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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 DECEMBER 28, 1997
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)
(612) 451-3030
(Registrant's telephone number, including area code)
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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. / /
As of March 6, 1998, the aggregate market value of the registrant's Common
Stock held by non-affiliates was approximately $21,644,221 based on the last
reported sale price of the Common Stock on such date on the Nasdaq National
Market.
As of March 6, 1998, there were 4,588,486 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 April 23, 1998 are incorporated by reference into Part III of
this Form 10-K.
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PART I
ITEM 1. BUSINESS.
OVERVIEW
The Sportsman's Guide, Inc. (the "Company") is a leading mail order catalog
retailer of value priced outdoor, hunting and general merchandise primarily
marketed to the outdoorsman. 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- The Company offers a large
selection of high value products at low prices including footwear, clothing and
accessories, hunting and shooting accessories, camping and outdoor recreation
equipment, 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 military surplus
from around the world.
The Company's business was started in 1970 by Gary Olen, the Company's
President and Chief Executive Officer. Originally serving the deer hunter, the
Company's product offerings and marketing efforts have evolved to broaden the
Company's focus to include the value-oriented male in general, and the
outdoorsman in particular. In 1992, the Company began its value pricing strategy
of offering hunting and shooting equipment at discount prices, later adding
military surplus, manufacturers' close-outs and other lines of high value, high
margin merchandise that appeal to a broader 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 $128 million in 1997.
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 President and Chief Executive Officer of the Company. 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 (612) 451-3030. The Company's web
site address is www.sportsmansguide.com.
INDUSTRY AND MARKET
The catalog shopping industry has experienced substantial growth over the
past several years. According to industry reports, from 1992 to 1996 U.S.
consumer catalog sales volume grew at a rate of approximately 8% annually to an
estimated $46 billion in 1996. The U.S. consumer catalog industry is expected to
reach sales of at least $62 billion by 2001. Between 1992 and 1996, U.S. catalog
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
outdoorsman, together with its product offerings and growing sales of general
merchandise to men, 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
value priced outdoor and general merchandise. Key elements of the Company's
business strategy include:
EXPAND AND CAPITALIZE ON THE VALUE-ORIENTED MALE NICHE. The Company seeks
to expand its customer base and capitalize on its value-oriented male market
niche through increased circulation of its specialty catalogs, name acquisition
programs and new 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 shopping. The Company
emphasizes customer service and maintains sophisticated order entry 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, 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.
CATALOGS
The Company publishes main and specialty editions of The Sportsman's Guide
catalog. The Company mailed approximately 61 million catalogs to existing and
prospective customers in 1997.
FORMAT. The Company's catalogs are designed to be fun and entertaining.
Every catalog uses a highly promotional format that features various items at
sale prices. Unique to the Company is its product description, or copy. The
catalogs 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
are perceived by customers as having entertainment value and are advertised as
The "Fun-to-Read" Catalog.-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
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it to be successful. The Company has since developed the concept into numerous
specialty editions. During 1997, the Company published 18 specialty catalogs
targeting buyers of footwear and apparel, deer hunting equipment, ammunition and
shooting 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.
4
PRODUCTS. The Company's products include footwear, clothing and
accessories, hunting and shooting accessories, camping and outdoor recreation
equipment, 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 1997:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
Footwear 24.5%
Clothing and Accessories 22.4%
Hunting and Shooting Accessories 9.9%
Camping and Outdoor Recreation 8.4%
Optics 7.8%
Ammunition 5.7%
Domestics 4.3%
Novelty and Collectibles 4.1%
Hardware, Tools and Automotive 3.3%
Electronics 2.9%
Knives 2.2%
Other 4.5%
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 point items, while maintaining a broad selection of
products. This strategy has added to the Company's customer base value-oriented
purchasers 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
5
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 1997, 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, cancelling 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.
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 one million
customers who have made purchases within the last 12 months. 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.
6
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 18% of the Company's sales during 1997.
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 performed to assist in merchandising and customer
targeting and to increase sales to existing customers. Existing customers
accounted for approximately 82% of the Company's sales during 1997.
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, respectively.
- 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.
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 which allows customers to
request catalogs and provides information on special product offerings. Although
customers cannot order merchandise from the web site, customers can e-mail the
Company with questions about products, pricing and availability. The
7
Company is collecting e-mail addresses and plans to use e-mail communications in
its future marketing efforts. The address of the Company's web site is
www.sportsmansguide.com.
OPERATIONS AND FULFILLMENT
INBOUND CALLS. The Company maintains an in-house call center. Approximately
75% of customer orders are placed through the Company's toll-free telephone
lines which are staffed 24 hours per day, seven days a week, with the remaining
25% of orders received by mail or facsimile. The Company's telephone system
consists of an expandable AT&T GR3 digital switch which currently has eleven 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 1997.
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 1997,
add-on sales averaging $10 per order were made to approximately 28% 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 and
packing and shipment. During 1997, the Company's on-line order processing system
handled in excess of 1.7 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 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
1997. 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 working days.
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
8
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 5.7% of
the Company's sales in 1997, 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 99.6% inventory accuracy during 1997.
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
the Company expects to be fully redundant by the second quarter of 1998. 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. The Company does not expect the Year 2000 computer issue to
significantly affect its operations. The Company is reviewing its internally
developed software for compliance and is contacting external software vendors
and other suppliers regarding compliance.
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 similar products 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.
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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 manner in which orders may be solicited, the
information which must be provided to prospective customers, the time in which
orders must be shipped, obligations to customers if orders are not shipped
within the time promised, and the time in which refunds must be paid if the
ordered merchandise is unavailable or if it is returned. 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 or localities, 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" and "The 'Fun-to-Read'
Catalog" have been registered with the United States Patent and Trademark
Office. "The Sportsman's Guide" mark has also been registered in Canada.
