UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
- - --- OF 1934.
FOR THE FISCAL YEAR ENDED JANUARY 3, 1999
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 NUMBER 0-15767
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THE SPORTSMAN'S GUIDE, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1293081
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
411 FARWELL AVENUE, SOUTH ST. PAUL, MINNESOTA 55075
(Address of principal executive offices)
(651) 451-3030
(Registrant's telephone number, including area code)
---------------------------
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
As of March 19, 1999, the aggregate market value of the registrant's Common
Stock held by non-affiliates was approximately $20,534,921 based on the last
reported sale price of the Common Stock on such date on the Nasdaq National
Market.
As of March 19, 1999, there were 4,747,810 shares of the registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its Annual Meeting of
Shareholders on May 10, 1999 are incorporated by reference into Part III of this
Form 10-K.
PART I.
ITEM 1. BUSINESS
OVERVIEW
The Sportsman's Guide, Inc. (the "Company") is a catalog retailer and
Internet "E-tailer" of value priced outdoor gear and general merchandise,
with a special emphasis on outdoor clothing, equipment and footwear. The
Company's broad selection of products are sold through distinctive main and
specialty catalogs which are advertised as The "Fun-to-Read"
Catalog-Registered Trademark-. In April 1998, the Company established an
E-commerce web site, www.sportsmansguide.com, where it sells selected product
offerings and processes orders. The web site is advertised as The
"Fun-to-Browse" Website-Registered Trademark-. The Company will begin posting
catalogs and full product offerings on the web site in March 1999.
The Company offers a large selection of high value products at low prices.
These products include footwear, clothing, camping and outdoor recreation
equipment, hunting and shooting accessories, optics, collectibles and gift
items, as well as a diverse range of additional offerings in other product
categories. In recent years, the Company has aggressively pursued a strategy to
provide manufacturers' close-outs of name brand shoes, boots, apparel and
general merchandise, as well as government surplus from around the world.
The Company's business was started in 1970 by Gary Olen, the Company's
Chairman and Chief Executive Officer. Over time, the Company's product offerings
and marketing efforts have broadened to include those interested in pursuing and
living the outdoor lifestyle in general and the value-oriented outdoorsman in
particular. In 1992, the Company began its value pricing strategy of offering
outdoor equipment and supplies at discount prices, later adding government
surplus, manufacturers' close-outs and other lines of high value, high margin
merchandise that appeal to a broad group of customers. Due in large part to the
success of these strategies, the Company's sales have increased from $38 million
in 1992 to over $142 million in 1998.
The Company was incorporated under the laws of the State of Minnesota on
March 23, 1977 as The Olen Company, Inc. At that time the Company acquired the
business and assets of The Olen Company, a sole proprietorship owned by Gary
Olen, the Company's Chairman and Chief Executive Officer. In March 1986, the
Company changed its name to The Sportsman's Guide, Inc. The Company's principal
executive offices are located at 411 Farwell Avenue, South St. Paul, Minnesota
55075, and its telephone number is (651) 451-3030.
INDUSTRY AND MARKET
The catalog shopping industry has experienced substantial growth over the
past several years. According to industry reports, from 1993 to 1998 U.S.
consumer sales volume grew at a rate of approximately 8% annually to an
estimated $87 billion in 1998. The U.S. consumer catalog industry is expected to
reach sales of at approximately $119 billion by 2003. Between 1993 and 1998,
U.S. consumer sales growth outpaced that of the retail industry. Of the total
U.S. adult population, 57% or 110 million adults shopped from catalogs in 1996.
An industry source estimates the size of the adult catalog shopper market will
reach 158 million by 2001, up 44% from 1996. The Company believes that catalog
sales will continue to increase due to the convenience and time savings of
catalog shopping.
The majority of the Company's sales fall within two large product segments
of the U.S. catalog market: apparel and sporting goods. Together, the apparel
and sporting goods segments represent approximately 27% of the total dollar
volume of catalog sales in the United States.
Since most direct mail catalogs are targeted to women, the Company believes
the male catalog customer is an underserved segment of the market that
represents a significant opportunity. The proportion of men who are catalog
shoppers is increasing. Recent industry data suggest that 52% of men in the U.S.
bought from catalogs during 1996, up from 38% in 1994.
The Company believes that its niche marketing focus on the value-oriented
outdoor enthusiast, together with its product offerings and growing sales of
general merchandise has positioned it to continue to take advantage of
opportunities within this large and expanding market.
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BUSINESS STRATEGY
The Company's objective is to maximize its niche of selling by direct mail
and E-commerce value priced outdoor and general merchandise. Key elements of the
Company's ongoing business strategy include:
EXPAND AND CAPITALIZE ON THE VALUE-ORIENTED OUTDOOR ENTHUSIAST. The Company
seeks to expand its customer base and capitalize on its value-oriented market
through increased circulation of its specialty catalogs, web site development
and advertising, name and e-mail acquisition programs, and new diverse product
offerings.
OFFER QUALITY, NAME BRAND AND UNIQUE PRODUCTS AT VALUE PRICING. The Company
offers high quality, name brand products along with unique and unusual products,
all at value pricing. The Company offers a changing mix of products which are
hand picked and field tested to ensure quality and maximize customer appeal.
PROVIDE A FUN AND CONVENIENT SHOPPING EXPERIENCE. The Company strives to
provide a fun and convenient shopping experience by combining its entertaining
catalog format with the convenience of direct mail and Internet shopping. The
Company emphasizes customer service and maintains sophisticated order entry via
Internet or inbound calls and fulfillment operations for efficient processing of
customer orders.
MANAGE BY PROACTIVELY USING INFORMATION SYSTEMS. The Company proactively
uses its information systems in merchandising, marketing and list management to
test, assess and adjust day-to-day as well as long-term operating activities.
Timely, comprehensive information allows the Company to alter product mix in
future catalogs and Internet offers, adjust circulation plans, select target
customers and change prices on particular products in response to consumer
preferences.
CAPITALIZE ON THE COMPANY'S FLEXIBLE STRUCTURE AND SHORT CATALOG LEAD TIME.
The Company's short catalog lead time (approximately 60 days) gives it a high
degree of flexibility to make changes in upcoming catalogs based on up-to-date
information. This enables the Company to manage its business on a catalog by
catalog, page by page, product by product basis to determine future product
offerings and the most profitable customer segments to target. The Company's
E-commerce initiative further increases the flexibility to offer products to
customers in a timely fashion.
CATALOGS
The Company publishes main and specialty editions of The Sportsman's Guide
catalog. The Company mailed approximately 75 million catalogs to existing and
prospective customers in 1998.
FORMAT. The Company's catalogs and Internet site are designed to be fun
and entertaining. Every merchandise offering uses a highly promotional format
that features various items at sale prices. Unique to the Company is its
product description, or copy. The catalogs and Internet site make creative
and expansive use of art and copy to extensively describe products with
humorous text, call-outs, photos, photo captions and caricatures. Copy is
written in the first person from Gary Olen to the reader. The catalogs and
Internet site are perceived by customers as having entertainment value and
are advertised as The "Fun-to-Read" Catalog-Registered Trademark- and The
"Fun-to-Browse" Website-Registered Trademark-. Excerpts from the catalogs
have been featured in Jay Leno's "Headlines" segment on The Tonight Show. The
copy has also been singled out for its excellence by various publications
within the direct mail industry.
TYPES AND PURPOSES. Main catalog editions are mailed monthly and offer
selections of the Company's best selling products in a variety of product
categories. Main catalogs generate the majority of the Company's sales. The
Company also uses its main catalog as its primary prospecting catalog to test
new names and new products. Response data from main catalog mailings is used to
create specialty catalogs. New customers continue to receive monthly main
catalogs in addition to specialty catalogs featuring the product categories in
which they have shown an interest through past purchases.
Specialty catalogs contain wide selections of products from a single
product category. The Company identifies the product categories for its
specialty catalogs based on demand generated for certain categories in the
Company's main catalogs. The Company first tested the specialty catalog concept
in 1994 and found it to be successful. The Company has since developed the
concept into numerous specialty editions. During 1998, the Company published 25
specialty catalogs targeting buyers of footwear and apparel, deer hunting
equipment, ammunition and shooting
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supplies, military surplus, camping equipment and holiday gifts. The Company
plans to continue to develop and test new specialty titles.
The specialty titles allow the Company to utilize a customized marketing
plan for individual consumer groups thereby maximizing response rates and
minimizing advertising costs as a percentage of sales. The Company believes that
its specialty catalog titles have been an important component in its sales
growth and have allowed the Company to expand its sales to existing customers
and to broaden sales to new customers beyond the Company's historical customer
profile.
CREATIVE. All catalogs are created and designed in-house by the Company's
creative services department which produces the advertising copy and layouts for
each catalog. Substantially all of the photographs used in the catalogs are
taken at the Company's in-house photo studio. Artwork and copy for the catalog
are transmitted in digital format from the Company's desktop publishing systems
to a pre-press vendor and then to the printer, which prints and mails the
catalogs. These capabilities allow the Company to preserve the catalog's
distinctive character and allow the Company greater control of the catalog
production schedule, which reduces the lead time necessary to produce catalogs.
The Company is able to prepare and mail a catalog in approximately 60 days,
which allows it to offer new merchandise quickly to its customers, thereby
maximizing pricing opportunities while minimizing inventory carrying costs. The
Company believes this turnaround time is one of the fastest in the direct
marketing industry. Because the Company uses a value-oriented sales approach,
the Company is able to use a lower weight and grade of paper than its
competitors to reduce its catalog production costs.
MERCHANDISING
The Company's products originally were limited to a small selection of
merchandise targeted to the deer hunter. The Company's product offerings have
gradually evolved to a broader range of merchandise intended to appeal to the
value-oriented outdoorsman. The Company offers a changing mix of products from
catalog to catalog.
PRODUCTS. The Company's products include footwear, clothing and
accessories, camping and outdoor recreation equipment, hunting and shooting
accessories, optics and ammunition as well as a diverse range of offerings in
other product categories. The Company sells high value, low price, name brand
products, as well as unique and unusual products which appeal to its targeted
customer base and provide value to customers. The following graph shows the
Company's sales by product category for 1998.
1998 SALES BY PRODUCT CATEGORY
Footwear 23.6%
Clothing and Accessories 22.1%
Camping and Outdoor Recreation 10.4%
Hunting and Shooting Acccesories 9.4%
Optics 6.7%
Ammunition 5.5%
Domestics 4.8%
Electronics 4.4%
Novelty and Collectibles 3.5%
Hardware, Tools and Automotive 3.0%
Other 6.6%
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MERCHANDISE MIX. The Company historically offered a changing mix of in-line
products. In-line products are those products regularly available from
manufacturers. As a complement to its value pricing approach, in 1996 the
Company began aggressively pursuing manufacturers' close-outs of name brand
shoes, boots, clothing, watches and other merchandise, which it offers to its
customers at savings of 25% to 60% from original retail prices. The Company also
offers military surplus from around the world, providing customers a low-cost
alternative for items such as wool coats and pants, shirts, gloves, underwear,
blankets, boots, sleeping bags, jackets, backpacks, skis and snowshoes.
