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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the quarterly period ended September 30, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the transition period from to .
------- -------
Commission File No. 015767
THE SPORTSMAN'S GUIDE, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1293081
(State or other jurisdiction (I.R.S. Employer I.D. Number)
of incorporation or organization)
411 FARWELL AVE., SO. ST. PAUL, MINNESOTA 55075
(Address of principal executive offices)
(651) 451-3030
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
As of November 4, 2003, there were 4,834,908 shares of the registrant's Common
Stock outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE SPORTSMAN'S GUIDE, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands of dollars)
ASSETS September 30, September 30, December 31,
2003 2002 2002
------------- ------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 10,810 $ 2,606 $ 17,152
Accounts receivable - net 1,853 1,832 3,014
Inventory 29,710 28,066 20,593
Promotional material 3,920 4,347 2,540
Prepaid expenses and other 2,020 1,249 1,133
Deferred income taxes 2,270 1,428 2,409
------------- ------------- -------------
Total current assets 50,583 39,528 46,841
PROPERTY AND EQUIPMENT - NET 2,296 2,924 2,672
------------- ------------- -------------
Total assets $ 52,879 $ 42,452 $ 49,513
============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 18,463 $ 16,124 $ 16,230
Accrued expenses 3,218 1,844 3,896
Income taxes payable 556 292 1,882
Deferred revenue 4,045 3,339 3,706
Returns reserve 1,724 1,499 1,738
Customer deposits and other liabilities 2,002 1,268 1,321
------------- ------------- -------------
Total current liabilities 30,008 24,366 28,773
LONG-TERM LIABILITIES
Deferred income taxes 92 112 119
Other 154 -- --
------------- ------------- -------------
Total long-term liabilities 246 112 119
------------- ------------- -------------
Total liabilities 30,254 24,478 28,892
COMMITMENTS AND CONTINGENCIES -- -- --
SHAREHOLDERS' EQUITY
Common Stock-$.01 par value; 36,800,000 shares authorized;
4,833,008 shares issued and outstanding at
September 30, 2003 and 4,753,810 shares issued and
outstanding at September 30, 2002 and December 31, 2002 48 47 47
Additional paid-in capital 11,278 11,588 11,588
Retained earnings 11,299 6,339 8,986
------------- ------------- -------------
Total shareholders' equity 22,625 17,974 20,621
------------- ------------- -------------
Total liabilities & shareholders' equity $ 52,879 $ 42,452 $ 49,513
============= ============= =============
See accompanying notes to consolidated financial statements
2
THE SPORTSMAN'S GUIDE, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
For the Three Months and Nine Months Ended
September 30, 2003 and 2002
(In thousands, except per share data)
Three Months Ended Nine Months Ended
------------------------- -------------------------
September 30, September 30,
------------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Sales $ 41,213 $ 36,746 $ 123,003 $ 113,002
Cost of sales 28,672 25,557 84,321 77,959
---------- ---------- ---------- ----------
Gross profit 12,541 11,189 38,682 35,043
Selling, general and administrative expenses 11,424 10,823 35,056 32,967
---------- ---------- ---------- ----------
Earnings from operations 1,117 366 3,626 2,076
Miscellaneous income (expense), net (10) 46 (14) 79
---------- ---------- ---------- ----------
Earnings before income taxes 1,107 412 3,612 2,155
Income tax expense 397 143 1,299 785
---------- ---------- ---------- ----------
Net earnings $ 710 $ 269 $ 2,313 $ 1,370
========== ========== ========== ==========
Net earnings per share:
Basic $ .15 $ .06 $ .49 $ .29
========== ========== ========== ==========
Diluted $ .13 $ .05 $ .44 $ .27
========== ========== ========== ==========
Weighted average common and common equivalent
shares outstanding:
Basic 4,801 4,754 4,769 4,752
========== ========== ========== ==========
Diluted 5,355 5,070 5,241 5,001
========== ========== ========== ==========
See accompanying notes to consolidated financial statements
3
THE SPORTSMAN'S GUIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended
September 30, 2003 and 2002
(In thousands of dollars)
2003 2002
---------- ----------
Cash flows from operating activities:
Net earnings $ 2,313 $ 1,370
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization 985 1,120
