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 FISCAL PERIOD ENDED SEPTEMBER 26, 1997, 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)
(612) 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 4, 1997 there were 2,339,225 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)
September 26, December 27,
ASSETS 1997 1996
------------ ------------
CURRENT ASSETS
Accounts receivable - net $ 2,353 $ 3,038
Inventory 29,552 17,765
Prepaid expenses 1,777 538
Promotional material 2,945 2,194
------- -------
Total current assets 36,627 23,535
PROPERTY AND EQUIPMENT - NET 4,345 4,355
------- -------
Total assets $40,972 $27,890
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft $ 1,156 $ 3,539
Notes payable - bank 13,256 1,497
Current maturities of long-term debt
Related parties 1,795 -
Other 1,662 52
Accounts payable 14,842 10,710
Accrued expenses 1,205 1,809
Customer deposits and other liabilities 2,013 2,316
------- -------
Total current liabilities 35,929 19,923
LONG-TERM LIABILITIES
Long-term debt
Related parties - 1,795
Other 118 1,811
Deferred income taxes 696 486
------- -------
Total liabilities 36,743 24,015
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Series A Preferred Stock-$.01 par value;
200,000 shares authorized, 20,000 shares
issued and outstanding
Common Stock-$.01 par value; 36,800,000 shares
authorized; 2,339,225 and 2,333,600 shares
issued and outstanding at September 26, 1997 24 23
and December 27, 1996, respectively
Additional paid-in capital 2,364 2,350
Accumulated earnings 1,841 1,502
------- -------
Total shareholders' equity 4,229 3,875
------- -------
Total liabilities and shareholders' equity $40,972 $27,890
------- -------
------- -------
SEE ACCOMPANYING CONDENSED NOTES TO FINANCIAL STATEMENTS
2
THE SPORTSMAN'S GUIDE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Thirteen Weeks and Thirty-nine Weeks Ended
September 26, 1997 and September 27, 1996
(In thousands, except per share data)
Thirteen Weeks Thirty-nine Weeks
---------------------- -----------------------
1997 1996 1997 1996
------ ------ ------ ------
Sales $26,490 $26,485 $77,611 $69,273
Cost of sales 15,810 17,224 47,234 45,624
------ ------ ------ ------
Gross profit 10,680 9,261 30,377 23,649
Selling, general and administrative
expenses 10,849 8,620 28,892 23,017
------ ------ ------ ------
Earnings (loss) from operations (169) 641 1,485 632
Interest expense (374) (323) (963) (714)
Miscellaneous income (expense), net - 1 (4) 10
------ ------ ------ ------
Earnings (loss) before income taxes (543) 319 518 (72)
Income tax (expense) benefit 187 - (179) -
------ ------ ------ ------
Net earnings (loss) $ (356) $ 319 $ 339 $ (72)
------ ------ ------ ------
------ ------ ------ ------
Net earnings (loss) per common and
common equivalent share:
Primary $ (.15) $ .14 $ .12 $ (.03)
------ ------ ------ ------
------ ------ ------ ------
Fully diluted $ (.15) $ .14 $ .11 $ (.03)
------ ------ ------ ------
------ ------ ------ ------
Weighted average common and common
equivalent shares outstanding:
Primary 2,337 2,334 2,940 2,334
------ ------ ------ ------
------ ------ ------ ------
Fully diluted 2,337 2,334 3,028 2,334
------ ------ ------ ------
------ ------ ------ ------
SEE ACCOMPANYING CONDENSED NOTES TO FINANCIAL STATEMENTS
3
THE SPORTSMAN'S GUIDE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Thirteen Weeks and Thirty-nine Weeks Ended
September 26, 1997 and September 27, 1996
(In thousands of dollars)
Thirteen Weeks Thirty-nine Weeks
---------------------- -----------------------
1997 1996 1997 1996
------ ------ ------ ------
Cash flows from operating activities:
Net earnings (loss) $ (356) $ 319 $ 339 $ (72)
Adjustments to reconcile net earnings
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization 372 260 1,026 751
Deferred income taxes - - 210 -
Other (10) (10) (42) (40)
Changes in assets and liabilities:
Accounts receivable 185 (515) 685 (11)