EMPLOYEES
As of February 15, 1998, the Company employed 783 individuals, including
full-time and part-time associates. During 1997, the Company's seasonal
employment ranged from a high of approximately 1,060 employees (plus an
additional 70 temporary workers) in November to a low of approximately 590
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 1999. 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
is exploring alternative sites for its operations in the event its lease is not
renewed. 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 legal 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.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information about the Company's executive
officers:
NAME AGE POSITION
- - ----------------------- --- ----------------------------------------------------------------------
Gary Olen.............. 55 President, Chief Executive Officer and Director
Gregory R. Binkley..... 49 Executive Vice President, Chief Operating Officer and Director
Charles B. Lingen...... 53 Senior Vice President of Finance, Chief Financial Officer, Secretary,
Treasurer and Director
William G. Luth........ 48 Senior Vice President of Marketing*
John M. Casler......... 47 Vice President of Merchandising
- - ------------------------
* Resigned effective March 6, 1998.
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 President and Chief Executive Officer of the Company in
1994. Mr. Olen has been a director of the Company since its incorporation. From
1970 to 1977, Mr. Olen was employed as the 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 February 1994 and was elected
Vice President in April 1994, Senior Vice President of Operations and Chief
Operating Officer in 1995 and Executive Vice President in 1996. 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 May 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.
WILLIAM G. LUTH was employed by the Company in June 1995, was elected Vice
President of Marketing in December 1995 and in 1996 was elected Senior Vice
President of Marketing. Mr. Luth resigned his employment with the Company
effective March 6, 1998. Mr. Luth was employed by Fingerhut from 1994 to 1995 as
General Manager Motorsports Marketing, served as an independent consultant to
two direct marketing catalog firms from 1993 to 1994, was employed by Lands'
End, Inc., a mail order catalog business, from 1992 to 1993 as Managing
Director/Canada and was employed by Fingerhut from 1982 to 1992 where he served
in various marketing and management positions including Vice President
Marketing--Figi's Inc. from 1991 to 1992, Director--Telemarketing from 1989 to
1990 and Director--Customer List Marketing from 1985 to 1989.
JOHN M. CASLER has been employed by the Company since January 1996 and was
elected Vice President of Merchandising in January 1997. Mr. Casler was employed
by Gander Mountain 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.
11
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
closing bid quotations for the Common Stock in the local over-the-counter market
as reported by Metro Data Company, a Minneapolis computer service bureau that
collects quotations for local market makers. Such quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and do not
necessarily represent actual transactions.
HIGH LOW
--------- ---------
1996
First Quarter........................................... 15/16 5/16
Second Quarter.......................................... 1 7/8 5/16
Third Quarter........................................... 1 7/8 1 7/8
Fourth Quarter.......................................... 2 1/2 1 1/2
1997
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
HOLDERS
As of March 6, 1998, there were approximately 349 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.
12
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 31,
1993, December 30, 1994, December 29, 1995, December 27, 1996 and December 28,
1997 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 Statement 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
----------------------------------------------------------
DECEMBER 28, DECEMBER 27, DECEMBER 29, DECEMBER 30, DECEMBER 31,
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND SELECTED OPERATING DATA)
STATEMENT OF OPERATIONS DATA:
Sales................................... $ 128,113 $ 112,270 $ 101,832 $ 96,398 $ 60,191
Cost of sales........................... 76,234 72,200 67,137 64,367 42,417
------------- ------------- ------------- ------------- -------------
Gross profit........................ 51,879 40,070 34,695 32,031 17,774
Selling, general and administrative
expenses............................... 46,830 36,014 35,924 28,299 17,800
------------- ------------- ------------- ------------- -------------
Earnings (loss) from operations..... 5,049 4,056 (1,229) 3,732 (26)
Interest expense........................ (1,266) (981) (943) (582) (437)
Miscellaneous income (expense), net..... (4) 11 73 (43) (15)
------------- ------------- ------------- ------------- -------------
Earnings (loss) before income
taxes............................. 3,779 3,086 (2,099) 3,107 (478)
Income taxes............................ 1,304 759 (355) 385 --
------------- ------------- ------------- ------------- -------------
Net earnings (loss)................. $ 2,475 $ 2,327 $ (1,744) $ 2,722 $ (478)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Net earnings (loss) per share(1):
Basic............................... $ 1.06 $ 1.00 $ (.75) $ 1.17 $ (.20)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Diluted............................. $ .85 $ .96 $ (.75) $ 1.06 $ (.20)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Weighted average shares outstanding(1):
Basic............................... 2,336 2,334 2,334 2,333 2,333
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Diluted............................. 2,919 2,431 2,334 2,576 2,333
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
SELECTED OPERATING DATA:
Gross profit as a percentage of sales... 40.5% 35.7% 34.1% 33.2% 29.5%
Total catalogs mailed (000s)............ 60,593 42,908 54,436 39,312 21,886
Total active customers (000s)(2)........ 1,094 1,017 1,034 1,021 773
Income (loss) per advertising
dollar(3).............................. $ .18 $ .21 $ (.06) $ .24 $ .00
BALANCE SHEET DATA:
Working capital (deficit)(4)............ $ 2,658 $ 3,612 $ (2,463) $ 3,951 $ 1,296
Total assets............................ 37,214 27,890 23,709 21,179 14,546
Note payable--bank...................... 1,690 1,497 965 -- --
Subordinated notes payable.............. 3,414 3,414 3,414 3,660 1,160
Long-term liabilities excluding trade
creditors' obligation and subordinated
notes payable.......................... 609 678 287 379 740
Trade creditors' obligation............. -- -- -- 635 785
Shareholders' equity.................... 6,365 3,875 1,548 3,292 570
- - ------------------------------
(1) See Note A-11 in the Notes to Financial Statements.
(2) 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.
(3) "Income (loss) per advertising dollar" is defined as earnings (loss) from
operations divided by advertising expense.
(4) Working capital at December 29, 1995 and December 28, 1997 reflects the
effect of the subordinated notes payable being classified as current
liabilities.
13
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company is a leading mail order catalog retailer of value priced
outdoor, hunting and general merchandise. The Company's predecessor was founded
by Gary Olen in 1970 as a direct marketer focused on the deer hunter. The
Company's product offerings and marketing efforts have evolved to broaden the
Company's focus to include the value-oriented male in general, and the
outdoorsman in particular. In 1992, the Company instituted a value pricing
approach by which high quality products are sold at below normal retail prices.