The Company's merchandising strategy has been to shift its merchandise mix
to a larger percentage of manufacturers' close-outs, military surplus and other
higher margin product categories including apparel and footwear, and to reduce
the number of lower price points items, while maintaining a broad selection of
products. This strategy has added to the Company's customer base value-oriented
customers who may not otherwise be identified as pure outdoorsmen. This strategy
has also contributed to significant increases in the Company's overall gross
profit margins.
SOURCING. The Company's buyers actively seek sources for products they
believe will interest the Company's targeted customers. The Company seeks to
maintain existing and develop new relationships with vendors to provide ongoing
access to manufacturers' close-outs, military surplus and other items. Buyers
regularly attend trade shows, meet with vendors and make mass mailings and cold
calls to locate high quality, low price, name brand merchandise as well as
unusual or unique products. The Company frequently purchases large quantities of
close-outs and other individual items on an opportunistic or when-available
basis. The capability to purchase large quantities in a short time period makes
the Company a unique and desirable outlet for manufacturers looking to sell
overstocked or discontinued products.
The Company purchases its merchandise from more than 1,000 suppliers and
generally purchases all of its product needs for a particular item from one
vendor. No single supplier accounted for more than 10% of the Company's
purchases during 1998, and the Company believes there are numerous sources for
products in its merchandise categories.
SELECTION. The Company's buyers and merchandising staff along with Gary
Olen collectively select the merchandise to be offered to customers by
evaluating product availability, pricing, historical demand, emerging
merchandise trends and expected product profitability. Each product is
hand-picked, and most are field tested by Company buyers to ensure quality,
functionality and proper sizing in order to maximize appeal to customers.
INVENTORY MANAGEMENT. Once merchandise has been selected, the Company's
rebuyers are responsible for ordering all merchandise, determining the quantity
and arrival date, managing inventory levels, assessing customer demand,
adjusting estimates, canceling orders for slow-moving merchandise and reordering
merchandise. Utilizing the Company's information systems, buyers and rebuyers
meet seven days following each catalog mailing to monitor product sales and take
responsive action. Slow-moving merchandise is actively promoted through
telemarketing, clearance sales, package stuffers or, when possible, is returned
to the vendor.
As part of its merchandise liquidation strategy, the Company maintains a
retail outlet store at its warehouse and distribution facilities in South St.
Paul, and opened a second retail store in Moundsview, Minnesota in 1997, from
which it sells discontinued, overstocked, returned and regular catalog
merchandise. The retail stores provide a liquidation outlet and serve to
minimize inventory mark-downs.
CATALOG CONTENT. The merchandise offered in the catalogs is determined
based on product availability and the catalog in-home delivery date.
Manufacturers' close-outs are offered when available. Close-outs and military
surplus merchandise purchased in large quantities are normally placed in the
Company's main catalogs. If a supply of merchandise is limited, it is usually
offered in a specialty catalog or is included in a multiple page insert in the
main catalog mailed to a targeted customer segment. Numerous products are shown
on each page giving the catalog a dense look and adding to the Company's
value-oriented image. Product sales are analyzed item by item to identify trends
and help plan future merchandise offerings.
5
MARKETING
The Company's marketing programs are based on gathering, analyzing and
organizing information on its customers. The Company believes that because it
offers such a broad mix of merchandise, it is particularly important for it to
fully understand its customers.
CUSTOMER DATABASE. The Company maintains a proprietary customer database in
which it stores detailed information on each customer in the Company's customer
list, including demographic data and purchasing history. The Company's customer
database contains over 3.6 million house names, including over 1.1 million
customers who have made purchases within the last 12 months and 160,000 e-mail
addresses provided by customers through the Company's broadcast program. The
customer database is updated regularly with information as new purchases are
recorded.
CUSTOMER SEGMENTATION. The Company has developed its own customer
segmentation models to segment its customer list according to many variables,
allowing the Company's marketing department to analyze each segment's buying
patterns. The Company statistically validates the results of each of its catalog
mailings. The data is used to further segment the customer database to refine
the frequency and selectivity of the Company's catalog mailings in an effort to
maximize response rates and profitability.
LIST DEVELOPMENT. The Company's new customer acquisition program is
designed to cost-effectively identify and capture new customers that fit its
customer profile. New customers are acquired principally through the use of
targeted mailings to individuals identified through mailing lists rented or
exchanged from other catalog companies, retail subscription lists, and lists of
names compiled from businesses whose customers have interests similar to those
of the Company's customers. The Company is generally entitled to make one
mailing to each name obtained through a rented or exchanged mailing list. If the
prospect responds, the name is added to the Company's database and may be freely
used by the Company in the future. The Company is also pursuing new sources of
prospective customers, such as those who request catalogs through advertising,
through the Company's web site or from customer referrals. New customers
accounted for approximately 15% of the Company's sales during 1998.
Once new customers are acquired, the Company's objective is to maximize the
long-term profit potential from these customers. With ongoing refinements in the
Company's approach to merchandising and marketing, the Company has increased the
frequency and quantity of mailings to the most profitable segments of its
existing customer list. Demographic and regression analyses of historical
purchasing patterns of existing customers, including recency, frequency and
monetary modeling, are preformed to assist in merchandising and customer
targeting and to increase sales to existing customers. Existing customers
accounted for approximately 85% of the Company's sales during 1998.
MARKETING PROGRAMS AND PROMOTIONAL FORMATS. The Company strives to develop
promotional formats that will stimulate customer purchases. Successful
promotional formats include catalog cover designs, different catalog covers (or
wraps), free gifts, and promotional tag lines such as "last chance" offers.
The Company employs a disciplined approach to its marketing activities. The
Company tests a sample of new names before mailing to a new customer group,
tests price and shipping charge changes, tests new list sources and tests
marketing programs and promotional formats before full-scale implementation to
ensure customer acceptance and cost-effectiveness. Two significant, successful
marketing programs implemented by the Company are a buyer's club and an
installment payment plan.
- BUYER'S CLUB. The Company's buyer's club offers its members
exclusive merchandise not offered to other customers as well as a
merchandise discount of 10% on regularly priced items and 5% on
sale items and special buys. Customers can purchase a one-year
membership in the Company's buyer's club for a $29.99 fee, or a
two or three year membership for a fee of $53.99 and $80.99.
- INSTALLMENT PAYMENT PLAN. The Company's installment payment plan,
known as the "G.O. Painless 4-Pay Plan," is available to credit
card customers with orders of $50 or more. Payments under the plan
consist of 25% of the merchandise charges (plus 100% of any
shipping charges and buyer's club fees, if applicable) at the time
of shipment with three equal installments in 30 day increments,
which are automatically charged to the customer's credit card. No
interest or additional fees are charged by the Company to
customers who elect the 4-Pay Plan.
6
CUSTOMER SERVICE. A key element of the Company's marketing strategy is its
commitment to customer service. The Company has a toll-free customer service
telephone line separate from its inbound ordering lines. The Company maintains a
separate customer service department staffed with full-time customer service
representatives who answer customer inquiries, reply to complaints and assist
customers in returning merchandise. The customer service department personally
responds to all customer correspondence. The Company's commitment to customer
service is supported by its unconditional guarantee which allows customers to
return merchandise for any reason and at any time for refund or exchange if they
are not satisfied with the merchandise.
WEB SITE. The Company maintains a web site at www.sportsmansguide.com,
which allows customers to order on-line from print media and contains unique
merchandise offerings. The web site further allows customers to view current
catalogs and request mailed catalog copies. E-mail addresses are collected
through an optional program and e-mail broadcast messages, which include a
variety of specialized product offerings, are delivered to 160,000 participating
customers on a weekly basis.
The Internet provides the Company a new source of customers at a lower
cost. In addition to being a more profitable business formula for the Company,
the Internet strategy reduces business risk by minimizing the effects of paper
and postage increases as well as insuring a continuous flow of product offerings
to customers by being less reliant on standard class postal delivery of
catalogs.
OPERATIONS AND FULFILLMENT
INBOUND CALLS. The Company maintains an in-house call center. Approximately
77% of customer orders are placed through the Company's toll-free telephone
lines which are staffed 24 hours per day, seven days a week, while 22% of orders
are received by mail or facsimile and 1% are received at the Company's web site.
The Company's telephone system consists of an expandable AT&T GR3 digital switch
which currently has twelve T-1 lines. Computer telephony integration software
identifies the caller and, if known, accesses the customer's records
simultaneously with answering the call. When fully staffed, the Company has the
capacity of handling up to 2,750 calls per hour on average, and the Company
believes that its current capacity is sufficient to handle demand in the
foreseeable future.
The Company also contracts with an outside call center to handle calls on
an as-needed basis. If calls become backlogged or in the event of telephone
system failure, back-up systems and rerouting capabilities allow the outside
call center to handle inbound telephone orders. The outside call center has
access to inventory availability, mirrors existing call processing and allows
the Company to maintain its call standards.
OUTBOUND TELEMARKETING. The Company maintains a small outbound
telemarketing department as part of its telephone sales operations.
Telemarketers contact existing customers who have previously purchased
collectibles and supply items such as ammunition to offer them similar products.
Outbound telephone sales accounted for approximately 1% of the Company's sales
during 1998.
ORDER ENTRY. The Company's telemarketing department is staffed with
individuals who are familiar with the products offered in the catalogs and can
offer assistance to customers on availability, color, size, and other
information. Telemarketers use a catalog sales system with pre-written
merchandise descriptions and sales offers and are provided monetary incentives
to sell additional merchandise to customers who order by phone. During 1998,
add-on sales averaging $11 per order were made to approximately 32% of all
inbound phone orders.
Processing of customer orders is coordinated and handled by the Company's
on-line order entry system. Telephone orders are entered directly into the
system. Mail orders are batched and, after payment is verified, are then entered
into the system. The system is also used in connection with all other order
entry and fulfillment tasks including credit authorization, order picking,
packing and shipment. During 1998, the Company's on-line order processing system
handled in excess of 2.2 million orders.
CREDIT AND PAYMENT TERMS. Customers can pay for orders by check or major
credit card. Orders are shipped after credit card charges are approved or checks
are received. Charges are not billed to customer credit cards until the orders
are ready for shipment.
