-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RhQCUBCrWufsB1Xjf7yfac27wnlbGe7k+MhVaPMQtVYqNGfodRLp4yCkUfu+3pBh KOo/cgJOiNXpLX5UAzyx6Q== 0000950144-01-500925.txt : 20010424 0000950144-01-500925.hdr.sgml : 20010424 ACCESSION NUMBER: 0000950144-01-500925 CONFORMED SUBMISSION TYPE: SC 13E3 PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 20010420 GROUP MEMBERS: ELLETT BROTHERS INC GROUP MEMBERS: ELLETT HOLDING, INC. SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: ELLETT BROTHERS INC CENTRAL INDEX KEY: 0000902055 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MISC DURABLE GOODS [5090] IRS NUMBER: 570957069 STATE OF INCORPORATION: SC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13E3 SEC ACT: SEC FILE NUMBER: 005-45517 FILM NUMBER: 1607306 BUSINESS ADDRESS: STREET 1: 267 COLUMBIA AVE CITY: CHAPIN STATE: SC ZIP: 29036 BUSINESS PHONE: 8033453751 MAIL ADDRESS: STREET 1: P O BOX 128 CITY: CHAPIN STATE: SC ZIP: 29036 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: ELLETT BROTHERS INC CENTRAL INDEX KEY: 0000902055 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MISC DURABLE GOODS [5090] IRS NUMBER: 570957069 STATE OF INCORPORATION: SC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13E3 BUSINESS ADDRESS: STREET 1: 267 COLUMBIA AVE CITY: CHAPIN STATE: SC ZIP: 29036 BUSINESS PHONE: 8033453751 MAIL ADDRESS: STREET 1: P O BOX 128 CITY: CHAPIN STATE: SC ZIP: 29036 SC 13E3 1 g68688sc13e3.txt ELLETT BROTHERS INC 1 SECURITIES AND EXCHANGE COMMISSION, WASHINGTON, D.C. 20549 SCHEDULE 13E-3 (RULE 13e-100) TRANSACTION STATEMENT UNDER SECTION 13(e) OF THE SECURITIES EXCHANGE ACT OF 1934 AND RULE 13e-3 THEREUNDER RULE 13e-3 TRANSACTION STATEMENT UNDER SECTION 13(e) OF THE SECURITIES EXCHANGE ACT OF 1934 Ellett Brothers, Inc. - -------------------------------------------------------------------------------- (Name of the Issuer) Ellett Brothers, Inc., Ellett Holding, Inc. - -------------------------------------------------------------------------------- (Names of Person (s) Filing Statement) Common Stock, No Par Value - -------------------------------------------------------------------------------- (Title of Class of Securities) 288398100 - -------------------------------------------------------------------------------- (CUSIP Number of Class of Securities) E. Wayne Gibson Post Office Box 912 Rocky Mount, NC 27804 (252) 443-7041 WITH COPIES TO: Julian Hennig III, Esquire Barney Stewart III, Esquire Nexsen Pruet Jacobs & Pollard, LLC Moore & VanAllen PLLC 1441 Main Street, Suite 1500 NationsBank Corporate Center Post Office Drawer 2426 100 North Tryon Street, Floor 47 Columbia, SC 29201 Charlotte, NC 28202-4003 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Name, Address, and Telephone Numbers of Person Authorized to Receive Notices and Communications on Behalf of the Person (s) Filing Statement) This statement is filed in connection with (check the appropriate box): a. [X] The filing of solicitation materials or an information statement subject to Regulation 14A, Regulation 14C or Rule 13e-3(c) under the Securities Exchange Act of 1934. b. [ ] The filing of a registration statement under the Securities Act of 1933. c. [ ] A tender offer. d. [ ] None of the above. Check the following box if the soliciting materials or information statement referred to in checking box (a) are preliminary copies: [X] Check the following box if the filing is a final amendment reporting the results of the transaction: [ ] Calculation of Filing Fee - -------------------------------------------------------------------------------- Transaction Valuation* Amount of Filing Fee* $4,953,497.60 $991.00 - -------------------------------------------------------------------------------- 2 *Set forth the amount on which the filing fee is calculated and state how it was determined. The filing fee was determined based upon the product of (a) the 1,547,968 shares of common stock, no par value per share, proposed to be acquired by the acquiror (which does not include 2,535,000 shares which will be owned by an affiliate of the acquiror prior to the merger), and (b) the merger consideration of $3.20 per share of common stock. The payment of the filing fee, calculated in accordance with Regulation 240.0-11 under the Securities Exchange Act of 1934, as amended, equals 1/50 of 1% of the transaction valuation. [X] Check the box if any part of the fee is offset as provided by Exchange Act Rule 0-11 (a) (2) and identify the filing with which the offsetting fee was previously paid. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. Amount Previously Paid: $ 991.00 Filing Party: Ellett Brothers, Inc. -------------- --------------------- Form or Registration No: Schedule 14A, Preliminary Proxy Statement Date Filed: April 20, 2001 ----------------------------------------- -------------- 3 INTRODUCTION This Rule 13e-3 Transaction Statement on Schedule 13E-3 (the "Schedule 13E-3") is being filed by Ellett Holding, Inc., a South Carolina corporation ("Holding Company"), and issuer of the equity securities which are the subject of the Rule 13e-3 transaction, Ellett Brothers, Inc., a South Carolina corporation ("Ellett Brothers"). This Transaction Statement relates to the Agreement and Plan of Merger, dated as of April 12, 2001 (the "Agreement"), among Holding Company, Ellett Brothers, and Ellett Acquisition, Inc., a South Carolina corporation ("Merger Sub"), pursuant to which Merger Sub will be merged with and into Ellett Brothers, with Ellett Brothers as the surviving corporation. Concurrently with the filing of this Schedule 13E-3, Ellett Brothers is filing with the Securities and Exchange Commission a preliminary proxy statement (the "Proxy Statement") under Regulation 14A of the Exchange Act relating to the special meeting of shareholders of Ellett Brothers at which the shareholders of Ellett Brothers will consider and vote upon a proposal to approve and adopt the Agreement. A copy of the Agreement is attached as Appendix A to the Proxy Statement. All references in this Schedule 13E-3 to Items numbered 1001 through 1016 are references to Items contained in Regulation M-A under the Exchange Act. The information in the Proxy Statement, including all appendices thereto, is expressly incorporated by reference into this Schedule 13E-3 in its entirety, and the responses to each item are qualified in their entirety by the provisions of the Proxy Statement. The Proxy Statement is in preliminary form and is subject to completion or amendment. Capitalized terms used but not defined in this statement shall have the meanings given to them in the Proxy Statement. Item 1. Summary Term Sheet. ITEM 1001 The information contained in the section of the Proxy Statement entitled "SUMMARY" is incorporated herein by reference. Item 2. Subject Company Information. ITEM 1002 (a) Ellett Brothers, Inc. 267 Columbia Avenue Chapin, South Carolina 29036 (803) 345-3751 (b) Common stock, no par value, 4,082,968 shares issued and outstanding as of April 6, 2001 (c)-(d) The information contained in the section of the Proxy Statement entitled "MARKET PRICES OF COMMON STOCK AND DIVIDENDS" is incorporated herein by reference. (e) Not applicable. (f) The information contained in the section of the Proxy Statement entitled "RECENT STOCK PURCHASES" is incorporated herein by reference. Item 3. Identity and Background of Filing Person. ITEM 1003 (a), (c) Ellett Brothers, Inc. 267 Columbia Avenue Chapin, South Carolina 29036 (803) 345-3751 1 4 Ellett Holding, Inc. Post Office Box 912 Rocky Mount, North Carolina 27804 (252) 443-7041 Joseph F. Murray, Jr. President and Director of Ellett Brothers, Inc. 267 Columbia Avenue Chapin, South Carolina 29036 (803) 345-3751 P. Douglas McMillan Executive Vice President of Ellett Brothers, Inc. 267 Columbia Avenue Chapin, South Carolina 29036 (803) 345-3751 Prior to joining Ellett Brothers, Inc. on July 1, 1998, Mr. McMillan served for six years as President and Chief Executive Officer of Allison-Erwin Company, a marketing and wholesale distribution company located at whose address is P.O. Box 32308, Charlotte, North Carolina 28232. George E. Loney Chief Financial Officer of Ellett Brothers, Inc. 267 Columbia Avenue Chapin, South Carolina 29036 (803) 345-3751 Prior to joining Ellett Brothers, Inc. on July 1, 1998, Mr. Loney served for seven years as the Senior Vice President of Finance, Chief Financial Officer and Treasurer for Merchants, Inc., a retailer and wholesale distributor in the tire and automotive service industry located at 9073 Evelid Avenue, Manassas, Virginia 20110. Robert D. Gorham, Jr. Chairman of the Board of Directors of Ellett Brothers, Inc., and Director of Ellett Holding, Inc. Post Office Box 912 Rocky Mount, North Carolina 27804 (252) 443-7041 E. Wayne Gibson Secretary, Chairman of the Executive Committee, and Director of Ellett Brothers, Inc., and President, Secretary, and Director of Ellett Holding, Inc. Post Office Box 912 Rocky Mount, North Carolina 27804 (252) 443-7041 William H. Batchelor Director of Ellett Brothers, Inc., and Director of Ellett Holding, Inc. Post Office Box 912 Rocky Mount, North Carolina 27804 (252) 443-7041 Since January 1, 1995, Mr. Batchelor has served as Executive Vice President of The Tuscarora Corporation, a private investment company whose address is Post Office Box 912, Rocky Mount, North Carolina 27804. From 1986 to 1998, Mr. Batchelor served as Chairman of the Board of New Southern of Rocky Mount, Inc., a peanut and cotton seed processing company located at 600 Wilkinson Street, Rocky Mount, North Carolina 27801 2 5 Charles V. Ricks Director of Ellett Brothers, Inc. 6000 Monroe Street, Suite 101 Charlotte, North Carolina 28212 (704) 537-0526 Mr. Ricks provides financial and tax advice and business consulting services through his companies, Ricks & Smith LLP and Edgemont Management Corporation, each located at 6000 Monroe Street, Suite 101, Charlotte, North Carolina 28212. Mr. Ricks also spends a significant amount of time managing his own business interests, most of which are involved in the retail automobile industry. William H. Stanley Director of Ellett Brothers, Inc. 1404 West Haven Boulevard Rocky Mount, North Carolina 27804 (252) 446-8385 Mr. Stanley serves as a director of Boddie-Noell Properties, Inc., a real estate investment trust, located at 3850 One First Union Center, Charlotte, North Carolina 28202, and a director of Rocky Mount Mills, a textile manufacturer that is currently being liquidated located at 1151 Falls Road, Rocky Mount, North Carolina 27804. For the period from 1992 through 1998, Mr. Stanley also served on the Nash County Social Services Board located at 120 West Washington Street, Nashville, North Carolina 27856. The respective officers, directors, and persons controlling Ellett Brothers, Inc. and Ellett Holding, Inc. have not during the last five years been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors) or been a party to a civil proceeding of judicial or administrative body of confident jurisdiction and as a result of such proceeding was or is subject to a judgment, decree, or file order in joining future violations of, or prohibiting activities subject to, federal or state securities laws or finding any violations of such laws. All the executive officers, directors, and persons controlling Ellett Brothers, Inc. and Ellett Holding, Inc. are citizens of the United States. The information contained in the following sections of the Proxy Statement is incorporated herein by reference: SUMMARY - Who are the parties to the merger? CONFLICTS OF INTEREST DIRECTORS AND EXECUTIVE OFFICERS SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT INFORMATION REGARDING HOLDING COMPANY AND ACQUISITION COMPANY (b) The information contained in the following sections of the Proxy Statement is incorporated herein by reference: INFORMATION REGARDING ELLETT INFORMATION REGARDING HOLDING COMPANY AND ACQUISITION COMPANY Item 4. Terms of the Transaction ITEM 1004 (a)(1) Not applicable. (a)(2) The information contained in the following sections of the Proxy Statement is incorporated herein by reference: SUMMARY - What will happen in the merger? SUMMARY - What will I receive in the merger? SUMMARY - Why is Ellett being acquired? 