-----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, AjcCfqmEmg/gNcxcjn5dhxNpL0eTQRe7GSeiOtl9eHd0UDAj505ytaD96/IEcQuW NjgQpFdAijkBxgK1uYRTQw== 0001046112-99-000010.txt : 19990303 0001046112-99-000010.hdr.sgml : 19990303 ACCESSION NUMBER: 0001046112-99-000010 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990302 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: 99554792 BUSINESS ADDRESS: STREET 1: 1203 A N 6TH ST CITY: ROGERS STATE: AR ZIP: 72756 BUSINESS PHONE: 5016214390 10-K 1 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, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ---------- to ---------- Commission File Number 0-23385 BRASS EAGLE INC. (Exact name of registrant as specified in its charter) Delaware 71-0578572 (State or other jurisdiction 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) 986-9090 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) BRASS EAGLE INC. 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 $48,332,708 at February 22, 1999. 7,245,511 shares of the registrant's common stock were outstanding as of February 22, 1999. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the May 13, 1999, Annual Meeting of Shareholders of the Company (the `1999 Proxy Statement') are incorporated by reference into Part III of this report. BRASS EAGLE INC. 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. BRASS EAGLE INC. 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 markers as a device to mark trees and cattle for commercial purposes in the early 1970's. Daisy manufactured paintball markers 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. 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 markers, 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 addresses 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 90% of the Company's sales are to national and regional mass merchandisers, such as Wal-Mart, Kmart, and Meijer, and major sporting goods retailers, such as The Sports Authority and Dick's Clothing and Sporting Goods. Wal-Mart and Kmart each accounted for over 10% of the Company's sales in 1998. The Company's products are also 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. BRASS EAGLE INC. GENERAL (Continued) 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 markers, paintballs, accessories, and playing field fees, were approximately $300 million for 1998 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 markers 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 markers 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 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 Pursuit Park-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. BRASS EAGLE INC. GENERAL (Continued) GEOGRAPHIC SEGMENTS The Company sells paintball markers, paintballs, and accessories through major domestic and international retailers and paintball specialty stores. The following summarizes the geographic segment activity.
(In Thousands) December 31, 1998 1997 1996 --------------------------- Revenues United States $73,327 $34,242 $11,845 Other geographic areas 1,822 1,897 1,993
PRODUCTS The Company offers a full line of paintball products, including paintball markers, paintballs, and accessories at various price points. PAINTBALL MARKERS. The Company designs and manufactures a full product line of paintball markers with a variety of performance characteristics. There are three primary classifications of paintball markers: 12 gram, pump action, and semi-automatic. The 12 gram paintball marker, 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 markers use 12 gram CO2 jets, are actuated using a pump action, and usually have a small paintball capacity. Pump action paintball markers, such as the Company's Tigershark, differ from a 12 gram paintball marker 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 marker needs to be cocked before each shot, a semi-automatic paintball marker needs to be cocked only once before expelling the first shot. Thereafter, it expels automatically after each trigger pull. Most organized paintball tournaments are played exclusively with semi-automatic paintball markers. The Company currently offers four semi- automatic paintball markers: Stingray II, Raptor Silver Eagle, Raptor Xtreme and Rainmaker-TM-. 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 ranging in size from 200 to 2,500 balls. The Company commenced manufacturing paintballs during the year and continues to purchase a portion of its paintball requirements from an independent vendor. BRASS EAGLE INC. PRODUCTS (Continued) ACCESSORY PRODUCTS. Brass Eagle markets a broad product line of paintball accessories complementary to its paintball markers and paintballs. These accessory products include facemasks, paintball hoppers, cleaning squeegees, and refillable CO2 tanks. Facemasks, a requirement for safe paintball play, are a primary component of the Company's accessory product line. The 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. 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 eight 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. BRASS EAGLE INC. 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 into mass merchandisers and sporting goods specialty stores. In addition, the Company expects to increase sales to wholesale distributors, which supply Brass Eagle products to other specialty retailers and international markets. The Company also believes that an expansion of product presence in existing outlets will also extend its market leadership. The Company also has a direct sales marketing group to reach consumers with unique, branded accessories and apparel. The Company's Amusement Sales Group is aggressively pursuing new markets such as family entertainment centers, fairs and carnivals using product concepts such as Pursuit Park-TM- playing fields and Paintball Pandemonium-TM- Shooting Arcade Trailers. - 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 promotional campaigns, such as the Company's `Ballin' on the Beach at Spring Break '98' in Panama City Beach, Florida, and national network cable television commercial spots on ESPN, ESPN2, MTV 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 supports the National Professional Paintball League (`NPPL'). In addition, the Company has been featured and advertises in paintball-related publications. The Company currently is marketing a modular field concept under the Pursuit Park-TM- name through a distributor in the amusement industry specializing in family entertainment centers. High-speed modular games such as those available in a Pursuit Park-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 inclusion of Pursuit Park-TM- in the 1998 World Paintball Championships in Kissimmee, Florida. The Company believes that the Pursuit Park-TM- product will continue to be an important part of bringing the sport to people of all skill levels. - INCREASE INTERNATIONAL SALES OF PAINTBALL PRODUCTS. The Company believes that international markets for paintball products and accessories present opportunities for growth and the Company is focusing on expanding retail distribution, especially in the Canadian and European markets. BRASS EAGLE INC. GROWTH STRATEGIES (Continued) - INCREASE PRODUCT SALES THROUGH STEP-BY-STEP PRICE SEGMENTATION. Brass Eagle offers five paintball markers to consumers at price points from $35 for beginner products to $450 for recreational and tournament level products and in 1998 introduced three new players kits and a host of accessories, which will satisfy the demands of multi-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 product development to ensure that Brass Eagle is able to offer high quality paintball products at step-by-step price points. - EVALUATE STRATEGIC ACQUISITIONS AND ALLIANCES. 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 and creative advertising in a variety of U.S. and international paintball publications and via targeted programming on national cable television. The Company's brand name and products also receive further promotion through frequent editorial references in paintball and broad based financial and general media publications. MANUFACTURING; STRATEGIC ALLIANCES; BACKLOG The Company designs all of its paintball markers 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 markers, and has non-exclusive contracts with a 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 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 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. The Company has $7.7 million in current and future open orders as of February 25, 1999. BRASS EAGLE INC. 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 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 markers and has a patent in the United States on the new Rainmaker-TM- paintball marker. In addition, the Company acquired four patents as part of its acquisition of the assets of CM Support, Inc. These patents are mainly related to loaders used to feed paintballs into the marker. 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. 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. BRASS EAGLE INC. 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 therefore), 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 did undertake a voluntary recall of the Xtreme Vision 280 Paintball Mask manufactured by Leader in April 1998, due to several incidents of cracked lens. The problem has been corrected, and this product meets all ASTM standards. The Company's supplier of the product has paid all costs of the recall. 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 markers. 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 face protection, and paintball markers. 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. BRASS EAGLE INC. 