The Company believes this value pricing approach has been the key factor in its
significant sales growth since that time, driving sales from $38 million in 1992
to $128 million in 1997. In 1994, the Company began to strengthen its management
team in an effort to capitalize on the opportunity represented by the recent
sales growth. The Company has added experienced direct marketing professionals
in each of its key functional areas over the past few years. The new management
team has focused on improving profitability by investing in advanced information
systems to allow better and more timely decision making, increasing emphasis on
higher margin manufacturers' close-outs and military surplus items and
implementing extensive cost control programs.
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
-------------------------------------------------
DECEMBER 28, DECEMBER 27, DECEMBER 29,
1997 1996 1995
--------------- --------------- ---------------
Sales............................................. 100.0% 100.0% 100.0%
Cost of sales..................................... 59.5 64.3 65.9
----- ----- -----
Gross profit.................................. 40.5 35.7 34.1
Selling, general and administrative expenses...... 36.6 32.1 35.3
----- ----- -----
Earnings (loss) from operations............... 3.9 3.6 (1.2)
Interest expense.................................. 1.0 0.9 0.9
----- ----- -----
Earnings (loss) before income taxes........... 2.9 2.7 (2.1)
Income taxes...................................... 1.0 0.7 (0.4)
----- ----- -----
Net earnings (loss)........................... 1.9% 2.0% (1.7)%
----- ----- -----
----- ----- -----
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.
14
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. This 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
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 reflects 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.
FISCAL YEAR ENDED DECEMBER 27, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 29,
1995
SALES. Sales for fiscal 1996 of $112.3 million were $10.5 million or 10.3%
higher than sales of $101.8 million for fiscal 1995. The increase in sales was
due to an increase in customer demand. The Company mailed 22 catalog editions,
including ten specialty editions, each year during 1996 and 1995. Gross returns
and allowances for fiscal 1996 were $10.2 million or 8.3% of gross sales
compared to $7.3 million or 6.7% of gross sales in fiscal 1995. This 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 1996 was $40.1 million or 35.7% of
sales compared to $34.7 million or 34.1% of sales in fiscal 1995. The increase
in gross profit as a percent of sales was due to higher retail product margins
which were the result of the 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.
15
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $36.0 million or 32.1% of sales during fiscal 1996
compared to $35.9 million or 35.3% of sales during fiscal 1995. The decrease as
a percent of sales was primarily the result of an improved circulation plan
which lowered advertising expense as a percent of sales, offset slightly by
higher spending in other expense categories. The Company's catalog circulation
strategy for 1996 was to control advertising costs by reducing its mailings from
the previous year. The Company made more informed mailing decisions during 1996
due to the implementation of improved customer demand monitors, the creation of
new segmentation models and the timely delivery of the Company's catalogs. Total
circulation during 1996 of 42.9 million catalogs represented a 21% decrease from
the 54.4 million catalogs mailed during 1995. Advertising expense for fiscal
1996 was $19.5 million or 17.4% of sales compared to $21.6 million or 21.2% of
sales for fiscal 1995. The decrease as a percent of sales was due to increased
customer demand.
EARNINGS (LOSS) FROM OPERATIONS. Earnings from operations were $4.1 million
or 3.6% of sales in fiscal 1996 compared to a loss from operations of $1.2
million during fiscal 1995.
INTEREST EXPENSE. Interest expense was $981,000 during fiscal 1996 compared
to $943,000 during fiscal 1995. The weighted average interest rate during 1996
was 10.6% compared to 9.2% during 1995 which reflected higher borrowing costs to
the Company in 1996 as a result of its performance in 1995.
INCOME TAXES. Income tax expense for fiscal 1996 was $759,000 compared to
an income tax benefit of $355,000 in fiscal 1995. The Company's effective tax
rate in 1996 was lower than the statutory tax rate due to the utilization of net
operating loss carryforwards and in 1995 was lower than the statutory rate due
to a valuation allowance being recorded. As of December 27, 1996, the Company
had fully utilized its net operating loss carryforwards.
NET EARNINGS (LOSS). Net earnings for fiscal 1996 were $2.3 million or 2.0%
of sales compared to a net loss of $1.7 million for fiscal 1995.
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. Management believes that sales during the third quarter of fiscal 1997
were negatively impacted by the UPS strike and related events.
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
16
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
--------- --------- --------- ---------
(IN THOUSANDS)
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
FISCAL 1996
Sales........................................... $ 24,177 $ 18,611 $ 26,485 $ 42,997
Gross profit.................................... 8,077 6,311 9,261 16,421
Earnings (loss) from operations................. 239 (248) 641 3,424
Net earnings (loss)............................. 80 (471) 319 2,399
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically met its operating cash requirements through
funds generated from operations and borrowings under its revolving line of
credit and from subordinated notes payable to shareholders and other investors.
The Company had working capital of $2.7 million as of December 28, 1997,
compared to working capital of $3.6 million as of December 27, 1996. The
decrease of $900,000 in working capital during fiscal 1997 was the result of
$3.4 million of subordinated notes payable being classified as a current
liability as of December 28, 1997, partially offset by fiscal 1997 net earnings.
The Company's working capital requirements increased during fiscal 1997 compared
to last year primarily as a result of higher inventory levels and lower
inventory turnover which are consistent with the Company's strategic plan to
increase product margins through purchasing more manufacturers' close-outs. The
Company purchases large quantities of manufacturers' close-outs and other
individual product items on an opportunistic or when-available basis,
particularly in the case of footwear and apparel. The seasonal nature of the
merchandise or the time of 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.
In November 1995, the Company began offering 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 $3.6 million at
December 28, 1997 compared to $2.3 million at December 27, 1996. 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.