3 6 SUMMARY - Why is the Board of Directors recommending that I vote to approve the merger? SUMMARY - What vote is required to approve the merger? SUMMARY - What are the tax consequences of the merger to me? SPECIAL FACTORS - Recommendation of the Special Committee of the Board of Directors PURPOSE AND REASONS OF THE TUSCARORA GROUP FOR THE MERGER THE SPECIAL MEETING - Required Vote; Voting Procedures EFFECTS OF THE MERGER THE MERGER FEDERAL INCOME TAX CONSEQUENCES APPENDIX A to the Proxy Statement (c) The information contained in the following sections of the Proxy Statement is incorporated herein by reference: SUMMARY - What will happen in the merger? EFFECTS OF THE MERGER THE MERGER - Conversion of Securities (d) The information contained in the following sections of the Proxy Statement is incorporated herein by reference: SUMMARY - What are the rights of a dissenting shareholder? THE SPECIAL MEETING - Rights of Objecting Shareholders RIGHTS OF DISSENTING SHAREHOLDERS APPENDIX C to the Proxy Statement (e) The information contained in the following sections of the Proxy Statement is incorporated herein by reference: THE SPECIAL MEETING - Rights of Objecting Shareholders INCORPORATION OF DOCUMENTS BY REFERENCE (f) Not Applicable. Item 5. Past Contacts, Transactions, Negotiations, and Agreements. ITEM 1005 (a) The information contained in the following sections of the Proxy Statement is incorporated herein by reference: CONFLICTS OF INTERESTS SUMMARY - What will happen in the merger? THE MERGER - Conversion of Securities INCORPORATION OF DOCUMENTS BY REFERENCE (b)-(c) The information contained in the following sections of the Proxy Statement is incorporated herein by reference: SUMMARY - Who are the parties to the merger? SPECIAL FACTORS - Background of the Merger CONFLICTS OF INTEREST SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT INFORMATION REGARDING ELLETT (e) The information contained in the following sections of the Proxy Statement is incorporated herein by reference: 4 7 SUMMARY - What will happen in the merger? CONFLICTS OF INTEREST THE MERGER MARKET PRICE OF COMMON STOCK AND DIVIDENDS APPENDIX A to the Proxy Statement Item 6. Purpose of the Transaction and Plans or Proposals. ITEM 1006 (b) The information contained in the following sections of the Proxy Statement is incorporated herein by reference: SUMMARY - What will happen in the merger? EFFECTS OF THE MERGER THE MERGER - Conversion of Securities (c) The information contained in the following sections of the Proxy Statement is incorporated herein by reference: SUMMARY - What will happen in the merger? SPECIAL FACTORS - Background of the Merger SPECIAL FACTORS - Inquiries by Land 'N' Sea Corporation CONDUCT OF ELLETT'S BUSINESS AFTER THE MERGER EFFECTS OF THE MERGER FINANCING OF THE MERGER THE MERGER RECENT STOCK PURCHASES MARKET PRICES OF COMMON STOCK AND DIVIDENDS APPENDIX A to the Proxy Statement Item 7. Purposes, Alternatives, Reasons, and Effects. ITEM 1013 (a)-(c) The information contained in the following sections of the Proxy Statement is incorporated herein by reference: SUMMARY - Why is Ellett being acquired? SUMMARY - Why is the Board of Directors recommending that I vote to approve the merger? SUMMARY - Did the Special Committee receive any firm offers from others to acquire Ellett at prices higher than $3.20 per share? SPECIAL FACTORS - Background of the Merger SPECIAL FACTORS - Recommendations of the Special Committee and of the Board of Directors SPECIAL FACTORS - Inquiries by Land 'N' Sea Corporation SPECIAL FACTORS - Opinion of the Special Committee's Financial Advisor PURPOSE AND REASONS OF THE TUSCARORA GROUP FOR THE MERGER (d) The information contained in the following sections of the Proxy Statement is incorporated herein by reference: SUMMARY - What will happen in the merger? SUMMARY - What will I receive in the merger? SUMMARY - What are the tax consequences of the merger to me? CONFLICT OF INTEREST CONDUCT OF ELLETT'S BUSINESS AFTER THE MERGER EFFECTS OF THE MERGER THE MERGER - Combination of Corporations 5 8 THE MERGER - Conversion of Securities THE MERGER - Cash-out of Ellett Stock Options THE MERGER - Transfer of Shares FEDERAL INCOME TAX CONSEQUENCES Item 8. Fairness of the Transaction. ITEM 1014 (a)-(e) The information contained in the following sections of the Proxy Statement is incorporated herein by reference: SUMMARY - Has the Board recommended the merger? SUMMARY - Why is the Board of Directors recommending a vote to approve the merger? SUMMARY - Why was the Special Committee formed, and who are the members? SUMMARY - What vote is required to approve the merger? SUMMARY - Who can vote on the merger? SPECIAL MEETING - Required Vote; Voting Procedures SPECIAL FACTORS - Background of the Merger SPECIAL FACTORS - Recommendation of the Special Committee and of the Board of Directors SPECIAL FACTORS - Opinion of the Special Committee's Financial Advisor POSITION OF THE TUSCARORA GROUP AS TO FAIRNESS OF THE MERGER (f) Not Applicable. Item 9. Reports, Opinions, Appraisals and Negotiations. ITEM 1015 (a)-(c) The information contained in the following sections of the Proxy Statement is incorporated herein by reference: SUMMARY - Why was the Special Committee formed, and who are the members? SUMMARY - How was the amount of the merger considerations determined? SPECIAL FACTORS - Recommendation of the Special Committee and of the Board of Directors SPECIAL FACTORS - Opinion of the Special Committee's Financial Advisor APPENDIX B to the Proxy Statement Item 10. Source and Amounts of Funds or Other Consideration ITEM 1007 (a)-(b), The information contained in the Section of the Proxy (d) Statement entitled "FINANCING OF THE MERGER" is incorporated herein by reference. (c) The information contained in the Section of the Proxy Statement entitled "THE MERGER - Fees and Expenses" is incorporated herein by reference. Item 11. Interest in Securities of the Subject Company. ITEM 1008 (a) The information contained in the Section of the Proxy Statement entitled "SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT" is incorporated herein by reference. (b) The information contained in the following sections of the Proxy Statement is incorporated herein by reference: 6 9 SUMMARY - What will happen in the merger? THE MERGER - Conversion of Securities Item 12. The Solicitation or Recommendation. ITEM 1012 (d)-(e) The information contained in the following sections of the Proxy Statement is incorporated herein by reference: SUMMARY - What will happen in the merger? SUMMARY - Has the Board of Directors recommended the merger? SUMMARY - What vote is required to approve the merger? THE MERGER - Conversion of Securities THE MERGER - Cash-out of Ellett Stock Options SUMMARY - Why is the Board of Directors recommending that I vote to approve the merger? SPECIAL FACTORS - Recommendation of the Special Committee and of the Board of Directors SPECIAL FACTORS - Opinion of the Special Committee's Financial Advisor CONFLICTS OF INTEREST SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Item 13. Financial Statements. ITEM 1010 (a) The information contained in the following sections of the Proxy Statement is incorporated herein by reference: INCORPORATION OF DOCUMENTS BY REFERENCE SELECTED CONSOLIDATED FINANCIAL DATA MARKET PRICES OF COMMON STOCK AND DIVIDENDS (b) Not applicable. Item 14. Persons/Assets, Retained, Employed, Compensated or Used. ITEM 1009 (a)-(b) The information contained in the following sections of the Proxy Statement is incorporated herein by reference: THE MERGER - Fees and Expenses THE SPECIAL MEETING - Time, Place and Date; Proxy Solicitation Item 15. Additional Information. ITEM 1011 (b) The information contained in the Proxy Statement, including all appendices attached thereto, is incorporated herein by reference. Item 16. Exhibits. (a) Preliminary form of the Proxy Statement filed with the Securities and Exchange Commission on April 19, 2001 7 10 (b) Financing and Security Agreement dated June 10, 1994 between First Union Commercial Corporation and Ellett Brothers, Inc., and amendments thereto. Incorporated by reference to Exhibits 10(a) through (l) of the Form 10-K for Ellett Brothers, Inc. for the year ended December 31, 2000. (c)(1) Opinion of Dixon Odom PLLC, attached as Appendix B to the Proxy Statement. (c)(2) Fairness Memorandum to the Board of Directors of Ellett Brothers, Inc. as of March 7, 2001, attached hereto as Exhibit (c)(2) (d) Agreement and Plan of Merger dated April 12, 2001, by and among Ellett Holding, Inc., a South Carolina corporation; Ellett Acquisition, Inc., a South Carolina corporation; and Ellett Brothers, Inc., a South Carolina corporation, attached as Appendix A to the Proxy Statement. (f) Sections 33-13-101 through 33-13-310 of the South Carolina Business Corporation Act of 1988, as amended, attached as Appendix C to the Proxy Statement. (g) Not Applicable. SIGNATURE After due inquiry and to the best of their knowledge and belief, the undersigned certify that the information set forth in the statement is true, complete and correct. Dated: April 20, 2001 ELLETT BROTHERS, INC. By: /s/ E. Wayne Gibson ------------------------------- E. Wayne Gibson Secretary ELLETT HOLDING, INC. By: /s/ E. Wayne Gibson ------------------------------- E. Wayne Gibson President 8 EX-99.C2 2 g68688ex99-c2.txt FAIRNESS MEMORANDUM 1 EXHIBIT (c)(2) FAIRNESS MEMORANDUM TO THE BOARD OF DIRECTORS OF ELLETT BROTHERS, INC. as of March 7, 2001 2 TABLE OF CONTENTS PAGE ---- Engagement Overview .................................................... 1 - 2 Purpose of Engagement Primary Procedures Stock Analysis ......................................................... 3 - 7 Historical Pricing Valuation Multiples Dividend Yield Valuation Procedures .................................................. 8 - 18 Nature of our Analysis Valuation Methods Asset Approach Income Approach Market Approach Conclusion ............................................................ 