<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Transition Period From ____ To ____
Commission File Number 0-23385
BRASS EAGLE INC.
(Exact name of registrant as specified in its charter)
Delaware 71-0578572
(State or other jurisdiction I.R.S. Employer
of incorporation of organization) Identification Number
1203A North Sixth Street, Rogers, Arkansas 72756
(Address of principal executive offices) (zip code)
501-986-9090
(Registrant's telephone number, including area code)
Indicate by a 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 period that the Registrant was required to file such reports)
Yes X No : and (2) has been subject to such filing requirements
for the past 90 days.
Yes No X
The number of shares of the Registrant's Common Stock, $0.01 par
value, outstanding as of October 21, 1998 was 7,241,951.
<PAGE>
BRASS EAGLE INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
INDEX
======
Page
----
PART I: FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Condensed Balance Sheets as of September 30,
1998 (unaudited) and December 31, 1997. . . 1-2
Condensed Statements of Operations for the
Three and Nine Months ended September 30,
1998(unaudited)and September 30, 1997
(unaudited) . . . . . . . . . . . . . . . . 3
Condensed Statements of Cash Flows for the
Three and Nine Months Ended September 30,
1998 (unaudited)and September 30, 1997
(unaudited). . . . . . . . . . . . . . . . . 4-5
Notes to Condensed Financial Statements. . . 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations. . . . . . . . . . . . . . . . . 9-14
PART II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds. . 15
Item 6. Exhibits and Reports on Form 8-K. . . . . . 16
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . 17
<PAGE>
BRASS EAGLE INC.
PART I: FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
(In thousands except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
---- ----
<S> <C> <C>
(unaudited)
ASSETS
Current assets
Cash & cash equivalents $ 4,970 $ 504
Securities available-for-sale 0 12,659
Accounts receivable _
less allowance for
doubtful accounts of $502
in 1998 and $118 in 1997 14,140 12,242
Due from affiliate 63 2,024
Inventories 11,945 3,584
Prepaid expenses and other
current assets 1,828 1,216
-------- -------
Total current assets 32,946 32,229
Property and equipment, net 5,143 1,334
Other assets
Intangible assets, net 2,611 2,666
-------- ---------
$ 40,700 $ 36,229
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of
long-term debt $ 398 $ 698
Accounts payable and
accrued expenses 8,937 6,256
Due to affiliate 0 2,737
-------- ---------
Total current liabilities 9,335 9,691
Long-term debt, less current
maturities 12 18
Deferred income taxes 143 365
</TABLE>
-1-
<PAGE>
BRASS EAGLE INC.
CONDENSED BALANCE SHEET (Continued)
CONDENSED BALANCE SHEETS
(In thousands except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
---- ----
<S> <C> <C>
(unaudited)
Stockholders' equity
common stock, $.01 par
value, 10,000,000
shares authorized,
issued and outstanding
7,241,291 in 1998, and
7,225,121 in 1997 72 72
Additional paid-in capital 25,659 25,631
Retained earnings 5,479 452
---------- ----------
31,210 26,155
---------- ----------
$ 40,700 $ 36,229
========== ==========
</TABLE>
See accompanying notes to condensed financial statement
-2-
<PAGE>
BRASS EAGLE INC
CONDENSED STATEMENTS OF OPERATIONS
(In thousands except share and per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
(unaudited) (unaudited)
Net sales $ 13,527 $ 9,909 $ 48,682 $ 21,814
Cost of sales 8,870 6,645 31,319 14,639
--------- --------- -------- ---------
Gross profit 4,657 3,264 17,363 7,175
Operating expenses 2,628 1,665 9,326 3,638
--------- --------- -------- ---------
Operating income 2,029 1,599 8,037 3,537
Interest income/(expense) 69 (58) 300 (181)
--------- --------- -------- ---------
Income before income
taxes 2,098 1,541 8,337 3,356
Provision for income
taxes 808 590 3,198 1,285
--------- --------- -------- ---------
Net income $ 1,290 $ 951 $ 5,139 $ 2,071
========= ========= ========= =========
Net income per share:
Basic $ 0.18 $ 0.21 $ 0.71 $ 0.45
Pro forma basic 0.18 0.19 0.71 0.41
Diluted 0.17 0.17 0.67 0.38
Pro forma diluted 0.17 0.12 0.67 0.27
Weighted Average Shares Outstanding:
Basic 7,241,223 4,608,871 7,238,173 4,608,871
Pro forma basic 7,241,223 5,028,150 7,238,173 5,028,150
Diluted 7,661,870 5,455,853 7,676,460 5,458,984
Pro forma diluted 7,661,870 7,652,824 7,676,460 7,655,955
</TABLE>
See accompanying notes to condensed financial statements.
