SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal quarterly period ended September 27, 1997
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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 0-19873
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BELL SPORTS CORP.
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(Exact name of registrant as specified in its charter)
Delaware 36-3671789
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
6350 San Ignacio Avenue, San Jose, California 95119
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(Address of principal executive offices) (Zip Code)
(408) 574-3400
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(Registrant's telephone number, including area code)
N/A
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Former name, former address and former fiscal year,
if changed since last report.
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) Yes _X_ No __ and (2) has been
subject to such filing requirements for the past 90 days. Yes _X_ No __.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
Common Stock, $.01 par value October 21, 1997 13,847,558
- ---------------------------- ---------------- ----------
Class Date Number of shares
1
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BELL SPORTS CORP.
INDEX TO FORM 10-Q
PART I
Page
Number
------
Bell Sports Corp. and Subsidiaries Consolidated Balance Sheets
as of September 27, 1997 and June 28, 1997 3
Bell Sports Corp. and Subsidiaries Consolidated Statements of Operations
for the three months ended September 27, 1997 and
September 28, 1996 4
Bell Sports Corp. and Subsidiaries Consolidated Condensed Statements of
Cash Flows for the three months ended September 27, 1997
and September 28, 1996 5
Notes to Consolidated Financial Statements 6 - 10
Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 14
PART II
Items 1 to 6 15
Signatures 16
2
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PART 1. Financial Information
Item 1. Financial Statements
BELL SPORTS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 27, June 28,
1997 1997
------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 46,177 $ 29,008
Accounts receivable 41,910 75,915
Inventories 44,546 46,549
Deferred taxes and other current assets 15,088 16,048
--------- ---------
Total current assets 147,721 167,520
Property, plant and equipment 20,718 23,738
Goodwill 55,688 56,471
Intangibles and other assets 18,326 21,025
--------- ---------
Total assets $ 242,453 $ 268,754
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 8,539 $ 11,299
Accrued compensation and employee benefits 2,792 3,998
Accrued expenses 16,972 20,209
Notes payable and current maturities of long-term debt and capital lease obligations 862 1,337
--------- ---------
Total current liabilities 29,165 36,843
Long-term debt 86,842 106,454
Capital lease obligations and other liabilities 6,241 6,492
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Total liabilities 122,248 149,789
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Commitments and contingencies
Stockholders' equity:
Preferred stock; $.01 par value; authorized 1,000,000 shares, none issued
Common stock; $.01 par value; authorized 25,000,000 shares; issued and outstanding:
14,330,190 and 13,835,118 shares at September 27, 1997, respectively, and
14,248,114 and 13,753,042 shares at June 28, 1997, respectively 143 143
Additional paid-in capital 143,167 142,486
Cumulative foreign currency translation adjustments (485) (407)
Accumulated deficit (17,402) (18,039)
--------- ---------
125,423 124,183
Treasury stock, at cost, 495,072 shares (5,218) (5,218)
--------- ---------
Total stockholders' equity 120,205 118,965
--------- ---------
Total liabilities and stockholders' equity $ 242,453 $ 268,754
========= =========
</TABLE>
See accompanying notes to these consolidated financial statements.
3
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BELL SPORTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------
September 27, September 28,
1997 1996
-------------- ---------------
<S> <C> <C>
Net sales $ 43,632 $ 62,068
Cost of sales 30,155 44,560
-------- --------
Gross profit 13,477 17,508
Selling, general and administrative expenses 11,075 15,279
Amortization of goodwill and intangible assets 636 862
Restructuring charges 1,358
Net investment income (429) (1,792)
Interest expense 1,167 1,796
-------- --------
Net income before income taxes 1,028 5
Provision for income taxes 391 2
-------- --------
Net income $ 637 $ 3
======== ========
Net income per common share $ 0.05 $ 0.00
======== ========
Weighted average number of common shares outstanding 14,075 13,754
======== ========
</TABLE>
See accompanying notes to these consolidated financial statements.
4
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BELL SPORTS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------
September 27, September 28,
1997 1996
--------------- ---------------
<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net cash provided by operating activities $ 24,171 $ 8,933
-------- --------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Capital expenditures (1,041) (2,170)
Net sales of marketable securities 3,162
Proceeds from the sale of SportRack 13,427
-------- --------
Net cash provided by investing activities 12,386 992
-------- --------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from issuance of stock 667
Payments on notes payable, long-term debt and capital leases (86) (195)
Net payments on line of credit agreement (19,971) (7,921)
-------- --------
Net cash used in financing activities (19,390) (8,116)
-------- --------
Effect of exchange rate changes on cash 2 2
-------- --------
Net increase in cash and cash equivalents 17,169 1,811
Cash and cash equivalents at beginning of period 29,008 23,140
-------- --------
Cash and cash equivalents at end of period $ 46,177 $ 24,951
======== ========
</TABLE>
See accompanying notes to these consolidated financial statements
5
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BELL SPORTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
Bell Sports Corp. and its wholly-owned subsidiaries (The "Company" or "Bell")
design, manufacture, market and distribute bicycle accessories, bicycle helmets
and automotive racing helmets.
Consolidation
- -------------
The consolidated financial statements include the accounts of Bell Sports Corp.
and its wholly-owned subsidiaries. All material intercompany transactions and
balances have been eliminated in consolidation.
Accounting Period
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The Company's fiscal year is either a fifty-two or fifty-three week accounting
period ending on the Saturday that is nearest to the last day of June.
Unaudited Information and Basis of Presentation
- -----------------------------------------------
The consolidated balance sheet as of September 27, 1997 and statements of
operations and condensed cash flows for all periods included in the accompanying
financial statements have not been audited. In the opinion of management these
financial statements include all normal and recurring adjustments necessary for
a fair presentation of such financial information. The results of operations for
the interim periods are not necessarily indicative of the results of operations
to be expected for the full year.
