<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 7, 1998
REGISTRATION NO. 333-65115
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
BELL SPORTS CORP.
BELL SPORTS, INC.
(EXACT NAME OF REGISTRANTS AS SPECIFIED IN THEIR RESPECTIVE CHARTERS)
DELAWARE 3949 36-3671789
CALIFORNIA 3949 95-1733731
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
6350 SAN IGNACIO AVENUE
SAN JOSE, CA 95119
TELEPHONE: (408) 574-3400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
MARY J. GEORGE
BELL SPORTS CORP.
6350 SAN IGNACIO AVENUE
SAN JOSE, CA 95119
TELEPHONE: (408) 574-3400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPY TO:
ROBERT W. KADLEC, ESQ.
SIDLEY & AUSTIN
555 WEST FIFTH STREET
LOS ANGELES, CA 90013
TELEPHONE: (213) 896-6000
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
$110,000,000
BELL SPORTS, INC.
OFFER TO EXCHANGE 11% SERIES B SENIOR SUBORDINATED NOTES DUE 2008
FOR ANY AND ALL OUTSTANDING 11% SERIES A SENIOR SUBORDINATED NOTES DUE 2008
---------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON JANUARY 14, 1999, UNLESS EXTENDED
Bell Sports, Inc., a California corporation (the "Issuer"), hereby offers
(the "Exchange Offer"), upon the terms and conditions set forth in this
Prospectus (as the same may be amended or supplemented from time to time, the
"Prospectus") and the accompanying Letter of Transmittal (the "Letter of
Transmittal"), to exchange $1,000 principal amount of its 11% Series B Senior
Subordinated Notes due 2008 (the "New Notes"), registered under the Securities
Act of 1933, as amended (the "Securities Act"), pursuant to a Registration
Statement of which this Prospectus is a part, for each $1,000 principal amount
of its outstanding 11% Series A Senior Subordinated Notes due 2008 (the "Old
Notes" and, together with the New Notes, the "Notes"), of which $110,000,000
principal amount is outstanding on the date hereof. The form and terms of the
New Notes are the same in all material respects as the form and terms of the
Old Notes except that the New Notes will bear a Series B designation and will
have been registered under the Securities Act and, therefore, will not bear
legends restricting their transfer and will not contain certain provisions
relating to an increase in the interest rate which were included in the terms
of the Old Notes in certain circumstances relating to the timing of the
Exchange Offer. The New Notes will evidence the same debt as the Old Notes and
will be issued under and be entitled to the benefits of the Indenture (the
"Indenture") dated as of August 17, 1998 among the Issuer, Bell Sports Corp.,
a Delaware corporation, as guarantor ("Holdings" and together with the Issuer
and their subsidiaries, the "Company" or "Bell Sports") and Harris Trust and
Savings Bank, as trustee. See "The Exchange Offer" and "Description of Notes."
The Notes will mature on August 15, 2008. Interest on the New Notes will be
payable semi-annually, in arrears, in cash on February 15 and August 15 of
each year, commencing on February 15, 1999. The New Notes will be redeemable
at the option of the Issuer, in whole or in part, at any time and from time to
time on or after August 15, 2003, in cash, at the redemption prices set forth
herein, plus accrued and unpaid interest, if any, thereon to the redemption
date. In addition, at any time and from time to time on or prior to August 15,
2001, the Issuer may, at its option, redeem up to 35% of the aggregate
principal amount of the Notes issued pursuant to the Indenture at a redemption
price equal to 111% of the aggregate principal amount thereof, plus accrued
and unpaid interest, if any, thereon to the redemption date, with the Net Cash
Proceeds (as defined) of one or more Equity Offerings (as defined); provided
that at least 65% of the aggregate principal amount of the Notes issued
pursuant to the Indenture remains outstanding immediately thereafter. The New
Notes will not be subject to any sinking fund requirement. Upon a Change of
Control (as defined), the Issuer may be required to purchase the New Notes for
cash at a price equal to 101% of the aggregate principal amount thereof plus
accrued and unpaid interest, if any, thereon to the date of purchase. See
"Description of Notes."
The Issuer is a direct, wholly-owned subsidiary of Holdings. On August 17,
1998, pursuant to a merger agreement dated February 17, 1998, HB Acquisition
Corporation, a Delaware corporation ("HB Acquisition") and affiliate of
Charlesbank Equity Fund IV, Limited Partnership and Brentwood Associates
Buyout Fund II, L.P., was merged with and into Holdings, with Holdings
continuing as the surviving corporation (the "Merger"). See "The
Transactions."
The New Notes will be senior subordinated, unsecured, general obligations of
the Issuer, ranking subordinate in right of payment to all existing and future
Issuer Senior Indebtedness (as defined) and will rank senior or pari passu in
right of payment to all existing and future subordinated Indebtedness (as
defined) of the Issuer. The Issuer's obligations under the New Notes will be
guaranteed on a senior subordinated basis by Holdings (the "Holdings
Guarantee"). The Holdings Guarantee will be a general, unsecured obligation of
Holdings, subordinate in right of payment to all Holdings senior indebtedness.
The New Notes initially will not be guaranteed by the Issuer's subsidiaries.
Consequently, liabilities of the Issuer's subsidiaries will effectively be
senior in right of payment to the New Notes. As of June 27, 1998, on a
pro forma basis after giving effect to the Transactions (as defined), the
Issuer and its subsidiaries would have had approximately $8.4 million of
Indebtedness that ranks senior or effectively senior to the New Notes. The
Indenture permits the Issuer and its subsidiaries to incur additional
Indebtedness, including Issuer Senior Indebtedness subject to certain
limitations. See "Description of Notes--Certain Covenants."
(Continued on next page)
SEE "RISK FACTORS," BEGINNING ON PAGE 14, FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS IN EVALUATING WHETHER TO TENDER
THEIR OLD NOTES IN THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS DECEMBER 7, 1998.
<PAGE>
(Continued from previous page)
The Issuer will accept for exchange any and all Old Notes validly tendered
and not withdrawn prior to 5:00 p.m., New York City time, on January 14, 1999,
unless extended by the Issuer in its sole discretion (the "Expiration Date").
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m. on the
Expiration Date. The Exchange Offer is subject to certain customary
conditions. The Old Notes were issued on August 17, 1998 to the Initial
Purchasers (as defined herein) in a transaction not registered under the
Securities Act in reliance upon an exemption under the Securities Act. The
Initial Purchasers subsequently placed the Old Notes with qualified
institutional buyers in reliance upon Rule 144A under the Securities Act.
Accordingly, the Old Notes may not be reoffered, resold or otherwise
transferred in the United States unless registered under the Securities Act or
unless an applicable exemption from the registration requirements of the
Securities Act is available. The New Notes are being offered hereunder in
order to satisfy the obligations of the Issuer and Holdings under the
Registration Rights Agreement (as defined herein) entered into by the Issuer
and Holdings in connection with the original transfer of the Old Notes to the
Initial Purchasers. See "The Exchange Offer."
Based on no-action letters issued by the staff of the Securities and
Exchange Commission (the "Commission") to third parties, the Company believes
the New Notes issued pursuant to the Exchange Offer may be offered for resale,
resold and otherwise transferred by any holder thereof (other than any such
holder that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holder's business and such
holder has no arrangement or understanding with any person to participate in
the distribution of such New Notes. See "The Exchange Offer--Purpose and
Effect of the Exchange Offer" and "The Exchange Offer--Resale of the New
Notes." Each broker-dealer (a "Participating Broker-Dealer") that receives New
Notes for its own account pursuant to the Exchange Offer must acknowledge that
it will deliver a prospectus in connection with any resale of such New Notes.
The Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a participating Broker-Dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act. This Prospectus,
as it may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with resales of New Notes received
in exchange for Old Notes where such Old Notes were acquired by such
Participating Broker-Dealer as a result of market-making activities or other
trading activities. The Company has agreed that, for a period of one year
after the thirtieth business day following the Expiration Date (or such
shorter period as will terminate when all of the Old Notes offered hereby for
exchange have been sold), it will make this Prospectus available to any
Participating Broker-Dealer for use in connection with any such resale. See
"Plan of Distribution."
Holders of Old Notes not tendered and accepted in the Exchange Offer will
continue to hold such Old Notes and will be entitled to all the rights and
benefits and will be subject to the limitations applicable thereto under the
Indenture and with respect to transfer under the Securities Act. The Company
will pay all the expenses incurred by it incident to the Exchange Offer. See
"The Exchange Offer."
There has not previously been any public market for the Old Notes or the New
Notes. The Company does not intend to list the New Notes on any securities
exchange or to seek approval for quotation through any automated quotation
system. There can be no assurance that an active market for the New Notes will
develop. See "Risk Factors--Lack of a Public Market for the Notes." Moreover,
to the extent that Old Notes are tendered and accepted in the Exchange Offer,
the trading market for untendered and tendered but unaccepted Old Notes could
be adversely affected.
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Company cautions readers that, in addition to the historical information
included herein and incorporated by reference in this Prospectus, this
Prospectus includes certain "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "Litigation Reform
Act"), that are based on management's beliefs as well as on assumptions made
by and information currently available to management. When used herein, the
words "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate,"
and similar expressions are intended to identify such forward-looking
statements. However, this Prospectus and the information incorporated by
reference herein also contain other forward-looking statements. Such forward-
looking statements involve known and unknown risks, including, but not limited
to, economic and market conditions, competitive activities or other business
conditions, dependence on key customers, fluctuations in sales or working
capital, weather conditions, consumer spending levels and results of pending
litigation, including product liability claims. Although the Company believes
that its expectations with respect to the forward-looking statements are based
upon reasonable assumptions within the bounds of its knowledge of its business
and operations, there can be no assurance that actual results, performance or
achievements of the Company will not differ materially from any future
results, performance or achievements expressed or implied from such forward-
looking statements. For a discussion of the risks associated with investment
in the Notes, please read carefully "Risk Factors."
----------------
Market data used throughout this Prospectus, including information relating
to the Company's relative position in the industry, is based on internal
Company surveys, independent industry publications, other publicly available
information or the good faith estimates of the Company's management. Although
the Company believes that such sources are reliable, the accuracy and
completeness of such information is not guaranteed and has not been
independently verified.
Except as set forth in "Summary--Summary Historical and Pro Forma
Consolidated Financial Data," "Capitalization" and "Note 1 to Consolidated
Financial Statements of Bell Sports Corp.," no separate financial statements
or data of the Issuer have been included or incorporated by reference herein.
Holdings and the Issuer do not consider that such financial statements would
be material to holders of the New Notes because the Issuer is a wholly-owned
subsidiary of Holdings and Holdings will guarantee all of the Issuer's
obligations under the New Notes. Holdings and the Issuer believe that the
material differences between the financial statements of Holdings and the
Issuer are, and will be, related to: (i) stockholders' equity; (ii) the
Holdings Senior Discount Notes (as defined); (iii) the Convertible Debentures
(as defined); and (iv) intercompany indebtedness. See "Summary--The
Transactions," "Summary--The Initial Offering," "Summary--Summary Historical
and Pro Forma Consolidated Financial Data," "Capitalization," "Description of
Notes" and "Note 1 to Consolidated Financial Statements of Bell Sports Corp."
Bell(C), Giro(C), Blackburn(C), Rhode Gear(C), VistaLite(C), Copper Canyon
Cycling(C), Spoke-Hedz(C) and Bike Star(TM) are registered trademarks of
Holdings, the Issuer or their subsidiaries. Other brand names, trademarks,
servicemarks or tradenames referred to or incorporated by reference in this
Prospectus are the registered trademarks of their respective owners.
----------------
AVAILABLE INFORMATION
Holdings is subject to the informational requirements of the Exchange Act,
and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
documents and information may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Regional Offices of the
Commission located at 7 World Trade Center, Suite 1300, New York, New York
10048 and Citicorp Center, Suite 1400, 500 West Madison Street, Chicago,
Illinois 60661. Copies of such material can be obtained from the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
i
<PAGE>
Street, N.W., Washington, D.C. 20549 at prescribed rates and from the
Commission's Web Site located at http://www.sec.gov.
The Issuer has filed with the Commission a Registration Statement on Form S-
4 (the "Exchange Offer Registration Statement," which term shall encompass all
amendments, exhibits, annexes and schedules thereto) pursuant to the
Securities Act, and the rules and regulations promulgated thereunder, covering
the New Notes being offered hereby. This Prospectus does not contain all the
information set forth in the Exchange Offer Registration Statement. For
further information with respect to the Exchange Offer, reference is made to
the Exchange Offer Registration Statement. Statements made in this Prospectus
as to the contents of any contract, agreement or other document referred to
are not necessarily complete. With respect to each such contract, agreement or
other document filed as an exhibit to the Exchange Offer Registration
Statement, reference is made to the exhibit for a more complete description of
the document or matter involved, and each such statement shall be deemed
qualified in its entirety by such reference.
ii
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
iii
<PAGE>
SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and Consolidated Financial
Statements (including the notes thereto) of Bell Sports Corp. appearing
elsewhere or incorporated by reference in this Prospectus. As used herein and
except as the context otherwise may require, the "Issuer" means Bell Sports,
Inc., a California corporation, "Holdings" means Bell Sports Corp., a Delaware
corporation, and the "Company" or "Bell Sports" means, collectively, Holdings,
the Issuer and all of their consolidated subsidiaries. Bell Sports Corp. is a
holding company which is not engaged in any business other than holding the
capital stock of the Issuer. References to the Company's "fiscal year" are to
the 52-week or 53-week period ending on the Saturday closest to the last day of
June. There were no 53-week periods in the five fiscal years ended June 27,
1998. The mailing address of the Company's chief executive offices is 6350 San
Ignacio Avenue, San Jose, California 95119. The phone number of the Company's
chief executive offices is (408) 574-3400.
THE COMPANY
OVERVIEW
Bell Sports is the leading manufacturer and marketer of bicycle helmets
worldwide and a leading supplier of a broad line of bicycle accessories in
North America. The Company is also a leading supplier of auto racing helmets
and a supplier of bicycle accessories worldwide. To capitalize upon increasing
safety awareness in other outdoor sports, the Company recently began marketing
in-line skating, snowboarding, snow skiing and water sport helmets. The Company
markets its helmets under the widely recognized Bell, Bell Pro and Giro brand
names, and its accessories under such leading brands as Bell, Blackburn, Rhode
Gear, VistaLite, Copper Canyon Cycling and Spoke-Hedz. With a broad, well-
diversified, branded product offering marketed across all price points, the
Company is a leading supplier of bicycle helmets and accessories to all major
distribution channels in the industry, including mass merchants and independent
bicycle dealers ("IBDs"). In fiscal 1998, the Company had net sales of
$207.2 million and EBITDA (as defined) of $26.6 million.
Bell Sports has developed a reputation over its 44-year history for
innovation, design, quality and safety and is recognized by bicycling and auto
racing enthusiasts as a market leader in helmet technology and design. To
leverage its outstanding reputation and position in bicycle helmets, the
Company has pursued strategic acquisitions of complementary bicycle helmet and
accessory brands. During the 1990s, the Company increased net sales from $40.4
million in fiscal 1990 to $207.2 million in fiscal 1998. The Company believes
the primary drivers of this growth include: (i) the development of innovative
bicycle helmets and accessories; (ii) strategic acquisitions; (iii) the
successful introduction of the Bell brand, which historically had been reserved
for sale to the IBD channel, into the mass merchant channel; (iv) an increase
in safety awareness among consumers; and (v) the popularity of bicycling,
including specialty segments such as mountain biking. In fiscal 1998,
approximately 52%, 46% and 2% of the Company's net sales were derived from the
sale of bicycle accessories, bicycle helmets and auto racing helmets,
respectively, with approximately 86% of net sales in North America, 11% in
Europe and 3% in Australia and the Pacific Rim.
COMPETITIVE STRENGTHS
Leading Industry Position. Bell Sports believes it holds the leading market
share position in the bicycle helmet market in the United States, Europe and
Canada. According to the Bicycle Market Research Institute ("BMRI"), in 1997
the Company held an approximate 67% share of the U.S. bicycle helmet market,
the largest bicycle helmet market in the world. In addition, the Company is a
leading supplier of bicycle accessories in North America. The Company believes
it has attained these leading positions through a combination of its: (i)
strong brand awareness among consumers; (ii) broad product offerings marketed
across all price points; (iii) outstanding reputation among bicycling
enthusiasts; and (iv) superior customer service. As a result, the Company
believes it is a primary supplier of bicycle helmets and accessories to a
majority of mass merchants in the United States and the largest supplier of
bicycle helmets to IBDs in North America.
1
<PAGE>
Strong Brand Name. The Bell brand has over a 40-year history. The Company
believes that the Bell brand is the most recognized name in bicycle helmets
both by bicycling enthusiasts and mass market consumers. The Company first
established its leading brand name among enthusiasts by producing premium
bicycle helmets sold through the IBD channel. In fiscal 1996, the Company
successfully expanded the use of its strong name by introducing Bell-branded
helmets into the mass merchant channel. To capitalize on the success of the
branded helmet program, in fiscal 1998, the Company introduced Bell-branded
bicycle accessories into the mass merchant channel. The Company markets
products through the IBD channel under the Giro, Bell Pro, Blackburn, Rhode
Gear and VistaLite brand names. The Company believes that these brands are
recognized by enthusiasts as leading names in each of their respective product
categories. Bell Sports reinforces the strength of its brands through a diverse
marketing program which includes print advertising, trade promotions,
sponsorship of athletes and grass-roots marketing.
Loyal and Diverse Customer Relationships. Bell Sports has a broad and well-
established customer base of over 4,000 mass merchants and IBDs. The Company is
a primary supplier of bicycle helmets and accessories to a majority of mass
merchants in the United States including Wal-Mart, K-Mart, Costco, Sears and
Fred Meyer, and presently has 100% of the shelf space for bicycle helmets and
accessories in Wal-Mart and 100% of the shelf space for bicycle helmets in K-
Mart. The Company also is a primary supplier of premium bicycle helmets and
accessories to its IBD customers through its Bell Pro and Giro bicycle helmet
brands and its Blackburn, Rhode Gear and VistaLite premium bicycle accessory
brands. The Company attributes its strong customer base primarily to its broad,
innovative and high quality product offerings marketed across all price points,
outstanding reputation and safety record and superior customer service. See
"Risk Factors--Customer Concentration."
Superior Customer Service. The Company supports its strong customer
relationships with sales, marketing and inventory management programs tailored
to serve specific distribution channels. Bell Sports works closely with
retailers to increase their effectiveness in selling the Company's products. To
this end, the Company has developed marketing and category management services
for its mass merchant customers including: (i) product mix optimization; (ii)
retail shelf management, including plan-o-gram services; (iii) Electronic Data
Interchange ("EDI") and inventory management programs; and (iv) field
merchandising. For its IBD customers, the Company develops innovative point-of-
sale materials to enhance product visibility. The Company believes that its
customers value these services in their efforts to maximize sales and
profitability. The Company has been recognized by many of its customers for
providing superior customer service. For example, in May 1998, Recreational
Equipment Incorporated ("REI") presented the Company with its prestigious
"Vendor of the Year" award, ranking Bell Sports number one in service quality
among REI's vendors.
Product Innovation and Design. The Company believes that innovation and
design are important to a consumer's selection of a bicycle helmet. As a
result, the Company continuously reviews the features, functionality, safety,
style and component materials used in its bicycle helmets and works with IBD
customers to enhance the appeal of its products. Since the introduction of its
first bicycle helmet in 1975, Bell Sports has been a leader in the development
and utilization of the latest technology and innovations in bicycle helmet
design, such as advancements which have reduced weight, improved aerodynamics
and enhanced helmet fit and comfort. As a part of the design process, Bell
Sports conducts extensive testing of new products and regular testing of its
existing products at its state-of-the-art test facility. The Bell Sports
research and development staff also conducts rigorous helmet testing to monitor
adherence to bicycle helmet safety standards and has contributed to the
development of the new mandatory helmet safety standard of the Consumer
Products Safety Commission (the "CPSC").
2
<PAGE>
BUSINESS STRATEGY
The Company seeks to strengthen its market leadership position and maximize
profitability and cash flow through the following strategies:
Continue to Leverage the Bell Brand. With over 40 years of experience in the
design and manufacture of helmets, Bell Sports has leveraged its brands to
become a leader in the sale of bicycle helmets and accessories. For example, in
fiscal 1996, the Company made a strategic decision to use the Bell brand on
bicycle helmets sold in the mass merchant channel. Prior to fiscal 1996, the
Bell brand had been reserved for premium bicycle helmets sold primarily through
IBDs. To continue the successful expansion of the Bell brand into the mass
merchant channel, in December 1997, the Company began to replace its non-
branded bicycle accessories with Bell-branded accessories in the mass merchant
channel. As a result, in fiscal 1998 approximately 46% of the Company's U.S.
mass merchant sales were comprised of Bell-branded bicycle helmets and
accessories, up from 11% in fiscal 1997. The Company intends to continue to
leverage its leading brands in order to: (i) expand its presence in attractive
emerging specialty helmet markets such as in-line skating, snowboarding, snow
skiing and water sports; (ii) capture strategic licensing opportunities in
complementary product lines; and (iii) increase market share internationally.
The Company believes that these initiatives can increase sales and profits with
relatively modest capital investments.
Expand International Sales. Bell Sports has achieved significant growth in
international sales from $12.8 million in fiscal 1994 to $50.8 million in
fiscal 1998. The Company believes that significant opportunities exist to
continue to grow sales in established European and Pacific Rim markets.
Compared to the U.S. market, these international bicycle helmet and accessory
markets are highly fragmented and regionally focused, generally involving
smaller companies offering narrower product lines with limited marketing and
customer service support. The Company believes that high quality, dependable
suppliers of a broad line of products such as Bell Sports are positioned
favorably to service such international markets. An important component of the
Company's European strategy is to increase bicycle accessories sales, which
represented only 14% of the Company's net sales in Europe in fiscal 1998,
compared to 57% of the Company's net sales in North America. The Company also
plans to increase its direct sales efforts in international markets across all
distribution channels and product lines in order to leverage further the Bell
brand and increase international sales. In Canada and Australia, where the
Company replaced third-party distributors with a direct sales approach in
fiscal 1997, net sales increased from $23.7 million in fiscal 1997 to $28.5
million in fiscal 1998. In fiscal 1998, the Company reorganized its European
sales, marketing and management functions in order to execute its growth
strategy.
Achieve Cost Savings. Since fiscal 1996, the Company has strived to increase
profitability through: (i) divesting non-strategic and lower margin businesses;
(ii) reducing corporate overhead; and (iii) reducing distribution and
manufacturing costs. The Company believes these strategic initiatives have
contributed to the improvement in EBITDA margins from approximately 5% in
fiscal 1996 to 13% in fiscal 1998. During fiscal 1997 and 1998, the Company
identified and began to implement certain initiatives which it believes would
have resulted in net cost savings of approximately $3.7 million had these cost
savings been fully implemented on June 29, 1997. These anticipated cost savings
result from: (i) the outsourcing of the Company's foam molding operations; (ii)
closure of the Fairfield, California and Memphis, Tennessee distribution
facilities; (iii) consolidation and restructuring of the Company's European
sales and marketing and management functions; (iv) manufacturing process and
productivity improvements at the Rantoul, Illinois manufacturing facility;
(v) renegotiation of the Company's existing insurance policies; and (vi)
renegotiation of certain management and director's compensation agreements in
connection with the Merger (as defined). The Company believes significant
opportunities exist to achieve additional cost savings in the future through
renegotiation of vendor supply agreements and outsourcing of certain other
manufacturing processes. There can be no assurance that such cost savings will
be achieved. See "Business--Company History" and "Business--Cost Reduction
Initiatives."
3
<PAGE>
Pursue Complementary Acquisitions. The Company has successfully completed and
integrated strategic acquisitions over the last nine years. In 1996, the
Company acquired Giro Sport Design International, Inc. ("Giro"), a leading
designer and marketer of premium bicycle helmets, to enhance its penetration of
the IBD segment of the bicycle helmet market. In 1995, the Company acquired
American Recreation Company Holdings, Inc. ("AMRE"), a major domestic supplier
of bicycle helmets and accessories, to expand the Company's product offering of
bicycle helmets and accessories in the mass merchant channel. In addition,
through the acquisition of VistaLite, Inc. ("VistaLite") in 1994, Blackburn
Designs, Inc. ("Blackburn") in 1992 and Rhode Gear USA, Inc. ("Rhode Gear") in
1989, the Company became a leading supplier of premium bicycle accessories and
successfully expanded its presence in the IBD channel. The Company intends to
continue to pursue strategic acquisitions selectively in order to: (i) add to
or complement its existing product offerings; (ii) increase its significant
presence in existing distribution channels; and (iii) strengthen its position
in international markets.
THE TRANSACTIONS
In February 1998, Holdings entered into an Agreement and Plan of
Recapitalization and Merger (as amended, the "Merger Agreement"), which,
subject to the conditions set forth therein including, without limitation,
obtaining the requisite approval of Holdings' stockholders, provided for the
merger of HB Acquisition Corporation, a Delaware corporation ("HB Acquisition")
and affiliate of Charlesbank Capital Partners, LLC (together with its
affiliates, "Charlesbank") and Brentwood Associates Buyout Fund II, L.P.
(together with its affiliates, "Brentwood"), with and into Holdings, with
Holdings continuing as the surviving corporation (the "Merger"). Charlesbank
Equity Fund IV, Limited Partnership and Brentwood are hereinafter referred to
collectively as the "Investors." On August 11, 1998, a majority of the
stockholders of Holdings approved and adopted the Merger Agreement at a special
meeting of stockholders. On August 17, 1998, pursuant to a Certificate of
Merger filed with the Secretary of State of the State of Delaware, the Merger
was consummated (the "Effective Time"). Under the Merger Agreement, as of the
Effective Time, each share of common stock, $.01 par value, of Holdings (the
"Common Stock") (other than (i) shares of Common Stock held by HB Acquisition
or shares of Common Stock held directly or indirectly by Holdings, which shares
were canceled and (ii) shares of Common Stock held by persons perfecting
appraisal rights) was converted into the right to receive $10.25 in cash (the
"Per Share Merger Consideration"). The Merger and the transactions contemplated
by the Merger Agreement are being accounted for as a recapitalization under
generally accepted accounting principles ("GAAP") for financial reporting
purposes.
In connection with the Merger, the Investors invested an aggregate of $45.0
million in the equity of HB Acquisition and $15.0 million in Holdings 14%
Senior Discount Debentures due 2009 (the "Holdings Senior Discount Notes").
Each Investor received securities consisting of a combination of a new class of
common stock of Holdings ("New Common Stock") and Series A Preferred Stock of
Holdings ("Preferred Stock") as a result of the Merger as well as the Holdings
Senior Discount Notes. In addition, immediately prior to the Effective Time, CB
Capital Investors, L.P. ("CBCI"), an existing shareholder of Holdings,
exchanged $5.0 million worth of shares of Common Stock (valued at the Per Share
Merger Consideration) with HB Acquisition, and received, in consideration
therefor, equity of HB Acquisition. The foregoing transactions are hereinafter
collectively referred to as the "Investors and CBCI Investments." In addition,
it is anticipated that certain members of management will be provided with an
opportunity to make equity investments in the Company pursuant to a management
investment incentive plan. See "Related Party Transactions." Upon completion of
the Transactions (as defined below), the Investors owned approximately 90% of
the equity of Holdings.
At the Effective Time, in order to finance a portion of the costs and
expenses related to the Merger and to support the Company's operating capital
requirements, up to $60.0 million of bank financing, subject to borrowing base
requirements, became available to the Issuer pursuant to a senior secured
credit facility (the "Senior Secured Credit Facility") with a group of lenders
arranged by SG Cowen Securities Corporation ("SG Cowen") and Donaldson, Lufkin
& Jenrette Securities Corporation ("DLJ"). The Senior Secured Credit Facility
4
<PAGE>
consists of a $60.0 million revolving credit facility available for loans and
letters of credit, subject to borrowing base requirements. See "Description of
Senior Secured Credit Facility." No borrowings were made under the Senior
Secured Credit Facility at the Effective Time.
The proceeds from the Investors and CBCI Investments and the Offering (as
defined) and available cash were used: (i) to fund the cash payments required
to effect the Merger; (ii) to purchase $62.5 million aggregate principal amount
of Holdings 4 1/4% Convertible Subordinated Debentures due 2000 (the
"Convertible Debentures") in the Tender Offer (as defined) and (iii) to pay
related fees and expenses. The offering (the "Offering") by the Issuer of
$110.0 million aggregate principal amount of its Old Notes, entering into the
Senior Secured Credit Facility, the Investors and CBCI Investments, the Merger,
the Tender Offer and the transactions contemplated thereby, are collectively
referred to in this Prospectus as the "Transactions."
On June 30, 1998, Holdings commenced a tender offer, as amended on July 24,
1998 (the "Tender Offer"), for up to $62.5 million aggregate principal amount
of the Convertible Debentures. The Tender Offer expired at 7:00 a.m. New York
City time on August 14, 1998. Approximately $77.4 million aggregate principal
amount of the Convertible Debentures had been tendered in the Tender Offer.
Upon expiration of the Tender Offer, the Company accepted for payment the
Maximum Tender Amount and was required to pay $57.2 million to repurchase the
Convertible Debentures. As of August 17, 1998, after giving effect to the
Company's acceptance of the Maximum Tender Amount, there was $23.8 million
aggregate principal amount of Convertible Debentures outstanding. The
Convertible Debentures are due in November 2000.
SOURCES AND USES
The following table sets forth the estimated sources and uses of funds in
connection with the Transactions, as if the Transactions had occurred on June
27, 1998. See "Use of Proceeds."
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
Sources of Funds:
Existing cash......................................... $ 42,093
Senior Secured Credit Facility (1).................... 6,231
Senior Subordinated Notes............................. 110,000
Investors and CBCI Investments (2)(3)................. 65,000
--------
Total Sources....................................... $223,324
========
Uses of Funds:
Payment of the merger consideration (3)............... $142,639
Repurchase of Convertible Debentures (4).............. 56,873
Purchase of stock based awards through the Merger..... 6,912
Transactions fees and expenses........................ 16,900
--------
Total Uses.......................................... $223,324
========
</TABLE>
- --------------------
(1) Represents estimated initial borrowings to partially fund costs and
expenses related to the Transactions. After consummation of the
Transactions, the Issuer would have had up to $53.8 million available for
borrowing under the Senior Secured Credit Facility, subject to borrowing
base requirements. See "Description of Senior Secured Credit Facility."
(2) Includes $15.0 million aggregate proceeds of the Holdings Senior Discount
Notes.
(3) Includes the exchange by CBCI of $5.0 million worth of shares of Common
Stock valued at the Per Share Merger Consideration for HB Acquisition
capital stock. The exchange of shares by CBCI does not represent a
purchase, sale or other change in such equity investment for the Company's
accounting or tax purposes or any funds or proceeds paid to or used by
Holdings in the Merger, and does not necessarily represent a market
valuation for such shares.
(4) Reflects the repurchase of $62.5 million aggregate principal amount of the
outstanding Convertible Debentures including accrued interest of $0.3
million.
5
<PAGE>
THE INITIAL OFFERING
Old Notes................... The Old Notes were sold by the Issuer on August
17, 1998 (the "Issue Date") to Donaldson, Lufkin
& Jenrette Securities Corporation, SG Cowen
Securities Corporation and NationsBanc Montgomery
Securities LLC (the "Initial Purchasers")
pursuant to a Purchase Agreement dated as of
August 10, 1998. The Initial Purchasers
subsequently resold the Old Notes to qualified
institutional buyers pursuant to Rule 144A under
the Securities Act.
Registration Rights......... Pursuant to the Purchase Agreement, the Issuer,
Holdings and the Initial Purchasers entered into
a Registration Rights Agreement, dated as of
August 17, 1998 (the "Registration Rights
Agreement"), which grants the holders of the Old
Notes certain exchange and registration rights.
The Exchange Offer is intended to satisfy such
exchange and registration rights which terminate
upon the consummation of the Exchange Offer.
THE EXCHANGE OFFER
Securities Offered.......... $110,000,000 aggregate principal amount of 11%
Series B Senior Subordinated Notes due 2008.
The Exchange Offer.......... $1,000 principal amount of New Notes in exchange
for each $1,000 principal amount of Old Notes. As
of the date hereof, $110,000,000 aggregate
principal amount of Old Notes are outstanding.
The Company will issue the New Notes on or
promptly after the Expiration Date.
Based on an interpretation by the staff of the
Commission set forth in no-action letters issued
to third parties, the Company believes that New
Notes issued pursuant to the Exchange Offer in
exchange for Old Notes may be offered for resale,
resold and otherwise transferred by any holder
thereof (other than any such holder which is an
"affiliate" of the Company within the meaning of
Rule 405 under the Securities Act) without
compliance with the registration and prospectus
delivery provisions of the Securities Act,
provided that such New Notes are acquired in the
ordinary course of such holder's business and
that such holder does not intend to participate
and has no arrangement or understanding with any
person to participate in the distribution of such
New Notes.
Any Participating Broker-Dealer that acquired Old
Notes for its own account as a result of market-
making activities or other trading activities may
be a statutory underwriter. Each Participating
Broker-Dealer that receives New Notes for its own
account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The
Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to
admit that it is an "underwriter" within the
meaning of the
6
<PAGE>
Securities Act. This Prospectus, as it may be
amended or supplemented from time to time, may be
used by a Participating Broker-Dealer in
connection with resales of New Notes received in
exchange for Old Notes where such Old Notes were
acquired by such Participating Broker-Dealer as a
result of market-making activities or other
trading activities.
The Issuer and Holdings have agreed to use their
best efforts to keep the Exchange Offer
Registration Statement, including this
Prospectus, continuously effective for one year
from the consummation of the Exchange Offer.
Any holder who tenders in the Exchange Offer with
the intention to participate, or for the purpose
of participating, in a distribution of the New
Notes could not rely on the position of the staff
of the Commission enunciated in no-action letters
and, in the absence of an exemption therefrom,
must comply with the registration and prospectus
delivery requirements of the Securities Act in
connection with any resale transaction. Failure
to comply with such requirements in such instance
may result in such holder incurring liability
under the Securities Act for which the holder is
not indemnified by the Issuer or Holdings.
Expiration Date............. 5:00 p.m., New York City time, on January 14,
1999 unless the Exchange Offer is extended, in
which case the term "Expiration Date" means the
latest date and time to which the Exchange Offer
is extended.
Accrued Interest on the New
Notes and the Old Notes.... Each New Note will bear interest from its
issuance date. Holders of Old Notes that are
accepted for exchange will receive, in cash,
accrued interest thereon to, but not including,
the issuance date of the New Notes. Such interest
will be paid with the first interest payment on
the New Notes. Interest on the Old Notes accepted
for exchange will cease to accrue upon issuance
of the New Notes.
Conditions to the Exchange
Offer...................... The Exchange Offer is subject to certain
customary conditions, which may be waived by the
Issuer. See "The Exchange Offer--Conditions."
Procedures for Tendering
Old Notes.................. Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
accompanying Letter of Transmittal, or a
facsimile thereof or transmit an Agent's Message
(as defined herein) in connection with a book-
entry transfer, in accordance with the
instructions contained herein and therein, and
mail or otherwise deliver such Letter of
Transmittal, or such facsimile or such Agent's
Message, together with the Old Notes and any
other required documentation to the Exchange
Agent (as defined herein) at the address set
forth herein. By executing the Letter of
Transmittal or Agent's Message, each holder will
represent to the Issuer that, among other things,
the New Notes acquired pursuant to
7
<PAGE>
the Exchange Offer are being obtained in the
ordinary course of business of the person
receiving such New Notes, whether or not such
person is the holder, that neither the holder nor
any such other person (i) has any arrangement or
understanding with any person to participate in
the distribution of such New Notes, (ii) is
engaging or intends to engage in the distribution
of such New Notes or (iii) is an "affiliate," as
defined under Rule 405 of the Securities Act, of
the Company. See "The Exchange Offer--Purpose and
Effect of the Exchange Offer" and "--Procedures
for Tendering."
Untendered Notes............ Following the consummation of the Exchange Offer,
holders of Old Notes eligible to participate but
who do not tender their Old Notes will not have
any further exchange rights and such Old Notes
will continue to be subject to certain
restrictions on transfer. Accordingly, the
liquidity of the market for such Old Notes could
be adversely affected.
Consequences of Failure to The Old Notes that are not exchanged pursuant to
Exchange................... the Exchange Offer will remain restricted
securities. Accordingly, such Old Notes may be
resold only (i) to the Company, (ii) pursuant to
Rule 144A or Rule 144 under the Securities Act or
pursuant to some other exemption under the
Securities Act, (iii) outside the United States
to a foreign person pursuant to the requirements
of Rule 904 under the Securities Act, or (iv)
pursuant to an effective registration statement
under the Securities Act. See "The Exchange
Offer--Consequences of Failure to Exchange."
Shelf Registration If any holder of the Old Notes (other than any
Statement.................. such holder which is an "affiliate" of the
Company within the meaning of Rule 405 under the
Securities Act) is not eligible under applicable
securities laws to participate in the Exchange
Offer, and such holder has provided information
regarding such holder and the distribution of
such holder's Old Notes to the Company for use
therein, the Company has agreed to register the
Old Notes on a shelf registration statement (the
"Shelf Registration Statement") and use its best
efforts to cause it to be declared effective by
the Commission as promptly as practical on or
after the consummation of the Exchange Offer. The
Issuer and Holdings have agreed to maintain the
effectiveness of the Shelf Registration Statement
for, under certain circumstances, a maximum of
two years, to cover resales of the Old Notes held
by any such holders.
Special Procedures for
Beneficial Owners..........
Any beneficial owner whose Old Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender should contact such
registered holder promptly and instruct such
registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes
to tender on such owner's own behalf, such owner
must, prior to completing and executing the
Letter of Transmittal and delivering its Old
Notes, either make appropriate arrangements to
register
8
<PAGE>
ownership of the Old Notes in such owner's name
or obtain a properly completed bond power from
the registered holder. The transfer of registered
ownership may take considerable time. The Issuer
will keep the Exchange Offer open for not less
than twenty business days in order to provide for
the transfer of registered ownership.
Guaranteed Delivery Holders of Old Notes who wish to tender their Old
Procedures................. Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes,
the Letter of Transmittal or any other documents
required by the Letter of Transmittal to the
Exchange Agent (or comply with the procedures for
book-entry transfer) prior to the Expiration Date
must tender their Old Notes according to the
guaranteed delivery procedures set forth in "The
Exchange Offer--Guaranteed Delivery Procedures."
Withdrawal Rights........... Tenders may be withdrawn at any time prior to
5:00 p.m., New York City time, on the Expiration
Date.
Acceptance of Old Notes and
Delivery of New Notes......
The Issuer will accept for exchange any and all
Old Notes which are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. The New Notes
issued pursuant to the Exchange Offer will be
delivered promptly following the Expiration Date.
See "The Exchange Offer--Terms of the Exchange."
Federal Income Tax The exchange pursuant to the Exchange Offer
Consequences............... should not be a taxable event for federal income
tax purposes. See "Certain Federal Income Tax
Consequences."
Use of Proceeds............. There will be no cash proceeds to the Issuer or
Holdings from the exchange pursuant to the
Exchange Offer.
Exchange Agent.............. Harris Trust and Savings Bank.
THE NEW NOTES
General..................... The form and terms of the New Notes are the same
as the form and terms of the Old Notes except
that (i) the New Notes bear a Series B
designation, (ii) the New Notes have been
registered under the Securities Act and,
therefore, will not bear legends restricting the
transfer thereof, and (iii) the holders of New
Notes will not be entitled to certain rights
under the Registration Rights Agreement,
including the provisions providing for an
increase in the interest rate on the Old Notes in
certain circumstances relating to the timing of
the Exchange Offer, which rights will terminate
when the Exchange Offer is consummated. See "The
Exchange Offer--Purpose and Effect of the
Exchange Offer." The New Notes will evidence the
same debt as the Old Notes and will be entitled
to the benefits of the Indenture. See
"Description of Notes." The Old Notes and the New
Notes are referred to herein collectively as the
"Notes."
9
<PAGE>
Issuer...................... Bell Sports, Inc.
Maturity Date............... August 15, 2008
Interest Rate............... The New Notes will bear interest at the rate of
11% per annum, payable semi-annually, in arrears,
in cash on February 15 and August 15 of each
year, commencing February 15, 1999.
Subordination............... The New Notes will be senior subordinated,
unsecured, general obligations of the Issuer,
will rank subordinate in right of payment to all
existing and future Issuer Senior Indebtedness
(as defined) and will rank senior or pari passu
in right of payment to all existing and future
subordinated Indebtedness (as defined) of the
Issuer. The Issuer's obligations under the New
Notes will be guaranteed on a senior subordinated
basis by Holdings (the "Holdings Guarantee"). The
Holdings Guarantee will be a general, unsecured
obligation of Holdings, subordinate in right of
payment to all Holdings senior indebtedness. In
addition, the New Notes will be effectively
subordinated to the Indebtedness of the
Subsidiaries (as defined). On June 27, 1998, $1.9
million of Indebtedness of Subsidiaries was
outstanding. As of June 27, 1998, on a pro forma
basis after giving effect to the Transactions,
the New Notes would have been subordinated to
$6.5 million of Issuer Senior Indebtedness and
the Holdings Guarantee would have been
subordinated to $21.2 million of Holdings senior
indebtedness. See "Risk Factors--Subordination of
Notes and the Holdings Guarantee."
Optional Redemption......... The New Notes will be redeemable at the option of
the Issuer, in whole or in part, at any time on
or after August 15, 2003, at the redemption
prices set forth herein, plus accrued and unpaid
interest, if any, thereon to the applicable date
of redemption. In addition, at any time prior to
August 15, 2001, the Issuer may redeem up to 35%
of the aggregate principal amount of Notes issued
pursuant to the Indenture (as defined) at a
redemption price equal to 111% of the principal
amount thereof, plus accrued and unpaid interest,
if any, thereon to the date of redemption with
the Net Cash Proceeds (as defined) received by
the Issuer of one or more Equity Offerings (as
defined); provided that at least 65% of the
aggregate principal amount of the Notes issued
pursuant to the Indenture remains outstanding
immediately thereafter. See "Description of
Notes."
Change of Control........... Upon a Change of Control (as defined), the Issuer
will be required to offer to repurchase all of
the holder's New Notes at a price in cash equal
to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest, if
any, thereon to the date of purchase. See
"Description of Notes--Repurchase at the Option
of Holders--Change of Control." A Change of
Control may be deemed to be a default under the
Senior Secured Credit Facility. As a result,
there can be no assurance that, in the event of a
Change of Control, the Issuer would have
sufficient funds to purchase all New Notes
tendered. See "Risk Factors--Change of Control."
10
<PAGE>
Guarantee................... The Issuer's obligations under the New Notes will
be guaranteed on a senior subordinated basis by
Holdings. The Holdings Guarantee will be a
general, unsecured obligation of Holdings,
subordinate in right of payment to all Holdings
senior indebtedness.
Certain Covenants........... The Indenture contains certain covenants that
will limit, among other things, the ability of
the Issuer and its Subsidiaries to (i) pay
dividends, redeem capital stock and make certain
other restricted payments or investments; (ii)
incur additional indebtedness or issue certain
preferred equity interests; (iii) merge,
consolidate or sell all or substantially all of
their assets; (iv) create liens on assets; and
(v) enter into certain transactions with
affiliates or related persons. See "Description
of Notes--Certain Covenants."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered before deciding whether to tender Old Notes for New Notes offered
hereby.
11
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table sets forth for the periods and the dates indicated
certain historical and pro forma consolidated financial data of Holdings which
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Holdings Unaudited Pro Forma
Historical Condensed Consolidated Financial Statements" and the Consolidated
Financial Statements of Holdings and the related notes thereto included
elsewhere in this Prospectus. The consolidated balance sheet data as of June
27, 1998 and the statements of operations data for each of the three fiscal
years presented below are derived from the Consolidated Financial Statements of
Holdings, which have been audited by PricewaterhouseCoopers LLP, independent
accountants, and are included elsewhere in this Prospectus. The consolidated
balance sheet data as of September 26, 1998 and the statements of operations
data for the three month periods ended September 26, 1998 and September 27,
1997 are unaudited and derived from the consolidated accounting records of Bell
Sports Corp. The other financial data for all periods presented are unaudited
and derived from the consolidated accounting records of Bell Sports Corp. The
pro forma statement of operations data, other consolidated financial data and
credit data of the Issuer for fiscal 1998 are adjusted to give effect to the
Transactions as if each had occurred as of June 29, 1997. The pro forma
consolidated balance sheet data gives effect to the Transactions as if each had
occurred as of June 27, 1998. The pro forma consolidated financial data does
not purport to be indicative of Holdings' or the Issuer's financial position or
results of operations that would actually have been obtained had the
Transactions been completed at the beginning of such periods. The credit data
and certain balance sheet data for the Issuer have also been presented below
since such information may be useful to investors.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR (1) ---------------------------
---------------------------- PRO FORMA SEPTEMBER 26, SEPTEMBER 27,
1996 1997 1998 FISCAL 1998 1998 1997
-------- -------- -------- ----------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA OF HOLDINGS:
Net sales (2)........... $262,340 $259,534 $207,236 $207,236 $ 40,918 $ 43,632
Gross profit............ 60,719 76,436 69,564 69,564 13,544 13,477
Selling, general and
administrative expenses
(3).................... 66,826 60,416 48,517 49,117 11,384 11,075
Loss on disposal of
product lines and sale
of assets (4).......... -- 25,360 700 700 -- --
Restructuring charges
(5).................... 5,850 4,141 1,192 1,192 -- --
Transaction costs (6)... 11,474 --
Income (loss) from
operations............. (14,811) (16,801) 16,895 16,295 (9,876) 1,766
Net interest expense
(7).................... 5,814 4,350 2,999 16,859 1,937 738
(Loss) income before
extraordinary items.... (10,447) 637
Extraordinary item: Gain
on early extinguishment
of debt, net of taxes
of $2,006.............. -- -- -- -- 2,887 --
Net income (loss) ...... (12,375) (18,188) 8,578 (387) (7,560) 637
OTHER FINANCIAL DATA OF
HOLDINGS:
EBITDA (8).............. $ 14,059 $ 22,242 $ 26,596 $ 26,596 $ 3,582 $ 3,771
EBITDA margin (9)....... 5% 9% 13% 13% 9% 9%
Cash provided by (used
in) operations......... (21,950) 910 27,493 18,528 13,192 24,171
Cash provided by (used
in) investing
activities............. 7,678 20,422 7,931 7,931 (8,814) 12,386
Cash used in financing
activities............. (34,516) (15,272) (18,136) (51,264) (35,679) (19,390)
Depreciation and
amortization (10)...... 8,913 9,542 7,809 7,809 1,984 2,005
Capital expenditures ... 5,312 7,058 5,496 5,496 1,233 1,041
Ratio of earnings to
fixed charges.......... -- -- 3.3x 1.0x -- 1.7x
Fixed charges in excess
of earnings before
fixed charges (11)..... 20,625 21,151 -- -- 11,813 --
CREDIT DATA OF ISSUER:
Cash interest expense.............................. $12,820
Ratio of EBITDA to cash interest expense........... 2.1x
Ratio of net debt to EBITDA........................ 4.5x
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 27, AS OF
1998 SEPTEMBER 26, 1998
------------------ ------------------
ACTUAL PRO FORMA ACTUAL
-------- --------- ------------------
<S> <C> <C> <C>
BALANCE SHEET DATA OF HOLDINGS:
Cash and cash equivalents............... $ 45,093 $ 3,000 $ 13,593
Working capital (including cash and cash
equivalents)........................... 130,437 88,885 83,043
Total assets............................ 247,067 209,651 200,645
Total debt (including current
maturities)............................ 88,384 157,115 149,609
Stockholders' equity.................... 128,259 22,653 23,488
BALANCE SHEET DATA OF ISSUER:
Cash and cash equivalents .............. $ 34,662 $ 3,000 $ 13,588
Total debt (including current
maturities) (12)....................... 115,707 118,365 127,910
Stockholder's equity.................... 52,891 46,916 8,612
</TABLE>
(footnotes on following page)
12
<PAGE>
- --------------------
(1) The Company believes its statement of operations data in fiscal 1998 is
not comparable to those of fiscal 1996 and 1997 due to the inclusion of
results of operations in fiscal 1996 and 1997 of Service Cycle/Mongoose
(as defined) and SportRack (as defined), which were divested in April 1997
and July 1997, respectively.
(2) The Company's net sales in fiscal 1996 and 1997, excluding net sales from
Service Cycle/Mongoose and SportRack, were $193.7 million and $208.8
million, respectively.
(3) In fiscal 1996, selling, general and administrative expenses included $5.6
million in advertising expenses for a one-time promotional campaign in
connection with the launch of the Bell Pro helmet line and the expansion
of the Bell brand into the mass merchant channel.
(4) In fiscal 1997, loss on disposal of product lines and sale of assets
included a $25.4 million charge related to the divestiture of Service
Cycle/Mongoose. In fiscal 1998, loss on disposal of product lines and sale
of assets included (i) a reversal of previously recorded charges of $1.9
million, including a $0.6 million benefit based on the finalization of
costs associated with the closure of distribution facilities, and a $1.3
million benefit related to the reversal of the remaining reserve for
uncollectible receivables established in connection with the divestiture
of Service Cycle/Mongoose, (ii) a $0.6 million charge associated with the
sale and related reorganization of the Company's domestic foam molding
facility in Rantoul, Illinois and (iii) a $2.0 million charge related to
the divestiture of SportRack.
(5) In fiscal 1996, restructuring charges related to organizational and office
consolidations, including those in connection with the merger with AMRE
(the "AMRE Merger"). In fiscal 1997, restructuring charges related to the
consolidation of the Company's corporate headquarters and the
consolidation of the Company's Canadian operations. In fiscal 1998,
restructuring charges related to the restructuring and consolidation of
the Company's European operations.
(6) Costs of $11.5 million were incurred in the fiscal 1999 first quarter
related to the consummation of the Transactions.
(7) Net interest expense is net of investment income.
(8) EBITDA is defined as income (loss) from operations plus (i) depreciation
and amortization (excluding amortization of deferred financing fees, which
is included in interest expense), (ii) write-up to fair value of finished
goods related to the AMRE Merger and the acquisitions of SportRack and
Giro, (iii) loss on disposal of product lines and sale of assets,
principally related to the divestitures of Service Cycle/Mongoose and
SportRack, (iv) restructuring charges, principally related to facility
reorganizations, (v) costs associated with the consummation of the
Transactions and (vi) on a pro forma basis, annual management fees payable
to the Investors upon the occurrence of certain events. The Company
believes that EBITDA provides useful information regarding the Company's
ability to service its debt; however, EBITDA does not represent cash flow
from operations as defined by GAAP and should not be considered as a
substitute for net income as an indicator of the Company's operating
performance or cash flow as a measure of liquidity.
(9) EBITDA margin represents EBITDA as a percentage of net sales.
(10) Depreciation and amortization excludes amortization of deferred financing
fees.
(11) The ratio of earnings to fixed charges is computed by dividing pre-tax net
income (loss) after adding back fixed charges (interest expense and
facility charges), by fixed charges. The Company was unable to fully cover
the indicated fixed charges by earnings for certain periods presented and
instead has disclosed the amount by which fixed charges exceed earnings
before fixed charges where applicable.
(12) Total debt (including current maturities) of the Issuer includes an
intercompany payable by the Issuer to Holdings of $113.6 million at June
27, 1998 and $17.3 million at September 26, 1998.
13
<PAGE>
RISK FACTORS
In addition to the other information herein and incorporated by reference in
this Prospectus, holders of Old Notes should carefully consider, among other
things, the following factors before deciding whether to tender Old Notes for
the New Notes offered hereby. Certain statements in "Risk Factors" constitute
"forward-looking statements" within the meaning of the Litigation Reform Act.
See "Special Note Regarding Forward-Looking Statements."
FAILURE TO EXCHANGE OLD NOTES
New Notes will be issued in exchange for Old Notes only after timely receipt
by the Exchange Agent of such Old Notes, a properly completed and duly
executed Letter of Transmittal and all other required documentation.
Therefore, holders of Old Notes desiring to tender such Old Notes in exchange
for New Notes should allow sufficient time to ensure timely delivery. Neither
the Exchange Agent nor the Issuer are under any duty to give notification of
defects or irregularities with respect to tenders of Old Notes for exchange.
Old Notes that are not tendered or are tendered but not accepted will,
following consummation of the Exchange Offer, continue to be subject to the
existing restrictions upon transfer thereof. In addition, any holder of Old
Notes who tenders in the Exchange Offer for the purpose of participating in a
distribution of the New Notes will be required to comply with the registration
and prospectus delivery requirements of the Securities Act in connection with
any resale transaction. Each Participating Broker-Dealer that receives New
Notes for its own account in exchange for Old Notes, where such Old Notes were
acquired by such Participating Broker-Dealer as a result of market-making
activities or any other trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale of such New Notes. To the
extent that Old Notes are tendered and accepted in the Exchange Offer, the
trading market for untendered and tendered but unaccepted Old Notes could be
adversely affected due to the limited amount, or "float," of the Old Notes
that are expected to remain outstanding following the Exchange Offer.
Generally, a lower "float" of a security could result in less demand to
purchase such security and could, therefore, result in lower prices for such
security. For the same reason, to the extent that a large amount of Old Notes
are not tendered or are tendered and not accepted in the Exchange Offer, the
trading market for the New Notes could be adversely affected. See "Plan of
Distribution" and "The Exchange Offer."
SUBSTANTIAL LEVERAGE AND DEBT SERVICE
The Company incurred substantial indebtedness in connection with the
Transactions. See "The Transactions" and "Capitalization." Upon completion of
the Transactions, the Company has consolidated indebtedness substantially
greater than the Company's pre-Merger indebtedness. As of June 27, 1998, on a
pro forma basis after giving effect to the Transactions, (i) the Issuer would
have had $6.5 million of Issuer Senior Indebtedness and $118.4 million of
Indebtedness and stockholder's equity of $46.9 million and (ii) Holdings would
have had $21.2 million of senior indebtedness and $157.1 million of
Indebtedness. Also after giving effect to the Transactions, the Issuer's ratio
of earnings to fixed charges would have been 1.3 to 1 for fiscal 1998.
Holdings pro forma net income (loss) for fiscal 1998 would have been ($0.4)
million, as compared to $8.6 million for the same period on a historical
basis. The Issuer's pro forma cash interest expense for fiscal 1998 would have
been $12.8 million ($13.5 million of total interest expense), as compared to
$0.2 million of cash interest expense ($0.4 million of total interest expense)
for the same period on a historical basis. See "Capitalization" and "Holdings
Unaudited Pro Forma Historical Condensed Consolidated Financial Statements."
The Company and its subsidiaries may incur additional indebtedness in the
future, subject to certain limitations contained in the instruments governing
their indebtedness. As of June 27, 1998, after giving effect to the
Transactions, the Issuer anticipates that it would have had $46.3 million
available to be borrowed under the Senior Secured Credit Facility. The Company
will have significant debt service obligations. See "Holdings Unaudited Pro
Forma Historical Condensed Consolidated Financial Statements."
The Company's debt service obligations could have important consequences to
holders of the Notes, including the following: (i) a substantial portion of
the Company's cash flow available from operations after satisfying certain
liabilities arising in the ordinary course of business will be dedicated to
the payment of
14
<PAGE>
principal and interest on its indebtedness, thereby reducing the funds that
would otherwise be available to the Company, including for acquisitions and
future business opportunities; (ii) the Company's ability to obtain additional
financing in the future may be limited; (iii) certain of the Company's
borrowings (including, but not limited to, the amounts borrowed under the
Senior Secured Credit Facility) will be at variable rates of interest, which
could cause the Company to be vulnerable to increases in interest rates; (iv)
the Company's flexibility in planning for, or reacting to, changes in its
business and the industry may be limited; (v) the Company's higher degree of
leverage may make it relatively more vulnerable to economic downturns and
competitive pressures; (vi) a substantial decrease in net operating cash flows
or an increase in expenses of the Company could make it difficult for the
Company to meet its debt service requirements or force it to modify its
operations; and (vii) all of the indebtedness incurred in connection with the
Senior Secured Credit Facility will become due prior to the time the principal
payment on the Notes will become due.
The Company's ability to make scheduled payments of the principal of, or to
pay interest on, or to refinance its indebtedness (including the Notes) and to
make scheduled payments under its operating leases depends on its future
performance, which is subject to economic, financial, competitive and other
factors beyond its control. While management believes that future cash flow
from operations, together with available borrowings under the Senior Secured
Credit Facility, will be adequate to meet the Company's anticipated
requirements for capital expenditures, working capital, interest payments and
scheduled principal payments, there can be no assurance that the Company's
business will continue to generate sufficient cash flow from operations in the
future to service its debt and make necessary capital expenditures after
satisfying certain liabilities arising in the ordinary course of business. If
unable to do so, the Company may be required to refinance all or a portion of
its existing debt, including the Notes, to sell assets or to obtain additional
financing. There can be no assurance that any such refinancing would be
possible or that any such sales of assets or additional financing could be
achieved.
RESTRICTIVE DEBT COVENANTS
The Indenture and the Senior Secured Credit Facility contain numerous
financial and operating covenants that limit the discretion of the Issuer's
management with respect to certain business matters, the most restrictive of
which are contained in the Senior Secured Credit Facility and include a
minimum interest coverage ratio, a maximum leverage ratio and a minimum fixed
charge coverage ratio. The Indenture and the Senior Secured Credit Facility
also contain covenants that prohibit the payment of cash dividends as well as
restrict the amount that the Issuer can repurchase of its subordinated debt
and equity. These covenants place significant restrictions on, among other
things, the ability of the Issuer to incur additional indebtedness, to create
liens or other encumbrances, to make certain payments and investments, to sell
or otherwise dispose of assets, and to merge or consolidate with other
entities. The Issuer's ability to comply with such covenants may be affected
by events beyond its control, including prevailing economic, financial and
industry conditions. The breach of any such covenants or restrictions could
result in a default under the Indenture or the Senior Secured Credit Facility,
which would permit the senior lenders, or the holders of the New Notes, or
both, as the case may be, to declare all amounts borrowed thereunder to be due
and payable, together with accrued and unpaid interest, and the commitments of
the senior lenders to make further extensions of credit under the Senior
Secured Credit Facility could be terminated. If the Issuer is unable to repay
its indebtedness to its senior lenders, such lenders could proceed against the
collateral securing such indebtedness. See "Description of Senior Secured
Credit Facility" and "Description of Notes."
SUBORDINATION OF NOTES AND THE HOLDINGS GUARANTEE
The Old Notes are, and the New Notes will be, senior, subordinated,
unsecured, general obligations of the Issuer, ranking subordinate in right of
payment to all existing and future Issuer Senior Indebtedness and will rank
senior or pari passu in right of payment to all existing and future
subordinated indebtedness of the Issuer. The Issuer's obligations under the
New Notes will be guaranteed on a senior subordinated basis by Holdings
pursuant to the Holdings Guarantee. The Holdings Guarantee will be a general,
unsecured obligation of Holdings subordinate in right of payment to all
Holdings senior indebtedness. The New Notes initially will not be guaranteed
by the Issuer's subsidiaries. Consequently, liabilities of the Issuer's
subsidiaries will effectively be
15
<PAGE>
senior in right of payment to the New Notes. As of June 27, 1998, on a pro
forma basis, after giving effect to the Transactions, (i) the Issuer and its
subsidiaries would have had approximately $8.4 million of Indebtedness that
ranks senior or effectively senior to the New Notes and stockholder's equity
of $46.9 million and (ii) Holdings would have had $21.2 million of senior
indebtedness. In the event of an insolvency, liquidation, or other
reorganization of the Company, the assets of the Issuer and Holdings will be
available to pay obligations on the New Notes and the Holdings Guarantee only
after all Issuer Senior Indebtedness and Holdings senior indebtedness,
respectively, has been paid in full. Accordingly, in such event there may be
insufficient assets remaining after payment of prior claims to pay amounts due
on the New Notes. In addition, generally, no payments may be made with respect
to the New Notes if a default exists with respect to any Issuer Senior
Indebtedness. See "Description of Senior Secured Credit Facility" and
"Description of Notes--Subordination."
CUSTOMER CONCENTRATION
In fiscal 1996, 1997 and 1998, approximately 17%, 18% and 21%, respectively,
of the Company's net sales were to a single customer, Wal-Mart. Due
principally to the sale of Service Cycle/Mongoose in April 1997 and the sale
of SportRack in July 1997, net sales to Wal-Mart as a percentage increased in
fiscal 1998. In addition, at the end of fiscal 1997 and 1998, 23% and 27% of
the Company's gross accounts receivable were attributed to Wal-Mart. In fiscal
1998, the largest five customers of the Company were Wal-Mart, K-Mart,
Canadian Tire, Sports Authority and Sears and accounted for 36% of its net
sales, and the largest ten customers accounted for 43% of its net sales. The
Company has no written agreement or other understanding with Wal-Mart or any
of its other customers that relate to future purchases by such customers, and
thus such purchases could be discontinued at any time. A termination of or
other adverse change in the Company's relationship with, an adverse change in
the financial condition of, or a significant reduction in sales to, Wal-Mart
or other large customers of the Company, could have a material adverse effect
on the Company. The write-off of any significant receivable due from these
customers could also adversely impact the Company.
PRODUCT LIABILITY
Due to the nature of the business of the Company, at any particular time the
Company may be a defendant in a number of product liability lawsuits for
serious personal injury or death allegedly related to the Company's products
and, in certain instances, products manufactured by others. Many such lawsuits
against the Company seek damages, including punitive damages, in substantial
amounts. As of December 2, 1998, there were 40 lawsuits pending relating to
injuries allegedly suffered from products made or sold by the Company. Of the
40 lawsuits, 12 involve motorcycle helmets, 12 involve bicycle helmets, one
involves an auto racing helmet, two involve bicycle pedals, 10 involve
bicycles and three involve bicycle accessories. None of the 40 lawsuits
pending against the Company as of December 2, 1998 are scheduled for trial
prior to December 31, 1998.
During each of the last five fiscal years the Company has been served with
complaints in the following number of cases: 11 cases in fiscal 1994, five
cases in fiscal 1995, 12 cases in fiscal 1996, 15 cases in fiscal 1997 and 14
cases in fiscal 1998. Of the 14 cases served in fiscal 1998, which includes
Giro and AMRE lawsuits, six involve bicycles, one involves bicycle accessories
and seven involve bicycle helmets. As of December 2, 1998, the Company has
been served with six complaints during fiscal 1999, of which none involve
bicycles, three involve bicycle accessories, one involves a bicycle helmet and
two involve motorcycle helmets. Of the 20 cases from fiscal 1998 and fiscal
1999 combined, four cases involve a claim relating to death, five cases
involve claims relating to serious, permanently disabling injuries and 11
cases involve less serious injuries such as broken bones or lacerations.
Typical product liability claims include allegations of failure to warn,
breach of express and implied warranties, design defects and defects in the
manufacturing process.
The philosophy of the Company is to defend vigorously all product liability
claims. Although the Company intends to continue to defend itself aggressively
against all claims asserted against it, current pending proceedings and any
future claims are subject to the uncertainties attendant to litigation and the
ultimate outcome of any such proceedings or claims cannot be predicted. Due to
the self insurance retention amounts in the Company's product
16
<PAGE>
liability insurance coverage, the assertion against the Company of a large
number of claims could have a material adverse effect on the Company. In
addition, the successful assertion against the Company of any, or a series of
large, claims exceeding insurance coverage, could have a material adverse
effect on the Company.
