<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
[No Fee Required, Effective October 7, 1996]
For the Fiscal Year Ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from to
Commission File Number 0-21632
ELLETT BROTHERS, INC.
(Exact name of Registrant as specified in its charter)
SOUTH CAROLINA 57-0957069
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
267 COLUMBIA AVENUE, CHAPIN, SOUTH CAROLINA 29036
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (803) 345-3751
Securities registered pursuant to section 12(b) of the Act:
NONE
Securities registered pursuant to section 12(g) of the Act:
Title for each class Name of each exchange on which registered
COMMON STOCK (NO PAR VALUE) NASDAQ NATIONAL MARKET SYSTEM
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 shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
As of February 28, 1997 there were 5,081,000 shares of common stock of the
registrant outstanding, and the aggregate market value of the shares of common
stock held by nonaffiliated shareholders (based upon the closing price for the
stock on the Nasdaq National Market on February 28, 1997) was $11,816,500.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the fiscal year ended December
31, 1996 are incorporated by reference into Parts I, II and IV of this report.
Portions of the Registrant's Proxy Statement in connection with the Registrant's
1996 Annual Meeting of Shareholders to be held May 28, 1997 are incorporated by
reference into Part III of this report.
Page 1 of 10
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PART I
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical in nature, are
intended to be, and are hereby identified as, 'forward looking statements' for
purposes of the safe harbor provided by Section 21E of the Securities Exchange
Act of 1934, as amended by Public Law 104-67. The Company cautions readers that
forward looking statements, including without limitation, those relating to the
Company's future business prospects, revenues, working capital, liquidity,
capital needs, interest costs, and income, are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
indicated in the forward looking statements, due to several important factors
herein identified, among others, and other risks and factors identified from
time to time in the Company's reports filed with the SEC.
ITEM 1. BUSINESS
BACKGROUND
GENERAL
Ellett Brothers, Inc. and subsidiaries (the "Company") is a nationwide marketer
and supplier of natural outdoor sporting goods products. The Company markets and
distributes a broad line of products and accessories for hunting and shooting
sports, marine, camping, archery, and other related outdoor activities. The
Company's product line, which contains over 60,000 stock-keeping units (SKU's),
includes firearms, ammunition, marine electronics, small engine replacement
parts, electric trolling motors, binoculars, cutlery, archery equipment, leather
goods, flashlights, tents, lanterns, sportsmen's gifts, camping accessories,
decorative boxes, licensed nostalgia items and a variety of other natural
outdoor sporting goods products. During fiscal years 1996, 1995 and 1994,
revenues from sales of firearms and ammunition comprised approximately 49.2%,
50.8%, and 63.2%, respectively, of the Company's revenues. The Company features
such recognized brand names as Remington, Ruger, Winchester, Daisy, Rocky Shoes
and Boots, LaCrosse, Motorguide, Coleman, Rubbermaid, Swiss Army, Bear Archery,
and Nikon. The Company's mailing address is 267 Columbia Avenue, Chapin, South
Carolina, 29036, and its telephone number is (803) 345-3751.
Ellett Brothers, Inc. ("Ellett") was incorporated in the state of South Carolina
in June 1992 as the successor to the business that has operated continuously
under the Ellett Brothers name through various ownerships since 1933. Ellett
made an initial public offering of its common stock in June 1993 with a
follow-on offering in October of 1994. During 1995, Ellett implemented its
acquisition strategy by acquiring assets of entities with products that
complement Ellett's existing product line as well as opening the possibility of
new markets or channels of distribution. As a result, substantially all of the
assets of Evans Sports, Inc. ("Evans") and Vintage Editions, Inc. ("Vintage")
were acquired in April and September 1995, respectively. Evans is a manufacturer
of outdoor sporting accessories and wooden nostalgia boxes. Vintage is a
manufacturer of specialty licensed nostalgia products. Also in August 1995,
Ellett purchased the accounts receivable and inventory of Safesport
Manufacturing Company ("Safesport") and subsequently relocated these assets to
South Carolina. Safesport is an importer and marketer of outdoor leisure
products, specializing in camping accessories and cutlery items. All of the
newly acquired assets were transferred to wholly-owned subsidiaries that were
incorporated in the state of South Carolina at the time of each respective
purchase.
HISTORICAL DEVELOPMENT
Ellett originally distributed only fishing supplies to independent sporting
goods dealers located in North Carolina, South Carolina, and Georgia. In 1957,
Ellett began distributing hunting and shooting sports products and outdoor
accessories in an expanded territory and subsequently discontinued the
distribution of fishing equipment. In the early 1970's, Ellett instituted a
teleservicing program that resulted in significant growth in sales and profits.
Shortly thereafter, Ellett eliminated all field sales personnel and began
selling exclusively through its teleservicing staff. By the end of that decade,
the teleservicing operation had transformed Ellett into a leading national
distributor of outdoor sporting goods products, with a primary emphasis on
hunting and shooting sports. In late 1988, the Company began broadening its
product line to include marine accessories. The Company's marine accessories
business has proven to be a natural extension of Ellett Brothers' traditional
sporting goods business, with sales increasing from $2.6 million in 1989 to over
$19.3 million in 1996. In 1994, Ellett formed a new sales group to specifically
target archery retailers, and have shown continued growth since their inception.
The subsidiaries were also purchased to further add to the growth of the
Company, by providing increased sales and gross profit as well as new channels
of distribution.
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DESCRIPTION OF BUSINESS
MARKETING AND DISTRIBUTION
To optimize its responsiveness to its distribution customers and suppliers,
Ellett utilizes a highly-trained group of business unit managers and
state-of-the-art telecommunications technology rather than a field sales force.
Ellett's customer base is organized into individual business units. Each sales
associate, after ten weeks of intensive training, is promoted to manager of an
individual business unit serving a designated customer base. Each business unit
manager also receives an additional 200 hours of training annually. The
teleservicing speed with which sales programs can be implemented is a pivotal
aspect of Ellett's operation. Teleservicing enables Ellett to communicate
frequently with its entire customer base, providing timely updates on market
developments, new product introductions, promotions, order status and inventory
availability. Ellett believes that it is capable of contacting its entire
customer base in two days rather than the weeks typically required by a
traditional field sales force.
The subsidiaries use a combination of teleservicing similar to Ellett's and a
traditional field sales force. Safesport has a teleservicing staff of five
business unit managers as well as outside sales representatives located across
the United States. Evans and Vintage rely on an inside marketing staff as well
as outside sales representatives. The products of the subsidiaries are also
cross-marketed to traditional Ellett customers by Ellett's sales associates to
help generate additional sales for the subsidiaries.
Another important element in maintaining successful customer relationships has
been Ellett's ability to ship orders in a timely fashion. Ellett monitors its
inventory levels through its computerized inventory control system allowing it
to minimize out-of-stock inventory positions. Customer orders are usually ready
for shipment within six business hours following the time the order is received
by a business unit manager. Safesport's inventory control system is also similar
to Ellett's and produces the same benefits to its customers. Consequently, the
Company has virtually no backlog of orders.
The Company utilizes United Parcel Service for delivery services to the majority
of its customers, while a few customers pick up merchandise with their own fleet
of trucks. The use of UPS has allowed the Company to avoid the substantial fixed
costs associated with regional warehouse locations and a fleet of trucks.
PURCHASING AND SUPPLIERS
The Company currently purchases products from approximately 900 manufacturers
and other suppliers. Management believes that the Company's size, reputation,
prompt payment history and overall knowledge of independent sporting goods
retailers have contributed to strong relationships with its suppliers. By taking
advantage of periodic extended payment programs offered by many of these
suppliers, the Company is able to make similar extended payment programs
available to its customers. Certain suppliers also provide advertising
allowances to the Company to assist in the promotion and sale of their products.
The Company's four largest suppliers accounted for approximately 30.2%, 26.6%
and 21.8% of the Company's purchases during 1996, 1995 and 1994, respectively.
The Company believes that its relationships with its suppliers are generally
good, however the Company has no long-term purchase commitments with any of its
suppliers.
CUSTOMERS
The Company currently sells to over 25,800 active customer accounts (defined as
customers who have made a purchase from the Company within the last twelve
months), the majority of which are independent natural outdoor sporting goods
retailers (versus mass merchandisers). The Company seeks to expand its existing
customer base further through the identification of new or alternative channels
for its product lines. New distribution channels recently targeted by the
Company include specialty pro shop retailers of archery products, industry
organization groups and larger sporting goods stores.
Each of Ellett's and Safesport's customers has a specifically-assigned business
unit manager who develops a continuing relationship with the customer. As a
result, management believes that these customers benefit from more personal and
timely interaction with the Company, and the Company benefits from better
management of customer relationships. Business unit managers continually update
each customer's file with product, sales and other customer-specific information
to tailor the Company's services to better suit the customer's needs. Customers
regularly contact their personal business unit manager to obtain current
information regarding compatible products and accessories, product warranties
and product availability.
The Company's largest customer account was responsible for approximately 2.4% of
1996 sales, and sales to the Company's ten largest customer accounts represented
approximately 5.8% of 1996 sales.
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COMPETITION
The industry in which Ellett competes is extremely competitive. The principal
methods of competition within the natural outdoor sporting goods distribution
industry include purchasing convenience, customer service, inventory selection,
price and rapid customer order turnaround. Ellett believes that it
differentiates itself by its strategies of servicing each customer through that
customer's own personal business unit manager, providing customers with ongoing
product and market information and after-the-sale follow-up, carrying one of the
most extensive selections of inventory in its various product categories and
having customer orders generally ready for shipment within six business hours of
the order being received by a business unit manager.
