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 MARCH 29, 1998 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)
(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 May 12, 1998 there were 4,721,252 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 29, December 28,
ASSETS 1998 1997
------ ------
CURRENT ASSETS
Accounts receivable - net $ 3,199 $ 4,180
Inventory 28,055 23,841
Promotional material 3,530 3,714
Prepaid expenses 730 1,163
------ ------
Total current assets 35,514 32,898
PROPERTY AND EQUIPMENT - NET 4,182 4,316
OTHER ASSETS 191 -
------ ------
Total assets $39,887 $37,214
------ ------
------ ------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Checks written in excess of bank balances $ 1,948 $ 2,383
Notes payable - bank 5,652 1,690
Current maturities of long-term debt
Related parties - 1,795
Other 33 1,657
Accounts payable
Trade 11,335 16,866
Related parties 139 470
Accrued expenses 1,649 2,239
Customer deposits and other liabilities 2,409 3,140
------ ------
Total current liabilities 23,165 30,240
LONG-TERM LIABILITIES
Long-term debt 115 115
Deferred income taxes 494 494
------ ------
Total liabilities 23,774 30,849
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Series A Preferred Stock-$.01 par value; 200,000
shares authorized; no shares issued and outstanding at
March 29, 1998 and 20,000 shares issued and
outstanding at December 28, 1997 - -
Common Stock-$.01 par value; 36,800,000 shares
authorized; 4,713,252 and 2,339,225 shares issued and
outstanding at March 29, 1998 and December 28, 1997 47 23
Additional paid-in capital 11,433 2,365
Retained earnings 4,633 3,977
------ ------
Total shareholders' equity 16,113 6,365
------ ------
Total liabilities & shareholders' equity $39,887 $37,214
------ ------
------ ------
SEE ACCOMPANYING CONDENSED NOTES TO FINANCIAL STATEMENTS
2
THE SPORTSMAN'S GUIDE, INC.
STATEMENTS OF EARNINGS
(UNAUDITED)
For the Thirteen Weeks Ended
March 29, 1998 and March 28, 1997
(In thousands, except per share data)
Thirteen Weeks Ended
--------------------
March 29, March 28,
1998 1997
------- ------
Sales $31,697 $27,876
Cost of sales 18,405 17,360
------- ------
Gross profit 13,292 10,516
Selling, general and administrative expenses 12,124 9,324
------- ------
Earnings from operations 1,168 1,192
Interest expense (168) (239)
Miscellaneous income, net 1 1
------- ------
Earnings before income taxes 1,001 954
Income taxes 345 329
------- ------
Net earnings $ 656 $ 625
------- ------
------- ------
Net earnings per share:
Basic $ .19 $.27
------- ------
------- ------
Diluted $ .16 $ .23
------- ------
------- ------
Weighted average common and common equivalent shares
outstanding:
Basic 3,519 2,334
------- ------
------- ------
Diluted 4,028 2,767
------- ------
------- ------
SEE ACCOMPANYING CONDENSED NOTES TO FINANCIAL STATEMENTS
3
THE SPORTSMAN'S GUIDE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Thirteen Weeks Ended
March 29, 1998 and March 28, 1997
(In thousands of dollars)
Thirteen Weeks Ended
--------------------
March 29, March 28,
1998 1997
----- -----
Cash flows from operating activities:
Net earnings $ 656 $ 625
Adjustments to reconcile net earnings
to net cash used in operating activities:
Depreciation and amortization 368 317
Other (10) (10)
Changes in assets and liabilities:
Accounts receivable 981 1,155
Inventory (4,214) (7,224)
Promotional material 184 405
Prepaid expenses 433 (120)
Other assets (191) -
Checks written in excess of bank balances (435) (1,875)
Accounts payable (5,862) 946
Accrued expenses (590) (387)
Customer deposits and other liabilities (721) (223)
----- -----
Cash flows used in operating activities (9,401) (6,391)
Cash flows from investing activities:
Purchases of property and equipment (234) (258)
----- -----
Cash flows used in investing activities (234) (258)
Cash flows from financing activities:
Net proceeds from revolving credit line 3,962 6,654
Payments on subordinated and long-term debt (3,419) (5)
Proceeds from exercise of warrants and stock options 1,571 -
Repurchase of preferred stock (1,000) -
Net proceeds from issuance of common stock 8,521 -
----- -----
Cash flows provided by financing activities 9,635 6,649
----- -----
Increase (decrease) in cash and cash equivalents - -
Cash and cash equivalents at beginning of the period - -
----- -----
Cash and cash equivalents at end of the period $ - $ -
----- -----
----- -----
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the periods for:
Interest $ 171 $ 185
Income taxes $ 635 $ 298
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.
