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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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 October 31, 1999, 4,326,518 shares of no par value common stock of the
registrant were outstanding.
Page 1 of 14 pages
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ELLETT BROTHERS, INC. AND SUBSIDIARIES
SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
Page
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Part I. Financial Information
Item 1. Financial Statements
Condensed consolidated balance sheets as of September 30, 1999 and December 31, 1998 3
Condensed consolidated statements of income for the three months and nine months ended
September 30, 1999 and 1998 4
Condensed consolidated statements of cash flows for the nine months ended September 30,
1999 and 1998 5
Notes to condensed consolidated financial statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
Part II. Other Information
Page
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Item 6. Exhibits and Reports on Form 8-K 13
</TABLE>
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PART I. FINANCIAL INFORMATION
Item I. Financial Statements
ELLETT BROTHERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, Dec. 31,
1999 1998
-------- --------
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ASSETS (unaudited) (see note)
Current assets:
Cash and cash equivalents $ 256 $ 183
Trade accounts receivable, less allowance for doubtful accounts of $1,084 and $605
at September 30, 1999 and December 31, 1998, respectively 28,666 20,066
Other receivable 415 1,716
Inventories 41,517 32,140
Prepaid expenses 2,080 948
Deferred income taxes 487 440
-------- --------
Total current assets 73,421 55,493
-------- --------
Property, plant and equipment, at cost, less accumulated depreciation 8,734 7,567
Other assets:
Intangible assets, at cost, less accumulated amortization 1,502 1,682
Other assets 15 27
-------- --------
Total other assets 1,517 1,709
-------- --------
$ 83,672 $ 64,769
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 9,998 $ 7,149
Accrued expenses 1,791 1,239
Current portion of long-term debt 566 567
-------- --------
Total current liabilities 12,355 8,955
-------- --------
Revolving credit facility 40,538 26,461
Long-term debt 5,356 5,836
Non-current deferred income taxes 331 585
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, 4,327 and 4,297 shares issued and outstanding
as of September 30, 1999 and December 31, 1998, respectively) 9,652 9,559
Common stock subscribed 42 93
Unearned compensation (23) (55)
Subscription receivable (465) (423)
Retained earnings 15,871 13,716
Accumulated other comprehensive income 15 42
-------- --------
Total shareholders' equity 25,092 22,932
-------- --------
$ 83,672 $ 64,769
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
Note: The balance sheet at December 31, 1998 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.
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ELLETT BROTHERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ---------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales $ 45,931 $ 39,625 $ 123,196 $ 105,513
Cost of goods sold 37,503 32,398 101,170 86,633
--------- --------- --------- ---------
Gross profit 8,428 7,227 22,026 18,880
Selling, general and administrative expenses 5,817 5,206 16,381 14,554
--------- --------- --------- ---------
Income from operations 2,611 2,021 5,645 4,326
Other income (expense):
Interest income 135 111 380 366
Interest expense (720) (724) (1,856) (1,866)
Other, net (2) (6) -- 36
--------- --------- --------- ---------
Income before income taxes 2,024 1,402 4,169 2,862
Income tax expense 722 518 1,502 1,027
--------- --------- --------- ---------
Net income $ 1,302 $ 884 $ 2,667 $ 1,835
========= ========= ========= =========
Basic and diluted earnings per common share $ 0.30 $ 0.17 $ 0.62 $ 0.36
========= ========= ========= =========
Weighted average shares outstanding 4,327 5,062 4,317 5,100
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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ELLETT BROTHERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,667 $ 1,835
Adjustments to reconcile net income to net cash used in operating activities:
Non-cash charges to income 1,235 833
Changes in assets and liabilities:
Accounts receivable (8,046) (4,433)
Inventories (9,377) (4,594)
Prepaid expenses (1,132) (384)
Accounts payable, trade 2,849 4,813
Accrued expenses 552 (386)
--------- ---------
Net cash used in operating activities (11,252) (2,316)
--------- ---------
Net cash used in investing activities, property, plant and equipment (1,717) (1,064)
--------- ---------
Cash flows from financing activities:
Gross borrowings on revolving credit facility 131,187 107,038
Gross repayments on revolving credit facility (117,110) (102,561)
Principal payments on capital lease obligations -- (8)
Principal payments on long-term debt (481) (379)
Subscription receivable (42) 34
Common stock repurchase -- (714)
Dividends to shareholders (512) (311)
--------- ---------
Net cash provided by financing activities 13,042 3,099
--------- ---------
Net (decrease) increase in cash and cash equivalents 73 (281)
Cash and cash equivalents:
Beginning of period 183 395
--------- ---------
End of period $ 256 $ 114
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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ELLETT BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1999
(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 and nine months ended September
30, 1999 are not necessarily indicative of the results that may be expected for
the full year ending December 31, 1999. 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, 1998.
