<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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 of (I.R.S. Employer
incorporation or organization) Identification Number)
1203A North Sixth Street, Rogers, Arkansas 72756
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(501) 621-4390
Securities registered pursuant to Section 12(b) of the Act
NONE
Securities registered pursuant to Section 12(g) of the Act
Common Stock
$.01 par value per share
(Title of Class)
<PAGE>
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 period 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference to Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting and non-voting common equity held by
nonaffiliates of the registrant was $46,732,219 at March 2, 1998.
7,225,121 shares of the registrant's common stock were outstanding as of March
2, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended December
31, 1997 (the "1997 Annual Report") are incorporated by reference into Parts I
and II of this report.
Portions of the Proxy Statement for the May 20, 1998, Annual Meeting of
Shareholders of the Company (the "1998 Proxy Statement") are incorporated by
reference into Part III of this report.
-2-
<PAGE>
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" and
"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.
PART I
ITEM 1: BUSINESS
GENERAL
Brass Eagle, including its predecessor organizations, has manufactured air
powered guns for over 100 years. The Company, operating as Daisy Manufacturing
Company, Inc., began manufacturing paintball guns as a device to mark trees and
cattle for commercial purposes in the early 1970's. Daisy manufactured
paintball guns under contract for the Nelson Paint Company and remained active
in this market until 1993. In 1993, Daisy began manufacturing, marketing and
distributing paintball products for sports and recreational use under a royalty
arrangement with Brass Eagle, Inc., a Mississauga, Ontario, Canada company,
("BEI"). In October 1995, Daisy purchased certain assets, patents, and
trademarks, including the Brass Eagle name, from BEI (the "BEI Acquisition"),
and from 1993 to September 1997 sold paintball products through its Brass Eagle
-3-
<PAGE>
division. In September 1997, Daisy changed its name to Brass Eagle Inc.
Pursuant to a corporate reorganization effected November 24, 1997, the Company
transferred all of its non-paintball related assets, operations, and liabilities
to a newly created subsidiary, Daisy Manufacturing Company, all the stock of
which was spun-off to existing Company shareholders.
The Company believes that it is a worldwide leader in the design,
manufacture, marketing, and distribution of paintball products, including
paintball guns, paintballs, and accessories. Based on market data compiled in
part by the Company and management's industry knowledge, the Company believes it
is the only manufacturer with a full line of products that address step-by-step
price points for beginner, recreational, and competition level paintball
participants, and that it is the only manufacturer to offer paintball products
to consumers through easily accessible channels such as mass merchandisers and
major sporting goods retailers. As a result of these initiatives, Brass Eagle
provides a large consumer base with high quality paintball products and
accessories that sell for substantially less than those of its competitors.
Based on this market analysis and industry knowledge, the Company believes that
these advances have significantly broadened the paintball industry's consumer
base, increased the overall number of paintball participants, and heightened the
general awareness of and excitement for the sport.
Approximately 80% of the Company's sales are to national and regional mass
merchandisers, such as Kmart, Wal*Mart, and Meijer, and major sporting goods
retailers, such as The Sports Authority, Dick's Sporting Goods, and Jumbo
Sports. Wal*Mart and Kmart each accounted for over 10% of the Company's sales
in 1997. The Company's products also are sold through sporting goods
distributors, specialty distributors of paintball products, and paintball
specialty shops.
While more sales of the Company's paintball products occur in the spring
and fall, the Company does not believe that seasonality has had a material
effect on the Company's operations to date.
The Company believes that paintball, as an extreme sport, is positioned to
experience substantial growth as the sport becomes available to a broader
consumer group. Based on published industry data compiled in part by the
Company and management's knowledge of the industry, the Company believes that
total paintball expenditures, including paintball guns, paintballs, accessories,
and playing field fees, were approximately $250.0 million for 1997 and projects
these expenditures to increase substantially in the near future. Historically,
paintball was played primarily by avid enthusiasts, generally with relatively
expensive, high-end paintball guns and accessories. Enthusiasts typically
obtained their equipment from a highly fragmented base of catalogue distributors
and specialty retailers. Recently, an increasingly broader group of players,
including corporate groups, youth leagues, church organizations, and others,
have begun participating in paintball. These beginner and recreational players
often purchase paintball guns and accessories at mass merchandise stores or
sporting goods stores and play paintball several times per year. Based on market
data compiled in part by the Company and management's knowledge of the industry,
the Company believes that its strategy of providing a full range of products at
various price and performance points
-4-
<PAGE>
has contributed significantly to the broadening of the industry's consumer base,
the increase in the overall number of paintball participants, and the growing
acceptance of the sport.
A key component in the continued growth of paintball is the availability of
playing facilities. Historically, these facilities have consisted of commercial
and private fields, typically located outside urban centers and in rural areas
and used primarily by paintball enthusiasts. In order to further develop the
market for paintball in more densely populated areas, the Company intends to
promote a modular paintball field concept that can be played in a relatively
small, self-contained area that can easily be adapted or designed to fit into
existing family amusement centers such as go-cart tracks, batting cages and
miniature golf courses or as a stand-alone facility. The Company recently began
marketing a version of this concept under the HyperBall/TM/ name. In addition,
the Company believes that a significant number of field operators are upgrading
their facilities to cater to the growing number of beginner and recreational
players. Many operators are constructing "scenario fields" where mock
battlefields, forts, and other props are utilized to provide a fun, exciting,
fantasy-like experience.
GEOGRAPHIC SEGMENTS
Note 13 (Geographic Segments) of notes to the financial statements in the
Company's Annual Report to shareholders is incorporated by reference.
PRODUCTS
The Company offers a full line of paintball products, including paintball
guns, paintballs, and accessories at various price points.
Paintball Guns. The Company designs and manufactures a full product line
of paintball guns with a variety of performance characteristics. There are
three primary classifications of paintball guns: 12 gram, pump action, and
semi-automatic. The 12 gram paintball gun, such as the Company's Talon model,
is a direct descendent of the original "splotch marker" used to mark cattle and
trees before the advent of the sport of paintball. These paintball guns use 12
gram CO\\2\\ jets, are actuated using a pump action, and usually have a small
paintball capacity. Pump action paintball guns, such as the Company's
Tigershark, differ from a 12 gram paintball gun in that they use a refillable
cylinder as a power source and a hopper to feed multiple paintballs into the
chamber. While a pump action gun needs to be cocked before each shot, a semi-
automatic paintball gun needs to be cocked only once before firing the first
shot. Thereafter, it fires automatically after each trigger pull. Depending
upon the skill and equipment of the paintball participant, some semi-automatic
paintball guns can be fired in excess of 14 times per second. Most organized
paintball tournaments are played exclusively with semi-automatic paintball guns.
The Company currently offers four semi-automatic paintball pistols and guns:
Eagle, Stingray, Raptor, and Rainmaker/TM/.
-5-
<PAGE>
Paintballs. Paintballs are made of a gelatinous material and the paint is
non-toxic, biodegradable, and washable. Paintballs are manufactured using an
encapsulation process requiring special equipment and certain technical
knowledge. Brass Eagle sells its paintballs in multiple colors in packages of
200, 500, and 2,500. The Company purchases all of its paintball requirements
from Goldcaps, Inc. ("Goldcaps"), a subsidiary of IVAX Corp. of Miami, Florida
("IVAX"), through an exclusive worldwide distribution arrangement entered into
July 1995. Under this agreement, the Company purchases paintballs at a fixed
price per unit, which is subject to change upon thirty days notice from
Goldcaps. This agreement extends through August 1999, but is terminable prior
to that time upon one year's notice and contains certain provisions which
prohibit the Company from selling any competing products during the term of the
agreement.
The Company is aware of only four manufacturers of the gelatin encapsulated
paintballs necessary for paintball play. The Company believes that the cost of
equipment and the knowledge required for the encapsulation process have
historically been significant barriers to the entry of additional paintball
suppliers. Accordingly, there can be no assurance that additional paintball
suppliers will exist in the future. Despite the contractual arrangements
discussed above, there can be no assurance that these suppliers will continue to
be able to supply sufficient quantities of their products in order to meet the
Company's current needs or to support any growth in sales by the Company. The
Company's success will depend, in part, on its ability to maintain relationships
with its current paintball suppliers and on the ability of these and the
Company's other suppliers to satisfy its product requirements. Failure of a key
supplier to meet the Company's product needs on a timely basis or loss of a key
supplier could have a material adverse effect on the Company and its prospects.
Accessory Products. Brass Eagle markets a broad product line of paintball
accessories complementary to its paintball guns and paintballs. These accessory
products include facemasks, paintball hoppers, cleaning squeegees, and
refillable CO\\2\\ tanks. Facemasks, a requirement for safe paintball play, are
a primary component of the Company's accessory product line. The Company's
facemasks are designed to provide full facial and ear protection.
The Company has entered into a strategic alliance with a producer of
facemasks, Leader Industries ("Leader") of Montreal, Quebec, Canada, pursuant to
which the Company has agreed to serve as such producer's exclusive worldwide
distributor of such products (except in Canada, where such producer also sells
its products). This agreement extends through August 31, 1999, but is
terminable prior to that time on six months' notice, and also contains certain
provisions which prohibit the Company from selling any competing products within
its distribution territory during the term of the agreement. Despite this
contractual arrangement, there can be no assurance that this supplier will
continue to be able to supply sufficient quantities of its products in order to
meet the Company's current needs or to support any growth in sales by the
Company. The Company's success will depend, in part, on its ability to maintain
relationships with its current suppliers and on the ability of these suppliers
to satisfy its product requirements. Failure of a key supplier to meet the
Company's product needs on a timely basis or loss of a key supplier could have a
material adverse effect on the Company and its prospects.
-6-
<PAGE>
SALES AND DISTRIBUTION
Brass Eagle's sales and distribution strategy is unique in the paintball
industry. Unlike its competitors, Brass Eagle makes its products readily
available to mainstream consumers through mass merchandisers, major sporting
goods retailers, and specialty retailers.
To facilitate its sales and distribution strategy, the Company maintains a
sales and marketing staff, including senior management and in-house sales and
marketing personnel, and retains nine independent manufacturers sales
representative organizations to service the United States market. The sales
representatives generally offer various lines of sporting goods and have
established relationships with retailers in the Company's targeted distribution
channels. Sales representatives operate under standard contracts in defined
geographic territories and are contractually prohibited from selling
competitors' paintball products.
The Company's products are distributed internationally by a UK-based
supplier of paintball guns and accessories primarily to European specialty
retailers. Additionally, the Company sells its products directly to other
organizations, such as the Army Air Force Exchange Service.
GROWTH STRATEGIES
The Company has developed the following growth strategies to capitalize on
its strong brand name, successful products, and operating capabilities:
. EXPAND PENETRATION OF NEW AND EXISTING MARKETS. Brass Eagle's sales
and marketing programs are aimed at increasing its presence in its
existing markets and expanding into new markets. The Company believes
significant opportunities exist for increased market penetration to
mass merchandisers. In addition, the Company expects to increase sales
to wholesale distributors, which supply Brass Eagle products to
specialty retailers and international markets. The Company also has a
direct sales program to reach consumers with unique, branded
accessories and apparel, and intends to pursue aggressively new
markets, such as family amusement centers and parks, using concepts
such as HyperBall and shooting booths.
. INCREASE PARTICIPATION IN THE SPORT OF PAINTBALL. Based on market data
compiled in part by the Company and management's knowledge of the
industry, the Company believes that its increased marketing efforts
and heightened media exposure are helping to promote and grow the
sport of paintball. Through high visibility promotion campaigns, such
as the Company's "Ballin' on the Beach at Spring Break '97" in Panama
City Beach, Florida, professional paintball tournament coverage on
ESPN, MTV's Road Rules, and other televised programs, paintball is
being introduced to a broader group of potential participants. The
Company is involved in numerous paintball events and promotions and
currently sponsors the National Professional Paintball League ("NPPL")
-7-
<PAGE>
and two professional paintball teams. In addition, the Company has
been featured and advertises in paintball-related publications. The
Company currently is marketing a modular field concept under the
HyperBall/TM/ name in a variety of urban areas through an exclusive
North and South American licensing agreement with WDP Europe, Limited,
the Company's European distributor. High speed modular games such as
HyperBall/TM/ provide the beginner, recreational, and competition
level participant with convenient access to playing fields and the
opportunity to participate in an exciting new paintball activity. The
modular field concept has been widely accepted in the competition
segment with the introduction of HyperBall/TM/ in 1996 at the World
Paintball Championships in Orlando, Florida, and the Company believes
that it will continue to be an important part of bringing the sport to
people of all skill levels. The Company has licensed modular fields
operated under the HyperBall/TM/ name in Newberg, New York, Mantua,
New Jersey, and Lansing, Illinois, and anticipates that it will
license several additional locations over the next 12 months.
. INCREASE INTERNATIONAL SALES OF PAINTBALL PRODUCTS. The Company
believes that international markets for paintball products and
accessories present significant opportunities for growth.
. INCREASE PRODUCT SALES THROUGH STEP-BY-STEP PRICE SEGMENTATION. Brass
Eagle offers four paintball guns to consumers at price points from $35
for beginner products to $110 for recreational products and in 1997
introduced the Raptor and the Rainmaker/TM/, which will satisfy the
demands of competition-level paintball participants. The Company
believes that by offering products spanning a wide range of price
points it is able to meet the needs of new paintball consumers as well
as recreation and competition players as they move to more
sophisticated products. The Company intends to continue to focus on
research and development to ensure that Brass Eagle is able to offer
high quality paintball products at step-by-step price points.
. EVALUATE STRATEGIC ACQUISITIONS. 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.
. WIDELY RECOGNIZED BRAND NAME AND DISTINCTIVE PRODUCTS. The Company
promotes its brand name and image through focused marketing programs,
including sponsorship of professional paintball teams and creative
advertising in a variety of U.S. and international paintball
publications. The Company's brand name and products also receive
further promotion through frequent editorial references in these
paintball publications.
MANUFACTURING; STRATEGIC ALLIANCES; BACKLOG
The Company designs all of its paintball guns and, in cooperation with
Leader and certain of its other key suppliers, facemasks and other accessory
items. The Company designs all tooling and dies necessary for the production of
paintball guns, and has non-exclusive contracts with a
-8-
<PAGE>
number of suppliers to provide all necessary components using the Company's
tooling and dies.
The Company works closely with a variety of vendors to meet its production
needs, including machine shops, die casters, and injection molders. Although
the Company has established relationships with its principal suppliers and
manufacturing sources, it does not have long-term contracts with any vendors
other than Goldcaps and Leader, nor does it maintain multiple simultaneous
relationships with vendors for parts, tooling, supplies, or services critical to
its manufacturing processes. The Company believes that alternative vendors are
available if necessary and consequently does not believe that the loss of any of
these vendors would have a material adverse effect on the Company and its
prospects. The Company's contractual relationships with its principal
suppliers and manufacturing sources, other than Goldcaps and Leader, are
pursuant to the Company's standard form purchase agreements. The Company
continually reviews its vendor relationships with regard to cost, delivery, and
quality.