Note 2: Net Earnings Per Share
On December 28, 1997, the Company adopted Statement of Financial
Accounting Standards (SFAS) 128, (EARNINGS PER SHARE). As required by
SFAS 128, all current and prior period net earnings (loss) per share
data have been restated to conform to the provisions of SFAS 128.
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. The Company's 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 thirteen week periods ended March 29, 1998 and March 28, 1997,
508,756 and 433,125 shares of common stock equivalents were included
in the computation of diluted net earnings per share. Options and
warrants to purchase 15,775 and 35,677 shares of common stock with a
weighted average exercise price of $8.70 and $7.13 were outstanding
during the thirteen week periods ended March 29, 1998 and March 28,
1997 respectively, but were not included in the computation of diluted
earnings per share because to do so would have been anti-dilutive.
Note 3: Public Offering
On February 10, 1998, the Company received net proceeds of
approximately $8.5 million from the sale of 1.6 million shares of its
common stock through a public offering. On February 10, 1998, the
Company paid $3.4 million of subordinated notes payable and
repurchased all of its Series A Preferred stock for $1.0 million.
During the quarter, the Company received net proceeds of approximately
$1.4 million from the exercise of warrants to purchase 716,027 shares
of common stock. The warrants had been issued in connection with
private placements of subordinated notes payable. All of the warrants
contained a provision for the warrants to be terminated if not
exercised within 30 days after the public offering.
On February 5, 1998, the Company granted to the officers of the
Company, options to purchase 177,500 shares of common stock in
connection with the completion of the Company's public offering. The
exercise price of $6.50 is the same as the price to public in the
offering and 25% of the options 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.
5
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
(UNAUDITED)
Note 3: Public Offering (continued)
As part of the public offering, the Company issued to the
Representatives of the Underwriters five-year warrants to purchase
100,000 shares of the Company's Common Stock at an exercise price of
$8.45.
Note 4: New Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE
INCOME, which was required to be adopted in the first quarter of 1998.
SFAS No. 130 established standards for the reporting and display of
comprehensive income and its components. Comprehensive income
includes certain non-owner changes in equity that are currently
excluded from net income. Because the Company historically has not
experienced transactions that would be included in comprehensive
income, the adoption of SFAS No. 130 did not have a material effect on
the financial position, results of operations or cash flows of the
Company.
The Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION effective December 29, 1997. SFAS
No. 131 requires public companies to report certain information about
operating segments in their financial statements, and establishes
related disclosures about products and services, geographic areas and
major customers. SFAS No. 131 does not need to be applied to
interim financial statements in the initial year of application;
however, comparative information for interim periods in the
initial year of application will be reported in the financial
statements for interim periods in fiscal 1999.
The AICPA's Accounting Standard Executive Committee has issued SOP
98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR
OBTAINED FOR INTERNAL USE. Capitalized costs of internal-use software
projects consist of external direct costs of materials and services
used to develop or purchase internal-use software, payroll and
payroll-related costs, and interest costs incurred during the
development of internal-use software. SOP 98-1 is effective for
fiscal years beginning after December 15, 1998 for costs incurred in
those fiscal years for all projects, including projects in progress
when the SOP is adopted. The adoption of this standard is not
expected to have a material effect on the financial statements of the
Company.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED MARCH 29, 1998 COMPARED TO THIRTEEN WEEKS ENDED
MARCH 28, 1997
SALES. Sales for the thirteen weeks ended March 29, 1998 of $31.7 million were
$3.8 million or 14% higher than sales of $27.9 million during the same period
last year. The increase in sales was due to a 39% increase in catalog
circulation, offset partially by lower customer response rates resulting
primarily from softness in sales of cold weather merchandise due to the warmer
than normal winter caused by El Nino and the increased number of catalog
editions. The Company mailed ten catalog editions, including seven specialty
editions, during the thirteen weeks ended March 29, 1998, compared to eight
editions, including five specialty editions, during the same period last year.