19 Appendices Appendix A: Financial Data Appendix B: Statement of Assumptions and Limiting Conditions 3 ENGAGEMENT OVERVIEW PURPOSE OF ENGAGEMENT We understand that Ellett Brothers, Inc. (the "Company" or "Ellett"), Ellett Holding, Inc., and Ellett Acquisition, Inc. (collectively, the "Buyer") propose to enter into an Agreement and Plan of Merger, the terms of which were approved by the Board of Directors of the Company on March 7, 2001 (the "Merger Agreement"). Pursuant to the Merger Agreement, each share of the outstanding common stock of the Company that is not owned by the Buyer (the "Minority Shares") will be converted into the right to receive $3.20 per share in cash (the "Merger"). We understand that approximately 62% of the outstanding common stock is owned by the Buyer. The terms and conditions of the Merger are set forth in the Merger Agreement. PRIMARY PROCEDURES In preparing our opinion, we, among other things: O Analyzed and researched the nature of Ellett's business and its history from Ellett's inception; O Visited Ellett's locations, including its two primary locations, and conducted extensive telephone and on site interviews with Ellett's management; O Researched the general economic outlook and market conditions that are relevant to Ellett's business; O Reviewed the book value and financial condition of Ellett at December 31, 2000, and considered whether Ellett has significant goodwill or other intangible value by reviewing, among other items, Ellett's earning and dividend paying capacities; O Conducted a review of the relevant geographic and competitive markets in which Ellett operates; O Researched actual transactions in Ellett's stock and considered trading volumes for Ellett's common stock; O Compared the performance and market prices of companies engaged in wholesale distribution or sporting goods whose stocks are actively traded in the public stock markets; O Conducted comparisons with similar, non-publicly traded companies, to the extent appropriate, as well as an analyses of selected acquisitions and "going private" transactions for public companies; O Reviewed the financial terms of the merger agreement; and O Performed such other analyses as we deemed relevant. - -------------------------------------------------------------------------------- Page 1 4 In all cases, we have relied upon the referenced information without independent verification. In conjunction with the preparation of this report, James L. Williams and Timothy W. York, of Dixon Odom PLLC, met with and held conversations with Ellett's management and advisors, providing an important perspective to our understanding of the information reviewed and analyzed in the preparation of this fairness opinion. A sound analysis is based upon the relevant facts, but the elements of common sense, informed judgment, and reasonableness must enter the process of weighing those facts and determining their aggregate significance. This position is clearly established in general valuation theory and for valuations prepared for specific tax purposes (see Revenue Ruling 59-60). We believe our opinion of fairness gives adequate consideration to the above factors. - -------------------------------------------------------------------------------- Page 2 5 STOCK ANALYSIS Historical Pricing We studied the stock price and trading statistics for Ellett since its IPO in June 1993. The objective of our analysis in this area was to identify trends in the price and activity of the stock that might help lead us to conclusions about future performance of the stock. As noted on the chart that follows, the peak in both price and activity appeared in the years 1994 and 1995, only a year or so removed from the IPO. Additionally, it should be noted that 1994 coincides with the enactment of the controversial "Brady Bill" and "Crime Bill", both of which significantly stimulated firearm sales and resultant profitability for Ellett on a short-term basis. Since that time, both volumes of shares traded and share prices have slowly decreased, as shown in the following graphs of both indicators. Not only has the total activity decreased, but also has the number of days that the stock has been traded. For the years 1994 through 1995, the stock was traded almost every day the market was open. Alternatively, since that time, many days have passed without a single transaction. Furthermore, 2001 has seen the stock traded on only thirteen days in over two months of the calendar year. The price at which a share of stock in a company actively trades is an indication of value to a third-party investor. As such, we must carefully review that price and historical pricing data in order to assess its relevance to the true value of the stock. Fairness of value may not always be reflected by the public markets. Based on the facts of this engagement and the declining trade activity of the stock, we ask whether the investing public has or has not utilized all of the information necessary to make the most prudent financial decision regarding underlying value. In other words, we believe there may be a difference between the trading price and the actual value of the stock. Examples of why this may occur are changes in the industry, competitors, or in Ellett that may not have yet been disclosed, understood, or accounted for in the market. Naturally, a company having a large number of active traders will demand more access and information than those with lower activity. The scrutiny of those companies will typically be greater, thus, the likelihood is increased that true value and share price are similar. We believe that the lack of activity with the stock leads to a greater likelihood that the value of the stock may vary from the trading price. Consequently, we have considered the trading price and history, but we have relied more heavily on other valuation models for our analysis and conclusion. This inactivity of the stock to trade at certain levels has also created changes with respect to the NASDAQ exchanges. First, in the last year, Ellett has been moved from the National Market under NASDAQ to the SmallCap Market due to its decline in market capitalization over the years. Furthermore, Ellett was notified on February 12, 2001, that it must maintain certain levels of activity or potentially become deleted from the SmallCap Market. While such a change could make it more burdensome for potential investors to invest in Ellett (or current investors to dispose of shares), such notification does not necessarily indicate the value of each share has changed. Finally, we also studied the effects on price based on the size of blocks traded. Due to the relatively thin trading nature of the stock, a large block of stock on the market can dramatically affect the price. For example, on June 5, 2000, some 92,800 shares were traded on a heavy day of trading for this stock. The previous trading day of June 2, 2000 had 1,200 shares exchanged, and the price closed at $3.8311 per share. With such a large block of shares available on June 5, 2000, the stock opened at $2.7536 per share and closed that day at $3.2923 (a 15% decrease). Such volatility reflects many characteristics, but we once again question whether it reflects the true value of a share of stock in Ellett. - -------------------------------------------------------------------------------- Page 3 6 The following chart of data on the stock trading activity highlights some of the trends noted in our review. It should be noted that the weighted proceeds and weighted average price were calculated using each day's average price, which was computed as the simple average of the opening and closing prices for that day. The information for 2001 is through February 26, 2001. - -------------------------------------------------------------------------------- Volume Number Weighted Per of Days Total Weighted Average Price Price Year Year Day Year Traded Volume Proceeds Price BOY EOY High Low Traded - -------------------------------------------------------------------------------- 1993 106 2,050,300 $15,874,832 $ 7.74 $ 7.82 $ 7.39 $ 8.91 $6.30 19,342 1994 213 3,967,400 $49,033,975 $12.36 $ 7.82 $13.13 $15.72 $7.71 18,626 1995 250 5,360,800 $38,220,848 $ 7.13 $13.13 $ 7.08 $13.13 $4.40 21,443 1996 223 2,423,800 $13,176,384 $ 5.44 $ 6.96 $ 4.48 $ 7.30 $4.02 10,869 1997 190 1,201,500 $ 5,735,108 $ 4.77 $ 4.48 $ 5.08 $ 5.78 $3.71 6,324 1998 184 3,771,100 $14,783,754 $ 3.92 $ 5.12 $ 4.29 $ 5.94 $2.98 20,495 1999 173 1,004,300 $ 5,278,241 $ 5.26 $ 3.94 $ 6.55 $ 7.88 $3.15 5,805 2000 160 844,000 $ 2,876,237 $ 3.41 $ 6.37 $ 3.00 $ 6.90 $1.47 5,275 2001 13 26,200 $ 60,778 $ 2.32 $ 3.00 $ 2.25 $ 3.00 $2.00 2,015 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Volume and Price Trends [Chart of Volume Per Day Traded and Weighted Average Stock Price For the Years 1993 to 2001]
2001 2000 1999 1998 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- ---- ---- ---- ---- Volume Per Day Traded 2,015 5,275 5,805 20,495 6,324 10,869 21,443 18,626 19,342
2001 2000 1999 1998 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- ---- ---- ---- ---- Weighted Average Stock Price $2.32 $3.41 $5.26 $3.92 $4.77 $5.44 $7.13 $12.36 $7.74
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Page 4 7 Valuation Multiples As discussed previously, while the market trading price of the stock must be considered in determining value, it may not always be the best indicator of value. Nevertheless, financial analysts often refer to various indicators of value through multiples of earnings, book value, and revenues for historical comparisons and to compare with others in the industry. For two of the categories (multiples based on revenues and book value), there has been a historical trend that indicates that the market has driven the share price down in the last year. The earnings multiples have remained fairly steady, except for the two years in which Ellett suffered losses. - -------------------------------------------------------------------------------- Price/Earnings [Chart of Price/Earnings For the Years 1994 to 2000] 2000 1999 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- ---- ---- Price/Earnings (37.28) 7.89 7.03 (29.87) 13.59 7.95 10.18 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Price/Book Value [Chart of Price/Book Value For the Years 1994 to 2000] 2000 1999 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- ---- ---- Price/Book Value 0.50 1.08 0.92 1.04 0.93 1.50 3.10 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Page 5 8 - -------------------------------------------------------------------------------- Price/Revenues [Chart of Price/Revenues For the Years 1994 to 2000] 2000 1999 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- ---- ---- Price/Revenues 0.08 0.18 0.13 0.15 0.15 0.23 0.40 - -------------------------------------------------------------------------------- One noted trend of these indicators revealed the consistency of the multiples for the years 1996 through 1999 for the multiples involving revenue and book value. We studied and considered the history of these multiples in our assessment of fairness. These multiples were utilized in comparison to similar ones of comparable guideline public companies. Dividend Yield Another indicator of value is often based on the returns available to equity investors paid through dividends. Ellett has typically paid dividends over the last seven years as a reward to investors for their investment in the company. Such dividends can often be an enticement for certain types of investors wishing to acquire current income through dividends, as opposed to growth equities which typically reinvest profits into the company. Dividend yield is a category that is important to consider when comparing similar companies, as one may pay dividends and another may not. This factor can often play a role in the decrease of the stock price itself, as the price reflects the fact that portions of the company's earnings and assets are being affected by such a distribution. - -------------------------------------------------------------------------------- Page 6 9 An important portion of Ellett's history of dividend payments relates to 1999, when a doubling of the dividend payment occurred. This level of dividend was repeated in 2000, despite lower earnings. Very few companies of Ellett's size or in Ellett's industry pay dividends. Out of the 111 companies that we initially studied for comparison to Ellett, only 11 paid dividends. This is a fact we considered when studying this issue as it became apparent that most companies in this group were sacrificing immediate returns on investment through dividends for future growth in the stock price. The following reflects the trends in historical earnings and dividends since 1994: - -------------------------------------------------------------------------------- Dividends and Earnings [Chart of Annual Dividends and Historical Net Income For the Years 1994 to 2000] 2000 1999 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- ---- ---- Annual Dividends $0.16 $0.16 $0.08 $0.08 $0.08 $0.08 $0.10 2000 1999 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- ---- ---- Historical Net Income $(329) $3,575 $3,012 $(815) $1,686 $4,634 $6,188 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Page 7 10 VALUATION PROCEDURES NATURE OF OUR ANALYSIS