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Previous: UNITED TENNESSEE BANKSHARES INC, SC 13G, 2001-01-18 |
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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q / A
/X/ AMENDED QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2000.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For The Transition Period From ____ To
Commission File Number 0-23385
BRASS EAGLE INC.
(Exact name of registrant as specified in its charter)
|
Delaware |
71-0578572 |
|
(State or other jurisdiction |
( I.R.S. Employer |
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of incorporation or organization) |
Identification Number) |
1201 S. E. 30th St., Bentonville, Arkansas 72712
(Address of principal executive offices) (zip code)
501-464-8700
(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) 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 November 6, 2000 was 7,138,590.
BRASS EAGLE INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2000
INDEX
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Part I: |
Financial Information |
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Item1. |
Condensed Consolidated Financial Statements |
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Independent Accountants' Report |
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Condensed Consolidated Balance Sheets as of September 30, 2000 |
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(unaudited) and December 31, 1999 |
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Condensed Consolidated Statements of Operations for the Three and |
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Nine Months ended September 30, 2000 (unaudited) and September 30, |
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1999 (unaudited) |
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Condensed Consolidated Statements of Cash Flows for the Nine |
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Months ended September 30, 2000 (unaudited) and September 30, 1999 |
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(unaudited) |
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Notes to Condensed Consolidated Financial Statements |
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Item 2. |
Management's Discussion and Analysis of Financial Condition and |
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Results of Operations |
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Part II: |
Other Information |
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Item 3. |
Senior Credit Facility Covenants |
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Item 6. |
Exhibits and Reports on Form 8-K |
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Signatures |
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BRASS EAGLE INC.
Brass Eagle is filing this Amended Quarterly Report on Form 10-Q / A for the quarterly period ended September 30, 2000 to clarify language in the Management's Discussion and Analysis of Financial Condition and Results of Operations. No change is being made to Brass Eagle's reported results of operations for the third quarter, and the corresponding financial statements are not being amended.
The clarifications to the Management's Discussion and Analysis of Financial Condition and Results of Operations appear in the "Net Sales", "Gross Profit", and "Operating Expenses" sections of both the Three Month Period and Ninth Month Period discussions.
PART I: FINANCIAL INFORMATION
Item 1. - Condensed Consolidated Financial Statements
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Shareholders
Brass Eagle Inc.
Bentonville, Arkansas
We have reviewed the condensed consolidated balance sheet of Brass Eagle Inc. as of September 30, 2000 and the related condensed consolidated statements of operations for the three month and nine month periods ended September 30, 2000 and 1999, and the condensed consolidated statements of cash flows for the nine month periods ended September 30, 2000 and 1999. These financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements for them to be in conformity with generally accepted accounting principles.
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Crowe, Chizek and Company LLP |
Oak Brook, Illinois
November 10, 2000
BRASS EAGLE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
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SEPTEMBER 30, |
DECEMBER 31, |
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2000 |
1999 |
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(unaudited) |
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Assets |
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Current assets |
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Cash & cash equivalents |
$ 122 |
$ 3,185 |
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Accounts receivable - less allowance |
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for doubtful accounts of $385 in 2000 |
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and $357 in 1999 |
21,423 |
16,888 |
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Due from affiliate |
220 |
420 |
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Inventories |
15,740 |
9,224 |
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Prepaid expenses and other current assets |
1,162 |
1,831 |
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Deferred taxes |
1,566 |
1,040 |
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Total current assets |
40,233 |
32,588 |
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Property and equipment, net |
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12,418 |
9,239 |
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Other assets |
342 |
0 |
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Intangible assets, net |
34,838 |
6,618 |
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$ 87,831 |
$ 48,445 |
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========== |
========== |
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Liabilities and stockholders' equity |
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Current liabilities |
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Notes payable to bank |
$ 1,280 |
$ 0 |
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Accounts payable |
6,757 |
3,139 |
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Accrued expenses |
6,110 |
2,739 |
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Current maturities of long-term debt |
26,607 |
0 |
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Total current liabilities |
40,754 |
5,878 |
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Long-term debt, less current maturities |
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16 |
0 |
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Deferred income taxes |
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644 |
560 |
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Stockholders' equity |
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Common stock, $.01 par value, 10,000,000 |
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shares authorized, 7,257,147 issued and |
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7,137,447 outstanding in 2000; 7,249,087 |
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issued and 7,129,387 outstanding in 1999 |
73 |
72 |
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Additional paid-in capital |
25,796 |
25,758 |
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Retained earnings |
21,091 |
16,720 |
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Treasury stock 119,700 shares at cost |
(543) |
(543) |
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46,417 |
42,007 |
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$ 87,831 |
$ 48,445 |
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========== |
========== |
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See accompanying notes to condensed consolidated financial statements.