During 1997, the Company entered into an Amended and Restated Credit and
Security Agreement providing a revolving line of credit up to $15.0 million,
subject to an adequate borrowing base, expiring in May 2000. Funding under the
credit facility is subject to a collateral base consisting of inventory, plus
80% of accounts receivable under the installment plan, less customer
liabilities. The collateral base related to inventory is limited to $10.0
million December 16 through March 31, $12.0 million April 1 through April 15 and
$15.0 million April 16 through December 15 of each year. The revolving line of
credit is for working capital and letters of credit. Commercial letters of
credit may not exceed $5.0 million at any time. Borrowings under the revolving
line of credit bear interest at the bank's prime rate. The availability of
funding under the facility is subject to the sum of the principal balance and
letters of credit being paid down to $4.0 million, plus 80% of installment
receivables. The paydown requirement must be maintained
17
for not less than 15 consecutive days between December 1 and March 31 of each
year. The revolving line of credit is collateralized by substantially all of the
assets of the Company. The Company was in compliance with the credit agreement's
covenants as of December 28, 1997. As of December 28, 1997, the Company had
borrowed $1.7 million against the revolving credit line compared to $1.5 million
at December 27, 1996.
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 provided by operating activities during fiscal
1996 was $662,000 compared to $1.3 million during fiscal 1995. The net decrease
in cash provided by operating activities resulted primarily from an increase of
$3.6 million in inventory and a decrease in accounts payable, partially offset
by the improved profitability of the Company and an increase in accrued
liabilities.
Cash used in investing activities during fiscal 1997 was $1.4 million
compared to $1.1 million in fiscal 1996. During 1994, the Company began a
multi-year project of replacing and enhancing its operational and management
information systems which has resulted in significant capital expenditures being
incurred each year to develop computer software programs. Additionally, the
Company has made investments to enhance warehouse operations in terms of
efficiencies and capacity. During 1997, the Company completed the multi-year
upgrade project initiated during 1994 with additional hardware and software
upgrades totaling approximately $706,000 during 1997 which have been funded from
operations. The Company does not expect the Year 2000 computer issue to
significantly affect its operations. The Company is reviewing its internally
developed software for compliance and is contacting external software vendors
and other suppliers regarding compliance.
Effective February 5, 1998, the Company sold 1.6 million shares of Common
Stock at $6.50 per share pursuant to a registered public offering and received
net proceeds of approximately $8.7 million. During February 1998, the Company
paid $3.4 million of subordinated notes payable and repurchased all of the
Company's Series A Preferred Stock for $1.0 million. The Company plans to
utilize the remaining $4.3 million as additional working capital and for general
corporate purposes.
The Company believes that its available cash after the public offering
together with 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.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
None.
18
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................................... 20
Balance Sheets as of December 28, 1997 and December 27, 1996......................... 21
Statements of Operations for the fiscal years ended December 28, 1997, December 27,
1996 and December 29, 1995......................................................... 22
Statements of Changes in Shareholders' Equity for the fiscal years ended December 28,
1997, December 27, 1996 and December 29, 1995...................................... 23
Statements of Cash Flows for the fiscal years ended December 28, 1997, December 27,
1996 and December 29, 1995......................................................... 24
Notes to Financial Statements........................................................ 25
Financial Statement Schedule:
Schedule II--Valuation and Qualifying Accounts for the fiscal years ended December
28, 1997, December 27, 1996 and December 29, 1995.................................. 36
19
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 December 28, 1997 and December 27, 1996 and the related statements of
operations, changes in shareholders' equity, and cash flows for each of the
three fiscal years in the period ended December 28, 1997. 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 December 28, 1997 and December 27, 1996, and the results of its operations
and its cash flows for each of the three fiscal years in the period ended
December 28, 1997 in conformity with generally accepted accounting principles.
We have also audited Schedule II for each of the three fiscal years in the
period ended December 28, 1997. In our opinion, this schedule presents fairly,
in all material respects, the information required to be set forth therein.
Minneapolis, Minnesota
January 23, 1998 (except for Note J,
as to which the date is February 10, 1998)
20
THE SPORTSMAN'S GUIDE, INC.
BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
DECEMBER 28, DECEMBER 27,
1997 1996
------------- -------------
ASSETS
CURRENT ASSETS
Accounts receivable--net........................................................... $ 4,180 $ 3,038
Inventory.......................................................................... 23,841 17,765
Promotional material............................................................... 3,714 2,194
Prepaid expenses................................................................... 1,163 538
------------- -------------
Total current assets........................................................... 32,898 23,535
PROPERTY AND EQUIPMENT--NET.......................................................... 4,316 4,355
------------- -------------
Total assets................................................................... $ 37,214 $ 27,890
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft..................................................................... $ 2,383 $ 3,539
Notes payable--bank................................................................ 1,690 1,497
Current maturities of long-term debt
Related parties.................................................................. 1,795 --
Other............................................................................ 1,657 52
Accounts payable
Trade............................................................................ 16,866 10,604
Related parties.................................................................. 470 106
Accrued expenses................................................................... 2,239 1,809
Customer deposits and other liabilities............................................ 3,140 2,316
------------- -------------
Total current liabilities...................................................... 30,240 19,923
LONG-TERM LIABILITIES
Long-term debt
Related parties.................................................................. -- 1,795
Other............................................................................ 115 1,811
Deferred income taxes.............................................................. 494 486
------------- -------------
Total liabilities.............................................................. 30,849 24,015
COMMITMENTS AND CONTINGENCIES........................................................ -- --
SHAREHOLDERS' EQUITY
Series A Preferred Stock--$.01 par value; 200,000 shares authorized; 20,000 shares
issued and outstanding........................................................... -- --
Common Stock--$.01 par value; 36,800,000 shares authorized; 2,339,225 and 2,333,600
shares issued and outstanding at December 28, 1997 and December 27, 1996......... 23 23
Additional paid-in capital......................................................... 2,365 2,350
Accumulated earnings............................................................... 3,977 1,502
------------- -------------
Total shareholders' equity..................................................... 6,365 3,875
------------- -------------
Total liabilities and shareholders' equity..................................... $ 37,214 $ 27,890
------------- -------------
------------- -------------
The accompanying notes are an integral part of these financial statements.
