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 March 31, 2002 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 Identification 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 May 13, 2002, there were 4,752,810 shares of the registrant's Common Stock
outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE SPORTSMAN'S GUIDE, INC.
BALANCE SHEETS
(UNAUDITED)
(In thousands of dollars)
March 31, December 31,
2002 2001
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,151 $ 8,592
Accounts receivable - net 1,729 2,759
Inventory 21,900 21,076
Promotional material 3,589 3,614
Prepaid expenses 978 933
Deferred income taxes 1,345 1,482
----------------- ----------------
Total current assets 33,692 38,456
PROPERTY AND EQUIPMENT - NET 3,425 3,632
----------------- ----------------
Total assets $ 37,117 $ 42,088
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 11,793 $ 15,201
Accrued expenses 1,744 2,782
Income taxes payable 381 2,184
Deferred revenue 3,137 2,993
Returns reserve 1,217 1,402
Customer deposits and other liabilities 1,505 942
----------------- ----------------
Total current liabilities 19,777 25,504
LONG-TERM LIABILITIES
Deferred income taxes 207 241
----------------- ----------------
Total liabilities 19,984 25,745
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' EQUITY
Common Stock-$.01 par value; 36,800,000 shares
authorized; 4,750,810 shares issued and
outstanding at March 31, 2002 and 4,748,810 shares
issued and outstanding at December 31, 2001 47 47
Additional paid-in capital 11,571 11,565
Stock subscription receivable (238) (238)
Retained earnings 5,753 4,969
----------------- ----------------
Total shareholders' equity 17,133 16,343
----------------- ----------------
Total liabilities and shareholders' equity $ 37,117 $ 42,088
================= ================
See accompanying condensed notes to financial statements.
2
THE SPORTSMAN'S GUIDE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended
March 31, 2002 and 2001
(In thousands, except per share data)
2002 2001
---- ----
Sales $ 41,631 $ 38,931
Cost of sales 28,162 27,191
---------------- ----------------
Gross profit 13,469 11,740
Selling, general and administrative expenses 12,253 11,754
---------------- ----------------
Earnings (loss) from operations 1,216 (14)
Interest expense (18) (68)
Miscellaneous income (expense), net 47 (64)
---------------- ----------------
Earnings (loss) before income taxes 1,245 (146)
Income tax expense 461 21
---------------- ----------------
Net earnings (loss) $ 784 $ (167)
================ ================
Net earnings (loss) per share:
Basic $ .17 $ (.04)
================ ================
Diluted $ .16 $ (.04)
================ ================
Weighted average common and common equivalent shares outstanding:
Basic 4,749 4,749
================ ================
Diluted 4,885 4,749
================ ================
See accompanying condensed notes to financial statements.
3
THE SPORTSMAN'S GUIDE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended
March 31, 2002 and 2001
(In thousands of dollars)
2002 2001
---- ----
Cash flows from operating activities:
Net earnings (loss) $ 784 $ (167)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 387 480
Other 103 69
Changes in assets and liabilities:
Accounts receivable 1,030 971
Inventory (824) 3,523
Promotional material 25 (307)
Prepaid expenses (45) 259
Checks written in excess of bank balances -- 2,384
Accounts payable (3,408) (4,036)
Accrued expenses (1,038) (589)
Income taxes (1,803) (147)
Customer deposits and other liabilities 522 (422)
---------------- -------------
Cash flows provided by (used in) operating activities (4,267) 2,018
Cash flows from investing activities:
Purchases of property and equipment (180) (130)
Other -- 21
---------------- -------------
Cash flows used in investing activities (180) (109)
Cash flows from financing activities:
Net payments on revolving credit line -- (3,253)
Proceeds from exercise of stock options 6 --
---------------- -------------
Cash flows provided by (used in) financing activities 6 (3,253)
---------------- -------------
Decrease in cash and cash equivalents (4,441) (1,344)
Cash and cash equivalents at beginning of the quarter 8,592 1,344
---------------- -------------
Cash and cash equivalents at end of the quarter $ 4,151 $ --
================ =============
Supplemental disclosure of cash flow information
Cash paid during the quarters for:
Interest $ 74 $ 209
Income taxes 2,161 176
See accompanying condensed notes to financial statements.