Ellett's customer base consists almost exclusively of independent sporting goods
retailers located across the United States. Ellett competes with other national
distributors, various regional and local distributors and various manufacturers
who sell certain products directly to these retailers. Ellett has identified
approximately 80 distributors, of whom approximately 10 are national in scope,
competing in the hunting and shooting sports, camping and archery products and
outdoor accessories markets, and has identified approximately 60 other
distributors competing in the marine accessories markets. Certain of these
competitors may have substantially greater financial resources, larger sales and
support staffs and greater purchasing power than Ellett. Ellett's ability to
compete successfully depends on factors both within and outside its control,
including its ability, if necessary, to support reductions in selling prices
through reductions in operating expenses, timing and success of product
introductions, access to high demand products, successful inventory management,
suitable product quality, reliability and price and general economic conditions.
Ellett also indirectly competes with sporting goods mass merchandisers or
"superstores," to which Ellett generally does not sell but which generally sell
in competition with the Ellett's primary customer base of independent sporting
goods retailers.
Although Ellett shares customers with its subsidiaries, competition in the
markets of the subsidiaries differs from Ellett's traditional distribution
business. Management believes Evans and Vintage hold the majority of the market
for nostalgic and licensed decorative boxes, with a few smaller companies
competing for market share. Evans' customer base is dominated by mass
merchandisers and Vintage's sales are predominately through specialty catalogs
and gift shops. The main competitive factor for Evans and Vintage is being able
to produce a product timely and at a price level commensurate to the quality of
the item. Safesport has a higher level of competition within the camping
accessories and cutlery market with approximately a dozen competitors. Like
Ellett, Safesport relies on its teleservicing sales staff, pricing and
availability of inventory as well as shipping customer orders as soon as
possible.
GOVERNMENT REGULATION AND LICENSES
In recent years, an increasing amount and variety of legislation aimed at
eliminating or limiting the production, sale, possession, ownership and use of
certain kinds of firearms has been introduced in the United States Congress and
in various state legislatures, and the Company expects that such legislation
will continue to be introduced in the future. In addition, certain states and
other local governments have already adopted, or are currently considering the
adoption of, laws aimed at the control of firearm possession and ownership by
the public. In 1994, the Brady Bill, which imposes up to a five-day waiting
period for a background check for purchasers of handguns, became effective. In
May 1994, the federal government banned the importation of firearms and
ammunition from China, including three types of firearms and related ammunition
sold by the Company, and the September 1994 Crime Bill imposed a ban on the
production and importation, but not the sale, of 19 types of firearms (including
copycat versions), six of which are sold by the Company, as well as large
capacity magazines. Such legislation however, still allows the Company to
continue to sell these products. There can be no assurance that existing and
future gun control legislation will not have a substantial negative impact on
consumer demand for firearms and result in a material adverse effect on the
Company's financial condition and results of operations.
The Company is also subject to a variety of federal, state and local laws and
regulations relating to, among other things, advertising, the sale and handling
of firearms, the offering and extension of credit and workplace and product
safety, including various regulations concerning the storage of gunpowder.
Certain governmental licenses and permits are also necessary in connection with
the Company's operations. In particular, as with any seller of firearms, the
Company is required to maintain a federal firearms license that imposes various
restrictions and conditions on the Company's operations, including a requirement
that the Company resell firearms and ammunition only to federally licensed
firearms dealers. In addition, all exports of firearms and ammunition require
federal government licenses in advance of shipment. In the event that the
Company should be determined to be in violation of any applicable regulations,
licenses or permits, the Company could become subject to cease and desist
orders, injunctions, civil fines and other penalties. Any such penalties could
have a material adverse effect on the Company's business and results of
operations.
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SEASONALITY
Historically the Company's business has been seasonal. The sales of hunting and
shooting sports products, as well as camping, archery, and outdoor accessories,
usually increase in the third quarter of each year, and peak early in the fourth
quarter. Sales of marine accessories usually increase in the first quarter of
each year, then peak midway through the second quarter and continue at similar
levels through the first half of the third quarter. Operations of the
subsidiaries have been seasonal, producing significantly higher sales and gross
profit during the third and fourth quarters, with losses in the first and second
quarters. The Company's quarterly operating results also may be affected by a
wide variety of factors, such as legislative and regulatory changes, competitive
pressures, and general economic conditions.
ASSOCIATES
The Company views all of its personnel as associates of the Company, rather than
merely as employees. As of February 28, 1997, the Company employed approximately
430 associates, none of whom was a member of an industry trade union or
collective bargaining unit. Part-time workers (primarily clerical and
distribution) are also utilized over the course of the year as needed to assist
the Company during periods of peak sales.
COMPANY TRADENAMES AND TRADEMARKS
The Company utilizes several trade names, trademarks and service marks in the
course of its business, including, among others, the Ellett Brothers(R), Ellett
Brothers As Big As All Outdoors(R), As Big As All Outdoors(R), and Safesport(R)
trademarks. Although the Company's operations are not dependent upon any single
trade name or trademark, other than the Ellett Brothers trademark, the Company
considers its various trademarks and trade names to be valuable to its business.
ITEM 2. PROPERTIES
The Company's operations are carried out at five separate locations. The
following table sets forth certain information regarding each of these
facilities:
<TABLE>
<CAPTION>
Approximate
Aggregate Usable
Square Feet Status
---------------------------------
<S> <C> <C>
Chapin, South Carolina 190,000 Owned
Chapin, South Carolina 40,000 Owned
Newberry, South Carolina 140,000 Owned
Houston, Missouri 62,000 Leased
Taylorsville, North Carolina 30,000 Leased
</TABLE>
The Company's headquarters is housed in the 190,000 square foot, two-story
office and warehouse facility located on 12 acres of land owned by the Company.
The second floor of this facility, approximately 40,000 square feet, encompasses
the Company's teleservicing sales and administrative departments, including a
complete media workshop as well as a video and photography studio. Both of the
Chapin, South Carolina facilities serve as collateral under the Company's
industrial revenue refunding bonds. See Note 8 to the Financial Statements
incorporated by reference into this report as set forth in Item 8. The Newberry
facility, located on 16.4 acres of land owned by the Company, includes 34,000
square feet of warehouse space added in February 1996 to accommodate the
distribution operations of Safesport relocated from Denver, Colorado.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings. See Note 13 to
the Financial Statements incorporated by reference into this report as set forth
in Item 8.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders of Ellett Brothers, Inc.
during the fourth quarter of fiscal year 1996.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required for this item is incorporated by reference from the
Company's 1996 Annual Report to Shareholders.
The Company did not sell any equity securities during the fiscal year ended
December 31, 1996 which were not registered under the Securities Act of 1933.
ITEM 6. SELECTED FINANCIAL DATA
The information required for this item is incorporated by reference from the
Company's 1996 Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required for this item is incorporated by reference from the
Company's 1996 Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(A) FINANCIAL STATEMENTS
The consolidated balance sheets of Ellett Brothers, Inc. and subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996 and the report dated February 14, 1997 of Coopers &
Lybrand L.L.P., independent accountants, are incorporated by reference from the
Company's 1996 Annual Report to Shareholders.
(B) SUPPLEMENTARY DATA
Quarterly results of operations for 1996 and 1995 are incorporated by reference
from of the Company's 1996 Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Information called for by Part III (Items 10, 11, 12 and 13) of this report on
Form 10-K has been omitted as the Company intends to file with the Securities
and Exchange Commission not later than April 30, 1997, a definitive proxy
statement pursuant to Regulation 14A promulgated under the Securities Exchange
Act of 1934. Such information will be set forth in such Proxy Statement and is
incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by the Item is incorporated by reference from the
section of the Company's Proxy Statement relating to the Annual Meeting of
Shareholders to be held May 28, 1997, under the caption "DIRECTORS AND EXECUTIVE
OFFICERS".
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ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from those
sections of the Company's Proxy Statement relating to the Annual Meeting of
Shareholders to be held May 28, 1997 under the captions "EXECUTIVE
COMPENSATION", "OPTIONS GRANTS", "FISCAL YEAR-END OPTION VALUES", "SAVINGS AND
RETIREMENT PLAN", "COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION" AND
"PERFORMANCE GRAPH."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from the
section of the Company's Proxy Statement relating to the Annual Meeting of
Shareholders to be held May 28, 1997 under the caption "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from the
section of the Company's Proxy Statement relating to the Annual Meeting of
Shareholders to be held May 28, 1997 under the caption "CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
1. Financial Statements:
Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Statements of Income - Years ended December 31,
1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity - Years
ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows - Years ended
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Report of Independent Accountants
This information is incorporated by reference from the Company's 1996
Annual Report to Shareholders as noted in Item 8 and included as Exhibit 13
filed as part of this Form 10-K.
2. Financial Statement Schedules:
Independent Auditors' Report - Page 8
Schedule II - Valuation and Qualifying Accounts - Page 9
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions, or are inapplicable, or the required information
is disclosed elsewhere, and therefore, have been omitted.
3. Exhibits: The Exhibits listed on the accompanying Index to Exhibits
on pages 11 and 12 are filed as part of this report.
(b) There were no reports filed on Form 8-K for the quarter ended December 31,
1996.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Ellett Brothers, Inc.
