-----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, OkmLCgx74f8REw0coE4BwgVpjBgbz+Vg07FMXc0jUmqjlXR0jNklWZig5pcEfbU+ Xr8YkKSYUDzpbUo5bMhxIA== 0000950144-99-010190.txt : 19990817 0000950144-99-010190.hdr.sgml : 19990817 ACCESSION NUMBER: 0000950144-99-010190 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: 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: 10-Q SEC ACT: SEC FILE NUMBER: 000-21632 FILM NUMBER: 99689946 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 10-Q 1 ELLETT BROTHERS INC 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ Commission File Number: 0-21632 ELLETT BROTHERS, INC. (Exact name of Registrant as specified in its charter) SOUTH CAROLINA 57-0957069 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 267 COLUMBIA AVENUE, CHAPIN, SOUTH CAROLINA 29036 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (803) 345-3751 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of July 31, 1999, 4,326,518 shares of no par value common stock of the registrant were outstanding. Page 1 of 14 pages 2 Form 10-Q Page 2 ELLETT BROTHERS, INC. AND SUBSIDIARIES JUNE 30, 1999 INDEX Part I. Financial Information Page Item 1. Financial Statements Condensed consolidated balance sheets as of June 30, 1999 and December 31, 1998 3 Condensed consolidated statements of income for the three months and six months ended June 30, 1999 and 1998 4 Condensed consolidated statements of cash flows for the six months ended June 30, 1999 and 1998 5 Notes to condensed consolidated financial statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk 12 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 13
3 Form 10-Q Page 3 PART I. FINANCIAL INFORMATION Item I. Financial Statements ELLETT BROTHERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
June 30, Dec. 31, 1999 1998 -------- -------- ASSETS (unaudited) (see note) Current assets: Cash and cash equivalents $ 221 $ 183 Trade accounts receivable, less allowance for doubtful accounts of $699 and $605 at June 30, 1999 and December 31, 1998, respectively 22,772 20,066 Other receivables 434 1,716 Inventories 42,441 32,140 Prepaid expenses 2,224 948 Deferred income taxes 485 440 -------- -------- Total current assets 68,577 55,493 -------- -------- Property, plant and equipment, at cost, less accumulated depreciation 8,205 7,567 Other assets: Intangible assets, at cost, less accumulated amortization 1,566 1,682 Other assets 27 27 -------- -------- Total other assets 1,593 1,709 -------- -------- $ 78,375 $ 64,769 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable, trade $ 10,886 $ 7,149 Accrued expenses 1,397 1,239 Current portion of long-term debt 567 567 -------- -------- Total current liabilities 12,850 8,955 Revolving credit facility 35,709 26,461 Long-term debt 5,588 5,836 Non-current deferred income taxes 275 585 Shareholders' equity: Preferred stock, no par value (5,000 shares authorized, no shares issued or outstanding) -- -- Common stock, no par value (20,000 shares authorized, 4,327 and 4,297 shares issued and outstanding as of June 30, 1999 and December 31, 1998, respectively) 9,652 9,559 Common stock subscribed 42 93 Unearned compensation (33) (55) Subscription receivable (465) (423) Retained earnings 14,743 13,716 Accumulated other comprehensive income 14 42 -------- -------- Total shareholders' equity 23,953 22,932 -------- -------- $ 78,375 $ 64,769 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. Note: The balance sheet at December 31, 1998 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. 4 Form 10-Q Page 4 ELLETT BROTHERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (in thousands, except per share data)
Three Months Ended Six Months Ended June 30, June 30, ----------------------- ------------------------ 1999 1998 1999 1998 -------- -------- -------- -------- Sales $ 38,319 $ 31,856 $ 77,265 $ 65,888 Cost of goods sold 31,469 26,108 63,667 54,235 -------- -------- -------- -------- Gross profit 6,850 5,748 13,598 11,653 Selling, general and administrative expenses 5,271 4,554 10,564 9,348 -------- -------- -------- -------- Income from operations 1,579 1,194 3,034 2,305 Other income (expense): Interest income 114 132 245 255 Interest expense (619) (616) (1,136) (1,142) Other income 1 46 2 42 -------- -------- -------- -------- Income before income taxes 1,075 756 2,145 1,460 Income tax expense 388 256 780 509 Net income $ 687 $ 500 $ 1,365 $ 951 ======== ======== ======== ======== Basic and diluted earnings per common share $ 0.16 $ 0.10 $ 0.32 $ 0.19 ======== ======== ======== ======== Weighted average shares outstanding 4,322 5,119 4,312 5,120 ======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 Form 10-Q Page 5 ELLETT BROTHERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)