4
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.
Amounts billed to customers for shipping and handling are recorded in
sales. Sales include shipping and handling revenues of $5.6 million and
$5.5 million for the quarters ended March 31, 2002 and 2001.
In preparing the Company's 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 Company's fiscal quarter ends on the Sunday nearest March 31 for
2002 and 2001, but for clarity of presentation, all periods are
described as if the quarter end is March 31. Fiscal first quarter 2002
and 2001 each consisted of 13 weeks.
Note 2: Net Earnings (Loss) Per Share
The Company's basic net earnings (loss) per share amounts have been
computed by dividing net earnings (loss) 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 stock options and warrants, when dilutive.
For the quarter ended March 31, 2002, 136,167 common share equivalents
were included in the computation of diluted net earnings per share.
For the quarter ended March 31, 2001, no common share equivalents were
included in the computation of diluted net loss per share. If the
Company had reported net income for the quarter ended March 31, 2001,
1,818 common share equivalents would have been included in the
computation of diluted net earnings per share.
Options and warrants to purchase 450,776 and 646,056 shares of common
stock with a weighted average exercise price of $6.90 and $5.83 were
outstanding during the quarters ended March 31, 2002 and 2001, but were
not included in the computation of diluted net earnings per share
because the exercise price exceeded the average market price of the
common shares during the period.
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are a leading marketer of value priced outdoor gear and general merchandise,
with a special emphasis on outdoor clothing, equipment and footwear. We market
and sell our merchandise through main, specialty and Buyer's Club catalogs and
two e-commerce Web sites. Our catalogs as well as our Web sites offer high
quality products at low prices. Our catalogs are advertised as The "Fun-to-Read"
Catalog(R) and our primary Web site is advertised as the "Fun-to-Browse"
Website(R). Our Web sites include www.sportsmansguide.com, our online retail
store modeled on our print catalogs and www.bargainoutfitters.com, our online
liquidation outlet.
Our business was started in 1970 by Gary Olen, our Chairman. Over time, our
product offerings and marketing efforts have broadened from the deer hunter to
include those interested in pursuing and living the outdoor lifestyle in general
and the value-oriented outdoorsman in particular. In 1992, we began our value
pricing strategy of offering outdoor equipment and supplies at discount prices,
later adding government surplus, manufacturers' close-outs and other merchandise
lines. In 1994, we began to publish specialty catalogs which allowed us to
utilize a customized marketing plan to individual customer groups.
Sales generated through the Internet have grown rapidly over the last several
years. We launched our online retail store in April 1998 and began posting our
catalogs and full product offerings on the site in February 1999. Our e-commerce
offerings generated over $36.0 million in sales in 2001 compared to $1.3 million
in 1998. Product sales on the sites accounted for approximately 27% of our sales
in the first quarter of 2002 compared to less than 1% for all of 1998.
In the fall of 2000, we began to aggressively promote and sell the Buyer's Club
membership program. In addition, unique catalogs (Buyer's Club Advantage(TM))
were developed and promoted to members only allowing us to maximize sales and
profitability from our best customers.
We believe that our value pricing, specialty catalog titles, the Internet and
Buyer's Club memberships have been important to our growth in sales and
profitability. Our sales have increased from $43 million in 1992 to
approximately $170 million in 2001.
CRITICAL ACCOUNTING POLICIES
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.
Customers can purchase one year memberships in our Buyer's Club for a $29.99
annual fee. We also offer two year memberships for $49.99. 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. 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 the customer list is
charged to operations as incurred. All other advertising costs are expensed as
incurred.