2. INVENTORIES
Inventories consisted of the following:
September 30, December 31,
1999 1998
------- -------
Finished goods $40,597 $31,112
Raw materials 721 881
Work in process 199 147
------- -------
$41,517 $32,140
======= =======
3. COMMON AND PREFERRED STOCK
In January 1997, the Company issued 112 shares of common stock for total
consideration of $475 ($452 in promissory notes and $23 of cash) to two
executives of the Company in exchange for the cancellation of 112 fully vested
and outstanding options of the officers with an exercise price of $7.00 per
share. The promissory notes bear interest at 5.6%, payable semi-annually, and
become due on a pro-rata basis as the shares are sold by the executives. The
shares carry restrictions over their transferability which have been lifted over
a two-year period ended January 1999. The market value of the common stock at
the date of the transaction was $559. 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 June
of 1998, the Company reacquired 34 shares from one of the former executives and
recorded it using the cost method of accounting.
During 1996, the Company awarded 58 shares of restricted common stock to two
executives of the Company. The restrictions are scheduled to be released
pro-rata over a three to four year period, based on certain criteria. 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 is recognized
as the awards vest over the three to four year period. In 1998, the Company
awarded 20 shares to an executive officer when the market value of these shares
was $93. Compensation expense was recognized at the time of the award and
shareholders' equity reflects the stock subscribed. During the three months
ended June 30, 1999, the Company issued to an executive officer 30 stock
options, of which 10 vested immediately. The options were issued at 85% of
market price on the day the options vest.
The Company reacquired 46 and 10 shares of its common stock in June and December
of 1997, respectively; and reacquired 142, 448, and 200 shares of its common
stock in September, October, and December of 1998, respectively. The Company
recorded these acquisitions using the cost method of accounting.
The Company is authorized to issue 20,000 shares of no-par-value common 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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4. EARNINGS PER SHARE
Although the Company had options outstanding during the year ended December 31,
1998 and the nine month period ended September 30, 1999, they have an
antidilutive effect on earnings per share. Basic and diluted earnings per share
calculated under the provisions of SFAS No. 128 are equal. Basic and diluted
earnings per share for the three months and nine months ended September 30, 1999
and 1998, and the year ended December 31, 1998 is computed as net income divided
by the weighted average shares outstanding.
5. COMPREHENSIVE INCOME
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 nine month periods ended
September 30, 1999 and 1998 was $2,650 and $1,858, respectively. Information
concerning the Company's other comprehensive income for the nine month periods
ended September 30, 1999 and 1998 is as follows:
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1999 1998
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Net unrealized gains (losses) on available for sale securities $ (27) $ 36
Income tax (expense) benefit relating to unrealized gains
on available for sale securities 10 (13)
-------- --------
Other comprehensive income (loss) $ (17) $ 23
======== ========
</TABLE>
6. SUBSEQUENT EVENT
On October 8, 1999, the Company purchased the assets of Archery Center
International, Inc. (ACI) of Monroe, Michigan for $2.3 million. ACI will operate
as a subsidiary of Ellett Brothers, Inc.
7. BUSINESS SEGMENT INFORMATION
The Company's reportable segments are business units that offer different
products and have separate management teams and infrastructures. The business
units have been aggregated into two reportable segments. These segments are:
Hunting, Shooting, Camping, Archery & Outdoor Products ("HS&A") and Marine
Products. The "Other" segment includes the Company's subsidiaries.
The accounting policies of the segments are the same as those described in the
Company's annual report on Form 10-K for the year ended December 31, 1998. The
Company evaluates performance based upon operating income of the business units.
On October 8, 1999, a newly created subsidiary of the Company called Archery
Center International, Inc. acquired the assets of ACI, Consolidated, Inc. of
Monroe, Michigan for $2.3 million.
