-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M/pgwcltfoH/YETO0MXy01q9J8MrhfPEMV4RNRVG5U2U8mR1a1qK1t0t3eNvQcfN ILblUtI9hoOg0MXOF0kOAg== 0000950134-04-012012.txt : 20040811 0000950134-04-012012.hdr.sgml : 20040811 20040811162316 ACCESSION NUMBER: 0000950134-04-012012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPORTSMANS GUIDE INC CENTRAL INDEX KEY: 0000791450 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 411293081 STATE OF INCORPORATION: MN FISCAL YEAR END: 0103 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15767 FILM NUMBER: 04967393 BUSINESS ADDRESS: STREET 1: 411 FARWELL AVENUE SO CITY: ST PAUL STATE: MN ZIP: 55075 BUSINESS PHONE: 6124513030 MAIL ADDRESS: STREET 1: 411 FARWELL AVE CITY: S ST PAUL STATE: MN ZIP: 55075 10-Q 1 c87065e10vq.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended June 30, 2004 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from ________ to _____. Commission File No. 015767 ---------------------------------- THE SPORTSMAN'S GUIDE, INC. (Exact name of registrant as specified in its charter) MINNESOTA 41-1293081 (State or other jurisdiction (I.R.S. Employer Identification Number) of incorporation or organization) 411 FARWELL AVE., SO. ST. PAUL, MINNESOTA 55075 (Address of principal executive offices) (651) 451-3030 (Registrant's telephone number, including area code) ---------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X] As of August 10, 2004, there were 4,709,305 shares of the registrant's Common Stock outstanding. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS THE SPORTSMAN'S GUIDE, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands of dollars)
June 30, June 30, December 31, 2004 2003 2003 -------- -------- ------------ ASSETS CURRENT ASSETS Cash and cash equivalents $ 16,534 $ 11,497 $ 32,054 Accounts receivable - net 1,935 1,682 3,034 Inventory 25,315 23,946 18,874 Promotional material 2,590 1,889 2,565 Prepaid expenses and other 2,416 2,034 1,871 Deferred income taxes 2,900 2,525 3,176 -------- -------- -------- Total current assets 51,690 43,573 61,574 PROPERTY AND EQUIPMENT - NET 1,813 2,440 2,248 -------- -------- -------- Total assets $ 53,503 $ 46,013 $ 63,822 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 15,040 $ 13,370 $ 18,950 Accrued expenses 3,954 3,172 5,891 Income taxes payable 417 691 3,107 Deferred revenue 4,734 3,729 4,623 Returns reserve 1,941 1,528 2,240 Customer deposits and other liabilities 2,099 1,485 2,016 -------- -------- -------- Total current liabilities 28,185 23,975 36,827 LONG-TERM LIABILITIES 133 218 187 -------- -------- -------- Total liabilities 28,318 24,193 37,014 COMMITMENTS AND CONTINGENCIES -- -- -- SHAREHOLDERS' EQUITY Common Stock-$.01 par value; 36,800,000 shares authorized; 4,707,555 shares issued and outstanding at June 30, 2004, 4,723,860 issued and outstanding at June 30, 2003 and 4,826,321 issued and outstanding at December 31, 2003 47 47 48 Additional paid-in capital 8,033 11,184 11,616 Accumulated comprehensive loss (3) -- -- Retained earnings 17,108 10,589 15,144 -------- -------- -------- Total shareholders' equity 25,185 21,820 26,808 -------- -------- -------- Total liabilities and shareholders' equity $ 53,503 $ 46,013 $ 63,822 ======== ======== ========
See accompanying notes to consolidated financial statements. 2 THE SPORTSMAN'S GUIDE, INC. CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) For the Three Months and Six Months Ended June 30, 2004 and 2003 (In thousands, except per share data)
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 2004 2003 2004 2003 -------- -------- -------- -------- Sales $ 38,861 $ 38,041 $ 83,455 $ 81,790 Cost of sales 26,724 26,097 57,190 55,649 -------- -------- -------- -------- Gross profit 12,137 11,944 26,265 26,141 Selling, general and administrative expenses 10,929 10,902 23,275 23,632 -------- -------- -------- -------- Earnings from operations 1,208 1,042 2,990 2,509 Miscellaneous income (expense), net 38 (33) 80 (4) -------- -------- -------- -------- Earnings before income taxes 1,246 1,009 3,070 2,505 Income tax expense 449 363 1,106 902 -------- -------- -------- -------- Net earnings $ 797 $ 646 $ 1,964 $ 1,603 ======== ======== ======== ======== Net earnings per share: Basic $ .17 $ .14 $ .42 $ .34 ======== ======== ======== ======== Diluted $ .15 $ .12 $ .37 $ .31 ======== ======== ======== ======== Weighted average common and common equivalent shares outstanding: Basic 4,703 4,748 4,728 4,753 ======== ======== ======== ======== Diluted 5,279 5,249 5,324 5,184 ======== ======== ======== ========
See accompanying notes to consolidated financial statements. 3 THE SPORTSMAN'S GUIDE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Six Months Ended June 30, 2004 and 2003 (In thousands of dollars)
2004 2003 -------- -------- Cash flows from operating activities: Net earnings $ 1,964 $ 1,603 Adjustments to reconcile net earnings to net cash used in operating activities: Depreciation and amortization 628 662 Deferred income taxes 252 (187) Tax benefit related to exercise of stock options 734 -- Other -- 16 Changes in operating assets and liabilities: Accounts receivable 1,099 1,332 Inventory (6,441) (3,353) Promotional material (25) 651 Prepaid expenses and other (548) (905) Income taxes payable (2,690) (1,191) Accounts payable (3,910) (2,860) Accrued expenses (1,937) (724) Customer deposits and other liabilities (135) 152 -------- -------- Cash flows used in operating activities (11,009) (4,804) Cash flows from investing activities: Purchases of property and equipment (193) (461) Other -- 14 -------- -------- Cash flows used in investing activities (193) (447) Cash flows from financing activities: Proceeds from exercise of stock options 830 58 Repurchase of common stock (5,148) (462) -------- -------- Cash flows used in financing activities (4,318) (404) -------- -------- Decrease in cash and cash equivalents (15,520) (5,655) Cash and cash equivalents at beginning of the period 32,054 17,152 -------- -------- Cash and cash equivalents at end of the period $ 16,534 $ 11,497 ======== ======== Supplemental disclosure of cash flow information Cash paid during the periods for: Income taxes $ 2,810 $ 2,280
See accompanying notes to consolidated financial statements. 4 THE SPORTSMAN'S GUIDE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1: Basis of Presentation The accompanying financial statements are unaudited and reflect all adjustments which are normal and recurring in nature, and which, in the opinion of management, are necessary for a fair presentation. Reclassifications have been made to prior year financial information wherever necessary to conform to the current year presentation. Results of operations for the interim periods are not necessarily indicative of full-year results. In preparing the Company's consolidated financial statements, management is required to make estimates and assumptions that affect reported amounts of assets and liabilities and related revenues and expenses. Actual results could differ from the estimates used by management. The accompanying consolidated financial statements include the accounts of the company and its wholly-owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation. The Company's fiscal quarter ends on the Sunday nearest June 30 for 2004 and 2003, but for clarity of presentation, all periods are described as if the three and six month periods end June 30. Fiscal second quarters 2004 and 2003 each consisted of 13 weeks. Amounts billed to customers for shipping and handling are recorded in revenues at the time of shipment. Sales include shipping and handling revenues of $4.9 million and $5.0 million for the three months ended June 30, 2004 and 2003 and $10.6 million and $10.8 million for the six months ended June 30, 2004 and 2003. Note 2: Stock Options Stock options issued to employees are accounted for under the intrinsic value method. No stock-based compensation cost is reflected in net earnings, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings and earnings per share as if the Company had applied the fair value method of accounting for stock options (in thousands, except per share data):
Three months ended June 30, Six months ended June 30, --------------------------- ------------------------- 2004 2003 2004 2003 ------- ------- --------- --------- Net earnings as reported $ 797 $ 646 $ 1,964 $ 1,603 Deduct: Total stock-based employee compensation expense under the fair value method for all awards, net of related tax effects 258 116 490 233 ------- ------- --------- --------- Pro-forma net earnings $ 539 $ 530 $ 1,474 $ 1,370 ======= ======= ========= ========= Earnings Per Share: Basic - as reported $ .17 $ .14 $ .42 $ .34 Basic - pro-forma .12 .12 .33 .30 Diluted - as reported $ .15 $ .12 $ .37 $ .31 Diluted - pro-forma .11 .10 .29 .27
5 Note 3: Net Earnings Per Share The Company's basic net earnings per share amounts have been computed by dividing net earnings by the weighted average number of outstanding common shares. Diluted net earnings per share amounts have been computed by dividing net earnings by the weighted average number of outstanding common shares and common share equivalents relating to the stock options and warrants, when dilutive. For the three months and six months ended June 30, 2004, 575,611 and 595,191 common share equivalents were included in the computation of diluted net earnings per share. For the three months and six months ended June 30, 2003, 500,466 and 431,075 common share equivalents were included in the computation of diluted net earnings per share. All outstanding options during the three months and six months ended June 30, 2004 were included in the computation of diluted earnings per share because the average market price of the common shares during the period exceeded the exercise price of the options. All outstanding options during the three months ended June 30, 2003 were included in the computation of diluted earnings per share because the average market price of the common shares during the period exceeded the exercise price of the options. Options to purchase 7,475 shares of common stock with a weighted average exercise price of $8.70 were outstanding during the six months ended June 30, 2003, but were not included in the computation of diluted earnings per share because their exercise price exceeded the average market price of the common shares during the period. Note 4: Legal Proceedings In March 2003, the Company was notified by the Bureau of Industry, United States Department of Commerce (BIS) that BIS has reason to believe the Company violated Export Administration Regulations by exporting optical sighting devices for firearms and associated parts to Canada and other destinations without obtaining required authorization from BIS. BIS asserts the Company committed 61 separate violations for shipments from October 1999 to March 2002. The potential maximum civil penalty is up to $11,000 for each violation. The Company is currently in discussions with BIS to settle the matter prior to issuance of a charging letter. The BIS has initially offered to settle the matter for a penalty of $207,500, representing 32 violations at $1,500 per violation and 29 violations at $5,500 per violation. The Company believes the settlement offer is excessive based on civil penalties imposed in similar cases and intends to continue negotiations with BIS. While the Company cannot predict the outcome of this matter at this time, management believes the matter will not have a material adverse impact on the Company. Note 5: Repurchase of Common Stock On May 5, 2003, the Company announced that its board of directors authorized a plan to repurchase up to ten percent of its outstanding common stock in the open market or in privately negotiated transactions over the next 12 months. Under this plan 259,644 shares of common stock at a total cost of $5,148,000 were repurchased during the six months ended June 30, 2004. On May 13, 2004, the Company announced that its board of directors authorized a new plan to repurchase up to ten percent of its outstanding common stock in the open market or in privately negotiated transactions over the next 12 months. No shares of common stock were repurchased under this new plan during the quarter ended June 30, 2004. Note 6: Subsequent Events The Company's fiscal quarter ends on the Sunday nearest June 30 for 2004 and 2003, but for clarity of presentation, all periods are described as if the quarter end is June 30. Fiscal second quarter 2004 ended June 27. The following events occurred subsequent to the end of fiscal second quarter 2004. On June 29, 2004, the Company entered into an amended Credit Agreement with Wells Fargo Bank National Association, providing a revolving line of credit up to $15.0 million and a term loan of $12.5 million, expiring September 30, 2007. The revolving line of credit is for working capital and letters of credit, and the proceeds from the term loan are for financing acquisitions of other business operations. Letters of credit may not exceed $10.0 6 million at any one time. Funding under the line of credit if combined borrowings under the line of credit and term loan exceed $20.0 million, is limited to a collateral base of 50% of eligible inventory plus 75% of eligible trade accounts receivable. Borrowings from the revolving line of credit and term loan bear interest at the bank's prime rate less 0.15% or, at the Company's option, fixed rate term, LIBOR plus 2.50 percentage points, provided certain financial ratios are met. Repayments of the term loan are payable annually each September as follows: $2,500,000 payable September 30, 2005, $5,000,000 payable September 30, 2006 and $5,000,000 payable September 30, 2007. The revolving line of credit and the term loan are collateralized by substantially all of the assets of the Company. All borrowings are subject to various covenants (while the term loan remains outstanding)which include funded debt to earnings before interest, income taxes, depreciation and amortization ratio and a fixed charge coverage ratio. The agreement also prohibits the payment of dividends to shareholders without consent of the bank. On June 29, 2004, the Company, through a newly-formed wholly-owned subsidiary TGW Acquisition Corporation, acquired 100% of the outstanding membership interests of The Golf Warehouse, L.L.C. ("TGW"), from Falconhead Capital LLC, a private investment firm, and members of TGW management pursuant to a Membership Interest Purchase Agreement dated as of June 29, 2004. The purchase price for the membership interests was $30 million, subject to pre-and post-closing adjustments, and was funded from the Company's working capital and borrowings under the Company's credit facility with Wells Fargo Bank, National Association. The terms of the Membership Interest Purchase Agreement were negotiated on an arm's length basis between the parties. The Golf Warehouse is a leading online and catalog retailer of golf equipment, apparel and accessories with office and warehouse facilities in Wichita, Kansas. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We are a leading marketer of value priced outdoor gear and general merchandise, with a special emphasis on outdoor clothing, equipment and footwear. We market and sell our merchandise through main, specialty and Buyer's Club Advantage(TM) catalogs and two e-commerce Web sites. Our catalogs as well as our Web sites offer high quality products at low prices. Our catalogs are advertised as The "Fun-to-Read" Catalog(R) and our primary Web site is advertised as the "Fun-to-Browse" Website(R). Our Web sites include www.sportsmansguide.com, our online retail store modeled on our print catalogs and www.bargainoutfitters.com, our online liquidation outlet. Our business was started in 1970. Over time, our product offerings and marketing efforts have broadened from the deer hunter to include those interested in pursuing and living the outdoor lifestyle in general and the value-oriented outdoorsman in particular. In 1992, we began our value pricing strategy of offering outdoor equipment and supplies at discount prices, later adding government surplus, manufacturers' close-outs and other merchandise lines. In 1994, we began to publish specialty catalogs which allowed us to utilize a customized marketing plan to individual customer groups. Sales generated through the Internet have grown rapidly over the last several years. We launched our online retail store in April 1998 and began posting our catalogs and full product offerings on the site in February 1999. Our e-commerce offerings generated over $69.0 million in sales in 2003 compared to $1.3 million in 1998. Product sales on the sites accounted for approximately 42% of our sales in the first half of 2004 compared to less than 1% for all of 1998. In the fall of 2000, we began to aggressively promote and sell the Buyer's Club membership program. In addition, unique Buyer's Club Advantage(TM) catalogs were developed and promoted exclusively to members allowing us to maximize sales and profitability from our best customers. We believe that our value pricing, specialty catalog titles, the Internet and Buyer's Club memberships have been important to our sales and profitability growth. Our sales have increased from $43 million in 1992 to approximately $195 million in 2003. 7 FISCAL YEAR Our fiscal quarter ends on the Sunday nearest June 30 for 2004 and 2003, but for clarity of presentation, all periods are described as if the quarter end is June 30. Fiscal second quarter 2004 and 2003 each consisted of 13 weeks. CRITICAL ACCOUNTING POLICIES Sales are recorded at the time of shipment along with a provision for anticipated merchandise returns, net of exchanges, which are recorded based upon historical experience and current expectations. Amounts billed to customers for shipping and handling are recorded in sales at the time of shipment. Customers can purchase one year memberships in our Buyer's Club for a $29.99 annual fee. We also offer two year memberships for $59.97. Club members receive merchandise discounts of 10% on regularly priced items and 5% on ammunition. Membership fees are deferred and recognized in income as the individual members place orders and receive discounts. Any remaining deferred membership fees are recognized as sales after the expiration of the membership. The cost of producing and mailing catalogs is deferred and expensed over the estimated useful lives of the catalogs. Catalog production and mailing costs are amortized over periods ranging from four to six months from the in-home date of the catalog with the majority of the costs amortized within the first month of the catalog's life cycle. We estimate the in-home date to be one week from the known mailing date of the catalog. The ongoing cost of developing and maintaining our customer list is charged to operations as incurred. All other advertising costs are expensed as incurred. Stock options issued to employees are accounted for under the intrinsic value method. Pro-forma disclosures as if the fair value method were used are included in Note 2 to the Consolidated Financial Statements. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, information from our Consolidated Statements of Earnings expressed as a percentage of sales:
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 2004 2003 2004 2003 ----- ----- ----- ----- Sales 100.0% 100.0% 100.0% 100.0% Cost of sales 68.8 68.6 68.5 68.0 ----- ----- ----- ----- Gross profit 31.2 31.4 31.5 32.0 Selling, general and administrative expenses 28.1 28.7 27.9 28.9 ----- ----- ----- ----- Earnings from operations 3.1 2.7 3.6 3.1 Miscellaneous income (expense) 0.1 -- 0.1 -- ----- ----- ----- ----- Earnings before income taxes 3.2 2.7 3.7 3.1 Income tax expense 1.2 1.0 1.3 1.1 ----- ----- ----- ----- Net earnings 2.0% 1.7% 2.4% 2.0% ===== ===== ===== =====
Three months and six months ended June 30, 2004 compared to three months and six months ended June 30, 2003 SALES. Sales for the three months and six months ended June 30, 2004 of $38.9 million and $83.5 million were $0.9 million or 2.3% and $1.7 million or 2.0% higher than sales of $38.0 million and $81.8 million during the same periods last year. The increase in sales for the second quarter and first half of 2004 was primarily due to higher sales generated from the Internet. For the second quarter and first half ended June 30, 2004, sales generated through the catalogs decreased from the prior year's sales level primarily as a result of lower than anticipated customer response rates. As of the end of the second quarter 2004, the Buyer's Club membership had increased to approximately 362,000, up 3% over the 351,000 reported at December 31, 2003 and up 8% over the membership count one year ago. 8 Sales generated through the Internet for the second quarter and the first half of 2004 were approximately 43% and 42% of total catalog and Internet sales, compared to approximately 36% and 35%, respectively, of total catalog and Internet sales during the same periods last year. We define sales generated through the Internet as sales that are derived from our web sites, catalog orders processed online and online offers placed by telephone. Internet related sales continue to grow, period over period, as we continue to make enhancements to our Web sites and implement and improve upon various marketing and merchandising programs. Gross returns and allowances for the three months and six months ended June 30, 2004 were $2.6 million or 6.2% of gross sales and $5.7 million or 6.3% of gross sales compared to $2.6 million or 6.3% of gross sales and $5.9 million or 6.7% of gross sales during the same periods last year. The decrease in gross returns and allowances, as a percentage of sales, for the three months and six months ended June 30, 2004 was primarily due to favorable trends in actual customer return activity. GROSS PROFIT. Gross profit for the three months and six months ended June 30, 2004 was $12.1 million or 31.2% of sales and $26.3 million or 31.5% of sales compared to $11.9 million or 31.4% of sales and $26.1 million or 32.0% of sales during the same periods last year. For the three months and six months ended June 30, 2004, the reduction in gross profit, as a percentage of sales, was primarily from a decrease in product margins due to promotional pricing and a higher percentage of sales in lower margin, factory direct merchandise items. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for the three months and six months ended June 30, 2004 were $10.9 million or 28.1% of sales and $23.3 million or 27.9% of sales compared to $10.9 million or 28.7% of sales and $23.6 million or 28.9% of sales for the same periods last year. For the second quarter of 2004, selling, general and administrative expenses, as a percentage of sales, were lower compared to the same quarter a year ago with the higher Internet related sales having a favorable impact on order processing costs and lower order fulfillment costs as a result of lower backorder levels and an increase in the number of factory direct shipments. For the first half of 2004, selling, general and administrative expenses, as a percentage of sales, were lower compared to the same period a year ago with the higher Internet related sales having a favorable impact on the overall advertising ratio to total sales and lower order processing costs, which were again directly related to the increase in sales generated through the Internet. For the second quarter of 2004, selling, general and administrative expenses, in dollars, were the same as the same period a year ago with the increased advertising costs from an increase in catalog circulation and an increase in the medical claims being offset somewhat by the lower order processing and order fulfillment costs. For the first half of 2004, the decrease in selling, general and administrative expenses, in dollars, was primarily due to lower order processing and order fulfillment costs. Total catalog circulation during the second quarter and first half of 2004 was 9.9 million and 21.0 million catalogs compared to 9.2 million and 20.4 million catalogs during the same periods last year. We mailed eight catalog editions consisting of three main catalogs, three Buyer's Club Advantage(TM) catalogs and two specialty catalog editions during the three months ended June 30, 2004 compared to seven catalog editions consisting of three main catalogs, three Buyer's Club Advantage(TM) catalogs and one specialty catalog edition during the three months ended June 30, 2003. We mailed 17 catalog editions consisting of six main catalogs, six Buyer's Club Advantage(TM) catalogs and five specialty catalog editions during the six months ended June 30, 2004 compared to 16 catalog editions consisting of six main catalogs, six Buyer's Club Advantage(TM) catalogs and four specialty catalog editions during the same period last year. Advertising expense for the three months and six months ended June 30, 2004 was $5.8 million or 15.0% of sales and $12.5 million or 14.9% of sales compared to $5.7 million or 14.9% of sales and $12.6 million or 15.4% of sales for the same periods last year. For the second quarter of 2004, the increase in advertising expense, as a percentage of sales, compared to the same period last year was primarily due to lower than anticipated customer response rates on the catalogs offset for the most part by higher Internet sales. For the first half of 2004, the decrease in advertising expense, as a percentage of sales, compared to the same period last year was due primarily to the increase in sales generated through the Internet. Advertising expense, in dollars, for the second quarter and the first half of 2004 was higher compared to the same period last year primarily from the increase in catalog circulation. EARNINGS FROM OPERATIONS. Earnings from operations for the three months and six months ended June 30, 2004 were $1.2 million and $3.0 million compared to $1.0 million and $2.5 million for the same periods last year. 9 INTEREST EXPENSE. We did not borrow under the revolving line of credit during the three and six months ended June 30, 2004 and 2003. NET EARNINGS. As a result of the above factors, net earnings for the three months and six months ended June 30, 2004 were $0.8 million and $2.0 million compared to $0.6 million and $1.6 million for the same periods last year. SEASONALITY AND QUARTERLY RESULTS The majority of our sales historically occur during the second half of the year. The seasonal nature of our business is due to our focus on outdoor merchandise and related accessories for the fall, as well as winter apparel and gifts for the holiday season. We expect this seasonality will continue in the future. In anticipation of increased sales activity during the third and fourth fiscal quarters, we incur significant additional expenses for hiring employees and building inventory levels. The following table sets forth certain unaudited financial information for each of the quarters shown (in thousands, except per share data):
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- 2004 Sales $44,594 $38,861 Gross profit 14,128 12,137 Earnings from operations 1,782 1,208 Net earnings 1,167 797 Net earnings per share: Basic .25 .17 Diluted .22 .15 2003 Sales $43,749 $38,041 $41,213 $71,700 Gross profit 14,197 11,944 12,541 25,832 Earnings from operations 1,467 1,042 1,117 5,971 Net earnings 957 646 710 3,845 Net earnings per share: Basic .20 .14 15 .80 Diluted .19 .12 13 .71
