<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal quarterly period ended September 26, 1998
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to ________
Commission file number 0-19873
BELL SPORTS CORP.
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(Exact name of registrant as specified in its charter)
DELAWARE 36-3671789
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
6350 San Ignacio Avenue, San Jose, California 95119
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(Address of principal executive offices) (Zip Code)
(408) 574-3400
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(Registrant's telephone number, including area code)
N/A
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Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) Yes X No__ and (2) has been
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subject to such filing requirements for the past 90 days. Yes X No___ .
---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
Class Date Number Of Shares
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Class A Common Stock, $.01 par value November 6, 1998 800,971
Class B Common Stock, $.01 par value November 6, 1998 none
Class C Common Stock, $.01 par value November 6, 1998 none
1
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BELL SPORTS CORP.
INDEX TO FORM 10-Q
PART 1
<TABLE>
<CAPTION>
Page
Number
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<S> <C>
Bell Sports Corp. and Subsidiaries Consolidated Balance Sheets
as of September 26, 1998 and June 27, 1998 3
Bell Sports Corp. and Subsidiaries Consolidated Statements of Operations
for the three months ended September 26, 1998 and September 27, 1997 4
Bell Sports Corp. and Subsidiaries Consolidated Condensed Statements of Cash
Flows for the three months ended September 26, 1998 and September 27, 1997 5
Notes to Consolidated Financial Statements 6 - 10
Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 14
PART II
Items 1 to 6 15 - 16
Signatures 17
</TABLE>
2
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BELL SPORTS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
September 26, June 27,
1998 1998
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(unaudited)
<S> <C> <C>
ASSETS
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Current assets:
Cash and cash equivalents $13,593 $45,093
Accounts receivable 42,824 63,472
Inventories 40,837 39,679
Deferred taxes and other current assets 10,989 12,234
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Total current assets 108,243 160,478
Property, plant and equipment 19,370 20,636
Goodwill 53,824 54,292
Intangibles and other assets 19,208 11,661
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Total assets $200,645 $247,067
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LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $6,862 $ 7,663
Accrued compensation and employee benefits 2,163 5,541
Accrued expenses 16,004 16,158
Notes payable and current maturities of long-term
debt and capital lease obligations 478 679
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Total current liabilities 25,507 30,041
Long-term debt 149,265 86,625
Capital lease obligations and other liabilities 2,692 2,142
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Total liabilities 177,464 118,808
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Commitments and contingencies
Stockholders' equity:
Series A Preferred Stock; 6% cumulative, $.01 par value; authorized 1,500,000 49,505
shares, 970,873 shares issued and outstanding at September 26, 1998
Preferred stock; $.01 par value; authorized 1,000,000 shares, none issued at
June 27, 1998
Class A Common Stock; $.01 par value; authorized 900,000 shares, 800,971 8
shares issued and outstanding at September 26, 1998
Class B Common Stock; $.01 par value; authorized 150,000 share, none issued
Class C Common Stock; $.01 par value; authorized 50,000 share, none issued
Common stock; $.01 par value; authorized 25,000,000 shares; issued and 144
outstanding: 14,410,508 and 13,915,436 shares at June 27, 1448, respectively
Additional paid-in capital (8,479) 143,905
Accumulated other comprehensive income (832) (1,111)
Accumulated deficit (17,021) (9,461)
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23,181 133,477
Treasury stock, at cost, none at September 26, 1998 and
495,072 shares at June 27, 1998 (5,218)
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Total stockholders' equity 23,181 128,259
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Total liabilities and stockholders' equity $200,645 $247,067
================= ==================
</TABLE>
See accompanying notes to these consolidated financial
statements.
3
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BELL SPORTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
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September 26, 1998 September 27, 1997
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<S> <C> <C>
Net sales $40,918 $43,632
Cost of sales 27,374 30,155
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Gross profit 13,544 13,477
Selling, general and administrative expenses 11,384 11,075
Amortization of goodwill and intangible assets 562 636
Transaction costs 11,474
Net investment income (601) (429)
Interest expense 2,538 1,167
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(Loss) income before income taxes (11,813) 1,028
Benefit (provision) for income taxes 1,366 (391)
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(Loss) income before extraordinary items (10,447) 637
Extraordinary item:
Gain on early extinguishment of debt, net of
taxes of $2,006 2,887
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Net (loss) income (7,560) 637
Foreign currency translation adjustment,
net of tax 279 (78)
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Comprehensive (loss) income $(7,281) $599
======================= =======================
</TABLE>
See accompanying notes to these consolidated financial
statements.
4
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BELL SPORTS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
Three Months Ended
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September 26, 1998 September 27, 1997
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<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net cash provided by operating activities $13,192 $24,171
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CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Capital expenditures (1,233) (1,041)
Expenditures to acquire intangible assets (7,581)
Proceeds from the sale of SportRack 13,427
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Net cash provided by (used in) investing activities (8,814) 12,386
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CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from issuance of common stock 667
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 (136) (86)
Net payments on line of credit agreement (248) (19,971)
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Net cash used in financing activities (35,679) (19,390)
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Effect of exchange rate changes on cash (199) 2
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Net increase (decrease) in cash and cash equivalents (31,500) 17,169
Cash and cash equivalents at beginning of period 45,093 29,008
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Cash and cash equivalents at end of period $13,593 $46,177
======================== =======================
</TABLE>
See accompanying notes to these consolidated financial statements
5
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BELL SPORTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
Bell Sports Corp. and its wholly-owned subsidiaries including Euro Bell S.A.