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, 1998, the Company employed approximately 218 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 As is true for most companies, the Year 2000 computer issue could create a risk for Brass Eagle Inc. If systems do not correctly recognize date information when the year changes to 2000, there could be an adverse impact on the Company's operations. The risk for Brass Eagle exists in the following areas: systems used by the company to run its business, systems used by the Company's suppliers and systems used by the Company's customers and service providers. Brass Eagle conducted a comprehensive inventory and evaluation of its systems. The Company's information technology (`IT') infrastructure consists of a business enterprise resource planning (`ERP') system, departmental workstations, application servers, and a network system that links all systems at each location. It is important to the Company's operations that these computer systems are compliant. The Company also has several non-IT systems that use dates electronically that have been reviewed for compliance. These include security systems, fire detection systems, gas detection systems, voice mail and phone systems, electrical systems, workstations, radio frequency equipment and telecommunication. At present, all application and departmental servers have been tested, 100% of networking infrastructure has been certified and the ERP Unix server has been upgraded. During 1997, the Company upgraded its primary business enterprise system to a version that is Year 2000 compliant. The Company completed comprehensive, full system testing in the fourth quarter of 1998. The underlying database and raw data have been either modified to support four digit years or the application has been modified and tested to support correct date calculations using two digit years. BRASS EAGLE INC. YEAR 2000 (Continued) Brass Eagle has also contacted its critical suppliers to determine that the suppliers' operations and the products and services they provide are Year 2000 compliant. Where practicable, Brass Eagle will attempt to mitigate its risks with respect to the failure of suppliers to be Year 2000 ready. The vendors that the Company considers to be critical to its business have responded and the Company is satisfied with their plans to operate without interruption into the next century. In the event that suppliers are not year 2000 compliant, the Company may seek alternative sources of suppliers. Brass Eagle has sent an initial questionnaire to several customers. The Company has tested invoicing of the critical customers and will continue testing customers with whom it trades production Electronic Data Interchange (`EDI') documents during 1999. Brass Eagle is in the process of testing or certifying that its service providers are Year 2000 compliant. Since Brass Eagle is a relatively new company, most of its computer equipment and software is Year 2000 certified. The external cost for the Company, in its efforts to become Year 2000 compliant in 1998, was approximately $35,000. No significant costs relating to Year 2000 compliance is anticipated for 1999. Management believes its actions to be sufficient for Year 2000 remediation and accordingly has not adopted a contingency plan. SUBSEQUENT EVENTS On January 4, 1999, the Company acquired certain assets of CM Support, Inc. of Dallas, Texas for $5.0 million in cash. CM Support, Inc. was a leading manufacturer and marketer of feeder loaders, tubes and accessories used in the paintball industry sold under the highly recognized ViewLoader-TM- trademark. The assets acquired were patents, trademarks, fixed assets and inventory. The acquisition will result in increased market share, improved margins, expanded retail product offerings and further penetration into the traditional paintball market. Management of the Company believes the acquisition will be accretive to income in 1999. BRASS EAGLE INC. ITEM 2: PROPERTIES The following table sets forth certain information as of December 31, 1998 relating to Brass Eagles' principal properties:
Approximate Owned or Location Purpose / Products Size (sq. ft.) Leased - ---------------------------------------------------------------------------- Rogers, Arkansas Sales & Administrative 6,400 Leased Office Granby, Missouri Manufacturing Facility - 32,000 Leased Markers Neosho, Missouri Warehouse Facility 40,000 Leased Neosho, Missouri Manufacturing Facility - 31,000 Leased Paintballs West Point, Retail Store 3,900 Leased Mississippi
The Company has lease renewal options on the warehouse facility in Neosho, Missouri, the manufacturing facility of paintballs in Neosho, Missouri and the retail store in West Point, Mississippi. There is an option to buy the manufacturing facility of markers in Granby, Missouri at the estimated fair market value. Brass Eagle signed an agreement to construct a new office building in Bentonville, Arkansas for sales and administrative staff. This building is expected to be completed in 1999 and will replace the current sales and administrative office. The Company believes that its facilities are suitable for their present and intended purposes and adequate for the Company's current and expected levels of operations. ITEM 3: LEGAL PROCEEDINGS Due to the occasional misuse of paintball products, the Company is a defendant in product liability lawsuits from time to time. At this time, there are five 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. ITEM 4: SUBMISSION OF MATTERS TO A VOTE AND SECURITY HOLDERS None. BRASS EAGLE INC. EXECUTIVE OFFICERS OF THE COMPANY E. LYNN SCOTT 44 Mr. Scott has been PRESIDENT AND CHIEF EXECUTIVE OFFICER of the Company since its inception in September 1997. Mr. Scott was responsible for developing Daisy's Paintball operations through its Brass Eagle division and has served as President of the division since November 1996. Prior to that, he served as Vice President, Sales and Marketing of Daisy from June 1989 to April 1997. Before joining Daisy, Mr. Scott served as VP, Sales and Marketing at Skeeter Products and Crosman, both divisions of the Coleman Company that specialize in sporting goods. J. R. BRIAN HANNA 46 Mr. Hanna has been VICE PRESIDENT - FINANCE, CHIEF FINANCIAL OFFICER AND TREASURER of the Company since December 1997. Prior to that he was employed at GSW Pumps for 14 years where he served as Vice President Finance - Chief Financial Officer from 1991 to November 1997; the Director of Marketing from 1988 - 1991; Treasurer from 1986 to 1988; Manager of Internal Audit from 1983 - 1986. CHARLES PRUDHOMME 47 Mr. Prudhomme has been VICE PRESIDENT OF MARKETING AND BUSINESS DEVELOPMENT of the Company since its inception in September 1997. Prior to that he served as Vice President of Business Development and Director of Marketing of Daisy from April 1996 and as a consultant at Daisy from August 1994 until March 1996. Before joining Daisy, Mr. Prudhomme served as a principal in the Coronado Group, a management consulting firm from March 1993 to March 1996; and Vice President of Joey Reiman Advertising Agency, an advertising firm, from December 1991 to February 1993. STEVEN R. DEMENT 41 Mr. DeMent has been VICE PRESIDENT OF OPERATIONS of the Company since its inception in September 1997. Prior to that, he served as Director of Operations of Daisy from September 1995 to August 1997. Before joining Daisy, he served as President of New Way Tours, a charter bus and transportation service, from May 1994 to September 1995; Vice President of Operations for Competec International Ltd., a maker of custom plastics from April 1993 to May 1994; and as Plant Manager for Key Tronic Corporation, a maker of computer key boards, from 1988 to 1993. BRASS EAGLE INC. EXECUTIVE OFFICERS OF THE COMPANY (Continued) STEVEN R. CHERRY 42 Mr. Cherry has been VICE PRESIDENT, BRAND DEVELOPMENT of the Company since its inception in September 1997. Prior to that he served as Director of Product Development of Daisy from May 1995 to August 1997. Mr. Cherry served as a liaison between Daisy's Paintball sales and manufacturing groups. He served as Product Manager from October 1990 to May 1995; as Manufacturing Engineering Manager from June 1988 to October 1990; and Chief Industrial Engineer of Daisy from June 1986 to June 1988. DANIEL L. OBERGFELL 38 Mr. Obergfell has been VICE PRESIDENT OF SALES of the Company since its inception in September 1997. Prior to that, he served as Sales Manager of the Brass Eagle division of Daisy from June 1997 to September 1997. Before joining Daisy, he served as National Account Sales Manager for DeVilbiss Air Power Company, a manufacturer of retail power equipment, from June 1996 to March 1997; and as National Account Sales Manager for the WD-40 Company, a multi-purpose lubricant manufacturer, from November 1988 to May 1996. JOHN D. FLYNN 49 Mr. Flynn has been VICE PRESIDENT _ GENERAL COUNSEL & SECRETARY of the Company since June 1998. Prior to that he served as Vice President General Counsel & Secretary at Daisy Manufacturing from November 1996 to June 1998. Prior to Daisy, Mr. Flynn was a Senior Attorney with Cleveland _ Cliffs Inc., an Iron Ore Mining firm, from 1985 _ 1996. BRASS EAGLE INC. PART II ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION The Company's Common Stock trades on the Nasdaq Stock Market under the symbol `XTRM'. The following table sets forth the high and low recorded last sale prices of the Common Stock during the periods indicated as reported by Nasdaq:
1998 1997 High Low High Low --------------------------------------------------- First Qtr. 16.875 12.500 N/A N/A Second Qtr. 17.563 14.500 N/A N/A Third Qtr. 15.938 9.500 N/A N/A Fourth Qtr. 15.875 10.000 12.625 11.000
SHAREHOLDERS On February 22, 1999, there were 7,245,511 shares of the Company's stock outstanding which was held by 70 shareholders of record and through approximately 1,500 nominee or street name accounts with brokers. CASH DIVIDENDS The Company has not paid any dividends during the years-ended December 31,1998 and 1997, nor does it expect to pay a cash dividend in the foreseeable future. BRASS EAGLE INC. ITEM 6: 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.