BRASS EAGLE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except share and per share data)
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THREE MONTHS ENDED |
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NINE MONTHS ENDED |
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SEPTEMBER 30, |
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SEPTEMBER 30, |
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2000 |
1999 |
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2000 |
1999 |
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(unaudited) |
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(unaudited) |
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Net sales |
$ 23,125 |
$ 15,141 |
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$ 54,917 |
$ 51,561 |
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Cost of sales |
13,550 |
9,092 |
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34,526 |
30,370 |
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Gross profit |
9,575 |
6,049 |
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20,391 |
21,191 |
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Strategic initiative expenses |
651 |
0 |
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651 |
0 |
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Operating expenses |
5,129 |
2,935 |
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12,478 |
10,099 |
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Operating income |
3,795 |
3,114 |
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7,262 |
11,092 |
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Minority interest |
29 |
0 |
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50 |
0 |
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Interest income / (expense) |
(598) |
41 |
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(326) |
161 |
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Income before income taxes |
3,226 |
3,155 |
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6,986 |
11,253 |
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Provision for income taxes |
1,209 |
1,183 |
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2,615 |
4,219 |
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Net income |
$ 2,017 |
$ 1,972 |
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$ 4,371 |
$ 7,034 |
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======== |
======= |
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======= |
======= |
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Net income per share: |
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Basic |
$ 0.28 |
$ 0.27 |
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$ 0.61 |
$ 0.97 |
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Diluted |
$ 0.27 |
$ 0.26 |
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$ 0.58 |
$ 0.91 |
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Weighted average shares outstanding: |
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Basic |
7,137,304 |
7,248,424 |
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7,136,173 |
7,246,875 |
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Diluted |
7,517,947 |
7,679,867 |
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7,523,373 |
7,696,337 |
See accompanying notes to condensed consolidated financial statements.
BRASS EAGLE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
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NINE MONTHS ENDED |
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SEPTEMBER 30, |
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2000 |
1999 |
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(Unaudited) |
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Cash flows from operating activities |
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Net income |
$ 4,371 |
$ 7,034 |
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Adjustments to reconcile net income to net cash from operating activities |
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Deferred income taxes |
(442) |
(1) |
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Depreciation and amortization |
1,890 |
1,028 |
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Provision for doubtful accounts |
(13) |
98 |
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Minority interest |
(50) |
0 |
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Stock compensation expense |
20 |
24 |
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Loss on disposition of equipment |
67 |
0 |
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Changes in assets and liabilities net of effects of acquisitions |
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Accounts receivable |
(2,863) |
329 |
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Inventories |
(4,155) |
(7,594) |
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Prepaid expenses and other assets |
1,087 |
436 |
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Accounts payable and accrued expenses |
5,249 |
1,769 |
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Net cash provided from operating activities |
5,161 |
3,123 |
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Cash flows from investing activities |
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Purchases of property and equipment |
(3,397) |
(3,886) |
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Acquisition of assets of JT USA, L. P. |
(32,374) |
0 |
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Acquisition of C. M. Support, Inc. |
0 |
(5,000) |
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Net cash from investing activities |
(35,771) |
(8,886) |