(collectively, 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. The Company 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.
On August 17, 1998, the Company consummated the Agreement and Plan of
Recapitalization and Merger with HB Acquisition Corporation, a Delaware
corporation ("HB Acquisition"), which provided for the merger of HB Acquisition
with and into Bell, with Bell continuing as the surviving corporation (the "Bell
Merger"). Additionally, the Company completed a tender offer (the "Tender
Offer") to purchase $62.5 million aggregate principal amount of its 4 1/4%
Convertible Subordinated Debentures due November 2000 (the "Debentures"). The
Company's wholly-owned subsidiary, Bell Sports, Inc., consummated the private
placement of $110.0 million of its 11% Series A Senior Subordinated Notes due
August 15, 2008 (the "Notes") and the Company completed the private placement of
$15.0 million of its 14% Senior Discount Notes due August 14, 2009 (the
"Discount Notes").
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 fifty-two or fifty-three week accounting period ending on the Saturday
that is nearest to the last day of June. The Company's fiscal first quarter in
1999 and 1998 had thirteen weeks.
UNAUDITED INFORMATION AND BASIS OF PRESENTATION
- -----------------------------------------------
The consolidated balance sheet as of September 26, 1998 and statements of
operations and of condensed cash flows for all periods included in the
accompanying financial statements have not been audited. In the opinion of
management these financial statements include all normal and recurring
adjustments necessary for a fair presentation of such financial information. The
results of operations for the interim periods are not necessarily indicative of
the results of operations to be expected for the full year.
The financial information included herein has been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to such rules and regulations. The interim financial
information and the notes thereto should be read in conjunction with the audited
financial statements for the fiscal years ended June 27, 1998, June 28, 1997 and
June 29, 1996 which are included in the Company's 1998 Annual Report on Form 10-
K.
ACCOUNTS RECEIVABLE
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Accounts receivable at September 26, 1998 and June 27, 1998 are net of
allowances for doubtful accounts of $1.5 million and $1.7 million, respectively.
PROPERTY, PLANT AND EQUIPMENT
- -----------------------------
Property, plant and equipment at September 26, 1998 and June 27, 1998 are net of
accumulated depreciation of $21.7 million and $21.8 million, respectively.
Depreciation expense for the first quarter was $1.4 million in both fiscal 1999
and fiscal 1998.
6
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MANAGEMENT'S ESTIMATES AND ASSUMPTIONS
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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.
NOTE 3 - ACCOUNTING CHANGES
Effective June 28, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income." This statement
establishes standards for reporting and display of comprehensive income and its
components. Comprehensive income is generally defined as all changes in equity
during a period except those resulting from investments by owners or
distributions to owners.
NOTE 4 - INVENTORIES
Inventories consist of the following
components (in thousands):
September 26, June 27,
1998 1998
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Raw materials $ 4,771 $ 3,539
Work in process 2,215 2,010
Finished goods 33,851 34,130
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Total $40,837 $ 39,679
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NOTE 5 - COMMITMENTS AND CONTINGENCIES
PRODUCT LIABILITY
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The Company is subject to various product liability claims and/or suits brought
against it for claims involving damages for personal injuries or deaths.
Allegedly, these injuries or deaths relate to the use by claimants of products
manufactured by the Company and, in certain cases, products manufactured by
others. The ultimate outcome of these existing claims and any potential future
claims cannot presently be determined. Management believes that existing product
liability claims/suits are defensible and that, based on the Company's past
experience and assessment of current claims, the aggregate of defense costs and
any uninsured losses will not have a material adverse impact on the Company's
liquidity or financial position.
The cost of product liability insurance fluctuated greatly in past years and the
Company opted to self-insure claims for certain periods. The Company has been
covered by product liability insurance since July 1, 1991. This insurance is
subject to a self-insured retention. There is no assurance that insurance
coverage will be available or economical in the future.
The Company sold its motorcycle helmet manufacturing business in June 1991 in a
transaction in which the purchaser assumed all responsibility for product
liability claims arising out of helmets manufactured prior to the date of
disposition and the Company agreed to use its in-house defense team to defend
these claims at the purchaser's expense. If the purchaser is for any reason
unable to pay the judgment, settlement amount or defense costs arising out of
this or any other claim, the Company could be held responsible for the payment
of such amounts or costs. The Company believes that the purchaser does not
currently have the financial resources to pay any significant judgment,
settlement amount, or defense costs arising out of this or any other claim.
7
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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 were heard on August 6, 1998. If the motions are denied, the
Company intends to appeal the original 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 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 consultation with legal counsel prosecuting the
appeals and the Company's experience in pursuing reversals and settlements after
the entry of judgments against it, 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 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.
SHAREHOLDER LITIGATION
- ----------------------
Following the announcement of the Bell Merger, 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 was consummated. The
complaints, which were filed by Jeffrey Kaplan, Jerry Krim and Cyrus Schwartz,
purported stockholders of the Company, named the Company, HB Acquisition, Chase
Capital Partners, CBCI and the Company's then current directors as defendants.