Deferred income taxes 112 (75)
Other 16 9
Changes in assets and liabilities:
Accounts receivable 1,161 927
Inventory (9,117) (6,990)
Promotional material (1,380) (733)
Prepaid expenses and other (891) (316)
Income taxes (1,326) (1,892)
Accounts payable 2,233 923
Accrued expenses (678) (938)
Customer deposits and other liabilities 1,165 753
---------- ----------
Cash flows used in operating activities (5,407) (5,842)
Cash flows from investing activities:
Purchases of property and equipment (640) (405)
Other 14 --
---------- ----------
Cash flows used in investing activities (626) (405)
Cash flows from financing activities:
Proceeds from exercise of stock options 616 23
Proceeds from payment of stock subscription receivable -- 238
Repurchase of common stock (925) --
---------- ----------
Cash flows provided by (used in) financing activities (309) 261
---------- ----------
Decrease in cash and cash equivalents (6,342) (5,986)
Cash and cash equivalents at beginning of the period 17,152 8,592
---------- ----------
Cash and cash equivalents at end of the period $ 10,810 $ 2,606
========== ==========
Supplemental disclosure of cash flow information
Cash paid during the periods for:
Income taxes $ 2,513 $ 2,751
See accompanying notes to consolidated financial statements
4
THE SPORTSMAN'S GUIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1: Basis of Presentation
The accompanying financial statements are unaudited and reflect all
adjustments which are normal and recurring in nature, and which, in the
opinion of management, are necessary for a fair presentation.
Reclassifications have been made to prior year financial information
wherever necessary to conform to the current year presentation. Results
of operations for the interim periods are not necessarily indicative of
full-year results.
In preparing the Company's consolidated financial statements,
management is required to make estimates and assumptions that affect
reported amounts of assets and liabilities and related revenues and
expenses. Actual results could differ from the estimates used by
management.
The accompanying consolidated financial statements include the accounts
of the company and its wholly-owned subsidiary. All intercompany
balances and transactions have been eliminated in consolidation.
The Company's fiscal quarter ends on the Sunday nearest September 30
for 2003 and 2002, but for clarity of presentation, all periods are
described as if the three and nine month periods end September 30. Each
fiscal third quarter of 2003 and 2002 consisted of 13 weeks.
Amounts billed to customers for shipping and handling are recorded in
revenues at the time of shipment. Sales include shipping and handling
revenues of $5.3 million and $4.8 million for the three months ended
September 30, 2003 and 2002 and $16.1 million and $15.1 million for the
nine months ended September 30, 2003 and 2002.
Note 2: Stock Options
Stock options issued to employees are accounted for under the intrinsic
value method. No stock-based compensation cost is reflected in the net
earnings, as all options granted had an exercise price equal to the
market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net earnings and earnings per
share as if the Company had applied the fair value method of accounting
for stock options (in thousands, except per share data):
Three months ended September 30, Nine months ended September 30,
2003 2002 2003 2002
-------------- -------------- -------------- --------------
Net earnings as reported $ 710 $ 269 $ 2,313 $ 1,370
Deduct: Total stock-based employee
compensation expense under the fair
value method for all awards, net of
related tax effects 116 37 349 133
-------------- -------------- -------------- --------------
Pro-forma net earnings $ 594 $ 232 $ 1,964 $ 1,237
============== ============== ============== ==============
Earnings Per Share:
Basic - as reported $ .15 $ .06 $ .49 $ .29
Basic - pro-forma .13 .05 .43 .27
Diluted - as reported $ .13 $ .05 $ .44 $ .27
Diluted - pro-forma .11 .05 .39 .25
Note 3: Net Earnings Per Share
The Company's basic net earnings per share amounts have been computed
by dividing net earnings by the weighted average number of outstanding
common shares. Diluted net earnings per share amounts have been
computed by dividing net earnings by the weighted average number of
outstanding common shares and common share equivalents relating to the
stock options and warrants, when dilutive.