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Cash flows from financing activities |
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Bank loan fees |
(350) |
0 |
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Issuance of stock |
19 |
59 |
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Proceeds from long-term debt |
28,000 |
0 |
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Reductions to long-term debt |
(1,402) |
0 |
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Proceeds from line of credit |
1,280 |
0 |
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Net cash from financing activities |
27,547 |
59 |
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Net change in cash |
(3,063) |
(5,704) |
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Cash at beginning of period |
3,185 |
6,836 |
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Cash at end of period |
$ 122 |
$ 1,132 |
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======== |
======== |
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Supplemental disclosures of cash flow information |
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Cash paid (refunded) during the period: |
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Interest |
$ 634 |
$ 0 |
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Taxes |
$ 1,175 |
$ 4,246 |
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Supplemental schedules of non-cash investing and financing activities: |
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In conjunction with the acquisition of assets of JT USA, L. P. |
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liabilities were assumed as follows: |
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Fair value of assets acquired |
$ 34,177 |
$ 0 |
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Cash paid |
32,374 |
0 |
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Liabilities assumed |
$ 1,803 |
$ 0 |
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See accompanying notes to condensed consolidated financial statements. |
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BRASS EAGLE INC.
Notes to Condensed Consolidated Financial Statements
(All information for the three and nine month periods ended September 30, 2000 and 1999 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 is a leading manufacturer of paintball markers and other paintball products. Brass Eagle sells its products through major domestic and international retailers and paintball specialty stores. The financial statements include the accounts of Brass Eagle and its subsidiaries.
Interim Results: The accompanying condensed consolidated balance sheet at September 30, 2000, the condensed consolidated statements of operations for the three month and nine month periods ended September 30, 2000 and 1999, and the condensed consolidated statements of cash flows for the nine month periods ended September 30, 2000 and 1999 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 results of operations for the three month and nine month periods ended September 30, 2000 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 1999 Annual Report on Form 10-K for the fiscal year ended December 31, 1999.
NOTE 2 - INVENTORIES
Inventories consist of the following components (in thousands):
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September 30, |
December 31, |
|
|
2000 |
1999 |
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Finished goods |
$ 7,007 |
$ 5,527 |
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Raw materials |
8,733 |
3,697 |
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$ 15,740 |
$ 9,224 |
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======== |
======== |
NOTE 3 - NEW ACCOUNTING STANDARD
On March 31, 2000, the Financial Accounting Standard Board (FASB) issued interpretive guidance on several implementation issues related to APB Opinion 25 on accounting for stock issued to employees. For purposes of applying Opinion 25, an individual would be considered an employee if the company granting the options has sufficient control over the individual as to establish an employer - employee relationship. The relationship is based on case law and IRS regulations. The FASB granted an exception to this definition for elected outside members of the board of directors.
Under ABP Opinion 25, fixed option plans for employees - that is, those plans whose terms, including price and number of shares granted, remain the same throughout the duration of the plan - have no compensation expense associated with the options when the exercise price is equal to the fair value of the stock at the grant date. That is an exception to the general requirement that all awards to employees in which the number of shares or the exercise price may change do have an element of compensation expense under Opinion 25. When a company directly or indirectly reprices options, it has changed the terms of the plan, which would make it a variable plan under Opinion 25. The interpretation is generally effective beginning July 1, 1999. The interpretation applies prospectively at that date for repricings that occurred after December 15, 1998. It also applies prospectively on July 1, 1999 to new awards granted after December 15, 1998 for purposes of applying the definition of employee.
In November 1999, Brass Eagle repriced certain options granted to employees after December 15, 1998. Brass Eagle did not recognize compensation expense under ABP opinion 25 during the third quarter of 2000 because the company's stock price at that time did not exceed the repriced stock price of $8 per share for these options. If in the future, Brass Eagle's stock price exceeds the repriced stock price of $8 per share Brass Eagle will recognize compensation expense.