From 1954 to 1991, the Company manufactured, marketed and sold motorcycle
helmets. The Company sold its motorcycle helmet manufacturing business in June
1991. Even though the purchaser assumed all responsibility for product
liability claims arising out of helmets manufactured prior to the date of the
disposition, the Company has paid certain costs associated with the defense of
such claims. If the purchaser is for any reason unable to pay the judgment,
settlement amount or defense costs arising out of any 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 any claims. The Company has licensed the Bell trademark to the purchaser
for use on motorcycle helmets. The Company believes that, by virtue of its
status as licensor and the fact that such motorcycle helmets carry the Bell
name, it is possible that the Company could be named as a defendant in actions
involving liability for the motorcycle helmets manufactured by the purchaser
of the Company's motorcycle helmet business. In fiscal 1998, the Company
secured insurance coverage for certain liabilities associated with its
motorcycle helmets manufactured or licensed prior to June 1991.
In February 1996, a Toronto, Canada jury returned a verdict against the
Company based on injuries arising out of a 1986 motorcycle accident. The jury
found that the Company 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 the Company would be
responsible and the legal fees and tax implications associated therewith are
estimated to be between $3.0 and $4.0 million (based on current exchange
rates). This claim arose during a period in which the Company was self-
insured. The Company has filed an appeal of the Canadian verdict.
In February 1998, a Wilkes-Barre, Pennsylvania jury returned a verdict
against the Company relating to injuries sustained in a 1993 motorcycle
accident. The judgment totaled $6.8 million, excluding any interest, fees or
costs which may be assessed. This claim arose during a period in which the
Company was self-insured. The Company filed post-trial motions to set aside
the jury's verdict which were denied. The Company is in the process of
appealing the judgment.
In June 1998, a Wilmington, Delaware jury returned a verdict against the
Company relating to injuries sustained in a 1991 off-road motorcycle accident.
The judgment totaled $1.8 million excluding any interest, fees or costs which
may be assessed. The claim is covered by insurance; however, the Company is
responsible for a $1.0 million self-insured retention. The Company has filed
post-trial motions to set aside the jury's verdict and to appeal the judgment
entered against the Company.
Due to certain deductibles, self-insured retention levels and aggregate
coverage amounts applicable under the Company's insurance policies, the
Company may bear responsibility for a significant portion, if not all, of the
defense costs (which include attorney's fees, settlement costs and the cost of
satisfying judgments) of any claim asserted against the Company or its
subsidiaries. There can be no assurance that the insurance coverage, if
available, will be sufficient to cover one or more large claims or that the
applicable insurer will be solvent at the time of any covered loss. Further,
there can be no assurance that the Company will obtain insurance coverage at
acceptable levels and costs in the future.
The Company's current product liability insurance for bicycling and auto
racing products covers claims based on occurrences within the policy period up
to a maximum of $50.0 million in the aggregate in excess of the Company's
self-insured retention of $1.0 million per occurrence for bicycle and auto
racing helmets and in excess of the Company's self-insured retention of
$250,000 for other bicycle-related products.
Insurance coverage for products manufactured by Giro, prior to the
acquisition by the Company in January 1996, include self-insured retentions of
$0.5 million per occurrence and $1.5 million in the aggregate for all product
claims, with $55.0 million coverage in excess of the self-insured retention
levels. The Company
17
<PAGE>
maintains an active role in the management of all Giro related litigation.
Giro claims served after December 31, 1996 are insured under the same coverage
provided to the Company.
In fiscal 1998, the Company secured a ten-year policy from AIG and Chubb for
insurance coverage for motorcycle helmets manufactured or licensed prior to
June 1991. The policy covers up to a maximum of $50.0 million in the aggregate
in excess of the Company's self-insured retention of $1.0 million per
occurrence, excluding all previous payments made on existing claims, and in
excess of $2.0 million in the aggregate for known claims or $4.0 million in
the aggregate for incurred but not reported claims and new occurrences. The
policy covers all claims except the February 1996 and February 1998 judgments
against the Company.
No litigation reserves have been established by the Company relating to the
foregoing judgments, although the Company has established reserves for
estimated costs of the defense of these and other known claims.
DEPENDENCE ON SUPPLIERS AND RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
Approximately 85% of the Company's mass merchant bicycle accessories are
manufactured by suppliers in Taiwan and the People's Republic of China
("China"). Approximately 25% of the Company's fiscal 1998 net sales were from
international sales. Consequently, the Company's business is subject to the
risks generally associated with doing business abroad. The Company cannot
predict the effect various factors in the countries in which the Company's
suppliers and customers are located, such as delays in shipments, foreign
governmental regulation, adverse fluctuations in foreign exchange rates,
difficulties in collecting receivables, embargoes, tariffs, exchange controls,
trade disputes, changes in economic conditions and political turmoil, could
have on the Company, but any such development could have a material adverse
effect on the Company's sales and profitability. The Company's business is
also subject to the risks associated with the enactment of additional United
States or foreign legislation and regulations relating to exports or imports,
including quotas, duties, taxes or other charges or restrictions that could be
imposed upon the export or import of bicycle products in the future which, if
imposed, could have a material adverse effect on the Company's sales and
profitability. The Company may also be adversely affected by significant
fluctuations in the value of the United States dollar relative to other
currencies. See "Management's Discussion and Analysis of Financial Conditions
and Results of Operations" and "Business."
COMPETITION
The markets for bicycle helmets and accessories are highly competitive, and
the Company faces competition from a number of sources in each of its product
lines. Some competitors are part of large bicycle manufacturers and may be
better able to promote bicycle helmet and accessory sales through bicycle
sales programs. Competition is primarily based on price, quality, customer
service, brand name recognition, product offerings, product features and
style. Although there are no significant technological or manufacturing
barriers to entering the bicycle helmet and accessory businesses, factors such
as brand recognition and customer relationships may discourage new competitors
from entering the business. New competitors entered the bicycle helmet market
in the last several years and pricing pressures increased significantly as a
result of such competition. There can be no assurance that additional
competitors will not enter the Company's existing markets, nor can there be
any assurance that the Company will be able to compete successfully against
existing or new competition.
ENVIRONMENTAL MATTERS
The Company is subject to many federal, state and local requirements
relating to the protection of the environment, and the Company has made, and
will continue to make, expenditures to comply with such provisions. The
Company believes that its operations are in material compliance with these
laws and regulations and does not believe that future compliance with such
laws and regulations will have a material adverse effect on its results of
operations or financial condition. If environmental laws become more
stringent, the Company's environmental capital expenditures and costs for
environmental compliance could increase in the future. In addition, due to the
possibility of unanticipated factual or regulatory developments, the amount
and timing of
18
<PAGE>
future environmental expenditures could vary substantially from those
currently anticipated and could have a material adverse effect on the Company.
In the ordinary course of its business, the Company is required to dispose
of certain waste at off-site locations. During fiscal 1993, the Company became
aware of an investigation by the Illinois Environmental Protection Agency (the
"Illinois EPA") 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 EPA 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 ("Illinois") filed a complaint with
the Illinois Pollution Control Board ("Pollution Control Board") against the
Company and the disposal site owner based on the same allegations. The
complaint sought penalties not exceeding statutory maximums as well as such
other relief as the Pollution Control Board deemed appropriate. The Pollution
Control Board has approved a settlement between Illinois and the Company
pursuant to which the Company paid $69,000 to Illinois and disposed of certain
materials in a container at the waste disposal site at an authorized disposal
facility. In connection with this matter, the disposal site owner filed a
cross-claim against the Company that sought to have penalties assessed against
the Company rather than the disposal site owner. The disposal site owner later
asserted that if it is required to meet any new or enhanced closure
requirements as a result of the Illinois claim against the landfill, the costs
of such additional closure requirements should be imposed on the Company. On
May 21, 1998, the Pollution Control Board found that the Company was not
liable for any of the violations alleged by the disposal site owner, and
dismissed the cross-claim.
In an unrelated matter, the Company recently received a De Minimis Notice
Letter and Settlement Offer from the United States Environmental Protection
Agency ("USEPA") under the Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA"), 42 U.S.C. Sections 9601 et seq. for the
Operating Industries, Inc. Landfill Superfund Site ("OII Site") in Monterey
Park, California. CERCLA imposes liability for the costs of cleaning up, and
certain damages resulting from, releases and threatened releases of hazardous
substances. Although courts have interpreted CERCLA liability to be joint and
several, where feasible, the liability typically is allocated among the
responsible parties according to a volumetric or other standard. USEPA
apparently has identified the Company as a de minimis potentially responsible
party based on several waste shipments the Company allegedly sent to the site
in the late 1970s and in 1980. USEPA's settlement offer to the Company is in
the range of $29,000 to $36,000. The settlement would cover all past and
expected future costs at the OII Site, and, with limited exception, provide
the Company with covenants not to sue from the United States and California,
and contribution protection from private parties. Accordingly, the Company
does not expect this claim to have a material adverse effect on the Company.
In another unrelated matter, the Company recently received a General Notice
Letter from USEPA under CERCLA for the Casmalia disposal site in Santa Barbara
County, California. USEPA apparently has identified the Company as a
potentially responsible party at the site. The Company has no further
information at this time about the basis of USEPA's assertion. Accordingly, it
is not possible at this time to evaluate the merits of the claim or to provide
an estimate as to potential exposure.
SEASONAL AND QUARTERLY FLUCTUATIONS
Bicycling is primarily a warm weather sport. Sales of the Company's products
reflect, in part, a seasonality of market demand. In fiscal 1998 and 1997,
approximately 58% and 54%, respectively, of the Company's net sales occurred
during the six months ended June 27 and 28, respectively. The second quarter
of the fiscal year is generally the Company's slowest quarter. In addition,
quarterly results may vary from year to year due to the timing of new product
introductions, major customer shipments, inventory holdings of significant
customers, adverse weather conditions and the sales mix of products sold.
Accordingly, comparisons of quarterly information of the Company's results of
operations may not be indicative of the Company's ongoing performance. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
19
<PAGE>
PROTECTION OF PROPRIETARY RIGHTS
Because much of the technology associated with bicycle helmets and bicycle
accessories is in the public domain, patent protection is generally available
only for particular features or functions of a product, rather than for any
product as a whole. The Company believes that many of its current products
contain some elements that are protected by the Company's patents.
Nevertheless, the Company's competitors currently imitate and may continue to
imitate certain features and functions of the Company's products. 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. In addition, 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'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. The Company has
occasionally received, and may receive in the future, claims asserting
intellectual property rights owned by third parties that relate to the
Company's products and product features. Although to date the Company has
incurred no material liabilities as a result of any such claims, there can no
assurance that the Company will not incur material liabilities in the future.
KEY PERSONNEL
The success of the Company is dependent upon the management and leadership
skills of the members of its senior management team and other key personnel,
including certain members of its product development team. The loss of any
such personnel or the inability to attract, retain and motivate key personnel
could have a material adverse effect on the Company.
DISCRETIONARY CONSUMER SPENDING
Sales of bicycle helmets and accessories have historically been dependent on
discretionary consumer spending, which may be affected by general economic
conditions. A decrease in consumer spending on bicycle helmets and accessories
could have a material adverse effect on the Company.
FRAUDULENT TRANSFER CONSIDERATIONS
The Issuer's obligations under the New Notes may be subject to review under
state or federal fraudulent transfer laws in the event of the Issuer's
bankruptcy or other financial difficulty. Under those laws, if a court in a
lawsuit by an unpaid creditor or representative of creditors of the Issuer,
such as a trustee in bankruptcy or the Issuer as debtor in possession, were to
find that when the Issuer issued the New Notes, it (a) received less than fair
consideration or reasonably equivalent value therefor, and (b) either (i) was
or was rendered insolvent, (ii) was engaged in a business or transaction for
which its remaining unencumbered assets constituted unreasonably small
capital, or (iii) intended to incur or believed (or reasonably should have
believed) that it would incur debts beyond its ability to pay as those debts
matured, the court could avoid the New Notes and the Issuer's obligations
thereunder, and direct the return of any amounts paid thereunder to the Issuer
or to a fund for the benefit of its creditors. Regardless of the factors
identified in clauses (a) - (b) above, the court could avoid the New Notes and
direct such repayment if it found that the Issuer issued the New Notes with
actual intent to hinder, delay, or defraud its creditors.
A court will likely find that the Issuer did not receive fair consideration
or reasonably equivalent value for its obligations under the New Notes to the
extent that the Notes' proceeds are used to pay the Merger consideration or
make other payments to Holdings' shareholders.
20
<PAGE>
In addition, Holdings' obligations under the Holdings Guarantee may be
subject to review under the same laws in the event of a Holdings' bankruptcy
or other financial difficulty. In that event, if a court were to find that
when Holdings issued the Holdings Guarantee (or, in some jurisdictions, when
it became obligated to make payments thereunder), the factors in clauses (i)-
(iii) above applied to Holdings (or that Holdings issued the Holdings
Guarantee with actual intent to hinder, delay, or defraud its creditors), the
court could avoid the Holdings Guarantee and direct the repayment of amounts
paid thereunder. The Indenture will limit Holdings' liability under the
Holdings Guarantee to the maximum amount that it could pay without the
Holdings Guarantee being deemed a fraudulent transfer. See "Description of
Notes." There can be no assurance that (if this limitation is effective) the
limited amount so guaranteed will suffice to pay amounts owed under the Notes
in full.
The measure of insolvency for purposes of the foregoing will vary depending
on the law of the jurisdiction being applied. Generally, however, an entity
would be considered insolvent if the sum of its debts (including contingent or
unliquidated debts) is greater than all of its property at a fair valuation or
if the present fair salable value of its assets is less than the amount that
will be required to pay its probable liability on its existing debts as they
become absolute and matured.
YEAR 2000 CONVERSIONS
The year 2000 problem, which is common to most corporations, concerns the
inability of information systems, including computer software programs as well
as other systems dependent on computerized information such as phones,
voicemail, security systems and elevators ("Non-IT Systems"), to properly
recognize and process date sensitive information related to the year 2000 and
beyond. The Company believes that it will be able to achieve compliance by the
end of 1999 and does not currently anticipate any material disruption of its
operations as a result of any failure by the Company to be in compliance. The
Company has performed a preliminary examination of its major software
applications to determine whether each system is prepared to accommodate the
year 2000. This examination included a review of program code which is
maintained by the Company, including performing tests on its systems with
dates in the year 2000. The Company also obtained confirmation from outside
software vendors that their products are year 2000 compliant and is polling
its customers and vendors to determine whether they are year 2000 compliant
and to attempt to identify any potential issues. The Company has not incurred
significant separately identifiable costs related to the year 2000 issues
through June 27, 1998 and does not expect to incur significant additional
costs in order to upgrade its information systems to year 2000 compliance.
However, there can be no assurance that year 2000 issues or any related costs
and expenses will not have a material adverse effect on the Company.
INTRODUCTION OF THE EURO
The European Economic and Monetary Union and the introduction of a new
currency (the "Euro") will begin in Europe on January 1, 1999. The new
currency enables the European Union ("EU") to blend the economies of EU's
member states into one large market with unrestricted and unencumbered trade
across borders. The change of currencies in Europe may affect the Company's
business operations in Europe as well as having systems and accounting issues
for the Company. The Company is currently evaluating the impact of the Euro,
if any, on the Company's financial position, results of operation and cash
flows.
LACK OF PUBLIC MARKET FOR THE NOTES
As of the date hereof, the only registered holder of Old Notes is Cede &
Co., as the nominee of DTC. There is currently no established trading market
for the Old Notes or the New Notes and there can be no assurance as to the
liquidity of markets that may develop for the New Notes, the ability of
holders to sell their New Notes or the price at which such holders would be
able to sell. If such markets were to exist, the New Notes could trade at
prices that may be higher or lower than the initial market values thereof
depending on many factors, including prevailing interest rates and the markets
for similar securities. The New Notes will not be listed on any securities
21
<PAGE>
exchange, but the Old Notes are eligible for trading in the PORTAL market. The
Initial Purchasers have advised the Company that each of them currently
intends to make a market in the Notes. However, no Initial Purchaser is
obligated to do so, and any market making with respect to the Notes may be
discontinued at any time without notice. In addition, such market making
activity may be limited during the pendency of the Exchange Offer or the
effectiveness of a Shelf Registration Statement in lieu thereof. See "The
Exchange Offer" and "Plan of Distribution." No assurance can be given as to
the liquidity of the trading market for the New Notes or, in the case of non-
tendering holders of the Old Notes, the trading market for the Old Notes
following the Exchange Offer.
CHANGE OF CONTROL
The Indenture provides that, upon the occurrence of a Change of Control, the
Issuer will be required to make an offer to purchase all of the Notes,
including the New Notes at a price in cash equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest, if any, thereon to
the date of purchase. Certain events involving a change of control could
result in acceleration of, or similar repurchase obligations with respect to,
other indebtedness of the Issuer and Holdings, including the Senior Secured
Credit Facility and the Convertible Debentures, or other indebtedness of the
Issuer, Holdings or any of their subsidiaries that may be incurred in the
future. There can be no assurance that, in the event of a Change of Control,
the Issuer would have sufficient funds to purchase all Notes tendered. In
addition, the Senior Secured Credit Facility prohibits the Issuer from
repurchasing any New Notes, except with certain proceeds of one or more Equity
Offerings and certain funds from other sources. The Senior Secured Credit
Facility also provides that certain change of control events with respect to
the Issuer would constitute a default thereunder. Any future credit agreements
or other agreements relating to Issuer Senior Indebtedness to which the Issuer
becomes a party may contain similar restrictions and provisions. In the event
a Change of Control occurs at a time when the Issuer is prohibited from
purchasing the Notes, the Issuer will either seek the consent of its lenders
to purchase the Notes or attempt to refinance the borrowings that contain such
prohibition. If the Issuer does not obtain such a consent or refinance such
borrowings, the Issuer will remain prohibited from purchasing the Notes except
to the extent permitted under such provisions. In such case, the Issuer's
failure to purchase tendered Notes would constitute an Event of Default (as
defined) under the Indenture. If, as a result thereof, a default occurs with
respect to any Senior Indebtedness, the subordination provisions in the
Indenture would likely restrict payments to the holders of the Notes. The
provisions relating to a Change of Control included in the Indenture may
increase the difficulty of a potential acquiror obtaining control of the
Issuer. See "Description of Notes--Repurchase at the Option of Holders--Change
of Control."
22
<PAGE>
THE TRANSACTIONS
In February 1998, HB Acquisition and Holdings entered into the Merger
Agreement, which, subject to the conditions set forth therein including,
without limitation, obtaining the requisite approval of Holdings'
stockholders, provided for the Merger. On August 11, 1998, a majority of the
stockholders of Holdings approved and adopted the Merger Agreement at a
special meeting of stockholders. On August 17, 1998, pursuant to a Certificate
of Merger filed with the Secretary of State of the State of Delaware, the
Merger was consummated. Under the Merger Agreement, as of the Effective Time,
each share of Common Stock (other than (i) shares of Common Stock held by HB
Acquisition or shares of Common Stock held directly or indirectly by Holdings,
which shares were canceled and (ii) shares of Common Stock held by persons
perfecting appraisal rights) was converted into the right to receive the Per
Share Merger Consideration. The Merger and the transactions contemplated by
the Merger Agreement are being accounted for as a recapitalization under GAAP
for financial reporting purposes.
In connection with the Merger, the Investors invested an aggregate of $45.0
million in the equity of HB Acquisition and $15.0 million in the Holdings
Senior Discount Notes. Each Investor received securities consisting of a
combination of New Common Stock and Preferred Stock of Holdings as a result of
the Merger as well as the Holdings Senior Discount Notes. In addition,
immediately prior to the Effective Time, CBCI, an existing shareholder of
Holdings, exchanged $5.0 million worth of shares of Common Stock (valued at
the Per Share Merger Consideration) with HB Acquisition, and received, in
consideration therefor, equity of HB Acquisition. In addition, it is
anticipated that certain members of management will be provided with an
opportunity to make equity investments in the Company pursuant to a management
investment incentive plan. See "Related Party Transactions." Upon completion
of the Transactions, the Investors owned approximately 90% of the equity of
Holdings.
At the Effective Time, in order to finance a portion of the costs and
expenses related to the Merger and to support the Company's operating capital
requirements, up to $60.0 million of bank financing, subject to borrowing base
requirements, became available to the Issuer pursuant to the Senior Secured
Credit Facility with a group of lenders arranged by SG Cowen and DLJ. The
Senior Secured Credit Facility consists of a $60.0 million revolving credit
facility available for loans and letters of credit, subject to borrowing base
requirements. See "Description of Senior Secured Credit Facility." No
borrowings were made under the Senior Secured Credit Facility at the Effective
Time.
The proceeds from the Investors and CBCI Investments and the Offering and
available cash were used: (i) to fund the cash payments required to effect the
Merger; (ii) to purchase $62.5 million aggregate principal amount of the
Convertible Debentures in the Tender Offer; and (iii) to pay related fees and
expenses.
On June 30, 1998 Holdings commenced the Tender Offer for up to $62.5 million
aggregate principal amount of the Convertible Debentures. The Tender Offer
expired at 7:00 a.m. New York City time on August 14, 1998. Approximately
$77.4 million aggregate principal amount of the Convertible Debentures had
been tendered in the Tender Offer. Upon expiration of the Tender Offer, the
Company accepted for payment the Maximum Tender Amount and was required to pay
$57.2 million to repurchase the Convertible Debentures. As of August 17, 1998,
after giving effect to the Company's acceptance of the Maximum Tender Amount,
there was $23.8 million aggregate principal amount of Convertible Debentures
outstanding. The Convertible Debentures are due in November 2000.
23
<PAGE>
USE OF PROCEEDS
USE OF PROCEEDS OF THE NEW NOTES
The Exchange Offer is intended to satisfy certain obligations of the Issuer
and Holdings under the Registration Rights Agreement. The Issuer will not
receive any proceeds from the issuance of the New Notes offered hereby. In
consideration for issuing the New Notes as contemplated in this Prospectus,
the Issuer will receive, in exchange, Old Notes in like principal amount. The
form and terms of the New Notes are substantially identical in all material
respects to the form and terms of the Old Notes, except as otherwise described
herein under "The Exchange Offer--Terms of the Exchange." The Old Notes
surrendered in exchange for the New Notes will be retired and canceled and
cannot be reissued. Accordingly, issuance of the New Notes will not result in
any increase in the outstanding indebtedness of the Company.
USE OF PROCEEDS OF THE OLD NOTES
The gross proceeds from the sales of Old Notes, together with the proceeds
from the Investors and CBCI Investments and available cash were used to
finance the Transactions and pay related fees and expenses. The following
table sets forth the estimated sources and uses of funds in connection with
the Transactions, as if the Transactions had occurred on June 27, 1998.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
Sources of Funds:
Existing cash......................................... $ 42,093
Senior Secured Credit Facility (1).................... 6,231
Senior Subordinated Notes............................. 110,000
Investors and CBCI Investments (2)(3)................. 65,000
--------
Total Sources....................................... $223,324
========
Uses of Funds:
Payment of the merger consideration (3)............... $142,639
Repurchase of Convertible Debentures (4).............. 56,873
Purchase of stock based awards through the Merger..... 6,912
Transactions fees and expenses........................ 16,900
--------
Total Uses.......................................... $223,324
========
</TABLE>
- ---------------------
(1) Represents estimated initial borrowings to partially fund costs and
expenses related to the Transactions. After consummation of the
Transactions, the Issuer would have had up to $53.8 million available for
borrowing under the Senior Secured Credit Facility, subject to borrowing
base requirements. See "Description of Senior Secured Credit Facility."
(2) Includes $15.0 million aggregate proceeds of the Holdings Senior Discount
Notes.
(3) Includes the exchange by CBCI of $5.0 million worth of shares of Common
Stock valued at the Per Share Merger Consideration for HB Acquisition
capital stock. The exchange of shares by CBCI does not represent a
purchase, sale or other change in such equity investment for the Company's
accounting or tax purposes or any funds or proceeds paid to or used by
Holdings in the Merger, and does not necessarily represent a market
valuation for such shares.
(4) Reflects the purchase of $62.5 million aggregate principal amount of the
outstanding Convertible Debentures at the Tender Price, including accrued
interest of $0.3 million.
24
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Issuer as
of June 27, 1998 and pro forma to give effect to the Transactions. The
following table should be read in conjunction with the Consolidated Financial
Statements of Holdings and the related notes thereto included elsewhere herein
and the other financial information included elsewhere in this Prospectus,
including "Management's Discussion and Analysis of Financial Condition and
Results of Operations." See "Holdings Unaudited Pro Forma Historical Condensed
Consolidated Financial Statements."
<TABLE>
<CAPTION>
AS OF JUNE 27,
1998
------------------
ACTUAL PRO FORMA
-------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................. $ 34,662 $ 3,000
======== ========
Debt (including current maturities):
Senior Secured Credit Facility (1)...................... $ -- $ 6,231
Other Existing Debt..................................... 2,134 2,134
Senior Subordinated Notes............................... -- 110,000
Intercompany payable to Holdings........................ 113,573 --
-------- --------
Total debt............................................ 115,707 118,365
Stockholder's equity...................................... 52,891 46,916
-------- --------
Total capitalization.................................. $168,598 $165,281
======== ========
</TABLE>
- ---------------------
(1) Represents estimated initial borrowings to partially fund costs and
expenses related to the Transactions. After consummation of the
Transactions, the Issuer would have had up to $53.8 million available for
borrowing under the Senior Secured Credit Facility, subject to borrowing
base requirements. See "Description of Senior Secured Credit Facility."
25
<PAGE>
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were originally sold by the Issuer on August 17, 1998 to the
Initial Purchasers pursuant to the Purchase Agreement. The Initial Purchasers
subsequently resold the Old Notes to qualified institutional buyers in
reliance on Rule 144A under the Securities Act. As a condition to the Purchase
Agreement, the Issuer and Holdings entered into the Registration Rights
Agreement with the Initial Purchasers pursuant to which the Issuer and
Holdings agreed, for the benefit of the holders of the Old Notes, to, among
other things, (i) file with the Commission the Exchange Offer Registration
Statement within 90 days after the Closing Date of the Offering and (ii) use
their best efforts to cause the Registration Statement (of which this
Prospectus is a part) to be declared effective under the Securities Act within
135 days after the Closing Date. The Issuer will keep the Exchange Offer open
for not less than 20 business days (or longer if required by applicable law)
after the date on which notice of the Exchange Offer is mailed to the holders
of the Old Notes. For each Old Note surrendered to the Issuer pursuant to the
Exchange Offer, the holder of such Old Note will receive a New Note having a
principal amount equal to that of the surrendered Old Note. Interest on each
New Note will accrue from the date of its original issue.
Under existing interpretations of the staff of the Commission contained in
several no-action letters to third parties, the New Notes would in general be
freely tradeable after the Exchange Offer without further registration under
the Securities Act. However, any purchaser of Old Notes who is an "affiliate"
of the Company or who intends to participate in the Exchange Offer for the
purpose of distributing the New Notes (i) will not be able to rely on the
interpretation of the staff of the Commission, (ii) will not be able to tender
its Old Notes in the Exchange Offer and (iii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any sale or transfer of the Old Notes, unless such sale or
transfer is made pursuant to an exemption from such requirements.
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent
to the Issuer in the Letter of Transmittal that (i) the New Notes are to be
acquired by the holder or the person receiving such New Notes, whether or not
such person is the holder, in the ordinary course of business, (ii) the holder
or any such other person (other than a broker-dealer referred to in the next
sentence) is not engaging and does not intend to engage, in the distribution
of the New Notes, (iii) the holder or any such other person has no arrangement
or understanding with any person to participate in the distribution of the New
Notes, (iv) neither the holder nor any such other person is an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act and (v)
the holder or any such other person acknowledges that if such holder or other
person participates in the Exchange Offer for the purpose of distributing the
New Notes it must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale of the New
Notes and cannot rely on such no-action letters. As indicated above, each
Participating Broker-Dealer that receives a New Note for its own account in
exchange for Old Notes must acknowledge that it (i) acquired the Old Notes for
its own account as a result of market-making activities or other trading
activities, (ii) has not entered into any arrangement or understanding with
the Company or any "affiliate" of the Company (within the meaning of Rule 405
under the Securities Act) to distribute the New Notes to be received in the
Exchange Offer and (iii) will deliver a prospectus meeting the requirements of
the Securities Act in connection with any resale of such New Notes. For a
description of the procedures for such resales by Participating Broker-
Dealers, see "Plan of Distribution."
In the event that changes in the law or the applicable interpretations of
the staff of the Commission do not permit the Company to effect such an
Exchange Offer, or if for any other reason the Exchange Offer is not
consummated or if any holder of the Old Notes (other than an "affiliate" of
the Company or the Initial Purchasers) is not eligible to participate in the
Exchange Offer, the Company will (a) file the Shelf Registration Statement
covering resales of the Old Notes, (b) use its reasonable best efforts to
cause the Shelf Registration Statement to be declared effective under the
Securities Act and (c) use its reasonable best efforts to keep effective the
Shelf Registration Statement until the earlier of two years after its
effective date and such time as all of the applicable Old Notes have been sold
thereunder. The Company will, in the event of the filing of the Shelf
26
<PAGE>
Registration Statement, provide to each applicable holder of the Old Notes
copies of the prospectus which is a part of the Shelf Registration Statement,
notify each such holder when the Shelf Registration Statement has become
effective and take certain other actions as are required to permit
unrestricted resales of the Old Notes. A holder of Old Notes that sells such
Old Notes pursuant to the Shelf Registration Statement generally will be
required to be named as a selling securityholder in the related prospectus and
to deliver a prospectus to purchasers, will be subject to certain of the civil
liability provisions under the Securities Act in connection with such sales
and will be bound by the provisions of the Registration Rights Agreement which
are applicable to such a holder (including certain indemnification
obligations). In addition, each holder of the Old Notes will be required to
deliver information to be used in connection with the Shelf Registration
Statement and to provide comments on the Shelf Registration Statement within
the time periods set forth in the Registration Rights Agreement in order to
have their Old Notes included in the Shelf Registration Statement.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified
in its entirety by, all the provisions of the Registration Rights Agreement, a
copy of which is filed as an exhibit to the Registration Statement of which
this Prospectus is a part.
Following the consummation of the Exchange Offer, holders of the Old Notes
who were eligible to participate in the Exchange Offer but who did not tender
their Old Notes will not have any further registration rights and such Old
Notes will continue to be subject to certain restrictions on transfer.
Accordingly, the liquidity of the market for such Old Notes could be adversely
affected.
TERMS OF THE EXCHANGE
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Issuer will accept any and all Old Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. The Issuer will issue $1,000 principal amount of New
Notes in exchange for each $1,000 principal amount of outstanding Old Notes
accepted in the Exchange Offer. Holders may tender some or all of their Old
Notes pursuant to the Exchange Offer. However, Old Notes may be tendered only
in integral multiples of $1,000.
The form and terms of the New Notes are the same as the form and terms of
the Old Notes except that (i) the New Notes bear a Series B designation and a
different CUSIP Number from the Old Notes, (ii) the New Notes have been
registered under the Securities Act and hence will not bear legends
restricting the transfer thereof and (iii) the holders of the New Notes will
not be entitled to certain rights under the Registration Rights Agreement,
including the provisions providing for an increase in the interest rate on the
Old Notes in certain circumstances relating to the timing of the Exchange
Offer, all of which rights will terminate when the Exchange Offer is
consummated. The New Notes will evidence the same debt as the Old Notes and
will be entitled to the benefits of the Indenture.
As of the date of this Prospectus, $110,000,000 aggregate principal amount
of Old Notes were outstanding. This Prospectus and the Letter of Transmittal
will be mailed initially to the holders of record of the Old Notes as of the
close of business on December 9, 1998.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the General Corporation Law of California or the Indenture in connection with
the Exchange Offer. The Issuer intends to conduct the Exchange Offer in
accordance with the applicable requirements of the Exchange Act and the rules
and regulations of the Commission thereunder.
The Issuer shall be deemed to have accepted validly tendered Old Notes when,
as and if the Issuer has given oral or written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for the tendering holders for the
purpose of receiving the New Notes from the Issuer.
27
<PAGE>
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Old Notes will be
returned, without expense, to the tendering holder thereof as promptly as
practicable after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old
Notes pursuant to the Exchange Offer. The Issuer will pay all charges and
expenses, other than transfer taxes in certain circumstances, in connection
with the Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
January 14, 1999, unless the Issuer, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Issuer will notify the Exchange
Agent of any extension by oral or written notice and will mail to the
registered holders an announcement thereof, each prior to 9:00 a.m., New York
City time, on the next business day after the previously scheduled expiration
date.
The Issuer reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "--Conditions"
shall not have been satisfied, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent or (ii) to amend the terms of
the Exchange Offer in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral
or written notice thereof to the registered holders.
INTEREST ON THE NEW NOTES
The New Notes will bear interest from their date of issuance. Holders of Old
Notes that are accepted for exchange will receive accrued interest thereon to,
but not including, the date of issuance of the New Notes. Such interest will
be paid with the first interest payment on the New Notes on February 15, 1999
in the manner provided in the New Notes. Interest on the Old Notes accepted
for exchange will cease to accrue upon issuance of the New Notes. Interest on
the New Notes is payable semi-annually on each February 15 and August 15,
commencing on February 15, 1999.
PROCEDURES FOR TENDERING
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
To tender in the Exchange Offer, a properly completed and duly executed Letter
of Transmittal (or facsimile thereof), with any required signature guarantee,
or (in the case of a book-entry transfer), an Agent's Message in lieu of the
Letter of Transmittal, and any other required documents, must be received by
the Exchange Agent at the address set forth below under "Exchange Agent" prior
to 5:00 p.m., New York City time, on the Expiration Date. In addition, prior
to 5:00 p.m. New York City time, on the Expiration Date either (a)
certificates for tendered Old Notes must be received by the Exchange Agent at
such address or (b) such Old Notes must be transferred pursuant to the
procedures for book-entry transfer described below (and a confirmation of such
tender received by the Exchange Agent, including an Agent's Message if the
tendering holder has not delivered a Letter of Transmittal).
The term "Agent's Message" means a message transmitted by DTC, received by
the Exchange Agent and forming part of the confirmation of a book-entry
transfer, which states that DTC has received an express acknowledgment from
the participant in DTC tendering Old Notes which are the subject of such book-
entry confirmation, that such participant has received and agrees to be bound
by the terms of the Letter of Transmittal and that the Issuer may enforce such
agreement against such participant. In the case of an Agent's Message relating
to guaranteed delivery, the term means a message transmitted by DTC and
received by the Exchange
28
<PAGE>
Agent, which states that DTC has received an express acknowledgment from the
participant in DTC tendering Old Notes that such participant has received and
agrees to be bound by the Notice of Guaranteed Delivery.
By executing the Letter of Transmittal, each holder will make to the Issuer
the representations set forth above in the third paragraph under the heading
"--Purpose and Effect of the Exchange Offer."
The tender by a holder and the acceptance thereof by the Issuer will
constitute agreement between such holder and the Issuer in accordance with the
terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE
RISK OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO
CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE
EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE
COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL
BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH
HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to
tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. See "Beneficial
Owner Instructions to Registered Holders " included with the Letter of
Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined in the
Letter of Transmittal) unless the Old Notes tendered pursuant thereto are
tendered (i) by a registered holder who has not completed the box entitled
"Special Registration Instructions" or "Special Delivery Instructions" on the
Letter of Transmittal or (ii) for the account of an Eligible Institution. In
the event that signatures on a Letter of Transmittal or a notice of
withdrawal, as the case may be, are required to be guaranteed, such guarantee
must be by an Eligible Institution.
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by a properly completed bond power, signed by such registered
holder as such registered holder's name appears on such Old Notes with the
signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal.
The Issuer understands that the Exchange Agent will make a request promptly
after the date of this Prospectus to establish accounts with respect to the
Old Notes at the book-entry transfer facility, The Depository Trust Company
(the "Book-Entry Transfer Facility"), for the purpose of facilitating the
Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in the Book-Entry Transfer Facility's system
may make book-entry delivery of Old Notes by causing such Book-Entry Transfer
Facility to transfer such Old Notes into the Exchange Agent's account with
respect to the Old Notes in accordance with the Book-Entry Transfer Facility's
procedures for such transfer. Although delivery of the Old Notes may be
effected through book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility, an appropriate Letter of Transmittal properly
completed and duly executed with any required signature guarantee, or (in the
case of a book-entry transfer) an Agent's Message in lieu of the Letter of
Transmittal, and all other required documents must in each case be transmitted
to and received or confirmed by the Exchange Agent at its
29
<PAGE>
address set forth below on or prior to the Expiration Date, or, if the
guaranteed delivery procedures described below are complied with, within the
time period provided under such procedures. Delivery of documents to the Book-
Entry Transfer Facility does not constitute delivery to the Exchange Agent.
The Exchange Agent and DTC have confirmed that the Exchange Offer is
eligible for the DTC Automated Tender Offer Program ("ATOP"). Accordingly, DTC
participants may electronically transmit their acceptance of the Exchange
Offer by causing DTC to transfer Old Notes to the Exchange Agent in accordance
with DTC's ATOP procedures for transfer. DTC will then send an Agent's Message
to the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Old Notes will be determined
by the Issuer in its sole discretion, which determination will be final and
binding. The Issuer reserves the absolute right to reject any and all Old
Notes not properly tendered or any Old Notes the Issuer's acceptance of which
would, in the opinion of counsel for the Issuer, be unlawful. The Issuer also
reserves the right in its sole discretion to waive any defects, irregularities
or conditions of tender as to particular Old Notes. The Issuer's
interpretation of the terms and conditions of the Exchange Offer (including
the instructions in the Letter of Transmittal) will be final and binding on
all parties. Unless waived, any defects or irregularities in connection with
tenders of Old Notes must be cured within such time as the Issuer shall
determine. Although the Issuer intends to notify holders of defects or
irregularities with respect to tenders of Old Notes, neither the Issuer, the
Exchange Agent nor any other person shall incur any liability for failure to
waive such notification. Tenders of Old Notes will not be deemed to have been
made until such defects or irregularities have been cured or waived. Any Old
Notes received by the Exchange Agent that are not properly tendered and as to
which the defects or irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering holders, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent or (iii) who
cannot complete the procedures for book-entry transfer, prior to the
Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number(s)
of such Old Notes and the principal amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that, within three
New York Stock Exchange trading days after the Expiration Date, the Letter
of Transmittal (or facsimile thereof) together with the certificate(s)
representing the Old Notes (or a confirmation of book-entry transfer of
such Old Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility), and any other documents required by the Letter of Transmittal
will be deposited by the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Old Notes in proper form for transfer (or a confirmation of book-entry
transfer of such Old Notes into the Exchange Agent's account at the Book-
Entry Transfer Facility), and all other documents required by the Letter of
Transmittal are received by the Exchange Agent within three New York Stock
Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
30
<PAGE>
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a telegram, telex,
letter or facsimile transmission notice of withdrawal must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York
City time, on the Expiration Date. Any such notice of withdrawal must (i)
specify the name of the person having deposited the Old Notes to be withdrawn
(the "Depositor"), (ii) identify the Old Notes to be withdrawn (including the
certificate number(s) and principal amount of such Old Notes, or, in the case
of Old Notes transferred by book-entry transfer, the name and number of the
account at the Book-Entry Transfer Facility to be credited), (iii) be signed
by the holder in the same manner as the original signature on the Letter of
Transmittal by which such Old Notes were tendered (including any required
signature guarantees) or be accompanied by documents of transfer sufficient to
have the Trustee with respect to the Old Notes register the transfer of such
Old Notes into the name of the person withdrawing the tender and (iv) specify
the name in which any such Old Notes are to be registered, if different from
that of the Depositor. All questions as to the validity, form and eligibility
(including time of receipt) of such notices will be determined by the Issuer
whose determination shall be final and binding on all parties. Any Old Notes
so withdrawn will be deemed not to have been validly tendered for purposes of
the Exchange Offer and no New Notes will be issued with respect thereto unless
the Old Notes so withdrawn are validly retendered. Any Old Notes which have
been tendered but which are not accepted for exchange will be returned to the
holder thereof without cost to such holder as soon as practicable after
withdrawal, rejection of tender or termination of the Exchange Offer. Properly
withdrawn Old Notes may be retendered by following one of the procedures
described above under "--Procedures for Tendering" at any time prior to the
Expiration Date.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Issuer will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the New Notes promptly after acceptance of
the Old Notes. See "--Conditions" below. For purposes of the Exchange Offer,
the Issuer shall be deemed to have accepted properly tendered Old Notes for
exchange when, as and if the Issuer has given oral and written notice thereof
to the Exchange Agent.
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely
confirmation of book-entry transfer of such Old Notes into the Exchange
Agent's account at the book-entry transfer facility, a properly completed and
duly executed Letter of Transmittal and all other required documents. If any
tendered Old Notes are not accepted for any reason set forth in the terms and
conditions of the Exchange Offer or if Old Notes are submitted for a greater
principal amount than the holder desires to exchange, such unaccepted or non-
exchanged Old Notes will be returned without expense to the tendering holder
thereof (or, in the case of Old Notes tendered by book-entry transfer into the
Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the
book-entry transfer procedures described above, such non-exchanged Old Notes
will be credited to an account maintained with such Book-Entry Transfer
Facility) as promptly as practicable after the expiration of the Exchange
Offer.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Issuer shall not
be required to accept for exchange, or to issue New Notes in exchange for any
Old Notes, and may terminate or amend the Exchange Offer as provided herein
before the acceptance of such Old Notes, if:
31
<PAGE>
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the reasonable judgment of the Issuer, might materially impair
the ability of the Issuer to proceed with the Exchange Offer or any
material adverse development has occurred in any existing action or
proceeding with respect to the Issuer or any of its subsidiaries; or
(b) the Exchange Offer shall violate any applicable law, statute, rule,
regulation or any applicable interpretation by the staff of the Commission;
or
(c) any governmental approval has not been obtained, which approval the
Issuer shall, in its reasonable discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
In addition, the Issuer will not accept for exchange any Old Notes tendered,
and no New Notes will be issued in exchange for any such Old Notes, if at such
time any stop order shall be threatened or in effect with respect to the
Registration Statement of which this Prospectus constitutes a part or the
qualification of the Indenture under the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"). In any such event the Issuer is required
to use every reasonable effort to obtain the withdrawal of any stop order at
the earliest possible time.
The Exchange Offer is not conditioned upon any minimum principal amount of
Old Notes being tendered for exchange.
The foregoing conditions are for the sole benefit of the Issuer and may be
asserted by the Issuer regardless of the circumstances giving rise to any such
condition or may be waived by the Issuer in whole or in part at any time or
from time to time in its sole discretion. The failure by the Issuer at any
time to exercise any of the foregoing rights shall not be deemed a waiver of
any such right and each such right shall be deemed an ongoing right which may
be asserted at any time and from time to time.
If the Issuer determines in its reasonable judgment that any of the
conditions are not satisfied, the Issuer may (i) refuse to accept any Old
Notes and return all tendered Old Notes to the tendering holders, (ii) extend
the Exchange Offer and retain Old Notes tendered prior to the expiration of
the Exchange Offer, subject, however, to the rights of holders to withdraw
such Old Notes (see "--Withdrawal of Tenders") or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Old Notes which have not been withdrawn.
EXCHANGE AGENT
Harris Trust and Savings Bank has been appointed as Exchange Agent for the
Exchange Offer. Questions and requests for assistance, requests for additional
copies of this Prospectus or of the Letter of Transmittal and requests for
Notice of Guaranteed Delivery should be directed to the Exchange Agent
addressed as follows:
By Mail: By Overnight Courier:
c/o Harris Trust Company of New York c/o Harris Trust Company of New York
Wall Street Station 88 Pine Street, 19th Floor
Post Office Box 1023 New York, New York 10005
New York, New York 10268-1023 Att'n: Reorganization Department
By Hand: By Facsimile Transmission:
c/o Harris Trust Company of New York (212) 701-7636
88 Pine Street, 19th Floor (for Eligible Institutions only)
New York, New York 10005
Att'n: Reorganization Department For Information or Confirmation by
Telephone:
(212) 701-7624
DELIVERY OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
32
<PAGE>
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Issuer. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the Issuer and its affiliates.
The Issuer has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Issuer, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection
therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Issuer. Such expenses include fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs, among others.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
which is face value, as reflected in the Issuer's accounting records on the
date of exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by the Issuer. The expenses of the Exchange Offer will be expensed
over the term of the New Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes that are not exchanged for New Notes pursuant to the Exchange
Offer will remain restricted securities. Accordingly, such Old Notes may be
resold only (i) to the Issuer (upon redemption thereof or otherwise), (ii) so
long as the Old Notes are eligible for resale pursuant to Rule 144A, to a
person inside the United States whom the seller reasonably believes is a
qualified institutional buyer within the meaning of Rule 144A under the
Securities Act in a transaction meeting the requirements of Rule 144A, in
accordance with Rule 144 under the Securities Act, or pursuant to another
exemption from the registration requirements of the Securities Act (and based
upon an opinion of counsel reasonably acceptable to the Issuer), (iii) outside
the United States to a foreign person in a transaction meeting the
requirements of Rule 904 under the Securities Act, or (iv) pursuant to an
effective registration statement under the Securities Act, in each case in
accordance with any applicable securities laws of any state of the United
States.
RESALE OF THE NEW NOTES
With respect to resales of New Notes, based on interpretations by the staff
of the Commission set forth in no-action letters issued to third parties, the
Issuer believes that a holder or other person who receives New Notes, whether
or not such person is the holder (other than a person that is an "affiliate"
of the Company within the meaning of Rule 405 under the Securities Act) who
receives New Notes in exchange for Old Notes in the ordinary course of
business and who is not participating, does not intend to participate, and has
no arrangement or understanding with any person to participate, in the
distribution of the New Notes, will be allowed to resell the New Notes to the
public without further registration under the Securities Act and without
delivering to the purchasers of the New Notes a prospectus that satisfies the
requirements of Section 10 of the Securities Act. However, if any holder
acquires New Notes in the Exchange Offer for the purpose of distributing or
participating in a distribution of the New Notes, such holder cannot rely on
the position of the staff of the Commission enunciated in such no-action
letters or any similar interpretive letters, and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction, unless an exemption from registration
is otherwise available. Further, each Participating Broker-Dealer that
receives New Notes for its own account in exchange for Old Notes, where such
Old Notes were acquired by such Participating Broker-Dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such New Notes.
33
<PAGE>
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent
to the Company in the Letter of Transmittal that (i) the New Notes are to be
acquired by the holder or the person receiving such New Notes, whether or not
such person is the holder, in the ordinary course of business, (ii) the holder
or any such other person (other than a broker-dealer referred to in the next
sentence) is not engaging and does not intend to engage, in the distribution
of the New Notes, (iii) the holder or any such other person has no arrangement
or understanding with any person to participate in the distribution of the New
Notes, (iv) neither the holder nor any such other person is an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act and (v)
the holder or any such other person acknowledges that if such holder or other
person participates in the Exchange Offer for the purpose of distributing the
New Notes it must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale of the New
Notes and cannot rely on such no-action letters. As indicated above, each
Participating Broker-Dealer that receives a New Note for its own account in
exchange for Old Notes must acknowledge that it (i) acquired the Old Notes for
its own account as a result of market-making activities or other trading
activities, (ii) has not entered into any arrangement with the Company (within
the meaning of Rule 405 under the Securities Act) or understanding with the
Company or any "affiliate" of the Company (within the meaning of Rule 405
under the Securities Act) to distribute the New Notes to be received in the
Exchange Offer and (iii) will deliver a prospectus meeting the requirements of
the Securities Act in connection with any resale of such New Notes. For a
description of the procedures for such resales by Participating Broker-
Dealers, see "Plan of Distribution."
34
<PAGE>
HOLDINGS UNAUDITED PRO FORMA HISTORICAL CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
The following Holdings Unaudited Pro Forma Historical Condensed Consolidated
Financial Statements have been derived by the application of pro forma
adjustments to Holdings' historical consolidated financial data included
elsewhere herein. The pro forma consolidated statement of operations for
fiscal 1998 gives effect to the Transactions as if the Transactions had been
consummated as of June 29, 1997. The pro forma consolidated statement of
operations for the three months ended September 26, 1998 gives effect to the
Transactions as if the Transactions had been consummated as of June 28, 1998.
The pro forma consolidated balance sheet data give effect to the Transactions
as if the Transactions had been consummated as of June 27, 1998. The
consolidated balance sheet data as of September 26, 1998 reflect the actual
recording of the Transactions when they took place on August 17, 1998. The pro
forma adjustments described in the accompanying notes are based upon available
information and certain assumptions that the Company believes are reasonable.
In the opinion of management, all adjustments necessary to fairly present the
pro forma information have been made. The Holdings Unaudited Pro Forma
Historical Condensed Consolidated Financial Statements are provided for
informational purposes only and do not purport to be indicative of the results
that would have been reported had such events actually occurred on the dates
specified, nor are they indicative of the Company's results for any future
period. The Holdings Unaudited Pro Forma Historical Condensed Consolidated
Financial Statements should be read in conjunction with the "Holdings Selected
Historical Consolidated Financial and Other Data" and the related notes
thereto and the Consolidated Financial Statements of Holdings and the related
notes thereto included elsewhere herein.
The Merger is being accounted for as a recapitalization under GAAP for
financial reporting purposes. Under recapitalization accounting, the
historical values of assets and liabilities continue to be reported by
Holdings and stockholders' equity is reduced by the amount of the merger
consideration paid to the stockholders of Holdings. New equity and debt issued
by Holdings are recorded based on the respective proceeds to Holdings, net of
issuance cost.
35
<PAGE>
HOLDINGS UNAUDITED PRO FORMA HISTORICAL CONDENSED
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF JUNE 27, 1998 AS OF SEPTEMBER 26, 1998
-------------------------------- ------------------------
PRO FORMA PRO
ACTUAL ADJUSTMENTS FORMA ACTUAL
-------- ----------- -------- ------------------------
<S> <C> <C> <C> <C>
ASSETS:
Current Assets:
Cash and cash
equivalents.......... $ 45,093 $ (42,093)(a) $ 3,000 $ 13,593
Accounts receivable... 63,472 63,472 42,824
Inventories........... 39,679 39,679 40,837
Deferred taxes and
other current
assets............... 12,234 12,234 10,989
-------- --------- -------- --------
Total current
assets............. 160,478 (42,093) 118,385 108,243
Property, plant and
equipment.............. 20,636 20,636 19,370
Goodwill................ 54,292 54,292 53,824
Intangibles and other
assets................. 11,661 4,677 (b) 16,338 19,208
-------- --------- -------- --------
Total assets........ $247,067 $ (37,416) $209,651 $200,645
======== ========= ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Current Liabilities:
Accounts payable...... $ 7,663 $ 7,663 $ 6,862
Accrued compensation
and employee
benefits............. 5,541 $ (415)(c) 5,126 2,163
Accrued expenses...... 16,158 (126)(c) 16,032 15,697
Notes payable and
current maturities
of long-term debt and
capital lease
obligations.......... 679 679 478
-------- --------- -------- --------
Total current
liabilities........ 30,041 (541) 29,500 25,200
Long-term debt.......... 86,625 68,731 (d) 155,356 149,265
Capital lease
obligations and other
liabilities............ 2,142 2,142 2,692
-------- --------- -------- --------
Total liabilities... 118,808 68,190 186,998 177,157
-------- --------- -------- --------
Total stockholders'
equity............. 128,259 (105,606)(e) 22,653 23,488
-------- --------- -------- --------
Total liabilities
and stockholders'
equity............. $247,067 $ (37,416) $209,651 $200,645
======== ========= ======== ========
</TABLE>
See accompanying notes to the Holdings unaudited pro forma historical condensed
consolidated financial statements.
36
<PAGE>
HOLDINGS UNAUDITED PRO FORMA HISTORICAL CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED THREE MONTHS ENDED
JUNE 27, 1998 SEPTEMBER 26, 1998
-------------------------------- --------------------------------
PRO FORMA PRO PRO FORMA PRO
ACTUAL ADJUSTMENTS FORMA ACTUAL ADJUSTMENTS FORMA
-------- ----------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $207,236 $207,236 $ 40,918 $ 40,918
Cost of sales........... 137,672 137,672 27,374 27,374
-------- -------- -------- --------
Gross profit............ 69,564 69,564 13,544 13,544
Selling, general and
administrative
expenses............... 48,517 $ 600 (f) 49,117 11,384 11,384
Loss on disposal of
product lines and sale
of assets.............. 700 700
Amortization of goodwill
and intangible assets.. 2,260 2,260 562 562
Transaction costs....... 11,474 11,474
Restructuring charges... 1,192 1,192
-------- -------- -------- -------- --------
Income (loss) from
operations............. 16,895 (600) 16,295 (9,876) (9,876)
Investment income....... 1,716 (1,596)(g) 120 601 $ (465)(j) 136
Interest expense........ 4,715 12,264 (h) 16,979 2,538 1,486 (k) 4,024
-------- -------- -------- -------- ------- --------
Net income before
provision (benefit) for
income taxes........... 13,896 (14,460) (564) (11,813) (1,951) (13,764)
Provision (benefit) for
income taxes........... 5,318 (5,495)(i) (177) (1,366) (741)(i) (2,107)
-------- -------- -------- -------- ------- --------
Income (loss) before
extraordinary items.... 8,578 (8,965) (387) (10,447) (1,210) (11,657)
Extraordinary item: Gain
on early extinguishment
of debt, net of taxes
of $2,006.............. 2,887 2,887
-------- -------- -------- -------- ------- --------
Net income (loss)....... $ 8,578 $ (8,965) $ (387) $ (7,560) $(1,210) $ (8,770)
======== ======== ======== ======== ======= ========
</TABLE>
See accompanying notes to the Holdings unaudited pro forma historical condensed
consolidated financial statements.
37
<PAGE>
NOTES TO HOLDINGS UNAUDITED PRO FORMA HISTORICAL CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(a) The following table sets forth the estimated sources and uses of funds in
connection with the Transactions, as if the Transactions had occurred on
June 27, 1998:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
Sources of Funds:
Senior Secured Credit
Facility (1)............. $ 6,231
Senior Subordinated
Notes.................... 110,000
Investors and CBCI
Investments (2)(3)....... 65,000
--------
Total Sources........... 181,231
--------
Uses of Funds:
Payment of the merger
consideration (3)........ 142,639
Repurchase of Convertible
Debentures (4)........... 56,873
Purchase of stock based
awards through the
Merger................... 6,912
Transactions fees and
expenses................. 16,900
--------
Total Uses.............. 223,324
--------
Net effect on cash...... $(42,093)
========
</TABLE>
---------------------
(1) Represents estimated initial borrowings to partially fund costs and
expenses related to the Transactions. After consummation of the
Transactions, the Issuer would have had up to $53.8 million available
for borrowing under the Senior Secured Credit Facility, subject to
borrowing base requirements. See "Description of Senior Secured Credit
Facility."
(2) Includes $15.0 million aggregate proceeds of the Holdings Senior
Discount Notes.
(3) Includes the exchange by CBCI of $5.0 million worth of shares of
Common Stock valued at the Per Share Merger Consideration for HB
Acquisition capital stock.
(4) Includes the purchase of $62.5 million aggregate principal amount of
the outstanding Convertible Debentures at the Tender Price, including
accrued interest of $0.3 million.
(b) Adjustment reflects deferred financing and certain other debt-related
transaction costs of $5.5 million associated with the Offering and the
Senior Secured Credit Facility, net of the write-off of unamortized
deferred financing fees associated with the Company's existing revolving
credit facility and the Convertible Debentures which was recognized as an
extraordinary loss of $0.5 million, net of a tax benefit of $0.3 million
in the period in which the Transactions occur.
(c) Adjustments reflect: (i) a decrease in accrued interest of $0.3 million
related to the Convertible Debentures which were purchased in connection
with the Tender Offer; (ii) an increase in accrued taxes of $0.2 million
related to taxes incurred in connection with the Transactions; and (iii) a
decrease in accrued compensation of $0.4 million which was paid to certain
members of management upon consummation of the Merger.
(d) Adjustment reflects: (i) the borrowing of $6.2 million under the Senior
Secured Credit Facility; (ii) the offering of $110.0 million of the Old
Notes; (iii) the purchase by the Investors of $15.0 million aggregate
proceeds of Holdings Senior Discount Notes; and (iv) the purchase of $62.5
million of the Convertible Debentures in connection with the Tender Offer.
38
<PAGE>
NOTES TO HOLDINGS UNAUDITED PRO FORMA HISTORICAL CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(e) Adjustment reflects the net effect of the items set forth below:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
Equity investments (1)(2)........................... $ 50,000
Payment of the merger consideration (2)............. (142,639)
Purchase of stock based awards through the Merger,
net of tax ........................................ (6,220)
Extraordinary gain (3).............................. 3,171
Tax benefit of foreign currency translation
adjustment......................................... 342
Transaction fees and expenses, net of tax........... (10,260)
---------
Net equity adjustment........................... $(105,606)
=========
</TABLE>
---------------------
(1) Includes $45.0 million aggregate investment in Holdings' equity by the
Investors.
(2) Includes the exchange by CBCI of $5.0 million worth of shares of
Common Stock valued at the Per Share Merger Consideration for HB
Acquisition capital stock.
(3) In connection with the Transactions, the Company will record an
extraordinary gain of $3.2 million, net of taxes of $1.9 million from
(i) the write-off of deferred financing fees and (ii) the recognition
of a gain on the purchase of $62.5 million of the Convertible
Debentures in connection with the Tender Offer.
(f) The pro forma adjustment to selling, general and administrative expenses
reflects the annual management fee payable to the Investors upon the
occurrence of certain events.
(g) Adjustment to investment income reflects the reduction of $1.6 million of
interest income based on the average cash balance during fiscal 1998 at an
assumed interest rate of 4%.
(h) The pro forma adjustment to interest expense reflects the elimination of
historical interest expense and amortization of deferred financing fees
and reflects the incurrence of interest expense and amortization of
deferred financing fees related to: (i) $6.2 million of borrowings under
the Senior Secured Credit Facility; (ii) the offering of $110.0 million of
the Notes; (iii) the sale of $15.0 million aggregate proceeds of Holdings
Senior Discount Notes to the Investors; and (iv) $2.1 million of other
existing debt of the Issuer.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
Interest expense and amortization of deferred
financing fees--new debt.......................... $15,413
Interest expense and amortization of deferred
financing fees--old debt.......................... (3,149)
-------
Net interest expense adjustment................ $12,264
=======
</TABLE>
(i) The pro forma adjustment to provision for income taxes reflects the tax
effect of deductible adjustments at the Company's effective income tax
rate of 38%.
(j) Adjustment to investment income reflects the reduction of $0.5 million of
interest income based on the average cash balance during the first fiscal
quarter of fiscal 1999 at an assumed interest rate of 4%.
(k) The pro forma adjustment to interest expense reflects the elimination of
actual interest expense and amortization of deferred financing fees for
the fiscal 1999 first quarter and reflects the incurrence of interest
expense and amortization of deferred financing fees related to: (i) the
offering of $110.0 million of the Old Notes; (ii) the sale of $15.0
million aggregate proceeds of Holdings Senior Discount Notes to the
Investors; and (iii) $0.9 million of other existing debt of the Issuer.
39
<PAGE>
HOLDINGS SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth for the periods and the dates indicated
certain historical consolidated financial data of Holdings which should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
of Holdings and the related notes thereto included elsewhere herein. The
consolidated balance sheet data as of June 28, 1997 and June 27, 1998 and the
statements of operations data for each of the fiscal years in the three year
period ended June 27, 1998 are derived from the consolidated financial
statements of Bell Sports Corp. which have been audited by
PricewaterhouseCoopers LLP, independent accountants, and are included
elsewhere herein. The consolidated balance sheet data as of July 2, 1994, July
1, 1995 and June 29, 1996 and the statements of operations data for each of
the fiscal years in the two year period ended July 1, 1995 are derived from
the consolidated financial statements of Bell Sports Corp. which have been
audited by PricewaterhouseCoopers LLP, independent accountants, not included
elsewhere herein. The consolidated balance sheet data as of September 26, 1998
and the statements of operations data for the three month periods ended
September 26, 1998 and September 27, 1997 are unaudited and derived from the
consolidated accounting records of Bell Sports Corp. The other financial data
for all periods presented are unaudited and are derived from the consolidated
accounting records of Bell Sports Corp.
<TABLE>
<CAPTION>
FISCAL YEAR THREE MONTHS ENDED
------------------------------------------------ ---------------------------
SEPTEMBER 27, SEPTEMBER 26,
1994 (1) 1995 (2) 1996 (3) 1997 (4) 1998 1997 1998
-------- -------- -------- -------- -------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net sales............... $116,090 $102,990 $262,340 $259,534 $207,236 $43,632 $40,918
Cost of sales........... 68,692 74,407 201,621 183,098 137,672 30,155 27,374
-------- -------- -------- -------- -------- ------- -------
Gross profit............ 47,398 28,583 60,719 76,436 69,564 13,477 13,544
Selling, general and
administrative
expenses............... 30,007 30,948 66,826 60,416 48,517 11,075 11,384
Amortization of goodwill
and intangible assets.. 884 954 2,854 3,320 2,260 636 562
Loss on disposal of
product lines and sale
of assets.............. -- -- -- 25,360 700 -- --
Transaction costs (5)... -- 11,474
Restructuring charges
(6).................... 185 2,123 5,850 4,141 1,192 -- --
-------- -------- -------- -------- -------- ------- -------
Income (loss) from
operations............. 16,322 (5,442) (14,811) (16,801) 16,895 1,766 (9,876)
Net investment income... 3,579 4,740 2,877 2,939 1,716 429 601
Interest expense........ 2,962 4,633 8,691 7,289 4,715 1,167 2,538
-------- -------- -------- -------- -------- ------- -------
Net income (loss) before
income taxes........... 16,939 (5,335) (20,625) (21,151) 13,896 1,028 (11,813)
Provision (benefit) for
income taxes........... 6,480 (1,892) (8,250) (2,963) 5,318 391 (1,366)
-------- -------- -------- -------- -------- ------- -------
Income (loss) before
extraordinary items.... 10,459 (3,443) (12,375) (18,188) 8,578 637 (10,447)
Extraordinary item: Gain
on early extinguishment
of debt, net of taxes
of $2,006.............. -- -- -- -- -- -- 2,887
-------- -------- -------- -------- -------- ------- -------
Net income (loss)....... $ 10,459 $ (3,443) $(12,375) $(18,188) $ 8,578 $ 637 $(7,560)
======== ======== ======== ======== ======== ======= =======
OTHER FINANCIAL DATA:
EBITDA (7).............. $ 20,122 $ 1,606 $ 14,059 $ 22,242 $ 26,596 $ 3,771 $ 3,582
Cash provided by (used
in) operations......... 651 8,256 (21,950) 910 27,493 24,171 13,192
Cash from (used in)
investing activities... (51,477) 15,758 7,678 20,422 7,931 12,386 (8,814)
Cash provided by (used
in) financing
activities............. 85,204 1,131 (34,516) (15,272) (18,136) (19,390) (35,679)
Capital expenditures.... 6,163 5,198 5,312 7,058 5,496 1,041 1,233
Depreciation and
amortization........... 3,615 4,925 8,913 9,542 7,809 2,005 1,984
Ratio of earnings to
fixed charges.......... 6.0x -- -- -- 3.3x 1.7 --
Fixed charges in excess
of earnings before
fixed charges (8)...... -- 5,335 20,625 21,151 -- -- 11,813
BALANCE SHEET DATA (AS
OF END OF PERIOD):
Cash and cash
equivalents............ $ 46,756 $ 72,018 $ 23,140 $ 29,008 $ 45,093 $46,177 $13,593
Working capital
(including cash and
cash equivalents)...... 91,044 108,821 149,474 130,677 130,437 118,556 83,043
Total assets............ 184,658 186,434 298,635 268,754 247,067 242,453 200,645
Total debt (including
current maturities).... 91,384 92,934 125,571 109,026 88,384 87,366 149,609
Stockholders' equity.... 75,187 75,816 136,041 118,965 128,259 120,205 23,488
</TABLE>
(footnotes on following page)
40
<PAGE>
- ---------------------
(1) Includes the results of VistaLite since its acquisition in January 1994.
(2) Includes the results of SportRack since its acquisition in May 1995.
(3) Includes the results of AMRE since its acquisition in July 1995.
(4) In April 1997, the Company completed the sale of Service Cycle/Mongoose.