To the knowledge of the Company, none of the complaints has been served. The
complaints alleged, among other things, that the Bell Merger was unfair to the
Company's former public stockholders and that certain defendants who were
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
had a conflict of interest which caused them, and the Company's then current
directors, to breach their fiduciary duties to the Company's former
stockholders. The complaints seek rescission of the Bell Merger or rescissory
damages and an "accounting", in addition to attorney's fees and costs. The
lawsuit filed by Jeffrey Kaplan was subsequently withdrawn, without prejudice to
refile. The Company believes that the allegations contained in the remaining two
complaints are without merit and intends to vigorously defend such actions.
8
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ENVIRONMENTAL LITIGATION
- ------------------------
In May 1998, the Company 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 ("Oil 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 Oil Site, and,
with limited exceptions, 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 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.
NOTE 6 - NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
On August 17, 1998, the Company's wholly-owned subsidiary, Bell Sports, Inc.
issued Notes totaling $110.0 million in a private placement transaction.
Interest on the Notes is payable on February 15 and August 15 of each year. The
Notes are redeemable, in whole or in part, at the option of Bell Sports, Inc. at
any time on or after August 15, 2003, in cash, at specified redemption prices.
On August 17, 1998, the Company issued Discount Notes totaling $15.0 million in
a private placement transaction. Interest on the Discount Notes is payable on
June 1 and December 1 of each year.
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 the
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. The
Debentures remaining outstanding of $23.8 million are redeemable at the
Company's option at any time on or after November 15, 1996, at specified
redemption prices.
In August 1998, the Company and its wholly-owned subsidiary, Bell Sports, Inc.
(the "Borrower") entered into a $60.0 million senior secured revolving credit
facility ("Credit Agreement").
The Credit Agreement is guaranteed by the Company and by certain of its
subsidiaries (collectively, the "Subsidiary Guarantors" and together with the
Company, the "Guarantors"). The Borrower's obligations under the Credit
Agreement are secured by (a) substantially all of the tangible and intangible
assets of the Borrower and each Guarantor, (b) the capital stock of the Borrower
and each Subsidiary Guarantor and (c) 65% of the capital stock of certain
foreign subsidiaries of the Company.
The Credit Agreement expires on August 17, 2003. The aggregate amount of
borrowings permitted under the Revolving Credit Facility is limited by a
borrowing base formula equal to a percentage of the eligible domestic accounts
receivable and inventory of the Borrower and the Subsidiary Guarantors plus an
amount allowed for the retirement of convertible debt. The Credit Agreement
provides for mandatory repayments from time to time to the extent the amount
outstanding thereunder exceeds the maximum amount permitted under the borrowing
base. Based on the provisions of the Credit Agreement, the Borrower could borrow
a maximum of $35.2 million as of September 26, 1998. As of September 26, 1998,
there were no outstanding borrowings under the Credit Agreement.
The Credit Agreement provides the Company with the option of borrowing based
either on the U.S. prime plus a margin or LIBOR plus a margin. Through February
1999, the margins are set at 0.50% for U.S. prime and 1.50% for LIBOR.
Thereafter, the margin for the U.S. prime can fluctuate between 0.0% and 1.0%,
and the margin for LIBOR loans can fluctuate between 1.0% and 2.0% based on the
Company's earnings and debt. Under the credit agreement, the Borrower is
required to pay a quarterly commitment fee on the unused portion of the facility
at a rate that ranges from 0.375% to 0.50% per annum, based on a pricing ratio.
Through February 1999, the quarterly commitment fee is fixed at 0.50% per annum.
9
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The Credit Agreement contains certain financial covenants, including a maximum
leverage ratio, a minimum fixed charge coverage ratio and a minimum cash
interest coverage ratio. It also contains covenants which restrict the ability
of the Company to pay dividends, incur liens, issue certain types of debt or
equity, engage in mergers, acquisitions or asset sales, or to make capital
expenditures. At September 26, 1998, the Company was in compliance with or had
obtained waivers for all bank covenants.
Long-term debt consists of the following (in thousands):
September 26, June 27,
1998 1998
--------------- ------------
Notes $110,000
Debentures 23,750 $86,250
Discount Notes 15,000
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% 859 936
-------- -------
149,609 87,186
Less: Current maturities (344) (561)
-------- -------
Total long-term debt $149,265 $86,625
======== =======
NOTE 7 - STOCKHOLDERS' EQUITY
PREFERRED STOCK
- ---------------
In connection with the Bell Merger, the Company issued Series A Preferred Stock,
par value $.01 (the "Series A Preferred Stock"). Each holder is entitled to
receive dividends on each share at the rate of six percent (6%) per annum
(computed on the basis of $50.99 per share), if, as and when declared by the
Board of Directors of the Company, subject to certain restrictions. Dividends on
the shares of Series A Preferred Stock shall be payable on June 30, September
30, December 31, and March 31 of each year (a "Dividend Payment Date"),
commencing September 30, 1998. If, on any Dividend Payment Date, the holders of
the Series A Preferred Stock shall not have received the full dividends, then
such dividends shall cumulate, whether or not earned or declared, with
additional dividends thereon, compounded quarterly, at the dividend rate of six
percent (6%) per annum, for each succeeding full Quarterly Dividend Period
during which such dividends shall remain unpaid.