NOTE 4 - ACQUISITION
On June 30, 2000 Brass Eagle completed the acquisition of substantially all of the assets of JT USA, L. P. of Chula Vista, California for $32.0 million in cash. In addition, Brass Eagle spent approximately $374,000 for closing costs for the purchase. The assets involved included all patent and trademark rights, molds, tools and dies used to produce product, all existing product lines, a lease of real property in Chula Vista, California, substantially all existing contracts, licenses and permits, all inventory, all accounts receivable and goodwill. The assets will be owned by Brass Eagle's newly formed subsidiary, JT USA Inc.
The purchase price of $32.4 million was allocated as follows:
(in thousands)
|
Current assets |
$ 4,448 |
|
Property and equipment |
798 |
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Liabilities |
(1,803) |
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Net assets acquired |
3,443 |
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Excess of cost over fair value |
28,931 |
|
Purchase price |
$ 32,374 |
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======== |
The $28.9 million intangible asset will be amortized over 20 years.
The following unaudited pro forma information presents a summary of the results of operations of Brass Eagle as if the acquisition had occurred on January 1, 1999 (in thousands, except for per share data):
|
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NINE MONTH PERIOD |
NINE MONTH PERIOD |
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ENDED SEPTEMBER 30, 2000 |
ENDED SEPTEMBER 30, 1999 |
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Net sales |
$ 62,869 |
$ 60,626 |
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Operating income |
8,505 |
11,536 |
|
Net income |
4,386 |
6,331 |
|
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|
|
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Net income per share: |
|
|
|
Basic |
$ 0.61 |
$ 0.87 |
|
Diluted |
$ 0.58 |
$ 0.82 |
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|
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Weighted average shares outstanding: |
|
|
|
Basic |
7,136,173 |
7,246,875 |
|
Diluted |
7,523,373 |
7,696,337 |
These unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that would have resulted had the acquisition occurred on the date indicated, or may result in the future. Management expects to gain synergies in marketing, product development, purchasing, sales and distribution in future periods as a result of the acquisition, although no assurance can be made in this regard.
NOTE 5 - CREDIT FACILITY & LONG-TERM DEBT BORROWINGS
On June 30, 2000, Brass Eagle signed a credit agreement for a Senior Credit Facility of $40.0 million. The Senior Credit Facility is comprised of a $10.0 million revolving credit facility, a $2.0 million term loan and a $28.0 million term loan for the acquisition of substantially all of the assets of JT USA, L. P. The credit facility is secured by all real property exclusive of Brass Eagle's investment in Challenge Park LLC.
On September 30, 2000, Brass Eagle borrowed $1,280,000 and had letters of credit outstanding of $204,150 from the $10.0 million revolving credit facility. Funds available on the credit line at September 30, 2000 were approximately $8.5 million.
On June 30, 2000 Brass Eagle utilized the $28.0 million term loan for the acquisition of substantially all of the assets of JT USA, L. P. The loan requires quarterly principal payments commencing September 2000. The loan matures in five years and the principal payments required are calculated based on the full amortization of the principal over the five years. Borrowings bear interest as designated by Brass Eagle at either the bank's prime rate (Adjusted up to prime plus 1.50% based on Brass Eagles' leverage ratio) or LIBOR (plus 1.25% to 2.50% based on Brass Eagle's leverage ratio).
The agreement includes certain restrictive covenants including maintaining a minimum net worth of $40.0 million plus 75% of net income, a leverage ratio of 2.25 through September 30, 2000 and 2.00 thereafter, a fixed charge coverage ratio of 2.25 from June 30, 2001 to December 30, 2001 and 2.50 at December 31, 2001 and beyond, minimum EBITDA of $10.0 million for the nine months ended September 30, 2000, $17.5 million for the period ended December 31, 2000, $6.0 million year to date for the quarter ending March 31, 2001 and $12.0 million year to date at quarter ending June 30, 2001. The agreement also limits capital expenditures to $4.0 million in 2000 and $4.5 million in 2001 and thereafter. Brass Eagle had EBITDA of $9.2 million including the $651,000 strategic initiative charge for the nine months ended September 30, 2000, which was below the $10.0 million required by the covenant. As a result, Brass Eagle is in technical default of its credit agreement and has classified $21.0 million of long-term debt as a current liability at September 30, 2000. Brass Eagle is negotiating to obtain a waiver.
