's sales,
operations and earnings. Sales for TSG for the third quarter of 2004 increased
8% when compared to the same period a year ago primarily as a result of
increased Internet sales.
As of the end of the third quarter 2004, the Buyer's Club membership for TSG had
increased to 369,000, up 5.1% over the 351,000 members reported at December 31,
2003 and up 8.8% over the membership count one year ago.
Sales generated through the Internet for TSG in the third quarter of 2004 were
approximately 41% of total catalog and Internet sales compared to 36% during the
same period last year. The majority of The Golf Warehouse's total sales for the
third quarter of 2004 were generated through the Internet. We define sales
generated through the Internet as sales that are derived from our web sites,
catalog orders processed online and online offers placed by telephone. Internet
related sales continue to grow, period over period, as we continue to make
enhancements to our Web sites and implement and improve upon various marketing
and merchandising programs.
Gross returns and allowances for the three months ended September 30, 2004 were
$3.7 million or 6.1% of gross sales compared to $2.9 million or 6.5% of gross
sales during the same period last year. The decrease in gross returns and
allowances, as a percentage of sales, for the three months ended September 30,
2004 was primarily due to favorable trends in actual customer return activity
within TSG.
GROSS PROFIT. Consolidated gross profit for the three months ended September 30,
2004 was $16.4 million or 29.0% of sales compared to $12.6 million or 30.4% of
sales during the same period last year.
The majority of the decrease in consolidated gross profit for the three months
ended September 30, 2004, as a percentage of sales, was primarily due to the
inclusion of lower product margin sales of The Golf Warehouse. The Golf
Warehouse's product margins are traditionally lower than those of TSG. TSG's
business product margins, as a percentage of sales, were lower in the third
quarter of 2004 when compared to the same period a year ago primarily due to
promotional pricing, competitive pressure and a higher percentage of lower
margin factory direct merchandise sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated Selling, general and
administrative expenses for the three months ended September 30, 2004 were $14.6
million or 25.7% of sales compared to $11.4 million or 27.7% of sales for the
same period last year.
Selling, general and administrative expenses, as a percentage of sales, for the
third quarter ended September 30, 2004 were lower compared to the same period
last year as a result of additional productivity from the Internet leverage in
TSG as well as the inclusion of The Golf Warehouse's selling, general and
administrative expenses which historically have been lower than those of TSG.
TSG's selling, general and administrative expenses, as a percentage of sales,
for the third quarter of 2004 were lower compared to the same period last year
as a result of higher Internet sales and lower order processing costs as a
result of the increase in sales generated through the Internet. The Golf
Warehouse's selling, general and administrative expenses, as a percentage of
sales, traditionally have been lower than TSG's with a higher percentage of its
sales generated from the Internet coupled with a higher average customer order
amount.
For the three months ended September 30, 2004, the increase in dollars, compared
to the same period last year, in consolidated selling, general and
administrative expenses was primarily due to the inclusion of The Golf
Warehouse's expenses since the acquisition on June 29, 2004 and higher
advertising spending by TSG from an increase in catalog circulation and
increased order fulfillment costs from higher sales volume.
Total Company catalog circulation during the third quarter of 2004 was 10.9
million catalogs compared to 9.9 million catalogs during the same period last
year including 0.7 million catalogs (one edition) circulated by The Golf
Warehouse since the acquisition on June 29, 2004. TSG mailed nine catalog
editions, consisting of three main catalogs, three Buyer's Club Advantage (TM)
catalogs and three specialty catalog editions, during the three months ended
September 30, 2004 and 2003.
Consolidated advertising expense for the third quarter of 2004 was $7.5 million
or 13.3% of sales compared to $6.2 million or 15.0% of sales for the same period
last year. The decrease in consolidated advertising expense for the third
quarter of 2004, as a percentage of sales, compared to the same period last year
was primarily due to the increase in TSG's sales generated from the Internet and
the inclusion of The Golf Warehouse since the acquisition on June 29, 2004. The
Golf Warehouse's advertising expense as a percentage of sales
10
is lower than the traditional TSG percentage as a result of its higher
percentage of Internet driven sales coupled with a higher average customer order
amount.
