UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934. FOR THE QUARTERLY FISCAL
PERIOD ENDED APRIL 4, 1999 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD
FROM TO .
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Commission File No. 015767
THE SPORTSMAN'S GUIDE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA 41-1293081
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
OF INCORPORATION OR ORGANIZATION)
411 FARWELL AVE., SO. ST. PAUL, MINNESOTA 55075
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(651) 451-3030
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes x No
----- -----
As of May 18, 1999, there were 4,747,810 shares of the registrant's Common
Stock outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE SPORTSMAN'S GUIDE, INC.
BALANCE SHEETS
(UNAUDITED)
(In thousands of dollars)
April 4, March 29,
ASSETS 1999 1998
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ -- $ 2,303
Accounts receivable - net 3,900 3,931
Inventory 30,657 27,855
Promotional material 4,560 3,968
Prepaid expenses 1,016 857
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Total current assets 40,133 38,914
PROPERTY AND EQUIPMENT - NET 4,909 4,798
OTHER ASSETS 191 191
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Total assets $ 45,233 $ 43,903
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------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Checks written in excess of bank balances $ 2,787 $ --
Notes payable - bank 6,695 5,775
Current maturities of long-term debt 30 30
Accounts payable
Trade 13,365 15,726
Related parties 215 294
Accrued expenses 1,394 1,556
Customer deposits and other liabilities 2,832 3,042
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Total current liabilities 27,318 26,423
LONG-TERM LIABILITIES
Long-term debt 78 78
Deferred income taxes 407 407
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Total liabilities 27,803 26,908
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' EQUITY
Common Stock-$.01 par value; 36,800,000 shares
authorized; 4,747,810 and 4,746,560 shares issued and
outstanding at April 4, 1999 and January 3, 1999 47 47
Additional paid-in capital 11,562 11,555
Retained earnings 5,821 5,393
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Total shareholders' equity 17,430 16,995
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Total liabilities and shareholders' equity $ 45,233 $ 43,903
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See accompanying condensed notes to financial statements.
2
THE SPORTSMAN'S GUIDE, INC.
STATEMENTS OF EARNINGS
(UNAUDITED)
For the Thirteen Weeks Ended
April 4, 1999 and March 29, 1998
(In thousands, except per share data)
Thirteen Weeks Ended
----------------------
April 4, March 29,
1999 1998
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Sales $ 38,384 $ 31,697
Cost of sales 23,070 18,405
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Gross profit 15,314 13,292
Selling, general and administrative expenses 14,549 12,124
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Earnings from operations 765 1,168
Interest expense (116) (168)
Miscellaneous income, net 4 1
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Earnings before income taxes 653 1,001
Income taxes 225 345
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Net earnings $ 428 $ 656
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Net earnings per share:
Basic $ .09 $ .19
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Diluted $ .09 $ .16
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Weighted average common and common equivalent
shares outstanding:
Basic 4,748 3,519
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--------- -----------
Diluted 4,849 4,028
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See accompanying condensed notes to financial statements.
3
THE SPORTSMAN'S GUIDE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Thirteen Weeks Ended
April 4, 1999 and March 29, 1998
(In thousands of dollars)
Thirteen Weeks Ended
---------------------
April 4, March 29,
1999 1998
--------- ----------
Cash flows from operating activities:
Net earnings $ 428 $ 656
Adjustments to reconcile net earnings
to net cash provided by (used in) operating activities:
Depreciation and amortization 412 368
Other -- (10)
Changes in assets and liabilities:
Accounts receivable 31 981
Inventory (2,802) (4,214)
Promotional material (592) 184
Prepaid expenses (159) 433
Checks written in excess of bank balances 2,787 (435)
Accounts payable (2,440) (5,862)
Accrued expenses (162) (590)
Customer deposits and other liabilities (210) (721)
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Cash flows used in operating activities (2,707) (9,210)
Cash flows from investing activities:
Purchases of property and equipment (523) (234)
Other -- (191)
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Cash flows used in investing activities (523) (425)
Cash flows from financing activities:
Net proceeds from revolving credit line 920 3,962
Payments on long-term debt -- (3,419)
Proceeds from exercise of stock options and warrants 7 1,571
Repurchase of preferred stock -- (1,000)
Net proceeds from sale of common stock -- 8,521
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Cash flows provided by financing activities 927 9,635
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Decrease in cash and cash equivalents (2,303) --
Cash and cash equivalents at beginning of the period 2,303 --
--------- ----------
Cash and cash equivalents at end of the period $ -- $ --
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the periods for:
Interest $ 126 $ 171
Income taxes $ 1 $ 635
See accompanying condensed notes to financial statements.