STOCK OPTIONS
- -------------
On August 17, 1998, the Company granted the option to purchase 20,511 shares of
Series A Preferred Stock at an exercise price of $36.15 per share and 16,921
shares of Class A Common Stock, $.01 par value at an exercise price of $.44 per
share (the "Options") to a certain member of management. The options are
immediately exercisable and must be exercised on or before August 27, 2006.
Compensation expense of approximately $307,000 was recorded in selling, general
and administrative expenses during the first quarter of fiscal 1999 related to
the grant of the Options.
NOTE 8 - DISPOSITIONS
In September 1998, the Company sold the assets of its domestic foam molding
facility in Rantoul, Illinois, 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 a charge in fiscal 1998 of
approximately $0.6 million in connection with the sale and related
reorganization of the Company's domestic foam molding facility. No material gain
or loss was recognized upon consummation of the sale in September 1998.
10
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
On August 17, 1998, the Company consummated the Agreement and Plan of
Recapitalization and Merger with HB Acquisition Corporation, a Delaware
corporation ("HB Acquisition"), which provided for the merger of HB Acquisition
with and into Bell, with Bell continuing as the surviving corporation (the "Bell
Merger"). Additionally, the Company completed a tender offer (the "Tender
Offer") to purchase $62.5 million aggregate principal amount of its 4 1/4%
Convertible Subordinated Debentures due November 2000 (the "Debentures"). The
Company's wholly-owned subsidiary, Bell Sports, Inc., consummated the private
placement of $110.0 million of its 11% Series A Senior Subordinated Notes due
August 15, 2008 (the "Notes") and the Company completed the private placement of
$15.0 million of its 14% Senior Discount Notes due August 14, 2009 (the
"Discount Notes").
RESULTS OF OPERATIONS
NET SALES. Net sales decreased 6% to $40.9 million in the fiscal 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 quarter, bicycle accessories,
bicycle helmets and auto racing helmets represented approximately 57%, 41% and
2%, respectively, of the Company's net sales.
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 the 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 Bell Merger totaled $11.5 million. The
Company completed the Bell Merger in August 1998 and does not expect to incur
any material additional costs related to the Bell Merger.
11
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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 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
Bell 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 Bell Merger costs. The Company anticipates the
effective tax rate for the remainder of fiscal 1999 will be 41%.
LIQUIDITY AND FINANCIAL 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 $82.7 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 Bell Merger and
the Tender Offer coupled with the seasonal decrease in accounts receivable.
The Company's capital expenditures were $1.2 million in the fiscal 1999 first
quarter compared to $1.0 million in the fiscal 1998 first quarter. The Company
estimates it will spend approximately $5.1 million on capital expenditures in
fiscal 1999 for product tooling and to maintain and upgrade its facilities and
equipment.
In August 1998, the Company and its wholly-owned subsidiary, Bell Sports, Inc.
entered into a $60.0 million senior secured revolving credit facility ("Credit
Agreement"). The Credit Agreement grants to various financial institutions a
security interest in substantially all of the tangible and intangible assets of
the Company, as well as a portion of the capital stock of the Company.
The Credit Agreement also contains certain financial covenants, including a
maximum leverage ratio, a minimum fixed charge coverage ratio and a minimum cash
interest coverage ratio. It also contains covenants which restrict the ability
of the Company to pay dividends, incur liens, issue certain types of debt or
equity, engage in mergers, acquisitions or asset sales, or to make capital
expenditures. At September 26, 1998, the Company was in compliance with or had
obtained waivers for all bank covenants.
The Credit Agreement expires in August 2003. As of September 26, 1998, there
were no outstanding borrowings under the Credit Agreement, however, based on the
provisions of the Credit Agreement, the Borrower could have borrowed a maximum
of $35.2 million.
Management believes that cash flows from operations and borrowings available
under the Credit Agreement 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 does not anticipate paying dividends on its Preferred or Common Stock in
the foreseeable future.
12
<PAGE>
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 other systems dependent on computerized information such as phones,
voicemail, security systems and elevators (collectively, "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.
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 September 26, 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
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 September 26, 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
13
<PAGE>
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 electronic data interchange 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.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
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 by the Company at the end of
fiscal 1999.
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 supercedes and amends a
number of existing standards. SFAS 133 is required to be adopted by the Company
at the beginning of fiscal 2000. 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 adoption of SFAS 133 is not expected to have a significant impact
on the financial results of the Company.
Certain matters contained herein are forward-looking statements that involve
risks and uncertainties that could cause actual results to differ materially
from those in the forward-looking statements. These include, but are not limited
to: expected sales, profitability, cash flow, seasonality, adverse outcome from
litigation, competitive actions, loss of significant customers, timing of major
customer shipments, adverse weather conditions, retail environment, economic
conditions and currency fluctuations.
14
<PAGE>
BELL SPORTS CORP.
