10-Q 1 g69502e10-q.txt 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 March 31, 2001 -------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ Commission File Number: 0-21632 ------- ELLETT BROTHERS, INC. (Exact name of Registrant as specified in its charter) SOUTH CAROLINA 57-0957069 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 267 COLUMBIA AVENUE, CHAPIN, SOUTH CAROLINA 29036 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (803) 345-3751 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- --------- As of April 30, 2001, 4,082,968 shares of no par value common stock of the registrant were outstanding. Page 1 of 13 2 Form 10-Q Page 2 ELLETT BROTHERS, INC. AND SUBSIDIARIES MARCH 31, 2001 INDEX

3 Form 10-Q Page 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements ELLETT BROTHERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)

The accompanying notes are an integral part of these condensed consolidated financial statements. Note: The balance sheet at December 31, 2000 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 OPERATIONS (UNAUDITED) (in thousands, except per share data)

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)

Supplemental disclosure of non-cash financing activities: |X| The change in net unrealized gain on investment securities available for sale was $12 for the three months ended March 31, 2001. 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) MARCH 31, 2001 (in thousands, except per share data) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements, which include the accounts of Ellett Brothers, Inc. and subsidiaries (the "Company"), have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2001 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2001. 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, 2000. 2. INVENTORIES Inventories consisted of the following: March 31, December 31, 2001 2000 ------- ------- Finished goods $44,102 $40,848 Raw materials 536 700 Work in process 474 307 ------- ------- $45,112 $41,855 ======= ======= 3. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which was amended by SFAS No. 138. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. SFAS No. 133 is effective for financial statements for all fiscal quarters of all fiscal years beginning after June 15, 2000. The Company has adopted SFAS No. 133; however, no derivative instruments were held at adoption, and as a result, there was no impact on the Company's consolidated financial position, results of operations, or cash flows. Management does not expect SFAS 133 to have a material impact due to the Company's limited use of derivative instruments. 4. EARNINGS AND DIVIDENDS PER COMMON SHARE Although the Company had options outstanding during portions of the three months ended March 31, 2001 and 2000, they have an antidilutive effect on earnings (loss) per share for each period. As such, basic and diluted earnings (loss) per share for the three months ended March 31, 2001 and 2000 are computed as net income (loss) divided by the weighted average shares outstanding. No dividends were declared or paid in the quarter ended March 31, 2001. 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 comprehensive income (loss) for the three month periods ended March 31, 2001 and 2000 was ($1,262) and $153, respectively. The following table reconciles net income (loss) to comprehensive income (loss) for the three month periods ended March 31, 2001 and 2000:

7 Form 10-Q Page 7 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 subsidiary operations, except for Archery Center International, which is included in HS&A. 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, 2000. The Company evaluates performance based upon operating income of the business units. The following table presents information about reported segments for the quarter ended March 31, 2001 and 2000 (in millions):