COMPETITION
The Company believes that paintball competes in the extreme sports segment
of the sports and recreation industry, which is highly competitive. This
industry includes mountain biking, snowboarding, alpine and cross-country snow
skiing, water skiing, in-line skating, and skateboarding. The Company believes
that it competes primarily on the basis of price and product performance. There
can be no assurance, however, that any number of new competitors, some of which
may have significantly greater financial and organizational resources than the
Company, will not emerge in the future as the market for paintball products
develops further, or that the present competitors of the Company will not be
able to compete more successfully in the future. In order for the Company to
maintain or grow its market share and profitability, it must continue to develop
the market for paintball while competing successfully with others in the extreme
sports segment of the sports and recreation industries, as well as with other
current and potential paintball product manufacturers.
INTELLECTUAL PROPERTY
Due to considerations relating to, among other things, cost, delay, or
adverse publicity, there can be no assurance that the Company will elect to
enforce its intellectual property rights. The Company has not been and is not
currently a party to any material intellectual property litigation.
The Company currently holds patents in the United States and Canada on most
of its paintball guns and has a patent pending in the United States on the new
Rainmaker/TM/ paintball gun. There can be no assurance that current or future
patent protection will prevent competitors from offering competing products,
that any issued patents will be upheld, or that patent protection will be
granted in any or all of the countries in which applications are currently
pending or granted on the breadth of the description of the invention. The
Company also has trademark registrations for its name and the name of its
products in the United States and both registrations and applications in Canada.
-9-
<PAGE>
Although the Company believes that patents are useful in maintaining the
Company's competitive position, it considers other factors, such as the
Company's brand name, ability to design innovative products, technical and
marketing expertise, and customer service to be its primary competitive
advantages.
The Company's competitors have also obtained and may continue to obtain
patents on certain features of their products, which may prevent or discourage
the Company from offering such features on its products, which, in turn, could
result in a competitive disadvantage to the Company.
ENVIRONMENTAL MATTERS
The Company is subject to Federal, state, and local laws, regulations, and
ordinances that (i) govern activities or operations that may have adverse
environmental effects (such as emissions to air, discharges to water, and the
generation, handling, storage, transportation, treatment, and disposal of solid
and hazardous wastes) or (ii) impose liability for cleaning up or remediating
contaminated property (or the costs therefor), including damages from spills,
disposals, or other releases of hazardous substances or wastes in certain
circumstances without regard to fault. The Company's manufacturing operations
routinely involve the handling of small amounts of chemicals and wastes, some of
which are or may be regulated as hazardous substances. The Company has not
incurred, and does not expect to incur, any significant expenditures or
liabilities for environmental matters. As a result, the Company believes that
its environmental obligations will not have a material adverse effect on its
operations or financial position.
GOVERNMENT REGULATION
Paintball products are within the jurisdiction of the United States
Consumer Products Safety Commission (the "CPSC") and other Federal, state, and
foreign regulatory bodies. Under CPSC regulations, a manufacturer of consumer
goods is obligated to notify the CPSC if, among other things, the manufacturer
becomes aware that one of its products has a defect that could create a
substantial risk of injury. If the manufacturer has not already undertaken to
do so, the CPSC may require a manufacturer to recall a product, which may
involve product repair, replacement, or refund. The Company is unaware of any
activity by the CPSC in the area of paintball products regarding the Company or
any competitor of the Company.
The Company understands that certain local and foreign jurisdictions have
legislation that prohibits retailers from selling certain product categories
that are or may be sufficiently broad to include paintball guns. Although the
Company is not aware of any state or Federal initiatives to enact comparable
legislation, there can be no assurance that such legislation will not be enacted
in the future.
The American Society of Testing Materials ("ASTM"), a non-governmental
self-regulating association, has been active in developing voluntary standards
regarding paintball fields, paintball
-10-
<PAGE>
face protection, and paintball guns. Company representatives are active on the
relevant ASTM subcommittees and in developing the relevant safety standards. The
Company does not believe that any current or pending ASTM standards will have a
material adverse effect on the Company's cost of doing business.
Adverse publicity relating to the sport of paintball, or publicity
associated with actions by the CPSC or others expressing concern about the
safety or function of the Company's products or competitors products (whether or
not such publicity is associated with a claim against the Company or results in
any action by the Company or the CPSC) could have a material adverse effect on
the Company's reputation, brand image, or markets, any of which could have a
material adverse effect on the Company or its prospects.
EMPLOYEES
As of December 31, 1997, the Company employed approximately 59 full-time
employees. In addition, the Company utilizes additional temporary personnel in
its assembly operations to meet production demand when necessary. The Company
is not a party to any labor agreements and none of its employees is represented
by a labor union. The Company considers its relationship with its employees to
be excellent.
YEAR 2000 ISSUES
The Company is aware of the year 2000 issue and has recognized the need to
ensure that its computer operations and operating systems will not be adversely
affected by the year 2000 prior to processing information which will include
dates in the year 2000. During 1997, the Company upgraded its primary business
enterprise system to a version that is year 2000 compliant and does not
anticipate any significant cost to be incurred related to year 2000 compliance
issues. However, there can be no assurance that the systems of other companies,
including customers and suppliers on which the Company's systems interact and
transmit data will be timely converted or that any such failure to convert by
another company would not have an adverses effect on the Company's systems.
ITEM 2: PROPERTIES
The Company leases approximately 6,400 square feet of space for its sales
and administrative offices in Rogers, Arkansas, a 32,000 square foot
manufacturing facility located in Granby, Missouri, and a 40,000 square foot
warehousing facility located in Neosho, Missouri, pursuant to three separate
leases, all of which expire in December 1999. The Company, through an agreement
with the Granby Economic Development Council, holds an option to acquire the
four-acre parcel upon which the Company's manufacturing facility is located.
There would be no cost to the Company for this acquisition provided the Company
employs 25 people at the time the option is exercised.
-11-
<PAGE>
ITEM 3: LEGAL PROCEEDINGS
Due to the risks associated with the misuse of paintball products, the
Company anticipates that it will be a defendant in product liability lawsuits
from time to time. At this time, there are no material product liability
lawsuits pending against the Company. To date, all claims and lawsuits against
the Company either have been, or are expected to be, resolved without any
material or adverse effect on the Company and its prospects.
In addition, the Company, Daisy and certain other entities and individuals,
including certain of the Company's distributors, were named as defendants in an
action filed by Powerball, Inc., d/b/a TASO ("TASO") on November 12, 1997. The
plaintiff filed an amended complaint on December 18, 1997, reducing the amount
of compensatory damages requested and eliminating its request for punitive
damages. TASO, which is one of the Company's distributors, has alleged that the
Company and the other defendants have engaged in unlawful secret and
discriminatory pricing practices in violation of California law. The company
believes that the claim is without merit and that it will be resolved without
any material cost or material adverse effect on the Company and its prospects.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE AND SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE COMPANY
The following table lists the names and ages of all Executive Officers of
the Registrant, and all positions and offices with the Registrant presently held
by each person named. All of the Executive Officers listed below have been in
managerial positions with the Registrant since its inception, except J.R. Brian
Hanna, who joined the Company in December, 1997. Prior to joining the Company,
Mr. Hanna served as Vice President - Finance, Chief Financial Officer of
Aermotor Pumps, Inc., a Delaware corporation.
NAME AGE POSITION
- ---- --- --------
E. Lynn Scott 44 President, Chief Executive Officer, Director
J.R. Brian Hanna 45 Vice President - Finance, Chief Financial Officer,
and Treasurer
Charles L. Prudhomme 46 Vice President - Marketing and Business Development
Steven R. DeMent 40 Vice President - Operations
Steven R. Cherry 41 Vice President - Brand Development
Daniel L. Obergfell 37 Vice President - Sales
-12-
<PAGE>
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company granted non-contingent options to purchase the following number
of shares of Common Stock at a price of $0.56 per share to the persons listed
herein on the dates specified:
Marvin Griffin 44,662 on August 20, 1997
E. Lynn Scott 22,331 on August 20, 1997
Bob DeGarmo 11,165 on February 20, 1997
11,165 on August 20, 1997
Steven R. DeMent 11,165 on August 20, 1997
John D. Flynn 11,165 on September 4, 1997
These grants were made in reliance on the exemption from registration set
forth in Section 4(2) of the Securities Act.
Subsequent to the period covered by this report, the Company effected an
initial public offering (the "Offering") of its Common Stock, par value $.01 per
share, pursuant to a Registration Statement on Form S-1 (File No. 333-36179)
that was declared effective by the Securities and Exchange Commission on
November 25, 1997. The Offering commenced on November 26, 1997. The initial
closing of the Offering occurred on December 2, 1997 with respect to 2,275,000
shares of Common Stock offered by the Company. A subsequent closing occurred on
December 8, 1997 with respect to an additional 341,250 shares of common stock
which had been reserved for over-allotments. The managing underwriters of the
Offering were McDonald and Company Securities, Inc. and Dain Bosworth
Incorporated.
The following table summarizes the number of shares of common stock and
aggregate offering price of the shares registered for the account of the Company
and the amount and aggregate offering price sold through the date of this
report:
For the Account of the Company
-----------------------------------------------------------------
Aggregate
Offering Price Aggregate
Amount of Amount Offering Price of
Registered Registered Amount Sold Amount Sold
---------- ---------- ----------- -----------
2,616,250 $28,778,750 2,616,250 $28,778,750
-13-
<PAGE>
The following table summarizes the gross proceeds to the Company, the
expenses incurred for the Company's account, and the net proceeds to the Company
in connection with the issuance and distribution of common stock by the Company
in the Offering:
Gross proceeds: $28,778,750
-----------
Underwriting discounts and commissions: 2,014,513
Finders' fees: 0
Expenses paid to or for underwriters: 100,000
Other expenses: 961,237
-----------
Total expenses: 3,075,750
-----------
Net proceeds: $25,703,000
===========
The following table summarizes the amounts of net Offering proceeds to the
Company used for the purposes listed, through the date of this report:
Amount
-----------
Funding distribution of divisional equity to Daisy: $11,578,559
Construction of plant, building and facilities: 0
Purchase and installation of machinery and equipment: 0
Purchases of real estate: 0
Acquisition of other businesses: 0
Repayment of indebtedness: 1,500,000
Working capital: 2,624,441
Temporary investments: 10,000,000
Other pertinent information required by this Item appears in the 1997
Annual Report at page 29, which information is incorporated herein by reference.
ITEM 6: SELECTED FINANCIAL DATA
The information required by this Item appears in the 1997 Annual Report at
page 1, which information is incorporated herein by reference.
-14-
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by this Item appears in the 1997 Annual Report at
pages 13-16, which information is incorporated herein by reference.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates. The
Company does not use financial instruments for trading or other speculative
purposes and is not a party to any leveraged financial instruments.
A discussion of the Company's accounting policies for financial instruments
is included in Note 1 (Summary of Significant Accounting Policies) of Notes to
Financial Statements of the Company's 1997 Annual Report to stockholders, and
such information is incorporated herein by reference.
The Company also maintains debt investments classified as available-for-
sale and carried at their quoted market value. These short-term investments
result from excess cash on hand.
ITEM 8: FINANCIAL STATEMENTS
The Financial Statements required by this Item appear in the 1997 Annual
Report at pages 17-28, which information is incorporated herein by reference.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to general instruction G(3) of the instructions to Form 10-K,
information concerning the Company's executive offices is included under the
caption "Executive Officers of the Company" at the end of Part I of this Report.
The remaining information required by this Item appears under the caption
"Election of Directors, Nominees" in the 1998 Proxy Statement and under the
caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the 1998
Proxy Statement, which information is incorporated herein by reference.
-15-
<PAGE>
ITEM 11: EXECUTIVE COMPENSATION
The information required by this Item appears under the caption
"Compensation of Directors and Executive Officers" in the 1998 Proxy Statement,
which information is incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required by this Item appears under the caption "Principal
Stockholders" in the 1998 Proxy Statement and under the caption "Equity
Ownership of Directors and Executive Officers" in the 1998 Proxy Statement,
which information is incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item appears under the heading "Certain
Transactions" in the 1998 Proxy Statement, which information is incorporated
herein by reference.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
The following documents are filed as a part of this Report:
1. Financial Statements.
--------------------
The following financial statements of the registrant included on pages 17-
28 of the 1997 Annual Report and the Report of Independent Auditors on page
16 thereof are incorporated herein by reference. Page references are to
page numbers in the Annual Report.
Report of Independent Auditors
Balance Sheets as of December 31, 1996 and 1997
Statements of Operations for the years ended December 31, 1995, 1996,
and 1997
Statements of Cash Flows for the years ended December 31, 1995,
1996,and 1997
Notes to Consolidated Financial Statements
-16-
<PAGE>
2. Financial Statement Schedules.
-----------------------------
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
3. Exhibits and Executive Compensation Plans.
-----------------------------------------
The following exhibits are filed with this Report or are incorporated
herein by reference to previously filed material.
Exhibit No.
- -----------
3(i) Restated Certificate of Incorporation (incorporated by reference
to Exhibit 3(i) to Form 10-Q for the quarter ended September 30,
1997, in 0-23385).
3(ii) By-Laws as currently in effect (incorporated by reference to
Exhibit 3(ii) to Form 10-Q for the quarter ended September 30,
1997, in 0-23385).
10(i) Assignment, Assumption and Indemnification Agreement effective
as of November 24, 1997 between Registrant and Daisy
Manufacturing Company (incorporated by reference to Exhibit
10(i) to Form 10-Q for the quarter ended September 30, 1997, in
0-23385).
10(ii) Distributor Agreement between Goldcaps, Inc. and Registrant
dated July 28, 1995 (incorporated by reference to Exhibit 10(ii)
to Registration Statement No. 333-36179).
10(iii) Distributor Agreement between Leader Industries and Registrant
dated August 31, 1995 (incorporated by reference to Exhibit
10(iii) to Registration Statement No. 333-36179).
10(iv) International Agency Agreement between WDP Ltd. and Registrant
dated June 19, 1996 (incorporated by reference to Exhibit 10(iv)
to Registration Statement No. 333-36179).
10(v) Lease Agreement between R.L. Brown Investments and Registrant
dated June 5, 1997 (incorporated by reference to Exhibit 10(v)
to Registration Statement No. 333-36179).
10(vi) Lease Agreement between Granby Apparel, Inc. and Registrant
dated December 11, 1995 (incorporated by reference to Exhibit
10(vi) to Registration Statement No. 333-36179).
-17-
<PAGE>
10(vii) Lease Agreement between Ozark Terminal, Inc. and Registrant
dated December 9, 1997
10(viii) Administrative Service Agreement between Daisy Manufacturing
Company and Registrant (incorporated by reference to Exhibit
10(viii) to Form 10-Q for the quarter ended September 30, 1997,
in 0-23385).
10(ix) Employment Agreement between E. Lynn Scott and Registrant dated
as of September 15, 1997 (incorporated by reference to Exhibit
10(ix) to Registration Statement No. 333-36179).
10(x) 1997 Stock Option Plan (incorporated by reference to Exhibit
10(iii) to Form 10-Q for the quarter ended September 30, 1997,
in 0-23385).
10(xi) Employee Stock Purchase Plan (incorporated by reference to
Exhibit 10(iv) to Form 10-Q for the quarter ended September 30,
1997, in 0-23385).