The Company's results of operations include the operations of Service
Cycle/Mongoose until the date of sale.
(5) Costs of $11.5 million were incurred in the fiscal 1999 first quarter
related to the consummation of the Transactions.
(6) In fiscal 1994, restructuring changes related to the consolidation of
manufacturing and distribution operations of Blackburn. In fiscal 1995,
restructuring charges related to the consolidation and integration of
Holdings and AMRE. In fiscal 1996, restructuring charges related to
organizational and office consolidations including, in connection with the
AMRE Merger. In fiscal 1997, restructuring charges related to the
consolidation of the Company's corporate headquarters and the
consolidation of the Company's Canadian operations. In fiscal 1998,
restructuring charges related to the restructuring and consolidation of
the Company's European operations.
(7) EBITDA is defined as income (loss) from operations plus (i) depreciation
and amortization (excluding amortization of deferred financing fees which
is included in interest expense), (ii) write-up to fair value of finished
goods related to the AMRE Merger and the acquisitions of SportRack and
Giro, (iii) loss on disposal of product lines and sale of assets,
principally related to divestitures of Service Cycle/Mongoose and
SportRack, (iv) restructuring charges, principally related to facility
reorganizations, (v) costs associated with the consummation of the
transactions and (vi) on a pro forma basis, annual management fees payable
to the Investors upon the occurrence of certain events. The Company
believes that EBITDA provides useful information regarding the Company's
ability to service its debt; however, EBITDA does not represent cash flow
from operations as defined by GAAP and should not be considered as a
substitute for net income as an indicator of the Company's operating
performance or cash flow as a measure of liquidity. The components of
EBITDA are set forth below for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR THREE MONTHS ENDED
-------------------------------------------- ---------------------------
SEPTEMBER 27, SEPTEMBER 26,
1994 1995 1996 1997 1998 1997 1998
------- ------- -------- -------- ------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) from
operations........... $16,322 $(5,442) $(14,811) $(16,801) $16,895 $1,766 $(9,876)
Depreciation and
amortization......... 3,615 4,925 8,913 9,542 7,809 2,005 1,984
Write-up to fair value
of finished goods.... -- -- 14,107 -- -- -- --
Loss on disposal of
product lines and
sale of assets....... -- -- -- 25,360 700 -- --
Transaction costs..... -- -- -- -- -- -- 11,474
Restructuring
charges.............. 185 2,123 5,850 4,141 1,192 -- --
------- ------- -------- -------- ------- ------ -------
EBITDA................ $20,122 $ 1,606 $ 14,059 $ 22,242 $26,596 $3,771 $ 3,582
======= ======= ======== ======== ======= ====== =======
</TABLE>
(8) The ratio of earnings to fixed charges is computed by dividing pre-tax net
income (loss) after adding back fixed charges (interest expense and
facility charges), by fixed charges. The Company was unable to fully cover
the indicated fixed charges by earnings for certain periods presented and
instead has disclosed the amount by which fixed charges exceed earnings
before fixed charges where applicable.
41
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Consolidated
Financial Statements of Holdings and the related notes thereto included
elsewhere in this Prospectus. Except as set forth in "Summary--Summary
Historical and Pro Forma Consolidated Financial Data," "Capitalization" and
"Note 1 to Consolidated Financial Statements of Bell Sports Corp.," no
separate financial statements or data of the Issuer have been included or
incorporated by reference herein. Holdings and the Issuer do not consider that
such financial statements would be material to holders of the Notes because
the Issuer is a wholly-owned subsidiary of Holdings and Holdings will
guarantee all of the Issuer's obligations under the Notes. Holdings and the
Issuer believe that the material differences between the financial statements
of Holdings and the Issuer are, and will be, related to: (i) stockholders'
equity; (ii) the Holdings Senior Discount Notes; (iii) the Convertible
Debentures; and (iv) intercompany indebtedness. See "Summary," "Summary--
Summary Historical and Pro Forma Consolidated Financial Data,"
"Capitalization," "Description of Notes" and "Note 1 to Consolidated Financial
Statements of Bell Sports Corp." Certain statements in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
constitute "forward-looking statements" within the meaning of the Litigation
Reform Act. See "Special Note Regarding Forward-Looking Statements."
OVERVIEW
Bell Sports is the leading manufacturer and marketer of bicycle helmets
worldwide and a leading supplier of a broad line of bicycle accessories in
North America. Bell Sports is also a leading supplier of auto racing helmets
and a supplier of bicycle accessories worldwide. The Company has developed a
reputation over its 44-year history for innovation, design, quality and
safety. Since its founding, the Company has engaged in the manufacture and
sale of bicycle helmets, bicycle accessories, auto racing helmets and
motorcycle helmets. In 1991, the Company elected to refocus its operations on
the growing bicycle helmet and accessory business by divesting its motorcycle
helmet business. Under the terms of the agreement providing for the sale of
the motorcycle helmet business, the Company entered into a long-term licensing
agreement under which the Company agreed to license the Bell brand name to the
purchaser for use on motorcycle helmets.
Throughout the 1980s and 1990s, the Company strengthened its position in the
bicycle helmet and accessory markets through a series of strategic
acquisitions, including: (i) Rhode Gear, a designer and marketer of certain
premium bicycle accessories, in November 1989; (ii) Blackburn, a designer and
marketer of certain premium bicycle accessories, in November 1992;
(iii) VistaLite, a designer and manufacturer of premium LED safety lights and
headlights for bicycles, in January 1994; (iv) SportRack Canada, Inc.
("SportRack"), a designer, manufacturer and marketer of automobile roof rack
systems, in May 1995; (v) AMRE, a leading designer, marketer and distributor
of bicycle helmets and accessories and marketer of a line of bicycles under
the Mongoose brand, in July 1995; and (vi) Giro, a leading designer,
manufacturer and marketer of premium bicycle helmets, in January 1996. Through
the acquisitions of Rhode Gear, Blackburn, VistaLite and AMRE, the Company
became one of the leading marketers and distributors of bicycle accessories in
North America. In addition, the acquisition of Giro enhanced the Company's
market position in the premium bicycle helmet market segment. Each of the
acquisitions described above was accounted for using the purchase method of
accounting, and accordingly, the Company's results of operations include the
operations of the acquired businesses since their respective dates of
acquisition. The Company has also expanded its international presence
throughout the 1990s. In 1991, the Company entered the European market by
opening a bicycle helmet manufacturing facility in France. In fiscal 1997, the
Company continued its international expansion with the opening of a sales,
marketing and distribution office in Australia to service the Australian, New
Zealand and Pacific Rim markets.
The domestic bicycle helmet market experienced significant growth in unit
sales during the early 1990s principally due to (i) increased safety awareness
among consumers and the adoption of mandatory bicycle helmet
42
<PAGE>
legislation by several states, including California and New York, and (ii) the
popularity of bicycling, including speciality segments such as mountain
biking. The convergence of these trends led to a significant increase in shelf
space, particularly in the mass merchant channel, dedicated to bicycle
helmets. As a result, several small helmet manufacturers entered the domestic
bicycle helmet market in the early 1990s. In 1995 and 1996, as the increase in
demand aided by new mandatory bicycle helmet legislation subsided, mass
merchants reduced shelf space dedicated to the segment, driving down price
points industry-wide. As a result, the Company reduced prices in an effort to
maintain market share, and believes that this strategic decision proved
successful as it effectively responded to new competitors and enabled Bell
Sports to maintain its leading market position. However, this price pressure
significantly reduced the Company's margins and profitability during this
period. The Company believes that domestic bicycle helmet demand has
stabilized.
In fiscal 1996 and 1997, the Company refocused on the profitability of its
core businesses through the divestiture of nonstrategic and low margin
businesses, elimination of duplicative overhead and reduction of distribution
and manufacturing costs. As a result, management initiated the following
changes: (i) the April 1997 divestiture of Service Cycle/Mongoose, a designer,
marketer and distributor of bicycles and certain non-proprietary bicycle parts
and accessories; (ii) the divestiture of SportRack in July 1997; (iii) the
consolidation of its corporate headquarters into its San Jose, California
facility; (iv) the closure of the Memphis, Tennessee distribution facility by
consolidating operations into the Company's other existing distribution
facilities; and (v) the installation of a new computer system in the
warehouses and mass merchant operations to improve operational efficiency and
customer service. Unless otherwise noted, the Company's results of operations
include the operations of the divested businesses until the date of sale.
GENERAL
Net sales, as calculated by the Company, are determined by subtracting
estimated returns, discounts, allowances and net freight charges from gross
sales. The Company's cost of sales and its resulting gross margin (defined as
gross profit as a percentage of net sales) are principally determined by the
cost of raw materials, the cost of labor to manufacture its products, the
overhead expenses of its manufacturing facilities, the cost of sourced
products, warehouse costs, freight expenses, royalties and obsolescence
expenses. Selling, general and administrative expenses consist primarily of
sales and marketing expenses, research and development costs and
administrative costs. Sales and marketing expenses generally vary with sales
volume while administrative costs are relatively fixed in nature.
As of June 27, 1998, the Company had domestic net operating loss
carryforwards of approximately $32.7 million. The Company's net operating loss
carryforwards begin to expire in fiscal 2008. The Merger caused a change of
ownership of more than 50%, resulting in an annual limitation of the loss
carryforward which may delay or limit the eventual utilization of the
carryforwards.
The Company believes its results of operations in fiscal 1998 are not
comparable to those of fiscal 1996 and 1997 due to the inclusion of results of
operations in fiscal 1996 and 1997 of Service Cycle/Mongoose and SportRack,
which were divested in April 1997 and July 1997, respectively. For ease of
comparison to fiscal 1998, which does not include the results of the divested
businesses, the Company has included adjusted information which excludes the
divested businesses from the net sales and gross margin data for fiscal 1996
and 1997.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 26, 1998 WITH THE THREE MONTHS
ENDED SEPTEMBER 27, 1997
Net Sales. Net sales decreased 6% to $40.9 million in the first quarter of
fiscal 1999 from $43.6 million in the fiscal 1998 first quarter--primarily due
to lower mass merchant bicycle helmet and accessories sales in the U.S. and in
Europe. The Company believes a portion of the decrease in sales during the
first quarter of fiscal 1999 was attributable to differences in the timing of
orders between periods.
For both the fiscal 1999 and fiscal 1998 first quarters, bicycle
accessories, bicycle helmets and auto racing helmets represented approximately
57%, 41% and 2%, respectively, of the Company's net sales.
43
<PAGE>
Gross Margin. Gross margins increased to 33% of net sales during the three-
month period ended September 26, 1998 from 31% of net sales in the comparable
prior year period. The increase is due to the continued improvement in the
Company's manufacturing and distribution efficiency.
Selling, General and Administrative. Selling, general and administrative
costs increased to 28% of net sales, or $11.4 million, in the first quarter of
fiscal 1999 compared to 25% of net sales, or $11.1 million, in the first
quarter of fiscal 1998. Selling, general and administrative expenses increased
as a percentage of net sales in fiscal 1999 first quarter due to the inclusion
of costs associated with the introduction of the Company's fiscal 1999 snow
ski and snow board helmet lines and compensation expense related to the
issuance of stock options.
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 percentage of net sales during the
third and fourth quarters of fiscal 1999.
Amortization of Intangibles. Amortization of goodwill and intangible assets
decreased to $562,000 in the Company's first quarter of fiscal 1999 compared
to $636,000 for the comparable prior year period.
Transaction Costs. Costs related to the Merger totaled $11.5 million. The
Company completed the Merger in August 1998 and does not expect to incur any
material additional costs related to the Merger.
Gain On Debt Tender. On August 17, 1998, the Company consummated the Tender
Offer at a purchase price of $905, plus accrued and unpaid interest from May
15, 1998 up to, but not including, the date of payment for each $1,000
principal amount of Convertible Debentures. Accordingly, the Company realized
an extraordinary gain, stated on an after-tax basis and net of related fees
and expenses, of $2.9 million.
Net Investment Income and Interest Expense. Net investment income increased
to $601,000 in the first three months of fiscal 1999 compared to $429,000 in
the first quarter of fiscal 1998 due to higher cash balances being invested at
the beginning of the fiscal period. The Company's cash balances decreased
after the Merger.
Interest expense increased to $2.5 million in the first quarter of fiscal
1999 from $1.2 million in the comparable prior year period due to the issuance
of $125 million in debt during August 1998 partially offset by a $62.5 million
reduction in debt pursuant to the Tender Offer, also completed in August 1998.
Income Taxes. The effective tax rate was 9% for the first quarter of fiscal
1999 and 38% for the first quarter of fiscal 1998. The decrease is
attributable to the non-deductibility of Merger costs. The Company anticipates
the effective tax rate for the remainder of fiscal 1999 will be 41%.
COMPARISON OF THE FISCAL YEAR ENDED JUNE 27, 1998 WITH THE FISCAL YEAR ENDED
JUNE 28, 1997
Net Sales. Net sales decreased 20% to $207.2 million in fiscal 1998 from
$259.5 million in fiscal 1997 primarily as a result of the divestiture of
Service Cycle/Mongoose and SportRack. Excluding the results of the divested
businesses, which combined contributed $50.7 million in net sales in fiscal
1997, net sales decreased $1.6 million, or 1%, to $207.2 million in fiscal
1998 from $208.8 million in fiscal 1997. The decrease resulted from lower
bicycle accessory shipments due to a reduction in the number of days of
inventory carried by a major mass merchant customer, the elimination of
certain lower margin products from the Company's sales mix and a decrease in
the prices of certain helmets sold in the mass merchant channel. The decrease
was largely offset by strong international sales growth and continued strength
in the IBD helmet market.
For fiscal 1998, bicycle accessories, bicycle helmets and auto racing
helmets represented approximately 52%, 46% and 2%, respectively, of the
Company's net sales. For fiscal 1997, bicycle accessories, bicycle helmets and
auto racing helmets represented approximately 54%, 44% and 2%, respectively,
of the Company's net sales, excluding the results of the divested businesses.
44
<PAGE>
Gross Margin. Gross margin increased to 34% of net sales in fiscal 1998 from
30% of net sales in fiscal 1997, on an actual basis, and from 32% of net sales
on an adjusted basis, excluding the results of the divested businesses.
Excluding the results of Service Cycle/Mongoose and SportRack, which had lower
gross margins than the Company's other product lines, the increase was
primarily attributable to the elimination of certain lower margin products
from the Company's sales mix, the introduction of Bell-branded bicycle
accessories into the mass merchant channel in December 1997, lower
distribution costs due to the closure of the Company's Memphis, Tennessee
distribution facility in November 1997, improvements in manufacturing
efficiencies and a reduction in manufacturing overhead costs. Despite the
decrease in the prices of certain helmets sold in the mass merchant channel,
the Company was able to increase its gross margin in that channel by over one
percentage point, which was primarily attributable to the Company's cost
reduction initiatives.
Selling, General and Administrative. Selling, general and administrative
expenses were 23% of net sales in both fiscal 1998 and 1997. Selling, general
and administrative expenses decreased by $11.9 million to $48.5 million in
fiscal 1998 from $60.4 million in fiscal 1997. The decrease was primarily
attributable to continued cost savings produced by the Company's cost
reduction initiatives and the divestiture of Service Cycle/Mongoose and
SportRack.
Amortization of Goodwill and Intangible Assets. Amortization of goodwill and
intangible assets decreased to $2.3 million in fiscal 1998 from $3.3 million
in fiscal 1997. The decrease was a result of a write-off of intangible assets
relating to the divestiture of Service Cycle/Mongoose and SportRack.
Loss on Disposal of Product Lines and Sale of Assets. During fiscal 1998,
the Company negotiated a letter of intent to sell the assets of its domestic
foam molding facility in Rantoul, Illinois, and agreed to sublet the building
housing the foam molding facility to the purchaser. In September 1998, the
Company consummated such asset sale and entered into a sublease with the
purchaser. In addition, the Company entered into an agreement with the
purchaser pursuant to which the purchaser has agreed to provide the Company
with foam helmet liners and certain related components. The Company recorded
fiscal 1998 charges of approximately $2.6 million, including a $2.0 million
charge related to the divestiture of SportRack, and approximately a
$0.6 million charge associated with the sale and related reorganization of the
Company's domestic foam molding facility. During fiscal 1998, the Company
reversed previously recorded charges of $1.9 million, including a $0.6 million
benefit based on the finalization of costs associated with the closure of
distribution facilities, and a $1.3 million benefit related to the reversal of
the remaining reserve for uncollectible receivables established in fiscal 1997
in connection with the divestiture of Service Cycle/Mongoose.
In April 1997, the Company completed the sale of its Service Cycle/Mongoose
inventory, trademarks and certain other assets to Brunswick Corporation. In
connection with the divestiture of Service Cycle/Mongoose, the Company
recorded a loss on disposal of product lines of $25.4 million, comprised of
the write-off of goodwill and intangibles ($14.8 million), disposal and exit
costs ($5.4 million) and reorganization costs associated with the distribution
network and operations ($5.2 million).
Restructuring Charges. Restructuring charges were approximately $1.2 million
and $4.1 million for fiscal 1998 and 1997, respectively. During fiscal 1998,
the Company approved a plan to restructure its European operations. In
connection with this plan, in December 1997, the Company consolidated its
Paris, France sales and marketing office into its Roche La Moliere, France
facility. In addition, the Company consolidated key management functions of
Giro Ireland (as defined) and EuroBell (as defined). As a result, in fiscal
1998, the Company recorded $1.2 million of restructuring charges related to
facility closing costs and severance benefits.
During fiscal 1997, the Company recorded $2.7 million of restructuring
charges related to the consolidation of its corporate headquarters into its
San Jose, California facility. The Company recorded an additional $1.5 million
of restructuring charges in fiscal 1997 related to the consolidation of the
Company's Canadian operations and closure of four offices in connection with
the AMRE Merger and the Company's cost reduction initiatives.
45
<PAGE>
Net Investment Income and Interest Expense. Net investment income decreased
to $1.7 million in fiscal 1998 from $2.9 million in fiscal 1997. The decrease
was due to the settlement of an arbitration case related to the handling of
certain marketable securities by an outside investment advisor during fiscal
1997. The settlement proceeds, net of related expenses and losses to sell
certain securities, were $1.3 million. Interest expense decreased to
$4.7 million in fiscal 1998 from $7.3 million in fiscal 1997 as a result of
lower average debt balances outstanding.
Income Taxes. An income tax provision of $5.3 million, or 38% of the pre-tax
income, was reported for fiscal 1998, compared to an income tax benefit of
$3.0 million, or 14% of the pre-tax loss, reported for fiscal 1997. A majority
of the difference in the effective tax rates was due to the write-off of non-
tax deductible goodwill in connection with the divestiture of Service
Cycle/Mongoose.
COMPARISON OF THE FISCAL YEAR ENDED JUNE 28, 1997 WITH THE FISCAL YEAR ENDED
JUNE 29, 1996
Net Sales. Net sales decreased 1% to $259.5 million in fiscal 1997 from
$262.3 million in fiscal 1996 primarily as a result of the divestiture, at the
beginning of the fourth quarter of fiscal 1997, of Service Cycle/Mongoose,
which contributed $68.6 million in net sales in fiscal 1996. Excluding the
results of Service Cycle/Mongoose and SportRack, net sales increased
$15.1 million, or 8%, to $208.8 million in fiscal 1997 from $193.7 million in
fiscal 1996. The increase primarily resulted from higher bicycle accessory
shipments to certain major mass merchants, which resulted in an increase in
net sales of approximately $5.8 million and higher bicycle helmet shipments in
the IBD market, which resulted in an increase in net sales of bicycle helmets
of approximately $9.8 million. Approximately $7.7 million of the IBD helmet
sales increase was due to the inclusion of Giro (which was acquired in January
1996) for a full year. The increase was partially offset by lower unit helmet
volumes and a decrease in the prices of certain helmets sold in the mass
merchant channel.
For fiscal 1997, bicycle accessories, bicycle helmets and auto racing
helmets represented 54%, 44% and 2%, respectively, of the Company's net sales,
excluding the results of the divested businesses. For fiscal 1996, bicycle
accessories, bicycle helmets and auto racing helmets represented 56%, 42%, and
2%, respectively, of the Company's net sales, excluding the results of the
divested businesses.
Gross Margin. Gross margin increased to 30% of net sales in fiscal 1997 from
29% in fiscal 1996, on an actual basis, excluding the $14.1 million inventory
write-up associated with the AMRE Merger and the acquisitions of SportRack and
Giro. On an adjusted basis, gross margin increased to 32% of net sales in
fiscal 1997 from 31% in fiscal 1996, excluding the results of the divested
businesses and the fiscal 1996 $14.1 million inventory write-up associated
with the AMRE Merger and the acquisitions of SportRack and Giro. The increase
was primarily attributable to the divestiture of Service Cycle/Mongoose and
SportRack, which had lower gross margins than the Company's other product
lines and an increase in the shipment of IBD bicycle helmets, which generally
have higher than average gross margins.
Selling, General and Administrative. Selling, general and administrative
expenses decreased by $6.4 million to $60.4 million in fiscal 1997 from $66.8
million in fiscal 1996. The decrease was primarily attributable to lower
advertising expenditures of $4.0 million, a full year benefit of cost savings
produced by the Company's restructuring plan related to the AMRE Merger and
the divestiture of Service Cycle/Mongoose in April 1997. In fiscal 1996, the
Company incurred $5.6 million in advertising expenses for a one-time
promotional campaign in connection with the launch of the Bell Pro helmet line
and the expansion of the Bell brand into the mass merchant channel. The
decrease in selling, general and administrative expenses was partially offset
by increases relating to opening a distribution and sales office in Sydney,
Australia during November 1996 and the inclusion of Giro for a full year.
Amortization of Goodwill and Intangible Assets. Amortization of goodwill and
intangible assets increased to $3.3 million in fiscal 1997 from $2.9 million
in fiscal 1996. The increase was due to the inclusion of a full year of
amortization related to the acquisition of Giro, partially offset by a
decrease in amortization as a result of the write-off in fiscal 1997 of
certain goodwill and intangible assets in connection with the divestiture of
Service Cycle/Mongoose.
46
<PAGE>
Loss on Disposal of Product Lines and Sale of Assets. In April 1997, the
Company completed the sale of its Service Cycle/Mongoose inventory, trademarks
and certain other assets to Brunswick Corporation. In connection with the
divestiture of Service Cycle/Mongoose, the Company recorded a loss on disposal
of product lines of $25.4 million, comprised of the write-off of goodwill and
intangibles ($14.8 million), disposal and exit costs ($5.4 million) and
reorganization costs associated with the distribution network and operations
($5.2 million).
Restructuring Charges. Restructuring charges were approximately $4.1 million
and $5.9 million for fiscal 1997 and 1996, respectively. During fiscal 1997,
the Company recorded $2.6 million of restructuring charges related to the
consolidation of its corporate headquarters into its San Jose, California
facility. The Company recorded an additional $1.5 million of restructuring
charges in fiscal 1997 related to the consolidation of the Company's Canadian
operations and closure of four offices in connection with the AMRE Merger and
the Company's cost reduction initiatives.
Restructuring charges were approximately $5.9 million in fiscal 1996. During
fiscal 1996, the Company commenced significant organizational and office
consolidations, including in connection with the AMRE Merger. Most U.S. sales,
marketing and research and development operations were consolidated into the
Company's San Jose, California office and all corporate functions were
consolidated into the Company's Scottsdale, Arizona office.
Net Investment Income and Interest Expense. Net investment income increased
slightly in fiscal 1997. The increase is due to the settlement of an
arbitration case related to the handling of certain marketable securities by
an outside investment advisor during fiscal 1997. The settlement proceeds, net
of related expenses and expected losses to sell certain securities were $1.3
million. Excluding this settlement, interest income decreased to $1.6 million
in fiscal 1997 from $2.9 million in fiscal 1996. This decline was due to lower
levels of cash and marketable securities invested during the year. Interest
expense decreased to $7.3 million for fiscal 1997 from $8.7 million for fiscal
1996. The decrease was due to lower average debt balances outstanding and
lower interest rates for fiscal 1997 when compared to fiscal 1996.
Income Taxes. An income tax benefit of $3.0 million, or 14% of the pre-tax
loss, was reported for fiscal 1997 compared to an income tax benefit of $8.3
million, or 40% of the pre-tax loss, was reported for fiscal 1996. A majority
of the difference in the effective tax rates was due to the write-off of non-
tax deductible goodwill in connection with the divestiture of Service
Cycle/Mongoose.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its operations, capital expenditures and
working capital requirements from internal cash flow from operations and
borrowings. The Company's working capital decreased to $130.4 million at June
27, 1998 from $130.7 million at June 28, 1997. The Company's working capital
decreased to $83.0 million at September 26, 1998 from $130.4 million at June
27, 1998. The decrease is primarily attributable to the use of cash in
connection with the Merger and the Tender Offer coupled with the seasonal
decrease in accounts receivable.
Cash provided by operating activities for fiscal 1998 increased to $27.5
million from $0.9 million for fiscal 1997. The increase was primarily due to
the collection of Service Cycle/Mongoose receivables subsequent to the
divestiture of the business; a decrease in accounts receivable and inventory
resulting from the divestiture of the SportRack business; and lower selling,
general and administrative expenses resulting from divested businesses and
realization of savings from consolidation and cost savings programs
implemented. This was partially offset by lower gross profit resulting from
the divestiture of businesses and payment of liabilities previously accrued
for restructuring and facility closure costs.
The Company's capital expenditures were $5.5 million, $7.1 million and $5.3
million in fiscal 1998, 1997 and 1996, respectively. The Company's capital
expenditures were $1.2 million in the fiscal 1999 first quarter
47
<PAGE>
compared to $1.0 million in the fiscal 1998 first quarter. These amounts
primarily reflect cash outlays for maintaining and upgrading the Company's
manufacturing facilities and equipment including new product tooling and
computer systems. Management estimates that the Company will spend
approximately $5.1 million in fiscal 1999 for product tooling and to maintain
and upgrade its facilities and equipment.
In connection with the Merger, the Issuer issued the Old Notes for $110.0
million in gross proceeds and entered into the Senior Secured Credit Facility,
which provides revolving loans in an aggregate amount of up to $60.0 million
(including letters of credit), subject to a borrowing base of 85% of eligible
accounts receivable and 55% of eligible domestic inventory. As of June 27,
1998, after giving effect to the Transactions, the Issuer anticipates that it
would have had $46.3 million available to be borrowed under the Senior Secured
Credit Facility. Proceeds to the Issuer from the issuance of the Old Notes and
a portion of the Issuer's available cash were paid to Holdings to finance, in
part, the Transactions and pay the related fees and expenses. In connection
with the Merger, the Investors invested $45.0 million in the equity of HB
Acquisition and $15.0 million in Holdings Senior Discount Notes. See "The
Transactions" and "Description of Senior Secured Credit Facility." No
borrowings were made under the Senior Secured Credit Facility at the Effective
Time.
Management believes that cash flow from operations and borrowing
availability under the Senior Secured Credit Facility will provide adequate
funds for the Company's foreseeable working capital needs, planned capital
expenditures, debt service obligations and the ultimate outcome of pending
product liability judgments. The Company's ability to fund its operations and
make planned capital expenditures, to make scheduled debt payments, to
refinance indebtedness and to remain in compliance with all of the financial
covenants under its debt agreements depends on its future operating
performance and cash flow, which in turn, are subject to prevailing economic
conditions and to financial, business and other factors, some of which are
beyond the Company's control. In addition, a termination of or other adverse
change in the Company's relationship with, an adverse change in the financial
condition of, or a significant reduction in sales to, Wal-Mart, which
represented approximately 21% of the Company's net sales in fiscal 1998, could
have a material adverse effect on the Company's liquidity and results of
operations. See "Risk Factors--Customer Concentration."
YEAR 2000 COMPLIANCE
The year 2000 problem, which is common to most corporations, concerns the
inability of information systems, including computer software programs as well
as Non-IT Systems, to properly recognize and process date sensitive
information related to the year 2000 and beyond. The Company believes that it
will be able to achieve year 2000 compliance by the end of 1999 and does not
currently anticipate any material disruption of its operations as a result of
any failure by the Company to be year 2000 compliant. However, to the extent
the Company is unable to achieve year 2000 compliance, the Company's business
and results of operations could be materially affected. This could be caused
by computer related failures in a number of areas including, but not limited
to, the failure of the Company's financial systems, manufacturing and
warehouse management systems, phone system and electricity supply.
The Company has performed a preliminary examination of its major software
applications to determine whether each system is prepared to accommodate the
year 2000. In fiscal 1998, through routine upgrades, the Company made the
computer software programs used at the Company's domestic facilities and at
Bell Sports Canada year 2000 compliant. These upgrades include, but are not
limited to, the manufacturing, financial, customer and vendor purchase order
processing and warehouse management systems. In fiscal 1999, the Company
expects to further upgrade these programs to a year 2000 level certified by
the Company's outside software vendors. The computer software programs of Giro
and Bell Sports Australia are currently year 2000 compliant. The computer
software programs of Giro Ireland are currently being upgraded to be year 2000
compliant by December 1998. The computer software programs of EuroBell are not
currently year 2000 compliant but are expected to be converted to a year 2000
compliant system or otherwise made year 2000 compliant before the end of 1999.
48
<PAGE>
All year 2000 efforts with respect to the Company and its subsidiaries'
computer software programs are being made through internal resources and
through routine software upgrades provided by the Company's software vendors.
The Company has not incurred significant separately identifiable costs related
to year 2000 issues through June 27, 1998 and does not expect to incur
significant additional costs in order to make its computer software programs
year 2000 compliant. The Company's internal resources consist of an
information technology support team comprised of approximately fifteen full-
time employees, covering both technical and application areas. The Company has
not hired additional employees, either full-time or contract, in order to
address year 2000 issues and expects all such issues will be adequately
addressed by the existing team.
The Company employs certain manufacturing processes that utilize computer
controlled manufacturing equipment. The Company believes such equipment is
year 2000 compliant but has not completed its testing of such equipment.
Testing is expected to be completed by December 1998. In the event the Company
determines that such equipment cannot readily be made year 2000 compliant, the
Company believes that it could revert to the manual processes previously
employed or outsource such work with minimal incremental manufacturing cost.
The Company's facilities staff currently is investigating the status of the
Company's Non-IT Systems with respect to year 2000 compliance. The Company's
Non-IT Systems include phones, voicemail, heating/air conditioning,
electricity, security systems and lift trucks. The Company expects that its
Non-IT Systems will be year 2000 compliant before the end of 1999. The Company
is utilizing internal resources to address the year 2000 compliance of its
Non-IT Systems and has not incurred significant separately identifiable costs
related to the year 2000 issues through June 27, 1998 and does not expect to
incur significant additional costs in order to upgrade its Non-IT Systems to
year 2000 compliance.
In addition to reviewing its internal systems, the Company has polled or is
in the process of polling its outside software and other vendors, customers
and freight carriers to determine whether they are year 2000 compliant and to
attempt to identify any potential issues. The Company's outside software
vendors have confirmed that they are year 2000 compliant, including the
products utilized by the Company. The Company believes based on the responses
it has received from its customers that its mass merchant customers will be
year 2000 compliant before the end of 1999.
If the Company's customers and vendors do not achieve year 2000 compliance
before the end of 1999, the Company may experience a variety of problems which
may have a material adverse effect on the Company. Among other things, to the
extent the Company's customers are not year 2000 compliant by the end of 1999,
such customers may lose EDI capabilities at the beginning of the year 2000.
Where EDI communication would no longer be available, the Company expects to
utilize voice, facsimile and/or mail communication in order to receive
customer orders and process customer billings. To the extent the Company's
vendors are not year 2000 compliant by the end of 1999, such vendors may fail
to deliver ordered materials and products to the Company and may fail to bill
the Company properly and promptly. Consequently, the Company may not have the
correct inventory to send to its customers and may experience a shortage or
surplus of inventory. Although the Company does not currently have a plan for
addressing these potential problems, with respect to its vendors, the Company
has alternative sources of supply.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, Statement of Financial Accounting Standards ("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. Effective June 28, 1998, the
Company adopted SFAS 130 and reclassified financial statements for earlier
periods for comparative purposes.
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
49
<PAGE>
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS 131 is required to be adopted for
fiscal years beginning after December 15, 1997.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133") was issued. SFAS 133 establishes a new model
for accounting for derivatives and hedging activities and supersedes and
amends a number of existing standards. SFAS 133 is required to be adopted for
fiscal years beginning after June 15, 1999. Upon initial application, all
derivatives are required to be recognized in the statement of financial
position as either assets or liabilities and measured at fair value. In
addition, all hedging relationships must be reassessed and documented pursuant
to the provisions of SFAS 133.
The Company plans to adopt SFAS 131 in fiscal 1999 and SFAS 133 in fiscal
2000 and does not expect such adoptions to have a material effect on the
consolidated financial statements.
50
<PAGE>
BUSINESS
OVERVIEW
Bell Sports is the leading manufacturer and marketer of bicycle helmets
worldwide and a leading supplier of a broad line of bicycle accessories in
North America. The Company is also a leading supplier of auto racing helmets
and a supplier of bicycle accessories worldwide. To capitalize upon increasing
safety awareness in other outdoor sports, the Company recently began marketing
in-line skating, snowboarding, snow skiing and water sport helmets. The
Company markets its helmets under the widely recognized Bell, Bell Pro and
Giro brand names, and its accessories under such leading brands as Bell,
Blackburn, Rhode Gear, VistaLite, Copper Canyon Cycling and Spoke-Hedz. With a
broad, well-diversified branded product offering marketed across all price
points, the Company is a leading supplier of bicycle helmets and accessories
to all major distribution channels in the industry, including mass merchants,
IBDs, and mail order catalog. In fiscal 1998, the Company had net sales of
$207.2 million and EBITDA of $26.6 million.
Bell Sports has developed a reputation over its 44-year history for
innovation, design, quality and safety and is recognized by bicycling and auto
racing enthusiasts as a market leader in helmet technology and design. To
leverage its outstanding reputation and position in bicycle helmets, the
Company has pursued strategic acquisitions of complementary bicycle helmet and
accessory brands. During the 1990s, the Company increased net sales from $40.4
million in fiscal 1990 to $207.2 million in fiscal 1998. The Company believes
the primary drivers of this growth include: (i) the development of innovative
bicycle helmets and accessories; (ii) strategic acquisitions; (iii) the
successful introduction of the Bell brand, which historically had been
reserved for sale to the IBD channel, comprised of both IBDs and mail order
catalog businesses, into the mass merchant channel; (iv) an increase in safety
awareness among consumers; and (v) the popularity of bicycling, including
specialty segments such as mountain biking. In fiscal 1998, approximately 52%,
46% and 2% of the Company's net sales were derived from the sale of bicycle
accessories, bicycle helmets and auto racing helmets, respectively, with
approximately 86% of net sales in North America, 11% in Europe and 3% in
Australia and the Pacific Rim.
COMPETITIVE STRENGTHS
Leading Industry Position. Bell Sports believes it holds the leading market
share position in the bicycle helmet market in the United States, Europe and
Canada. According to the BMRI, in 1997 the Company held an approximate 67%
share of the U.S. bicycle helmet market, the largest bicycle helmet market in
the world. In addition, the Company is also a leading supplier of bicycle
accessories in North America. The Company believes it has attained these
leading positions through a combination of its: (i) strong brand awareness
among consumers; (ii) broad product offerings marketed across all price
points; (iii) outstanding reputation among bicycling enthusiasts; and (iv)
superior customer service. As a result, the Company believes it is a primary
supplier of bicycle helmets and accessories to a majority of mass merchants in
the United States and the largest supplier of bicycle helmets to IBDs in North
America.
Strong Brand Name. The Bell brand has over a 40-year history. The Company
believes that the Bell brand is the most recognized name in bicycle helmets
both by bicycling enthusiasts and mass market consumers. The Company first
established its leading brand name among enthusiasts by producing premium
bicycle helmets sold through the IBD channel. In fiscal 1996, the Company
successfully expanded the use of its strong name by introducing Bell-branded
helmets into the mass merchant channel. To capitalize on the success of the
branded helmet program, in fiscal 1998, the Company introduced Bell-branded
bicycle accessories into the mass merchant channel. The Company markets
products through the IBD channel under the Giro, Bell Pro, Blackburn, Rhode
Gear and VistaLite brand names. The Company believes that these brands are
recognized by enthusiasts as leading names in each of their respective product
categories. Bell Sports reinforces the strength of its brands through a
diverse marketing program which includes print advertising, trade promotions,
sponsorship of athletes and grass-roots marketing.
Loyal and Diverse Customer Relationships. Bell Sports has a broad and well-
established customer base of over 4,000 mass merchants and IBDs. The Company
is a primary supplier of bicycle helmets and accessories to a majority of mass
merchants in the United States including Wal-Mart, K-Mart, Costco, Sears and
Fred Meyer,
51
<PAGE>
and presently has 100% of the shelf space for bicycle helmets and accessories
in Wal-Mart and 100% of the shelf space for bicycle helmets in K-Mart. The
Company also is a primary supplier of premium bicycle helmets and accessories
to its IBD customers through its Bell Pro and Giro bicycle helmet brands and
its Blackburn, Rhode Gear and VistaLite premium bicycle accessory brands. The
Company attributes its strong customer base primarily to its broad, innovative
and high quality product offerings marketed across all price points,
outstanding reputation and safety record and superior customer service. See
"Risk Factors--Customer Concentration."
Superior Customer Service. The Company supports its strong customer
relationships with sales, marketing and inventory management programs tailored
to serve specific distribution channels. Bell Sports works closely with
retailers to increase their effectiveness in selling the Company's products.
To this end, the Company has developed marketing and category management
services for its mass merchant customers including: (i) product mix
optimization; (ii) retail shelf management, including plan-o-gram services;
(iii) EDI and inventory management programs; and (iv) field merchandising. For
its IBD customers the Company develops innovative point-of-sale materials to
enhance product visibility. The Company believes that its customers value
these services in their efforts to maximize sales and profitability. The
Company has been recognized by many of its customers for providing superior
customer service. For example in May 1998, REI presented the Company with its
prestigious "Vendor of the Year" award, ranking Bell Sports number one in
service quality among all of its vendors.
Product Innovation and Design. The Company believes that innovation and
design are important to a consumer's selection of a bicycle helmet. As a
result the Company continuously reviews the features, functionality, safety,
style and component materials used in its bicycle helmets and works with IBD
customers to enhance the appeal of its products. Since the introduction of its
first bicycle helmet in 1975, Bell Sports has been a leader in the development
and utilization of the latest technology and innovations in bicycle helmet
design, such as reduced weight, improved aerodynamics and enhanced helmet fit
and comfort. As a part of the design process, Bell Sports also conducts
extensive testing of new products and regular testing of its existing products
at its state-of-the-art test facility. The Bell Sports research and
development staff conducts rigorous helmet testing to monitor adherence to
bicycle helmet safety standards and has contributed to the development of the
new mandatory helmet safety standard of the CPSC.
BUSINESS STRATEGY
The Company seeks to strengthen its market leadership position and maximize
profitability and cash flow through the following strategies.
Continue to Leverage the Bell Brand. With over 40 years of experience in the
design and manufacture of helmets, Bell Sports has leveraged its brands to
become a leader in the sale of bicycle helmets and accessories. For example,
in fiscal 1996, the Company made a strategic decision to use the Bell brand on
bicycle helmets sold in the mass merchant channel. Prior to fiscal 1996, the
Bell brand name had been reserved for premium bicycle helmets sold primarily
through IBDs. To continue the successful expansion of the Bell brand into the
mass merchant channel, in December 1997, the Company began to replace its non-
branded bicycle accessories with Bell-branded accessories in the mass merchant
channel. As a result, in fiscal 1998 approximately 46% of the Company's U.S.
mass merchant sales were comprised of Bell-branded bicycle helmets and
accessories, up from 11% in fiscal 1997. The Company intends to continue to
leverage its leading brands in order to: (i) expand its presence in attractive
emerging specialty helmet markets such as in-line skating, snowboarding, snow
skiing and water sports; (ii) capture strategic licensing opportunities in
complementary product lines; and (iii) increase market share internationally.
The Company believes that these initiatives can increase sales and profits
with relatively modest capital investments.
Expand International Sales. Bell Sports has achieved significant growth in
international sales from $12.8 million in fiscal 1994 to $50.8 million in
fiscal 1998. The Company believes that significant opportunities exist to
continue to grow sales in established European and Pacific Rim markets.
Compared to the U.S. market, these international bicycle helmet and accessory
markets are highly fragmented and regionally focused, generally
52
<PAGE>
involving smaller companies offering narrower product lines with limited
marketing and customer service support. The Company believes that high
quality, dependable suppliers of a broad line of products such as Bell Sports
are positioned favorably to service such international markets. An important
component of the Company's European strategy is to increase bicycle
accessories sales, which represented only 14% of the Company's net sales in
Europe in fiscal 1998, compared to 57% of the Company's net sales in North
America. The Company also plans to increase its direct sales efforts in
international markets across all distribution channels and product lines in
order to leverage further the Bell brand and increase international sales. In
both Canada and Australia, where the Company replaced third-party distributors
with a direct sales approach in fiscal 1997, net sales increased from $23.7
million in fiscal 1997 to $28.5 million in fiscal 1998. In fiscal 1998, the
Company reorganized its European sales, marketing and management functions in
order to execute its growth strategy.
Achieve Cost Savings. Since fiscal 1996, the Company has strived to increase
profitability through: (i) divesting non-strategic and lower margin
businesses; (ii) reducing corporate overhead; and (iii) reducing distribution
and manufacturing costs. The Company believes these strategic initiatives have
contributed to the improvement in EBITDA margins from approximately 5% in
fiscal 1996 to 13% in fiscal 1998. During fiscal 1997 and 1998, the Company
identified and began to implement certain initiatives which it believes would
have resulted in net cost savings of approximately $3.7 million had these cost
savings been fully implemented on June 29, 1997. These anticipated cost
savings result from: (i) the outsourcing of the Company's foam molding
operations; (ii) closure of the Fairfield, California and Memphis, Tennessee
distribution facilities; (iii) consolidation and restructuring of the
Company's European sales and marketing and management functions; (iv)
manufacturing process and productivity improvements at the Rantoul, Illinois
manufacturing facility; (v) renegotiation of the Company's existing insurance
policies; and (vi) renegotiation of certain management and director's
compensation agreements in connection with the Merger. The Company believes
significant opportunities exist to achieve additional cost savings in the
future through renegotiation of vendor supply agreements and outsourcing of
certain other manufacturing processes. There can be no assurance that such
cost savings will be achieved. See "Business--Company History" and "Business--
Cost Reduction Initiatives."
Pursue Complementary Acquisitions. The Company has successfully completed
and integrated strategic acquisitions over the last nine years. In 1996, the
Company acquired Giro, a leading designer and marketer of premium bicycle
helmets, to enhance its penetration of the IBD segment of the bicycle helmet
market. In 1995, the Company acquired AMRE, a major domestic supplier of
bicycle helmets and accessories, to expand the Company's product offering of
bicycle helmets and accessories in the mass merchant channel. In addition,
through the acquisitions of VistaLite in 1994, Blackburn in 1992 and Rhode
Gear in 1989, the Company became a leading supplier of premium bicycle
accessories and successfully leveraged its presence in the IBD channel. The
Company intends to continue to pursue strategic acquisitions selectively in
order to: (i) add to or complement its product offering; (ii) leverage its
significant presence in existing distribution channels; and (iii) strengthen
its position in international markets.
COMPANY HISTORY
Since its founding in 1954, Bell Sports has engaged in the design,
manufacture and marketing of: (i) bicycle helmets; (ii) bicycle accessories;
(iii) auto racing helmets; and (iv) motorcycle helmets. In 1989, the Company
initiated a series of transactions to focus the Company's business on the
growing bicycle helmet and accessory markets. Since 1989, the Company has
sought to enhance its competitive position in the bicycle helmet and accessory
markets through a series of strategic acquisitions including: (i) Rhode Gear
in November 1989; (ii) Blackburn in November 1992; (iii) VistaLite in January
1994; (iv) SportRack in May 1995; (v) AMRE in July 1995; and (vi) Giro in
January 1996. In 1991, the Company divested its motorcycle helmet business and
entered into a long-term licensing agreement for motorcycle helmets to be
marketed under the Bell brand name. In addition, in 1991, the Company opened a
bicycle helmet manufacturing facility in Roche La Moliere, France and, in
November 1996, opened a sales, marketing and distribution office in Australia
to strengthen its worldwide competitive position and better serve these
growing markets.
In fiscal 1996 and 1997, the Company developed a comprehensive program to
improve the Company's operating efficiency and margins by: (i) divesting non-
strategic and lower margin businesses; (ii) reducing
53
<PAGE>
corporate overhead; (iii) reducing distribution and manufacturing costs; and
(iv) expanding the Bell brand name across all distribution channels and
product lines. As a result, the Company divested Service Cycle/Mongoose in
April 1997 and SportRack in July 1997. Furthermore, the Company consolidated
its corporate office and is in the process of consolidating its domestic
distribution centers. In addition, the Company introduced the Bell brand name
into the mass merchant channel on bicycle helmets in fiscal 1996 and bicycle
accessories in fiscal 1998. The Company believes these strategic initiatives
have contributed to EBITDA margin expansion from approximately 5% in fiscal
1996 to 13% in fiscal 1998.
COST REDUCTION INITIATIVES
Since fiscal 1996, the Company has strived to increase profitability
through: (i) divesting non-strategic and lower margin businesses; (ii)
reducing corporate overhead; and (iii) reducing distribution and manufacturing
costs. The Company believes these strategic initiatives have contributed to
the improvement in EBITDA margins from approximately 5% in fiscal 1996 to 13%
in fiscal 1998. During fiscal 1998, the Company identified certain
opportunities which it believes would have resulted in net cost savings in
fiscal 1998 of approximately $3.7 million had these cost savings been fully
implemented on June 29, 1997. The components of these estimated cost savings
are set forth below:
<TABLE>
<CAPTION>
(DOLLARS
IN
THOUSANDS)
<S> <C>
Outsourcing of domestic foam molding............................ $1,246
Renegotiation of management compensation agreements (excluding
Investor management fees)...................................... 648
Consolidation of distribution facilities........................ 501
Renegotiation of insurance policies............................. 580
Manufacturing process and productivity improvements............. 400
Consolidation and restructuring of European operations.......... 292
------
Total estimated cost savings, net............................. $3,667
======
</TABLE>
The Company believes these cost savings will be fully implemented by the end
of fiscal 1999. The Company's actual results and cost savings may differ
materially from those reflected above due to risks, including, without
limitation, (i) higher than expected costs of distributing products from the
Company's alternative distribution facilities, (ii) an inability to source
foam beads and other raw materials employed in the manufacture of helmets on a
cost-effective basis from alternative suppliers and (iii) an increase in other
costs of the Company. Such estimated cost savings do not qualify as pro forma
adjustments under Regulation S-X promulgated under the Securities Act and
constitute forward looking statements within the meaning of the Litigation
Reform Act. Accordingly, such cost savings have been excluded from the pro
forma adjustments in the Holdings Unaudited Pro Forma Historical Condensed
Consolidated Statement of Operations. PricewaterhouseCoopers LLP does not
express any opinion or other form of assurance with respect to the amounts of
any such cost savings. See "Business--Company History" and "Special Note
Regarding Forward-Looking Statements."
PRODUCTS
HELMETS
The Company began designing, manufacturing and marketing auto racing helmets
in 1954 and introduced its first bicycle helmet to the IBD channel in 1975.
Since 1975, the Company has expanded its bicycle helmet line to include a wide
variety of models for adults, youths and infants under the Bell, Bell Pro and
Giro brand names. In fiscal 1998, bicycle helmets accounted for $94.4 million
or 46% of the Company's net sales and auto racing helmets accounted for $5.1
million or 2% of the Company's net sales. According to BMRI, in 1997 the
Company had an approximate 67% share of the U.S. bicycle helmet market, the
largest bicycle helmet market in the world.
54
<PAGE>
Bell. Historically, the Company marketed Bell brand bicycle helmets
exclusively in the IBD channel. In fiscal 1996, the Company made a strategic
decision to use the Bell brand on bicycle helmets sold into the mass merchant
channel. The Bell helmet line consists of four adult, four youth and four
infant models at suggested retail selling prices ranging from $7.99 to $24.99.
Bell Sports also offers in-line skating, snowboarding, snow skiing and water
sports helmets under the Bell brand. Bell bicycle helmets comprised $40.7
million or 20% of the Company's net sales in fiscal 1998.
Bell Pro. In connection with the introduction of the Bell brand into the
mass merchant channel, the Company began marketing bicycle helmets to IBDs
under the Bell Pro brand name. The Company created the distinct Bell Pro line
of bicycle helmets, which offers more advanced features and different designs
than the Bell helmet line sold into the mass merchant channel, in order to
maintain the presence of the Bell name in the IBD channel with high-end
bicycle helmets targeted at bicycling enthusiasts. The Company believes that
Bell Pro helmets are recognized as one of the top bicycle helmet lines in the
IBD market. In order to promote the new helmet line, in fiscal 1996, Bell
Sports initiated the largest advertising campaign in its history, which
included television advertisements. The Bell Pro line consists of 10 adult,
three youth and two infant models at suggested retail selling prices ranging
from $29.99 to $199.99. Bell Pro bicycle helmets comprised $27.8 million or
13% of the Company's net sales in fiscal 1998.
Giro. Giro, acquired by the Company in January 1996, enabled the Company to
enhance its leading share in the enthusiast segment of the premium bicycle
helmet market. The Company believes Giro bicycle helmets represent some of the
most technologically advanced bicycle helmets available worldwide. Giro
bicycle helmets include design features such as increased ventilation,
superior fit mechanisms and proprietary molding technology. The Giro helmet
line consists of 10 adult models, two youth models and one infant model at
suggested retail selling prices ranging from $34.99 to $349.99. The Company
also offers snow skiing and snowboarding helmets under the Giro brand to the
IBD channel. Giro bicycle helmets comprised $25.3 million or 12% of the
Company's net sales in fiscal 1998.
Bell Auto Racing. Bell Sports is a leading manufacturer and marketer of auto
racing helmets worldwide. The Company's auto racing helmets are lightweight,
comfortable and aerodynamic, and are recognized by auto racing professionals
as well as amateurs for their reliability, safety and performance. The Bell
auto racing helmet line consists of 16 models at suggested retail selling
prices ranging from $168.99 to $849.99. The Company believes its position as a
state-of-the-art auto racing helmet manufacturer provides it with significant
product expertise and favorable publicity. Bell auto racing helmets comprised
$5.1 million or 2% of the Company's net sales in fiscal 1998.
BICYCLE ACCESSORIES
Bell Sports is a leading supplier of a broad line of bicycle accessories in
North America and a supplier of bicycle accessories worldwide. Bicycle
accessories comprised approximately $107.8 million or 52% of the Company's net
sales in fiscal 1998.
Bell. Bell Sports is the leading supplier of bicycle accessories to North
American mass merchants. The Company's Bell line of bicycle accessories
consists of broad, well-diversified product offerings including tires, tubes,
seats, locks and children's products. The Company also markets certain bicycle
accessories under the Copper Canyon Cycling, Cycletech, Spoke-Hedz and Fisher-
Price(R) brands. The Company's Bell line of bicycle accessories is sold at
suggested retail selling prices ranging from $3.99 to $59.99. Approximately
85% of the Company's mass merchant bicycle accessories are purchased from
suppliers in Taiwan and China. The Company expects to increase sales of Bell-
branded accessories in fiscal 1999 through more extensive distribution of the
Bell accessories line, which was introduced into the mass merchant channel in
December 1997. Mass merchant bicycle accessories comprised $68.6 million or
33% of the Company's net sales in fiscal 1998, of which $19.8 million
represented Bell-branded accessories.
55
<PAGE>
Blackburn, Rhode Gear and VistaLite. Bell Sports believes that it is a
leader in all of the premium bicycle accessory categories in which it
competes. Sold primarily through the IBD channel, the Company's premium
bicycle accessories are marketed under the Blackburn, Rhode Gear and VistaLite
brands. Blackburn products include premium bicycle pumps, hydration systems,
racks, bottle cages, trainers and tools. Rhode Gear products include bicycle
shuttles (used to transport bicycles on automobiles) and bicycle child seats.
VistaLite products include bicycle lighting systems, including safety lights
and headlights. The Company manufactures approximately 46% of its premium
bicycle accessories, sources approximately 48% from Taiwan and China and
sources the remainder from U.S. vendors. Blackburn, Rhode Gear and VistaLite
bicycle accessories comprised $28.3 million or 14% of the Company's net sales
in fiscal 1998. The Company also serves as a distributor for other bicycle
accessory brands, primarily in international markets. These distribution
efforts comprised $10.8 million or 5% of the Company's net sales in fiscal
1998. Bicycle accessories marketed to the IBD channel comprised $39.2 million
or 19% of the Company's net sales in fiscal 1998.
SALES AND DISTRIBUTION
Bell Sports sells its products primarily through the mass merchant and IBD
channels. The Company distributes its products to these retailers through
approximately 90 independent, commissioned representatives. The
representatives, who have an average of approximately four years of experience
distributing the Company's products, possess extensive product knowledge and
are integral to Bell Sports' efforts to maintain excellent customer
relationships. The Company historically has experienced low turnover and
significant loyalty from these representatives. The Company directs its
representatives through an experienced in-house sales team of three national
and five regional sales managers and provides store-level support with field
merchandisers who visit select customers regularly to assist them with
merchandising, point-of-purchase signage and selling techniques.
The Mass Merchant Channel. The Company markets products to value-conscious
customers primarily through the mass merchant channel, including retailers
such as Wal-Mart, K-Mart, Costco, Sears and Fred Meyer. The Company estimates
that nearly 65% of the end-users in this channel are under the age of 18. The
Company believes that the expansion of the Bell brand into the mass merchant
channel provides high visibility to a young demographic category and allows
the Company to build brand recognition early in consumers' lives. The Company
is a leading supplier of bicycle helmets and accessories to a majority of mass
merchants and presently has 100% of the shelf space for bicycle helmets and
accessories in Wal-Mart and 100% of the shelf space for bicycle helmets in K-
Mart. The Company estimates that its market share is in excess of 70% of
bicycle helmets and 60% of accessories sold through the U.S. mass merchant
channel. Sales of products through the mass merchant channel comprised
approximately $109.4 million or 53% of the Company's net sales in fiscal 1998.
See "Risk Factors--Customer Concentration."
The Company supports its mass merchant customer relationships by working
closely with its retailers to increase their effectiveness in selling the
Company's products. Category management services provided by the Company
include: (i) product mix optimization; (ii) retail shelf management, including
plan-o-gram services; (iii) EDI and inventory management programs; and (iv)
field merchandising. The Company believes these services are important to mass
merchants in their selection of bicycle helmets and accessories vendors.
The IBD Channel. The Company markets products targeted to bicycling
enthusiasts primarily through the IBD channel, including 3,500 stores in the
U.S. such as bicycle chains, independent bicycle shops, specialized sporting
goods stores and mail order catalogs. The Company estimates that nearly 75% of
end users in this channel are adult enthusiasts; as a result, a majority of
the Company's helmets and accessories are premium products sold at mid- to
high-price points. The Company estimates that it has approximately 65% market
share of bicycle helmets and a leading market position in each of its major
accessory product categories sold through the U.S. IBD channel. Sales of
products through the IBD channel comprised approximately $92.8 million or 45%
of the Company's net sales in fiscal 1998.
56
<PAGE>
The Company works with its IBD customers to increase their effectiveness in
selling the Company's products through services such as optimal merchandising
and selling strategies and high visibility point-of-purchase signage. In May
1998, REI presented the Company with its prestigious "Vendor of the Year"
award, ranking Bell Sports number one in service quality among REI's vendors.
MARKETING
The goal of the Company's marketing program is to continue to build its Bell
brand and other brands' leading positions as high performance bicycle helmet
and accessory brands. The Company's marketing effort is focused on
communicating the innovation, design, quality and safety features of the
Company's products and is comprised of a mixture of print advertising
(including in leading cycling periodicals such as Bicycling and Mountain Bike
Magazine), trade promotions and grass-roots marketing. The Company's
advertising expenditures were approximately $14.7 million, $9.1 million and
$5.5 million in fiscal 1996, 1997 and 1998, respectively. The Company's
advertising expenditures in fiscal 1996 include a one-time television
advertising campaign in excess of $5.6 million to build and strengthen the
Bell family of brands in connection with the launch of the Bell Pro helmet
line and the expansion of the Bell brand into the mass merchant channel.
The Company believes endorsement of its products by professional bicyclists,
auto racing professionals and professional snow skiers reinforces Bell Sports'
reputation as a market leader and innovator. The Company's bicycle helmets are
endorsed by leading bicyclists such as Greg LeMond (three-time winner of the
Tour de France), John Tomac (former national mountain biking champion) and the
Volvo Cannondale Mountain Bike Team. The Company's auto racing helmets are
endorsed by auto racing professionals such as Indy car driver Michael
Andretti. The Company's recently introduced ski helmets are endorsed by Picabo
Street (Olympic gold medalist). The Company also utilizes the Bell Sports
Traveling Helmet Museum at high visibility events to inform the general public
and to reinforce the leadership of Bell helmets. In addition, the Company
sponsors the National SAFE KIDS Campaign, which focuses on safety issues for
children and promotes awareness of helmets as an integral component of
bicycling safety for children.
INTERNATIONAL
Bell Sports has achieved significant growth in international sales from
$12.8 million in fiscal 1994 to $50.8 million in fiscal 1998. The Company
believes that significant opportunities exist to continue to grow sales in
established European and Pacific Rim markets. Compared to the U.S. market,
these international bicycle helmet and accessory markets are highly fragmented
and regionally focused, with smaller companies offering narrower product lines
and limited marketing and customer service support. The Company believes that
high quality, dependable suppliers of a broad line of products such as Bell
Sports are positioned favorably to service such international markets. In
September 1998, the Company reorganized its international management structure
as a part of the Company's increased focus on international growth and
profitability. See Note 14 to the Consolidated Financial Statements of Bell
Sports Corp. appearing elsewhere herein.
The following is a discussion of each of the Company's international
operating divisions:
Bell Sports Canada. The Bell Sports division in Canada ("Bell Sports
Canada"), located in Granby, Quebec, markets its products to the Canadian IBD
and mass merchant channels. Bell Sports Canada markets its products primarily
under the same brands as those in the United States. The Company estimates
that its share of the Canadian bicycle helmet market is approximately 70%,
which represents an increase from 58% in 1995. The Company attributes this
increase in market share to the successful penetration of the Canadian mass
merchant channel through the development of relationships with leading
retailers such as Canadian Tire and Wal-Mart Canada. In addition, in fiscal
1997, the Company changed its distribution and sales strategy in Canada by
marketing its Bell and Giro premium branded bicycle helmets with a direct
sales force instead of through third-party distributors. In Canada, the
Company also serves as a distributor for certain other bicycle accessory
brands comprising $7.2 million of the Company's net sales in fiscal 1998.
Sales of Bell Sports Canada comprised approximately $22.7 million or 11% of
the Company's net sales in fiscal 1998.
57
<PAGE>
Bell Sports Europe. Giro Ireland, Limited ("Giro Ireland"), headquartered in
Limerick, Ireland, assembles, markets and distributes bicycle helmets across
Europe under the Giro brand name. EuroBell S.A. ("EuroBell"), located in Roche
La Moliere, France, manufactures, markets and distributes bicycle helmets and
bicycle accessories to the IBD and mass merchant channels throughout Europe.
EuroBell markets its bicycle helmets in Europe under the Bell, Bell Pro and
Bike Star(TM) brand names and certain private label arrangements, and its
bicycle accessories under the Bell, Rhode Gear, Blackburn and VistaLite brand
names. The Company believes it currently has approximately a 29% and a 1%
share of the European bicycle helmet and accessory markets, respectively.
European sales of EuroBell and Giro Ireland comprised approximately
$22.2 million or 11% of the Company's net sales in fiscal 1998.
In fiscal 1998, the Company initiated a marketing plan to increase direct
sales and enhance profitability in Europe. As a result of its efforts, the
Company will introduce its products for sale to more than 10 new European
retailers, including Carrefour, the largest mass merchant in Europe. In
addition, the Company recently closed its Paris, France sales office and
consolidated the sales and marketing functions of EuroBell and Giro Ireland to
focus its sales and marketing efforts and to reduce overhead costs.
Bell Sports Australia. The Bell Sports division in Australia ("Bell Sports
Australia"), located in Sydney, Australia, began operating in November 1996 as
a sales, marketing and distribution office servicing Australia, New Zealand
and the Pacific Rim. Prior to November 1996, Bell Sports marketed its products
in Australia through third-party distributors. The division markets bicycle
helmets to the IBD and mass merchant channels under the Bell, Bell Pro and
Giro brand names and bicycle accessories under the Bell, Rhode Gear, Blackburn
and VistaLite brand names. The Company has developed a significant market
presence since initiating a direct sales and marketing approach in fiscal
1997, and estimates that its market share in the Australian bicycle helmet
market has grown to approximately 17%. Sales of Bell Sports Australia
comprised approximately $5.8 million or 3% of the Company's net sales in
fiscal 1998.
MANUFACTURING
The Company currently manufactures and assembles its bicycle helmets at its
manufacturing and distribution facilities in Rantoul, Illinois and Roche La
Moliere, France. The Company also assembles helmets at its facilities in
Granby, Quebec; Limerick, Ireland; and Santa Cruz, California. The assembly
facilities in Canada and Europe enable the Company to provide its customers
with faster response times and lower freight and duty costs than if the
Company shipped its products exclusively from the United States. The Rantoul,
Illinois facility also manufactures and assembles auto racing helmets, bicycle
child seats and certain bicycle shuttles. Other IBD and mass accessories are
manufactured by outside suppliers, including some in Taiwan and China. During
fiscal 1998, the Company negotiated a letter of intent to sell the assets of
its domestic foam molding facility in Rantoul, Illinois. In September 1998,
the Company consummated such asset sale and entered into a sublease with the
purchaser. In addition, the Company entered into an agreement with the
purchaser pursuant to which the purchaser has agreed to provide the Company
with foam helmet liners and certain related components. The Company believes
that sufficient capacity exists through its own bicycle helmet assembly
facilities and current suppliers to support its anticipated growth in both
bicycle helmets and accessories. Furthermore, the Company believes that
additional capacity can be added at these facilities without significant
additional capital expenditures.
The Company's quality assurance program has been structured to meet the
strict product and manufacturing quality performance requirements of the
International Standards Organization ("ISO"). Compliance with ISO requirements
is monitored in each phase of the manufacturing process. Product safety
testing on each production run is performed on a random sampling basis to
ensure compliance with such manufacturing standards, as well as one or more of
the standards promulgated by The SNELL Memorial Foundation, the American
National Standards Institute, or the American Standards for Testing and
Materials, all of which are independent organizations which establish and
publish voluntary safety standards for helmets. The Company also assists in
the development of new performance standards for bicycle helmets and is
represented on several standards committees for bicycle helmets on a worldwide
basis. The Company's research and development team actively
58
<PAGE>
participated in the development of the new industry-wide Consumer Product
Safety Commission bicycle helmet safety standard which gives bicycle helmet
manufacturers a one-year period, ending March 15, 1999, to comply with the new
standard. The Company believes that virtually all of its bicycle helmets are
already in compliance with the new standard. Before new products are
introduced, the Company conducts extensive testing of its products for safety
and quality. The Company believes that this active in-house approach to
product development and development of safety standards assists in the
reduction of the time and expense relating to the Company's development of new
products.
INDUSTRY
Bicycle helmets and accessories represent components of the U.S. bicycling
industry. According to BMRI, the bicycling industry has grown significantly in
the 1990s, from $3.6 billion in 1990 to $5.4 billion in 1997, representing a
6% compounded annual growth rate. The National Sporting Goods Association
estimates that bicycling, including mountain biking, is among the most popular
participation sports in the United States. The Company believes that
continuing interest in bicycling in part reflects the increasing awareness of
the health benefits of exercise and active lifestyles.