Our report on the consolidated financial statements of Ellett Brothers, Inc. and
subsidiaries is included on page 20 of the Company's 1996 Annual Report to
Shareholders. In connection with our audits of such financial statements, we
have also audited the related financial statement schedule, Schedule II -
Valuation and Qualifying Accounts, included on page 9 herein.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
Raleigh, North Carolina
February 14, 1997
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ELLETT BROTHERS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 & 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance at
Beginning Cost/ Other End
Description of Period Expenses Accounts Deductions of Period
--------------------- --------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
1996
Allowance for Doubtful Accounts $ 712 $ 933 $ 1,471(B) $ 2,366(A) $750
====== ======= ======== ======= ====
Allowance for Obsolete Inventory $ 500(D) $ - (E) $ -- $ - (F) $500
====== ======= ======== ======= ====
1995
Allowance for Doubtful Accounts $ 521 $ 905 $ 1,645(C) $ 2,359(A) $712
====== ======= ======== ======= ====
Allowance for Obsolete Inventory $ 250(D) $ - (E) $ 250(G) $ - (F) $500
====== ======= ======== ======= ====
1994
Allowance for Doubtful Accounts $ 512 $ 887 $ 953(B) $ 1,831(A) $521
====== ======= ======== ======= ====
Allowance for Obsolete Inventory $ 250(D) $ - (E) $ -- $ - (F) $250
====== ======= ======== ======= ====
</TABLE>
- ----------
The information above is provided in support of the financial statements as
further described in Note 2 to the financial statements.
(A) Represents actual write-off of uncollectable accounts.
(B) Recoveries.
(C) Represents $1,305 of recoveries and $340 of reserves established at the
acquisition of the Acquired Businesses and purchased accounts
receivable of another entity.
(D) The Company maintains a general reserve for excess or obsolete
inventory and for lower of cost or market adjustments. As part of the
Company's inventory management, slow moving items are identified and
prices are reduced until the items are liquidated. These sales are part
of sales and cost of sales.
(E) Reflected as cost of sales. See Note D above.
(F) Reflected as sales. See Note D above.
(G) Represents reserves established at acquisition of the Acquired
Businesses and purchased inventory of another entity.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ELLETT BROTHERS, INC.
(Registrant)
Date: March 31, 1997 By: /s/ Joseph F. Murray, Jr.
---------------------------
Joseph F Murray, Jr.
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert D. Gorham, Jr. Chairman of the Board March 31, 1997
- -------------------------
Robert D. Gorham, Jr.
/s/ Joseph F. Murray, Jr. Director, President and March 31, 1997
- ------------------------- Chief Executive Officer
Joseph F. Murray, Jr.
/s/ Richard M. Eddinger Vice President of Finance, Treasurer March 31, 1997
- ------------------------- and Chief Financial Officer
Richard M. Eddinger
/s/ E. Wayne Gibson Director, Chairman of the Executive March 31, 1997
- ------------------------- Committee and Secretary
E. Wayne Gibson
/s/ William H. Batchelor Director March 31, 1997
- -------------------------
William H. Batchelor
/s/ Charles V. Ricks Director March 31, 1997
- -------------------------
Charles V. Ricks
/s/ William H. Stanley Director March 31, 1997
- -------------------------
William H. Stanley
</TABLE>
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INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
3(a) Articles of Incorporation of the Corporation. Incorporated by
reference to the Exhibit of the same number filed as part of the
Corporation's Registration Statement on Form S-1 (File No.
33-61490).
3(b) Bylaws of the Corporation. Incorporated by reference to the
Exhibit of the same number filed as part of the Corporation's
Registration Statement on Form S-1 (File No. 33-61490).
4(a) Specimen Stock Certificate for the Common Stock of the
Corporation. Incorporated by reference to the Exhibit of the same
number filed as part of the Corporation's Registration Statement
on Form S-1 (File No. 33-61490).
4(c) Loan Agreement between Lexington County, South Carolina and
Ellett Brothers Limited Partnership dated as of November 1, 1988.
Incorporated by reference to the Exhibit of the same number filed
as part of the Corporation's Registration Statement on Form S-1
(File No. 33-61490).
4(d) Promissory Note of Ellett Brothers Limited Partnership to
Lexington County, South Carolina dated December 1, 1988.
Incorporated by reference to the Exhibit of the same number filed
as part of the Corporation's Registration Statement on Form S-1
(File No. 33-61490).
4(e) Trust Indenture between Lexington County, South Carolina and
Ellett Brothers Limited Partnership dated as of November 1, 1988.
Incorporated by reference to the Exhibit of the same number filed
as part of the Corporation's Registration Statement on Form S-1
(File No. 33-61490).
4(f) Mortgage and Security Agreement between Ellett Brothers Limited
Partnership and Citizens and Southern Trust Company (South
Carolina), National Association, dated as of November 1, 1988.
Incorporated by reference to the Exhibit of the same number filed
as part of the Corporation's Registration Statement on Form S-1
(File No. 33-61490).
4(i) Form of Amendment dated June 3, 1992 between Ellett Brothers
Limited Partnership, NationsBank, Allstate Municipal Income
Opportunities Trust and Allstate Municipal Income Trust II
relating to the Loan Agreement filed as Exhibit 4(c).
Incorporated by reference to the Exhibit of the same number filed
as part of the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1993.
4(j) Form of Letter Agreement dated July 29, 1992 among Allstate
Municipal Income Opportunities Trust, Allstate Municipal Income
Trust II, Ellett Brothers Limited Partnership, NationsBank and
Lexington County relating to the Loan Agreement filed as Exhibit
4(c). Incorporated by reference to the Exhibit of the same number
filed as part of the Corporation's Annual Report on Form 10-K for
the year ended December 31, 1993.
4(k) Letter dated February 23, 1993 of Allstate Municipal Income
Opportunities Trust and Allstate Municipal Income Trust II to
Ellett Brothers Limited Partnership relating to the Loan
Agreement filed as Exhibit 4(c). Incorporated by reference to the
Exhibit of the same number filed as part of the Corporation's
Registration Statement on Form S-1 (File No. 33-61490).
4(l) Form of Assignment and Assumption Agreement dated June 9, 1993
between Ellett Brothers Limited Partnership and Ellett Brothers,
Inc. relating to the Loan Agreement filed as Exhibit 4 (c).
Incorporated by reference to the Exhibit of the same number filed
as part of the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1993.
10(a) Option Agreement with Joseph F. Murray, Jr. Incorporated by
reference to the Exhibit of the same number filed as part of the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1995.
11
<PAGE> 12
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
10(b) Option Agreement with Leonard C. Hale. Incorporated by reference
to the Exhibit of the same number filed as part of the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1995.
10(c) Option Agreement with Richard M. Eddinger. Incorporated by
reference to the Exhibit of the same number filed as part of the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1995.
10(d) Financing and Security Agreement dated June 10, 1994 between
First Union Commercial Corporation and the Corporation.
Incorporated by reference to the Exhibit of the same number filed
as part of the Corporation's quarterly report on Form 10-Q for
the quarter ended June 30, 1994.
10(e) Amendment dated April 21, 1995 to the Financing and Security
Agreement filed as exhibit 10(d). Incorporated by reference to
the Exhibit of the same number filed as part of the Corporation's
Annual Report on Form 10-K for the year ended December 31,
1995.
10(f) Amendment dated December 23, 1996 to the Financing and Security
Agreement filed as Exhibit 10(d).
13 Portions of the Annual Report to Shareholders of the Company for
the year ended December 31, 1996. Except for those portions of
such Annual Report to Shareholders expressly incorporated by
reference into the report, such Annual Report to Stockholders in
furnished solely for the information of the Securities and
Exchange Commission and shall not be deemed a "filed" document.
21 Subsidiaries of the Registrant.
27 Financial data schedule.
12
<PAGE> 1
Exhibit 10f
Page 1
SECOND AMENDMENT TO
FINANCING AND SECURITY AGREEMENT
THIS SECOND AMENDMENT TO FINANCING AND SECURITY AGREEMENT, dated as of
December 23, 1996, is by and among FIRST UNION COMMERCIAL CORPORATION
("Lender"), ELLETT BROTHERS, INC. ("Ellett"), LEISURE SPORTS MARKETING, INC.
("Leisure"), EVANS SPORTS, INC., ("Evans"), SAFESPORT MANUFACTURING COMPANY
("Safesport"), and VINTAGE EDITIONS, INC. ("Vintage") (hereinafter Ellett,
Leisure, Evans, Safesport and Vintage may be referred to collectively as the
"Borrower").
RECITAL
A. The Lender, Ellett and Evans have entered into that certain
Financing and Security Agreement, dated June 10, 1994, as amended April 21, 1995
(the "Financing Agreement").
B. Subsequent to the date of the Financing Agreement, Leisure,
Safesport and Vintage have been formed and have acquired various assets.
C. Leisure, Safesport and Vintage desire to become parties to the
Financing Agreement and the Lender has agreed to permit Leisure, Safesport and
Vintage to become parties to the Financing Agreement and has also agreed to make
various other amendments to the Financing Agreement as set forth herein.
NOW, THEREFORE, the parties hereto agree as follows:
1. The Financing Agreement is hereby amended as follows:
(a) The introductory paragraph of the Financing
Agreement is amended in its entirety so that such paragraph
now reads as follows:
AGREEMENT made June 10, 1994, as amended
April 21, 1995 and December 23, 1996, by and between
ELLETT BROTHERS, INC., a business corporation duly
organized under the laws of the State of South
Carolina having a principal place of business at 267
Columbia Avenue, Chapin, South Carolina 29036
("Ellett"), EVANS SPORTS, INC., a business
corporation duly organized under the laws of the
State of South Carolina having a principal place of
business at 267 Columbia Avenue, Chapin, South
Carolina 29036 ("Evans"), LEISURE SPORTS MARKETING,
INC., a business corporation duly organized under the
laws of the State of South Carolina having a
principal place of business at 267 Columbia Avenue,
Chapin, South Carolina 29036 ("Leisure"), SAFESPORT
MANUFACTURING COMPANY, a business corporation duly
organized under the laws of the State of South
Carolina having a principal place of business at 267
Columbia Avenue, Chapin, South Carolina 29036
("Safesport") and VINTAGE EDITIONS, INC., a business
corporation duly organized under the laws of the
State of South Carolina having a principal place of
business at 267 Columbia Avenue, Chapin, South
Carolina 29036 ("Vintage") (herein Ellett, Evans,
Leisure, Safesport and Vintage are collectively
referred to as "Borrower") and FIRST UNION COMMERCIAL
CORPORATION ("Lender") with its principal place of
business at Charlotte, North Carolina.