A reconciliation of total segment operating income (loss) to total consolidated income (loss) before taxes for the quarter ended March 31 (in millions) is as follows: ------------------------------------------------------------------------------- 2001 2000 ------------------------------------------------------------------------------- Operating income (loss) $ (1.2) $ .8 Interest income and other income, net .1 .1 Interest expense (.8) (.6) ............................................................................... Income (loss) before taxes $ (1.9) $ .3 ------------------------------------------------------------------------------- A reconciliation of identifiable segment assets to total assets for the quarter ended March 31 (in millions) is as follows: ------------------------------------------------------------------------------- 2001 2000 ------------------------------------------------------------------------------- Identifiable segment assets $ 66.7 $ 66.3 Other corporate assets 15.4 16.1 ............................................................................... Total assets $ 82.1 $ 82.4 ------------------------------------------------------------------------------- 7. CONTINGENCIES The Company is a party to litigation in connection with the distribution of its inventory. Over the past three years, thirty cities and/or counties, states, and one advocacy group have filed lawsuits against the firearms industry as a whole. These lawsuits list numerous manufacturers and distributors as defendants in the claims. To date, three of the thirty-one suits have been dismissed, as the judges have found the complaints "without standing" under the laws of their respective states. The Company was named in five of these remaining twenty-eight suits. The Company and all distributors were dismissed from one of these lawsuits (the Hamilton-Cargill lawsuit) in the first quarter of 1999. The remaining defendants appealed the ruling and in April of 2001 the appeals court reversed the ruling in favor of the defendants. There are three remaining industry-wide cases in which the Company is named. Although the outcome cannot be predicted, it is the opinion of management that the Company has meritorious defenses and the disposition of these matters will not have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company. In recent years, an increasing amount and variety of legislation aimed at eliminating or limiting the production, sale, possession, ownership and use of certain kinds of firearms has been introduced in the United States Congress and in various state legislatures, and the Company expects that such legislation will continue to be introduced in the future. In addition, certain states and other local governments have already adopted, or are currently considering the adoption of, laws aimed at the control of firearm possession and ownership by the public. There can be no assurance that existing and 8 Form 10-Q Page 8 future gun control legislation will not have a substantial negative impact on consumer demand for firearms and result in a material adverse effect on the Company's financial condition, results of operations, or cash flows. The Company is also subject to a variety of federal, state and local laws and regulations relating to, among other things, advertising, the sale and handling of firearms, the offering and extension of credit and workplace and product safety, including various regulations concerning the storage of gunpowder. Certain governmental licenses and permits are also necessary in connection with the Company's operations. In particular, as with any seller of firearms, the Company is required to maintain a federal firearms license that imposes various restrictions and conditions on the Company's operations, including a requirement that the Company resell firearms and ammunition only to federally licensed firearms dealers. In addition, all exports of firearms and ammunition require federal government licenses in advance of shipment. In the event that the Company should be determined to be in violation of any applicable regulations, licenses or permits, the Company could become subject to cease and desist orders, injunctions, civil fines and other penalties. Any such penalties could have a material adverse effect on the Company's business, financial condition, results of operations, and cash flows. 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, 2000, and the consolidated financial statements and related notes included in this Form 10-Q. Sales for the three months ended March 31, 2001 were $35.5 million, as compared to $36.7 million for the same period in 2000, a decrease of $1.2 million, or 3.3%. Included in these amounts were sales from the subsidiaries of $1.6 million for of the three month periods ended March 31, 2001 and 2000. Sales for the distribution business were affected in the first quarter of 2001 by slow retail sales and competitive discounting. Consequently, sales in our distribution business were down $1.2 million, or 3.4%. Sales in our marine accessories were impacted the most by the above, and were down $800,000, or 11.8%. Sales in the hunting and shooting sports were essentially flat in comparison to last year. Our camping, archery and outdoor accessories sales were down $300,000, or 3.8%. Gross profit was $5.1 million (14.4% of sales) for the three months ended March 31, 2001, as compared to $6.8 million (18.5% of sales) for the same period in 2000. As previously discussed, the competitive discounting adversely affected margins. Additionally, the sales mix of lower margin items in 2001 had an impact in comparison to the mix in 2000. Selling, general and administrative (SG&A) expenses for the three months ended March 31, 2001 were $6.3 million (17.7% of sales) as compared to $6.0 million (16.3% of sales) for the same period in 2000, an increase of $300,000 or 5.2%. The increase in expenses was affected by a reimbursement in 2000 in associate insurance along with one less month of depreciation for the new computer system in the first quarter of 2000. Income tax benefit was $640,000 for the three months ended March 31, 2001, as compared to $127,000 in income tax expense for the same period in 2000. Net loss for the three months ended March 31, 2001 was $1.3 million ($.31 per basic and diluted share) as compared to a net income of $157,000 ($0.04 per basic and diluted share) for the three months ended March 31, 2000 as a result of the above noted factors. SEASONALITY AND QUARTERLY INFORMATION Historically the Company's business has been seasonal. The sales of hunting and shooting sports products, as well as camping, archery and outdoor accessories, usually increase in the third quarter of each year, and peak early in the fourth quarter. Sales of marine accessories usually increase in the first quarter of each year, then peak midway through the second quarter and continue at similar levels through the first half of the third quarter. Operations of the subsidiaries have been seasonal, producing significantly higher sales and gross profit during the third and fourth quarters, with losses in the first and second quarters. The Company's quarterly operating results may also be affected by a wide variety of factors, such as legislative and regulatory changes, competitive pressures, and general economic conditions. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity have been results of operations and borrowings under its revolving credit facility. Pursuant to its operating strategy, the Company maintains minimal cash balances and is substantially dependent on, among other things, the availability of adequate working capital financing to support inventories and accounts receivable. 9 Form 10-Q Page 9 Net cash provided by operating activities was $4.1 million for the three months ended March 31, 2001 as compared to net cash used by operating activities of $19,000 for the same period in 2000. For the quarter ended March 31, 2001, the Company incurred a net loss as compared to net income for the same period in 2000. This was offset by the Company's non-cash charges to income, primarily depreciation and amortization along with an increase in payables partially offset by an increase in inventory. The net result was an increase in cash provided from operations. Net cash used in investing activities was $121,000 for the three months ended March 31, 2001 as compared to $506,000 for the same period in 2000. The net cash used was primarily for computer equipment. Net cash used in financing activities was $4.0 million for the three months ended March 31, 2001 as compared to $345,000 provided in the same period in 2000. During the quarter ended March 31, 2001, the Company used its cash provided by operating activities to reduce its revolving credit facility. Working capital requirements for the Company's distribution business have historically been somewhat seasonal in nature. Accounts receivable have generally increased in the first quarter primarily because of the customary industry practice during the first quarter of each year to offer customers extended payment terms for purchases of certain products, thereby extending the payment due dates for a portion of its sales into the third and fourth quarters of the year. Accounts receivable have generally increased further early in the third quarter as additional 60 to 90 day extended terms have been offered to stimulate sales in advance of the Company's highest volume quarters. Accounts receivable usually decrease in the fourth quarter as payments are received on prior quarters' sales and a larger percentage of current sales are made with shorter payment terms. Inventory generally builds during the first two quarters and peaks in the third quarter to support the higher sales volumes of the third and fourth quarters. Working capital requirements have been seasonal for the subsidiaries. Inventories have generally increased during the first half of the year to accommodate the sales in the third and fourth quarters. Accounts receivable generally decline to their lowest point in the second quarter just before the sales increase in the second half of the year. Principal maturities on the Company's industrial revenue bonds for the remainder of 2001 will be $742,000, and maturities for 2002 and 2003 will be $967,000 and $1,017,000, respectively. The annual interest charges on the Company's industrial revenue bonds, at a fixed rate of 7.5%, will be $355,000 for the remainder of 2001, and $410,000 and $356,000 for 2002 and 2003, 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 2001 and for the foreseeable future. ADVISORY NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain of the statements contained in Item 2 (Management's Discussion and Analysis of Financial Condition and Results of Operations) that are not historical facts are forward-looking statements subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. The Company cautions readers of this report on Form 10-Q that such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from those expressed or implied by such forward-looking statements. Although the Company's management believes that their expectations of future performance are based on reasonable assumptions within the bounds of their knowledge of their business and operations, there can be no assurance that actual results will not differ materially from their expectations. Factors which could cause actual results to differ from expectations include, among other things, reductions in, or lack of growth of, firearm sales; potential negative effects of existing and future gun control legislation on consumer demand for firearms; the potential negative impact on 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 lawsuits; the Company's ability to obtain liability insurance coverage for firearm related claims; the challenges and uncertainties in the implementation of the Company's expansion and development strategies; the Company's dependence on key personnel; and other factors described in this report and in other reports filed by the Company with the Securities and Exchange Commission. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company's exposure to market risk for a change in interest rates relates solely to its debt under its revolving credit facility ($35.3 at March 31, 2001 and $39.2 million at December 31, 2000). The Company does not currently use derivative financial instruments. 10 Form 10-Q Page 10 Approximately $5.1 million and $5.2 million of the Company's debt at March 31, 2001 and December 31, 2000, respectively, was subject to fixed interest rates and principal payments. This debt consists 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 January 31, 2002. Borrowings under the Facility bear interest at a rate equal to, at the Company's option, prime rate plus 0.375% or 2.00% 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 March 31, 2001, the interest rate was 7.53%. 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 $41.4 million at March 31, 2001 ($45.0 million at December 31, 2000). 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 March 31, 2001: Maturity Date Fixed Rate Debt Interest Rate ------------------------------------------------------------------------------ 2001 $ 742,000 7.5% 2002 967,000 7.5% 2003 1,017,000 7.5% 2004 1,067,000 7.5% 2005 1,117,000 7.5% Thereafter 147,000 7.5% ------------------------------------------------------------------------------ $ 5,057,000 7.5% 11 Form 10-Q Page 11 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None. (b) Reports on Form 8-K On March 9, 2001, a report on Form 8-K was filed announcing the approval of a cash-out merger between the Company and certain corporations owned by members of the Company's management (the "Acquirers"). The merger will result in a payment of $3.20 per share for all shares of the Company not already owned by the Acquirers. This price represents a 16.4% increase over the $2.75 original price per share offered by the Acquirers on November 6, 2000. The transaction is subject to approval of the Company's shareholders. In an unrelated matter, the Company announced the pending delisting from the NASDAQ SmallCap Market for failure to maintain a minimum of two active market makers for its stock in compliance with NASDAQ Marketplace Rule 431(c)(1). On March 22, 2001, a report on Form 8-K was filed relating to the announcement of the delisting from the NASDAQ SmallCap Market effective March 23, 2001. 12 Form 10-Q Page 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized. Ellett Brothers, Inc. Date: May 15, 2001 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)

ELLETT BROTHERS INC 10-Q