10(xii) Indemnification Agreement between Marvin W. Griffin and
Registrant dated as of November 24, 1997 (incorporated by
reference to Exhibit 10(v) to Form 10-Q for the quarter ended
September 30, 1997, in 0-23385).
10(xiii) Indemnification Agreement between E. Lynn Scott and Registrant
dated as of November 24, 1997 (incorporated by reference to
Exhibit 10(vi) to Form 10-Q for the quarter ended September 30,
1997, in 0-23385).
10(xiv) Form of Continuing Guaranty (incorporated herein by reference to
Exhibit 10(xiv) to Registration Statement No. 333-36179).
10(xv) Tax Allocation Agreement between Brass Eagle Inc. and Daisy
Manufacturing Company dated November 24, 1997 (incorporated by
reference to Exhibit 10(vii) to Form 10-Q for the quarter ended
September 30, 1997, in 0-23385).
11 Statement of Computation of Earnings Per Share.
13 Portions of the Company's Annual Report.
24 Powers of Attorney
27 Financial Data Schedule
Listed below are the executive compensation plans and arrangements currently in
effect and which are required to be filed as exhibits to this Report.
- Employment Agreement between E. Lynn Scott and Brass Eagle, Inc.
-18-
<PAGE>
- 1997 Stock Option Plan
- Employee Stock Purchase Plan
4. Reports on Form 8-K.
--------------------
None
-19-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
(Registrant)
By:
-----------------------------------------------
E. Lynn Scott
President and Chief Executive Officer
Date: _________, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
President, Chief Executive March __, 1998
- ------------------------------- Officer, and Director
E. Lynn Scott (Principal Executive Officer)
Chairman of the Board of March __, 1998
- ------------------------------- Directors
Marvin W. Griffin
Director March __, 1998
- -------------------------------
Anthony J. Dowd
Director March __, 1998
- -------------------------------
Stephen J. Schaubert
Director March __, 1998
- -------------------------------
H. Gregory Wold
Vice President - Finance, March __, 1998
- ------------------------------- Chief Financial Officer,
J.R. Brian Hanna and Treasurer
(Principal Financial and
Accounting Officer)
-20-
<PAGE>
EXHIBIT INDEX
The following exhibits are filed with this Report or are incorporated
herein by reference to previously filed material:
Number in
Exhibit Table Exhibit
- ------------- -------
3(i) Restated Certificate of Incorporation (incorporated by reference
to Exhibit 3(i) to Form 10-Q for the quarter ended September 30,
1997, in 0-23385).
3(ii) By-Laws as currently in effect (incorporated by reference to
Exhibit 3(ii) to Form 10-Q for the quarter ended September 30,
1997, in 0-23385).
10(i) Assignment, Assumption and Indemnification Agreement effective
as of November 24, 1997 between Registrant and Daisy
Manufacturing Company (incorporated by reference to Exhibit
10(i) to Form 10-Q for the quarter ended September 30, 1997, in
0-23385).
10(ii) Distributor Agreement between Goldcaps, Inc. and Registrant
dated July 28, 1995 (incorporated by reference to Exhibit 10(ii)
to Registration Statement No. 333-36179).
10(iii) Distributor Agreement between Leader Industries and Registrant
dated August 31, 1995 (incorporated by reference to Exhibit
10(iii) to Registration Statement No. 333-36179).
10(iv) International Agency Agreement between WDP Ltd. and Registrant
dated June 19, 1996 (incorporated by reference to Exhibit 10(iv)
to Registration Statement No. 333-36179).
10(v) Lease Agreement between R.L. Brown Investments and Registrant
dated June 5, 1997 (incorporated by reference to Exhibit 10(v)
to Registration Statement No. 333-36179).
10(vi) Lease Agreement between Granby Apparel, Inc. and Registrant
dated December 11, 1995 (incorporated by reference to Exhibit
10(vi) to Registration Statement No. 333-36179).
10(vii) Lease Agreement between Ozark Terminal, Inc. and Registrant
dated December 9, 1997.
10(viii) Administrative Service Agreement between Daisy Manufacturing
Company and Registrant (incorporated by reference to Exhibit
10(viii) to Form 10-Q for the quarter
-21-
<PAGE>
ended September 30, 1997, in 0-23385).
10(ix) Employment Agreement between E. Lynn Scott and Registrant dated
as of September 15, 1997 (incorporated by reference to Exhibit
10(ix) to Registration Statement No. 333-36179).
10(x) 1997 Stock Option Plan (incorporated by reference to Exhibit
10(iii) to Form 10-Q for the quarter ended September 30, 1997,
in 0-23385).
10(xi) Employee Stock Purchase Plan (incorporated by reference to
Exhibit 10(iv) to Form 10-Q for the quarter ended September 30,
1997, in 0-23385).
10(xii) Indemnification Agreement between Marvin W. Griffin and
Registrant dated as of November 24, 1997 (incorporated by
reference to Exhibit 10(v) to Form 10-Q for the quarter ended
September 30, 1997, in 0-23385).
10(xiii) Indemnification Agreement between E. Lynn Scott and Registrant
dated as of November 24, 1997 (incorporated by reference to
Exhibit 10(vi) to Form 10-Q for the quarter ended September 30,
1997, in 0-23385).
10(xiv) Form of Continuing Guaranty (incorporated herein by reference to
Exhibit 10(xiv) to Registration Statement No. 333-36179).
10(xv) Tax Allocation Agreement between Brass Eagle Inc. and Daisy
Manufacturing Company dated November 24, 1997 (incorporated by
reference to Exhibit 10(vii) to Form 10-Q for the quarter ended
September 30, 1997, in 0-23385).
11 Statement of Computation of Earnings Per Share.
13 Portions of the Company's Annual Report.
24 Powers of Attorney
27 Financial Data Schedule.
-22-
<PAGE>
EXHIBIT 10(vii)
LEASE AGREEMENT
THIS LEASE is made as of December 9, 1997, between Landlord and Tenant,
both named and defined below, who now agree as follows:
1. TERMS, DEFINITIONS: Whenever capitalized in this Lease, the following
terms shall have the meanings set forth below, unless the context clearly
indicates a contrary intent:
Landlord: Ozark Terminal, Inc.,
a Missouri corporation
11923 Lime Kiln Drive
Post Office Box 471
Neosho, Missouri 64850
Tenant: Brass Eagle Inc.,
a Delaware corporation
1203A N. Sixth Street
Rogers, Arkansas 72756
Premises: Approximately 40,000 square feet of warehouse space (the
"Warehouse Space") located in Area 4 of the Ozark Terminal Facility at Lime Kiln
Road, Neosho, Newton County, Missouri, which Facility is located on land legally
described on attached Exhibit A (the "Facility"), together with the associated
parking area (the "Parking Area"), subject to Landlord's right of ingress and
egress over and across the Parking Area to other parts of the Facility and
public roads, the right of ingress and egress through a portion of Area 3 (the
"Access Area"), and the right to use, in common with Landlord, the truck dock
area (the "Truck Dock"). The Warehouse Space, the Parking Area, the Truck Dock,
and the Access Area are depicted on attached Exhibit B and are collectively
referred to as the "Premises."
Term: The Term shall commence on December 1, 1997 (the "Commencement
Date"), as to the approximately 10,000 square feet of the Warehouse Space that
is not currently being used by Landlord and as to the remainder of the Warehouse
Space on December 15, 1997, and, unless sooner terminated as provided in this
Lease, shall end on December 31, 1999 (the "Expiration Date").
Rent: Rent for the month of December, 1997 shall be in the amount of
$3,750, payable upon the execution of this Lease. Rent for the remainder of the
Term shall be paid in monthly installments each in the amount of $5,000 per
month, commencing on January 1, 1998, and on the first day of each subsequent
month during the Term.
Late Payment Charge: $100
Security Deposit: $0
<PAGE>
Permitted Use: The Premises shall be used only for the warehousing and
distribution of products manufactured or purchased for sale by Tenant,
excluding, however, products of a hazardous or dangerous variety (e.g., live
ammunition) which materially increase the health and safety concerns for the
Premises and the Facility and for persons in or near the Premises and the
Facility, and for supporting office functions and for no other purpose.
Exhibit A - Legal Description of Facility
Exhibit B - Drawing of Premises
Exhibit C - Hazardous Material
Each Exhibit is attached to and made a part of this Lease.
2. GRANT: Landlord hereby leases to Tenant, and Tenant hereby leases from
Landlord, the Premises subject to the terms and conditions contained in this
Lease. Landlord agrees, so long as Tenant fully complies with all the terms,
covenants and conditions of this Lease, that Tenant may peaceably have, hold and
enjoy the Premises during the Term.
3. TERM:
(a) The Term shall commence on the Commencement Date and shall end, unless
sooner terminated as provided in this Lease, on the Expiration Date.
(b) Should Landlord permit Tenant to occupy the Premises prior to the
Commencement Date, such occupancy shall be subject to all provisions of this
Lease and the Expiration Date shall not be advanced.
(4) RENT: Tenant agrees to pay Landlord Rent in the amounts and at the
times set forth in Section 1, without setoff or deduction whatsoever, but
prorated for the first and last months of the Term if the Commencement Date is
other than the first day of a month or the Expiration Date is other than the
last day of a month, unless the Expiration Date falls in the last month of a
lease year, in which case no proration shall occur. All Rent and other payments
required under this Lease shall be payable at the office of the Landlord as set
forth in Section 1, or at such other place as Landlord may designate from time
to time in writing to Tenant. Notwithstanding anything in this Lease to the
contrary, all amounts payable by Tenant to or on behalf of Landlord under this
Lease, whether or not expressly denominated as Rent, shall constitute Rent for
all purposes including, without limitation, for the purpose of Section 502(b)(6)
of the Bankruptcy Code or its successor provision. Any sums payable under this
Lease shall bear interest at the rate of twelve percent (12%) per annum from
their due date until the date paid, unless paid within five (5) days of their
due date.
(5) LATE PAYMENT CHARGE: If Landlord does not receive the full amount of
any Rent or other payment due under this Lease within five (5) days after the
date payment is due, a late payment charge at the rate set forth in Section I
will be added to the unpaid amount to cover the extra expense involved in
handling the delinquency.
<PAGE>
(6) USE: Tenant shall use and occupy the Premises only for the Permitted
Use set forth in Section 1 and for no other purpose without Landlord's prior
written consent. During the month of December, 1997, Tenant's right of access to
the Warehouse Space shall be limited to the normal business hours of Landlord
(7:30 a.m. to 4:15 p.m. Monday-Friday), unless prior approval has been received
from Landlord.
7. ASSIGNING OR SUBLEASING:
(a) Tenant shall not permit an Assignment (as hereinafter defined) without
the prior written consent of Landlord in each instance. An "Assignment" shall be
deemed to have occurred in the event: (i) Tenant shall assign, sublet, transfer,
mortgage, pledge, hypothecate or encumber this Lease or any interest therein, in
whole or in part (including any involuntary assignment or subletting arising by
operation of law); (ii) Tenant shall allow any person or entity (the employees,
agents, servants and invitees of Tenant excepted) to occupy or use all or any
part of the Premises; or (iii) Tenant is a corporation or partnership and there
occurs any sale, transfer or other disposition of fifty percent (50%) or more of
the corporate stock or fifty percent (50%) or more of the partnership interests
in Tenant (or in any general partner of Tenant if Tenant is a limited
partnership) by any transaction or series of transactions after the date of this
Lease. Any Assignment in contravention of this Section 7 shall be void.
(b) Notwithstanding any approved Assignment Tenant shall remain fully
liable on this Lease and shall not be released from performing any of the terms,
covenants and conditions hereof.
(c) Without limiting Landlord's right to approve any Assignment, Tenant
hereby assigns to Landlord the right but not the obligation, to collect Rent
(including any additional Rent) from any subtenant or assignee of Tenant and to
apply such Rent to Tenant's obligations under this Lease.
(d) The consent by Landlord to any Assignment will not constitute a waiver
of the necessity for such consent in any subsequent event.
(e) Notwithstanding anything set forth in this Lease to the contrary, if
this Lease is assigned to any person or entity pursuant to the provisions of any
chapter of the Federal Bankruptcy Code, any and all money or other consideration
payable or otherwise to be delivered in connection with such Assignment will be
paid or delivered to Landlord, will be and remain the exclusive property of
Landlord and will not constitute property of Tenant or of the estate of Tenant
within the meaning of the Bankruptcy Code. Any and all money or other
consideration constituting Landlord's property under the preceding sentence not
paid or delivered to Landlord will be held in trust for the benefit of Landlord
and will be promptly paid or delivered to Landlord. Further, the assignee will
be deemed, without further act or deed, to have assumed all of the obligations
arising under this Lease on and after the date of Assignment. The assignee will,
upon demand, execute and deliver to Landlord an instrument confirming the
assumption.
8. LANDLORD'S RIGHT OF ENTRY: Landlord or Landlord's agent may enter the
Premises at reasonable hours or at any time in the case of an emergency, to
examine the Premises
<PAGE>
and to do anything Landlord may be required to do under this Lease or which
Landlord may deem necessary for the good of the Premises. During the Term,
Landlord may exhibit the Premises to prospective mortgagees and purchasers, and
during the last six (6) months of the Term, Landlord may exhibit the Premises to
prospective tenants and place signs on the Premises indicating Landlord's desire
to lease same.
9. SIGNS AND ADVERTISEMENTS: Tenant shall not place on the Premises any
signs, billboards or advertisements of any kind without the prior written
consent of Landlord.
10. REAL ESTATE TAXES AND SPECIAL ASSESSMENTS: Tenant shall pay Landlord
as additional Rent within thirty (30) days after demand from Landlord, the
Tenant's pro rata share of real estate taxes and special assessments assessed
against the Facility. "Tenant's pro rata share" shall be computed by multiplying
the total amount of taxes and special assessments by a fraction, the numerator
of which is the total square footage of the Warehouse Space, and the denominator
of which is the total square feet of space leased and available for lease in the
Facility as of January 1 of the year for which the taxes and special assessments
are assessed. Currently, that fraction produces a percentage of 5.8% as Tenant's
pro rata share. The amount payable by Tenant under this Section will be prorated
on a per diem basis for the partial years, if any, in which this Lease commences
and terminates, and Tenant's obligation under this Section shall survive the
expiration or termination of this Lease.
11. REPAIRS AND MAINTENANCE:
(a) By Landlord. Landlord agrees to maintain the structural portions of
the Premises, the septic system (except the grinder and pump located in the
Premises) and dehumidification equipment serving the Premises. If any repairs
for which Landlord is obligated are necessitated by the negligent act or
omission of Tenant, its employees, agents, contractors, customers, guests,
licensees or invitees, Tenant shall immediately reimburse Landlord for the cost
upon demand. Landlord shall perform such repairs and maintenance with reasonable
diligence, but Landlord shall not be liable for any damages, direct, indirect or
consequential, or for damages for personal discomfort, illness or inconvenience
of Tenant by reason of reasonable delays in the performance of the repairs.
Landlord will be under no obligation, and will not be liable for any failure to
make any repairs until Tenant notifies Landlord in writing they are necessary,
in which event Landlord will have a reasonable time after notice to make such
repairs.