In addition, the agreement provides for an excess cash flow recapture requirement for the first two years of the agreement equal to 50% of the excess cash flow over fixed charges not to exceed $750,000.
Financing costs incurred are capitalized and are amortized over the five-year life of the loan.
NOTE 6 - INTEREST RATE SWAP AND IMPACTS OF FAS 133
Brass Eagle entered into an interest rate swap agreement to hedge future cash flows for interest payments on $14.0 million of term debt on August 31, 2000. Under the terms of the swap agreement, Brass Eagle will pay a fixed rate of 6.97% on $14.0 million of borrowings under the term note agreement. The swap agreement runs for three years through August 29, 2000. The fair value of the hedge at September 30, 2000 is ($166,030).
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 also requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. In June 1999, the FASB issued SFAS No. 137, which defers the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. Management does not expect the adoption of the new standard to have a material impact on the financial statements. Brass Eagle will adopt FAS 133 in the first quarter of 2001.
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 consolidated financial statements for the three months and nine months ended September 30, 2000 and Brass Eagle's Annual Report on Form 10-K for the fiscal year ended December 31, 1999.
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:
(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; and
(6) Unanticipated changes in industry trends.
RESULTS OF OPERATIONS
The following table sets forth operations data as a percentage of sales for the periods indicated:
|
|
Three Months Ended |
Nine Months Ended |
||
|
|
September 30, |
September 30, |
||
|
|
2000 |
1999 |
2000 |
1999 |
|
Net sales |
100.0% |
100.0% |
100.0% |
100.0% |
|
Cost of sales |
58.6% |
60.0% |
62.9% |
58.9% |
|
Gross profit |
41.4% |
40.0% |
37.1% |
41.1% |
|
Strategic initiative expenses |
2.8% |
0.0% |
1.2% |
0.0% |
|
Operating expenses |
22.2% |
19.4% |
22.7% |
19.6% |
|
Operating income |
16.4% |
20.6% |
13.2% |
21.5% |
|
Net income |
8.7% |
13.0% |
8.0% |
13.6% |
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1999
Net Sales. Net sales increased by 53.0% to $23.1 million for the three months ended September 30, 2000 compared to $15.1 million in the three months ended September 30, 1999. The increase in net sales was due primarily to the acquisition of JT USA. In addition, sales of new markers that became available for sale in the third quarter of 2000 contributed to the sales increase.
Domestic sales increased by 53.1% to $21.9 million (or 94.6% of sales) for the three months ended September 30, 2000 from $14.3 million (or 94.5% of sales) for the three months ended September 30, 1999. International sales increased by 55.1% to $1.3 million (5.4% of sales) for the three months ended September 30, 2000 from $838,000 (or 5.5% of sales) for the three months ended September 30, 1999. The increase in international sales was due to increased sales to Canadian customers.
Gross Profit. Gross profit as a percentage of net sales increased to 41.4% for the three months ended September 30, 2000 as compared to 40.0% for the three months ended September 30, 1999. The increase was due primarily to cost savings resulting from Brass Eagle manufacturing masks as a result of its acquisition of JT USA on June 30, 2000 versus purchasing masks for resale prior to that date.