LIQUIDITY AND CAPITAL RESOURCES We meet our operating cash requirements through funds generated from operations and borrowings under our revolving line of credit. WORKING CAPITAL. We had working capital of $23.5 million as of June 30, 2004 compared to $24.7 million as of December 31, 2003, with current ratios of 1.8 to 1 and 1.7 to 1, respectively. We purchase large quantities of manufacturers' closeouts and direct imports, particularly in footwear and apparel merchandise categories. The seasonal nature of the merchandise may require that it be held for several months before being offered in a catalog. This can result in increased inventory levels and lower inventory turnover, thereby increasing our working capital requirements and related carrying costs. We offer our Buyer's Club members an installment credit plan with no finance fees, known as the "Buyer's Club 4-Pay Plan". Each of the four consecutive monthly installments is billed directly to customers' credit cards. We had installment receivables of $1.4 million at June 30, 2004 compared to $2.4 million at December 31, 2003. The installment plan will continue to require the allocation of working capital, which we expect to fund from operations and availability under our revolving credit facility. 10 On June 29, 2004, we entered into an amended Credit Agreement with Wells Fargo Bank National Association, providing a revolving line of credit up to $15.0 million and a term loan of $12.5 million, expiring September 30, 2007. The revolving line of credit is for working capital and letters of credit, and the proceeds from the term loan are for financing acquisitions of other business operations. Letters of credit may not exceed $10.0 million at any one time. Funding under the line of credit if combined borrowings under the line of credit and term loan exceed $20.0 million, is limited to a collateral base of 50% of eligible inventory plus 75% of eligible trade accounts receivable. Borrowings from the revolving line of credit and term loan bear interest at the bank's prime rate less 0.15% or, at our option, fixed rate term, LIBOR plus 2.50 percentage points, provided certain financial ratios are met. Repayments of the term loan are payable annually each September as follows: $2,500,000 payable September 30, 2005, $5,000,000 payable September 30, 2006 and $5,000,000 payable September 30, 2007. The revolving line of credit and the term loan are collateralized by substantially all of our assets. All borrowings are subject to various covenants (while the term loan remains outstanding), which include funded debt to earnings before interest, income taxes, depreciation and amortization ratio and a fixed charge coverage ratio. The agreement also prohibits the payment of dividends to shareholders without consent of the bank. As of June 30, 2004, we were in compliance with all applicable covenants under the revolving line of credit agreement. We had no borrowings against the revolving credit line as of June 30, 2004 and December 31, 2003. Outstanding letters of credit were $2.7 million at June 30, 2004 compared to $2.5 million at December 31, 2003. OPERATING ACTIVITIES. Cash flows used in operating activities for the six months ended June 30, 2004 were $11.0 million compared to $4.8 million for the same period last year. The increase in cash flows used in operating activities was primarily the result of higher inventory levels, increased payments to vendors and an increase in the cash payment of income taxes. INVESTING ACTIVITIES. Cash flows used in investing activities during the six months ended June 30, 2004 were $0.2 million compared to $0.4 million during the same period last year. FINANCING ACTIVITIES. Cash flows used in financing activities during the six months ended June 30, 2004 were $4.3 million compared to $0.4 million during the same period last year. The change in cash flows used in financing activities during the first half of 2004 was largely due to the repurchase of our common stock during the six months ended June 30, 2004. On May 5, 2003, we announced that our board of directors authorized a plan to repurchase up to ten percent of our outstanding common stock in the open market or in privately negotiated transactions over the next 12 month period. Under this plan, 259,644 shares of common stock at a total cost of approximately $5.1 million were repurchased during the first half of 2004. During the second quarter and first half of 2004 and 2003, we did not borrow under the revolving line of credit. Subsequent to the end of the second quarter of 2004, we acquired 100% of the outstanding membership interests of The Golf Warehouse, L.L.C. pursuant to a Membership Interest Purchase Agreement. The purchase price for the membership interests was $30 million, subject to pre- and post-closing adjustments. The acquisition was funded from working capital and borrowings under our newly amended credit facility. We believe that cash flows from operations and borrowing capacity under our revolving credit facility will be sufficient to fund operations for the next 12 months. FORWARD-LOOKING STATEMENTS This report may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We use words such as "may," "believe," "estimate," "plan," "expect," "intend," "anticipate" and similar expressions to identify forward-looking statements. These forward-looking statements involve risk and uncertainties. Actual results could differ materially from those projected in the forward-looking statements due to a number of factors, including general economic conditions, a changing market environment for our products and the market acceptance of our product offerings as well as the factors set forth in Exhibit 99 "Risk Factors" to the Company's Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission. 11 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. The Company does not have any material, near-term, market rate risk. ITEM 4. CONTROLS AND PROCEDURES The Company's management evaluated, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company's disclosure controls and procedures, as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. There were no changes in the Company's internal control over financial reporting that occurred during the Company's last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In March 2003, the Company was notified by the Bureau of Industry, United States Department of Commerce (BIS) that BIS has reason to believe the Company violated Export Administration Regulations by exporting optical sighting devices for firearms and associated parts to Canada and other destinations without obtaining required authorization from BIS. BIS asserts the Company committed 61 separate violations for shipments from October 1999 to March 2002. The potential maximum civil penalty is up to $11,000 for each violation. The Company is currently in discussions with BIS to settle the matter prior to issuance of a charging letter. The BIS has initially offered to settle the matter for a penalty of $207,500, representing 32 violations at $1,500 per violation and 29 violations at $5,500 per violation. The Company believes the settlement offer is excessive based on civil penalties imposed in similar cases and intends to continue negotiations with BIS. While the Company cannot predict the outcome of this matter at this time, management believes the matter will not have a material adverse impact on the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Our annual meeting of shareholders was held May 7, 2004, at which the following matters were submitted to a vote of shareholders: 1. Election of seven directors.
NOMINEE FOR AGAINST ABSTAIN ------- --------- ------- ------- Gary Olen 3,529,717 530,331 290,011 Gregory R. Binkley 3,531,677 528,371 290,011 Charles B. Lingen 3,531,717 528,331 290,011 Leonard M. Paletz 3,504,928 555,120 290,011 William T. Sena 4,059,398 650 290,011 Jay A. Leitch 4,059,398 650 290,011 Darold D. Rath 4,059,898 150 290,011
2. Approval of the 2004 Stock Incentive Plan:
FOR AGAINST ABSTAIN BROKER NON-VOTES --- ------- ------- ---------------- 1,655,671 1,198,501 78,902 1,416,985
12 3. Ratification of the engagement of Grant Thornton LLP as independent certified public accountants for the Company for 2004:.
FOR AGAINST ABSTAIN BROKER NON-VOTES - --------- ------- ------- ---------------- 4,296,890 45,465 7,704 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Credit Agreement by and between The Sportsman's Guide, Inc. and Wells Fargo Bank, National Association dated June 29, 2004. 10.2 The Sportsman's Guide, Inc. 2004 Stock Incentive Plan 31 Rule 13a-14(a)/15d-14(a) Certifications 32 Section 1350 Certifications (b) Reports on Form 8-K On April 20, 2004, the Company filed a Form 8-K under Item 12 reporting in a press release expected sales and earnings per share for the quarter ended March 31, 2004. On April 29, 2004, the Company filed a Form 8-K under Item 12 reporting in a press release its financial results for the quarter ended March 31, 2004. 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE SPORTSMAN'S GUIDE, INC. Date: August 10, 2004 /s/ Charles B. Lingen -------------------------------------- Charles B. Lingen Executive Vice President of Finance and Administration/CFO 14 EX-10.1 2 c87065exv10w1.txt CREDIT AGREEMENT EXHIBIT 10.1 CREDIT AGREEMENT THIS AGREEMENT is entered into as of June 29, 2004, by and between THE SPORTMAN'S GUIDE, INC., a Minnesota corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank"). RECITALS Borrower has requested that Bank extend or continue credit to Borrower as described below, and Bank has agreed to provide such credit to Borrower on the terms and conditions contained herein. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Bank and Borrower hereby agree as follows: ARTICLE I CREDIT TERMS SECTION 1.1. LINE OF CREDIT. (a) Line of Credit. Subject to the terms and conditions of this Agreement, Bank hereby agrees to make advances to Borrower from time to time up to and including September 30, 2007, not to exceed at any time the aggregate principal amount of Fifteen Million Dollars ($15,000,000.00) ("Line of Credit"), the proceeds of which shall be used for working capital and to allow for standby letters of credit. Borrower's obligation to repay advances under the Line of Credit shall be evidenced by a promissory note dated June 29, 2004 ("Line of Credit Note"), all terms of which are incorporated herein by this reference. (b) Limitation on Borrowings. At any time when combined outstanding borrowings under the Line of Credit and Term Loan exceed $20,000,000.00, the outstanding borrowings under the Line of Credit, to a maximum of the principal amount set forth above, shall not at any time exceed an aggregate of Seventy Five percent (75%) of Borrower's eligible accounts receivable, plus Fifty percent (50%) of the value of Borrower's eligible inventory and eligible inventory of The Golf Warehouse, Inc. (exclusive of work in process and inventory which is obsolete, unsaleable or damaged), with value defined as the lower of cost or market value. All of the foregoing shall be determined by Bank upon receipt and review of all collateral reports required hereunder and such other documents and collateral information as Bank may from time to time require. Borrower acknowledges that said borrowing base was established by Bank with the understanding that, among other items, the aggregate of all returns, rebates, discounts, credits and allowances for the immediately preceding three (3) months at all times shall be less than ten percent (10%) of Borrower's gross sales for said period. If such dilution of Borrower's accounts for the immediately preceding three (3) months at any time exceeds ten percent (10%) of Borrower's gross sales for said period, or if there at any time exists any other matters, events, conditions or contingencies which Bank reasonably believes may affect payment of any portion of Borrower's accounts, Bank, in its sole discretion, may reduce the foregoing advance rate against eligible accounts receivable to a percentage appropriate to reflect such additional dilution and/or establish additional reserves against Borrower's eligible accounts receivable. -1- As used herein, "eligible accounts receivable" shall consist solely of trade accounts created in the ordinary course of Borrower's business, upon which Borrower's right to receive payment is absolute and not contingent upon the fulfillment of any condition whatsoever, and in which Bank has a perfected security interest of first priority, and shall not include: (i) any account which is past due more than twice Borrower's standard selling terms; (ii) that portion of any account for which there exists any right of setoff, defense or discount (except regular discounts allowed in the ordinary course of business to promote prompt payment) or for which any defense or counterclaim has been asserted; (iii) any account which represents an obligation of any state or municipal government or of the United States government or any political subdivision thereof (except accounts which represent obligations of the United States government and for which the assignment provisions of the Federal Assignment of Claims Act, as amended or recodified from time to time, have been complied with to Bank's satisfaction); (iv) any account which represents an obligation of an account debtor located in a foreign country; (v) any account which arises from the sale or lease to or performance of services for, or represents an obligation of, an employee, affiliate, partner, member, parent or subsidiary of Borrower; (vi) that portion of any account, which represents interim or progress billings or retention rights on the part of the account debtor; (vii) any account which represents an obligation of any account debtor when twenty percent (20%) or more of Borrower's accounts from such account debtor are not eligible pursuant to (i) above; (viii) that portion of any account from an account debtor which represents the amount by which Borrower's total accounts from said account debtor exceeds twenty-five percent (25%) of Borrower's total accounts; (ix) any account deemed ineligible by Bank when Bank, in its sole discretion, deems the creditworthiness or financial condition of the account debtor, or the industry in which the account debtor is engaged, to be unsatisfactory. As used herein, the term "Eligible Inventory" shall mean all of Borrower's inventory valued at cost, as reduced by an Eligible Inventory Reserve. "Eligible Inventory Reserve" means the sum of: (a) for inventory that has been held for one year or more but less than two years, 25% of cost for such inventory, plus (b) for inventory that has been held for two years or more, 50% of the cost of such inventory, plus (c) for The Sportsman's Guide Outlet, Inc., the greater of five percent (5.0%) of its inventory or the actual "shrink reserve" for The Sportsman's Guide Outlet, Inc. The parties expressly acknowledge and agree that Eligible Inventory shall include any inventory acquired with the support of a letter of credit, whether or not such inventory is in transit. -2- (c) Letter of Credit Subfeature. As a subfeature under the Line of Credit, Bank agrees from time to time during the term thereof to issue or cause an affiliate to issue Standby letters of credit for the account of Borrower (each, a "Letter of Credit" and collectively, "Letters of Credit"); provided however, that the aggregate undrawn amount of all outstanding Letters of Credit shall not at any time exceed Ten Million Dollars ($10,000,000.00). The form and substance of each Letter of Credit shall be subject to approval by Bank, in its sole discretion. No Letter of Credit shall have an expiration date subsequent to the maturity date of the Line of Credit. The undrawn amount of all Letters of Credit shall be reserved under the Line of Credit and shall not be available for borrowings thereunder. Each Letter of Credit shall be subject to the additional terms and conditions of the Letter of Credit agreements, applications and any related documents required by Bank in connection with the issuance thereof. Each drawing paid under a Letter of Credit shall be deemed an advance under the Line of Credit and shall be repaid by Borrower in accordance with the terms and conditions of this Agreement applicable to such advances; provided however, that if advances under the Line of Credit are not available, for any reason, at the time any drawing is paid, then Borrower shall immediately pay to Bank the full amount drawn, together with interest thereon from the date such drawing is paid to the date such amount is fully repaid by Borrower, at the rate of interest applicable to advances under the Line of Credit. In such event Borrower agrees that Bank, in its sole discretion, may debit any account maintained by Borrower with Bank for the amount of any such drawing. (d) Borrowing and Repayment. Borrower may from time