The stock of Ellett is publicly traded, but as discussed earlier in this report and due to a number of factors, the publicly traded price for a security may not be reflective of what is fair, or viewed as fair, for a proposed transaction from a financial point of view. The issue of fairness arises where there can be actual, potential, or perceived conflicts of interest existing among the parties involved. Our objective was to provide our independent assessment of fairness, from a financial point of view, for the proposed transaction. For that reason, we viewed not only the price in the public market, but we also applied fundamental valuation analyses to determine the reasonableness of the transaction pricing. VALUATION METHODS We have considered the following valuation methods under the asset, income, and market approaches to develop a reasonable opinion of the fairness of the purchase offer, from a financial point of view, as of March 7, 2001: Liquidation Value - which produces an estimate of value by adjusting the subject company's assets to liquidation value, reducing that number by respective liabilities and income tax implications, and determining the resultant cash flow benefiting the stockholders. Discounted Future Cash Flows - which discounts the projected future cash flows of the subject company to determine the fair market value at the valuation date. Guideline Company - which produces an estimate of value by comparing the subject company with various valuation multiples of publicly traded companies. Acquired Company - which produces an estimate of value by comparing the subject company with comparable transactions of companies. - -------------------------------------------------------------------------------- Page 8 11 ASSET APPROACH O Liquidation Value Method The liquidation value is based on an assumed discontinuance of the entity and a related pro-rata distribution of the liquidation proceeds as a measure of the value of Ellett. Valuation experts often purport that this method can be viewed as the minimum value that should be considered for the sale or buyout of a company. By using this method we arrived at ranges of value from $2.39 to $2.66 per share. We calculated these values by taking the historical balance sheet items and multiplying each item by realization multiples that we believe to be reflective of current economic and industry conditions. We received assistance from different sources, including management and independent parties, in arriving at the various realization percentages. The realization percentages were obtained by reviewing the collectibility and liquidity of each class of assets and liabilities. For example, cash and cash equivalents were valued at 100%, since these items are fully realizable at the stated value. Other items, such as inventory, were less liquid and required a smaller realization percentage. We also considered the income tax implications resulting from an orderly liquidation, and a summary of this method is presented in Appendix A. INCOME APPROACH O Discounted Future Cash Flows We considered the Income Approach - Discounted Future Cash Flows method to discount future corporate net cash flows, as investors base value assessments on the income they expect to receive in the future. Under this approach, a net earnings stream available in the future is then discounted to the present for the time value of money and the risk inherent in the business. In this method, considerable analysis is required to project income and expenses, as well as developing an appropriate discount rate. In the Discounted Future Cash Flows method, a pro forma financial analysis is made of the Company to estimate future available net cash flows. Available net cash flows are the amounts that could be paid to providers of equity capital without impairing the business' operations. Each year's projected available net future cash flows are then discounted to present value. The sum of the present values, including the present value of the estimated terminal or residual value, equals the current value of the business. Such methodology is appropriate when past results of operations are not reflective of anticipated future results. In this case, our analysis leads us to the conclusion that future prospects are important in determining the fairness of the proposed transaction price. - -------------------------------------------------------------------------------- Page 9 12 Discount Rate In discounting the available cash flows, an appropriate discount rate must be determined. Projected earnings are discounted for: 1. Time Value of Money - Time value of money deals with the concept that $1 received today is worth more to an individual than $1 received at some future date. It is assumed that a prudent individual will always choose $1 in hand versus the guarantee of $1 in the future, because the individual can invest this "in hand" dollar at some rate of return and earn interest. 2. Risk - Risk is defined in terms of financial structure (financial risk) and in terms of the company's markets (business risk). Financial risk refers to the possibility of bankruptcy and the variability of returns to equity investors because of the amount of debt. Business risk refers to the variability of earnings from the firm's operations. The build-up method is utilized to compute the required equity return. This method separately identifies and quantifies each of the components of risk associated with an investment. The resultant rate represents the minimum return necessary to cause an investor to invest in assets with financial characteristics similar to that of Ellett. The components of the build-up method are as follows: - -------------------------------------------------------------------------------- BUILD - UP METHOD FORMULA - -------------------------------------------------------------------------------- Ke = Rf + Pm + Ps + Psc + C Where: Ke = Cost of equity capital Rf = The total return required on a long-term, risk-free investment Pm = The historical premium on publicly held stocks over the risk-free investment rate Ps = The premium for the greater risk associated with an investment in the stocks of small, publicly held companies Psc = Adjustment for the specific risk associated with an investment in the company - -------------------------------------------------------------------------------- The sum of these components represents the cost of equity capital for Ellett. The risk-free component of the build-up method represents the expected return by an investor for investing in a totally risk-free investment. The return (interest rate) on U.S. Government bonds of the same maturity as the investment under consideration is normally considered as an appropriate risk-free interest rate. Having considered that, in general, equity investments are relatively long-term in nature, we selected 6.22%, the interest rate on U.S. Government Bonds - Long-Term, as the risk-free rate to use in the formula. - -------------------------------------------------------------------------------- Page 10 13 The long-term general risk premium for the period 1926 - 1999 time period, as reported in the publication Stocks Bonds Bills and Inflation: 2000 Yearbook, Ibbotson Associates; Chicago, Illinois, is 8.1%. This rate is calculated on the simple differences of historical arithmetic means returns from 1926 to 1999 on average returns of common stock and average returns on long-term U. S. Government Bonds. A small stock premium is required to reflect the incremental addition of return of stocks smaller than the Standard & Poor's 500. The small stock premium of 2.20% was obtained from the same Ibbotson Associates publication mentioned above. We then considered the application of a company specific risk premium as a part of our capitalization rate. This risk premium (or potential discount) for Ellett takes into consideration risk factors related to customer base, key personnel, depth of management, and financial stability as would be perceived by the potential investor. As a result of these items that we considered important to the potential investor, we applied a company specific risk factor of two percent. Substituting the appropriate values for the variables in the equation yielded the following: - -------------------------------------------------------------------------------- BUILD - UP COST OF EQUITY - -------------------------------------------------------------------------------- 6.22% + 8.10% + 2.20% + 2.00% = 18.52% - -------------------------------------------------------------------------------- In connection with our analyses, we prepared and used estimates and forecasts of Ellett's future operating results through 2005 based on expectations and estimates provided by various members of Ellett's management. This summarized estimate of income and cash flows is shown in Appendix A. Analyses based on forecasts of future results are not necessarily indicative of actual future results, which may be significantly more or less favorable than such analyses. The analyses are inherently subject to uncertainty as they are based on numerous factors or events beyond the control of Ellett. Therefore, future results or actual values may be materially different from those forecast. The outlook for sales was not particularly strong. The historical compound annual growth rate for the last five years has been less than one percent. When measured over the last seven years it has been 4.11%. Through management interviews, the outlook for 2001 is believed to be growth of only about 5%. Subsequent to 2001, sales are expected to be flat, growing at no more than about the rate of inflation. Forecasted gross profits were derived by taking the 2000 gross profit percentage and then applying it to sales. As earlier stated, this percentage has been very stable over the years. Management does not foresee any change in product mix or business developments that would change this percentage. Once gross profits were estimated we determined levels of operating expense. This value was calculated using average variable operating expenses as a percentage of sales. For 2000, variable operating expenses were around 4.45% of sales. - -------------------------------------------------------------------------------- Page 11 14 Historical fixed operating expenses were "normalized" for removal of unusual and nonrecurring items. The level for 2000 was utilized as a base for future periods when increased by an anticipated growth rate of three percent, which is close to the inflation rate. Operating income consists of gross profit less operating expenses. The sum of operating income and other income yielded the forecasted pretax income. Taxes were based on the blended corporate rate of 38%. Once net income was determined, many items were added back and deducted to arrive at net cash flows. Depreciation was calculated using the straight-line method, with a consistent addition of approximately $2 million a year. Other additions included new debt that will take effect as of 2001. This new debt equaled an estimated 80% financing level for new capital expenditures. Deductions made for capital expenditures were calculated by taking the average of the past four years. Debt service on new debt was calculated. The scheduled amount of bond payments were used each year in the calculation. Working capital increases were calculated based on historical levels required as a percentage of sales. A numerical detail of the derivation of forecasted earnings and cash flows is presented in Appendix A. The value indicator generated through this calculation is $1.80 per share. - -------------------------------------------------------------------------------- Page 12 15 MARKET APPROACH O Guideline Company Method One of the generally accepted methods of valuing stock is through the use of