21
THE SPORTSMAN'S GUIDE, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEARS ENDED
----------------------------------------
DECEMBER 28, DECEMBER 27, DECEMBER 29,
1997 1996 1995
------------ ------------ ------------
Sales................................................................. $ 128,113 $ 112,270 $ 101,832
Cost of sales......................................................... 76,234 72,200 67,137
------------ ------------ ------------
Gross profit...................................................... 51,879 40,070 34,695
Selling, general and administrative expenses.......................... 46,830 36,014 35,924
------------ ------------ ------------
Earnings (loss) from operations................................... 5,049 4,056 (1,229)
Interest expense...................................................... (1,266) (981) (943)
Miscellaneous income (expense), net................................... (4) 11 73
------------ ------------ ------------
Earnings (loss) before income taxes............................... 3,779 3,086 (2,099)
Income taxes.......................................................... 1,304 759 (355)
------------ ------------ ------------
Net earnings (loss)............................................... $ 2,475 $ 2,327 $ (1,744)
------------ ------------ ------------
------------ ------------ ------------
Net earnings (loss) per share:
Basic............................................................. $ 1.06 $ 1.00 $ (.75)
------------ ------------ ------------
------------ ------------ ------------
Diluted........................................................... $ .85 $ .96 $ (.75)
------------ ------------ ------------
------------ ------------ ------------
Weighted average common and common equivalent shares outstanding:
Basic............................................................. 2,336 2,334 2,334
------------ ------------ ------------
------------ ------------ ------------
Diluted........................................................... 2,919 2,431 2,334
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes are an integral part of these financial statements.
22
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 30, 1994...................... 20 $ -- 2,334 $ 23 $2,350 $ 919
Net loss......................................... -- -- -- -- -- (1,744)
------- ------- ------- ------- ------- ------------
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
------- ------- ------- ------- ------- ------------
------- ------- ------- ------- ------- ------------
The accompanying notes are an integral part of these financial statements.
23
THE SPORTSMAN'S GUIDE, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
FISCAL YEARS ENDED
----------------------------------------
DECEMBER 28, DECEMBER 27, DECEMBER 29,
1997 1996 1995
------------ ------------ ------------
Cash flows from operating activities:
Net earnings (loss)................................................. $ 2,475 $ 2,327 $ (1,744)
Adjustments to reconcile net earnings (loss) to net cash provided
by operating activities:
Depreciation and amortization................................... 1,416 1,092 708
Deferred income taxes........................................... 8 486 (290)
Other........................................................... (50) (44) (38)
Changes in assets and liabilities
Accounts receivable........................................... (1,142) (807) (1,446)
Inventory..................................................... (6,076) (3,557) (637)
Promotional material.......................................... (1,520) (80) 41
Prepaid expenses.............................................. (625) 320 (131)
Bank overdraft................................................ (1,156) 1,920 1,619
Accounts payable.............................................. 6,626 (2,844) 2,664
Accrued expenses.............................................. 430 1,015 (249)
Customer deposits and other liabilities....................... 830 834 779
------------ ------------ ------------
Cash flows provided by operating activities................. 1,216 662 1,276
Cash flows from investing activities:
Purchases of property and equipment................................. (1,377) (1,149) (1,911)
Proceeds from sale of property and equipment........................ -- -- 136
------------ ------------ ------------
Cash flows used in investing activities..................... (1,377) (1,149) (1,775)
Cash flows from financing activities:
Net proceeds from revolving credit line............................. 193 532 965
Payments on trade creditors' obligation............................. -- -- (561)
Payments on long-term debt.......................................... (47) (45) (558)
Proceeds from exercise of stock options............................. 15 -- --
------------ ------------ ------------
Cash flows provided by (used in) financing activities....... 161 487 (154)
------------ ------------ ------------
Decrease in cash and cash equivalents................................. -- -- (653)
Cash and cash equivalents at beginning of year........................ -- -- 653
------------ ------------ ------------
Cash and cash equivalents at end of year.............................. $ -- $ -- $ --
------------ ------------ ------------
------------ ------------ ------------
Supplemental disclosure of cash flow information
Cash paid during the years for:
Interest.......................................................... $ 1,244 $ 1,019 $ 938
Income taxes...................................................... 956 5 191
The accompanying notes are an integral part of these financial statements.
24
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
retailer, offering a variety of products including footwear, clothing and
accessories, hunting and shooting accessories, camping and outdoor recreation
equipment, optics and ammunition as well as a diverse range of additional
offerings in other product categories. The Company conducts its operations out
of one warehouse and office facility and two retail outlet locations in
Minnesota and distributes its catalogs throughout the United States.
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,
$7.4 million and $5.2 million during fiscal years 1997, 1996 and 1995. Reserves
for returns, net of exchanges, of $1.3 million and $640,000 were recorded in
accrued expenses at December 28, 1997 and December 27, 1996.
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 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 $190,000 and $140,000 at
December 28, 1997 and December 27, 1996.
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 ("FIFO")
method used to determine cost.
25
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
7. PROMOTIONAL MATERIAL
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.
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 enhancements
and/or replacements of operating and management systems. Depreciation and
amortization is computed using the straight-line method.
9. INCOME TAXES
Deferred tax assets and liabilities represent the tax effects, based on
current tax law, of future deductible or taxable items that have been recognized
in the financial statements.
10. STOCK OPTIONS
The Company's employee stock option plans are accounted for under the
intrinsic value method.
11. NET EARNINGS (LOSS) PER SHARE
On December 28, 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) 128, EARNINGS PER SHARE. As required by SFAS 128, all current
and prior year net earnings (loss) per share data have been restated to conform
to the provisions of SFAS 128.
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 (loss) per share amounts have
been computed by dividing net earnings (loss) by the weighted average number of
outstanding common shares and common share equivalents relating to stock options
and warrants, when dilutive.
For fiscal years 1997 and 1996, 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 18,650, 44,878 and 496,433 shares of common
stock with a weighted average exercise price of $8.70, $6.50 and $2.47 were
outstanding during fiscal year end 1997, 1996 and 1995, but were not included in
the computation of diluted earnings per share because to do so would have been
anti-dilutive.
12. FINANCIAL INSTRUMENTS
The fair value of the Company's financial instruments approximates the
carrying value at December 28, 1997.
