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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, 2004 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
As of August 10, 2004, there were 4,709,305 shares of the registrant's Common
Stock outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE SPORTSMAN'S GUIDE, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands of dollars)
June 30, June 30, December 31,
2004 2003 2003
-------- -------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 16,534 $ 11,497 $ 32,054
Accounts receivable - net 1,935 1,682 3,034
Inventory 25,315 23,946 18,874
Promotional material 2,590 1,889 2,565
Prepaid expenses and other 2,416 2,034 1,871
Deferred income taxes 2,900 2,525 3,176
-------- -------- --------
Total current assets 51,690 43,573 61,574
PROPERTY AND EQUIPMENT - NET 1,813 2,440 2,248
-------- -------- --------
Total assets $ 53,503 $ 46,013 $ 63,822
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 15,040 $ 13,370 $ 18,950
Accrued expenses 3,954 3,172 5,891
Income taxes payable 417 691 3,107
Deferred revenue 4,734 3,729 4,623
Returns reserve 1,941 1,528 2,240
Customer deposits and other liabilities 2,099 1,485 2,016
-------- -------- --------
Total current liabilities 28,185 23,975 36,827
LONG-TERM LIABILITIES 133 218 187
-------- -------- --------
Total liabilities 28,318 24,193 37,014
COMMITMENTS AND CONTINGENCIES -- -- --
SHAREHOLDERS' EQUITY
Common Stock-$.01 par value; 36,800,000 shares authorized;
4,707,555 shares issued and outstanding at June 30, 2004,
4,723,860 issued and outstanding at June 30, 2003 and
4,826,321 issued and outstanding at December 31, 2003 47 47 48
Additional paid-in capital 8,033 11,184 11,616
Accumulated comprehensive loss (3) -- --
Retained earnings 17,108 10,589 15,144
-------- -------- --------
Total shareholders' equity 25,185 21,820 26,808
-------- -------- --------
Total liabilities and shareholders' equity $ 53,503 $ 46,013 $ 63,822
======== ======== ========
See accompanying notes to consolidated financial statements.
2
THE SPORTSMAN'S GUIDE, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
For the Three Months and Six Months Ended
June 30, 2004 and 2003
(In thousands, except per share data)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2004 2003 2004 2003
-------- -------- -------- --------
Sales $ 38,861 $ 38,041 $ 83,455 $ 81,790
Cost of sales 26,724 26,097 57,190 55,649
-------- -------- -------- --------
Gross profit 12,137 11,944 26,265 26,141
Selling, general and administrative expenses 10,929 10,902 23,275 23,632
-------- -------- -------- --------
Earnings from operations 1,208 1,042 2,990 2,509
Miscellaneous income (expense), net 38 (33) 80 (4)
-------- -------- -------- --------
Earnings before income taxes 1,246 1,009 3,070 2,505
Income tax expense 449 363 1,106 902
-------- -------- -------- --------
Net earnings $ 797 $ 646 $ 1,964 $ 1,603
======== ======== ======== ========
Net earnings per share:
Basic $ .17 $ .14 $ .42 $ .34
======== ======== ======== ========
Diluted $ .15 $ .12 $ .37 $ .31
======== ======== ======== ========
Weighted average common and common equivalent
shares outstanding:
Basic 4,703 4,748 4,728 4,753
======== ======== ======== ========
Diluted 5,279 5,249 5,324 5,184
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
3
THE SPORTSMAN'S GUIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six Months Ended
June 30, 2004 and 2003
(In thousands of dollars)
2004 2003
-------- --------
Cash flows from operating activities:
Net earnings $ 1,964 $ 1,603
Adjustments to reconcile net earnings to net cash
used in operating activities:
Depreciation and amortization 628 662
Deferred income taxes 252 (187)
Tax benefit related to exercise of stock options 734 --
Other -- 16
Changes in operating assets and liabilities:
Accounts receivable 1,099 1,332
Inventory (6,441) (3,353)
Promotional material (25) 651
Prepaid expenses and other (548) (905)
Income taxes payable (2,690) (1,191)
Accounts payable (3,910) (2,860)
Accrued expenses (1,937) (724)
Customer deposits and other liabilities (135) 152
-------- --------
Cash flows used in operating activities (11,009) (4,804)
Cash flows from investing activities:
Purchases of property and equipment (193) (461)
Other -- 14
-------- --------
Cash flows used in investing activities (193) (447)
Cash flows from financing activities:
Proceeds from exercise of stock options 830 58
Repurchase of common stock (5,148) (462)
-------- --------
Cash flows used in financing activities (4,318) (404)
-------- --------
Decrease in cash and cash equivalents (15,520) (5,655)
Cash and cash equivalents at beginning of the period 32,054 17,152
-------- --------
Cash and cash equivalents at end of the period $ 16,534 $ 11,497
======== ========
Supplemental disclosure of cash flow information
Cash paid during the periods for:
Income taxes $ 2,810 $ 2,280
See accompanying notes to consolidated financial statements.