PICKING AND PACKING. Through its fulfillment and delivery methods, the
Company strives to be a low cost operator in the direct mail industry. The
Company uses an integrated computer-driven picking, packing and
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shipping system. The system edits orders and generates warehouse pick tickets
and packing slips. Packers are provided monetary incentives to ensure
accuracy of orders, which has contributed to the Company's distribution
accuracy rate in excess of 99% during 1998. During its peak season, the
Company normally ships in excess of 20,000 packages in a single shift. The
Company believes it has sufficient additional capacity available for the
foreseeable future which can be utilized by adding more shifts and weekends.
SHIPPING. The Company promises next business day shipping on orders
received by 7 p.m. for in-stock merchandise. Virtually all of the Company's
merchandise is stocked at, and shipped from, its facility in South St. Paul,
Minnesota, although a small percentage of merchandise is drop-shipped directly
to the customer by specific vendors. The Company primarily utilizes the U.S.
Postal Service and, to a lesser extent, United Parcel Service ("UPS") for
shipment of merchandise to customers. Ammunition, which accounted for
approximately 5.5% of the Company's sales in 1998, is shipped exclusively via
UPS. The Company utilizes a consolidating shipper for delivery of merchandise to
the U.S. Postal Service. A shipping fee is charged on each customer order based
on the total dollar amount ordered. The Company will expedite shipping for an
additional fee. The Company's fulfillment system automatically determines the
lowest cost method of shipping each order.
INVENTORY CONTROL. The Company's merchandise mix results in the Company
maintaining a broad selection of products as well as large quantities of
individual products. Consequently, inventory management is an important
component of its operations. The Company employs a cycle count (perpetual
inventory) procedure which eliminates wall-to-wall physical counts and resulted
in 99.7% inventory accuracy during 1998.
RETURNS. The Company maintains an unconditional return policy which
permits customers to return merchandise for any reason at any time for refund
or exchange. Returned merchandise is restocked, sold in the retail outlets,
returned to the supplier or scrapped. Returns processors are provided
monetary incentives to ensure accuracy of returns processing.
SEASONAL STAFFING. The Company adjusts the number of employees to meet
variable demand levels, particularly during the peak selling season, which
includes the months of November and December. To meet increased order volume
during the Company's peak selling season, the Company hires a significant number
of temporary employees.
INFORMATION SYSTEMS AND TECHNOLOGY
The Company has developed an integrated management information system which
is fully redundant. In addition to on-line order entry and processing, the
information system also provides support for merchandising, inventory
management, marketing, and financial and management reporting. The on-line
access to information allows management to monitor daily trends and the
performance of merchandise and planning functions.
The Company's main hardware platform is the IBM RISC 6000 series of
computers. The Company uses a Unidata database operating system. The Company
believes that its recent investment in the IBM RISC 6000 processors and its
operating system will provide the Company with an adequate platform to support
its growth plan. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000" for a discussion of the Year
2000 computer issue.
COMPETITION
The direct marketing industry includes a wide variety of specialty and
general merchandise retailers in a highly competitive and fragmented business
environment. The Company sells its products to customers in all 50 states and
competes in the purchase and sale of merchandise with all retailers. The Company
believes that no competitor offers as comprehensive a selection of products at
discount prices. However, there are other mail order catalogs as well as
discount retailers that offer products similar to those found in the Company's
catalogs. Examples of other outdoor/hunting catalogs include Bass Pro Shops Inc.
and Cabela's Inc. Although these catalogs may compete with the Company in
certain product categories, none focuses directly on the value-oriented
outdoorsman niche. Discount retailers, such as Wal-Mart Stores, Inc. or Kmart
Corporation, offer selected products similar to those found in the Company's
catalogs.
8
REGULATION
The Company is subject to federal, state and local laws and regulations
which affect its catalog mail order operations. Federal Trade Commission
regulations, in general, govern the solicitation of orders, the information
provided to prospective customers, and the timeliness of shipments and refunds.
In addition, the Federal Trade Commission has established guidelines for
advertising and labeling many of the products sold by the Company.
The Company is also subject to a variety of state laws and regulations
relating to, among other things, advertising, pricing, charging and collecting
state sales or use tax and product safety/restrictions. Some of these laws
prohibit or limit the sale, in certain states and locations, of certain items
offered in the Company's catalogs such as black powder firearms, ammunition,
bows, knives and similar products. State and local government regulation of
hunting can also affect the Company's business.
SERVICE MARKS
The Company's service marks "The Sportsman's Guide," "The `Fun-to-Read'
Catalog" and "The `Fun-to Browse' Website" have been registered with the United
States Patent and Trademark Office. "The Sportsman's Guide" mark has also been
registered in Canada. A service mark is a word or symbol used to identify,
distinguish and indicate the source of services.
EMPLOYEES
As of February 28, 1999, the Company employed 794 associates, including
full-time and part-time staff. During 1998, the Company's seasonal employment
ranged from a high of approximately 930 employees (plus an additional 85
temporary workers) in November to a low of approximately 665 employees in early
June. None of the Company's employees are currently covered by a collective
bargaining agreement. The Company considers its employee relations to be good.
ITEM 2. PROPERTIES.
The Company's executive offices, warehouse and distribution facilities are
located at 411 Farwell Avenue, South St. Paul, Minnesota. The Company leases
approximately 320,000 square feet at this facility under a triple net lease
expiring March 2004. The lease includes a three-year renewal option at fair
market value rental rates. The Company conducts all of its catalog operations at
this facility, which also includes a retail outlet store from which it sells
discontinued, overstocked, returned and regular catalog merchandise. The Company
also leases approximately 14,000 square feet in Moundsview, Minnesota where it
opened a second retail outlet store in 1997. The Company believes its facilities
are sufficient for its current operating plan.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any pending proceedings other than litigation
which is incidental to its business and which the Company believes is not
material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
9
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information about the Company's executive officers:
NAME AGE POSITION
---- --- ---------
Gary Olen. . . . . . . . . . 56 Chairman of the Board, Chief Executive Officer and Director
Gregory R. Binkley . . . . . 50 President, Chief Operating Officer and Director
Charles B. Lingen. . . . . . 54 Senior Vice President of Finance, Chief Financial Officer, Secretary,
Treasurer and Director
John M. Casler . . . . . . . 48 Senior Vice President of Merchandising
Barry W. Benecke . . . . . . 54 Senior Vice President of Creative Services
Bernard S. Bauhof. . . . . . 51 Senior Vice President of Information Systems and
Technology and Chief Information Officer
GARY OLEN is a co-founder of the Company and served as its Executive Vice
President and Secretary from its incorporation in 1977 until December 31, 1993.
Mr. Olen was elected Chief Executive Officer in 1994, served as President from
1994 to 1998 and was elected Chairman of the Board in 1998. Mr. Olen has been a
director of the Company since its incorporation. From 1970 to 1977, Mr. Olen was
employed as the Merchandising/Marketing Director for Fidelity File Box, Inc.,
which sells corrugated storage products, office and industrial equipment and
office industrial supplies through mail order catalogs. From 1967 to 1970, Mr.
Olen was a Merchandise Manager with C&H Distributors, a business-to-business
mail order catalog specializing in the sale of industrial and office equipment.
From 1960 to 1967, Mr. Olen was employed in the catalog division of J.C. Penney
Company. Mr. Olen was also the sole proprietor of the predecessor of the
Company, The Olen Company, founded in 1970.
GREGORY R. BINKLEY has been a director of the Company since 1995. Mr.
Binkley has been employed by the Company since 1994 and was elected Vice
President in 1994, Senior Vice President of Operations and Chief Operating
Officer in 1995, Executive Vice President in 1996 and President in 1998. From
1993 to 1994, Mr. Binkley served as an independent operations consultant. From
1990 to 1993, Mr. Binkley was employed by Fingerhut Companies, Inc.
("Fingerhut"), a mail order catalog business, as Director of Distribution. From
1988 to 1990, Mr. Binkley was Director of Distribution with Cable Value Network,
Inc., a cable television retailer. From 1975 to 1988, Mr. Binkley was employed
by Donaldsons Department Stores, a division of Allied Stores Corporation,
serving as Vice President of Finance and Operations from 1987 to 1988 and Vice
President of Operations from 1981 to 1987.
CHARLES B. LINGEN has been a director of the Company since 1995. Mr. Lingen
has been employed by the Company since 1994 as its Chief Financial Officer, Vice
President of Finance and Treasurer, in 1995 was elected Secretary and in 1996
was elected Senior Vice President of Finance. From 1973 to 1994, Mr. Lingen was
employed by Fingerhut, serving as Vice President of Finance and Controller from
1989 to 1994.
JOHN M. CASLER has been employed by the Company since 1996 and was elected
Vice President of Merchandising in 1997 and Senior Vice President of
Merchandising in 1999. Mr. Casler was employed by Gander Mountain, Inc. from
1989 to 1995, where he served as Division Merchandise Manager from 1990 to 1995.
Prior to that time, Mr. Casler held merchandise management positions at Munson
Sporting Goods Co., Inc. from 1985 to 1989 and at the Target Stores Division of
Dayton Hudson Corp. from 1982 to 1985.
BARRY W. BENECKE has been employed by the Company since 1996 as Senior
Director - Creative Services and was elected Vice President of Creative Services
in 1997 and Senior Vice President of Creative Services in 1998. Mr. Benecke was
employed by CyDeCosse Inc., a direct marketing company, from 1990 to 1996 as
Vice President of Creative Services, and Fingerhut from 1983 to 1990 as Creative
Director. Prior to 1983, Mr. Benecke managed his own advertising/design firm for
13 years.
BERNARD S. BAUHOF has been employed by the Company since 1996 as Senior
Director - Information Systems and Technology and was elected Vice President of
Information Systems and Technology and Chief Information Officer in 1997 and
Senior Vice President of Information Sytems and Technology in 1999. Mr. Bauhof
was employed by CyDeCosse Inc. from 1994 to 1996 as Director of Information
Systems, by The MusicLand Group, Inc. from 1990 to 1994 as Director of
Distributed Systems, by Zetaco Inc., a manufacturer of optical disc servers,
from 1988 to 1990 as Director of Software Engineering and by CPT Corporation, a
network printing company, from 1980 to 1988 as Software Engineering Director.
10
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The Company's Common Stock has traded on the Nasdaq National Market under
the symbol "SGDE" since February 5, 1998. Prior to that date the Company's
Common Stock was traded in the local over-the-counter market, but such trading
was limited and sporadic.
The following table sets forth, for the periods indicated, the high and low
sales prices of the Common Stock as reported on the Nasdaq National Market (for
periods since February 5, 1998) and the high and low closing bid quotations for
the Common Stock in the local over-the-counter market as reported by Metro Data
Company (for periods prior to February 5, 1998). Such quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and do not
necessarily represent actual transactions.