(b) The first paragraph of Section 1(a) is amended in
its entirety so that such paragraph now reads as follows:
<PAGE> 2
Exhibit 10f
Page 2
Lender agrees to make loans (the "Loans") to Borrower
from time to time up to the sum of the following amounts
(hereinafter such sum shall be referred to as the "Borrowing
Base"):
(A) an amount equal to 85% of the
outstanding amount of "Eligible Trade Receivables" of
Ellett; plus
(B) an amount equal to 85% of "Eligible
Dated Trade Receivables" of Ellett; provided,
however, the foregoing amount specified in this
subsection (B) shall not exceed 50% of the
Receivables of Ellett; plus
(C) an amount equal to the sum of 70% of
"Eligible Hunting and Shooting Sports Finished Goods
Inventory" of Ellett plus 50% of "Eligible Marine
Finished Goods Inventory" of Ellett plus an amount
equal to 50% of the "Eligible Subsidiary Inventory";
provided, however, such sum specified in this
subsection (C) shall not exceed $25,000,000.00 at
any time outstanding; plus
(D) an amount equal to 85% of the "Eligible
Subsidiary Receivables";
provided, however, the outstanding principal amount
of the Loans, plus the aggregate stated amount of
outstanding Drafts (as defined below) plus the Letter
of Credit Obligations (as defined below) shall not
exceed $40,000,000.00 at any time; provided further,
each Loan which bears interest at the Three Month
LIBOR Rate plus the Applicable Margin shall be in a
minimum amount of $1,000,000.00 and in multiples of
$1,000,000.00 in excess thereof.
(c) Section 2 is amended by adding the following
definitions in the alphabetically appropriate places:
"Eligible Subsidiary Inventory" means
Inventory of Leisure, Evans, Safesport and Vintage
which is and at all times shall continue to be
acceptable to Lender in all respects. Standards of
eligibility shall be fixed and revised from time to
time solely by Lender in its exclusive judgment.
"Eligible Subsidiary Receivables" means
Receivables of Leisure, Evans, Safesport and Vintage
which is and at all times shall continue to be
acceptable to Lender in all respects. Standards of
eligibility shall be fixed and revised from time to
time solely by Lender in its exclusive judgment.
(d) Section 11(iii) is amended in its entirety so
that such Section now reads as follows:
(iii) (A) declare or pay any cash dividends
or make any other cash distributions to its
stockholders; or (B) repurchase, redeem or retire any
of its capital stock; provided, however, Borrower
shall be permitted to make such dividend payments,
cash distributions, repurchases, redemptions or
retirements in fiscal year 1996 in an aggregate
amount equal to $1,800,000 and in any fiscal year
thereafter in an aggregate amount equal to 60% of
Borrower's net income after taxes for such fiscal
year;
(e) Section 11(iv) is amended in its entirety so that
such Section now reads as follows:
(iv) guarantee, assume, sell with recourse,
endorse, contingently agree to purchase, become
surety for, or otherwise become liable upon the
obligation of any other person, firm or corporation
other than by endorsement of negotiable instruments
for
<PAGE> 3
Exhibit 10f
Page 3
deposit or collection or similar transactions in the
ordinary course of business and other than the
guaranties executed by Ellett guaranteeing the
obligations of Evans, Leisure, Safesport and/or
Vintage;
(f) Section 11(vii) is amended in its entirety so
that such Section now reads as follows:
(vii) allow Borrower's ratio of net income before
interest and taxes to interest expense as of the last
day of fiscal year 1996 (computed for such fiscal
year) to be less than 1.7 to 1.0 or as of the last
day of each fiscal year thereafter (computed for each
such fiscal year) to be less than 2.0 to 1.0;
(g) Section 11(ix) is amended in its entirety so that
such Section now reads as follows:
(ix) allow aggregate capital expenditures made
during fiscal year 1994, 1995 or 1996 to exceed
$750,000.00 or made during fiscal year 1997 to exceed
$1,500,000.00; provided, however, Borrower may make
additional capital expenditures during fiscal years
1994, 1995 and 1996 in an aggregate amount of up to
$4,000,000.00.
(h) Section 17 is amended by adding the following
inventory locations of Evans, Safesport and Vintage:
Evans: 801 Industrial Drive
Houston, Texas County, Missouri
Safesport: 786 Wilson
Newberry, Newberry County,
South Carolina
267 Columbia Avenue
Chapin, Lexington, South Carolina
Vintage: 88 Buff Lane
Taylorsville, Alexander County,
North Carolina
(i) The first sentence of Section 20 of the Financing
Agreement is hereby amended in its entirety so that such
sentence now reads as follows:
This Agreement shall have an initial term
commencing on the date hereof through and including
January 31, 1998 and shall be automatically renewed
for successive periods of one year unless terminated
as herein provided.
2. Ellett, Evans, Leisure, Safesport and Vintage agree that
(a) Ellett, Evans, Leisure, Safesport and Vintage are included within
the term "Borrower" for all purposes in the Financing Agreement, (b)
Ellett, Evans, Leisure, Safesport and Vintage are jointly and severally
obligated to repay the Obligations (as defined in the Financing
Agreement), (c) the Obligations (as defined in the Financing Agreement)
include all obligations, liabilities and indebtedness of each of
Ellett, Evans, Leisure, Safesport and Vintage to the Lender and (d)
Ellett, Evans, Leisure, Safesport and Vintage have each granted the
Lender a security interest in all of their respective Receivables (as
defined in the Financing Agreement), Inventory (as defined in the
Financing Agreement) and Collateral (as defined in the Financing
Agreement) to secure the Obligations.
3. This Second Amendment may be executed in any number of
counterparts, each of which when so executed and delivered shall be
deemed an original.
<PAGE> 4
Exhibit 10f
Page 4
4. Ellett, Evans, Leisure, Safesport and Vintage will each
execute such additional documents as are reasonably requested by the
Lender to reflect the terms and conditions of this Second Amendment and
will cause to be delivered such certificates, legal opinions and other
documents as are reasonably required by the Lender. In addition,
Ellett, Evans, Leisure, Safesport and Vintage will pay all costs and
expenses in connection with the preparation, execution and delivery of
the documents executed in connection with this transaction, including,
without limitation, the reasonable fees and out-of-pocket expenses of
special counsel to the Lender as well as any and all filing and
recording fees and stamp and other taxes with respect thereto and to
save the Lender harmless from any and all such costs, expenses and
liabilities.
5. This Second Amendment may be executed in any number of
counterparts, each of which when so executed and delivered shall be
deemed an original, and it shall not be necessary in making proof of
this Second Amendment to produce or account for more than one
counterpart.
6. THIS SECOND AMENDMENT AND THE OTHER DOCUMENTS AND
AGREEMENTS EXECUTED IN CONNECTION HEREWITH (UNLESS SPECIFICALLY
STIPULATED TO THE CONTRARY IN SUCH DOCUMENT OR AGREEMENT), AND THE
RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER, SHALL
BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF NORTH CAROLINA WITHOUT REGARD TO CONFLICTS OF LAWS
PRINCIPLES.
<PAGE> 5
Exhibit 10f
Page 5
IN WITNESS WHEREOF, the parties hereto have caused this Second
Amendment to be executed by their duly authorized corporate officers as of the
day and year first above written.
ELLETT BROTHERS, INC.
By:________________________________
(Title)
EVANS SPORTS, INC., a South
Carolina corporation
By:________________________________
(Title)
LEISURE SPORTS MARKETING, INC., a
South Carolina corporation
By:________________________________
(Title)
SAFESPORT MANUFACTURING COMPANY, a
South Carolina corporation
By:________________________________
(Title)
VINTAGE EDITIONS, INC., a
South Carolina corporation
By:________________________________
(Title)
FIRST UNION COMMERCIAL CORPORATION
By:_______________________________
(Title)
<PAGE> 1
EXHIBIT 13
Ellett Brothers
Portions of the
1996 Annual
Report
<PAGE> 2
SELECTED FINANCIAL DATA(1)
(in thousands, except per share and other data)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $147,666 $150,411 $160,187 $118,652 $91,216
Income before income taxes 2,673 7,384 9,722 5,404 2,910
Net income(2) 1,687 4,634 6,156 3,415 1,822
Earnings per share(2)(3) 0.33 0.89 1.29 0.78 0.46
Dividends paid per share(4) 0.08 0.08 0.18 0.00 N/A
Weighted average number of
shares outstanding(3) 5,135 5,230 4,783 4,380 4,000
Working capital 55,029 50,512 45,678 31,949 19,052
Total assets 73,360 70,275 61,236 46,690 32,701
Long-term debt obligations 38,484 33,533 30,089 28,773 24,998
Shareholders' equity(5) 24,637 24,548 20,332 7,507 42
Other data:
Number of business units at year end 145 160 151 134 123
Number of customers served during year(6) 25,890 25,737 20,228 18,197 16,401
</TABLE>
(1) Prior to June 9, 1993, Ellett Brothers operated as the outdoor sporting
goods division of Ellett Brothers Limited Partnership. For comparison
purposes, amounts prior to June 9, 1993 reflect the operations of that
division of Ellett Brothers Limited Partnership and thereafter the
operations of Ellett Brothers, Inc. Pro forma provisions for income
taxes have been made at the corporate statutory rates for periods prior
to June 9, 1993.
(2) For comparison purposes, net income for the year ended December 31,
1993 excludes a one-time, non-cash charge of $622, related to income
taxes, or $0.14 per share, upon the conversion from a partnership to a
corporation.