Prior to the mid-1980s, there was limited demand for bicycle helmets in the
U.S. Helmets were generally available in only a few models and styles, and
usage was limited to serious bicycling enthusiasts and racers. Since then, the
Company believes that general demand for bicycle helmets has increased as a
result of (i) the increase in safety awareness among consumers and the
adoption of mandatory helmet legislation by several states, including
California and New York; (ii) the popularity of bicycling, including
speciality segments such as mountain biking; and (iii) the introduction of new
designs, styles and materials that have broadened consumer appeal.
The Company believes that helmet usage in international markets is
substantially less than in the United States. However, the Company believes
that the current international helmet market appears to exhibit
characteristics similar to the United States market in the mid-1980s, such as
low market penetration, a developing infant and youth helmet market in certain
regions, the beginnings of a trend toward helmet usage by professional
bicyclists and increasing availability of bicycle helmets in several
distribution channels.
PRODUCT LIABILITY
The philosophy of the Company is to defend vigorously all product liability
claims. Although the Company intends to continue to defend itself aggressively
against all claims asserted against it, current pending proceedings and any
future claims are subject to the uncertainties attendant to litigation and the
ultimate outcome of any such proceedings or claims cannot be predicted. Due to
the self insurance retention amounts in the Company's product insurance
coverage, the assertion against the Company of a large number of claims could
have a material adverse effect on the Company. In addition, the successful
assertion against the Company of any, or a series of large, uninsured claims,
or of one or a series of claims exceeding insurance coverage, could have a
material adverse effect on the Company.
Due to certain deductibles, self-insured retention levels and aggregate
coverage amounts applicable under the Company's insurance policies, the
Company may bear responsibility for a significant portion, if not all, of the
defense costs (which include attorney's fees, settlement costs and the cost of
satisfying judgments) of any claim asserted against the Company or its
subsidiaries. There can be no assurance that the insurance coverage, if
available, will be sufficient to cover one or more large claims or that the
applicable insurer will be solvent at the time of any covered loss. Further,
there can be no assurance that the Company will obtain insurance coverage at
acceptable levels and costs in the future.
The Company's current product liability insurance for bicycling and auto
racing products covers claims based on occurrences within the policy period up
to a maximum of $50.0 million in the aggregate in excess of the Company's
self-insured retention of $1.0 million per occurrence for bicycle and auto
racing helmets and in excess of the Company's self-insured retention of
$250,000 for other bicycle-related products.
59
<PAGE>
Insurance coverage for products manufactured by Giro, prior to the
acquisition by the Company in January 1996, include self-insured retentions of
$0.5 million per occurrence and $1.5 million in the aggregate for all product
claims, with $55.0 million coverage in excess of the self-insured retention
levels. The Company maintains an active role in the management of all Giro
related litigation. Giro claims served after December 31, 1996 are insured
under the same coverage provided to the Company.
From 1954 to 1991, the Company manufactured, marketed and sold motorcycle
helmets. The Company sold its motorcycle helmet manufacturing business in June
1991. Even though the purchaser assumed all responsibility for product
liability claims arising out of helmets manufactured prior to the date of the
disposition, the Company has paid certain costs associated with the defense of
such claims. If the purchaser is for any reason unable to pay the judgment,
settlement amount or defense costs arising out of any 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 any claims. The Company has licensed the Bell trademark to the purchaser
for use on motorcycle helmets. The Company believes that, by virtue of its
status as licensor and the fact that such motorcycle helmets carry the Bell
name, it is possible that the Company could be named as a defendant in actions
involving liability for the motorcycle helmets manufactured by the purchaser
of the Company's motorcycle helmet business. In fiscal 1998, the Company
secured insurance coverage for certain liabilities associated with its
motorcycle helmets manufactured or licensed prior to June 1991.
In fiscal 1998, the Company secured a ten-year policy from AIG and Chubb for
insurance coverage for motorcycle helmets manufactured or licensed prior to
June 1991. The policy covers up to a maximum of $50.0 million in the aggregate
in excess of the Company's self-insured retention of $1.0 million per
occurrence, excluding all previous payments made on existing claims, in excess
of $2.0 million in the aggregate for known claims or $4.0 million in the
aggregate for incurred but not reported claims and new occurrences. The policy
covers all claims except the February 1996 and February 1998 judgments against
the Company.
PROPERTIES
The following table sets forth a brief description of the properties of the
Company and its subsidiaries:
<TABLE>
<CAPTION>
LOCATION GENERAL DESCRIPTION
-------- -------------------
<C> <S>
San Jose, CA.............. Corporate headquarters and sales, marketing,
administration, research and development facility
of approximately 63,600 square feet
Rantoul, IL (1)........... Administration, manufacturing, and distribution
facility of approximately 294,600 square feet on 34
acres
Santa Cruz, CA............ Giro sales, marketing, administration,
manufacturing, distribution and research and
development facility of approximately 41,300 square
feet
Scottsdale, AZ............ Administration offices of approximately 1,600
square feet
York, PA (2).............. Distribution center of approximately 300,000 square
feet
Roche La Moliere, France.. Administrative, manufacturing and distribution
facility of approximately 38,700 square feet on 2.9
acres
Limerick, Ireland......... Giro sales, manufacturing and distribution facility
of approximately 18,750 square feet
Granby, Quebec............ Sales, marketing, administration and distribution
facility of approximately 136,000 square feet
Calgary, Alberta.......... Distribution facility of approximately 14,000
square feet
Sydney, Australia......... Sales, marketing, administration and distribution
facility of approximately 21,500 square feet
</TABLE>
60
<PAGE>
- ---------------------
All locations are leased except for the York, Pennsylvania facility and the
Roche La Moliere facility, which is held under a lease-purchase arrangement.
(1) The Company announced its intention to sell the assets of the domestic
foam plant and sublease the facility in fiscal 1999. The foam plant
represents approximately 27,000 square feet and is detached from the other
facilities.
(2) The Company announced its intention to do a sale-leaseback transaction on
the York facility in fiscal 1999.
COMPETITION
The markets for the Company's bicycle helmets and accessories are highly
competitive, and the Company faces competition from a number of sources in
each of its product lines. Some competitors are part of large bicycle
manufacturers and may be better able to promote bicycle helmet and accessory
sales through bicycle sales programs. Competition for the Company's products
are primarily based on price, quality, customer service, brand name
recognition, product offerings, product features and style. Although there are
no significant technological or manufacturing barriers to enter the bicycle
helmet and accessory businesses, factors such as brand recognition and
customer relationships may discourage new competitors from entering the
business. New competitors entered the bicycle helmet market in the last
several years and pricing pressures have increased as a result of such
competition. There can be no assurance that additional competitors will not
enter the Company's existing markets, nor can there be any assurance that the
Company will be able to compete successfully against existing or new
competition.
ENVIRONMENTAL MATTERS
The Company is subject to many federal, state and local requirements
relating to the protection of the environment, and the Company has made, and
will continue to make, expenditures to comply with such provisions. The
Company believes that its operations are in material compliance with these
laws and regulations and does not believe that future compliance with such
laws and regulations will have a material adverse effect on its results of
operations or financial condition. If environmental laws become more
stringent, the Company's environmental capital expenditures and costs for
environmental compliance could increase in the future.
In the ordinary course of its business, the Company is required to dispose
of certain waste at off-site locations. During fiscal 1993, the Company became
aware of an investigation by the Illinois EPA 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 EPA 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, Illinois filed a complaint with
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 as well as such other relief as the Pollution Control Board
deemed appropriate. The Pollution Control Board has approved a settlement
between Illinois and the Company pursuant to which the Company paid $69,000 to
Illinois and disposed of certain materials in a container at the waste
disposal site at an authorized disposal facility. In connection with this
matter, the disposal site owner filed a cross-claim against the Company that
sought to have penalties assessed against the Company rather than the disposal
site owner. The disposal site owner later asserted that if it is required to
meet any new or enhanced closure requirements as a result of the Illinois
claim against the landfill, the costs of such additional closure requirements
should be imposed on the Company. On May 21, 1998, the Pollution Control Board
found that the Company was not liable for any of the violations alleged by the
disposal site owner, and dismissed the cross-claim.
In an unrelated matter, the Company recently received a De Minimis Notice
Letter and Settlement Offer from the USEPA under CERCLA for the OII Site in
Monterey Park, California. CERCLA imposes liability for the costs of cleaning
up, and certain damages resulting from, releases and threatened releases of
hazardous substances. Although courts have interpreted CERCLA liability to be
joint and several, where feasible, the
61
<PAGE>
liability typically is allocated among the responsible parties according to a
volumetric or other standard. The USEPA apparently has identified the Company
as a de minimis potentially responsible party based on several waste shipments
the Company allegedly sent to the site in the late 1970s and in 1980. USEPA's
settlement offer to the Company is in the range of $29,000 to $36,000. The
settlement would cover all past and expected future costs at the OII Site,
and, with limited exception, provide the Company with covenants not to sue
from the United States and California, and contribution protection from
private parties.
In another unrelated matter, the Company recently received a General Notice
Letter from USEPA under CERCLA for the Casmalia disposal site in Santa Barbara
County, California. USEPA apparently has identified the Company as a
potentially responsible party at the site. The Company has no further
information at this time about the basis for USEPA's assertion. Accordingly,
it is not possible at this time to evaluate the merits of the claim or to
provide an estimate as to potential exposure.
EMPLOYEES
The Company employed approximately 1,320 persons as of June 27, 1998. The
Company is a party to collective bargaining agreements at two of its
facilities, covering approximately 52 employees. The Company's collective
bargaining agreement with the Retail, Wholesale and Department Store Union
covers employees at the Company's York, Pennsylvania facility and expires in
December 2000. The Company's collective bargaining agreement with the Service
Employees International Union covers employees at the Company's Fairfield,
California facility and expires in December 1999.
LEGAL PROCEEDINGS
Product Liability. Due to the nature of the business of the Company, at any
particular time the Company may be a defendant in a number of product
liability lawsuits for serious personal injury or death allegedly related to
the Company's products and, in certain instances, products manufactured by
others. Many such lawsuits against the Company seek damages, including
punitive damages, in substantial amounts.
During each of the last five fiscal years the Company has been served with
complaints in the following number of cases: 11 cases in fiscal 1994, five
cases in fiscal 1995, 12 cases in fiscal 1996, 15 cases in fiscal 1997 and 14
cases in fiscal 1998. Of the 14 cases served in fiscal 1998, which includes
Giro and AMRE lawsuits, six involve bicycles, one involves bicycle accessories
and seven involve bicycle helmets. As of December 2, 1998, the Company has
been served with six complaints during fiscal 1999, of which none involve
bicycles, three involve bicycle accessories, one involves a bicycle helmet and
two involve motorcycle helmets. Of the 20 cases from fiscal 1998 and fiscal
1999 combined, four cases involve a claim relating to death, five cases
involve claims relating to serious, permanently disabling injuries and 11
cases involve less serious injuries such as broken bones or lacerations.
Typical product liability claims include allegations of failure to warn,
breach of express and implied warranties, design defects and defects in the
manufacturing process.
As of December 2, 1998, there were 40 lawsuits pending relating to injuries
allegedly suffered from products made or sold by the Company. Of the 40
lawsuits, 12 involve motorcycle helmets, 12 involve bicycle helmets, one
involves an auto racing helmet, two involve bicycle pedals, 10 involve
bicycles and three involve bicycle accessories. None of the 40 product
liability lawsuits pending against the Company as of December 2, 1998 are
scheduled for trial prior to December 31, 1998.
In February 1996, a Toronto, Canada jury returned a verdict against the
Company based on injuries arising out of a 1986 motorcycle accident. The jury
found that the Company 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 the Company would be
responsible and the legal fees and tax implications associated therewith are
estimated to be between $3.0 and $4.0 million (based on current exchange
rates). This claim arose during a period in which the Company was self-
insured. The Company has filed an appeal of the Canadian verdict.
62
<PAGE>
In February 1998, a Wilkes-Barre, Pennsylvania jury returned a verdict
against the Company relating to injuries sustained in a 1993 motorcycle
accident. The judgment totaled $6.8 million, excluding any interest, fees or
costs which may be assessed. This claim arose during a period in which the
Company was self-insured. The Company filed post-trial motions to set aside
the jury's verdict which were denied. The Company is in the process of
appealing the judgment.
In June 1998, a Wilmington, Delaware jury returned a verdict against the
Company relating to injuries sustained in a 1991 off-road motorcycle accident.
The judgment totaled $1.8 million, excluding any interest, fees or costs which
may be assessed. The claim is covered by insurance; however, the Company is
responsible for a $1.0 million self-insured retention. The Company has filed
post-trial motions to set aside the jury's verdict and to appeal any judgment
against the Company that might be entered in the action.
Based on management's extensive consultations with legal counsel prosecuting
the appeals and the Company's experience in pursuing reversals and settlements
after the entry of judgments against the Company, management currently
believes that the ultimate outcome of the pending judgments will not have a
material adverse affect on the financial condition of the Company.
Accordingly, the Company has only established reserves for estimated costs for
the defense of these and other known claims. The Company believes that after
giving effect to the Transactions, it will have adequate cash balances and
sources of capital available to satisfy such pending judgments. However, there
can be no assurance that the Company will be successful in appealing or
pursuing settlements of these judgments or that the ultimate outcome of the
judgments will not have a material adverse effect on the liquidity or
financial condition of the Company.
Certain Stockholder Litigation. Following the announcement of the Merger
Agreement, three purported class action lawsuits were filed in Delaware
Chancery Court seeking preliminary and permanent injunctive relief against the
consummation of the Merger or, alternatively, the recovery of damages in the
event the Merger is consummated. The complaints, which were filed by Jeffrey
Kaplan, Jerry Krim and Cyrus Schwartz, purported stockholders of Holdings,
name Holdings, HB Acquisition, Chase Capital Partners, CBCI and Holdings'
current directors as defendants. To the knowledge of Holdings, none of the
complaints has been served. The complaints allege, among other things, that
the Merger is unfair to Holdings' public stockholders and that certain
defendants who are expected to exchange a portion of their shares of Common
Stock, options to purchase shares of Common Stock or other Common Stock-based
awards held by them for shares of common stock of HB Acquisition in connection
with the Merger have a conflict of interest which has caused them, and
Holdings' directors, to breach their fiduciary duties to Holdings'
stockholders. The lawsuit filed by Jeffrey Kaplan was subsequently withdrawn,
without prejudice to refile. Holdings believes that the allegations contained
in the complaints are without merit and intends to vigorously defend each
action.
63
<PAGE>
MANAGEMENT
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age as of October 5, 1998 and
position of each person who serves as a director or executive officer of
Holdings:
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Terry G. Lee.............. 49 Chairman
Mary J. George............ 47 Chief Executive Officer, President, and Director
Robert E. Collins......... 52 Chief Financial Officer
William L. Bracy.......... 57 U.S. Group President
William M. Barnum, Jr. ... 44 Director
Kim G. Davis.............. 44 Director
John F. Hetterick......... 52 Director
Edward L. McCall.......... 31 Director
Tim R. Palmer............. 41 Director
John M. Sullivan.......... 62 Director
</TABLE>
Each director serves a term expiring at the next annual meeting of
stockholders or until his successor shall have been elected and qualified.
Executive officers of Holdings are elected annually and serve until their
earlier resignation or removal.
Terry G. Lee serves as the Chairman of Holdings. Prior to the consummation
of the Merger, Mr. Lee also served as the Chief Executive Officer of Holdings.
Mr. Lee joined Bell Helmets, Inc. (a predecessor of Holdings, "Bell Helmets")
as Director and the President and Chief Operating Officer in 1984, and became
Chief Executive Officer in 1986 and Chairman in 1989. Mr. Lee served as
President of Holdings from 1984 until the consummation of the AMRE Merger in
1995. He was also a stockholder and consultant to Echelon Sports Corporation
(a predecessor of Holdings) prior to its acquisition by Holdings in 1989.
Prior to joining Bell Helmets, Mr. Lee spent 14 years with Wilson Sporting
Goods where his last position was Senior Vice President--Sales and
Distribution.
Mary J. George continues to serve as President and became Chief Executive
Officer and a Director of Holdings upon consummation of the Merger. Ms. George
joined Holdings in October 1994 as the Senior Vice President of Marketing and
Strategic Planning, became President--Specialty Retail Division in July 1995,
became President--North America in December 1995, and became President and
Chief Operating Officer in April 1997. Prior to joining Holdings, Ms. George
served as President of Denar Corporation from January 1993 to August 1994 and
as President of the WestPointe Group from January 1991 to December 1992.
Robert E. Collins has served as the Chief Financial Officer of Holdings
since October 1998. From December 1995 until June 1998, Mr. Collins was Vice
President and Chief Financial Officer of Zilog, Inc., a semi-conductor
manufacturer and designer. Prior to his employment at Zilog, Mr. Collins
served as Senior Vice President and Chief Financial Officer of Chem Trak, Inc.
from December 1993 to December 1995. From October 1979 until August 1993, Mr.
Collins held various management positions, including the positions of Vice
President and Treasurer, with Syntex Corporation.
William L. Bracy joined Holdings in January 1998 as U.S. Group President.
Prior to joining Holdings, Mr. Bracy served as Executive Vice President of
Mattel Europa and as a President of Mattel Games, both divisions of Mattel,
Inc., from September 1995 to December 1997. From August 1990 to September
1995, Mr. Bracy served as President for Lenox Brands and Lenox China &
Crystal, both divisions of Lenox, Inc.
64
<PAGE>
William M. Barnum, Jr. became a director of Holdings upon consummation of
the Merger. Mr. Barnum joined Brentwood in 1984 and is presently a managing
member of Brentwood Private Equity, L.L.C. and Brentwood Private Equity
Management, L.L.C. Mr. Barnum is a director of Rental Service Corporation,
Classroom Connect Holdings, Inc., Aspen Marketing Group, Inc., WorldPoint
Logistics, Inc. and Quiksilver Corporation.
Kim G. Davis became a director of Holdings upon consummation of the Merger.
Mr. Davis is a Managing Director and co-founder of Charlesbank, a private
investment firm and the successor to Harvard Private Capital Group, Inc.,
which he joined in 1998. Charlesbank is the investment advisor to Charlesbank
Equity Fund IV, Limited Partnership. From 1995 to 1998, Mr. Davis was a
private investor, and from 1988 to 1994, he was a General Partner of Kohlberg
& Co. He is a director of Westinghouse Air Brake Company.
John F. Hetterick became a director of Holdings upon consummation of the
Merger. Since 1997, Mr. Hetterick has been an independent consultant in the
consumer products industry. From 1992 to 1997, Mr. Hetterick was President and
Chief Executive Officer of Rollerblade, Inc., a manufacturer of in-line
skates. Mr. Hetterick also served as President of Tonka International, a
division of Tonka Corporation, a toy manufacturer, from 1989 to 1991, and Vice
President of Marketing of Pepsi-Cola International, a manufacturer and
distributor of soft drinks, from 1986 to 1989.
Edward L. McCall became a director of Holdings upon consummation of the
Merger. Mr. McCall joined Brentwood in 1993 and is presently a managing member
of Brentwood Private Equity, L.L.C. and Brentwood Private Equity Management,
L.L.C. Mr. McCall currently is a director of Classroom Connect Holdings, Inc.
Tim R. Palmer became a director of Holdings upon consummation of the Merger.
Mr. Palmer is a Managing Director and co-founder of Charlesbank, a private
investment firm and the successor to Harvard Private Capital Group, Inc.,
which he joined in 1990. Charlesbank is the investment advisor to Charlesbank
Equity Fund IV, Limited Partnership. He is a director of The WMF Group, Ltd.
John M. Sullivan became a director of Holdings upon consummation of the
Merger. From October 1987 to January 1993, Mr. Sullivan was Chairman of the
Board and Chief Executive Officer of Prince Holdings, Inc. He is presently
Chairman of the Board of Directors of Silver Cinemas International, Inc. and a
director of The Scotts Company and Rental Service Corporation.
65
<PAGE>
EXECUTIVE OFFICER COMPENSATION
SUMMARY COMPENSATION TABLE
The table below summarizes the annual and long-term compensation paid to
each of the Company's Chief Executive Officer, the three next most highly
compensated executive officers and one former executive officer (the "Named
Executive Officers") for all services rendered to the Company during its last
three fiscal years, in accordance with the Commission rules relating to
disclosure of executive compensation.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
----------------------------------------- -----------------------
RESTRICTED SECURITIES ALL OTHER
NAME AND FISCAL OTHER ANNUAL STOCK UNDERLYING COMPEN-
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (1) AWARDS($)(2) OPTIONS SATION(3)
------------------ ------ ------ ----- ---------------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Terry G. Lee (4) 1998 $410,962 $152,750 $200,000 $5,773
Chairman 1997 392,885 50,000 209,363 5,155
1996 375,027 100,000 2,124
Harry H. Manko 1998 255,810 9,493
Vice Chairman (5) 1997 251,967 8,480
1996 352,296 $684,200 35,000 3,644
Mary J. George (6) 1998 298,209 265,000 700,000 5,411
President and Chief 1997 239,962 50,000 148,500 3,193
Executive Officer 1996 207,069 167,726 125,000 1,626
Howard A. Kosick 1998 205,089 100,000 50,000 5,470
U.S. Group President 1997 195,039 50,000 111,855 4,581
1996 165,016 50,000 4,181
Linda Bounds 1998 161,847 100,800 119,012 50,000 20,000 4,579
Chief Financial Officer, 1997 120,539 12,000 30,000 2,255
Senior Vice President, 1996
Secretary and Treasurer
</TABLE>
- -------------------
(1) The Fiscal 1998 amount includes, in part, relocation reimbursements paid
by the Company to Ms. Bounds of $104,042. The Fiscal 1996 amount
includes, in part, relocation reimbursements paid by the Company to
Ms. George of $163,326.
(2) Fiscal 1998 awards consist solely of restricted phantom stock units.
Phantom stock units were granted as of August 28, 1997 to the Named
Executive Officers as follows: Mr. Lee 21,763 units, Ms. George
10,881 units, Mr. Kosick 5,441 units and Ms. Bounds 5,441 units. Such
phantom stock unit awards fully vested upon consummation of the Merger.
In addition, in accordance with the terms of her employment agreement
with the Company, 32,324 and 30,769 phantom stock units were granted to
Ms. George on August 23, 1997 and September 12, 1997, respectively. Such
additional phantom stock units fully vested upon consummation of the
Merger. During Fiscal 1997, each of Mr. Lee, Ms. George and Mr. Kosick
were awarded 7,082 shares of restricted stock. Each restricted stock
award fully vested upon consummation of the Merger. At the end of Fiscal
1998, Mr. Lee held 21,763 phantom stock units and 4,721 shares of
restricted stock with an aggregate value of $248,506, Ms. George held
73,974 phantom stock units and 4,721 shares of restricted stock with an
aggregate value of $738,156 and Ms. Bounds held 5,441 phantom stock units
with an aggregate value of $51,027. In connection with his termination of
employment with the Company, the Company agreed that Mr. Kosick's
restricted stock and phantom stock units would vest. The holder of a
Company phantom stock unit is entitled to be paid in full therefor when
such phantom stock unit vests. Mr. Kosick received a payment of $50,705
in connection with the vesting of his phantom stock units.
66
<PAGE>
(3) The Fiscal 1998 amounts include the following annual Company contributions
to the Bell Sports Corp. Employees' Retirement and 401(k) Plan: Mr. Lee
$5,077, Mr. Manko $4,807, Ms. George $4,715, Mr. Kosick $5,062, and Ms.
Bounds $4,387. The Fiscal 1998 amounts also include the following life
insurance premiums paid by the Company: Mr. Lee $696, Mr. Manko $4,686,
Ms. George $696, Mr. Kosick $408 and Ms. Bounds $192.
(4) Prior to consummation of the Merger, Mr. Lee was the Chairman and Chief
Executive Officer of Holdings. Upon consummation of the Merger, Mr. Lee
became Chairman of the Issuer and Holdings.
(5) Mr. Manko became an employee of the Company on July 3, 1995, upon
consummation of the AMRE Merger. Pursuant to a prior employment agreement
with AMRE, the Company paid Mr. Manko $684,200 in lieu of annual bonuses
through June 30, 1996 and all future installments of the signing bonus.
(6) Prior to consummation of the Merger, Ms. George was the President and
Chief Operating Officer of Holdings. Upon consummation of the Merger, Ms.
George became President and Chief Executive Officer of the Issuer and
Holdings.
OPTION GRANTS IN LAST FISCAL YEAR
The table below provides information relating to grants of stock options by
the Company during Fiscal 1998 to each of the Named Executive Officers. The
Company has never granted any stock appreciation rights.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
NUMBER OF % OF TOTAL AT ASSUMED ANNUAL RATES OF
SECURITIES STOCK OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO TEN-YEAR OPTION TERM (2)
OPTIONS EMPLOYEES EXERCISE EXPIRATION ----------------------------
NAME GRANTED (#)(1) IN FISCAL YEAR PRICE DATE 5% 10%
- ---- -------------- -------------- -------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Linda K. Bounds......... 20,000 9% 9.19 08/28/07 115,591 292,930
Increase in market value of Common Stock for all stockholders at assumed
annual rates of stock price appreciation over 10-year period above. (3).. $82.3 million $208.6 million
</TABLE>
- -------------------
(1) These awards were made pursuant to the 1992 Plan. Under this plan, the
exercise price per share must not be less than 100% of the fair market
value of one share of Common Stock on the date of grant of option. The
options vest ratably in one-third increments over a three-year period and
may not be exercised ten years after the date of grant. In the event of a
change in control, the Board of Directors may accelerate the vesting of
these options.
(2) The gains shown in these columns result from calculations assuming 5% and
10% growth rates as set by the SEC and are not intended to forecast future
stock price performance.
(3) These amounts represent the increase in the market value of outstanding
shares of Common Stock (approximately 13.9 million) as of June 27, 1998
that would result from the same stock price assumptions used to show the
Potential Realizable Values for the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The table below provides certain information relating to the stock options
held by each of the Named Executive Officers at the end of Fiscal 1998. No
stock options were exercised by the Named Executive Officers during
Fiscal 1998.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED IN-
THE-MONEY OPTIONS AT FY-
NUMBER OF SECURITIES END
UNDERLYING UNEXERCISED (BASED UPON $9.313 PER
OPTIONS AT FY-END SHARE)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Terry G. Lee................ 224,983 0 $491,166 $ 0
Harry Manko................. 63,744 11,666 310,890 0
Mary George................. 99,500 49,000 224,011 10,584
Linda Bounds................ 33,125 20,000 74,700 4,320
</TABLE>
67
<PAGE>
DIRECTOR COMPENSATION
In Fiscal 1998, each non-employee director received 2,212 options at $4.52
per share in lieu of a cash retainer fee and 2,000 options at $9.03 per share
for continuing service on the Board.
In Fiscal 1998, Phillip D. Matthews, a director of the Company prior to
consummation of the Merger, received aggregate compensation of $45,600 for
consulting services provided to the Company.
EMPLOYMENT AGREEMENTS
The Company had an employment agreement with Mr. Lee which provided for him
to serve as Chairman of the Board and Chief Executive Officer of the Company
and which, as described below, was replaced following consummation of the
Merger. The employment agreement was for a term expiring on June 30, 1999
unless terminated earlier in the event of the employee's death or disability,
termination by the Company with or without cause (as defined in the agreement)
or termination by the employee with or without good reason (as defined in the
agreement), with automatic renewals for successive one-year periods after the
initial term thereof unless either the Company or Mr. Lee terminated such
renewal provision at least one year prior to any such renewal. The agreement
provided for an initial annual base salary of $375,000, annual salary
increases and annual cash bonuses based on actual operating income as compared
to projected operating income targets approved by the Board of Directors, up
to a maximum annual bonus of 125% of Mr. Lee's then existing base salary.
Under the employment agreement, Mr. Lee was entitled to participate in the
Company's benefit plans and programs and to reimbursement for any deductibles
and co-payments related to medical expenses. In the event of a change in
control of the Company during the two year period ending June 30, 1999, the
terms of the employment agreement were automatically to be extended for a two-
year period following such change in control. Under the employment agreement,
in the event of early termination of employment by the Company without cause
or by Mr. Lee for good reason, the Company was to continue to pay Mr. Lee his
base salary, bonus and all other benefits payable for two years or until the
end of the term of the employment agreement, whichever was longer. In the
event of early termination of employment due to the disability of Mr. Lee, the
Company was to continue to pay Mr. Lee his base salary until the end of the
term of the agreement, less all payments under any disability plan covering
Mr. Lee. In the event of early termination of employment due to the death of
Mr. Lee, the Company was to pay Mr. Lee's executor or administrator four
months of base salary and bonus. In the event that the Company terminated the
automatic renewal provision, the Company was to continue to pay Mr. Lee his
base salary, bonus and all other benefits otherwise payable for six months
following the expiration of the term of the employment agreement. The
agreement provided for a noncompetition period following termination of
employment prior to a change in control of the Company which was to extend for
two years or the period of salary continuation payments, whichever was longer.
The Company entered into a noncompetition agreement with Mr. Lee which was
replaced following consummation of the Merger and which provided that if Mr.
Lee's employment with the Company was terminated upon certain circumstances
and subject to certain limitations, Mr. Lee would not compete against the
Company for a two-year period after a change in control of the Company (as
defined in the noncompetition agreement) in any place in which the Company has
engaged in such business during the term of Mr. Lee's employment. In
consideration of the foregoing, Mr. Lee was be entitled to receive from the
Company, within 5 days following the date of the commencement of such two-year
period, a lump-sum cash amount equal to (i) three times Mr. Lee's highest
annual base salary in effect during the 12-month period prior to the date of
termination of Mr. Lee's employment, plus (ii) three times Mr. Lee's average
annual bonus paid or payable, including by reason of deferral, from the
Company over the five fiscal years of the Company immediately preceding the
fiscal year in which the change in control occurs. See "Related Party
Transactions--Transactions with Management."
The Company has an employment agreement with Mr. Manko, which provides that
Mr. Manko will serve as Vice Chairman of the Board of Directors of the Company
and as Chairman of AMRE and of the specialty retail division of the Company.
The employment agreement is for a term ending on December 31, 1998, unless
terminated earlier for any reason which is the same as those provided in the
employment agreement with Mr. Lee. The employment agreement provides for an
annual base salary of $250,000 through June 28, 1996 and
68
<PAGE>
thereafter, annual salary increases, and annual cash bonuses for fiscal years
ending on or after June 30, 1997 based on actual operating income as compared
to projected operating income targets approved by the Board of Directors, up
to a maximum annual bonus of 125% of his then existing base salary. Under the
employment agreement, Mr. Manko is entitled to participate in the Company's
benefit plans and programs. The employment agreement provides that in the
event of early termination of employment by the Company without cause (as
defined in the agreement) or by Mr. Manko for good reason (as defined in the
agreement), the Company will continue to pay Mr. Manko his base salary and all
other benefits otherwise payable until the end of the term of the employment
agreement, and if such termination occurs following a change in control of the
Company, Mr. Manko will be entitled to receive a lump sum amount equal to the
present value of such payments. In the event of early termination of
employment due to the disability or death of Mr. Manko, the Company will
continue to pay Mr. Manko, or his executor or administrator in the event of
his death, his base salary, bonus and all other benefits otherwise payable for
a period of four months following such termination of employment. Mr. Manko's
employment agreement also provides for a noncompetition period following
termination of employment which would extend for two years or the period of
salary continuation payments, whichever is longer.
The Company had an employment agreement with Ms. George which was amended
and restated upon consummation of the Merger and which provided that she would
serve as President and Chief Operating Officer of the Company. The employment
agreement was for a term ending on February 15, 2000 unless terminated earlier
in the event of Ms. George's death or disability, termination by the Company
with or without cause (as defined in the agreement) or termination by Ms.
George. The agreement provided for an annual base salary of $300,000, subject
to annual increases in the discretion of the Company, annual cash bonuses in
accordance with the Company's management incentive program and grants of
restricted phantom stock units if the Common Stock trades at specified prices,
the number of such Units to be based upon a multiple of one or two times the
amount of Ms. George's base salary divided by the market price of the Common
Stock. Such restricted phantom stock units were to vest upon the earlier of
the termination of Ms. George's employment or a Change in Control of the
Company (as defined in the agreement), provided that unvested restricted
phantom stock units were to be forfeited if Ms. George's employment was
terminated by the Company for cause or voluntarily by Ms. George. Under the
agreement, Ms. George was entitled to participate in the Company's benefit
plans and programs, reimbursement for any deductibles and co-payments related
to medical expenses and reimbursement of automobile expenses and her expenses
for commuting to San Jose. In the event of early termination of Ms. George's
employment by the Company without cause or voluntarily by Ms. George, the
Company was to continue to pay Ms. George her base salary and all other
benefits, excluding bonus, for 18 months and, in the case of termination of
her employment by the Company without cause, Ms. George's restricted phantom
stock units were to vest and her unexercisable stock options were to become
exercisable. See "Related Party Transactions--Transactions with Management."
In connection with the relocation of the Company's corporate offices to San
Jose, California during 1997, Mr. Kosick and the Company agreed that Mr.
Kosick would serve as U.S. Group President of the Company and that the Company
would reimburse Mr. Kosick for his commuting expenses and his living expenses
in San Jose. Mr. Kosick and the Company also agreed that, due to such
relocation, Mr. Kosick could elect to terminate his employment with the
Company and that such termination would constitute a "termination of his
employment for good reason" within the meaning of his employment agreement
with the Company. Mr. Kosick subsequently determined to terminate his
employment with the Company for that reason. In accordance of the terms of his
employment agreement, Mr. Kosick became entitled to receive his base salary,
bonus and all other benefits payable for a two year period following the
termination of his employment with the Company. The Company and Mr. Kosick
agreed that his Company stock options would become exercisable in full and
remain exercisable during such two year period and for 90 days thereafter. In
addition, the Company agreed that his unvested restricted stock and phantom
stock units would become fully vested. Mr. Kosick agreed that a bonus payment
of $100,000 made to him on December 5, 1997 would be in lieu of any further
bonus payments to which he would have been entitled pursuant to his employment
agreement.
69
<PAGE>
The Company had an employment agreement with Ms. Bounds which provided that
she was to serve as the Senior Vice President, Chief Financial Officer,
Treasurer and Secretary of Holdings and the Company. The employment agreement
was for a term ending on March 31, 2000 unless terminated earlier in the event
of Ms. Bounds' death or disability, termination by the Company with or without
cause (as defined in the agreement) or by Ms. Bounds. The agreement provided
for an annual base salary of $160,000, subject to annual increases in the
discretion of the Company, annual bonuses in accordance with the Company's
management incentive program, with Ms. Bounds participating in such program at
a level which would result in a performance bonus equal to 50% of her base
salary if the target level of performance were achieved. Ms. Bounds was
entitled to a cash automobile allowance in the amount of $400 per month. In
the event of an early termination of the employment agreement by the Company
without cause or by Ms. Bounds for good reason (as defined in the agreement),
the Company was to continue to pay Ms. Bounds her base salary and all other
benefits, excluding bonus, for 18 months and her coverage under the medical,
dental, life and long-term disability insurance policies maintained by the
Company was to remain in effect during such period and all of her Company
stock options will become exercisable in full. The Company and Ms. Bounds
agreed that her employment with the Company terminated on November 13, 1998,
and that she is entitled to the benefits described in the immediately
preceding sentence. The agreement provides for an employee
noncompetition/nonsolicitation period continuing until two years after the
termination of Ms. Bounds' employment thereunder.
The Company entered into a severance agreement with Mr. Lee which was
replaced following consummation of the Merger and which provided that if Mr.
Lee's employment with the Company was terminated upon certain circumstances (a
"Qualifying Termination") during the two-year period after a change in control
(as defined in the agreement), Mr. Lee was to receive a severance payment and
certain insurance benefits. A Qualifying Termination included a termination of
employment with the Company, except for cause, death or disability, or by Mr.
Lee during such two-year period for good reason (as defined in the agreement)
or for any reason during the 30-day period commencing ninety days after the
change in control. The severance payments and other benefits to be provided to
Mr. Lee upon a Qualifying Termination were to determined in accordance with
his severance agreement and not his employment agreement.
Upon a Qualifying Termination, Mr. Lee was entitled to receive any earned
unpaid base salary, deferred compensation and accrued vacation pay and the
value of any unvested employer contributions for his benefit under the
Company's 401(k) Plan. For the one-year period commencing with the Qualifying
Termination, Mr. Lee was entitled to cause the Company to repurchase certain
shares of Common Stock owned by him in the same manner as provided in his
employment agreement. Mr. Lee was also entitled to receive certain insurance
benefits for the three-year period commencing with the date of the
termination.
If it was determined that payments made to Mr. Lee under his severance
agreement or otherwise would be subject to the excise tax imposed by Section
4999 of the Internal Revenue Code of 1986, as amended (the "Code") and it was
determined that the payments made to Mr. Lee after imposition of such excise
tax would be less than the amount he would receive if he received the maximum
amount that could be paid to him without the imposition of such excise tax,
then the amount paid under his severance agreement was to be reduced so that
the payments made to him will be one dollar less than the amount that would
require payment of such excise tax. See "Related Party Transactions--
Transactions with Management."
In the case of a merger, consolidation, dissolution or liquidation of the
Company, or in any other case in which the Management Stock Incentive
Committee determines that it is in the Company's best interest, the Management
Stock Incentive Committee may accelerate the exercisability of any outstanding
stock options issued under the 1991 Plan, the 1992 Plan or the 1996 Plan. Each
option to purchase Common Stock previously issued by the Company that was
outstanding immediately prior to the consummation of the Merger (other than
options subject to the George Equity Agreement) became fully vested and
exercisable immediately prior to the consummation of the Merger. The holder of
any such option was entitled to receive, for each share of Common Stock
subject thereto, a cash payment in an amount equal to the excess, if any, of
the per share Merger Consideration over the applicable per share exercise
price.
70
<PAGE>
RELATED PARTY TRANSACTIONS
RELATIONSHIP WITH INVESTORS
Pursuant to a Corporate Development and Administrative Services Agreement
entered into in connection with the closing of the Merger (the "Development
Agreement") among Brentwood Private Equity, L.L.C. ("BPE"), an affiliate of
Brentwood, Charlesbank (together with BPE, the "Advisors"), the Issuer and
Holdings, as amended from time to time (the "Services Agreement"), the
Advisors have agreed to assist in the corporate development activities of the
Company by providing services to the Company, including (i) assistance in
analyzing, structuring and negotiating the terms of investments and
acquisitions, (ii) researching, identifying, contacting, meeting and
negotiating with prospective sources of debt and equity financing, (iii)
preparing, coordinating and conducting presentations to prospective sources of
debt and equity financing, (iv) assistance in structuring and establishing the
terms of debt and equity financing and (v) assistance and advice in connection
with the preparation of the Company's financial and operating plans. Pursuant
to the Services Agreement, the Advisors are entitled to receive: (i) upon the
occurrence of certain events, monitoring fees equal to 1% of the aggregate
amount of investment in the Company by the Investors; (ii) aggregate financial
advisory fees equal to 1.5% of the acquisition cost of the Company's completed
acquisitions, as described above; and (iii) reimbursement of their reasonable
fees and expenses incurred from time to time (a) in performing the services
rendered thereunder and (b) in connection with any investment in, financing
of, or sale, distribution or transfer of any interest in the Company by the
Advisors or any person or entity associated with the Advisors. Upon the
closing of the Transactions, the Investors, together, were paid a fee of
approximately $3.0 million, in the aggregate, and reimbursed for out of pocket
expenses in connection with the negotiation of the Transactions and for
providing certain financial advisory and investment banking services to the
Issuer and Holdings including the arrangement and negotiation of the Senior
Secured Credit Facility, the arrangement and negotiation of the Notes and for
other management consulting services.
For a description of the terms of the initial investment in the Company by
Charlesbank, Brentwood and CBCI, see "The Transactions."
STOCKHOLDERS AGREEMENT
In connection with the Merger, Holdings entered into a stockholders
agreement with its stockholders which provides for, among other things, (i)
certain restrictions and rights related to the transfer, sale or purchase of
Holdings Common Stock and Holdings Preferred Stock, (ii) certain rights
relating to the election of the Board of Directors of Holdings and (iii)
certain registration rights relating to Holdings Class A Common Stock.
TRANSACTIONS WITH MANAGEMENT
In connection with the Merger Agreement, Mr. Lee entered into an employment
agreement (the "Lee Employment Agreement") which replaced his existing
employment, severance and noncompetition agreements with the Issuer and
Holdings. The Lee Employment Agreement has a term of two years and provides
for Mr. Lee to serve as the Chairman of the Board of the Issuer and Holdings
on a full-time basis for six months beginning at the Effective Time and on a
part-time basis thereafter. Mr. Lee's base salary will be $415,000 per annum
during his full-time employment and $207,500 per annum during his part-time
employment. Under the Lee Employment Agreement, Holdings paid Mr. Lee a one-
time cash bonus equal to $860,800 at the Effective Time. Mr. Lee will also be
eligible for an annual performance bonus if certain pre-established net income
criteria are met by Holdings.
In the event Mr. Lee's employment is terminated by Holdings for any reason
other than cause or by Mr. Lee for good reason, the Lee Employment Agreement
provides for the payment of Mr. Lee's base salary and any prorated bonus up to
the date of termination and the continued payment of his base salary, bonus
and all other benefits which would otherwise have been payable for the
remainder of the term of the agreement. Additionally, in such event, any
options to purchase securities of Holdings granted to Mr. Lee after the
Effective Time will vest and become immediately exercisable. The Lee
Employment Agreement also contains a noncompetition and
71
<PAGE>
non-solicitation agreement for five years following the Effective Time in
consideration for which Mr. Lee will be paid a total of $1.5 million in three
equal annual installments, commencing at the Effective Time.
In connection with the Merger Agreement, Ms. George entered into an
employment agreement (the "George Employment Agreement") which became
effective at the Effective Time and which replaced her existing employment
agreement with the Issuer and Holdings. The George Employment Agreement has a
term of five years and provides for Ms. George to serve as the President and
Chief Executive Officer of the Issuer and Holdings. Ms. George's base salary
will be $350,000 per annum and may be increased annually by the Board. Ms.
George will also be eligible for an annual performance bonus in accordance
with Holdings' management incentive program. The George Employment Agreement
provides for such management incentive program to be amended for fiscal 1999
to include an additional measure for determining Ms. George's performance
bonus based on Holdings' return on assets. In addition, the George Employment
Agreement provides that, at the Effective Time, Holdings will grant stock
options to Ms. George to purchase 4% of Holdings Stock on a fully diluted
basis. Fifty percent of such stock options will vest and become exercisable in
equal annual installments over a five-year period beginning on the date that
is one year after the Effective Time. The remaining 50% percent of the stock
options will vest and become exercisable over such five-year period according
to annual performance criteria established by the Compensation Committee of
the Board. The terms and conditions of the awards to be received by Ms. George
are subject to change, as an equity-based management incentive program,
expected to be implemented by the Company, is developed.
In the event Ms. George's employment is terminated by Holdings for reason
other than cause or by Ms. George for any reason, the George Employment
Agreement provides for the payment of Ms. George's base salary and any
prorated bonus up to the date of termination and the continued payment of Ms.
George's base salary and other benefits, excluding bonus, for a period of 18
months following the date of termination. If Ms. George's employment is
terminated by Holdings for reason other than cause or by Ms. George for good
reason, certain of Ms. George's stock options will vest and become immediately
exercisable. In addition, upon termination of Ms. George's employment prior to
an initial public offering of Holding's equity securities, Holdings or its
designee will have the right to purchase and Ms. George will have the
obligation to sell any equity interests in Holdings held by Ms. George and
exercisable at the time of termination at the fair market value of such equity
interests. Similarly, in the event of such a termination of her employment,
Ms. George will have the right to sell and Holdings or its designee will have
the obligation to purchase all or any portion of any equity interests in
Holdings held by Ms. George and exercisable at the time of termination at the
fair market value of such equity interests. The George Employment Agreement
also contains a customary provision providing for the non-disclosure of
confidential information and a noncompetition and non-solicitation agreement
for two years following the end of Ms. George's employment by Holdings.
Ms. George has also entered into an equity agreement pursuant to which she
exchanged a portion of her options to purchase Common Stock for options to
purchase capital stock of Holdings. Each share of Common Stock subject to an
option held by Ms. George that was exchanged was, for purposes of such
exchange, valued at the Per Share Merger Consideration (exclusive of
indemnification rights limited to an amount necessary to avoid adverse tax
consequences to Ms. George arising from such exchange).
During fiscal 1998, in connection with the relocation of Mr. Bracy's primary
residence, the Company made a non-interest bearing secured loan of $150,000,
which remains outstanding as of September 28, 1998. The loan is due upon the
earlier of (i) termination of employment, (ii) dissolution or liquidation of
the Issuer, or (iii) April 8, 2001. Half of any bonus award earned by Mr.
Bracy will be applied to reduce the outstanding balance of such loan.
In July 1997, the Company sold SportRack to Advanced Accessory Systems
Canada Inc. ("AAS"). An affiliate of CBCI is a principal stockholder of the
parent company of AAS. On July 27, 1998, the Company and AAS entered into an
agreement (the "AAS Agreement") pertaining to an adjustment to the purchase
price of SportRack pursuant to which the Company paid AAS $2.0 million and the
Company and AAS agreed to share any amounts that the Company is able to
recover from insurance carriers or other third parties with respect to the
amounts paid by the Company to AAS pursuant to the AAS Agreement.
72
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of December 2, 1998 concerning
beneficial ownership of Common Stock by each person known by the Company to
own beneficially more than five percent of the outstanding shares of Common
Stock, each director, each Named Executive Officer and all directors and
executive officers of the Company as a group. Unless otherwise noted, the
listed persons have sole voting and dispositive power with respect to the
shares of Common Stock held in their names, subject to community property laws
if applicable.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF TOTAL
OF COMMON STOCK OUTSTANDING
NAME OF BENEFICIAL HOLDER BENEFICIALLY OWNED SHARES(6)
- ------------------------- ------------------ ----------------
<S> <C> <C>
Charlesbank Capital Partners, LLC(1)...... 360,437 44.07%
Brentwood Associates Buyout Fund II,
LP(2).................................... 360,437 44.07%
CB Capital Investors, L.P.(3)............. 80,097 9.79%
Mary J. George (Chief Executive Officer
and President)(4)........................ 16,921 2.07%
All Officers and Directors as a Group (1
person)(5)............................... 16,921 2.07%
</TABLE>
- ---------------------
(1) Includes shares held by Charlesbank Bell Sports Holdings, Limited
Partnership and Charlesbank Coinvestment Partners, LLC. The mailing
address for Charlesbank Capital Partners, LLC is 600 Atlantic Avenue,
26th Floor, Boston, Massachusetts 02210-2203.
(2) The mailing address for Brentwood Associates Buyout Fund II, LP is 11150
Santa Monica Boulevard, Suite 1200, Los Angeles, California 90025.
(3) The mailing address for CB Capital Investors, L.P. is 380 Madison Avenue,
12th Floor, New York, New York 10017.
(4) The mailing address for Ms. George is c/o Bell Sports Corp., 6350 San
Ignacio Avenue, San Jose, California 95119. Includes an option to purchase
16,921 shares of Common Stock which became exercisable in August 1998.
(5) Includes the beneficial ownership of Ms. George.
(6) Percent of Common Stock owned calculated using the beneficial owner's
Common Stock owned as the numerator and the total number of shares of
Common Stock outstanding on December 2, 1998 (817,892) as the denominator.
73
<PAGE>
DESCRIPTION OF SENIOR SECURED CREDIT FACILITY
In order to finance a portion of the costs and expenses related to the
Merger and to support the Company's operating capital requirements, at the
Effective Time, the Company entered into the Senior Secured Credit Facility
under which the Company may borrow a maximum aggregate amount of $60.0 million
on a revolving basis, subject to borrowing base requirements. No borrowings
were made under the Senior Secured Credit Facility at the Effective Time.
The Senior Secured Credit Facility matures in 2003. The Company expects that
its working capital needs will require it to obtain new revolving credit
facilities at the time that the Senior Secured Credit Facility matures, but
there can be no assurance that any such extension, renewal, replacement or
refinancing will be successfully accomplished.
The obligations of the Company under the Senior Secured Credit Facility are
unconditionally guaranteed by Holdings and by each existing and subsequently
acquired or created domestic subsidiary of the Company. In addition, the
Senior Secured Credit Facility and the guarantees thereunder are secured by
security interests in and pledges of substantially all of the tangible and
intangible assets of the Company and the guarantors, including pledges of all
of the capital stock of the Issuer and each direct or indirect domestic
subsidiary of the Issuer and up to 65% of the capital stock of each first-tier
foreign subsidiary of the Issuer.
At the Company's election, the interest rates per annum applicable to the
loans under the Senior Secured Credit Facility are measured by reference to
either (a) an adjusted London inter-bank offered rate ("LIBOR") plus a
borrowing margin or (b) an alternate base rate ("ABR") (as defined in the
Senior Secured Credit Facility) plus a borrowing margin. The borrowing margins
applicable to the loans under the Senior Secured Credit Facility are 0.50% for
ABR loans and 1.50% for LIBOR loans until February 17, 1999. The borrowing
margins applicable to the loans under the Senior Secured Credit Facility after
such date may be increased or reduced, based on the Company's leverage ratio.
The fees with respect to the Senior Secured Credit Facility include (i) fees
on the unused commitments of the lenders equal to 0.50% per annum on the
undrawn portion of the commitments, subject to change based on the Company's
leverage ratio; (ii) letter of credit fees on the aggregate face amount of
outstanding standby letters of credit equal to the then applicable borrowing
margin for LIBOR loans under the Senior Secured Credit Facility plus an
issuance fee equal to the greater of $500 and 0.125% per annum for the letter
of credit issuing bank; and (iii) an annual administrative fee of $50,000 for
the first year and $30,000 per year thereafter.
The Senior Secured Credit Facility contains a number of covenants that,
among other things, limit or restrict the ability of the Company and its
subsidiaries to dispose of assets, incur additional indebtedness, incur
guarantee obligations, prepay other indebtedness, make restricted payments,
create liens, make equity or debt investments, make acquisitions, modify terms
of the Indenture, engage in mergers or consolidations, change the business
conducted by the Company or its subsidiaries, make capital expenditures or
engage in certain transactions with affiliates. In addition, under the Senior
Secured Credit Facility, the Company is required to comply with specified
financial ratios and tests, including a minimum interest expense coverage
ratio, a minimum fixed charge coverage ratio, and a maximum leverage ratio.
The Senior Secured Credit Facility contains customary events of default
including nonpayment of principal, interest or fees, failure to meet
covenants, inaccuracy of representations or warranties in any material
respect, bankruptcy, cross default to certain other indebtedness, loss of lien
perfection, material judgments and change of ownership or control.
74
<PAGE>
DESCRIPTION OF HOLDINGS' INDEBTEDNESS
THE CONVERTIBLE DEBENTURES
The following summary of the Convertible Debentures does not purport to be
complete and is qualified in its entirety by reference to the indenture
pursuant to which the Convertible Debentures were issued (the "Convertible
Indenture"). Holdings issued approximately $86.3 million aggregate principal
amount of Convertible Debentures in November 1993, all of which was
outstanding prior to the Merger. Holdings was not obligated to tender for or
otherwise repurchase the Convertible Debentures in connection with the Merger.
Prior to the Merger, the Convertible Debentures or portions thereof were
convertible at the option of the holder at any time on or prior to the close
of business on the maturity date into fully paid, non-assessable shares of
Common Stock, at a conversion price per share of Common Stock of $54.06
(subject to adjustment). The Convertible Debentures (i) are no longer
convertible into shares of Common Stock and the anti-dilution provisions no
longer apply and (ii) if converted, entitle the holder to receive cash in an
amount equal to $189.60 per $1,000 principal amount of Convertible Debentures.
The Convertible Debentures are redeemable at the option of the Company, in
whole or in part, at any time after November 15, 1996, and prior to maturity,
in accordance with the terms of the Convertible Debentures and the Convertible
Indenture. If the Company were to redeem the Convertible Debentures in the
twelve-month period commencing November 15, 1997, the redemption price to be
paid would be 101.82% of the principal amount thereof, declining to 101.21% of
the principal amount thereof for the twelve-month period commencing November
15, 1998, declining to 100.61% of the principal amount thereof for the twelve-
month period commencing November 15, 1999 (in each case, together with accrued
and unpaid interest to the redemption date).
After consummation of the Tender Offer, approximately $23.8 million
aggregate principal amount of Convertible Debentures remained outstanding. The
Convertible Debentures are due in November 2000. See "The Transactions."
HOLDINGS SENIOR DISCOUNT NOTES
Contemporaneously with the other Transactions, the Investors purchased the
Holdings Senior Discount Notes, which mature on August 17, 2009 for aggregate
proceeds of $15.0 million. The Holdings Senior Discount Notes are senior
unsecured obligations of Holdings. The issue price of the Holdings Senior
Discount Notes represents a yield to maturity of 14% (computed on a semi-
annual bond equivalent basis) calculated from August 17, 1998. The Holdings
Senior Discount Notes will accrete at a rate of 14%, compounded semi-annually,
to an aggregate principal amount at maturity of $29.5 million by August 15,
2003. Cash interest will not accrue on the Holdings Senior Discount Notes
prior to August 15, 2003. Commencing on the first interest payment date
occurring after August 15, 2003, cash interest on the Holdings Senior Discount
Notes will be payable at a rate of 14% per annum, semi-annually in arrears on
each February 15 and August 15.
DESCRIPTION OF ISSUER CAPITAL STOCK
All of the Issuer's issued and outstanding capital stock is owned by
Holdings. The Issuer has no outstanding capital stock other than common stock,
nor are there any outstanding options, warrants or other rights to purchase
the Issuer' capital stock.
DESCRIPTION OF NOTES
GENERAL
The New Notes will be issued as a separate series pursuant to the Indenture
(the "Indenture") between Bell Sports, Inc. and Harris Trust and Savings Bank,
as trustee (the "Trustee"). As used in this "Description of Notes" only, the
Company means Bell Sports, Inc. The terms of the Notes include those stated in
the Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939 (the "Trust Indenture Act"). The New Notes are subject
to all such terms, and Holders of New Notes are referred to the Indenture and
75
<PAGE>
the Trust Indenture Act for a statement thereof. The form and terms of the New
Notes are identical in all material respects to the form and terms of the Old
Notes except that (i) the New Notes bear a Series B designation, (ii) the New
Notes have been registered under the Securities Act and, therefore, will not
bear legends restricting the transfer thereof and (iii) the holders of the New
Notes will not be entitled to certain rights under the Registration Rights
Agreement, including the provisions increasing the interest rate on the Old
Notes in certain circumstances relating to the timing of the Exchange Offer,
which rights terminate when the Exchange Offer is consummated. The following
summary of certain provisions of the Indenture does not purport to be complete
and is qualified in its entirety by reference to the Indenture, including the
definitions therein of certain terms used below. Copies of the Indenture and
Registration Rights Agreement are included in the Registration Statement of
which this Prospectus is a part and are also available as set forth under "--
Additional Information." The definitions of certain terms used in the
following summary are set forth below under "--Certain Definitions."
Capitalized terms used herein and not otherwise defined shall have the
meanings assigned to them in the Indenture.
The New Notes will be senior, subordinated, unsecured, general obligations
of the Company. The Indenture provides, in addition to the $110.0 million
aggregate principal amount of New Notes being issued in connection with the
Exchange Offer, for the issuance of additional New Notes having identical
terms and conditions to the New Notes offered hereby (the "Additional New
Notes"), subject to compliance with the covenants contained in the Indenture.
Any Additional Notes will be part of the same issue as the New Notes offered
hereby and will entitle holders thereof to vote on all matters with the New
Notes offered hereby. The aggregate principal amount of New Notes, Old Notes
and Additional Notes will be limited to the sum of $150.0 million. The New
Notes will be guaranteed on a senior subordinated basis by the Guarantors.
Holdings is currently the only Guarantor. The obligations of each Guarantor
under its guarantee, however, will be limited in a manner intended to avoid it
being deemed a fraudulent transfer under applicable law. See "--Certain
Bankruptcy Limitations" below.
As of the date hereof, none of the Company's Subsidiaries are Unrestricted
Subsidiaries. However, under certain circumstances, the Company will be able
to designate current or future Subsidiaries as Unrestricted Subsidiaries.
Unrestricted Subsidiaries generally will not be subject to the restrictive
covenants set forth in the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Notes, including the Additional Notes, will be limited in aggregate
principal amount to $150.0 million and will mature on August 15, 2008. The
Notes bear interest at 11% per annum and interest is payable semi-annually in
arrears on February 15 and August 15, commencing on February 15, 1999, to
Holders of record on the immediately preceding February 1 and August 1.
Interest on the Notes will accrue from the most recent date to which interest
has been paid or, if no interest has been paid, from the date of original
issuance. Interest will be computed on the basis of a 360-day year comprised
of twelve 30-day months. Principal, premium if any, and interest and
Liquidated Damages, if any, on the Notes will be payable at the office or
agency of the Company maintained for such purpose within the City and State of
New York or, at the option of the Company, any payment of interest and
Liquidated Damages, if any, may be made by check mailed to the Holders of the
Notes at their respective addresses set forth in the register of Holders of
Notes; provided that all payments with respect to Global Notes and Definitive
Notes, the Holders of whom have given wire transfer instructions to the
Company, will be required to be made by wire transfer of immediately available
funds to the accounts specified by the Holders thereof. Until otherwise
designated by the Company, the Company's office or agency in New York will be
the office of the Trustee maintained for such purpose. The Notes will be
issued only in denominations of $1,000 and integral multiples thereof. The
Company may act as Paying Agent under the Indenture and may change any Paying
Agent without notice to the Holders.
SUBORDINATION
The Indebtedness evidenced by the Notes and the payment of principal of,
premium, if any, and interest on the Notes, and Liquidated Damages, if any, in
respect of the Notes will be subordinated in right of payment, as
76
<PAGE>
set forth in the Indenture, to the prior payment in full of all Obligations in
respect of Senior Indebtedness, whether outstanding on the date of the
Indenture or thereafter issued, created, incurred, assumed or guaranteed. In
addition, as set forth in "Guarantee" below, each Guarantee will be a general,
unsecured obligation of the respective Guarantor, subordinated in right of
payment to all Obligations in respect of Guarantor Senior Indebtedness. As of
June 27, 1998, on a pro forma basis after giving effect to the Transactions,
the Company would have had outstanding on a consolidated basis approximately
$118.4 million of Indebtedness and $6.5 million of Senior Indebtedness, and
the Company's subsidiaries would have had outstanding as of such date $10.1
million of liabilities, including trade payables, all of which would have been
effectively senior in right of payment to the Notes. As of June 27, 1998, on a
pro forma basis after giving effect to the Transactions, Holdings would have
had approximately $21.2 million of Guarantor Senior Indebtedness.
Upon any distribution to creditors of the Company or a Guarantor in a
liquidation or dissolution of the Company or a Guarantor or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to the
Company or a Guarantor or its property, whether voluntary or involuntary, an
assignment for the benefit of creditors or any marshalling of the Company's or
any Guarantor's assets and liabilities, the holders of Senior Indebtedness or
Guarantor Senior Indebtedness, as applicable, will be entitled to receive
payment in full in cash or Cash Equivalents of all Obligations due in respect
of such Senior Indebtedness or Guarantor Senior Indebtedness, as applicable
(including Post-Petition Interest, Expense and Indemnity Claims), before the
Holders of Notes or any Guarantee will be entitled to receive any payment with
respect to the Notes, or any Guarantee, and until all such Obligations due
with respect to Senior Indebtedness or Guarantor Senior Indebtedness, as
applicable (including Post-Petition Interest, Expense and Indemnity Claims),
are paid in full in cash or Cash Equivalents, any distribution to which the
Holders of Notes or any Guarantee would be entitled shall be made to the
holders of Senior Indebtedness or Guarantor Senior Indebtedness, as applicable
(except that Holders of Notes or any Guarantee may receive (i) Junior
Securities and (ii) payments made from the trust described under "--Legal
Defeasance and Covenant Defeasance"). If a distribution is made to Holders
that, due to the subordination provision, should not have been made to them,
such Holders are required to hold such payment in trust for the holders of the
Senior Indebtedness or Guarantor Senior Indebtedness, as applicable, and pay
it over to them in accordance with their interest.
Neither the Company nor any Guarantor may make any payment upon or in
respect of the Notes or any Guarantee or acquire any Notes pursuant to the
covenants described under the caption "--Repurchase at the Option of Holders"
(except in Junior Securities or from the trust described under "--Legal
Defeasance and Covenant Defeasance") if (i) a default in the payment of any
principal, interest or any other Obligations due in respect of Designated
Senior Indebtedness occurs and is continuing beyond any applicable period of
grace (a "Payment Default") or (ii) any other default occurs and is continuing
with respect to Designated Senior Indebtedness that permits holders of the
Designated Senior Indebtedness as to which such default relates to accelerate
its maturity (a "Nonpayment Default") and the Trustee receives a notice of
such default (a "Payment Blockage Notice") from the Company or the
representative of the holders of any Designated Senior Indebtedness. Payments
on the Notes may and shall be resumed (a) in the case of a Payment Default,
upon the date on which such default is cured or waived and (b) in case of a
Nonpayment Default, the earlier of the date on which such Nonpayment Default
is cured or waived or 179 days after the date on which the applicable Payment
Blockage Notice is received (the "Payment Blockage Period"), unless the
maturity of any Designated Senior Indebtedness has been accelerated. No new
Payment Blockage Period may be commenced by reason of the occurrence of a
Nonpayment Default unless and until 360 days have elapsed since the
commencement of the immediately prior Payment Blockage Period. No Nonpayment
Default that existed or was continuing on the date of delivery of any Payment
Blockage Notice to the Trustee shall be, or be made, the basis for a
subsequent Payment Blockage Notice (it being acknowledged that any subsequent
action, or any breach of any financial covenant for a period ending after the
expiration of such Payment Blockage Period that, in either case, would give
rise to a new event of default, even though it is a breach pursuant to any
provision under which a prior event of default previously existed, shall
constitute a new event of default for this purpose).
The Indenture further requires that the Company promptly notify holders of
Senior Indebtedness if payment of the Notes is accelerated because of an Event
of Default.
77
<PAGE>
As a result of the subordination provisions described above, in the event of
a liquidation, dissolution, reorganization or insolvency, Holders of Notes may
recover less ratably than creditors of the Company and the Guarantor who are
holders of Senior Indebtedness and Guarantor Senior Indebtedness,
respectively. See "Risk Factors--Subordination." The Indenture limits, subject
to certain financial tests, the amount of additional Indebtedness, including
Senior Indebtedness and Guarantor Senior Indebtedness that the Company and its
Subsidiaries can incur. See "--Certain Covenants--Incurrence of Indebtedness
and Issuance of Preferred Stock."
No provision contained in the Indenture or the Notes affects the obligation
of the Company and the Guarantors, which is absolute and unconditional, to
pay, when due, principal of, premium, if any, and interest on the Notes. The
subordination provisions of the Indenture and the Notes will not prevent the
occurrence of any Default or Event of Default under the Indenture or limit the
rights, except as described above, of the Trustee or any Holder to pursue any
other rights, or remedies with respect to the Notes.
GUARANTEE
The Company's Obligations under the Notes will be guaranteed pursuant to the
Guarantees on a senior subordinated basis by the Guarantors. The Guarantees of
the Guarantors will be subordinated to the prior payment in full of all
Obligations in respect of Guarantor Senior Indebtedness, of which there would
have been outstanding $21.2 million as of June 27, 1998 on a pro forma basis
giving effect to the Transactions. The obligations of each Guarantor under its
Guarantee will be limited in a manner intended to not constitute a fraudulent
transfer under applicable law. The Indenture does not limit the amount of
Indebtedness that Holdings may incur. See, however, "Risk Factors--Fraudulent
Transfer Considerations," and "Certain Bankruptcy Limitations" below.