-3-
<PAGE>
BRASS EAGLE INC.
CONDENSED STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1998 1997
---- ----
<S> <C> <C>
(Unaudited)
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income $ 5,139 $ 2,071
Adjustments to reconcile net income to net
cash from operating activities
Deferred income taxes (584) (96)
Depreciation and amortization 1,102 556
Provision for doubtful accounts 384 0
Stock Compensation Expense 20 298
Changes in assets and liabilities
Accounts receivable (2,837) (6,214)
Inventories (8,361) (2,962)
Prepaid expenses and other assets 205 (715)
Accounts payable and accrued expenses 2,681 4,971
Due from affiliate 1,961 0
--------- -------
Net cash provided by (used in) Operating
activities (290) (2,091)
--------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (4,757) (668)
Sales of securities available-for-sale 55,763 0
Purchase of securities available-for-sale (43,104) 0
Distribution to Daisy (2,737) 0
--------- -------
Net cash provided by (used in) investing
activities 5,165 (668)
--------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt (306) (271)
Net payments on intercompany debt 0 3,038
Exercise of stock options less shares
forfeited for taxes (103) 0
---------- -------
Net cash provided by (used in) financing
activities (409) 2,767
---------- -------
</TABLE>
-4-
<PAGE>
BRASS EAGLE INC.
CONDENSED STATEMENT OF CASH FLOW (Continued)
CONDENSED STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1998 1997
---- ----
<S> <C> <C>
(Unaudited)
NET CHANGE IN CASH 4,466 8
---------- -------
CASH AT BEGINNING OF PERIOD 504 0
CASH AT END OF PERIOD $ 4,970 $ 8
========== =======
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 62 $ 199
Taxes 4,120 0
</TABLE>
See accompanying notes to condensed financial statements.
-5-
<PAGE>
BRASS EAGLE INC.
Notes to Condensed Financial Statements
(All information for the three and nine month periods ended
September 30, 1998 and 1997 is unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies and practices followed by the Company are
as follows:
DESCRIPTION OF BUSINESS: Brass Eagle Inc. (the `Company' or `Brass Eagle') is
a leading manufacturer of paintball guns and other paintball products. The
Company sells its products through both foreign and major national domestic
retailers. The financial statements have been prepared using certain estimates
and allocations (see below) and include only the accounts of Brass Eagle.
INTERIM RESULTS (UNAUDITED): The accompanying condensed balance sheet at
September 30, 1998 and the condensed statements of operations for the three and
nine month periods ended September 30, 1998 and 1997 and condensed cash flows
for the nine month periods ended September 30, 1998 and 1997 are unaudited. In
the opinion of management, these statements have been prepared on the same
basis as the audited financial statements and include all adjustments,
consisting of only normal recurring adjustments necessary for the fair
presentation of the results of the interim periods. The data disclosed in
these notes to the financial statements for those interim periods are also
unaudited. The results of operations for the three and nine month periods
ended September 30, 1998 are not necessarily indicative of the results expected
for the full calendar year. Because all of the disclosures required by
generally accepted accounting principles are not included, these interim
statements should be read in conjunction with the financial statements and
notes thereto contained in the Company's 1997 Annual Report.
ALLOCATIONS AND USE OF ESTIMATES: During the three-month and nine-month
periods ended September 30, 1997 Brass Eagle shared operational and
administrative facilities with Daisy Manufacturing Company (`Daisy'). As a
result, certain manufacturing, selling, and administrative expenses had to be
allocated from Daisy to Brass Eagle. Allocations were based on various
activities including quantity of inventory produced, quantity of inventory
received, number of shipments, headcount, and estimates of time spent on Brass
Eagle's paintball related operations. Management believes that these
allocations are based on a reasonable method. Sales, returns, material cost,
and direct labor cost were not allocated because they could be specifically
identified to Brass Eagle. Since November of 1997 the Company has been
operating on a stand-alone basis and no longer shares administrative or
operating facilities with Daisy; therefore, no allocations were required for
the three and nine-month periods ended September 30, 1998.
Management must make estimates and assumptions in preparing financial
statements that affect the amounts reported therein and the disclosures
provided. These estimates, allocations, and assumptions may change in the
future and future results could differ.
-6-
<PAGE>
BRASS EAGLE INC.
Notes to Condensed Financial Statements
(All information for the three and nine month periods ended
September 30, 1998 and 1997 is unaudited)
NOTE 1 (Continued)
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash, time
deposits, and readily marketable securities with original maturities of 3
months or less.