The increase in consolidated advertising dollars for the third quarter was
primarily due to an increase in TSG's catalog circulation and the inclusion of
The Golf Warehouse's advertising expense since the acquisition on June 29, 2004.
EARNINGS FROM OPERATIONS. Earnings from operations for the three months ended
September 30, 2004 were $1.9 million compared to $1.1 million during the same
period last year. The increase in earnings from operations was largely due to
the inclusion of The Golf Warehouse's earnings since the acquisition on June 29,
2004 as well as growth and improved performance in TSG.
INTEREST EXPENSE. Interest expense for the three months ended September 30, 2004
was $0.2 million or 0.3% of sales. Interest expense increased in the third
quarter of 2004 over the prior year period as a result of the acquisition of The
Golf Warehouse. A portion of the purchase price of approximately $30.5 million
was financed by borrowings under a new credit facility.
NET EARNINGS. As a result of the above factors, net earnings for the three
months ended September 30, 2004 were $1.1 million compared to $0.7 million for
the same period last year.
Nine months ended September 30, 2004 compared to nine months ended September 30,
2003
The Sportsman's Guide The Golf Warehouse Consolidated
-------------------------------- -------------------------------- --------------------------------
2004 2003 2004 2003 2004 2003
------------- ------------- ------------- ------------- ------------- -------------
Net sales $ 127,960 $ 123,003 $ 12,049 $ -- $ 140,009 $ 123,003
Earnings from
operations $ 4,470 $ 3,626 $ 371 $ -- $ 4,841 $ 3,626
SALES. Consolidated sales for the nine months ended September 30, 2004 of $140.0
million were $17.0 million or 13.8% higher than sales of $123.0 million during
the same period last year. The increase in sales for the first nine months of
2004 was primarily a result of including the sales of the newly-acquired The
Golf Warehouse, effective June 29, 2004. Sales for TSG for the nine months ended
September 30, 2004 increased 4% when compared to the same period a year ago as a
result of increased Internet sales.
As of the end of the third quarter 2004, the Buyer's Club membership for TSG had
increased to 369,000, up 5.1% over the 351,000 members reported at December 31,
2003 and up 8.8% over the membership count one year ago.
Sales generated through the Internet for TSG for the nine months ended September
30, 2004 were approximately 42% of total catalog and Internet sales compared to
36% during the same period last year. We define sales generated through the
Internet as sales that are derived from our web sites, catalog orders processed
online and online offers placed by telephone. Internet related sales continue to
grow, period over period, as we continue to make enhancements to our Web sites
and implement and improve upon various marketing and merchandising programs.
Gross returns and allowances for the nine months ended September 30, 2004 were
$9.3 million or 6.2% of gross sales compared to $8.8 million or 6.6% of gross
sales during the same period last year. The decrease in gross returns and
allowances, as a percentage of sales, for the nine months ended September 30,
2003 was primarily due to favorable trends in actual customer return activity
within TSG.
GROSS PROFIT. Consolidated gross profit for the nine months ended September 30,
2004 was $42.7 million or 30.5% of sales compared to $38.7 million or 31.4% of
sales during the same period last year.
The decrease in the consolidated gross profit percentage for the nine months
ended September 30, 2004 was primarily due to inclusion of lower product margin
sales of The Golf Warehouse which traditionally are lower than the product
margins of TSG. TSG's product margins, as a percentage of sales, for the nine
months ended September 30, 2004 were lower when compared to the same period last
year primarily due to promotional pricing, competitive pressure and a higher
percentage of lower margin factory direct merchandise sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated selling, general and
administrative expenses for the nine months ended September 30, 2004 were $37.8
million or 27.0% of sales compared to $35.1 million or 28.5% of sales for the
same period last year.