comparisons with similar companies whose stocks are also publicly traded. However, two major limitations of this approach exist. First, it is virtually impossible to find identical public companies. Second, required disclosure for public companies notwithstanding, we are not privy to "inside" information for any public companies. Our search and application of this analysis was significantly limited by the lack of truly comparable entities. No major competitor of Ellett is publicly traded, and efforts in the past during offerings of stock have provided few, if any, quality comparables. We noted that no company used in the foregoing analysis is identical or directly comparable to Ellett. Furthermore, many of the companies observed have a much different market capitalization than Ellett, have different business purposes, and deal with different products than Ellett. Although we did not specifically quantify the relevance of this valuation methodology compared to the other methodologies used, and because of the absence of truly comparable companies, we considered this methodology to be less relevant to our analysis than the discounted cash flow analysis and acquired company analysis. The following were the procedures performed in our guideline company analysis: Guideline Company Group The procedures used to develop the group of public companies generally involve the following steps: (1) Determine an appropriate SIC number using the Standard Industrial Classification Manual; (2) Compile a list of publicly traded companies that are listed under the desired SIC number(s); (3) Obtain business descriptions and financial characteristics of the companies through periodic reports of the individual companies, and financial information databases; and (4) Determine which publicly traded companies are sufficiently similar to the Company in terms of operating, financial, geographical, industry, and/or market characteristics for inclusion in the comparable group. Our search for similar guideline companies focused on publicly traded entities in the market of recreational goods or sporting goods. Due to the lack of truly comparable companies, we analyzed selected companies from more than one perspective. Our initial review of public company filings revealed over 110 companies that we believed were useful in evaluating Ellett. These companies included those involved in not only distribution, but also manufacturing and retailing of recreational or sporting goods. In fact, most of the initial group of companies studied involved activities other than distribution, which limited the effectiveness of such comparisons. This lack of highly comparable companies is nothing new to Ellett, as management represented that such difficulties were encountered during its offerings of stock and on a continual basis with respect to its internal analyses. - -------------------------------------------------------------------------------- Page 13 16 Pricing Multiples By convention, analysts express the relationship between the market price of a stock and its historical book value in the form of the ratio of the market price to the earnings for the most recent twelve months, i.e., price/earnings ("P/E") ratio. If the guideline company group is sufficiently homogeneous with respect to the companies selected, their recent performances, and the public market's reaction to their performances, analysts typically calculate some form of average or median P/E ratio, or multiple, as representative of the group. Likewise, analysts often discuss value in terms of the price to book value and price to revenue multiples. Prior to using any of these other multiples, the guideline company group must be analyzed to determine whether the group is representative of the subject company's operations. To do this we sorted and ranked each of the public companies by operating type or profile, sizes through revenues, and market capitalization. We considered various multiples for all companies, including price to earnings, price to revenue, and price to book value based on the three criteria stated above: business type, revenues, and market capitalization. The first category of sorting was by company profile. We reviewed each company and compared it to Ellett based on its type of operations. In developing our pricing multiples, we ultimately utilized the multiples for the companies we perceived as having the most similar operations to Ellett. The companies we eventually selected, a brief description of their primary operations, and trailing twelve months' revenues, follow: - -------------------------------------------------------------------------------- REVENUES NAME DESCRIPTION (in millions) - -------------------------------------------------------------------------------- The Coast Distribution System Wholesale supplier of $151 recreational vehicle and marine parts accessories Rawlings Sporting Goods Co. Inc. Manufacturer of sporting $175 goods products Brass Eagle Incorporated Manufacturer of paint ball $ 72 products Johnson Outdoors, Inc. Manufacturer of recreational $347 products - -------------------------------------------------------------------------------- Page 14 17 The next categorization was based on size. We ranked the initial large group of companies by revenues and market capitalization. A multiple was developed by sorting the companies by size based on revenues. We chose companies with stated revenues within a proximate range similar to that of Ellett. Those companies within the range of comparability and their respective trailing twelve months' revenues to Ellett follow:
- ---------------------------------------------------------------------------------------------------------------------- REVENUES NAME DESCRIPTION (in millions) - ---------------------------------------------------------------------------------------------------------------------- Hibbett Sporting Good, Inc. Retailer of full line sporting goods. $199 Hockey Company Manufactures hockey, figure and inline skate products and accessories. $199 Rawlings Sporting Goods Co. Inc. Manufacturers baseball, basketball, hockey, softball and football equipment, licensed MLB, NHL, and NCAA retail products. $175 Cannondale Corporation Manufactures high performance bicycles. $161 Toymax International Inc. Manufactures stuffed toys, novelties and consumer electronics. $151 The Coast Distribution System Wholesale supplier of recreational vehicle and marine parts and accessories. $151 Play By Play Toys & Novelties Manufactures stuffed toys, novelties, and consumer electronics. $147 Coastcast Corporation Manufactures investment-cast titanium and stainless steel golf club heads. $144 Sportsmans Guide, Inc. Retail mail order catalog and internet seller of outdoor merchandise direct to the consumer. $136 Zindart Ltd. Produces and markets high quality die-cast and injection molded collectible products. $135 Baldwin Piano & Organ Company Manufactures high quality keyboard instruments. $135 Cybex International Manufactures strength and cardiovascular fitness equipment. $131 Radica Games Ltd. Manufactures line of electronic entertainment devices. $114 Sport Supply Group, Inc. Institutional direct marketer of sports equipment and supplies. $113 Escalade Incorporated Manufactures table tennis, pool and other game tables and basketball systems and archery equipment. $108 4 Kids Entertainment, Inc. Designs toys, licenses merchandise, plans and buys media and distributes television, movie and music production. $104 - ----------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- Page 15 18 Within the recreational products industry of the consumer cyclical sector, we studied companies possessing similar levels of market capitalization. This category, like both of the previous two searches, provided no exact matches to Ellett. A range of market capitalization reasonably above and below Ellett's was studied, and the companies and their respective market capitalization within that range follow:
- ---------------------------------------------------------------------------------------------------------------------- MARKET CAPITALIZATION NAME DESCRIPTION (in millions) - ---------------------------------------------------------------------------------------------------------------------- Sport Supply Group, Inc. Institutional direct marketer of sports equipment and supplies. $14.6 Zindart Ltd. Produces and markets die-cast and injection-molded collectible products. $14.3 Zapworld.com Manufactures and distributes electric vehicles. $14.0 Fountain Powerboat Industries Manufactures various types of boats. $12.9 Royal Precision, Inc. Manufactures and distributes golf club shafts. $12.7 Rock Shox Inc. Designs, manufactures, and markets high performance bicycle suspension products. $11.8 Yifan Communications, Inc. Creates, designs, develops and assembles interactive electronic game simulators. $10.1 Valley Media Inc. Full-time distributor of prerecorded music and video entertainment products. $8.8 First Team Sports Inc. Manufactures and distributes in-line roller skates, ice skates, street hockey equipment and related accessory products. $7.8 Tribune Company Developer of natural motion technology for health and fitness equipment. $7.7 Baldwin Piano & Organ Company Manufactures high quality keyboard instruments. $7.1 Fotoball USA, Inc. Designs, develops, manufactures, and markets custom sports and non-sports related products. $6.7 I2corp.com Patents ideas that offer new experiences for the inter-national entertainment industry. $6.1 Sportsmans Guide Inc. Retail mail order catalog and internet seller of outdoor merchandise direct to consumer. $5.0 - ----------------------------------------------------------------------------------------------------------------------
The determination of value using the guideline company method was then developed by multiplying the various adjusted pricing multiples, obtained from the comparable group, by the factors for Ellett. We also studied the calculated multiples to assess their relevance in determining fairness in this matter, ultimately determining that the most appropriate multiple was the price to book value multiple. The other two multiples considered (price to revenues and price to earnings) were ultimately not utilized due to the large discrepancies in estimated values from other methods utilized. We believe that their results did not provide results that appeared reasonable, based on our considerations of all the relevant factors. In our review of data, we observed price to book value multiples that ranged from .467 to .602, with the different variations of sorting creating multiples consistently within a narrow range, supporting that stocks of companies tend to trade for amounts less than their book values on a per share basis. These calculations also included a premium of 20%, representing an appropriate acquisition premium. Based on these calculations, we arrived at ranges of value on a per share basis between $3.36 and $4.33. - -------------------------------------------------------------------------------- Page 16 19 o Acquired Company Method The acquired company method determines a value indication by comparing transactions of companies that have been purchased, sold, or merged in recent years by applying pricing multiples and acquisition premiums developed from those transactions. We searched the Mergerstat database for transactions over the last ten years of public companies that subsequently went private. The search yielded 253 companies over the last ten years, and 144 of these were from the past two years of published data (1998 and 1999). A summary of the findings follows: - -------------------------------------------------------------------------------- GOING PRIVATE TRANSACTIONS P/E Offered Premium Offered ------------------------------- ----------------- Average Median