1997 HIGH LOW
---- ---
First Quarter. . . . . . . . . . . . . . . . . . 5 2 3/16
Second Quarter . . . . . . . . . . . . . . . . . 6 3 1/2
Third Quarter. . . . . . . . . . . . . . . . . . 6 7/8 5 1/2
Fourth Quarter . . . . . . . . . . . . . . . . . 7 3/8 5 1/4
1998
First Quarter. . . . . . . . . . . . . . . . . . 7 1/4 5 1/4
Second Quarter . . . . . . . . . . . . . . . . . 10 1/4 3 5/8
Third Quarter. . . . . . . . . . . . . . . . . . 4 3/4 3
Fourth Quarter . . . . . . . . . . . . . . . . . 8 2 7/8
HOLDERS
As of March 19, 1999, there were approximately 321 holders of record of the
Company's Common Stock.
DIVIDENDS
The Company has not previously declared or paid any cash dividends on its
Common Stock. The Company currently intends to retain all earnings for use in
its business in the foreseeable future. The Company is prohibited from paying
and declaring cash dividends under the terms of its revolving credit agreement.
11
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth certain historical financial and operating
data for the Company for the periods indicated. The Statement of Operations Data
and Balance Sheet Data as of and for each of the fiscal years ended December 30,
1994, December 29, 1995, December 27, 1996, December 28, 1997 and January 3,
1999 have been derived from the Company's Financial Statements audited by Grant
Thornton LLP, independent certified public accountants. The Selected Operating
Data as of and for the periods indicated were derived or computed from the
Company's circulation or accounting records or the Statements of Operations Data
identified above. The information below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Financial Statements and Notes thereto.
FISCAL YEAR ENDED
--------------------------------------------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 27, DECEMBER 29, DECEMBER 30,
1999(1) 1997 1996 1995 1994
----------- ------------ ------------ ------------ ------------
(In thousands, except per share amounts and Selected Operating Data)
STATEMENT OF OPERATIONS DATA:
Sales $ 142,876 $ 128,113 $ 112,270 $ 101,832 $ 96,398
Cost of sales 83,886 76,234 72,200 67,137 64,367
--------- --------- --------- --------- ---------
Gross profit 58,990 51,879 40,070 34,695 32,031
Selling, general and administrative
expenses 55,915 46,830 36,014 35,924 28,299
--------- --------- --------- --------- ---------
Earnings (loss) from operations 3,075 5,049 4,056 (1,229) 3,732
Interest expense (883) (1,266) (981) (943) (582)
Miscellaneous income (expense), net (30) (4) 11 73 (43)
--------- --------- --------- --------- ---------
Earnings (loss) before income taxes 2,162 3,779 3,086 (2,099) 3,107
Income taxes 746 1,304 759 (355) 385
--------- --------- --------- --------- ---------
Net earnings (loss) $ 1,416 $ 2,475 $ 2,327 $ (1,744) $ 2,722
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net earnings (loss) per share (2):
Basic $ .32 $ 1.06 $ 1.00 $ (.75) $ 1.17
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted $ .31 $ .85 $ .96 $ (.75) $ 1.06
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average shares outstanding(2):
Basic 4,434 2,336 2,334 2,334 2,333
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted 4,616 2,919 2,431 2,334 2,576
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
SELECTED OPERATING DATA:
Gross profit as a percentage of sales 41.3% 40.5% 35.7% 34.1% 33.2%
Total catalogs mailed (000s) 75,041 60,593 42,908 54,436 39,312
Total active customers (000s)(3) 1,133 1,094 1,017 1,034 1,021
Income per advertising dollar (4) $ .09 $ .18 $ .21 $ (.06) $ .24
BALANCE SHEET DATA:
Working capital (deficit)(5) $ 12,491 $ 2,658 $ 3,612 $ (2,463) $ 3,951
Total assets 43,903 37,214 27,890 23,709 21,179
Note payable--bank 5,775 1,690 1,497 965 --
Subordinated notes payable -- 3,414 3,414 3,414 3,660
Long-term liabilities excluding trade
creditors' obligation and subordinated
notes payable 485 609 678 287 379
Trade creditors' obligation -- -- -- -- 635
Shareholders' equity 16,995 6,365 3,875 1,548 3,292
- - ------------------------------------------
(1) Fiscal year ended January 3, 1999 consisted of 53 weeks.
(2) See Note A-10 in the Notes to Financial Statements.
(3) An "active customer" is defined as a customer who has purchased merchandise
from the Company within 12 months preceding the end of the period indicated.
(4) "Income (loss) per advertising dollar" is defined as earnings (loss) from
operations divided by advertising expense.
(5) Working capital at December 29, 1995 and December 28, 1997 reflects the
effect of the subordinated notes payable being classified as current
liabilities.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Sportsman's Guide, Inc. (the "Company") is a catalog retailer and
Internet "E-tailer" of value priced outdoor gear and general merchandise,
with a special emphasis on outdoor clothing, equipment and footwear. The
Company's broad selection of products are sold through distinctive main and
specialty catalogs which are advertised as The "Fun-to-Read"
Catalog-Registered Trademark-. In April of 1998, the Company established an
E-commerce web site, www.sportsmansguide.com, where it sells selected product
offerings and processes orders. The web site is advertised as The
"Fun-to-Browse" Website-Registered Trademark-. The Company will begin posting
its entire catalogs and full product offerings on the web site in March of
1999.
The Company's business was started in 1970 by Gary Olen, The Company's
Chairman and Chief Executive Officer. Over time, the Company's product offerings
and marketing efforts have broadened to include those interested in pursuing and
living the outdoor lifestyle in general and the value-oriented outdoorsman in
particular. In 1992, the Company began its value pricing strategy of offering
outdoor equipment and supplies at discount prices, later adding government
surplus, manufacturers' close-outs and other lines of high value, high margin
merchandise that appeal to a broad group of customers. In 1994, the Company
began to strengthen its management team in an effort to capitalize on the
opportunity represented by its value pricing strategy and the resulting sales
growth. Due in large part to the success of the strategy and the management
enhancements, the Company's sales increased from $38 million in 1992 to over
$142 million in 1998. Of the total sales reported for 1998, $1.1 million were
Internet related sales including those from the Company's web site or from
orders that are processed online on the site.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated information from
the Company's statements of operations expressed as a percentage of sales.
FISCAL YEAR ENDED
----------------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 27,
1999 1997 1996
---- ---- ----
Sales ...................................... 100.0% 100.0% 100.0%
Cost of sales .............................. 58.7 59.5 64.3
---- ---- ----
Gross profit .......................... 41.3 40.5 35.7
Selling, general and administrative expenses 39.1 36.6 32.1
---- ---- ----
Earnings from operations .............. 2.2 3.9 3.6
Interest and miscellaneous expense, net .... 0.7 1.0 0.9
---- ---- ----
Earnings before income taxes .......... 1.5 2.9 2.7
Income taxes ............................... 0.5 1.0 0.7
---- ---- ----
Net earnings .......................... 1.0% 1.9% 2.0%
---- ---- ----
---- ---- ----
FISCAL YEAR ENDED JANUARY 3, 1999 COMPARED TO FISCAL YEAR ENDED DECEMBER 28,
1997
SALES. Sales for fiscal 1998 of $142.9 million were $14.8 million or 11.5%
higher than sales of $128.1 million for fiscal 1997. The increase in sales was
due to a 24% increase in catalog circulation, offset partially by lower customer
response rates (resulting from the increased number of catalog editions mailed
to existing customers) and lower customer demand on cold weather products. Sales
during the traditionally busy fourth quarter were down from plan due to lower
customer response levels. Management believes that unseasonably warm weather
throughout the recent fourth quarter and first quarter of fiscal 1998 resulted
in significantly less demand for cold weather products, lowering overall
customer response rates for the respective quarters and entire year. The Company
mailed 36 catalog editions, including 25 specialty editions, during fiscal 1998
compared to 29 catalog editions, including 18 specialty editions, during fiscal
1997.
Gross returns and allowances for fiscal 1998 were $15.0 million or 9.5% of
gross sales compared to $14.9 million or 10.4% of gross sales in fiscal 1997.
Gross returns and allowances as a percent of sales decreased during
13
the fiscal year due to actual returns rates on new specialty catalogs and
product categories being less than originally estimated during fiscal 1997.
GROSS PROFIT. Gross profit for fiscal 1998 was $59.0 million or 41.3% of
sales compared to $51.9 million or 40.5% of sales in fiscal 1997. The increase
in gross profit as a percent of sales was primarily due to higher retail product
margins resulting from offering a larger percentage of higher margin
manufacturers' close-outs and direct import merchandise within the clothing and
footwear categories. In addition, higher retail product margins were affected by
higher shipping and handling margins resulting from a planned price increase.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $55.9 million or 39.1% of sales during fiscal 1998
compared to $46.8 million or 36.6% of sales during fiscal 1997. The dollar
increase was primarily due to the 24% increase in catalog circulation. Total
circulation during fiscal 1998 was 75 million catalogs compared to 61 million
catalogs during fiscal 1997. The increase in catalog circulation was due to
the planned increase in the number of specialty catalog editions. Advertising
expense for fiscal 1998 was $33.9 million or 23.7% of sales compared to $27.5
million or 21.4% of sales for fiscal 1997. The increase as a percent of sales
was primarily due to lower customer response rates associated with the number
of catalog editions mailed to existing customers and lower customer response
on cold weather products primarily during the fourth quarter which management
believes was caused by warmer than normal temperatures during the past two
winter seasons.
EARNINGS FROM OPERATIONS. Earnings from operations were $3.1 million or
2.2% of sales during fiscal 1998 compared to $5.0 million or 3.9% of sales in
fiscal 1997.
INTEREST EXPENSE. Interest expense for fiscal 1998 was $883,000 compared to
$1.3 million for the same period last year. The decrease was primarily due to
the availability of additional working capital provided by a public offering of
common stock and retirement of subordinated notes payable, both completed in
February 1998.
INCOME TAXES. Income tax expense for fiscal 1998 was $746,000 compared to
$1.3 million during fiscal 1997. The Company's effective tax rate was 34.5% for
both fiscal years.
NET EARNINGS. Net earnings for fiscal 1998 were $1.4 million or 1.0% of
sales compared to $2.5 million or 1.9% of sales during fiscal 1997.