For the three months and nine months ended September 30, 2003, 553,867
and 472,005 share equivalents were included in the computation of
diluted net earnings per share.
5
For the three months and nine months ended September 30, 2002, 316,614
and 248,975 share equivalents were included in the computation of
diluted net earnings per share.
All outstanding options during the three months ended September 30,
2003 were included in the computation of diluted earnings per share
because the average market price of the common shares during the period
exceeded the exercise price of the options.
Options and warrants to purchase 114,950 shares of common stock with a
weighted average exercise price of $8.48 were outstanding during the
three months ended September 30, 2002, but were not included in the
computation of diluted net earnings per share because their exercise
price exceeded the average market price of the common shares during the
period.
Options and warrants to purchase 4,983 and 226,892 shares of common
stock with a weighted average exercise price of $8.70 and $7.43 were
outstanding during the nine months ended September 30, 2003 and 2002,
but were not included in the computation of diluted net earnings per
share because their exercise price exceeded the average market price of
the common shares during the period.
Note 4: Repurchase of Common Stock
On May 5, 2003, the Company announced that its board of directors
authorized a plan to repurchase up to ten percent of its outstanding
common stock in the open market or in privately negotiated transactions
over the next 12 months. Under this plan 37,800 and 84,450 shares of
common stock at a total cost of $463,000 and $925,000 were repurchased
during the three and nine months ended September 30, 2003.
Note 5: New Accounting Pronouncements
In December 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 148,
"Accounting for Stock-Based Compensation--Transition and Disclosure."
SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of Accounting Principles Board ("APB") Opinion
No. 28, Interim Financial Reporting, to require pro-forma disclosure in
interim financial statements by companies that elect to account for
stock-based compensation using the intrinsic value method prescribed in
APB Opinion No. 25. The Company continues to use the intrinsic value
method of accounting for stock-based compensation. As a result, the
transition provisions will not have an effect on the Company's
consolidated financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. FIN 45
addresses the disclosure requirements of a guarantor in its interim and
annual financial statements about its obligations under certain
guarantees that it has issued. FIN 45 also requires a guarantor to
recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The
disclosure requirements of FIN 45 were effective for the Company
beginning with its year ended December 31, 2002. The liability
recognition requirements will be applicable prospectively to all
guarantees issued or modified after December 31, 2002. This
pronouncement did not have a material effect on the Company's
consolidated financial position or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46 is an
interpretation of Accounting Research Bulletin No. 51, Consolidated
Financial Statements, and addresses consolidation by business
enterprises of variable interest entities. FIN 46 applies immediately
to variable interest entities created or obtained after January 31,
2003 and it applies in the first fiscal year or interim period ending
after December 15, 2003, to variable interest entities in which an
enterprise holds a variable interest that is acquired before February
1, 2003. This pronouncement is not anticipated to have a material
effect on the Company's consolidated financial position or results of
operations.
In May 2003, the FASB issued Statement 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity. Statement 150 changes the classification in the statement of
financial position of certain common financial instruments from either
equity or mezzanine presentation to liabilities and requires an issuer
of those financial statements to recognize changes in fair value or
redemption amount, as applicable, in earnings. SFAS 150 is effective
for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of Statement 150 did not
have an impact on the Company's financial position or results of
operations.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a leading marketer of value priced outdoor gear and general merchandise,
with a special emphasis on outdoor clothing, equipment and footwear. We market
and sell our merchandise through main, specialty and Buyer's Club Advantage(TM)
catalogs and two e-commerce Web sites. Our catalogs as well as our Web sites
offer high quality products at low prices. Our catalogs are advertised as The
"Fun-to-Read" Catalog(R) and our primary Web site is advertised as the
"Fun-to-Browse" Website(R). Our Web sites include www.sportsmansguide.com, our
online retail store modeled on our print catalogs and www.bargainoutfitters.com,
our online liquidation outlet.