(b) By Tenant. Except for the obligations imposed upon Landlord in the
immediately preceding subsection, and except for damage resulting from a loss
covered by Landlord's insurance, during the Term of this Lease and at Tenant's
sole cost and expense, Tenant will maintain and keep in good order, repair and
condition, and, when necessary, will replace all parts of the Premises,
including, but not limited to, dock equipment and apparatus, utility service
lines, interior walls and partitions, fixtures, floor coverings, lighting
fixtures, heating, ventilating, air-conditioning, plumbing, sprinkler, glass,
windows, doors, electrical and other mechanical equipment, appliances and
systems (including the grinder and pump which are a part of the septic system
and located within the Premises), and improvements made by and at the expense of
Tenant. Tenant will police and keep
<PAGE>
the Parking Area clean, orderly, sightly, and unobstructed. Tenant shall not
store any personal property in the Parking Area or any place outside without the
prior written consent of Landlord.
12. CONDITION OF PREMISES AT BEGINNING AND END OF TERM: Tenant acknowledges
that Tenant has inspected the Premises and except as may be provided elsewhere
in this Lease and without abrogating Landlord's maintenance and other
obligations in this Lease, Tenant will accept the Premises in their present
condition. At the end of the Term of this Lease, except for damage caused by
fire or other perils, Tenant, at Tenant's expense, will (a) cause the all
fixtures and equipment which are a part of Premises, including, but not limited
to, all lighting fixtures, light bulbs, dryer, air compressor, septic system
grinder and pump, and all heating, ventilating, air-conditioning, plumbing,
sprinkler, elevator, electrical and other mechanical equipment to be in good
working order and repair, (b) surrender the Premises in as good a condition as
the Permitted Use will have permitted, subject to Tenant's obligations stated in
the immediately preceding clause, (c) remove all of Tenant's Property from the
Premises, (d) promptly repair any damage to the Premises caused by the removal
of Tenant's Property, and (e) leave the Premises free of trash and debris and
the Building in "broom clean" condition.
13. TENANT'S PROPERTY: All equipment, materials, supplies, inventory,
furniture, business trade fixtures and property of a similar nature and kind in
or about the Premises owned by Tenant and not the property of Landlord
("Tenant's Property") shall be at Tenant's sole risk, and Tenant does hereby,
now and forever, release Landlord from any claims for damages, howsoever caused,
including the breach by Landlord of any of its obligations under this Lease.
Landlord hereby waives, as to Tenant's Property, any statutory or common law
lien rights that exist in favor of landlords of real property on account of a
tenant's failure to pay rent.
14. ALTERATIONS AND IMPROVEMENTS: Except as may be provided in this Lease,
Tenant shall not make or allow to be made, any alterations, additions,
improvements, installations and replacements of or to all or any part of the
Premises, including, without limitation, modifications to the current electrical
and air systems and painting of the Premises, without Landlord's prior written
consent which consent will not be unreasonably withheld. Any alterations,
additions, improvements, installations and replacements of or to the Premises
shall be at Tenant's sole cost and expense and shall immediately become part of
the Premises and the property of Landlord, subject to the provisions of this
Lease. Any approved alterations, additions, improvements, installations and
replacements shall be performed in a good and workmanlike manner and in
accordance with all applicable laws, statutes, ordinances, regulations and
codes. Tenant shall not permit any mechanic's liens to be filed against the
Premises on account of any such work.
15. UTILITIES: Landlord shall provide water and electricity to the
Warehouse Space. Tenant shall pay to Landlord Tenant's pro rata share of the
cost of the electrical service. "Tenant's pro rata share" shall be computed by
multiplying the total cost of the electricity billed to Landlord for the
Facility by a fraction, the numerator of which is the total square footage of
the Warehouse Space, and the denominator of which is the total square feet of
space in the Facility, excluding, however, any space in the Facility where the
electrical service is separately metered. On the first day of each month during
the Term, Tenant shall pay Landlord as an estimate of Tenant's pro rata share of
the
<PAGE>
electrical service for that month, the sum of $500. At the end of each lease
year, Landlord shall compute Tenant's pro rata share of the electrical service
for such year and give Tenant written notice of the amount of same. If the
estimated payments paid by Tenant during such year are less than Tenant's pro
rata share, Tenant shall pay Landlord the difference within ten (10) days after
its receipt of the notice. If Tenant's estimated payments are greater than
Tenant's pro rata share, the excess shall be credited against Tenant's estimated
payment for the next month or, in the case of the end of the Term shall be paid
to Tenant by Landlord with such notice.
16. ENVIRONMENTAL MATTERS:
(a) Tenant shall not cause or permit any Hazardous Material to be brought
upon, kept, disposed from or used in or about the Premises by Tenant, its
agents, employees, contractors or invitees, without the prior written consent of
Landlord (which Landlord shall not unreasonably withhold as long as Tenant
demonstrates to Landlord's reasonable satisfaction that such Hazardous Material
is necessary or useful to Tenant's business and will be used, kept and stored in
a manner that complies with all laws regulating any such Hazardous Material so
bought upon or used or kept in or about the Premises). Attached as Exhibit C is
a list of Hazardous Material that is used in Tenant's business, the use of which
is approved by Landlord subject to the terms of this Section 16. If Tenant
breaches the obligations stated in the preceding sentence or if the presence of
Hazardous Material on the Premises caused or permitted by Tenant results in
contamination of the Premises, or if contamination of the Premises by Hazardous
Material otherwise occurs for which Tenant is legally liable to Landlord for
damage resulting therefrom, then Tenant shall indemnify, defend and hold
Landlord harmless from any and all claims, judgments, damages, penalties, fines,
costs, liabilities or losses (including, without limitation, diminution in value
of the Premises, damages for the loss or restriction on use of rentable or
usable space or of any amenity of the Premises, damages arising from any adverse
impact on marketing of space, and sums paid in settlement of claims, attorneys'
fees, consultant fees and expert fees) which arise during or after the Term as a
result of such contamination. Such indemnification of Landlord by Tenant shall
include, without limitation, costs incurred in connection with any investigation
of site conditions or any cleanup, remedial, removal, or restoration work
required by any federal, state, or local government agency or political
subdivision because of Hazardous Material present in the soil or ground water on
or under the Premises. Without limiting the foregoing, if the presence of any
Hazardous Material on the Premises caused or permitted by Tenant results in any
contamination of the Premises, Tenant shall promptly take all actions at its
sole expense as are necessary to return the Premises to the condition existing
prior to the introduction of any such Hazardous Material to the Premises,
provided that Landlord's approval of such actions shall first be obtained, which
approval shall not be unreasonably withheld so long as such actions would not
potentially have any material adverse long-term or short-term effect on the
Premises. Provided, however, Tenant shall not be responsible for the
consequences of any Hazardous Material that existed on the Premises prior to the
Commencement Date.
(b) As used in this Lease, the term "Hazardous Material" means any
hazardous or toxic substance, material or waste which is or becomes regulated by
any local governmental authority, the state in which the Premises are located or
the United States Government. The term "Hazardous Material" includes, without
limitation, any material or substance that is (i) defined as a "hazardous
<PAGE>
substance" under the laws of the state in which the Premises are located, (ii)
petroleum, (iii) asbestos, (iv) designated as a "hazardous substance" pursuant
to Section 311 of the Federal Water Pollution Control Act (33 U.S.C. (S) 1321),
(v) defined as a "hazardous waste" pursuant to Section 1004 of the Federal
Resource Conservation and Recovery Act 42 U.S.C. (S) 6901 (42 U.S.C.(S) 6903),
(vi) defined as a "hazardous substance" pursuant to Section 101 of the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
(S) 9601 et seq (42 U.S.C. (S) 9601), or (vii) defined as a "regulated
substance" pursuant to Subchapter IX, Solid Waste Disposal Act (Regulation of
Underground Storage Tanks), 42 U.S.C. (S) 6991 et seq.
17. LEGAL REQUIREMENTS: Tenant shall comply with all laws, orders,
ordinances and other public requirements now or hereafter affecting the Premises
or their use, including, without limitation, ADA (except Landlord shall be
responsible for complying with any ADA requirements from the Parking Area,
through the Access Area, to the exterior of the Warehouse Space), OSHA and like
requirements and indemnify, defend and save Landlord harmless from any expense
(including attorneys' fees) or damage resulting from Tenant's failure to do so.
18. INSURANCE:
(a) Landlord's Insurance. Tenant will not do or permit to be done, or keep
or permit to be kept, anything in, upon or about the Premises which will
contravene Landlord's insurance policies on the Premises or any part of the
Premises or which will prevent Landlord from procuring such policies in
companies acceptable to Landlord at the minimum rate from time to time
applicable to the Premises. Tenant will pay the amount of any increase in the
insurance rate caused by its use of the Premises promptly upon Landlord's
demand.
(b) Tenant's Insurance. Tenant shall keep in force with an insurance
company or companies authorized to do business in Missouri and reasonably
acceptable to Landlord: (i) a policy of comprehensive public liability insurance
with respect to the Premises and the business operated by Tenant with single
limit coverage of not less than $2,000,000 for bodily injury, including death,
and property damage, with a contractual liability endorsement insuring Tenant's
indemnity obligations under this Lease; and (ii) an "all risk" policy of
casualty insurance insuring Tenant's Property for one hundred percent (100%) of
its replacement value. In addition to Tenant, the policy for public liability
insurance shall also name Landlord, as well as any person, firm or corporation
designated by Landlord and in privity with it as an additional insured. Tenant
shall upon demand deliver to Landlord from time to time certificates or other
evidence of the maintenance of the insurance coverages, with an undertaking by
the insurer not to cancel the coverages without at least 30 days' prior written
notice to Landlord.
(c) Indemnification. Tenant shall, subject to the provisions of subsection
(d) below, indemnify, defend and save harmless Landlord, its officers, agents
and servants, from and against any and all third-party claims, actions,
liability and expense (including attorneys' fees) in connection with loss of
life, bodily injury and/or damage to property arising from or out of any
occurrence in, on, or about the Premises, or the occupancy or use by Tenant of
the Premises or any part thereof, or occasioned wholly or in part by any act or
omission of Tenant, its agents, contractors, employees,
<PAGE>
servants, subtenants or invitees, including a breach of Tenant's obligations
under this Lease unless the same be caused by the negligent or willful act of
Landlord, its officers, agents, servants, employees or invitees. If any action
or proceeding is brought against Landlord, its officers, agents, servants or
employees by reason of any of the aforementioned causes, Tenant upon receiving
written notice thereof from Landlord agrees to defend such action or proceeding
by competent counsel at its own expense.
(d) Waiver of Subrogation. Notwithstanding anything to the contrary
contained in this Lease, each party to this Lease (the "Releasing Party") hereby
releases the other party (the "Released Party") from any liability which the
Released Party would, but for this Section, have had to the Releasing Party
during the Term for any loss or damage to the property of the Releasing Party or
to the property of others which is under the Releasing Party's control which
results from an Insurable Loss to the property of, or to the property under the
control of, the Releasing Party, regardless of how such loss or damage occurs.
Each party to this Lease will promptly give notice of the terms of this Section
to its insurance carriers and obtain from them any endorsements required to give
effect to the foregoing releases and deliver reasonable evidence of such
endorsements to the other party. For the purposes of this Lease, an "Insurable
Loss" means any loss which is covered by any insurance policy of Landlord or of
Tenant in force at the time of such loss or would be covered under any insurance
policy required by either party under this Lease. However, the releases
contained in this subsection shall not apply to any loss or damage occasioned by
intentional acts of Landlord or Tenant.
(e) Notice by Tenant. Tenant shall give prompt notice to Landlord in case
of any casualty damage to or accident on the Premises.
19. DAMAGE BY CASUALTY:
(a) Subject to the options to terminate provided below in this Section, if
the Premises suffer a loss covered by Landlord's insurance, Landlord, at its
sole cost and expense, will (i) repair or restore the Premises (but not Tenant's
Property) to a condition substantially equivalent to their condition immediately
prior to the loss, subject to zoning and building laws applicable at the time of
the work, (ii) subject to receipt of the insurance proceeds, commence the repair
or restoration with reasonable promptness and (iii) diligently pursue such work
to completion.
(b) If the Premises (i) suffer a loss that is not covered by Landlord's
insurance and the cost to repair or restore such loss exceeds $10,000, or (ii)
if the loss is covered by Landlord's insurance but is substantial, or (iii) if
existing zoning and building laws do not permit or substantially impair the
repair or restoration, or (iv) the loss occurs during the last six (6) months of
the Term, including any extension or renewal, Landlord may terminate this Lease
by written notice to Tenant given within thirty (30) days after the date of the
loss. If Landlord does not exercise its option to terminate, Landlord will
repair or restore the Premises in accordance with the terms of the immediately
preceding subsection. For the purposes of this Section, "substantial" will mean
damage to such an extent that the estimated cost of fully repairing the damage
is greater than fifty percent (50%) of the then replacement cost of the Premises
(exclusive of land). If Landlord exercises its right to terminate this Lease
under (i) above, Tenant may avoid such termination if Tenant gives Landlord
written
<PAGE>
notice, within ten (10) days after the date of Landlord's notice of election to
terminate, that Tenant will pay the cost of the repairs or restoration in excess
of $10,000 and provides Landlord with reasonable proof that such sum is readily
available for that purpose. Before such repairs and restoration commence,
Landlord may require Tenant's share to be paid to Landlord to be used toward the
cost of the repairs or restoration.
(c) If the Premises cannot reasonably be expected to be repaired or
restored within one hundred eighty (180) days after the date of the loss
(without overtime), Tenant may terminate this Lease by written notice to
Landlord given within thirty (30) days after the date of the loss.
(d) If this Lease is terminated under any option given in this Section,
this Lease will terminate on the earlier of (i) the thirtieth (30th) day
following the giving of the notice of termination or (ii) Tenant's surrender of
the Premises. Rent will be apportioned as of the date of termination.
(e) Following any loss or damage that Landlord is obligated or has
elected to repair or restore, Tenant will cooperate fully with Landlord to
facilitate Landlord's repair or restoration of the Premises. In either event,
Tenant shall remove all rubbish, debris, furniture, merchandise, equipment and
any other personal property, within five (5) days after request by Landlord.
Landlord will not be responsible to Tenant for any inconvenience arising from
such work. In the case of any loss or damage to the Premises, there shall be an
abatement or reduction of Rent between the date of the loss or damage and the
date of completion of restoration, based on the extent to which the destruction
interferes with Tenant's use of the Premises.
20. FIXTURES: All repairs, alterations, additions, improvements,
installations, equipment and fixtures (including light fixtures and light
bulbs), by whomsoever installed, erected or paid for (except equipment and
business trade fixtures constituting Tenant's Property which can be removed
without damaging or leaving incomplete the Premises), shall belong to Landlord
and remain on and be surrendered with the Premises as a part thereof, at the
expiration of this Lease.