Six Months Ended June 30, 1999 1998 -------- -------- Cash flows from operating activities: Net income $ 1,365 $ 951 Adjustments to reconcile net income to net cash used in operating activities: Non-cash charges to income 657 592 Changes in assets and liabilities: Receivables (1,933) 110 Inventories (10,301) (5,811) Prepaid expenses (1,276) (523) Accounts payable, trade 3,737 2,674 Accrued expenses 158 (600) -------- -------- Net cash used in operating activities (7,593) (2,607) -------- -------- Net cash used in investing activities, property, plant and equipment (1,004) (670) -------- -------- Cash flows from financing activities: Gross borrowings on revolving credit facility 85,261 70,909 Gross repayments on revolving credit facility (76,013) (67,201) Principal payments on capital lease obligations -- (8) Principal payments on long-term debt (275) (250) Subscription receivable -- 38 Common stock repurchase -- (187) Dividends to shareholders (338) (204) -------- -------- Net cash provided by financing activities 8,635 3,097 -------- -------- Net increase (decrease) in cash and cash equivalents 38 (180) Cash and cash equivalents: Beginning of period 183 395 -------- -------- End of period $ 221 $ 215 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 6 Form 10-Q Page 6 ELLETT BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 1999 (in thousands, except per share data) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements, which include the accounts of Ellett Brothers, Inc. and subsidiaries (the "Company"), have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 1999 are not necessarily indicative of the results that may be expected for the full year ending December 31, 1999. For further information, refer to the financial statements and footnotes thereto included in Ellett Brothers, Inc.'s annual report on Form 10-K for the year ended December 31, 1998. 2. INVENTORIES Inventories consisted of the following: June 30, December 31, 1999 1998 -------- -------- Finished goods $ 41,006 $ 31,112 Raw materials 1,217 881 Work in process 218 147 -------- -------- $ 42,441 $ 32,140 ======== ======== 3. COMMON AND PREFERRED STOCK In January 1997, the Company issued 112 shares of common stock for total consideration of $475 ($452 in promissory notes and $23 of cash) to two executives of the Company in exchange for the cancellation of 112 fully vested and outstanding options of the officers with an exercise price of $7.00 per share. The promissory notes bear interest at 5.6%, payable semi-annually, and become due on a pro-rata basis as the shares are sold by the executives. The shares carry restrictions over their transferability which have been lifted over a two-year period ended January 1999. The market value of the common stock at the date of the transaction was $559. The difference between the market value and the price at which the shares were sold to the executives is reflected as unearned compensation and is being amortized over the two-year period. In June of 1998, the Company reacquired 34 shares from one of the former executives and recorded it using the cost method of accounting. During the three months ended June 30, 1999, the Company issued to an executive officer 30 stock options, of which 10 vested immediately. The options were issued at 85% of market price on the day the options vest. In 1998, the Company awarded 20 shares to an executive officer when the market value of these shares was $93. Compensation expense was recognized at the time of the award and shareholders' equity reflects the stock subscribed. During 1996, the Company awarded 58 shares of restricted common stock to two executives of the Company. The restrictions are scheduled to be released pro-rata over a three to four year period, based on certain criteria. The stock awards were valued at the market price per share at the time of each award, and unearned compensation was recorded in equity. Compensation expense is recognized as the awards vest over the three to four year period. 7 Form 10-Q Page 7 The Company reacquired 46 and 10 shares of its common stock in June and December of 1997, respectively; and reacquired 142, 448, and 200 shares of its common stock in September, October, and December of 1998, respectively. The Company recorded these acquisitions using the cost method of accounting. The Company is authorized to issue 20,000 shares of no-par-value common stock. Additionally, the Board of Directors of the Company is authorized to issue, at its discretion, up to 5,000 shares of preferred stock in one or more series with the number of shares, designation, relative rights and preferences, and limitations to be determined by resolution of the Board of Directors. However, no share of stock of any class shall be subject to preemptive rights or have cumulative voting provisions. 