Our business was started in 1970 by Gary Olen, our Chairman. Over time, our
product offerings and marketing efforts have broadened from the deer hunter to
include those interested in pursuing and living the outdoor lifestyle in general
and the value-oriented outdoorsman in particular. In 1992, we began our value
pricing strategy of offering outdoor equipment and supplies at discount prices,
later adding government surplus, manufacturers' close-outs and other merchandise
lines. In 1994, we began to publish specialty catalogs which allowed us to
utilize a customized marketing plan to individual customer groups.
Sales generated through the Internet have grown rapidly over the last several
years. We launched our online retail store in April 1998 and began posting our
catalogs and full product offerings on the site in February 1999. Our e-commerce
offerings generated over $53.0 million in sales in 2002 compared to $1.3 million
in 1998. Product sales on the sites accounted for approximately 35.5% of our
sales for the nine months ended September 30, 2003, compared to less than 1% for
all of 1998.
In the fall of 2000, we began to aggressively promote and sell the Buyer's Club
membership program. In addition, unique Buyer's Club Advantage(TM) catalogs were
developed and promoted exclusively to members allowing us to maximize sales and
profitability from our best customers.
We believe that our value pricing, specialty catalog titles, the Internet and
Buyer's Club memberships have been important to our growth in sales and
profitability. Our sales have increased from $43 million in 1992 to
approximately $179 million in 2002.
FISCAL YEAR
Our fiscal quarter ends on the Sunday nearest September 30 for 2003 and 2002,
but for clarity of presentation, all periods are described as if the quarter end
is September 30. Each fiscal third quarter 2003 and 2002 consisted of 13 weeks.
CRITICAL ACCOUNTING POLICIES
Sales are recorded at the time of shipment along with a provision for
anticipated merchandise returns, net of exchanges, which is recorded based upon
historical experience and current expectations. Amounts billed to customers for
shipping and handling are recorded in sales at the time of shipment.
Customers can purchase one year memberships in our Buyer's Club for a $29.99
annual fee. We also offer two year memberships for $59.97. Club members receive
merchandise discounts of 10% on regularly priced items and 5% on ammunition.
Membership fees are deferred and recognized in income as the individual members
place orders and receive discounts. Any remaining deferred membership fees are
recognized in income after the expiration of the membership.
The cost of producing and mailing catalogs is deferred and expensed over the
estimated useful lives of the catalogs. Catalog production and mailing costs are
amortized over periods ranging from four to six months from the in-home date of
the catalog with the majority of the costs amortized within the first month of
the catalog's life cycle. We estimate the in-home date to be one week from the
known mailing date of the catalog. The ongoing cost of developing and
maintaining our customer list is charged to operations as incurred. All other
advertising costs are expensed as incurred.
Stock options issued to employees are accounted for under the intrinsic value
method. Pro-forma disclosures as if the fair value method were used are included
in Note 2 to the Consolidated Financial Statements.