PRO FORMA BASIC AND PRO FORMA DILUTED NET INCOME PER SHARE: The Company's
presentation of earnings per share includes a presentation of pro forma basic
earnings per share to comply with the regulations of the Securities and
Exchange Commission. Pro forma basic net income per share has been computed by
dividing net income by the weighted average number of common shares outstanding
during the period, plus the weighted average number of shares issued in the
initial public offering whose proceeds would have been used to pay the
divisional equity to Daisy, as if these shares had been outstanding during all
periods presented. Pro forma diluted net income per share has been presented
in order to compare diluted earnings per share for 1998 to 1997, considering
the additional shares, including overallotments, issued in the Initial Public
Offering in November, 1997. Accordingly, both diluted and pro forma diluted
net income per share for 1998 are identical. Pro forma diluted net income per
share for 1997 has been computed by dividing net income by the diluted shares
plus the number of shares issued in the Company's Initial Public Offering,
including overallotments, as if these shares were outstanding during the three
and nine month periods ended September 30, 1997. In addition, the computation
of earnings per share included in the September 30, 1997 Form 10-Q have been
updated to comply with the Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 128 `Earnings Per Share' and the Securities
and Exchange Commission Staff Accounting Bulletin (SAB 98).
NOTE 2 - SECURITIES AVAILABLE-FOR-SALE
Securities available-for-sale consisted of interest bearing securities, which
were held to maturity and therefore no realized gain or loss was recorded
during the three and nine months ended September 30, 1998. During the three
and nine months ended September 30, 1998 unrealized losses were $2 and $0 and
there were no unrealized gains. Comprehensive income (net income plus
unrealized gains and losses on securities available-for-sale) was $1,288 and
$5,139 for the three and nine months ended September 30, 1998.
-7-
<PAGE>
BRASS EAGLE INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
NOTE 3 - INVENTORIES
Inventories consist of the following components (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ -----------
<S> <C> <C>
Finished goods $ 7,660 $ 2,320
Raw materials 4,285 1,264
--------- --------
$ 11,945 $ 3,584
========= ========
</TABLE>
NOTE 4 - NONCASH TRANSACTIONS
The company acquired the rights to the hyberball concept and certain other
assets in exchange for trade receivables of $371,000. The rights to the
hyperball concept are being amortized over 60 months.
NOTE 5 - EMPLOYEE BENEFIT PLAN
The Company participated in a defined benefit pension plan, which covered the
Company's eligible employees and New Daisy's Eligible employees. At the end of
1997, the Company intended to establish a defined benefit plan of its own by
transferring the liabilities for its employees into a separate defined benefit
plan to be maintained exclusively for Brass Eagle employees. The liability was
to be funded by the transfer of a like amount of assets. In 1998, the plan was
amended to increase the minimum lump sum payment to vested participants.
Because most of the Company's employees participating in this plan will receive
lump sum payments, the Company has decided not to establish a separate defined
benefit pension plan at this time. Employees not receiving lump sum
distributions will continue to have a vested account balance in the Daisy
Manufacturing Company Retirement Income Plan.
-8-
<PAGE>
BRASS EAGLE INC.
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the accompanying
condensed financial statements for the three and nine month periods ended
September 30, 1998 and September 30, 1997 and the 1997 Annual Report.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this filing and elsewhere (such as in other filings by
the Company with the Securities and Exchange Commission (`SEC'), press
releases, presentations by the company or its management and oral statements)
may constitute `forward-looking statements' within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements may include, among
other things, statements regarding the Company's financial position, results of
operations, market position, product development, regulatory matters, growth
opportunities and growth rates, acquisition and divestiture opportunities, and
other similar forecasts and statements of expectation. Words such as
`expects', `anticipates', `intends', `plans', `believes', `seeks', `estimates',
`should' and variations of these words and similar expressions, are intended to
identify these forward-looking statements. Such statements are not statements
of historical fact. Rather, they are based on the Company's estimates,
assumptions, projections and current expectations, and are not guarantees of
future performance. The Company disclaims any obligation to update or revise
any forward-looking statement based upon the occurrence of future events, the
receipt of new information, or otherwise. 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 any future results, performance or achievements
expressed or implied by such forward-looking statements. Factors that could
cause the Company's actual results to differ materially from the results,
projections and expectations expressed in the forward-looking statements
include, among others, the following possibilities: (i) intensifying
competition, including specifically the intensification of price competition,
the entry of new competitors and the introduction of new products by new and
existing competitors; (ii) failure to obtain new customers or retain existing
customers; (iii) inability to carry out marketing and sales plans; (iv) loss of
key executives; (v) general economic and business conditions which are less
favorable than expected; and (vi) unanticipated changes in industry trends.
-9-
<PAGE>
BRASS EAGLE INC.