Year Ended December 31, (Dollars in thousands except per share data.) 1998 1997 1996 1995 1994 ---------------------------------------------- STATEMENT OF OPERATIONS DATA: Net Sales 75,149 36,139 13,838 4,319 2,615 Operating Income 13,090 6,062 1,744 89 400 Net Income 8,195 3,636 882 1 247 Diluted Earnings Per Share 1.07 0.64 0.16 BALANCE SHEET DATA (AT PERIOD END) Total Assets 41,430 36,229 9,269 6,288 Long Term Debt, Less Current Maturities 0 0 1,892 3,043
ITEM 7: MANAGEMENT'S DISCUSSION AND 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 $13.8 million in 1996, to $36.1 million in 1997 and to $75.1 million 1998. 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. Although significant growth opportunities remain, there can be no assurance that the growth rate will continue at historical levels. BRASS EAGLE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The Company's gross profits have increased from $4.2 million in 1996 to $25.9 million in 1998. The Company's gross profit percentages have increased because of increased absorption of fixed overhead and manufacturing spending efficiencies. For the year ended December 31, 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 costs were not allocated because they could be specifically identified to Brass Eagle. Management made estimates and assumptions in preparing financial statements that affected 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 effect on the Company and its prospects. No costs were allocated subsequent to the reorganization. For the year ended December 31, 1998, Daisy provided some fee based administrative services for Brass Eagle. These administrative service agreements expired December 31, 1998 and were not renewed. RESULTS OF OPERATIONS The following table sets forth operations data as a percentage of sales for the periods indicated.
1998 1997 1996 ------------------------------------ Sales 100.0% 100.0% 100.0% Cost of Sales 65.5% 68.6% 69.6% Gross Profit 34.5% 31.4% 30.4% Operating Expenses 17.1% 14.6% 17.8% Operating Income 17.4% 16.8% 12.6% Net Income 10.9% 10.1% 6.4%
YEAR ENDED DECEMBER 31, 1998, COMPARED TO YEAR ENDED DECEMBER 31, 1997. SALES. Sales increased by 108.0% to $75.1 million in 1998 compared to $36.1 million in 1997. The increase in sales was due to the increased popularity of paintball play, increased domestic distribution to mass merchandisers and increased unit volume of all products. BRASS EAGLE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Domestic sales increased by 114.3% to $73.3 million (or 97.6% of sales) in 1998 from $34.2 million (or 94.7% of sales) in 1997. International sales decreased by 5.3% to $1.8 million (or 2.4% of sales in 1998 from $1.9 million (or 5.3% of sales) in 1997. The decrease in international sales is due to the Company discontinuing its sales relationship with an UK based supplier of paintball markers, paintballs and accessories. GROSS PROFIT. Gross profit as a percentage of net sales increased to 34.5% in 1998 compared to 31.4% in 1997. This increase was primarily due to increased absorption of fixed overhead and manufacturing spending efficiencies. In addition, cost of sales for 1998 included $667,000 in start-up costs associated with the Company's new paintball manufacturing facility that commenced production in the fourth quarter of 1998. OPERATING EXPENSES. Operating expenses increased by 141.5% to $12.8 million in 1998 compared to $5.3 million in 1997. This increase from 14.6% of sales to 17.1% of sales was a result of additional compensation related to increased staffing and related benefits. In addition, the Company had increased advertising and promotional expenses, additional distribution costs, increased costs of product development and an additional allowance for doubtful accounts. OPERATING INCOME. Operating income increased by 114.8% to $13.1 million in 1998 compared to $6.1 million in 1997. The increase was primarily due to higher unit sales volume and improved gross profit percentages. INTEREST. The Company recorded net interest income of $338,000 for 1998 compared to net interest expenses of $169,000 in 1997. The change was due to investment income from the net proceeds of the Initial Public Offering and interest earned on cash and cash equivalents versus interest expenses on outstanding borrowings in 1997. INCOME TAX RATE. The Company's effective federal and state income tax rate was 39% for 1998 and 38.3% for 1997. 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 PROFIT. 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. BRASS EAGLE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 17.8% 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 258.8% to $6.1 million in 1997 compared to $1.7 million in 1996. The increase was primarily due to higher unit sales volume. INTEREST. The Company incurred net 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 purchase of certain assets. 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 in 1996. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1998 the Company had working capital of $26.6 million and at December 31, 1997 had working capital of $22.5 million. The Company paid certain intercompany borrowings from Daisy with proceeds from the Company's initial public offering and has in place a $10 million line of credit with Bank of America. The Company believes that funds generated from operations, together with borrowings under the credit facility, will be adequate to meet its anticipated cash requirements for at least the next 18 months. The Company may, when and if the opportunity arises, acquire other businesses involved in activities or having product lines that are compatible with those of the Company or pursue vertical integration of production capabilities for one or more of the Company products which are currently purchased from third parties. The capital expenditures that would be associated with any such activities that may occur in the future would be funded with available cash and cash equivalents, borrowings from the credit facility, working capital, or a combination of such sources. In January of 1999, the Company acquired certain assets of CM Support, Inc. of Dallas, Texas for $5.0 million in cash. The assets acquired were patents, trademarks, fixed assets and inventory. In addition, the Company plans 1999 capital expenditures of approximately $3.5 million for the expansion and improvement of manufacturing capacity and the construction of an office building. BRASS EAGLE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Net cash provided by operating activities for 1998 was $2.5 million, which consisted primarily of net income of $8.2 million, depreciation and amortization expense of $1.5 million, a decrease in `Due from Affiliate' of $1.8 million, an increase in accounts payable and accrued expenses and prepaid expense of $502,000, less net increases in accounts receivable of $6.6 million, an increase in inventory of $2.0 million, and an increase in deferred taxes of $916,000. 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 increase 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. Trade accounts receivable, as a percent of net sales was 24.3% in 1998, 33.9% in 1997 and 26.4% in 1996. Net cash provided by investing activities in 1998 was $7.3 million. This resulted from net proceeds on sales of securities available-for-sale of $12.7 million reduced by the purchase of property and equipment of $5.3 million. Net cash used in investing activities was $13.5 million for 1997, which consisted of purchases of property, equipment and other asset and the purchase of investments with the proceeds of the Company's initial public offering in 1997. The proceeds from the sale of available-for-sale securities were used to fund the increase in inventory, receivables and the new paintball facility. The majority of the property and equipment purchases related to the addition of a paintball manufacturing facility that commenced production in the fourth quarter of 1998. The Company spent $3.8 million for the new facility. Total start-up charges of $667,000 related to the new paintball facility were included in cost of sales for 1998. Net cash used in financing activities was $3.5 million for 1998, which consisted of $698,000 reduction in long-term debt, a distribution of $2.7 million to Daisy and the proceeds from the issuance of shares upon exercise of stock options less shares forfeited for taxes of $103,000. Net cash provided by financing activities was $16.1 million in 1997, which consisted of $2.3 million reduction in long-term debt, a $5.2 million reduction in intercompany borrowings from Daisy, a $2.0 million reduction of _due to affiliate_ borrowings from Daisy and a $25.7 million increase from proceeds received from the Company's initial public offering. BRASS EAGLE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) NEW ACCOUNTING PRONOUNCEMENTS In February 1998, the FASB issued Statement of Financial Accounting Standards No. 132 (`FAS 132'), `Employers' Disclosures about Pensions and Other Postretirement Benefits', which the Company was required to adopt for its 1998 Annual Financial Statements. This statement revises disclosure requirements regarding pension and other postretirement benefits. The revised disclosures include a reconciliation of the changes in the projected benefit obligation and plan assets and more detail regarding the amortization of gains and losses, prior service cost, and transition assets and liabilities recognized in expense. FAS 132 does not change the accounting for these plans. The adoption of FAS 132 did not have an impact on the Company's financial statements disclosures. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133 (`FAS No. 133'), `Accounting for Derivative Instrument and Hedging Activities', which the Company is required to adopt beginning the third quarter of 1999. FAS 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The adoption of SFAS No. 133 is not expected to have a material impact on the financial position or results of operations of the Company. 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 included herein. BRASS EAGLE INC. ITEM 8: FINANCIAL STATEMENTS 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, 1998, and 1997, and the related statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998. 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, 1998 and 1997 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. Crowe, Chizek and Company LLP Oak Brook, Illinois January 29, 1999 BRASS EAGLE INC. FINANCIAL STATEMENTS (Continued) BALANCE SHEETS (In thousands except per share data) December 31, 1998 and 1997
1998 1997 ---- ---- ASSETS Current assets Cash $ 6,836 $ 504 Short-term investments 0 12,659 Accounts receivable _ less allowance for doubtful accounts of $479 in 1998 and $118 in 1997 18,271 12,242 Due from affiliate 227 2,024 Inventories 5,607 3,584 Prepaid expenses and other current assets 1,359 737 Deferred income taxes 1,243 479 --------- ---------- Total current assets 33,543 32,229 Property, plant and equipment, net 5,337 1,334 Other assets: Intangible assets, net 2,550 2,666 --------- ---------- $ 41,430 $ 36,229 ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current maturities of long-term debt $ 0 $ 698 Accounts payable 2,772 4,695 Accrued expenses 4,171 1,579 Due to affiliate 0 2,737 --------- --------- Total current liabilities 6,943 9,709 Deferred income taxes 213 365 Stockholders' equity: Common stock, $.01 par value; 10,000,000 shares 72 72 authorized, 7,241,951 issued and outstanding in 1998 7,225,121 issued and outstanding in 1997 Additional paid-in capital 25,667 25,631 Retained earnings 8,535 452 --------- --------- 34,274 26,155 --------- --------- $ 41,430 $ 36,229 ========= =========
See accompanying notes to financial statements BRASS EAGLE INC. FINANCIAL STATEMENTS (Continued) STATEMENTS OF OPERATIONS (In thousands except share data) Years ended December 31, 1998, 1997, and 1996
1998 1997 1996 ---- ---- ---- NET SALES $ 75,149 $ 36,139 $ 13,838 Cost of Sales 49,253 24,800 9,625 --------- --------- --------- GROSS PROFIT 25,896 11,339 4,213 Operating expenses: Selling & marketing 8,162 3,385 1,472 General & administrative 4,428 1,686 795 Amortization expense 216 206 202 --------- --------- --------- 12,806 5,277 2,469 --------- --------- --------- OPERATING INCOME 13,090 6,062 1,744 Other income/(expense) Interest income 370 51 0 Interest expense (32) (220) (315) --------- ---------- ---------- 338 (169) (315) --------- ---------- ---------- INCOME BEFORE INCOME TAXES 13,428 5,893 1,429 Provision for income taxes 5,233 2,257 547 --------- ---------- ---------- NET INCOME $ 8,195 $ 3,636 $ 882 ========= ========== ========== Pro forma basic earnings per share $ 1.13 $ 0.69 $ 0.18 ========= ========== ========== Diluted earnings per share $ 1.07 $ 0.64 $ 0.16 ========= ========== ==========
See accompanying notes to financial statements BRASS EAGLE INC. FINANCIAL STATEMENTS (Continued) STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands except share data) December 31, 1998, 1997, and 1996
Common Stock Additional ------------ Paid-In Retained Shares Amount Capital Earnings Total ------ ------ --------- -------- ----- Balance, January 1, 1996 0 $ 0 $ 0 $ 248 $ 248 Net Income 0 0 0 882 882 --------- ------ --------- -------- ------- Balance, December 31, 1996 0 0 0 1,130 1,130 Stock options granted 0 0 298 0 298 Reorganization and stock split 4,608,871 46 (46) 0 0 Net income for the period January 1, 1997 through November 25, 1997 0 0 0 3,184 3,184 Distribution of Divisional equity 0 0 (298) (4,314) (4,612) Issuance of common stock 2,616,250 26 25,677 0 25,703 Net income for the period November 26, 1997 through December 31,1997 0 0 0 452 452 --------- ------- --------- -------- ------- Balance, December 31, 1997 7,225,121 72 25,631 452 26,155 Stock options exercised 22,331 0 12 0 12 Common stock repurchased (7,345) 0 (4) (112) (116) Issuance of common stock 1,844 0 28 0 28 Net Income 0 0 0 8,195 8,195 --------- ------- --------- -------- ------ Balance, December 31, 1998 7,241,951 $ 72 $ 25,667 $ 8,535 $34,274 ========= ======= ========= ======== =======
See Accompanying notes to financial statements BRASS EAGLE INC. FINANCIAL STATEMENTS (Continued) STATEMENTS OF CASH FLOWS (In thousands) Years ended December 31, 1998, 1997, and 1996
1998 1997 1996 ------- -------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 8,195 $ 3,636 $ 882 Adjustments to reconcile net income to net cash from operating activities Deferred income taxes (916) (231) 124 Depreciation and amortization 1,535 751 426 Provision for doubtful accounts 507 66 34 Loss on sale of equipment 0 0 46 Stock compensation expense 27 298 0 Changes in assets and liabilities Accounts receivable (7,091) (8,652) (2,356) Inventories (2,023) (2,389) (649) Prepaid expenses and other assets (167) (358) (323) Accounts payable and accrued expenses 669 4,712 1,317 Due from affiliate 1,797 0 0 ------- --------- ---------- Net cash from operating activities 2,533 (2,167) (499) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (5,322) (795) (217) Proceeds from sale of equipment 0 0 105 Net proceeds from securities available-for-sale 12,659 0 0 Purchase of securities available-for-sale 0 (12,659) 0 ------- --------- ---------- Net cash from investing activities 7,337 (13,454) (112)
BRASS EAGLE INC. FINANCIAL STATEMENTS (Continued) STATEMENTS OF CASH FLOWS (Continued) (In thousands) Years ended December 31, 1998, 1997, and 1996
1998 1997 1996 ------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from stock offering 0 25,703 0 Distribution to Daisy (2,737) 0 0 Payments on long-term debt (698) (2,327) (1,122) Net proceeds (payments) on intercompany debt 0 (5,227) 1,733 Exercise of stock options less amount forfeited for taxes (103) 0 0 Due from affiliate 0 (2,024) 0 ------- --------- ---------- Net cash from financing activities (3,538) 16,125 611 ------- --------- ---------- Net change in cash 6,332 504 0 Cash at beginning of year 504 0 0 ------- --------- ---------- CASH AT THE END OF YEAR $ 6,836 $ 504 $ 0 ======= ========= ========== Supplemental disclosures of cash flow information Cash paid during the year for: Interest $ 62 $ 318 $ 227 Taxes $ 6,412 $ 0 $ 0