7
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information from our
Consolidated Statements of Earnings expressed as a percentage of sales:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 69.6 69.6 68.6 69.0
---------- ---------- ---------- ----------
Gross profit 30.4 30.4 31.4 31.0
Selling, general and administrative expenses 27.7 29.4 28.5 29.2
---------- ---------- ---------- ----------
Earnings from operations 2.7 1.0 2.9 1.8
Miscellaneous income (expense) -- 0.1 -- 0.1
---------- ---------- ---------- ----------
Earnings before income taxes 2.7 1.1 2.9 1.9
Income tax expense 1.0 0.4 1.0 0.7
---------- ---------- ---------- ----------
Net earnings 1.7% 0.7% 1.9% 1.2%
========== ========== ========== ==========
Three months and nine months ended September 30, 2003 compared to three months
and nine months ended September 30, 2002
SALES. Sales for the three months and nine months ended September 30, 2003 of
$41.2 million and $123.0 million were $4.5 million or 12.2% higher and $10.0
million or 8.8% higher than sales of $36.7 million and $113.0 million during the
same periods last year. The increase in sales for the third quarter and the
first nine months was primarily due to higher sales generated from unique
product offerings on the Internet as well as the catalogs. Catalog related sales
for the three months and nine months ended September 30, 2003 increased
primarily as the result of an increase in catalog circulation and improved
catalog productivity. As of the end of the third quarter 2003, the Buyer's Club
membership had increased to 339,000, up 9% over the 310,000 members reported at
December 31, 2002 and up 19% over the membership count one year ago.
Sales generated through the Internet for the third quarter and the nine months
ended September 30, 2003 were approximately 36.0% and 35.5% of total sales
compared to 30.0% and 29.0% during each of the same periods last year. We define
sales generated through the Internet as sales that are derived from our web
sites, catalog orders processed online and online offers placed by telephone.
Internet related sales continue to grow, period over period, as we continue to
make enhancements to our Web sites and implement and improve upon various
marketing and merchandising programs.
Gross returns and allowances for the three months and nine months ended
September 30, 2003 were $2.9 million or 6.5% of gross sales and $8.8 million or
6.6% of gross sales compared to $2.7 million or 6.8% of gross sales and $8.6
million or 7.1% of gross sales during the same periods last year. The decrease
in gross returns and allowances, as a percentage of sales, for the three months
and nine months ended September 30, 2003 was primarily due to favorable trends
in actual customer return activity.
GROSS PROFIT. Gross profit for the three months and nine months ended September
30, 2003 was $12.6 million or 30.4% of sales and $38.7 million or 31.4% of sales
compared to $11.2 million or 30.4% of sales and $35.1 million or 31.0% of sales
during the same periods last year.
Gross profit for the three months ended September 30, 2003, as a percentage of
sales, was flat when compared to the same period one year ago with the product
margin improvement offset by higher shipping costs. The increase in the gross
profit percentage for the nine months ended September 30, 2003 was primarily due
to an increase in product margins which were aided by an increase in sales of
higher margin, direct import products offset somewhat by higher shipping costs
largely due to an increase in the average weight of outgoing shipments to our
customers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months and nine months ended September 30,
2003 were $11.4 million or 27.7% of sales and $35.0 million or 28.5% of sales
compared to $10.8 million or 29.4% of sales and $32.9 million or 29.2% of sales
for the same periods last year.
Selling, general and administrative expenses, as a percentage of sales, for the
third quarter and the nine months ended September 30, 2003 were lower compared
to the same periods last year primarily due to higher Internet sales, improved
catalog productivity and lower order processing costs as a result of the
increase in sales generated through the Internet. For the three months ended
September 30, 2003, the increase in dollars, compared to the same period last
year, in selling, general and administrative expenses was primarily due to
higher advertising spending from the increase in the catalog circulation and
increased order fulfillment costs from the higher sales volume. For the nine
months ended September 30, 2003, the increase
8
in dollars, compared to the same period last year, in selling, general, and
administrative expenses was primarily due to higher general and administrative
expenses due to increased facility costs as a result of leasing additional
temporary warehouse space, additional costs incurred in moving inventory to a
new smaller leased warehouse and increased costs related to medical claims,
workers compensation and other business insurance.
Total catalog circulation during the third quarter and the first nine months of
2003 was 9.9 million and 30.3 million catalogs compared to 9.6 million and 30.2
million catalogs during the same periods last year. We mailed nine catalog
editions, consisting of three main catalogs, three Buyer's Club Advantage(TM)
catalogs and three specialty catalog editions, during the three months ended
September 30, 2003 and 2002. We mailed 25 catalog editions, consisting of nine
main catalogs, nine Buyer's Club Advantage(TM) catalogs and seven specialty
catalog editions, during the nine months ended September 30, 2003 compared to 27
catalog editions, consisting of nine main catalogs, nine Buyer's Club Advantage
(TM) catalogs and nine specialty catalog editions, during the same period last
year.