CERTAIN BANKRUPTCY LIMITATIONS
Holders of the Notes will be direct creditors of the Guarantors by virtue of
the Guarantees. Nonetheless, in the event of the bankruptcy or financial
difficulty of a Guarantor, such Guarantor's obligations under its Guarantee
may be subject to review and avoidance under state and federal fraudulent
transfer laws. Among other things, such obligations may be avoided if a court
concludes that such obligations were incurred for less than reasonably
equivalent value or fair consideration at a time when such Guarantor was
insolvent, was rendered insolvent, or was left with inadequate capital to
conduct its business. A court would likely conclude that such Guarantor did
not receive reasonably equivalent value or fair consideration to the extent
that the aggregate amount of its liability on its Guarantee exceeds the
economic benefits it receives in the Offering. The obligations of the
Guarantor under its Guarantee will be limited in a manner intended to cause it
not to be a fraudulent obligation under applicable law, although no assurance
can be given that a court would give the holder the benefit of such provision.
See "Risk Factors--Fraudulent Transfer Considerations."
If the obligations of each Guarantor under the Guarantee were avoided,
Holders of Notes would have to look to the assets of the Company and its
Subsidiaries for payment. There can be no assurance that such assets would
suffice to pay the outstanding principal of, premium, if any, and interest on
the Notes, and Liquidated Damages, if any.
OPTIONAL REDEMPTION
The Notes will not be redeemable at the Company's option prior to August 15,
2003 except as provided below. Thereafter, the Notes will be subject to
redemption at the option of the Company, in whole or in part, from time to
time, upon not less than 30 nor more than 60 days' notice, at the redemption
prices (expressed as percentages of principal amount) set forth below plus
accrued and unpaid interest and Liquidated Damages, if
78
<PAGE>
any, thereon to the applicable redemption date, if redeemed during the twelve-
month period beginning on August 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003.......................................................... 105.500%
2004.......................................................... 103.667%
2005.......................................................... 101.833%
2006 and thereafter........................................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time on or prior to August 15, 2001,
the Company may, at its option (but shall not have the obligation to), redeem
up to 35% of the aggregate principal amount of the Notes issued pursuant to
the Indenture at a redemption price of 111% of the principal amount thereof,
in each case plus accrued and unpaid interest and Liquidated Damages, if any,
thereon to the redemption date, with the Net Cash Proceeds received by the
Company from one or more Equity Offerings; provided, that, in each case at
least 65% of the aggregate principal amount of Notes issued pursuant to the
Indenture remain outstanding immediately after the occurrence of such
redemption; and provided, further, that such redemption shall occur within 60
days of the date of the closing of such Equity Offering.
If less than all of the Notes are to be redeemed, selection of Notes for
redemption will be made by the Trustee in compliance with the requirements of
the principal national securities exchange, if any, on which the Notes are
listed, or, if the Notes are not so listed, on a pro rata basis, by lot or by
such method as the Trustee shall deem fair and appropriate; provided that the
Notes may be redeemed in part in multiples of $1,000 only. Notices of
redemption shall be mailed by first class mail at least 30 but not more than
60 days before the redemption date to each Holder of Notes to be redeemed at
its registered address. If any Note is to be redeemed in part only, the notice
of redemption that relates to such Note shall state the portion of the
principal amount thereof to be redeemed. A new Note in principal amount equal
to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Note. On and after the redemption
date, interest ceases to accrue on the Notes or portions of them called for
redemption, unless the Company defaults in such payments due on the redemption
date.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of such Holder's Notes pursuant to the
offer described below (the "Change of Control Offer") at an offer price in
cash equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any, thereon to the date of
purchase (the "Change of Control Payment") on a date (the "Change of Control
Payment Date") no later than 60 Business Days after the occurrence of the
Change of Control. Within 35 days following any Change of Control, the Company
will mail a notice to each Holder describing the transaction or transactions
that constitute the Change of Control and offering to repurchase Notes
pursuant to the procedures required by the Indenture and described in such
notice, which offer shall remain open for at least 20 Business Days following
its commencement, but in any event no longer than 30 Business Days. The
Company and the Guarantor will comply with the requirements of Rule 14e-1
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and any other securities laws and regulations thereunder to the extent such
laws and regulations are applicable in connection with the repurchase of the
Notes as a result of a Change of Control. To the extent that the provisions of
any such securities laws or regulations conflict with the provisions of this
79
<PAGE>
paragraph, compliance by the Company or the Guarantor with such laws and
regulations shall not in and of itself cause a breach of its obligations under
such covenant.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating
the aggregate principal amount of Notes or portions thereof being purchased by
the Company. The Paying Agent will promptly mail to each Holder of Notes so
tendered the Change of Control Payment for such Notes, and the Trustee will
promptly authenticate and mail (or cause to be transferred by book entry) to
each Holder a new Note equal in principal amount to any unpurchased portion of
the Notes surrendered, if any; provided that each such new Note will be in a
principal amount of $1,000 or an integral multiple thereof. The Company will
publicly announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
The Indenture provides that, prior to complying with the provisions of this
covenant, but in any event within 30 days following a Change of Control, the
Company will either repay all outstanding Designated Senior Indebtedness or
obtain the requisite consents, if any, under all agreements governing
outstanding Designated Senior Indebtedness to permit the repurchase of Notes
required by this covenant. The Company will not be required to purchase any
Notes until it has complied with the preceding sentence, but the Company's
failure to make a Change of Control Offer when required or to purchase
tendered Notes when tendered would constitute an Event of Default.
Except as described above with respect to a Change of Control, the Indenture
does not contain provisions that permit the Holders of the Notes to require
that the Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar restructuring.
The Change of Control purchase feature of the Notes may make more difficult
or discourage a takeover of the Company, and, thus, the removal of incumbent
management by increasing the capital required to effectuate such transactions.
The phrase "all or substantially all" of the assets of the Company will
likely be interpreted under applicable state law and will be dependent upon
particular facts and circumstances. As a result, there may be a degree of
uncertainty in ascertaining whether a sale or transfer of "all or
substantially all" of the assets of the Company has occurred.
The occurrence of certain of the events that would constitute a Change of
Control would constitute a default under the Credit Agreement. Future Senior
Indebtedness of the Company and Guarantor Senior Indebtedness may also contain
prohibitions of certain events that would constitute a Change of Control or
require such Senior Indebtedness or Guarantor Senior Indebtedness, as
applicable, to be repurchased upon a Change of Control. Moreover, the exercise
by the Holders of their right to require the Company to repurchase the Notes
could cause a default under such Senior Indebtedness, or Guarantor Senior
Indebtedness, as applicable, even if the Change of Control itself does not,
due to the financial effect of such repurchase on the Company. Finally, the
Company's ability to pay cash to the Holders upon a repurchase may be limited
by the Company's then existing financial resources. There can be no assurance
that sufficient funds will be available when necessary to make any required
repurchases. Even if sufficient funds were otherwise available, the terms of
the Credit Agreement (and other Senior Indebtedness and Guarantor Senior
Indebtedness may) prohibit the Company's prepayment of Notes prior to their
scheduled maturity. Consequently, if the Company is not able to prepay the
Senior Bank Debt and any other Senior Indebtedness and Guarantor Senior
Indebtedness containing similar restrictions or obtain requisite consents, as
described above, the Company will be unable to fulfill its repurchase
obligations if Holders of Notes exercise their repurchase rights following a
Change of Control, thereby resulting in a default under the Indenture.
80
<PAGE>
If the Change of Control Payment Date hereunder is on or after an interest
payment Record Date and on or before the associated Interest Payment Date, any
accrued and unpaid interest (and Liquidated Damages, if any) due on such
Interest Payment Date will be paid to the Person in whose name a Note is
registered at the close of business on such Record Date, and such interest
(and Liquidated Damages, if applicable) will not be payable to Holders who
tender the Notes pursuant to the Change of Control Offer.
ASSET SALES
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, engage in an Asset Sale in excess of $1.0 million, unless
(i) the Company (or such Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the assets or Equity Interests sold or otherwise disposed of and, in
the case of a lease of assets, a lease providing for rent and other conditions
which are no less favorable to the Company (or such Subsidiary, as the case
may be) in any material respect than the then prevailing market conditions
(evidenced in each case by a resolution of the Board of Directors of such
entity set forth in an Officers' Certificate delivered to the Trustee) and
(ii) at least 75% (100% in the case of lease payments) of the consideration
therefor received by the Company or such Subsidiary is in the form of cash or
Cash Equivalents; provided that the amount of (x) any Senior Indebtedness of
the Company or any Indebtedness of any Subsidiary (reflected on the Company's
or such Subsidiary's most recent balance sheet or in the notes thereto, but
excluding contingent liabilities and trade payables) that is assumed by the
transferee of any such assets and from which the Company or such Subsidiary
are unconditionally released from liability and (y) any notes, securities or
other obligations received by the Company or any such Subsidiaries from such
transferee that are promptly, but in no event more than 30 days after receipt,
converted by the Company or such Subsidiary into cash (to the extent of the
cash received), shall, in each case, be deemed to be cash for purposes of this
provision.
The Company or any of its Subsidiaries may apply the Net Proceeds from each
Asset Sale, at its option, within 360 days after the consummation of such
Asset Sale, (a) to reduce permanently any Senior Indebtedness or any
Indebtedness of its Subsidiaries (and in the case of any senior revolving
indebtedness of the Company or its Subsidiaries correspondingly permanently to
reduce commitments with respect thereto), (b) to make capital expenditures,
for the acquisition of another business or the acquisition of other long-term
assets, in each case, in the same or a Related Business, or (c) to reimburse
the Company or its Subsidiaries for expenditures made, and costs incurred, to
repair, rebuild, replace or restore property subject to loss, damage or taking
to the extent that the Net Proceeds consist of insurance proceeds received on
account of such loss, damage or taking. Pending the final application of any
such Net Proceeds, the Company may invest such Net Proceeds in any manner that
is not prohibited by the Indenture. Any Net Proceeds from Asset Sales that are
not applied or invested as provided in the first sentence of this paragraph
will be deemed to constitute "Excess Proceeds." When the aggregate amount of
Excess Proceeds exceeds $5.0 million, the Company will be required to make an
unconditional and irrevocable offer to all Holders of Notes (an "Asset Sale
Offer") and to holders of other Indebtedness of the Company outstanding
ranking on a parity with the Notes with similar provisions requiring the
Company to make a similar offer with proceeds from asset sales, pro rata in
proportion to the respective principal amounts (or accreted values in the case
of Indebtedness issued with an original issue discount) of the Notes and such
other Indebtedness then outstanding, to purchase the maximum principal amount
(or accreted value, as applicable) of Notes and such other Indebtedness, if
any, that may be purchased out of the Excess Proceeds, at an offer price in
cash in an amount equal to l00% of the principal amount (or accreted value, as
applicable) thereof, plus accrued and unpaid interest and Liquidated Damages,
if any, thereon to the date of purchase, in accordance with the procedures set
forth in the Indenture. If the aggregate principal amount (or accreted value,
as applicable) of Notes and such Indebtedness surrendered by Holders thereof
exceeds the amount of Excess Proceeds, the Trustee shall select the Notes to
be purchased on a pro rata basis in increments of $1,000 with such
Indebtedness. Upon completion of such offer to purchase, regardless of whether
any Notes are tendered, the amount of Excess Proceeds shall be reset to zero.
Any Asset Sale Offer shall remain open for at least 20 Business Days, but in
any event no longer that 30 Business Days, and shall be made in compliance
with all applicable laws, rules, and regulations, including, if
81
<PAGE>
applicable, Regulation l4E of the Exchange Act and the rules and regulations
thereunder and all other applicable Federal and state securities laws. To the
extent that the provisions of any securities laws or regulations conflict with
the provisions of this paragraph, compliance by the Company or any of its
Subsidiaries with such laws and regulations shall not in and of itself cause a
breach of its obligations under such covenant.
If the payment date in connection with an Asset Sale Offer hereunder is on
or after an interest payment Record Date and on or before the associated
Interest Payment Date, any accrued and unpaid interest (and Liquidated
Damages, if any, due on such Interest Payment Date) will be paid to the Person
in whose name a Note is registered at the close of business on such Record
Date, and such interest (or Liquidated Damages, if applicable) will not be
payable to Holders who tender Notes pursuant to such Asset Sale Offer.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries directly or indirectly to: (i) declare or pay any dividend or
make any distribution on account of the Company or any of its Subsidiaries' or
any of its direct or indirect parent's Equity Interests (including, without
limitation, any payment in connection with any merger or consolidation
involving the Company) (other than dividends or distributions payable in
Equity Interests (other than Disqualified Stock) of the Company or dividends
or distributions payable to the Company or any Subsidiary of the Company);
(ii) purchase, redeem or otherwise acquire or retire for value any Equity
Interests of the Company or any direct or indirect parent of the Company or
other Affiliate or Subsidiary of the Company (other than any such Equity
Interests owned by the Company); (iii) make any principal payment on or
purchase, redeem, defease or otherwise acquire or retire for value any
Indebtedness that is subordinated to or pari passu with (unless in the case of
pari passu Indebtedness only, such purchase, redemption, defeasance,
acquisition or retirement is made or offered (if applicable), pro rata with
the Notes or the Guarantees (if applicable)) the Notes or any Guarantee, as
applicable (and other than the Notes or any Guarantee, as applicable), except
for any scheduled repayment or at the final maturity thereof, or (iv) make any
Restricted Investment (all such payments and other actions set forth in
clauses (i) through (iv) above being collectively referred to as "Restricted
Payments"), unless at the time of and after giving effect to such Restricted
Payment:
(a)no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;
(b)the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable trailing four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Fixed Charge Coverage Ratio test set forth in the first paragraph of
the covenant described below under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock"; and
(c)such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Subsidiaries after the
Issue Date (including Restricted Payments permitted by clauses (i), (vi),
(vii) and (viii), but excluding Restricted Payments permitted by clauses
(ii), (iii), (iv), (v) and (ix) of the next succeeding paragraph), is less
than the sum of (i) 50% of the Consolidated Net Income (adjusted to exclude
any amounts that are otherwise included in this clause (c) to the extent
there would be, and to avoid, any duplication in the crediting of any such
amounts) of the Company for the period (taken as one accounting period)
from the beginning of the first fiscal quarter commencing after the Issue
Date to the end of the Company's most recently ended fiscal quarter for
which internal financial statements are available at the time of such
Restricted Payment (or, if such Consolidated Net Income for such period is
a deficit, less 100% of such deficit), plus (ii) 100% of the aggregate Net
Cash Proceeds received directly by the Company after the Issue Date from a
Capital Contribution or from the issue or sale of Equity Interests of the
Company or of debt securities of the Company that have been converted into
such Equity Interests (other than Equity Interests (or convertible debt
securities) sold to a Subsidiary or an Unrestricted Subsidiary of the
Company
82
<PAGE>
and other than Disqualified Stock or debt securities that have been
converted into Disqualified Stock), plus (iii) 100% of any cash dividends
received directly by the Company or a Wholly Owned Subsidiary of the
Company after the Issue Date from an Unrestricted Subsidiary, plus (iv)
100% of the Net Proceeds realized directly by the Company or a Wholly Owned
Subsidiary of the Company upon the sale of any Unrestricted Subsidiary of
the Company or any Wholly Owned Subsidiary of the Company (less the amount
of any reserve established for purchase price adjustments and less the
maximum amount of any indemnification or similar contingent obligation for
the benefit of the purchaser, any of its Affiliates or any other third
party in such sale, in each case as adjusted for any permanent reduction in
any such amount on or after the date of such sale, other than by virtue of
a payment made to such Person) to a Person other than the Company or a
Subsidiary or Unrestricted Subsidiary of the Company following the Issue
Date, plus (v) to the extent that any Restricted Investment that was made
after the Issue Date is sold to a Person other than the Company or a
Subsidiary or Unrestricted Subsidiary of the Company for cash or Cash
Equivalents or otherwise liquidated or repaid by a Person other than the
Company or a Subsidiary or Unrestricted Subsidiary of the Company for cash
or Cash Equivalents, the amount of Net Proceeds received directly by the
Company or a Wholly Owned Subsidiary of the Company with respect to such
Restricted Investment.
The foregoing provisions do not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the making of any Restricted Investment, directly or
indirectly, in exchange for, or out of the Net Cash Proceeds of, the
substantially concurrent Capital Contribution or sale (other than to a
Subsidiary of the Company) of Equity Interests of the Company (other than
Disqualified Stock); provided that any Net Cash Proceeds that are utilized for
any such Restricted Investment, and any Net Income resulting therefrom, shall
be excluded from clauses (c) (i) and (c) (ii) of the preceding paragraph;
(iii) the redemption, repurchase, retirement or other acquisition of any
Equity Interests of the Company in exchange for, or out of the proceeds of,
the substantially concurrent sale (other than to a Subsidiary of the Company)
of other Equity Interests of the Company (other than any Disqualified Stock);
provided that any Net Cash Proceeds that are utilized for any such redemption,
repurchase, retirement or other acquisition, and any Net Income resulting
therefrom, shall be excluded from clauses (c) (i) and (c) (ii) of the
preceding paragraph; (iv) the defeasance, redemption, repurchase, acquisition
or other retirement of pari passu or subordinated Indebtedness with the cash
proceeds from an incurrence of Permitted Refinancing Indebtedness or, in
exchange for, or out of the Net Cash Proceeds of, the substantially concurrent
sale (other than to a Subsidiary of the Company) of Equity Interests of the
Company (other than Disqualified Stock); provided that any Net Cash Proceeds
that are utilized for any such defeasance, redemption, repurchase and any Net
Income resulting therefrom, shall be excluded from clauses (c) (i) and
(c) (ii) of the preceding paragraph; (v) the repurchase, redemption, or other
acquisition or retirement for value of any Equity Interests of the Company or
any Subsidiary of the Company or Holdings held by any member of the Company's
(or any of its Subsidiaries) management pursuant to any management agreement
or stock option or other agreement entered into in good faith for proper
purposes in the ordinary course of business; provided that the aggregate price
paid for all such repurchased, redeemed, acquired or retired Equity Interests
shall not exceed the sum of (A) $5.0 million and (B) the aggregate cash
proceeds received by the Company from any reissuance of Equity Interests by
Holdings or the Company to members of management of the Company and its
Subsidiaries (provided that cash proceeds referred to in this clause (B) shall
be excluded from clause (c)(i) of the preceding paragraph), and no Default or
Event of Default shall have occurred and be continuing immediately after such
transaction; (vi) so long as no Default or Event of Default shall have
occurred and be continuing, Restricted Payments in an aggregate amount not to
exceed $1.0 million made on and after the Issue Date; (vii) pro rata dividends
and other distributions on the Capital Stock of any Subsidiary of the Company
by such Subsidiary; (viii) payments in lieu of fractional shares in an amount
not to exceed $250,000 in the aggregate made on and after the Issue Date; (ix)
Permitted Payments to Holdings; (x) the sale or liquidation of a Restricted
Investment, provided no Default or Event of Default shall have occurred and be
continuing immediately after such transaction; and (xi) the amount required
from the Company to discharge Holdings' obligations with respect to (A) the
Merger (including amounts paid with respect to appraisal rights, if any, and
any noncompetition agreements, and any execution bonuses), (B) the Tender
Offer and (C) any expenses directly related thereto.
83
<PAGE>
Additionally, the foregoing provisions of this covenant do not prohibit, so
long as no Default or Event of Default shall have occurred and be continuing,
any payment to Holdings (i) made not more than 10 Business Days after an
Interest Payment Date if the Company shall first have paid to the Holders all
principal, premium (if any) and interest (and Liquidated Damages, if any) due
and owing on the Notes on or prior to such Interest Payment Date and (ii) used
by Holdings concurrently with such payment (a) to make a scheduled interest
payment on its Senior Discount Notes as required by the terms of its Senior
Discount Notes relating to the amount and timing of interest payments and
maturity as they exist on the Issue Date, (b) to make a scheduled interest
payment or payment of principal on its Convertible Subordinated Debentures or
(c) to repurchase the Convertible Subordinated Debentures. The full amount of
any Restricted Payments made pursuant to clause (ii)(a) of this paragraph,
however, will be deducted in the calculation of the aggregate amount of
Restricted Payments available to be made pursuant to clause (c) of the first
paragraph of this covenant.
The Board of Directors may designate any Subsidiary to be an Unrestricted
Subsidiary if such designation would not cause a Default. For purposes of
making such determination, all outstanding Investments by the Company and its
Subsidiaries (except to the extent repaid in cash) in the Subsidiary so
designated will be deemed to be Restricted Payments at the time of such
designation and will reduce the amount available for Restricted Payments under
the first paragraph of this covenant. All such outstanding Investments will be
deemed to constitute Investments in an amount equal to the greatest of (x) the
net book value of such Investments at the time of such designation, (y) the
fair market value (as reasonably determined in good faith by the Board of
Directors of the Company) of such Investments at the time of such designation
and (z) the original fair market value (as reasonably determined in good faith
by the Board of Directors of the Company) of such Investments at the time they
were made. Such designation will only be permitted if such Restricted Payment
would be permitted at such time and if such Subsidiary to be designated
otherwise meets the definition of an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value (evidenced by a resolution of the Board of Directors set forth in
an Officers' Certificate delivered to the Trustee) on the date of the
Restricted Payment of the asset(s) proposed to be transferred by the Company
or such Subsidiary, as the case may be, pursuant to the Restricted Payment.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an Officers' Certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by the covenant "--Restricted Payments" were computed, which
calculations may be based upon the Company's latest available financial
statements.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Indebtedness) and that the Company will not issue any Disqualified
Stock and will not permit any of its Subsidiaries to issue any shares of
preferred stock or Disqualified Stock; provided, however, that the Company may
incur Indebtedness (including Acquired Indebtedness) or issue shares of
Disqualified Stock: if (a) the Fixed Charge Coverage Ratio for the Company's
most recently ended four full fiscal quarters for which internal financial
statements are available immediately preceding the date on which such
additional Indebtedness is incurred or such Disqualified Stock or preferred
stock is issued would have been at least 2.0 to l (the "Ratio Test"),
determined on a pro forma basis (including a pro forma application of the net
proceeds therefrom), as if the additional Indebtedness had been incurred, or
the Disqualified Stock or preferred stock had been issued, as the case may be,
at the beginning of such four-quarter period; and (b) no Default or Event of
Default shall have occurred and be continuing or would occur as a consequence
thereof. For purposes of determining any particular amount of Indebtedness
under this covenant, guarantees, liens or obligations with respect to letters
of credit supporting Indebtedness otherwise included in the determination of
such particular amount shall be not included (except for any such guarantees,
liens or obligations with respect to letters of credit supporting Indebtedness
incurred by a Subsidiary in support of Indebtedness (other than Senior
Indebtedness) of the Company). The foregoing provisions will not apply to:
84
<PAGE>
(i)the incurrence of Indebtedness by the Company or its Subsidiaries
under the Credit Agreement in an aggregate principal amount at any time
outstanding (with letters of credit being deemed to have a principal amount
equal to the maximum potential liability of the Company and its
Subsidiaries thereunder) not to exceed an amount equal to $85.0 million,
less the aggregate amount of all Net Proceeds of Asset Sales applied to
reduce permanently the outstanding amount or, as applicable, the
commitments with respect to such Indebtedness pursuant to the covenant
described above under the caption "--Asset Sales;"
(ii)Existing Indebtedness;
(iii)the incurrence by the Company and Subsidiaries of the Company that
are Guarantors of Indebtedness represented by the Notes and the Guarantees
pursuant to the terms of the Indenture;
(iv)the incurrence by the Company or any of its Subsidiaries of
Indebtedness represented by Capital Lease Obligations, mortgage financings
or Purchase Money Obligations, in each case incurred for the purpose of
financing all or any part of the purchase price or cost of construction or
improvement of property used in the business of the Company or such
Subsidiary, in an aggregate principal amount at any time outstanding
(including any Indebtedness incurred to refinance, retire, renew, defease,
refund or otherwise replace any such Indebtedness) not to exceed $2.5
million;
(v)the incurrence by the Company or any of its Subsidiaries of Permitted
Refinancing Indebtedness in exchange for, or the net proceeds of which are
used to extend, refinance, renew, replace, defease or refund, Indebtedness
that was permitted by the Indenture pursuant to the Ratio Test or Clauses
(ii) or (iii) of this covenant to be incurred or was outstanding on the
Issue Date, after giving effect to the Transactions;
(vi)the incurrence by the Company or any of its Wholly Owned Subsidiaries
of intercompany Indebtedness between or among the Company and any of its
Wholly Owned Subsidiaries or between or among any Wholly Owned
Subsidiaries; provided, however, that (i) any subsequent issuance or
transfer of Equity Interests that results in any such Indebtedness being
held by a Person other than a Wholly Owned Subsidiary and (ii) any sale or
other transfer of any such Indebtedness to a Person that is not either the
Company or a Wholly Owned Subsidiary shall be deemed, in each case, to
constitute an incurrence of such Indebtedness by the Company or such
Subsidiary, as the case may be;
(vii)the incurrence by the Company or any of its Subsidiaries of Hedging
Obligations or purchase of foreign currencies that are incurred for the
purpose of (i) fixing or hedging interest rate risk with respect to any
floating rate Indebtedness or (ii) fixing or hedging currency risks that is
permitted by the Indenture to be incurred;
(viii)the incurrence by the Company or any of its Subsidiaries of
Indebtedness in an aggregate amount at any time outstanding (including any
Indebtedness incurred to refinance, retire, renew, defease, refund or
otherwise replace any such Indebtedness) not to exceed $12.5 million;
(ix)the incurrence by the Company or any Subsidiary of Indebtedness in
respect of judgment, appeal, surety, performance and other like bonds,
bankers acceptance and letters of credit provided by the Company and its
Subsidiaries in the ordinary course of business in an aggregate amount
(including any indebtedness incurred to refinance, retire, renew, defease,
refund or otherwise replace any such indebtedness) at any time outstanding
of not more than $10.0 million; and
(x)Indebtedness incurred by the Company or any of its Subsidiaries
arising from agreements or their respective bylaws providing for
indemnification, adjustment of purchase price or similar obligations, or
from guarantees of letters of credit, surety bonds or performance bonds
securing the performance of the Company or any of its Subsidiaries to any
Person acquiring all or a portion of such business or assets of a
Subsidiary of the Company for the purpose of financing such acquisition, in
a principal amount not to exceed 25% of the gross proceeds (with proceeds
other than cash or Cash Equivalents being valued at the fair market value
thereof as determined by the Board of Directors of the Company in good
faith) actually received by the Company or any of its Subsidiaries in
connection with such disposition.
85
<PAGE>
Indebtedness or Disqualified Stock of any Person which is outstanding at the
time such Person becomes a Subsidiary of the Company (including upon
designation of any subsidiary or other Person as a Subsidiary) or is merged
with or into or consolidated with the Company or a Subsidiary of the Company
shall be deemed to have been incurred at the time such Person becomes such a
Subsidiary of the Company or is merged with or into or consolidated with the
Company or a Subsidiary of the Company, as applicable.
LIENS
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create, incur, assume or suffer
to exist any Lien on any asset now owned or hereafter acquired, or any income
or profits therefrom or assign or convey any right to receive income
therefrom, except Permitted Liens, unless the Notes are secured by such Lien
on an equal and ratable basis; provided that if the Obligation secured by any
Lien is subordinate or junior in right of payment to the Notes, the Lien
securing such Obligation shall be subordinate and junior to the Lien securing
the Notes with the same or lesser relative priority as such Obligation shall
have been with respect to the Notes.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any encumbrance or restriction on the
ability of any Subsidiary to (i) (a) pay dividends or make any other
distributions to the Company or any of its Subsidiaries (l) on its Capital
Stock or (2) with respect to any other interest or participation in, or
measured by, its profits, or (b) pay any indebtedness owed to the Company or
any of its Subsidiaries, (ii) make loans or advances to the Company or any of
its Subsidiaries or (iii) transfer any of its properties or assets to the
Company or any of its Subsidiaries, except for such encumbrances or
restrictions existing under or by reason of (a) Existing Indebtedness as in
effect on the date of the Indenture, (b) the Credit Agreement as in effect as
of the date of the Indenture and, any amendments, modifications, restatements,
renewals, increases, supplements, refundings, replacements or refinancings
thereof, (c) the Indenture and the Notes or the Guarantees, as applicable, or
Indebtedness permitted to be incurred pursuant to the Indenture and ranking
pari passu with the Notes to the extent such restrictions are no more
restrictive than those of the Indenture, (d) applicable law, (e) any
instrument governing Acquired Indebtedness or Capital Stock of a Person
acquired by the Company or any of its Subsidiaries as in effect at the time of
such acquisition (except to the extent such Acquired Indebtedness was incurred
in connection with or in contemplation of such acquisition), which encumbrance
or restriction is not applicable to any Person, or the properties or assets of
any Person, other than the Person, or the property or assets of the Person, so
acquired, (f) by reason of customary non-assignment provisions in leases and
licenses entered into in the ordinary course of business and consistent with
past practices, (g) Purchase Money Obligations or Capital Lease Obligations
for property acquired in the ordinary course of business that impose
restrictions of the nature described in clause (iii) above only on the
property so acquired, (h) agreements relating to the financing of the
acquisition of real or tangible personal property acquired after the date of
the Indenture, provided that such encumbrance or restriction relates only to
the property which is acquired and in the case of any encumbrance or
restriction that constitutes a Lien, such Lien constitutes a Permitted Lien as
set forth in clause (xi) of the definition of "Permitted Lien," (i) any
restriction or encumbrance contained in contracts for sale of assets permitted
by this Indenture in respect of the assets being sold pursuant to such
contract, (j) Senior Indebtedness or Guarantor Senior Indebtedness permitted
to be incurred under the Indenture and incurred on or after the date of the
Indenture, (k) Permitted Refinancing Indebtedness, provided that the
restrictions contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive than those contained in the agreements
governing the Indebtedness refinanced thereby, or (l) any restriction with
respect to a Subsidiary (or any of its property or assets) imposed pursuant to
an agreement entered into for the direct or indirect sale or disposition of
all or substantially all of the Capital Stock or assets of such Subsidiary (or
the property or assets that are subject to such restriction) pending the
closing of such transaction.
86
<PAGE>
LIMITATION ON LAYERING DEBT
The Indenture provides that (i) the Company will not incur, create, issue,
assume, guarantee or otherwise become liable for any Indebtedness that by its
terms or the terms of any document or instrument relating thereto is
subordinate or junior in right of payment to any Senior Indebtedness and
senior in any respect in right of payment to the Notes, and (ii) the
Guarantors will not incur, create, issue, assume, guarantee or otherwise
become liable for any Indebtedness that by its terms or the terms of any
document or instrument relating thereto is subordinate or junior in right of
payment to any Guarantor Senior Indebtedness and senior in any respect in
right of payment to the Guarantee.
MERGER, CONSOLIDATION, OR SALE OF ASSETS
The Indenture provides that the Company will not in a single transaction or
series of related transactions consolidate or merge with or into (whether or
not the Company is the surviving corporation), or directly or indirectly,
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
transactions, to another corporation, Person, or entity, unless (i) the
Company is the surviving corporation or the entity or the Person formed by or
surviving any such consolidation or merger (if other than the Company) or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia; (ii) the
entity or Person formed by or surviving any such consolidation or merger (if
other than the Company) or the entity or Person to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made assumes all the obligations of the Company under the Notes and the
Indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee; (iii) immediately after such transaction no
Default or Event of Default exists; (iv) the Company, or the entity or Person
formed by or surviving any such consolidation or merger (if other than the
Company), or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made will, at the time of such transaction
and after giving pro forma effect thereto as if such transaction had occurred
at the beginning of the applicable four-quarter period, be permitted to incur
at least $1.00 of additional Indebtedness pursuant to the Fixed Charge
Coverage Ratio test set forth in the first paragraph of the covenant described
above under the caption "--Incurrence of Indebtedness and Issuance of
Preferred Stock"; and (v) the Company shall have delivered to the Trustee an
Officer's Certificate and an opinion of counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture (if any)
comply with the Indenture. Notwithstanding the foregoing, the transactions
constituting the Transactions shall be deemed to be expressly permitted under
the Indenture and shall not require the execution and delivery of a
supplemental indenture.
Upon any consolidation or merger or any transfer of all or substantially all
of the assets of the Company in accordance with the foregoing, the successor
corporation formed by such consolidation or into which the Company is merged
or to which such transfer is made shall succeed to and (except in the case of
a lease) be substituted for, and may exercise every right and power of, the
Company under the Indenture with the same effect as if such successor
corporation had been named therein as the Company, and (except in the case of
a lease) the Company shall be released from the obligations under the Notes
and the Indenture except with respect to any obligations that arise from, or
are related to, such transaction.
For the purposes of the foregoing, the transfer (by lease, assignment, sale
or otherwise) of all or substantially all of the properties and assets of one
or more Subsidiaries of the Company, the Company's interest in which
constitutes all or substantially all of the properties and assets of the
Company shall be deemed to be the transfer of all or substantially all of the
properties and assets of the Company.
TRANSACTIONS WITH AFFILIATES
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to enter into any transaction (including the sale, lease,
exchange, transfer or other disposition of any of its properties or assets or
services, or the purchase of any property, assets or services), or enter into
or make any contract,
87
<PAGE>
agreement, understanding, loan, advance or guarantee with, or for the benefit
of, any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless
(i) such Affiliate Transaction is on terms that are no less favorable to the
Company or the relevant Subsidiary than those that would have been obtained in
a comparable transaction by the Company or such Subsidiary with an unrelated
Person and (ii) the Company delivers to the Trustee (a) with respect to any
Affiliate Transaction or series of related Affiliate Transactions entered into
after the date of the Indenture involving aggregate consideration in excess of
$1.0 million, a resolution of the Board of Directors set forth in an officers'
certificate certifying that such Affiliate Transactions comply with clause
(i) above and that such Affiliate Transactions have been approved by a
majority of the disinterested members of the Board of Directors and (b) with
respect to any Affiliate Transactions or series of related Affiliate
Transactions involving aggregate consideration in excess of $10.0 million, a
favorable written opinion as to the fairness to the Company or such Subsidiary
of such Affiliate Transactions from a financial point of view issued by an
investment banking firm of national standing in the United States, or in the
event such transaction is a type that investment bankers do not generally
render fairness opinions, a valuation or appraisal firm of national standing;
provided that the following shall not be deemed to be Affiliate Transactions:
(A) the Development Agreement as in effect on the Issue Date, so long as no
Event of Default shall have occurred and be continuing; (B) the Stockholders
Agreement among Holdings and the stockholders listed as signatories thereto;
(C) indemnification agreements entered into by the Company with any of its
officers and directors; (D) any employment or consulting agreement entered
into by the Company or any of its Subsidiaries in good faith and in the
ordinary course of business and consistent with the past practice of the
Company or such Subsidiary (including the Lee Employment Agreement and the
George Employment Agreement as in effect on the Issue Date); (E) transactions
between or among the Company and/or its Wholly Owned Subsidiaries; and (F)
transactions permitted by the provisions of the Indenture described above
under the caption "Restricted Payments." In addition, none of the Transactions
shall be deemed to be Affiliate Transactions.
LINE OF BUSINESS
The Indenture provides that neither the Company nor any of its Subsidiaries
shall directly or indirectly engage to any substantial extent in any line or
lines of business activity other than that which, in the reasonable good faith
judgment of the Board of Directors of the Company, is a Related Business.
REPORTS
The Indenture provides that for so long as Holdings is subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act and the
Company is a wholly owned Subsidiary of Holdings, the Company shall deliver to
the Trustee, and to each Holder, Holdings' annual, quarterly and current
reports pursuant to Section 13 or 15(d) of the Exchange Act within 15 days
after such reports have been filed with the SEC; provided, however, that in
the event that either (i) Holdings is no longer subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act or (ii) the Company is
no longer a wholly owned Subsidiary of Holdings, then whether or not required
by the rules and regulations of the Commission so long as any Notes are
outstanding, the Company will furnish to the Holders of Notes (i) all
quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms l0-Q and 10-K if the
Company were required to file such forms, including a "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and, with
respect to the annual information and a report thereon by the Company's
certified independent accountants and (ii) all current reports that would be
required to be filed with the Commission on Form 8-K if the Company were
required to file such reports. In addition, whether or not required by the
rules and regulations of the Commission, at any time after the effectiveness
of a registration statement with respect to the Exchange Offer, the Company
and Holdings, as the case may be, will file a copy of all such information and
reports with the Commission for public availability (unless the Commission
will not accept such a filing) and make such information available to
securities analysts and prospective investors upon request. In addition, the
Company and Holdings (for so long as the Company is a wholly owned Subsidiary
of Holdings) have agreed that, for so long as any Notes remain outstanding,
they will furnish to the Holders and to securities analysts and prospective
investors, upon their request, the information required to be delivered
pursuant to Rule l44A(d) (4) under the Securities Act.
88
<PAGE>
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default (i) default for 30 days in the payment when due of interest or
Liquidated Damages, if any on the Notes (whether or not prohibited by the
subordination provisions of the Indenture); (ii) default in payment when due
of the principal of or premium, if any, on the Notes (whether or not
prohibited by the subordination provisions of the Indenture); (iii) failure by
the Company to comply with the provisions described under the caption
"Repurchase at the Option of Holders"; (iv) failure by the Company for 60 days
after notice given to the Company by the Trustee or to the Company and the
Trustee by the Holders of at least 25% of the aggregate principal amount of
Notes outstanding to comply with any of its other agreements in the Indenture
or the Notes; (v) default under any mortgage, indenture or instrument under
which there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Subsidiaries (or
the payment of which is guaranteed by the Company or any of its Subsidiaries)
whether such Indebtedness or Guarantee now exists, or is created after the
date of the Indenture, which default (a) is caused by a failure to pay
principal of or premium on such Indebtedness at maturity (after giving effect
to any applicable grace period provided in such Indebtedness) or (b) results
in the acceleration of such Indebtedness prior to its express maturity and, in
each case, the principal amount of any such Indebtedness, together with the
principal amount of any other such Indebtedness under which there has been
such a payment default or the maturity of which has been so accelerated,
aggregates $5.0 million or more; (vi) failure by the Company or any of its
Significant Subsidiaries to pay nonappealable final judgments (not fully
covered by insurance) aggregating in excess of $5.0 million, which judgments
are not paid, bonded, discharged or stayed within a period of 60 days; (vii)
except as permitted by the Indenture, any Guarantee shall be held in a
judicial proceeding to be unenforceable or invalid or shall cease for any
reason to be in full force and effect or any Guarantor, or any Person acting
on behalf of any Guarantor, shall deny or disaffirm its obligations under its
Guarantee; and (viii) certain events of bankruptcy or insolvency with respect
to the Company or any of its Significant Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in aggregate principal amount of the then outstanding Notes
may declare all the Notes to be due and payable immediately by notice in
writing to the Company (and to the Trustee if given by the Holders).
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency with respect to the Company, or any
Significant Subsidiary or any group of Subsidiaries that, taken together,
would constitute a Significant Subsidiary, all outstanding Notes will become
due and payable without further action or notice. Holders of the Notes may not
enforce the Indenture or the Notes, except as provided in the Indenture.
Subject to certain limitations, Holders of a majority in aggregate principal
amount of the then outstanding Notes may direct the Trustee in its exercise of
any trust or power. The Trustee may withhold from Holders of the Notes notice
of any continuing Default or Event of Default (except a Default or Event of
Default relating to the payment of principal, premium, or interest) if it
determines that withholding notice is in their interest.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may, generally, on behalf of the Holders
of all of the Notes waive any existing Default or Event of Default and its
consequences under the Indenture except a continuing Default or Event of
Default in the payment of interest or Liquidated Damages on, or the principal
or premium of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes, the Indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each Holder of Notes by accepting a
Note waives and releases all such liability. The waiver and release are part
of the consideration for issuance of the Notes.
89
<PAGE>
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance"), except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
and Liquidated Damages on such Notes when such payments are due from the trust
referred to below, (ii) the Company's obligations with respect to the Notes
concerning issuing temporary Notes, registration of Notes, mutilated,
destroyed, lost or stolen Notes and the maintenance of an office or agency for
payment and money for security payments held in trust, (iii) the rights,
powers, trusts, duties and immunities of the Trustee, and the Company's
obligations in connection therewith and (iv) the Legal Defeasance provisions
of the Indenture. In addition, the Company may, at its option and at any time,
elect to have the obligations of the Company released with respect to certain
covenants that are described in the Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Notes. In the event Covenant
Defeasance occurs, certain events (not including nonpayment, bankruptcy,
receivership, rehabilitation and insolvency events) described under "Events of
Default" will no longer constitute an Event of Default with respect to the
Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient,
in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest and
Liquidated Damages on the outstanding Notes on the stated maturity or on the
applicable redemption date, as the case may be, and the Company must specify
whether the Notes are being defeased to maturity or to a particular redemption
date; (ii) in the case of Legal Defeasance, the Company shall deliver to the
Trustee an opinion of counsel in the United States reasonably acceptable to
the Trustee confirming that (A) the Company has received from, or there has
been published by, the Internal Revenue Service a ruling or (B) since the date
of the Indenture, there has been a change in the applicable federal income tax
law, in either case to the effect that, and based thereon such opinion of
counsel shall confirm that, the Holders of the outstanding Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, the Company shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that the Holders of the outstanding Notes will not recognize income, gain or
loss for federal income tax purposes as a result of such Covenant Defeasance
and will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Event of Default or Default shall have
occurred and be continuing on the date of such deposit (other than an Event of
Default or Default resulting from the borrowing of funds to be applied to such
deposit); (v) such Legal Defeasance or Covenant Defeasance will not result in
a breach or violation of, or constitute a default under, the Credit Agreement
or any other material agreement or instrument (other than the Indenture) to
which the Company or any of its Subsidiaries is a party or by which the
Company or any of its Subsidiaries is bound; (vi) the Company must have
delivered to the Trustee an opinion of counsel to the effect that after the
91st day following the deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar
laws affecting creditors' rights generally; (vii) the Company must deliver to
the Trustee an Officers Certificate stating that the deposit was not made by
the Company with the intent of preferring the Holders of Notes over the other
creditors of the Company with the intent of defeating, hindering, delaying or
defrauding creditors of the Company or others; and (viii) the Company must
deliver to the Trustee an Officers Certificate and an opinion of counsel, each
stating that all conditions precedent provided for, in the case of the
Officers' Certificate, (i) through (vii) and, in the case of the opinion of
counsel, clauses (i) (with respect to the validity and perfection of the
security interest), (ii), (iii) and (v) of this paragraph relating to the
Legal Defeasance or the Covenant Defeasance, as applicable, have been complied
with.
90
<PAGE>
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note
selected for redemption. Also, the Company is not required to transfer or
exchange any Note for a period of 15 days before a selection of Notes to be
redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of a
majority in aggregate principal amount of the Notes then outstanding
(including consents obtained in connection with a tender offer or exchange
offer for Notes) and any existing default or compliance with any provision of
the Indenture or the Notes may be waived with the consent of the Holders of a
majority in aggregate principal amount of the then outstanding Notes
(including consents obtained in connection with a tender offer or exchange
offer for Notes).
Without the consent of each Holder affected thereby, an amendment or waiver
may not (with respect to any Notes held by a non-consenting Holder): (i)
reduce the aggregate principal amount of Notes whose Holders must consent to
an amendment, supplement or waiver, (ii) reduce the principal of or change the
fixed maturity of any Note or alter the provisions with respect to the
redemption of the Notes (neither of the covenants described above under the
caption "--Repurchase at the Option of Holders" shall constitute a provision
with respect to the redemption of the Notes), (iii) reduce the rate of or
change the time for payment of interest on any Note, (iv) waive a Default or
Event of Default in the payment of Liquidated Damages or principal of, or
premium, if any, or interest on the Notes (except a rescission of acceleration
of the Notes by the Holders of a majority in aggregate principal amount of the
Notes and a waiver of the payment default that resulted from such
acceleration), (v) make any Note payable in currency other than that stated in
the Notes, (vi) make any change in the provisions of the Indenture relating to
waivers of past Defaults or the rights of Holders of Notes to receive payments
of principal of, or premium, if any, or interest on the Notes, (vii) waive a
redemption payment with respect to any Note (a payment required by either of
the covenants described above under the caption "Repurchase at the Option of
Holders" shall not constitute a redemption payment), or (viii) make any change
in the foregoing amendment and waiver provisions. In addition, any amendment
to the subordination provisions of the Indenture will require the consent of
the holders of Designated Senior Indebtedness.
Notwithstanding the foregoing, without the consent of any Holder of Notes
(but subject to the consent of the Holders of Designated Senior Indebtedness
in the case of any amendment of or supplement to the subordination provisions
of the Indenture), the Company and the Trustee may amend or supplement the
Indenture or the Notes to cure any ambiguity, defect or inconsistency, to
provide for uncertificated Notes in addition to or in place of certificated
Notes, to provide for the assumption of the Company's obligations to Holders
of Notes in the case of a merger or consolidation, to make any change that
would provide any additional rights or benefits to the Holders of Notes
(including the addition of any Guarantors) or that does not adversely affect
the legal rights under the Indenture of any such Holder, to comply with
requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act, or to comply
with the procedures of the Depositary with respect to the provisions of the
Indenture and the Notes relating to transfers and/or exchanges of the Notes.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; however, if it acquires any conflicting interest it
must eliminate such conflict within 90 days, apply to the Commission for
permission to continue, or resign.
91
<PAGE>
The Holders of a majority in aggregate principal amount of the then
outstanding Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The Indenture provides that in case an Event of
Default shall occur (which shall not be cured), the Trustee will be required,
in the exercise of its power, to use the degree of care of a prudent Person in
the conduct of his own affairs. Subject to such provisions, the Trustee will
be under no obligation to exercise any of its rights or powers under the
Indenture at the request of any Holder of Notes, unless such Holder shall have
offered to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to the Company at 6350
San Ignacio Avenue, San Jose, California 95119, Attention: Assistant
Secretary.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Indebtedness" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with"), as used with respect to any Person,
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of voting securities, by agreement or otherwise;
provided that beneficial ownership of 15% or more of the voting securities of
a Person shall be deemed to be control.
"Asset Sale" means (i) the sale, lease (other than operating leases),
conveyance or other disposition that does not constitute a Restricted Payment
or an Investment by such Person of any of its non-cash assets (including,
without limitation, by way of a sale and leaseback and including the issuance,
sale or other transfer of any of the capital stock of any Subsidiary of such
Person but excluding Cash Equivalents liquidated in the ordinary course of
business) other than to the Company or to any of its Wholly Owned Subsidiaries
(including the receipt of proceeds of insurance paid on account of the loss of
or damage to any asset and awards of compensation for any asset taken by
condemnation, eminent domain or similar proceeding, and including the receipt
of proceeds of business interruption insurance); and (ii) the issuance of
Equity Interests in any Subsidiaries or the sale of any Equity Interests in
any Subsidiaries, in each case, in one or a series of related transactions,
provided that notwithstanding the foregoing, the term "Asset Sale" shall not
include: (a) the sale, lease, conveyance, disposition or other transfer of all
or substantially all of the assets of the Company, as permitted pursuant to
the covenant entitled "Merger, Consolidation or Sale of Assets," (b) the sale
or lease of equipment, inventory, accounts receivable or other assets in the
ordinary course of business consistent with past practice, (c) the sale or
disposal of damaged, worn out or other obsolete personal property in the
ordinary course of business so long as such property is no longer necessary
for the proper conduct of the business of the Company or such Subsidiary, as
applicable; (d) a transfer of assets by the Company to a Wholly Owned
Subsidiary or by a Wholly Owned Subsidiary to the Company or to another Wholly
Owned Subsidiary, (e) an issuance of Equity Interests by a Wholly Owned
Subsidiary to the Company or to another Wholly Owned Subsidiary, (f) the
surrender or waiver of contract rights or the settlement, release or surrender
of contract, tort
92
<PAGE>
or other claims of any kind, in each case undertaken in good faith, (g) the
grant in the ordinary course of business of any non-exclusive license of
patents, trademarks, registrations therefor and other similar intellectual
property, (h) the sale of the assets described in the letter agreement dated
July 7, 1998 between the Company and Pactuco, Inc. (relating to the sale of
certain Rantoul, Illinois manufacturing assets), (i) Permitted Investments or
Permitted Liens, or (j) the sale, lease, conveyance or other disposition of
any Restricted Investment or the assets of, equity interest in, or claims
against, any Unrestricted Subsidiary.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York are authorized or
obligated by law or executive order to close.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a Capital Lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Contribution" means any contribution to the equity of the Company
for which no consideration is given, or if consideration is given by the
Company, the only consideration given is common stock with no redemption
rights and no special privileges, preferences, or special voting rights.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
"Cash Equivalents" means (a) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States is pledged in support thereof) having maturities not more than twelve
months from the date of acquisition, (b) U.S. dollar denominated (or foreign
currency fully hedged) time deposits, certificates of deposit, Eurodollar time
deposits or Eurodollar certificates of deposit of (i) any domestic commercial
bank of recognized standing having capital and surplus in excess of $100
million or (ii) any bank whose short-term commercial paper rating from S&P is
at least A-l or the equivalent thereof or from Moody's is at least P-l or the
equivalent thereof (any such bank being an "Approved Lender"), in each case
with maturities of not more than twelve months from the date of acquisition,
(c) commercial paper and variable or fixed rate notes issued by any Approved
Lender (or by the parent company thereof) or any variable rate notes issued
by, or guaranteed by, any domestic corporation rated A-2 (or the equivalent
thereof) or better by S&P or P-2 (or the equivalent thereof) or better by
Moody's and maturing within twelve months of the date of acquisition, (d)
repurchase agreements with a bank or trust company or recognized securities
dealer having capital and surplus in excess of $100 million for direct
obligations issued by or fully guaranteed by the United States of America in
which the Company shall have a perfected first priority security interest
(subject to no other Liens) and having, on the date of purchase thereof, a
fair market value of at least 100% of the amount of repurchase obligations,
and (e) interests in regulated money market mutual funds which invest solely
in assets or securities of the type described in subparagraphs (a), (b), (c)
or (d) hereof.
"Change of Control" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or
a series of related transactions) of all or substantially all of the assets of
the Company to any Person or group of related Persons for purposes of Section
13(d) of the Exchange Act (a "Group"), together with any Affiliates thereof
(whether or not otherwise in compliance with the provisions of the Indenture);
(ii) (A) prior to the initial public offering (other than a public offering
pursuant to a registration statement on Form S-8) of the Common Stock of the
Company or of Holdings (for so long as the Company is a wholly owned
Subsidiary of Holdings), both (x) Brentwood Associates Buyout Fund II, L.P.
and Charlesbank Equity Fund IV, Limited Partnership and their Related Persons
(collectively, the "Permitted Holders") shall own directly or indirectly less
than 50% of the aggregate ordinary voting power for the election of directors
("Voting Power") represented by the issued and outstanding Capital Stock of
the Company and (y)
93
<PAGE>
any Person or Group (other than the Permitted Holders) shall become the owner,
directly or indirectly, beneficially or of record, of shares representing
Voting Power greater than that owned by the Permitted Holders or (B)
subsequent to the initial public offering (other than a public offering
pursuant to a registration statement on Form S-8) of the Common Stock of the
Company or of Holdings (for so long as the Company is a wholly owned
Subsidiary of Holdings), both (x) the Permitted Holders shall directly or
indirectly own less than 30% of the aggregate Voting Power represented by the
issued and outstanding Capital Stock of the Company and (y) any other Person
or Group (other than the Permitted Holders) shall become the owner, directly
or indirectly, beneficially or of record, of shares representing greater than
35% of the aggregate Voting Power of the Company; (iii) during any two-year
period the directors who constituted the Board of Directors of the Company at
the beginning of such period, (together with any new directors whose election
by such Board of Directors or whose nomination for election by the
shareholders of the Company was approved by a vote of at least a majority of
the directors of the Company then still in office who were either directors at
the beginning of such period or whose election or nomination for election was
previously so approved or is any designee of the Permitted Holders or was
nominated by such Permitted Holders or any of their designees) cease for any
reason to constitute a majority of the Board of Directors of the Company then
in office; or (iv) at any time after the Issue Date, the Company no longer
continues, for Federal income tax purposes, to be a member of the affiliated
group of Holdings under circumstances that would accelerate, for Federal
income tax purposes, the recognition of any material unrealized gain in
respect of Holdings' investment account in the Company.
"Common Stock" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether
voting or non-voting) of such Person's common stock, whether outstanding on
the Issue Date or issued after the Issue Date, and includes, without
limitation, all series and classes of such common stock.
"Consolidated EBITDA" means, with respect to the Company and its
Subsidiaries for any period, the sum of, without duplication, (i) the
Consolidated Net Income for such period, plus (ii) the Fixed Charges for such
period, plus (iii) provision for taxes based on income or profits for such
period, all determined in accordance with GAAP, (to the extent such income or
profits were considered in computing Consolidated Net Income for such period),
plus (iv) consolidated depreciation, amortization and other non-cash charges
of the Company and its Subsidiaries required to be reflected as expenses on
the books and records of the Company, all determined in accordance with GAAP,
minus (v) cash payments with respect to any non-recurring, non-cash charges
previously added back pursuant to clause (iv), and (vi) excluding the impact
of foreign currency translations. Notwithstanding the foregoing, the provision
for taxes based on the income or profits of, and the depreciation and
amortization and other non-cash charges of, a Subsidiary of a Person shall be
added to Consolidated Net Income to compute Consolidated EBITDA only to the
extent (and in the same proportion) that the Net Income of such Subsidiary was
included in calculating the Consolidated Net Income of such Person and only if
a corresponding amount would be permitted at the date of determination to be
paid as a dividend to the Company by such Subsidiary without prior approval
(that has not been obtained), pursuant to the terms of its charter and all
agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to that Subsidiary or its stockholders.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided
that (i) the Net Income (but not loss) of any Person that is not a Subsidiary
or that is accounted for by the equity method of accounting shall be included
only to the extent of the amount of dividends or distributions paid in cash to
the referent Person or a Wholly Owned Subsidiary thereof, (ii) the Net Income
of any Subsidiary shall be excluded to the extent that the declaration or
payment of dividends or similar distributions by that Subsidiary of that Net
Income is not at the date of determination permitted without any prior
governmental approval (which has not been obtained) or, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to that Subsidiary or its stockholders, (iii) the Net Income of any
Person acquired in a pooling of interests transaction for any period prior to
the date of such acquisition shall be excluded, (iv) the cumulative
94
<PAGE>
effect of a change in accounting principles shall be excluded, (v) the Net
Income of, or any dividends or other distributions from, any Unrestricted
Subsidiary, to the extent otherwise included, shall be excluded, whether or
not distributed to the Company or one of its Subsidiaries, and (vi) all other
extraordinary nonrecurring gains and extraordinary nonrecurring losses shall
be excluded. See "Net Income."
"Convertible Subordinated Debentures" means 4 1/4% Convertible Subordinated
Debentures due 2000 of Holdings.
"Credit Agreement" means that certain Credit Agreement, dated as of August
17, 1998, by and among the Company and Societe Generale, as administrative
agent, and the lenders parties thereto, including any related notes,
guarantees, collateral documents, instruments and agreements executed in
connection therewith, and in each case as amended, modified, renewed,
refunded, replaced, extended, restated or refinanced from time to time,
including any agreement restructuring or adding Subsidiaries of the Company as
additional borrowers or guarantors thereunder and whether by the same or any
other agent, lender or group of lenders; provided that the total amount of
Indebtedness is not thereby increased beyond the amount that may then be
incurred at such time pursuant to the covenant described under the caption "--
Incurrence of Indebtedness and Issuance of Preferred Stock."
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Designated Senior Indebtedness" means (i) so long as the Senior Bank Debt
is outstanding, the Senior Bank Debt and (ii) thereafter, any other Senior
Indebtedness permitted under the Indenture the principal amount of which is
$25.0 million or more and that has been designated by the Company as
"Designated Senior Indebtedness."
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable
at the option of the holder thereof, in whole or in part, on or prior to the
date on which the Notes mature.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means an underwritten public offering of Equity Interests
of the Company, or of Holdings (for so long as the Company is a wholly owned
Subsidiary of Holdings), other than Disqualified Stock, pursuant to a
registration statement filed with the Commission in accordance with the
Securities Act.
"Existing Indebtedness" means the Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the Credit Agreement) in existence
on the date of the Indenture, until such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person
and its Subsidiaries for such period, whether paid or accrued (including,
without limitation, amortization of original issue discount, amortization of
deferred financing fees, non-cash interest payments, the interest component of
any deferred payment obligations, the interest component of all payments
associated with Capital Lease Obligations, commissions, discounts and other
fees and charges incurred in respect of letter of credit or bankers'
acceptance financings, and net payments (if any) pursuant to Hedging
Obligations), all as determined in accordance with GAAP, (ii) the consolidated
interest expense of such Person and its Subsidiaries that was capitalized
during such period, all as determined in accordance with GAAP, (iii) any
interest expense on Indebtedness of another Person, all as determined in
accordance with GAAP, that is Guaranteed by such Person or one of its
Subsidiaries or secured by a Lien on assets of such Person or one of its
Subsidiaries (whether or not such Guarantee or Lien is called upon) and (iv)
the product of (a) all cash dividend
95
<PAGE>
payments (and non-cash dividend payments in the case of a Person that is a
Subsidiary of the Company) on any series of preferred stock of such Person
payable to a party other than the Company or a Wholly Owned Subsidiary, times
(b) a fraction, the numerator of which is one and the denominator of which is
one minus the then current combined federal state and local statutory tax rate
of such Person, expressed as a decimal, on a consolidated basis and in
accordance with GAAP.
"Fixed Charge Coverage Ratio" means, with respect to any Person for any
period, the ratio of the Consolidated EBITDA of such Person and its
Subsidiaries for such period to the Fixed Charges of such Person and its
Subsidiaries for such period. In the event that the Company or any of its
Subsidiaries incurs, assumes, retires, Guarantees or redeems any Indebtedness
(other than revolving credit borrowings) or issues preferred stock subsequent
to the commencement of the four-quarter reference period for which the Fixed
Charge Coverage Ratio is being calculated but on or prior to the date on which
the event for which the calculation of the Fixed Charge Coverage Ratio is made
(the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be
calculated giving pro forma effect to such incurrence, assumption, retirement,
Guarantee or redemption of Indebtedness, or such issuance or redemption of
preferred stock, as if the same had occurred at the beginning of the
applicable four-quarter reference period. For purposes of making the
computation referred to above, (i) acquisitions that have been made by the
Company or any of its Subsidiaries, including through mergers or
consolidations and including any related financing and refinancing
transactions, during the four-quarter reference period or subsequent to such
reference period and on or prior to the Calculation Date shall be deemed to
have occurred on the first day of the four-quarter reference period, (ii) the
Consolidated EBITDA attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of on or prior to
the Calculation Date, shall be excluded, and (iii) the Fixed Charges
attributable to discontinued operations, as determined in accordance with
GAAP, and operations or businesses disposed of on or prior to the Calculation
Date, shall be excluded, but only to the extent that the obligations giving
rise to such Fixed Charges will not be obligations of the referent Person or
any of its Subsidiaries following the Calculation Date.
"Foreign Subsidiary" means any Wholly Owned Subsidiary of the Company
organized and incorporated in a jurisdiction outside the United States that
primarily conducts its business outside the United States.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture.
"George Employment Agreement" means the Amended and Restated Employment
Agreement dated as of February 17, 1998 among Holdings, the Company and Mary
J. George.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any Person and any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of)
such Indebtedness of such Person (whether arising by virtue of agreements to
keep well, to purchase assets, goods, letters of credit, reimbursement
agreements, securities or services, to take-or-pay or to maintain financial
statement conditions or otherwise) or (ii) entered into for the purpose of
assuring in any other manner the obligee of such Indebtedness of the payment
thereof or to protect such obligee against loss in respect thereof (in whole
or in part); provided, however, that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has corresponding meaning.
"Guarantor Senior Indebtedness" means (i) all Obligations in respect of the
Senior Bank Debt and any Guarantee by a Guarantor of the Senior Bank Debt and
(ii) any other Indebtedness incurred, created or assumed by a Guarantor
(including Post Petition Interest, Expense and Indemnity Claims, whether or
not allowable or enforceable as a claim in a case commenced under Bankruptcy
Law or any other receivership, reorganization, insolvency or liquidation
proceeding), unless the instrument under which such Indebtedness is incurred
expressly
96
<PAGE>
provides that it is on a parity with or subordinated in right of payment to
the Guarantee by a Guarantor of the Notes. Notwithstanding anything to the
contrary in the foregoing, Guarantor Senior Indebtedness will not include (w)
any liability for federal, state, local, or other taxes owed or owing by the
Guarantor, (x) any Indebtedness of a Guarantor (other than a Guarantee of
Senior Bank Debt under the Credit Agreement) to any of its Subsidiaries or
other Affiliates or (y) any trade payables.
"Guarantor" means (i) Holdings and (ii) any Subsidiary of the Company that
becomes a guarantor of the Notes pursuant to the terms of the Indenture.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) currency exchange or interest rate swap agreements,
interest rate cap agreements and interest rate collar agreements and (ii)
other agreements or arrangements designed to protect such Person against
fluctuations in interest rates or currency exchange rates.
"Holder" means the Person in whose name a Note is registered on the
Registrar's books.
"Holdings" means Bell Sports Corp., a Delaware corporation, and its
successors and assigns.
"Indebtedness" means, with respect to any Person on the date of
determination, any (i) principal of, interest, premium, if any, and fees in
respect of indebtedness of such Person, whether or not contingent, in respect
of borrowed money or evidenced by bonds, notes, debentures or similar
instruments or letters of credit (or reimbursement agreements in respect
thereof) or banker's acceptances or representing Capital Lease Obligations or
the balance deferred and unpaid of the purchase price of any property or
representing any Hedging Obligations, except any such balance that constitutes
an accrued expense or trade payable or warranty or service obligations in the
ordinary course of business incurred in the ordinary course of business, but
only (other than with respect to letters of credit and Hedging Obligations) if
and to the extent any of the foregoing indebtedness would appear as a
liability upon a consolidated balance sheet of such Person prepared in
accordance with GAAP, (ii) all obligations of such Person with respect to any
conditional sale or title retention agreement, (iii) the amount of all
Obligations of such Person with respect to redemption, repayment or other
repurchase of any Disqualified Stock or, with respect to any Subsidiary of
such Person, any preferred stock, (iv) all indebtedness of others secured by a
Lien on any asset of such Person (whether or not such indebtedness is assumed
by such Person), and (v) to the extent not otherwise included, the Guarantee
by such Person of any Indebtedness of any other Person.
"Intercompany Note" means that certain promissory note made by Holdings in
favor of the Company as of the Issue Date.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations, but
excluding guarantees of Indebtedness of the Company or any Subsidiary to the
extent such guarantee is permitted by the covenant "Incurrence of Indebtedness
and Issuance of Preferred Stock"), advances or capital contributions
(excluding commission, travel and similar advances to officers and employees
made in good faith in the ordinary course of business), transfers of assets
outside the ordinary course of business other than Asset Sales, purchases or
other acquisitions for consideration of Indebtedness, Equity Interests or
other securities and all other items that are or would be classified, as
investments on a balance sheet prepared in accordance with GAAP; provided that
an acquisition of assets, Equity Interests or other securities by the Company
for consideration consisting of common equity securities of the Company shall
not be deemed to be an Investment.
"Issue Date" means the date of first issuance of the Notes under the
Indenture.
"Junior Securities" means securities (i) that are subordinated, at least to
the same extent as the Notes are subordinated to Senior Indebtedness, to
Senior Indebtedness or Guarantor Senior Indebtedness, as applicable, and
97
<PAGE>
all securities issued in exchange for, or on account of, Senior Indebtedness
or Guarantor Senior Indebtedness, as applicable ("Reorganization Senior
Debt"), (ii) that have a final maturity date and Weighted Average Life to
Maturity that is the same or greater than the Notes or the Guarantee and (iii)
that are not secured by any collateral; provided, that, in the case of
subordination in respect of Senior Bank Debt under the Credit Agreement and
any Reorganization Senior Debt issued in exchange therefor or on account
thereof, "Junior Securities" means securities (i) that are subordinated, at
least to the same extent as the Notes are subordinated to Senior Indebtedness,
to all Obligations in respect of Senior Bank Debt and any guarantee thereof
and all Reorganization Senior Debt issued in exchange for, or on account of,
Obligations in respect of Senior Bank Debt or any such guarantee, as
applicable, (ii) that (A) have a final maturity date occurring after the last
scheduled final maturity date of all Senior Bank Debt under the Credit
Agreement or Reorganization Senior Debt issued in respect thereof that is
outstanding on the date of issuance of such securities and (B) are not subject
to any required principal payment, sinking fund payment or redemption prior to
such last scheduled final maturity date and (iii) that are not secured by any
collateral.