Transactions Average Median - -------------------------------------------------------------------------------- 1990 15.5 13.6 20 34.3% 31.6% 1991 13.2 10.7 9 23.8% 20.0% 1992 15.2 12.7 8 24.8% 8.1% 1993 14.8 14.9 8 34.7% 20.0% 1994 24.5 20.2 3 41.9% 35.0% 1995 30.8 17.2 10 29.8% 19.2% 1996 28.9 23.1 16 34.8% 26.2% 1997 23.6 19.9 35 30.4% 24.5% 1998 20.2 17.7 70 29.1% 20.4% 1999 22.3 16.9 74 38.0% 32.7% Average 20.9 16.7 25 32.2% 23.8% Median 21.3 17.1 13 32.4% 22.5% - -------------------------------------------------------------------------------- Applying the median multiples of 21.3 and 17.1 to Ellett derived estimated values on a per share basis of $2.40 to $3.00. Application of the median of the average acquisition premiums paid from 1990 through 1999 for companies going private yielded a premium of 32.4%. This provided a value indicator on a per share basis of $2.98. The average premium for 1999 was 38%, but the median was 32.7%, with the median analysis being selected as the more relevant due to its reduction of the impact of unusually high or low transaction premiums with the database. Application of the 1999 median premium yielded a value on a per share basis of $2.99. Focusing on the median of the medians for 1990 through 1999 provided a premium of 22.5%, for a value indicator on a per share basis of $2.76. The next search under the acquired company method was of companies that operated as distributors and wholesalers. This Mergerstat search yielded 115 published transactions over the past six years for the offered price to earnings ratio. The average and median were selected for price to earnings ratios of the offers for such distributing companies as follows: - -------------------------------------------------------------------------------- Page 17 20 - -------------------------------------------------------------------------------- ACQUIRED COMPANY DATA P/E Offered --------------------------- Average Transactions Premium Offered - -------------------------------------------------------------------------------- 1994 26.6 6 32.2% 1995 24.5 12 35.5% 1996 18.0 10 46.7% 1997 24.7 20 34.9% 1998 22.8 38 39.4% 1999 20.8 29 39.8% Average 22.9 19 38.1% Median 23.7 16 37.5% - -------------------------------------------------------------------------------- Applying the multiples of 22.9 and 23.7 to Ellett derived estimated values on a per share basis of $3.21 to $3.32. Viewing the premiums for acquired companies by industry segment was also deemed relevant. From 1994 through 1999, the average of the annual premiums was 38.1%. Application to Ellett resulted in a per share value indication of $3.11. Of the companies in this wholesale and distribution category, approximately 200 made announcements in 1999 about merger or acquisition activity. This is in comparison to the 29 companies in this industry that provided information shown in the above study. Included in the companies making such announcements were the following companies with a SIC code similar to Ellett: - -------------------------------------------------------------------------------- NAME DESCRIPTION - -------------------------------------------------------------------------------- Albouy Distribution Wholesale distributors of swimming pool supplies. - -------------------------------------------------------------------------------- Archery Center International Wholesale distributor of archery products. - -------------------------------------------------------------------------------- Benson Pump Company Wholesale distributor of swimming pool supplies. - -------------------------------------------------------------------------------- Black (Larry) Sporting Goods, Inc. Retailer of sporting goods. - -------------------------------------------------------------------------------- CM Support, Inc. Wholesale distributor of recreational products. - -------------------------------------------------------------------------------- Cortz, Inc Distributor of pool products. - -------------------------------------------------------------------------------- Garden Leisure Products Wholesale distributor of swimming pool supplies. - -------------------------------------------------------------------------------- Les Agences Claude Marchand, Inc. Manufacturer and distributor of pool accessories. - -------------------------------------------------------------------------------- Pro's Edge Wholesale, Inc. Wholesaler and manufacturer of golf accessories. - -------------------------------------------------------------------------------- One of the companies shown above, Archery Center International, was purchased by Ellett. . - -------------------------------------------------------------------------------- Page 18 21 CONCLUSION As noted in the previous sections, we analyzed Ellett utilizing a variety of approaches and methodologies to assess the fairness of the offer to purchase shares of Ellett. While there is no one method that can claim to provide the perfect answer, comfort can be found in the consideration of several methods in arriving at our conclusion. We have used our professional judgment and experience in considering how such various indicators weigh in the determination of financial fairness. Our opinion's foundation lies in the fact that market indications for similar transactions provide evidence that the offering price is fair. First, we have relied upon our extensive study of companies that are the most similar to Ellett and are actively trading on an open market, providing a useful benchmark for pricing. Furthermore, data for companies going private allows for meaningful comparisons to Ellett in its proposal to do the same. Additionally, the study of companies engaged in wholesale and distribution builds an even stronger case for the price being offered. Supporting our findings in a secondary role are the asset based methodologies. Ellett fully expects to operate as a going concern, so the sale of the assets as a whole under any circumstances is not envisioned. We have also considered the possibility that Ellett has greater potential value in liquidation than as a going concern, regardless of management intent. As mentioned previously, the going concern premise many times dictates that more reliance be placed upon income and market applications, so less consideration has been applied to the asset methodologies for Ellett. We do believe that the issue of liquidation has some relevance in determining the fairness of the purchase offer and believe that this value indication serves as a floor of value for Ellett. The proposed merger price exceeds the hypothetical floor estimated by our liquidation computations. We placed reliance upon the Discounted Cash Flow Method in this matter and compared its results to others derived by alternative methodologies. This method provided for the lowest value indication. It also indicates that each shareholder would have expectations of cash flows limited by the challenges faced by Ellett. Nevertheless, we have analyzed and considered its application to Ellett and have included those considerations in our opinion. In summary, the methodology employed in this project, our study of Ellett, its industry, and the economy, as well as our experience and professional judgment support our findings in this engagement. Based on our total analysis, and subject to the foregoing factors, it is our opinion that the proposed cash offer for all of the outstanding common stock of the minority shareholders of Ellett, at a price of $3.20, is fair from a financial point of view. - -------------------------------------------------------------------------------- Page 19 22 APPENDIX A: DETAILED FINANCIAL DATA 23 Ellett Brothers, Inc. Historical Balance Sheets (in 000s)
Year Year Year Year Year Year Year Year End Ending Ending Ending Ending Ending Ending Ending 12-31-00 12-31-99 12-31-98 12-31-97 12-31-96 12-31-95 12-31-94 12-31-93 -------------------------------------------------------------------------------------------- In 000's ASSETS: Current Assets Cash & Equivalents $ 216 $ 346 $ 183 $ 395 $ 139 $ 325 $ -- $ -- Accounts Receivable 21,450 21,777 20,066 19,201 19,716 18,893 17,995 17,300 Other Receivable 900 1,109 1,716 1,820 1,218 337 196 167 Total Inventory 41,930 36,061 32,140 31,535 39,756 38,452 33,966 19,583 Prepaid Expenses 1,499 1,154 948 1,488 3,727 3,940 3,632 4,888 Other Current Assets -- 834 440 534 591 293 187 -- -------------------------------------------------------------------------------------------- Total Current Assets 65,994 61,281 55,493 54,973 65,147 62,240 55,976 41,938 Fixed Assets - Net Fixed Assets - Cost Property/ Plant/ Equipment 18,522 17,452 14,988 13,395 12,169 11,039 9,869 8,778 Accumulated Depreciation (9,806) (8,100) (7,421) (6,692) (5,979) (5,484) (4,987) (4,439) -------------------------------------------------------------------------------------------- Total Fixed Assets - Net 8,716 9,352 7,567 6,703 6,190 5,555 4,882 4,339 Other Assets Intangibles Net 1,936 2,293 1,709 1,936 2,262 2,466 378 413 Other Long Term Assets -- -- -- 2 89 14 -- -- -------------------------------------------------------------------------------------------- Total Other Non-Current Assets 1,936 2,293 1,709 1,938 2,351 2,480 378 413 -------------------------------------------------------------------------------------------- Total Other Assets 10,652 11,645 9,276 8,641 8,541 8,035 5,260 4,752 -------------------------------------------------------------------------------------------- Total Assets $ 76,646 $ 72,926 $ 64,769 $ 63,614 $ 73,688 $ 70,275 $ 61,236 $ 46,690 ============================================================================================ LIABILITIES AND EQUITY: Liabilities Current Liabilities Accounts Payable $ 6,470 $ 7,891 $ 7,149 $ 4,424 $ 7,909 $ 9,034 $ 8,146 $ 8,148 Accrued Expenses 1,171 1,780 1,239 1,884 1,696 2,231 2,019 1,760 Current Portion - LTD 667 617 567 525 513 463 133 -- Other Current Liabilities (660) 99 -- -- -- -- -- 81 -------------------------------------------------------------------------------------------- Total Current Liabilities 7,648 10,387 8,955 6,833 10,118 11,728 10,298 9,989 Long-Term Liabilities Revolving credit facility 39,236 30,327 26,461 26,788 31,515 26,079 22,127 20,699 Long Term Debt 4,565 5,269 5,836 6,399 6,957 7,454 7,962 8,074 Deferred Income Tax 720 850 585 258 461 466 517 421 -------------------------------------------------------------------------------------------- Total Long-Term Liabilities 44,520 36,446 32,882 33,445 38,933 33,999 30,606 29,194 -------------------------------------------------------------------------------------------- Total Liabilities 52,168 46,833 41,837 40,278 49,051 45,727 40,904 39,183 Total Equity 24,478 26,093 22,932 23,336 24,637 24,548 20,332 7,507 -------------------------------------------------------------------------------------------- Total Liabilities and Equity $ 76,646 $ 72,926 $ 64,769 $ 63,614 $ 73,688 $ 70,275 $ 61,236 $ 46,690 ============================================================================================
24 Ellett Brothers, Inc. Historical Balance Sheets - Common Sized