4
THE SPORTSMAN'S GUIDE, INC.
NOTES TO CONSOLIDATED 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.
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.
In preparing the Company's consolidated 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.
The accompanying consolidated financial statements include the accounts of
the company and its wholly-owned subsidiary. All significant intercompany
balances and transactions have been eliminated in consolidation.
The Company's fiscal quarter ends on the Sunday nearest June 30 for 2004
and 2003, but for clarity of presentation, all periods are described as if
the three and six month periods end June 30. Fiscal second quarters 2004
and 2003 each consisted of 13 weeks.
Amounts billed to customers for shipping and handling are recorded in
revenues at the time of shipment. Sales include shipping and handling
revenues of $4.9 million and $5.0 million for the three months ended June
30, 2004 and 2003 and $10.6 million and $10.8 million for the six months
ended June 30, 2004 and 2003.
Note 2: Stock Options
Stock options issued to employees are accounted for under the intrinsic
value method. No stock-based compensation cost is reflected in net
earnings, as all options granted had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following
table illustrates the effect on net earnings and earnings per share as if
the Company had applied the fair value method of accounting for stock
options (in thousands, except per share data):
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2004 2003 2004 2003
------- ------- --------- ---------
Net earnings as reported $ 797 $ 646 $ 1,964 $ 1,603
Deduct: Total stock-based employee compensation
expense under the fair value method for all awards,
net of related tax effects 258 116 490 233
------- ------- --------- ---------
Pro-forma net earnings $ 539 $ 530 $ 1,474 $ 1,370
======= ======= ========= =========
Earnings Per Share:
Basic - as reported $ .17 $ .14 $ .42 $ .34
Basic - pro-forma .12 .12 .33 .30
Diluted - as reported $ .15 $ .12 $ .37 $ .31
Diluted - pro-forma .11 .10 .29 .27
5
Note 3: 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. 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 the stock options and
warrants, when dilutive.
For the three months and six months ended June 30, 2004, 575,611 and
595,191 common share equivalents were included in the computation of
diluted net earnings per share.
For the three months and six months ended June 30, 2003, 500,466 and
431,075 common share equivalents were included in the computation of
diluted net earnings per share.
All outstanding options during the three months and six months ended June
30, 2004 were included in the computation of diluted earnings per share
because the average market price of the common shares during the period
exceeded the exercise price of the options.
All outstanding options during the three months ended June 30, 2003 were
included in the computation of diluted earnings per share because the
average market price of the common shares during the period exceeded the
exercise price of the options.
Options to purchase 7,475 shares of common stock with a weighted average
exercise price of $8.70 were outstanding during the six months ended June
30, 2003, but were not included in the computation of diluted earnings per
share because their exercise price exceeded the average market price of
the common shares during the period.
Note 4: Legal Proceedings
In March 2003, the Company was notified by the Bureau of Industry, United
States Department of Commerce (BIS) that BIS has reason to believe the
Company violated Export Administration Regulations by exporting optical
sighting devices for firearms and associated parts to Canada and other
destinations without obtaining required authorization from BIS. BIS
asserts the Company committed 61 separate violations for shipments from
October 1999 to March 2002. The potential maximum civil penalty is up to
$11,000 for each violation. The Company is currently in discussions with
BIS to settle the matter prior to issuance of a charging letter. The BIS
has initially offered to settle the matter for a penalty of $207,500,
representing 32 violations at $1,500 per violation and 29 violations at
$5,500 per violation. The Company believes the settlement offer is
excessive based on civil penalties imposed in similar cases and intends to
continue negotiations with BIS. While the Company cannot predict the
outcome of this matter at this time, management believes the matter will
not have a material adverse impact on the Company.