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Consolidated selling, general and administrative expenses, as a percentage of
sales, for the nine months ended September 30, 2004 were lower compared to the
same period last year primarily due to improved performance in TSG with the
continued leverage of the Internet as well as the inclusion of The Golf
Warehouse's selling, general and administrative expenses which historically have
been lower than that of TSG. TSG's selling, general and administrative expenses,
as a percentage of sales, for the nine months ended September 30, 2004 were
lower compared to the same period last year as a result of higher Internet sales
and lower order processing and order fulfillment costs as a result of the
increase in sales generated through the Internet and the factory direct
merchandise program.
For the nine months ended September 30, 2004, the increase in dollars, compared
to the same period last year, in selling, general and administrative expenses
was primarily due to the inclusion of The Golf Warehouse's selling, general and
administrative expenses since its acquisition on June 29, 2004 by the Company.
Total Company catalog circulation during the first nine months of 2004 was 31.9
million catalogs compared to 30.4 million catalogs during the same period last
year including 0.7 million catalogs (one edition) circulated by The Golf
Warehouse since the acquisition on June 29, 2004. TSG mailed 26 catalog
editions, consisting of nine main catalogs, nine Buyer's Club Advantage (TM)
catalogs and eight specialty catalog editions, during the nine months ended
September 30, 2004 compared to 25 catalog editions, consisting of nine main
catalogs, nine Buyer's Club Advantage (TM) catalogs and seven specialty catalog
editions, during the same period last year.
Consolidated advertising expense for the first nine months of 2004 was $20.0
million or 14.3% of sales compared to $18.7 million or 15.2% of sales for the
same period last year. The decrease in advertising expense for first nine months
of 2004, as a percentage of sales, compared to the same period last year was
primarily due to higher Internet sales in TSG. The minor increase in advertising
dollars for the nine months ended September 30, 2004 was primarily due to the
inclusion of The Golf Warehouse's advertising expenses since the acquisition on
June 29, 2004 by the Company.
EARNINGS FROM OPERATIONS. Earnings from operations for the nine months ended
September 30, 2004 were $4.8 million compared to $3.6 million for the same
period last year.
INTEREST EXPENSE. Interest expense for the nine months ended September 30, 2004
was $0.2 million. We borrowed under the new credit facility during the nine
months ended September 30, 2004 to finance a portion of the purchase price of
The Golf Warehouse.
NET EARNINGS. As a result of the above factors, net earnings for the nine months
ended September 30, 2004 were $3.0 million compared to $2.3 million for the same
period last year.
SEASONALITY AND QUARTERLY RESULTS
The majority of our sales historically occur during the second half of the year.
The seasonal nature of our business is due to our focus on outdoor merchandise
and related accessories for the fall, as well as winter apparel and gifts for
the holiday season. We expect this seasonality will continue in the future. In
anticipation of increased sales activity during the third and fourth fiscal
quarters, we incur significant additional expenses for hiring employees and
building inventory levels.
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The following table sets forth certain unaudited financial information for each
of the quarters shown (in thousands, except per share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
2004
Sales $ 44,594 $ 38,861 $ 56,554
Gross profit 14,128 12,137 16,415
Earnings from operations 1,782 1,208 1,851
Net earnings 1,167 797 1,069
Net earnings per share:
Basic .25 .17 .23
Diluted .22 .15 .20
2003
Sales $ 43,749 $ 38,041 $ 41,213 $ 71,700
Gross profit 14,197 11,944 12,541 25,832
Earnings from operations 1,467 1,042 1,117 5,971
Net earnings 957 646 710 3,845
Net earnings per share:
Basic .20 .14 .15 .80
Diluted .19 .12 .13 .71
Note: The acquisition of The Golf Warehouse, LLC was effective June 29, 2004.
The third quarter of 2004 was the first quarter for inclusion of TGW's
sales, operations and earnings.
