<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
/X/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Transition Period From ____ To ____
Commission File Number 0-23385
BRASS EAGLE INC.
(Exact name of registrant as specified in its charter)
Delaware 71-0578572
(State or other jurisdiction I.R.S. Employer
of incorporation of organization) Identification Number
1203A North Sixth Street, Rogers, Arkansas 72756
(Address of principal executive offices) (zip code)
501-986-9090
(Registrant's telephone number, including area code)
Indicate by a check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports)
Yes X No : and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The number of shares of the Registrant's Common Stock, $0.01 par
value, outstanding as of April 16, 1999 was 7,245,511.
<PAGE>
BRASS EAGLE INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 1999
INDEX
------
Page
----
PART I: FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Condensed Balance Sheets as of March 31,
1999 (unaudited) and December 31, 1998. . . 1
Condensed Statements of Operations for the
Three Months ended March 31, 1999 (unaudited)
and March 31, 1998 (unaudited). . . . . . . 2
Condensed Statements of Cash Flows for the
Three Months Ended March 31, 1999 (unaudited)
and March 31, 1998 (unaudited). . . . . . . 3-4
Notes to Condensed Financial Statements. . . 5-6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations6-10
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. . . . 10
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . 11
<PAGE>
BRASS EAGLE INC.
PART I: FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
(In thousands except share data)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash & cash equivalents $ 5,583 $ 6,836
Accounts receivable _ less allowance for
Doubtful accounts of $524 in 1999 and
$479 in 1998 19,651 18,271
Inventories 7,912 5,607
Prepaid expenses and other current assets 2,618 2,829
--------- ---------
Total current assets 35,764 33,543
Property and equipment, net 5,772 5,337
Intangible assets, net 7,017 2,550
--------- ---------
$ 48,553 $ 41,430
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 5,911 $ 2,772
Accrued expenses 5,831 4,171
--------- ---------
Total current liabilities 11,742 6,943
Deferred income taxes 263 213
Stockholders' equity
common stock, $.01 par value,
10,000,000 shares authorized,
issued and outstanding 7,245,511
in 1999, and 7,241,951 in 1998 72 72
Additional paid-in capital 25,711 25,667
Retained earnings 10,765 8,535
--------- ---------
36,548 34,274
--------- ---------
$ 48,553 $ 41,430
========= =========
</TABLE>
See accompanying notes to condensed financial statement
-1-
<PAGE>
BRASS EAGLE INC
CONDENSED STATEMENTS OF OPERATIONS
(In thousands except share and per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------
1999 1998
---- ----
(unaudited)
<S> <C> <C>
Net sales $ 19,004 $ 15,658
Cost of sales 11,608 10,253
---------- ----------
Gross profit 7,396 5,405
Operating expenses 3,805 3,464
---------- ----------
Operating income 3,591 1,941
Interest income 65 141
---------- ----------
Income before income taxes 3,656 2,082
Provision for income taxes 1,426 797
---------- ----------
Net income $ 2,230 $ 1,285
========== ==========
Net income per share:
Basic $ .31 $ .18
Diluted $ .29 $ .17
Weighted Average Shares Outstanding:
Basic 7,245,036 7,232,781
Diluted 7,691,500 7,680,319
</TABLE>
See accompanying notes to condensed financial statements.
-2-
<PAGE>
BRASS EAGLE INC.
CONDENSED STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income $ 2,230 $ 1,285
Adjustments to reconcile net income to net
cash from operating activities
Deferred income taxes (251) (307)
Depreciation and amortization 319 293
Provision for doubtful accounts 48 327
Stock Compensation Expense 8 0
Changes in assets and liabilities
(net of assets acquired)
Accounts receivable (1,428) (5,356)
Inventories (2,260) 9
Prepaid expenses and other assets 512 12
Accounts payable and accrued expenses 4,799 1,810
Due from affiliate 0 1,246
---------- ----------
Net cash provided by (used in) Operating
activities 3,977 (681)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (266) (935)
Acquisition of CM Support (5,000) 0
Net proceeds from investments 0 5,687
Distribution to Daisy 0 (2,737)
---------- ----------
Net cash from investing activities (5,266) 2,015
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt 0 (302)
Common stock issuance 36 103
---------- ----------
Net cash from investing activities 36 (405)
---------- ----------
NET CHANGE IN CASH (1,253) 929
---------- ----------
CASH AT BEGINNING OF PERIOD 6,836 504
---------- ----------
CASH AT END OF PERIOD $ 5,583 $ 1,433
========== ==========
</TABLE> -3-
<PAGE>
BRASS EAGLE INC.