26
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
13. FISCAL YEAR
The Company's fiscal year ends on the Friday nearest December 31 for years
prior to 1997 and the Sunday nearest December 31 for 1997. Fiscal years 1997,
1996 and 1995 consisted of 52 weeks.
14. 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
period. Actual results could differ from those estimates.
15. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued SFAS 130, REPORTING
COMPREHENSIVE INCOME, which requires the Company to display an amount
representing total comprehensive income, as defined by the statement, as part of
the Company's basic financial statements. Additionally, SFAS 131, DISCLOSURES
AND SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, requires the Company to
disclose financial and other information about its business segments, their
products and services, geographic areas, sales, profits, assets and other
information. These statements are effective for financial statements for periods
beginning after December 15, 1997. The adoption of the statements is not
expected to have a material effect on the financial statements of the Company.
NOTE B--RELATED PARTY TRANSACTIONS
The Company purchased $6,000, $41,000 and $175,000 of inventory during
fiscal years 1997, 1996 and 1995 from companies owned by family members of
certain officers and directors of the Company.
The Company purchased $2.0 million, $3.0 million and $4.4 million of
inventory during fiscal years 1997, 1996 and 1995 from companies partially owned
by two directors of the Company.
The Company incurred interest expense on related party subordinated notes
payable of $183,000, $172,000 and $172,000 during fiscal years 1997, 1996 and
1995.
27
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE C--PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
ESTIMATED
DECEMBER 28, DECEMBER 27, USEFUL
1997 1996 LIVES
------------- ------------- -----------
Machinery, equipment and furniture................. $ 2,830 $ 2,343 5-12 years
Equipment under capital leases..................... 133 133 5 years
Leasehold improvements............................. 1,085 853 Lease life
Computer equipment and accessories................. 1,204 935 5 years
Computer software.................................. 2,940 2,553 4-5 years
------ ------
8,192 6,817
Less accumulated depreciation and amortization..... 3,876 2,462
------ ------
$ 4,316 $ 4,355
------ ------
------ ------
NOTE D--COMMITMENTS AND CONTINGENCIES
LEASE AND SERVICE COMMITMENTS
The Company has several long-term contracts and operating leases related to
a building facility, telecommunications and computer equipment, long-distance
telephone services and a retail location with varying terms ranging from 19 to
62 months. The Company occupies approximately 320,000 square feet under a lease
that expires in March 1999.
At December 28, 1997, future minimum commitments under the above agreements
are as follows for fiscal years (in thousands):
1998................................................................ $ 3,022
1999................................................................ 1,881
2000................................................................ 1,276
2001................................................................ 239
2002................................................................ 137
-------
$ 6,555
-------
-------
Rent expense was $2.1 million, $1.8 million and $1.7 million for fiscal
years 1997, 1996 and 1995.
EMPLOYMENT AGREEMENTS
In 1997, the Company entered into employment agreements with five 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.
28
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE D--COMMITMENTS AND CONTINGENCIES (CONTINUED)
OTHER
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 is
not material.
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.
NOTE E--REVOLVING CREDIT FACILITY
During 1997, the Company entered into an Amended and Restated Credit and
Security Agreement providing a revolving line of credit up to $15.0 million,
subject to an adequate borrowing base, expiring in May 2000. Funding under the
credit facility is subject to a collateral base consisting of inventory, plus
80% of accounts receivable under an installment payment plan, less customer
liabilities. The collateral base related to inventory is limited to $10.0
million December 16 through March 31, $12.0 million April 1 through April 15 and
$15.0 million April 16 through December 15 of each year. The revolving line of
credit is for working capital and letters of credit. Commercial letters of
credit may not exceed $5.0 million at any time. Borrowings under the revolving
line of credit bear interest at the bank's prime rate. The availability of
funding under the facility is subject to the sum of the principal balance and
letters of credit being paid down to $4.0 million, plus 80% of installment
receivables. The paydown requirement must be maintained for not less than 15
consecutive days between December 1 and March 31 of each year. The revolving
line of credit is collateralized by substantially all of the assets of the
Company.
All borrowings are subject to various monthly covenants. The most
restrictive covenants require certain levels of year-to-date net earnings (loss)
and net worth and have a maximum debt to net worth ratio and a maximum annual
spending level for capital assets. As of December 28, 1997, the Company was in
compliance with all applicable covenants under the revolving line of credit
agreement.
The following is a summary of the credit facility (in thousands):
FISCAL YEARS ENDED
-----------------------------------------
DECEMBER 28, DECEMBER 27, DECEMBER 29,
1997 1996 1995
------------ ------------- ------------
Balance at end of year............................ $ 1,690 $ 1,497 $ 965
Interest rate at end of year...................... 8.50% 9.75% 9.50%
Maximum month-end borrowing during the year....... $ 13,599 $ 9,765 $ 11,720
Average daily borrowing during the year........... $ 9,517 $ 6,029 $ 6,729
Weighted average interest rate during the year.... 9.22% 10.60% 9.23%
29
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE F--LONG-TERM DEBT
Long-term debt is as follows (in thousands):
DECEMBER 28, DECEMBER 27,
1997 1996
------------- -------------
Subordinated notes payable to shareholders, interest at 1.75%
over prime but not less than 9%, payable quarterly (effective
rates of 10.25% and 10% at December 28, 1997 and December 27,
1996), principal due June 1998. Collateralized by the assets of
the Company (a)................................................ $ 3,414 $ 3,414
Note payable to a government agency, interest at 4%, principal
and interest payable annually. Collateralized by machinery,
equipment and furniture and fixtures........................... 145 182
Other............................................................ 8 62
------ ------
3,567 3,658
Less current maturities.......................................... 3,452 52
------ ------
$ 115 $ 3,606
------ ------
------ ------
- - ------------------------
(a) These notes were renewed during 1996. In connection with the renewal, the
Company issued warrants to purchase 341,347 shares of common stock (see note
H). The above notes payable to shareholders are subordinate to present and
future financial institution borrowings (see notes E and J).
The aggregate maturities of long-term debt at December 28, 1997 are due
during fiscal 1998 (see note J).