The financial information included herein has been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to such rules and regulations. The interim financial
information and the notes thereto should be read in conjunction with the audited
financial statements for the fiscal years ended June 28, 1997, June 29, 1996 and
July 1, 1995 which are included in the Company's 1997 Annual Report to
Stockholders.
Income Per Share Information
- ----------------------------
Income per common and common equivalent share is computed using the weighted
average number of common stock and common stock equivalent shares outstanding
during the periods, using the treasury stock method for stock options and
warrants. Fully diluted net income per common share for all periods included in
the accompanying financial statements has not been presented since an assumed
conversion (using the if-converted method, which includes the adjustment of
reported net income for interest charges on a net-of-tax basis) of the Company's
convertible subordinated debentures (the "Debentures") bearing interest at
4-1/4% per annum would be anti-dilutive.
Investment Income
- -----------------
The investment income reported for the first quarter of fiscal 1997 includes
proceeds from the settlement of an arbitration case related to the handling of
certain marketable securities by an outside investment advisor. The settlement
proceeds, net of related expenses and expected losses to sell certain
securities, were $1.3 million.
6
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Accounts Receivable
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Accounts receivable at September 27, 1997 and June 28, 1997 are net of
allowances for doubtful accounts of $4.4 million and $5.0 million, respectively.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment at September 27, 1997 and June 28, 1997 are net of
accumulated depreciation of $17.9 million and $17.1 million, respectively.
Management's Estimates and Assumptions
- --------------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Recent Accounting Pronouncements
- --------------------------------
In February 1997, SFAS No. 128, "Earnings per Share" ("SFAS 128") was issued.
Under SFAS 128, primary earnings per share is replaced by basic earnings per
share and fully diluted earnings per share is replaced by diluted earnings per
share.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130") was
issued. SFAS 130 establishes standards for the reporting of comprehensive income
and its components in a full set of general-purpose financial statements for
periods beginning after December 15, 1997. Reclassification of financial
statements for earlier periods for comparative purposes is required.
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131") was issued. SFAS 131 revises information
regarding the reporting of operating segments. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers.
The Company will adopt SFAS 128 in the second quarter of fiscal 1998 and SFAS
130 and SFAS 131 in fiscal 1999 and does not expect such adoptions to have a
material effect on the consolidated financial statements and footnotes.
NOTE 2 - INVENTORIES
Inventories consist of the following components (in thousands):
September 27, June 28,
1997 1997
--------------- ---------------
Raw materials $ 4,815 $ 5,865
Work in process 2,616 2,125
Finished goods 37,115 38,559
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Total $44,546 $46,549
======= =======
7
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NOTE 3 - PRODUCT LIABILITY AND CONTINGENCIES
Product Liability
- -----------------
The Company is subject to various product liability claims and/or suits brought
against it for claims involving damages for personal injuries or deaths.
Allegedly, these injuries or deaths relate to the use by claimants of products
manufactured by the Company and, in certain cases, products manufactured by
others. The ultimate outcome of these existing claims and any potential future
claims cannot presently be determined. Management believes that existing product
liability claims/suits are defensible and that, based on the Company's past
experience and assessment of current claims, the aggregate of defense costs and
any uninsured losses will not have a material adverse impact on the Company's
liquidity or financial position.
The cost of product liability insurance fluctuated greatly in past years and the
Company opted to self-insure claims for certain periods. The Company has been
covered by product liability insurance since July 1, 1991. This insurance is
subject to a self-insured retention. There is no assurance that insurance
coverage will be available or economical in the future.
The Company sold its motorcycle helmet manufacturing business in June 1991 in a
transaction in which the purchaser assumed all responsibility for product
liability claims arising out of helmets manufactured prior to the date of
disposition and the Company agreed to use its in-house defense team to defend
these claims at the purchaser's expense. If the purchaser is for any reason
unable to pay the judgment, settlement amount or defense costs arising out of
this or any other claim, the Company could be held responsible for the payment
of such amounts or costs. The Company believes that the purchaser does not
currently have the financial resources to pay any significant judgment,
settlement amount, or defense costs arising out of this or any other claim.
On February 2, 1996, a Toronto, Canada jury returned a verdict against Bell
based on injuries arising out of a 1986 motorcycle accident. The jury found that
Bell was 25% responsible for the injuries with the remaining 75% of the fault
assigned to the plaintiff and the other defendant. If the judgment is upheld,
the amount of the claim for which Bell would be responsible and the legal fees
and tax implications associated therewith are estimated to be between $3.0 and
$4.0 million.
The Company has filed an appeal of the Canadian verdict. Although the Company
cannot predict the outcome of an appeal, the Company currently has adequate cash
balances and sources of capital available to satisfy the judgment if the appeal
is unsuccessful. Accordingly, the Company currently does not believe the claim
will have a material adverse effect on liquidity or the financial condition of
the Company. Although the Company maintains product liability insurance, this
claim arose during a period in which the Company was self-insured. The Company
currently does not have a reserve for this judgment.