Gross returns and allowances for the thirteen weeks ended March 29, 1998 were
$3.9 million or 11.1% of gross sales compared to $3.2 million or 10.4% of gross
sales during the same period 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 weeks ended March 29, 1998 was
$13.3 million or 41.9% of sales compared to $10.5 million or 37.7% of sales
during the same period last year. The increase in gross profit as a percentage
of sales was primarily due to higher retail product margins resulting from
offering a larger percentage of close-out, government surplus and direct import
products as well as more apparel and footwear, and by higher shipping and
handling margins due to a planned price increase.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the thirteen weeks ended March 29, 1998 were $12.1
million or 38.2% of sales compared to $9.3 million or 33.4% of sales for the
same period last year. The dollar increase was primarily due to a 39% increase
in catalog circulation. Total circulation during the first quarter of 1998 was
16.4 million catalogs compared to 11.8 million catalogs during the first quarter
of 1997. 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 weeks ended March
29, 1998 was $7.2 million or 22.6% of sales compared to $5.3 million or 18.8% of
sales for the same period last year. The increase as a percentage of sales was
primarily due to lower customer response rates which management believes were
caused by softness in demand for cold weather merchandise due to El Nino and the
late mailing of the March main catalog which was shipped late by one of the
Company's printers and lower customer response associated with the increased
number of catalog editions mailed to existing customers. The Company recorded
$100,000 of recovered merger costs during the thirteen weeks ended March 28,
1997. 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 FROM OPERATIONS. Earnings from operations of $1.2 million for the
thirteen weeks ended March 29, 1998 were even with last year. Earnings from
operations for the first quarter of 1997 included $100,000 from recovery of
merger expenses incurred in 1996. Operating earnings for the first quarter of
1998 thus reflected a slight gain over last year.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
INTEREST EXPENSE. Interest expense for the thirteen weeks ended March 29, 1998
was $168,000 compared to $239,000 for the same period last year. The decrease
in interest expense was primarily due to the availability of additional working
capital from the public offering and the retirement of subordinated notes
payable, both completed in February.
NET EARNINGS. Net earnings for the thirteen weeks ended March 29, 1998 were
$656,000 or 2.1% of sales compared to $625,000 or 2.2% of sales during the same
period last year ($559,000 or 2.0% of sales when adjusted for the tax effected
benefit from recovered merger related expenses). Diluted earnings per share for
the thirteen weeks ended March 29, 1998 were $.16 compared to $.23 for the same
period last year. The diluted weighted average common and common equivalent
shares increased to 4,028,000 in the first quarter of 1998 compared to 2,767,000
for the same period last year, due to the public offering of 1.6 million common
shares.
QUARTERLY FLUCTUATIONS AND SEASONALITY
The Company's sales and results of operations have fluctuated and can be
expected to continue to fluctuate on a quarterly basis as a result of a number
of factors, including: the timing of new merchandise and catalog offerings;
recognition of costs or sales contributed by new merchandise and catalog
offerings; fluctuations in response rates; fluctuations in postage, paper and
printing costs and in merchandise returns; adverse weather conditions that
affect response, distribution or shipping; shifts in the timing of holidays; and
changes in the Company's product mix. The Company recognizes the cost of
catalog production and mailing over the estimated useful lives of the catalogs,
ranging from four to six months from the catalog's in-home date. Consequently,
quarter-to-quarter sales and expense comparisons will be impacted by the timing
of the mailing of the Company's catalog editions.
The majority of the Company's sales historically occur during the third and
fourth fiscal quarters. The seasonal nature of the Company's business is due to
the catalog's focus on hunting merchandise and related accessories for the fall,
as well as winter apparel and gifts for the holiday season. The Company expects
this seasonality will continue in the future. In anticipation of increased
sales activity during the third and fourth fiscal quarters, the Company incurs
significant additional expenses for hiring employees and building inventory
levels.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
QUARTERLY FLUCTUATIONS AND SEASONALITY (CONTINUED)
The following table sets forth certain unaudited quarterly financial information
for the Company for the periods shown. In the opinion of management, this
unaudited information has been prepared on the same basis as the audited
information and includes all normal recurring adjustments necessary to present
fairly, in all material respects, the information set forth therein.
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------
FISCAL 1998
Sales $31,697
Gross profit 13,292
Earnings from operations 1,168
Net earnings 656
FISCAL 1997
Sales $27,876 $23,245 $26,490 $50,502
Gross profit 10,516 9,181 10,680 21,502
Earnings (loss) from operations 1,192 462 (169) 3,564
Net earnings (loss) 625 70 (356) 2,136
LIQUIDITY AND CAPITAL RESOURCES
The Company meets its operating cash requirements through funds generated from
operations and borrowings under its revolving line of credit. On February 10,
1998, the Company received net proceeds of $8.5 million from the sale of 1.6
million shares of its common stock through a public offering. The Company used
a portion of the offering proceeds to pay $3.4 million of subordinated notes
payable and repurchase all of the Company's Series A Preferred Stock for $1.0
million. The remaining $4.1 million is being used as additional working
capital.
