<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 0-21632
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 No.)
267 COLUMBIA AVENUE, CHAPIN, SOUTH CAROLINA 29036
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (803) 345-3751
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods 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
As of April 30, 1998, 5,120,918 shares of no par value common stock of the
registrant were outstanding.
Page 1 of 12
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Form 10-Q
Page 2
ELLETT BROTHERS, INC. AND SUBSIDIARIES
MARCH 31, 1998
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
PAGE
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<S> <C>
Item 1. Financial Statements
Condensed consolidated balance sheets as of March 31, 1998 and December 31, 1997 3
Condensed consolidated statements of income for the three months ended
March 31, 1998 and 1997 4
Condensed consolidated statements of cash flows for the three months ended
March 31, 1998 and 1997 5
Notes to condensed consolidated financial statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualititative Disclosures About Market Risk 10
PART II. OTHER INFORMATION
PAGE
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Item 6. Exhibits and Reports on Form 8-K 11
</TABLE>
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Form 10-Q
Page 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ELLETT BROTHERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, Dec. 31,
1998 1997
----------- ----------
(unaudited) (see note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 139 $ 395
Accounts receivable, less allowance for doubtful accounts of $761 and $769
at March 31, 1998 and December 31, 1997, respectively 19,147 19,201
Other accounts receivable 1,103 1,820
Inventories 35,025 31,535
Prepaid expenses 2,470 1,488
Deferred income tax asset 540 534
-------- --------
Total current assets 58,424 54,973
-------- --------
Property, plant and equipment, at cost, less accumulated depreciation 6,742 6,703
Other assets:
Intangible assets, at cost, less accumulated amortization 1,872 1,936
Other assets 27 2
-------- --------
Total other assets 1,899 1,938
-------- --------
$ 67,065 $ 63,614
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 12,484 $ 4,424
Accrued expenses 1,647 1,884
Current portion of long-term debt 517 525
-------- --------
Total current liabilities 14,648 6,833
-------- --------
Revolving credit facility 22,173 26,788
Long-term debt 6,276 6,399
Non-current deferred income tax liability 232 258
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, 5,121 shares issued and outstanding
as of March 31, 1998 and December 31, 1997) 12,425 12,402
Unearned compensation (148) (177)
Retained earnings 11,459 11,111
-------- --------
Total shareholders' equity 23,736 23,336
-------- --------
$ 67,065 $ 63,614
======== ========
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
Note: The balance sheet at December 31, 1997 has been derived from the
audited financial statements at that date, but does not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. See note 5 entitled
Comprehensive Income on page 7.
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Form 10-Q
Page 4
ELLETT BROTHERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1998 1997
---- ----
<S> <C> <C>
Sales $ 34,032 $ 36,801
Cost of goods sold 28,126 30,458
-------- --------
Gross profit 5,906 6,343
Selling, general and administrative expenses 4,795 5,149
-------- --------
Income from operations 1,111 1,194
Other income (expenses) :
Interest income 123 136
Interest expense (526) (717)
Other income (3) 10
-------- --------
Income before income taxes 705 623
Income tax expense 254 231
-------- --------
Net income $ 451 $ 392
======== ========
Basic and diluted earnings per common share $ 0.09 $ 0.08
======== ========
Weighted average shares outstanding 5,121 5,171
======== ========
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
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Form 10-Q
Page 5
ELLETT BROTHERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 451 $ 392
Adjustments to reconcile net income to net cash provided by operating activities:
Non-cash charges to income 296 668
Changes in assets and liabilities:
Accounts receivable 740 (1,587)
Inventories (3,490) (1,653)
Prepaid expenses (982) (762)
Accounts payable, trade 8,060 4,489
Accrued expenses (237) (243)
-------- --------
Net cash provided by operating activities 4,838 1,304
-------- --------
Net cash used in investing activities (245) (58)
-------- --------
Cash flows from financing activities:
Gross borrowings on revolving credit facility 30,190 34,758
Gross repayments on revolving credit facility (34,805) (35,699)
Principal payments on capital lease obligations (8) (12)
Principal payments on long-term debt (123) (112)
Exercise of stock options by certain executive officers 3
Dividends to shareholders (103) (104)
-------- --------
Net cash used in financing activities (4,849) (1,166)
-------- --------
Net increase (decrease) in cash and cash equivalents (256) 80
Cash and cash equivalents :
Beginning of period 395 139
-------- --------
End of period $ 139 $ 219
======== ========
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
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Form 10-Q
Page 6
ELLETT BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1998
(in thousands, except per share data)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements, which
include the accounts of Ellett Brothers, Inc. and subsidiaries (the "Company"),
have been prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended March 31, 1998 are
not necessarily indicative of the results that may be expected for the full year
ending December 31, 1998. For further information, refer to the financial
statements and footnotes thereto included in Ellett Brothers, Inc.'s annual
report on Form 10-K for the year ended December 31, 1997.
2. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
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<S> <C> <C>
Finished goods $ 33,852 $ 30,406
Raw materials 782 885
Work in process 391 244
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$ 35,025 $ 31,535
========= =========
</TABLE>
3. COMMON AND PREFERRED STOCK
In January 1997, the Company issued 112 shares of common stock to two executives
of the Company for $475. The market value of these shares on the measurement
date was $559. The shares carry restrictions over their transferability which
will be lifted over a two year period ending in January 1999. The difference
between the market value and the price at which the shares were sold to the
executives is reflected as unearned compensation and is being amortized over the
two year period. In connection with the issuance of these shares, the Company
received promissory notes totaling $452, which has been classified at December
31, 1997 as an offset to shareholders' equity, and $23 in cash from the
executives. Balances due under the promissory notes, which bear interest at
5.6%, payable semi-annually, become due on a pro-rata basis as the shares are
sold by the executives.
The Company reacquired 46 and 10 shares in June and December of 1997, and
recorded it using the cost method of accounting for treasury stock.
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.
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Form 10-Q
Page 7
4. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS No.
128 is designed to improve the earnings per share information provided in
financial statements by simplifying the prior computational guidelines, revising
the disclosure requirements, and increasing comparability of earnings per share
data on an international basis. This pronouncement, which became effective for
periods ending after December 15, 1997, required the restatement of earnings per
share data for all periods presented in the form of basic earnings per share and
diluted earnings per share. The Company had no options outstanding during the
year ended December 31, 1997. The earnings per share calculations reported by
the Company equal basic and diluted earnings per share calculated under the
provisions of SFAS No. 128. Basic and diluted earnings per share for the quarter
ended March 31, 1998 and the year ended December 31, 1997 is earnings divided by
the weighted average shares outstanding.
5. COMPREHENSIVE INCOME
On January 1, 1998 the Company adopted Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income." As required by the SFAS No.
130, prior year information has been modified to conform with the new
presentation.
Comprehensive income includes net income and all other changes to the Company's
equity, with the exception of transactions with shareholders ("other
comprehensive income"). The Company's only components of other comprehensive
income relate to unrealized gains and losses on available for sale securities.
The Company's total comprehensive income for the three month periods ended March
31, 1998 and 1997 was $464 and $392, respectively. Information concerning the
Company's other comprehensive income for the three month periods ended March 31,
1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
Net unrealized gains on available for sale securities $ 21 $ -
Income tax expense relating to unrealized gains
on available for sale securities (8) -
------ ------
Other comprehensive income $ 13 $ -
====== ======
</TABLE>
<PAGE> 8
Form 10-Q
Page 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis provides information that management
believes is relevant to an assessment and understanding of the operations and
financial condition of Ellett Brothers, Inc. and its subsidiaries (the
"Company"). This discussion and analysis should be read in conjunction with the
financial statements and related notes presented in the Company's annual report
on Form 10-K for the year ended December 31, 1997, and the consolidated
financial statements and related notes included in this Form 10-Q.