Environmental Litigation
- ------------------------
In the ordinary course of its business, the Company is required to dispose of
certain waste at off-site locations. During 1993, the Company became aware of an
investigation by the Illinois Environmental Protection Agency (the "Illinois
Agency") of a waste disposal site, owned by a third party, which was previously
utilized by the Company. As a result of that investigation, the Illinois Agency
informed the Company that certain of the Company's practices with respect to the
identification, storage and disposal of hazardous waste and related reporting
requirements may not have complied with the applicable law. On March 14, 1995,
the State of Illinois (the "State") filed a complaint with the Illinois
Pollution Control Board (the "Pollution Control Board") against the Company and
the disposal site owner based on the same allegations. The complaint sought
penalties not exceeding statutory maximums and such other relief as the
Pollution Control Board determines to be appropriate. The disposal site owner
filed a cross-claim against the Company that seeks to have penalties assessed
against the Company and not against the disposal site owner. Any penalties as a
result of the cross-claim would be payable to the State. The Pollution Control
Board approved a settlement between the State and the Company pursuant to which
the Company paid
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$69,000 to the State and disposed of certain materials in a container at the
waste disposal site at an authorized disposal facility. The cross-claim by the
landfill owner is still pending, and the outcome of the cross-claim cannot
presently be determined.
Additionally, the Illinois Agency has been negotiating with the disposal site
owner with respect to the procedures and actions necessary to close the disposal
site. The extent and nature of any actions which may be taken against the
Company with respect to this matter cannot presently be determined.
NOTE 4 - NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
The Company has a total of approximately $88.9 million in notes payable,
long-term debt and capital lease obligations outstanding at September 27, 1997.
Of this amount, $86.25 million relates to the outstanding balance on the
Company's 4-1/4% convertible subordinated debentures. Maturing November 15,
2000, the debentures are convertible at any time prior to maturity into common
stock at a conversion price of $54.06 per share. Interest on the debentures is
payable semi-annually. The debentures are redeemable at the Company's option at
any time on or after November 15, 1996, at specified redemption prices.
In April 1997, the Company entered into a $60.0 million multicurrency secured
revolving line of credit ("Credit Agreement"). The Credit Agreement grants to
the syndicated bank group a security interest in the U.S. accounts receivable
and inventories for the term of the facility. The Credit Agreement requires
borrowings outstanding under the line of credit to be maintained below $15.0
million for a period of thirty consecutive days between July 1st and September
30th of each fiscal year.
Borrowings under the Credit Agreement were reduced approximately $20.0 million
during the fiscal 1998 first quarter using the proceeds received from the sale
of SportRack (see Note 6) and the collection of receivables, including those
related to the Service Cycle/Mongoose business. At September 27, 1997, there
were no outstanding borrowings under the Credit Agreement.
The Credit Agreement expires in December 1999 and is classified as a long-term
liability. Based on the provisions of the Credit Agreement at September 27, 1997
the Company could borrow a maximum of $35.3.
The Credit Agreement provides the Company with several interest rate options,
including U.S. prime, LIBOR plus a margin, Canadian prime plus the applicable
LIBOR margin less 0.50%, Canadian banker's acceptance plus the LIBOR margin plus
0.125%, and short-term fixed rates offered by the agent bank in the loan
syndication. The LIBOR margin is currently 1.50% per annum, but it can range
between 1.00% and 1.50% depending on the Company's interest coverage ratio.
Under the Credit Agreement, the Company is required to pay a quarterly
commitment fee on the unused portion of the facility at a rate that ranges from
0.20% to 0.30% per annum. At September 27, 1997, the quarterly commitment fee
was 0.30% per annum.
The Credit Agreement contains certain financial covenants, the most restrictive
of which are a minimum interest coverage ratio, a maximum funded debt ratio and
a minimum adjusted net worth amount. It also contains covenants that prohibit
the payment of cash dividends as well as restrict the amount that the Company
can repurchase of its subordinated debt and common stock. At September 27, 1997
and June 28, 1997, the Company was in compliance with all of the Credit
Agreements covenants.
9
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NOTE 5 - COMMON STOCK
The Company granted its executive officers, non-employee directors and certain
other employees options to purchase shares of the Company's Common Stock. At
September 27, 1997, options to purchase approximately 2.3 million shares of
Common Stock were outstanding.
On August 24, 1995, the Company announced a stock repurchase program authorizing
the repurchase of up to 10% of the outstanding shares of the Company's Common
Stock from time to time in open market or private transactions. The timing of
any repurchase and the price and number of shares repurchased will depend on
market conditions and other factors. To date, the Company has repurchased a
total of 523,400 shares at an aggregate purchase price of approximately $5.5
million, of which 28,328 shares were utilized under a Restricted Stock Award
Program. Shares repurchased may be retired or used for general corporate
purposes.
NOTE 6 - DISPOSITIONS
On July 2, 1997, the Company completed the sale of substantially all of the
assets of SportRack, which designs, manufactures and markets automobile roof
rack systems, for approximately $13.5 million to an affiliate of Advance
Accessory System Canada, Inc. There was no material gain or loss associated with
this transaction.
10
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL POSITION AND LIQUIDITY
The Company's current ratio increased to 5.1 to 1 at September 27, 1997 from 4.5
to 1 at June 28, 1997. Cash and cash equivalents increased $17.2 million to
$46.2 million at September 27, 1997 from $29.0 million at June 28, 1997. The
increase in cash and cash equivalents is primarily due to strong receivables
collections and the proceeds received from the sale of the SportRack business in
July 1997 (the "Sale of SportRack"). The increase was partially offset by the
Company utilizing a portion of its cash position to reduce outstanding
borrowings.
Accounts receivable at September 27, 1997 decreased $34.0 million to $41.9
million from $75.9 million at June 28, 1997. The decrease is attributable to
strong collections and a normal seasonal net sales decrease from the fourth
quarter of fiscal 1997 to the first quarter of fiscal 1998. Approximately $5.0
million in receivables were collected related to the Service Cycle/Mongoose
business. Although the Service Cycle/Mongoose business was sold in April 1997,
the Company retained the receivables related to the business unit. As of October
1997, a majority of the Service Cycle/Mongoose receivables had been collected.