to time during the term of the Line of Credit borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions contained herein or in the Line of Credit Note; provided however, that the total outstanding borrowings under the Line of Credit shall not at any time exceed the maximum principal amount available thereunder, as set forth above. SECTION 1.2. TERM LOAN. (a) Term Loan. Subject to the terms and conditions of this Agreement, Bank hereby agrees to make a loan to Borrower in the principal amount of Twelve Million Five Hundred Thousand Dollars ($12,500,000.00) ("Term Loan"), the proceeds of which shall be used to finance the acquisition of other business operations. Borrower's obligation to repay the Term Loan shall be evidenced by a promissory note dated as of June 29, 2004 ("Term Note"), all terms of which are incorporated herein by this reference. Bank's commitment to grant the Term Loan shall terminate on July 21, 2004. (b) Repayment. Principal and interest on the Term Loan shall be repaid in accordance with the provisions of the Term Note. (c) Prepayment. Borrower may prepay principal on the Term Loan solely in accordance with the provisions of the Term Note. SECTION 1.3. INTEREST/FEES. (a) Interest. The outstanding principal balance of each credit subject hereto shall bear interest, and the amount of each drawing paid under the Standby Letter of Credit paid to the date such amount is fully repaid by Borrower, at the rate of interest set forth in each promissory note or other instrument or document executed in connection therewith. -3- (b) Computation and Payment. Interest shall be computed on the basis of a 360-day year, actual days elapsed. Interest shall be payable at the times and place set forth in each promissory note or other instrument or document required hereby. (c) Commitment Fee. Borrower shall pay to Bank an annual non-refundable commitment fee for the Line of Credit equal to Eighteen Thousand Seven Hundred Fifty Dollars ($18,750.00), which fee shall be due and payable annually in advance, commencing August 31, 2004. (d) Commitment Fee. Borrower shall pay to Bank a non-refundable commitment fee for the Term Loan equal to Thirty Thousand Dollars ($30,000.00), which fee shall be due and payable in full as of the date of this Agreement. (e) Unused Commitment Fee. Borrower shall pay to Bank a fee equal to (.250%) per annum (computed on the basis of a 360-day year, actual days elapsed) on the average daily unused amount of the Line of Credit, which fee shall be calculated on a quarterly basis by Bank and shall be due and payable by Borrower in arrears within ten (10) days after each billing is sent by Bank. (f) Letter of Credit Fees. Borrower shall pay to Bank (i) fees upon the issuance of each Letter of Credit equal to (1.25%) per annum (computed on the basis of a 360-day year, actual days elapsed) of the face amount thereof, and (ii) fees upon the payment or negotiation of each drawing under any Letter of Credit and fees upon the occurrence of any other activity with respect to any Letter of Credit (including without limitation, the transfer, amendment or cancellation of any Letter of Credit) determined in accordance with Bank's standard fees and charges then in effect for such activity. (g) Termination Fee. If the Line of Credit is terminated prior to September 30, 2005 (other than through a refinancing with an affiliate of the Bank), a termination fee of 1% of the maximum amount of the Line of Credit will be payable to the Bank. SECTION 1.3. COLLECTION OF PAYMENTS. Borrower authorizes Bank to collect all principal, interest and fees due under each credit subject hereto by charging Borrower's deposit account number 6355031049 with Bank, or any other deposit account maintained by Borrower with Bank, for the full amount thereof. Should there be insufficient funds in any such deposit account to pay all such sums when due, the full amount of such deficiency shall be immediately due and payable by Borrower. SECTION 1.4. COLLATERAL. As security for all indebtedness of Borrower to Bank subject hereto, Borrower hereby grants to Bank security interests of first priority in all Borrower's accounts receivable and other rights to payment, general intangibles, inventory and equipment. As security for all indebtedness of Borrower to Bank subject hereto, Borrower shall cause The Golf Warehouse, Inc. to grant to Bank security interests of first priority in all accounts receivable and other rights to payment, general intangibles, inventory and equipment. All of the foregoing shall be evidenced by and subject to the terms of such security agreements, financing statements, deeds of trust and other documents as Bank shall reasonably require, all in form and substance satisfactory to Bank. Borrower shall reimburse Bank immediately upon -4- demand for all costs and expenses incurred by Bank in connection with any of the foregoing security, including without limitation, filing and recording fees and costs of appraisals, audits and title insurance. SECTION 1.5. BANKING RELATIONSHIP. The Borrower's primary operating accounts shall be maintained at the Bank or one of its affiliates. ARTICLE II REPRESENTATIONS AND WARRANTIES Borrower makes the following representations and warranties to Bank, which representations and warranties shall survive the execution of this Agreement and shall continue in full force and effect until the full and final payment, and satisfaction and discharge, of all obligations of Borrower to Bank subject to this Agreement. SECTION 2.1. LEGAL STATUS. Borrower is a corporation, duly organized and existing and in good standing under the laws of the State of Minnesota, and is qualified or licensed to do business (and is in good standing as a foreign corporation, if applicable) in all jurisdictions in which such qualification or licensing is required or in which the failure to so qualify or to be so licensed could have a material adverse effect on Borrower. SECTION 2.2. AUTHORIZATION AND VALIDITY. This Agreement and each promissory note, contract, instrument and other document required hereby or at any time hereafter delivered to Bank in connection herewith (collectively, the "Loan Documents") have been duly authorized, and upon their execution and delivery in accordance with the provisions hereof will constitute legal, valid and binding agreements and obligations of Borrower or the party which executes the same, enforceable in accordance with their respective terms. SECTION 2.3. NO VIOLATION. The execution, delivery and performance by Borrower of each of the Loan Documents do not violate any provision of any law or regulation, or contravene any provision of the Articles of Incorporation or By-Laws of Borrower, or result in any breach of or default under any contract, obligation, indenture or other instrument to which Borrower is a party or by which Borrower may be bound. SECTION 2.4. LITIGATION. There are no pending, or to the best of Borrower's knowledge threatened, actions, claims, investigations, suits or proceedings by or before any governmental authority, arbitrator, court or administrative agency which could have a material adverse effect on the financial condition or operation of Borrower other than those disclosed by Borrower to Bank in writing prior to the date hereof. SECTION 2.5. CORRECTNESS OF FINANCIAL STATEMENT. The financial statement of Borrower dated March 31, 2004, a true copy of which has been delivered by Borrower to Bank prior to the date hereof, (a) is complete and correct and presents fairly the financial condition of Borrower, (b) discloses all liabilities of Borrower that are required to be reflected or reserved against under generally accepted accounting principles, whether liquidated or unliquidated, fixed or contingent, and (c) has been prepared in accordance with generally accepted accounting principles consistently applied. Since the date of such financial statement there has been no material adverse change in the financial condition of Borrower, nor has Borrower mortgaged, pledged, granted a security interest in or otherwise encumbered any of its assets or properties except in favor of Bank or as otherwise permitted by Bank in writing. -5- SECTION 2.6. INCOME TAX RETURNS. Borrower has no knowledge of any pending assessments or adjustments of its income tax payable with respect to any year. SECTION 2.7. NO SUBORDINATION. There is no agreement, indenture, contract or instrument to which Borrower is a party or by which Borrower may be bound that requires the subordination in right of payment of any of Borrower's obligations subject to this Agreement to any other obligation of Borrower. SECTION 2.8. PERMITS, FRANCHISES. Borrower possesses, and will hereafter possess, all permits, consents, approvals, franchises and licenses required and rights to all trademarks, trade names, patents, and fictitious names, if any, necessary to enable it to conduct the business in which it is now engaged in compliance with applicable law. SECTION 2.9. ERISA. Borrower is in compliance in all material respects with all applicable provisions of the Employee Retirement Income Security Act of 1974, as amended or recodified from time to time ("ERISA"); Borrower has not violated any provision of any defined employee pension benefit plan (as defined in ERISA) maintained or contributed to by Borrower (each, a "Plan"); no Reportable Event as defined in ERISA has occurred and is continuing with respect to any Plan initiated by Borrower; Borrower has met its minimum funding requirements under ERISA with respect to each Plan; and each Plan will be able to fulfill its benefit obligations as they come due in accordance with the Plan documents and under generally accepted accounting principles. SECTION 2.10. OTHER OBLIGATIONS. Borrower is not in default on any obligation for borrowed money, any purchase money obligation or any other material lease, commitment, contract, instrument or obligation. ARTICLE III CONDITIONS SECTION 3.1. CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation of Bank to extend any credit contemplated by this Agreement is subject to the fulfillment to Bank's satisfaction of all of the following conditions: (a) Approval of Bank Counsel. All legal matters incidental to the extension of credit by Bank shall be satisfactory to Bank's counsel. (b) Documentation. Bank shall have received, in form and substance satisfactory to Bank, each of the following, duly executed: (i) This Agreement and each promissory note or other instrument or document required hereby. (ii) Certificate of Incumbency (2). (iii) Corporate Resolution: Borrowing. (iv) Corporate Resolution: Third Party Pledgor. (v) Security Agreement: Continuing Rights to Payment & Inventory. (vi) Security Agreement: Equipment. (vii) Security Agreement Third Party: Rights to Payment & Inventory. (viii) Security Agreement Third Party: Equipment. -6- (ix) UCC Financing Statement. (vii) Such other documents as Bank may require under any other Section of this Agreement. (c) Financial Condition. There shall have been no material adverse change, as determined by Bank, in the financial condition or business of Borrower. (d) Insurance. Borrower shall have delivered to Bank evidence of insurance coverage on all Borrower's property, in form, substance, amounts, covering risks and issued by companies satisfactory to Bank, and where required by Bank, with loss payable endorsements in favor of Bank. (e) Acquisition. The acquisition of The Golf Warehouse by Borrower shall have been completed prior to the initial funding of the Term Loan. SECTION 3.2. CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of Bank to make each extension of credit requested by Borrower hereunder shall be subject to the fulfillment to Bank's satisfaction of each of the following conditions: (a) Compliance. The representations and warranties contained herein and in each of the other Loan Documents shall be true on and as of the date of the signing of this Agreement and on the date of each extension of credit by Bank pursuant hereto, with the same effect as though such representations and warranties had been made on and as of each such date, and on each such date, no Event of Default as defined herein, and no condition, event or act which with the giving of notice or the passage of time or both would constitute such an Event of Default, shall have occurred and be continuing or shall exist. (b) Documentation. Bank shall have received all additional documents which may be required in connection with such extension of credit. ARTICLE IV AFFIRMATIVE COVENANTS Borrower covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower shall, unless Bank otherwise consents in writing: SECTION 4.1. PUNCTUAL PAYMENTS. Punctually pay all principal, interest, fees or other liabilities due under any of the Loan Documents at the times and place and in the manner specified therein, and immediately upon demand by Bank, the amount by which the outstanding principal balance of any credit subject hereto at any time exceeds any limitation on borrowings applicable thereto. SECTION 4.2. ACCOUNTING RECORDS. Maintain adequate books and records in accordance with generally accepted accounting principles consistently applied, and permit any representative of Bank, at any reasonable time, to inspect, audit and examine such books and records, to make copies of the same, and to inspect the properties of Borrower. -7- SECTION 4.3. FINANCIAL STATEMENTS. Provide to Bank all of the following, in form and detail satisfactory to Bank: (a) not later than 120 days after and as of the end of each fiscal year, an audited consolidated financial statement of Borrower, prepared by Certified Public Accountant, to include balance sheet, income statement, statement of cash flow and management letter including management's discussion and analysis (if any); (b) not later than 45 days after and as of the end of each quarter, a consolidated financial statement of Borrower, prepared by Borrower, to include balance sheet and income statement; (c) not later than 45 days after and as of the end of each month in which the aggregate outstanding amount under the Line of Credit and Term Loan exceed $20,000,00.00, a borrowing base certificate, and an inventory collateral report; (d) contemporaneously with each annual and quarterly financial statement of Borrower required hereby, a certificate of the president or chief financial officer of Borrower that said financial statements are accurate and that there exists no Event of Default nor any condition, act or event which with the giving of notice or the passage of time or both would constitute an Event of Default; (e) An annual collateral audit will be required if aggregate outstanding amounts under the Line of Credit and Term Loan exceed $20,000,000.00 for a 360 day period. Borrower will be responsible for