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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the quarterly period ended June 30, 2000 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the transition period from to .
------- -------
Commission File No. 015767
THE SPORTSMAN'S GUIDE, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1293081
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
411 FARWELL AVE., SO. ST. PAUL, MINNESOTA 55075
(Address of principal executive offices)
(651) 451-3030
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of August 16, 2000 there were 4,748,810 shares of the registrant's Common
Stock outstanding.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE SPORTSMAN'S GUIDE, INC.
BALANCE SHEETS
(In thousands of dollars)
<TABLE>
<CAPTION>
ASSETS June 30, December 31,
2000 1999
----- ----
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Accounts receivable - net $ 2,142 $ 4,944
Inventory 31,190 37,403
Promotional material 3,757 4,435
Prepaid expenses 2,585 759
---------- ----------
Total current assets 39,674 47,541
PROPERTY AND EQUIPMENT - NET 5,585 5,764
OTHER ASSETS 191 191
---------- ----------
Total assets $ 45,450 $ 53,496
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Checks written in excess of bank balances $ 1,199 $ 2,425
Notes payable - bank 15,700 12,598
Current maturities of long-term debt 30 30
Accounts payable 9,849 16,068
Accrued expenses 1,529 1,809
Customer deposits and other liabilities 1,752 3,342
---------- ----------
Total current liabilities 30,059 36,272
LONG-TERM LIABILITIES
Long-term debt
2 40
Deferred income taxes 170 170
---------- ----------
Total liabilities 30,231 36,482
COMMITMENTS AND CONTINGENCIES
-- --
SHAREHOLDERS' EQUITY
Common Stock-$.01 par value; 36,800,000 shares authorized:
4,748,810 and 4,747,810 shares issued and outstanding at
June 30, 2000 and December 31, 1999 47 47
Additional paid-in capital 11,565 11,562
Retained earnings 3,607 5,405
---------- ----------
Total shareholders' equity 15,219 17,014
---------- ----------
Total liabilities and shareholders' equity $ 45,450 $ 53,496
========== ==========
</TABLE>
See accompanying condensed notes to financial statements.
2
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THE SPORTSMAN'S GUIDE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months and Six Months Ended
June 30, 2000 and 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 25,938 $ 32,683 $ 56,671 $ 71,067
Cost of sales 15,509 19,230 34,651 42,300
----------- ----------- ----------- -----------
Gross profit 10,429 13,453 22,020 28,767
Selling, general and administrative
expenses 11,318 13,062 23,940 27,611
----------- ----------- ----------- -----------
Earnings (loss) from operations (889) 391 (1,920) 1,156
Interest expense (444) (198) (826) (314)
Miscellaneous income, net 12 11 17 15
----------- ----------- ----------- -----------
Earnings (loss) before income taxes (1,321) 204 (2,729) 857
Income taxes expense (benefit) (445) 71 (931) 296
----------- ----------- ----------- -----------
Net earnings (loss) $ (876) $ 133 $ (1,798) $ 561
=========== =========== =========== ===========
Net earnings (loss) per share:
Basic $ (.18) $ .03 $ (.38) $ .12
=========== =========== =========== ===========
Diluted $ (.18) $ .03 $ (.38) $ .12
=========== =========== =========== ===========
Weighted average common and common
equivalent shares outstanding:
Basic 4,749 4,748 4,749 4,748
=========== =========== =========== ===========
Diluted 4,749 4,831 4,749 4,840
=========== =========== =========== ===========
</TABLE>
See accompanying condensed notes to financial statements.
3
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THE SPORTSMAN'S GUIDE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six Months Ended
June 30, 2000 and 1999
(In thousands of dollars)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (1,798) $ 561
Adjustments to reconcile net earnings (loss) to net cash
used in operating activities:
Depreciation and amortization 1,079 855
Other (13) (13)
Changes in assets and liabilities:
Accounts receivable 2,802 411
Inventory 6,213 (9,586)
Promotional material 678 (359)
Prepaid expenses (1,826) (167)
Checks written in excess of bank balances (1,226) 2,493
Accounts payable (6,219) (1,780)
Accrued expenses (280) (39)
Customer deposits and other liabilities (1,590) (660)
------------ ------------
Cash flows used in operating activities (2,180) (8,284)
Cash flows from investing activities:
Purchases of property and equipment (902) (1,531)
Other 2 --
------------ ------------
Cash flows used in investing activities (900) (1,531)
Cash flows from financing activities:
Net proceeds from revolving credit line 3,102 7,530
Payments on long-term debt (25) (25)
Proceeds from exercise of stock options and warrants 3 7
------------ ------------
Cash flows provided by financing activities 3,080 7,512
------------ ------------
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 $ -- $ --
============ ============
Supplemental disclosure of cash flow information
Cash paid during the periods for:
Interest $ 796 $ 307
Income taxes 65 161
</TABLE>
See accompanying condensed notes to financial statements.