FISCAL YEAR ENDED DECEMBER 28, 1997 COMPARED TO FISCAL YEAR ENDED DECEMBER 27,
1996
SALES. Sales for fiscal 1997 of $128.1 million were $15.8 million or 14.1%
higher than sales of $112.3 million for fiscal 1996. The increase in sales was
due to a 41% increase in catalog circulation, offset partially by lower customer
response rates resulting from the increased number of catalog editions, the
planned merchandising shift to higher margin products, and the effects of a UPS
strike during the third quarter. Although the Company is not dependent upon UPS
to ship most of its products, management believes the UPS strike and resulting
publicity created a perception among buyers that orders could not be delivered
or that delivery would be significantly delayed. This perception resulted in a
decrease in orders for the Company's product offerings and therefore suppressed
sales. The Company was further affected when the overloaded U.S. Postal Service
failed to deliver catalogs on a timely basis, or at all, during and after the
UPS strike. Management believes that the UPS strike and related events
negatively impacted sales by approximately $2.5 million in the third quarter.
The Company mailed 29 catalog editions, including 18 specialty editions,
during 1997 compared to 22 catalog editions, including ten specialty editions,
during 1996. Gross returns and allowances for fiscal 1997 were $14.9 million or
10.4% of gross sales compared to $10.2 million or 8.3% of gross sales in fiscal
1996. The increase was due to the merchandising strategy of offering more
products in the apparel and footwear categories, which tend to have higher
return rates than other product categories.
GROSS PROFIT. Gross profit for fiscal 1997 was $51.9 million or 40.5% of
sales compared to $40.1 million or 35.7% of sales in fiscal 1996. The increase
in gross profit as a percent of sales was due to higher retail product margins
which were the result of the ongoing strategic 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 were $46.8 million or 36.6% of sales during fiscal 1997
compared to $36.0 million or 32.1% of sales during fiscal 1996. The dollar
14
increase was primarily due to the 41% increase in circulation. Total circulation
during 1997 was 61 million catalogs compared to 43 million catalogs during 1996.
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 fiscal 1997 was $27.5 million or 21.4% of
sales compared to $19.5 million or 17.4% of sales for fiscal 1996. The increase
as a percent of sales was primarily due to lower customer response associated
with the number of catalog editions mailed to existing customers, new customer
prospecting, the planned shift to higher margin products and lower customer
response rates which management believes were caused by the UPS strike and
related events.
EARNINGS FROM OPERATIONS. Earnings from operations were $5.0 million or
3.9% of sales in fiscal 1997 compared to earnings from operations of $4.1
million or 3.6% of sales during fiscal 1996.
INTEREST EXPENSE. Interest expense for fiscal 1997 was $1.3 million
compared to $981,000 for the same period last year. The increase was primarily
due to increased borrowings against the revolving line of credit as a result of
higher inventory levels partially offset by a lower weighted average interest
rate. The weighted average interest rate during 1997 was 9.2% compared to 10.6%
during 1996 which reflected the lower borrowing costs to the Company in 1997 as
a result of its improved financial performance.
INCOME TAXES. Income tax expense for fiscal 1997 was $1.3 million compared
to $759,000 during fiscal 1996. The Company's effective tax rate was lower than
the statutory tax rate in 1996 due to the utilization of net operating loss
carryforwards.
NET EARNINGS. Net earnings for fiscal 1997 were $2.5 million or 1.9% of
sales compared to $2.3 million or 2.0% of sales for fiscal 1996.
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 distribution,
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 outdoor sporting 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. Management believes that sales during the first and fourth
quarters of fiscal 1998 were negatively impacted by unseasonably warmer than
normal temperatures during the past two winter seasons.
The following table sets forth certain unaudited quarterly financial
information for the Company. 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.
15
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(In thousands)
FISCAL 1998
Sales ......................... $ 31,697 $ 28,273 $ 30,423 $ 52,483
Gross profit .................. 13,292 12,437 12,464 20,797
Earnings from operations ...... 1,168 323 609 975
Net earnings .................. 656 79 212 469
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 typically meets its operating cash requirements through funds
generated from operations and borrowings under its revolving line of credit.
The Company had working capital of $12.5 million as of January 3, 1999,
compared to working capital of $2.7 million as of December 28, 1997, with
current ratios of 1.5 to 1.0 and 1.1 to 1.0, respectively. The increase in
working capital of $9.8 million during fiscal 1998 was primarily due to the
proceeds from the public offering and from borrowings under the revolving credit
facility. The Company's working capital requirements increased during fiscal
1998 compared to last year 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 manufactures' close-outs and
direct imports. The Company purchases large quantities of manufacturers'
close-outs and direct imports, particularly in the footwear and apparel
merchandise categories. 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.
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 the customers' credit cards. The
Company had installment receivables of $3.2 million at January 3, 1999 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.
The Company maintains a credit facility through a syndicate led by Norwest
Bank Minnesota, N.A. providing a revolving line of credit of up to $20.0
million, subject to an adequate borrowing base, expiring July 31, 1999. The
agreement provides for automatic annual renewals through 2003. Either party may
terminate the agreement by providing notice 60 days before expiration. The
borrowing base related to inventory is limited to $17.0 million. The revolving
line of credit is for working capital and letters of credit. Letters of credit
may not exceed $7.5 million at any one time. Borrowings under the revolving
credit agreement, as amended, bear interest at the bank's base (prime) rate less
0.3% or, at the Company's option, fixed over short term periods not to exceed
six months at LIBOR plus 2.0 percentage points. The availability of funding
under the facility is subject to an annual pay-down provision whereby the sum of
the principal balance and letters of credit must be paid down to $6.0 million,
plus 80% of installment receivables. The pay-down requirement must be maintained
for not less than 30 consecutive days between December 1 and March 1 of each
fiscal year. The revolving line of credit is collateralized by substantially all
of the assets of the Company.
All borrowings are subject to various covenants. The most restrictive
covenants require a maximum debt to net worth ratio, quarterly measure of
minimum tangible net worth and minimum net income over the most recent four
quarters, a maximum annual spending level for capital assets and prohibit the
payment of dividends to shareholders. As of January 3, 1999, the Company was
in compliance with all applicable covenants under the revolving line of
credit agreement, as amended. As of January 3, 1999, the Company had borrowed
$5.8 million against the revolving credit line compared to $1.7 million at
December 28, 1997.
16
Cash flows used in operating activities during fiscal 1998 were $5.2
million compared to cash flows provided by operating activities of $1.2 million
in fiscal 1997. The increase in cash used in operations was primarily the result
of decreased net earnings, and increased inventory levels which were not funded
by a corresponding increase in accounts payable. Cash flows provided by
operating activities during fiscal 1997 were $1.2 million compared to $662,000
during fiscal 1996. The net increase in cash provided by operations was
primarily the result of increased net earnings and increased depreciation
expense. In addition, inventory and accounts payable increased $6.1 million and
$6.6 million during fiscal 1997 as a result of higher inventory levels and lower
inventory turnover that is the result of the Company's strategic plan to
increase product margins through purchasing more manufacturers' close-outs.
Cash flows used in investing activities during fiscal 1998 were $2.2
million compared to $1.4 million in fiscal 1997. During fiscal 1998, the Company
purchased its main computer servers that were previously leased and enhanced its
primary office and warehouse facility through leasehold improvements after
extending the lease term an additional five years. The Company also expended
funds for machinery and equipment, additional computer equipment and software to
support the growing sales volume.
Cash flows provided by financing activities during fiscal 1998 were $9.7
million compared to $161,000 during fiscal 1997. During fiscal 1998, the Company
received $8.5 million in net proceeds from a public offering completed in
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 outstanding
Series A Preferred Stock for $1.0 million. The Company also generated $4.1
million due to draws on the revolving credit facility. The remaining increase in
cash provided by financing activities was from the exercise of stock warrants
and options totaling $1.6 million.
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.
YEAR 2000
The statements in this section include "Year 2000 readiness disclosure"
within the meaning of the Year 2000 Information and Readiness Disclosure Act.
The Year 2000 issue is the result of computer programs accessing date
information stored in a two-digit year format (99) as opposed to a four-digit
year format (1999). Computer systems with this date representation and access
method will be unable to accurately interpret dates beyond the year 1999. This
inability could cause problems ranging from reporting errors to full system
failures. The Company utilizes a relational database that stores dates in an
internal format, which is a sequential number, either negative or positive, in
relation to January 1, 1968. For example, November 5, 1998 is day 11267. Each
time a date is utilized it is converted from the internal format to an external
date format, thereby avoiding the use of a two-digit date representation.
Therefore, management expects the impact of the Year 2000 on the Company's
internal computer systems to be minimal.
The Company has initiated a comprehensive project to prepare and test its
computer systems, including all telecommunications and data communications
systems, to ensure that they will be able to accurately process date information
beyond the year 1999. The investigative and assessment phases of this project
are completed. Initial program modifications and testing were completed in May
1998. Comprehensive system testing of this project is scheduled to begin in the
first quarter of 1999 with completion scheduled by the end of the second quarter
of 1999.
Costs associated with this Year 2000 compliance project are funded through
cash flows from operations. Costs related to this project are estimated to be
approximately $400,000 to $500,000.
Time and cost estimates are based on currently available information and
are management's best estimates. However, there is no guarantee that these
estimates will be achieved, and actual results may differ materially from those
anticipated. Developments which could affect estimates include, but are not
limited to, the availability and cost of trained personnel; the ability to
locate and correct all relevant computer code and equipment; and planning and
modification success of third party suppliers of products and services. The
Company will continue to assess and evaluate cost estimates and target dates for
completion of each phase of the Year 2000 project on a periodic basis.
The Company is in the process of contacting its critical suppliers of
products and services to assess whether these suppliers' operations and the
products and services they provide are Year 2000 compliant. The Company will
17
also monitor the progress of those suppliers who are in the planning or
execution phase of their Year 2000 projects to ensure eventual compliance.
If the systems of the Company or other companies on whose services the
Company depends, including the Company's customers, or with whom the Company's
systems interface are not Year 2000 compliant, there could be a material adverse
effect on the Company's financial condition or results of operations. At this
time, the Company believes it is unnecessary to adopt a contingency plan
covering the possibility that the project will not be completed in a timely
manner, but as part of the overall project, the Company will continue to assess
the need for a contingency plan.
FORWARD-LOOKING STATEMENTS
This report may contain forward-looking statements within the meaning of
the federal securities laws. Actual results could differ materially from those
projected in the forward-looking statements due to a number of factors,
including general economic conditions, a changing market environment for the
Company's products and the market acceptance of the Company's catalogs and
Internet offerings as well as the factors set forth 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following financial statements and schedules relating to the Company
are included herein:
PAGE
----
Financial Statements:
Report of Independent Certified Public Accountants 19
Balance Sheets as of January 3, 1999 and December 28, 1997 20
Statements of Operations for the fiscal years ended January 3, 1999, December
28, 1997 and December 27, 1996 21
Statements of Changes in Shareholders' Equity for the fiscal years ended
January 3, 1999, December 28, 1997 and December 27, 1996 22
Statements of Cash Flows for the fiscal years ended January 3, 1999, December
28, 1997 and December 27, 1996 23
Notes to Financial Statements 24
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts for the fiscal years ended
January 3, 1999, December 28, 1997 and December 27, 1996 33
18
Letterhead
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
The Sportsman's Guide, Inc.