"Lee Employment Agreement" means the Amended and Restated Employment
Agreement dated as of February 17, 1998 among Holdings, the Company and Terry
G. Lee.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or similar statutes) of any jurisdiction).
"Liquidated Damages" means, the amounts payable by the Company, if any,
pursuant to the Registration Rights Agreement.
"Merger" means the merger of HB Acquisition Corporation, a Delaware
corporation with and into Holdings pursuant to an Agreement and Plan of
Recapitalization and Merger, as amended, dated as of February 17, 1998.
"Net Cash Proceeds" means the aggregate amount of cash or Cash Equivalents
received by the Company in the case of a sale or equity contribution in
respect of Qualified Capital Stock plus, in the case of an issuance of
Qualified Capital Stock upon any exercise, exchange or conversion of
securities (including options, warrants, rights and convertible or
exchangeable debt) of the Company that were issued for cash after the Issue
Date, the amount of cash originally received by the Company upon the issuance
of such securities (including options, warrants, rights and convertible or
exchangeable debt) less the sum of all payments, fees, commissions, and
customary and reasonable expenses (including, without limitation, the fees and
expenses of legal counsel and investment banking fees and expenses) incurred
in connection with such sale or equity contribution in respect of Qualified
Capital Stock.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but
not loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b)
the disposition of any securities by such Person or any of its Subsidiaries or
the extinguishment of any Indebtedness of such Person or any of its
Subsidiaries and (ii) any extraordinary or nonrecurring gain (but not loss),
together with any related provision for taxes on such extraordinary or
nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash and Cash Equivalents received by the
Company or any of its Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of
any non-cash consideration received in any Asset Sale) and, with respect to
the covenant "Restricted Payments," by the Company or any Subsidiary in
respect of the sale of an Unrestricted Subsidiary
98
<PAGE>
and the sale, liquidation or repayment for cash of a Restricted Investment, in
each case, net of the direct costs relating thereto (including, without
limitation, legal, accounting and investment banking fees, and sales
commissions) and any relocation expenses incurred as a result thereof, taxes
paid or payable as a result thereof (after taking into account any available
tax credits or deductions and any tax-sharing arrangements), and any reserve
for adjustment in respect of the sale price of such asset or assets
established in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness of a Person to the extent that under
the terms thereof and pursuant to applicable law, no personal recourse could
be had against such Person for the payment of the principal of or interest or
premium or any other amounts with respect to such Indebtedness or for any
claim based on such Indebtedness and that enforcement of obligations on such
Indebtedness is limited solely to recourse against interests in specified
assets.
"Obligations" means any principal, interest, fees, expense reimbursements,
indemnities and other liabilities payable, whether at maturity, upon
redemption, by declaration or otherwise, pursuant to the terms contained in
the documentation governing any Indebtedness.
"Permitted Investments" means (a) any Investments in (i) the Company, (ii) a
Wholly Owned Subsidiary of the Company that is a Guarantor or (iii) a Foreign
Subsidiary, that, in the case of each of (i), (ii) and (iii) above, is engaged
in one or more Related Businesses; (b) Investments in Wholly Owned
Subsidiaries of the Company that are not Foreign Subsidiaries and that are
engaged in one or more Related Businesses in an amount not to exceed (at the
time of Investment) 35% of the total assets of the Company, as determined
pursuant to its most recently available balance sheet; (c) any Investments in
Cash Equivalents; (d) Investments by the Company or any Subsidiary of the
Company in a Person if as a result of such Investment (i) such Person becomes
a Wholly Owned Subsidiary of the Company that is engaged in one or more
Related Businesses or (ii) such Person is merged, consolidated or amalgamated
with or into, or transfers or conveys substantially all of its assets to, or
is liquidated into, the Company or a Wholly Owned Subsidiary of the Company
and that is engaged in one or more Related Businesses; (e) Investments made as
a result of the receipt of non-cash consideration from an Asset Sale that was
made pursuant to and in compliance with the covenant described above under the
caption "--Repurchase at the Option of Holders--Asset Sales"; (f) Investments
outstanding as of the date of the Indenture, including but not limited to the
Intercompany Note; (g) Investments in the form of promissory notes of members
of the Company's management in consideration of the purchase by such members
of Equity Interests (other than Disqualified Stock) in the Company or the
Guarantor (not to exceed in the aggregate $1.0 million at any time); (h)
Investments which constitute Existing Indebtedness of the Company or any of
its Subsidiaries; (i) accounts receivable, endorsements for collection or
deposits arising in the ordinary course of business; and (j) other Investments
in any Person or Persons that do not in the aggregate exceed $5.0 million at
any time outstanding; provided, however, that to the extent there would be,
and to avoid, any duplication in determining the amounts of investments
outstanding under this clause (j) any amounts which were credited under clause
(c) of the covenant "Restricted Payments" shall reduce the amounts outstanding
under this clause (j).
"Permitted Liens" means (i) Liens securing Senior Indebtedness; (ii) Liens
in favor of the Company or a Wholly Owned Subsidiary; (iii) Liens on property
of a Person existing at the time such Person is merged into or consolidated
with the Company or any Subsidiary of the Company, including any Liens
securing Permitted Refinancing Indebtedness with respect thereto; provided
that such Liens were in existence prior to the contemplation of such merger or
consolidation and do not extend to any assets other than those of the Person
merged into or consolidated with the Company; (iv) Liens on property existing
at the time of acquisition thereof by the Company or any Subsidiary of the
Company; provided that such Liens were in existence prior to the contemplation
of such acquisition; (v) Liens to secure the performance of statutory
obligations, surety or appeal bonds, performance bonds or other obligations of
a like nature incurred in the ordinary course of business; (vi) Liens existing
on the date of the Indenture; (vii) Liens for taxes, assessments or
governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings, provided that any reserve
or other appropriate provision as shall be required in conformity with GAAP
shall have been made therefor; (viii) Liens incurred in the ordinary course of
business of the Company or any Subsidiary of the
99
<PAGE>
Company with respect to obligations that do not exceed in the aggregate $5.0
million at any one time outstanding and that (a) are not incurred in
connection with the borrowing of money or the obtaining of advances or credit
(other than trade credit in the ordinary course of business) and (b) do not in
the aggregate materially detract from the value of the property or materially
impair the use thereof in the operation of business by the Company or such
Subsidiary; (ix) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance and
other types of social security; (x) easements, rights-of-way, restrictions,
defects or irregularities in title and other similar charges or encumbrances
not interfering in any material respect with the business of the Company or
any of its Subsidiaries, (xi) Purchase Money Liens (including extensions and
renewals thereof); (xii) Liens securing reimbursement obligations with respect
to letters of credit which encumber only documents and other property relating
to such letters of credit and the products and proceeds thereof, (xiii)
judgment and attachment Liens not giving rise to an Event of Default;
(xiv) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual or warranty requirements; (xv) Liens
arising out of consignment or similar arrangements for the sale of goods;
(xvi) any interest or title of a lessor in property subject to any capital
lease obligation or operating lease; (xvii) Liens on assets of Subsidiaries
with respect to Acquired Indebtedness (including Liens securing Permitted
Refinancing Indebtedness with respect thereto;) provided such Liens are only
on assets or property acquired with such Acquired Indebtedness and that such
Liens were not created in contemplation of or in connection with such
Acquisition; (xviii) statutory Liens of landlords and Liens of carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen and other Liens
imposed by law incurred in the ordinary course of business for sums not yet
delinquent or being contested in good faith by appropriate proceeding, if such
reserve or other appropriate provision, if any, as shall be required by GAAP
shall have been made in respect thereof; (xix) Liens upon specific items of
inventory or other goods and proceeds of any Person securing such Person's
obligations in respect of bankers' acceptances issued or created for the
account of such Person to facilitate the purchase, shipment, or storage of
such inventory or other goods; (xx) Liens securing Hedge Obligations that are
otherwise permitted under the Indenture; (xxi) Liens securing Indebtedness of
Foreign Subsidiaries of the Company; (xxii) leases or subleases granted to
others that do not materially interfere with the ordinary course of business
of the Company and its Subsidiaries; (xxiii) Liens arising from filing Uniform
Commercial Code financing statements regarding leases; (xxiv) Liens in favor
of customs and revenue authorities arising as a matter of law to secure
payment of custom duties in connection with the importation of goods.
"Permitted Payments to Holdings" means without duplication, (a) payments to
Holdings in an amount sufficient to permit Holdings to pay reasonable and
necessary operating expenses and other general corporate expenses to the
extent such expenses relate or are fairly allocable to the Company and its
Subsidiaries including any reasonable professional fees and expenses not in
excess of $500,000 in the aggregate during any consecutive 12-month period,
(b) payment to Holdings to enable Holdings to pay foreign, federal, state or
local tax liabilities ("Tax Payment"), not to exceed the amount of any tax
liabilities that would be otherwise payable by the Company and its
Subsidiaries to the appropriate taxing authorities if they filed separate tax
returns, to the extent that Holdings has an obligation to pay such tax
liabilities relating to the operations, assets or capital of the Company or
its Subsidiaries; provided, however that (i), notwithstanding the foregoing,
in the case of determining the amount of a Tax Payment that is permitted to be
paid by Company and any of its U.S. Subsidiaries in respect of their Federal
income tax liability, such payment shall be determined assuming that Company
is the parent company of an affiliated group (the "Company Affiliated Group")
filing a consolidated Federal income tax return and that Holdings and each
such U.S. Subsidiary is a member of the Company Affiliated Group and (ii) any
Tax Payments shall either be used by Holdings to pay such tax liabilities
within 90 days of Holdings' receipt of such payment or refunded to the party
from whom Holdings received such payments.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Subsidiaries issued in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Company or any of its Subsidiaries; provided that: (a) the
principal amount of such Permitted Refinancing Indebtedness does not exceed
(after deduction of reasonable and customary fees and expenses incurred in
connection with such refinancing and the amount of any premium or prepayment
penalty paid in connection with such Refinancing Transaction to the extent in
accordance with the terms of the document
100
<PAGE>
governing such Indebtedness (except for any modification to any such document
made in connection with or in contemplation of such refinancing) the lesser of
(i) the principal amount of the Indebtedness so extended refinanced, renewed,
replaced, defeased or refunded; and (ii) if such Indebtedness being Refinanced
was issued with an original issue discount, the accreted value thereof (as
determined in accordance with GAAP) at the time of such Refinancing, plus, in
each case accrued interest on such Indebtedness being Refinanced; (b) such
Permitted Refinancing Indebtedness has a Weighted Average Life to Maturity
equal to or greater than the Weighted Average Life to Maturity of, the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; (c) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the
Notes, such Permitted Refinancing Indebtedness has a final maturity date later
than the final maturity date of, and is subordinated in right of payment to,
the Notes on terms at least as favorable to the Holders of Notes as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and (d) such Indebtedness
is incurred either by the Company or by the Subsidiary who is the obligor on
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"Post-Petition Interest, Expense and Indemnity Claims" means (i) in the case
of any Senior Bank Debt interest at the rate (including the applicable post-
default rate) set forth in the Credit Agreement and expense reimbursement and
indemnity claims accruing (or that, if allowable, would have accrued) after
commencement of a case under Bankruptcy Law or any other receivership,
reorganization, insolvency or liquidation proceeding, whether or not such
interest, expense reimbursement or indemnity is an allowable claim in such
proceeding), and (ii) in the case of any other Senior Indebtedness, interest
accruing after the date of the commencement of any bankruptcy proceeding at
the rate specified in the applicable governing documentation, whether or not
allowable as a claim in such proceeding.
"Purchase Money Lien" means a Lien granted on an asset or property to secure
a Purchase Money Obligation permitted to be incurred under the Indenture and
incurred solely to finance the acquisition, including, in the case of a
Capital Lease, the lease, of such asset or property; provided, however, that
such Lien encumbers only such asset or property and is granted within 180 days
of such acquisition.
"Purchase Money Obligations" of any Person means any obligations of such
Person to any seller or another Person incurred or assumed to finance solely
the acquisition, including, in the case of a Capital Lease, the lease, of real
or personal property to be used in the business of such Person or any of its
Subsidiaries in an amount that is not more than 100% of the cost of such
property, and incurred within 180 days after the date of such acquisition
(excluding accounts payable to trade creditors incurred in the ordinary course
of business).
"Qualified Capital Stock" means any Capital Stock of the Company, or, if
expressly applicable, Holdings (for so long as the Company is a wholly owned
Subsidiary of Holdings), that is not Disqualified Stock.
"Related Business" means the business conducted (or proposed to be
conducted) by the Company and its Subsidiaries as of the Issue Date and any
and all businesses that in the good faith judgment of the Board of Directors
of the Company are materially related businesses.
"Related Person" with respect to any Permitted Holder means (A) any
controlling stockholder, 80% (or more) owned Subsidiary, or spouse, or
immediate family member (in the case of any individual) of such Permitted
Holder, (B) any trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, owners or Persons beneficially holding
an 80% or more controlling interest of which, consist of such Permitted Holder
and/or such other Persons referred to in the immediately preceding clause (A),
or (C), in the case of Harvard Private Capital Holdings, Inc., Charlesbank
Equity Fund IV, Limited Partnership.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Senior Bank Debt" means all Obligations in respect of the Indebtedness
outstanding under the Credit Agreement, including, without limitation, Post-
Petition Interest, Expense and Indemnity Claims whether or not
101
<PAGE>
allowable or enforceable as a claim in a case commenced under Bankruptcy Law
or any other receivership, reorganization, insolvency or liquidation
proceeding.
"Senior Discount Notes" means the 14% Senior Discount Notes due 2009 of
Holdings and any notes issued in substitution therefor having the same
interest rate, interest payment date and maturity date terms as they exist on
the Issue Date.
"Senior Indebtedness" means (i) the Senior Bank Debt and (ii) any other
Indebtedness permitted to be incurred, created or assumed by the Company
(including Post-Petition Interest, Expense and Indemnity Claims, whether or
not allowable or enforceable as a claim in a case commenced under Bankruptcy
Law or any other receivership, reorganization, insolvency or liquidation
proceeding) under the terms of the Indenture, unless the instrument under
which such Indebtedness is incurred expressly provides that it is on a parity
with or subordinated in right of payment to the Notes. Notwithstanding
anything to the contrary in the foregoing, Senior Indebtedness will not
include (w) any liability for federal, state, local or other taxes owed or
owing by the Company, (x) any Indebtedness (other than Senior Bank Debt under
the Credit Agreement) of the Company to any of its Subsidiaries or other
Affiliates, (y) any trade payables, or (z) any Indebtedness that is incurred
in violation of the Indenture.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Exchange Act, as such Regulation is in effect on the date
hereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total
voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
or trustees thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (ii) any partnership (a) the sole
general partner or the managing general partner of which is such Person or a
Subsidiary of such Person or (b) the only general partners of which are such
Person or of one or more Subsidiaries of such Person (or any combination
thereof). Unrestricted Subsidiaries shall not be included in the definition of
Subsidiary for any purposes of the Indenture (except, as the context may
otherwise require, for purposes of the definition of "Unrestricted
Subsidiary").
"Tender Offer" means the tender offer by Holdings for up to $62.5 million
aggregate principal amount of its Convertible Subordinated Debentures pursuant
to an Offer to Purchase dated as of June 30, 1998, as amended on July 24,
1998.
"Unrestricted Subsidiary" means (i) any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution; but only to the extent that such Subsidiary: (a) has no
Indebtedness other than Non-Recourse Debt; (b) is not party to any agreement,
contract, arrangement or understanding with the Company or any Subsidiary of
the Company, unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to the Company or such Subsidiary than
those that might be obtained at the time from Persons who are not Affiliates
of the Company; (c) is a Person with respect to which neither the Company nor
any of its Subsidiaries has any direct or indirect obligation to subscribe for
additional Equity Interests or maintain or preserve such Person's financial
condition or to cause such Person to achieve any specified level of operating
results; and (d) has not guaranteed or otherwise directly or indirectly
provided credit support for any Indebtedness of the Company or any of its
Subsidiaries, and (ii) any Subsidiary of an Unrestricted Subsidiary. Any such
designation by the Board of Directors shall be evidenced to the Trustee by
filing with the Trustee a certified copy of the Board Resolutions giving
effect to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing conditions and was permitted by the
covenant described above under the caption "Certain Covenants--Restricted
Payments." If, at any time, any Unrestricted Subsidiary would fail to meet the
foregoing requirements as an Unrestricted Subsidiary, it shall thereafter
cease to be an Unrestricted Subsidiary for purposes of the Indenture and any
Indebtedness of such Subsidiary shall be deemed to be incurred by a Subsidiary
of the Company as of such date (and, if such
102
<PAGE>
Indebtedness is not permitted nor incurred as of such date under the covenant
described under the caption "Certain Covenants--Incurrence of Indebtedness and
Issuance of Preferred Stock," the Company shall be in default of such
covenant). The Board of Directors of the Company may at any time designate any
Unrestricted Subsidiary to be a Subsidiary; provided that such designation
shall be deemed to be an incurrence of Indebtedness by a Subsidiary of the
Company of any outstanding Indebtedness of such Unrestricted Subsidiary and
such designation shall only be permitted if (i) such Indebtedness is permitted
under the covenant described under the caption "Certain Covenants--Incurrence
of Indebtedness and Issuance of Preferred Stock," and (ii) no Default or Event
of Default would be in existence following such designation.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each of the remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twentieth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person.
Unrestricted Subsidiaries shall not be included in the definition of Wholly
Owned Subsidiary for any purposes of the Indenture (except, as the context may
otherwise require, for purposes of the definition of "Unrestricted
Subsidiary.")
BOOK-ENTRY; DELIVERY; FORM AND TRANSFER
The Old Notes sold to qualified institutional buyers ("QIBs") initially have
been, and the New Notes initially will be, in the form of one or more
registered global notes without interest coupons (collectively, the "U.S.
Global Notes"). Upon issuance, the U.S. Global Notes will be deposited with
the Trustee, as custodian for the Depository Trust Company ("DTC" or the
"Depositary"), in New York, New York, and registered in the name of DTC or its
nominee for credit to the accounts of DTC's Direct Participants and Indirect
Participants (each as defined). The Old Notes offered and sold in offshore
transactions in reliance on Regulation S, if any, initially have been, and the
New Notes initially will be, in the form of one or more temporary, registered,
global book-entry notes without interest coupons (the "Reg S Temporary Global
Notes"). The Reg S Temporary Global Notes were deposited with the Trustee, as
custodian for DTC, in New York, New York and registered in the name of a
nominee of DTC for credit to the accounts of Indirect Participants
participating in DTC through the Euroclear System ("Euroclear") and Cedel
bank, societe anonyme ("CEDEL"). During the 40-day period commencing on the
day after the later of the commencement of the Offering and the original Issue
Date (as defined) of the Notes (the "Distribution Compliance Period"),
beneficial interests in the Reg S Temporary Global Notes may be held only
through Euroclear or CEDEL, and, pursuant to DTC's procedures, Indirect
Participants that hold a beneficial interest in the Reg S Temporary Global
Notes will not be able to transfer such interest to a person that takes
delivery thereof in the form of an interest in the U.S. Global Notes. Within a
reasonable time after the expiration of the Distribution Compliance Period,
the Reg S Temporary Global Notes will be exchanged for one or more permanent
global notes (the "Reg S Permanent Global Notes"; collectively with the Reg S
Temporary Global Notes, the "Reg S Global Notes") upon delivery to DTC of
certification of compliance with the transfer restrictions applicable to the
Notes and pursuant to Regulation S as provided in the Indenture. After the
Distribution Compliance Period, (i) beneficial interests in the Reg S
Permanent Global Notes may be transferred to a person that takes delivery in
the form of an interest in the U.S. Global Notes and (ii) beneficial interests
in the U.S. Global Notes may be transferred to a person that takes delivery in
the form of an interest in the Reg S Permanent Global Notes, provided, in each
case, that the certification requirements described below are complied with.
See "--Transfers of Interests in One Global Note for Interests in Another
Global Note." All registered global notes are referred to herein collectively
as "Global Notes."
Beneficial interests in all Global Notes and all Certificated Notes (as
defined), if any, will be subject to a certain restrictions on transfer and
will bear a restrictive legend. In addition, transfer of beneficial interests
in
103
<PAGE>
any Global Notes will be subject to the applicable rules and procedures of DTC
and its Direct Participants or Indirect Participants (including, if
applicable, those of Euroclear and CEDEL), which may change from time to time.
The Global Notes may be transferred, in whole and not in part, only to
another nominee of DTC or to a successor of DTC or its nominee in certain
limited circumstances. Beneficial interests in the Global Notes may be
exchanged for Notes in certificated form in certain limited circumstances. See
"--Transfer of Interests in Global Notes for Certificated Notes."
Initially, the Trustee will act as Paying Agent and Registrar. The Notes may
be presented from registration of transfer and exchange at the offices of the
Registrar.
DEPOSITARY PROCEDURES
DTC has advised the Issuer that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Direct Participants") and to facilitate the clearance and settlement of
transactions in those securities between Direct Participants through
electronic book-entry changes in accounts of Participants. The Direct
Participants include securities brokers and dealers (including the Initial
Purchasers), banks, trust companies, clearing corporations and certain other
organizations, including Euroclear and CEDEL. Access to DTC's system is also
available to other entities that clear through or maintain a direct or
indirect, custodial relationship with a Direct Participant (collectively, the
"Indirect Participants"). DTC may hold securities beneficially owned by other
persons only through the Direct Participants or Indirect Participants and such
other person's ownership interest and transfer of ownership interest will be
recorded only on the records of the Direct Participant and/or Indirect
Participant and not on the records maintained by DTC.
DTC has also advised the Issuer that, pursuant to DTC's procedures, (i) upon
deposit of the Global Notes, DTC will credit the accounts of the Direct
Participants designated by the Initial Purchasers with portions of the
principal amount of the Global Notes allocated to them by the Initial
Purchasers, and (ii) DTC will maintain records of the ownership interests of
such Direct Participants in the Global Notes and the transfer of ownership
interests by and between Direct Participants. DTC will not maintain records of
the ownership interests of, or the transfer of ownership interests by and
between, Indirect Participants or other owners of beneficial interests in the
Global Notes. Direct Participants and Indirect Participants must maintain
their own records of the ownership interests of, and the transfer of ownership
interests by and between, Indirect Participants and other owners of beneficial
interests in the Global Notes.
Investors in the U.S. Global Notes may hold their interests therein directly
through DTC if they are Direct Participants in DTC or indirectly through
organizations that are Direct Participants in DTC. Investors in the Reg S
Temporary Global Notes may hold their interests therein directly through
Euroclear or CEDEL or indirectly through organizations that are participants
in Euroclear or CEDEL. After the expiration of the 40-Day Distribution
Compliance Period (but not earlier), investors may hold interests in the Reg S
Permanent Global Notes through organizations other than Euroclear and CEDEL
that are Direct Participants in the DTC system. Morgan Guaranty Trust Company
of New York, Brussels office is the operator and depositary of Euroclear and
Citibank, N.A. is the operator and depositary of CEDEL (each a "Nominee" of
Euroclear and CEDEL, respectively). Therefore, they will each be recorded on
DTC's records as the holders of all ownership interests held by them on behalf
of Euroclear and CEDEL, respectively. Euroclear and CEDEL must maintain on
their own records the ownership interests, and transfers of ownership
interests by and between, their own customers' securities accounts. DTC will
not maintain such records. All ownership interests in any Global Notes,
including those of customers' securities accounts held through Euroclear or
CEDEL, may be subject to the procedures and requirements of DTC.
The laws of some states in the United States require that certain persons
take physical delivery in definitive, certificated form, of securities that
they own. This may limit or curtail the ability to transfer beneficial
interests in a Global Note to such persons. Because DTC can act only on behalf
of Direct Participants, which in turn act
104
<PAGE>
on behalf of Indirect Participants and others, the ability of a person having
a beneficial interest in a Global Note to pledge such interest to persons or
entities that are not Direct Participants in DTC, or to otherwise take actions
in respect of such interests, may be affected by the lack of physical
certificates evidencing such interests. For certain other restrictions on the
transferability of the Notes see "--Reg S Temporary and Reg S Permanent Global
Notes" and "--Transfers of Interests in Global Notes for Certificated Notes."
EXCEPT AS DESCRIBED IN "--TRANSFERS OF INTERESTS IN GLOBAL NOTES FOR
CERTIFICATED NOTES," OWNERS OF BENEFICIAL INTERESTS IN THE GLOBAL NOTES WILL
NOT HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY
OF NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS
OF HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Under the terms of the Indenture, the Issuer, Holdings and the Trustee will
treat the persons in whose names the Notes are registered (including Notes
represented by Global Notes) as the owners thereof for the purpose of
receiving payments and for any and all other purposes whatsoever. Payments in
respect of the principal, premium, Liquidated Damages, if any, and interest on
Global Notes registered in the name of DTC or its nominee will be payable by
the Trustee to DTC or its nominee as the registered holder under the
Indenture. Consequently, none of the Issuer, Holdings, the Trustee or any
agent of the Issuer, Holdings or the Trustee has or will have any
responsibility or liability for (i) any aspect of DTC's records or any Direct
Participant's or Indirect Participant's records relating to or payments made
on account of beneficial ownership interests in the Global Note or for
maintaining, supervising or reviewing any of DTC's records or any Direct
Participant's or Indirect Participant's records relating to the beneficial
ownership interests in any Global Note or (ii) any other matter relating to
the actions and practices of DTC or any of its Direct Participants or Indirect
Participants.
DTC has advised the Company that its current payment practice (for payments
of principal, interest and the like) with respect to securities such as the
Notes is to credit the accounts of the relevant Direct Participants with such
payment on the payment date in amounts proportionate to such Direct
Participant's respective ownership interests in the Global Notes as shown on
DTC's records. Payments by Direct Participants and Indirect Participants to
the beneficial owners of the Notes will be governed by standing instructions
and customary practices between them and will not be the responsibility of
DTC, the Trustee, the Issuer or Holdings. None of the Issuer, Holdings or the
Trustee will be liable for any delay by DTC or its Direct Participants or
Indirect Participants in identifying the beneficial owners of the Notes, and
the Issuer and the Trustee may conclusively rely on and will be protected in
relying on instructions from DTC or its nominee as the registered owner of the
Notes for all purposes.
The Global Notes will trade in DTC's Same-Day Funds Settlement System and,
therefore, transfers between Direct Participants in DTC will be effected in
accordance with DTC's procedures, and will be settled in immediately available
funds. Transfers between Indirect Participants (other than Indirect
Participants who hold an interest in the Notes through Euroclear or CEDEL) who
hold an interest through a Direct Participant will be effected in accordance
with the procedures of such Direct Participant but generally will settle in
immediately available funds. Transfers between and among Indirect Participants
who hold interests in the Notes through Euroclear and CEDEL will be effected
in the ordinary way in accordance with their respective rules and operating
procedures.
Subject to compliance with the transfer restrictions applicable to the Notes
described herein, cross-market transfers between Direct Participants in DTC,
on the one hand, and Indirect Participants who hold interests in the Notes
through Euroclear or CEDEL, on the other hand, will be effected by Euroclear's
or CEDEL's respective Nominee through DTC in accordance with DTC's rules on
behalf of Euroclear or CEDEL; however, delivery of instructions relating to
crossmarket transactions must be made directly to Euroclear or CEDEL, as the
case may be, by the counterparty in accordance with the rules and procedures
of Euroclear or CEDEL and within their established deadlines (Brussels time
for Euroclear and U.K. time for CEDEL). Indirect Participants who hold
interest in the Notes through Euroclear and CEDEL may not deliver instructions
directly to Euroclear's or CEDEL's Nominee. Euroclear or CEDEL will, if the
transaction meets its settlement requirements, deliver instructions to its
respective Nominee to deliver or receive interests on Euroclear's or CEDEL's
behalf in the
105
<PAGE>
relevant Global Note in DTC, and make or receive payment in accordance with
normal procedures for same-day fund settlement applicable to DTC.
Because of time zone differences, the securities accounts of an Indirect
Participant who holds an interest in the Notes through Euroclear or CEDEL
purchasing an interest in a Global Note from a Direct Participant in DTC will
be credited, and any such crediting will be reported to Euroclear or CEDEL
during the European business day immediately following the settlement date of
DTC in New York. Although recorded in DTC's accounting records as of DTC's
settlement date in New York, Euroclear and CEDEL customers will not have
access to the cash amount credited to their accounts as a result of a sale of
an interest in a Reg S Permanent Global Note to a DTC Participant until the
European business day for Euroclear or CEDEL immediately following DTC's
settlement date.
DTC has advised the Issuer that it will take any action permitted to be
taken by a holder of Notes only at the direction of one or more Direct
Participants to whose account interests in the Global Notes are credited and
only in respect of such portion of the aggregate principal amount of the Notes
to which such Direct Participant or Direct Participants has or have given
direction. However, if there is an Event of Default under the Notes, DTC
reserves the right to exchange Global Notes (without the direction of one or
more of its Direct Participants) for legended Notes in certificated form, and
to distribute such certificated forms of Notes to its Direct Participants. See
"--Transfers of Interests in Global Notes for Certificated Notes."
Although DTC, Euroclear and CEDEL have agreed to the foregoing procedures to
facilitate transfers of interests in the Reg S Permanent Global Notes and in
the U.S. Global Notes among Direct Participants, including Euroclear and
CEDEL, they are under no obligation to perform or to continue to perform such
procedures, and such procedures may be discontinued at any time. None of the
Issuer, Holdings, the Initial Purchasers or the Trustee shall have any
responsibility for the performance by DTC, Euroclear or CEDEL or their
respective Direct Participants and Indirect Participants of their respective
obligations under the rules and procedures governing any of their operations.
The information in this section concerning DTC, Euroclear and CEDEL and
their book-entry systems has been obtained from sources that the Issuer
believes to be reliable, but the Issuer takes no responsibility for the
accuracy thereof.
REG S TEMPORARY AND REG S PERMANENT GLOBAL NOTES
An Indirect Participant who holds an interest in the Reg S Temporary Global
Notes through Euroclear or CEDEL must provide Euroclear or CEDEL, as the case
may be, with a certificate in the form required by the Indenture certifying
that such Indirect Participant is either not a U.S. person (as defined) or has
purchased such interests in a transaction that is exempt from the registration
requirements under the Securities Act, and Euroclear or CEDEL, as the case may
be, must provide to the Trustee (or the Paying Agent, if other than the
Trustee) a certificate in the form required by the Indenture prior to any
exchange of such beneficial interests for beneficial interests in Reg S
Permanent Global Notes.
"U.S. Person" means (i) any natural person resident in the United States,
(ii) any partnership or corporation organized or incorporated under the laws
of the United States, (iii) any estate of which an executor or administrator
is a U.S. Person (other than an estate governed by foreign law and of which at
least one executor or administrator is a non-U.S. Person who has sole or
shared investment discretion with respect to its assets), (iv) any trust of
which any trustee is a U.S. Person (other than a trust of which at least one
trustee is a non-U.S. Person who has sole or shared investment discretion with
respect to its assets and no beneficiary of the trust (and no settler, if the
trust is revocable) is a U.S. Person), (v) any agency or branch of a foreign
entity located in the United States, (vi) any non-discretionary or similar
account (other than an estate or trust) held by a dealer or other fiduciary
for the benefit or account of a U.S. Person, (vii) any discretionary or
similar account (other than an estate or trust) held by a dealer or other
fiduciary organized, incorporated or (if any individual) resident in the
United States (other than such an account held for the benefit or account of a
non-U.S. Person), (viii) any
106
<PAGE>
partnership or corporation organized or incorporated under the laws of a
foreign jurisdiction and formed by a U.S. Person principally for the purpose
of investing in securities not registered under the Securities Act (unless it
is organized or incorporated and owned by "accredited investors" within the
meaning of Rule 501(a) under the Securities Act who are not natural persons,
estates or trusts); provided, however that the term "U.S. Person" shall not
include (A) a branch or agency of a U.S. Person that is located and operating
outside the United States for valid business purposes as a locally regulated
branch or agency engaged in the banking or insurance business, (B) any
employee benefit plan established and administered in accordance with the law,
customary practices and documentation of a foreign country and (C) the
international organizations set forth in Section 902(o)(7) of Regulation S
under the Securities Act and any other similar international organizations,
and their agencies, affiliates and pension plans.
TRANSFERS OF INTERESTS IN ONE GLOBAL NOTE FOR INTERESTS IN ANOTHER GLOBAL NOTE
Prior to the expiration of the Distribution Compliance Period, an Indirect
Participant who holds an interest in the Reg S Temporary Global Note through
Euroclear or CEDEL will not be permitted to transfer its interest to a U.S.
Person who takes delivery in the form of an interest in U.S. Global Notes.
After the expiration of the Distribution Compliance Period, an Indirect
Participant who holds an interest in Reg S Permanent Global Notes will be
permitted to transfer its interest to a U.S. Person who takes delivery in the
form of an interest in U.S. Global Notes only upon receipt by the Trustee of a
written certification from the transferor to the effect that such transfer is
being made in accordance with the restrictions on transfer set forth under
"Notice to Investors" and set forth in the legend printed on the Reg S
Permanent Global Notes.
Prior to the expiration of the Distribution Compliance Period, a Direct
Participant or Indirect Participant who holds an interest in the U.S. Global
Note will not be permitted to transfer its interests to any person that takes
delivery thereof in the form of an interest in the Reg S Temporary Global
Notes. After the expiration of the 40-Day Restricted Period, a Direct
Participant or Indirect Participant who holds an interest in U.S. Global Note
may transfer its interests to a person who takes delivery in the form of an
interest in Reg S Permanent Global Notes only upon receipt by the Trustee of a
written certification from the transferor to the effect that such transfer is
being made in accordance with Rule 904 of Regulation S.
Transfers involving an exchange of a beneficial interest in Reg S Global
Notes for a beneficial interest in U.S. Global Notes or vice versa will be
effected by DTC by means of an instruction originated by the Trustee through
DTC/Deposit Withdraw at Custodian (DWAC) system. Accordingly, in connection
with such transfer, appropriate adjustments will be made to reflect a decrease
in the principal amount of the one Global Note and a corresponding increase in
the principal amount of the other Global Note, as applicable. Any beneficial
interest in the one Global Note that is transferred to a person who takes
delivery in the form of the other Global Note will, upon transfer, cease to be
an interest in such first Global Note and become an interest in such other
Global Note and, accordingly, will thereafter be subject to all transfer
restrictions and other procedures applicable to beneficial interests in such
other Global Note for as long as it remains such an interest.
TRANSFERS OF INTERESTS IN GLOBAL NOTES FOR CERTIFICATED NOTES
An entire Global Note may be exchanged for definitive Notes in registered,
certificated form without interest coupons ("Certificated Notes") if (i) DTC
(x) notifies the Issuer that it is unwilling or unable to continue as
depositary for the Global Notes and the Issuer thereupon fails to appoint a
successor depositary within 90 days or (y) has ceased to be a clearing agency
registered under the Exchange Act, (ii) the Issuer, at its option, notifies
that Trustee in writing that it elects to cause the issuance of Certificated
Notes or (iii) there shall have occurred and be continuing a Default or an
Event of Default with respect to the Notes. In any such case, the Issuer will
notify the Trustee in writing that, upon surrender by the Direct Participants
and Indirect Participants of their interest in such Global Note, Certificated
Notes will be issued to each person that such Direct Participants and Indirect
Participants and the DTC identify as being the beneficial owner of the related
Notes.
107
<PAGE>
Beneficial interests in Global Notes held by any Direct Participants or
Indirect Participant may be exchanged for Certificated Notes upon request to
DTC, by such Direct Participant (for itself or on behalf of an Indirect
Participant), to the Trustee in accordance with customary DTC procedures.
Certificated Notes delivered in exchange for any beneficial interests in any
Global Note will be registered in the names, and issued in any approved
denominations, requested by DTC on behalf of such Direct Participants or
Indirect Participants (in accordance with DTC's customary procedures).
In all cases described herein, such Certificated Notes will bear the
restrictive legend referred to in "Notice to Investors," unless the Issuer
determines otherwise in compliance with applicable law.
None of the Issuer, Holdings or the Trustee will be liable for any delay by
the holder of any Global Note or DTC in identifying the beneficial owners of
Notes, and the Issuer and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the holder of the Global Note or
DTC for all purposes.
TRANSFERS OF CERTIFICATED NOTES
Certificated Notes may only be transferred if the transferor first delivers
to the Trustee a written certificate (and, in certain circumstances, an
opinion of counsel) confirming that, in connection with such transfer, it has
complied with the restrictions on transfer required by applicable law.
SAME DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Notes represented by
the Global Notes (including principal, premium, if any, interest and
Liquidated Damages, if any) be made by wire transfer of immediately available
same day funds to the accounts specified by the holder of interests in such
Global Note. With respect to Certificated Notes, the Issuer will make all
payments of principal, premium, if any, interest and Liquidated Damages, if
any, by wire transfer of immediately available same day funds to the accounts
specified by the holders thereof or, if no such account is specified, by
mailing a check to each such holder's registered address. The Issuer expects
that secondary trading in the Certificated Notes will also be settled in
immediately available funds.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Issuer, Holdings (together, the "Obligors") and the Initial Purchasers
entered into the Registration Rights Agreement on August 17, 1998. In the
Registration Rights Agreement, the Obligors agreed to file the Registration
Statement (of which this Prospectus is a part) with the Commission within 90
days of the Closing, and to use their respective best efforts to have it
declared effective within 135 days of the Closing. The Obligors also agreed to
use their respective best efforts to cause the Exchange Offer Registration
Statement to be effective continuously, to keep the Exchange Offer open for a
period of not less than 20 business days and cause the Exchange Offer to be
consummated no later than the 30th business day after it is declared effective
by the Commission. Pursuant to the Exchange Offer, certain holders of the
Notes which constitute Transfer Restricted Securities (as defined) may
exchange their Transfer Restricted Securities for registered New Notes. To
participate in the Exchange Offer, each holder must represent that it is not
an affiliate of the Company, it is not engaged in, and does not intend to
engage in, and has no arrangement or understanding with any person to
participate in, a distribution of the New Notes that are issued in the
Exchange Offer and it is acquiring the New Notes in the Exchange Offer in its
ordinary course of business.
If (i) the Exchange Offer is not permitted by applicable law or Commission
policy or (ii) any holder of Old Notes which are Transfer Restricted
Securities notifies the Issuer prior to the 20th business day following the
consummation of the Exchange Offer that (a) it is prohibited by law or
Commission policy from participating in the Exchange Offer, (b) it may not
resell the New Notes acquired by it in the Exchange Offer to the public
without delivering a prospectus, and the prospectus contained in the
Registration Statement of which this Prospectus is a part is not appropriate
or available for such resales by it, or (c) it is a broker-dealer and holds
108
<PAGE>
Old Notes acquired directly from the Issuer or any of the Issuer's affiliates,
the Obligors will file with the Commission a Shelf Registration Statement to
register for public resale the Transfer Restricted Securities held by any such
holder who provides the Issuer with certain information for inclusion in the
Shelf Registration Statement.
For the purposes of the Registration Rights Agreement, "Transfer Restricted
Securities" means each Old Note until the earliest on the date of which (i)
such Old Note is exchanged in the Exchange Offer and entitled to be resold to
the public by the holder thereof without complying with the prospectus
delivery requirements of the Securities Act, (ii) such Old Note has been
disposed of in accordance with the Shelf Registration Statement, (iii) such
Old Note is disposed of by a broker-dealer pursuant to the "Plan of
Distribution" contemplated by the Registration Statement of which this
Prospectus is a part (including delivery of the Prospectus contained therein)
or (iv) such Old Note is distributed to the public pursuant to Rule 144 under
the Securities Act.
The Registration Rights Agreement provides that (i) if the Obligors fail to
file an Exchange Offer Registration Statement with the Commission on or prior
to the 90th day after the Closing, (ii) if the Exchange Offer Registration
Statement is not declared effective by the Commission on or prior to the 135th
day after the Closing, (iii) if the Exchange Offer is not consummated on or
before the 30th business day after the Exchange Offer Registration Statement
is declared effective, (iv) if obligated to file the Shelf Registration
Statement and the Obligors fail to file the Shelf Registration Statement with
the Commission on or prior to the 30th business day after such filing
obligation arises, (v) if obligated to file a Shelf Registration Statement and
the Shelf Registration Statement is not declared effective on or prior to the
90th day after the obligation to file a Shelf Registration Statement arises,
or (vi) if the Exchange Offer Registration Statement or the Shelf Registration
Statement, as the case may be, is declared effective but thereafter ceases to
be effective or useable in connection with resales of the Transfer Restricted
Securities, for such time of non-effectiveness or non-usability (each, a
"Registration Default"), the Obligors agree to pay to each holder of Transfer
Restricted Securities affected thereby Liquidated Damages in an amount equal
to $0.05 per week per $1,000 in principal amount of Transfer Restricted
Securities held by such holder for each week or portion thereof that the
Registration Default continues for the first 90 day period immediately
following the occurrence of such Registration Default. The amount of the
Liquidated Damages shall increase by an additional $0.05 per week per $1,000
in principal amount of Transfer Restricted Securities at the beginning of and
for each subsequent 90-day period until all Registration Defaults have been
cured, up to a maximum amount of Liquidated Damages of $0.50 per week, per
$1,000 in principal amount of Transfer Restricted Securities. The Obligors
shall not be required to pay Liquidated Damages for more than one Registration
Default at any given time. No holder of Transfer Restricted Securities will be
entitled to receive Liquidated Damages pursuant to the Registration Rights
Agreement unless and until such holder has provided certain information to the
Company for use in connection with the applicable Shelf Registration
Statement. Following the cure of all Registration Defaults, the accrual of
Liquidated Damages will cease.
All accrued Liquidated Damages shall be paid by the Obligors to holders
entitled thereto in the same manner as interest payments on the Notes on semi-
annual damages payment dates which correspond to interest payment dates for
the Notes.
109
<PAGE>
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of certain United States federal
income tax consequences relevant to the purchase, ownership and disposition of
the Notes by the beneficial owners thereof ("Holders"). This discussion is
limited to the tax consequences to the initial Holders of Notes and does not
address the tax consequences to subsequent purchasers of Notes. This summary
does not purport to be a complete analysis of all of the potential United
States federal income tax consequences relating to the purchase, ownership and
disposition of the Notes, nor does this summary describe any federal estate
tax consequences. There can be no assurance that the Internal Revenue Service
("IRS") will take a similar view of the tax consequences described herein.
Furthermore, this discussion does not address all aspects of taxation that
might be relevant to particular purchasers in light of their individual
circumstances or to purchasers who are subject to special treatment under
United States federal tax law or to certain types of purchasers (including
dealers in securities, insurance companies, financial institutions, tax-exempt
entities and, except to the extent discussed below, Foreign Holders (as
defined below)). This discussion is based on the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the Treasury Regulations
promulgated thereunder, and administrative and judicial interpretations
thereof, all as in effect as of the date hereof and all of which are subject
to change (possibly on a retroactive basis). The discussion below assumes that
the Notes are held as capital assets (generally, property held for investment)
within the meaning of Code Section 1221.
EACH PROSPECTIVE INVESTOR IS URGED TO CONSULT SUCH INVESTOR'S TAX ADVISOR AS
TO THE SPECIFIC TAX CONSEQUENCES OF A PURCHASE OF NOTES IN LIGHT OF SUCH
INVESTOR'S PARTICULAR TAX SITUATION, INCLUDING THE APPLICATION AND EFFECT OF
THE CODE, AS WELL AS STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
The exchange of an Old Note for a New Note pursuant to the Exchange Offer is
not anticipated to be taxable to the exchanging Holder. As a result, an
exchanging Holder (i) would not be expected to recognize any gain or loss on
the exchange, (ii) would have a holding period for the New Note that includes
the holding period for the Old Note exchanged therefor, (iii) would have an
adjusted tax basis in the New Note equal to its adjusted tax basis in the Old
Note exchanged therefor and (iv) would recognize taxable gain or loss on a
subsequent sale, exchange, redemption or retirement of a New Note under the
same circumstances and conditions as a Holder of an Old Note would have with
respect to a sale, exchange, redemption or retirement of an Old Note.
The Exchange Offer is not expected to result in any United States federal
income tax consequences to a nonexchanging Holder.
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives New Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. This Prospectus,
as it may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with resales of New Notes received
in exchange for Old Notes where such Old Notes were acquired as a result of
market-making activities or other trading activities. The Issuer has agreed
that for a period of one year after the thirtieth business day following the
Expiration Date (or such shorter period as will terminate when all of the Old
Notes offered for exchange hereby have been sold), it will make this
Prospectus, as amended or supplemented, available to any Participating Broker-
Dealer for use in connection with any such resale.
The Issuer will not receive any proceeds from any sales of the New Notes by
Participating Broker-Dealers. New Notes received by Participating Broker-
Dealers for their own account pursuant to the Exchange Offer may be sold from
time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the New Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such
110
<PAGE>
resale may be made directly to purchaser or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from
any such Participating Broker-Dealer and/or the purchasers of any such New
Notes. Any Participating Broker-Dealer that resells the New Notes that were
received by it for its own account pursuant to the Exchange Offer and any
broker or dealer that participates in a distribution of New Notes may be
deemed to be an "underwriter" within the meaning of the Securities Act and any
profit on any such resale of New Notes and any commissions or concessions
received by any such persons may be deemed to be underwriting compensation
under the Securities Act. The Letter of Transmittal states that by
acknowledging that it will deliver and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
LEGAL MATTERS
The validity of the issuance of the New Notes offered hereby will be passed
upon for the Company by Sidley & Austin.
EXPERTS
The consolidated financial statements as of June 27, 1998 and June 28, 1997
and for each of the three years in the period ended June 27, 1998 included in
this Prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm.
111
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants......................................... F-2
Consolidated Balance Sheets as of June 28, 1997, as of June 27, 1998 and
as of September 28, 1998................................................. F-3
Consolidated Statements of Operations for the years ended June 29, 1996,
June 28, 1997 and June 27, 1998 and for the three months ended September
27, 1997 and September 26, 1998.......................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended June
29, 1996, June 28, 1997 and June 27, 1998................................ F-5
Consolidated Statements of Cash Flows for the years ended June 29, 1996,
June 28, 1997 and June 27, 1998 and for the three months ended September
27, 1997 and September 26, 1998.......................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Bell Sports Corp.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of Bell
Sports Corp. and its subsidiaries at June 27, 1998, and June 28, 1997, and the
results of their operations and their cash flows for each of the three fiscal
years in the period ended June 27, 1998, in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
San Francisco, California
July 27, 1998, except as to
Note 1, which is as of
August 17, 1998
F-2
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 26, JUNE 27, JUNE 28,
ASSETS 1998 1998 1997
- ------ ------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.................. $ 13,593 $ 45,093 $ 29,008
Accounts receivable........................ 42,824 63,472 75,915
Inventories................................ 40,837 39,679 46,549
Deferred taxes and other current assets.... 10,989 12,234 16,048
-------- -------- --------
Total current assets..................... 108,243 160,478 167,520
Property, plant and equipment................ 19,370 20,636 23,738
Goodwill..................................... 53,824 54,292 56,471
Intangibles and other assets................. 19,208 11,661 21,025
-------- -------- --------
Total assets............................. $200,645 $247,067 $268,754
======== ======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
<S> <C> <C> <C>
Current liabilities:
Accounts payable........................... $ 6,862 $ 7,663 $ 11,299
Accrued compensation and employee
benefits.................................. 2,163 5,541 3,998
Accrued expenses........................... 15,697 16,158 20,209
Notes payable and current maturities of
long-term debt and capital lease
obligations............................... 478 679 1,337
-------- -------- --------
Total current liabilities................ 25,200 30,041 36,843
Long-term debt............................... 149,265 86,625 106,454
Capital lease obligations and other
liabilities................................. 2,692 2,142 6,492
-------- -------- --------
Total liabilities........................ 177,157 118,808 149,789
-------- -------- --------
Commitments and contingencies
Stockholders' equity:
Series A Preferred stock; 6% cumulative,
$.01 par value; authorized 1,500,000
shares, 970,873 shares issued and
outstanding at September 26, 1998......... 49,505 -- --
Preferred stock, $0.1 par value authorized
1,000,000 shares, none issued at June 27,
1998 and June 28, 1997.................... -- -- --
Common stock; $.01 par value; authorized
25,000,000 shares; issued and outstanding:
14,410,508 and 13,915,436 shares at June
27, 1998, respectively, and 14,248,114 and
13,753,042 shares at June 28, 1997,
respectively.............................. -- 144 143
Class A Common stock; $.01 par value;
authorized 900,000 shares, 800,971 shares
issued and outstanding at September 26,
1998...................................... 8 -- --
Class B Common stock; $.01 par value;
authorized 15,000 shares, none issued.....
Class C Common stock; $.01 par value;
authorized 50,000 share, none issued......
Additional paid-in capital................. (8,172) 143,905 142,486
Accumulated other comprehensive income..... (832) (1,111) (407)
Accumulated deficit........................ (17,021) (9,461) (18,039)
-------- -------- --------
23,488 133,477 124,183
Treasury stock, at cost, none at September
26, 1998 and 495,072 shares at June 27,
1998 and June 28, 1997.................... -- (5,218) (5,218)
-------- -------- --------
Total stockholders' equity............... 23,488 128,259 118,965
-------- -------- --------
Total liabilities and stockholders'
equity.................................. $200,645 $247,067 $268,754
======== ======== ========
</TABLE>
See accompanying notes to these consolidated financial statements.
F-3
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED THREE MONTHS ENDED
---------------------------- ---------------------------
JUNE 27, JUNE 28, JUNE 29, SEPTEMBER 26, SEPTEMBER 27,
1998 1997 1996 1998 1997
-------- -------- -------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............... $207,236 $259,534 $262,340 $40,918 $43,632
Cost of sales........... 137,672 183,098 201,621 27,374 30,155
-------- -------- -------- ------- -------
Gross profit............ 69,564 76,436 60,719 13,544 13,477
Selling, general and
administrative
expenses............... 48,517 60,416 66,826 11,384 11,075
Amortization of goodwill
and intangible assets.. 2,260 3,320 2,854 562 636
Loss on disposal of
product lines and sale
of assets.............. 700 25,360 -- -- --
Restructuring charges... 1,192 4,141 5,850 -- --
Transaction costs....... -- -- -- 11,474
-------- -------- -------- ------- -------
Income (loss) from
operations............. 16,895 (16,801) (14,811) (9,876) 1,766
Net investment income... (1,716) (2,939) (2,877) (601) (429)
Interest expense........ 4,715 7,289 8,691 2,538 1,167
-------- -------- -------- ------- -------
Income (loss) before
provision for (benefit
from) income taxes..... 13,896 (21,151) (20,625) (11,813) 1,028
Provision for (benefit
from) income taxes..... 5,318 (2,963) (8,250) (1,366) 391
-------- -------- -------- ------- -------
Income (loss) before
extraordinary items.... 8,578 (18,188) (12,375) (10,447) 637
Extraordinary item: Gain
on early extinguishment
of debt, net of taxes
of $2,006.............. -- -- -- 2,887 --
-------- -------- -------- ------- -------
Net (loss) income....... $ 8,578 $(18,188) $(12,375) $(7,560) $ 637
======== ======== ======== ======= =======
</TABLE>
See accompanying notes to these consolidated financial statements.
F-4
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A CLASS A ACCUMULATED RETAINED TOTAL
PREFERRED COMMON ADDITIONAL OTHER EARNINGS STOCK-
COMMON COMMON -------------- ------------ PAID-IN COMPREHENSIVE (ACCUMULATED TREASURY HOLDERS'
SHARES STOCK SHARES STOCK SHARES STOCK CAPITAL INCOME DEFICIT) STOCK EQUITY
------- ------ ------ ------- ------ ----- ---------- ------------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at July
1, 1995.......... 8,166 $ 82 $ 64,320 $(1,110) $ 12,524 $ 75,816
Issuance of stock
and stock options
for AMRE Merger.. 5,988 59 77,152 77,211
Exercise of stock
options.......... 70 1 175 176
Purchase of
treasury stock... (523) $(5,517) (5,517)
Comprehensive
income:
Net loss........ (12,375) (12,375)
Other
comprehensive
income net of
tax:
Change in
unrealized
holding losses
on marketable
securities, net
of taxes of
$548............ 822 822
Currency
translation
adjustment...... (92) (92)
Other
comprehensive
income..........
Comprehensive
income...........
------- ----- --------- -------- -------- ------- ---------
Balance at June
29, 1996......... 13,701 142 141,647 (380) 149 (5,517) 136,041
Exercise of stock
options.......... 24 1 1,138 1,139
Issuance of
treasury stock... 28 (299) 299
Comprehensive
income:
Net loss........ (18,188) (18,188)
Other
comprehensive
income net of
tax:
Change in
unrealized
holding losses
on marketable
securities, net
of taxes of
$75............. 461 461
Currency
translation
adjustment...... (488) (488)
Other
comprehensive
income..........
Comprehensive
income...........
------- ----- --------- -------- -------- ------- ---------
Balance at June
28, 1997......... 13,753 143 142,486 (407) (18,039) (5,218) 118,965
Exercise of stock
options.......... 166 1 1,419 1,420
Cancellation of
shares........... (4) --
Comprehensive
income:
Net income...... 8,578 8,578
Other
comprehensive
income net of
tax:
Currency
translation
adjustment...... (704) (704)
Other
comprehensive
income..........
Comprehensive
income...........
------- ----- --------- -------- -------- ------- ---------
Balance at June
27, 1998......... 13,915 144 143,905 (1,111) (9,461) (5,218) 128,259
Issuance of
shares........... 874 $44,554 721 $ 7 440 45,001
Exchange of
shares........... (488) (5) 97 4,951 80 1 (4,946) 1
Exercise of stock
options.......... 5 38 38
Issuance of stock
options.......... 307 307
Repurchase of
common stock..... (13,432) (134) (137,549) (137,683)
Cancellation of
treasury stock... (5) (5,213) 5,218 --
Exchange of stock
options.......... (5,154) (5,154)
Comprehensive
income:
Net loss........ (7,560) (7,560)
Other
comprehensive
income net of
tax:
Currency
translation
adjustment...... 279 279
Other
comprehensive
income..........
Comprehensive
income...........
------- ----- --- ------- --- --- --------- -------- -------- ------- ---------
Balance at
September 26,
1998
(unaudited)...... -- $ -- 971 $49,505 801 $ 8 $ (8,172) $ (832) $(17,021) $ -- $ 23,488
======= ===== === ======= === === ========= ======== ======== ======= =========
<CAPTION>
COMPREHENSIVE
INCOME
-------------
<S> <C>
Balance at July
1, 1995..........
Issuance of stock
and stock options
for AMRE Merger..
Exercise of stock
options..........
Purchase of
treasury stock...
Comprehensive
income:
Net loss........ $(12,375)
Other
comprehensive
income net of
tax:
Change in
unrealized
holding losses
on marketable
securities, net
of taxes of
$548............ 822
Currency
translation
adjustment...... (92)
-------------
Other
comprehensive
income.......... 730
-------------
Comprehensive
income........... $(11,645)
=============
Balance at June
29, 1996.........
Exercise of stock
options..........
Issuance of
treasury stock...
Comprehensive
income:
Net loss........ $(18,188)
Other
comprehensive
income net of
tax:
Change in
unrealized
holding losses
on marketable
securities, net
of taxes of
$75............. 461
Currency
translation
adjustment...... (488)
-------------
Other
comprehensive
income.......... (27)
-------------
Comprehensive
income........... $(18,215)
=============
Balance at June
28, 1997.........
Exercise of stock
options..........
Cancellation of
shares...........
Comprehensive
income:
Net income...... $ 8,578
Other
comprehensive
income net of
tax:
Currency
translation
adjustment...... (704)
-------------
Other
comprehensive
income.......... (704)
-------------
Comprehensive
income........... $ 7,874
=============
Balance at June
27, 1998.........
Issuance of
shares...........
Exchange of
shares...........
Exercise of stock
options..........
Issuance of stock
options..........
Repurchase of
common stock.....
Cancellation of
treasury stock...
Exchange of stock
options..........
Comprehensive
income:
Net loss........ $ (7,560)
Other
comprehensive
income net of
tax:
Currency
translation
adjustment...... 279
-------------
Other
comprehensive
income.......... 279
-------------
Comprehensive
income........... $ (7,281)
=============
Balance at
September 26,
1998
(unaudited)......
</TABLE>
See accompanying notes to these consolidated financial statements.
F-5
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED THREE MONTHS ENDED
---------------------------- -----------------------
JUNE 27, JUNE 28, JUNE 29, SEPT. 26, SEPT. 27,
1998 1997 1996 1998 1997
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS PROVIDED BY
(USED IN) OPERATING
ACTIVITIES:
Net income (loss)........ $ 8,578 $(18,188) $(12,375) $ (7,560) $ 637
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities:
Write-off of goodwill
and intangibles..... 14,531 621
Amortization of
goodwill and
intangibles......... 2,260 3,338 2,854 562 648
Depreciation......... 5,549 6,222 6,059 1,422 1,369
Loss on disposal of
property, plant and
equipment........... 434 1,599 1,299 1,155 133
Provision for
doubtful accounts... 1,077 4,553 2,481 41 268
Loss on disposal of
product lines and
sale of assets...... 700
Provision for
inventory
obsolescence........ 2,340 2,876 3,602 818 480
Deferred income
taxes............... 3,997 (2,827) (7,546)
Changes in assets and
liabilities, net of
adjustments for
acquisitions and
dispositions:
Accounts receivable.. 8,542 (4,976) (14,819) 21,494 28,832
Inventories.......... (371) (7,782) 8,296 (2,175) (2,610)
Other assets......... 5,310 (684) 717 (422) 355
Accounts payable..... (2,300) (288) 852 (838) (1,472)
Other liabilities.... (8,623) 2,536 (13,370) (1,926) (4,469)
-------- -------- -------- --------- --------
Net cash provided by
(used in) operating
activities.............. 27,493 910 (21,950) 13,192 24,171
-------- -------- -------- --------- --------
CASH FLOWS PROVIDED BY
INVESTING ACTIVITIES:
Capital expenditures... (5,496) (7,058) (5,312) (1,233) (1,041)
Proceeds from the sale
of Service
Cycle/Mongoose........ 20,515
Acquisition of other
businesses, net of
cash acquired......... (1,493) (16,789)
Expenditures to acquire
intangible assets..... (7,581)
Net sales of marketable
securities............ 8,458 29,779
Proceeds from the sale
of SportRack.......... 13,427 13,427
-------- -------- -------- --------- --------
Net cash provided by
investing activities.... 7,931 20,422 7,678 (8,814) 12,386
-------- -------- -------- --------- --------
CASH FLOWS USED IN
FINANCING ACTIVITIES:
Proceeds from issuance
of common stock, net
of costs.............. 1,420 176 667
Treasury stock
purchases............. (5,517)
Proceeds from issuance
of senior subordinated
notes................. 110,000
Proceeds from issuance
of senior discount
notes................. 15,000
Proceeds from issuance
of preferred stock.... 44,555
Repurchase of common
stock................. (142,350)
Tender of subordinated
debentures............ (62,500)
Payments on notes
payable, long-term
debt and capital
leases................ (489) (869) (4,076) (136) (86)
Net payments on line of
credit agreement...... (19,067) (14,403) (25,099) (248) (19,971)
-------- -------- -------- --------- --------
Net cash used in
financing activities.... (18,136) (15,272) (34,516) (35,679) (19,390)
-------- -------- -------- --------- --------
Effect of exchange rate
changes on cash......... (1,203) (192) (90) (199) 2
-------- -------- -------- --------- --------
Net increase (decrease)
in cash and cash
equivalents............. 16,085 5,868 (48,878) (31,500) 17,169
Cash and cash equivalents
at beginning of period.. 29,008 23,140 72,018 45,093 29,008
-------- -------- -------- --------- --------
Cash and cash equivalents
at end of period........ $ 45,093 $ 29,008 $ 23,140 $ 13,593 $ 46,177
======== ======== ======== ========= ========
</TABLE>
See accompanying notes to these consolidated financial statements.
F-6
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY
Bell Sports Corp. ("the Company" or "Bell") is the leading manufacturer and
marketer of bicycle helmets worldwide and a leading supplier of a broad line
of bicycle accessories in North America. Bell is also a leading supplier of
auto racing helmets and a supplier of bicycle accessories worldwide. Recently,
the Company began marketing in-line skating, snowboarding, snow skiing and
water sport helmets.
In February 1998, HB Acquisition Corporation, a Delaware corporation ("HB
Acquisition"), and affiliate of Harvard Private Capital Holdings, Inc.
("Harvard Private Capital"), and Brentwood Associates Buyout Fund II, L.P.
("Brentwood"), and Bell entered into an Agreement and Plan of Recapitalization
and Merger (as amended, the "Merger Agreement"), which provides for the merger
of HB Acquisition with and into Bell, with Bell continuing as the surviving
corporation (the "Bell Merger"). On July 1, 1998, Harvard Private Capital
Group, Inc. separated from its parent company, Harvard Management Company, and
changed its name to Charlesbank Capital Partners, LLC ("Charlesbank"). As a
result, the portion of the investment in the Company formerly allocated to
Harvard Private Capital will be made by Charlesbank Equity Fund IV, Limited
Partnership, an investment affiliate of Charlesbank. Charlesbank Equity Fund
IV, Limited Partnership and Brentwood are hereinafter referred to collectively
as the "Investors." Consummation of the Bell Merger is subject to obtaining
the requisite vote of the Company's stockholders and the satisfaction of the
conditions set forth in the Merger Agreement. Under the Merger Agreement, as
of the effective time of the Bell Merger (the "Effective Time"), each share of
common stock, $.01 par value, of the Company (the "Common Stock") (other than
(i) shares of Common Stock held by HB Acquisition or shares of Common Stock
held directly or indirectly by the Company, which shares will be canceled and
(ii) shares of Common Stock held by persons perfecting appraisal rights) will
be converted into the right to receive $10.25 in cash (the "Per Share Merger
Consideration").
The Bell Merger was consummated on August 17, 1998.
In June 1998, the Company announced that it had commenced an offer (the
"Offer") to purchase up to $62.5 million aggregate principal amount of its 4
1/4% Convertible Subordinated Debentures due November 2000 (the "Debentures").
The Offer is expected to be completed in August 1998 in conjunction with the
Bell Merger and the offering of $110 million Senior Subordinated Notes (the
"Notes Offering") by Bell Sports, Inc. ("BSI"), a wholly-owned subsidiary of
the Company. In connection with the Notes Offering, the Company will guarantee
the Notes. Prior to the completion of the Notes Offering, American Recreation
Company Holdings, Inc. ("AMRE") a wholly-owned subsidiary of the Company will
be merged into BSI (the "BSI Merger"). Selected financial data of BSI and AMRE
is presented below on a pro forma combined basis as if the BSI Merger had been
completed on June 27, 1998 for the balance sheet data presented, and on
July 2, 1995 for the statement of operations data presented.
The Offer was consummated on August 17, 1998, and the BSI Merger was
consummated on July 29, 1998.