YEAR 2000
As is true for most companies the Year 2000 computer issue could create a risk
for Brass Eagle Inc. If systems do not correctly recognize date information
when the year changes to 2000, there could be an adverse impact on the
Company's operations. The risk for Brass Eagle exists in the following areas:
systems used by the company to run its business, systems used by the Company's
suppliers and systems used by the Company's customers and service providers.
Brass Eagle is in the process of conducting a comprehensive inventory and
evaluation of its systems. The Company's information technology ('IT')
infrastructure consists of a business enterprise resource planning ('ERP')
system, departmental workstations, application servers, and a network system
that links all systems at each location. It is important to the Company's
operations that these computer systems are compliant. The Company also has
several non-IT systems that use dates electronically that are being reviewed
for compliance. These include security systems, fire detection systems, gas
detection systems, voice mail and phone systems, electrical systems,
workstations, radio frequency equipment and telecommunication.
At present all application and departmental servers have been tested; 75% of
networking infrastructure has been certified and the ERP Unix server has been
upgraded.
During 1997, the Company upgraded its primary business enterprise system to a
version that is Year 2000 compliant. The Company's goal is to have all
internal systems Year 2000 compliant by December 31, 1998. The Company plans
to complete comprehensive, full system testing in the fourth quarter of 1998.
The underlying database and raw data have been either modified to support four
digit years or the application has been modified and tested to support correct
date calculations using two digit years.
Brass Eagle is also in the process of contacting its critical suppliers to
determine that the suppliers' operations and the products and services they
provide are Year 2000 compliant. Where practicable, Brass Eagle will attempt
to mitigate its risks with respect to the failure of suppliers to be Year 2000
ready. In the event that suppliers are not Year 2000 compliant, the Company
may seek alternative sources of suppliers.
Brass Eagle has sent an initial questionnaire to several customers. We will be
testing invoicing of the critical customers and evaluate them further. All
customers with whom we trade production EDI documents are scheduled for systems
testing this year.
Brass Eagle is in the process of testing or certifying that its service
providers are Year 2000 compliant.
Since Brass Eagle is a relatively new company, most of its computer equipment
and software is Year 2000 certified. The estimated cost for the Company to
become Year 2000 compliant is approximately $35,000.
-10-
<PAGE>
BRASS EAGLE INC.
YEAR 2000 (Continued)
The Company plans to perform the required modifications described in the
previous paragraphs in order to become compliant. The Company's contingency
plan for compliance is to implement the actions indicated in the previous
paragraphs. Management deems the implementation of these actions to be
sufficient for Year 2000 remediation. Contingency plans for the failure to
implement compliance procedures have not been completed because it is the
Company's intent to complete all required modifications and to test such
modifications thoroughly prior to December 31, 1998.
RESULTS OF OPERATIONS
The following table sets forth operations data as a percentage of sales for the
periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 65.6% 67.1% 64.3% 67.1%
Gross profit 34.4% 32.9% 35.7% 32.9%
Operating expenses 19.4% 16.8% 19.2% 16.7%
Operating income 15.0% 16.1% 16.5% 16.2%
Net income 9.5% 9.6% 10.6% 9.5%
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
SALES. Sales increased by 36.4% to $13.5 million for the three months ended
September 30, 1998 compared to $9.9 million for the three months ended
September 30, 1997. The increase in sales was due to the increased popularity
of paintball play, increased domestic distribution to mass merchandisers and
increased unit volume for all products.
Domestic sales increased by 36.8% to $13.0 million (or 95.8% of sales) for the
three months ended September 30, 1998 from $9.5 million (or 96.2% of sales) for
the three months ended September 30, 1997. International sales increased by
50.9% to $563,000 (or 4.2% of sales) for the three months ended September 30,
1998 from $373,000 (or 3.8% of sales) for the three months ended September 30,
1997.
-11-
<PAGE>
BRASS EAGLE INC.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997 (Continued)
GROSS PROFIT. Gross profit as a percentage of net sales increased to 34.4% for
the three months ended September 30, 1998, as compared to 32.9% for the three
months ended September 30, 1997. This increase was primarily due to a change
in the product mix and increased absorption of fixed overhead, which resulted
in higher gross profit percentage. In addition, cost of sales for the three
months ended September 30, 1998 included $376,000 relating to the start-up
costs associated with the Company's new paintball manufacturing facility that
commenced pilot production in the third quarter.
OPERATING EXPENSES. Operating expenses increased by 52.9% to $2.6 million for
the three months ended September 30, 1998 compared to $1.7 million for the
three months ended September 30, 1997. This represented an increase from 16.8%
of sales to 19.4% of sales as a result of additional compensation and benefits
related to increased staffing and additional distribution, advertising and
promotional expenses.
OPERATING INCOME. Operating income increased by 25.0% to $2.0 million for the
three months ended September 30, 1998 as compared to $1.6 million for the three
months ended September 30, 1997. The increase was primarily due to higher unit
sales volume and improved gross profit percentages.