Sales for the three months ended March 31, 1998 were $34.0 million, as compared
to $36.8 million for the same period in 1997, a decrease of $2.8 million, or
7.5%. Included in these amounts were sales from the subsidiaries of $421,000 and
$2.0 million for the three months ended March 31, 1998 and 1997, respectively.
During the first quarter of 1998, sales for the traditional distribution
business declined $1.2 million, or 3.3%. Sales in the hunting and shooting
sports product group had a decrease of $1.7 million, or 7.6%. Marine accessories
showed continued growth with an increase of $401,000, or 7.8%, while camping,
archery and outdoor accessories sales increased by $183,000, or 2.8%. Sales were
impacted by one less selling day in the quarter versus 1997, along with the
extreme weather patterns in much of the country, as well as a change for the
industry wide trade show from three to five business days. Subsidiary sales in
1997 included $1.7 million of Safesport Manufacturing which was liquidated in
1997. Excluding Safesport, subsidiary sales increased 36.7% in the first quarter
of 1998.
Gross profit was $5.9 million (17.4% of sales) for the three months ended March
31, 1998, as compared to $6.3 million (17.2% of sales) for the same period in
1997, a decrease of $437,000, or 6.9%. Excluding the Safesport operation, gross
profit would have been $5.8 million (16.6% of sales) in the first quarter of
1997. In the distribution business, where our improvements were focused, gross
margin as a percentage of sales increased 43 basis points. As a result, gross
margin dollars per day increased 1.1%, despite the reduction in sales per day by
1.8%. Gross margin as a percentage of sales for the hunting and shooting sports
products increased 49 basis points, while marine accessories increased 39 basis
points and camping, archery and outdoor accessories decreased 103 basis points.
Selling and general and administrative expenses for the three months ended March
31, 1998 were $4.8 million (14.1% of sales), as compared to $5.1 million (14.0%
of sales) for the same period in 1997, a decrease of $354,000, or 6.9%.
Excluding the Safesport operation in 1997, selling and general and
administration expenses for the three months would have been $4.5 million (12.8%
of sales). The increase in the first quarter of 1998 over 1997 of $300,000,
excluding the Safesport operation, is primarily due to the computer equipment
and information systems upgrade, increased costs of insurance, and a change in
the allocation of costs at the subsidiaries.
Interest expense was $526,000 (1.5% of sales) for the three months ended March
31, 1998, as compared to $717,000 (1.9% of sales) for the same period in 1997, a
decrease of $191,000, or 26.6%. Interest expense decreased due to lower
borrowings over the prior year.
Income tax expense was $254,000 for the three months ended March 31, 1998, as
compared to $231,000 for the same period in 1997, an increase of $23,000, or
9.7%. The effective tax rate for the three months ended March 31, 1998 was
35.9%, as compared to 37.1% for the same period in 1997. The decrease in the
effective tax rate was due to the deferred tax items.
Net income for the three months ended March 31, 1998 was $451,000 ($0.09 per
share) as compared to $392,000 ($0.08 per share) for the three months ended
March 31, 1997. Excluding the results of the Safesport operation in the three
months ended March 31, 1997, net income was $578,000 ($0.11 per share).
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 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.
<PAGE> 9
Form 10-Q
Page 9
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have been 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 provided by operating activities was $4.8 million for the three months
ended March 31, 1998 as compared to net cash provided by operating activities of
$1.3 million for the same period in 1997. The increase in cash provided by
operating activities was mainly due to a larger increase in trade payables and a
decrease in accounts receivable offset partially by a larger increase in
inventory in the first quarter of 1998 versus the first quarter of 1997.
Net cash used in investing activities was $245,000 for the three months ended
March 31, 1998 as compared to $58,000 for the same period in 1997. The net cash
used was primarily for computer equipment and information systems upgrades.
Net cash used in financing activities was $4.8 million for the three months
ended March 31, 1998 as compared to $1.2 million for the same period in 1997.