We have audited the accompanying balance sheets of The Sportsman's Guide,
Inc. as of January 3, 1999 and December 28, 1997 and the related statements of
operations, changes in shareholders' equity, and cash flows for each of the
three fiscal years in the period ended January 3, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Sportsman's Guide, Inc.
as of January 3, 1999 and December 28, 1997, and the results of its operations
and its cash flows for each of the three fiscal years in the period ended
January 3, 1999 in conformity with generally accepted accounting principles.
We have also audited Schedule II for each of the three fiscal years in the
period ended January 3, 1999. In our opinion, this schedule presents fairly, in
all material respects, the information required to be set forth therein.
/s/ Grant Thornton LLP
Minneapolis, Minnesota
February 11, 1999
19
THE SPORTSMAN'S GUIDE, INC.
BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
ASSETS JANUARY 3, DECEMBER 28,
1999 1997
--------- -----------
CURRENT ASSETS
Cash and cash equivalents $ 2,303 $ --
Accounts receivable--net 3,931 4,180
Inventory 27,855 23,841
Promotional material 3,968 3,714
Prepaid expenses 857 1,163
--------- -----------
Total current assets 38,914 32,898
PROPERTY AND EQUIPMENT--NET 4,798 4,316
OTHER ASSETS 191 --
--------- -----------
Total assets $43,903 $37,214
--------- -----------
--------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft $ -- $ 2,383
Notes payable--bank 5,775 1,690
Current maturities of long-term debt
Related parties -- 1,795
Other 30 1,657
Accounts payable
Trade 15,726 16,866
Related parties 294 470
Accrued expenses 1,556 2,239
Customer deposits and other liabilities 3,042 3,140
--------- -----------
Total current liabilities 26,423 30,240
LONG-TERM LIABILITIES
Long-term debt 78 115
Deferred income taxes 407 494
--------- -----------
Total liabilities 26,908 30,849
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' EQUITY
Series A Preferred Stock--$.01 par value; 200,000 shares authorized; no shares
issued and outstanding at January 3, 1999 and 20,000 shares issued and
outstanding at December 28, 1997 -- --
Common Stock--$.01 par value; 36,800,000 shares authorized; 4,746,560 and
2,339,225 shares issued and outstanding at January 3, 1999
and December 28, 1997 47 23
Additional paid-in capital 11,555 2,365
Accumulated earnings 5,393 3,977
--------- -----------
Total shareholders' equity 16,995 6,365
--------- -----------
Total liabilities and shareholders' equity $43,903 $37,214
--------- -----------
--------- -----------
The accompanying notes are an integral part of these financial statements.
20
THE SPORTSMAN'S GUIDE, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEARS ENDED
----------------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 27,
1999 1997 1996
---------- ----------- -----------
Sales $ 142,876 $ 128,113 $ 112,270
Cost of sales 83,886 76,234 72,200
---------- ----------- -----------
Gross profit 58,990 51,879 40,070
Selling, general and administrative expenses 55,915 46,830 36,014
---------- ----------- -----------
Earnings from operations 3,075 5,049 4,056
Interest expense (883) (1,266) (981)
Miscellaneous income (expense), net (30) (4) 11
---------- ----------- -----------
Earnings before income taxes 2,162 3,779 3,086
Income taxes 746 1,304 759
---------- ----------- -----------
Net earnings $ 1,416 $ 2,475 $ 2,327
---------- ----------- -----------
---------- ----------- -----------
Net earnings per share:
Basic $ .32 $ 1.06 $ 1.00
---------- ----------- -----------
---------- ----------- -----------
Diluted $ .31 $ .85 $ .96
---------- ----------- -----------
---------- ----------- -----------
Weighted average common and common
equivalent shares outstanding:
Basic 4,434 2,336 2,334
---------- ----------- -----------
---------- ----------- -----------
Diluted 4,616 2,919 2,431
---------- ----------- -----------
---------- ----------- -----------
The accompanying notes are an integral part of these financial statements.
21
THE SPORTSMAN'S GUIDE, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
PREFERRED STOCK COMMON STOCK ADDITIONAL ACCUMULATED
----------------- ------------- PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT)
------ ------ ------- ------ -------- ----------
Balances at December 29, 1995 20 $ -- 2,334 $ 23 $ 2,350 $ (825)
Net earnings -- -- -- -- -- 2,327
------ ------ ------- ------ -------- --------
Balances at December 27, 1996 20 -- 2,334 23 2,350 1,502
Exercise of stock options -- -- 5 -- 15 --
Net earnings -- -- -- -- -- 2,475
------ ------ ------- ------ -------- --------
Balances at December 28, 1997 20 -- 2,339 23 2,365 3,977
Net proceeds from sale of
common stock -- -- 1,600 16 8,450 --
Repurchase of preferred stock (20) -- -- -- (1,000) --
Exercise of stock options and
warrants -- -- 808 8 1,584 --
Other -- -- -- -- 156 --
Net earnings -- -- -- -- -- 1,416
------ ------ ------- ------ -------- --------
Balances at January 3, 1999 -- $ -- 4,747 $ 47 $11,555 $ 5,393
------ ------ ------- ------ -------- --------
------ ------ ------- ------ -------- --------
The accompanying notes are an integral part of these financial statements.
22
THE SPORTSMAN'S GUIDE, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
FISCAL YEARS ENDED
---------------------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 27,
1999 1997 1996
--------- ----------- ------------
Cash flows from operating activities:
Net earnings $ 1,416 $ 2,475 $ 2,327
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,496 1,416 1,092
Deferred income taxes (87) 8 486
Other 164 (50) (44)
Changes in assets and liabilities
Accounts receivable 249 (1,142) (807)
Inventory (4,014) (6,076) (3,557)
Promotional material (254) (1,520) (80)
Prepaid expenses 306 (625) 320
Bank overdraft (2,383) (1,156) 1,920
Accounts payable (1,316) 6,626 (2,844)
Accrued expenses (683) 430 1,015
Customer deposits and other liabilities (66) 830 834
--------- ----------- ------------
Cash flows provided by (used in) operating activities (5,172) 1,216 662
Cash flows from investing activities:
Purchases of property and equipment (2,030) (1,377) (1,149)
Other (191) -- --
--------- ----------- ------------
Cash flows used in investing activities (2,221) (1,377) (1,149)
Cash flows from financing activities:
Net proceeds from revolving credit line 4,085 193 532
Payments on long-term debt (3,447) (47) (45)
Proceeds from exercise of stock options and warrants 1,592 15 --
Repurchase of preferred stock (1,000) -- --
Net proceeds from sale of common stock 8,466 -- --
--------- ----------- ------------
Cash flows provided by financing activities 9,696 161 487
--------- ----------- ------------
Increase in cash and cash equivalents 2,303 -- --
Cash and cash equivalents at beginning of year -- -- --
--------- ----------- ------------
Cash and cash equivalents at end of year $ 2,303 $ -- $ --
--------- ----------- ------------
--------- ----------- ------------
Supplemental disclosure of cash flow information
Cash paid during the years for:
Interest $ 886 $ 1,244 $ 1,019
Income taxes 1,379 956 5
The accompanying notes are an integral part of these financial statements.
23
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. DESCRIPTION OF BUSINESS
The Sportsman's Guide, Inc. (the "Company") is a mail order catalog and
Internet retailer, offering a variety of products including footwear, clothing
and accessories, hunting and shooting accessories, camping and outdoor
recreation equipment, optics and gifts as well as a diverse range of additional
offerings in other product categories. The Company conducts its primary
operations out of one warehouse and office facility and two retail outlet
locations in Minnesota and distributes its catalogs throughout the United States
and hosts a web site with product offerings at www.sportsmansguide.com. The
Company operates in one business segment.
2. REVENUE RECOGNITION
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. The provision charged against sales was $11.0 million,
$11.0 million and $7.4 million during fiscal years 1998, 1997 and 1996. Reserves
for returns, net of exchanges, of $1.2 million and $1.3 million were recorded in
accrued expenses at January 3, 1999 and December 28, 1997.
Amounts billed to customers for shipping of orders are netted against the
associated costs.
Customers can purchase one year memberships in the Company's buyer's club
for a $29.99 annual fee. The Company also offers two and three year memberships
at $53.99 and $80.99. Club members receive merchandise discounts of 10% on
regularly priced items and 5% on sale items and special buys. Membership fees
are deferred and recognized in income as the members place orders and receive
discounts. After 50% of the membership term has expired, members can no longer
cancel their memberships, and any remaining deferred membership fees are
recognized as income.
3. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid temporary investments purchased
with an original maturity of three months or less to be cash equivalents. The
Company also considers credit card settlements in-transit as cash for reporting
purposes. Chargebacks from the credit card companies are charged against
operations at the time initiated by the credit card company.
4. BANK OVERDRAFT
As a result of maintaining a consolidated cash management system, the
Company sometimes maintains overdraft positions at its primary bank. When
outstanding checks exceed the bank cash balances, the bank overdraft is included
in current liabilities.
5. ACCOUNTS RECEIVABLE
Accounts receivable consist primarily of amounts owed for merchandise by
customers utilizing an installment payment plan and amounts owed for list rental
and other advertising services provided by the Company to third parties. The
Company had an allowance for doubtful accounts of $90,000 and $190,000 at
January 3, 1999 and December 28, 1997.
6. INVENTORY
Inventory consists of purchased finished merchandise available for sale and
is recorded at the lower of cost or market with the first-in, first-out method
used to determine cost.
24
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
7. PROMOTIONAL MATERIAL AND ADVERTISING COSTS
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. The ongoing cost of developing and maintaining the customer list
is charged to operations as incurred. All other advertising costs are expensed
as incurred.
8. PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation and
amortization. The Company capitalizes external and incremental internal costs of
developing computer software for internal use that represent major enhancement
and/or replacements of operating and management systems. Depreciation and
amortization is computed using the straight-line method.
9. STOCK OPTIONS
Stock options issued to employees are accounted for under the intrinsic value
method.
10. NET EARNINGS PER SHARE
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 stock options and warrants, when dilutive.
For fiscal years 1998, 1997 and 1996, 181,362, 583,057 and 97,480 shares of
common stock equivalents were included in the computation of diluted net
earnings per share. Options and warrants to purchase 301,382, 18,650, and 44,878
shares of common stock with a weighted average exercise price of $7.14, $8.70,
and $6.50 were outstanding during fiscal year ends 1998, 1997 and 1996, but were
not included in the computation of diluted earnings per share because to do so
would have been anti-dilutive.