Note 5: Repurchase of Common Stock
On May 5, 2003, the Company announced that its board of directors
authorized a plan to repurchase up to ten percent of its outstanding
common stock in the open market or in privately negotiated transactions
over the next 12 months. Under this plan 259,644 shares of common stock at
a total cost of $5,148,000 were repurchased during the six months ended
June 30, 2004.
On May 13, 2004, the Company announced that its board of directors
authorized a new plan to repurchase up to ten percent of its outstanding
common stock in the open market or in privately negotiated transactions
over the next 12 months. No shares of common stock were repurchased under
this new plan during the quarter ended June 30, 2004.
Note 6: Subsequent Events
The Company's fiscal quarter ends on the Sunday nearest June 30 for 2004
and 2003, but for clarity of presentation, all periods are described as if
the quarter end is June 30. Fiscal second quarter 2004 ended June 27. The
following events occurred subsequent to the end of fiscal second quarter
2004.
On June 29, 2004, the Company entered into an amended Credit Agreement
with Wells Fargo Bank National Association, providing a revolving line of
credit up to $15.0 million and a term loan of $12.5 million, expiring
September 30, 2007. The revolving line of credit is for working capital
and letters of credit, and the proceeds from the term loan are for
financing acquisitions of other business operations. Letters of credit may
not exceed $10.0
6
million at any one time. Funding under the line of credit if combined
borrowings under the line of credit and term loan exceed $20.0 million, is
limited to a collateral base of 50% of eligible inventory plus 75% of
eligible trade accounts receivable. Borrowings from the revolving line of
credit and term loan bear interest at the bank's prime rate less 0.15% or,
at the Company's option, fixed rate term, LIBOR plus 2.50 percentage
points, provided certain financial ratios are met. Repayments of the term
loan are payable annually each September as follows: $2,500,000 payable
September 30, 2005, $5,000,000 payable September 30, 2006 and $5,000,000
payable September 30, 2007. The revolving line of credit and the term loan
are collateralized by substantially all of the assets of the Company.
All borrowings are subject to various covenants (while the term loan
remains outstanding)which include funded debt to earnings before interest,
income taxes, depreciation and amortization ratio and a fixed charge
coverage ratio. The agreement also prohibits the payment of dividends to
shareholders without consent of the bank.
On June 29, 2004, the Company, through a newly-formed wholly-owned
subsidiary TGW Acquisition Corporation, acquired 100% of the outstanding
membership interests of The Golf Warehouse, L.L.C. ("TGW"), from
Falconhead Capital LLC, a private investment firm, and members of TGW
management pursuant to a Membership Interest Purchase Agreement dated as
of June 29, 2004. The purchase price for the membership interests was $30
million, subject to pre-and post-closing adjustments, and was funded from
the Company's working capital and borrowings under the Company's credit
facility with Wells Fargo Bank, National Association. The terms of the
Membership Interest Purchase Agreement were negotiated on an arm's length
basis between the parties. The Golf Warehouse is a leading online and
catalog retailer of golf equipment, apparel and accessories with office
and warehouse facilities in Wichita, Kansas.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a leading marketer of value priced outdoor gear and general merchandise,
with a special emphasis on outdoor clothing, equipment and footwear. We market
and sell our merchandise through main, specialty and Buyer's Club Advantage(TM)
catalogs and two e-commerce Web sites. Our catalogs as well as our Web sites
offer high quality products at low prices. Our catalogs are advertised as The
"Fun-to-Read" Catalog(R) and our primary Web site is advertised as the
"Fun-to-Browse" Website(R). Our Web sites include www.sportsmansguide.com, our
online retail store modeled on our print catalogs and www.bargainoutfitters.com,
our online liquidation outlet.
Our business was started in 1970. Over time, our product offerings and marketing
efforts have broadened from the deer hunter to include those interested in
pursuing and living the outdoor lifestyle in general and the value-oriented
outdoorsman in particular. In 1992, we began our value pricing strategy of
offering outdoor equipment and supplies at discount prices, later adding
government surplus, manufacturers' close-outs and other merchandise lines. In
1994, we began to publish specialty catalogs which allowed us to utilize a
customized marketing plan to individual customer groups.