Interest. The Company recorded interest income of $69,000 for the three months
ended September 30, 1998 compared to interest expense of $58,000 for the three
months ended September 30, 1997. The change was primarily due to investment
income earned on cash and cash equivalents versus interest expense on
outstanding borrowings in 1997.
INCOME TAX RATE. The Company's effective federal and state income tax rate was
38.5% for the three months ended September 30, 1998 and 38.3% for the three
months ended September 30, 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
SALES. Sales increased by 123.4% to $48.7 million for the first nine months of
1998 compared to $21.8 million the first nine months of 1997. The increase in
sales was primarily due to higher unit volume of all products due to increased
popularity of paintball play and increased domestic distribution to mass
merchandisers.
Domestic sales increased by 136.8% to $47.6 million (or 97.7% of sales) for the
nine months ended September 30, 1998 from $20.1 million (or 92.2% of sales) for
the nine months ended September 30, 1997. International sales decreased by
35.3% to $1.1 million (or 2.3% of sales) for the nine months ended September
30, 1998 from $1.7 million (or 7.8% of sales) for the nine months ended
September 30, 1997.
-12-
<PAGE>
BRASS EAGLE INC.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997 (Continued)
GROSS PROFIT. Gross profit as a percentage of net sales increased to 35.7% for
the first nine months of 1998 compared to 32.9% for the first nine months of
1997 primarily due to product mix changes and increased absorption of fixed
overhead which resulted in a higher gross profit percentage. In addition, cost
of sales for the nine months ended September 30, 1998 included $667,000 in
start-up costs associated with the Company's new paintball manufacturing
facility that commenced pilot production in the third quarter.
OPERATING EXPENSES. Operating expenses increased by 158.3% to $9.3 million for
the first nine months of 1998 compared to $3.6 million for the first nine
months of 1997. This increase from 16.7% of sales to 19.2% of sales was a
result of an additional allowance for doubtful accounts corresponding to the
increases in sales and receivables, additional outside services, additional
compensation related to increased staffing and related benefits and additional
distribution, advertising and promotional expenses.
OPERATING INCOME. Operating income increased by 128.6% to $8.0 million for the
first nine months of 1998 compared to $3.5 million for the first nine months of
1997. The increase was primarily due to higher unit sales volume and improved
gross profit percentages.
INTEREST. The Company recorded interest income of $300,000 for the first nine
months of 1998 compared to interest expense of $181,000 for the first nine
months of 1997. The changes were primarily due to investment income from the
net proceeds of the Initial Public Offering and interest earned on cash and
cash equivalents versus interest expenses on outstanding borrowings in 1997.
INCOME TAX RATE. The Company's effective federal and state income tax rate was
38.4% for the nine months ended September 30, 1998 compared to 38.3% for the
nine months ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the nine months ended September 30,
1998 was $290,000, which consisted primarily of net income of $5.1 million,
depreciation and amortization expense of $1.1 million, less net increases in
accounts receivable of $2.5 million, an increase in accounts payable and
accrued expenses and prepaid expenses of $2.9 million, an increase in inventory
of $8.4 million and a decrease in `Due from Affiliate' of $2.0 million, and a
decrease in deferred taxes of $584,000.
The $11.9 million inventory balance includes finished product assembled for a
significant order scheduled to ship in October, 1998. Inventories are expected
to be significantly lower by year-end.
-13-
<PAGE>
BRASS EAGLE INC.
LIQUIDITY AND CAPITAL RESOURCES (Continued)
Net cash provided by investing activities was $5.2 million for the nine months
ended September 30, 1998. This resulted from net proceeds on sales of
securities available-for-sale of $12.7 million, reduced by a distribution of
$2.7 million to Daisy and the purchase of property and equipment of $4.8
million.
The proceeds from the sale of available-for-sale securities were used to fund
the increase in inventory, receivables and the new paintball facility. In
addition, excess funds have been reinvested in shorter-term cash equivalents to
provide added liquidity.
The majority of the property and equipment purchases related to the addition of
a paintball manufacturing facility that commenced pilot production in the third
quarter. Full production is expected to begin early in the fourth quarter.
Equipment and leasehold improvements, including installation of equipment, is
estimated to cost $4.4 million. The Company has expended $3.6 million for the
new facility through September 30, 1998. Total start-up charges of $667,000
related to the new paintball facility were included in cost of sales for the
nine months ended September 30, 1998.
Net cash used in financing activities was $409,000 in the nine months ended
September 30, 1998 which consisted of a $306,000 reduction of long-term debt
and the proceeds from the issuance of shares upon exercise of stock options
less shares forfeited for taxes of $103,000.