(3) Earnings per share and weighted average common shares outstanding were
computed based on an assumed 4,000 pro forma shares outstanding prior
to the conversion from a partnership to a corporation in June 1993, and
actual shares outstanding thereafter.
(4) Includes quarterly dividends at $0.02 per share paid in March, June,
September and December 1996, 1995 and 1994, and a special dividend at
$0.10 per share paid in March 1994.
(5) Amounts prior to December 31, 1993 represent the equity of the natural
outdoor sporting goods division of Ellett Brothers Limited Partnership.
(6) Due to the potential for errors in elimination of mutual customers
between subsidiaries, the numbers for 1996 and 1995 are approximations.
Management feels that any differences are insignificant.
ELLETT BROTHERS . 1996 ANNUAL REPORT . PAGE 1
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
Statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations which are not historical in
nature, are intended to be, and are hereby identified as, "forward looking
statements" for purposes of the safe harbor provided by Section 21E of the
Securities Exchange Act of 1934, as amended by Public Law 104-67. The Company
cautions readers that forward looking statements, including without limitation,
those relating to the Company's future business prospects, revenues, working
capital, liquidity, capital needs, interest costs, and income, are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those indicated in the forward looking statements, due to
several important factors herein identified, among others, and other risks and
factors identified from time to time in the Company's reports filed with the
SEC.
1996 COMPARED TO 1995
Sales for the year ended December 31, 1996 were $147.7 million, as
compared to $150.4 million in 1995, a decrease of $2.7 million or 1.8%. Included
in these amounts were sales from Ellett's subsidiaries, Evans Sports, Vintage
Editions and Safesport, of $12.8 million and $9.1 million for the years ended
December 31, 1996 and 1995, respectively. During 1996, sales of hunting and
shooting sports products declined 5.9% when compared to 1995 sales. Also during
1996, sales of camping, archery and outdoor accessories declined by 6.1% when
compared to 1995 sales. The marine accessory group showed continued growth with
a 5.1% increase when compared to 1995 sales. Management believes the weak
consumer demand in 1995 and 1996 led retailers in the hunting and shooting
sports markets to reduce their inventory levels and subsequently purchase
inventory on a "Just in Time" basis. Retailers were reluctant to purchase
inventory ahead of the typical fall hunting seasons, even with the incentives of
extended terms and additional discounts, which contributed to small sales
increases in the third and fourth quarters in hunting and shooting sports
products. Retailers also reduced their purchases of accessories related to the
hunting and shooting sports products which contributed to the decline in the
camping, archery and outdoor accessories sales. Management believes that the
general slowdown in the hunting and shooting sports industry may continue in the
near future.
Gross profit was $27.0 million for the year ended December 31, 1996, as
compared to $28.7 million in 1995, a decrease of $1.7 million or 5.8%. As a
percentage of sales, gross profit was 18.3% in 1996, as compared to 19.1% in
1995. The decline in gross profit as a percentage of sales was mainly due to
lowering sales prices to remain competitive and stimulate sales within the
traditional distribution business. The subsidiaries were affected by unfavorable
manufacturing variances which led to a 5.1% decline in gross profit as a
percentage of sales. Management expects the competitive pricing pressures to
continue in the future, affecting gross profit for the Company.
Selling, general and administrative expenses in 1996 were $21.4 million
(14.5% of sales), as compared to $18.7 million (12.5% of sales) in 1995, an
increase of $2.7 million or 14.3%. Increased expenses were incurred as a result
of operating the subsidiaries for a full year as compared to a partial year in
1995, relocation of one subsidiary from Denver, Colorado to Newberry, South
Carolina, increased costs incurred with the computer equipment and information
system upgrades, increased costs of catalog and mini-catalog production and
compensation expense recorded for the stock awards to certain officers. Expenses
that decreased were directly related to the decrease in sales and profits, such
as sales and management bonuses and telephone expense.
Interest expense in 1996 was $3.3 million (2.2% of sales), as compared
to $3.1 million (2.1% of sales) in 1995, an increase of $177,000 or 5.7%. The
benefit of lower interest rates in 1996 was more than offset by increased
borrowings to operate the subsidiaries and fund the increase in working capital.
Income tax expense in 1996 was $1.0 million, as compared to $2.8
million in 1995. The effective rate for 1996 was 36.9%, as compared to 37.2% for
1995.
ELLETT BROTHERS . 1996 ANNUAL REPORT . PAGE 2
<PAGE> 4
1995 COMPARED TO 1994
Between April and September 1995, the Company acquired substantially
all of the assets of two entities (the "Acquired Businesses")-- specialty
manufacturers of sporting accessories and nostalgia products, and certain assets
of an importer and marketer of outdoor leisure products (see Note 3 to the
Financial Statements) and placed the assets into three new subsidiaries. The
objective in making these acquisitions was to improve the Company's sales, gross
profit and net income by acquiring operations that provide access to new
customer bases and channels of distribution, and whose products are
complementary to Ellett's products.
Sales for the year ended December 31, 1995, were $150.4 million, as
compared to $160.2 million in 1994, a decrease of $9.8 million, or 6.1%.
Included in this amount were $9.1 million in sales from the new subsidiaries
from the dates of the respective acquisitions until December 31, 1995.
Management believes that the publicity resulting from Congressional debates and
subsequent legislation in late 1993 increased public concern about personal
safety and the continued availability of certain firearms and ammunition. This
heightened public concern produced a significant one-time increase in firearm
sales in 1994. In 1995, sales of hunting and shooting sports products declined
20% as a result of being compared to the one-time 1994 sales gains and a general
softening in the hunting and shooting sports market at the retail level. The
decline in sales of hunting and shooting sports products was offset somewhat by
increases in marine accessories sales of 20%, and camping, archery and outdoor
accessories sales of 2%. Sales of archery related products increased by $2.2
million over 1994, helping increase total sales of the archery division to
almost $4.0 million. The archery sales organization was established in September
1994 to target sales to archery retailers. Management believes that the general
slowdown in the hunting and shooting sports industry which has led to difficult
sales comparisons in 1995 will extend into 1996, and possibly beyond that.
Gross profit was $28.7 million for the year ended December 31, 1995, as
compared to $29.8 million in 1994, a decrease $1.1 million, or 3.9%. As a
percentage of sales, gross profit was 19.1% in 1995, as compared to 18.6% in
1994. The increase in gross profit as a percentage of sales was the result of
higher gross profit as a percent of sales generated by the new subsidiaries.
Excluding the results of operations for the new subsidiaries, gross profit as a
percentage of sales would have been 17.7% for the year ended December 31, 1995.
This decline was due primarily to competitive pricing pressures and a larger
portion of current year sales being generated by promotional mini-catalogs, in
which products are generally sold at lower gross margins. Management believes
that these trends in margins as a percent of sales are likely to continue into
1996.
Selling, general and administrative expenses in 1995 were $18.7 million
(12.5% of sales), as compared to $17.7 million (11.1% of sales) in 1994, an
increase of $1.0 million, or 5.8%. Expenses increased because of the operation
of the new subsidiaries, the new marine distribution facility, and an increase
in the number of business units, catalogs, and mini-catalogs. Expenses that
decreased were directly related to the decrease in sales, such as sales and
management bonuses and net shipping charges.
In 1995, interest expense was $3.1 million (2.1% of sales), as compared
to $2.5 million (1.5% of sales) in 1994. Interest expense increased because
borrowings were increased to purchase and operate the new subsidiaries, and to
fund the growth in working capital.
Income tax expense was $2.8 million in 1995, as compared to $3.6
million in 1994. The effective tax rate for 1995 was 37.2%, as compared to 36.7%
for 1994.
SEASONALITY AND QUARTERLY INFORMATION
Historically the Company's business has been seasonal. The sales of
hunting and shooting sports products, as well as camping, archery and outdoor
accessories, usually increase in the third quarter of each year and peak early
in the fourth quarter. Sales of marine accessories usually increase in the first
quarter of each year, then peak midway through the second quarter and continue
at similar levels through the first half of the third quarter. Operations of the
subsidiaries
ELLETT BROTHERS . 1996 ANNUAL REPORT . PAGE 3
<PAGE> 5
acquired during 1995 have been seasonal, producing significantly higher sales
and gross profit during the third and fourth quarters, with losses in the first
and second quarters. The Company's quarterly operating results may also be
affected by a wide variety of factors, such as legislative and regulatory
changes, competitive pressures, and general economic conditions.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are results of operations
and borrowings under its revolving credit facility. Pursuant to its operating
strategy, the Company maintains minimal cash balances and is substantially
dependent on, among other things, the availability of adequate working capital
financing to support inventories and accounts receivable.
Net cash used in operating activities was $2.1 million during the year
ended December 31, 1996 as compared to net cash provided by operating activities
of $1.9 million in 1995. The increase in net cash used in operating activities
in 1996 was mainly due to a decrease in net income, accounts payable and accrued
expenses, and increases in accounts receivable and inventories. The inventory
increase was primarily driven by increases in the subsidiary operations due to
slower fourth quarter sales than anticipated. Accounts receivable increased in
the distribution business due to the sales increases late in the fourth quarter,
and increased use of expanded terms.
Net cash used in investing activities was $1.4 million during the year
ended December 31, 1996 as compared to $5.0 million in 1995. The decrease in net
cash used in investing activities was mainly due to the business acquisitions in
1995, offset somewhat by increased purchases of fixed assets in 1996. The
increase in purchases of fixed assets was mainly due to computer equipment and
information system upgrades.
Net cash provided by financing activities was $3.3 million during the
year ended December 31, 1996 as compared to $3.4 million in 1995. The Company
obtained the additional cash needed to fund operations in 1996 by increasing
borrowings under its revolving credit facility by $5.4 million. The Company used
a portion of these proceeds from the revolving credit facility to make principal
payments on long-term debt, to repurchase common stock and to pay dividends.