4. EARNINGS PER SHARE Although the Company had options outstanding during the year ended December 31, 1998 and the six month period ended June 30, 1999, they have an antidilutive effect on earnings per share. The earnings per share calculations reported by the Company equal basic and diluted earnings per share calculated under the provisions of SFAS No. 128. Basic and diluted earnings per share for the quarters and six months ended June 30, 1999 and 1998, and the year ended December 31, 1998 is computed as net income divided by the weighted average shares outstanding. 5. COMPREHENSIVE INCOME Comprehensive income includes net income and all other changes to the Company's equity, with the exception of transactions with shareholders ("other comprehensive income"). The Company's only components of other comprehensive income relate to unrealized gains and losses on available for sale securities. The Company's total comprehensive income for the six month periods ended June 30, 1999 and 1998 was $1,347 and $970, respectively. Information concerning the Company's other comprehensive income for the six month periods ended June 30, 1999 and 1998 is as follows:
1999 1998 ------- ------- Net unrealized gains (losses) on available for sale securities $ (28) $ 31 Income tax (expense) benefit relating to unrealized gains on available for sale securities 10 (12) ------- ------- Other comprehensive income (loss) $ (18) $ 19 ======= =======
6. BUSINESS SEGMENT INFORMATION The Company's reportable segments are business units that offer different products and have separate management teams and infrastructures. The business units have been aggregated into two reportable segments. These segments are: Hunting, Shooting, Camping, Archery & Outdoor Products ("HS&A") and Marine Products. The "Other" segment includes the Company's subsidiaries. The accounting policies of the segments are the same as those described in the Company's annual report on Form 10-K for the year ended December 31, 1998. The Company evaluates performance based upon operating income of the business units. 8 Form 10-Q Page 8 The following table presents information about reported segments for the three months ended June 30, 1999 and 1998 (in millions):
- ------------------------------------------ ------------------ ------------------ ----------------- ------------------ 1999 HS&A MARINE OTHER TOTAL - ------------------------------------------ ------------------ ------------------ ----------------- ------------------ Sales $ 28.2 $ 9.7 $ .4 $ 38.3 Operating income (loss) .9 .9 (.2) 1.6 Identifiable segment assets 45.1 8.5 3.2 56.8 Capital expenditures .5 .0 .0 .5 Depreciation .1 .1 .0 .2 - ------------------------------------------ ------------------ ------------------ ----------------- ------------------ - ------------------------------------------ ------------------ ------------------ ----------------- ------------------ 1998 HS&A MARINE OTHER TOTAL - ------------------------------------------ ------------------ ------------------ ----------------- ------------------ Sales $ 22.9 $ 8.6 $ .4 $ 31.9 Operating income (loss) .5 .8 (.1) 1.2 Identifiable segment assets 42.8 9.3 2.1 54.2 Capital expenditures .5 .0 .0 .5 Depreciation .2 .1 .0 .3 - ------------------------------------------ ------------------ ------------------ ----------------- ------------------
A reconciliation of total segment operating income to total consolidated income before taxes for the three months ended June 30 (in millions) is as follows:
- ----------------------------------------------------------- ----------------------- ---------------------- 1999 1998 - ----------------------------------------------------------- ----------------------- ---------------------- Operating income $ 1.6 $ 1.2 Interest income and other income, net .1 .1 Interest expense (.6) (.6) - ----------------------------------------------------------- ----------------------- ---------------------- Income before taxes $ 1.1 $ .7 - ----------------------------------------------------------- ----------------------- ----------------------
The following table presents information about reported segments for the six months ended June 30, 1999 and 1998 (in millions):
- ------------------------------------------ ------------------ ------------------ ----------------- ------------------ 1999 HS&A MARINE OTHER TOTAL - ------------------------------------------ ------------------ ------------------ ----------------- ------------------ Sales $ 60.2 $ 16.2 $ .9 $ 77.3 Operating income (loss) 2.2 1.3 (.5) 3.0 Identifiable segment assets 45.1 8.5 3.2 56.8 Capital expenditures 1.0 .0 .0 1.0 Depreciation .3 .1 .0 .4 - ------------------------------------------ ------------------ ------------------ ----------------- ------------------ - ------------------------------------------ ------------------ ------------------ ----------------- ------------------ 1998 HS&A MARINE OTHER TOTAL - ------------------------------------------ ------------------ ------------------ ----------------- ------------------ Sales $ 51.0 $ 14.1 $ .8 $ 65.9 Operating income (loss) 1.5 1.1 (.3) 2.3 Identifiable segment assets 42.8 9.3 2.1 54.2 Capital expenditures .7 .0 .0 .7 Depreciation .3 .1 .0 .4 - ------------------------------------------ ------------------ ------------------ ----------------- ------------------