4
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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.
The Company's fiscal quarter ends on the Sunday nearest June 30 for 2000
and 1999, but for clarity of presentation, all periods are described as
if the three and six month periods end June 30. Fiscal quarters 2000 and
1999 consisted of thirteen weeks.
In preparing the Company's financial statements, management is required
to make estimates and assumptions that affect reported amounts of assets
and liabilities and related revenues and expenses. Actual results could
differ from the estimates used by management.
Note 2: Net Earnings (Loss) Per Share
The Company's basic net earnings (loss) per share amounts have been
computed by dividing net earnings (loss) by the weighted average number
of outstanding common shares. 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 three months and six months ended June 30, 2000, no common share
equivalents were included in the computation of diluted net loss per
share. However, if the Company would have reported net income in the
three months and six months ended June 30, 2000, the common share
equivalents that would have been included in the computation of diluted
net earnings per share were 22,349 and 24,915.
For the three months and six months ended June 30, 1999, 83,376 and
92,320 shares of common stock equivalents were included in the
computation of diluted net earnings per share.
Options and warrants to purchase 609,839 and 488,325 shares of common
stock with a weighted average exercise price of $6.29 and $6.87 were
outstanding during the three months ended June 30, 2000 and 1999, but
were not included in the computation of diluted earnings per share
because to do so would have been anti-dilutive.
Options and warrants to purchase 613,014 and 439,000 shares of common
stock with a weighted average exercise price of $6.29 and $6.98 were
outstanding during the six months ended June 30, 2000 and 1999, but were
not included in the computation of diluted earnings per share because to
do so would have been anti-dilutive.
Note 3: Revolving Credit Facility
The Company is a party to a Credit and Security Agreement with Wells
Fargo Bank Minnesota, National Association, f/k/a Norwest Bank
Minnesota, National Association providing for a revolving line of credit
up to $25.0 million, subject to an adequate borrowing base, expiring in
December 2002. Effective August 2, 2000, the Credit and Security
Agreement was amended to provide an additional $2.0 million in
availability over the borrowing base until November 15, 2000. Borrowings
under the seasonal over-advance component bear interest at the bank's
prime rate plus 2% to 4%.
5
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THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
(UNAUDITED)
Note 4: Subsequent Event
On March 22, 2000, the Company entered into a letter of intent with E
Com Ventures, Inc. pursuant to which E Com Ventures, Inc. agreed to
purchase from the Company 550,000 shares of common stock of the Company
for $6.00 per share in a private placement, subject to customary due
diligence. On July 14, 2000, the Company announced the letter agreement
had been terminated by mutual consent of the two companies.
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three months and six months ended June 30, 2000 compared to three months and six
months ended June 30, 1999
SALES. Sales for the three months and six months ended June 30, 2000 of $25.9
million and $56.7 million were $6.8 million or 20.8% and $14.4 million or 20.3%
lower than sales of $32.7 million and $71.1 million during the same periods last
year. The decrease in sales for the second quarter and first half of 2000 was
primarily due to a planned decrease in catalog circulation combined with lower
than anticipated customer response rates and average order size. The Company's
plan for 2000 was to improve profitability by reducing the number of catalog
mailings through the elimination of unprofitable specialty catalog editions and
monthly main catalog mailings to unprofitable segments of the house customer
file. This strategy will yield a significant reduction in advertising costs
while producing lower sales compared to the prior year. The Company expected
sales to decrease at a lower rate than advertising costs, producing a higher
level of profitability through improved customer response rates.
The catalog circulation plan for the second quarter and first half of 2000 was
down approximately 22% and 21%, respectively, compared to the same periods last
year. At the same time, overall customer response rates were expected to improve
over the prior year with the elimination of unprofitable catalog editions and
customer segments. Actual customer response rates in the second quarter and
first half of 2000 were much lower than anticipated causing a significant
shortfall to the projected sales level. Management believes that customer
response rates during the second quarter and first half were negatively impacted
by late and undelivered catalogs by the United States Postal Service and
unseasonably warm weather, especially in the first quarter.