F-7
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
PRO FORMA COMBINED BSI AND AMRE
<TABLE>
<CAPTION>
JUNE 27, 1998 JUNE 28, 1997
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Selected Combined Balance Sheet
Data:
Cash and cash equivalents......... $ 34,662 $ 16,404
Current assets.................... 149,972 154,931
Non-current assets................ 47,916 61,053
Current liabilities............... 28,907 35,523
Non-current liabilities........... 116,070 140,124
Debt payable to unrelated
parties.......................... 2,134 22,621
Intercompany debt payable to the
Company.......................... 113,573 113,428
Stockholder's equity.............. 52,891 40,337
<CAPTION>
YEAR ENDED
-----------------------------------------
JUNE 27, 1998 JUNE 28, 1997 JUNE 29, 1996
------------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Selected Combined Statement of
Operations Data:
Net sales......................... $207,236 $259,534 $262,340
Gross profit...................... 69,564 76,436 80,719
Total interest expense............ 449 1,489 3,093
Net income........................ 13,260 (15,369) (9,542)
</TABLE>
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Accounting Period
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. The Company's
fiscal year is either a 52 or 53 week accounting period ending on the Saturday
that is nearest to the last day of June. There were no 53 week periods in the
three fiscal years ended June 27, 1998.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
Accounts Receivable and Concentration of Credit Risk
Accounts receivable at June 27, 1998 and June 28, 1997 are net of allowances
for doubtful accounts of $1.7 million and $5.0 million, respectively.
The Company's principal customers operate in the mass merchant, sporting
goods or independent bicycle dealer retail markets worldwide. The customers
are not geographically concentrated. As of June 27, 1998, and June 28, 1997,
respectively, 27% and 23% of the Company's gross accounts receivable were
attributed to one mass merchant customer. In addition, the same mass merchant
customer accounted for 21%, 18% and 17% of net sales during fiscal 1998, 1997
and 1996, respectively.
Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or
market (net realizable value). Costs included in inventories are (i) landed
purchased cost on sourced items and (ii) raw materials, direct labor and
manufacturing overhead on manufactured items.
F-8
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Property, Plant and Equipment
Property, plant and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation is provided using the straight-
line method over the estimated useful lives of the related assets. Leasehold
improvements and capital lease assets are amortized using the straight-line
method over the shorter of the base lease term or the estimated useful lives
of the related assets. Maintenance and repair costs are expensed as incurred.
Goodwill and Intangible Assets
The excess of the acquisition cost over the fair value of the net
identifiable assets of businesses acquired in purchase transactions has been
included in goodwill and is amortized on a straight-line basis over 25 to 40
years and is recorded net of accumulated amortization of $7.3 million and $5.5
million at June 27, 1998 and June 28, 1997, respectively. Other intangible
assets, which include non-compete agreements, acquisition costs, patents and
trademarks, and other items, are amortized over their estimated economic
lives, ranging from 2 to 17 years. Accumulated amortization of intangible
assets totaled $5.1 million and $4.2 million at June 27, 1998 and June 28,
1997, respectively. The Company's policy is to account for goodwill and all
other intangible assets at the lower of amortized cost or net realizable
value. As part of an ongoing review of the valuation and amortization of
intangible assets, management assesses the carrying value of the Company's
intangible assets to determine if changes in facts and circumstances suggest
that it may be impaired. If this review indicates that the intangible assets
will not be recoverable, as determined by a nondiscounted cash flow analysis
over the remaining amortization period, the carrying value of the Company's
intangible assets would be reduced to its estimated fair market value.
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.
Research and Development Expense
Research and development costs are expensed as incurred. These costs totaled
$3.6 million, $4.7 million and $4.7 million for fiscal 1998, 1997 and 1996,
respectively.
Advertising Costs
Advertising and related costs are expensed as incurred, except for ad
production costs which are expensed in the fiscal year in which the ad is
first run. These costs amounted to $5.5 million, $9.1 million, and $14.7
million for fiscal 1998, 1997 and 1996, respectively. The fiscal 1996 amount
includes $5.6 million related to a one-time advertising and promotional
campaign in connection with the launch of the Bell Pro helmet line and the
expansion of the Bell brand into the mass merchant channel.
Translation of Foreign Currency
Assets and liabilities of foreign subsidiaries are translated into U.S.
dollars at the rates of exchange on the balance sheet date. Revenue and
expense items are translated at the average rates of exchange prevailing
during the fiscal year. Translation adjustments are recorded in the cumulative
foreign currency translation adjustment component of stockholders' equity.
F-9
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Foreign Exchange Contracts
The Company periodically enters into forward foreign exchange contracts in
managing its foreign currency risk. Forward exchange contracts are used to
hedge various intercompany and external commitments with foreign subsidiaries
and inventory purchases denominated in foreign currencies. Exchange contracts
usually have maturities of less than one year. The Company has no significant
outstanding foreign exchange contracts at June 27, 1998, and had no
significant foreign exchange contract activity during the fiscal year then
ended.
Income Taxes
Consistent with the provisions of Statement of Financial Accounting Standard
("SFAS") No. 109 "Accounting for Income Taxes" ("SFAS 109"), the Company uses
the liability method of accounting for income taxes, which is an asset and
liability approach for financial accounting and reporting of income taxes.
Deferred tax assets and liabilities are recorded based upon temporary
differences between the tax basis of assets and liabilities and their carrying
values for financial reporting purposes. A valuation allowance is provided for
deferred tax assets when management concludes it is more likely than not that
some portion of the deferred tax assets will not be realized.
Accounting for Stock-Based Compensation
The Company has elected to continue to recognize compensation expense based
on the intrinsic value method.
Recent Accounting Pronouncements
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. Effective June 28, 1998, the Company adopted SFAS 130 and
reclassified 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. SFAS 131 is required to be adopted for fiscal years beginning
after December 15, 1997.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133") was issued. SFAS 133 establishes a new model
for accounting for derivatives and hedging activities and supersedes and
amends a number of existing standards. SFAS 133 is required to be adopted for
fiscal years beginning after June 15, 1999. Upon initial application, all
derivatives are required to be recognized in the statement of financial
position as either assets or liabilities and measured at fair value. In
addition, all hedging relationships must be reassessed and documented pursuant
to the provisions of SFAS 133.
The Company plans to adopt SFAS 131 in fiscal 1999 and SFAS 133 in fiscal
2000 and does not expect such adoptions to have a material effect on the
consolidated financial statements.
Reclassifications
Certain amounts have been reclassified to conform with the current
presentation.
F-10
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--NET INVESTMENT INCOME
Net investment income consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 27, JUNE 28, JUNE 29,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Dividend income.............................. $ 184 $ 610
Interest income.............................. $1,716 1,646 3,130
Proceeds from settlement of arbitration
case........................................ 1,815
Realized losses on sale of marketable
securities.................................. (654) (779)
Investment fees and other.................... (52) (84)
------ ------ ------
Total.................................... $1,716 $2,939 $2,877
====== ====== ======
</TABLE>
In fiscal 1997, net investment income included 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 losses to sell certain securities, were $1.3 million.
NOTE 4--INVENTORIES
Inventories consist of the following components (in thousands):
<TABLE>
<CAPTION>
JUNE JUNE
27, 28,
1998 1997
------- -------
<S> <C> <C>
Raw materials............................................. $ 3,539 $ 5,865
Work in process........................................... 2,010 2,125
Finished goods............................................ 34,130 38,559
------- -------
Total................................................. $39,679 $46,549
======= =======
</TABLE>
NOTE 5--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
JUNE 27, JUNE 28, USEFUL
1998 1997 LIFE
-------- -------- ----------
<S> <C> <C> <C>
Land, buildings and leasehold
improvements............................ $ 9,809 $ 9,703 3-38 years
Machinery, equipment and tooling......... 24,468 21,239 3-10 years
Office equipment......................... 7,363 9,408 3-7 years
Other.................................... 786 475 3-7 years
-------- --------
42,426 40,825
Less: Accumulated depreciation and
amortization............................ (21,790) (17,087)
-------- --------
Total................................ $ 20,636 $ 23,738
======== ========
</TABLE>
NOTE 6--BANK CREDIT FACILITIES AND LONG-TERM DEBT
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.
F-11
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Credit Agreement expires in December 1999. Based on the provisions of
the agreement, the Company could borrow a maximum of $49.5 million as of June
27, 1998. There were no outstanding borrowings under the Credit Agreement at
June 27, 1998.
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 June 27, 1998, 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
June 27, 1998 and June 28, 1997, the Company was in compliance with all bank
covenants.
The Company anticipates the Credit Agreement will be replaced by a new
facility following the consummation of the Bell Merger.
In November 1993, the Company issued an aggregate principal amount of $86.25
million of Convertible Subordinated Debentures (the "Debentures"), at par
value. Interest on the Debentures is payable on May 15 and November 15 of each
year. The Debentures are redeemable, in whole or in part, at the option of the
Company at any time on or after November 15, 1996, at specified redemption
prices. Principal is due at maturity on November 15, 2000. The Debentures are
convertible by the holder at any time prior to maturity, unless previously
redeemed, into shares of the Common Stock at a conversion price of $54.06 per
share, subject to adjustment in certain events. For the fiscal years ended
June 27, 1998, June 28, 1997, and June 29, 1996, interest expense relating to
the Debentures totaled $4.1 million in each year. This amount includes
$384,000 of amortization expense relating to debt issuance costs. Unamortized
debt issuance costs relating to the Debentures total $919,000 and $1.3 million
at June 27, 1998, and June 28 1997, respectively. Such costs are amortized on
an effective interest method over seven years.
The fair value of the Debentures at June 27, 1998, based on their quoted
market price of $84.0 at the close of business on June 27, 1998, was
approximately $72.5 million.
On June 30, 1998, the Company commenced an offer to purchase up to $62.5
million aggregate principal amount of the Debentures. The purchase price per
$1,000 principal amount of Debentures will be $905, plus accrued and unpaid
interest from May 15, 1998 up to, but not including, the date of payment. The
Company's obligation to purchase Debentures is conditioned upon, among other
things, the consummation of the Bell Merger and the receipt of financing.
F-12
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE
27, JUNE 28,
1998 1997
------- --------
<S> <C> <C>
Notes collateralized by certain equipment due at various dates
through December 2000 and bearing interest at fixed rates
ranging from 2.9% to 10.3%................................... $ 936 $ 1,841
Revolving credit agreement, maturing December 1999, bearing
interest at 4.63%............................................ -- 19,591
4 1/4% convertible subordinated debentures maturing November
2000......................................................... 86,250 86,250
------- --------
87,186 107,682
Less: Current maturities...................................... 561 1,228
------- --------
Total long-term debt...................................... $86,625 $106,454
======= ========
</TABLE>
Scheduled maturities, by fiscal year, of long-term debt are as follows (in
thousands):
<TABLE>
<S> <C>
1999...................................... $ 561
2000...................................... 353
2001...................................... 86,272
</TABLE>
NOTE 7--STOCKHOLDERS' EQUITY
Stock Options
The Company may grant, under various employee stock option plans (the
"Plans"), options to purchase up to 1,825,000 shares of Common Stock to
officers and key employees. Under the various Plans, the exercise price of
options granted may not be less than the fair market value of the Common Stock
at the date of grant. The options must be exercised within ten years of the
date of grant and typically vest equally over a three year period.
Under the 1993 Outside Directors Stock Option Plan (the "Directors' Plan"),
stock options for up to 205,000 shares may be granted to directors who are not
employees of the Company. Each non-employee director receives an option to
purchase 2,000 shares of Common Stock on the date of the Company's annual
meeting of stockholders at an exercise price equal to the fair market value of
the Common Stock on the date of grant. The options must be exercised within
ten years of the date of grant and vest equally over a three-year period. Each
non-employee director also receives an annual grant of immediately exercisable
options to purchase Common Stock, with an exercise price per share equal to
50% of the fair market value of Common Stock at the date of grant, in lieu of
a cash retainer fee. The number of shares subject to each option is determined
by dividing $10,000 by 50% of the fair market value of the Common Stock on the
date of grant. The Company recorded $70,000 in compensation expense in each of
fiscal 1998 and fiscal 1997 for options granted to non-employee directors
under this plan.
In April 1997, the Company provided Brunswick Corporation a three year
option to purchase 600,000 shares of the Company's Common Stock at an exercise
price of $7.50 per share pursuant to the sale of the Service Cycle/Mongoose
business. See Note 10. The options are immediately exercisable and must be
exercised within three years of the date of grant.
On August 27, 1996 the Management Stock Incentive Committee (the
"Committee") of the Board of Directors (the "Board") adopted a program
permitting employees eligible to participate in the Company's bonus program to
elect to forego their fiscal 1997 operating bonus and return all outstanding
stock options granted after April 1992 in exchange for replacement stock
options. In general, employees eligible to participate in the Company's bonus
program are eligible for 10% to 75% of their annual base salary if the Company
meets or exceeds certain Board approved net operating income goals.
F-13
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Senior management with long tenure agreed to cancel 40% of their existing
stock options, excluding stock options granted prior to April 1992, to
increase the number of stock options available for grant, thereby facilitating
the broadening of participation in the stock option program and enabling the
Company to create a voluntary program by which other employees participating
in the Company's bonus program would be able to replace existing stock options
in exchange for foregoing their fiscal 1997 operating bonus.
Under the replacement program, the number of shares of Common Stock subject
to a replacement option to be granted to an eligible employee was determined
by multiplying 80% of such employee's estimated fiscal 1997 operating bonus.
Each replacement option had an exercise price of $7.06 per share, the average
of the high and low transaction prices of a share of Common Stock as reported
by The Nasdaq Stock Market, and will become exercisable in equal one-third
increments over an eighteen month period with respect to options replacing
canceled options and over a three year period for replacement options granted
in excess of their existing options. Options with respect to 966,242 shares
with exercise prices ranging from $8.50 to $17.37 per share were exchanged
under the replacement program.
The following table summarizes option activity:
<TABLE>
<CAPTION>
NUMBER
OF SHARES WEIGHTED
UNDERLYING AVERAGE OPTIONS
OPTIONS EXERCISE PRICE EXERCISABLE
---------- -------------- -----------
<S> <C> <C> <C>
Options outstanding at July 1, 1995..... 1,152,675 $15.92 61,000
Options granted....................... 909,688 9.19
Options exercised..................... (70,607) 1.31
Options canceled...................... (75,000) 13.67
Options terminated.................... (70,167) 18.28
---------
Options outstanding at June 29, 1996.... 1,846,589 13.33 549,660
Options granted....................... 2,041,847 7.21
Options exercised..................... (23,754) 0.46
Options canceled...................... (966,242) 13.92
Options terminated.................... (566,677) 13.10
---------
Options outstanding at June 28, 1997.... 2,331,763 8.19 1,130,635
Options granted....................... 220,484 8.84
Options exercised..................... (165,935) 7.09
Options terminated.................... (194,706) 9.23
Options outstanding at June 27, 1998.... 2,191,606 8.25 1,670,035
=========
</TABLE>
Options outstanding at June 27, 1998 consisted of the following:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
RANGE OF REMAINING
EXERCISE NUMBER WEIGHTED AVERAGE CONTRACTUAL LIFE
PRICES OF SHARES EXERCISE PRICE (IN YEARS)
------------- --------- ---------------- ----------------
<S> <C> <C> <C>
$ 1.713-$4.52 78,294 $ 2.67 7.9
$ 6.25-$7.88 1,651,359 7.28 8.2
$ 8.50-$9.19 250,500 9.15 9.0
$10.80-$13.12 94,786 11.94 5.3
$13.87-$15.12 63,667 14.11 6.7
$16.12-$19.75 23,000 17.07 5.9
$28.25-$42.37 30,000 37.66 5.4
---------
2,191,606
=========
</TABLE>
F-14
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Options exercisable at June 27, 1998 consisted of the following:
<TABLE>
<CAPTION>
RANGE OF
EXERCISE NUMBER WEIGHTED AVERAGE
PRICES OF SHARES EXERCISE PRICE
------------- --------- ----------------
<S> <C> <C>
$ 1.713-$4.52 78,294 $ 2.67
$ 6.25-$7.88 1,364,280 7.31
$ 8.50-$9.13 31,006 9.04
$10.80-$13.12 79,788 11.75
$13.87-$15.12 63,667 14.11
$16.12-$19.75 23,000 17.07
$28.25-$42.37 30,000 37.66
---------
1,670,035
=========
</TABLE>
Pursuant to the Bell Merger, the Board will take all necessary or
appropriate steps to cause each option that is outstanding immediately prior
to the Bell Merger to be fully vested and exercisable. The holder of an option
that is not exercised prior to the Bell Merger will be entitled to receive,
for each share of Common Stock subject thereto, a cash payment in an amount
equal to the excess, if any, of $10.25 per share over the applicable per share
exercise price. Certain options to purchase Common Stock held by a member of
management will be exchanged for options to purchase capital stock of the
surviving corporation in the Bell Merger.
As required, the Company has adopted the disclosure provisions of SFAS No.
123 "Accounting for Stock Based Compensation" ("SFAS 123") for employee stock
options. The fair value of options granted during fiscal years 1998, 1997 and
1996 was computed using the Black-Scholes option pricing model. The weighted-
average assumptions used for stock option grants were an expected volatility
of the market price of the Company's Common Stock of 41%; weighted-average
expected life of the options of 4.9 years, no dividend yield and risk-free
interest rate of 6.50%. The interest rates are effective for option grant
dates made throughout the year. Adjustments for forfeitures are made as they
occur. The total value of options granted for the years ended June 27, 1998,
June 28, 1997 and June 29, 1996 was computed as approximately $949,000,
$1,405,000 and $75,000, respectively. If the Company had accounted for these
stock options issued to employees in accordance with SFAS 123, the effect on
net income (loss) for each fiscal year would have been reported as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------
JUNE 27, JUNE 28, JUNE 29,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net income (loss):
As reported...................................... $8,578 $(18,188) $(12,375)
Pro forma for SFAS 123........................... 7,463 (19,045) (12,421)
</TABLE>
The pro forma effects of applying SFAS 123 may not be representative of the
effects on reported net income for future years since options vest over
several years and additional option awards are made each year.
Rights Plan
On September 22, 1994, the Board declared a dividend of one preferred stock
purchase right (a "Right") for each outstanding share of Common Stock. The
dividend was awarded on October 3, 1994, to the holders of record of the
Common Stock at the close of business on October 3, 1994. One Right is also
associated with each share of Common Stock issued after October 3, 1994.
When the Rights become exercisable, each Right will entitle the holder
thereof (with certain exceptions) to purchase from the Company one one-
hundredth of a share of the Series A Junior Participating Preferred Stock,
F-15
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$.01 par value (the "Preferred Shares"), of the Company at a price of $75.00
per one one-hundredth of a Preferred Share, subject to adjustment (the
"Exercise Price"). Under certain circumstances, each Right (other than those
which have become void) will entitle the holder to purchase, at the Exercise
Price, Common Stock having a then current market value of two times the
Exercise Price; or, if the Company is acquired in a merger or other business
combination, each such Right will entitle the holder to purchase, at the
Exercise Price, common stock of the acquirer having a then current market
value of two times the Exercise Price.
The Rights become exercisable 10 business days after any person has
acquired, or announced its intention to commence a tender offer for, 15% or
more of the Common Stock. The Rights will also become exercisable 10 business
days after a determination by the disinterested members of the Board (as
defined in the Stockholders Rights Agreement dated as of September 22, 1994
and amended by the First Amendment dated as of February 15, 1995) that any
person beneficially owning 10% or more of the Common Stock intends to utilize
its position to seek short-term financial gain to the detriment of the best
long-term interests of the Company and its stockholders.
Under specified conditions, the Company will be entitled to redeem the
Rights at $.01 per Right.
Stock Repurchase
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. In fiscal
1997, the Company 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. No shares were repurchased in
fiscal 1998.
NOTE 8--COMMITMENTS AND CONTINGENCIES
The philosophy of the Company is to defend vigorously all product liability
claims. Although the Company intends to continue to defend itself aggressively
against all claims asserted against it, current pending proceedings and any
future claims are subject to the uncertainties attendant to litigation and the
ultimate outcome of any such proceedings or claims cannot be predicted. Due to
the self insurance retention amounts in the Company's product insurance
coverage, the assertion against the Company of a large number of claims could
have a material adverse effect on the Company. In addition, the successful
assertion against the Company of any, or a series of large, uninsured claims,
or of one or a series of claims exceeding insurance coverage, could have a
material adverse effect on the Company.
Due to the nature of the business of the Company, at any particular time the
Company may be a defendant in a number of product liability lawsuits for
serious personal injury or death allegedly related to the Company's products
and, in certain instances, products manufactured by others. Many such lawsuits
against the Company seek damages, including punitive damages, in substantial
amounts.
Due to certain deductibles, self-insured retention levels and aggregate
coverage amounts applicable under the Company's insurance policies, the
Company may bear responsibility for a significant portion, if not all, of the
defense costs (which include attorney's fees, settlement costs and the cost of
satisfying judgments) of any claim asserted against the Company or its
subsidiaries. There can be no assurance that the insurance coverage, if
available, will be sufficient to cover one or more large claims or that the
applicable insurer will be solvent at the time of any covered loss. Further,
there can be no assurance that the Company will obtain insurance coverage at
acceptable levels and costs in the future.
F-16
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's current product liability insurance for bicycling and auto
racing products covers claims based on occurrences within the policy period up
to a maximum of $50.0 million in the aggregate in excess of the Company's
self-insured retention of $1.0 million per occurrence for bicycle and auto
racing helmets and in excess of the Company's self-insured retention of
$250,000 for other bicycle-related products.
Insurance coverage for products manufactured by Giro, prior to the
acquisition by the Company in January 1996, include self-insured retentions of
$0.5 million per occurrence and $1.5 million in the aggregate for all product
claims, with $55.0 million coverage in excess of the self-insured retention
levels. The Company maintains an active role in the management of all Giro
related litigation. Giro claims served after December 31, 1996 are insured
under the same coverage provided to the Company.
In fiscal 1998, the Company secured a ten-year policy from AIG and Chubb for
insurance coverage for motorcycle helmets manufactured or licensed prior to
June 1991. The policy covers up to a maximum of $50.0 million in the aggregate
in excess of the Company's self-insured retention of $1.0 million per
occurrence, excluding all previous payments made on existing claims, in excess
of $2.0 million in the aggregate for known claims or $4.0 million in the
aggregate for incurred but not reported claims and new occurrences. The policy
covers all claims except the February 1996 and February 1998 judgments against
the Company.
From 1954 to 1991, the Company manufactured, marketed and sold motorcycle
helmets. The Company sold its motorcycle helmet manufacturing business in June
1991. Even though the purchaser assumed all responsibility for product
liability claims arising out of helmets manufactured prior to the date of the
disposition, the Company has paid certain costs associated with the defense of
such claims. If the purchaser is for any reason unable to pay the judgment,
settlement amount or defense costs arising out of any 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 any claims. The Company has licensed the Bell trademark to the purchaser
for use on motorcycle helmets. The Company believes that, by virtue of its
status as licensor and the fact that such motorcycle helmets carry the Bell
name, it is possible that the Company could be named as a defendant in actions
involving liability for the motorcycle helmets manufactured by the purchaser
of the Company's motorcycle helmet business. In fiscal 1998, the Company
secured insurance coverage for certain liabilities associated with its
motorcycle helmets manufactured or licensed prior to June 1991.
As of June 27, 1998, there were 39 lawsuits pending relating to injuries
allegedly suffered from products made or sold by the Company. Of the 39
lawsuits, 11 involve motorcycle helmets, 15 involve bicycle helmets, one
involves an auto racing helmet, one involves a bicycle pedal, 10 involve
bicycles and one involves bicycle accessories.
Six of the 39 product liability lawsuits pending against the Company as of
June 27, 1998 are scheduled for trial prior to December 31, 1998. Of the six
lawsuits scheduled for trial prior to December 31, 1998, one involves a
motorcycle helmet claim resulting in a permanent eye injury, and five involve
bicycle helmet claims, three resulting in brain damage and two resulting in
death. The motorcycle helmet claim is a product liability action alleging
design defect and the bicycle helmet claims include allegations of failure to
warn and design defects.
During each of the last five fiscal years the Company has been served with
complaints in the following number of cases: 11 cases in fiscal 1994, five
cases in fiscal 1995, 12 cases in fiscal 1996, 15 cases in fiscal 1997 and 14
cases in fiscal 1998. Of the 14 cases served in fiscal 1998, which includes
Giro and AMRE lawsuits, six involve bicycles, one involves bicycle accessories
and seven involve bicycle helmets. Of these same 14 cases, three cases involve
a claim relating to death, three involve claims relating to serious,
permanently disabling injuries and eight involve less serious injuries such as
broken bones or lacerations. Typical product liability claims include
allegations of failure to warn, breach of express and implied warranties,
design defects and defects in the manufacturing process.
F-17
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In February 1996, a Toronto, Canada jury returned a verdict against the
Company based on injuries arising out of a 1986 motorcycle accident. The jury
found that the Company 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 the Company would be
responsible and the legal fees and tax implications associated therewith are
estimated to be between $3.0 and $4.0 million (based on current exchange
rates). This claim arose during a period in which the Company was self-
insured. The Company has filed an appeal of the Canadian verdict.
In February 1998, a Wilkes-Barre, Pennsylvania jury returned a verdict
against the Company relating to injuries sustained in a 1993 motorcycle
accident. The judgment totaled $6.8 million, excluding any interest, fees or
costs which may be assessed. This claim arose during a period in which the
Company was self-insured. The Company has filed post-trial motions to set
aside the jury's verdict, which are scheduled to be heard on August 6, 1998.
If the motions are denied, the Company intends to appeal the judgment against
the Company.
In June 1998, a Wilmington, Delaware jury returned a verdict against the
Company relating to injuries sustained in a 1991 off-road motorcycle accident.
The judgment totaled $1.8 million, excluding any interest, fees or costs which
may be assessed. The claim is covered by insurance; however, the Company is
responsible for a $1.0 million self-insured retention. The Company intends to
file post-trial motions to set aside the jury's verdict and to appeal any
judgment against the Company that might be entered in the action.
Based on management's extensive consultations with legal counsel prosecuting
the appeals and the Company's experience in pursuing reversals and settlements
after the entry of judgments against the Company, management currently
believes that the ultimate outcome of the pending judgments will not have a
material adverse affect on the financial condition of the Company.
Accordingly, the Company has only established reserves for estimated costs for
the defense of these and other known claims. The Company believes that after
giving effect to the Transactions, it will have adequate cash balances and
sources of capital available to satisfy such pending judgments. However, there
can be no assurance that the Company will be successful in appealing or
pursuing settlements of these judgments or that the ultimate outcome of the
judgments will not have a material adverse effect on the liquidity or
financial condition of the Company.
Following the announcement of the Merger Agreement, three purported class
action lawsuits were filed in Delaware Chancery Court seeking preliminary and
permanent injunctive relief against the consummation of the Bell Merger or,
alternatively, the recovery of damages in the event the Bell Merger is
consummated. The complaints, which were filed by Jeffrey Kaplan, Jerry Krim
and Cyrus Schwartz, purported stockholders of the Company, name the Company,
HB Acquisition, Chase Capital Partners, CBCI and the Company's current
directors as defendants. To the knowledge of the Company, none of the
complaints has been served. The complaints allege, among other things, that
the Bell Merger is unfair to the Company's public stockholders and that
certain defendants who are expected to exchange a portion of their shares of
Common Stock, options to purchase shares of Common Stock or other Common
Stock-based awards held by them for shares of common stock of HB Acquisition
in connection with the Bell Merger have a conflict of interest which has
caused them, and the Company's directors, to breach their fiduciary duties to
the Company's stockholders. The lawsuit filed by Jeffrey Kaplan was
subsequently withdrawn, without prejudice to refile. The Company believes that
the allegations contained in the complaints are without merit and intends to
vigorously defend each action.
Besides the litigation described above, the Company is not party to any
material litigation that, if adversely determined, would have a material
effect on its business.
F-18
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company leases certain equipment and facilities under various
noncancellable capital and operating leases. The total expense under these
operating leases amounted to approximately $4.2 million, $4.0 million, and
$3.4 million for fiscal 1998, 1997 and 1996, respectively.
At June 27, 1998, the future minimum annual rental commitments under all
noncancellable leases were as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
<S> <C> <C>
1999.................................................... $ 3,917 $ 240
2000.................................................... 3,426 240
2001.................................................... 3,299 240
2002.................................................... 2,609 204
2003.................................................... 2,334 188
Thereafter.............................................. 12,482 698
------- ------
Total minimum lease commitments..................... $28,067 1,810
=======
Less: Interest portion.................................. 612
------
Present value of capital lease obligations.............. 1,198
Less: Current portion................................... 118
------
Total long-term capital lease obligations........... $1,080
======
</TABLE>
NOTE 9--FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable, accrued expenses and short-term debt approximates fair value
because of the short maturity of these instruments. The following table
presents the carrying amounts and estimated fair value of the Company's other
financial instruments (in thousands):
<TABLE>
<CAPTION>
JUNE 27, 1998 JUNE 28, 1997
---------------- ----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Long-term debt (Note 6)................ $86,625 $72,825 $106,454 $94,745
</TABLE>
The estimated fair value of the convertible debentures is based on quoted
market prices. The estimated fair value of other long-term debt approximates
its carrying value.
NOTE 10--ACQUISITIONS AND DISPOSITIONS
During fiscal 1998, the Company negotiated a letter of intent to sell the
assets of its domestic foam molding facility in Rantoul, Illinois and agreed
to sublet the building. The Company expects to enter into a foam molding
supply agreement with the purchaser. The Company recorded approximately
$600,000 in expense associated with the sale and related reorganization of the
Company's domestic foam molding facility.
On July 2, 1997, the Company completed the sale of substantially all of the
assets of SportRack (the "Sale of SportRack"), which designs, manufactures and
markets automobile roof rack systems, for $13.4 million to an affiliate of
Advanced Accessory System Canada, Inc. Subsequently, the Company recorded a
loss on the Sale of SportRack of approximately $2.0 million in fiscal 1998 in
connection with a purchase price adjustment related to such sale.
On April 29, 1997, the Company completed the sale of its Service
Cycle/Mongoose inventory, trademarks and certain other assets (the "Sale of
Service Cycle/Mongoose") to Brunswick Corporation for a sales price of $21.1
million. As part of the sales transaction, the Company provided Brunswick
Corporation a three-year option to purchase 600,000 shares of the Company's
Common Stock at an exercise price of $7.50 per share. The Company retained
customer accounts receivable related to the Service Cycle/Mongoose business of
approximately $19.4 million.
F-19
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In connection with the Sale of Service Cycle/Mongoose, the Company announced
plans to reorganize its North American distribution network and operations to
better utilize the distribution facilities. Included in the fiscal 1997 pre-
tax income were $25.4 million of costs associated with the Sale of Service
Cycle/Mongoose. The costs were comprised of the write-off of goodwill and
intangibles ($14.8 million), disposal and exit costs ($5.4 million), and
reorganization costs associated with the distribution network and operations
($5.2 million). During fiscal 1998, the Company reversed previously recorded
charges of $1.9 million, including a $600,000 benefit based on the
finalization of costs associated with the closure of distribution facilities,
and $1.3 million benefit related to the reversal of the remaining reserve for
uncollectible receivables established in fiscal 1997 in connection with the
divestiture of Service Cycle/Mongoose.
On January 22, 1996, the Company acquired, for $16.8 million, substantially
all of the assets of privately-owned, Giro Sport Design, Inc. of California
and all outstanding shares of Giro Sport Design International, Inc., the
holding company which owns Giro's Ireland operation (collectively "Giro").
Giro designs, manufactures and markets premium bicycle helmets in North
America, Europe and other parts of the world.
Effective July 3, 1995, the Company completed, for Common Stock, the merger
of a subsidiary of the Company with AMRE (the "AMRE Merger"), a world wide
designer, marketer and distributor of bicycles, bicycle helmets and bicycle
parts and accessories. The purchase price of $76.0 million was computed by
converting each of the 8.7 million outstanding shares of AMRE Common Stock
into .6890 shares of Bell Common Stock and multiplying the result by $12.70,
the average of the Bell Common Stock between June 9, 1995 and June 22, 1995.
The purchase price was increased by an additional $1.2 million, attributable
to outstanding AMRE stock options, which were converted into Bell stock
options. The purchase price has been allocated to the fair value of the net
assets of AMRE. The purchase price was approximately $52.8 million greater
than the fair value of the identifiable net assets acquired, and, accordingly,
goodwill was increased by this amount.
Acquisitions were accounted for as purchase transactions from their
respective effective dates. Accordingly, results of operations of the acquired
companies have been included in the accompanying statements of operations from
the effective dates of the acquisitions. The impact of these acquisitions,
other than the AMRE Merger, were not significant.
NOTE 11--RESTRUCTURING CHARGES
Restructuring Charges--1998
During fiscal 1998, the Company formed and approved a plan to restructure
its European operations. In connection with this plan, the Company closed its
Paris, France, sales and marketing office in December 1997, and consolidated
these functions with its Roche La Moliere, France, facility. The key
management positions of Giro Ireland and EuroBell were also consolidated.
Included in the fiscal 1998 pre-tax income are $1.2 million of estimated
restructuring charges related to this plan, including facility closing costs
and severance benefits.
The following table sets forth the details of activity during fiscal 1998
for restructuring charges and related accrued liabilities (in thousands):
<TABLE>
<CAPTION>
JUNE 28, RESTRUCTURING CASH NON-CASH JUNE 27,
1997 CHARGES PAYMENTS CHARGES 1998
-------- ------------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Lease payments and other
facility expenses......... $ 860 $ 191 $ (263) $(230) $ 558
Severance and other
employee related costs.... 2,917 820 (2,968) 122 891
Asset write-downs.......... 181 (140) 41
------ ------ ------- ----- ------
Total.................. $3,777 $1,192 $(3,371) $(108) $1,490
====== ====== ======= ===== ======
</TABLE>
F-20
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Restructuring Charges--1997
During fiscal 1997, the Company announced plans to significantly downsize
the Scottsdale, Arizona corporate office by consolidating certain Scottsdale
functions with the San Jose, California office. Included in the fiscal 1997
pre-tax income are $2.7 million of restructuring charges related to this plan.
Also included in the fiscal 1997 pre-tax income are $1.5 million of
restructuring charges related to the Program, as defined below, including
facility closing costs, severance and other employee related costs.
The following table sets forth the details of activity during fiscal 1997
for restructuring charges and related accrued liabilities (in thousands):
<TABLE>
<CAPTION>
JUNE 29, RESTRUCTURING CASH JUNE 28,
1996 CHARGES PAYMENTS 1997
-------- ------------- -------- --------
<S> <C> <C> <C> <C>
Lease payments and other facility
expenses........................... $ 942 $ 983 $(1,065) $ 860
Severance and other employee related
costs.............................. 4,215 3,158 (4,456) 2,917
------ ------ ------- ------
Total........................... $5,157 $4,141 $(5,521) $3,777
====== ====== ======= ======
</TABLE>
On June 27, 1995, the Company's stockholders approved the issuance of Common
Stock in connection with the Agreement and Plan of Merger dated February 15,
1995 among the Company, Bell Merger Co., a wholly owned subsidiary of the
Company, and AMRE. In contemplation of the merger, the Company formulated a
program (the "Program") to consolidate and integrate the operations of Bell,
SportRack and AMRE, as well as combine certain product lines. This Program
called for the consolidation of certain sales and marketing, research and
development, manufacturing, finance and management information systems
functions.
Restructuring Charges--1996
During fiscal 1996, the Company commenced significant organizational and
office consolidations including closing the Cerritos, Providence, Commack and
Calgary offices. Most U.S. sales, marketing and research and development
operations were consolidated in San Jose, California and all corporate
functions in Scottsdale, Arizona. Substantially all of the Canadian operations
were consolidated into one facility in Granby, Quebec. These consolidations
were finalized during the first half of fiscal 1997.
Included in fiscal 1996 pre-tax income is $5.9 million related to
restructuring charges, including facility closing costs, severance and other
employee related costs and costs to combine computer systems. The Company
eliminated 35 positions in sales and marketing, research and development,
finance and manufacturing. The other employee costs are due to various
employees relocating to San Jose or Scottsdale. The costs to combine computer
systems related to an implementation study and the write-off of redundant
software costs.
The following table sets forth the details of activity during fiscal 1996
for restructuring charges and related accrued liabilities (in thousands):
<TABLE>
<CAPTION>
ACQUISITION
JULY ACCRUAL RESTRUC- NON-
1, RECORDED TO TURING CASH CASH JUNE 29,
1995 GOODWILL CHARGES PAYMENTS CHARGES 1996
------ ----------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Lease payments and other
facility expenses...... $ 769 $1,951 $ 528 $ (1,755) $(551) $ 942
Severance and other
employee related
costs.................. 453 7,965 2,328 (6,531) 4,215
Computer systems........ 2,994 (2,994)
------ ------ ------ -------- ----- ------
Total............... $1,222 $9,916 $5,850 $(11,280) $(551) $5,157
====== ====== ====== ======== ===== ======
</TABLE>
F-21
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--INCOME TAXES
Pre-tax income (loss) by jurisdiction for each fiscal year are as follows
(in thousands):
<TABLE>
<CAPTION>
JUNE
27, JUNE 28, JUNE 29,
1998 1997 1996
------- -------- --------
<S> <C> <C> <C>
Domestic...................................... $ 9,496 $(23,882) $(22,395)
Foreign....................................... 4,400 2,731 1,770
------- -------- --------
Total..................................... $13,896 $(21,151) $(20,625)
======= ======== ========
</TABLE>
The provision for (benefit from) income taxes for each fiscal year is as
follows (in thousands):
<TABLE>
<CAPTION>
JUNE JUNE
JUNE 27, 28, 29,
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Current expense (benefit):
U.S. Federal............................... $ 75 $ (757) $(1,254)
State and local............................ 60
Foreign.................................... 1,123 601 482
------ ------- -------
Total current............................ 1,258 (156) (772)
------ ------- -------
Deferred tax expense (benefit):
U.S. Federal............................... 3,368 (2,200) (6,402)
State and local............................ 722 (568) (1,144)
Foreign.................................... (93) (59)
------ ------- -------
Total deferred........................... 3,997 (2,827) (7,546)
------ ------- -------
Impact of stock option deduction credited to
equity...................................... 63 20 68
------ ------- -------
Total income tax provision (benefit)..... $5,318 $(2,963) $(8,250)
====== ======= =======
</TABLE>
The provision for (benefit from) income taxes for each fiscal year differs
from the U.S. statutory federal income tax rate for the following reasons:
<TABLE>
<CAPTION>
JUNE 27, JUNE 28, JUNE 29,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Statutory U.S. rate.......................... 34.0% (34.0)% (34.0)%
Tax exempt investment income................. (0.2) (0.1) (0.2)
Nondeductible goodwill....................... 24.8 2.9
State income tax............................. 5.0 (2.7) (5.5)
Effective international tax rate............. (2.4) (1.5) (0.6)
Other items, net............................. 1.6 (0.5) (2.6)
---- ----- -----
Effective tax benefit rate................... 38.0% (14.0)% (40.0)%
==== ===== =====
</TABLE>
The majority of the nondeductible goodwill included in permanent differences
under the effective tax rate calculation for the year ended June 28, 1997 is
the write-off of goodwill due to the Sale of Service Cycle/ Mongoose.
F-22
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred income tax assets and (liabilities) are comprised of the following
(in thousands):
<TABLE>
<CAPTION>
JUNE
27, JUNE 28,
1998 1997
------- --------
<S> <C> <C>
Net operating losses and other tax loss
carryforwards...................................... $11,810 $ 14,142
Inventory and accounts receivable reserves.......... 1,485 3,692
Accrued liabilities................................. 4,778 6,066
Package design costs capitalized for tax purposes... 910 780
Other............................................... 915
------- --------
Gross deferred tax assets......................... 18,983 25,595
------- --------
Depreciation........................................ (760) (858)
Other............................................... (456) (276)
------- --------
Gross deferred tax liability...................... (1,216) (1,134)
------- --------
Deferred tax assets valuation allowance............. (1,798) (1,970)
------- --------
Net deferred tax assets........................... 15,969 22,491
Less: current portion............................. (8,970) (10,228)
------- --------
Long term deferred tax assets..................... $ 6,999 $ 12,263
======= ========
</TABLE>
Domestic net operating losses totaling approximately $32.7 million will be
carried forward and begin to expire in 2008. After the Bell Merger, there will
be a change of ownership of more than 50%, resulting in an annual limitation
of the loss carryforward which may delay or limit the eventual utilization of
the carryforwards. The consolidated return rules limit utilization of acquired
net operating loss and other carryforwards to income of the acquired companies
in years in which the consolidated group has taxable income.
General business tax credits of approximately $630,000 were accounted for
under the flow-through method and are being carried forward. Minimum tax
credits totaling approximately $500,000 are also being carried forward.
The deferred tax assets valuation allowance at June 27, 1998 and June 28,
1997 was required primarily for net operating loss carryforwards and
accounting reserves that, in management's view, will not be realized in the
foreseeable future.
The Company has not provided for U.S. federal income and foreign withholding
taxes of certain non-U.S. subsidiaries' undistributed earnings as of June 27,
1998, because such earnings are intended to be reinvested indefinitely. If
these earnings were distributed, the withholding tax would be due and foreign
tax credits should become available under current law to reduce the resulting
U.S. income tax liability.
NOTE 13--ADDITIONAL CASH FLOW STATEMENT INFORMATION
The Company's non-cash investing and financing activities and cash payments
for interest and income taxes for each fiscal year are summarized below (in
thousands):
<TABLE>
<CAPTION>
JUNE 27, JUNE 28, JUNE 29,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Additional paid in capital arising from tax benefits
associated with the exercise of stock options...... $ 63 $ 20 $ 68
Issuance of stock and stock options for AMRE
merger............................................. 77,211
Cash paid during the period for:
Interest.......................................... 4,100 7,050 8,816
Income taxes...................................... 795 748 116
</TABLE>
F-23
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14--FOREIGN OPERATIONS AND EXPORT SALES
Information regarding geographic sales, net income and assets are as follows
(in thousands):
<TABLE>
<CAPTION>
UNITED
STATES EUROPE CANADA TOTAL
-------- ------- ------- --------
<S> <C> <C> <C> <C>
Year ending June 27, 1998:
Sales to unaffiliated customers........... $162,298 $22,213 $22,725 $207,236
Net income................................ 5,539 1,816 1,223 8,578
Total assets.............................. 233,801 8,237 5,029 247,067
Year ending June 28, 1997:
Sales to unaffiliated customers........... $212,634 $21,419 $25,481 $259,534
Net (loss) income......................... (20,778) 1,441 1,149 (18,188)
Total assets.............................. 233,189 8,581 26,984 268,754
Year ending June 29, 1996:
Sales to unaffiliated customers........... $222,613 $17,408 $22,319 $262,340
Net (loss) income......................... (13,644) 688 581 (12,375)
Total assets.............................. 262,568 10,956 25,111 298,635
</TABLE>
Included in the figures for the United States in the above table are sales
and income in Asia, and the assets of Bell Sports Australia, which are not
significant enough to be broken-out in the periods depicted.
NOTE 15--SUMMARY QUARTERLY FINANCIAL DATA (UNAUDITED)
The unaudited information presented below has been prepared in accordance
with generally accepted accounting principles for interim financial
information. In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) considered necessary for a fair presentation of
financial position and results of operations have been made.
Summary quarterly financial data is as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
------- ------- -------- -------
<S> <C> <C> <C> <C>
Year ending June 27, 1998:
Net sales................................. $43,632 $42,590 $ 52,332 $68,682
Gross profit.............................. 13,477 13,286 18,200 24,601
Net income................................ 637 322 3,160 4,459
Year ending June 28, 1997:
Net sales................................. $62,068 $56,623 $ 70,575 $70,268
Gross profit.............................. 17,508 16,006 20,713 22,209
Net income (loss)......................... 3 (475) (21,943) 4,227
</TABLE>
F-24
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS EXCHANGE OFFER
NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPA-
NY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SECURI-
TIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH THE PERSON MAKING
THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT
IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME, SUBSEQUENT TO THE
DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary.................................................................. 1
Risk Factors............................................................. 14
The Transactions......................................................... 23
Use of Proceeds.......................................................... 24
Capitalization........................................................... 25
The Exchange Offer....................................................... 26
Holdings Unaudited Pro Forma Historical
Condensed Consolidated Financial Statements............................. 35
Holdings Selected Historical Consolidated Financial and Other Data....... 40
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 42
Business................................................................. 51
Management............................................................... 64
Executive Officer Compensation........................................... 66
Related Party Transactions............................................... 71
Security Ownership of Certain Beneficial Owners and Management........... 73
Description of Senior Secured Credit Facility............................ 74
Description of Holdings' Indebtedness.................................... 75
Description of Issuer Capital Stock...................................... 75
Description of Notes..................................................... 75
Certain United States Federal Income Tax Considerations.................. 110
Plan of Distribution..................................................... 110
Legal Matters............................................................ 111
Experts.................................................................. 111
Index to Consolidated Financial Statements............................... F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$110,000,000
[LOGO OF BELL(TM) SPORTS]
BELL SPORTS, INC.
OFFER TO EXCHANGE 11% SERIES B SENIOR SUBORDINATED NOTES DUE 2008
FOR
ANY AND ALL OUTSTANDING 11% SERIES A SENIOR SUBORDINATED NOTES DUE 2008
----------------
PROSPECTUS
----------------
DECEMBER 7, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Bell Sports Corp. ("Holdings") is incorporated under the laws of the State
of Delaware. Reference is made to Section 145 of the General Corporation Law
of the State of Delaware (the "Delaware GCL") which provides for
indemnification of directors and officers in certain circumstances.
Holdings' Amended and Restated Certificate of Incorporation (the "Holdings
Certificate") provides that a director of Holdings will not be personally
liable to Holdings or its stockholders for monetary damages for breach of
fiduciary duty as a director of Holdings, except to the extent exculpation
from liability is not permitted under the Delaware GCL at the time such
liability is determined.
The Holdings Certificate provides indemnification for directors, officers,
employees, representatives and agents to the full extent permitted by the
Delaware GCL, except that Holdings is not obligated to indemnify any such
person with respect to proceedings initiated by or on behalf of any such
person. It also provides for the advancement to indemnified persons of
litigation expenses.
The Holdings Certificate states that the indemnification previously
described is not deemed exclusive of other indemnification rights arising
under any bylaw agreement, vote of directors or stockholders or otherwise.
Pursuant to Section 145 and the Holdings Certificate, Holdings maintains
directors' and officers' liability insurance coverage which insures Holdings,
its subsidiaries and the elected officers and directors of Holdings and its
subsidiaries (including the Issuer), against damages, judgments, settlements
and costs incurred by reason of certain acts committed by such persons in
their capacities as officers and directors.
Bell Sports, Inc. (the "Issuer") is incorporated under the laws of the State
of California. Reference is made to Section 204(10) of the California General
Corporation Law (the "California GCL") which permits the inclusion in the
articles of incorporation of a California corporation of a provision
eliminating or limiting the personal liability of a director for monetary
damages in an action brought by or in the right of a corporation for breach of
a director's duties to the corporation and its shareholders. The foregoing
provision is subject to certain qualifications set forth in the California GCL
including, without limitation, that such provision may not limit or limit
liability of directors for (i) intentional misconduct, (ii) transactions from
which a director derived an improper personal benefit, (iii) reckless
disregard of the director's duties, and (iv) an unexcused pattern of
inattention.
The Issuer's Amended and Restated Articles of Incorporation provide that the
liability of directors of the Issuer for monetary damages are eliminated to
the fullest extent permissible under California law and that the Issuer is
authorized to provide indemnification to its agents for breach of duty to the
Issuer and its stockholders in excess of the indemnification otherwise
permitted by Section 317 of the California GCL, subject to the limits on
indemnification set forth in Section 204 of the California GCL.
In addition, Article IV of the Issuer's Amended and Restated Bylaws requires
that the Issuer indemnify any person who was or is a party or is threatened to
be made a party to any third party proceeding by reason of the fact that such
person is or was an agent of the Issuer, against expenses, judgments, fines,
settlements and other amounts actually and reasonably incurred in connection
with such proceeding if such person acted in good faith and in a manner such
person reasonably believed to be in the best interests of the Issuer and, in
the case of a criminal third party proceeding, had no reasonable cause to
believe the conduct of such person was unlawful. In a corporate proceeding,
the Issuer is required to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action
by or in the right of the Issuer to procure a judgment in its favor by reason
of the fact that such person is or was an agent of the Issuer against monetary
damages and expenses actually and reasonably incurred by such person in
connection with the defense or
II-1
<PAGE>
settlement of such corporate proceeding if such person acted in good faith, in
a manner such person believed to be in the best interests of the Issuer and
its shareholders, except that no indemnification shall be made: (i) in respect
of any claim, issue or matter as to which such person shall have been adjudged
to be liable to the Issuer in the performance of such person's duty to the
Issuer and its shareholders, unless and only to the extent that the court in
which such proceeding is or was pending shall determine upon application that,
in view of all circumstances of the case, such person is fairly and reasonably
entitled to indemnity for expenses and then only to the extent that the court
shall determine; (ii) of amounts paid in settling or otherwise disposing of a
pending action without court approval; or (iii) of expenses incurred in
defending a pending action which is settled or otherwise disposed of without
court approval. To the extent that an agent of the Issuer has been successful
on the merits in defense of any third party or corporate proceedings or in
defense of any claim, issue or matter therein, the agent shall be indemnified
against expenses actually and reasonably incurred by the agent in connection
therewith. To the extent that an agent of the Issuer has not been successful
on the merits of any corporate proceeding or in defense of any claim, issue or
matter therein, the agent shall be indemnified against expenses actually and
reasonably incurred by the agent in connection therewith; provided, however,
that an agent of the Issuer may not be indemnified for expenses incurred in
connection with such a proceeding, or in defense of any claim, issue or matter
therein, if the agent has been unsuccessful on the merits with respect to: (i)
acts or omissions that involve intentional misconduct or a knowing and
culpable violation of law; (ii) acts of omission that an agent believes to be
contrary to the best interests of the Issuer or its shareholders or that
involve the absence of good faith on the part of the agent; (iii) any
transaction from which an agent derived an improper personal benefit; (iv)
acts or omissions that show a reckless disregard for the agent's duty to the
Issuer or its shareholders in circumstances in which the agent was aware, or
should have been aware, in the ordinary course of performing an agent's
duties, of a risk of serious injury to the Corporation or its shareholders;
(v) acts or omissions that constitute an unexcused pattern of inattention that
amounts to an abdication of an agent's duty to the Issuer or its shareholders;
(vi) transactions in violation of Section 310 of the California GCL; or (vii)
actions in violation of Section 316 of the California GCL.
Any indemnification shall be made by the Issuer only if authorized in the
specific case, upon a determination that indemnification of the agent is
proper in the circumstances because the agent has met the applicable standard
of conduct. Such determination shall be made: (i) by a majority vote of a
quorum consisting of directors who are not parties to such proceeding; (ii) if
such a quorum of directors is not obtainable, by independent legal counsel in
a written opinion; (iii) by approval of the shareholders, with the shares
owned by the person to be indemnified not being entitled to vote thereon; or
(iv) by the court in which such proceeding is or was pending upon application
made by the Issuer or the agent or the attorney or other person rendering
services in connection with the defense, whether or not such applicable by the
agent, attorney, or other person is opposed by the Issuer.
Expenses incurred in defending any proceeding may be advanced by the Issuer
prior to the final disposition of such proceeding upon receipt of an
undertaking by or on behalf of the agent to repay such amount unless it shall
be determined ultimately that the agent is entitled to be indemnified by the
Issuer.
II-2
<PAGE>
ITEM 21. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<C> <S>
2.1 Agreement and Plan of Recapitalization and Merger, dated as of
February 17, 1998, between HB Acquisition and Holdings (incorporated
by reference to Exhibit 2 to Holdings' Current Report on Form 8-K
dated February 17, 1998).
2.2 First Amendment to Agreement and Plan of Recapitalization and Merger,
dated as of April 8, 1998, between HB Acquisition and Holdings
(incorporated by reference to Exhibit 2 to Holdings' Current Report
on Form 8-K dated April 8, 1998).
3.1 Amended and Restated Certificate of Incorporation of Holdings
(incorporated by reference to Exhibit 4.2 to Holdings' Current Report
on Form 8-K dated August 17, 1998 (the "August 1998 8-K")).
3.2 Bylaws of Holdings (incorporated by reference to Exhibit 4.3 to the
August 1998 8-K).
3.3 Articles of Incorporation of the Issuer.*
3.4 Amended and Restated Bylaws of the Issuer.+
4.1 Shareholders Agreement, dated as of August 17, 1998, among Holdings
and the stockholders party thereto.*
4.2 Indenture, dated as of August 17, 1998, among Holdings, the Issuer and
Harris Trust and Savings Bank, as Trustee, relating to the Issuer's
Series A and Series B Senior Subordinated Notes due 2008
(incorporated by reference to Exhibit 4.1 to the August 1998 8-K).
4.3 Registration Rights Agreement, dated as of August 17, 1998, between
the Issuer, Holdings and Donaldson, Lufkin & Jenrette Securities
Corporation, NationsBank Montgomery Securities LLC and Societe
Generale Securities Corporation.*
4.4 Form of 11% Series B Senior Subordinated Note due 2008.*
4.5 Form of 11% Series A Senior Subordinated Note due 2008*
4.6 Indenture, dated as of November 15, 1993, between Holdings and Harris
Trust and Savings Bank, as Trustee, relating to Holdings' 4 1/4%
Convertible Subordinated Debentures due 2000 (incorporated by
reference to Exhibit 4.1 to Holdings' Current Report on Form 8-K dated
October 26, 1993).
5.1 Opinion of Sidley & Austin regarding the securities being issued.*
10.1 Credit Agreement, dated August 17, 1998, among the Issuer, Holdings,
the financial institutions parties thereto as Lenders, Societe
Generale and DLJ Capital Funding, Inc.*
10.2 Borrower Pledge and Security Agreement, dated August 17, 1998, between
the Issuer and Societe Generale.*
10.3 Guarantor Pledge and Security Agreement, dated August 17, 1998, among
Holdings, Giro Sport Design International, Inc. and Societe
Generale.*
10.4 Corporate Development and Administrative Services Agreement, dated
August 17, 1998 among Holdings, the Issuer, Charlesbank Capital
Partners, LLC and Brentwood Private Equity, L.L.C.*
10.5 Amended and Restated Employment Agreement, dated as of February 17,
1998, among Holdings, the Issuer and Terry G. Lee (incorporated by
reference to Exhibit 10.1 to Holdings' Quarterly Report on Form 10-Q
for the quarter ended March 28, 1998 (the "March 1998 10-Q")).
10.6 Noncompetition Agreement dated December 8, 1997 between Holdings, the
Issuer and Terry G. Lee (incorporated by reference to Exhibit 10.2 to
Holdings' Quarterly Report on Form 10-Q for the quarter ended
December 27, 1997 (the "December 1997 10-Q")).
10.7 Amended and Restated Employment Agreement, dated as of February 17,
1998, among Holdings, the Issuer and Mary J. George (incorporated by
reference to Exhibit 10.2 to the March 1998 10-Q).
10.8 Employment Agreement, dated as of April 25, 1997, among Holdings, the
Issuer and Linda K. Bounds (incorporated by reference to Exhibit
10.12 to Holdings' Quarterly Report on Form 10-Q for the quarter
ended March 29, 1997).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<C> <S>
10.9 Memorandum of Understanding, dated January 28, 1998, between Holdings
and Linda K. Bounds (incorporated by reference to Exhibit 10.3 to the
March 1998 10-Q).
10.10 Memorandum reference Employment Outline for Bill Bracy, dated November
26, 1997 (incorporated by reference to Exhibit 10.6 to the December
1997 10-Q).
10.11 Severance Agreement, dated December 1, 1997, between Holdings, the
Issuer and Bill Bracy (incorporated by reference to Exhibit 10.7 to
the December 1997 10-Q).
10.12 Promissory Note, dated April 8, 1998, between the Issuer and Bill
Bracy (incorporated by reference to Exhibit 10.4 to the March 1998
10-Q).
10.13 Collateral Pledge Agreement, dated April 8, 1998, between the Issuer
and Bill Bracy (incorporated by reference to Exhibit 10.5 to the
March 1998 10-Q).
10.14 Employment Agreement, dated as of June 13, 1995, among Holdings, the
Issuer and Harry H. Manko (incorporated by reference to Exhibit 10.1
to Holdings' Annual Report on Form 10-K for the fiscal year ended
July 1, 1995).
10.15 Form of Vehicle Lease Agreement between the Issuer and Mission Leasing
(incorporated by reference to Exhibit 10.77 to Holdings' Registration
Statement on Form S-1, File No. 33-45868).
10.16 Form of Equipment Lease between the Issuer and Mission Leasing
(incorporated by reference to Exhibit 10.78 to Holdings' Registration
Statement on Form S-1, File No. 33-45868).
10.17 Lease of Aircraft between the Issuer and Hayden Leasing, L.C. dated
November 1, 1995 (incorporated by reference to Exhibit 10.18 to
Holdings' Annual Report on Form 10-K for the fiscal year ended
June 29, 1996).
12.1 Computation of earnings to fixed charges.+
21.1 Subsidiaries of the Company.+
23.1 Consent of PricewaterhouseCoopers LLP.+
23.2 Consent of Sidley & Austin (contained in Exhibit 5.1).*
24.1 Power of Attorney (included in the Signature Pages in Part II of the
Registration Statement).*
25.1 Statement of Eligibility of Trustee.*
99.1 Form of Letter of Transmittal.*
99.2 Form of Notice of Guaranteed Delivery.*
</TABLE>
- ---------------------
* Previously filed.
+ Filed herewith.
ITEM 22. UNDERTAKINGS.
The undersigned registrants hereby undertake:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
II-4
<PAGE>
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at the time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
(4) For purposes of determining any liability under the Securities Act of
1933, each filing of the registrant's annual report pursuant to Section 13(a)
or Section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant
to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated
by reference in the Registration Statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at the time shall be deemed to be the initial bona
fide offering thereof.
(5) To respond to requests for information that is incorporated by reference
into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of
the registration statement through the date of responding to the request.
(6) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when it
became effective.
(7) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions described
under Item 20 or otherwise, the registrants have been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by a registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of San
Jose, State of California, on December 7, 1998.
BELL SPORTS CORP.
/s/ Mary J. George
By: _________________________________
Mary J. George
Chief Executive Officer,
President and Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed by the following persons in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
* Chairman of the Board of December 7, 1998
_______________________________________ Directors
Terry G. Lee
/s/ Mary J. George Chief Executive Officer, December 7, 1998
_______________________________________ President and Director
Mary J. George (principal executive
officer)
/s/ Robert E. Collins Chief Financial Officer, December 7, 1998
_______________________________________ Treasurer and Vice
Robert E. Collins President (principal
financial and accounting
officer)
* Director December 7, 1998
_______________________________________
William M. Barnum
* Director December 7, 1998
_______________________________________
Kim G. Davis
* Director December 7, 1998
_______________________________________
John F. Hetterick
* Director December 7, 1998
_______________________________________
Edward L. McCall
* Director December 7, 1998
_______________________________________
Tim R. Palmer
* Director December 7, 1998
_______________________________________
John M. Sullivan
/s/ Mary J. George
*By: __________________________________
Mary J. George
Attorney-in-Fact
</TABLE>
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of San
Jose, State of California, on December 7, 1998.
BELL SPORTS, INC.
By: /s/ Mary J. George
_________________________________
Mary J. George
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed by the following persons in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ Mary J. George Chief Executive Officer December 7, 1998
____________________________________ and President (principal
Mary J. George executive officer)
/s/ Robert E. Collins Chief Financial Officer, December 7, 1998
____________________________________ Treasurer and Vice
Robert E. Collins President (principal
financial and accounting
officer)
* Director December 7, 1998
____________________________________
Terry G. Lee
* Director December 7, 1998
____________________________________
Tim R. Palmer
* Director December 7, 1998
____________________________________
William M. Barnum
</TABLE>
*By: /s/ Mary J. George
_______________________
Mary J. George
Attorney-in-Fact
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<C> <S>
2.1 Agreement and Plan of Recapitalization and Merger, dated as of
February 17, 1998, between HB Acquisition and Holdings (incorporated
by reference to Exhibit 2 to Holdings' Current Report on Form 8-K
dated February 17, 1998).
2.2 First Amendment to Agreement and Plan of Recapitalization and Merger,
dated as of April 8, 1998, between HB Acquisition and Holdings
(incorporated by reference to Exhibit 2 to Holdings' Current Report
on Form 8-K dated April 8, 1998).
3.1 Amended and Restated Certificate of Incorporation of Holdings
(incorporated by reference to Exhibit 4.2 to Holdings' Current Report
on Form 8-K dated August 17, 1998 (the "August 1998 8-K")).
3.2 Bylaws of Holdings (incorporated by reference to Exhibit 4.3 to the
August 1998 8-K).
3.3 Articles of Incorporation of the Issuer.*
3.4 Amended and Restated Bylaws of the Issuer.+
4.1 Shareholders Agreement, dated as of August 17, 1998, among Holdings
and the stockholders party thereto.*
4.2 Indenture, dated as of August 17, 1998, among Holdings, the Issuer and
Harris Trust and Savings Bank, as Trustee, relating to the Issuer's
Series A and Series B Senior Subordinated Notes due 2008
(incorporated by reference to Exhibit 4.1 to the August 1998 8-K).
4.3 Registration Rights Agreement, dated as of August 17, 1998, between
the Issuer, Holdings and Donaldson, Lufkin & Jenrette Securities
Corporation, NationsBank Montgomery Securities LLC and Societe
Generale Securities Corporation.*
4.4 Form of 11% Series B Senior Subordinated Note due 2008.*
4.5 Form of 11% Series A Senior Subordinated Note due 2008*
4.6 Indenture, dated as of November 15, 1993, between Holdings and Harris
Trust and Savings Bank, as Trustee, relating to Holdings' 4 1/4%
Convertible Subordinated Debentures due 2000 (incorporated by
reference to Exhibit 4.1 to Holdings' Current Report on Form 8-K dated
October 26, 1993).
5.1 Opinion of Sidley & Austin regarding the securities being issued.*
10.1 Credit Agreement, dated August 17, 1998, among the Issuer, Holdings,
the financial institutions parties thereto as Lenders, Societe
Generale and DLJ Capital Funding, Inc.*
10.2 Borrower Pledge and Security Agreement, dated August 17, 1998, between
the Issuer and Societe Generale.*
10.3 Guarantor Pledge and Security Agreement, dated August 17, 1998, among
Holdings, Giro Sport Design International, Inc. and Societe
Generale.*
10.4 Corporate Development and Administrative Services Agreement, dated
August 17, 1998 among Holdings, the Issuer, Charlesbank Capital
Partners, LLC and Brentwood Private Equity, L.L.C.*
10.5 Amended and Restated Employment Agreement, dated as of February 17,
1998, among Holdings, the Issuer and Terry G. Lee (incorporated by
reference to Exhibit 10.1 to Holdings' Quarterly Report on Form 10-Q
for the quarter ended March 28, 1998 (the "March 1998 10-Q")).
10.6 Noncompetition Agreement dated December 8, 1997 between Holdings, the
Issuer and Terry G. Lee (incorporated by reference to Exhibit 10.2 to
Holdings' Quarterly Report on Form 10-Q for the quarter ended
December 27, 1997 (the "December 1997 10-Q")).
10.7 Amended and Restated Employment Agreement, dated as of February 17,
1998, among Holdings, the Issuer and Mary J. George (incorporated by
reference to Exhibit 10.2 to the March 1998 10-Q).
10.8 Employment Agreement, dated as of April 25, 1997, among Holdings, the
Issuer and Linda K. Bounds (incorporated by reference to Exhibit
10.12 to Holdings' Quarterly Report on Form 10-Q for the quarter
ended March 29, 1997).
</TABLE>
<PAGE>
EXHIBIT INDEX--(CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<C> <S>
10.9 Memorandum of Understanding, dated January 28, 1998, between Holdings
and Linda K. Bounds (incorporated by reference to Exhibit 10.3 to the
March 1998 10-Q).
10.10 Memorandum reference Employment Outline for Bill Bracy, dated November
26, 1997 (incorporated by reference to Exhibit 10.6 to the December
1997 10-Q).