4
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Note 1: Basis of Presentation
The accompanying financial statements are unaudited and reflect all
adjustments which are normal and recurring in nature, and which, in the
opinion of management, are necessary for a fair presentation thereof.
Reclassifications have been made to prior year financial information
wherever necessary to conform to the current year presentation. Results
of operations for the interim periods are not necessarily indicative of
full-year results.
Note 2: Net Earnings Per Share
The Company's basic net earnings per share amounts have been computed
by dividing net earnings by the weighted average number of outstanding
common shares. The Company's diluted net earnings per share amounts
have been computed by dividing net earnings by the weighted average
number of outstanding common shares and common share equivalents
relating to stock options and warrants, when dilutive.
For the thirteen week periods ended April 4, 1999, and March 29, 1998,
101,451 and 508,756 shares of common stock equivalents were included in
the computation of diluted net earnings per share. Options and warrants
to purchase 392,225 and 115,775 shares of common stock with a weighted
average exercise price of $7.11 and $8.48 were outstanding during the
thirteen week periods ended April 4, 1999, and March 29, 1998,
respectively, but were not included in the computation of diluted
earnings per share because to do so would have been anti-dilutive.
Note 3: Commitments
During May 1999, the Company executed a lease for expanded warehouse
storage capacity. The facility contains approximately 200,000 square
feet of warehouse space, located in Eagan, Minnesota. The lease term
is for 48 months commencing August 1999. Minimum annual lease
payments are approximately $360,000, $864,000, $864,000, $864,000,
and $504,000, for 1999, 2000, 2001, 2002 and 2003.
Note 4: In May 1999 the Board of Directors unanimously adopted a shareholder
rights plan designed to ensure that all of the Company's
shareholders receive fair and equal treatment in the event of any
proposal to acquire the Company. The Board declared a distribution
of one Right for each share of common stock outstanding on May 21,
1999. Each Right entitles the holder to purchase one share of the
Company's common stock at an initial exercise price of $50.
Initially, the Rights will be attached to the common stock and will
not be exercisable. They become exercisable only following the
acquisition by a person or group, without the prior consent of the
Company's Board of Directors, of 15 percent or more of the Company's
voting stock, or following the announcement of a tender offer or
exchange offer to acquire an interest of 15 percent or more.
In the event that the Rights become exercisable, each Right will
entitle the holder to purchase, at the exercise price, common stock
with a market value equal to twice the exercise price and should the
Company be acquired, each Right would entitle the holder to purchase,
at the exercise price, common stock of the acquiring company with a
market value equal to twice the exercise price. Rights owned by the
acquiring entity/person would become void. In certain specified
instances, the Rights may be redeemed by the Company. If not redeemed,
they would expire on May 11, 2009.
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED APRIL 4, 1999 COMPARED TO THIRTEEN WEEKS ENDED MARCH 29,
1998
SALES. Sales for the thirteen weeks ended April 4, 1999, of $38.4 million
were $6.7 million or 21% higher than sales of $31.7 million during the same
period last year. The increase in sales was due to a 12% increase in catalog
circulation during the quarter, complemented by increases in average order
size, Internet sales and response rates, versus last year. Internet sales for
the quarter ended April 4, 1999, were approximately 4% of total sales,
compared to no Internet sales during the same period last year. The Company
defines Internet sales as those that are derived from our web site
and catalog orders that are processed online on our web site. The Company
mailed 12 catalog editions, including nine specialty editions, during the
thirteen weeks ended April 4, 1999, compared to ten editions, including seven
specialty editions, during the same period last year.