Advertising expense for the third quarter and the first nine months of 2003 was
$6.2 million or 15.0% of sales and $18.7 million or 15.2% of sales compared to
$6.0 million or 16.4% of sales and $18.6 million or 16.5% of sales for the same
periods last year. The decrease in advertising expense for the third quarter and
the first nine months of 2003, as a percentage of sales, compared to the same
periods last year was primarily due to the increase in sales generated from
unique product offerings on the Internet and the improved catalog productivity.
The minor increase in advertising dollars for the third quarter and nine months
ended September 30, 2003 was primarily due to an increase in the catalog
circulation.
EARNINGS FROM OPERATIONS. Earnings from operations for the three months ended
September 30, 2003 were $1.1 million compared to $0.4 million during the same
period last year. Earnings from operations for the nine months ended September
30, 2003 were $3.6 million compared to $2.1 million for the same period last
year.
INTEREST EXPENSE. We did not borrow under the revolving line of credit during
the three and nine months ended September 30, 2003 and 2002.
NET EARNINGS. Net earnings for the three months and nine months ended September
30, 2003 were $0.7 million and $2.3 million compared to $0.3 million and $1.4
million for the same periods last year.
SEASONALITY AND QUARTERLY RESULTS
The majority of our sales historically occur during the second half of the year.
The seasonal nature of our business is due to our focus on outdoor merchandise
and related accessories for the fall, as well as winter apparel and gifts for
the holiday season. We expect this seasonality will continue in the future. In
anticipation of increased sales activity during the third and fourth fiscal
quarters, we incur significant additional expenses for hiring employees and
building inventory levels.
The following table sets forth certain unaudited financial information for each
of the quarters shown (in thousands, except per share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
2003
Sales $ 43,749 $ 38,041 $ 41,213
Gross profit 14,197 11,944 12,541
Earnings from operations 1,467 1,042 1,117
Net earnings 957 646 710
Net diluted earnings per share .19 .12 .13
2002
Sales $ 41,465 $ 34,791 $ 36,746 $ 66,312
Gross profit 13,303 10,551 11,189 23,564
Earnings from operations 1,216 494 366 4,549
Net earnings 784 317 269 2,647
Net diluted earnings per share .16 .06 .05 .53
9
LIQUIDITY AND CAPITAL RESOURCES
We meet our operating cash requirements through funds generated from operations
and borrowings under our revolving line of credit.
WORKING CAPITAL. We had working capital of $20.6 million as of September 30,
2003 compared to $15.2 million as of September 30, 2002 and $18.1 million as of
December 31, 2002, with current ratios of 1.69 to 1, 1.62 to 1 and 1.63 to 1,
respectively. We purchase large quantities of manufacturers' closeouts and
direct imports, particularly in footwear and apparel merchandise categories. The
seasonal nature of the merchandise may require that it be held for several
months before being offered in a catalog. This can result in increased inventory
levels and lower inventory turnover, thereby increasing our working capital
requirements and related carrying costs.
We offer our Buyer's Club members an installment credit plan with no finance
fees, known as the "Buyer's Club 4-Pay Plan". Each of the four consecutive
monthly installments is billed directly to customers' credit cards. We had
installment receivables of approximately $1.5 million at September 30, 2003
compared to approximately $1.4 million at September 30, 2002 and approximately
$2.3 million at December 31, 2002. The installment plan will continue to require
the allocation of working capital, which we expect to fund from operations and
availability under our revolving credit facility.