Strategic Initiative Expenses. During the third quarter Brass Eagle terminated discussions with a prospective buyer regarding the potential acquisition of Brass Eagle. Discussions were terminated by the Board of Directors of Brass Eagle based on the Company's improved performance and the Board's determination that the prospective buyer had not made reasonable progress toward a timely, conclusive transaction. Brass Eagle incurred one-time, strategic initiative expenses of $651,000, or $0.05 per share in connection with the proposed transaction, a portion of which represents expenses of the prospective buyer reimbursed by Brass Eagle as previously agreed.
Operating Expenses. Operating expenses increased by 75.9% to $5.1 million in the three months ended September 30, 2000 compared to $2.9 million in the three months ended September 30, 1999. The increase was primarily due to additional administrative and selling expenses associated with the J T USA Inc. operations and additional amortization of goodwill associated with the acquisition of JT USA L. P. The administrative and selling expenses for Challenge Park Xtreme also contributed to the increase.
Operating Income. Operating income increased by 22.6% to $3.8 million in the three months ended September 30, 2000 as compared to $3.1 million in the three months ended September 30, 1999. The increase was primarily due to increased sales.
Interest. Brass Eagle recorded net interest expense of $598,000 for the three months ended September 30, 2000 as compared to net interest income of $41,000 for the three months ended September 30, 1999. The increase in net interest expense was due to the borrowing of $28.0 million to acquire JT USA L. P.
Income Tax Rate. Brass Eagle's effective federal and state income tax rate was 37.5% for the three months ended September 30, 2000 and 37.5% for the three months ended September 30, 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1999
Net Sales. Net sales increased by 6.4% to $54.9 million for the first nine months of 2000 compared to $51.6 million for the first nine months of 1999. The increase in net sales was due to the acquisition of JT USA.
Domestic sales increased by 4.3% to $51.4 million (or 93.6% of sales) for the nine months ended September 30, 2000 from $49.3 million (or 95.5% of sales) for the nine months ended September 30, 1999. International sales increased by 52.2% to $3.5 million (or 6.4% of sales) for the nine months ended September 30, 2000 from $2.3 million (or 4.5% of sales) for the nine months ended September 30, 1999. International sales increased primarily because of increased sales to Canadian customers.
Gross Profit. Gross profit as a percentage of net sales decreased to 37.1% for the first nine months of 2000 compared to 41.1% for the first nine months of 1999. The decrease was in part due to a change in sales mix of existing products. The decrease was less significantly due to Brass Eagle discounting certain products in preparation for the introduction of new products.
Strategic Initiative Expenses. During the third quarter Brass Eagle terminated discussions with a prospective buyer regarding the potential acquisition of Brass Eagle. Discussions were terminated by the Board of Directors of Brass Eagle based on the Company's improved performance and the Board's determination that the prospective buyer had not made reasonable progress toward a timely, conclusive transaction. Brass Eagle incurred one-time, strategic initiative expenses of $651,000, or $0.05 per share in connection with the proposed transaction, a portion of which represents expenses of the prospective buyer reimbursed by Brass Eagle as previously agreed.
Operating Expenses. Operating expenses increased by 23.8% to $12.5 million in the first nine months of 2000 compared to $10.1 million in the first nine months of 1999. The increase was primarily due to additional administrative and selling expenses associated with the J T USA Inc. operations. The administrative and selling expenses for Challenge Park Xtreme also contributed to the increase.
Operating Income. Operating income decreased by 34.2% to $7.3 million in the first nine months of 2000 compared to $11.1 million in the first nine months of 1999. The decrease was primarily due to increased operating expenses and decreased margins.
Interest. Brass Eagle recorded net interest expense of $326,000 in the first nine months of 2000 compared to net interest income of $161,000 in the first nine months of 1999. The increase in net interest expense was due to the borrowing of $28.0 million to acquire JT USA.
Income Tax Rate. Brass Eagle's effective federal and state income tax rate was 37.4% in the first nine months ended September 30, 2000 and 37.5% for the first nine months ended September 30, 1999.