During the quarter ended March 31, 1998, the Company used cash collections in
excess of the current borrowings to reduce its revolving credit facility by $4.6
as well as to make principal payments on long-term debt 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. The accounts receivable decrease in the first quarter of 1998 was
different due to lower sales. 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 generally increased during the first half of the year to
accommodate the sales in the third and fourth quarters. Accounts receivable
generally decline to their lowest point in the second quarter just before the
sales increase in the second half of the year.
Principal maturities on the Company's industrial revenue bonds for the remainder
of 1998 will be $391,667, and maturities for 1999 and 2000 will be $566,667 and
$616,667, respectively. The annual interest charges on the Company's industrial
revenue bonds, at a fixed rate of 7.5%, will be $422,188 for the remainder of
1998, and $567,000 and $565,000 for 1999 and 2000, respectively.
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, and debt
service requirements for the remainder of 1998 and for the foreseeable future.
ADVISORY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the statements contained in Item 2 (Management's Discussion and
Analysis of Financial Condition and Results of Operations) that are not
historical facts are forward-looking statements subject to the safe harbor
created by the Private Securities Litigation Reform Act of 1995. The Company
cautions readers of this report on Form 10-Q that such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the Company
to be materially different from those expressed or implied by such
forward-looking statements. Although the Company's management believes that
their expectations of future performance are based on reasonable assumptions
within the bounds of their knowledge of their business and operations, there can
be no assurance that actual results will not differ materially from their
expectations. Factors which could cause actual results to differ from
expectations include, among other things, reductions in, or lack of growth of,
firearm sales; potential negative effects of existing and future gun control
legislation on consumer demand for firearms; the potential negative impact on
<PAGE> 10
Form 10-Q
Page 10
gross margins from shifts in the Company's product mix toward lower margin
products; seasonal fluctuations in the Company's business; competition from
national, regional and local distributors and various manufacturers who sell
products directly to the Company's customer base; competition from sporting
goods mass merchandisers or "superstores" which sell in competition with the
Company's primary customer base; exposure to product liability lawsuits; the
challenges and uncertainties in the implementation of the Company's expansion
and development strategies; the Company's dependence on key personnel; and other
factors described in this report and in other reports filed by the Company with
the Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Pursuant to Securities and Exchange Commission Release 33-7386 (January 31,
1997), the disclosure requirement contemplated by Item 305 of Regulation S-K in
response to this Item 3 is not currently mandated for the Company.
<PAGE> 11
Form 10-Q
Page 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended March 31, 1998.
<PAGE> 12
Form 10-Q
Page 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Form 10-Q to be signed on its behalf by the
undersigned thereunto duly authorized.
Ellett Brothers, Inc.
Date: May 15, 1998
By: /s/ Joseph F. Murray, Jr.
-----------------------------------------------
Joseph F. Murray, Jr.
President, Chief Executive Officer and Director
By: /s/ George E. Loney
-----------------------------------------------
George E. Loney
Chief Financial Officer
(principal financial and accounting officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ELLETT BROTHERS, INC. FOR THE THREE MONTHS ENDED MARCH
31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 139
<SECURITIES> 0
<RECEIVABLES> 19,908
<ALLOWANCES> 761
<INVENTORY> 35,025
<CURRENT-ASSETS> 58,424
<PP&E> 13,615
<DEPRECIATION> 6,873
<TOTAL-ASSETS> 67,065
<CURRENT-LIABILITIES> 14,648
<BONDS> 6,276
0
0
<COMMON> 12,425
<OTHER-SE> 11,311
<TOTAL-LIABILITY-AND-EQUITY> 67,065
<SALES> 34,032
<TOTAL-REVENUES> 34,032
<CGS> 28,126
<TOTAL-COSTS> 28,126
<OTHER-EXPENSES> 4,795
<LOSS-PROVISION> 32
<INTEREST-EXPENSE> (526)
<INCOME-PRETAX> 705
<INCOME-TAX> 254
<INCOME-CONTINUING> 451
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 451
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