Working capital requirements for the Company's traditional
distribution business have historically been somewhat seasonal in nature.
Accounts receivable have generally increased in the first quarter primarily
because of the customary industry practice during the first quarter of each year
to offer customers extended payment terms for purchases of certain products,
thereby extending the payment due dates for a portion of its sales into the
third and fourth quarters of the year. Accounts receivable have generally
increased further early in the third quarter as additional 60 to 90 day extended
terms have been offered to stimulate sales in advance of the Company's highest
volume quarters. Accounts receivable usually decrease in the fourth quarter as
payments are received on prior quarters' sales and a larger percentage of
current sales are made with shorter payment terms. Inventory generally builds
during the first two quarters and peaks in the third quarter to support the
higher sales volumes of the third and fourth quarters.
Working capital requirements have been seasonal for the subsidiaries.
Inventories have increased during the first half of the year to accommodate the
sales in the third and fourth quarters. Accounts receivable have declined to
their lowest point in the second quarter just before the sales increase in the
second half of the year.
During the year ended December 31, 1996, the Company entered into
several commitments to upgrade its computer equipment and information systems in
the aggregate amount of approximately $1.3 million, of which approximately
$550,000 is expected to be paid in lease payments over a three year period. The
total cost of the computer upgrades is expected to be approximately $3.0
million.
Principle maturities on the Company's industrial revenue refunding
bonds for 1997, 1998 and 1999 will be $467,000, $517,000, and $567,000,
respectively. The annual interest charges, assuming a fixed rate of 10.625%, are
$908,000, $859,000, and $804,000 for 1997, 1998 and 1999, respectively (see Note
8 to the financial statements).
Management believes that cash generated from operations, and
available under the Company's revolving credit facility, will be sufficient to
finance its operations, expected working capital needs, capital expenditures,
debt service requirements, and business acquisitions during 1997 and for the
foreseeable future.
ELLETT BROTHERS . 1996 ANNUAL REPORT . PAGE 4
<PAGE> 6
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------------------------------------
ASSETS 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 139 $ 325
Accounts receivable, less allowance for doubtful accounts of $750
and $712 at December 31, 1996 and 1995, respectively 19,716 18,893
Other accounts receivable 878 337
Inventories 39,756 38,452
Prepaid expenses 3,727 3,940
Deferred income tax asset 591 293
- ------------------------------------------------------------------------------------------------------------------
Total current assets 64,807 62,240
- ------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, at cost, less
accumulated depreciation and amortization 6,190 5,555
Other assets:
Intangible assets, at cost, less accumulated amortization 2,262 2,466
Other assets 101 14
- ------------------------------------------------------------------------------------------------------------------
Total other assets 2,363 2,480
- ------------------------------------------------------------------------------------------------------------------
$ 73,360 $70,275
==================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable, trade $ 7,909 $ 9,034
Accrued expenses 1,356 2,231
Current portion of long-term debt 513 463
- ------------------------------------------------------------------------------------------------------------------
Total current liabilities 9,778 11,728
- ------------------------------------------------------------------------------------------------------------------
Revolving credit facility 31,515 26,079
Long-term debt 6,969 7,454
Deferred income tax liability 461 466
Commitments and Contingencies (see Note 9 and 13)
Shareholders' equity:
Preferred stock, no par value (5,000 shares authorized,
no shares issued or outstanding) -- --
Common stock, no par value (20,000 shares authorized, 5,065 and 5,230
shares issued and outstanding as of December 31, 1996 and 1995,
respectively) 12,550 13,487
Unearned compensation (250) --
Retained earnings 12,337 11,061
- ------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 24,637 24,548
- ------------------------------------------------------------------------------------------------------------------
$ 73,360 $70,275
==================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
ELLETT BROTHERS . 1996 ANNUAL REPORT . PAGE 5
<PAGE> 7
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the year ended December 31,
- ----------------------------------------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $ 147,666 $ 150,411 $ 160,187
Cost of goods sold 120,683 121,756 130,357
- ----------------------------------------------------------------------------------------------
Gross profit 26,983 28,655 29,830
Selling, general and administrative expenses 21,420 18,744 17,724
- ----------------------------------------------------------------------------------------------
Income from operations 5,563 9,911 12,106
- ----------------------------------------------------------------------------------------------
Other income (expenses)
Interest income 444 431 367
Interest expense (3,289) (3,112) (2,461)
Other income (expense) (45) 154 (290)
- ----------------------------------------------------------------------------------------------
(2,890) (2,527) (2,384)
- ----------------------------------------------------------------------------------------------
Income before income taxes 2,673 7,384 9,722
Income tax expense 986 2,750 3,566
- ----------------------------------------------------------------------------------------------
Net income $ 1,687 $ 4,634 $ 6,156
==============================================================================================
Earnings per common share $ 0.33 $ 0.89 1.29
==============================================================================================
Weighted average shares outstanding 5,135 5,230 4,783
==============================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
ELLETT BROTHERS . 1996 ANNUAL REPORT . PAGE 6
<PAGE> 8
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Common Unearned Retained
Stock Compensation Earnings Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shareholders' equity at December 31, 1993 $ 5,961 $-- $ 1,546 $ 7,507
Net income -- -- 6,156 6,156
Dividends paid, $0.18 per share -- -- (857) (857)
Capital contribution 30 -- -- 30
Issuance of 530 shares of common stock
(net of $719 in offering costs) 7,496 -- -- 7,496
- -------------------------------------------------------------------------------------------------------------------
Shareholders' equity at December 31, 1994 13,487 -- 6,845 20,332
Net income -- -- 4,634 4,634
Dividends paid, $0.08 per share -- -- (418) (418)
- -------------------------------------------------------------------------------------------------------------------
Shareholders' equity at December 31, 1995 13,487 -- 11,061 24,548
Net income -- -- 1,687 1,687
Dividends paid, $0.08 per share -- -- (411) (411)
Repurchase of 223 shares of common stock (1,277) -- -- (1,277)
Issuance of 58 shares of common stock to executive officers 340 (340) -- --
Amortization of unearned compensation -- 90 -- 90
- -------------------------------------------------------------------------------------------------------------------
Shareholders equity at December 31, 1996 $ 12,550 $(250) $ 12,337 $ 24,637
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements
ELLETT BROTHERS . 1996 ANNUAL REPORT . PAGE 7
<PAGE> 9
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the year ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,687 $ 4,634 $ 6,156
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 901 686 584
Deferred income taxes (303) (157) (172)
Provision for loss on accounts receivable 933 905 887
Amortization of unearned compensation 90 -- --
Other (17) -- --
Changes in assets and liabilities:
Accounts receivable (2,298) (1,586) (1,611)
Inventories (1,304) (2,965) (14,383)
Prepaid expenses 213 (281) 1,256
Accounts payable, trade (1,125) 529 (2)
Accrued expenses (875) 198 259
Other assets (13) (17) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (2,111) 1,946 (7,026)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (1,332) (887) (1,092)
Purchase of intangibles and other assets (121) -- --
Proceeds from sale of property and equipment 40 -- --
Proceeds from sale of intangibles 25 -- --
Business acquisitions (see Note 3) -- (3,971) --
Change in industrial revenue refunding bond reserve 23 (140) 21
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,365) (4,998) (1,071)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Gross borrowings on revolving credit facility 154,200 155,314 193,190
Gross repayments on revolving credit facility (148,764) (151,363) (191,762)
Principal payments on long-term debt (416) (133) --
Principal payments on capital lease obligations (42) (23) --
Net proceeds from sale of common stock -- -- 7,496
Repurchase of common stock (1,277) -- --
Dividends to shareholders (411) (418) (857)
Capital contribution -- -- 30
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,290 3,377 8,097
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (186) 325 --
Cash and cash equivalents:
Beginning of year 325 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
End of year $ 139 $ 325 $ --
===================================================================================================================================
Cash payments for interest $ 3,246 $ 3,050 $ 2,452
===================================================================================================================================
Cash payments for income taxes $ 1,297 $ 3,056 $ 3,796
===================================================================================================================================
Non-cash financing activity: lease liability assumed $ -- $ 118 $ --
===================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
ELLETT BROTHERS . 1996 ANNUAL REPORT . PAGE 8
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
1. BASIS OF PRESENTATION
Ellett Brothers is principally a supplier of goods and customer
services to independent retailers who serve the natural outdoor sporting goods
market, primarily in the United States. Ellett Brothers' products are
diversified among a wide variety of outdoor sporting goods equipment including a
wide selection of styles and brand names. During 1995, Ellett Brothers also
acquired substantially all of the assets of two entities (the "Acquired
Businesses") and certain assets of an importer and marketer (see Note 3) whose
products complement Ellett Brothers' existing operations. The assets of each
entity were transferred to separate wholly-owned subsidiaries.
2. SIGNIFICANT ACCOUNTING POLICIES
Principals of consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries (see Note 3). Significant intercompany
accounts and transactions have been eliminated in consolidation.
Use of estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and cash equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Revenue recognition
The Company recognizes revenue from product sales at the time of
shipment.
Inventories
Inventories, consisting principally of purchased goods held for resale,
are stated at the lower of cost or market, with cost determined under the
first-in, first-out (FIFO) method.
Credit risk
The Company performs ongoing evaluations of its customers and generally
does not require collateral. An allowance for doubtful accounts is provided in
an amount equal to the estimated collection losses. At December 31, 1996 and
1995 prepaid expenses included prepayments in the amounts of $2,553 and $3,071,
respectively, on future purchases of inventory from certain suppliers for which
the Company will receive favorable discounts.