11. FINANCIAL INSTRUMENTS
The fair value of the Company's financial instruments approximates the
carrying value at January 3, 1999.
12. FISCAL YEAR
The Company's fiscal year ends on the Sunday nearest December 31 for 1998
and 1997 and on the Friday nearest December 31 for 1996. Fiscal year 1998
consisted of 53 weeks and fiscal years 1997 and 1996 consisted of 52 weeks.
13. USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, and
the disclosure of contingent assets and liabilities at the date of the financial
statements, and the amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
25
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE B--RELATED PARTY TRANSACTIONS
The Company purchased $3.9 million, $2.0 million and $3.0 million of
inventory during fiscal years 1998, 1997 and 1996 from companies partially owned
by two directors of the Company.
The Company incurred interest expense on related party subordinated notes
payable of $23,000, $183,000 and $172,000 during fiscal years 1998, 1997 and
1996.
The Company loaned $238,000 to an officer of the Company to be repaid over
five years with interest at 5.69% per annum.
NOTE C--PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
JANUARY 3, DECEMBER 28, ESTIMATED
1999 1997 USEFUL LIVES
------ ------ ------------
Machinery, equipment and furniture.......... $3,543 $2,830 5-12 years
Equipment under capital leases.............. 133 133 5 years
Leasehold improvements...................... 1,386 1,085 Lease life
Computer equipment and accessories.......... 1,625 1,204 5 years
Computer software........................... 3,312 2,940 4-5 years
------- ------
9,999 8,192
Less accumulated depreciation and
amortization.............................. 5,201 3,876
------- ------
$4,798 $4,316
------- ------
------- ------
NOTE D--COMMITMENTS AND CONTINGENCIES
LEASE AND SERVICE COMMITMENTS
The Company has several long-term contracts and operating leases related to
building facilities, telecommunications and computer equipment, long-distance
telephone services and a retail location with varying terms as long as 62
months. The Company occupies approximately 320,000 square feet under a lease
that expires in March 2004.
At January 3, 1999, future minimum commitments under the above agreements are
as follows for fiscal years (in thousands):
1999.......................................................... $ 3,258
2000.......................................................... 2,818
2001.......................................................... 1,607
2002.......................................................... 1,444
2003.......................................................... 1,288
2004.......................................................... 322
--------
$ 10,737
--------
--------
Rent expense was $2.4 million, $2.1 million and $1.8 million for fiscal years
1998, 1997 and 1996.
26
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE D--COMMITMENTS AND CONTIGENCIES (CONTINUED)
EMPLOYMENT AGREEMENTS
The Company has employment agreements with four of its officers. The
agreements contain various terms and conditions including a provision for the
officers to receive up to three years of base salary upon the occurrence of
certain events as defined in the agreement. The agreements provide for automatic
annual renewals unless two months' prior written notice is provided by the
Company or the officer.
RISKS AND UNCERTAINTIES
The Year 2000 issue relates to limitations in computer systems and
applications that may prevent proper recognition of the Year 2000. The potential
effect of the Year 2000 issue on the Company and its business partners will not
be fully determinable until the year 2000 and thereafter. If Year 2000
modifications are not properly completed either by the Company or any entities
with whom the Company conducts business, the Company's revenues and financial
condition could be adversely impacted.
OTHER
Several states, where the Company does not currently collect and remit
sales and use taxes, have attempted to enact legislation that seeks to require
out-of-state mail order companies to collect and remit such taxes. No
assessments have been made against the Company and, to its knowledge, none has
been threatened or is contemplated. The United States Supreme Court has held
that such taxes place an unconstitutional burden on interstate commerce, which
may only be resolved by actions of the United States Congress.
The Company is not a party to any pending legal proceedings other than
litigation which is incidental to its business and which the Company believes
will not have a material effect on its financial statements.
NOTE E--REVOLVING CREDIT FACILITY
The Company maintains a credit facility through a syndicate led by Norwest
Bank Minnesota, N.A. providing a revolving line of credit of up to $20.0
million, subject to an adequate borrowing base, expiring July 31, 1999. The
agreement provides for automatic annual renewals through 2003. Either party may
terminate the agreement by providing notice 60 days before expiration. The
borrowing base related to inventory is limited to $17.0 million. The revolving
line of credit is for working capital and letters of credit. Letters of credit
may not exceed $7.5 million at any one time. Document letters of credit totaling
$1,094,000 were outstanding as of January 3, 1999. Borrowings under the
revolving credit agreement, as amended, bear interest at the bank's base (prime)
rate less 0.3% or, at the Company's option, fixed over short term periods not to
exceed six months at LIBOR plus 2.0 percentage points. The availability of
funding under the facility is subject to an annual pay-down provision whereby
the sum of the principal balance and letters of credit must be paid down to $6.0
million, plus 80% of installment receivables. The pay-down requirement must be
maintained for not less than 30 consecutive days between December 1 and March 1
of each fiscal year. The revolving line of credit is collateralized by
substantially all of the assets of the Company.
All borrowings are subject to various covenants. The most restrictive
covenants require a maximum debt to net worth ratio, quarterly measure of
minimum tangible net worth and minimum net income over the most recent four
quarters, a maximum annual spending level for capital assets and prohibit the
payment of dividends to shareholders. As of January 3, 1999, the Company was in
compliance with all applicable covenants under the revolving line of credit
agreement, as amended.
27
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE E--REVOLVING CREDIT FACILITY (CONTINUED)
The following is a summary of the credit facility (in thousands):
FISCAL YEARS ENDED
--------------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 27,
1999 1997 1996
---------- ------------ ------------
Balance at end of year ...................... $ 5,775 $ 1,690 $ 1,497
Interest rate at end of year ................ 7.25% 8.50% 9.75%
Maximum month-end borrowing during
the year ................................. $14,769 $13,599 $ 9,765
Average daily borrowing during the year ..... $ 9,917 $ 9,517 $ 6,029
Weighted average interest rate during the
year ..................................... 8.31% 9.22% 10.60%
NOTE F--LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
JANUARY 3, DECEMBER 28,
1999 1997
---------- ------------
Subordinated notes payable to shareholders, interest at
1.75% over prime but not less than 9%, paid in 1998 ... $ -- $3,414
Other ...................................................... 108 153
---------- ------------
108 3,567
Less current maturities .................................... 30 3,452
---------- ------------
$ 78 $ 115
---------- ------------
---------- ------------
At January 3, 1999 future maturities of long-term debt are $30,000 for each
of the fiscal years 1999 through 2001 and $18,000 in fiscal 2002.
NOTE G--INCOME TAXES
The provision for income taxes consists of the following for fiscal years
1998, 1997 and 1996 (in thousands):
FISCAL YEARS ENDED
--------------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 27,
1999 1997 1996
----------- ------------ -----------
Current
Federal .......... $ 647 $1,277 $ 263
State ............ 12 19 10
------ ------ ------
659 1,296 273
Deferred
Federal .......... 87 8 486
------ ------ ------
$ 746 $1,304 $ 759
------ ------ ------
------ ------ ------
28
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE G--INCOME TAXES (CONTINUED)
Differences between income tax expense and amounts derived by applying the
statutory federal income tax rate to earnings before income taxes are as follows
for fiscal years 1998, 1997 and 1996:
FISCAL YEARS ENDED
--------------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 27,
1999 1997 1996
--------- ------------ ------------
U.S. federal statutory rate .............. 34.0% 34.0% 34.0%
Change in valuation allowance ............ -- -- (13.7)
Adjustment of prior years' accruals ...... -- -- 3.8
Other .................................... 0.5 0.5 0.5
--------- ------------ ------------
34.5% 34.5% 24.6%
--------- ------------ ------------
--------- ------------ ------------
The components of deferred taxes at January 3, 1999 and December 28, 1997,
calculated at 34%, are as follows (in thousands):
JANUARY 3, DECEMBER 28,
1999 1997
---------- -----------
Current deferred tax assets (liabilities)......................
Inventory................................................... $ 659 $ 529
Vacation accrual............................................ 137 127
Returns reserve............................................. 397 437
Promotional material........................................ (947) (883)
Prepaid expenses............................................ (154) (205)
Other....................................................... 85 129
---------- -----------
Net current deferred tax asset........................... 177 134
Long-term deferred tax liabilities.............................
Internally developed software............................... (630) (527)
Depreciation................................................ 46 (101)
---------- -----------
Net long-term deferred tax liability..................... (584) (628)
---------- -----------
Net deferred tax liability............................... $ (407) $ (494)
---------- -----------
---------- -----------
NOTE H--SHAREHOLDERS' EQUITY
The Company has 40,000,000 authorized shares; 200,000 of Series A Preferred
Stock, 36,800,000 of Common Stock and 3,000,000 undesignated shares.
PUBLIC OFFERING OF COMMON STOCK
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.
STOCK OPTIONS
The Company has a stock option plan (the "1991 Plan") which provides
participating employees the right to purchase common stock of the Company
through incentive stock options. A total of 35,000 shares of common stock are
reserved for issuance under the 1991 Plan. Options issued under the 1991 Plan
are exercisable over a ten year period from the date of grant. At January 3,
1999, no options were outstanding.
29
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTES H--SHAREHOLDERS' EQUITY (CONTINUED)
The Company previously issued options to purchase 55,000 shares of the
Company's common stock at $2.50 per share to an officer of the Company. All of
the options became exercisable upon the Company's public offering of common
stock and were exercised during 1998.
The Company also previously issued options to purchase 5,000 shares of the
Company's common stock at $2.50 per share to a director and former officer of
the Company. All of the options were exercised during 1997.
The Company has a non-qualified stock option plan (the "1994 Plan") which
provided for the issuance of up to 100,000 options to purchase shares of the
Company's common stock to certain employees, contingent upon meeting certain
quarterly pre-tax earnings levels. Options under the 1994 Plan are exercisable
over a three year period from the date of grant. At January 3, 1999, a total of
35,189 options were outstanding, all of which were exercisable.
The Company has an incentive stock option plan ( the "1996 Plan") which
provides selected key employees the right to purchase common stock of the
Company through the exercise of options granted. A total of 600,000 shares of
common stock are reserved for issuance under the 1996 Plan. Options issued under
the 1996 Plan are exercisable over a ten year period from the date of grant. At
January 3, 1999, a total of 467,030 options were outstanding, of which 214,993
options were exercisable.