21. EMINENT DOMAIN: If the Premises are totally taken by the exercise of
the power of eminent domain (including any conveyance in lieu of such exercise),
this Lease shall terminate on the date of taking. If only a portion of the
Premises is taken, this Lease shall remain in effect, except that Tenant may
elect to terminate this Lease if ten percent (10%) or more of the total number
of square feet of the Warehouse Space is taken. If Tenant elects to terminate
under the provisions of this Section, it must terminate by giving notice to
Landlord within thirty (30) days after the nature and extent of the taking have
been finally determined. If this Lease is not terminated within the 30-day
period, it shall continue in full force and effect except that Rent shall be
reduced based on the extent to which the taking interferes with Tenant's use of
the Premises. If there is a partial taking of the Premises and this Lease
remains in full force and effect pursuant to this Section, Landlord, at its
cost, shall accomplish all necessary restoration so that the Premises are
returned as near as practical to their condition immediately prior to the date
of the taking, but in no event shall Landlord be obligated to expend more for
such restoration than the extent of funds actually paid to Landlord by the
condemning authority, less the reasonable costs incurred by Landlord in
obtaining those funds. Any award arising from the condemnation or its settlement
shall belong to and be paid to the
<PAGE>
Landlord. Tenant may seek an award from the condemning authority for Tenant's
trade fixtures, tangible personal property, goodwill, loss of business and
relocation expenses. However, in all events, the Landlord shall be solely
entitled to all awards in respect of the real property, including the bonus
value of the leasehold.
22. DEFAULT: Tenant shall be in default under this Lease if any one of the
following events occur:
(a) Tenant fails to pay when due any installment of Rent or any other sums
due under this Lease;
(b) Tenant fails to keep, observe or perform any other terms, covenant or
condition of this Lease within fifteen (15) days after written notice from
Landlord;
(c) Tenant abandons the Premises;
(d) Tenant files a voluntary petition under the bankruptcy laws of the
United States or under any state laws for relief of debtors, or if an
involuntary petition under such law(s) is filed against Tenant and is not
dismissed within sixty (60) days of filing;
(e) A petition for reorganization or arrangement under the bankruptcy laws
of the United States or any state laws for the relief of debtors is filed by or
against Tenant; or
(f) Tenant makes a general assignment for the benefit of its creditors or
if a trustee or a receiver is appointed to take charge of and manage a
substantial part of the assets of Tenant, or an execution or attachment is
issued against Tenant under which the Premises or any part of the Premises or
any interest in the Premises of the Tenant under this Lease, shall be taken or
attempted to be taken.
23. LANDLORD'S REMEDIES: After an event of default occurs, Landlord may,
at Landlord's option, without further notice or demand, except as provided below
in this Section, do any of the following:
(a) Remain out of possession of the Premises; treat the remaining term of
this Lease as subsisting; and recover Rent as it becomes due.
(b) Reenter and resume possession of the Premises without termination of
this Lease; evict, remove and put out Tenant or any other persons who might be
in possession of, or present at, the Premises, together with all personal
property found at the Premises; and attempt to relet the Premises in an effort
to mitigate Landlord's damages. Landlord shall receive the rental income from
any reletting of the Premises and shall apply it first, to the payment of any
amounts, other than Rent, including, without limitation, Default Expenses
(defined in (c) below), owed by Tenant to Landlord under this Lease; second, to
the costs and expenses of any repair, renovation, remodeling, redecorating and
advertising of the Premises, brokerage fees and other costs and expenses,
including,
<PAGE>
without limitation, reasonable attorney's fees and other legal and judicial
costs and expenses, associated with Landlord's efforts to relet the Premises;
and third, to the payment of Rent due, and to become due, under this Lease.
(c) Give Tenant notice that this Lease is terminated effective the date
stated in the notice; reenter and resume possession of the Premises for
Landlord's own benefit free of this Lease; and evict, remove and put out Tenant
or any other persons who might be in possession of, or present at, the Premises,
together with all personal property found at the Premises. If Landlord
terminates this Lease, all of Tenant's obligations for unpaid Rent and other
sums due under this Lease through the date of termination, including, without
limitation, Tenant's liability for (1) all losses, costs and expenses reasonably
incurred by Landlord, including, without limitation, reasonable attorneys' fees
and other legal and judicial costs and expenses that are in any way connected
with Tenant's default ("Default Expenses"); (2) interest that accrues on Default
Expenses and on unpaid Rent and other sums due under this Lease; (3) damage to
the Premises caused by Tenant in connection with Tenant's occupying or vacating
the Premises; and (4) the present value, at the time of termination, of the
difference between the amount of Rent reserved for the balance of the term of
this Lease and the reasonable rental value of the Premises for the same period
shall be determined as of the date this Lease is terminated and shall be paid by
Tenant to Landlord upon demand. All other obligations of Tenant that would have
come due if this Lease had not been terminated shall terminate as of the date
this Lease is terminated.
(d) Pursue any and all other remedies available at law or in equity that
are not inconsistent with the terms of this Lease. Prior to Landlord notifying
Tenant that this Lease is terminated, any judicial process, and the results
thereof, pursued or obtained by Landlord shall not be deemed to be a termination
of this Lease unless a judgment or order specifically states that this Lease is
terminated.
24. WAIVER: A waiver by Landlord of any default or breach hereunder shall
not be construed to be a continuing waiver of such default or breach, nor as a
waiver or permission, expressed or implied, of any other or subsequent default
or breach. No payment by Tenant or receipt by Landlord of a lesser amount than
the monthly Rent and other charges herein reserved shall be deemed to be other
than on account of the earliest stipulated Rent or other charges, nor shall any
endorsement or statement on any check or on any letter accompanying any check be
deemed an accord and satisfaction.
25. REMEDIES CUMULATIVE: The rights and remedies of Landlord under this
Lease and any others provided by law shall be construed as cumulative and no one
of them is exclusive of any other right or remedy. Such rights and remedies
shall further be continuing rights, none of which shall be exhausted by being
exercised on one or more occasions. Landlord shall be entitled to an injunction,
without bond, in proper cases to enforce any part or parts of this Lease or to
prevent or stop any violation or default on the part of Tenant. Whenever in this
Lease Landlord reserves or is given the right and power to give or withhold its
consent to any action on the part of Tenant such right and power shall not be
exhausted by its exercise on one or more occasions, but shall be a continuing
right and power for the full term of this Lease.
<PAGE>
26. SUBORDINATION: This Lease shall be subordinate to any mortgages, deeds
of trust or other encumbrances that may now or hereafter be in existence against
all or any part of the Premises.
27. SALE OF PREMISES BY LANDLORD: In the event of any sale of the
Premises, Landlord shall be and is hereby entirely freed and relieved of all
liability under any and all of its covenants and obligations contained in or
derived from this Lease arising out of any act, occurrence or omission occurring
after the consummation of such sale; and the purchaser, at such sale or any
subsequent sale of the Premises shall be deemed, without any further agreement
between the parties or their successors in interest or between the parties and
any such purchaser, to have assumed and agreed to carry out any and all the
covenants and obligations of the Landlord under this Lease.
28. PEACEABLE SURRENDER: Upon termination of this Lease, whether by
expiration of its stated term or otherwise, Tenant shall peaceably quit and
surrender to Landlord the Premises together with all improvements constructed
thereon, specifically including, but not by way of limitation, any improvements
constructed and/or paid for by Tenant.
29. HOLDING OVER: In the event Tenant remains in possession of the Premises
after termination of this Lease, and without the execution of a new lease,
Tenant, at the option of Landlord, shall be deemed to be occupying the Premises
as a Tenant from month-to-month, at twice the monthly Rent subject to all other
terms, conditions and obligations of this Lease to the extent same are
applicable to a month-to-month tenancy.
30. BROKER'S COMMISSION: Landlord and Tenant each warrants to the other
that there are no claims for broker's commissions or finder's fees in connection
with this Lease. Each party agrees to defend, indemnify and save the other
harmless from and against any liability, costs and expenses (including
attorneys' fees) that may arise from the claim of any person by or through it.
31. ESTOPPEL CERTIFICATE: Tenant agrees, at any time, and from time to
time, upon not less than 10 days prior notice by Landlord, to execute,
acknowledge and deliver to Landlord, a statement in writing addressed to
Landlord (or to whom Landlord directs) certifying that this Lease is in full
force and effect (or, if there have been modifications, that the same is in full
force and effect as modified and stating the modifications), stating the dates
to which the Rent, additional rental and other charges have been paid, and
stating whether or not there exists any default by either party in the
performance of any covenant, agreement, term, provision or condition contained
in this Lease, and, if so, specifying each such default of which the signer may
have knowledge and the claims, if any, of Tenant, it being intended that any
such statement may be relied upon by Landlord or a purchaser of Landlord's
interest and by any mortgagee or beneficiary or trustee of a deed of trust or
any prospective mortgagee, beneficiary or trustee affecting the Premises and the
Building.
32. SECURITY DEPOSIT: Tenant has deposited with Landlord the sum set forth
in Section 1 as a security deposit. The security deposit shall be held by
Landlord as security for the faithful performance by Tenant of all the terms,
covenants, and conditions of this Lease to be kept and performed by Tenant
during the term hereof. If Tenant defaults with respect to any provision of this
<PAGE>
Lease, including, but not limited to the provisions relating to the payment of
Rent, Landlord may (but shall not be required to) use, apply or retain all or
any part of this security deposit for the payment of any Rent or any other sum
in default, or for the payment of any amount which Landlord may spend or become
obligated to spend by reason of Tenant's default. If any portion of said deposit
is so used or applied, Tenant shall, within five (5) days after written demand
therefor, deposit cash with Landlord in an amount sufficient to restore the
security deposit to its original amount and Tenant's failure to do so shall be a
material breach of this Lease. Landlord shall not be required to keep this
security deposit separated from its general funds, and Tenant shall not be
entitled to interest on the deposit. If Tenant shall fully and faithfully
perform every provision of this Lease to be performed by it, the security
deposit or any balance thereof shall be returned to Tenant (or, at Landlord's
option, to the last assignee of Tenant's interest hereunder) at the expiration
of the Lease term. Landlord may transfer the security deposit to a purchaser of
the Building and upon such transfer Landlord shall be discharged from any
further liability for the application or return of the security deposit.
33. ATTORNEYS' FEES: If either party employs an attorney or attorneys to
enforce any of the provisions of this Lease, the defaulting party agrees to pay,
as additional Rent all attorneys' fees, court costs and litigation expenses
reasonably incurred by the non-defaulting party, regardless of whether any legal
action or proceeding is commenced.
34. PARAGRAPH HEADINGS: The headings used in describing the various
paragraphs of this Lease are for convenience of the parties only and shall not
be considered in interpreting the meaning of the various paragraphs and
provisions of this Lease.
35. NOTICES: All notices, consents, approvals, requests, demands,
objections, waivers and other communications (collectively, "notices") which may
or are required to be sent, delivered, given, made, maintained or obtained
pursuant to the terms of this Lease shall be in writing and shall be given
either by hand delivery, by prepaid United States certified mail, or by a
reputable overnight delivery service that guarantees next day delivery and that
provides a receipt. All notices shall be addressed to the parties at their
respective addresses set forth in Section 1, as same may be changed from time to
time except that notices given to Tenant after the Commencement Date shall be
sent to the Premises. Either party may, by notice in the manner provided above,
change its address for all subsequent notices. All notices given by certified
mail as provided above shall be deemed given two (2) days after they are so
mailed. All notices given by overnight delivery or hand delivery shall be deemed
given upon delivery. A party's failure or refusal to accept service of a notice
will constitute delivery of the notice.
36. ENTIRE AGREEMENT: This Lease contains the entire agreement between the
parties and may be modified only by a writing signed by the parties after the
date of this Lease. This Lease supersedes any and all prior oral or written
agreements or understandings relating to the Premises.
37. INVALIDITY: If one or more provisions of this Lease shall be held to
be invalid or unenforceable for any reason, the remaining provisions shall not
be affected and shall be construed as if the invalid or unenforceable provision
had never been contained in this Lease.
38. SUCCESSORS: The provisions, covenants and conditions of this Lease
shall bind and
<PAGE>
inure to the benefit of the legal representatives, successors and permitted
assigns of each of the parties hereto, except that no assignment, encumbrance or
subletting by Tenant without written consent of Landlord, shall vest any right
in the assignee, encumbrancer or subtenant of Tenant.
39. TIME: Time is of the essence of this Lease and each and every
provision contained in this Lease.
40. TENANT'S IMPROVEMENTS: Tenant, at Tenant's sole cost, may construct in
the Warehouse Space offices and restrooms and install phone lines. All such
improvements shall be subject to the terms of Section 14 of this Lease and none
of such improvements may be commenced until Landlord reviews and approves the
plans and specifications for such improvements.
41. OPTION TO RENEW: Landlord grants to Tenant the option, at Tenant's
election, to extend the Term of this Lease for one (1) successive period of two
(2) years, provided that Tenant is not in default of any of the terms and
conditions of this Lease. This renewal option shall be upon each and all of the
following terms and conditions:
(a) Tenant may exercise the option by giving Landlord written notice at
least four (4) months prior to the expiration of the Term. If such notification
is not given, this option shall automatically expire.
(b) All of the provisions and conditions of this Lease, except where
specifically modified by this option, shall apply.
(c) Upon the exercise of this option, the term "Expiration Date" shall
mean the last day of the renewal term.
IN WITNESS WHEREOF, the parties have executed this Lease as of the day and
year first above written.
OZARK TERMINAL, INC.
By: /s/ Kevin Bowman
----------------------------------------------
President
BRASS EAGLE INC.
By: /s/ Steven R. DeMent
----------------------------------------------
Vice President - Operations
<PAGE>
EXHIBIT 11
BRASS EAGLE INC.
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
December 31, December 31,
1997 1996
PRO FORMA BASIC NET INCOME PER SHARE
Net income available to common stockholder $ 3,636 $ 882
========== ==========
Weighted average common shares outstanding 4,860,368 4,623,112
Theoretical shares issued whose proceeds would
have been used to pay divisional equity 377,926 419,279
---------- ----------
Pro forma basic weighted average shares
outstanding 5,238,294 5,042,391
========== ==========
Pro forma basic net income per share $ 0.69 $ 0.18
---------- ----------
DILUTED NET INCOME PER SHARE
Net income available to common stockholders $ 3,636 $ 882
========== ==========
Pro forma basic weighted average common
shares outstanding 5,238,294 5,042,391
Add dilutive effect of stock options 431,710 400,931
---------- ----------
Weighted average dilutive common shares
outstanding 5,670,004 5,443,322
========== ==========
Diluted net income per share $ 0.64 $ 0.16
========== ==========
<PAGE>
EXHIBIT 13
Selected Financial Data
- --------------------------------------------------------------------------------
The following table presents selected historical financial data of the
Company. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical financial statements and notes hereto included
herein. The data for the year ended December 31, 1993 is derived from unaudited
financial statements.
<TABLE>
<CAPTION>
Year Ended December 31,
(Dollars in thousands except per share data.)
- ------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA: 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales 36,139 13,838 4,319 2,615 851
Operating Income 6,062 1,789 89 400 (60)
Net Income 3,636 882 1 247 (37)
Diluted Net Income Per Share 0.64 0.16
BALANCE SHEET DATA: (at period end)
- ------------------------------------------------------------------------------------------------------------
Total Assets 36,229 9,269 6,288
Long-Term Debt, Less Current Maturities 18 1,892 3,043
</TABLE>
1
<PAGE>
Management's Discussion &
Analysis Of Financial Condition
And Results Of Operations
- --------------------------------------------------------------------------------
The following discussion and analysis should be read in conjunction with
the "Selected Financial Data" and the Financial Statements and the related notes
thereto, which are included elsewhere in this report.