We have a Credit Agreement, dated September 15, 2003, with Wells Fargo Bank,
National Association, providing a revolving line of credit up to $15.0 million,
subject to an adequate borrowing base for borrowings greater than $10.0 million,
expiring September 30, 2005. The revolving line of credit is for working capital
and letters of credit. Letters of credit may not exceed $10.0 million at any one
time. Funding under the credit facility if borrowings exceed $10.0 million is
limited to a collateral base of 50% of eligible inventory plus 75% of eligible
trade accounts receivable. Borrowings bear interest at the bank's prime rate
less 0.5% or, at the Company's option, fixed over short term periods, LIBOR plus
2.15 percentage points, provided certain financial ratios are met. The revolving
line of credit is collateralized by substantially all of our assets. All
borrowings are subject to various covenants, which include year-to-date
earnings, current ratio, tangible net worth and total liabilities divided by
tangible net worth. The agreement also prohibits the payment of dividends to
shareholders, without the consent of the bank. As of September 30, 2003,
September 30, 2002 and December 31, 2002, we were in compliance with all
applicable covenants under the revolving line of credit agreement. We had no
borrowings against the revolving line of credit as of September 30, 2003,
September 30, 2002 and December 31, 2002. Outstanding letters of credit were
$1.2 million at September 30, 2003 compared to $1.0 million at September 30,
2002 and $2.6 million at December 31, 2002.
OPERATING ACTIVITIES. Cash flows used in operating activities for the nine
months ended September 30, 2003 were $5.4 million compared to $5.8 million for
the same period last year. The decrease in cash flows used in operating
activities was primarily the result of the increase in net earnings and lower
vendor payments offset somewhat by higher inventory levels due primarily to
several seasonal, opportunistic product purchases.
INVESTING ACTIVITIES. Cash flows used in investing activities for the nine
months ended September 30, 2003 were $0.6 million compared to $0.4 million for
the same period last year.
FINANCING ACTIVITIES. Cash flows used in financing activities during the nine
months ended September 30, 2003 were $0.3 million compared to cash flows
provided by financing activities of $0.3 million during the same period last
year. The change in cash flows from financing activities during the nine months
ended September 30, 2003, compared to the prior year, was largely due to the
Company's repurchase of its common stock.
We believe that cash flows from operations and borrowing capacity under our
revolving credit facility will be sufficient to fund operations and future
growth for the next twelve months.
FORWARD-LOOKING STATEMENTS
This report may contain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. We use words such as "may," "believe," "estimate," "plan," "expect,"
"intend," "anticipate" and similar expressions to identify forward looking
statements. Actual results could differ materially from those projected in the
forward-looking statements due to a number of factors, including general
economic conditions, a changing market environment for our products and the
market acceptance of our product offerings as well as the factors set forth in
Exhibit 99 "Risk Factors" to the Company's Annual Report on Form 10-K for the
year ended December 31, 2002 filed with the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company does not have any material, near-term, market rate risk.
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ITEM 4. CONTROLS AND PROCEDURES
The Company's management evaluated, with the participation of the Company's
Chief Executive Officer and Chief Financial Officer, the effectiveness of the
Company's disclosure controls and procedures as of the end of the period covered
by this report. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms.
There were no changes in the Company's internal control over financial reporting
that occurred during the Company's last fiscal quarter that have materially
affected, or are reasonably likely to materially affect the Company's internal
control over financial reporting.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Credit Agreement by and between The Sportsman's
Guide, Inc., and Wells Fargo Bank, National
Association dated September 15, 2003.
31 Section 302 Certifications
32 Section 906 Certifications
(b) Reports on Form 8-K
On July 11, 2003, the Company filed a Form 8-K under Item 12
reporting in a press release expected sales and earnings per
share for the quarter ended June 30, 2003.
On July 29, 2003, the Company filed a Form 8-K under Item 12
reporting in a press release its financial results for the
quarter ended June 30, 2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE SPORTSMAN'S GUIDE, INC.
Date: November 4, 2003
/s/Charles B. Lingen
-----------------------------------
Charles B. Lingen
Executive Vice President of Finance
and Administration/CFO
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