CONDENSED STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Supplemental disclosures of cash flow information
Cash Paid during the period:
Interest $ 0 $ 62
Taxes 178 163
</TABLE>
See accompanying notes to condensed financial statements.
-4-
<PAGE>
BRASS EAGLE INC.
Notes to Condensed Financial Statements
(All information for the three month periods ended March 31, 1999 and 1998 is
unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies and practices followed by Brass Eagle are
as follows:
DESCRIPTION OF BUSINESS: Brass Eagle Inc. is a leading manufacturer of
paintball markers and other paintball products. Brass Eagle sells its products
through both foreign and major national domestic retailers. The financial
statements have been prepared using certain estimates and allocations (see
below) and include only the accounts of Brass Eagle.
INTERIM RESULTS (UNAUDITED): The accompanying condensed balance sheet at March
31, 1999 and the condensed statements of operations for the three month period
ended March 31, 1999 and 1998 are unaudited. In the opinion of management,
these statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting of only normal recurring
adjustments necessary for the fair presentation of the results of the interim
periods. The data disclosed in these notes to the financial statements for
those interim periods are also unaudited. The results of operations for the
three months ended March 31, 1999 are not necessarily indicative of the results
expected for the full calendar year. Because all of the disclosures required
by generally accepted accounting principles are not included, these interim
statements should be read in conjunction with the financial statements and
notes thereto contained in Brass Eagle's 1998 Annual Report.
NOTE 2 - INVENTORIES
Inventories consist of the following components (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------- ------------
<S> <C> <C>
Finished goods $ 4,935 $ 3,131
Raw materials 2,977 2,476
------- -------
$ 7,912 $ 5,607
======= =======
</TABLE>
-5-
<PAGE>
BRASS EAGLE INC.
Notes to Condensed Financial Statements
(All information for the three month periods ended March 31, 1999 and 1998 is
unaudited)
NOTE 3 - ACQUISITION
On January 4, 1999, Brass Eagle acquired certain assets of C. M. Support, Inc.
of Dallas, Texas for $5.0 million in cash. The assets acquired were patents,
trademarks, fixed assets and inventory. The acquisition was accounted for as a
purchase with approximately $4.6 million allocated to intangible assets and $.4
million allocated to fixed assets and inventory.
NOTE 4 - COMMITMENTS
Brass Eagle has committed to the construction of a new office building at a
cost of approximately $1.2 million, and expects to occupy the building during
the second quarter of 1999.
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the accompanying
condensed financial statements for the three months ended March 31, 1999 and
March 31, 1998 and the 1998 Annual Report.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this filing and in other filings by Brass Eagle with
the Securities and Exchange Commission and in press releases, presentations by
Brass Eagle or its management and oral statements may constitute forward-
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. These statements may include statements regarding Brass
Eagle's financial position, results of operations, market position, product
development, regulatory matters, growth opportunities and growth rates,
acquisition and divestiture opportunities, and other similar forecasts and
statements of expectation. Words such as expects, anticipates, intends, plans,
believes, seeks, estimates, should and variations of these words and similar
expressions, are intended to identify these forward-looking statements. The
statements are not statements of historical fact. Rather, they are based on
Brass Eagle's estimates, assumptions, projections and current expectations, and
are not guarantees of future performance. Brass Eagle 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. The forward-
looking statements involve known and unknown risks, uncertainties, and other
factors which may cause the actual results, performance or achievements of
Brass Eagle to be materially different from any future results, performance or
achievements expressed or implied by the forward-looking statements. Factors
that could cause Brass Eagle's actual results to differ materially from the
results, projections and expectations expressed in the forward-looking
statements include the following possibilities:
-6-
<PAGE>
BRASS EAGLE INC.
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
(1) 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
(2) Failure to obtain new customers or retain existing customers
(3) Inability to carry out marketing and sales plans
(4) Loss of key executives
(5) General economic and business conditions which are less favorable than
expected
(6) Unanticipated changes in industry trends.
YEAR 2000
As is true for most companies, the Year 2000 computer issue could create a risk
for Brass Eagle Inc. If systems do not correctly recognize date information
when the year changes to 2000, there could be an adverse impact on Brass
Eagle's operations. The risk for Brass Eagle exists in the following areas:
systems used by Brass Eagle to run its business, systems used by Brass Eagle's
suppliers and systems used by Brass Eagle's customers and service providers.
Brass Eagle conducted a comprehensive inventory and evaluation of its systems.