An additional $5.0 million decrease in receivables resulted from the Sale of
SportRack.
Inventories decreased $2.0 million to $44.5 million in the fiscal 1998 first
quarter compared to June 28, 1997. The decrease is attributed to the Sale of
SportRack, which accounted for approximately $4.2 million in inventory at June
28, 1997. This decrease was partially offset by the normal business cycle
build-up of inventory in the first half of the fiscal year to meet anticipated
increased sales demands in the second half of the fiscal year.
In April 1997, the Company entered into a $60.0 million multicurrency, secured
revolving line of credit ("Credit Agreement"). The Credit Agreement grants to
the syndicated bank group a security interest in the U.S. accounts receivable
and inventories for the term of the facility. The Credit Agreement requires
borrowings outstanding under the line of credit to be maintained below $15.0
million for a period of thirty consecutive days between July 1st and September
30th of each fiscal year.
Borrowings under the Credit Agreement were reduced approximately $20.0 million
during the fiscal 1998 first quarter using the proceeds received from the Sale
of SportRack and the collection of receivables, including those related to the
Service Cycle/Mongoose business. At September 27, 1997, there were no
outstanding borrowings under the Credit Agreement.
The Credit Agreement expires in December 1999 and is classified as a long-term
liability. Based on the provisions of the Credit Agreement, at September 27,
1997 the Company could borrow a maximum of $35.3 million.
The Credit Agreement provides the Company with several interest rate options,
including U.S. prime, LIBOR plus a margin, Canadian prime plus the applicable
LIBOR margin less 0.50%, Canadian banker's acceptance plus the LIBOR margin plus
0.125%, and short-term fixed rates offered by the agent bank in the loan
syndication. The LIBOR margin is currently 1.50% per annum, but it can range
between 1.00% and 1.50% depending on the Company's interest coverage ratio.
Under the Credit Agreement, the Company is required to pay a quarterly
commitment fee on the unused portion of the facility at a rate that ranges from
0.20% to 0.30% per annum. At September 27, 1997, the quarterly commitment fee
was 0.30% per annum.
The Credit Agreement contains certain financial covenants, the most restrictive
of which are a minimum interest coverage ratio, a maximum funded debt ratio and
a minimum adjusted net worth
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amount. It also contains covenants that prohibit the payment of cash dividends
as well as restrict the amount that the Company can repurchase of its
subordinated debt and common stock. At September 27, 1997 and June 28, 1997, the
Company was in compliance with all of the Credit Agreement covenants.
Capital expenditures were $1.0 million for the first quarter of fiscal 1998. The
Company expects to spend approximately $5.0 million on capital expenditures in
fiscal year 1998. The largest planned expenditures are for new product tooling.
The Company announced in September 1997 that it retained Montgomery Securities
as its financial advisor to assist the Company in evaluating strategic
alternatives designed to enhance stockholder value. Such alternatives may
include, but will not be limited to, a merger, sale, joint venture or other
business combination, repurchase of outstanding debt or equity securities, or
continuing to pursue a corporate growth strategy. There can be no assurance that
a transaction will occur as a result of this evaluation.
The Company believes its available cash flows from operations and the Credit
Agreement should be adequate to satisfy its working capital requirements in
fiscal 1998. The Company does not anticipate paying dividends on its Common
Stock in the foreseeable future.
Certain matters contained herein are forward-looking statements that involve
risks and uncertainties that could cause actual results to differ materially
from those in the forward-looking statements. These include, but are not limited
to: seasonality, adverse outcome from litigation, competitive actions, loss of
significant customers, timing of major customer shipments, adverse weather
conditions, retail environment, economic conditions and currency fluctuations.
RESULTS OF OPERATIONS
The Company completed the sale of Service Cycle/Mongoose on April 28, 1997 (the
"Sale of Service Cycle/Mongoose"), and the Sale of SportRack on July 2, 1997.
Accordingly, to enhance the comparability of the current year and prior year
amounts, certain prior year amounts (where noted below) have been adjusted to
exclude the activity of the Service Cycle/Mongoose and SportRack businesses.
Net Sales. Net sales decreased $18.5 million from $62.1 million in the
fiscal 1997 first quarter -- primarily the result of the Sale of Service
Cycle/Mongoose and the Sale of SportRack. Net sales decreased by 6.4% to $43.6
million during the three months ended September 27, 1997 as compared to $46.6
million for the same period of fiscal 1997 after adjusting for the Sale of
Service Cycle/Mongoose and the Sale of SportRack. Sales to the specialty retail
channel increased 9% from the prior year, but were offset by a 23% decrease in
mass merchant accessory sales. This decrease was due to a mass merchant customer
making an inventory adjustment to reduce stock from a five week to three week
supply. The Company continues to pursue methods to assist major customers in
managing their inventory levels.
The product line sales mix, excluding the sales of the Service Cycle/Mongoose
and SportRack businesses, for the three-month periods are as follows:
September 27, September 28,
1997 1996
--------------- ---------------
Product Line Sales Mix:
Bicycle accessories 56% 61%
Bicycle helmets 41% 37%
Auto Racing helmets 3% 2%
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The Company anticipates net sales in fiscal 1998 will be lower than those
achieved in fiscal 1997, due to the Sale of Service Cycle/Mongoose and the Sale
of SportRack, which combined contributed $50.8 million to net sales during
fiscal 1997.
Due to the mature nature of the U.S. market for bicycle related products, the
Company expects overall modest sales growth in fiscal 1998.