Sales generated through the Internet have grown rapidly over the last several
years. We launched our online retail store in April 1998 and began posting our
catalogs and full product offerings on the site in February 1999. Our e-commerce
offerings generated over $69.0 million in sales in 2003 compared to $1.3 million
in 1998. Product sales on the sites accounted for approximately 42% of our sales
in the first half of 2004 compared to less than 1% for all of 1998.
In the fall of 2000, we began to aggressively promote and sell the Buyer's Club
membership program. In addition, unique Buyer's Club Advantage(TM) catalogs were
developed and promoted exclusively to members allowing us to maximize sales and
profitability from our best customers.
We believe that our value pricing, specialty catalog titles, the Internet and
Buyer's Club memberships have been important to our sales and profitability
growth. Our sales have increased from $43 million in 1992 to approximately $195
million in 2003.
7
FISCAL YEAR
Our fiscal quarter ends on the Sunday nearest June 30 for 2004 and 2003, but for
clarity of presentation, all periods are described as if the quarter end is June
30. Fiscal second quarter 2004 and 2003 each consisted of 13 weeks.
CRITICAL ACCOUNTING POLICIES
Sales are recorded at the time of shipment along with a provision for
anticipated merchandise returns, net of exchanges, which are recorded based upon
historical experience and current expectations. Amounts billed to customers for
shipping and handling are recorded in sales at the time of shipment.
Customers can purchase one year memberships in our Buyer's Club for a $29.99
annual fee. We also offer two year memberships for $59.97. Club members receive
merchandise discounts of 10% on regularly priced items and 5% on ammunition.
Membership fees are deferred and recognized in income as the individual members
place orders and receive discounts. Any remaining deferred membership fees are
recognized as sales after the expiration of the membership.
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 with the majority of the costs amortized within the first month of
the catalog's life cycle. We estimate the in-home date to be one week from the
known mailing date of the catalog. The ongoing cost of developing and
maintaining our customer list is charged to operations as incurred. All other
advertising costs are expensed as incurred.
Stock options issued to employees are accounted for under the intrinsic value
method. Pro-forma disclosures as if the fair value method were used are included
in Note 2 to the Consolidated Financial Statements.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information from our
Consolidated Statements of Earnings expressed as a percentage of sales:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2004 2003 2004 2003
----- ----- ----- -----
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 68.8 68.6 68.5 68.0
----- ----- ----- -----
Gross profit 31.2 31.4 31.5 32.0
Selling, general and administrative expenses 28.1 28.7 27.9 28.9
----- ----- ----- -----
Earnings from operations 3.1 2.7 3.6 3.1
Miscellaneous income (expense) 0.1 -- 0.1 --
----- ----- ----- -----
Earnings before income taxes 3.2 2.7 3.7 3.1
Income tax expense 1.2 1.0 1.3 1.1
----- ----- ----- -----
Net earnings 2.0% 1.7% 2.4% 2.0%
===== ===== ===== =====
Three months and six months ended June 30, 2004 compared to three months and six
months ended June 30, 2003
SALES. Sales for the three months and six months ended June 30, 2004 of $38.9
million and $83.5 million were $0.9 million or 2.3% and $1.7 million or 2.0%
higher than sales of $38.0 million and $81.8 million during the same periods
last year. The increase in sales for the second quarter and first half of 2004
was primarily due to higher sales generated from the Internet. For the second
quarter and first half ended June 30, 2004, sales generated through the catalogs
decreased from the prior year's sales level primarily as a result of lower than
anticipated customer response rates. As of the end of the second quarter 2004,
the Buyer's Club membership had increased to approximately 362,000, up 3% over
the 351,000 reported at December 31, 2003 and up 8% over the membership count
one year ago.
8
Sales generated through the Internet for the second quarter and the first half
of 2004 were approximately 43% and 42% of total catalog and Internet sales,
compared to approximately 36% and 35%, respectively, of total catalog and
Internet sales during the same periods last year. We define sales generated
through the Internet as sales that are derived from our web sites, catalog
orders processed online and online offers placed by telephone. Internet related
sales continue to grow, period over period, as we continue to make enhancements
to our Web sites and implement and improve upon various marketing and
merchandising programs.