See accompanying notes to financial statements BRASS EAGLE INC. NOTES TO FINANCIAL STATEMENTS (In thousands except share and per share data) December 31, 1998, 1997, and 1996 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 markers and other paintball products. The Company sells its products through major domestic and international retailers and paintball specialty stores. REORGANIZATION: Prior to the initial public offering of common stock in November of 1997, the Company operated as a division of Daisy Manufacturing Company, Inc. (`Daisy'). Concurrently with the consummation of the initial public offering of common stock, the Company effected a corporate reorganization The reorganization transferred all of the non paintball-related assets, operations, and liabilities to a newly created subsidiary, Daisy Manufacturing Company (`New Daisy') and then distributed all of the issued and outstanding common stock of New Daisy to the Company's existing shareholders in a spin-off transaction under Section 355 of the Internal Revenue Code of 1986, as amended. The Company and New Daisy have indemnified each other from and against all liabilities and obligations arising with respect to the paintball operations and non-paintball operations, respectively prior to the reorganization. WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: As discussed above, the Company completed a reorganization prior to the initial public offering. Accordingly, the presentation of earnings per common share prior to 1998 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 would 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 upon shipment of product and accrues for defective returns based on experience. CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash, time deposits, and highly liquid investments with original maturities of 3 months or less. INVENTORIES: Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. The Company acquired certain inventory in exchange for $271 of trade receivables in the year ended December 31, 1998. PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. Expenditures for repairs and maintenance are expensed 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. BRASS EAGLE INC. NOTES TO FINANCIAL STATEMENTS (Continued) (In thousands except share and per share data) Tools and dies are depreciated using the units of production method. Manufacturing equipment and office equipment are depreciated over the estimated useful life of the assets, ranging from three 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 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 $694 and $478 as of December 31, 1998 and 1997, respectively. The Company acquired certain intangible assets in exchange for $100 of trade receivables in the year ended December 31, 1998. The valuation of intangible assets is reviewed on an ongoing basis by comparing the unamortized cost of the asset to the related projected undiscounte revenue streams. Any impairment is charged to operations in the period determined. FINANCIAL INSTRUMENTS: The carrying value of accounts receivable and accounts payable approximates fair value because of the short maturity of these items. 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. INCOME TAXES: The provision for income taxes includes federal and state taxes currently payable and deferred taxes arising from temporary differences between the financial statement and tax basis of assets and liabilities using current tax rates. The Company has a tax allocation agreement which provides for the settlemen of certain tax attributes as described in Note 11. The tax allocation agreement also provides that income taxes would be payable on the same basis as if Brass Eagle had filed a separate income tax return for years prior to the spin-off. SHORT-TERM INVESTMENTS: Short-term investments are classified as available for-sale when the company may decide to sell those securities for changes in liquidity needs, yield, alternative investments, and other reasons. At December 31, 1997, the cost of short-term investments approximated their fair value. BRASS EAGLE INC. NOTES TO FINANCIAL STATEMENTS (Continued) (In thousands except share and per share data) ALLOCATIONS AND USE OF ESTIMATES: During the two-year period ended Decembe 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 o 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 futur results could differ. NOTE 2 - INVENTORIES Inventories consist of the following components: 1998 1997 -------- -------- Finished goods $ 3,131 $ 2,320 Raw materials 2,476 1,264 -------- -------- Total inventory $ 5,607 $ 3,584 ======== ========
BRASS EAGLE INC. NOTES TO FINANCIAL STATEMENTS (Continued) (In thousands except share and per share data) NOTE 3 - PROPERTY AND EQUIPMENT Property and equipment consist of the following major classifications:
1998 1997 -------- -------- Tools and dies $ 1,857 $ 1,480 Manufacturing equipment 2,688 248 Leasehold improvements 1,365 85 Office equipment 508 136 -------- -------- 6,418 1,949 Accumulated depreciation (2,100) (783) -------- -------- 4,318 1,166 Construction in Progress 1,019 168 ------- -------- $ 5,337 $ 1,334 ======= ========
NOTE 4 - CREDIT FACILITY & LONG-TERM DEBT BORROWINGS During 1998, the Company entered into a Revolving Credit Agreement with Bank of America providing for up to $10,000 in working capital related loans and up to $250 in standby letters of credit. Loan availability is based on 75% of eligible trade receivables. Interest is calculated at a variable rate based on the Reference Rate (LIBOR) plus 1.25% to 1.55% with the rate dependent on the Funded Debt Ratio. The agreement expires on July 1, 2001. The Company had no borrowings or letters of credit outstanding as of December 31, 1998. The Company, through Daisy, had a non-interest-bearing promissory note, which was secured by certain assets. The note was paid in full during 1998. BRASS EAGLE INC. NOTES TO FINANCIAL STATEMENTS (Continued) (In thousands except share and per share data) NOTE 5 - LEASES The Company leases its manufacturing and administrative facilities and certain operating equipment under operating leases, which expire from September 2, 1999 to July 30, 2003. In addition, the Company leases office facilities under an operating lease. Rent expense approximated $327, $106, and $27 for the years ended December 31, 1998, 1997,and 1996 respectively. Total minimum rentals under noncancelable operating leases over future years as of December 31, 1998 are as follows: 1999 $394 2000 175 2001 109 2002 104 2003 9 ---- $791 ====
NOTE 6 - INCOME TAXES The income tax provision is comprised of the following;
December 31, 1998 1997 1996 ---------------------------- Current Payable $6,149 $2,488 $ 423 Deferred income taxes (916) (231) 124 ------ ------ ------- $5,233 $2,257 $ 547 ====== ====== =======
BRASS EAGLE INC. NOTES TO FINANCIAL STATEMENTS (Continued) (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, 1998 1997 1996 -------------------------- Income taxes at the statutory rate $4,566 $2,004 $ 486 State taxes, net of federal benefit 667 253 61 ------ ------ ------ $5,233 $2,257 $ 547 ====== ====== ======
Deferred tax assets are comprised of the following:
1998 1997 ------ ------- Deferred tax assets resulting from Accounts receivable allowance $ 185 $ 45 Accrued warranty 447 347 Inventory valuation 221 78 Stock options 114 114 Other accruals 389 9 ------- ------- 1,356 593 Deferred tax liabilities from Depreciation and amortization 326) (479) ------- ------- Net deferred tax asset $ 1,030 $ 114 ======= =======
BRASS EAGLE INC. NOTES TO FINANCIAL STATEMENTS (Continued) (In thousands except share and per share data) NOTE 7 - EMPLOYEE BENEFIT PLANS The Company sponsors an employee savings plan under section 401(k) of the Internal Revenue Code. The plan covers substantially all full-time employees. Employees may elect to contribute to the plan a portion of their eligible pretax compensation up to certain limits as specified in the plan. The Company also makes annual contributions to the plan. Amounts contributed by the Company to the plan amounted to $117 in 1998. Prior to 1998, the Company's eligible employees participated in the Daisy 401(k) plan. Certain employees of the Company who were employed by Daisy prior to the reorganization described in Note 1 participate in the Daisy Manufacturing Company, Inc. retirement income plan administered by New Daisy. The plan ceased future benefit accruals as of December 31, 1997. The majority of these employees received lump sum distributions from the plan during 1998. The expense for this plan for the years ended December 31, 1998, 1997, and 1996 was $0, $43, and $44, respectively. NOTE 8 - DUE FROM AFFILIATE The due from affiliate represents the net amount resulting from certain transactions between the Company and New Daisy subsequent to the initial public offering. During 1999, Brass Eagle anticipates no significant intercompany activity with Daisy. The balances at December 31, 1998 included cash collected 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, and administrative charges from Daisy. BRASS EAGLE INC. NOTES TO FINANCIAL STATEMENTS (Continued) (In thousands except share and per share data) NOTE 9 - DUE TO AFFILIATE Brass Eagle's cash collection and cash disbursements were administered by Daisy prior to the initial public offering. The net cash received/(paid) was classified as intercompany receivable/(debt). In addition, assets transferred from Daisy by the Company were also accounted for through the intercompany debt account. There was no interest expense charged for the use of these funds in 1997 or 1996. The following is a summary of the intercompany activity.