Year Year Year Year Year Year Year Year End Ending Ending Ending Ending Ending Ending Ending 12-31-00 12-31-99 12-31-98 12-31-97 12-31-96 12-31-95 12-31-94 12-31-93 -------------------------------------------------------------------------------------------- ASSETS: Current Assets Cash & Equivalents 0.3% 0.5% 0.3% 0.6% 0.2% 0.5% 0.0% 0.0% Accounts Receivable 28.0% 29.9% 31.0% 30.2% 26.8% 26.9% 29.4% 37.1% Other Receivable 1.2% 1.5% 2.6% 2.9% 1.7% 0.5% 0.3% 0.4% Total Inventory 54.7% 49.4% 49.6% 49.6% 54.0% 54.7% 55.5% 41.9% Prepaid Expenses 2.0% 1.6% 1.5% 2.3% 5.1% 5.6% 5.9% 10.5% Other Current Assets 0.0% 1.1% 0.7% 0.8% 0.8% 0.4% 0.3% 0.0% -------------------------------------------------------------------------------------------- Total Current Assets 86.1% 84.0% 85.7% 86.4% 88.4% 88.6% 91.4% 89.8% Fixed Assets - Net Fixed Assets - Cost Property/ Plant/ Equipment 24.2% 23.9% 23.1% 21.1% 16.5% 15.7% 16.1% 18.8% Accumulated Depreciation -12.8% -11.1% -11.5% -10.5% -8.1% -7.8% -8.1% -9.5% -------------------------------------------------------------------------------------------- Total Fixed Assets - Net 11.4% 12.8% 11.7% 10.5% 8.4% 7.9% 8.0% 9.3% Other Assets Intangibles Net 2.5% 3.1% 2.6% 3.0% 3.1% 3.5% 0.6% 0.9% Other Long Term Assets 0.0% 0.0% 0.0% 0.0% 0.1% 0.0% 0.0% 0.0% -------------------------------------------------------------------------------------------- Total Other Non-Current Assets 2.5% 3.1% 2.6% 3.0% 3.2% 3.5% 0.6% 0.9% -------------------------------------------------------------------------------------------- Total Other Assets 13.9% 16.0% 14.3% 13.6% 11.6% 11.4% 8.6% 10.2% -------------------------------------------------------------------------------------------- Total Assets 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% ============================================================================================ LIABILITIES AND EQUITY: Liabilities Current Liabilities Accounts Payable 8.4% 10.8% 11.0% 7.0% 10.7% 12.9% 13.3% 17.5% Accrued Expenses 1.5% 2.4% 1.9% 3.0% 2.3% 3.2% 3.3% 3.8% Current Portion - LTD 0.9% 0.8% 0.9% 0.8% 0.7% 0.7% 0.2% 0.0% Other Current Liabilities -0.9% 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.2% -------------------------------------------------------------------------------------------- Total Current Liabilities 10.0% 14.2% 13.8% 10.7% 13.7% 16.7% 16.8% 21.4% Long-Term Liabilities Revolving credit facility 51.2% 41.6% 40.9% 42.1% 42.8% 37.1% 36.1% 44.3% Long Term Debt 6.0% 7.2% 9.0% 10.1% 9.4% 10.6% 13.0% 17.3% Deferred Income Tax 0.9% 1.2% 0.9% 0.4% 0.6% 0.7% 0.8% 0.9% Total Long-Term Liabilities 58.1% 50.0% 50.8% 52.6% 52.8% 48.4% 50.0% 62.5% -------------------------------------------------------------------------------------------- Total Liabilities 68.1% 64.2% 64.6% 63.3% 66.6% 65.1% 66.8% 83.9% Total Equity 31.9% 35.8% 35.4% 36.7% 33.4% 34.9% 33.2% 16.1% -------------------------------------------------------------------------------------------- Total Liabilities and Equity 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% ============================================================================================
25 Ellett Brothers, Inc. Historical Statements of Operations (in 000s)
2000 1999 1998 1997 1996 1995 1994 1993 -------------------------------------------------------------------------------------- Revenue $157,324 $168,056 $147,130 $152,500 $147,666 $150,411 $160,195 $118,652 Cost of Revenue 128,651 137,529 120,686 129,372 120,683 121,756 130,312 96,384 -------------------------------------------------------------------------------------- Gross Profits 28,673 30,527 26,444 23,128 26,983 28,655 29,883 22,268 Operating Expenses 25,957 22,673 19,705 21,785 21,420 18,744 17,725 13,844 -------------------------------------------------------------------------------------- Operating Income/(Loss) 2,717 7,854 6,739 1,343 5,563 9,911 12,158 8,424 Interest Expense (3,486) (2,700) (2,514) (3,301) (3,316) (3,112) (2,459) (2,657) Interest/Investment Income, Non-Operating 440 445 481 454 444 431 367 322 Other Income (expense) (38) 13 44 151 (19) 154 (294) (38) -------------------------------------------------------------------------------------- Income Before Tax (368) 5,612 4,750 (1,353) 2,672 7,384 9,772 6,051 Income Tax Expense 39 (2,037) (1,738) 538 (986) (2,750) (3,584) (2,849) -------------------------------------------------------------------------------------- Net Income/(Loss) ($329) $ 3,575 $ 3,012 ($815) $ 1,686 $ 4,634 $ 6,188 $ 3,202 ======================================================================================
26 Ellett Brothers, Inc. Historical Statements of Operations - Common Sized
2000 1999 1998 1997 1996 1995 1994 1993 -------------------------------------------------------------------------------------- Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of Revenue 81.8% 81.8% 82.0% 84.8% 81.7% 80.9% 81.3% 81.2% -------------------------------------------------------------------------------------- Gross Profits 18.2% 18.2% 18.0% 15.2% 18.3% 19.1% 18.7% 18.8% Operating Expenses 16.5% 13.5% 13.4% 14.3% 14.5% 12.5% 11.1% 11.7% -------------------------------------------------------------------------------------- Operating Income/(Loss) 1.7% 4.7% 4.6% 0.9% 3.8% 6.6% 7.6% 7.1% Interest Expense -2.2% -1.6% -1.7% -2.2% -2.2% -2.1% -1.5% -2.2% Interest/Investment Income, Non-Operating 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.2% 0.3% Other Income (expense) 0.0% 0.0% 0.0% 0.1% 0.0% 0.1% -0.2% 0.0% -------------------------------------------------------------------------------------- Income Before Tax -0.2% 3.3% 3.2% -0.9% 1.8% 4.9% 6.1% 5.1% Income Tax Expense 0.0% -1.2% -1.2% 0.4% -0.7% -1.8% -2.2% -2.4% -------------------------------------------------------------------------------------- Net Income/(Loss) -0.2% 2.1% 2.0% -0.5% 1.1% 3.1% 3.9% 2.7% =====================================================================================
27 Ellett Brothers, Inc. Adjusted Statements of Operations (in 000s)
2000 1999 1998 1997 1996 1995 1994 1993 -------------------------------------------------------------------------------------- Revenue $157,324 $168,056 $147,130 $152,500 $147,666 $150,411 $160,195 $118,652 Cost of Revenue 128,651 137,529 120,686 129,372 120,683 121,756 130,312 96,384 -------------------------------------------------------------------------------------- Gross Profits 28,673 30,527 26,444 23,128 26,983 28,655 29,883 22,268 Operating Expenses 24,672 21,982 19,683 21,785 21,420 18,744 17,725 13,844 -------------------------------------------------------------------------------------- Operating Income/(Loss) 4,002 8,545 6,761 1,343 5,563 9,911 12,158 8,424 Interest Expense (3,486) (2,700) (2,514) (3,301) (3,316) (3,112) (2,459) (2,657) Interest/Investment Income, Non-Operating 440 445 481 454 444 431 367 322 Other Income (expense) (38) 13 44 151 (19) 154 (294) (38) -------------------------------------------------------------------------------------- Income Before Tax 917 6,303 4,772 (1,353) 2,672 7,384 9,772 6,051 Income Tax Expense (345) (2,370) (1,794) 538 (986) (2,750) (3,584) (2,849) -------------------------------------------------------------------------------------- Net Income/(Loss) $ 573 $ 3,933 $ 2,978 ($815) $ 1,686 $ 4,634 $ 6,188 $ 3,202 ======================================================================================
28 Ellett Brothers, Inc. Adjusted Statements of Operations - Common Sized
2000 1999 1998 1997 1996 1995 1994 1993 -------------------------------------------------------------------------------------- Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of Revenue 81.8% 81.8% 82.0% 84.8% 81.7% 80.9% 81.3% 81.2% -------------------------------------------------------------------------------------- Gross Profits 18.2% 18.2% 18.0% 15.2% 18.3% 19.1% 18.7% 18.8% Operating Expenses 15.7% 13.1% 13.4% 14.3% 14.5% 12.5% 11.1% 11.7% -------------------------------------------------------------------------------------- Operating Income/(Loss) 2.5% 5.1% 4.6% 0.9% 3.8% 6.6% 7.6% 7.1% Interest Expense -2.2% -1.6% -1.7% -2.2% -2.2% -2.1% -1.5% -2.2% Interest/Investment Income, Non-Operating 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.2% 0.3% Other Income (expense) 0.0% 0.0% 0.0% 0.1% 0.0% 0.1% -0.2% 0.0% -------------------------------------------------------------------------------------- Income Before Tax 0.6% 3.8% 3.2% -0.9% 1.8% 4.9% 6.1% 5.1% Income Tax Expense -0.2% -1.4% -1.2% 0.4% -0.7% -1.8% -2.2% -2.4% -------------------------------------------------------------------------------------- Net Income/(Loss) 0.4% 2.3% 2.0% -0.5% 1.1% 3.1% 3.9% 2.7% ======================================================================================
29 Ellett Brothers, Inc. Adjusted Balance Sheet-Asset Sale Scenarios
------------------------------------- ------------------------------------------------ Historical and Adjusted Net Assets Liquidation Value - Low ------------------------------------- ------------------------------------------------ Stated Adjusted Stated Liquidation Book Normalization Book Book Realization Value Adjusted Value Adjustment Value Value % Adjustment Value ------------------------------------- ------------------------------------------------ ASSETS: Current Assets Cash & Equivalents 215,715 215,715 215,715 100% -- 215,715 Accounts Receivable 22,062,872 22,062,872 22,062,872 90% (2,206,287) 19,856,585 Allowance for Bad Debts (613,357) (613,357) (613,357) 100% -- (613,357) Other Receivable 899,866 899,866 899,866 95% (44,993) 854,873 Total Inventory 42,471,392 42,471,392 42,471,392 80% (8,494,278) 33,977,114 Inventory Reserve (541,551) (541,551) (541,551) 100% -- (541,551) Prepaid Expenses 1,498,728 1,498,728 1,498,728 50% (749,364) 749,364 ------------------------------------- ---------- ------------------------ Total Current Assets 65,993,665 -- 65,993,665 65,993,665 (11,494,923) 54,498,742 ------------------------------------- ---------- ------------------------ Fixed Assets - Net Fixed Assets - Cost Land 201,856 201,856 Building & Leaseholds 6,587,910 6,587,910 Accumulated Depreciation (3,510,899) (3,510,899) ------------------------------------- ---------- ------------------------ Net 3,278,867 3,404,733 6,683,600 3,278,867 3,404,733 6,683,600 ------------------------------------- ---------- ------------------------ Furniture, Fixtures & Equipment 11,732,679 11,732,679 Accumulated Depreciation (6,295,560) (6,295,560) ------------------------------------- ---------- ------------------------ Net 5,437,119 (4,756,909) 680,210 5,437,119 (4,756,909) 680,210 ------------------------------------- ---------- ------------------------ Total Fixed Assets - Net 8,715,986 (1,352,176) 7,363,810 8,715,986 (1,352,176) 7,363,810 ------------------------------------- ---------- ------------------------ Other Assets Intangibles Net 1,935,087 (1,935,087) -- 1,935,087 0% (1,935,087) -- Other Long Term Assets 1,000 1,000 1,000 0% (1,000) -- Tax Benefit of NOL Carryback 1,932,571 1,932,571 ------------------------------------- ---------- ------------------------ Total Other Assets 1,936,087 (1,935,087) 1,000 1,936,087 (3,516) 1,932,571 ------------------------------------- ---------- ------------------------ Total Assets 76,645,738 (3,287,263) 73,358,475 76,645,738 (12,850,615) 63,795,123 ===================================== ========== ======================== LIABILITIES AND EQUITY: Liabilities Current Liabilities Accounts Payable 6,470,452 6,470,452 6,470,452 100% 6,470,452 Accrued Expenses 1,170,794 1,170,794 1,170,794 (125,000) 1,045,794 Current Portion - LTD 666,667 666,667 666,667 100% 666,667 Liability for Disposal Costs/Runoff -- -- 2,040,000 2,040,000 Deferred Income Tax (659,897) (659,897) (659,897) 659,897 -- ------------------------------------- ---------- ------------------------ Total Current Liabilities 7,648,016 -- 7,648,016 7,648,016 2,574,897 10,222,913 ------------------------------------- ---------- ------------------------ Long-Term Liabilities Revolving credit facility 39,235,814 39,235,814 39,235,814 100% 39,235,814 Long Term Debt 4,564,621 4,564,621 4,564,621 100% 4,564,621 Deferred Income Tax 719,904 719,904 719,904 (719,904) -- ------------------------------------- ---------- ------------------------ Total Long-Term Liabilities 44,520,339 -- 44,520,339 44,520,339 (719,904) 43,800,435 ------------------------------------- ---------- ------------------------ Other Liabilities -- ------------------------------------- ---------- ------------------------ Total Liabilities 52,168,355 -- 52,168,355 52,168,355 1,854,993 54,023,348 ------------------------------------- ---------- ------------------------ Equity Total Equity 24,477,383 (3,287,263) 21,190,120 24,477,383 (14,705,608) 9,771,775 ------------------------------------- ---------- ------------------------ Total Liabilities and Equity 76,645,738 (3,287,263) 73,358,475 76,645,738 (12,850,615) 63,795,123 ===================================== ========== ======================== Shares Outstanding 4,082,968 4,082,968 4,082,968 Value Per Share 5.99 5.19 2.39 ------------------------------------- ------------------------------------------------