NOTE G--INCOME TAXES
The provision for income tax expense (benefit) consists of the following for
fiscal years 1997, 1996 and 1995 (in thousands):
FISCAL YEARS ENDED
---------------------------------------------
DECEMBER 28, DECEMBER 27, DECEMBER 29,
1997 1996 1995
------------- --------------- -------------
Current
Federal......................................... $ 1,277 $ 263 $ (70)
State........................................... 19 10 5
------ ----- -----
1,296 273 (65)
Deferred
Federal......................................... 8 486 (290)
------ ----- -----
$ 1,304 $ 759 $ (355)
------ ----- -----
------ ----- -----
30
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE G--INCOME TAXES (CONTINUED)
Differences between income tax expense (benefit) and amounts derived by
applying the statutory federal income tax rate to earnings (loss) before income
taxes are as follows for fiscal years 1997, 1996 and 1995:
FISCAL YEARS ENDED
-------------------------------------------------
DECEMBER 28, DECEMBER 27, DECEMBER 29,
1997 1996 1995
--------------- --------------- ---------------
U.S. federal statutory rate....................... 34.0% 34.0% (34.0)%
Change in valuation allowance..................... -- (13.7 ) 20.2
Adjustment of prior years' accruals............... -- 3.8 --
Other............................................. 0.5 0.5 (3.1 )
----- ----- -----
34.5% 24.6% (16.9 )%
----- ----- -----
----- ----- -----
The components of deferred taxes at December 28, 1997 and December 27, 1996,
calculated at 34% consist of (in thousands):
DECEMBER DECEMBER
28, 27,
1997 1996
------- -------
Current deferred tax assets (liabilities):
Inventory...................................................... $ 529 $ 437
Vacation accrual............................................... 127 99
Returns reserve................................................ 437 218
Promotional material........................................... (883) (618)
Prepaid expenses............................................... (205) (148)
Income tax credits............................................. -- 137
Other.......................................................... 129 94
------- -------
Deferred tax asset........................................... 134 219
Long-term deferred tax liabilities:
Internally developed software.................................. (527) (467)
Depreciation................................................... (101) (238)
------- -------
Deferred tax liability....................................... (628) (705)
------- -------
Net deferred tax liability................................... $ (494) $ (486)
------- -------
------- -------
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.
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. A total of 30,750
options were granted under the
31
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE H--SHAREHOLDERS' EQUITY (CONTINUED)
1991 Plan during 1991 through 1993 at a range of exercise prices from $2.00 to
$2.50 per share. A total of 19,750 options at a range of exercise prices from
$2.00 to $2.50 per share were canceled. A total of 250 options at an exercise
price of $2.50 were exercised. During 1996, a total of 6,750 options at an
exercise price of $2.00 expired. At December 28, 1997, a total of 4,000 options
were outstanding, all of which were exercisable.
During 1993, the Company issued options to purchase 55,000 shares of the
Company's common stock at $2.50 per share to an officer of the Company. The
options, which are nontransferable, may only be exercised within six months of
the occurrence of any of the following events or they terminate: the death or
permanent disability of the officer, retirement at age 62, termination of
employment without cause or a public offering of the Company's common stock.
None of the options were exercisable at December 28, 1997.
During 1993, the Company also 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. During 1997, a total of 36,564
options issued and outstanding under the 1994 Plan were amended to extend the
term of exercise from three years from the date of grant to ten years from the
date of grant. A total of 50,003 options were granted under the 1994 Plan during
1994 and 1995 at a range of exercise prices from $3.70 to $8.70 per share.
During 1995, a total of 1,000 options at a range of exercise prices from $3.70
to $8.70 were canceled. During 1996, a total of 4,125 options at a range of
exercise prices from $3.70 to $8.70 were canceled. During 1997, a total of 1,501
options at a range of exercise prices from $3.70 to $8.70 were canceled and a
total of 3,938 options at a range of exercise prices from $3.70 to $5.50
expired. At December 28, 1997, a total of 39,439 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. A
total of 125,000 options were granted under the 1996 Plan during 1996 at an
exercise price of $2.50. During 1997, a total of 130,000 options were granted
under the 1996 Plan at an exercise price of $4.00. During 1997, a total of 625
options at a range of exercise prices of $2.50 to $4.00 were exercised and a
total of 4,375 options at a range of exercise prices of $2.50 to $4.00 were
canceled. At December 28, 1997, a total of 250,000 options were outstanding, of
which 152,875 options were exercisable.
32
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE H--SHAREHOLDERS' EQUITY (CONTINUED)
The following applies to options that are outstanding at December 28, 1997:
WEIGHTED AVERAGE
NUMBER REMAINING WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE
- - -------------------------------------------- ----------- ---------------- -----------------
$2.50 - $3.70............................... 185,950 8 years $ 2.54
$4.00 - $5.50............................... 143,839 9 years $ 4.14
$8.70....................................... 18,650 7 years $ 8.70
-----------
348,439
-----------
-----------
NUMBER WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES EXERCISABLE EXERCISE PRICE
- - -------------------------------------------- ----------- -----------------
$2.50 - $3.70............................... 130,950 $ 2.56
$4.00 - $5.50............................... 46,714 $ 4.43
$8.70....................................... 18,650 $ 8.70
-----------
196,314
-----------
-----------
Exercise prices for all of the 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 1997, 1996 and 1995 is as
follows:
1997 1996 1995
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ----------- --------- ----------- --------- -----------
Outstanding at beginning of
year...................... 233,878 $ 3.27 121,753 $ 4.03 104,503 $ 3.12
Granted................. 130,000 4.00 125,000 2.50 20,000 8.70
Exercised............... (5,625) 2.53 -- -- -- --
Forfeited............... (5,876) 3.43 (6,125) 4.26 (2,750) 3.25
Expired................. (3,938) 4.87 (6,750) 2.00 -- --
--------- --------- ---------
Outstanding at end of
year...................... 348,439 $ 3.53 233,878 $ 3.27 121,753 $ 4.03
--------- --------- ---------
--------- --------- ---------
Options exercisable at end
of year................... 196,314 $ 3.59 177,878 $ 3.51 64,753 $ 5.38
--------- --------- ---------
--------- --------- ---------
Weighted average fair value
of options granted during
the year.................. $ 1.75 $ 1.30 $ 2.20
In 1997, the Company's Board of Directors approved the grant to officers of
the Company options to purchase 220,000 shares of common stock contingent upon
the completion of the Company's public
33
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE H--SHAREHOLDERS' EQUITY (CONTINUED)
offering (see note J). The exercise price will be the same as the price to
public in the offering document, and 25% of the options will vest immediately
upon the date of grant with the balance vesting over the next three years. The
options will expire ten years from the date of grant.