Inventory (3,086) (3,205) (11,787) (4,659)
Prepaid expenses (339) 61 (1,239) 119
Promotional material 672 302 (751) (87)
Bank overdraft (174) 329 (2,383) 175
Accounts payable 2,191 1,442 4,132 (3,162)
Accrued expenses 354 316 (604) 205
Customer deposits and other
liabilities 574 539 (303) 1
------ ------ ------ ------
Cash flows provided by (used in)
operating activities 383 (162) (10,717) (6,780)
Cash flows from investing activities:
Purchases of property and equipment (433) (501) (1,016) (895)
------ ------ ------ ------
Cash flows used in investing
activities (433) (501) (1,016) (895)
Cash flows from financing activities:
Net proceeds from revolving credit line 41 668 11,759 7,716
Payments on long-term debt (6) (5) (41) (41)
Proceeds from exercise of options 15 - 15 -
------ ------ ------ ------
Cash flows provided by financing
activities 50 663 11,733 7,675
Decrease in cash and cash equivalents - - - -
Cash and cash equivalents at beginning
of the period - - - -
------ ------ ------ ------
Cash and cash equivalents at end of the
period $ - $ - $ - $ -
------ ------ ------ ------
------ ------ ------ ------
4
SEE ACCOMPANYING CONDENSED NOTES TO FINANCIAL STATEMENTS
THE SPORTSMAN'S GUIDE, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
For the Thirteen Weeks and Thirty-nine Weeks Ended
September 26, 1997 and September 27, 1996
(In thousands of dollars)
Thirteen Weeks Thirty-nine Weeks
--------------- ------------------
1997 1996 1997 1996
------ ------- --------- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the periods for:
Interest $ 373 $ 320 $ 895 $ 779
Income taxes $ - $ 1 $ 956 $ 3
SEE ACCOMPANYING CONDENSED NOTES TO FINANCIAL STATEMENTS
5
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 of
operations and cash flows. 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.
Note 2: Net Earnings (Loss) Per Common and Common Equivalent Share
Net earnings (loss) per common and common equivalent share is computed
by dividing net earnings (loss) by the weighted average number of
common and common equivalent shares outstanding, when dilutive.
Net earnings (loss) per common and common equivalent share was
calculated using the modified treasury stock method for the
thirty-nine weeks ended September 26, 1997 and the treasury stock
method for the thirteen weeks ended September 26, 1997 and for the
thirteen and thirty-nine weeks ended September 27, 1996.
Note 3: Credit Facility
On April 18, 1997 the Company entered into an Amended and Restated
Credit and Security Agreement ("the amended agreement") with its
bank which expires in May 2000. The amended agreement contains
substantially the same terms and conditions as the previous
agreement except that the maximum borrowing under the line of credit
was increased from $10.0 million to $15.0 million, the interest rate
was reduced to the bank's prime rate and the limit on letters of
credit was increased from $1.0 million to $5.0 million. The amended
credit facility has an increased collateral base related to
inventory of $10.0 million December 16 through March 31, $12.0
million April 1 through April 15 and $15.0 million April 16 to
December 15 of each year. In September 1997, the Company further
amended its credit facility to provide a temporary increase in the
credit line to $16.5 million, subject to an adequate borrowing base.
The additional $1.5 million of availability expires on December 15,
1997. All other terms and conditions remained substantially the
same as in the previous agreement.
Note 4: Public Offering
On July 11, 1997 the Company filed a Registration Statement with the
Securities and Echange Commission for the sale of 2,000,000 shares
of its common stock. The Company expects the offering price to be
between $7.00 and $8.00 per share. Of the shares being registered,
1,600,000 are to be sold by the Company and 400,000 are to be sold
by certain selling shareholders. The Registration Statement has not
yet become effective.