reimbursing the Bank for the cost of such collateral audit; (f) from time to time such other information as Bank may reasonably request. SECTION 4.4. COMPLIANCE. Preserve and maintain all licenses, permits, governmental approvals, rights, privileges and franchises necessary for the conduct of its business; and comply with the provisions of all documents pursuant to which Borrower is organized and/or which govern Borrower's continued existence and with the requirements of all laws, rules, regulations and orders of any governmental authority applicable to Borrower and/or its business. SECTION 4.5. INSURANCE. Maintain and keep in force insurance of the types and in amounts customarily carried in lines of business similar to that of Borrower, including but not limited to fire, extended coverage, public liability, flood, property damage and workers' compensation, with all such insurance carried with companies and in amounts satisfactory to Bank, and deliver to Bank from time to time at Bank's request schedules setting forth all insurance then in effect. SECTION 4.6. FACILITIES. Keep all properties useful or necessary to Borrower's business in good repair and condition, and from time to time make necessary repairs, renewals and replacements thereto so that such properties shall be fully and efficiently preserved and maintained. SECTION 4.7. TAXES AND OTHER LIABILITIES. Pay and discharge when due any and all indebtedness, obligations, assessments and taxes, both real or personal, including without limitation federal and state income taxes and state and local property taxes and assessments, except such (a) as Borrower may in good faith contest or as to which a bona fide -8- dispute may arise, and (b) for which Borrower has made provision, to Bank's satisfaction, for eventual payment thereof in the event Borrower is obligated to make such payment. SECTION 4.8. LITIGATION. Promptly give notice in writing to Bank of any litigation pending or threatened against Borrower. SECTION 4.9. FINANCIAL CONDITION. Maintain Borrower's financial condition as follows using generally accepted accounting principles consistently applied and used consistently with prior practices (except to the extent modified by the definitions herein): Covenants (a) through (d) to apply only if the Term Loan has been repaid in full: (a) Current Ratio not at any time less than 1.0 to 1.0, with "Current Ratio" defined as total current assets divided by total current liabilities. (b) Tangible Net Worth not at any time less than $17,300,000.00, with such amount to increase by 50% of Borrower's positive net income for each quarter thereafter, with "Tangible Net Worth" defined as the aggregate of total stockholders' equity plus subordinated debt less any intangible assets. The parties expressly acknowledge and agree that prepaid expenses, excluding, without limitation, prepaid advertising, shall not be deemed to be intangible assets. (c) Total Liabilities divided by Tangible Net Worth not at any time greater than 3.50 to 1.0, with "Total Liabilities" defined as the aggregate of current liabilities and non-current liabilities less subordinated debt, and with "Tangible Net Worth" as defined above. (d) Net income after taxes not less than $1,000,000.00 on an annual basis, determined as of each fiscal year end, and be profitable year to date as of each June 30. Covenants (e) and (f) to apply only while the Term Loan remains outstanding: (e) Funded Debt to EBITDA ratio of less than or equal to 2.25 to 1.0 at all times through March 31, 2005 and 2.0 to 1.0 at all times thereafter measured at each fiscal quarter end on a trailing 12 month basis, with "Funded Debt" defined as the sum of all obligations for borrowed money (including subordinated debt) plus all capital lease obligations, and with "EBITDA" defined as net profit before tax plus interest expense (net of capitalized interest expense), depreciation expense and amortization expense, when an outstanding balance exists on the term loan. (f) Fixed Charge Coverage Ratio of 1.50 to 1.0 or more measured at each quarter end on a trailing 12-month basis with "Fixed Charge Coverage Ratio" defined as: EBITDAR less the sum of unfinanced capex, dividends, redemptions and distributions and taxes paid in cash divided by the sum of current maturities of long term debt, interest expense and rent expense, with "EBITDAR" defined as net income plus interest expense, depreciation expense, amortization expense and rent expense minus capital expenditures and distributions divided by current maturities of long term and debt and current maturities of capital leases plus interest expense and rental expense, when an outstanding balance exists on the term loan. SECTION 4.10. NOTICE TO BANK. Promptly (but in no event more than five (5) days after the occurrence of each such event or matter) give written notice to Bank in reasonable detail of: (a) the occurrence of any Event of Default, or any condition, event or act which with the giving of notice or the passage of time or both would constitute an Event of Default; (b) any change in the name or the organizational structure of Borrower; (c) the occurrence and nature of -9- any Reportable Event or Prohibited Transaction, each as defined in ERISA, or any funding deficiency with respect to any Plan; or (d) any termination or cancellation of any insurance policy which Borrower is required to maintain, or any uninsured or partially uninsured loss through liability or property damage, or through fire, theft or any other cause affecting Borrower's property. ARTICLE V NEGATIVE COVENANTS Borrower further covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower will not without Bank's prior written consent: SECTION 5.1. USE OF FUNDS. Use any of the proceeds of any credit extended hereunder except for the purposes stated in Article I hereof. SECTION 5.2. CAPITAL EXPENDITURES. Make any additional investment in fixed assets in any fiscal year in excess of an aggregate of $1,750,000.00. SECTION 5.3. LEASE EXPENDITURES. Incur operating lease expense in any fiscal year in excess of an aggregate of $500,000.00. SECTION 5.4. OTHER INDEBTEDNESS. Create, incur, assume or permit to exist any indebtedness or liabilities resulting from borrowings, loans or advances, whether secured or unsecured, matured or unmatured, liquidated or unliquidated, joint or several, except (a) the liabilities of Borrower to Bank, and (b) any other liabilities of Borrower existing as of, and disclosed to Bank prior to, the date hereof; provided that Borrower shall be permitted to grant purchase money security interest relating to the acquisition of machinery and equipment to the extent permitted under Section 5.2 above. SECTION 5.5. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Merge into or consolidate with any other entity; make any substantial change in nature of Borrower's business as conducted as of the date hereof; acquire all or substantially all of the assets of any other entity for a purchase price in excess of One Million Dollars; nor sell, lease, transfer or otherwise dispose of all or a substantial or material portion of Borrower's assets except in the ordinary curse of business. SECTION 5.6. GUARANTIES. Guarantee or become liable in any way as surety, endorser (other than as endorser of negotiable instruments for deposit or collection in the ordinary course of business), accommodation endorser or otherwise for, nor pledge or hypothecate any assets of Borrower as security for, any liabilities or obligations of any other person or entity, except any of the foregoing in favor of Bank. SECTION 5.7. LOANS, ADVANCES, INVESTMENTS. Make any loans or advances to or investments in any person or entity, except any of the foregoing existing as of, and disclosed to Bank prior to, the date hereof. -10- SECTION 5.8. DIVIDENDS, DISTRIBUTIONS. Declare or pay any dividend or distribution either in cash, stock or any other property on Borrower's stock now or hereafter outstanding, nor redeem, retire, repurchase or otherwise acquire any shares of any class of Borrower's stock now or hereafter outstanding without the prior written consent of Bank. Notwithstanding the foregoing, Bank hereby expressly acknowledges and agrees that Borrower shall be permitted to continue to repurchase up to 10% of its common stock through May 31, 2005. SECTION 5.9. PLEDGE OF ASSETS. Mortgage, pledge, grant or permit to exist a security interest in, or lien upon, all or any portion of Borrower's assets now owned or hereafter acquired, except any of the foregoing in favor of Bank or which is existing as of, and disclosed to Bank in writing prior to, the date hereof and except for purchase money security interests relating to the acquisition of machinery and equipment to the extent permitted under Section 5.2 above. ARTICLE VI EVENTS OF DEFAULT SECTION 6.1. The occurrence of any of the following shall constitute an "Event of Default" under this Agreement: (a) Borrower shall fail to pay when due any principal, interest, fees or other amounts payable under any of the Loan Documents. (b) Any financial statement or certificate furnished to Bank in connection with, or any representation or warranty made by Borrower or any other party under this Agreement or any other Loan Document shall prove to be incorrect, false or misleading in any material respect when furnished or made. (c) Any default in the performance of or compliance with any obligation, agreement or other provision contained herein or in any other Loan Document (other than those referred to in subsections (a) and (b) above), and with respect to any such default which by its nature can be cured, such default shall continue for a period of twenty (20) days from its occurrence. (d) Any default in the payment or performance of any obligation, or any defined event of default, under the terms of any contract or instrument (other than any of the Loan Documents) pursuant to which Borrower, any guarantor hereunder or any general partner or joint venturer in any Borrower which is a partnership or joint venture (with each such guarantor, general partner and/or joint venturer referred to herein as a "Third Party Obligor") has incurred any debt or other liability to any person or entity, including Bank. (e) The filing of a notice of judgment lien against Borrower or any Third Party Obligor; or the recording of any abstract of judgment against Borrower or any Third Party Obligor in any county in which Borrower or such Third Party Obligor has an interest in real property; or the service of a notice of levy and/or of a writ of attachment or execution, or other like process, against the assets of Borrower or any Third Party Obligor; or the entry of a judgment against Borrower or any Third Party Obligor in excess of $50,000.00. (f) Borrower or any Third Party Obligor shall become insolvent, or shall suffer or consent to or apply for the appointment of a receiver, trustee, custodian or liquidator of itself or any of its property, or shall generally fail to pay its debts as they become due, or shall make a -11- general assignment for the benefit of creditors; Borrower or any Third Party Obligor shall file a voluntary petition in bankruptcy, or seeking reorganization, in order to effect a plan or other arrangement with creditors or any other relief under the Bankruptcy Reform Act, Title 11 of the United States Code, as amended or recodified from time to time ("Bankruptcy Code"), or under any state or federal law granting relief to debtors, whether now or hereafter in effect; or any involuntary petition or proceeding pursuant to the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors is filed or commenced against Borrower or any Third Party Obligor, or Borrower or any Third Party Obligor shall file an answer admitting the jurisdiction of the court and the material allegations of any involuntary petition; or Borrower or any Third Party Obligor shall be adjudicated a bankrupt, or an order for relief shall be entered against Borrower or any Third Party Obligor by any court of competent jurisdiction under the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors. (g) There shall exist or occur any event or condition which Bank in good faith believes impairs, or is substantially likely to impair, the prospect of payment or performance by Borrower of its obligations under any of the Loan Documents. (h) The death or incapacity of any individual Borrower or Third Party Obligor. The dissolution or liquidation of any Borrower or Third Party Obligor which is a corporation, partnership, joint venture or other type of entity; or Borrower or any such Third Party Obligor, or any of its directors, stockholders or members, shall take action seeking to effect the dissolution or liquidation of such Borrower or Third Party Obligor. (i) Any change in ownership of an aggregate of twenty-five percent (25%) or more of the common stock of Borrower. SECTION 6.2. REMEDIES. Upon the occurrence of any Event of Default: (a) all indebtedness of Borrower under each of the Loan Documents, any term thereof to the contrary notwithstanding, shall at Bank's option and without notice become immediately due and payable without presentment, demand, protest or notice of dishonor, all of which are hereby expressly waived by each Borrower; (b) the obligation, if any, of Bank to extend any further credit under any of the Loan Documents shall immediately cease and terminate; and (c) Bank shall have all rights, powers and remedies available under each of the Loan Documents, or accorded by law, including without limitation the right to resort to any or all security for any credit subject hereto and to exercise any or all of the rights of a beneficiary or secured party pursuant to applicable law. All rights, powers and remedies of Bank may be exercised at any time by Bank and from time to time after the occurrence of an Event of Default, are cumulative and not exclusive, and shall be in addition to any other rights, powers or remedies provided by law or equity. ARTICLE VII MISCELLANEOUS SECTION 7.1. NO WAIVER. No delay, failure or discontinuance of Bank in exercising any right, power or remedy under any of the Loan Documents shall affect or operate as a waiver of such right, power or remedy; nor shall any single or partial exercise of any such right, power or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power or remedy. Any waiver, permit, consent or approval of any kind by Bank of any breach of or default under any of the Loan Documents must be in writing and shall be effective only to the extent set forth in such writing. -12- SECTION 7.2. NOTICES. All notices, requests and demands which any party is required or may desire to give to any other party under any provision of this Agreement must be in writing delivered to each party at the following address: BORROWER: THE SPORTMAN'S GUIDE, INC. 411 Farwell Avenue South St. Paul, Minnesota 55075 BANK: WELLS FARGO BANK, NATIONAL ASSOCIATION 430 North Wabasha Street, Suite 302 St. Paul, Minnesota 55101 or to such other address as any party may designate by written notice to all other parties. Each such notice, request and demand shall be deemed given or made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or three (3) days after deposit in the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy, upon receipt. SECTION 7.3. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to Bank immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in-house counsel), expended or incurred by Bank in connection with (a) the negotiation and preparation of this Agreement and the other Loan Documents, Bank's continued administration hereof and thereof, and the preparation of any amendments and waivers hereto and thereto, (b) the enforcement of Bank's rights and/or the collection of any amounts which become due to Bank under any of the Loan Documents, and (c) the prosecution or defense of any action in any way related to any of the Loan Documents, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to any Borrower or any other person or entity. SECTION 7.4. SUCCESSORS, ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties; provided however, that Borrower may not assign or transfer its interest hereunder without Bank's prior written consent. Bank reserves the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or any interest in, Bank's rights and benefits under each of the Loan Documents. In connection therewith, Bank may disclose all documents and information which Bank now has or may hereafter acquire relating to any credit subject hereto, Borrower or its business, or any collateral required hereunder. SECTION 7.5. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other Loan Documents constitute the entire agreement between Borrower and Bank with respect to each credit subject hereto and supersede all prior negotiations, communications, discussions and correspondence concerning the subject matter hereof. This Agreement may be amended or modified only in writing signed by each party hereto. -13- SECTION 7.6. NO THIRD PARTY BENEFICIARIES. This Agreement is made and entered into for the sole protection and benefit of the parties hereto and their respective permitted successors and assigns, and no other person or entity shall be a third party beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any other of the Loan Documents to which it is not a party. SECTION 7.7. TIME. Time is of the essence of each and every provision of this Agreement and each other of the Loan Documents. SECTION 7.8. SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or any remaining provisions of this Agreement. SECTION 7.9. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when executed and delivered shall be deemed to be an original, and all of which when taken together shall constitute one and the same Agreement. SECTION 7.10. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Minnesota. SECTION 7.11. ARBITRATION. (a) Arbitration. The parties hereto agree, upon demand by any party, to submit to binding arbitration all claims, disputes and controversies between or among them (and their respective employees, officers, directors, attorneys, and other agents), whether in tort, contract or otherwise arising out of or relating to in any way (i) the loan and related Loan Documents which are the subject of this Agreement and its negotiation, execution, collateralization, administration, repayment, modification, extension, substitution, formation, inducement, enforcement, default or termination; or (ii) requests for additional credit. (b) Governing Rules. Any arbitration proceeding will (i) proceed in a location in Minnesota selected by the American Arbitration Association ("AAA"); (ii) be governed by the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provision in any of the documents between the parties; and (iii) be conducted by the AAA, or such other administrator as the parties shall mutually agree upon, in accordance with the AAA's commercial dispute resolution procedures, unless the claim or counterclaim is at least $1,000,000.00 exclusive of claimed interest, arbitration fees and costs in which case the arbitration shall be conducted in accordance with the AAA's optional procedures for large, complex commercial disputes (the commercial dispute resolution procedures or the optional procedures for large, complex commercial disputes to be referred to, as applicable, as the "Rules"). If there is any inconsistency between the terms hereof and the Rules, the terms and procedures set forth herein shall control. Any party who fails or refuses to submit to arbitration following a demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any dispute. Nothing contained herein shall be deemed to be a waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. Section 91 or any similar applicable state law. (c) No Waiver of Provisional Remedies, Self-Help and Foreclosure. The arbitration requirement does not limit the right of any party to (i) foreclose against real or personal property -14- collateral; (ii) exercise self-help remedies relating to collateral or proceeds of collateral such as setoff or repossession; or (iii) obtain provisional or ancillary remedies such as replevin, injunctive relief, attachment or the appointment of a receiver, before during or after the pendency of any arbitration proceeding. This exclusion does not constitute a waiver of the right or obligation of any party to submit any dispute to arbitration or reference hereunder, including those arising from the exercise of the actions detailed in sections (i), (ii) and (iii) of this paragraph. (d) Arbitrator Qualifications and Powers. Any arbitration proceeding in which the amount in controversy is $5,000,000.00 or less will be decided by a single arbitrator selected according to the Rules, and who shall not render an award of greater than $5,000,000.00. Any dispute in which the amount in controversy exceeds $5,000,000.00 shall be decided by majority vote of a panel of three arbitrators; provided however, that all three arbitrators must actively participate in all hearings and deliberations. The arbitrator will be a neutral attorney licensed in the State of Minnesota or a neutral retired judge of the state or federal judiciary of Minnesota, in either case with a minimum of ten years experience in the substantive law applicable to the subject matter of the dispute to be arbitrated. The arbitrator will determine whether or not an issue is arbitratable and will give effect to the statutes of limitation in determining any claim. In any arbitration proceeding the arbitrator will decide (by documents only or with a hearing at the arbitrator's discretion) any pre-hearing motions which are similar to motions to dismiss for failure to state a claim or motions for summary adjudication. The arbitrator shall resolve all disputes in accordance with the substantive law of Minnesota and may grant any remedy or relief that a court of such state could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award. The arbitrator shall also have the power to award recovery of all costs and fees, to impose sanctions and to take such other action as the arbitrator deems necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the Minnesota Rules of Civil Procedure or other applicable law. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction. The institution and maintenance of an action for judicial relief or pursuit of a provisional or ancillary remedy shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such action for judicial relief. (e) Discovery. In any arbitration proceeding discovery will be permitted in accordance with the Rules. All discovery shall be expressly limited to matters directly relevant to the dispute being arbitrated and must be completed no later than 20 days before the hearing date and within 180 days of the filing of the dispute with the AAA. Any requests for an extension of the discovery periods, or any discovery disputes, will be subject to final determination by the arbitrator upon a showing that the request for discovery is essential for the party's presentation and that no alternative means for obtaining information is available. (f) Class Proceedings and Consolidations. The resolution of any dispute arising pursuant to the terms of this Agreement shall be determined by a separate arbitration proceeding and such dispute shall not be consolidated with other disputes or included in any class proceeding. (g) Payment Of Arbitration Costs And Fees. The arbitrator shall award all costs and expenses of the arbitration proceeding. (h) Miscellaneous. To the maximum extent practicable, the AAA, the arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the filing of the dispute with the AAA. No arbitrator or other party to an arbitration proceeding -15- may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business or by applicable law or regulation. If more than one agreement for arbitration by or between the parties potentially applies to a dispute, the arbitration provision most directly related to the Loan Documents or the subject matter of the dispute shall control. This arbitration provision shall survive termination, amendment or expiration of any of the Loan Documents or any relationship between the parties. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first written above. WELLS FARGO BANK, THE SPORTMAN'S GUIDE, INC. NATIONAL ASSOCIATION By: /s/ Charles Lingen By: /s/ Thomas G. Skalitzky --------------------------- ------------------------- Title: CFO Title: Vice President -16- EX-10.2 3 c87065exv10w2.txt 2004 STOCK INCENTIVE PLAN EXHIBIT 10.2 THE SPORTSMAN'S GUIDE, INC. 2004 STOCK INCENTIVE PLAN SECTION 1. PURPOSE The purpose of the Plan is to promote the interests of the Company and its shareholders by (i) attracting and retaining individuals eligible to participate in the Plan; (ii) motivating such individuals by providing incentive compensation; and (iii) aligning the interests of such individuals with the interests of the Company's shareholders. SECTION 2. DEFINITIONS The following terms, as used in the Plan, shall have the meaning specified below. Other capitalized terms shall have the meaning specified in the Plan. a. "AWARD" means an award granted pursuant to Section 4. b. "AWARD AGREEMENT" means a document described in Section 6 setting forth the terms and conditions applicable to the Award granted to the Participant. c. "BOARD OF DIRECTORS" means the Board of Directors of the Company, as it may be comprised from time to time. d. "CHANGE OF CONTROL" means Change of Control as defined in Section 10. e. "CODE" means the Internal Revenue Code of 1986, and any successor statute, as it or they may be amended from time to time. f. "COMMITTEE" means the Compensation Committee of the Board of Directors or such other committee as may be designated by the Board of Directors. g. "COMPANY" means The Sportsman's Guide, Inc., and any successor thereto. h. "COVERED EMPLOYEE" means a covered employee within the meaning of Code section 162(m)(3). i. "DIVIDEND EQUIVALENT" means an amount equal to the amount of cash dividends payable with respect to a Share after the date an Award is granted. j. "EMPLOYEE" means an employee of the Company or a Subsidiary. The term includes consultants of the Company or a Subsidiary, but excludes members of the Board of Directors who are not also employees of the Company or a Subsidiary. The term also includes any person who, in connection with the hiring of such person, has been granted an Award prior to the date such person first performs services for the Company or a Subsidiary, provided that no Award granted to such a person shall become vested prior to the date that such person first performs such services. k. "EXCHANGE ACT" means the Securities Exchange Act of 1934, and any successor statute, as it may be amended from time to time. l. "FAIR MARKET VALUE" means (i) the average of the highest and lowest sale prices of the Shares as reported on the Nasdaq reporting system on the relevant date (or if the Shares are not then so traded, the average of the highest and lowest sale prices of the Shares on the stock exchange or over-the-counter market on which the Shares are principally trading on such date), or if no sale of the Shares is reported for such date, the next preceding day for which there is a reported sale or (ii) if there is no public market for the Shares on such date, fair market value as determined by the Committee. m. "INCENTIVE STOCK OPTION" means an Option (or option granted pursuant to any other plan of the Company or a Subsidiary) intended to comply with Code section 422. n. "INSIDER" means any person who is subject to Section 16 of the Exchange Act, and any successor statutory provision, as it may be amended from time to time. o. "NON-QUALIFIED STOCK OPTION" means an Option not intended to comply with Code section 422. p. "OPTION" means an option granted pursuant to Section 4(a). q. "PARTICIPANT" means any Employee who has been granted an Award. r. "PERFORMANCE GOAL" means the level of performance, whether absolute or relative to a peer group or index, established by the Committee as the performance goal with respect to a Performance Measure. Performance Goals may vary from Performance Period to Performance Period and from Participant to Participant and may be established on a stand-alone basis, in tandem or in the alternative. s. "PERFORMANCE FORMULA" means, for a Performance Period, one or more objective formulas or standards established by the Committee for purposes of determining whether or the extent to which an Award has been earned based on the level of performance attained with respect to one or more Performance Goals. Performance Formulas may vary from Performance Period to Performance Period and from Participant to Participant and may be established on a stand-alone basis, in tandem or in the alternative. t. "PERFORMANCE MEASURE" means one or more of the following selected by the Committee to measure Company and/or Subsidiary performance for a 2 Performance Period: basic or diluted earnings per share; revenue; operating income; net income (either before or after taxes); net income before interest and taxes; net income before interest, taxes, depreciation and amortization; return on capital; return on equity; net cash provided by operations; stock price and total shareholder return. Each such measure shall be determined in accordance with generally accepted accounting principles as consistently applied by the Company and, if so determined by the Committee and to the extent permitted under Code section 162(m), adjusted to omit the effects of extraordinary items, gain or