Gross Margin. Gross margins increased to 31% of net sales during the
three-month period ended September 27, 1997 from 28% of net sales in the
comparable prior year period. The increase is primarily due to the Sale of
Service Cycle/Mongoose, which carried lower margins than the Company's other
core businesses. Gross margins, when adjusted for the Sale of Service
Cycle/Mongoose and the Sale of SportRack, were 31% of net sales in the fiscal
1997 first quarter. Bicycle accessories margins increased 200 basis points due
to lower freight costs and an increase in direct sales to customers versus
through distributors by the Canadian and Australian divisions. These increases
were offset by a decrease in helmet margins caused by a mix shift of sales
volumes to lower price point helmets. The Company anticipates gross margins will
remain in the low 30% range for the foreseeable future.
Selling, General and Administrative. Selling, general and
administrative costs decreased to 25% of net sales in the first quarter of
fiscal 1998, as compared to 27% in the first quarter of fiscal 1997, after
adjusting for the Sale of Service Cycle/Mongoose and the Sale of SportRack. The
improvement is a result of the Company's restructuring activities and
management's concerted effort to reduce the Company's overall cost structure.
Actual selling, general and administrative expenses for the fiscal 1997 first
quarter were 25% of net sales or $15.3 million.
As a result of the seasonality of the Company's business, sales are generally
higher in the second half of the fiscal year. Although some selling, general and
administrative expenses are variable with sales, such as distribution expenses
and commissions, most expenses are incurred evenly throughout the year.
Accordingly, the Company expects selling, general and administrative expenses
will decrease as a percent of net sales during the third and fourth quarters of
fiscal 1998.
Amortization of intangibles. Amortization of goodwill and intangible
assets decreased 26% or $226,000 from the prior year, due to the Sale of Service
Cycle/Mongoose and the Sale of SportRack. After adjusting for the Sale of
Service Cycle/Mongoose and the Sale of SportRack, amortization remained
consistent at $636,000 for both periods.
Restructuring Charges. Restructuring charges of $1.4 million related to
the fiscal 1996 organizational and office consolidation impacted the first
quarter 1997 results. These consolidation activities were substantially
completed during the second quarter of fiscal 1997 and yielded an estimated $5.0
million in annual cost savings.
Net investment income and interest expense. Net investment income
decreased to $429,000 in the first quarter of fiscal 1998, as compared to $1.8
million in the first quarter of fiscal 1997. The decrease is due to the
settlement of an arbitration case related to the handling of certain marketable
securities by an outside investment advisor. The settlement proceeds, net of
related expenses and expected losses to sell certain securities, of $1.3 million
are included in net investment income in the first quarter of fiscal 1997.
Interest expense decreased 35% to $1.2 million in the first quarter of fiscal
1998, compared to $1.8 million in the comparable prior year period due to lower
levels of debt outstanding during fiscal 1998.
Income taxes. The effective tax rate was 38% for the first quarter of
fiscal 1998, and 44% for the first quarter of fiscal 1997.
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Net income and weighted average shares. Net income for the fiscal 1998
first quarter was $637,000 (or $0.05 per share) compared to net income of $3,000
(or break-even per share) for the prior year first quarter. The weighted average
number of shares outstanding for the fiscal three month period ended September
27, 1997 was 14.1 million compared to 13.8 million at September 28, 1996.
14
<PAGE>
BELL SPORTS CORP.
PART II
Item 1 Legal Proceedings
None
Item 2 Changes in Securities
None
Item 3 Defaults Upon Senior Securities
None
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibit Index Page 17
(b) None
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: November 6, 1997
BELL SPORTS CORP.
/s/ Linda K. Bounds Senior Vice President and Chief Financial Officer
- ------------------------ (Principal financial officer)
Linda K. Bounds
/s/ John A. Williams Vice President of Finance and Corporate Controller
- ------------------------ (Principal accounting officer)
John A. Williams
16
<PAGE>
BELL SPORTS CORP.
INDEX TO EXHIBITS
Exhibit
Number Description
- --------------------------------------------------------------------------------
10.1* Promissory Note between Bell Sports, Inc. and Mary George dated
September 24, 1996
10.2* Collateral Pledge Agreement between Bell Sports, Inc. and Mary George
dated September 24, 1996.
11* Statement re: computation of per share earnings
27* Financial Data Schedule
- ----------------------------------
* Filed herewith
17
PROMISSORY NOTE
(Interim Loan)
$65,000.00 September 24, 1996
San Jose, California
FOR VALUE RECEIVED, the undersigned promises to pay to Bell Sports,
Inc., a California corporation ("Payee"), the principal sum of Sixty Five
Thousand Dollars. No interest shall accrue or be payable on the principal
balance provided that the principal balance is timely paid in accordance with
the following terms.
Interest will be imputed at the rate of six percent (6%) per annum, and
shall be added to the W-2 of the undersigned employee. The undersigned employee
will pay all taxes on interest so imputed.
The balance of the note is payable as follows:
(1) Fifty percent (50%) of any bonus (if any) awarded to the
undersigned by Payee after the date hereof shall be applied by Payee to reduce
the balance hereof;
(2) The entire principal balance hereof is due and payable
upon the earlier of the following: (a) the termination, for whatever reason, of
the undersigned as an employee of the Payee; (b) the dissolution or liquidation
of the Payee; or (c) the third anniversary of this promissory note as reflected
by the date at the top hereof.
In the event that the note is not paid strictly in accordance with all
of the above terms, then and thereafter the principal balance will bear interest
at the maximum legal rate until paid in full.
This Note is secured by a Collateral Pledge Agreement of even date
herewith, the terms of which are incorporated herein by reference. This Note
shall for all purposes be governed by and construed in accordance with the laws
of the State of California.
