-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HyAcz7ESjeXmTzQjkzOpq+YtRP9EjnkvFBH31fqsCca1rU9v9L02l5HmUKX4wLR/ SZUNk8SLaVr2zyIXfjORsw== 0000930661-98-000588.txt : 19980326 0000930661-98-000588.hdr.sgml : 19980326 ACCESSION NUMBER: 0000930661-98-000588 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980325 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BRASS EAGLE INC CENTRAL INDEX KEY: 0001046112 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-RETAIL STORES, NEC [5990] IRS NUMBER: 710578572 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23385 FILM NUMBER: 98573201 BUSINESS ADDRESS: STREET 1: 1203 A N 6TH ST CITY: ROGERS STATE: AR ZIP: 72756 BUSINESS PHONE: 5016214390 10-K 1 FORM 10-K 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) 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- - 1997 Stock Option Plan - Employee Stock Purchase Plan 4. Reports on Form 8-K. -------------------- None -19- 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- 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- 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- EX-10.(VII) 2 LEASE AGREEMENT BETWEEN OZARK AND REGISTRANT 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 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. (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 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 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 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 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, 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 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 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, 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. 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 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 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 EX-11 3 STATEMENT OF COMPUTATION OF EARNINGS PER SHARE 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 ========== ========== EX-13 4 PORTIONS OF THE COMPANY'S ANNUAL REPORT 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.
Year Ended December 31, (Dollars in thousands except per share data.) - ------------------------------------------------------------------------------------------------------------ STATEMENT OF OPERATIONS DATA: 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------ 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
1 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 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 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 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 BALANCE SHEETS (In thousands except share data) December 31, 1997 and 1996
1997 1996 - ------------------------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. 17 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 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 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 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 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 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 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 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 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 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 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 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. EX-24 5 POWERS OF ATTORNEY 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 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 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 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 EX-27 6 FINANCIAL DATA SCHEDULE
5 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. 12-MOS 12-MOS 12-MOS DEC-31-1995 DEC-31-1996 DEC-31-1997 DEC-31-1995 DEC-31-1996 DEC-31-1997 0 0 504 0 0 12,659 1,352 3,708 12,360 18 52 118 546 1,195 3,584 1,973 5,313 32,229 1,274 1,307 2,117 51 237 783 6,288 9,269 36,229 2,966 6,047 9,691 0 0 0 0 0 0 0 0 0 0 0 72 248 1,130 26,083 6,288 9,269 36,229 4,319 13,838 36,139 4,319 13,838 36,139 2,456 9,625 24,800 4,230 12,049 30,077 0 45 0 18 34 66 87 315 169 2 1,429 5,893 1 547 2,257 1 882 3,636 0 0 0 0 0 0 0 0 0 1 882 3,636 0 0 0 0 0.16 0.64
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