6
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
(UNAUDITED)
Note 5: Shareholders' Equity
The Company's Board of Directors approved a one-for-ten reverse stock
split which was approved by the shareholders on March 5, 1997. All
share and per share amounts have been restated to reflect the effect
of the reverse stock split.
On June 20, 1997 the Company's Board of Directors approved increasing
the number of shares reserved for issuance under the 1996 Stock Option
Plan from 400,000 to 600,000, subject to shareholder approval which
was obtained on July 16, 1997.
On July 1, 1997 the Company's Board of Directors approved the grant to
officers of the Company options to purchase 220,000 shares of common
stock contingent upon the completion of the Company's public offering.
The exercise price will be the same as the price to public in the
offering document and 25% of the options will vest immediately upon
the date of grant with the balance vesting over the next three years.
The options will expire ten years from the date of grant.
On July 1, 1997 the Company's Board of Directors approved the
repurchase of all of the Company's Series A Preferred Stock for $1.0
million upon completion of the Company's public offering.
Note 6: Recent Accounting Pronouncements
The FASB has issued Statement of Financial Accounting Standards (SFAS)
No. 128, EARNINGS PER SHARE, which is effective for financial
statements issued after December 15, 1997. Early adoption of the new
standard is not permitted. The new standard eliminates primary and
fully diluted earnings per share and requires presentation of basic
and diluted earnings per share together with disclosure of how the per
share amounts were computed. The effect of adopting this new standard
has not been determined.
The FASB also issued SFAS No. 130, "Reporting Comprehensive Income,"
which requires the company to display an amount representing total
comprehensive income, as defined by the statement, as part of the
company's basic financial statements. Additionally, SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information,"
requires the company to disclose financial and other information about
its business segments, their products and services, geographic areas,
sales, profits, assets and other information. These statements are
effective for financial statements for periods beginning after
December 15, 1997.
The adoption of these statements is not expected to have a material
effect on the consolidated financial statements of the company.
7
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SALES. Sales for the thirteen weeks ended September 26, 1997 of $26.5 million
were flat compared to sales for the same period last year. Sales for the
thirty-nine weeks ended September 26, 1997 of $77.6 million were $8.3 million or
12.0% higher than sales of $69.3 million for the same period last year.
Sales for the thirteen weeks ended September 26, 1997 were down significantly
from expectations. The planned sales increase from a 48% increase in catalog
circulation was completely offset by the effects of a United Parcel Service
(UPS) strike in August and lower than anticipated response on the July 1997
catalog. The UPS strike and resulting publicity created a negative effect on
consumer confidence and therefore suppressed sales. The Company was further
affected when the overloaded U.S. Postal Service failed to deliver catalogs on a
timely basis during and after the UPS strike. Management believes that the
strike related events negatively impacted sales by an estimated $2.6 million in
the third quarter. The sales increase for the thirty-nine weeks ended September
26, 1997 was due to a 40% increase in circulation offset partially by the
effects of the UPS strike, and by lower customer response rates resulting from
increased catalog editions and the planned merchandising shift to higher margin
products.
The Company mailed eight catalog editions, including five specialty editions,
during the thirteen weeks ended September 26, 1997, compared to seven editions,
including four specialty editions, during the same period last year. Year to
date the Company has mailed 22 catalog editions, including 14 specialty
editions, compared to 17 catalog editions, including eight specialty editions,
during the same period last year.
Gross returns and allowances for the thirteen and thirty-nine weeks ended
September 26, 1997 were $2.9 million or 10.0% of gross sales and $9.0 million or
10.4% of gross sales compared to $2.3 million or 8.0% of gross sales and $6.0
million or 7.9% of gross sales for the same periods last year. The increase was
anticipated as part of the merchandising strategy to offer more products in the
apparel and footwear categories, which tend to have higher return rates than
other product categories.