Brass Eagle's information technology infrastructure consists of a business
enterprise resource planning system, departmental workstations, application
servers, and a network system that links all systems at each location. It is
important to Brass Eagle's operations that these computer systems are
compliant. Brass Eagle also has several non-information technology systems
that use dates electronically that have been reviewed for compliance. These
include security systems, fire detection systems, gas detection systems, voice
mail and phone systems, electrical systems, workstations, radio frequency
equipment and telecommunication.
At present, all application and departmental servers have been tested, 100% of
networking infrastructure has been certified and the enterprise resource
planning Unix server has been upgraded.
During 1997, Brass Eagle upgraded its primary business enterprise system to a
version that is Year 2000 compliant. Brass Eagle completed comprehensive, full
system testing in the fourth quarter of 1998. The underlying database and raw
data have been either modified to support four digit years or the application
has been modified and tested to support correct date calculations using two
digit years.
-7-
<PAGE>
BRASS EAGLE INC.
YEAR 2000 (Continued)
Brass Eagle has also contacted its critical suppliers to determine that the
suppliers' operations and the products and services they provide are Year 2000
compliant. Where practicable, Brass Eagle will attempt to mitigate its risks
with respect to the failure of suppliers to be Year 2000 ready. The vendors
that Brass Eagle considers to be critical to its business have responded and
Brass Eagle is satisfied with their plans to operate without interruption into
the next century. In the event that suppliers are not year 2000 compliant,
Brass Eagle may seek alternative sources of suppliers.
Brass Eagle has sent questionnaires to several customers and is satisfied by
their responses. Brass Eagle has tested Electronic Data Interchange order
receipt and invoicing for key customers.
Brass Eagle has certified all external providers of mission critical services.
These include telecommunications, security and electrical. Brass Eagle does
not expect any issue with respect to Year 2000 issues that will lead to
significant service interruptions.
Since Brass Eagle is a relatively new company, most of its computer equipment
and software is Year 2000 certified. The external cost for Brass Eagle, in
it's efforts to become Year 2000 compliant in 1998, was approximately $35,000.
The internal cost of Year 2000 compliance is not measured by Brass Eagle. No
significant costs relating to Year 2000 compliance is anticipated for 1999.
Management believes its actions to be sufficient for Year 2000 remediation.
However, management plans to monitor all critical systems at the change of the
millenium and other critical dates in order to promptly respond to any systems
issues which may arise.
RESULTS OF OPERATIONS
The following table sets forth operations data as a percentage of sales for the
periods indicated:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1999 1998
---- ----
<S> <C> <C>
Sales 100.0% 100.0%
Cost of sales 61.1% 65.5%
Gross profit 38.9% 34.5%
Operating expenses 20.0% 22.1%
Operating income 18.9% 12.4%
Net income 11.7% 8.2%
</TABLE>
-8-
<PAGE>
BRASS EAGLE INC.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED
MARCH 31, 1998
SALES. Sales increased by 21.0% to $19.0 million for the three months ended
March 31, 1999 compared to $15.7 million for the three months ended March 31,
1998. The increase in sales was due to the increased popularity of paintball
play, increased domestic distribution to mass merchandisers and increased unit
volume for all products.
Domestic sales increased by 20.1% to $18.5 million (or 97.5% of sales) for the
three months ended March 31, 1999 from $15.4 million (or 98.5% of sales) for
the three months ended March 31, 1998. International sales increased by 100.0%
to $466,000 (or 2.5% of sales) for the three months ended March 31, 1999 from
$233,000 (or 1.5% of sales) for the three months ended March 31, 1998.
GROSS PROFIT. Gross profit as a percentage of net sales increased to 38.9% for
the three months ended March 31, 1999, as compared to 34.5% for the three
months ended March 31, 1998. This increase was primarily due to strong sales
of higher margin products, favorable manufacturing efficiencies and raw
material price reductions resulting from increased volumes.
OPERATING EXPENSES. Operating expenses increased by 8.6% to $3.8 million for
the three months ended March 31, 1999 compared to $3.5 million for the three
months ended March 31, 1998. This represents a decrease from 22.1% to 20.0% of
sales as a result of a provision for bad debts, and other non-recurring costs
recorded in the first quarter of 1998.
OPERATING INCOME. Operating income increased by 89.5% to $3.6 million for the
three months ended March 31, 1999 as compared to $1.9 million for the three
months ended March 31, 1998. The increase was primarily due to higher unit
sales volume and improved gross profit percentages, and a decrease in operating
expenses as a percentage of sales.
INTEREST. Brass Eagle recorded interest income of $65,000 for the three months
ended March 31, 1999 compared to interest income of $141,000 for the three
months ended March 31, 1998. The change was primarily due to a reduction of
cash in short-term investments associated with the funds expended to build and
equip Brass Eagle's new paintball production facility completed during 1998 and
the acquisition of certain assets from C.M. Support in January 1999.