Advertising cost
The Company has elected to expense all advertising cost as incurred or
the first time advertising takes place, with the exception of direct response
advertising, which is capitalized and amortized over the period of its expected
future benefit. At December 31, 1996, the Company did not have any significant
amounts capitalized as direct response advertising. The Company incurred total
advertising expenditures of $808, $357 and $142 during the years ended December
31, 1996, 1995, and 1994, respectively.
Property, plant and equipment
Property, plant and equipment are depreciated or amortized using the
straight-line method over the estimated useful lives of the respective assets
which range as follows:
<TABLE>
<CAPTION>
Description Years
----------------------------------------
<S> <C>
Buildings and improvements 25-39
Furniture, fixtures and equipment 3-10
</TABLE>
ELLETT BROTHERS . 1996 ANNUAL REPORT . PAGE 9
<PAGE> 11
Expenditures for repairs and maintenance are charged to expense as
incurred. The costs of major renewals and betterments are capitalized and
depreciated over their estimated useful lives. The cost and related accumulated
depreciation of property, plant and equipment are removed from the accounts upon
disposition and any resulting gain or loss is reflected in income.
Intangible assets
Intangible assets principally represent the amount by which costs of
acquired net assets exceeded their related fair value ("goodwill") and costs of
acquired non-compete agreements. The carrying value of goodwill is reviewed
periodically , and if the facts and circumstances suggests that it is impaired,
the impairment will be accounted for in accordance with FASB Statement No. 121,
"Accounting for Impairment of Long-Lived Assets". The non-compete agreements are
being amortized over the original terms of the agreements. Intangible assets are
amortized using the following methods and estimated useful lives.
<TABLE>
<CAPTION>
Description Method Years
----------------------------------------------------------
<S> <C> <C>
Deferred financing costs Effective interest 20
Licenses and trademarks Straight-line 5 - 20
Goodwill Straight-line 10
Non-compete agreements Straight-line 10
</TABLE>
Fair values of financial instruments
The Company owns certain debt securities held on deposit with the
trustee for payment of interest and principal on the IRB bond (see Note 8).
Market values of bond issues outstanding are based on quotes received from
securities dealers or the present value of principal and interest payments at
the current market rates. The revolving credit facility is carried at current
value which approximates the fair market value.
Income taxes
Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.
Stock based compensation
The Company grants stock options for a fixed number of shares to
employees with an exercise price equal to the fair value of the shares at the
date of the grant. On January 1, 1996 the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation"(SFAS
123). As permitted by SFAS 123, the Company has chosen to continue to apply
APB Opinion No. 25 "Accounting for Stock Issued to Employees"(APB 25) and
related interpretations in accounting for its stock based compensation. Had
compensation cost for the Company's stock based compensation been determined
based on the fair value at the grant dates for stock awards consistent with the
method of SFAS 123, the impact on the Company's net income and net income per
share would not have been material.
Earnings per common share
Earning per common share is based on the weighted average number of
shares of common stock and common stock equivalents outstanding during each
year.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." SFAS 128 is designed to improve the earnings per share information
provided in financial statements by simplifying the existing computational
guidelines, revising the disclosure requirements, and increasing comparability
of earnings per share data on an international basis. This pronouncement is
effective for periods beginning after December 15, 1997, and is not expected to
have a material impact on the Company's financial statements.
ELLETT BROTHERS . 1996 ANNUAL REPORT . PAGE 10
<PAGE> 12
3. ACQUISITIONS AND CONSOLIDATION
From April to September 1995, the Company purchased substantially all
of the assets of two entities - specialty manufacturers of sporting accessories
and nostalgia products, and substantially all the accounts receivable and
inventory of an importer and marketer of outdoor leisure products. The Company
paid $7,077 in cash for these assets and Acquired Businesses, which was the sum
of the net amounts due after acquiring $9,091 of assets (primarily accounts
receivable, inventory and intangible assets) and assuming $2,014 in
liabilities(primarily trade payables, accrued expenses and a $500 liability for
relocation costs of acquired inventory). The assets of each entity were
transferred to separate, wholly-owned subsidiaries, and the acquisitions were
accounted for using the purchase method of accounting, with the excess of the
prices paid over the estimated fair value of the assets acquired being recorded
as goodwill. The goodwill and non-compete agreements arising from these
transactions (see Note 6) are being amortized over 10 years. The results of
operations for these entities are included in the income statement from the
dates of acquisition.
The following information presents the unaudited pro forma results of
operations for the Company as if the acquisitions described above had occurred
on January 1, 1995.
<TABLE>
For the year ended December 31, 1995
(Unaudited)
-----------------------------------------------------
<S> <C>
Pro forma sales $157,153
Pro forma net income $ 3,437
Pro forma earnings per share $ .66
</TABLE>
Comparative pro forma information for 1994 is not presented because
reliable information in accordance with generally accepted accounting principles
is not available. The objective of the pro forma information is to show what the
effects on the Company's sales, net income and earnings per share might have
been had the transactions described above occurred on January 1, 1995. However,
the pro forma results of operations are not necessarily indicative of the
results of operations the Company would have experienced had such transactions
occurred on such date or of results which may occur in the future.
4. INVENTORIES
Inventories consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
----------------------------------------------
<S> <C> <C>
Finished goods $38,283 $37,391
Raw materials 1,096 718
Work in progress 377 343
----------------------------------------------
$39,756 $38,452
==============================================
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at
December 31:
<TABLE>
<CAPTION>
1996 1995
------------------------------------------------------------------------
<S> <C> <C>
Land $ 216 $ 216
Buildings and improvements 6,751 6,495
Furniture, fixtures and equipment 5,202 4,328
------------------------------------------------------------------------
12,169 11,039
Less accumulated depreciation and amortization 5,979 5,484
------------------------------------------------------------------------
$ 6,190 $ 5,555
========================================================================
</TABLE>
ELLETT BROTHERS . 1996 ANNUAL REPORT . PAGE 11
<PAGE> 13
6. INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------------------------
<S> <C> <C>
Deferred financing costs $ 336 $ 336
Licenses 282 356
Goodwill 528 528
Non-compete agreements 1,700 1,700
-------------------------------------------------------------
2,846 2,920
Less accumulated amortization 584 454
-------------------------------------------------------------
$2,262 $2,466
=============================================================
</TABLE>
7. REVOLVING CREDIT FACILITY
On June 10, 1994, the Company entered into a revolving credit facility
(the "Agreement") with an affiliate of First Union National Bank of North
Carolina, N.A. The Agreement is collateralized by substantially all of the
Company's assets other than real estate. The initial term of the Agreement was
for three years ending in June 1997. The Agreement was amended on December 23,
1996 to extend the term to January 31, 1998, with automatic one year renewals
unless terminated by either party. Effective August 1, 1996 borrowings under the
Agreement bear interest at a rate equal to, at the Company's option, prime rate
or 2.25% above the 30 or 90 day LIBOR rate. Combinations of these rates can be
used for the various loans which comprise the total facility outstanding
balance. The interest rates of the facility are subject to change based on
changes in the Company's leverage ratio and net income. At December 31, 1996,
the interest rate was 7.625%.
The Agreement provides the Company with a revolving line of credit and
letters of credit. The revolving line of credit provides loans of up to 70% of
the eligible inventories and up to 85% of eligible receivables. The maximum
amount that can be outstanding at any time under the Agreement is $40,000.
The Agreement contains various restrictions which, among other things,
limit capital expenditures and limit cash dividends to 60% of current year net
income. The Agreement also requires the Company to meet various minimum
financial covenants.
8. LONG-TERM DEBT
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Industrial Revenue Refunding Bonds, Series 1988 ("IRB") collateralized by
real estate. Interest at 10.625% due to bond holders semi-annually is
required to be deposited with the Trustee monthly in an amount equal
to one-sixth of the next interest payment. Beginning September 15, 1995,
the Company also began to pay one-twelfth of the next principal payment
(by way of annual maturity or annual mandatory sinking fund redemption)
to the Trustee monthly in addition to the interest. $ 8,550 $ 8,967
Industrial revenue refunding bond reserve on deposit with the Trustee
(market value of $1,133 and $1,169 at 1996 and 1995, respectively). (1,121) (1,145)
Capital lease agreement collateralized by computer equipment. Lease was
assumed with the purchase of the Acquired Businesses during 1995. The
original cost of the equipment was $138 and the lease requires a total of
42 monthly payments of $4. 53 95
- ----------------------------------------------------------------------------------------------------------------
7,482 7,917
Less, current portion (513) (463)
- ----------------------------------------------------------------------------------------------------------------
$ 6,969 $ 7,454
================================================================================================================
</TABLE>
ELLETT BROTHERS . 1996 ANNUAL REPORT . PAGE 12
<PAGE> 14
Under the terms of the IRB, the Company is required to maintain a
reserve fund with a fair market value in the amount of $1,050 on deposit with
the Trustee. The Company may, depending upon market value fluctuations of the
bonds held in the reserve fund, be required to make payments to bring the fund
up to the $1,050. If for any reason, the reserve fund is in excess of the
required amount, such excess may be used to reduce required sinking fund
payments. Reserve fund balances may also be used toward the redemption of the
outstanding IRB obligations.
The Company has the option to prepay the IRB in whole or in part on any
interest payment date at a premium ranging from 103% to 101% until August 31,
1999, and at par value thereafter. The fair market value of the IRB at December
31, 1996 and 1995 was approximately $9,600, and $10,000, respectively.
Principal maturities and sinking fund requirements for long-term debt
at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
For year ending December 31,
---------------------------------------
<S> <C>
1997 467
1998 517
1999 567
2000 617
2001 667
Thereafter 4,594
---------------------------------------
$7,429
=======================================
</TABLE>
Under the bond agreement, as amended, annual cash dividends are limited
to 60% of annual net income, the required minimum current ratio is 1.17:1 at
December 31, 1996 and thereafter, and the required minimum stockholders' equity
level (as defined) is $6,000 at December 31, 1996 and thereafter.