As of September 30, 1998 the Company had a non-interest bearing term debt with
a remaining face value of $390,000 payable to the prior owners of BEI, secured
by specific equipment. The note had an imputed interest rate of 8.4% and was
paid in full on October 3, 1998.
At September 30, 1998 the Company had working capital of $23.6 million. The
Company paid the intercompany borrowings from Daisy with the proceeds from the
Initial Public Offering and has in place a $10 million line of credit with Bank
of America.
The Company believes that funds generated from operations, together with
borrowings under the credit facility, will be adequate to meet its anticipated
cash requirements for at least the next 18 months. The Company may, when and
if the opportunity arises, acquire other businesses involved in activities or
having product lines that are compatible with those of the Company or pursue
the vertical integration of production capabilities for one or more of the
Company's products which are currently purchased from third parties. The
capital expenditures that would be associated with any such activities that may
occur in the future would be funded with available cash and cash equivalents,
borrowings from the credit facility, working capital, or a combination of such
sources.
-14-
<PAGE>
BRASS EAGLE INC.
PART II: OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(d) Use of proceeds information:
In previous filings the Company reported $25,703,000 in net proceeds from the
Initial Public Offering, Registration No. 333-36179, which became effective
11/25/97.
The following table shows how the Company used the proceeds from the Initial
Public Offering:
<TABLE>
<CAPTION>
Amount
------
<S> <C>
Funding distribution of divisional equity to
Daisy $ 11,578,559
Construction of plant, building and facilities: 0
Purchase and installation of machinery and
equipment: 4,757,000
Purchases of real estate: 0
Acquisition of other businesses: 0
Repayment of indebtedness: 2,204,000
Working capital: 7,163,441
Temporary investments: 0
------------
$ 25,703,000
============
</TABLE>
-15-
<PAGE>
BRASS EAGLE INC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are filed with this Report or are incorporated
herein by reference to previously filed material:
(a) Exhibits
Exhibit
Number Description of Document
- ------ -----------------------
10(i) Lease agreement between Leroy Locke & Bonnie Locke and Brass Eagle
dated August 1, 1998.
11 Statement of Computation of Earnings Per Share
27 Financial Data Schedule
- -------------------------------------------------------------------------------
(b) Reports on Form 8-K:
None
-16-
<PAGE>
BRASS EAGLE INC.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Brass Eagle Inc.
By: /s/ J. R. Brian Hanna
J. R. Brian Hanna
Vice President-Finance and Chief
Financial Officer and Treasurer
(on behalf of the Registrant and as the
Registrant's principal Financial and
Accounting Officer)
-17-
<PAGE>
BRASS EAGLE INC.
EXHIBIT INDEX
--------------
The following exhibits are filed with this Report or are incorporated
herein by reference to previously filed material:
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
10(i) Lease agreement between Leroy Locke & Bonnie Locke and Brass Eagle
dated August 1, 1998.
11 Statement of Computation of Earnings Per Share
27 Financial Data Schedule
<PAGE>
BRASS EAGLE INC. EXHIBIT 10(i)
LEASE AGREEMENT
---------------
This AGREEMENT, made, entered into and effective this 1st day of August,
1998, by and between LEROY LOCKE & BONNIE LOCKE, HIS WIFE, 12513 Wildlife Road,
Neosho, Missouri, hereinafter referred to as `LESSORS', and BRASS EAGLE INC.,
1203A North Sixth Street, Rogers, Arkansas 72756, hereinafter referred to as
`LESSEE', WITNESSETH:
WHEREAS, the said Lessors are the owners of certain real estate located
and situated in Neosho, Newton County, Missouri, more particularly described as
follows, to wit:
1) Building located at 4251 Doniphan Drive, Neosho, Newton County,
Missouri, containing 24,564 square feet, plus existing parking spaces
and ingress and egress.
2) Building #2 at the same location, containing 6, 480 square feet, and
Buildings #3, 4 and 5 and the surrounding approximately eight (8)
acres, within the fenced-in area;
WHEREAS, the said Lessee desires to lease said property,
NOW, THEREFORE, IT IS MUTUALLY AGREED TO BY AND BETWEEN THE PARTIES HERETO
AS FOLLOWS:
1. (a) All prior Leases for the same premises between the parties are
hereby terminated and replaced by this Lease Agreement.
(b) That the Lessors do hereby agree to lease, let, rent and demise
unto the said Lessee the hereinabove described property for a period
of fifty-four (54) months beginning on the 1st day of August, 1998,
and Lessee shall have three (3) consecutive options to renew for
periods of sixty (60) months each at the rental rate indicated in
Section 10 herein. Each renewal shall require sixty (60) days prior
written notice.