PART II
ITEM 1 Legal Proceedings
None
ITEM 2 Changes in Securities
(c) Pursuant to the Agreement and Plan of
Recapitalization and Merger dated February 17, 1998
and amended April 8, 1998 by and between HB
Acquisition and the Company, the Company issued (i)
436,893 shares of Series A Preferred Stock of the
Company ("Company Preferred Stock") and 360,437
shares of Class A Common Stock ("Company Common
Stock") to each of Charlesbank Bell Sports Holdings,
Limited Partnership ("Charlesbank") and Brentwood
Associates Buyout Fund II, LP ("Brentwood") and (ii)
97,087 shares of Company Preferred Stock and
80,097 shares of Company Common Stock to CB Capital
Investors, L.P. ("CBCI") in exchange for an equal
number of shares of Series A Preferred Stock of HB
Acquisition ("HB Acquisition Preferred Stock") and
Common Stock of HB Acquisition ("HB Acquisition
Common Stock"). In connection with the Bell Merger,
the Company also issued to Mary George options to
purchase 20,511 shares of Company Preferred Stock
and 16,921 shares of Company Common Stock (the
"George Options") in exchange for options to
purchase 20,511 shares of HB Acquisition Preferred
Stock and 16,921 shares of HB Acquisition Common
Stock. The exercise price of the George Options is
$36.15 per share of Company Preferred Stock and $.44
per share of Company Common Stock. The final
exercise date of the George Options is August 27,
2006. Neither Company Preferred Stock nor Company
Common Stock is convertible into other equity
securities of the Company. The issuances of Company
Preferred Stock and Company Common Stock to
Charlesbank, Brentwood and CBCI as well as the
George Options were made pursuant to Rule 506 under
Regulation D of the Securities Act of 1933, as
amended.
ITEM 3 Defaults Upon Senior Securities
None
ITEM 4 Submission of Matters to a Vote of Security Holders
(a) A Special Meeting of Stockholders of Bell Sports
Corp. was held on August 11, 1998
(b) Not required
(c) To approve and adopt the Agreement and Plan of
Recapitalization and Merger among Bell Sports Corp.
and HB Acquisition Corporation
Summary of proxies voted:
Broker
For Against Abstain Non-Votes
10,053,064 09,438 33,007 0
Immediately subsequent to the consummation of the Bell
Merger, the stockholders of the Company, by action by
unanimous written consent in lieu of a meeting, adopted
resolutions 1) increasing the number of authorized shares
of the Company to 2,600,000, consisting of 1,500,000
shares of preferred stock and 1,100,000 shares of common
stock; 2) approving an amendment to the Company's
certificate of incorporation designating 900,000 shares of
Class A common stock, 150,000 shares of Class B common
stock and 50,000 shares of Class C common stock,
authorizing the filing of an amended and restated
certificate of incorporation (the "Amended and Restated
Certificate") to effect this amendment and approving and
adopting the Amended and Restated Certificate; 3)
converting all then-outstanding shares of common stock of
the Company to Class A common stock upon filing of the
Amended and Restated Certificate; 4) increasing to eight
the number of directors constituting the board of
directors of the company (the "Board") and electing
directors of the Company; 5) appointing a chairman of the
Board; 6) authorizing the Board to act on behalf of the
Company in its capacity as sole shareholder of Bell
Sports, Inc.; and 7) providing general authorization for
the officers of the Company to act on behalf of the
Company.
ITEM 5 Other Information
None
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibit Index Page 17
(b) Current Report on Form 8-K dated August 10, 1998 (as
amended on August 12, 1998) Current Report on
Form 8-K dated August 17, 1998
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: NOVEMBER 9, 1998
-------------------
BELL SPORTS CORP.
/S/ ROBERT E. COLLINS Vice President and Chief Financial Officer
- ----------------------
Robert E. Collins (Principal financial and accounting officer)
16
<PAGE>
BELL SPORTS CORP.
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- -------------------------------------------------------------------------------
10.1* Manufacturing and Product Development Agreement between Bell
Sports, Inc. and Pactuco, Inc. dated September 22, 1998
10.2* Bell Sports Corp. Series A Preferred Stock Option Agreement
between the Registrant and Mary J. George dated August 17,
1998
10.3* Bell Sports Corp. Class A Common Stock Option Agreement
between the Registrant and Mary J. George dated August 17,
1998
27* Financial Data Schedule
- ------------------------------
* Filed herewith
17
<PAGE>
EXHIBIT 10.1
MANUFACTURING AND PRODUCT
DEVELOPMENT AGREEMENT
THIS MANUFACTURING AND PRODUCT DEVELOPMENT AGREEMENT
is made and entered into this 22 day of September, 1998, between Pactuco, Inc.,
a California corporation, having a place of business at 1641 West Central
Avenue, Lompoc, California 93438 (hereinafter referred to as "Manufacturer") and
Bell Sports, Inc. a California corporation, having a place of business at 6350
San Ignacio Avenue, San Jose, California 95119 (hereinafter referred to as
"Customer").
BACKGROUND
WHEREAS, Manufacturer has purchased certain assets for manufacturing helmet
liners and helmet components from Customer and Customer desires to purchase
helmet liners and helmet components from Manufacturer, and Manufacturer desires
to sell to Customer, on the terms and subject to the conditions of this
Agreement, helmet liners and helmet components (the "Helmet Components"); and
WHEREAS, Manufacturer and Customer desire to set forth the terms and
conditions under which Manufacturer is to manufacture and sell Helmet Components
to Customer and under which Customer is to purchase Helmet Components from
Manufacturer and the terms and conditions under which the Manufacturer and
Customer are to jointly develop new products for helmets(the "New Helmet
MANUFACTURING AND PRODUCT DEVELOPMENT AGREEMENT--PAGE 1
<PAGE>
Components"), all as set forth in this MANUFACTURING AND PRODUCT DEVELOPMENT
AGREEMENT (the "Agreement").