loss on the disposal of a business segment, unusual or infrequently occurring events and transactions and cumulative effects of changes in accounting principles. Performance Measures may vary from Performance Period to Performance Period and from Participant to Participant and may be established on a stand-alone basis, in tandem or in the alternative. u. "PERFORMANCE PERIOD" means one or more periods of time (of not less than one fiscal year of the Company), as the Committee may designate, over which the attainment of one or more Performance Goals will be measured for the purpose of determining a Participant's rights in respect of an Award. v. "SHARES" means shares of Common Stock of the Company or any security of the Company issued in substitution, exchange or lieu thereof. w. "SUBSIDIARY" means (i) any corporation or other entity in which the Company, directly or indirectly, controls 50% or more of the total combined voting power of such corporation or other entity and (ii) any other corporation or other entity in which the Company has a significant equity interest, in either case as determined by the Committee. x. "TEN-PERCENT SHAREHOLDER" means any person who owns, directly or indirectly, on the relevant date, securities having 10% or more of the combined voting power of all classes of the Company's securities or of its parent or subsidiaries. For purposes of applying the foregoing 10% limitation, the rules of Code section 424(d) shall apply. SECTION 3. ELIGIBILITY The Committee may grant one or more Awards to any Employee designated by it to receive an Award. SECTION 4. AWARDS The Committee may grant any one or more of the following types of Awards, either singly, in tandem or in combination with other types of Awards: 3 a. OPTIONS. An Option is an option to purchase a specific number of Shares exercisable at such time or times and subject to such terms and conditions as the Committee may determine subject to the Plan, provided that the term of an Option shall not exceed ten years. (i) The exercise price of an Option shall not be less than 100% of the Fair Market Value of the Shares on the date such Option is granted. (ii) The exercise price of an Option shall be paid in cash or check (subject to collection); provided that, at the discretion of the Committee, the exercise price may also be paid by the tender, by either actual delivery or attestation, of Shares acceptable to the Committee and valued at their Fair Market Value on the date of exercise; through a combination of Shares and cash; or through such other means as the Committee may determine. Without limiting the foregoing, to the extent permitted by applicable law: A. The Committee may, on such terms and conditions as it may determine, permit a Participant to elect to pay the exercise price by authorizing a third party, pursuant to a brokerage or similar arrangement, approved in advance by the Committee, to simultaneously sell all (or a sufficient portion) of the Shares acquired upon exercise of such Option and to remit to the Company a sufficient portion of the proceeds from such sale to pay the entire exercise price of such Option and any required tax withholding resulting therefrom. (iii) No fractional Shares will be issued or accepted. The Committee may impose such other conditions, restrictions and contingencies with respect to Shares delivered pursuant to the exercise of an Option as it deems desirable. (iv) Incentive Stock Options shall be subject to the following additional provisions: A. The aggregate Fair Market Value (determined on the date that the Option is granted) of the Shares subject to Incentive Stock Options which are exercisable by one person for the first time during a particular calendar year shall not exceed $100,000. B. No Incentive Stock Option may be granted under this Plan on or after the tenth anniversary of the earlier of: (1) the date this Plan is adopted, or (2) the date this Plan is approved by shareholders. 4 C. No Incentive Stock Option may be exercisable more than: (1) in the case of an Employee who is not a Ten-percent Shareholder on the date that the Option is granted, ten years after the date the Option is granted, and (2) in the case of an Employee who is a Ten-percent Shareholder on the date the Option is granted, five years after the date the Option is granted. D. In the case of an Employee who is a Ten-percent Shareholder on the date that the Option is granted, the exercise price of any Incentive Stock Option shall not be less than 110% of the Fair Market Value of the Shares subject to the Option on such date. E. No Incentive Stock Option may be granted to a person who is not an employee of the Company or a Subsidiary on the date that the Option is granted. b. RESTRICTED STOCK. Restricted Stock is Shares that are issued to a Participant subject to restrictions on transfer and such other restrictions on incidents of ownership as the Committee may determine, including but not limited to the achievement of specific goals with respect to Company, Subsidiary or individual performance over a specified period of time. Subject to such restrictions, the Participant as owner of such Restricted Stock shall have the rights of the holder thereof, except that the Committee may provide at the time of the Award that any dividends or other distributions paid with respect to such Restricted Stock while subject to such restrictions shall be accumulated or reinvested in Shares and held subject to the same restrictions as the Restricted Stock and such other terms and conditions as the Committee shall determine. A certificate for the Restricted Stock, which certificate shall be registered in the name of the Participant, shall bear an appropriate restrictive legend and shall be subject to appropriate stop-transfer orders; provided, however, that the certificates representing Restricted Stock shall be held in custody by the Company until the restrictions relating thereto otherwise lapse, and the Participant shall deliver to the Company a stock power endorsed in blank relating to the Restricted Stock. c. STOCK EQUIVALENT UNITS. A Stock Equivalent Unit is an Award based on the Fair Market Value of one Share. All or part of any Stock Equivalent Units Award may be subject to conditions and restrictions established by the Committee, including but not limited to the achievement of specific goals with respect to Company, Subsidiary or individual performance over a specified period of time. Dividend Equivalents may be granted with respect to all or part of a Stock Equivalent Unit Award. Alternatively, the Committee may also provide for automatic awards of additional Stock Equivalent Units on each date that cash dividends are paid on the Shares in an amount equal to (i) the product of the dividend per Share times the total number of Stock Equivalent Units held by the Participant as of the record date for such cash 5 dividend divided by (ii) the Fair Market Value of a Share on the dividend payment date. Stock Equivalent Units may be settled in Shares or cash or both. d. PERFORMANCE UNITS. A Performance Unit is an Award denominated in cash, the amount of which may be based on the achievement of specific goals with respect to Company, Subsidiary or individual performance over a specified period of time. The maximum amount of such compensation that may be paid to any one Participant with respect to any one Performance Period shall be $1,000,000. Performance Units may be settled in Shares or cash or both. e. PERFORMANCE COMPENSATION AWARDS. (i) The Committee may, at the time of grant of an Award (other than an Option), designate such Award as a Performance Compensation Award in order that such Award constitute qualified performance-based compensation under Code section 162(m). With respect to each such Performance Compensation Award, the Committee shall (on or before the 90th day of the applicable Performance Period), establish, in writing, a Performance Period, Performance Measure(s), Performance Goal(s) and Performance Formula(s). Once established for a Performance Period, such items shall not be amended or otherwise modified to the extent such amendment or modification would cause the compensation payable pursuant to the Award to fail to constitute qualified performance-based compensation under Code section 162(m). (ii) A Participant shall be eligible to receive payment in respect of a Performance Compensation Award only to the extent that the Performance Goal(s) for such Award are achieved and the Performance Formula as applied against such Performance Goals(s) determines that all or some portion of such Participant's Award has been earned for the Performance Period. As soon as practicable after the close of each Performance Period, the Committee shall review and certify in writing whether, and to what extent, the Performance Goals(s) for the Performance Period have been achieved and, if so, determine and certify in writing the amount of the Performance Compensation Award earned by the Participant for such Performance Period based upon such Participant's Performance Formula. The Committee shall then determine the actual amount of the Performance Compensation Award to be paid to the Participant and, in so doing, may use negative discretion to decrease, but not increase, the amount of the Award otherwise payable to the Participant based upon such performance. The maximum Performance Compensation Award for any one Participant for any one Performance Period shall be determined in accordance with Sections 4(d) and 5(b), as applicable. 6 f. DEFERRALS. The Committee may require or permit Participants to defer the issuance or vesting of Shares or the settlement of Awards under such rules and procedures as it may be established under the Plan. The Committee may also provide that deferred settlements include the payment of, or crediting of interest on, the deferral amounts or the payment or crediting of Dividend Equivalents on deferred settlements denominated in Shares. SECTION 5. SHARES AVAILABLE UNDER PLAN a. Subject to the adjustment provisions of Section 9, the number of Shares with respect to which Awards may be granted (or, in the cases of Awards that may be settled in cash or Shares, settled) under the Plan shall not exceed 600,000 Shares; provided that Shares with respect to the unexercised or undistributed portion of any terminated or forfeited Award and Shares tendered or withheld to pay the exercise price of an Option and/or any required tax withholding with respect to an Award shall be available for further Awards. Additional rules for determining the number of Shares granted under the Plan may be adopted by the Committee, as it deems necessary and appropriate. b. Subject to the adjustment provisions of Section 9, the maximum number of Shares with respect to which Awards may be granted to any single Participant in the form of Options, Restricted Stock or Stock Equivalent Units shall not exceed the total number of Shares available under this Plan. c. The Shares that may be issued pursuant to an Award under the Plan may be authorized but unissued Shares, or Shares may be acquired, subsequently or in anticipation of the transaction, in the open market to satisfy the requirements of the Plan. SECTION 6. AWARD AGREEMENTS Each Award under the Plan shall be evidenced by an Award Agreement. Each Award Agreement shall set forth the terms and conditions applicable to the Award, as determined by the Committee subject to the Plan, including but not limited to provisions describing the treatment of an Award in the event of the termination of a Participant's status as an Employee. SECTION 7. AMENDMENT AND TERMINATION The Board of Directors may at any time amend, suspend or terminate the Plan, in whole or in part, and the Committee may, subject to the Plan, at any time alter or amend any or all Award Agreements to the extent permitted by applicable law; provided that no such action shall impair the rights of any holder of an Award without the holder's consent. Notwithstanding the foregoing, neither the Board of Directors nor the Committee shall (except pursuant to Section 9) amend the Plan or any Award Agreement without the approval of the shareholders of the Company to (i) increase the number of Shares available for Awards as set forth in Section 5 or (ii) decrease the exercise price of any Option. 7 SECTION 8. ADMINISTRATION a. The Plan and all Awards shall be administered by the Committee. In the absence of the Committee, or to the extent determined by the Board of Directors, any action that could be taken by the Committee may be taken by the Board of Directors, provided that any such action may be taken with respect to Covered Employees only by those members of the Board of Directors who are considered "outside directors" within the meaning of Treasury Reg. Section 1.162-27(e)(3). A majority of the members of the Committee shall constitute a quorum. The vote of a majority of a quorum shall constitute action by the Committee. b. The Committee shall have full and complete authority, in its sole and absolute discretion, (i) to exercise all of the powers granted to it under the Plan, (ii) to construe, interpret and implement the Plan and any related document, (iii) to prescribe, amend and rescind rules relating to the Plan, (iv) to make all determinations necessary or advisable in administering the Plan and (v) to correct any defect, supply any omission and reconcile any inconsistency in the Plan. The actions and determinations of the Committee on all matters relating to the Plan and any Awards will be final and conclusive. The Committee's determinations under the Plan need not be uniform and may be made by it selectively among Participants who receive, or who are eligible to receive, Awards under the Plan, whether or not such persons are similarly situated. c. The Committee and others to whom the Committee has allocated or delegated authority or duties shall keep a record of all their proceedings and actions and shall maintain all such books of account, records and other data as shall be necessary for the proper administration of the Plan. d. The Company shall pay all reasonable expenses of administering the Plan, including, but not limited to, the payment of professional fees. e. It is the intent of the Company that this Plan and Awards hereunder satisfy, and be interpreted in a manner that satisfy, (i) in the case of Participants who are or may be Insiders, the applicable requirements of Rule 16b-3 of the Exchange Act, so that such persons will be entitled to the benefits of Rule 16b-3, or other exemptive rules under Section 16, and will not be subjected to avoidable liability thereunder and (ii) in the case of Performance Compensation Awards, the applicable requirements of Code section 162(m). If any provision of this Plan or of any Award Agreement would otherwise frustrate or conflict with the intent expressed in this Section 8(e), that provision, to the extent possible, shall be interpreted and deemed amended so as to avoid such conflict. To the extent of any remaining irreconcilable conflict with such intent, such provision shall be deemed void as applicable to Insiders and/or Covered Employees, as applicable. 