Liquidation Value - High --------------------------------------------------------- Stated Liquidation Book Realization Value Adjusted Value % Adjustment Value --------------------------------------------------------- ASSETS: Current Assets Cash & Equivalents 215,715 100% -- 215,715 Accounts Receivable 22,062,872 95% (1,103,144) 20,959,728 Allowance for Bad Debts (613,357) 100% -- (613,357) Other Receivable 899,866 95% (44,993) 854,873 Total Inventory 42,471,392 80% (8,494,278) 33,977,114 Inventory Reserve (541,551) 100% -- (541,551) Prepaid Expenses 1,498,728 50% (749,364) 749,364 ---------- ---------------------------- Total Current Assets 65,993,665 (10,391,779) 55,601,886 ---------- ---------------------------- Fixed Assets - Net Fixed Assets - Cost Land 201,856 Building & Leaseholds 6,587,910 Accumulated Depreciation (3,510,899) ---------- ---------------------------- Net 3,278,867 3,404,733 6,683,600 ---------- ---------------------------- Furniture, Fixtures & Equipment 11,732,679 Accumulated Depreciation (6,295,560) ---------- ---------------------------- Net 5,437,119 (4,756,909) 680,210 ---------- ---------------------------- Total Fixed Assets - Net 8,715,986 (1,352,176) 7,363,810 ---------- ---------------------------- Other Assets Intangibles Net 1,935,087 0% (1,935,087) -- Other Long Term Assets 1,000 0% (1,000) -- Tax Benefit of NOL Carryback 1,932,571 1,932,571 ---------- ---------------------------- Total Other Assets 1,936,087 (3,516) 1,932,571 ---------- ---------------------------- Total Assets 76,645,738 (11,747,471) 64,898,267 ========== ============================ LIABILITIES AND EQUITY: Liabilities Current Liabilities Accounts Payable 6,470,452 100% 6,470,452 Accrued Expenses 1,170,794 (125,000) 1,045,794 Current Portion - LTD 666,667 100% 666,667 Liability for Disposal Costs/Runoff -- 2,040,000 2,040,000 Deferred Income Tax (659,897) 659,897 -- ---------- ---------------------------- Total Current Liabilities 7,648,016 2,574,897 10,222,913 ---------- ---------------------------- Long-Term Liabilities Revolving credit facility 39,235,814 100% 39,235,814 Long Term Debt 4,564,621 100% 4,564,621 Deferred Income Tax 719,904 (719,904) -- ---------- ---------------------------- Total Long-Term Liabilities 44,520,339 (719,904) 43,800,435 ---------- ---------------------------- Other Liabilities -- ---------- ---------------------------- Total Liabilities 52,168,355 1,854,993 54,023,348 ---------- ---------------------------- Equity Total Equity 24,477,383 (13,602,464) 10,874,919 ---------- ---------------------------- Total Liabilities and Equity 76,645,738 (11,747,471) 64,898,267 ========== ============================ Shares Outstanding 4,082,968 Value Per Share 2.66 ---------------------------------------------------------
30 ELLETT BROTHERS, INC. Detailed Calculation of Discounted Cash Flow Method
Projected Growth Rate 5% 3% 3% 3% 3% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Sales $160,187 $150,411 $147,666 $144,381 $147,130 $168,056 $157,324 $165,190 $170,146 $175,250 $180,508 $185,923 Gross Profit 26,983 25,291 26,445 30,527 28,673 30,107 31,010 31,940 32,898 33,885 18.27% 17.52% 17.97% 18.16% 18.23% 18.23% 18.23% 18.23% 18.23% 18.23% Variable Expenses 6,997 7,347 7,567 7,794 8,028 8,269 -------- -------- -------- -------- -------- -------- 4.45% 4.45% 4.45% 4.45% 4.45% 4.45% Fixed Expenses 17,675 18,205 18,751 19,314 19,893 20,490 -------- -------- -------- -------- -------- -------- 103% 103% 103% 103% 103% Income from Operations 5,563 1,343 6,739 7,854 4,001 4,555 4,691 4,832 4,977 5,126 Net Interest Expense 2,845 2,843 2,016 2,229 3,046 3,081 3,226 3,364 3,496 3,622 Other (Income) Expense 45 (147) (27) 13 38 38 38 38 38 38 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Income Before Taxes 2,673 (1,353) 4,750 5,612 917 1,435 1,427 1,430 1,443 1,466 Income Taxes 986 (538) 1,738 2,037 345 545 542 543 548 557 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Net Income 1,687 (815) 3,012 3,575 572 890 885 886 894 909 Addbacks: Depreciation & Amorti- zation 901 973 983 1,054 2,059 2,059 2,059 2,059 2,059 2,059 New Debt 800 800 800 800 800 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Additions 901 973 983 1,054 2,059 2,859 2,859 2,859 2,859 2,859 Deductions: Capital Expenditures 1,332 1,257 1,596 2,561 1,200 1,000 1,000 1,000 1,000 1,000 New Debt Service 100 200 300 400 500 Bonds 654 654 654 654 654 654 Working Capital Increase 1,056 665 685 706 727 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Deductions 1,854 2,810 2,519 2,639 2,759 2,881 Net Cash Flow (431) (284) $ (613) $ (1,507) $ 777 $ 939 $ 1,225 $ 1,106 $ 994 $ 887 ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== Terminal Net Cash Flow $ 939 $ 1,225 $ 1,106 $ 994 $ 887 $ 936 Multiple 6 ------ 5,617 0.9186 0.7750 0.6539 0.5517 0.4655 0.4655 -------- -------- -------- -------- -------- ------ $ 863 $ 949 $ 724 $ 548 $ 413 2,615 ======== ======== ======== ======== ======== 6,112 Premium 20% 1,222 ------ Total 7,334 Shares Outstanding 4,083 ------ Value Per Share $ 1.80 ======
31 APPENDIX B: STATEMENT OF ASSUMPTIONS AND LIMITING CONDITIONS 32 ELLETT BROTHERS, INC. MARCH 7, 2001 - -------------------------------------------------------------------------------- STATEMENT OF ASSUMPTIONS AND LIMITING CONDITIONS We have no present or contemplated financial interest in Ellett Brothers, Inc. ("Ellett"). Our fees for this valuation are based up on our normal hourly billing rates, and are in no way contingent upon the results of our findings. We have no responsibility or obligation to update this report for events or circumstances occurring subsequent to the date of this report. Our report is based on historical and prospective financial information provided to us by management and other third parties. Had we audited or reviewed the underlying data, matters may have come to our attention, which would have resulted in our using amounts which differ from those provided. Accordingly, we take no responsibility for the underlying data presented or relied upon in this report. All of the representations and information supplied by Ellett, its management, and agents are assumed to be true, accurate, and complete. We have relied upon the representations of the owners, management, and other third parties concerning the date of the transaction, and value and useful condition of all assets or liabilities, except as specifically stated to the contrary in this report. We have not attempted to confirm whether or not all assets of the business are free and clear of liens and encumbrances, or that Ellett has good title to all assets. Dixon Odom PLLC ("Dixon Odom") assumes no responsibility for matters of a legal or tax-oriented nature affecting any of the property valued or any opinion of title. The indication of value included in this report assumes that the existing management will maintain the character and integrity of Ellett through any reorganization or reduction of any existing owner's/manager's participation in the existing activities of Ellett. Dixon Odom does not purport to be a guarantor of value. Valuation of companies is an imprecise science, with value being a question of fact, and reasonable people can differ in their opinions of value. However, Dixon Odom and the individual analysts have performed conceptually sound and commonly accepted methods and procedures of valuation in analyzing the value included in this report. We have compiled certain items of the information contained herein. That information, namely, but not limited to, financial statements (historical and adjusted), company history and industry overview, has been supplied by Ellett, its officers, or representatives. This information has not been audited or reviewed by us, nor has it been subjected to any type of audit or review procedures by us, nor have we audited or reviewed the books and records of Ellett. Accordingly, this report should not be construed, or referred to, as an audit, examination, or review by Dixon Odom. This analysis of Ellett was performed only for Ellett and the purpose stated herein. The report and any information contained within are not to be used for any other purpose by any other party. Such other use will render the report invalid and is not authorized. 33 ELLETT BROTHERS, INC. MARCH 7, 2001 - -------------------------------------------------------------------------------- We have assumed that there are no factors such as restrictive agreements of any kind, other than those noted herein, which will affect or impair value in any way or the ability to affect an expedient sale of the shares being valued in accordance with the purchase offer. Nothing in this report is intended to recommend, imply, or provide any guarantees, representations, warranties, or opinions of any kind whatsoever regarding the financial prudence, collateral, investment potential, or debt service ability of Ellett or any investment in its stock or assets by any party, including investors of any kind, financial institutions, and all other individuals or entities. Such parties should undertake a full due diligence review of Ellett and make their own independent determinations of its future prospects, financial and otherwise, and the financial prudence, tax, legal, and all other ramifications of any contemplated transaction and should retain independent and qualified advisors. Nothing in this report should be construed as providing a "due diligence" study of Ellett as such a study has not been undertaken. Such a study could uncover factors not considered herein which could result in a materially different estimate of value. This fairness opinion was based in part on forecasts of revenues, earnings, and other matters as estimated by the management of Ellett. Some assumptions inevitably will not materialize, and numerous unanticipated events and circumstances may occur. Therefore, the actual performance in the areas projected will vary from the projections, and the variations may be material. Dixon Odom expresses no form of assurance whatsoever on the likelihood of achieving the estimated future results or on the reasonableness of the assumptions, representations, and conclusions. Any such information is presented for purposes of this analysis only, and is not intended to be used separately or for any other purpose, including obtaining credit or soliciting investors. Any potential such parties must independently examine the outlook for Ellett and make their own separate determinations. It has been assumed, for purposes of this opinion, that Ellett is in good standing and is not in violation of any laws or regulatory statues of any kind. This has not been independently verified. This valuation assumes no contingent or other liabilities of any kind, including pending or threatened lawsuits, environmental, or hazardous waste or other similar matters except as noted herein. The dollar amount of any value reported is based on the purchasing power of the U.S. dollar as of the date of our report. Dixon Odom assumes no responsibility for economic or physical factors occurring subsequent to the date that may affect the opinions reported. This memorandum is subject to the terms and conditions set forth in an engagement letter between Ellett and Dixon Odom, incorporated by reference herein. -----END PRIVACY-ENHANCED MESSAGE-----