Gross returns and allowances for the thirteen weeks ended April 4, 1999, were
$4.3 million or 10.2% of gross sales compared to $3.9 million or 11.1% of
gross sales during the same period last year. Gross returns and allowances as
a percentage of sales decreased during the fiscal quarter due to actual
return rates on products in new specialty catalogs being less than originally
estimated during the first quarter of fiscal 1998.
GROSS PROFIT. Gross profit for the thirteen weeks ended April 4, 1999, was
$15.3 million or 39.9% of sales compared to $13.3 million or 41.9% of sales
during the same period last year. The decrease in gross profit as a
percentage of sales was primarily due to planned clearance promotions of cold
weather merchandise and lower shipping and handling margins. Shipping and
handling margins were down from last year primarily due to rate increases
from the United States Post Office as well as other parcel post carriers,
which were effective during the first quarter of 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the thirteen weeks ended April 4, 1999, were
$14.5 million or 37.9% of sales compared to $12.1 million or 38.2% of sales
for the same period last year. The dollar increase was primarily due to a 12%
increase in catalog circulation and higher fulfillment costs associated with
the 21% increase in sales volume. Total circulation during the first quarter
of 1999 was 18.4 million catalogs compared to 16.4 million catalogs during
the first quarter of 1998. The increase in catalog circulation was primarily
due to a planned increase in the number of specialty catalog editions.
Advertising expense for the thirteen weeks ended April 4, 1999, was $8.7
million or 22.6% of sales compared to $7.2 million or 22.6% of sales for the
same period last year. Advertising expense as a percentage of sales was even
with last year. Gains in average order size, Internet sales and response
rates offset increased mailing costs. Mailing costs were up during the
quarter, primarily due to postal rate increases effective January 1999, paper
price increases and an increase in the average page count of each catalog
edition.
EARNINGS FROM OPERATIONS. Earnings from operations of $765,000 for the
thirteen weeks ended April 4, 1999, were $403,000 lower than last year,
largely due to the aforementioned decrease in gross profit as a result of the
planned clearance of cold weather merchandise.
INTEREST EXPENSE. Interest expense for the thirteen weeks ended April 4,
1999, was $116,000 compared to $168,000 for the same period last year. The
decrease in interest expense was primarily due to the retirement of
subordinated notes payable, which was completed during February 1998.
NET EARNINGS. Net earnings for the thirteen weeks ended April 4, 1999, were
$428,000 or 1.1% of sales compared to $656,000 or 2.1% of sales during the
same period last year. Diluted earnings per share for the thirteen weeks
ended April 4, 1999, were $.09 compared to $.16 for the same period last
year. The diluted weighted average common and common equivalent shares
increased to 4,849,000 in the first quarter of 1999 compared to 4,028,000 for
the same period last year primarily due to the public offering of 1.6 million
common shares during February 1998.
6
QUARTERLY FLUCTUATIONS AND SEASONALITY
The Company's sales and results of operations have fluctuated and can be
expected to continue to fluctuate on a quarterly basis as a result of a
number of factors, including: the timing of new merchandise and catalog
offerings; recognition of costs or sales contributed by new merchandise and
catalog offerings; fluctuations in response rates; fluctuations in postage,
paper and printing costs and in merchandise returns; adverse weather
conditions that affect response, distribution or shipping; shifts in the
timing of holidays; and changes in the Company's product mix. The Company
recognizes the cost of catalog production and mailing over the estimated
useful lives of the catalogs, ranging from four to six months from the
catalog's in-home date. Consequently, quarter-to-quarter sales and expense
comparisons will be impacted by the timing of the mailing of the Company's
catalog editions.
The majority of the Company's sales historically occur during the third and
fourth fiscal quarters. The seasonal nature of the Company's business is due
to the catalog's focus on hunting merchandise and related accessories for the
fall, as well as winter apparel and gifts for the holiday season. The Company
expects this seasonality will continue in the future. In anticipation of
increased sales activity during the third and fourth fiscal quarters, the
Company incurs significant additional expenses for hiring employees and
building inventory levels.