At the end of the second quarter of 2000, the Company has taken additional
actions to return the catalog to profitability. Certain organizational changes,
largely reductions in headcount, have been made which will reduce expenses by
over $1.0 million on an annual basis. In addition, the Company's strategy will
re-focus on the product price/value relationship, will increase catalog product
density, and will test various promotions to enhance the value proposition and
increase the membership of the Company's buyers' club. These changes, with the
exception of the organizational changes, will largely affect the fourth quarter
of 2000.
Internet sales for the second quarter and first half of 2000 were approximately
15% and 14% of total sales, compared to 7% and 5%, respectively, during the same
periods last year. The Company defines Internet sales as those that are derived
from our web sites and catalog orders that are processed online on our web
sites.
The Company mailed ten catalog editions, including seven specialty catalog
editions, during the three months ended June 30, 2000 compared to 12 editions,
including nine specialty catalog editions, during the same period last year.
Year to date, the Company has mailed 20 catalog editions, including 14 specialty
catalogs, compared to 24 catalog editions, including 18 specialty catalog
editions, during the same period last year.
Gross returns and allowances for the three months and six months ended June 30,
2000 were $2.3 million or 8.2% of gross sales and $5.9 million or 9.4% of gross
sales compared to $3.1 million or 8.7% of gross sales and $7.5 million or 9.5%
of gross sales during the same periods last year.
GROSS PROFIT. Gross profit for the three months and six months ended June 30,
2000 was $10.4 million or 40.2% of sales and $22.0 million or 38.9% of sales
compared to $13.5 million or 41.2% of sales and $28.8 million or 40.5% of sales
during the same periods last year. The decrease in gross profit percentage for
the second quarter and first half of 2000 was primarily due to higher
distribution and merchandising costs as a result of lower sales volume.
7
<PAGE> 8
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months and six months ended June 30, 2000
were $11.3 million or 43.6% of sales and $23.9 million or 42.2% of sales
compared to $13.1 million or 40.0% of sales and $27.6 million or 38.9% of sales
for the same periods last year. Selling, general and administrative expenses as
a percentage of sales were higher during both periods compared to last year due
primarily to the lower sales volume. Total catalog circulation during the second
quarter and first half of 2000 was 13.3 million and 28.0 million catalogs
compared to 16.9 million and 35.4 million catalogs during the same periods last
year. Advertising expense for the three months and six months ended June 30,
2000 was $6.3 million or 24.4% of sales and $13.7 million or 24.2% of sales
compared to $7.8 million or 23.9% of sales and $16.5 million or 23.2% of sales
for the same periods last year. The increase in advertising expense for the
second quarter and first half of 2000, as a percentage of sales, compared to the
same periods last year was primarily due to lower than anticipated customer
response rates and higher costs of catalogs.
EARNINGS (LOSS) FROM OPERATIONS. Loss from operations for the three months and
six months ended June 30, 2000 was ($889,000) and ($1.9) million compared to
earnings of $391,000 or 1.2% of sales and $1.2 million or 1.6% of sales for the
same periods last year.
INTEREST EXPENSE. Interest expense for the three months and six months ended
June 30, 2000 was $444,000 and $826,000 compared to $198,000 and $314,000 for
the same periods last year. The increase in interest expense for the quarter and
year to date was primarily due to higher levels of borrowing as a result of the
net losses incurred to date.
NET EARNINGS (LOSS). Net loss for the three months and six months ended June 30,
2000 was ($876,000) and ($1.8) million compared to net earnings of $133,000 or
0.4% of sales and $561,000 or 0.8% of sales for the same periods last year.
SEASONALITY AND QUARTERLY RESULTS
The majority of the Company's sales historically occur during the second half of
the year. The seasonal nature of the Company's business is due to the catalog's
focus on outdoor 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 financial information for each
of the quarters shown.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
2000
Sales $30,733 $25,938
Gross profit 11,591 10,429
Loss from operations (1,031) (889)
Net loss (922) (876)
1999
Sales $38,384 $32,683 $34,659 $56,789
Gross profit 15,314 13,453 13,169 22,948
Earnings (loss) from operations 765 391 (1,378) 1,348
Net earnings (loss) 428 133 (1,146) 597
</TABLE>
8
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LIQUIDITY AND CAPITAL RESOURCES
The Company meets its operating cash requirements through funds generated from
operations and borrowings under its revolving line of credit.