December 31, 1998 1997 1996 ---------------------------- Balance at the beginning of the year $ 2,737 $ 3,352 $ 1,619 Cash received from customers 0 (22,793) (11,516) Cash paid to suppliers and others 0 23,082 11,477 Income taxes payable to Daisy 0 2,181 423 Payments of long-term debt and interest 0 2,645 1,349 Divisional equity 0 4,612 0 Payment to Daisy (2,737) (10,342) 0 ------- -------- -------- Balance at the end of the year $ 0 $ 2,737 $ 3,352 ======= ======== ======== Average balance outstanding $ 1,366 $ 3,045 $ 2,486 ======= ======== ========
BRASS EAGLE INC. NOTES TO FINANCIAL STATEMENTS (Continued) (In thousands except share and per share data) NOTE 10 - MAJOR CUSTOMERS Customers accounting for 10% or more of the Company's sales for the periods presented are as follows:
December 31, 1998 1997 1996 ------------------------- Customer A 63% 28% 14% Customer B 15% 31% 22% Customer C * * 10% --- --- --- 78% 59% 46% === === ===
* Customer's sales were less than 10% of the Company's sales in these periods. Accounts receivable balances from these customers were approximately $15,829 and $9,359 at December 31, 1998 and 1997 respectively. NOTE 11 - RELATED PARTY TRANSACTIONS ADMINISTRATIVE SERVICES AGREEMENT: The Company and New Daisy entered into an administrative services agreement effective as of November 24, 1997. Pursuant to this agreement, New Daisy provided the Company with certain legal, administrative and computer information services for the years ended December 31, 1998 and 1997 were $182 and $42, respectively. 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 1997, net operating losses generated by Daisy, and the potential benefits upon future exercises of stock options. BRASS EAGLE INC. NOTES TO FINANCIAL STATEMENTS (Continued) (In thousands except share and per share data) ALLOCATED COST: The Company has been allocated costs in the amounts of $4,608, and $3,527 for the years ended December 31, 1997, and 1996, respectively. The costs represent costs associated with advertising, promotions, utilities, insurance, customer service, warehousing, shipping, human resources, information systems, finance and legal services. NOTE 12 - GEOGRAPHIC SEGMENTS The Company sells paintball markers, paintballs, and accessories through major domestic and international retailers and paintball specialty stores. The following summarizes the geographic segment activity.
December 31, 1998 1997 1996 -------------------------- Revenues United States $73,327 $34,242 $11,845 Other geographic areas 1,822 1,897 1,993
NOTE 13 - 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 method 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 SFAS 123 are presented below. The Company has 606,509 options outstanding at December 31, 1998, 341,841, of which, are held by Brass Eagle employees. There are 184,350 options outstanding from grants in 1997 and 1998 under the Company's 1997 Stock Option Plan. The remaining 422,159 shares were granted under plans established by Daisy prior to the reorganization. The options granted under the Daisy plans were converted to options to purchase the Company's common stock effective with the reorganization. All of the 422,159 options granted under the Daisy plan are currently vested and are exercisable at $0.56 per share. Options totaling 157,491 are exercisable by Brass Eagle employees. BRASS EAGLE INC. NOTES TO FINANCIAL STATEMENTS (Continued) (In thousands except share and per share data) The 1997 stock option plan reserved 430,000 shares to be granted to key employees and consultants at the discretion of the Compensation Committee of the Board of Directors. No options may be issued for less than the fair market value at the date of grant. Options granted under the plan are exercisable at such times and at such terms as the Compensation Committee shall determine. All options granted under the plan to date vest equally over a four-year period. The options under this plan expire ten years after the date of grant. There are 184,350 options outstanding under the plan of which 40,837 are exercisable with a weighted average exercise price of $11.07 per share at December 31, 1998. Information regarding the Brass Eagle employees participating in the plans above for the years ended December 31, 1998 and 1997 is shown below:
Weighted Average Number of Exercise Shares Price ----------- ------------ Options outstanding at December 31, 1996 112,829 $ 0.56 Granted prior to the initial public offering 33,497 0.56 Granted 178,870 11.06 ------- -------- Options outstanding at December 31, 1997 325,196 6.34 Granted 21,000 15.25 Other 11,165 0.56 Forfeited (15,520) (11.00) -------- -------- Options outstanding at December 31, 1998 341,841 $ 6.49 ======== ========
BRASS EAGLE INC. NOTES TO FINANCIAL STATEMENTS (Continued) (In thousands except share and per share data) Compensation expense recorded under APB Opinion No. 25 for the years ended December 31, 1998, 1997, and 1996 was $0, $298, and $0, respectively for these plans. No compensation expense was recorded in 1998 or 1996 because the exercise price equaled or exceeded the fair market value of the options on the dates of grant. Compensation expense for the year ended December 31, 1997 was recorded for options granted in August, 1997 under the Daisy plan. The expense was based on the estimated fair value of the Company including the anticipated consummation of an initial public offering at that time of approximately $9 per share. The Company determined the fair value of the options 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 these options. The Company's net income and earnings per share would be the same under SFAS 123 as under APB Opinion 25 for the year ended December 31, 1996 because the options had no significant fair value on the dates distributed. Had compensation cost for the Company's stock option plan been determined based upon the fair value at the grant date for options awarded in 1998 and 1997 under this plan consistent with the methodology prescribed under SFAS 123, the Company' pro forma net income and basic and diluted earnings per share would have differed from amounts reported as follows:
1998 1997 ------ ------ Net income as reported $8,195 $3,636 Pro forma net income 8,093 3,262 Basic earnings per share as reported $ 1.13 $ 0.69 Pro forma basic earnings per share $ 1.12 $ 0.69 Diluted earnings per share as reported $ 1.07 $ 0.64 Pro forma diluted earnings per share $ 1.06 $ 0.64
BRASS EAGLE INC. NOTES TO FINANCIAL STATEMENTS (Continued) (In thousands except share and per share data) The fair value of options was estimated at the date of grant using the following weighted average assumptions:
1998 1997 ------- ------- Risk-free interest rate 5.60% 5.83% Dividend yield 0.00% 0.00% Expected volatility 30.00% 30.00% Weighted average expected life 4 years 4 years