Gross returns and allowances for the three months and six months ended June 30,
2004 were $2.6 million or 6.2% of gross sales and $5.7 million or 6.3% of gross
sales compared to $2.6 million or 6.3% of gross sales and $5.9 million or 6.7%
of gross sales during the same periods last year. The decrease in gross returns
and allowances, as a percentage of sales, for the three months and six months
ended June 30, 2004 was primarily due to favorable trends in actual customer
return activity.
GROSS PROFIT. Gross profit for the three months and six months ended June 30,
2004 was $12.1 million or 31.2% of sales and $26.3 million or 31.5% of sales
compared to $11.9 million or 31.4% of sales and $26.1 million or 32.0% of sales
during the same periods last year. For the three months and six months ended
June 30, 2004, the reduction in gross profit, as a percentage of sales, was
primarily from a decrease in product margins due to promotional pricing and a
higher percentage of sales in lower margin, factory direct merchandise items.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months and six months ended June 30, 2004
were $10.9 million or 28.1% of sales and $23.3 million or 27.9% of sales
compared to $10.9 million or 28.7% of sales and $23.6 million or 28.9% of sales
for the same periods last year. For the second quarter of 2004, selling, general
and administrative expenses, as a percentage of sales, were lower compared to
the same quarter a year ago with the higher Internet related sales having a
favorable impact on order processing costs and lower order fulfillment costs as
a result of lower backorder levels and an increase in the number of factory
direct shipments. For the first half of 2004, selling, general and
administrative expenses, as a percentage of sales, were lower compared to the
same period a year ago with the higher Internet related sales having a favorable
impact on the overall advertising ratio to total sales and lower order
processing costs, which were again directly related to the increase in sales
generated through the Internet. For the second quarter of 2004, selling, general
and administrative expenses, in dollars, were the same as the same period a year
ago with the increased advertising costs from an increase in catalog circulation
and an increase in the medical claims being offset somewhat by the lower order
processing and order fulfillment costs. For the first half of 2004, the decrease
in selling, general and administrative expenses, in dollars, was primarily due
to lower order processing and order fulfillment costs.
Total catalog circulation during the second quarter and first half of 2004 was
9.9 million and 21.0 million catalogs compared to 9.2 million and 20.4 million
catalogs during the same periods last year. We mailed eight catalog editions
consisting of three main catalogs, three Buyer's Club Advantage(TM) catalogs and
two specialty catalog editions during the three months ended June 30, 2004
compared to seven catalog editions consisting of three main catalogs, three
Buyer's Club Advantage(TM) catalogs and one specialty catalog edition during the
three months ended June 30, 2003. We mailed 17 catalog editions consisting of
six main catalogs, six Buyer's Club Advantage(TM) catalogs and five specialty
catalog editions during the six months ended June 30, 2004 compared to 16
catalog editions consisting of six main catalogs, six Buyer's Club Advantage(TM)
catalogs and four specialty catalog editions during the same period last year.
Advertising expense for the three months and six months ended June 30, 2004 was
$5.8 million or 15.0% of sales and $12.5 million or 14.9% of sales compared to
$5.7 million or 14.9% of sales and $12.6 million or 15.4% of sales for the same
periods last year. For the second quarter of 2004, the increase in advertising
expense, as a percentage of sales, compared to the same period last year was
primarily due to lower than anticipated customer response rates on the catalogs
offset for the most part by higher Internet sales. For the first half of 2004,
the decrease in advertising expense, as a percentage of sales, compared to the
same period last year was due primarily to the increase in sales generated
through the Internet. Advertising expense, in dollars, for the second quarter
and the first half of 2004 was higher compared to the same period last year
primarily from the increase in catalog circulation.
EARNINGS FROM OPERATIONS. Earnings from operations for the three months and six
months ended June 30, 2004 were $1.2 million and $3.0 million compared to $1.0
million and $2.5 million for the same periods last year.
9
INTEREST EXPENSE. We did not borrow under the revolving line of credit during
the three and six months ended June 30, 2004 and 2003.
NET EARNINGS. As a result of the above factors, net earnings for the three
months and six months ended June 30, 2004 were $0.8 million and $2.0 million
compared to $0.6 million and $1.6 million for the same periods last year.