6
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information from our
Statements of Operations expressed as a percentage of sales:
Quarters Ended March 31,
2002 2001
---- ----
Sales ....................................................... 100.0% 100.0%
Cost of sales ............................................... 67.6 69.8
----- -----
Gross profit ............................................ 32.4 30.2
Selling, general and administrative expenses ................ 29.4 30.2
----- -----
Earnings (loss) from operations ......................... 3.0 --
Interest and miscellaneous expense, net ..................... -- (0.4)
----- -----
Earnings (loss) before income taxes ..................... 3.0 (0.4)
Income tax expense .......................................... 1.1 --
----- -----
Net earnings (loss) ..................................... 1.9% (0.4)%
===== =====
Quarter ended March 31, 2002 compared to quarter ended March 31, 2001
SALES. Sales for the quarter ended March 31, 2002 of $41.6 million were $2.7
million or approximately 7% higher than sales of $38.9 million during the same
period last year. The increase in sales, quarter over quarter, was primarily due
to higher sales generated from unique product offerings on the Internet as well
as the catalog. For the first quarter of 2002, sales generated through the
catalogs increased slightly as a result of a 6% increase in circulation offset
somewhat by lower customer response rates. As of the end of the first quarter
2002, the Buyer's Club membership had increased to approximately 270,000, up 6%
over the 254,000 reported at December 31, 2001 and up approximately 72% over the
membership count one year ago.
Sales generated through the Internet for the quarter ended March 31, 2002 were
approximately 27% of total sales compared to approximately 20% of total sales
during the same period last year. Sales generated through the Internet are
defined as sales that are derived from our web sites, catalog orders processed
online and online offers placed by telephone.
Gross returns and allowances for the quarter ended March 31, 2002 were $3.4
million or 7.5% of gross sales compared to $3.1 million or 7.4% of gross sales
during the same period last year.
GROSS PROFIT. Gross profit for the quarter ended March 31, 2002 was $13.5
million or 32.4% of sales compared to $11.7 million or 30.2% of sales during the
same period last year. The increase in gross profit as a percentage of sales was
primarily due to fewer markdowns to clearance aged inventory.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the quarter ended March 31, 2002 were $12.2 million
or 29.4% of sales compared to $11.8 million or 30.2% of sales for the same
period last year. The increase in selling, general and administrative expense
dollars, compared to the same period last year, was primarily due to the
increase in catalog circulation. Selling, general and administrative expenses,
as a percentage of sales, were lower compared to the same quarter a year ago
primarily due to lower order fulfillment costs as a result of the increase in
sales generated through the Internet.
Total catalog circulation during the first quarter of 2002 was 11.8 million
catalogs compared to 11.1 million catalogs during the first quarter of 2001. We
mailed 11 catalog editions consisting of three main catalogs, three Buyer's Club
Advantage(TM) catalogs and five specialty catalogs during the quarter ended
March 31, 2002 compared to ten catalog editions consisting of three main
catalogs, two Buyer's Club Advantage(TM) catalogs and five specialty catalogs
during the quarter ended March 31, 2001. Advertising expense for the quarter
ended March 31, 2002 was $7.2 million or 17.2% of sales compared to $6.8 million
or 17.5% of sales for the same period last year. The decrease in advertising
expense as a percentage of sales, compared to the same period last year, was
primarily due to the increase in sales generated through the Internet.
EARNINGS (LOSS) FROM OPERATIONS. Earnings from operations for the quarter ended
March 31, 2002 were $1.2 million compared to a loss of $(14,000) for the quarter
ended March 31, 2001.
7
INTEREST EXPENSE. Interest expense for the quarter ended March 31, 2002 was
$18,000 compared to $68,000 for the same period last year. The decrease in
interest expense was primarily due to lower levels of bank borrowings as a
result of the improved profitability for the year ended December 31, 2001 and
the quarter ended March 31, 2002.
INCOME TAX. Income tax expense for the quarter ended March 31, 2002 was $461,000
compared to $21,000 for the quarter ended March 31, 2001. The income tax expense
in 2001 represented an additional state income tax assessment for the 1999 tax
year.