A reconciliation of total segment operating income to total consolidated income before taxes for the six months ended June 30 (in millions) is as follows:
- ----------------------------------------------------------- ----------------------- ---------------------- 1999 1998 - ----------------------------------------------------------- ----------------------- ---------------------- Operating income $ 3.0 $ 2.3 Interest income and other income, net .2 .3 Interest expense (1.1) (1.1) - ----------------------------------------------------------- ----------------------- ---------------------- Income before taxes $ 2.1 $ 1.5 - ----------------------------------------------------------- ----------------------- ----------------------
A reconciliation of identifiable segment assets to total assets as of June 30 (in millions) is as follows:
- ----------------------------------------------------------- ----------------------- ---------------------- 1999 1998 - ----------------------------------------------------------- ----------------------- ---------------------- Identifiable segment assets $ 56.8 $ 54.2 Other corporate assets 21.6 15.6 - ----------------------------------------------------------- ----------------------- ---------------------- Total assets $ 78.4 $ 69.8 - ----------------------------------------------------------- ----------------------- ----------------------
9 Form 10-Q Page 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of the operations and financial condition of Ellett Brothers, Inc. and its subsidiaries (the "Company"). This discussion and analysis should be read in conjunction with the financial statements and related notes presented in the Company's annual report on Form 10-K for the year ended December 31, 1998, and the condensed consolidated financial statements and related notes included in this Form 10-Q. Sales for the three months ended June 30, 1999 were $38.3 million, as compared to $31.9 million for the same period in 1998, an increase of $6.4 million, or 20.3%. Sales for the six months ended June 30, 1999 were $77.3 million, as compared to $65.9 million for the same period in 1998, an increase of $11.4 million, or 17.3%. Included in these amounts were sales from the subsidiaries of $446,000 and $860,000 for the three and six months ended June 30, 1999, respectively, and $320,000 and $741,000 for the three and six months ended June 30, 1998, respectively. Sales in our distribution business increased 20.1% in the quarter as compared to the second quarter of 1998. When combined with the first quarter increase of 14.6%, the distribution business had a 17.3% increase for the first six months of 1999. Hunting and shooting sports product sales increased 21.7%, marine products increased 16.3%, and camping, archery and outdoor products increased 21.0% for the quarter as compared to the second quarter of last year. Gross profit was $6.9 million (17.9% of sales) for the three months ended June 30, 1999, as compared to $5.8 million (18.0% of sales) for the same period in 1998, an increase of $1.1 million. Gross profit for the six months ended June 30, 1999 was $13.6 million (17.6% of sales), as compared to $11.7 million (17.7% of sales) for the same period in 1998, an increase of $1.9 million. Gross margin as a percentage of sales in our distribution business was basically flat for the quarter and for the six months, as compared to the same periods in 1998. Selling, general and administrative ("SG&A") expenses for the three months ended June 30, 1999 were $5.3 million (13.8% of sales), as compared to $4.6 million (14.3% of sales) for the same period in 1998, an increase of $700,000, or 15.7%. SG&A expenses for the six months ended June 30, 1999 were $10.6 million (13.7% of sales), as compared to $9.4 million (14.2% of sales) for the same period in 1998, an increase of $1.2 million, or 13.0%. Interest expense was $619,000 (1.6% of sales) for the three months ended June 30, 1999, as compared to $616,000 (1.9% of sales) for the same period in 1998, an increase of $3,000, or 0.4%. Interest expense for the six months ended June 30, 1999 was $1.1 million (1.5% of sales), as compared to $1.1 million (1.7% of sales) for the same period in 1998, a decrease of $6,000, or 0.5%. Income tax expense was $388,000 for the three months ended June 30, 1999, as compared to $256,000 for the same period in 1998. Income tax expense was $780,000 for the six months ended June 30, 1999, as compared to $509,000 for the same period in 1998. The effective tax rate for the three months ended June 30, 1999 was 36.1%, as compared to 33.9% for the same period in 