SEASONALITY AND QUARTERLY RESULTS
The majority of our sales historically occur during the second half of the year.
The seasonal nature of our business is due to our focus on outdoor merchandise
and related accessories for the fall, as well as winter apparel and gifts for
the holiday season. We expect this seasonality will continue in the future. In
anticipation of increased sales activity during the third and fourth fiscal
quarters, we incur 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 (in thousands, except per share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2004
Sales $44,594 $38,861
Gross profit 14,128 12,137
Earnings from operations 1,782 1,208
Net earnings 1,167 797
Net earnings per share:
Basic .25 .17
Diluted .22 .15
2003
Sales $43,749 $38,041 $41,213 $71,700
Gross profit 14,197 11,944 12,541 25,832
Earnings from operations 1,467 1,042 1,117 5,971
Net earnings 957 646 710 3,845
Net earnings per share:
Basic .20 .14 15 .80
Diluted .19 .12 13 .71
LIQUIDITY AND CAPITAL RESOURCES
We meet our operating cash requirements through funds generated from operations
and borrowings under our revolving line of credit.
WORKING CAPITAL. We had working capital of $23.5 million as of June 30, 2004
compared to $24.7 million as of December 31, 2003, with current ratios of 1.8 to
1 and 1.7 to 1, respectively. We purchase large quantities of manufacturers'
closeouts and direct imports, particularly in footwear and apparel merchandise
categories. The seasonal nature of the merchandise 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 our
working capital requirements and related carrying costs.
We offer our Buyer's Club members an installment credit plan with no finance
fees, known as the "Buyer's Club 4-Pay Plan". Each of the four consecutive
monthly installments is billed directly to customers' credit cards. We had
installment receivables of $1.4 million at June 30, 2004 compared to $2.4
million at December 31, 2003. The installment plan will continue to require the
allocation of working capital, which we expect to fund from operations and
availability under our revolving credit facility.
10
On June 29, 2004, we entered into an amended Credit Agreement with Wells Fargo
Bank National Association, providing a revolving line of credit up to $15.0
million and a term loan of $12.5 million, expiring September 30, 2007. The
revolving line of credit is for working capital and letters of credit, and the
proceeds from the term loan are for financing acquisitions of other business
operations. Letters of credit may not exceed $10.0 million at any one time.
Funding under the line of credit if combined borrowings under the line of credit
and term loan exceed $20.0 million, is limited to a collateral base of 50% of
eligible inventory plus 75% of eligible trade accounts receivable. Borrowings
from the revolving line of credit and term loan bear interest at the bank's
prime rate less 0.15% or, at our option, fixed rate term, LIBOR plus 2.50
percentage points, provided certain financial ratios are met. Repayments of
the term loan are payable annually each September as follows: $2,500,000 payable
September 30, 2005, $5,000,000 payable September 30, 2006 and $5,000,000 payable
September 30, 2007. The revolving line of credit and the term loan are
collateralized by substantially all of our assets.
All borrowings are subject to various covenants (while the term loan remains
outstanding), which include funded debt to earnings before interest, income
taxes, depreciation and amortization ratio and a fixed charge coverage ratio.
The agreement also prohibits the payment of dividends to shareholders without
consent of the bank. As of June 30, 2004, we were in compliance with all
applicable covenants under the revolving line of credit agreement. We had no
borrowings against the revolving credit line as of June 30, 2004 and December
31, 2003. Outstanding letters of credit were $2.7 million at June 30, 2004
compared to $2.5 million at December 31, 2003.
OPERATING ACTIVITIES. Cash flows used in operating activities for the six months
ended June 30, 2004 were $11.0 million compared to $4.8 million for the same
period last year. The increase in cash flows used in operating activities was
primarily the result of higher inventory levels, increased payments to vendors
and an increase in the cash payment of income taxes.
INVESTING ACTIVITIES. Cash flows used in investing activities during the six
months ended June 30, 2004 were $0.2 million compared to $0.4 million during the
same period last year.
FINANCING ACTIVITIES. Cash flows used in financing activities during the six
months ended June 30, 2004 were $4.3 million compared to $0.4 million during the
same period last year. The change in cash flows used in financing activities
during the first half of 2004 was largely due to the repurchase of our common
stock during the six months ended June 30, 2004. On May 5, 2003, we announced
that our board of directors authorized a plan to repurchase up to ten percent of
our outstanding common stock in the open market or in privately negotiated
transactions over the next 12 month period. Under this plan, 259,644 shares of
common stock at a total cost of approximately $5.1 million were repurchased
during the first half of 2004. During the second quarter and first half of 2004
and 2003, we did not borrow under the revolving line of credit.