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The following table presents information about reported segments for the three
months ended September 30, 1999 and 1998 (in millions):
- --------------------------------------------------------------------------------
1999 HS&A MARINE OTHER TOTAL
- --------------------------------------------------------------------------------
Sales $ 36.1 $ 6.7 $ 3.1 $ 45.9
Operating income 1.6 .6 .4 2.6
Capital expenditures .7 .0 .0 .7
Depreciation .1 .0 .1 .2
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1998 HS&A MARINE OTHER TOTAL
- --------------------------------------------------------------------------------
Sales $ 30.5 $ 6.3 $ 2.8 $ 39.6
Operating income 1.0 .5 .5 2.0
Capital expenditures .4 .0 .0 .4
Depreciation .1 .0 .1 .2
- --------------------------------------------------------------------------------
A reconciliation of total segment operating income to total consolidated income
before taxes for the three months ended September 30 (in millions) is as
follows:
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Operating income $ 2.6 $ 2.0
Interest income and other income, net .1 .1
Interest expense (.7) (.7)
- --------------------------------------------------------------------------------
Income before taxes $ 2.0 $ 1.4
- --------------------------------------------------------------------------------
The following table presents information about reported segments for the nine
months ended September 30, 1999 and 1998 (in millions):
- --------------------------------------------------------------------------------
1999 HS&A MARINE OTHER TOTAL
- --------------------------------------------------------------------------------
Sales $ 96.3 $ 22.9 $ 4.0 $123.2
Operating income (loss) 3.8 1.9 (.1) 5.6
Identifiable segment assets 59.1 7.5 3.6 70.2
Capital expenditures 1.7 .0 .0 1.7
Depreciation .4 .1 .1 .6
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1998 HS&A MARINE OTHER TOTAL
- --------------------------------------------------------------------------------
Sales $ 81.5 $ 20.4 $ 3.6 $105.5
Operating income 2.5 1.6 .2 4.3
Identifiable segment assets 49.9 7.4 3.2 60.5
Capital expenditures 1.1 .0 .0 1.1
Depreciation .4 .1 .1 .6
- --------------------------------------------------------------------------------
A reconciliation of total segment operating income to total consolidated income
before taxes for the nine months ended September 30 (in millions) is as follows:
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Operating income $ 5.6 $ 4.3
Interest income and other income, net .4 .4
Interest expense (1.8) (1.8)
- --------------------------------------------------------------------------------
Income before taxes $ 4.2 $ 2.9
- --------------------------------------------------------------------------------
A reconciliation of identifiable segment assets to total assets as of September
30 (in millions) is as follows:
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Identifiable segment assets $ 70.2 $ 60.5
Other corporate assets 13.5 12.5
- --------------------------------------------------------------------------------
Total assets $ 83.7 $ 73.0
- --------------------------------------------------------------------------------
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis provide 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, 1998, and the condensed
consolidated financial statements and related notes included in this Form 10-Q.
Sales for the three months ended September 30, 1999 were $45.9 million, as
compared to $39.6 million for the same period in 1998, an increase of $6.3
million, or 15.9%. Sales for the nine months ended September 30, 1999 were
$123.2 million, as compared to $105.5 million for the same period in 1998, an
increase of $17.7 million, or 16.8%. Included in these amounts were sales from
the subsidiaries of $3.1 million and $4.0 million for the three and nine months
ended September 30, 1999, respectively, and $2.8 million and $3.6 million for
the three and nine months ended September 30, 1998, respectively.
Total sales in the distribution business increased 16.5% in the three months
ended September 30, 1999, as compared to the same period in 1998. Our hunting
and shooting sports sales had a 21.5% increase compared to 1998, while our
camping, archery and outdoor accessories sales experienced an 11.0% increase
over 1998. Marine products had a 9.4% increase, as compared to 1998.
Gross profit was $8.4 million (18.3% of sales) for the three months ended
September 30, 1999. This compares to $7.2 million (18.2% of sales) for the same
period in 1998, an increase of $1.2 million. Gross profit for the nine months
ended September 30, 1999 was $22.0 million (17.9% of sales), as compared to
$18.9 million (17.9% of sales) for the same period in 1998, an increase of $3.1
million. Gross margin as a percentage of sales in our distribution business was
up 40 basis points for the quarter and 14 basis points for the nine months, as
compared to the same period in 1998. Consolidated margins were flat in spite of
this because distribution sales accounted for the greater part of the mix this
year as compared to last year.
Selling, general and administrative (SG&A) expenses for the three months ended
September 30, 1999 were $5.8 million (12.7% of sales), as compared to $5.2
million (13.1% of sales) for the same period in 1998, an increase of $610,000,
or 11.7%. Selling, general and administrative expenses for the nine months ended
September 30, 1999 were $16.4 million (13.3% of sales), as compared to $14.6
million (13.8% of sales) for the same period in 1998, an increase of $1.8
million, or 12.6%. Increased expenses were incurred in shipping expense and bad
debt expense, which are due to increases in sales. In addition, larger than
normal associate insurance claims were incurred. The company has also incurred
expenses for Year 2000 remediation.