The following table sets forth certain unaudited quarterly financial
information for the Company for the periods shown. In the opinion of
management, this unaudited information has been prepared on the same basis as
the audited information and includes all normal recurring adjustments
necessary to present fairly, in all material respects, the information set
forth therein.
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------
FISCAL 1999
Sales $ 38,384
Gross profit 15,314
Earnings from operations 765
Net earnings 428
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
7
LIQUIDITY AND CAPITAL RESOURCES
The Company meets its operating cash requirements through funds generated
from operations and borrowings under its revolving line of credit. On
February 10, 1998, the Company received net proceeds of $8.5 million from the
sale of 1.6 million shares of its common stock through a public offering. The
Company used a portion of the offering proceeds to pay $3.4 million of
subordinated notes payable and repurchase all of the Company's Series A
Preferred Stock for $1.0 million. The remaining $4.1 million was used for
working capital purposes.
The Company had working capital of $12.8 million as of April 4, 1999,
compared to $12.5 million as of January 3, 1999. The increase of $300,000 was
primarily due to year to date net earnings. The Company's working capital
requirements have increased over the last three years primarily as a result
of higher inventory levels and lower inventory turnover which are consistent
with the Company's strategic plan to increase product margins through
purchasing more manufacturers' close-outs and imports. The Company purchases
large quantities of manufacturers' close-outs and other individual product
items on an opportunistic or when-available basis, particularly in the case
of footwear and apparel. The seasonal nature of the merchandise or the time
of acquisition may require that it be held for several months before being
offered in a catalog. This can result in increased inventory levels thereby
increasing the Company's working capital requirements and related carrying
costs.
The Company offers its customers an installment credit plan with no finance
fees, known as the "G. O. Painless 4-Pay Plan". Each of the four consecutive
monthly installments is billed directly to customers' credit cards. The
Company had installment receivables of $2.7 million at April 4, 1999,
compared to $3.2 million at January 3, 1999. 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 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 prior to 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 April 4, 1999, the Company was in
compliance with all applicable covenants under the revolving line of credit
agreement, as amended. As of April 4, 1999, the Company had borrowed $6.7
million against the revolving credit line compared to $5.8 million at January
3, 1999.
Cash flows used in operating activities for the thirteen weeks ended April 4,
1999, were $2.7 million compared to $9.2 million for the same period last
year. The decrease in cash flows used in operating activities was primarily
the result of a smaller increase in inventory levels and a smaller decrease
in the outstanding accounts payable balance during the first quarter of 1999
versus the same period last year.
Cash flows used in investing activities during the thirteen weeks ended April
4, 1999, were $523,000 compared to $425,000 during the same period last year.
The Company plans to expend approximately $1.8 million for capital additions
during 1999.
8
Cash flows provided by financing activities during the thirteen weeks ended
April 4, 1999, were $927,000 compared to $9.6 million during the same period
last year. The change in cash flows provided by financing activities during
the first quarter of 1999 versus last year was due to a public stock
offering, completed February 1998, under which the Company received net
proceeds of $8.5 million. A portion of the proceeds were used to pay $3.4
million of subordinated notes payable and to repurchase all of the Company's
Series A Preferred Stock for $1.0 million. The Company also received proceeds
from the exercise of stock warrants and options totaling $1.6 million.
The 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 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 May 1998. Comprehensive system testing of this project is scheduled
to begin in the second quarter of 1999 with the completion scheduled by the
beginning of the third 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.
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 product 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 has contacted 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 is continuing to 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.
9
FORWARD-LOOKING STATEMENTS
This report may contain forward-looking statements within the meaning of the
federal securities laws. Actual results could differ materially from those
projected in the forward-looking statements due to a number of factors,
including general economic conditions, a changing market environment for the
Company's products and the market acceptance of the Company's catalogs as
well as the factors set forth under "Risk Factors" in the Company's
prospectus dated February 5, 1998, filed with the Securities and Exchange
Commission pursuant to Rule 424(b) under the Securities Act of 1933.
10
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the thirteen weeks ended
April 4, 1999.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE SPORTSMAN'S GUIDE, INC.
Date: May 18, 1999 /s/Charles B. Lingen
---------------------------------
Charles B. Lingen
Senior Vice President Finance/CFO
12