1998. The effective tax rate for the six months ended June 30, 1999 was 36.3%, as compared to 34.9% for the same period in 1998. Net income for the three months ended June 30, 1999 was $687,000 (1.8% of sales), as compared to a net income of $500,000 (1.6% of sales), for the same period in 1998. Net income for the six months ended June 30, 1999 was $1.4 million (1.8% of sales), as compared to a net income of $951,000 (1.4% of sales) for the same period in 1998. SEASONALITY AND QUARTERLY INFORMATION Historically, the Company's business has been seasonal. The sales of hunting and shooting sports products, as well as camping, archery and outdoor accessories, usually increase in the third quarter of each year, and peak early in the fourth quarter. Sales of marine accessories usually increase in the first quarter of each year, then peak midway through the second quarter and continue at similar levels through the first half of the third quarter. Operations of the subsidiaries are very seasonal, producing significantly higher sales and gross profit during the third and fourth quarters, with losses in the first and second quarters. The Company's quarterly operating results may also be affected by a wide variety of factors, such as legislative and regulatory changes, competitive pressures, and general economic conditions. 10 Form 10-Q Page 10 LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity are results of operations and borrowings under its revolving credit facility. Pursuant to its operating strategy, the Company maintains very minimal cash balances and is substantially dependent on, among other things, the availability of adequate working capital financing to support inventories and accounts receivable. Net cash used in operating activities was $7.6 million for the six months ended June 30, 1999, as compared to net cash used in operating activities of $2.6 million in 1998. The net cash used in 1999 was due primarily to an increase in inventory, which normally takes place in the first six months, partially offset by an increase in accounts payable. Net cash used in investing activities was $1.0 million for the six months ended June 30, 1999, as compared to $670,000 for the same period in 1998. The net cash used in 1999 was primarily for computer equipment and information systems upgrades. These system upgrades will be year 2000 compliant. Net cash provided by financing activities was $8.7 million for the six months ended June 30, 1999, as compared to $3.1 million for the same period in 1998. During the six months ended June 30, 1999, the Company's net borrowings were $9.2 million, as compared to $3.7 million during the same period in 1998. Working capital requirements for the Company's traditional distribution business have historically been somewhat seasonal in nature. Accounts receivable have generally increased in the first quarter primarily because of the customary industry practice during the first quarter of each year whereby the Company has offered to its customers extended payment terms for purchases of certain products, thereby extending the payment due dates for a portion of its sales into the third and fourth quarters of the year. Accounts receivable have generally increased further early in the third quarter as additional 60 to 90 day extended terms have been offered to stimulate sales in advance of the Company's highest volume quarters. Accounts receivable usually decrease in the fourth quarter as payments are received on prior quarters' sales and a larger percentage of current sales are made with shorter payment terms. Inventory generally builds during the first two quarters and peaks in the third quarter to support the higher sales volumes of the third and fourth quarters. In the fourth quarter, the higher sales volumes have traditionally served to reduce inventory to its lowest point at year-end. Working capital requirements are also seasonal for the subsidiaries. Inventories generally increase during the first half of the year to accommodate the sales expected in the third and fourth quarters. Accounts receivable generally decline to their lowest point in the second quarter just before the sales increase in the second half of the year. Principal maturities on the Company's industrial revenue refunding bonds began in 1995. Remaining payments for 1999 will be $292,000, and maturities for 2000 and 2001 will be $617,000 and $667,000, respectively. The annual interest charges on the Company's industrial revenue bonds, at a fixed rate of 7.5%, will be $277,000 for the remainder of 1999, and $525,000 and $479,000 for 2000 and 2001, respectively. Management believes that cash generated from operations, and available under the Company's revolving credit facility, will be sufficient to finance its operations, expected working capital needs, capital expenditures, and debt service requirements for the remainder of 1999 and the foreseeable future. 