INCOME TAX RATE. Brass Eagle's effective federal and state income tax rate was
39% for the three months ended March 31, 1999 and 38.3% for the three months
ended March 31, 1998.
-9-
<PAGE>
BRASS EAGLE INC.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999 Brass Eagle had working capital of $24.0 million. Brass Eagle
has in place a $10 million line of credit with Bank of America. Brass Eagle is
planning capital expenditures of approximately $3.2 million for the remainder
of 1999 for the expansion and improvement of manufacturing capacity and the
construction of an office building.
Brass Eagle believes that funds generated from operations, together with
borrowings under the credit facility, will be adequate to meet its anticipated
cash requirements for at least the next 18 months. Brass Eagle may, when and
if the opportunity arises, acquire other businesses involved in activities or
having product lines that are compatible with those of Brass Eagle or pursue
the vertical integration of production capabilities for one or more of Brass
Eagle's products which are currently purchased from third parties. The capital
expenditures that would be associated with any such activities that may occur
in the future would be funded with available cash and cash equivalents,
borrowings from the credit facility, working capital, or a combination of these
sources.
Net cash provided by operating activities for the three months ended March 31,
1999 was $4.0 million, which consisted primarily of net income of $2.2 million,
depreciation and amortization expense of $319,000, less net increases in
accounts receivable of $1.4 million, an increase in accounts payable and
accrued expenses and prepaid expenses of $5.3 million, an increase in inventory
of $2.3 million and a decrease in deferred taxes of $251,000.
Net cash used in investing activities was $5.3 million for the three months
ended March 31, 1999. Brass Eagle used $5.0 million to purchase certain assets
of C. M. Support and $266,000 was used to fund other capital expenditures.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are filed with this Report or are incorporated
herein by reference to previously filed material:
(a) Exhibits
Exhibit
Number Description of Document
- ------- -----------------------
11 Statement of Computation of Earnings Per Share
27 Financial Data Schedule
- -------------------------------------------------------------------------------
(b) Reports on Form 8-K:
None
-10-
<PAGE>
BRASS EAGLE INC.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Brass Eagle Inc.
By: /s/ J. R. Brian Hanna
J. R. Brian Hanna
Vice President-Finance and Chief
Financial Officer and Treasurer
(on behalf of the Registrant and as the
Registrant's principal Financial and
Accounting Officer)
-11-
<PAGE>
BRASS EAGLE INC.
EXHIBIT INDEX
-------------
The following exhibits are filed with this Report or are incorporated
herein by reference to previously filed material:
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
11 Statement of Computation of Earnings Per Share
27 Financial Data Schedule
<PAGE>
BRASS EAGLE INC. Exhibit 11
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
(In thousands except share and per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1999 1998
---- ----
<S> <C> <C>
BASIC NET INCOME PER SHARE
Net income available to common stockholders $ 2,230 $ 1,285
========== ==========
Weighted average common shares outstanding 7,245,036 7,232,781
========== ==========
Basic net income per share $ .31 $ .18
========== ==========
DILUTED NET INCOME PER SHARE
Net income available to common stockholders $ 2,230 $ 1,285
========== ==========
Pro forma basic weighted average common
shares outstanding 7,245,036 7,232,781
Add dilutive effect of stock options 446,464 447,538
---------- ----------
Weighted average dilutive common shares
outstanding 7,691,500 7,680,319
========== ==========
Diluted net income per share $ .29 $ .17
========== ==========
/TABLE
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED MARCH 31, 1999 CONDENSED BALANCE SHEET AND THE UNAUDITED CONDENSED
STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND THE
UNAUDITED NOTES THERETO AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 5,583
<SECURITIES> 0
<RECEIVABLES> 20,175
<ALLOWANCES> 524
<INVENTORY> 7,912
<CURRENT-ASSETS> 35,764
<PP&E> 8,058
<DEPRECIATION> 2,286
<TOTAL-ASSETS> 48,553
<CURRENT-LIABILITIES> 11,742
<BONDS> 0
0
0
<COMMON> 72
<OTHER-SE> 36,476
<TOTAL-LIABILITY-AND-EQUITY> 48,553
<SALES> 19,004
<TOTAL-REVENUES> 19,069
<CGS> 11,608
<TOTAL-COSTS> 15,413
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 48
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,656
<INCOME-TAX> 1,426
<INCOME-CONTINUING> 2,230
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,230
<EPS-PRIMARY> .31
<EPS-DILUTED> .29
</TABLE>