The weighted average fair value of options granted in 1997 prior to the initial public offering 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 in 1998 and subsequent to the initial public offering in 1997 were $5 and $4 per share, respectively. The effects of applying SFAS 123 are not indicative of future amounts. Additional awards in future years are anticipated. The options granted under the Daisy plans include 187,753 options granted on June 30, 1993 and 256,737 shares granted at the discretion of Daisy's compensation committee prior to the initial public offering. These options are exercisable at a fixed exercise price of $0.56 per share until September 15, 2002 and June 1, 2003, respectively. Options totaling 22,331 that were granted by the Daisy compensation committee were exercised during the year ended December 31, 1998. The exercise price of the options granted by Daisy has generally been equal to or greater than the fair market value at the date of grant. Fair market value was determined by the Board of Directors. NOTE 14 - PRO FORMA BASIC AND DILUTED EARNINGS 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 earnings per share considers the effects of the reorganization and the 1,777.96-for-1 stock split which occurred on November 24, 1997. BRASS EAGLE INC. NOTES TO FINANCIAL STATEMENTS (Continued) (In thousands except share and per share data) In accordance with the regulations of the Securities and Exchange Commission, the Company has deleted the presentation of basic earnings per share and included pro forma basic earnings per share for the years ended December 31, 1998, 1997, and 1996. Pro forma basic earnings 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 prior to the initial public offering. Diluted earnings 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 earnings per share and diluted earnings per share for the years ended December 31, 1998, 1997, and 1996 are presented below.
1998 1997 1996 --------------------------------------- PRO FORMA BASIC EARNINGS PER SHARE Net income available to common stockholder $ 8,195 $ 3,636 $ 882 ========= ========= ========= Weighted average common shares outstanding 7,239,092 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 7,239,092 5,238,294 5,042,391 ========= ========= ========= Pro forma basic earnings per share $ 1.13 $ 0.69 $ 0.18 ========= ========= =========
BRASS EAGLE INC. NOTES TO FINANCIAL STATEMENTS (Continued) (In thousands except share and per share data)
1998 1997 1996 --------------------------------------- DILUTED EARNINGS PER SHARE Net income available to common stockholder $ 8,195 $ 3,636 $ 882 ========= ========= ========= Pro forma basic weighted average common shares outstanding 7,239,092 5,238,294 5,042,391 Add dilutive effect of stock options 432,853 431,710 400,931 --------- --------- --------- Weighted average dilutive common shares outstanding 7,671,945 5,670,004 5,443,322 ========= ========= ========= Diluted earnings per share $ 1.07 $ 0.64 $ 0.16 ========= ========= =========
NOTE 15 - COMMITMENTS AND CONTINGENCIES Due to the risks associated with the misuse of paintball products, the Company is a defendant in product liability lawsuits from time to time. To date, all claims and lawsuits have been resolved without any material cost or a material adverse effect on the Company and its prospects. As of December 31, 1998, the Company had agreed to pay $1,150 during 1999 for the construction of a new office building. NOTE 16 - SUBSEQUENT EVENT On January 4, 1999, the Company acquired certain assets of C.M. Support, Inc. of Dallas, Texas for $5,000 in cash. The assets acquired were patents, trademarks, fixed assets, and inventory. The acquisition will be accounted for as a purchase with approximately $4,600 being allocated to intangible assets and $400 being allocated to fixed assets and inventory. BRASS EAGLE INC. NOTES TO FINANCIAL STATEMENTS (Continued) (In thousands except share and per share data) NOTE 17 - QUARTERLY FINANCIAL DATA (UNAUDITED) (In thousands except per share data)
First Second Third Fourth Quarter Ended 1998 Qtr. Qtr. Qtr. Qtr. - ----------------------------------------------------------------------- Net Sales $ 15,658 $ 19,497 $13,527 $ 26,467 Gross Profit 5,405 7,301 4,657 8,533 Operating Income 1,941 4,067 2,029 5,053 Income before income taxes 2,082 4,157 2,098 5,091 -------- -------- ------- -------- Net Income $ 1,285 $ 2,564 $ 1,290 $ 3,056 ======== ======== ======= ======== Earnings per share: Pro forma basic $ 0.18 $ 0.35 $ 0.18 $ 0.42 Diluted 0.17 0.33 0.17 0.40
First Second Third Fourth Quarter Ended 1997 Qtr. Qtr. Qtr. Qtr. - --------------------------------------------------------------------- Net Sales $ 4,375 $ 7,530 $ 9,909 $ 14,325 Gross Profit 1,514 2,397 3,264 4,164 Operating Income 704 1,234 1,599 2,525 Income before income taxes 643 1,172 1,541 2,537 --------- --------- -------- -------- Net Income $ 397 $ 723 $ 951 $ 1,565 ========= ========= ======== ======== Earnings per share: Pro forma basic $ 0.08 $ 0.14 $ 0.19 $ 0.27 Diluted 0.07 0.13 0.17 0.25
BRASS EAGLE INC. 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 1999 Proxy Statement and under the caption `Section 16(a) Beneficial Ownership Reporting Compliance' in the 1999 Proxy Statement, which information is incorporated herein by reference. ITEM 11: EXECUTIVE COMPENSATION The information required by this Item appears under the caption 'Compensation of Directors and Executive Officers' in the 1999 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 1999 Proxy Statement and under the caption `Equity Ownership of Directors and Executive Officers' in the 1999 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 1999 Proxy Statement, which information is incorporated herein by reference. BRASS EAGLE INC. 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 are included in Part II of this report: Report of Independent Auditors Balance Sheets as of December 31, 1998 and 1997 Statements of Operations for the years ended December 31, 1998, 1997, and 1996 Statements of Shareholders Equity for years ended December 31, 1998, 1997, and 1996 Statements of Cash Flows for the years ended December 31, 1998, 1997, and 1996 Notes to Consolidated Financial Statements Quarterly Financial Data 2. FINANCIAL STATEMENT SCHEDULES. Schedule II Valuation and Qualifying Accounts (This schedule appears immediately following the signature page.) 3. EXHIBITS AND EXECUTIVE COMPENSATION PLANS. The following exhibits are filed with this Report or are incorporated herein by reference to previously filed material. BRASS EAGLE INC. 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 April 1, 1998 (incorporated by reference to Exhibit 10(iii) to Form 10-Q for the quarter ended June 30, 1998, in 0-23385). 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) 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(v) 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(vi) Lease Agreement between Ozark Terminal, Inc. and Registrant dated December 9, 1997 (incorporated by reference to Exhibit 10(vii) to Form 10-K for the year ended 12/31/97, in 0-23385). 10(vii) Lease Agreement between Leroy Locke & Bonnie Locke and Registrant dated August 1, 1998 (incorporated by reference to Exhibit 10(i) to Form 10-Q for the quarter ended September 30, 1998, in 0-23385) 10(viii) Administrative Service Agreement between Daisy Manufacturing Company and Registrant (incorporated by reference to Exhibit 10(i) to Form 10-Q for the quarter ended June 30, 1998, 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). BRASS EAGLE INC. EXHIBIT NO. (Continued) - ----------- 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). 