Interest expense was $720,000 (1.5% of sales) for the three months ended
September 30, 1999, as compared to $724,000 (1.8% of sales) for the same period
in 1998, a decrease of $4,000, or 0.5%. Interest expense for the nine months
ended September 30, 1999 was $1.9 million (1.5% of sales), as compared to $1.9
million (1.8% of sales) for the same period in 1998.
Income tax expense for the three months ended September 30, 1999 was $722,000,
as compared to $518,000 for the same period in 1998. Income tax expense was
$1.5 million for the nine months ended September 30, 1999, as compared to
$1.0 million for the same period in 1998. The effective tax rates for the three
months and nine months ended September 30, 1999 were 35.7% and 36.0%,
respectively, as compared to 36.9% and 35.9% for the same periods in 1998.
Net income for the three months ended September 30, 1999 was $1.3 million (2.8%
of sales), or $0.30 per share, as compared to a net income of $884,000 (2.2% of
sales), or $0.17 per share, for the same period in 1998. Net income for the nine
months ended September 30, 1999 was $2.7 million (2.2% of sales), or $0.62 per
share, as compared to a net income of $1.8 million (1.7% of sales), or $0.36 per
share for the same period in 1998.
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 are very seasonal, producing significantly higher sales and gross
profit during the third and fourth quarters, with losses
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generated 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 very minimal cash balances and is substantially
dependent on, among other things, the availability of adequate working capital
financing to support inventories and accounts receivable.
During the nine months ended September 30, 1999, net cash used in operating
activities was $11.3 million, as compared to $2.3 million for the same period in
1998. The net cash used in 1999 over the cash generated from operations was for
increases in inventory and accounts receivable, offset partially by an increase
in accounts payable.
The net cash used in investing activities in 1999 of $1.7 million was primarily
due to the purchase of computer software.
Net cash provided by financing activities was $13.0 million for the nine months
ended September 30, 1999, as compared to $3.1 million for the same period in
1998. During the nine months ended September 30, 1999, the Company obtained the
additional cash needed to fund operations by increasing borrowings under its
revolving credit facility by $14.1 million. The Company also paid dividends of
$512,000 in the nine months ended September 30, 1999.
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 whereby the Company has
offered to its 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. In the fourth
quarter, the higher sales volumes have traditionally served to reduce inventory
to its lowest point at year-end.
Working capital requirements are also seasonal for the subsidiaries. Inventories
increase during the first half of the year to accommodate the sales expected in
the third and fourth quarters. Accounts receivable 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 refunding bonds began
in 1995. Remaining payments for 1999 will be $150,000, and maturities for 2000
and 2001 will be $617,000 and $667,000, respectively. The annual interest
charges on the Company's industrial revenue bonds, at a fixed rate of 7.5%, will
be $135,000 for the remainder of 1999, and $525,000 and $479,000 for 2000 and
2001, 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, debt service
requirements, and business acquisitions for the remainder of 1999 and the
foreseeable future.
YEAR 2000 ISSUE
The Company is devoting resources throughout its business operations to minimize
the risk of potential disruption from the Year 2000 ("Y2K") problem. This
problem is a result of computer programs having been written using two digits
(rather than four) to define the applicable year. Any information technology
("IT") systems that have time-sensitive software may recognize a date using "00"
as the year 1900 rather than the year 2000, which could result in
miscalculations and system failures. The problem also extends to many "Non-IT"
systems; that is, operating and control systems that rely on embedded chip
systems. In addition, like every other business enterprise, the Company is at
risk from Y2K failures on the part of its major business counterparts, including
suppliers and customers, as well as potential failures in public and private
infrastructure services.
System failures resulting from the Y2K problem could adversely affect operations
and financial results of the Company. Y2K failures on the part of our major
vendors would limit our available inventory for resale. Failures at our customer
level would result in lower revenue. Public infrastructure failures could
adversely affect power and communications.
<PAGE> 11
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In late 1996, the Company determined that its operating system would not be Y2K
compliant and made a decision to purchase new operating software (purchasing,
distribution, and financial) to run its business. In connection with this
decision, new hardware was purchased that was designed to move the Company from
a mainframe to a client/server environment. The new system was installed in the
third quarter for part of the company's operations. The remaining operations
will be converted in the first quarter of 2000.
As additional insurance, the Company made the decision to remediate the current
system code, which will be completed in the fourth quarter of 1999. Those
systems not converted to the new system will operate under the remediated system
to begin the year 2000. The cost to remediate the code is approximately
$350,000.