Subsequent to the end of the second quarter of 2004, we acquired 100% of the
outstanding membership interests of The Golf Warehouse, L.L.C. pursuant
to a Membership Interest Purchase Agreement. The purchase price for the
membership interests was $30 million, subject to pre- and post-closing
adjustments. The acquisition was funded from working capital and borrowings
under our newly amended credit facility.
We believe that cash flows from operations and borrowing capacity under our
revolving credit facility will be sufficient to fund operations for the next 12
months.
FORWARD-LOOKING STATEMENTS
This report may contain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. We use words such as "may," "believe," "estimate," "plan," "expect,"
"intend," "anticipate" and similar expressions to identify forward-looking
statements. These forward-looking statements involve risk and uncertainties.
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 our products and the
market acceptance of our product 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, 2003 filed with the Securities and Exchange Commission.
11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company does not have any material, near-term, market rate risk.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management evaluated, with the participation of the Company's
Chief Executive Officer and Chief Financial Officer, the effectiveness of the
Company's disclosure controls and procedures, as of the end of the period
covered by this report. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms.
There were no changes in the Company's internal control over financial reporting
that occurred during the Company's last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In March 2003, the Company was notified by the Bureau of Industry, United States
Department of Commerce (BIS) that BIS has reason to believe the Company violated
Export Administration Regulations by exporting optical sighting devices for
firearms and associated parts to Canada and other destinations without obtaining
required authorization from BIS. BIS asserts the Company committed 61 separate
violations for shipments from October 1999 to March 2002. The potential maximum
civil penalty is up to $11,000 for each violation. The Company is currently in
discussions with BIS to settle the matter prior to issuance of a charging
letter. The BIS has initially offered to settle the matter for a penalty of
$207,500, representing 32 violations at $1,500 per violation and 29 violations
at $5,500 per violation. The Company believes the settlement offer is excessive
based on civil penalties imposed in similar cases and intends to continue
negotiations with BIS. While the Company cannot predict the outcome of this
matter at this time, management believes the matter will not have a material
adverse impact on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our annual meeting of shareholders was held May 7, 2004, at which the following
matters were submitted to a vote of shareholders:
1. Election of seven directors.
NOMINEE FOR AGAINST ABSTAIN
------- --------- ------- -------
Gary Olen 3,529,717 530,331 290,011
Gregory R. Binkley 3,531,677 528,371 290,011
Charles B. Lingen 3,531,717 528,331 290,011
Leonard M. Paletz 3,504,928 555,120 290,011
William T. Sena 4,059,398 650 290,011
Jay A. Leitch 4,059,398 650 290,011
Darold D. Rath 4,059,898 150 290,011
2. Approval of the 2004 Stock Incentive Plan:
FOR AGAINST ABSTAIN BROKER NON-VOTES
--- ------- ------- ----------------
1,655,671 1,198,501 78,902 1,416,985
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3. Ratification of the engagement of Grant Thornton LLP as independent
certified public accountants for the Company for 2004:.
FOR AGAINST ABSTAIN BROKER NON-VOTES
- --------- ------- ------- ----------------
4,296,890 45,465 7,704 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Credit Agreement by and between The Sportsman's Guide, Inc.
and Wells Fargo Bank, National Association dated June 29,
2004.
10.2 The Sportsman's Guide, Inc. 2004 Stock Incentive Plan
31 Rule 13a-14(a)/15d-14(a) Certifications
32 Section 1350 Certifications
(b) Reports on Form 8-K
On April 20, 2004, the Company filed a Form 8-K under Item 12
reporting in a press release expected sales and earnings per share
for the quarter ended March 31, 2004.
On April 29, 2004, the Company filed a Form 8-K under Item 12
reporting in a press release its financial results for the quarter
ended March 31, 2004.
13
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 10, 2004 /s/ Charles B. Lingen
--------------------------------------
Charles B. Lingen
Executive Vice President of Finance
and Administration/CFO
14