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants, agreements, representations and warranties set forth herein and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto covenant and agree as follows:
ARTICLE I
HELMET COMPONENTS/INTENT OF THE PARTIES
1.1 Helmet Components Subject to the terms and conditions set forth
-----------------
herein, Manufacturer is to continue to manufacture, deliver and sell to Customer
the Helmet Components as set forth on a schedule entitled HELMET COMPONENTS
which is labeled Exhibit A and attached hereto.
1.2 Intent of the Parties It is the intent of the parties that, for the
---------------------
term of this Agreement including any renewals thereof as provided herein,
Manufacturer and Customer are to have a relationship wherein Manufacturer will
assure Customer of having a first priority on manufacturing capacity in the foam
molding facility located at Route 136E, Rantoul, Illinois 61866 and wherein
Customer will assure Manufacturer the following:
(A) the continuing opportunity to quote on all of customer's products to
be incorporated into helmets for final
MANUFACTURING AND PRODUCT DEVELOPMENT AGREEMENT--PAGE 2
<PAGE>
assembly in the United States which specifically relate to Manufacturer's
expertise in thermoforming, foam molding, injection molding and foam
fabrication;
(B) the opportunity to match any lower quotes received by Customer from
qualified and capable suppliers on products integral to the manufacture of
helmet liners; and
(C) the right to manufacture all of Customer's product needs for products
integral to the manufacture of helmet liners as long as Manufacturer is willing
to meet or beat the lowest pricing for such products and to manufacture such
products in accordance with the terms hereof.
ARTICLE II
HELMET COMPONENT SPECIFICATIONS
2.1 Proposed Specifications Customer is to provide to Manufacturer in
-----------------------
writing the proposed Specifications for the Helmet Components and Manufacturer
shall, as promptly as possible, but in no event more than three (3) business
days after receipt, accept or reject the Specifications.
2.2 Acceptance of Specifications If the Manufacturer accepts a
----------------------------
Specification provided by Customer, then in such event the Specification shall
be deemed final for purpose of this Agreement and such Specification shall apply
to the applicable Helmet Components manufactured by Manufacturer for Customer
until
MANUFACTURING AND PRODUCT DEVELOPMENT AGREEMENT--PAGE 3
<PAGE>
the Specification is amended, deleted or otherwise modified in a writing duly
signed by the parties.
2.3 Specification Resolution If the Manufacturer does not accept a
------------------------ ---
Specification provided by Customer, then in such event the Manufacturer shall
advise the Customer thereof in writing as promptly as possible, but in no event
more than three (3) business days after receipt of the Specification, specifying
the objections to the Specification. The parties shall then promptly meet and,
in good faith, attempt to resolve the Manufacturer's objections to the
Specification. Upon the parties mutually agreeing in writing to overcoming the
Manufacturer's objections, the Specification shall be deemed final for purposes
of this Agreement and such Specification shall apply to the applicable Helmet
Components manufactured by Manufacturer for Customer until the Specification is
amended, deleted or otherwise modified in a writing duly signed by the parties.
Manufacturer agrees not to unreasonably withhold its acceptance to any
Specifications.
2.4 Patent Infringement To the extent Customer shall have provided the
-------------------
Specifications for the Helmet Components and New Helmet Components to
Manufacturer for purposes of this Agreement, and Customer shall indemnify,
defend and agree to hold Manufacturer harmless in respect of any and all claims,
losses, damages, liabilities, penalties, interest, costs and expenses
(including, without limitation, reasonable attorneys' fees and
MANUFACTURING AND PRODUCT DEVELOPMENT AGREEMENT--PAGE 4
<PAGE>
other expenses) reasonably incurred by Manufacturer as a result of any third
party claim of infringement arising out of compliance with the Specifications.
Manufacturer agrees that Customer shall, at Customer's expense, have the right
to control the defense and settlement of any such infringement action and
Manufacturer shall provide reasonable assistance and cooperation to Customer in
connection with any such defense. Manufacturer further agrees to promptly notify
Customer of any change in any Helmet Component it is manufacturing for Customer
that has not been authorized by Customer.
ARTICLE III
FORECAST/QUOTE/BLANKET PURCHASE ORDERS
3.1 Forecast Customer shall provide Manufacturer concurrently with the
--------
execution of this Agreement a written ten (10) month forecast of Helmet
Components showing estimated volume of Helmet Components by month and a forecast
of delivery schedules for each month and on July 1, 1999 and each July 1/st/
thereafter during the term of this Agreement, Customer shall provide
Manufacturer a written twelve (12) month forecast of Helmet Components showing
estimated volume of Helmet Components by month and a forecast of delivery
schedules for each month (collectively referred to as "the Forecast").
3.2 Review of Forecast/Quotation Manufacturer shall review the Forecast
----------------------------
and shall provide to Customer, within twenty (20)
MANUFACTURING AND PRODUCT DEVELOPMENT AGREEMENT--PAGE 5
<PAGE>
days from receipt of same, a written quotation setting forth the pricing to be
charged by Manufacturer based on the estimated volume level of Helmet Components
and forecasted monthly delivery dates.
3.3 Review of Quotation Customer shall within ten (10) business days from
-------------------
receipt of the written quotation from Manufacturer advise Manufacturer in
writing if the quotation is acceptable or unacceptable.