NET EARNINGS (LOSS). Net earnings for the quarter ended March 31, 2002 were
$784,000 compared to a loss of $(167,000) 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 quarters,
we incur 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
- ------------------------------------------------------------------------------------------------------------------
2002
Sales $ 41,631
Gross profit 13,469
Earnings from operations 1,216
Net earnings 784
Net earnings per share .16
2001
Sales $ 38,931 $ 31,796 $ 36,472 $ 62,476
Gross profit 11,740 10,480 11,897 22,472
Earnings (loss) from operations (14) (138) 9 4,482
Net earnings (loss) (167) (207) (124) 3,251
Net earnings (loss) per share (.04) (.04) (.03) .68
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 $13.9 million as of March 31, 2002
compared to $13.0 million as of December 31, 2001, with current ratios of 1.7 to
1 and 1.5 to 1, respectively. We purchase large quantities of manufacturers'
close-outs 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.
We offer our 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 $1.3 million at March 31, 2002 compared to $2.1
million at December 31, 2001. 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.
We have a Credit and Security Agreement with Wells Fargo Bank Minnesota,
National Association, providing a revolving line of credit up to $20.0 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 45% of eligible inventory plus 80% of eligible
8
trade accounts receivable. Borrowings bear interest at the bank's prime rate.
The revolving credit line is collateralized by substantially all of our assets.
All borrowings are subject to various covenants. The most restrictive covenants
include a limit on quarterly measurements of year-to-date earnings (loss),
minimum gross margin percentage, maximum days inventory levels (as defined) and
maximum annual spending levels for capital assets. The agreement also prohibits
the payment of dividends to shareholders. We had no borrowings against the
revolving credit line as of March 31, 2002 and December 31, 2001. Outstanding
letters of credit were $1.3 million at March 31, 2002 compared to $2.4 million
at December 31, 2001.
OPERATING ACTIVITIES. Cash flows used in operating activities for the quarter
ended March 31, 2002 were $4.3 million compared to cash flows provided by
operating activities of $2.0 million for the same period last year. The increase
in cash flows used in operating activities was primarily the result of higher
inventory levels and payment of income taxes due for the year ended December 31,
2001. The increase in inventory was primarily due to several seasonal,
opportunistic product purchases.
INVESTING ACTIVITIES. Cash flows used in investing activities during the quarter
ended March 31, 2002 were $180,000 compared to $109,000 during the same period
last year.
FINANCING ACTIVITIES. Cash flows provided by financing activities during the
quarter ended March 31, 2002 were $6,000 compared to cash flows used in
financing activities of $3.3 million during the same period last year. Cash
flows used in financing activities in the first quarter of 2001 were comprised
of payments to reduce outstanding borrowings under the revolving line of credit.
We believe that cash flows from operations and borrowing capacity under our
revolving credit facility will be sufficient to fund our operations for the next
12 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. These forward-looking statements involve risk and uncertainties.
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 our Annual Report on Form 10-K for the year ended
December 31, 2001 filed with the Securities and Exchange Commission.
9
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our annual meeting of shareholders was held April 25, 2002, at which the
following matters were submitted to a vote of shareholders:
1. Election of eight directors.
NOMINEE FOR AGAINST ABSTAIN
------- --- ------- -------
Gary Olen 4,090,127 100 280
Gregory R. Binkley 4,090,127 100 280
Charles B. Lingen 4,090,127 100 280
Vincent W. Shiel 4,090,127 100 280
Leonard M. Paletz 4,090,127 100 280
Mark F. Kroger* 4,090,127 100 280
William T. Sena 4,090,127 100 280
Todd D. Peterson 4,090,127 100 280
* Mr. Kroger resigned as a director effective May 8, 2002
2. Ratification of the engagement of Grant Thornton LLP as independent
certified public accountants for the Company for 2002.
FOR AGAINST ABSTAIN BROKER NON-VOTES
--- ------- ------- ----------------
4,085,827 900 3,780 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months
ended March 31, 2002.
10
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: May 13, 2002 /s/ Charles B. Lingen
---------------------------------------
Charles B. Lingen
Executive Vice President Finance and
Administration/CFO
11