Liquidity and Capital Resources
At September 30, 2000 Brass Eagle had working capital of ($0.5) million including $21.0 million of long-term debt classified as current due to a technical default under the credit facility. Brass Eagle is planning capital expenditures of approximately $1.1 million for the remainder of 2000 for the expansion and improvement of manufacturing capacity and $1.6 million additional investment in the joint venture that owns and operates Challenge Park. The investments will be funded from available cash flow.
Brass Eagle believes that funds generated from operations, together with borrowings under the credit facility, (anticipated to be available after the covenant violation has been cured) 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 or participate in other businesses or ventures 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 would 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 nine months ended September 30, 2000 was $5.2 million, consisting primarily of net income of $4.4 million, depreciation and amortization expense of $1.9 million, plus a net increase in accounts receivable of $2.9 million, an increase in accounts payable and accrued expenses of $5.2 million, a decrease in prepaid expenses of $1.1 million, an increase in inventory of $4.2 million and an increase in deferred taxes of $442,000.
Net cash used in investing activities was $35.8 million for the nine months ended September 30, 2000. This is due to $32.4 million spent for the JT USA L. P. acquisition and $3.4 million of purchases of property and equipment.
Net cash provided by financing activities was $27.5 million for the nine months ended September 30, 2000, and was due to the proceeds from borrowings from Brass Eagle's Senior Credit Facility of $28.0 million, bank loan fees of $350,000, reductions of long-term debt of $1.4 million and borrowings from the line of credit of $1.3 million.
PART II: OTHER INFORMATION
Item 3. Senior Credit Facility Covenants
Brass Eagle's Senior Credit Facility includes a covenant requiring that Brass Eagle achieve EBITDA of $10 million for the nine months ended September 30, 2000. Through September 30, Brass Eagle achieved EBITDA of $9.9 million before its one-time charge of $651,000 for strategic initiative expenses, and EBITDA of $9.2 million after this charge. Brass Eagle believes that they will either obtain a waiver of the technical default of the EBITDA covenant for the nine months ended September 30, 2000 under the credit facility or that they will meet the EBITDA covenant for the year ended December 31, 2000 which would cure the default. Until the default is cured Brass Eagle will not be able to receive advances under the revolving credit facility. Brass Eagle is in compliance with all other Senior Credit Facility covenants.
Item 6. Exhibits and Reports on Form 8-K
The following exhibits are filed with this Report:
(a) Exhibits
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Exhibit |
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Number |
Description of Document |
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11 |
Statement of Computation of Earnings Per Share (incorporated by reference to Exhibit 11 to Form 10-Q for the quarter ended September 30, 2000, in 0-23385, filed with the SEC on November 13, 2000) |
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27 |
Financial Data Schedule (incorporated by reference to Exhibit 27 to Form 10-Q for the quarter ended September 30, 2000, in 0-23385, filed with the SEC on November 13, 2000) |
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______________________________________________________________________________
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K on July 13, 2000 to report the acquisition of substantially all of the assets of JT USA, L. P. of Chula Vista, California. The Company filed an Amended Current Report on Form 8-K / A on September 11, 2000 to include certain historical and pro forma financial statements related to the JT USA acquisition.
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.
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Brass Eagle Inc. |
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Date: January 17, 2001 |
By: /s/ J. R. Brian Hanna |
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J. R. Brian Hanna |
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Vice President-Finance and Chief Financial Officer and Treasurer |
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(on behalf of the Registrant and as the Registrant's principal Financial and Accounting Officer) |
EXHIBIT INDEX
The following exhibits are filed with this Report:
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NUMBER |
DESCRIPTION OF DOCUMENT |
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11 |
Statement of Computation of Earnings Per Share (incorporated by reference to Exhibit 11 to Form 10-Q for the quarter ended September 30, 2000, in 0-23385, filed with the SEC on November 13, 2000) |
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27 |
Financial Data Schedule (incorporated by reference to Exhibit 27 to Form 10-Q for the quarter ended September 30, 2000, in 0-23385, filed with the SEC on November 13, 2000) |
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