In the second half of 1998, the Company put together a project team headed up by
an executive of the Company with the assistance of the department heads. A plan
was put together to assess all internal Non-IT systems as well as key suppliers
and customers. The Company has completed its assessment and feels it has
addressed all critical areas that could affect its business.
The cost of the system upgrades, which includes hardware and software, since
inception through completion, is expected to be approximately $4.8 million. As
of September 30, 1999, the Company had spent $4.5 million. This amount was
funded out of working capital and the Company's revolving credit line. Amounts
incurred to-date and expected to be incurred in the future do not include
amounts for internal manpower or additional amounts determined as a result of
the contingency programs to be developed, if any.
Based upon its efforts to-date, the Company believes that the vast majority of
both its IT and its Non-IT systems, including all critical and important
systems, will remain up and running after January 1, 2000. Accordingly, the
Company does not currently anticipate that internal systems failures will result
in any material adverse effect to its operations or financial condition.
The nature and focus of the Company's efforts to address the Y2K problem may be
revised periodically as interim goals are achieved or new issues are identified.
In addition, it is important to note that the description of the Company's
efforts necessarily involves estimates and projections with respect to
activities required in the future. These estimates and projections are subject
to change as work continues, and such changes may be substantial.
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
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
The Company's exposure to market risk for a change in interest rates relates
solely to its debt under its revolving credit facility ($40.5 million at
September 30, 1999 and $26.5 million at December 31, 1998). The Company does not
currently use derivative financial instruments.
Approximately $5.9 million of the Company's debt at September 30, 1999 and $6.4
million at December 31, 1998 was subject to fixed interest rates and principal
payments. This debt is comprised of the Company's long-term debt under its
industrial revenue refunding bonds which carry an interest rate of 7.5%.
<PAGE> 12
Page 12
The Company is exposed to changes in interest rates primarily as a result of its
debt in a variable rate revolving credit facility ("Facility") used to maintain
liquidity and fund the Company's business operations. Pursuant to the Company's
operating strategies, it maintains minimal cash balances and is substantially
dependent on, among other things, the availability of adequate working capital
financing to support inventories and accounts receivables. The Facility provides
the Company with a revolving line of credit and letters of credit. The maximum
amount that can be outstanding at anytime is $45.0 million. The term of the
Facility expires on September 30, 2001. Borrowings under the Facility bear
interest at a rate equal to, at the Company's option, prime rate plus 0.375% or
2.25% above the 30 or 90 day LIBOR rate. Combinations of these rates can be used
for the various loans that comprise the total outstanding balance under the
Facility. The interest rates of the Facility are subject to change based on
changes in the Company's leverage ratio and net income. At September 30, 1999,
the interest rate was 7.12%. The definitive extent of the Company's interest
rate risk under the Facility is not quantifiable or predictable because of the
variability of future interest rates and business financing requirements.
The Company's long-term debt has a fair value, based upon current interest
rates, of approximately $47.2 million at September 30, 1999 and $33.9 million at
December 31, 1998. Fair value will vary as interest rates change. The following
table presents the aggregate maturities and historical cost amounts of the fixed
debt principal and interest rates by maturity dates at September 30, 1999:
Maturity Date Fixed Rate Debt Interest Rate
--------------------------------------------------------------------
1999 $ 150,000 7.5%
2000 617,000 7.5%
2001 667,000 7.5%
2002 716,000 7.5%
2003 766,000 7.5%
Thereafter 3,006,000 7.5%
--------------------------------------------------------------------
$ 5,922,000 7.5%
<PAGE> 13
Page 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three months ended
September 30, 1999.
<PAGE> 14
Page 14
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: November 12, 1999
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 NINE MONTHS ENDED
SEPTEMBER 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 256
<SECURITIES> 0
<RECEIVABLES> 29,750
<ALLOWANCES> 1,084
<INVENTORY> 41,517
<CURRENT-ASSETS> 73,421
<PP&E> 16,611
<DEPRECIATION> 7,877
<TOTAL-ASSETS> 83,672
<CURRENT-LIABILITIES> 12,355
<BONDS> 5,356
0
0
<COMMON> 9,694
<OTHER-SE> 15,398
<TOTAL-LIABILITY-AND-EQUITY> 83,672
<SALES> 123,196
<TOTAL-REVENUES> 123,196
<CGS> 101,170
<TOTAL-COSTS> 101,170
<OTHER-EXPENSES> 16,381
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,856)
<INCOME-PRETAX> 4,169
<INCOME-TAX> 1,502
<INCOME-CONTINUING> 2,667
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,667
<EPS-BASIC> 0.62
<EPS-DILUTED> 0.62
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