GENERAL
Based on market data compiled in part by the company and management's
knowledge of the industry, Brass Eagle believes that it is a worldwide leader in
the design, manufacture, marketing and distribution of paintball products. The
Company's sales have grown rapidly, from $4.3 million in 1995 to $13.8 million
in 1996 and to $36.1 million in 1997. Based on this market data and industry
knowledge, the Company believes that its growth has been the result of
increasing market acceptance of paintball products and, more specifically,
growing demand from consumers through mass merchandisers and major sporting
goods retailers for Brass Eagle products. The Company believes significant
opportunities for growth continue to exist worldwide and intends to increase
market awareness both nationally and internationally through an active growth
campaign.
While the Company's gross profits have increased from $1.9 million in 1995
to $11.3 million in 1997, the Company's gross margins have been negatively
impacted by increased sales of lower margin paintballs and paintball
accessories. Operating expenses as a percentage of sales continue to decrease as
the Company realizes operating efficiencies from increased volume, as well as
from the decrease in royalty expense beginning in October 1995.
For the years ended December 31, 1995 and 1996, and the eleven month period
ended November 25, 1997, Brass Eagle shared operational and administrative
facilities with Daisy. As a result, manufacturing, selling, and administrative
expenses had to be allocated between Daisy and 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. Sales, returns, material cost, and direct labor cost were
not allocated because they could be specifically identified to Brass Eagle.
Management must make estimates and assumptions in preparing financial statements
that affect the amounts reported therein and the disclosures provided. The
Company believes all allocations made were reasonable and that any errors in the
historical allocations would not have a material adverse affect on the company
and its prospects. However, there can be no assurance that these historical
allocations reflect the costs the company will incur in the future.
RESULTS OF OPERATIONS
The following table sets forth operations data as a percentage of sales for
the periods indicated.
1997 1996 1995
- --------------------------------------------------------------------------------
Sales 100.0% 100.0% 100.0%
Cost of Sales 68.6 69.6 56.9
Gross Margin 31.4 30.4 43.1
Operating Expenses 14.6 17.5 41.1
Operating Income 16.8 12.9 2.0
Net Income 10.1 6.4 0.0
13
<PAGE>
Management's Discussion &
Analysis Of Financial Condition
And Results Of Operations
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997, COMPARED TO YEAR ENDED DECEMBER 31, 1996.
Sales. Sales increased by 161.6% to $36.1 million in 1997 compared to $13.8
million in 1996. The increase in sales was primarily due to higher unit volume
of all products. Domestic sales increased by 189.8% to $34.2 million (or
94.7% of sales) in 1997 from $11.8 million (or 85.5% of sales) in 1996.
International sales decreased by 5.0% to $1.9 million (or 5.3% of sales) in
1997 from $2.0 million (or 14.5% of sales) in 1996.
Gross Margin. Gross margin (gross profit as a percentage of net sales)
increased to 31.4% in 1997 compared to 30.4% in 1996 principally due to raw
materials purchasing and manufacturing spending efficiencies.
Operating Expenses. Operating expenses increased by 120.8% to $5.3
million in 1997 compared to $2.4 million in 1996 as the business grew but
decreased as a percentage of sales from 17.5% to 14.6%. The decrease in
operating expenses as a percent of sales was primarily the result of certain
fixed expenses being allocated over an increased sales base.
Operating Income. Operating income increased by 238.9% to $6.1 million in
1997 compared to $1.8 million in 1996. The increase was primarily due to higher
unit sales volume.
Interest Expenses. The Company incurred interest expense of $169,000 in
1997 compared to $315,000 in 1996. The decrease was primarily due to the
scheduled debt payments reducing outstanding borrowings incurred in connection
with the BEI Acquisition.
Income Tax Rate. Based upon tax expenses allocated on a separate return
basis, the Company's effective Federal and State income tax rate was 38.3% in
1997 and 1996.
YEAR-ENDED DECEMBER 31, 1996, COMPARED TO YEAR ENDED DECEMBER 31, 1995
Sales. Sales increased by 220.9% to $13.8 million in 1996 compared to
$4.3 million in 1995. The increase was primarily due to higher unit volume in
all of the Company's products, the addition of new products in the accessories
category, and the introduction of the new Raptor paintball gun. Domestic sales
increased by 187.8% to $11.8 million (or 85.5% of sales) in 1996 from $4.1
million (or 93.9% of sales) in 1995. International sales increased by 660.5%
to $2.0 million (or 14.5% of sales) in 1996 from $263,000 (or 6.1% of sales)
in 1995.
Gross Margin. Gross margin decreased to 30.4% in 1996 compared to 43.1%
in 1995. The decrease was primarily due to increases in unit volume of
paintballs, which have significantly lower margins than the Company's other
products.
Operating Expenses. Operating expenses increased by 33.3% to $2.4 million
in 1996, compared to $1.8 million in 1995, principally due to increased sales
and marketing expenses. The increase related in part to an increase in the
number of employees, but was primarily due to increased unit volume related
expenses, e.g., freight and commission. Operating expenses in 1995 decreased
from 41.1% to 17.5% of sales in 1996 primarily due to the termination in
October, 1995 of the royalty arrangement with BEI which accounted for $487,000
(or 11.2% of sales in 1995) and increases in unit volume.
Operating Income. Operating income increased by 1,922.5% to $1.8 million
in 1996, compared to $89,000 in 1995. The increase was primarily due to higher
unit sales volume.
14
<PAGE>
Management's Discussion &
Analysis Of Financial Condition
And Results Of Operations
- --------------------------------------------------------------------------------
Interest Expense. The Company incurred interest expense of $315,000 in
1996, compared to $87,000 in 1995. The increase was due to debt incurred in
connection with the BEI Acquisition.
Income Tax Rate. Based upon tax expenses allocated on a separate return
basis, the Company's effective Federal and State income tax rate was 38.3% in
1996 and 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company will use the remaining proceeds from the offering to finance
working capital to support the planned growth of the business and for general
corporate purposes, which may include the investment in or acquisition of
complementary businesses. During the past three years the Company has satisfied
its operating cash needs, other than cash required to finance the BEI
Acquisition in October 1995, through intercompany borrowings from Daisy.
Net cash used in operating activities for 1997, was $2.2 million, which
consisted primarily of net income of $3.6 million, depreciation and amortization
expense of $751,000, stock option compensation expense of $298,000, less
increases in accounts receivable of $8.7 million and inventory of $2.4 million
and an increase in accounts payable and accrued expenses over prepaid expenses
of $4.4 million. Net cash used in operations for 1996 was $499,000, which
consisted primarily of net income of $882,000, depreciation and amortization
expense of $426,000, and a net increase of accounts payable and accrued expenses
over prepaid expenses of $994,000, less the increases in accounts receivable of
$2.4 million and inventory of $649,000.
Net cash used in investing activities was $13.5 million for 1997 and
$112,000 for 1996, which consisted of purchases of property, equipment, other
assets and the purchase of investments with the proceeds of the offering in
1997. The company does not have any capital commitments for the next 12 months
but expects to spend approximately $1.2 million during that period for the
following: plant and facilities, product development, and increased production
capacity. The Company is aware of the year 2000 issue and has recognized the
need to ensure that its computer operations and operating systems will not be
adversely affected by the year 2000 prior to processing information which will
include dates in the year 2000. During 1997, the Company upgraded its primary
business enterprise system to a version that is year 2000 compliant and does not
anticipate any significant cost to be incurred related to year 2000 compliance
issues. However, there can be no assurance that the systems of other companies,
including customers and suppliers on which the Company's systems interact and
transmit data will be timely converted or that any such failure to convert by
another company would not have an adverse effect on the Company's systems.
Net cash provided by financing activities was $16.1 million in 1997, which
consisted of a $2.3 million reduction of long-term debt, a $5.2 million
reduction of the intercompany borrowings from Daisy, a $2.0 million reduction of
"due to affiliate" borrowings from Daisy and a $25.7 increase from proceeds
received from the stock offering. Net cash provided by financing activities was
$611,000 in 1996, which consisted of a $1.1 million reduction of the long-term
debt and $1.7 million of additional borrowings from Daisy. As of December 31,
1997, the Company had a non-interest bearing term debt with a remaining face
value of $745,000 payable to the prior owners of BEI, secured by specific
equipment The note has an imputed interest rate of 8.4% and is payable in two
installments of $350,000 and $395,000, on January 31, 1998 and October 3, 1998,
respectively.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("FAS 130"). "Reporting
Comprehensive Income," which the company is required to adopt for 1998. This
statement will require the Company to report in the financial statements, in
addition to net income, comprehensive income and its components including
foreign currency items and unrealized gains and losses on certain investments in
debt
15
<PAGE>
Management's Discussion &
Analysis Of Financial Condition
And Results Of Operations
- --------------------------------------------------------------------------------
and equity securities. Upon adoption of FAS 130, the Company is also required to
reclassify financial statements for earlier periods provided for comparative
purposes. The adoption of FAS 130 will not have a significant impact on the
Company's consolidated financial statement disclosures.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("FAS 131"), "Disclosures about Segments of an Enterprise and Related
Information," which the Company is required to adopt for its 1998 annual
financial statements. This statement establishes standards for reporting
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial reports
issued to stockholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. Under FAS
131, operating segments are to be determined consistent with the way that
management organizes and evaluates financial information internally for making
operating decisions and assessing performance. The Company has not determined
the impact of the adoption of this new accounting standard on its financial
statement disclosures.
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
Board of Directors
Brass Eagle, Inc.
Rogers, Arkansas
We have audited the accompanying balance sheets of Brass Eagle Inc. (Brass
Eagle) as of December 31, 1997 and 1996, and the related statements of
operations, shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Brass Eagle Inc. as of
December 31, 1997 and 1996 and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1997, in
conformity with generally accepted accounting principles.
As explained in Note 1, the financial statements include significant
allocations of costs and expenses of Daisy Manufacturing Company allocated to
Brass Eagle.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
January 30, 1998, except for Note 5 as to which the date is March 5, 1998
16
<PAGE>
BALANCE SHEETS
(In thousands except share data)
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash $ 504 $ --
Securities available-for-sale 12,659 --
Accounts receivable -- less allowance for doubtful accounts
of $118 in 1997 and $52 in 1996 12,242 3,656
Due from affiliate 2,024 --
Inventories 3,584 1,195
Prepaid expenses and other current assets 737 379
Deferred income taxes 479 83
- -------------------------------------------------------------------------------------------------------------
Total current assets 32,229 5,313
Property and equipment, net 1,334 1,070
Other assets
Intangible assets, net 2,666 2,886
- -------------------------------------------------------------------------------------------------------------
$36,229 $9,269
- -------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 698 $1,151
Accounts payable 4,695 1,122
Accrued expenses 1,561 422
Due to affiliate 2,737 3,352
- -------------------------------------------------------------------------------------------------------------
Total current liabilities 9,691 6,047
Long-term debt, less current maturities 18 1,892
Deferred income taxes 365 200
Stockholders' equity
Common stock, $ .01 par value; 10,000,000 shares
authorized, 7,225,121 issued and outstanding 72 --
Additional paid-in capital 25,631 --
Retained earnings 452 1,130
- -------------------------------------------------------------------------------------------------------------
26,155 1,130
- -------------------------------------------------------------------------------------------------------------
$36,229 $9,269
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
17
<PAGE>
Statements Of Operations
(In thousands except share and per share data)
Years ended December 31, 1997, 1996, and 1995
1997 1996 1995
- --------------------------------------------------------------------------------
Net sales $36,139 $13,838 $4,319
Cost of sales 24,800 9,625 2,456
- --------------------------------------------------------------------------------
Gross profit 11,339 4,213 1,863
Operating expenses
Selling and marketing 3,385 1,472 640
General arid administrative 1,686 750 595
Royalty expense -- -- 487
Amortization expense 206 202 52
- --------------------------------------------------------------------------------
5,277 2,424 1,774
- --------------------------------------------------------------------------------
Operating income 6,062 1,789 89
Other expense
Interest expense, net 169 315 87
Other, net -- 45 --
- --------------------------------------------------------------------------------
169 360 87
- --------------------------------------------------------------------------------
Income before income taxes 5,893 1,429 2
Provision for income taxes 2,257 547 1
- --------------------------------------------------------------------------------
Net income $ 3,636 $ 882 $ 1
================================================================================
Pro forma basic net income per share $ 0.69 $ 0.18 $ --
================================================================================
Diluted net income per share $ 0.64 $ 0.16 $ --
================================================================================
See accompanying notes to financial statements.
18
<PAGE>
Statements Of Shareholders' Equity
(In thousands)
December 31, 1997, 1996, and 1995
Additional
Common Paid-in Retained
Stock Capital Earnings Total
- --------------------------------------------------------------------------------
Balance, January 1, 1995 $-- $ -- $ 247 $ 247
Net income -- -- 1 1
- --------------------------------------------------------------------------------
Balance, December 31, 1995 -- -- 248 248
Net income -- -- 882 882
- --------------------------------------------------------------------------------
Balance, December 31, 1996 -- -- 1,130 1,130
Stock options granted -- 298 -- 298
Reorganization and stock split 46 (46) -- --
Net income for the period January 1, 1997
through November 25, 1997 -- -- 3,184 3,184
Distribution of divisional equity -- (298) (4,314) (4,612)
Issuance of common stock 26 25,677 -- 25,703
Net income for the period November 26,
1997 through December 31, 1997 -- -- 452 452
- --------------------------------------------------------------------------------
Balance, December 31, 1997 $ 72 $25,631 $ 452 $ 26,155
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
19
<PAGE>
Statements Of Cash Flows
(In thousands)
Years ended December 31, 1997, 1996, and 1995
1997 1996 1995
- --------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 3,636 $ 882 $ 1
Adjustments to reconcile net income to
net cash from operating activities
Deferred income taxes (231) 124 10
Depreciation and amortization 751 426 102
Provision for doubtful accounts 66 34 18
Loss on sale of equipment -- 46 --
Stock option compensation expense 298 -- --
Changes in assets and liabilities
Accounts receivable (8,652) (2,356) (735)
Inventories (2,389) (649) (314)
Prepaid expenses and other assets (358) (323) (42)
Accounts payable and accrued expenses 4,712 1,317 188
- --------------------------------------------------------------------------------
Net cash used in operating activities (2,167) (499) (772)
Cash flows from investing activities
Purchases of property and equipment (795) (217) (48)
Acquisition of BEI assets -- -- (2,178)
Proceeds from sale of equipment -- 105 --
Purchase of securities available-for-sale (12,659) -- --
- --------------------------------------------------------------------------------
Net cash used in investing activities (13,454) (112) (2,226)
Cash flows from financing activities
Net proceeds from stock offering 25,703 -- --
Proceeds (payments) on long-term debt (2,327) (1,122) 2,000
Net proceeds (payments) on intercompany debt (5,227) 1,733 998
Due from affiliate (2,024) -- --
- --------------------------------------------------------------------------------
Net cash provided by financing activities 16,125 611 2,998
- --------------------------------------------------------------------------------
Net change in cash 504 -- --
Cash at beginning of year -- -- --
- --------------------------------------------------------------------------------
Cast at end of year $ 504 $ -- $ --
- --------------------------------------------------------------------------------
Supplemental disclosures of cash flow information
Cash paid during the year
Interest $ 318 $ 227 $ 41
Supplemental schedule of noncash investing
and financing activities
The Company purchased certain assets of BEI
for $4,343,475
The purchase price was allocated as follows
Production equipment -- -- 73
Tooling -- -- 1,146
Intangible assets -- -- 3,125
- --------------------------------------------------------------------------------
Total purchase price -- -- 4,344
Cash paid -- -- (2,178)
- --------------------------------------------------------------------------------
Amount financed by seller $ -- $ -- $ 2,166
- --------------------------------------------------------------------------------
20
<PAGE>
Notes to Financial Statements
- --------------------------------------------------------------------------------
(in thousands except share and per share data)
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, and was a
division of Daisy Manufacturing Company, Inc. ("Daisy") until the Reorganization
described below. 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.