11 Form 10-Q Page 11 YEAR 2000 The Company is devoting resources throughout its business operations to minimize the risk of potential disruption from the Year 2000 ("Y2K") problem. This problem is a result of computer programs having been written using two digits (rather than four) to define the applicable year. Any information technology ("IT") systems that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculations and system failures. The problem also extends to many "Non-IT" systems; that is, operating and control systems that rely on embedded chip systems. In addition, like every other business enterprise, the Company is at risk from Y2K failures on the part of its major business counterparts, including suppliers and customers, as well as potential failures in public and private infrastructure services. System failures resulting from the Y2K problem could adversely affect operations and financial results of the Company. Y2K failures on the part of our major vendors would limit our available inventory for resale. Failures at our customer level would result in lower revenue. Public infrastructure failures could adversely affect power and communications. In late 1996, the Company determined that its operating system would not be Y2K compliant and made a decision to purchase new operating software (purchasing, distribution, and financial) to run its business. In connection with this decision, new hardware was purchased that moved the Company from a mainframe to a client/server environment. System modifications and testing have been ongoing with installation of the new system to begin in the third quarter of 1999 with completion expected in the fourth quarter of 1999. In the second half of 1998, the Company put together a project team headed up by an executive of the Company with the assistance of the department heads. A plan was put together to assess all internal Non-IT systems as well as key suppliers and customers. An inventory was taken of all internal Non-IT systems. From this inventory, 39% of the systems were identified as critical to business operations. Of the critical systems, 87% have been identified as Y2K compliant or unaffected by computer dates. Of the remaining ones, 7% will be addressed by the new operating system and the other 6% are still being investigated. All critical vendors have been surveyed as well as all major customers as to their Y2K readiness. The Company is currently evaluating the responses to determine what action is necessary, if any. The Company has been developing contingency plans as a precautionary measure for all systems that are not expected to be Y2K compliant. Due to the timing of the installation of the new operating system, which is Y2K compliant, a decision was made to remediate the current system code as a back up plan for the year 2000. The Company estimates the cost of this at approximately $350,000. The cost of the system upgrades, which includes hardware and software, since inception through completion, is expected to be approximately $4.5 million. As of June 30, 1999, the Company had spent $3.8 million. This amount was funded out of working capital and the Company's revolving credit line. Amounts incurred to-date and expected to be incurred in the future do not include amounts for internal manpower or additional amounts determined as a result of the contingency programs to be developed, if any. Based upon its efforts to-date, the Company believes that the vast majority of both its IT and its Non-IT systems, including all critical and important systems, will remain up and running after January 1, 2000. Accordingly, the Company does not currently anticipate that internal systems failures will result in any material adverse effect to its operations or financial condition. The nature and focus of the Company's efforts to address the Y2K problem may be revised periodically as interim goals are achieved or new issues are identified. In addition, it is important to note that the description of the Company's efforts necessarily involves estimates and projections with respect to activities required in the future. These estimates and projections are subject to change as work continues, and such changes may be substantial. 