LIQUIDITY AND CAPITAL RESOURCES
We meet our operating cash requirements through funds generated from operations
and borrowings under our revolving line of credit.
WORKING CAPITAL. We had working capital of $5.3 million as of September 30, 2004
compared to $24.7 million as of December 31, 2003, with current ratios of 1.1 to
1and 1.7 to 1, respectively. We purchase large quantities of manufacturers'
closeouts and direct imports, particularly in footwear and apparel merchandise
categories. The seasonal nature of the merchandise may require that it be held
for several months before being offered in a catalog. This can result in
increased inventory levels and lower inventory turnover, thereby increasing our
working capital requirements and related carrying costs.
TSG offers its Buyer's Club members an installment credit plan with no finance
fees, known as the "Buyer's Club 4-Pay Plan". Each of the four consecutive
monthly installments is billed directly to customers' credit cards. We had
installment receivables of approximately $1.7 million at September 30, 2004
compared to approximately $2.4 million at December 31, 2003. The installment
plan will continue to require the allocation of working capital, which we expect
to fund from operations and availability under our revolving credit facility.
On June 29, 2004, we entered into an amended Credit Agreement with Wells Fargo
Bank, National Association, providing a revolving line of credit up to $15.0
million and a term loan of $12.5 million, expiring September 30, 2007. The
revolving line of credit is for working capital and letters of credit and the
proceeds from the term loan are for financing acquisitions of other business
operations. Letters of credit may not exceed $10.0 million at any one time.
Funding under the line of credit if combined borrowings under the line of credit
and term loan exceed $20.0 million, is limited to a collateral base of 50% of
eligible inventory plus 75% of eligible trade accounts receivable. Borrowings
from the revolving line of credit and term loan bear interest at the bank's
prime rate less 0.15% or, at our option, fixed term LIBOR plus 2.5 percentage
points, provided certain financial ratios are met. Repayments of the term loan
are payable annually each September as follows: $2,500,000 payable September 30,
2005, $5,000,000 payable September 30, 2006 and $5,000,000 payable September 30,
2007. The revolving line of credit and the term loan are collateralized by
substantially all of our assets.
All borrowings are subject to various covenants (while the term loan remains
outstanding), which include funded debt to earnings before interest, income
taxes, depreciation and amortization ratio and a fixed charge coverage ratio.
The agreement also prohibits the payment of dividends to shareholders, without
the consent of the bank. As of September 30, 2004, and December 31, 2003, we
were in compliance with all applicable covenants under the revolving line of
credit agreement. We had borrowings of $4.5 million against the revolving line
of credit and $12.5 million against the term loan at September 30,
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2004. We had no borrowings against the revolving line of credit as of December
31, 2003. Outstanding letters of credit were $0.7 million at September 30, 2004
compared to $2.5 million at December 31, 2003.
OPERATING ACTIVITIES. Cash flows used in operating activities for the nine
months ended September 30, 2004 were $15.8 million compared to $5.4 million for
the same period last year. The increase in cash flows used in operating
activities for the nine months ended September 30, 2004 when compared to the
same period last year was primarily the result of an increase in inventory and
higher vendor and income tax payments made during this period. The inventory
level increased, year over year, primarily as a result of an earlier receipt
flow of fourth quarter goods than the previous year along with the inclusion of
The Golf Warehouse's inventory activity for the first time since its acquisition
on June 29, 2004.
INVESTING ACTIVITIES. Cash flows used in investing activities for the nine
months ended September 30, 2004 were $30.9 million compared to $0.6 million for
the same period last year. The Company acquired 100% of the outstanding
membership interests of The Golf Warehouse, LLC for a purchase price of
approximately $30 million with an additional $0.5 million of transactions costs
incurred.
FINANCING ACTIVITIES. Cash flows provided by financing activities during the
nine months ended September 30, 2004 were $15.4 million compared to cash flows
used in financing activities of $0.3 million during the same period last year.