Reorganization: Concurrently with the consummation of the initial public
offering (the Offering) of common stock on November 26, 1997, Daisy effected a
corporate reorganization (the "Reorganization"). In preparation for the
Reorganization, the Company transferred all of its nonpaintball-related assets,
operations, and liabilities to a newly-created subsidiary, Daisy Manufacturing
Company, a Delaware corporation ("New Daisy"), on November 24, 1997, retaining
only its paintball-related assets, operations, and liabilities. The Company then
distributed all of the issued and outstanding common stock of New Daisy to the
Company's existing stockholders in a spin-off transaction described under
Section 355 of the Internal Revenue Code of 1986, as amended, and a majority of
the Company's common and preferred shareholders adopted a Restated Certificate
of Incorporation which, among other things, increased the authorized capital
stock of the Company to 10 million shares of common stock and eliminated the
authorization for shares of preferred stock, whereupon the outstanding shares of
the Company's preferred stock were canceled without consideration. New Daisy has
agreed to indemnify and hold harmless the Company and its directors, officers,
employees, and shareholders from and against all liabilities and obligations
arising with respect to the Company's nonpaintball-related operations. In
addition, the Company has agreed to indemnify and hold harmless New Daisy and
its directors, officers, employees, and shareholders from and against all
liabilities and obligations arising with respect to the paintball-related
operations.
Weighted Average Common Shares Outstanding: As discussed above, the Company
completed a reorganization prior to the initial public offering. Accordingly,
the historical presentation of net income per common share is based on the
shares outstanding prior to the offering, the weighted average outstanding stock
options, and the number of shares to be issued in the offering whose proceeds
will be used to pay the divisional equity to Daisy as if all shares had been
outstanding during all periods presented (see Note 14).
Revenue Recognition: The Company recognizes revenue, net of allowances for
estimated returns upon shipment of product.
Securities Available-for-Sale: Securities are classified as
available-for-sale when the Company may decide to sell those securities for
changes in market interest rates, liquidity needs, changes in yield or
alternative investments and for other reasons. They are carried at fair value.
Unrealized gains and losses on securities available-for-sale are charged or
credited to a valuation allowance which is included as a separate component of
stockholder's equity. Realized gains and losses on disposition are based on the
net proceeds and the adjusted carrying amount of the securities sold, using the
specific identification method. At December 31, 1997, the cost of securities
available-for-sale approximated their fair value.
Inventories: Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
Property and Equipment: Property and equipment are stated at cost.
Expenditures for repairs and maintenance are charged to expense as incurred and
expenditures for additions and improvements which significantly extend the lives
of assets are capitalized. Upon sale or other retirement of depreciable
property, the cost and accumulated depreciation are removed from the related
accounts and any gain or loss is reflected in operations.
Tools and dies are depreciated using the units of production method.
Manufacturing equipment and office equipment are depreciated over the estimated
useful
21
<PAGE>
Notes to Financial Statements
(in thousands except share and per share data)
life of the assets, ranging from six to twelve years, using the straight-line
method. Amortization of leasehold improvements is based on the shorter of the
lease term or the useful life, using the straight-line method.
Intangible Assets: Intangible assets, including the Brass Eagle name and debt
financing costs, are stated at amortized cost. Intangible assets are being
amortized over the useful life of the assets, primarily 15 years on a
straight-line basis and debt financing costs are amortized over the period of
the related debt. Accumulated amortization was $478 and $258 as of December 31,
1997, and 1996, respectively.
The valuation of intangible assets is reviewed on an ongoing basis by
comparing the unamortized cost of the asset to the related projected
undiscounted revenue streams. Any impairment is charged to operations in the
period determined.
Income Taxes: The Company has a tax allocation agreement with Daisy which
provides for income taxes to be payable by Brass Eagle on the same basis as if
the Company had filed a separate income tax return.
A deferred tax liability or asset is determined at each balance sheet date.
It is measured by applying enacted tax laws to future amounts that will result
from differences in the financial statement and tax bases of assets and
liabilities.
Financial Instruments: The carrying value of accounts receivable and accounts
payable approximates fair value because of the short maturity of these items.
Based on the current market rates available to the Company, the fair value of
long-term debt approximates carrying value.
Initial Public Offering: On November 26, 1997, the Company completed its
initial public offering of its common stock. In connection with the Offering,
the Company issued 2,275,000 shares of stock and received net proceeds of
approximately $22,212 net of underwriting discounts and offering expenses. On
December 3, 1997, the Company sold an additional 341,250 shares which had been
reserved for the underwriting over-allotment and received net proceeds of
$3,491, net of underwriting discounts.
Allocations and Use of Estimates: During the three-year period ended December
31, 1997, Brass Eagle shared operational and administrative facilities with
Daisy. As a result, certain manufacturing, selling and administrative expenses
had to be allocated between Daisy and 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.
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.
NOTE 2 -- ACQUISITIONS
On October 1, 1995, Daisy purchased certain assets of BEI for $4,344. The
purchase price was allocated to equipment, tools, dies, jigs, molds and
exclusive rights to the Brass Eagle name. The purchase price was allocated to
the tangible and intangible assets acquired as follows:
Production equipment $ 73
Tooling 1,146
The Brass Eagle name 3,125
- --------------------------------------------------------------------------------
$ 4,344
================================================================================
NOTE 3 -- INVENTORIES
Inventories consist of the following components:
1997 1996
- --------------------------------------------------------------------------------
Finished goods $2,320 $ 437
Raw materials 1,264 758
- --------------------------------------------------------------------------------
Total inventory $3,584 $1,195
================================================================================
22
<PAGE>
Notes to Financial Statements
- --------------------------------------------------------------------------------
(in thousands except share and per share data)
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following major classifications:
1997 1996
- --------------------------------------------------------------------------------
Tools and dies $1,480 $1,117
Manufacturing equipment 248 169
Leasehold improvements 85 --
Office equipment 136 21
- --------------------------------------------------------------------------------
1,949 1,307
Accumulated depreciation (783) (237)
- --------------------------------------------------------------------------------
1,166 1,070
- --------------------------------------------------------------------------------
Construction in progress 168 --
- --------------------------------------------------------------------------------
$1,334 $1,070
================================================================================
NOTE 5 -- LONG-TERM DEBT
The Company had a term loan agreement specifically allocated in the Daisy
credit facility at LIBOR plus 2.5%. This allocated portion, along with
borrowings under the loan by Daisy Manufacturing, were secured by all personal
assets including accounts receivable, inventory, property and equipment, and
intangible properties of both Daisy and Brass Eagle. As of December 31, 1997 and
1996, the Company had $0 and $1,800, respectively, outstanding under this term
loan agreement.
Covenants related to the term loan agreement establish borrowing limitations
and net worth, interest coverage, and debt to equity and cash flow requirements
and impose restrictions on the disposition and purchase of assets and the
creation and retirement of debt for Daisy. On March 5, 1998, the bank released
its security interest in the assets of Brass Eagle.
The Company, through Daisy, also has a non-interest-bearing promissory note
in an original face amount of $2,500, which is secured by certain assets. This
note has been discounted at 8.4% which was the Company's incremental borrowing
rate as of October 1, 1995, the inception of the note. The present value of the
note outstanding at December 31, 1997 and 1996 was $690 and $1,243,
respectively. The balance of this note is payable in two installments of
principal and accrued interest in January and October, 1998.
Aggregate maturities of long-term debt as of December 31, 1997 are as follows
1998 $698
1999 8
2000 9
2001 1
- --------------------------------------------------------------------------------
$716
================================================================================
NOTE 6 -- LEASES
The Company leases its manufacturing and administrative facilities and
certain operating equipment under operating leases which expire December, 1999.
In addition, the Company leases office facilities under an operating lease. Rent
expense approximated $106 and $27 for the years ended December 31, 1997 and
1996, respectively. Previous to the Company entering into these leases, the
Company was allocated facility cost from Daisy. Total minimum rentals under
noncancelable operating leases over future years as of December 31, 1997 are:
1998 $210
1999 208
2000 17
2001 7
2002 6
- --------------------------------------------------------------------------------
$448
================================================================================
NOTE 7 -- INCOME TAXES
The income tax provision is comprised of the following:
December 31,
1997 1996 1995
- --------------------------------------------------------------------------------
Current payable $2,488 $423 $(9)
Deferred income taxes (231) 124 10
- --------------------------------------------------------------------------------
$2,257 $547 $ 1
================================================================================
23
<PAGE>
Notes to Financial Statements
(in thousands except share and per share data)
Income tax expense is reconciled to the tax expense that would result from
applying regular statutory rates to pretax income as follows:
December 31,
1997 1996 1995
- --------------------------------------------------------------------------------
Income taxes at the
statutory rate $2.004 $486 $1
State taxes, net of
federal benefit 253 61 --
- --------------------------------------------------------------------------------
$2,257 $547 $1
================================================================================
Deferred tax assets are comprised of the following:
1997 1996
- --------------------------------------------------------------------------------
Deferred tax assets resulting from
Accounts receivable allowance $ 45 $ 20
Accrued warranty 347 34
Accrued vacation 8 10
Inventory valuation 78 13
Accrued insurance 1 6
Accrued pension cost -- 27
Accrued postretirement benefit cost -- 18
Stock options 114 --
- --------------------------------------------------------------------------------
593 128
Deferred tax liabilities from
Depreciation and amortization (479) (245)
- --------------------------------------------------------------------------------
Net deferred tax asset (liability) $ 114 $(117)
================================================================================
NOTE 8 -- EMPLOYEE BENEFIT PLANS
Along with the Reorganization, the Company assumed responsibility for
pension and post-retirement benefits for employees whose last work assignment
was with the Company (see Note 1). No obligations for retired employees was
assumed.
Retirement Income Plan: The Company participates in a defined benefit
pension plan which covers the Company's eligible employees and New Daisy's
eligible employees. Plan assets are invested in various mutual funds. The
expense for this plan allocated to the Company for the years ended December 31,
1997, 1996 and 1995 was $43, $44 and $19, respectively. Pension expense was
allocated based on the earnings of the Company participants.
On November 24. 1997, the Board of Directors of Brass Eagle and New Daisy
approved a resolution for New Daisy to assume the role of plan sponsor and the
assignment of the liability attributable to Brass Eagle employees to a separate
defined benefit plan to be maintained exclusively for Brass Eagle employees. It
is estimated that the liability transferred will be approximately $124 and will
be funded by the transfer of an equal amount of assets. The transfer will take
place in 1998 upon completion of the actuarial calculations required.
In addition, the Company's Board of Directors has authorized the ceasing of
benefit accruals under the current plan as of December 31, 1997. All Brass Eagle
participants shall be considered fully vested as of December 31, 1997.
Summarized information about the Daisy plan at December 31, 1997 is as
follows: accumulated benefit obligation -- $13,628, projected benefit obligation
- -- $13,628, plan assets -- $13,196, unrecognized gain -- $1,253, accrued
liability -- $1,685, service cost -- $161, interest -- $1,014. expected return
on assets -- $981, amortization of prior service costs -- $20, net expense --
$214.
The assumptions used to calculate the accrued pension cost are as follows:
80/0 weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation, 6% expected rate of compensation
increase, and 90/a long-term rate of return on assets.
Postretirement Benefits Other Than Pensions: The Company also participates in
a postretirement benefit plan maintained by New Daisy. Employees retiring from
the Company on or after attaining age 60 with ten years of service are entitled
to postretirement health care benefits. These benefits are subject to
deductibles, copayment provisions and other limitations. After attaining age 65,
an eligible retiree's health care benefit coverage terminates. In December,
1997, the Board of Directors of the Company approved the spin-off of the Retiree
Medical Plan to New Daisy and the termination of benefits attributable to new
retirees as of January 1, 1998. The Company has no employees who are eligible
for benefits under the Retiree Medical Plan. The expense for this plan allocated
to Brass Eagle for the years ended December 31, 1997, 1996 and 1995 was $13, $17
and $25, respectively.
24
<PAGE>
Notes to Financial Statements
- --------------------------------------------------------------------------------
(in thousands except share and per share data)
NOTE 9 -- DUE FROM AFFILIATE
The due from affiliate represents the net amount resulting from certain
transactions between the Company and Daisy for the period from November 25, 1997
through December 31, 1997. These transactions include cash collection by Daisy
on the Company's behalf, amounts related to tax attributes in accordance with
the tax allocation agreement, payments made by Daisy on the Company's behalf to
various vendors, administrative charges from Daisy in accordance with the
administrative services agreement, and inventory transactions.
NOTE 10 -- DUE TO AFFILIATE
Brass Eagle's cash collection and cash disbursements were administered by
Daisy prior to the initial public offering. The net cash disbursed in excess of
the net cash received is classified as intercompany debt. In addition, assets
transferred from Daisy to the Company and liabilities assumed from Daisy by the
Company are also accounted for through the intercompany debt account. There has
been no interest expense charged for the use of these funds. The following is a
summary of the intercompany activity.
December 31,
1997 1996 1995
- --------------------------------------------------------------------------------
Balance at the beginning
of the year $ 3,352 $ 1,619 $ 566
Cash received from
customers (22,793) (11,516) (3,602)
Cash paid to suppliers
and others 22,316 11,366 4,397
Interest paid 318 227 41
Income taxes payable
to Daisy 2,181 423 (9)
(Proceeds) payments of
long-term debt 2,327 1,122 (2,000)
Purchase of property
and equipment 766 111 48
Purchase of Brass Eagle -- -- 2,178
Divisional equity 4,612 -- --
Payment to Daisy (10,342) -- --
- --------------------------------------------------------------------------------
Balance at the end of the year $ 2,737 $ 3,352 $1,619
================================================================================
Average balance
outstanding $ 3,045 $ 2,486 $1,093
================================================================================
The amount included in due to affiliate at December 31, 1997 includes the
remaining payment due to Daisy for the payout of the intercompany indebtedness
and divisional equity as of November 25, 1997 in the amount of $2,737.