10.11 Severance Agreement, dated December 1, 1997, between Holdings, the
Issuer and Bill Bracy (incorporated by reference to Exhibit 10.7 to
the December 1997 10-Q).
10.12 Promissory Note, dated April 8, 1998, between the Issuer and Bill
Bracy (incorporated by reference to Exhibit 10.4 to the March 1998
10-Q).
10.13 Collateral Pledge Agreement, dated April 8, 1998, between the Issuer
and Bill Bracy (incorporated by reference to Exhibit 10.5 to the
March 1998 10-Q).
10.14 Employment Agreement, dated as of June 13, 1995, among Holdings, the
Issuer and Harry H. Manko (incorporated by reference to Exhibit 10.1
to Holdings' Annual Report on Form 10-K for the fiscal year ended
July 1, 1995).
10.15 Form of Vehicle Lease Agreement between the Issuer and Mission Leasing
(incorporated by reference to Exhibit 10.77 to Holdings' Registration
Statement on Form S-1, File No. 33-45868).
10.16 Form of Equipment Lease between the Issuer and Mission Leasing
(incorporated by reference to Exhibit 10.78 to Holdings' Registration
Statement on Form S-1, File No. 33-45868).
10.17 Lease of Aircraft between the Issuer and Hayden Leasing, L.C. dated
November 1, 1995 (incorporated by reference to Exhibit 10.18 to
Holdings' Annual Report on Form 10-K for the fiscal year ended
June 29, 1996).
12.1 Computation of earnings to fixed charges.+
21.1 Subsidiaries of the Company.+
23.1 Consent of PricewaterhouseCoopers LLP.+
23.2 Consent of Sidley & Austin (contained in Exhibit 5.1).*
24.1 Power of Attorney (included in the Signature Pages in Part II of the
Registration Statement).*
25.1 Statement of Eligibility of Trustee.*
99.1 Form of Letter of Transmittal.*
99.2 Form of Notice of Guaranteed Delivery.*
</TABLE>
- ---------------------
* Previously filed.
+ Filed herewith.
<PAGE>
EXHIBIT 3.4
AMENDED AND RESTATED
BYLAWS OF
BELL SPORTS, INC.
ARTICLE I
MEETINGS OF HOLDERS
Section 1.1 Annual Meetings. The annual meeting of the shareholders of
Bell Sports, Inc., a California corporation (the "Corporation"), for the
election of directors and for the transaction of such other business as may come
before the meeting shall be on the third Wednesday of November of each year, if
not a legal holiday, and if a legal holiday, then on the next succeeding day not
a legal holiday, at such time and at such location as shall be designated by the
Board of Directors or at such other date, time, and location as the Board of
Directors shall designate. If the election of directors shall not be held on the
day designated herein for the annual meeting of shareholders, or at any
adjournment thereof, the Board of Directors shall cause such election to be held
at a special meeting of shareholders to be called as soon thereafter as is
convenient.
Section 1.2 Special Meetings. Special meetings of the shareholders,
unless otherwise prescribed by statute, may be called at any time by the Board
of Directors or the President and shall be called by the President or Secretary
at the request in writing of shareholders of record holding at least sixty-five
percent (65%) of the shares of stock of the Corporation.
Section 1.3 Notice of Meetings. Notice of the place, date and time of the
holding of each annual and special meeting of the shareholders and, in the case
of a special meeting, the purpose or purposes thereof, may be given by personal
delivery or by depositing it in a postage prepaid envelope, in the United States
mails, air mail or first class, or by delivering it to a telegraph company,
charges prepaid for transmission, or by transmitting it via telecopier, to each
shareholder entitled to vote at such meeting, not less than ten (10) nor more
than sixty (60) days before the date of such meeting, and, if mailed, shall be
directed to such shareholder at such shareholder's address as it appears on the
records of the Corporation, unless such shareholder shall have filed with the
Secretary of the Corporation a written request that notices to such shareholder
be mailed at some other address, in which case it shall be directed to such
shareholder at such other address. Such requirements for notice shall also be
deemed satisfied, except in the case of shareholder meetings required by law, if
actual notice is received orally or by other writing by the person entitled
thereto as far in advance of the event with respect to which notice is being
given as the minimum notice period required by the laws of the State of
California or these Bylaws. Notice of any meeting of shareholders shall not be
required to be given to any shareholder who shall attend such meeting in person
or by proxy and shall not, at beginning of such meeting, object to the
transaction of any business because the meeting is not lawfully called or
convened, or who shall, either before or after the meeting, submit a signed
waiver of notice, in person or by proxy. Unless the Board of Directors shall
fix, after the adjournment, a new record
<PAGE>
date for an adjourned meeting, notice of such adjourned meeting need not be
given if the time and place to which the meeting shall be adjourned were
announced at the meeting at which the adjournment is taken. At the adjourned
meeting, the Corporation may transact any business which might have been
transacted at the original meeting. If the adjournment is for more than forty-
five (45) days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
shareholder of record.
Whenever notice is required to be given under any provision of the laws of
the State of California, the Certificate of Incorporation or these Bylaws to any
shareholder to whom (i) notice of two consecutive annual meetings of
shareholders, and all notices of meetings of shareholders or of the taking of
action by shareholders by written consent without a meeting to such shareholder
during the period between such two consecutive annual meetings, or (ii) all, and
at least two, payments (if sent by first class mail) of dividends or interest on
securities of the Corporation during a 12-month period, have been mailed
addressed to such shareholder at the address of such shareholder as shown on the
records of the Corporation and have been returned undeliverable, the giving of
such notice to such shareholder shall not be required. Any action or meeting
which shall be taken or held without notice to such shareholder shall have the
same force and effect as if such notice had been duly given. If any such
shareholder shall deliver to the Corporation a written notice setting forth the
then current address of such shareholder, the requirement that notice be given
to such shareholder shall be reinstated.
Section 1.4 Place of Meetings. Meetings of the shareholders may be held
at such place, within or without the State of California, as the Board of
Directors or the officer calling the same shall specify in the notice of such
meeting, or in a duly executed waiver of notice thereof. if not otherwise
designated, the place of any special meeting shall be the principal office of
the Corporation in the State of California.
Section 1.5 Quorum. A majority of shares entitled to vote generally in
the election of directors present in person or by proxy shall constitute a
quorum for the transaction of any business, except as otherwise provided by
statute or the Corporation's Articles of Incorporation (the "Articles of
Incorporation"). In the absence of a quorum, the holders of a majority of the
shares of stock present in person or by proxy, or if no shareholder is present,
then any Officer of the Corporation may adjourn the meeting. At any such
adjourned meeting at which a quorum may be present, any business may be
transacted which might have been transacted at the meeting as originally called.
Section 1.6 Organization. At each meeting of the shareholders, the
Chairman, or in the absence of the Chairman or the Chairman's inability to act,
the President, or in the absence of the President or the President's inability
to act, any vice President, or in the absence or inability of any such Vice
President to act, any person chosen by a majority of those shareholders present,
in person or by proxy and shall act as Chairman of the meeting. The Secretary,
or in the absence or inability of such Secretary to act, any Assistant
Secretary, or in the absence or inability of such Assistant Secretary to act,
any person appointed by the Chairman of the meeting, shall act as secretary of
the meeting and keep the minutes thereof.
-2-
<PAGE>
Section 1.7 Order of Business. The order of business at all meetings of
the shareholders shall be as determined by the Chairman of the meeting.
Section 1.8 Voting. Except as otherwise provided by statute or by the
Articles of Incorporation, the shareholders shall be entitled to one vote for
each share held in such shareholder's name on the record of shareholders of the
Corporation on the date fixed by the Board of Directors as the record date for
the determination of the shareholders who shall be entitled to notice of and to
vote at such meeting; or if such record date shall not have been so fixed, then
at the close of business on the day next preceding the date on which notice
thereof shall be given, or if notice is waived, at the close of business on the
day next preceding the day on which the meeting is held. If a quorum shall be
present, then, except as otherwise provided by statute, these Bylaws, or the
Certificate of Incorporation, any corporate action to be taken by vote of the
shareholders shall be authorized by a majority of the total votes cast at a
meeting of shareholders by the holders of shares of Stock present in person or
represented by proxy and entitled to vote on such action. Unless required by
statute, or determined by the Chairman of the meeting to be advisable, the vote
on any question need not be by written ballot. On a vote by written ballot, each
ballot shall be signed by the shareholder voting, or by his proxy, if there by
such proxy, and shall state the number of shares voted.
In all elections for directors, every shareholder complying with Section
708(b) of the California General Corporation Law and entitled to vote, shall
have the right to vote in person or proxy, the number of shares of stock owned
by him, for as many persons as there are directors to be elected, or to cumulate
the vote of said shares, and give one candidate a number of votes equal to the
number of directors to be elected multiplied by the number of votes to which the
shareholder's shares are normally entitled, or to distribute the votes an the
same principle among as many candidates as he sees fit. As provided in Section
708(b) of the California General Corporation Law, no shareholder shall be
entitled to cumulate votes for any candidate for the office of director unless
such candidate's name has been placed in nomination prior to the voting and said
shareholder has given notice at the meeting prior to the voting of his intention
to cumulate his votes.
Section 1.9 Proxies. At every meeting of shareholders, each shareholder
having the right to vote thereat shall be entitled to vote in person or by
proxy. Such proxy shall be filed with the Secretary before or at the time of the
meeting. No proxy shall be valid after eleven months from its date, unless such
proxy provides for a longer period. Every proxy shall be revocable at the
pleasure of the shareholder executing it, except in these cases where an
irrevocable proxy is permitted by law.
A shareholder may authorize another person or persons to act for such
shareholder as proxy (i) by executing a writing authorizing such person or
persons to act as such, which execution may be accomplished by such shareholder
or such shareholder's authorized officer, director, employee or agent signing
such writing or causing his or her signature to be affixed to such writing by
any reasonable means, including, but not limited to, facsimile signature, or
(ii) by transmitting or authorizing the transmission of a telegram, cablegram or
other means of electronic transmission (a "Transmission") to the person who will
be the holder of the proxy or to a proxy
-3-
<PAGE>
solicitation firm, proxy support service organization or like agent duly
authorized by the person who will be the holder of the proxy to receive such
Transmission; provided, however, that any such Transmission must either set
forth or be submitted with information from which it can be determined that such
Transmission was authorized by such shareholder. Either the Secretary or such
other person or persons as shall be appointed from time to time by the Board of
Directors, or the inspector or inspectors appointed pursuant to Section 1.12
hereof, as appropriate, shall examine Transmissions to determine if they are
valid. If it is determined that a Transmission is valid, the person or persons
making that determination shall specify the information upon which such person
or persons relied. Any copy, facsimile telecommunication or other reliable
reproduction of such a writing or such a Transmission may be substituted or used
in lieu of the original writing or Transmission for any and all purposes for
which the original writing or Transmission could be used; provided, however,
that such copy, facsimile telecommunication or other reproduction shall be a
complete reproduction of the entire original writing or Transmission.
Section 1.10 Fixing Date for Determination of Shareholders of Record.
(a) In order that the Corporation may determine the shareholders entitled
to notice of or to vote at any meeting of shareholders or any adjournment
thereof, the Board of Directors may fix a record date, which record date shall
not precede the date upon which the resolution fixing such record date shall be
adopted by the Board of Directors, and which record date shall not be more than
sixty (60) nor less than ten (10) days before the date of such meeting. If no
such record date shall have been fixed by the Board of Directors, such record
date shall be at the close of business on the day next preceding the day on
which such notice is given or, if such notice is waived, at the close of
business on the day next preceding the day on which such meeting shall be held.
A determination of shareholders of record entitled to notice of or to vote at
any meeting of shareholders shall apply to any adjournment of such meeting
unless the Board of Directors fixes a new record date for the adjourned meeting,
but the Board of Directors shall fix a new record date if the meeting is
adjourned for more than forty-five (45) days from the date set for the original
meeting.
(b) In order that the Corporation may determine the shareholders entitled
to receive payment of any dividend or other distribution or any allotment of any
rights or the shareholders entitled to exercise any rights in respect of any
change, conversion or exchange of any capital stock, or for the purpose of any
other lawful action, the Board of Directors may fix a record date, which record
date shall not precede the date upon which the resolution fixing such record
date shall be adopted by the Board of Directors, and which record date shall not
be more than sixty (60) nor less than ten (10) days prior to such payment,
allotment or other action. If no such record date shall have been fixed, such
record date shall be at the close of business on the day on which the Board of
Directors shall adopt the resolution relating to such payment, allotment or
other action.
Section 1.1 List of shareholders. The officer who has charge of the stock
ledger of the Corporation shall prepare and make, at least ten (10) days before
every meeting of shareholders, a complete list of the shareholders entitled to
vote at the meeting, arranged in alphabetical order, and showing the address of
each shareholder and the number of shares registered in the name of
-4-
<PAGE>
each shareholder. Such list shall be open to the examination of any shareholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten (10) days prior to the meeting either at a place within
the city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or if not so specified, at the place where the meeting is
to be held. The list shall also be produced and kept at the time and place of
the meeting during the whole time thereof, and may be inspected by any
shareholder who is present. Such stock ledger shall be the only evidence as to
who are the shareholders entitled to examine such stock ledger, such list or the
books of the Corporation or to vote in person or by proxy at any meeting of
shareholders.
Section 1.12 Voting Procedures and Inspectors of Elections.
(a) The Board of Directors may, in advance of any meeting of shareholders,
appoint one (1) or three (3) inspectors (individually, an "Inspector," and
collectively, "Inspectors") to act at such meeting and make a written report
thereof. The Board of Directors may designate one or more persons as alternate
Inspectors to replace any Inspector who shall fail to act. If no Inspector or
alternate shall be able to act at such meeting, the person presiding at such
meeting may, and on the request of any shareholder or shareholder's proxy and
shall appoint one or more other persons to act as inspectors thereat. Each
Inspector, before entering upon the discharge of his or her duties, shall take
and sign an oath faithfully to execute the duties of Inspector with strict
impartiality and according to the best of his or her ability.
(b) The Inspectors shall (i) ascertain the number of shares of capital
stock of the Corporation outstanding and the voting cower of each, (ii)
determine the shares of capital stock of the Corporation represented at such
meeting and the validity of proxies and ballots, (iii) count all votes and
ballots, (iv) determine and retain for a reasonable period a record of the
disposition of any challenges made to any determination by the Inspectors and
(v) certify their determination of the number of such shares represented at such
meeting and their count of all votes and ballots. The Inspectors may appoint or
retain other persons or entities to assist them in the performance of their
duties.
(c) The date and time of the opening and the closing of the polls for each
matter upon which the shareholders will vote at such meeting shall be announced
at such meeting. No ballots, proxies or votes, nor any revocations thereof or
changes thereto, shall be accepted by the inspectors after the closing of the
polls.
(d) In determining the validity and counting of proxies and ballots, the
Inspectors shall be limited to an examination of the proxies, any envelopes
submitted with such proxies, any information provided in accordance with the
second paragraph of Section 9 of these Bylaws, ballots and the regular books and
records of the Corporation, except that the inspectors may consider other
reliable information for the limited purpose of reconciling proxies and ballots
submitted by or on behalf of banks, brokers, their nominees or similar persons
which represent more votes than the holder of a proxy is authorized by a
shareholder of record to cast or more votes than such shareholder holds of
record. If the Inspectors consider other reliable information for the limited
purpose permitted herein, the Inspectors, at the time they make their
certification
-5-
<PAGE>
pursuant to paragraph (b) of this Section 1.12, shall specify the precise
information considered by them, including the person or persons from whom they
obtained such information, when the information was obtained, the means by which
such information was obtained and the basis for the Inspectors' belief that such
information is accurate and reliable.
(e) If there are three (3) Inspectors, the decision, act or certificate of
a majority is effective in all respects as the decision, act or certificate of
all.
Section 1.13 Voting of Shares by Certain Holders. Shares of capital stock
of the Corporation standing in the name of another corporation, domestic or
foreign, and entitled to vote may be voted by such officer, agent or proxy as
the Bylaws of such other corporation may prescribe or, in the absence of such
provision, as the board of directors of such other corporation may determine.
Shares of capital stock of the Corporation standing in the name of a
deceased person, a minor, an incompetent or a corporation declared bankrupt and
entitled to vote may be voted by an administrator, executor, guardian,
conservator or trustee, as the case may be, either in person or by proxy,
without transfer of such shares into the name of the official so voting.
A shareholder whose shares of capital stock of the corporation are pledged
shall be entitled to vote such shares unless on the transfer books of the
Corporation the pledgor has expressly empowered the pledgee to vote such shares,
in which case only the pledgee, or such pledgee's proxy, may represent such
shares and vote thereon.
Shares of capital stock of the Corporation belonging to the Corporation, or
to another corporation if a majority of the shares entitled to vote in the
election of directors of such other corporation shall be held by the
Corporation, shall not be voted at any meeting of shareholders and shall not be
counted in determining the total number of outstanding shares for the purpose of
determining whether a quorum is present. Nothing in this Section 1.13 shall be
construed to limit the right of the Corporation to vote shares of capital stock
of the Corporation held by it in a fiduciary capacity.
Section 1.14 Action by Written Consent. Unless otherwise provided in the
Articles of Incorporation, any action, except the election of directors, which
may be taken at any annual or special meeting of shareholders may be taken
without a meeting and without prior notice, if a consent in writing, setting
forth the action so taken, shall be signed by the holders of outstanding shares
having not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all shares entitled to vote
thereon were present and voted. Except to fill a vacancy in the Board of
Directors not filled by the directors, directors may not be elected by written
consent except by unanimous written consent of all shares entitled to vote for
the election of directors. Any election of a director to fill a vacancy (other
than a vacancy created by removal), not filled by the directors, requires the
written consent of a majority of the shares entitled to vote.
-6-
<PAGE>
Section 1.15 Advance Notice of Shareholder Business. At an annual meeting
of the shareholders, only such business shall be conducted as shall have been
properly brought before the meeting. To be properly brought before an annual
meeting, business must be (i) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors, (ii)
otherwise properly brought before the meeting by or at the direction of the
Board of Directors, or (iii) otherwise properly brought before the meeting by a
shareholder. For business to be properly brought before an annual meeting by a
shareholder, the shareholder must have given timely notice thereof in writing to
the Secretary of the Corporation. To be timely, a shareholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation, not less than 60 days nor more than 90 days prior to the meeting;
provided, however, that in the event that less than 70 days' notice or prior
public disclosure of the date of the meeting is given or made to shareholders,
notice by the shareholder to be timely must be so received not later than the
close of business on the 10th day following the day on which such notice of the
date of the annual meeting was mailed or such public disclosure was made. A
shareholder's notice to the Secretary shall set forth as to each matter the
shareholder proposes to bring before the annual meeting (w) a brief description
of the business desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting, (x) the name and address, as
they appear on the Corporation's books, of the shareholder proposing such
business, (y) the class and number of shares of the Corporation which are
beneficially owned by the shareholder, and (z) any material interest of the
shareholder in such business. Notwithstanding anything in the Bylaws to the
contrary, no business shall be conducted at any annual meeting except in
accordance with the procedures set forth in this Section 1.15. The Chairman of
the annual meeting shall, if the facts warrant, determine and declare to the
meeting that business was not properly brought before the meeting and in
accordance with the provisions of this Section 1.15, and if the Chairman should
so determine, the Chairman shall so declare to the meeting and any such business
not properly brought before the meeting shall not be transacted.
Section 1.16 Notice of Shareholder Nominees. Only persons who are
nominated in accordance with the procedures set forth in this Section 1.16 shall
be eligible for election as Directors. Nominations of persons for election to
the Board of Directors of the Corporation may be made at a meeting of
shareholders by or at the direction of the Board of Directors or by any
shareholder of the Corporation entitled to vote for the election of Directors at
the meeting who complies with the notice procedures set forth in this Section
1.16. Such nominations, other than those made by or at the direction of the
Board of Directors, shall be made pursuant to timely notice in writing to the
Secretary of the Corporation. To be timely, a shareholder's notice shall be
delivered to or mailed and received at the principal executive offices of the
Corporation not less than 60 days nor more than 90 days prior to the meeting;
provided, however, that in the event that less than 70 days' notice or prior
public disclosure of the date of the meeting is given or made to shareholders,
notice by the shareholder to be timely must be so received not later than the
close of business on the 10th day following the day on which such notice of the
date of the meeting was mailed or such public disclosure was made. Such
shareholder's notice shall set forth (a) as to each person whom the shareholder
proposes to nominate for election or reelection as a Director, (i) the name,
age, business address and residence address of such person, (ii) the principal
occupation or employment of such person, (iii) the class and number of shares of
the Corporation which are beneficially owned by such person and (iv) any other
information relating to such person that is
-7-
<PAGE>
required to be disclosed in solicitations of proxies for election of Directors,
or is otherwise required, in each case pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (including without limitation such
persons' written consent to being named in the proxy statement as a nominee and
to serving as a Director if elected); and (b) as to the shareholder giving the
notice (i) the name and address, as they appear on the Corporation's books, of
such shareholder and (ii) the class and number of shares of the Corporation
which are beneficially owned by such shareholder. At the request of the Board of
Directors any person nominated by the Board of Directors for election as a
Director shall furnish to the Secretary of the Corporation that information
required to be set forth in a shareholders notice of nomination which pertains
to the nominee. No person shall be eligible for election as a Director of the
Corporation unless nominated in accordance with the procedures set forth in this
Section 1.16. The Chairman of the meeting shall, if the facts warrant, determine
and declare to the meeting that a nomination was not made in accordance with the
procedures prescribed by the Bylaws, and if the Chairman should so determine,
the chairman shall so declare to the meeting and the defective nomination shall
be disregarded.
ARTICLE II
BOARD OF DIRECTORS
Section 2.1 General Powers. The business and affairs of the Corporation
shall be managed by the Board of Directors. The Board of Directors may exercise
all such authority and powers of the Corporation and do all such lawful acts and
things as are not by statute or the Articles of Incorporation directed or
required to be exercised or done by the shareholders.
Section 2.2 Number, Qualifications Election, and Term of Office. The
number of directors shall be three (3). Directors need not be residents of the
State of California nor shareholders of the Corporation. The directors shall be
elected at the annual meeting of shareholders, and each director elected shall
same until the next succeeding annual meeting and until his successor shall have
been elected and qualified.
Section 2.3 Place of Meeting. Meetings of the Board of Directors may be
held at such place, within or without the State of California, as the Board of
Directors may from time to time determine or shall be specified in the notice or
waiver of notice of such meeting. If not otherwise designated, the place of any
special meeting shall be the principal office of the Corporation in the State of
California.
Section 2.4 Regular Meetings. Regular meetings of the Board of Directors
shall be held quarterly at such place as the Board of Directors may from time to
time determine. If any day fixed for a regular meeting shall be a legal holiday
at the place where the meeting is to be held, then the meeting which would
otherwise be held on that day shall be held at the same hour on the next
succeeding business day. Notice of regular meetings of the Board of Directors
need not be given except as otherwise required by statute or these Bylaws.
Section 2.5 Special Meetings. Special meetings of the Board of Directors
may be called by any two (2) directors of the Corporation or by the Chairman.
-8-
<PAGE>
Section 2.6 Notice of Meetings. Notice of each special meeting of the
Board of Directors (and of each regular meeting for which notice shall be
required) shall be given by the Secretary as hereinafter provided in this
Section 6, in which notice shall be stated the time and place of the meeting.
Notice of each such meeting shall be delivered to each director either
personally or by telephone, telegraph cable or telecopier, at least forty-eight
(48) hours before the time at which such meeting is to be held or by depositing
it, in a sealed envelope, in the United States mails first class mail, postage
prepaid, addressed to each director at the director's residence, or usual place
of business, at least four (4) days before the day on which such meeting is to
be held. Notice of any such meeting need not be given to any director who shall,
either before or after the meeting, submit a signed waiver of notice or who
shall attend such meeting without protesting, prior to or at its commencement,
the lack of notice to such director. Except as otherwise specifically required
by these Bylaws, a notice or waiver of notice of any regular or special meeting
need not state the purpose of such meeting.
Section 2.7 Quorum and Manner of Acting. A majority of the entire Board
of Directors shall be present in person at any meeting of the Board of Directors
in order to constitute a quorum for the transaction of business at such meeting,
and, except as otherwise expressly required by statute or the Articles of
Incorporation, the act of a majority of the directors present at any meeting at
which a quorum is present shall be the act of the Board of Directors. In the
absence of a quorum at any meeting of the Board of Directors, a majority of the
directors present thereat, or if no director be present, the Secretary, may
adjourn such meeting to another time and place, or such meeting, unless it be
the first meeting of the Board of Directors, need not be held. At any adjourned
meeting at which a quorum is present, any business may be transacted which might
have been transacted at the meeting as originally called. Except as provided in
Article III of these Bylaws, the directors shall act only as a Board and the
individual directors shall have no power as such.
Section 2.8 Telephonic Meetings. Members of the Board of Directors or of
any committee designated by the Board of Directors may participate in a meeting
of the Board of Directors or such committee through conference telephone or
similar communications equipment by means of which all persons participating in
such meeting can hear each other, and participation in any meeting conducted
pursuant to this Section 8 shall constitute presence in person at such meeting.
Section 2.9 Organization. At each meeting of the Board of Directors, the
Chairman, or, in the absence of or inability of the Chairman to act, another
director chosen by a majority of the directors present shall act as Chairman of
the meeting and preside thereat. The Secretary (or, in the absence or inability
to act of the Secretary any person appointed by the Chairman) shall act as
secretary of the meeting and keep the minutes thereof.
Section 2.10 Presumption of Assent. Unless otherwise provided by the laws
of the State of California, a director who is present at a meeting of the Board
of Directors or a committee thereof at which action is taken on any corporate
matter shall be presumed to have assented to the action taken unless his or her
dissent shall be entered in the minutes of such meeting or unless he or she
shall file his or her written dissent to such action with the person acting as
secretary of such
-9-
<PAGE>
meeting before the adjournment thereof or shall forward such dissent by
registered mail to the Secretary immediately after the adjournment of such
meeting. Such right to dissent shall not apply to a director who voted in favor
of such action.
Section 2.11 Resignations. Any director of the Corporation may resign at
any time by giving written notice of such director's resignation to the Board of
Directors or the President or the Secretary. Any such resignation shall take
effect at the time specified therein or, if the time when it shall become
effective shall not be specified therein, immediately upon its receipt; and,
unless otherwise specified therein, the acceptance of such resignation shall not
be necessary to make it effective.
Section 2.12 Vacancies. Any vacancies in the Board of Directors, for any
reason, and any newly created directorships resulting from any increase in the
number of directors may be filled by a majority of the directors then in office,
or, if the number of directors then in office is less than a quorum, by (1) the
unanimous written consent of the directors then in office; or (2) a sole
remaining director, and any directors so chosen shall hold office until the next
election of directors and until their successors are duly elected and qualified.
If there are no directors in office, then an election of directors may be held
in the manner provided by statute. The shareholders may elect a director at any
time to fill any vacancy not filled by the directors. Any such election by
written consent requires the majority of the outstanding shares entitled to
vote. Except as otherwise provided in these Bylaws, when one or more directors
shall resign from the Board of Directors, effective at a future date, a majority
of the directors then in office, including those who have so resigned, shall
have the power to fill such vacancy or vacancies, the vote thereon to take
effect when such resignation or resignations shall become effective, and each
director so chosen shall hold office as provided in this section in the filling
of other vacancies.
Section 2.13 Removal of Directors. Notwithstanding any provision of the
Articles of Incorporation or these Bylaws (and notwithstanding the fact that
some lesser percentage may be specified by law, the Articles of Incorporation or
these Bylaws), any director or the entire Board of Directors of the Corporation
may be removed at any time, by the affirmative vote of the holders of the
outstanding shares. No director may be removed (unless the entire board is
removed) when the votes cast against removal, or not consenting in writing to
the removal, would be sufficient to elect the director if voted cumulatively at
an election at which the same total number of votes were cast (or, if the action
is taken by written consent, all shares entitled to vote were voted) and the
entire number of directors authorized at the time of the director's most recent
election were then being elected.
Section 2.14 Compensation. The Board of Directors shall have authority to
fix the compensation, including fees and reimbursement of reasonable expenses,
of directors for services to the Corporation in any capacity, provided no such
payment shall preclude any director from serving the Corporation in any other
capacity and receiving compensation therefor.
Section 2.15 Action Without Meeting. Any action required or permitted to
be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting if all members of the Board of Directors or
committee, as the case may be, consent
-10-
<PAGE>
thereto in writing, and the writing or writings are filed with the minutes of
proceedings of the Board of Directors or committee.
Section 2.16 Executive Committee. The Board of Directors may, in its
discretion, by resolution passed by a majority of the entire Board of Directors,
designate an Executive Committee consisting of such number of directors as the
Board of Directors shall determine (but in no instance less than two members).
The Executive Committee shall have and may exercise all of the powers and
authority of the Board of Directors in the management of the business and
affairs of the Corporation with respect to any matter which may require action
prior to, or which in the opinion of the Executive Committee may be
inconvenient, inappropriate or undesirable to be postponed until, the next
meeting of the Board of Directors; provided, however, that the Executive
Committee shall not have the power or authority of the Board of Directors in
reference to amending the Certificate of Incorporation, adopting an agreement of
merger or consolidation, recommending to the stockholders the sale, lease or
exchange of all or substantially all of the Corporation's property and assets,
recommending to the stockholders a dissolution of the Corporation or a
revocation of such a dissolution, amending these Bylaws, declaring a dividend,
authorizing the issuance of capital stock of the Corporation, adopting a
certificate of ownership and merger or otherwise approving a transaction with an
aggregate value in excess of $100,000. Any member of the Board of Directors may
request the chairman of the Executive Committee to call a meeting of the
Executive Committee with respect to a specified subject.
Section 2.17 Other Committees. The Board of Directors may from time to
time, in its discretion, by resolution passed by a majority of the entire Board
of Directors, designate other committees of the Board of Directors consisting of
such number of directors as the Board of Directors shall determine (but in no
instance less than two members), which shall have and may exercise such
lawfully delegable powers and duties of the Board of Directors as shall be
conferred or authorized by such resolution. The Board of Directors shall have
the power to change at any time the members of any such committee, to fill
vacancies and to dissolve any such committee.
In connection with the foregoing, the Corporation shall establish an Audit
Committee and Compensation Committee in addition to the Executive Committee.
The chairmen of the Compensation and Audit Committees shall be persons not
regularly employed by the Corporation. In addition, a majority of the members of
the Audit Committee shall be persons not regularly employed by the Corporation.
Any committee established by the Board of Directors shall have all the
authority of the board, except with respect to:
(a) approving any action requiring shareholder's approval or approval of
the outstanding shares;
(b) filling vacancies on the Board of Directors or any committee thereof;
(c) fixing the compensation of the directors for serving on the board or
on any committee thereof;
-11-
<PAGE>
(d) amending or repealing any bylaw or adopting new bylaws;
(e) amending or repealing any resolution of the Board of Directors which
by its express terms is not so amendable or repealable;
(f) distributing dividends, except at a rate, in a periodic amount or
within a price range set forth in the Articles of Incorporation or determined by
the Board of Directors; or
(g) appointing of other committees of the Board of Directors or members
thereof.
Section 2.18 Alternates. The Board of Directors may from time to time
designate from among the directors alternates to serve on any committee of the
Board of Directors to replace any absent or disqualified member at any meeting
of such committee. Whenever a quorum cannot be secured for any meeting of any
committee from among the regular members thereof and designated alternates, the
member or members of such committee present at such meeting and not disqualified
from voting, whether or not constituting a quorum, may unanimously appoint
another director to act at such meeting in place of any absent or disqualified
member.
Section 2.19 Quorum and Manner of Acting - Committees. A majority of the
members of any committee of the Board of Directors shall constitute a quorum for
the transaction of business at any meeting of such committee, and the act of a
majority of the members present at any meeting at which a quorum is present
shall be the act of such committee.
Section 2.20 Committee Chairman, Books and Records, Etc. The chairman of
each committee of the Board of Directors shall be selected from among the
members of such committee by the Board of Directors, or, in the absence of such
selection, by the majority vote of the Committee's members.
Each committee shall keep a record of its acts and proceedings, and all
actions of each committee shall be reported to the Board of Directors at its
next meeting.
Each committee shall fix its own rules of procedure not inconsistent with
these Bylaws or the resolution of the Board of Directors designating such
committee and shall meet at such times and places and upon such call or notice
as shall be provided by such rules.
Section 2.21 Reliance upon Records. Every director, and every member of
any committee of the Board of Directors, shall, in the performance of his or her
duties, be fully protected in relying in good faith upon the records of the
Corporation and upon such information, opinions, reports or statements presented
to the Corporation by any of the Corporation's officers or employees, or
committees of the Board of Directors, or by any other person as to matters the
director or member reasonably believes are within such other person's
professional or expert competence and who has been selected with reasonable care
by or on behalf of the Corporation, including, but not limited to, such records,
information, opinions, reports or statements as to the value and amount of the
assets, liabilities and/or net profits of the Corporation, or any other facts
pertinent to the existence and amount of surplus or other funds from which
dividends might
-12-
<PAGE>
properly be declared and paid, or with which the Corporation's capital stock
might properly be purchased or redeemed.
Section 2.22 Interested Directors. The presence of a director, who is
directly or indirectly a party in a contract or transaction with the
Corporation, or between the Corporation and any other corporation, partnership,
association or other organization in which such director is a director or
officer or has a financial interest, may be counted in determining whether a
quorum is present at any meeting of the Board of Directors or a committee
thereof at which such contract or transaction is discussed or authorized, and
such director may participate in such meeting to the extent permitted by
applicable law, including Section 310 of the California General Corporation.
ARTICLE III
OFFICERS
Section 3.1 Number and Qualifications. The officers of the Corporation
shall be the Chairman of the Board of Directors, President or Presidents,
Treasurer and Secretary. Any two or more offices may be held by the same person.
Such officers shall be elected from time to time by the Board of Directors, each
to hold office until the meeting of the Board of Directors following the next
annual meeting of the shareholders, or until such officer's successor shall have
been duly elected and shall have qualified, or until such officer's death, or
until such officer shall have resigned, or have been removed, as hereinafter
provided in these Bylaws. The Board of Directors may from time to time elect, or
the Chairman may appoint, such other officers (including one or more Vice
Presidents, Assistant Vice Presidents, Assistant Secretaries and Assistant
Treasurers), and such other officers, agents and representatives, as may be
necessary or desirable for the business of the Corporation. Such other officers,
agents and representatives shall have such duties and shall hold their offices
or appointments for such terms as may be prescribed by the Board of Directors or
by the appointing authority. Notwithstanding anything to the contrary contained
in this Article, in no event shall the term of any such officer, agent or
representative appointed pursuant to this Article shorten or lengthen the
employment term of such officer, agent or representative as set forth in any
Employment Agreement between such individual and the Corporation or its
subsidiaries.
Section 3.2 Resignations. Any officer, agent or representative of the
Corporation may resign at any time by giving written notice of such officer's
resignation to the Board of Directors, the President or the Secretary. Any such
resignation shall take effect at the time specified therein or, if the time when
it shall become effective shall not be specified therein, immediately upon its
receipt; and unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
Section 3.3 Removal. Any officer, agent or representative of the
Corporation may be removed, either with or without cause, at any time, by the
vote of the majority of the entire Board of Directors. Such removal shall be
without prejudice to the contractual rights, if any, of the person so removed.
-13-
<PAGE>
Section 3.4 Vacancies. A vacancy in any office, whether arising from
death, resignation, removal or any other cause, may be filled for the unexpired
portion of the term of the office which shall be vacant, in the manner
prescribed in these Bylaws for the regular election or appointment of such
office.
Section 3.5 Officers' Bonds or Other Security. If required by the Board
of Directors, any officer, agent or representative of the Corporation shall give
a bond or other security for the faithful performance of such officer's duties,
in such amount and with such surety or sureties as the Board of Directors may
require. Such bond may be at the expense of the Corporation.
Section 3.6 Compensation. The compensation of the officers, including
the Chairman of the Board of the Corporation, for their services as such
officers shall be fixed from time to time by the Board of Directors or the
Compensation Committee, if any, provided, however, that the Board of Directors
may delegate to the Chairman the power to fix the compensation of officers,
agents and representatives appointed by the Chairman. An officer of the
Corporation shall not be prevented from receiving compensation by reason of the
fact that such officer is also a director of the Corporation.
Section 3.7 Chairman. The Chairman shall be the Chief Executive Officer
of the Corporation and shall have the general and active management of the
business of the Corporation and general and active supervision and direction
over the other officers, agents, representatives and employees and shall see
that their duties are properly performed. The Chairman shall, if present,
preside at each meeting of the shareholders and of the Board of Directors and
shall be an ex-officio member of all committees of the Board of Directors. The
Chairman shall perform all duties incident to the office of Chairman and Chief
Executive Officer and such other duties as may from time to time be assigned to
such Chairman by the Board of Directors.
Section 3.8 President or Presidents. The President or Presidents shall
perform such duties as from time to time shall be assigned to such President by
the Board of Directors, or the Chairman of the Board, and in the absence or
inability of the Chairman of the Board, shall perform the duties of the Chairman
of the Board, in the order designated, or in the absence of any designation,
then in the order of their election, and when so acting, shall have all the
powers of and be subject to all the restrictions upon the Chairman. The Board
of Directors may designate certain Presidents as being in charge of designated
divisions, plants or functions of the Corporation's business and add appropriate
descriptions to their titles.
Section 3.9 The Vice Presidents. In the event of the absence of the
President or Presidents or in the event of his or their inability or refusal to
act, each Vice President, in the order designated, or in the absence of any
designation, then in the order of their election, shall perform the duties of
such President or Presidents, when so acting, shall have all the powers of and
be subject to all the restrictions upon such President. The Board of Directors
may also designate certain Vice Presidents as being in charge of designated
divisions, plants or functions of the Corporation's business and add appropriate
descriptions to their titles. The Vice Presidents shall also perform such other
duties as from time to time may be assigned to them by the Board of Directors or
by the chief executive officer of the Corporation.
-14-
<PAGE>
Section 3.10 Secretary and Assistant Secretaries. The Secretary shall:
(a) keep or cause to be kept in one or more books provided for that
purpose, the minutes of the meetings of the Board of Directors, the committees
of the Board of Directors and the shareholders;
(b) see that all notices are duly given in accordance with the provisions
of these Bylaws and as required by law;
(c) be custodian of the records and the seal of the Corporation and affix
and attest the seal to all stock certificates of the Corporation (unless the
seal of the Corporation on such certificates shall be a facsimile, as
hereinafter provided), if necessary and affix and attest the seal to all other
documents to be executed on behalf of the Corporation under its seal, if
necessary;
(d) see that the books, reports, statements, certificates, stock transfer
books and other documents and records required by law to be kept and filed are
properly kept and filed; and
(e) in general, perform all the duties incident to the office of Secretary
and such other duties as from time to time may be assigned to such Secretary by
the Board of Directors or the President.
The assistant secretary, or if there be more than one, the assistant
secretaries, in the order determined by the Board of Directors (or if there be
no such determination, then in the order of their election) shall, in the
absence of the secretary or in the event of the secretary's inability or refusal
to act, perform the duties and exercise the powers of the secretary and shall
perform such other duties and have such other powers as the Board of Directors
may from time to time prescribe.
Section 3.11 Treasurer and Assistant Treasurers. The Treasurer shall:
(a) have the custody of the corporate funds and securities and shall keep
full and accurate accounts of receipts and disbursements in books belonging to
the Corporation and shall deposit all moneys and other valuable effects in the
name and to the credit of the Corporation in such depositories as may be
designated by the Board of Directors;
(b) disburse the funds of the Corporation as may be ordered by the Board
of Directors or the Chairman, taking proper vouchers for such disbursements, and
shall render to the Chairman and the Board of Directors, at its regular
meetings, or when the Chairman or Board of Directors so requires, an account of
all such treasurer's transactions as treasurer and of the financial condition of
the Corporation; and
(c) if required by the Board of Directors, give the Corporation, at the
Corporation's cost, a bond (which shall be renewed every six years) in such sum
and with such surety or sureties as shall be satisfactory to the Board of
Directors for the faithful performance of the duties of such treasurer's office
and for the restoration to the Corporation, in case of such treasurer's death,
-15-
<PAGE>
resignation, retirement or removal from office, of all the books, papers,
vouchers, money and other property of whatever kind in such treasurer's
possession or under such treasurer's control belonging to the Corporation.
(d) in general, perform all the duties incident to the office of Treasurer
and such other duties as from time to time may be assigned to such Treasurer by
the Board of Directors or Chairman.
The assistant treasurer, or if there shall be more than one, the assistant
treasurers in the order determined by the Board of Directors (or if there be no
such determination, then in the order of their election), shall, in the absence
of the treasurer or in the event of such treasurer's inability or refusal to
act, perform the duties and exercise the powers of the treasurer and shall
perform such other duties and have such other powers as the Board of Directors
may from time to time prescribe.
ARTICLE IV
INDEMNIFICATION
Section 4.1 Definitions. For the purposes of this Article "agent" means
any person who is or was a director, officer, employee or other agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another foreign or domestic corporation,
partnership, joint venture, trust or other enterprise, or was a director,
officer, employee or agent of a foreign or domestic corporation, which was a
predecessor corporation of the Corporation or of another enterprise at the
request of such predecessor corporation; "proceeding" includes any threatened,
pending, or completed action or proceeding, whether civil, criminal,
administrative or investigative; and "expenses" includes, without limitation,
attorneys' fees and any expenses of establishing a right to indemnification
under Section 4.4 or Section 4.5(ii) of this Article IV.
Section 4.2 Indemnification in Actions by Third Parties. The Corporation
shall indemnify any person who was or is a party or is threatened to be made a
party to any proceeding (other than an action by or in the right of the
Corporation to procure a judgment in its favor) by reason of the fact that such
person is or was an agent of the Corporation, against expenses, judgments,
fines, settlements and other amounts actually and reasonably incurred in
connection with such proceeding if such person acted in good faith and in a
manner such person reasonably believed to be in the best interests of the
Corporation and, in the case of a criminal proceeding, had no reasonable cause
to believe the conduct of such person was unlawful. The termination of any
proceeding by judgment, order, settlement, conviction or upon a plea of nolo
contendere or its equivalent shall not, of itself, create a presumption that the
person did not act in good faith and in a manner which the person reasonably
believed to be in the best interests of the Corporation or that the person had
reasonable cause to believe that the person's conduct was unlawful.
Section 4.3 Indemnification in Actions by or in the Right of the
Corporation. The Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action by or in the right of the Corporation to procure a
-16-
<PAGE>
judgment in its favor by reason of the fact that such person is or was an agent
of the Corporation, against monetary damages and expenses actually and
reasonably incurred by such person in connection with the defense or settlement
of such action if such person acted in good faith, in a manner such person
believed to be in the best interests of the Corporation and its shareholders. No
indemnification shall be made under this Section 4.3 for any of the following:
(i) in respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable to the Corporation in the performance of
such person's duty to the Corporation and its shareholders, unless and only to
the extent that the court in which such proceeding is or was pending shall
determine upon application that, in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for expenses and then
only to the extent that the court shall determine;
(ii) of amounts paid in settling or otherwise disposing of a pending
action without court approval; or
(iii) of expenses incurred in defending a pending action which is settled
or otherwise disposed of without court approval.
Section 4.4 Indemnification Against Expenses. To the extent that an agent
of the Corporation has been successful on the merits in defense of any
proceeding referred to in Sections 4.2 or 4.3 of this Article IV or in defense
of any claim, issue or matter therein, the agent shall be indemnified against
expenses actually and reasonably incurred by the agent in connection therewith.
To the extent that an agent of the Corporation has not been successful on the
merits of any proceeding referred to in Section 4.3 of this Article IV (with
respect to actions by or in the right of the Corporation) or in defense of any
claim, issue or matter therein, the agent shall be indemnified against expenses
actually and reasonably incurred by the agent in connection therewith; provided,
however, that an agent of the Corporation may not be indemnified for expenses
incurred in connection with such a proceeding, or in defense of any claim, issue
or matter therein, if the agent has been unsuccessful on the merits with respect
to: (i) acts or omissions that involve intentional misconduct or a knowing and
culpable violation of law, (ii) acts of omission that an agent believes to be
contrary to the best interests of the Corporation or its shareholders or that
involve the absence of good faith on the part of the agent, (iii) any
transaction from which an agent derived an improper personal benefit, (iv) acts
or omissions that show a reckless disregard for the agent's duty to the
Corporation or its shareholders in circumstances in which the agent was aware,
or should have been aware, in the ordinary course of performing an agent's
duties, of a risk of serious injury to the Corporation or its shareholders, (v)
acts or omissions that constitute an unexcused pattern of inattention that
amounts to an abdication of an agent's duty to the Corporation or its
shareholders, (vi) transactions in violation of Section 310 of the California
General Corporation Law, or (vii) actions in violation of Section 316 of the
California General Corporation Law. In addition, no provision in this Section
4.4 of this Article IV shall eliminate or limit the liability of an agent for
any act or omission occurring prior to the date when the provision becomes
effective, nor eliminate or limit the liability of an officer for any act or
omission as an officer, notwithstanding that the officer is also a director or
that his or her actions, if negligent or improper, have been ratified by the
directors.
-17-
<PAGE>
Section 4.5 Required Determinations.
(a) Upon the determination in the manner provided in paragraph (b) of this
Section 4.5 of this Article IV that indemnification of the agent is proper in
the circumstances because the agent has met the applicable standard of conduct
set forth in Section 4.3 of this Article IV (with respect to actions by or in
the right of the Corporation), the agent shall be indemnified in accordance with
the provisions of Section 4.3 of this Article IV; provided, however, that an
agent shall not be entitled to indemnification in accordance with the provisions
of this paragraph (a) of Section 4.5 of this Article IV for: (i) acts or
omissions that involve intentional misconduct or a knowing and culpable
violation of law, (ii) acts of omission that an agent believes to be contrary to
the best interests of the Corporation or its shareholders or that involve the
absence of good faith on the part of the agent, (iii) any transaction from which
an agent derived an improper personal benefit, (iv) acts or omissions that show
a reckless disregard for the agent's duty to the Corporation or its shareholders
in circumstances in which the agent was aware, or should have been aware, in the
ordinary course of performing an agent's duties, of a risk of serious injury to
the Corporation or its shareholders, (v) acts or omissions that constitute an
unexcused pattern of inattention that amounts to an abdication of an agent's
duty to the Corporation or its shareholders, (vi) transactions in violation of
Section 310 of the California General Corporation Law, or (vii) actions in
violation of Section 316 of the California General Corporation Law. In
addition, no provision in this Section 4.5 of this Article IV shall eliminate or
limit the liability of an agent for any act or omission occurring prior to the
date when the provision becomes effective, nor eliminate or limit the liability
of an officer for any act or omission as an officer, notwithstanding that the
officer is also a director or that his or her actions, if negligent or improper,
have been ratified by the directors.
(b) Except as provided in Section 4.4 of this Article IV, any
indemnification under this Article IV shall be made by the Corporation only if
authorized in the specific case, upon a determination that indemnification of
the agent is proper in the circumstances because the agent has met the
applicable standard of conduct set forth in Sections 4.2 or 4.3 of this Article
IV by any of the following:
(i) a majority vote of a quorum consisting of directors who are not
parties to such proceeding;
(ii) if such a quorum of directors is not obtainable, by independent
legal counsel in a written opinion;
(iii) approval of the shareholders, with the shares owned by the
person to be indemnified not being entitled to vote thereon; or
(iv) the court in which such proceeding is or was pending upon
application made by the Corporation or the agent or the attorney or other person
rendering services in connection with the defense, whether or not such
application by the agent, attorney, or other person is opposed by the
Corporation.
-18-
<PAGE>
Section 4.6 Advance of Expenses. Expenses incurred in defending any
proceeding may be advanced by the Corporation prior to the final disposition of
such proceeding upon receipt of an undertaking by or on behalf of the agent to
repay such amount unless it shall be determined ultimately that the agent is
entitled to be indemnified as authorized in this Article IV.
Section 4.7 Other Indemnification. The indemnification provided by this
Article VI shall not be deemed exclusive of any other rights to which those
seeking indemnification may be entitled under any agreement, vote of
shareholders or disinterested directors or otherwise, both as to action in an
official capacity and as to action in another capacity while holding such
office, to the extent such additional rights to indemnification are authorized
in the Articles of Incorporation. The rights to indemnity hereunder shall
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of the heirs, executors and administrators
of the person. Nothing contained in this Article IV shall affect any right to
indemnification to which persons other than such directors and officers may be
entitled by contract or otherwise.
Section 4.8 Forms of Indemnification Not Permitted. No indemnification
or advance shall be made under this Article IV, except as provided in Section
4.4 or Section 4.5(b)(iii) in any circumstance where it appears:
(i) that it would be inconsistent with a provision of the Articles of
Incorporation, these bylaws, a resolution of the shareholders or an agreement in
effect at the time of the accrual of the alleged cause of action asserted in the
proceeding in which the expenses were incurred or other amounts were paid, which
prohibits or otherwise limits indemnification; or
(ii) that it would be inconsistent with any condition expressly imposed by
a court in approving a settlement.
Section 4.9 Insurance. The Corporation shall have power to purchase and
maintain insurance on behalf of any agent of the Corporation against any
liability asserted against or incurred by the agent in such capacity or arising
out of the agent's status as such whether or not the Corporation would have the
power to indemnify the agent against such liability under the provisions of this
Article IV.
Section 4.10 Nonapplicability to Fiduciaries of Employee Benefit Plans.
This Article IV does not apply to any proceeding against any trustee, investment
manager or other fiduciary of an employee benefit plan in such person's capacity
as such, even though such person may also be an agent of the Corporation as
defined in Section 4.1 of this Article IV. The Corporation shall have power to
indemnify such trustee, investment manager or other fiduciary to the extent
permitted by subdivision (f) of Section 207 of the California General
Corporation Law.
ARTICLE V
CERTIFICATES OF STOCK AND THEIR TRANSFER
Section 5.1 Certificates of Stock. Shares of capital stock of the
Corporation shall be represented by certificates which shall be in such form as
may be determined by the Board of
-19-
<PAGE>
Directors, shall be numbered and shall be entered on the books of the
Corporation as they are issued. Such certificates shall indicate the holder's
name and the number of shares evidenced thereby and shall be signed by the
Chairman, a President or a Vice President and by the Secretary or an Assistant
Secretary. Every certificate shall have noted thereon any information required
to be set forth by the California General Corporation Law and such information
shall be set forth in the manner provided by such law. If any stock certificate
shall be manually signed (i) by a transfer agent or an assistant transfer agent
or (ii) by a transfer clerk acting on behalf of the Corporation and a registrar,
the signature of any officer of the Corporation may be facsimile. In case any
such officer whose facsimile signature has been used on any such stock
certificate shall cease to be such officer, whether because of death,
resignation, removal or otherwise, before such stock certificate shall have been
delivered by the Corporation, such stock certificate may nevertheless be
delivered by the Corporation as though the person whose facsimile signature has
been used thereon had not ceased to be such officer.
Section 5.2 Lost, Stolen or Destroyed Certificates. The Board of
Directors in individual cases, or by general resolution or by delegation to the
transfer agent for the Corporation, may direct that a new stock certificate or
certificates for shares of capital stock of the Corporation be issued in place
of any stock certificate or certificates theretofore issued by the Corporation
claimed to have been lost, stolen or destroyed, upon the filing of an affidavit
to that effect by the person claiming such loss, theft or destruction. When
authorizing such an issuance of a new stock certificate or certificates, the
Board of Directors may, in its discretion and as a condition precedent to such
issuance, require the owner of such lost, stolen or destroyed stock certificate
or certificates to advertise the same in such manner as the Corporation shall
require and/or to give the Corporation a bond in such sum as it may direct as
indemnity against any claim that may be made against the Corporation with
respect to the stock certificate or certificates claimed to have been lost,
stolen or destroyed.
Section 5.3 Transfers of Stock. Upon surrender to the Corporation or the
transfer agent of the Corporation of a stock certificate for shares of capital
stock of the Corporation duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer or, if the relevant stock
certificate for shares of capital stock of the Corporation is claimed to have
been lost, stolen or destroyed, upon compliance with the provisions of Section
5.2 of these Bylaws, and upon payment of applicable taxes with respect to such
transfer, and in compliance with any restrictions on transfer applicable to such
stock certificate or the shares represented thereby of which the Corporation
shall have notice and subject to such rules and regulations as the Board of
Directors may from time to time deem advisable concerning the transfer and
registration of stock certificates for shares of capital stock of the
Corporation, the Corporation shall issue a new stock certificate or certificates
for such shares to the person entitled thereto, cancel the old stock certificate
and record the transaction upon its books. Transfers of shares shall be made
only on the books of the Corporation by the registered holder thereof or by such
holder's attorney or successor duly authorized as evidenced by documents filed
with the Secretary or transfer agent of the Corporation. Whenever any transfer
of shares of capital stock of the Corporation shall be made for collateral
security, and not absolutely, it shall be so expressed in the entry of transfer
if, when the stock certificate or certificates representing such shares are
presented to the Corporation for transfer, both the transferor and transferee
request the Corporation to do so.
-20-
<PAGE>
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 6.1 Contracts. The Board of Directors may authorize any officer
or officers, or agent or agents, to enter into any contract or execute and
deliver any instrument in the name of and on behalf of the Corporation, and such
authority may be general or confined to specific instances.
Section 6.2 Loans. No loans shall be contracted on behalf of the
Corporation and no evidences of indebtedness shall be issued in the name of the
Corporation unless authorized by or pursuant to a resolution adopted by the
Board of Directors. Such authority may be general or confined to specific
instances.
Section 6.3 Checks, Drafts, Etc. All checks, drafts or other orders for
payment of money issued in the name of the Corporation shall be signed by such
officers, employees or agents of the Corporation as shall from time to time be
designated by the Board of Directors, the Chairman or the Treasurer.
Section 6.4 Deposits. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in such banks, trust companies or other depositories as shall be designated from
time to time by the Board of Directors, the Chairman or the Treasurer; and such
officers may designate any type of depository arrangement (including, but not
limited to, depository arrangements resulting in net debits against the
Corporation) as may from time to time be offered or made available.
ARTICLE VII
MISCELLANEOUS
Section 7.1 Fiscal Year. The fiscal year of the Corporation shall end
on the Saturday closest to June 30th, or as otherwise designated by the Board of
Directors.
Section 7.2 Seal. The Board of Directors may provide a corporate seal,
which shall be in the form of the name of the Corporation and the words
"Corporate Seal California." Such seal may be used, if necessary, by causing
it, or a facsimile thereof, to be impressed or affixed or otherwise reproduced.
Section 7.3 Registered Office. The registered office of the Corporation
in the State of California shall be located at 6350 San Ignacio Avenue, San
Jose, California 95119, and the name of its registered agent is Robert E.
Collins or such other person as elected.
Section 7.4 Other Offices. The Corporation may have offices at such other
places, both within or without the State of California, as shall be determined
from time to time by the Board of Directors or as the business of the
Corporation may require.
-21-
<PAGE>
Section 7.5 Waiver of Notice of Meetings of Shareholders, Directors and
Committees. Whenever any notice is required to be given under any provisions of
the laws of the State of California, the Certificate of Incorporation or these
Bylaws, any written waiver of notice, signed by the person or persons entitled
to notice, whether before or after the time stated therein, shall be deemed
equivalent to such notice. Attendance of a person at a meeting shall constitute
a waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of any
regular or special meeting of the shareholders, directors, or members of a
committee of directors need be specified in any written waiver of notice unless
so required by the laws of the State of California, the Certificate of
Incorporation or these Bylaws.
Section 7.6 Contracts with Interested Parties. No Contract or transaction
between the Corporation and one or more of its directors or officers, or between
the Corporation and any other Corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof which
authorizes the contract or transaction, or solely because any one or more of
such officer's or director's votes are counted for such purpose, if: (i) the
material facts as to such director's or officer's relationship or interest and
as to the contract or transaction are disclosed or are known to the Board of
Directors or the committee, and the Board of Directors or committee in good
faith authorizes the contract or transaction by the affirmative votes of a
majority of the disinterested directors, even though the disinterested be less
than a quorum; or (ii) the material facts as to such director's or officer's
relationship or interest and as to the contract or transaction are disclosed or
are known to the shareholders, entitled to vote thereon, and the contract or
transaction is specifically approved in good faith by a vote of the
shareholders; or (iii) the contract or transaction is fair as to the Corporation
as of the time it is authorized, approved or ratified, by the Board of
Directors, a committee thereof, or the shareholders. All directors may be
counted in determining the presence of a quorum at a meeting of the Board of
Directors or of a committee which authorizes the contract or transaction.
Section 7.7 Form of Records. Any records maintained by the Corporation in
the regular course of its business, including its stock ledger, books of
account, and minute books, may be kept on, or be in the form of, punch cards,
magnetic tape, photographs, microphotographs, or any other information storage
device, provided that the records so kept can be converted into clearly legible
form within a reasonable time. The Corporation shall so convert any records so
kept upon the request of any person entitled to inspect the same.
Section 7.8 Stock in Other Corporations. Any shares of stock in any other
corporation which may from time to time be held by this Corporation may be
represented and voted at any meeting of shareholders of such corporation by the
Chairman of the Board, or a President or a Vice President, or by any other
person or persons thereunto authorized by the Board of Directors, or by any
proxy designated by written instrument of appointment executed in the name of
this Corporation by its Chairman or a President or a Vice President. Shares of
stock belonging to the
-22-
<PAGE>
Corporation need not stand in the name of the Corporation, but may be held for
the benefit of the Corporation in the individual name of the Treasurer or of any
other nominee designated for the purpose by the Board of Directors. Certificates
for shares so held for the benefit of the Corporation shall be endorsed in blank
or have proper stock powers attached so that said certificates are at all times
in due form for transfer, and shall be held for safekeeping in such manner as
shall be determined from time to time by the Board of Directors.
Section 7.9 Amendment of Bylaws. These bylaws may be altered, amended or
repealed or new bylaws may be adopted (a) at any regular or special meeting of
shareholders at which a quorum is present or represented, by the affirmative
vote of a majority of the stock entitled to vote, provided notice of the
proposed alteration, amendment or repeal be contained in the notice of such
meeting, or (b) by the affirmative vote of a majority of the Board of Directors
at any regular or special meeting of the Board of Directors.
The Board of Directors shall not make or alter any bylaw specifying a fixed
number of directors or the maximum or minimum number of directors and the
directors shall not change a fixed board to a variable board or vice versa. The
Board of Directors shall not change a bylaw, if any, which requires a larger
proportion of the vote of directors for approval than is required by the
California General Corporation Law.
Notwithstanding the foregoing, after the date hereof, the shareholders of
the Corporation, shall have the power to adopt, alter, amend or repeal any Bylaw
made by the Board of Directors only by the affirmative vote of not less than
sixty-five percent (651%) of the Stock entitled to vote thereon, cast at a
special meeting of such shareholders called and held for that purpose.
Section 7.10 Dividends. The Board of Directors of the Corporation,
subject to any restrictions contained in the Certificate of Incorporation and
other lawful commitments of the Corporation, may declare and pay dividends upon
the outstanding shares of its capital stock in cash, in property or in shares of
capital stock of the Corporation. Dividends may be paid either out of the
surplus of the Corporation, as defined in and computed in accordance with the
General Corporation Law of the State of California, or in case there shall be no
such surplus, out of the net profits of the Corporation for the fiscal year in
which the dividend is declared and/or the preceding fiscal year. If the capital
of the Corporation, computed in accordance with the General Corporation Law of
the State of California, shall have been diminished by depreciation in the value
of its property, or by losses, or otherwise, to an amount less than the
aggregate amount of the capital represented by the issued and outstanding stock
of all classes having a preference upon the distribution of assets, the Board of
Directors of the Corporation shall not declare and pay out of such net profits
any dividends upon any shares of any classes of its capital stock until the
deficiency in the amount of capital represented by the issued and outstanding
stock of all classes having a preference upon the distribution of assets shall
have been repaid.
Section 7.11 Reserves. The Board of Directors of the Corporation may set
apart, out of any of the funds of the Corporation available for dividends, a
reserve or reserves for any proper purpose and may abolish any such reserve.
-23-
<PAGE>
Section 7.12 Restriction on Transfer of Securities. A restriction on the
transfer or registration of transfer of securities of the Corporation may be
imposed either by the Certificate of Incorporation or by these Bylaws or by an
agreement among any number of security holders or among such holders and the
Corporation. No restriction so imposed shall be binding with respect to
securities issued prior to the adoption of the restriction unless the holders of
the securities are parties to an agreement or voted in favor of the restriction.
A restriction on the transfer of securities of the Corporation is permitted
by this Section 7.12 if it:
(a) Obligates the holder of the restricted securities to offer to the
Corporation or to any other holders of securities of the Corporation or to any
other person or to any combination of the foregoing a prior opportunity, to be
exercised within a reasonable time, to acquire the restricted securities; or
(b) Obligates the Corporation or any holder of securities of the
Corporation or any other person or any combination of the foregoing to purchase
the securities which are the subject of an agreement respecting the purchase and
sale of the restricted securities; or
(c) Requires the Corporation or the holders of any class of securities of
the Corporation to consent to any proposed transfer of the restricted securities
or to approve the proposed transferee of the restricted securities; or
(d) Prohibits the transfer of the restricted securities to designated
persons or classes of persons; and such designation is not manifestly
unreasonable; or
(e) Restricts transfer or registration of transfer in any other lawful
manner.
Unless noted conspicuously on the security, a restriction, even though
permitted by this Section, is ineffective except against a person with actual
knowledge of the restriction.
-24-
<PAGE>
EXHIBIT 12.1
Bell Sports Corp.
Computation of Earnings to Fixed Charges
($ in thousands)
<TABLE>
<CAPTION>
FY98
FY94 FY95 FY96 FY97 FY98 Pro forma Q1 99 Q1 98
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss) before income taxes 16,939 (5,335) (20,625) (21,151) 13,896 (387) (11,813) 1,028
Add:
Net interest expense including amortization of debt expense 3,362 5,266 9,824 8,622 6,115 18,379 2,863 1,517
---------------------------------------------------------------------
Total earnings 20,301 (69) (10,801) (12,529) 20,011 17,992 (8,950) 2,545
=====================================================================
Fixed charges:
Net interest expense including amortization of debt expense 3,362 5,266 9,824 8,622 6,115 18,379 2,863 1,517
=====================================================================
Ratio of earnings to fixed charges 6.0 3.3 1.0 1.7
Amount insufficient to cover fixed charges (5,335) (20,625) (21,151) (11,813)
</TABLE>
<PAGE>
Exhibit 21.1
Subsidiaries of the Registrants
State or Other Names (other than
-------------- -----------------
Jurisdiction of Name of Subsidiary)
--------------- -------------------
Incorporation or under which
---------------- -----------
Organization of Subsidiary does
--------------- ---------------
Name of Subsidiary Subsidiary business
- ------------------ ---------- ---------
Bell Sports, Inc. California Not applicable.
EuroBell, S.A. France Not applicable.
Bell Sports Canada, Canada (Quebec) Not applicable.
Inc.
Bell Sports Australia Not applicable.
Australia Pty
Limited
Giro Sport Design California Not applicable.
International, Inc.
Giro Ireland Limited Ireland Not applicable.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the use in the Prospectus constituting part of this
Amendment No. 1 to the Registration Statement on Form S-4 of Bell Sports Corp.,
of our report dated July 27, 1998, except as to Note 1, which is as of August
17, 1998 relating to the financial statements of Bell Sports Corp., which
appears in such Prospectus. We also consent to the reference to us under the
headings "Experts", "Summary Historical and Pro Forma Consolidated Financial
Data" and "Holdings Selected Historical Consolidated Financial and Other Data"
in such Prospectus. However, it should be noted that PricewaterhouseCoopers LLP
has not prepared or certified such "Summary Historical and Pro Forma
Consolidated Financial Data" or such "Holdings Selected Historical Consolidated
Financial and Other Data."
PRICEWATERHOUSECOOPERS LLP
San Franciso, California
December 3, 1998