10(xvi) Asset Acquisition Agreement between CM Support, Inc. and Registrant dated January 4, 1999 (incorporated by reference to Exhibit 2 to Form 8-K dated January 4, 1999). 11 Statement of Computation of Earnings Per Share. 23 Consent of Independent Auditors 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. - 1997 Stock Option Plan - Employee Stock Purchase Plan 4. REPORTS ON FORM 8-K The Company filed a current report on Form 8-K dated January 4, 1999 disclosing the acquisition of CM Support, Inc. of Dallas, Texas. BRASS EAGLE INC. 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: /s/ E. Lynn Scott ---------------- E. Lynn Scott President and Chief Executive Officer Date: February 26, 1999 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. /s/ E. Lynn Scott President, Chief Executive February 26, 1999 - --------------------------- Officer, and Director E. Lynn Scott (Principal Executive Officer) * Chairman of the Board of February 26, 1999 - --------------------------- Directors Marvin W. Griffin * Director February 26, 1999 - --------------------------- Anthony J. Dowd * Director February 26, 1999 - --------------------------- Stephen J. Schaubert * Director February 26, 1999 - --------------------------- H. Gregory Wold /s/ J. R. Brian Hanna Vice President - Finance, February 26, 1999 - --------------------------- Chief Financial Officer, J.R. Brian Hanna and Treasurer (Principal Financial and Accounting Officer) *By: /s/ J. R. Brian Hanna --------------------- Attorney-in-fact J. R. Brian Hanna, by signing his name hereto, does sign this document on behalf of each of the persons indicated above pursuant to powers of attorney duly executed by such persons, exhibits filed hereto. BRASS EAGLE INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the Three Years in the Period Ended December 31, 1998 (Dollars in Thousands)
Column A Column B Column C Column D Column E - --------------------------------------------------------------------------- Additions Balance at Charged to Charged Balance Beginning costs and to other Write at end of Description of period expenses accounts Offs period - --------------------------------------------------------------------------- Allowance for doubtful accounts: Year ended December 31, 1998 $ 118 $ 507 $ 0 ($146) $ 479 ------ ------ -------- ------ ------- Year ended December 31, 1997 $ 52 $ 66 $ 0 $ 0 $ 118 ------- ------- -------- ------ ------- Year ended December 31, 1996 $ 18 $ 34 $ 0 $ 0 $ 52 ------- ------- -------- ------ ------- Warranty Reserve: Year ended December 31, 1998 $ 910 $3,342 $ 0 $3,085 $1,167 ------- ------ -------- ------ ------ Year ended December 31, 1997 $ 0 $1,206 $ 0 $ 296 $ 910 ------- ------ -------- ------ ------ Year ended December 31, 1996 $ 0 $ 287 $ 0 $ 287 $ 0 ------- ------ -------- ------ ------
BRASS EAGLE INC. 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 April 1, 1998 (incorporated by reference to Exhibit 10(iii) to Form 10-Q for the quarter ended June 30, 1998, in 0-23385). 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) 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(v) 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(vi) Lease Agreement between Ozark Terminal, Inc. and Registrant dated December 9, 1997 (incorporated by reference to Exhibit 10(vii) to Form 10-K for the year ended 12/31/97, in 0-23385). 10(vii) Lease Agreement between Leroy Locke & Bonnie Locke and Registrant dated August 1, 1998 (incorporated by reference to Exhibit 10(i) to Form 10-Q for the quarter ended September 30, 1998, in 0-23385) 10(viii) Administrative Service Agreement between Daisy Manufacturing Company and Registrant (incorporated by reference to Exhibit 10(i) to Form 10-Q for the quarter ended June 30, 1998, in 0-23385). BRASS EAGLE INC. EXHIBIT INDEX (Continued) Number in Exhibit Table Exhibit - ------------- ------- 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). 10(xvi) Asset Acquisition Agreement between CM Support, Inc. and Registrant dated January 4, 1999 (incorporated by reference to Exhibit 2 to Form 8-K dated January 4, 1999). 11 Statement of Computation of Earnings Per Share. 23 Consent of Independent Auditors 24 Powers of Attorney 27 Financial Data Schedule. BRASS EAGLE INC. EXHIBIT 11 STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
1998 1997 1996 ---- ---- ----- PRO FORMA BASIC EARNINGS PER SHARE Net income available to common stockholder $ 8,195 $ 3,636 $ 882 ========= ========= ========= Weighted average common shares outstanding 7,239,092 4,860,368 4,623,112 Theoretical shares issued whose proceeds would have been used to pay divisional equity 0 377,926 419,279 --------- --------- --------- Pro forma basic weighted average shares outstanding 7,239,092 5,238,294 5,042,391 ========= ========= ========= Pro forma basic earnings per share $ 1.13 $ 0.69 $ 0.18 ========= ========= ========= DILUTED EARNINGS PER SHARE Net income available to common stockholder $ 8,195 $ 3,636 $ 882 ========= ========= ========= Pro forma basic weighted average common shares outstanding 7,239,092 5,238,294 5,042,391 Add dilutive effect of stock options 432,853 431,710 400,931 --------- --------- --------- Weighted average dilutive common shares Outstanding 7,671,945 5,670,004 5,443,322 ========= ========= ========= Diluted earnings per share $ 1.07 $ 0.64 $ 0.16 ========= ========= =========
BRASS EAGLE INC. EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Brass Eagle Inc. We hereby consent to the incorporation by reference of our report on the financial statements appearing in Brass Eagle Inc. Annual Report on Form 10-K for the year ended December 31, 1998, in the Registration Statement on Form S-8 (as amended, Reg. No. 33-61173) filed with the Securities and Exchange Commission on August 19, 1998 pertaining to the Brass Eagle Inc. 1997 Stock Option Plan and on Form S-8 (as amended, Reg. No. 33-61175) filed with the Securities and Exchange Commission on August 19, 1998 pertaining to the Brass Eagle Inc. Employee Stock Purchase Plan. Crowe, Chizek and Company LLP Oak Brook, Illinois February 25, 1999 BRASS EAGLE INC. 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, 1998 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: February 26, 1999 BRASS EAGLE INC. EXHIBIT 24 (Continued) 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, 1998 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: February 26, 1999 BRASS EAGLE INC. EXHIBIT 24 (Continued) 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, 1998 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: February 26, 1999 BRASS EAGLE INC. EXHIBIT 24 (Continued) 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, 1998 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: February 26, 1999 EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER 31, 1998 CONSOLIDATED BALANCE SHEETS AND THE STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE NOTES THERETO, AND IS QUALIFIED IN ITS ENTIRETY BY REERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1998 DEC-31-1998 6,836 0 18,750 479 5,607 33,543 7,437 2,100 41,430 6,943 0 0 0 72 34,202 41,430 75,149 75,519 49,253 62,059 0 507 32 13,428 5,233 8,195 0 0 0 8,195 1.13 1.07
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