IN WITNESS WHEREOF, the undersigned have caused this Promissory Note to
be executed as of the day and year first above written.
/s/ Mary George
---------------------------
Employee, Mary George
I join the act and deed of Employee, my husband/wife, and agree to
joint and several liability of all obligations hereinabove imposed.
/s/
---------------------------
Employee's Spouse
COLLATERAL PLEDGE AGREEMENT
THIS COLLATERAL PLEDGE AGREEMENT ("Agreement") is made this 24th day of
September, 1996, by and among MARY GEORGE, a resident of the State of California
("Pledgor") and BELL SPORTS, INC., a California corporation (BSI).
1. Pledge.
As security for Pledgor's promissory note ("Note") to BSI of
even date herewith, which Note evidences the indebtedness of the Pledgor to BSI,
Pledgor hereby pledges, mortgages, hypothecates, assigns, transfers, delivers,
sets over and confirms unto BSI, its successors and assigns, the following
property, to wit:
Any and all options to purchase shares of BSI or any of its affiliates,
however received or whenever granted, either registered to or
exercisable by the Pledgor, together with all proceeds thereof,
additions thereto and substitutions therefor, including without
limitation any other securities, cash or other properties distributed
with respect to the foregoing options to purchase stock or other
securities subject to this Agreement, whether as a result of merger,
consolidation, dissolution, reorganization, recapitalization, interest
payment, stock split, stock dividend, reclassification or redemption or
any other change declared or made in the capital structure of BSI, or
otherwise,
as collateral security for the payment in full when due of any and all
obligations and indebtedness of Pledgor to BSI, whether direct, indirect or
contingent, whether now existing or hereafter incurred and whether or not
otherwise secured (hereinafter collectively referred to as the "Obligations"),
including, without limitation, all obligations and indebtedness of Pledgor under
the Note and any extensions, amendments and renewals thereto. In the event of a
conflict or inconsistency between the terms hereof and the terms of the Note,
the terms of the Note shall control. Pledgor warrants and represents that
Pledgor has the right to pledge, mortgage, hypothecate, assign, transfer,
deliver, set over and confirm unto BSI all of the foregoing options to purchase
shares free of any encumbrance subject only to the terms of any plan or plans by
or pursuant to which such options were issued or awarded.
Collateral Pledge Agreement/Page 1
<PAGE>
Pledgor hereby agrees promptly to pledge and deposit hereunder with BSI
any stock, securities, or other property with respect to any of the options or
securities represented thereby, whether taken in substitution for or in addition
to the above described property. Such stock, other securities and property shall
stand pledged and assigned for the Obligations in the same manner as the
property described in the first paragraph hereof. All of the property described
in this Section 1 and in the first and second paragraphs hereof is hereinafter
called the "Pledged Property."
2. Voting Power, Dividends, Etc.
(a) Unless and until an Event of Default (as hereinafter
defined) or an event which, with the passage of time or giving of notice or both
would constitute an Event of the Default, has occurred, the Pledgor shall have
the right to exercise all voting, consensual and other powers of ownership
pertaining to the Pledged Property, and the Pledgor shall be entitled to receive
and retain any dividends on the Pledged Property paid in cash out of earned
surplus on BSI to the extent such dividends are reasonable in amount and paid in
the ordinary course of business. To the extent not so permitted, such sums shall
be applied to the amount owing under the Note.
(b) Pledgor hereby irrevocably appoints the President of BSI
as Pledgor's proxy holder with respect to the Pledged Property with full power
and authority to vote such Pledged Property and otherwise act with respect to
such Pledged Property on behalf of Pledgor, provided that this proxy shall be
operative only upon an Event of Default. This Proxy shall be irrevocable for so
long as any of the Obligations remain in existence, and shall be coupled with an
interest. If any Event of Default shall have occurred, then whether or not any
holder of the Note, or the Obligations, exercises any available options to
declare the note or the Obligations due and payable or seeks or pursues any
other relief or remedy available to such holder under this Pledge Agreement or
the Obligations:
(i) The President of BSI, or his nominee or nominees,
shall forthwith, without further action on the part of any person, have the sole
and exclusive right to exercise the proxy granted above and all voting,
consensual and other powers of ownership pertaining to the Pledged Property and
shall exercise such powers in such manner as such person, in his sole reasonable
discretion, shall determine to be necessary, appropriate or advisable, and, if
BSI shall so request in writing, the Pledgor agrees to execute and deliver to
BSI such other and additional powers, authorizations, proxies, dividends and
such other documents as BSI may reasonably request to secure to BSI the rights,
powers and authorities intended to be conferred upon BSI by this Subsection (b);
and
Collateral Pledge Agreement/Page 2
<PAGE>
(ii) All dividends and other distributions on the
Pledged Property shall be deposited in a sinking fund to be established for the
benefit of BSI, and, if BSI shall so request in writing, the Pledgor agrees to
execute and deliver to BSI appropriate additional dividend, distribution and
other orders and documents to that end.
3. Sale of Pledged Property After an Event of Default.
If any Event of Default shall have occurred, then, unless the Note and
the Obligations shall have been paid in full at or before the time BSI gives
Pledgor the notice provided for in Subsection (a) of this Section 3 or at or
before the time the suit provided for in Subsection (b) of this Sections 3 shall
be begun, BSI may, in its sole discretion, without further demand, advertisement
or notice, except as expressly provided for in Subsection (a) of this section 3,
(i) apply the cash, if any, then held by him as collateral hereunder, for the
purposes and in the manner provided in Section 4 hereof, and (ii) if there shall
be no such cash or the cash so applied shall be insufficient to make in full all
payments provided in Subsections (a) and (b) of Sections 4 hereof:
(a) Sell the Pledged Property, or any part thereof, in one or
more sales, at public or private sale, conducted by any officer or agent or
auctioneer or attorney for, BSI, at BSI's place of business or elsewhere, for
cash, upon credit or future delivery, and at such price or prices as BSI shall,
in its sole discretion, determine, and BSI may be the purchaser of any or all of
the Pledged Property so sold and shall hold the same thereafter in its own
right, free from any claims of Pledgor or any right of redemption of Pledgor.