12 Form 10-Q Page 12 Advisory Note Regarding Forward-Looking Statements Certain of the statements contained in Item 2 (Management's Discussion and Analysis of Financial Condition and Results of Operations) that are not historical facts are forward-looking statements subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. The Company cautions readers of this report on Form 10-Q that such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from those expressed or implied by such forward-looking statements. Although the Company's management believes that their expectations of future performance are based on reasonable assumptions within the bounds of their knowledge of their business and operations, there can be no assurance that actual results will not differ materially from their expectations. Factors which could cause actual results to differ from expectations include, among other things, reductions in, or lack of growth of, firearm sales; potential negative effects of existing and future gun control legislation on consumer demand for firearms; the potential negative impact on gross margins from shifts in the Company's product mix toward lower margin products; seasonal fluctuations in the Company's business; competition from national, regional and local distributors and various manufacturers who sell products directly to the Company's customer base; competition from sporting goods mass merchandisers or "superstores" which sell in competition with the Company's primary customer base; exposure to product liability lawsuits; the challenges and uncertainties in the implementation of the Company's expansion and development strategies; the Company's dependence on key personnel; the Company's ability to detect and correct the potential Y2K sensitive problem; and other factors described in this report and in other reports filed by the Company with the Securities and Exchange Commission. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company's exposure to market risk for a change in interest rates relates solely to its debt under its revolving credit facility ($35.7 million at June 30, 1999 and $26.5 million at December 31, 1998). The Company does not currently use derivative financial instruments. Approximately $6.2 million of the Company's debt at June 30, 1999 and $6.4 million at December 31, 1998 was subject to fixed interest rates and principal payments. This debt is comprised of the Company's long-term debt under its industrial revenue refunding bonds which carry an interest rate of 7.5%. The Company is exposed to changes in interest rates primarily as a result of its debt in a revolving credit facility ("Facility") used to maintain liquidity and fund the Company's business operations. Pursuant to the Company's operating strategies, it maintains minimal cash balances and is substantially dependent on, among other things, the availability of adequate working capital financing to support inventories and accounts receivables. The Facility provides the Company with a revolving line of credit and letters of credit. The maximum amount that can be outstanding at anytime is $40.0 million. The term of the Facility expires on September 30, 2001. Borrowings under the Facility bear interest at a rate equal to, at the Company's option, prime rate plus 0.375% or 2.25% above the 30 or 90 day LIBOR rate. Combinations of these rates can be used for the various loans that comprise the total outstanding balance under the Facility. The interest rates of the Facility are subject to change based on changes in the Company's leverage ratio and net income. At June 30, 1999, the interest rate was 7.17%. The definitive extent of the Company's interest rate risk under the Facility is not quantifiable or predictable because of the variability of future interest rates and business financing requirements. The Company's long-term debt has a fair value, based upon current interest rates, of approximately $42.5 million at June 30, 1999 and $33.9 million at December 31, 1998. Fair value will vary as interest rates change. The following table presents the aggregate maturities and historical cost amounts of the fixed debt principal and interest rates by maturity dates at June 30, 1999: Maturity Date Fixed Rate Debt Interest Rate ------------- --------------- ------------- 1999 $ 292,000 7.5% 2000 617,000 7.5% 2001 667,000 7.5% 2002 716,000 7.5% 2003 767,000 7.5% Thereafter 3,096,000 7.5% ------------- --------------- ------------- $ 6,155,000 7.5% 13 Form 10-Q Page 13 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27 Financial Data Schedule (for SEC only) (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the three months ended June 30, 1999. 14 Form 10-Q Page 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized. ELLETT BROTHERS, INC. Date: August 13, 1999 By: /s/ Joseph F. Murray, Jr. ----------------------------------------------- Joseph F. Murray, Jr. President, Chief Executive Officer and Director By: /s/ George E. Loney ----------------------------------------------- George E. Loney Chief Financial Officer (principal financial and accounting officer) EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF ELLETT BROTHERS, INC. FOR THE SIX MONTHS ENDED JUNE 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1999 JUN-30-1999 221 0 23,471 699 42,441 68,577 15,993 7,788 78,375 12,850 5,588 0 0 9,694 14,259 78,375 77,265 77,265 63,667 63,667 10,564 0 1,136 2,145 780 1,365 0 0 0 1,365 0.32 0.32
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