The Company had working capital of $12.3 million as of March 29, 1998, compared
to $2.7 million as of December 28, 1997. The increase of $9.6 million was
primarily due to the proceeds from the public offering, proceeds from the
exercise of options and warrants, and year to date net earnings. The Company's
working capital requirements have increased during the thirteen weeks ended
March 29, 1998 compared to the same period in the previous 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 acquisition may
require that it be held for several months before being offered in a catalog.
This can result in increased inventory levels thereby increasing the Company's
working capital requirements and related carrying costs. Inventory carryover of
cold weather merchandise is up approximately $2.5 million over the same
period last year due to the decrease in sales demand which management believes
was the effect of El Nino.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company offers its customers an installment credit plan with no finance
fees, known as the "G. O. Painless 4-Pay Plan". Each of the four consecutive
monthly installments is billed directly to customers' credit cards. The Company
had installment receivables of $2.5 million at March 29, 1998 compared to $3.6
million at December 28, 1997. 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.
On April 18, 1997, the Company entered into a $15.0 million revolving line of
credit with Norwest Business Credit, Inc. The credit facility is subject to
an adequate borrowing base and expires in May 2000. Funding under the credit
facility is subject to a collateral base consisting of inventory, plus 80% of
accounts receivable under the installment plan, less customer liabilities.
The collateral base related to inventory is limited to $10.0 million from
December 16 through February 28 and $15.0 million from March 1 through
December 15 of each year. The revolving line of credit is for working
capital and letters of credit. Commercial letters of credit may not exceed
$5.0 million at any time. Borrowings under the revolving line of credit bear
interest at the bank's prime rate. The availability of funding under the
facility is subject to the sum of the principal balance and letters of credit
being paid down to $4.0 million, plus 80% of installment receivables. The
pay-down requirement must be maintained for not less than 15 consecutive days
between December 1 and March 31 of each year. The revolving line of credit
is collateralized by substantially all of the assets of the Company. The
Company was in compliance with the credit agreement's covenants as of March
29, 1998. As of March 29, 1998, the Company had borrowed $5.7 million
against the revolving credit line compared to $1.7 million at December 28,
1997.
Cash flows used in operating activities for the thirteen weeks ended March 29,
1998 were $9.4 million compared to $6.4 million for the same period last year.
The increase in cash flows used in operating activities was primarily the result
of increased inventory levels and the decrease in accounts payable. Accounts
payable decreased as a result of aggressively pursuing cash discounts.
Cash flows used in investing activities during the thirteen weeks ended
March 29, 1998 were $234,000 compared to $258,000 during the same period last
year. The Company plans to expend approximately $1.5 million for capital
additions during 1998.
Cash flows provided by financing activities during the thirteen weeks ended
March 29, 1998 were $9.6 million compared to $6.6 million during the same period
last year. The Company received $8.5 million in net proceeds from a public
offering completed during February. A portion of the proceeds were used to pay
$3.4 million of subordinated notes payable and to repurchase all of the
Company's' Series A Preferred Stock for $1.0 million. The Company also received
proceeds from the exercise of stock warrants and options totaling $1.6 million.
The warrants were to expire 30 days after the public offering unless exercised.
The Company believes that cash flow from operations and borrowing capacity under
its revolving credit facility will be sufficient to fund operations and future
growth for the next 12 months.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
FORWARD-LOOKING STATEMENTS
This report may contain forward-looking statements within the meaning of the
federal securities laws. Actual results could differ materially from those
projected in the forward-looking statements due to a number of factors,
including general economic conditions, a changing market environment for the
Company's products and the market acceptance of the Company's catalogs as well
as the factors set forth under "Risk Factors" in the Company's prospectus dated
February 5, 1998 filed with the Securities and Exchange Commission pursuant to
Rule 424(b) under the Securities Act of 1933.
11
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the thirteen weeks ended
March 29, 1998.
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: May 12, 1998 /s/Charles B. Lingen
--------------------------
Charles B. Lingen
Senior Vice President Finance/CFO
13