3.4 Quotation Acceptance If the quotation is acceptable, then Customer
--------------------
shall promptly issue to Manufacturer a Blanket Purchase Order as set forth in
Section 3.6 below.
3.5 Quotation Non-Acceptance If the quotation is unacceptable, then
------------------------
Customer shall, during, but not later than the expiration of the ten (10)
business day period set forth above, advise Manufacturer in writing, in good
faith and in accordance with the intentions of the parties as set forth in
Section 1.2 above, as to what would be required to make the quotation acceptable
to Customer. Manufacturer and Customer shall promptly meet and, in good faith,
attempt to reach mutual agreement on the quotation and then proceed in
accordance with the provisions of Section 3.4 above. If the parties fail to
agree on a quotation during the ten (10) day period immediately following the
date on which the Customer advised the Manufacturer in writing that the
quotation was unacceptable, then in such event the quotation
MANUFACTURING AND PRODUCT DEVELOPMENT AGREEMENT--PAGE 6
<PAGE>
shall be deemed as rejected by the Customer for purposes of this Agreement.
3.6 Issuance of Blanket Purchase Order When a quotation is accepted by
----------------------------------
the Customer as provided hereinabove, the Customer shall issue to Manufacturer a
Blanket Purchase Order, which shall be a firm five (5) week order. Upon the
expiration of one (1) week, then Customer shall issue Manufacturer a new firm
Blanket Purchase Order wherein the five (5) weeks volume level and delivery
schedule is firm.
ARTICLE IV
PRICING
4.1 Pricing Except as provided herein below and subject to the provisions
-------
of Sections 4.2 and 8.2 below, the pricing set forth in the quotation shall
remain firm for at least twelve (12) months from the date of such quotation and
Manufacturer shall have the right thereafter to provide Customer with at least
thirty (30) days prior written notice of any permitted price increases. Such
price increases shall apply to all Blanket Purchase Orders issued by Customer
after the effective date of such price increases. The exceptions to the above
firm pricing requirements which will permit the Manufacturer to increase pricing
effective upon (30) days prior written notice to Customer shall be:
MANUFACTURING AND PRODUCT DEVELOPMENT AGREEMENT--PAGE 7
<PAGE>
(A) An increase of seven per cent (7%) or greater becomes effective with
respect to the raw material pricing to Manufacturer from a vendor; or
(B) Manufacturer is required to incur or expend funds to meet anticipated
expenditures for equipment, apparatus or systems which Manufacturer is required
to make to meet its obligations under environmental statutes and regulations as
provided in Section 8.2 hereof.
4.2 Pricing Review At the end of each Forecast Period, if the total unit
--------------
volume of products comprising the Helmet Components actually delivered by
Manufacturer and accepted by Customer is less than 85% of the forecasted volume
of Helmet Components pursuant to the provisions of Section 3.1 of this
Agreement, then the Manufacturer shall notify Customer, in writing, within
thirty (30) days of such shortfall and the parties shall then negotiate in good
faith for a reasonable pricing increase to reflect the lesser volume. Such
pricing shall be billed and paid within the agreed terms of Section 6.1 of this
Agreement. Similarly, if the total unit volume of products comprising Helmet
Components actually delivered by Manufacturer and accepted by Customer is 15%
greater than that of the forecasted volume of Helmet Components pursuant to
Section 3.1 of this Agreement, the parties shall negotiate in good faith for a
reasonable pricing decrease to reflect the higher volume.
MANUFACTURING AND PRODUCT DEVELOPMENT AGREEMENT--PAGE 8
<PAGE>
ARTICLE V
DELIVERY/INSPECTION OF DELIVERED GOODS
5.1 Delivery Period
---------------
(A) All Helmet Components shall have at least a thirty (30) day delivery
period from the date of each Blanket Purchase Order. All deliveries shall be FOB
place of shipment at Manufacturer's Facility at Rantoul, Illinois and title to
the Helmet Components shall pass to Customer at the FOB place of shipment. For
product shipped from Manufacturer's facility at Rantoul, Illinois to be
delivered to Customer's facility at Rantoul, Illinois Manufacturer agrees that
freight will be prepaid.
(B) Manufacturer shall have the right to deliver Helmet Components up to
six (6) days earlier than the applicable scheduled delivery date and shall use
its best commercial efforts to ship zero (0) days late. Manufacturer hereby
acknowledges the importance of timely delivery by Customer to its retail
customers and that late delivery by Manufacturer may cause Customer to be late
in making such deliveries to its customers. If, during the course of production,
Manufacturer becomes aware that it will not be able to deliver Helmet Components
pursuant to the terms and conditions of accepted Purchase Orders described in
Section 3.6 of this Agreement, Manufacturer will promptly notify Customer of the
extent of such circumstances and the parties will coordinate
MANUFACTURING AND PRODUCT DEVELOPMENT AGREEMENT--PAGE 9
<PAGE>
their efforts to rectify such circumstances to their mutual satisfaction.
5.2 Initial Volume Levels and Delivery Schedule The parties agree that,
-------------------------------------------
commencing as of the effective date of this Agreement, Manufacturer shall
deliver the Helmet Components to Customer at the delivery schedule set forth on
the firm 5 week order which is labeled Exhibit B and attached hereto.
Thereafter, the procedure set forth above in Section 3.6 shall apply.