GROSS PROFIT. Gross profit for the thirteen and thirty-nine weeks ended
September 26, 1997 was $10.7 million or 40.3% of sales and $30.4 million or
39.1% of sales, compared to $9.3 million or 35.0% of sales and $23.6 million or
34.1% of sales for the same periods last year. The increase in gross profit as
a percent of sales was due primarily to higher retail product margins which were
the result of the Company's ongoing plan to shift a larger percentage of product
offerings to higher margin manufacturers' close-outs and military surplus as
well as apparel and footwear.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the thirteen and thirty-nine weeks ended September
26, 1997 were $10.8 million or 41.0% of sales and $28.9 million or 37.2% of
sales compared to $8.6 million or 32.5% of sales and $23.0 million or 33.2% of
sales for the same periods last year. The dollar increase was primarily due to
the 48% and 40% increase in circulation. Total circulation during the thirteen
and thirty-nine weeks ended September 26, 1997 was 15.7 million and 39.6 million
catalogs
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS (continued)
compared to 10.6 million and 28.3 million catalogs during the same periods last
year. The increase in catalog circulation was primarily due to a planned
increase in the number of specialty catalog editions and increased efforts to
develop new customers. Advertising expense for the thirteen and thirty-nine
weeks ended September 26, 1997 was $6.5 million or 24.5% of sales and $17.0
million or 21.9% of sales compared to $4.9 million or 18.3% of sales and $12.7
million or 18.3% of sales for the same periods last year. The increase as a
percent of sales for both periods was primarily due to lower customer response
associated with the number of catalog editions mailed to existing customers, new
customer prospecting, and lower customer response rates caused by the UPS strike
during the third quarter. The Company did not have any merger related expenses
during the thirteen weeks ended September 26, 1997 and recorded $100,000 of
recovered merger costs during the thirty-nine weeks ended September 26, 1997
compared to $12,000 and $218,000 of merger related expenses during the same
periods last year. These expenses were incurred in connection with an Agreement
and Plan of Merger entered into in March 1996 among the Company, VISTA 2000,
Inc. and VISTA Acquisition Subsidiary, Inc. The Company terminated the
agreement in May 1996 based upon various breaches of the agreement by VISTA
2000, Inc.
EARNINGS (LOSS) FROM OPERATIONS. The loss from operations for the thirteen
weeks ended September 26, 1997 was $169,000 and the earnings from operations for
the thirty-nine weeks ended September 26, 1997 was $1.5 million or 1.9% of sales
compared to earnings from operations of $641,000 and $632,000 for the same
periods last year.
INTEREST EXPENSE. Interest expense for the thirteen and thirty-nine weeks ended
September 26, 1997 was $374,000 and $963,000 compared to $323,000 and $714,000
for the same periods last year. The increase was primarily due to increased
borrowings against the revolving line of credit as a result of higher inventory
levels.
INCOME TAXES. The company recorded an income tax benefit of $187,000 and income
tax expense of $179,000 for the thirteen and thirty-nine weeks ended
September 26, 1997. No income tax expense was recorded during the thirteen
weeks ended September 27, 1996 due to the utilization of net operating loss
carry forwards. No income tax benefit was recorded during the thirty-nine weeks
ended September 27, 1996 due to a valuation allowance being recorded.
NET EARNINGS (LOSS). The company had a net loss for the thirteen weeks ended
September 26, 1997 of $356,000 and net earnings of $339,000 or .4% of sales for
the thirty-nine weeks ended Septmeber 26, 1997 compared to net earnings of
$319,000 and a net loss of $72,000 for the same periods last year.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically met its operating cash requirements through funds
generated from operations and borrowings under its revolving line of credit and
from subordinated notes payable to shareholders and other investors.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
The Company had working capital of $700,000 as of September 26, 1997 compared to
working capital of $3.6 million as of December 27, 1996. The decrease of $2.9
million in working capital during the thirty-nine weeks ended September 26, 1997
was the result of the $3.4 million in subordinated notes payable, maturing
June 15, 1998, being classified as a current liability as of June 27, 1997,
partially offset by year-to-date earnings. The Company's working capital
requirements have increased during the thirteen and thirty-nine weeks ended
September 26, 1997 compared to the same periods last year primarily as a result
of higher inventory levels and lower inventory turnover which are consistent
with the Company's strategic plan to increase product margins through purchasing
more manufacturers' close-outs. 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 its acquisition 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 the Company's working capital requirements and related carrying
costs.