(c) Lessor hereby leases to Lessee and Lessee hereby leases from
Lessor, the Premises subject to the terms and conditions contained on
this Lease. Lessor agrees, so long as Lessee fully complies with all
the terms covenants and conditions of this Lease, that Lessee may
peaceably have, hold and enjoy the Premises during the Term.
2. The Lessee shall pay the Lessors six thousand seven hundred dollars
($6,700.00) per month, as and for said lease consideration, the first
month's rent being payable upon the execution of this agreement, the
receipt and sufficiency of which is hereby acknowledged.
<PAGE>
BRASS EAGLE INC.
LEASE AGREEMENT(Continued)
3. IT IS FURTHER AGREED BY AND BETWEEN THE PARTIES HERETO, that absolute
and unqualified possession of the hereinabove described premises shall be
delivered to the Lessees upon the execution of this agreement. The Lessor
agrees that they shall, upon termination of this lease, unless said lease
is renewed, peacefully surrender possession of the premises and the
Lessors shall have the right to re-enter and take possession of the
premises and the Lessee shall peacefully surrender possession thereof to
the Lessors upon written demand. All rights and interest of the Lessee
shall cease and terminate, provided nothing herein shall effect the
Lessor's right to rental for the term herein specified.
4. IT IS FURTHER AGREED BY AND BETWEEN THE PARTIES HERETO, that should
destruction or waste be permitted on the property outside of the terms of
this agreement by the Lessee or default of any other condition or covenant
contained in this agreement (including payment of rent as described in
paragraph one), unless such destruction, waste or default be cured within
fifteen (15) days of receipt of written notice setting forth the defaults
or conditions, the Lessors shall have the right to re-enter and take
possession of the premises and the Lessee shall peacefully surrender
possession thereof to the Lessors upon such written demand and all rights
and interest of the Lessee shall cease and terminate, provided that
nothing herein contained shall affect the Lessor's right to rental for the
term herein specified.
5. IT IS FURTHER AGREED BY AND BETWEEN THE PARTIES HERETO, that the
Lessee shall not assign this lease or sub-let the premises or any part
thereof, or permit any person to occupy the same without the prior written
consent of the Lessors.
6. IT IS FURTHER AGREED BY AND BETWEEN THE PARTIES HERETO, that the real
estate taxes on the premises for the above described property shall be
payable by the Lessors.
7. IT IS EXPRESSLY UNDERSTOOD AND AGREED that the Lessors shall provide
casualty insurance only on the hereinabove described premises. The Lessee
agrees to provide liability and content insurance on the above described
building, should they so desire.
8. LESSEE FURTHER COVENANTS AND AGREES TO:
(a) Make all modifications to the building for manufacture of
Paintballs to be in compliance with Federal and State
Regulations;
(b) To commit no waste or damages on said premises and to permit
none to be done;
<PAGE>
BRASS EAGLE INC.
LEASE AGREEMENT(Continued)
9. IT IS FURTHER AGREED BY AND BETWEEN THE PARTIES HERETO, that the
Lessee agrees to save and hold harmless the Lessors from any and all
liability or liabilities occasioned by the negligence or careless acts of
the Lessee.
10. IT IS FURTHER AGREED BY AND BETWEEN THE PARTIES HERETO, that if Lessee
chooses a five-year option to renew this Lease that the parties shall
review the rental at that time, and it may be adjusted up or down to
reflect the current fair market rental; but in no event shall any increase
exceed 6% over the prior term's rental. All remaining terms and
conditions of this Lease Agreement shall remain in full force and effect.
11. IT IS FURTHER AGREED BY AND BETWEEN THE PARTIES HERETO, that this
agreement is binding upon the heirs, executors, administrators, successor
and assigns of the parties hereto
12. IT IS FURTHER AGREED BY AND BETWEEN THE PARTIES HERETO, that all
erasures and interlineations herein contained are approved before signing
and become a part of this agreement.
13. Lessor agrees to make the following improvements to premises:
(a) Cement loading dock, driveways on south end of building at the
three (3) dock doors.
(b) Drywall and paint employees cafeteria area.
(c) Either pave or ensure roadway from front of building through
north side of building can withstand constant use of tanker
delivery vehicles.
(d) Seal building #2 and ceiling of any cracks and / or leakage.
14. Notwithstanding anything herein, Lessee may terminate this Lease at
any time upon 180 days prior notice, if continued occupation of the
Premises is inconsistent with Lessee's business.
15. In the event Lessors shall propose to sell all or part of the eight
(8) acre parcel on which the buildings in this Lease are situated, Lessee
shall have a right of first refusal to purchase the property from Lessor
on the same terms and conditions of Lessor's proposed sale. Any purchaser
of the premises shall take subject to this Real Estate Lease Agreement.