Upon any such sale BSI shall have the right to deliver, assign and transfer to
the Purchaser thereof the Pledged Property so sold. Each purchaser (including
BSI) at any such sale shall hold the Pledged Property so sold including, without
limitation, any equity or right of redemption of the Pledgor, which the Pledgor
hereby specifically waives, to the extent he may lawfully do so, and all rights
of redemption, stay or appraisal which he has or may have under any rule of law
of statute now existing or hereafter adopted. BSI shall give the Pledgor at
least five (5) days' written notice, in case of public or private sale. Any such
public sale shall be held at such time or times within ordinary business hours
as BSI shall fix in the notice of such sale. At any such sale the Pledged
Property may be sold in one lot as an entity or in separate parcels. BSI shall
not be obligated to make any sale pursuant to any notice. BSI may, without
notice or publication, adjourn any public or private sale from time to time by
announcement at the time and place fixed for such sale, or any adjournment
thereof, and any such sale my be made at any time or place to which the same may
be so adjourned without further notice or publication. In case of any sale of
all or any part of the Pledged Property for credit or for future delivery, the
Pledged Property so sold may be retained by BSI until the selling price is paid
by the purchaser thereof, but BSI shall not incur any liability in case of the
Collateral Pledge Agreement/Page 3
<PAGE>
failure of such purchaser to take up and pay for the Pledged Property so sold,
and in case of any such failure, such Pledged Property may again be sold under
and pursuant to the provisions hereof; or
(b) Proceed by a suit or suits at law or in equity to
foreclose upon this Agreement and sell the Pledged Property, or any portion
thereof, under a judgment or decree of a court of courts of competent
jurisdiction.
The President of BSI, as attorney-in-fact pursuant to section 5 hereof
may, in the name and stead of the Pledgor, make and execute all conveyances,
assignments and transfers of the Pledged Property sold pursuant to Subsection
(a) or (b) of this Section 3. The Pledgor shall, if so requested by BSI, ratify
and confirm any sale or sales by executing and delivering to BSI or to such
purchaser or purchasers all such instruments as may, in the sole judgment of
BSI, be advisable.
4. Application of Proceeds.
If an Event of Default exists, the proceeds of any sale, or of
collection, of all or any part of the Pledged Property shall be applied by BSI,
without any marshaling of assets, in the following order:
(a) first, to the payment of all of the costs and expenses of
such sale, including, without limitation, reasonable compensation to BSI and its
agents, attorneys and counsel, and all other reasonable expenses, liabilities
and advances made or incurred by BSI in connection therewith; and
(b) second, to the payment of the principal of and premium, if
any, and interest on the Note, and all obligations of the Pledgor under the Note
and this Agreement and then to pay any other Obligations; and
(c) finally, to the payment to the Pledgor, his successors or
assigns, or their respective heirs, executors or administrators, or to
whomsoever may be lawfully entitled to receive the same or as a court of
competent jurisdiction may direct, or any surplus remaining from such proceeds
after payments of the character referred to in Subsections (a) and (b) of this
Section 4 shall have been made.
5. President of BSI Appointed Attorney-in-Fact; Indemnity.
Upon an Event of Default, the President of BSI, his successors and
assigns, is hereby appointed attorney-in-fact, with full power of substitution,
of the Pledgor for the purpose of carrying out the provisions of the Pledge
Agreement and taking any action and executing any instruments which such
attorney-in-fact may deem necessary or advisable to accomplish the purposes
hereof, which appointment as attorney-in-fact
Collateral Pledge Agreement/Page 4
<PAGE>
is irrevocable and coupled with an interest. The Pledgor will indemnify and save
harmless such person from and against any liability or damage which he may
incur, in good faith and without gross negligence, in the exercise and
performance of any of its or his powers and duties specifically set forth
herein.
6. No Waiver.
No failure on the part of BSI to exercise, and no delay on the part of
BSI in exercising, any right, power or remedy hereunder shall operate as a
waiver thereof; nor shall any single or partial exercise by BSI of any right,
power or remedy hereunder preclude any other or further right, power or remedy.
The remedies herein provided are cumulative and are not exclusive of any
remedies provided by law or equity.
7. Termination of Pledge.
When all of the Obligations, including, without limitation, the
indebtedness evidenced or secured by the Note or this Agreement, shall have been
paid in full, this Agreement shall terminate. BSI shall forthwith assign,
transfer and deliver to the Pledgor or his assignees, without representation,
warranty or recourse, against appropriate receipts, all the Pledged Property, if
any, then held by him in pledge hereunder.
8. Representations and Warranties.
The Pledgor hereby represents and warrants that, when the Pledged
Property is pledged hereunder:
(a) Ownership of Pledged Property. Pledgor is the legal and
equitable owner of the Pledged Property free and clear of all liens, charges,
encumbrances and security interests of every kind and nature, other that those
created hereunder.
(b) Authority to Pledge. Pledgor has taken all action
necessary to make this Pledge and all obligations hereunder fully enforceable
against Pledgor.