WORKING CAPITAL. The Company had working capital of $9.6 million as of June 30,
2000 compared to $11.3 million as of December 31, 1999. The decrease of $1.7
million was primarily due to year to date losses. The Company's working capital
requirements have increased over the last three years primarily as a result of
higher inventory levels 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 $1.3 million at June 30, 2000 compared to $4.1
million at December 31, 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.
In December 1999, the Company entered into a Credit and Security Agreement with
Wells Fargo Bank Minnesota, National Association, f/k/a Norwest Bank Minnesota,
National Association providing a revolving line of credit up to $25.0 million,
subject to an adequate borrowing base, expiring in December 2002. The revolving
line of credit is for working capital and letters of credit. Letters of credit
may not exceed $10.0 million at any one time. Funding under the credit facility
consists of a collateral base of 55% of inventory plus 80% of trade accounts
receivable. Borrowings bear interest at the bank's prime rate. 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
include a limit on monthly pretax loss, quarterly measurement of year-to-date
earnings (loss), maximum debt to net worth ratio, maximum days inventory levels
(as defined) and maximum annual spending levels for capital assets. The
agreement also prohibits the payment of dividends to shareholders. Effective May
12, 2000, the Company amended the Credit and Security Agreement to provide,
among other things, amendments to (i) the quarterly measurement of year-to-date
earnings (loss) covenant and (ii) the interest rate applicable to the
outstanding borrowings of the Company in the event that certain net income
levels are not obtained. Effective August 2, 2000, the Credit and Security
Agreement was amended to provide an additional $2.0 million in availability over
the borrowing base until November 15, 2000. Borrowings under the seasonal
over-advance component bear interest at the bank's prime rate plus 2% to 4%. As
of June 30, 2000, the Company was in compliance with all applicable covenants
under the revolving line of credit agreement. As of June 30, 2000, the Company
had borrowed $15.7 million against the revolving credit line compared to $12.6
million at December 31, 1999. Outstanding letters of credit were $1.4 million at
June 30, 2000 compared to $1.5 million at December 31, 1999.
OPERATING ACTIVITIES. Cash flows used in operating activities for the six months
ended June 30, 2000 were $2.2 million compared to $8.3 million for the same
period last year. The decrease in cash flows used in operating activities was
primarily the result of the decrease in inventory.
INVESTING ACTIVITIES. Cash flows used in investing activities during the six
months ended June 30, 2000 were $900,000 compared to $1.5 million during the
same period last year. The Company plans to expend approximately $1.2 million
for capital additions during 2000.
FINANCING ACTIVITIES. Cash flows provided by financing activities during the six
months ended June 30, 2000 were $3.1 million compared to $7.5 million during the
same period last year. The change in cash flows provided by financing activities
during the first half of 2000 versus last year was due to the lower
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level of inventory.
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 twelve months.
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 in Exhibit 99 "Risk Factors"
to the Company's Annual Report on Form 10-K for the year ended December 31, 1999
filed with the Securities and Exchange Commission.
10
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders was held July 19, 2000, at which
the following matters were submitted to a vote of shareholders:
1. Election of seven directors.
<TABLE>
<CAPTION>
NOMINEE FOR AGAINST ABSTAIN
------- --- ------- -------
<S> <C> <C> <C>
Gary Olen 3,826,643 3,150 37,863
Gregory R. Binkley 3,829,643 150 37,863
Charles B. Lingen 3,829,643 150 37,863
Vincent W. Shiel 3,829,643 150 37,863
Leonard M. Paletz 3,829,643 150 37,863
Mark F. Kroger 3,829,643 150 37,863
William T. Sena 3,829,643 150 37,863
</TABLE>
2. Ratification of the engagement of Grant Thornton LLP as
independent certified public accountants for the Company for
2000.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTES
--- ------- ------- ----------------
<S> <C> <C> <C>
3,852,173 9,958 5,525 0
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 First Amendment to Credit and Security Agreement between the
Company and Norwest Bank Minnesota, National Association dated
May 12, 2000
10.2 Second Amendment to Credit and Security Agreement between the
Company and Wells Fargo Bank Minnesota, National Association,
f/k/a Norwest Bank Minnesota, National Association dated August 2,
2000
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended June
30, 2000.
11
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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: August 16, 2000 /s/ Charles B. Lingen
-----------------------------------
Charles B. Lingen
Senior Vice President Finance/CFO
12