16. The parties agree that this Lease and the Options to Renew will
survive the death of either or both of the Lessors.
<PAGE>
BRASS EAGLE INC.
LEASE AGREEMENT(Continued)
IN WITNESS WHEREOF, the parties hereto have set their hands and seals the day
and year first above written.
/s/ Leroy Locke
LEROY LOCKE/Lessor
/s/ Bonnie Locke
BONNIE LOCKE/Lessor
BRASS EAGLE INC.
By: /s/ Steven R. DeMent, VP of Operations
Lessee
<PAGE>
BRASS EAGLE INC. Exhibit 11
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
(In thousands except share and per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
BASIC NET INCOME PER SHARE
Net income available to
Common stockholders $1,290,000 $ 951,000 $5,139,000 $2,071,000
========== ========== ========== ==========
Weighted average common
shares outstanding 7,241,223 4,608,871 7,238,173 4,608,871
========== ========== ========== ==========
Basic net income per
share $ 0.18 $ 0.21 $ 0.71 $ 0.45
========== ========== ========== ==========
Pro FORMA BASIC NET INCOME PER SHARE
Net income available to
common stockholders $1,290,000 $ 951,000 $5,139,000 $2,071,000
========== ========== ========== ==========
Weighted average common
shares outstanding 7,241,223 4,608,871 7,238,173 4,608,871
Theoretical shares issued
whose proceeds would have
been used to pay
divisional equity 0 419,279 0 419,279
---------- ---------- ---------- ----------
Pro forma basic weighted
average shares
outstanding 7,241,223 5,028,150 7,238,173 5,028,150
========== ========== ========== ==========
Pro forma basic net
income per share $ 0.18 $ 0.19 $ 0.71 $ 0.41
========== ========== ========== ==========
DILUTED NET INCOME PER SHARE
Net income available to
common stockholders $1,290,000 $ 951,000 $5,139,000 $2,071,000
========== ========== ========== ==========
Pro forma basic weighted
average common shares
outstanding 7,241,223 5,028,150 7,238,173 5,028,150
Add dilutive effect of
stock options 420,647 427,703 438,287 430,834
---------- ---------- ---------- ----------
</TABLE>
<PAGE>
BRASS EAGLE INC.
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE (Continued)
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
(In thousands except share and per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average dilutive
common shares
outstanding 7,661,870 5,455,853 7,676,460 5,458,984
========== ========== ========== ==========
Diluted net income
per share $ 0.17 $ 0.17 $ 0.67 $ 0.38
========== ========== ========== ==========
PRO FORMA DILUTED NET INCOME PER SHARE
Net income available to
Common stockholders $1,290,000 $ 951,000 $5,139,000 $2,071,000
========== ========== ========== ==========
Weighted average common
shares outstanding 7,241,223 4,608,871 7,238,173 4,608,871
Common shares sold in the
Offering, including
overallotments 0 2,616,250 0 2,616,250
Add dilutive effect of
stock options 420,647 427,703 438,287 430,834
---------- ---------- ---------- ---------
Pro forma weighted
average Dilutive common
shares outstanding 7,661,870 7,652,824 7,676,460 7,655,955
========== ========== ========== ==========
Pro forma diluted net
income per share $ 0.17 $ 0.12 $ 0.67 $ 0.27
========== ========== ========== ==========
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED SEPTEMBER 30, 1998 AND THE SEPTEMBER 30, 1997 CONDENSED
BALANCE SHEETS AND THE UNAUDITED CONDENSED STATEMENT OF OPERATIONS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30,
1997, AND THE UNAUDITED NOTES THERETO AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 4,970 8
<SECURITIES> 0 0
<RECEIVABLES> 14,642 9,922
<ALLOWANCES> 502 52
<INVENTORY> 11,945 4,157
<CURRENT-ASSETS> 32,946 15,309
<PP&E> 6,873 1,989
<DEPRECIATION> 1,730 638
<TOTAL-ASSETS> 40,700 19,462
<CURRENT-LIABILITIES> 9,335 14,263
<BONDS> 0 0
0 0
0 0
<COMMON> 72 0
<OTHER-SE> 31,138 3,499
<TOTAL-LIABILITY-AND-EQUITY> 40,700 19,462
<SALES> 48,682 21,814
<TOTAL-REVENUES> 49,015 21,814
<CGS> 31,319 14,639
<TOTAL-COSTS> 40,645 18,277
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 384 0
<INTEREST-EXPENSE> 33 181
<INCOME-PRETAX> 8,337 3,356
<INCOME-TAX> 3,198 1,285
<INCOME-CONTINUING> 5,139 2,071
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 5,139 2,071
<EPS-PRIMARY> 0.71 0.41
<EPS-DILUTED> 0.67 0.38
</TABLE>