8 f. The Committee may appoint such accountants, counsel and other experts as it deems necessary or desirable in connection with the administration of the Plan. g. Except to the extent prohibited by applicable law or otherwise, the Committee may from time to time allocate to one or more of its members and delegate to one or more Employees all or any portion of its authority and duties, provided that the Committee may not allocate or delegate any discretionary authority with respect to substantive decisions or functions regarding the Plan or Awards to the extent inconsistent with the intent expressed in Section 8(e). SECTION 9. ADJUSTMENT PROVISIONS a. In the event of any change in the outstanding Shares by reason of a stock dividend or stock split, the number of Shares then remaining subject to this Plan, and the maximum number of Shares that may be issued to any single Participant pursuant to this Plan, including those that are then covered by outstanding Awards, shall (i) in the event of an increase in the number of outstanding Shares, be proportionately increased and the exercise price for each Share then covered by an outstanding Award shall be proportionately reduced, and (ii) in the event of a reduction in the number of outstanding Shares, be proportionately reduced and the exercise price for each Share then covered by an outstanding Award shall be proportionately increased. b. In the event of any change in the outstanding Shares by reason of a recapitalization, merger or consolidation (whether or not the Company is the surviving corporation), reorganization, combination or exchange of shares or other similar corporate changes or an extraordinary dividend in cash or property, but not including the repurchase or issuance of Shares by the Company unrelated to any such corporate change or extraordinary dividend, the number and kind of shares subject to this Plan, the maximum number of shares that may be issued to any single Participant, the number and kind of shares subject to outstanding Awards and the exercise price thereof shall be adjusted by the Committee as it deems appropriate to prevent dilution or enlargement of the rights and benefits intended to be conveyed by an Award. c. The Committee shall make any further adjustments as it deems necessary to help ensure equitable treatment of any holder of an Award as the result of any transaction affecting the securities subject to the Plan not described in Section 9(a) or (b), or as is required or authorized under the terms of any applicable Award Agreement, provided the Committee shall not be permitted under this Section 9(c) to increase the number of Shares available for Awards in total or to each Participant as set forth in Section 5. d. The existence of the Plan and the Awards granted hereunder shall not affect or restrict in any way the right or power of the Board of Directors or the shareholders of the Company to make or authorize any adjustment, 9 recapitalization, reorganization or other capital structure of its business, any merger or consolidation of the Company, any issue of bonds, debentures, preferred or prior preference shares ahead of or affecting the Shares or the rights thereof, the dissolution or liquidation of the Company or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding. SECTION 10. CHANGE OF CONTROL a. In the event of a Change of Control, in addition to any action required or authorized by the terms of an Award Agreement, the Committee may, in its sole discretion, take any of the following actions as a result, or in anticipation, of any such event to assure fair and equitable treatment of Participants: (i) accelerate time periods for purposes of vesting in, or realizing gain from, any outstanding Award made pursuant to this Plan; (ii) offer to purchase any outstanding Award made pursuant to this Plan from the holder for its equivalent cash value, as determined by the Committee, as of the date of the Change of Control; or (iii) make adjustments or modifications to outstanding Awards as the Committee deems appropriate to maintain and protect the rights and interests of Participants following such Change of Control. b. A "Change of Control" means a change in control of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act, provided that, without limitation, such a Change of Control shall include and be deemed to occur upon the following events: (i) Any person (as such term is defined in Sections 13(d) and 14(d)(2) of the Exchange Act) other than the Company, its Subsidiaries or any employee benefit plan of the Company or its Subsidiaries, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the then outstanding securities of the Company. (ii) The Incumbent Directors cease to constitute a majority of the Board of Directors. "Incumbent Directors" means the members of the Board of Directors at the effective date of the Plan and persons elected or nominated for election as their successors or pursuant to increases in the size of the Board by a vote of at least two-thirds of the Incumbent Directors and successors or additional members so elected or nominated. (iii) The shareholders of the Company approve a merger, combination, consolidation, recapitalization or other reorganization of the Company 10 with one or more other entities that are not wholly-owned Subsidiaries and, as a result of the transaction, less than 50% of the outstanding voting securities of the surviving or resulting corporation shall immediately after the event be beneficially owned in the aggregate by shareholders of the Company, determined as of the record date for determination of holders entitled to vote on the action or the day immediately prior to the event in the absence of a vote. (iv) The Shareholders of the Company approve a plan of liquidation and dissolution or sale or transfer of all or substantially all of the Company's assets to an entity that is not a wholly-owned Subsidiary. SECTION 11. MISCELLANEOUS a. NONASSIGNABILITY. Except as otherwise provided in this Plan or by the Committee, no Award or benefit or right related thereto shall be assignable or transferable except by will or by the laws of descent and distribution. b. OTHER PAYMENTS OR AWARDS. Nothing contained in the Plan shall be deemed in any way to limit or restrict the Company or a Subsidiary from making any award or payment to any person under any other plan, arrangement or understanding, whether now existing or hereafter in effect. c. PAYMENTS TO OTHER PERSONS. To the extent permitted by law, none of the benefits payable under or relating to the Plan shall be subject to the claims or legal process of the creditors of a Participant or of his or her beneficiary, spouse, prior spouse, or other persons or entity. Any payment legally required to be made to any person other than the person to whom any amount is made available under the Plan shall be a complete discharge of the liability with respect thereto. d. UNFUNDED PLAN. The Plan shall be unfunded. No provision of the Plan or any Award Agreement shall require the Company or a Subsidiary, for the purpose of satisfying any obligations under the Plan, to purchase assets or place any assets in a trust or other entity to which contributions are made or otherwise to segregate any assets, nor shall the Company or a Subsidiary maintain separate bank accounts, books, records or other evidence of the existence of a segregated or separately maintained or administered fund for such purposes. Participants shall have no rights under the Plan other than as unsecured general creditors of the Company or a Subsidiary, except that insofar as they may have become entitled to payment of additional compensation by performance of services, they shall have the same rights as other employees under generally applicable law. e. LIMITS OF LIABILITY. Any liability of the Company or a Subsidiary to any Participant with respect to an Award shall be based solely upon contractual obligations created by the Plan and the Award Agreement. Neither the Company or its Subsidiaries, nor any member of the Board of Directors or of the 11 Committee, nor any other person participating in any determination of any question under the Plan, or in the interpretation, administration or application of the Plan, shall have any liability to any party for any action taken, or not taken, in good faith under the Plan. f. RIGHTS OF PARTICIPANTS. Status as an eligible Employee shall not be construed as a commitment that any Award shall be made under this Plan to such eligible Employee or to eligible Employees generally. Nothing contained in this Plan or in any Award Agreement shall confer upon any Employee or Participant any right to continue in the employ or other service of the Company or a Subsidiary or constitute any contract or limit in any way the right of the Company or a Subsidiary to change such person's compensation or other benefits or to terminate the employment or other service of such person with or without cause. Except as provided otherwise in an Award Agreement, an Employee's (i) transfer from the Company to a Subsidiary or affiliate of the Company, whether or not incorporated, or vice versa, or from one Subsidiary to another; (ii) change in status to or from employee or consultant; or (iii) leave of absence, duly authorized in writing by the Company or a Subsidiary, shall not be deemed a termination of such Employee's employment or other service. g. RIGHTS AS A SHAREHOLDER. A Participant shall have no rights as a shareholder with respect to any Shares covered by an Award until the date the Participant becomes the holder of record of such Shares. Except as provided in Section 9, no adjustment shall be made for dividends or other rights, unless the Award Agreement specifically requires such adjustment. h. WITHHOLDING. Applicable taxes, to the extent required by law, shall be withheld in respect of all Awards. A Participant may satisfy the withholding obligation by paying the amount of any taxes in cash, check (subject to collection) or Shares, or with the approval of the Committee, Shares may be deducted from the payment to satisfy the obligation in full or in part. The amount of the withholding and the number of Shares to be paid or deducted in satisfaction of the withholding requirement shall be determined by the Committee with reference to the Fair Market Value of the Shares when the withholding is required to be made. i. SECTION HEADINGS. The section headings contained herein are for the purpose of convenience only, and in the event of any conflict, the text of the Plan, rather than the section headings, shall control. j. CONSTRUCTION. In interpreting the Plan, the masculine gender shall include the feminine, the neuter gender shall include the masculine or feminine, and the singular shall include the plural unless the context clearly indicates otherwise. k. INVALIDITY. If any term or provision contained herein or in any Award Agreement shall to any extent be invalid or unenforceable, such term or provision will be 12 reformed so that it is valid, and such invalidity or unenforceability shall not affect any other provision or part hereof or thereof. l. APPLICABLE LAW. The Plan, the Award Agreements and all actions taken hereunder or thereunder shall be governed by, and construed in accordance with, the laws of the State of Minnesota without regard to the conflict of law principles thereof. m. COMPLIANCE WITH LAWS. Notwithstanding anything contained herein or in any Award Agreement to the contrary, the Company shall not be required to sell or issue Shares hereunder or thereunder if the issuance would constitute a violation by the Participant or the Company of any provisions of any law or regulation of any governmental authority or any national securities exchange; and as a condition of any sale or issuance, the Company may require such agreements or undertakings, if any, as the Company may deem necessary or advisable to assure compliance with any such law or regulation. n. EFFECTIVE DATE AND TERM. The Plan was adopted by the Board of Directors effective as of March 10, 2004, subject to approval by the Company's shareholders. The Committee may grant Awards prior to shareholder approval, provided, however, that Awards granted prior to such shareholder approval are automatically cancelled if shareholder approval is not obtained at or prior to the period ending 12 months after the date the Plan is effective and provided further that no Award may be exercisable prior to the date shareholder approval is obtained. The Plan shall remain in effect until all Awards under the Plan have been exercised or terminated under the terms of the Plan and applicable Award Agreements, provided that Incentive Stock Options under the Plan may only be granted within ten years from the effective date of the Plan. 13 EX-31 4 c87065exv31.txt RULE 13A-14(A)/15D-14(A) CERTIFICATIONS EXHIBIT 31 CERTIFICATIONS I, Gregory R. Binkley, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Sportsman's Guide, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 10, 2004 /s/ Gregory R. Binkley ------------------------------- Gregory R. Binkley President and CEO I, Charles B. Lingen, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Sportsman's Guide, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 2 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 10, 2004 /s/ Charles B. Lingen ---------------------------------------- Charles B. Lingen Executive Vice President of Finance & Administration/CFO 3 EX-32 5 c87065exv32.txt SECTION 1350 CERTIFICATIONS EXHIBIT 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of The Sportsman's Guide, Inc. (the "Company") on Form 10-Q for the quarter ended June 30, 2004 as filed with the Securities and Exchange Commission (the "Report"), I, Gregory R. Binkley, Chief Executive Officer, and I, Charles B. Lingen, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 10, 2004 /s/ Gregory R. Binkley ------------------------------------------------- Gregory R. Binkley, President (Chief Executive Officer) /s/ Charles B. Lingen ------------------------------------------------- Charles B. Lingen, Executive Vice President of Finance and Administration/Chief Financial Officer (Principal Financial and Accounting Officer) A signed original of this written statement required by Section 906 has been provided to The Sportsman's Guide, Inc. and will be retained by The Sportsman's Guide, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. 1 -----END PRIVACY-ENHANCED MESSAGE-----