NOTE 11 -- MAJOR CUSTOMERS AND SUPPLIERS
Customers accounting for 10% or more of the Company's sales for the
periods presented are as follows:
December 31,
1997 1996 1995
- --------------------------------------------------------------------------------
Customer A 28% 14% 10%
Customer B 31% 22% *
Customer C * * 15%
Customer D * 10% *
- --------------------------------------------------------------------------------
59% 46% 25%
================================================================================
* Customer's sales were less than 10% of the Company's sales in these
periods.
Accounts receivable balances from these customers were approximately $9,359
and $1,723 at December 31, 1997 and 1996, respectively.
Certain customers, including one major customer, are still issuing purchase
orders for the Company's product to New Daisy. The sales and accounts receivable
balances related to these transactions are reflected on the Company's financial
statement in accordance with an agency agreement established between New Daisy
and the Company.
The Company has entered into a strategic alliance with a paintball producer,
pursuant to which the Company has agreed to serve as such producer's exclusive
worldwide paintball distributor to all retail and wholesale outlets. This
Agreement extends through August 1999, but is terminable prior to that time upon
one year's notice and contains certain provisions which prohibit the Company
from selling any competing products during the term of the Agreement. Failure of
this supplier to meet the Company's product needs on a timely basis or loss of
this supplier could have a material adverse effect on the Company.
25
<PAGE>
Notes to Financial Statements
- --------------------------------------------------------------------------------
(in thousands except share and per share data)
NOTE 12 -- RELATED PARTY TRANSACTIONS
The Company has been allocated costs in the amounts of $4,608, $3,527 and
$2,327 for the period ended November 25, 1997 and the years ended December 31,
1996 and 1995, respectively. The costs represent costs associated with
advertising, promotions, utilities, insurance, customer service, warehousing,
shipping, human resources, information systems, finance and legal services. As
part of operating on a stand-alone basis, the Company has entered into an
administrative services agreement for warehousing, shipping, human resources,
information system, credit and collections, and legal services with New Daisy.
The administrative services agreement will define specific services to be
provided and the fees related to these services.
During 1997, 1996 and 1995, the expenses related to these services were
allocated to Brass Eagle as discussed in Note 1.
For the years 1997, 1996 and 1995, there was no interest expense charged on
the intercompany debt
Tax Allocation Agreement: The Company and New Daisy entered into a Tax
Allocation Agreement effective as of November 24, 1997. The Tax Allocation
Agreement provides generally that the Company and New Daisy shall compute their
separate federal and state tax liabilities as if they had always filed separate
returns for each taxable period. The Company and New Daisy have agreed to
reimburse each other for any reduction or increase in the tax obligation caused
by the use of tax attributes allocable to the other. The significant tax
attributes allocable include the gain on the spin-off of New Daisy, including
the effects of revoking Daisy's LIFO election as of the beginning of the year,
net operating losses generated by Daisy, and the potential benefits upon future
exercises of stock options.
Administrative Services Agreement: The Company and New Daisy entered into an
administrative services agreement effective as of November 24, 1997 (the
`Administrative Agreement). Pursuant to the Administrative Agreement, New Daisy
will provide the Company with certain legal, administrative and computer
information services through December 31, 1998 for $24 monthly. Unless
terminated by prior written notice, the Administrative Agreement is
automatically renewed annually for three years. The Administrative Agreement is
terminable, in whole or in part, without penalty, by agreement of the parties if
such services are no longer required. For the period from November 26, 1997
through December 31, 1997, the Company paid $42 in conjunction with this
agreement
NOTE 13 -- GEOGRAPHIC SEGMENTS
The Company sells paintball guns, paintballs and accessories through both
foreign and major national domestic retailers. The following summarizes the
geographic segment activity.
December 31,
1997 1996 1995
- --------------------------------------------------------------------------------
Revenues
United States $34,242 $11,845 $4,056
Other geographic areas 1,897 1,993 263
NOTE 14-- EMPLOYEE STOCK OPTIONS
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock options. FASB Statement No. 123, "Accounting for
Stock-Based Compensation," (SFAS 123) was issued by the FASB and if fully
adopted changes the methods for recognition of cost on plans similar to those of
the Company. Adoption of SFAS 123 is optional, however, pro forma disclosures as
if the Company adopted the cost recognition requirements under SEAS 123 are
presented below.
Certain stock options consist of options granted when Charter Oak Partners
and certain members of management acquired Daisy on June 30, 1993. The options
granted in June 1993 reserved 5% of Daisy's common stock for issuance under
the plan. These options were converted to options to purchase the Company's
common stock effective with the Reorganization. The options granted vested on
September 15, 1997, because of the Offering, and are exercisable until September
15, 2002. The exercise price of the options is fixed at $ .56 per share. The
exercise price of the options granted by Daisy has generally been equal to or
greater than fair market value
26
<PAGE>
Notes To Financial Statements
- --------------------------------------------------------------------------------
(in thousands except share and per share data)
at the date of grant. Fair market value was determined by the Board of Directors
without an independent valuation. As of December 31, 1997, there were 187,753
shares granted under this plan. Brass Eagle employees hold options to purchase
62,584 shares of common stock granted on June 30, 1993. None of these options
have been exercised as of December 31, 1997.
The Company also reserved 279,140 shares on June 30, 1993 to be distributed
at the discretion of Daisy's compensation committee. The option price was fixed
at $ .56 per share and the options are exercisable until June 1, 2003. As of
December 31, 1997, 256,737 shares were granted under this plan. Brass Eagle
employees held options to purchase 83,742 shares of common stock granted prior
to December 31, 1997. None of these options have been exercised as of December
31, 1997.
All 444,490 shares granted to both Brass Eagle and Daisy employees by Daisy
under the above stock option plan are outstanding options to purchase the
Company's stock and are currently vested and exercisable whether they are held
by Brass Eagle employees or Daisy employees.
Information regarding the Brass Eagle employees participating in the plan is
shown below:
Weighted
Number Average
of Exercise
Shares Price
- --------------------------------------------------------------------------------
Options outstanding at
December 31, 1995 90,498 $ 0.56
Granted 22,331 0.56
- --------------------------------------------------------------------------------
Options outstanding at
December 31, 1996 112,829 0.56
Granted prior to the
initial public offering 33,497 0.56
Granted under the 1997
stock option plan 178,870 11.06
- --------------------------------------------------------------------------------
Options outstanding at
December 31, 1997 325,196 $ 6.34
================================================================================
There was no compensation expense recorded for the years ended December 31,
1996 and 1995 because the exercise price equaled or exceeded the fair market
value of the option on the date of the grant. The Company recorded compensation
expense of approximately $298 for the year ended December 31, 1997, based on the
estimated fair market value of the Company including the anticipated
consummation of an initial public offering (see Notes 1 and 14) at that time of
approximately $9 per share. The Company determined the fair value of the options
granted in August, 1997, based on the anticipated offering price to the public
of $11 per share, less the estimated expenses of the offering of approximately
$1 per share and a discount to reflect the lack of marketability of the
Company's stock and risk prior to the potential initial public offering. A
deferred tax asset of approximately $114 has also been recognized for the book
tax differences associated with the options.
The Company's net income and net income per share would be the same under
SFAS 123 as under APB Opinion 25 for the years ended December 31, 1996, and
1995, because the options had no significant fair value on the dates
distributed. Under SFAS 123, the Company's pro forma net income would be $3,262
or $.69 per share on a pro forma basic basis and $.64 per share on a diluted
basis prior to the initial public offering. The weighted average fair value of
options granted was approximately $9 per share. The following assumptions were
used to calculate the option values: exercise price $ .56, risk-free weighted
average rate 5.75%, option term 4 years, dividend yield 0%, and 30%
volatility. The weighted average fair value of options granted November and
December, 1997, was approximately $4 per share. The following assumptions were
used to calculate option values: exercise price $11, risk-free weighted average
rate 5.83%, option term six years, dividend yield 0%, and 30% volatility.
The effects of applying SFAS 123 are not indicative of future amounts. SFAS
123 does not apply to awards prior to 1995, and additional awards in future
years are anticipated.
Along with the Reorganization and spin-off of New Daisy (see Note 1), the
New Daisy employees will retain their stock options in the Company. These
individuals hold options to purchase 298,306 shares of common stock at $ .56 per
share.
27
<PAGE>
Notes to Financial Statements
(in thousands except share and per share data)
NOTE 15 -- PRO FORMA BASIC AND DILUTED NET
INCOME PER SHARE
As discussed in Note 1, the Company, concurrent with the consummation of the
initial public offering, completed a reorganization. Accordingly, the
presentation of pro forma basic and diluted net income per share considers the
effects of the reorganization and the 1,777.96-for-i stock split which occurred
on November 24, 1997.
In accordance with the regulations of the Securities and Exchange
Commission, the Company has deleted the presentation of basic net income per
share and included pro forma basic net income per share for the years ended
December 31, 1997 and 1996. 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. Diluted net income per share has been computed by dividing
net income by the pro forma basic shares outstanding plus the weighted average
outstanding stock options during the periods presented.
A reconciliation of the numerators and denominators of the pro forma basic
net income per share and diluted net income per share for the years ended
December 31, 1997 and 1996 are presented below.
1997 1996
- --------------------------------------------------------------------------------
Pro forma basic net income per share
Net income available to
common stockholder $ 3,636 $ 882
- --------------------------------------------------------------------------------
Weighted average common
share outstanding 4,860,368 4,623,112
Theoretical shares issued
whose proceeds would
have been used to pay
divisional equity 377,926 419,279
- --------------------------------------------------------------------------------
Pro forma basic weighted
average shares outstanding 5,238,294 5,042,391
- --------------------------------------------------------------------------------
Pro farina basic net income
per share $0.69 $0.18
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
Diluted net income per share
Net income available to
common stockholders $ 3,636 $ 882
- --------------------------------------------------------------------------------
Pro farina basic weighted
average common shares
outstanding 5,238,294 5,042,391
Add dilutive effect of
stock options 431,710 400,931
- --------------------------------------------------------------------------------
Weighted average dilutive
common shares outstanding 5,670,004 5,443,322
- --------------------------------------------------------------------------------
Diluted net income
per share $0.64 $0.16
- --------------------------------------------------------------------------------
NOTE 16-- COMMITMENTS AND CONTINGENCIES
Due to the risks associated with the misuse of paintball products, the
Company anticipates that it will be a defendant in product liability lawsuits
from time to time. Currently, the Company is named as a defendant in one
lawsuit. To date, all claims and lawsuits have been resolved without any
material cost or a material adverse effect on the Company and its prospects.
In addition, the Company, Daisy, and certain other entities and individuals,
including certain of the Company's distributors, are named as defendants in an
action filed by Powerball, Inc. d/b/a TASO ("TASO"). TASO, which is one of the
Company's distributors, has alleged that the Company and the other defendants
have engaged in unlawful secret and discriminatory pricing practices in
violation of California law. The Company believes that the claim is without
merit and that it will be resolved without any material cost or material adverse
effect on the Company and its prospects.
28
<PAGE>
Market Information
STOCK PRICES
The Company's Common Stock commenced trading, on November 26, 1997, on the
national Market System of Nasdaq under the symbol "XTRM." The following table
sets forth for the periods indicated the high and low closing sale prices of the
Common Stock.
Fiscal 1997 High $ Low $
- --------------------------------------------------------------------------------
Fourth Quarter 12 5/8 11 5/8
Initial Offering 11 11
SHAREHOLDERS OF RECORD
The approximate number of shareholders of record of the Company's Common
Stock as of April 3, 1998 was _____ .
DIVIDENDS
The Company has never paid cash dividends on its Common Stock. The Company
presently intends to retain earnings to provide funds for its business
operations and for the expansion of its business. Thus, it does not anticipate
paying cash dividends in the foreseeable future.
CORPORATE INFORMATION
A copy of the Company's latest Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission is available upon written request to the
Chief Financial Officer, 1203 A North 6th St., Rogers, AR 72756.
TRANSFER AGENT AND REGISTRANT
SunTrust Bank
P.O. Box 4625
Atlanta, GA 30302-4625
AUDITORS
Crowe, Chizek and Company LLP
One Mid America Plaza
P.O. Box 3697
Oak Brook, IL 60522-3697
ANNUAL MEETING:
The Annual Meeting of Shareholders will be held at Las Colinas Hilton Garden
Inn, 7516 Las Colinas Blvd., Irving, TX 75063 on May 20, 1998 at 1:30 P.M.
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints E. Lynn Scott and J.R. Brian Hanna, and each of them, his true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K of Brass Eagle Inc. for the
fiscal year ended December 31, 1997 and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto such attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that such attorneys-in-fact
and agents or any of them, or their or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
/s/ Marvin W. Griffin
--------------------------------------------
Marvin W. Griffin
Director
Date: _________, 1998
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints E. Lynn Scott and J.R. Brian Hanna, and each of them, his true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K of Brass Eagle Inc. for the
fiscal year ended December 31, 1997 and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto such attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that such attorneys-in-fact
and agents or any of them, or their or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
/s/ Anthony J. Dowd
--------------------------------------------
Anthony J. Dowd
Director
Date: _________, 1998
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints E. Lynn Scott and J.R. Brian Hanna, and each of them, his true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K of Brass Eagle Inc. for the
fiscal year ended December 31, 1997 and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto such attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that such attorneys-in-fact
and agents or any of them, or their or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
/s/ Stephen J. Schaubert
--------------------------------------------
Stephen J. Schaubert
Director
Date: _________, 1998
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints E. Lynn Scott and J.R. Brian Hanna, and each of them, his true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K of Brass Eagle Inc. for the
fiscal year ended December 31, 1997 and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto such attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that such attorneys-in-fact
and agents or any of them, or their or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
/s/ H. Gregory Wold
--------------------------------------------
H. Gregory Wold
Director
Date: _________, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1995 AND DECEMBER 31, 1996 AND DECEMBER 31, 1997 CONSOLIDATED BALANCE SHEETS
AND THE STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996,
1997 AND THE NOTES THERETO, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996 DEC-31-1997
<PERIOD-END> DEC-31-1995 DEC-31-1996 DEC-31-1997
<CASH> 0 0 504
<SECURITIES> 0 0 12,659
<RECEIVABLES> 1,352 3,708 12,360
<ALLOWANCES> 18 52 118
<INVENTORY> 546 1,195 3,584
<CURRENT-ASSETS> 1,973 5,313 32,229
<PP&E> 1,274 1,307 2,117
<DEPRECIATION> 51 237 783
<TOTAL-ASSETS> 6,288 9,269 36,229
<CURRENT-LIABILITIES> 2,966 6,047 9,691
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 0 0 72
<OTHER-SE> 248 1,130 26,083
<TOTAL-LIABILITY-AND-EQUITY> 6,288 9,269 36,229
<SALES> 4,319 13,838 36,139
<TOTAL-REVENUES> 4,319 13,838 36,139
<CGS> 2,456 9,625 24,800
<TOTAL-COSTS> 4,230 12,049 30,077
<OTHER-EXPENSES> 0 45 0
<LOSS-PROVISION> 18 34 66
<INTEREST-EXPENSE> 87 315 169
<INCOME-PRETAX> 2 1,429 5,893
<INCOME-TAX> 1 547 2,257
<INCOME-CONTINUING> 1 882 3,636
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 1 882 3,636
<EPS-PRIMARY> 0 0 0
<EPS-DILUTED> 0 0.16 0.64
</TABLE>