(c) Continuous Security Interest. Pledgor hereby agrees that,
until payment of principal, interest, and all other sums owing pursuant to the
Note in accordance with the terms thereof and performance in full of all of the
Obligations and the covenants, conditions and agreements to Pledgor hereunder,
all rights, powers and remedies granted to BSI hereunder shall continue to exist
and may be exercised by BSI.
(d) Right to Transfer. Pledgor hereby represents and warrants
that on the date of this Agreement he has the absolute right and authority to
enter into this Agreement and thereby to create in favor of BSI
Collateral Pledge Agreement/Page 5
<PAGE>
a valid and binding security interest in the Pledged Property, subject to no
liens, charges, encumbrances or rights of others.
(e) No Transfer, Further Encumbering, Etc. Pledgor hereby
agrees not to directly or indirectly assign, transfer or convey or further
encumber the Pledged Property or any part thereof or interest therein without
the prior written consent of BSI.
9. Governing Law.
This Agreement shall in all respects be construed and interpreted in
accordance with and governed by the laws of the State of California applicable
to agreements made and to be performed entirely in California by California
residents.
10. Successor and Assigns.
This Agreement shall be binding upon and inure to the benefit of the
respective successors and assign of the Pledgor and BSI, and any subsequent
holder of the Note or the Obligations.
11. Additional Instruments and Assurance.
The Pledgor hereby agrees, at his own expense, to execute and deliver,
from time to time, any and all further or other instruments, and to perform such
acts, as BSI may reasonably request for purposes of this Agreement and to secure
to BSI, and to all persons who may from time to time be the holder of the Note
or the Obligations, the benefits of all rights, authorities and remedies
conferred upon BSI by the terms of this Agreement.
12. Notices.
All notices and other communications provided for hereunder shall be in
writing (including telegraphic communication) and mailed or telegraphed or
delivered, if to the Pledgor, at his address at ___________________________
____________________________________________________ or if to BSI, at 15170 N.
Hayden, Suite I-1, Scottsdale, AZ 85260, ATTN: Chief Financial Officer, or, as
to each party, at such other address as shall be designated by such party in a
written notice to the other party, complying with the foregoing terms. All such
notices and communications shall, when mailed or telegraphed, be effective when
deposited in the United States Mail, postage prepaid, certified, registered or
express, return receipt requested, or delivered to the telegraph company or
overnight courier, charges prepaid, respectively, addressed as aforesaid.
13. Severability.
Collateral Pledge Agreement/Page 6
<PAGE>
In case any one or more of the provisions of this Agreement shall for
any reason be held to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other provision
hereof, but this Agreement shall be construed as if such invalid, illegal or
unenforceable provision had not been included.
14. Events of Default.
The Pledgor shall be in default under this Agreement upon the
occurrence of any one of the following events (herein referred to as an "Event
of Default"):
(a) Default by the Pledgor in the due observance or
performance of any covenant or agreement contained herein or breach by the
Pledgor of any representation or warranty herein contained; or
(b) any default by Pledgor in the payment or performance when
due of any of the Obligations, including, without limitation, the payment of the
principal of, or interest on, any indebtedness of Pledgor to BSI, as set forth
in the Note; or
(c) the occurrence of any event of default under the
provisions of the Note, and any other instrument, document or agreement securing
the indebtedness evidenced by the Note.
15. Heading.
The headings of the Sections of this Agreement have been inserted for
convenience of reference only and shall in no way affect the construction or
interpretation of this Agreement.
IN WITNESS WHEREOF, the parties have entered into this Collateral
Pledge Agreement as of the date first above written.
PLEDGOR:
/s/ Mary George
--------------------------------
Employee, Mary George
BELL SPORTS, INC.
By /s/ Linda Bounds
-----------------------------
Linda Bounds
V.P. and Corporate Controller
Collateral Pledge Agreement/Page 7
BELL SPORTS CORP.
EXHIBIT 11 - STATEMENT RE:
COMPUTATION OF PER SHARE EARNINGS
(In Thousands, Except Per Share Amounts)
Three months ended
--------------------------------
September 27, September 28,
1997 1996
--------------------------------
Net income $ 637 $ 3
Net effect of convertible subordinated
debentures (using the if-converted method) 607 566
------------------------
Adjusted net income $ 1,244 $ 569
========================
Weighted average number of common
and common equivalent shares
outstanding - primary 14,075 13,754
Net effect of other potentially dilutive
securities 249
Additional shares assuming conversion of
convertible subordinated debentures 1,595 1,595
------------------------
Adjusted average shares outstanding for
fully diluted computation 15,919 15,349
========================
Per share amount - fully diluted $ 0.08 $ 0.04
========================
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-27-1998
<PERIOD-START> JUN-29-1997
<PERIOD-END> SEP-27-1997
<EXCHANGE-RATE> 1
<CASH> 46,177
<SECURITIES> 0
<RECEIVABLES> 46,277
<ALLOWANCES> 4,367
<INVENTORY> 44,546
<CURRENT-ASSETS> 147,721
<PP&E> 38,636
<DEPRECIATION> 17,918
<TOTAL-ASSETS> 242,453
<CURRENT-LIABILITIES> 29,165
<BONDS> 93,083
0
0
<COMMON> 143
<OTHER-SE> 120,062
<TOTAL-LIABILITY-AND-EQUITY> 242,453
<SALES> 43,632
<TOTAL-REVENUES> 43,632
<CGS> 30,155
<TOTAL-COSTS> 30,155
<OTHER-EXPENSES> 11,282
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,167
<INCOME-PRETAX> 1,028
<INCOME-TAX> (391)
<INCOME-CONTINUING> 637
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 637
<EPS-PRIMARY> .05
<EPS-DILUTED> .08
</TABLE>