The increase in cash flows from financing activities during the nine months
ended September 30, 2004, compared to the prior year, was largely due to the
Company's borrowings under the new credit facility to finance a portion of the
total consideration paid for the outstanding membership interests of The Golf
Warehouse, LLC. The increase in cash flows from financing activities was offset
somewhat by the Company's repurchase of its common stock.
We believe that cash flows from operations and borrowing capacity under our
revolving credit facility will be sufficient to fund operations and future
growth for the next twelve months.
FORWARD-LOOKING STATEMENTS
This report may contain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. We use words such as "may," "believe," "estimate," "plan," "expect,"
"intend," "anticipate" and similar expressions to identify forward looking
statements. 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 our products and the
market acceptance of our product 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, 2003 filed with the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Our interest expense on borrowings is affected by changes in interest rates in
the United States. The Company believes that there may be future exposure to
interest rate risk.
The Company has no history of, and does not anticipate in the future, investing
in derivative financial instruments. All transactions with customers are
entered into in U.S. dollars, precluding the need for foreign currency hedges.
As a result, the exposure to market risk is not material.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management evaluated, with the participation of the Company's
Chief Executive Officer and Chief Financial Officer, the effectiveness of the
Company's disclosure controls and procedures as of the end of the period covered
by this report. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms.
There were no changes in the Company's internal control over financial reporting
that occurred during the Company's last fiscal quarter that have materially
affected, or are reasonably likely to materially affect the Company's internal
control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has been notified by NCR Corporation that NCR believes some of the
Company's e-commerce website functions are covered by certain "business method"
patents owned by NCR. NCR has stated it is willing to grant a patent license to
the Company on commercially reasonable terms. The Company is currently
investigating the claims. At the present time, the Company cannot predict the
outcome of this matter or the potential amount or range of loss or expense
involved.
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In March 2003, the Company was notified by the Bureau of Industry, United States
Department of Commerce (BIS) that BIS has reason to believe the Company violated
Export Administration Regulations by exporting optical sighting devices for
firearms and associated parts to Canada and other destinations without obtaining
required authorization from BIS. BIS asserts the Company committed 61 separate
violations for shipments from October 1999 to March 2002. The potential maximum
civil penalty is up to $11,000 for each violation. The Company is currently in
discussions with BIS to settle the matter prior to issuance of a charging
letter. The BIS has initially offered to settle the matter for a penalty of
$207,500, representing 32 violations at $1,500 per violation and 29 violations
at $5,500 per violation. The Company believes the settlement offer is excessive
based on civil penalties imposed in similar cases and intends to continue
negotiations with BIS. While the Company cannot predict the outcome of this
matter at this time, management believes the matter will not have a material
adverse impact on the Company.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
Total Number of Maximum Number
Shares Repurchased Of Shares that May
Total Number as Part of Publicly Yet be Purchased
of Shares Average Price Announced Plans Under the Plans
Period Purchased Paid per Share or Programs (1) or Programs (1)
- ------ --------- -------------- --------------- ---------------
July 1 - 31, 2004 -- -- -- 470,756
August 1 - 31, 2004 29,245 $ 19.92 29,245 441,511
September 1 - 30, 2004 -- -- -- 441,511
-------
Total 29,245 $ 19.92 29,245 441,511
====== =========== ====== =======
(1) On May 13, 2004, the Company announced that its Board of Directors
authorized a plan to repurchase up to ten percent of the Company's
outstanding common stock in the open market or in privately
negotiated transactions over the next 12 months.
ITEM 6. EXHIBITS
Exhibits
10.1 Form of Stock Option Agreement under 2004 Stock Incentive Plan
10.2 Annual Bonus Program
31 Rule 13a-14(a)/15d-14(a) Certifications
32 Section 1350 Certifications
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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 10, 2004 /s/ Charles B. Lingen
--------------------------------------
Charles B. Lingen
Executive Vice President of Finance
and Administration/CFO
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