The Company's pro forma net earnings (loss) and net earnings (loss) per
share for fiscal years 1997, 1996 and 1995 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
------------------------------------------
DECEMBER 28, DECEMBER 27, DECEMBER 29,
1997 1996 1995
------------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net earnings (loss) As reported............... $ 2,475 $ 2,327 $ (1,744)
Pro forma................. 2,412 2,164 (1,788)
Net earnings (loss) per share
Basic As reported............... $ 1.06 $ 1.00 $ (.75)
Pro forma................. 1.03 .93 (.77)
Diluted As reported............... $ .85 $ .96 $ (.75)
Pro forma................. .83 .89 (.77)
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
In connection with private placements of subordinated notes payable in 1993
and 1994, warrants to purchase 374,680 shares of the Company's common stock were
issued to the debt holders. Of these warrants, 50,000 were issued at $2.50 per
share and expire in June 1998, and 324,680 were issued at $1.88 per share and
expire in April 1999 (see note J).
In connection with the extension of $3.4 million in subordinated notes
payable in May 1996, warrants to purchase 341,347 shares of the Company's common
stock at an exercise price of $1.81 per share were issued to the debt holders.
The warrants expire in 2001 (see note J).
In the aggregate, warrants to purchase 716,027 shares of common stock were
exercisable at December 28, 1997.
All of the warrants contain a provision for the warrants to be terminated if
not exercised within 30 days after a sale, dissolution, public offering, merger
or consolidation of the Company (see note J).
PREFERRED STOCK
In 1997, the Company's Board of Directors approved the repurchase of all of
the Company's Series A Preferred Stock for $1.0 million upon completion of the
Company's public offering (see note J).
34
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE I--ADVERTISING EXPENSE
Selling, general and administrative expenses include advertising expenses of
$27.5 million, $19.5 million and $21.6 million for fiscal years 1997, 1996 and
1995.
NOTE J--SUBSEQUENT EVENTS
On February 10, 1998, the Company received net proceeds of approximately
$8.7 million from the sale of 1.6 million shares of its common stock through a
public offering.
On February 10, 1998, the Company paid $3.4 million of subordinated notes
payable and repurchased all of its Series A Preferred Stock for $1.0 million.
In accordance with the terms of the respective agreements, all of the
Company's outstanding warrants will be terminated if not exercised within 30
days of completion of the Company's public offering of common stock.
35
THE SPORTSMAN'S GUIDE, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
COLUMN C
------------------------------
ADDITIONS
COLUMN B ------------------------------
------------- (1) (2) COLUMN D COLUMN E
COLUMN A 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
December 28, 1997..................... $ 640 $ 10,953 $ -- $ 10,308* $ 1,285
December 27, 1996..................... 177 7,371 -- 6,908* 640
December 29, 1995..................... 218 5,230 -- 5,271* 177
- - ------------------------
* Represents actual returns from customers.
ITEM 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 "Item 1.
Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's Proxy Statement for its Annual Meeting of
Shareholders on April 23, 1998 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 April 23, 1998 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 April 23, 1998 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 April 23, 1998 and is incorporated herein by
reference.
36
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 December 28, 1997 and December 27, 1996
Statements of Operations for the fiscal years ended December 28,
1997, December 27, 1996
and December 29, 1995
Statements of Changes in Shareholders' Equity for the fiscal years
ended December 28,
1997, December 27, 1996 and December 29, 1995
Statements of Cash Flows for the fiscal years ended December 28,
1997, December 27, 1996
and December 29, 1995
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 December 28,
1997, December 27, 1996 and December 29, 1995
3. EXHIBITS. See Exhibit Index at page 39 of this report.
(B) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the thirteen weeks ended
December 28, 1997.
37
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 9, 1998 By /s/ GARY OLEN
-----------------------------------------
Gary Olen
President 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
- - ------------------------------ -------------------------- -------------------
VINCENT W. SHIEL*
- - ------------------------------ Chairman of the Board
Vincent W. Shiel
President, Chief Executive
/s/ GARY OLEN Officer and Director
- - ------------------------------ (principal executive
Gary Olen officer)
Senior Vice President of
Finance, Chief Financial
/s/ CHARLES B. LINGEN Officer, Secretary,
- - ------------------------------ Treasurer and Director
Charles B. Lingen (principal financial and
accounting officer)
March 9, 1998
/s/ GREGORY R. BINKLEY Executive Vice President,
- - ------------------------------ Chief Operating Officer
Gregory R. Binkley and Director
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
38
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 January 1, 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 Amended and Restated Credit and Security Agreement between the Company and Norwest Business
Credit, Inc. dated April 18, 1997 (incorporated by reference from Exhibit 10.16 to Form 10-Q for
the quarter ended March 28, 1997)
10.7* 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)
10.8* 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)
10.9* 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)
10.10* Description of 1997 Senior Management Stock Option Plan...........................................
10.11 Promissory Note from Gary Olen to the Company dated February 11, 1998 and related Stock Pledge
Agreement.......................................................................................
23.1 Consent of Grant Thornton LLP.....................................................................
39
EXHIBIT DESCRIPTION PAGE
- - ----------- -------------------------------------------------------------------------------------------------- -----------
24.1 Powers of Attorney of each person whose name is signed to this report pursuant to a power of
attorney........................................................................................
27 Financial Data Schedule...........................................................................
- - ------------------------
Those exhibits marked with an asterisk (*) above constitute management
contracts or compensatory plans or arrangements for management and executive
officers of the Company.
40