The following applies to options that are outstanding at January 3, 1999:
WEIGHTED AVERAGE
NUMBER REMAINING WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE
- - ------------------------ -------------- ---------------- ----------------
$2.50 - $3.70............................ 102,280 7 years $2.57
$4.00 - $5.50............................ 117,664 8 years $4.16
$5.875 - $6.50........................... 266,750 9 years $6.29
$8.70.................................... 15,525 6 years $8.70
--------
502,219
--------
--------
NUMBER WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES EXERCISABLE EXERCISE PRICE
- - ------------------------ ----------- ----------------
$2.50 - $3.70............................ 102,280 $2.57
$4.00 - $5.50............................ 65,689 $4.30
$5.875 - $6.50........................... 66,688 $6.29
$8.70.................................... 15,525 $8.70
-------
250,182
-------
-------
Exercise prices for all options granted were equal to or higher than the
fair value of the Company's common stock on the respective grant dates and,
therefore, no compensation expense has been recorded by the Company. A summary
of the stock option transactions during fiscal years 1998, 1997 and 1996 is as
follows:
30
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE H--SHAREHOLDERS' EQUITY (CONTINUED)
1998 1997 1996
---- ---- ----
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- ------ --------
Outstanding at beginning
of year................. 348,439 $3.53 233,878 $3.27 121,753 $4.03
Granted............. 319,500 $6.31 130,000 4.00 125,000 2.50
Exercised........... (91,308) $2.64 (5,625) 2.53 --- ---
Canceled............ (70,287) $5.76 (5,876) 3.43 (6,125) 4.26
Expired............. (4,125) $8.02 (3,938) 4.87 (6,750) 2.00
-------- --------- ---------
Outstanding at the end of
year................... 502,219 $5.11 348,439 $3.53 233,878 $3.27
-------- --------- ---------
-------- --------- ---------
Options exercisable at
end of year............ 250,182 $4.40 196,314 $3.59 177,878 $3.51
-------- --------- ---------
-------- --------- ---------
Weighted average fair
value of options
granted during the
year................... $3.26 $1.75 $1.30
The Company's pro forma net earnings and net earnings per share for fiscal
years 1998, 1997 and 1996 had the fair value based method of accounting for the
issuance of stock options been used are set forth below. These effects may not
be representative of the future effects of applying this method.
FISCAL YEARS ENDED
-------------------------------------------------------------------
JANUARY 3. DECEMBER 28, DECEMBER 27,
1999 1997 1996
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net earnings ............................... As reported $ 1,416 $ 2,475 $ 2,327
Pro forma 1,098 2,412 2,164
Net earnings per share:
Basic ...................................... As reported $ .32 $ 1.06 $ 1.00
Pro forma .25 1.03 .93
Diluted .................................... As reported $ .31 $ .85 $ .96
Pro forma .24 .83 .89
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted-average
assumptions used: zero dividend yield; expected volatility of 25 percent;
risk-free interest rate of six percent; and expected life of 10 years.
WARRANTS
During the first quarter of 1998, the Company received net proceeds of
approximately $1.4 million from the exercise of warrants to purchase 716,027
shares of common stock.
In connection with the public offering of common stock in 1998, warrants to
purchase 100,000 shares of common stock at $8.45 per share were issued. The
warrants are exercisable immediately and expire February 2003.
31
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE H--SHAREHOLDERS' EQUITY (CONTINUED)
PREFERRED STOCK
On February 10, 1998, the Company repurchased all of its outstanding Series A
Preferred Stock for $1.0 million.
NOTE I--ADVERTISING EXPENSE
Selling, general and administrative expenses include advertising expenses of
$33.9 million, $27.5 million, and $19.5 million for fiscal years 1998, 1997 and
1996.
32
THE SPORTSMAN'S GUIDE, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- - ------------------------------ ----------------- ------------------------------------ ------------------ ----------------
ADDITIONS
------------------------------------
(1) (2)
BALANCE AT CHARGED TO: CHARGED TO:
BEGINNING COSTS AND OTHER ACCOUNTS-- DEDUCTIONS-- BALANCE AT
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD
- - ------------------------------- ------------------ ----------- -------------------- ------------------ -----------------
RETURNS RESERVE
January 3, 1999 $1,285 $10,985 --- $11,102* $1,168
December 28, 1997 640 10,953 --- 10,308* 1,285
December 27, 1996 177 7,371 --- 6,908* 640
* Represents actual returns from customers.
NOTE 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item 10 is set forth under "Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's Proxy Statement for its Annual Meeting of Shareholders on May 10, 1999
and is incorporated herein by reference, except for certain information
concerning the executive officers of the Company which is set forth in Part I of
this report.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item 11 is set forth under "Executive
Compensation" in the Company's Proxy Statement for its Annual Meeting of
Shareholders on May 10, 1999 and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item 12 is set forth under "Security
Ownership of Certain Beneficial Owners and Management" in the Company's Proxy
Statement for its Annual Meeting of Shareholders on May 10, 1999 and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item 13 is set forth under "Certain
Relationships and Related Transactions" and "Compensation Committee Interlocks
and Insider Participation" in the Company's Proxy Statement for its Annual
Meeting of Shareholders on May 10, 1999 and is incorporated herein by reference.
33
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. FINANCIAL STATEMENTS.
The following financial statements of the Company are included
herein at Item 8.
Report of Independent Certified Public Accountants
Balance Sheets as of January 3, 1999 and December 28, 1997
Statements of Operations for the fiscal years ended January
3, 1999, December 28, 1997 and December 27, 1996
Statements of Changes in Shareholders' Equity for the fiscal
years ended January 3, 1999, December 28, 1997 and December
27, 1996
Notes to Financial Statements
2. FINANCIAL STATEMENT SCHEDULES.
The following financial statement schedule of the Company is
included herein at Item 8.
Schedule II--Valuation and Qualifying Accounts for the
fiscal years ended January 3, 1999, December 28, 1997 and
December 27, 1996
3. EXHIBITS.
See Exhibit Index at page 36 of this report.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the fourteen weeks ended
January 3, 1999.
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 26, 1999 By /s/ GARY OLEN
------------------------------------
Gary Olen
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
---------- -------- ----
/s/ GARY OLEN Chairman of the Board, Chief
- - ----------------------------------------- Executive Officer and Director
Gary Olen (principal executive officer)
/s/ CHARLES B. LINGEN Senior Vice President of Finance,
- - ----------------------------------------- Chief Financial Officer, Secretary,
Charles B. Lingen Treasurer and Director (principal
financial and accounting officer)
/s/ GREGORY R. BINKLEY President, Chief Operating Officer March 26, 1999
- - ----------------------------------------- And Director
Gregory R. Binkley
VINCENT W. SHIEL* Director
- - -----------------------------------------
Vincent W. Shiel
MARK F. KROGER* Director
- - -----------------------------------------
Mark F. Kroger
LEONARD M. PALETZ* Director
- - -----------------------------------------
Leonard M. Paletz
WILLIAM T. SENA* Director
- - -----------------------------------------
William T. Sena
*By /s/ GARY OLEN
- - -----------------------------------------
Gary Olen, Attorney-In-Fact
35
EXHIBIT INDEX
EXHIBIT DESCRIPTION PAGE
- - ------- ----------- ----
3.1 Restated Articles of Incorporation as restated through March 5, 1997
(incorporated by reference from Exhibit 3.1 to Form 10-K for the year
ended December 27, 1996, File No. 0-15767)
3.2 Bylaws (incorporated by reference from Exhibit 3.2 to Form S-18
Registration Statement No. 33-4496C filed April 1, 1986)
4.1 Specimen of the Company's Common Stock certificate (incorporated by
reference from Exhibit 4.1 to Amendment No. 1 to Form S-18 Registration
Statement No. 33-4496C filed May 8, 1986)
4.2 Form of Promissory Note dated April 18, 1997 issued by the Company
(incorporated by reference from Exhibit 4.2 to Form 10-Q for the quarter
ended March 28, 1997)
10.1 Letter of agreement between Vincent W. Shiel and the Company dated
September 8, 1989 (incorporated by reference from Exhibit 19.1 to Form
10-Q for the quarter ended September 29, 1989)
10.2* Consulting Agreement dated January 11, 1990 between the Company and
Outdoor Consulting, Inc. (incorporated by reference from Exhibit 10.16 to
Form 10-K for the year ended December 29, 1989)
10.3* The Company's 1991 Incentive Stock Option Plan (incorporated by reference
from Exhibit 10.16 to Form 10-K for the year ended December 27, 1991)
10.4* Agreement between the Company and Gary Olen dated July 1, 1992 granting
the use of Mr. Olen's name, picture and likeness (incorporated by
reference from Exhibit 10.19 to Form 10-K for the year ended December 31,
1993)
10.5 Industrial Real Estate Lease between the Company and CB Commercial Real
Estate Group, Inc. dated April 22, 1993 (incorporated by reference from
Exhibit 10.20 to Form 10-K for the year ended December 31, 1993)
10.6 Amendment to Industrial Real Estate Lease between the Company and American
Real Estate Holdings, L.P. dated February 23, 1998 (incorporated by
reference from Exhibit 10.1 to Form 10-Q for the quarter ended June 28,
1998)
10.7 Credit Agreement between the Company, Norwest Bank Minnesota, N.A. and M &
I Marshall and Ilsley Bank dated June 26, 1998 (incorporated by reference
from Exhibit 10.2 to Form 10-Q for the quarter ended June 28, 1998)
10.8 First Amendment to Credit Agreement between the Company, Norwest Bank
Minnesota, N.A. and M & I Marshall and Ilsley Bank dated February 1, 1999 37
10.9* Form of Stock Option Agreement pursuant to the Company's 1994
Non-Qualified Performance Option Plan (incorporated by reference from
Exhibit 10.16 to Form 10-K for the year ended December 27, 1996)
10.10* The Company's 1996 Stock Option Plan (incorporated by reference from
Exhibit 10.17 to Form 10-K for the year ended December 27, 1996)
10.11* Form of Employment Agreement with members of senior management
(incorporated by reference from Exhibit 10.10 to Amendment No. 1 to Form
S-2 Registration Statement No. 333-31111 filed January 2, 1998)
10.12* Description of 1997 Senior Management Stock Option Plan (incorporated by
reference from Exhibit 10.10 to Form 10-K for the year ended December 28,
1997)
10.13 Replacement Promissory Note from Gary Olen to the Company dated February
11, 1999 40
10.14 Stock Pledge Agreement between Gary Olen and the Company dated February
11, 1998 (incorporated by reference from Exhibit 10.11 to Form 10-K for
the year ended December 28, 1997)
10.15* Consulting Agreement between the Company and William T. Sena dated
April 1, 1998 42
23.1 Consent of Grant Thornton LLP 45
24.1 Powers of Attorney of each person whose name is signed to this report
pursuant to a power of attorney 46
27 Financial Data Schedule 50
- - -------------------------
Those exhibits marked with an asterisk (*) above constitute management
contracts or compensatory plans or arrangements for management and executive
officers of the Company.
36