In November 1995, the Company began offering 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 $1.7 million at September 26,
1997 compared to $2.3 million at December 27, 1996. 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.
In April 1997, the Company entered into an Amended and Restated Credit and
Security Agreement with Norwest Business Credit, Inc. increasing its revolving
line of credit to $15.0 million, subject to an adequate borrowing base, and
extending the expiration date to May 2000. The amended credit facility
increased the limit for letters of credit to $5.0 million and the interest rate
was reduced to the bank's prime rate. In September 1997, the Company further
amended its credit facility to provide a temporary increase in the credit line
to $16.5 million, subject to an adequate borrowing base. The additional $1.5
million of availability expires on December 15, 1997. All other terms and
conditions remained substantially the same as in the previous agreement. The
Company was in compliance with the credit agreement's covenants as of September
26, 1997. As of September 26, 1997, the Company had borrowed $13.3 million
against the revolving credit line compared to $1.5 million at December 27, 1996.
The increase during the thirty-nine weeks ended September 26, 1997 is due to the
$11.8 million increase in inventory required to support the merchandising plan.
Cash flows used in operating activities for the thirty-nine weeks ended
September 26, 1997 were $10.7 million compared to $6.8 million for the same
period last year. The increase in cash flows used in operating activities was
primarily the result of increased inventory levels.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
Cash used in investing activities during the thirty-nine weeks ended
September 26, 1997 was $1.0 million compared to $895,000 for the same period
last year. During 1994, the Company began a multi-year project of replacing and
enhancing its operational and management information systems which has resulted
in significant capital expenditures being incurred each year to develop computer
software programs. Additionally, the Company has made investments to enhance
warehouse operations in terms of efficiencies and capacity. The Company has
continued the system development plan with additional hardware and software
upgrades totaling $668,000 year to date which are funded from operations.
During 1997, the Company plans to spend approximately $900,000 under the system
development plan.
The Company believes that cash flow from operations, borrowing capacity under
its revolving credit facility and subordinated debt will be sufficient to fund
operations for the next 12 months.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders was held on July 16,
1997, at which the following three matters were submitted to a vote of
shareholders:
1. Election of seven directors. The vote on this mattter was as
follows:
Nominee For Withheld
------- --- --------
Vincent W. Shiel 1,729,762 0
Gary Olen 1,729,762 0
Leonard M. Paletz 1,729,762 0
Mark F. Kroger 1,729,762 0
William T. Sena 1,729,762 0
Gregory R. Binkley 1,729,762 0
Charles Lingen 1,729,762 0
2. Approval and ratification of the Company's 1996 Stock Option Plan
which had been approved by the Board of Directors to provide
incentives to certain officers and key employees of the Company.
The vote on this matter was as follows:
For Against Abstain
--- ------- -------
1,729,762 0 0
11
PART II. OTHER INFORMATION (continued)
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (continued)
3. Approval and ratification of the selection of Grant Thornton LLP as
independent certified public accountants to audit the Company's
financial statements for the fiscal year ending December 28, 1997.
The vote on this matter was as follows:
For Against Abstain
--- ------- -------
1,729,762 0 0
ITEM 5. OTHER INFORMATION
On November 1, 1997 the Company's Board of Directors approved a change
in the Company's fiscal year end from the Friday nearest December 31
to the Sunday nearest December 31. The Company's Annual Report on
form 10-K for the fiscal year ended December 28, 1997 will include the
two day transition period from December 26 (previous fiscal year end)
to December 28 (new fiscal year end).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
See Exhibit Index at page 14 of this report.
(B) REPORTS ON FORM 8-K:
None.
12
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 4, 1997 BY: /S/ CHARLES B. LINGEN
---------------------
Charles B. Lingen
Vice President Finance/CFO
13
EXHIBIT INDEX
Exhibit Method of Filing
- ----------- -----------------------------
27 Financial Data Schedule.............Filed herewith electronically
14