Principal and interest payments related to the capital lease are due in
the amounts of $46 and $7 for the years ended December 31, 1997 and 1998. These
payments include imputed interest amounts of $4 in 1997.
9. OPERATING LEASES
The Company entered into three significant leases for computer
equipment in conjunction with the first phase of an information system upgrade.
The Company incurred $169 in rental expenses related to these leases in 1996.
The future minimum lease payments as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
For year ending December 31,
--------------------------------------------------
<S> <C>
1997 $ 279
1998 279
1999 109
--------------------------------------------------
$ 667
==================================================
</TABLE>
10. COMMON AND PREFERRED STOCK
The Company is authorized to issue 20,000 shares of no-par-value common
stock. At January 1, 1994, 4,700 shares of common stock were outstanding. The
Company completed a follow-on offering in October 1994 and issued an additional
350 shares of its common stock. The Underwriters, in connection with the
follow-on offering, also exercised their over-allotment option and the Company
issued another 180 shares of common stock in November 1994. At December 31, 1996
and 1995, the Company had 112 and 142 outstanding options, respectively, all of
which are fully vested. At December 31, 1996, the 112 options had an exercise
price of $7.00 per share which equaled the closing market price on the date of
grant. The options may be exercised at any time on or before June 9, 2003. As of
December 31, 1996, no options had been exercised.
The Company reacquired 100, 93, and 30 shares of its common stock in
April, July and September of 1996, respectively, and recorded it using the cost
method of accounting for treasury stock. During 1996, the Company awarded 58
shares of restricted common stock to two executives of the Company. The
restrictions will be released pro-rata over a three to four year period. The
stock awards were valued at the market price per share at the time of each
award, and unearned compensation was recorded in equity. Compensation expense
will be recognized as the awards vest over the three to four year period.
Additionally, the Board of Directors of the Company is authorized to
issue, at its discretion, up to 5,000 shares of preferred stock in one or more
series with the number of shares, designation, relative rights and preferences,
and limitations to be determined by resolution of the Board of Directors.
However, no share of stock of any class shall be subject to preemptive rights or
have cumulative voting provisions.
ELLETT BROTHERS . 1996 ANNUAL REPORT . PAGE 13
<PAGE> 15
11. INCOME TAXES
Income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
For the year ended December 31,
-----------------------------------------------------
1996 1995 1994
-----------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 1,186 $ 2,648 $ 3,377
State 103 259 361
-----------------------------------------------------
1,289 2,907 3,738
-----------------------------------------------------
Deferred:
Federal (278) (156) (112)
State (25) (1) (60)
-----------------------------------------------------
(303) (157) (172)
-----------------------------------------------------
$ 986 $ 2,750 $ 3,566
=====================================================
</TABLE>
Components of the net deferred income tax liability (asset) were as
follows:
<TABLE>
<CAPTION>
As of December 31,
------------------------------------------------------------
1996 1995
------------------------------------------------------------
<S> <C> <C>
Depreciation and amortization $ 415 $ 366
Bad debt expense (225) (187)
Inventory capitalization (355) (26)
Other 35 20
------------------------------------------------------------
Total $(130) $ 173
============================================================
</TABLE>
Income tax expense varied from statutory federal income taxes as
follows:
<TABLE>
<CAPTION>
For the year ended December 31,
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes at 34% statutory federal rate $909 $2,511 $3,305
State income taxes, net of federal tax benefit 52 172 198
Other 25 67 63
- --------------------------------------------------------------------------------
Income tax expense $986 $2,750 $3,566
================================================================================
</TABLE>
12. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) defined contribution plan (the "Plan")
covering substantially all full-time employees who meet certain age and length
of service requirements. Participants are eligible to contribute up to 19% of
their annual compensation, not to exceed legal limits, and the Company, at its
discretion, makes matching contributions to the Plan. Participants vest
immediately in their contributions and after three years in the Company's
contributions. The Company incurred expenses related to the Plan of $49, $42 and
$37 for the years ended December 31, 1996, 1995 and 1994, respectively.
13. CONTINGENCY
The Company is currently a defendant in certain product liability
lawsuits that arose in the normal course of business. It is the opinion of
management that the Company has meritorious defenses and the disposition of
these matters will not have a material adverse effect on the consolidated
financial position, results of operations or liquidity of the Company.
ELLETT BROTHERS . 1996 ANNUAL REPORT . PAGE 14
<PAGE> 16
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table of supplementary financial information
presents selected unaudited quarterly results of the Company's operations over
the last eight quarters:
<TABLE>
<CAPTION>
1995 1996
- -----------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $38,149 $32,860 $39,094 $40,308 $36,722 $32,372 $38,857 $39,715
Gross profit 7,067 5,869 7,676 8,043 6,527 6,594 7,024 6,838
Selling, general
and administrative 4,061 4,398 5,224 5,061 5,519 5,250 5,537 5,114
Income from operations 3,006 1,471 2,452 2,982 1,008 1,344 1,487 1,724
Net income 1,608 516 1,117 1,393 348 365 406 568
Earnings per share 0.31 0.10 0.21 0.27 0.07 0.07 0.08 0.11
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Ellett Brothers, Inc.
We have audited the accompanying consolidated balance sheets of
Ellett Brothers, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Ellett
Brothers, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P
Raleigh, North Carolina
February 14, 1997
ELLETT BROTHERS . 1996 ANNUAL REPORT . PAGE 15
<PAGE> 17
CORPORATE INFORMATION/OFFICERS AND DIRECTORS
OFFICERS
Joseph F. Murray, Jr.
President and Chief Executive Officer
Robert D. Gorham, Jr.
Chairman of the Board
Richard M. Eddinger
Vice President of Finance, Treasurer and Chief Financial Officer
E. Wayne Gibson
Chairman of the Executive Committee and Secretary
DIRECTORS
Robert D. Gorham, Jr.
Chairman of the Board, Ellett Brothers, Inc.
Chairman of the Board, The Tuscarora Corporation
Joseph F. Murray, Jr.
President and Chief Executive Officer
Ellett Brothers, Inc.
E. Wayne Gibson
Chairman of the Executive Committee and Secretary,
Ellett Brothers, Inc.
President, The Tuscarora Corporation
William H. Batchelor
Executive Vice President, The Tuscarora Corporation
Charles V. Ricks
Business Consultant
President, Edgemont Holdings, Inc.
William H. Stanley
Chairman of the Audit Committee
Retired President, Chairman and Chief Executive Officer,
Peoples Bank and Trust Company
CORPORATE INFORMATION
Independent Accountants
Coopers &Lybrand L.L.P.
150 Fayetteville Street Mall
Suite 2300
Raleigh, North Carolina 27601
Legal Counsel
Nexsen Pruet Jacobs & Pollard, LLP
1441 Main Street
Suite 1500
Columbia, South Carolina 29201
Annual Meeting of Shareholders
The 1997 annual meeting of shareholders will be held at 10 o'clock a.m. local
time on Wednesday, May 28, 1997 at the Company's offices in Chapin, South
Carolina. Shareholders of record as of April 15, 1997 are invited to attend this
meeting.
Corporate Headquarters
Ellett Brothers, Inc.
267 Columbia Avenue
Chapin, South Carolina 29036
(803) 345-3751
STOCK AND DIVIDEND INFORMATION
Form 10-K
Copies of Form 10-K filed with the Securities and Exchange Commission are
available upon request to the Company at the Corporate address.
Stock Transfer Agent
Continental Stock Transfer & Trust Company
2 Broadway, 19th Floor
New York, New York 10004
Stock Listing
The common stock of Ellett Brothers, Inc. is traded on the Nasdaq National
Market System under the symbol ELET. As of March 18, 1997, the Company had a
total of approximately 1279 shareholders. Of this total there were 79
shareholders of record and approximately 1200 nominee holders.
The following table sets forth the quarterly high and low sale prices per share
for the common stock as reported on the Nasdaq National Market and dividends
paid on common stock.
Quarter Ended: High Low Dividend
- --------------------------------------------------------------------------------
March 31, 1995 $15.00 $7.00 $0.02
June 30, 1995 9.25 5.00 0.02
September 30, 1995 8.00 6.13 0.02
December 31, 1995 8.63 6.50 0.02
March 31, 1996 8.25 5.50 0.02
June 30, 1996 7.38 5.38 0.02
September 30, 1996 6.50 5.00 0.02
December 31, 1996 5.63 4.50 0.02
ELLETT BROTHERS . 1996 ANNUAL REPORT . PAGE 16
<PAGE> 1
Exhibit 21
Page 1
ELLETT BROTHERS, INC.
SUBSIDIARIES OF THE REGISTRANT
Evans Sports, Inc., a South Carolina corporation
Leisure Sports Marketing, Inc., a South Carolina corporation
Safesport Manufacturing Company, Inc., a South Carolina corporation
Vintage Editions, Inc., a South Carolina corporation
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 139
<SECURITIES> 0
<RECEIVABLES> 21,344
<ALLOWANCES> 750
<INVENTORY> 39,756
<CURRENT-ASSETS> 64,807
<PP&E> 12,169
<DEPRECIATION> 5,979
<TOTAL-ASSETS> 73,360
<CURRENT-LIABILITIES> 9,778
<BONDS> 6,969
0
0
<COMMON> 12,550
<OTHER-SE> 12,087
<TOTAL-LIABILITY-AND-EQUITY> 73,360
<SALES> 147,666
<TOTAL-REVENUES> 147,666
<CGS> 120,683
<TOTAL-COSTS> 120,663
<OTHER-EXPENSES> 21,420
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,289
<INCOME-PRETAX> 2,673
<INCOME-TAX> 986
<INCOME-CONTINUING> 1,687
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,687
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
</TABLE>