5.3 Inspection of Delivered Goods The parties agree as follows with
-----------------------------
respect to Customer's inspection of delivery of units of Helmet Components:
(A) If the rejection level of the units of Helmet Components in a delivery
lot, (the "Lot"), is under 3%, Customer will return the rejected units of Helmet
Components on a weekly basis using Customer's standard Returned Goods Procedure,
at no inspection or other charge to Manufacturer; and
(B) If the aggregate rejection level of units of Helmet Components is 3%
or more in a Lot, Customer shall provide manufacturer with written notice
thereof, and Manufacturer shall, within three (3) business days instruct
Customer in writing concerning such Lot to proceed in accordance with one of the
following three alternatives:
MANUFACTURING AND PRODUCT DEVELOPMENT AGREEMENT--PAGE 10
<PAGE>
(1) Authorize Customer to inspect all of the units of Helmet
Components included in the Lot, and sort the inspected units of Helmet
Components into acceptable units and rejected units of Helmet Components, to
charge Manufacturer therefor at a rate of $12.00 per hour with Customer
returning the rejected units of Helmet Components to Manufacturer at
Manufacturer's expense;
(2) Authorize Customer to ship back the entire Lot of units of Helmet
Components with Customer being authorized to charge Manufacturer therefor at a
flat rate of $50.00; or
(3) Manufacturer elects to sort the units of Helmet Components for
the Lot at Customer's location and under Customer's supervision with
Manufacturer, delivering the accepted units of Helmet Components to Customer and
returning the rejected units of Helmet Components back to Manufacturer's
facilities with Customer being authorized to charge Manufacturer therefor at a
flat rate of $50.00
ARTICLE VI
PAYMENT
6.1 Invoicing and Payment/Discount Manufacturer shall invoice Customer
------------------------------
for each shipment of Helmet Components using the pricing for each product as
determined by the applicable terms and conditions of this Agreement. Customer
shall have thirty (30) days from the date of the Invoice to pay Manufacturer.
MANUFACTURING AND PRODUCT DEVELOPMENT AGREEMENT--PAGE 11
<PAGE>
Manufacturer grants to Customer a discount of 2% for payments received by
manufacturer within ten (10) days from date of invoicing, with the net payment
due, without discount, within thirty (30) days.
ARTICLE VII
MANUFACTURING PRIORITIES
7.1 Priorities It is the intent of Manufacturer to assure Customer that
----------
Customer has first priority on manufacturing capacity at its facility in
Rantoul, Illinois, and to that end, if Manufacturer experiences priority issues
in scheduling production of Helmet Components at that facility, that the
manufacturing of Customer's Helmet Components shall have the highest priority
for production until the delivery of Helmet Components is current. If, despite
its best efforts, Manufacturer is unable to meet Customer's requirements per
Section 3.6, then Customer shall be free to purchase any shortfall from another
vendor, including affiliates of Customer outside the United States, until
delivery of Helmet Components is again current.
7.2 Delivery Rescheduling for Slowdown In the event that Customer
----------------------------------
experiences a slowdown in delivery of helmets or Helmet Components to its
customers, requiring a slowdown in delivery of Helmet Components or other
products relative to the Blanket Purchase Order, then Customer shall provide
written notice
MANUFACTURING AND PRODUCT DEVELOPMENT AGREEMENT--PAGE 12
<PAGE>
thereof to Manufacturer and Manufacturer shall use its best efforts to reduce
the volume of Helmet Components scheduled for delivery, but Customer agrees to
accept Helmet Components already in production at the time of notification to
Manufacturer and Customer shall be responsible for reimbursing Manufacturer for
Manufacturer's cost of any materials purchased specifically for the applicable
Helmet Components if such materials are not utilized in deliverable product
within ninety (90) days from the date Manufacturer received the notification
from Customer relating to the reduced volume of Helmet Components. Any payment
due Manufacturer under this Section 7.2 shall be paid within ten (10) business
days from Customer's receipt of an invoice for such materials.
7.3 Rescheduling for Increase in Product Delivery In the event that
---------------------------------------------
Customer experiences a requirement for an increase in delivery of Helmet
Components to its customers requiring an increase in production and in delivery
of Helmet Components relative to the Blanket Purchase Order, Manufacturer agrees
to use its best efforts to meet any increase in requested delivery of Helmet
Components over accepted Purchase Orders described in Section 3.6 of this
Agreement.
MANUFACTURING AND PRODUCT DEVELOPMENT AGREEMENT--PAGE 13
<PAGE>
ARTICLE VIII
ENVIRONMENTAL COMPLIANCE
8.1 Environmental Compliance Manufacturer is to be responsible for
------------------------
compliance with all environmental statutes and regulations including use of or
generation of toxic or hazardous material relating to the manufacturing of
Helmet Components. In the event that Manufacturer is obligated to make an
investment in or purchase equipment, apparatus or systems to meet its
obligations under such environmental statutes and regulations, either by
directive of a governmental authority or otherwise, such investment is
anticipated to have an impact on the manufacturing costs and pricing of Helmet
Components.
8.2 Pricing Modification In such event, Manufacturer shall advise
--------------------
Customer of the existence of the requirement, the anticipated expenditure for
equipment, apparatus or systems which Manufacturer is to make to meet its
obligations under such environmental statutes and regulations together with an
estimate as to the impact such investment will have on the manufacturing costs
and pricing for the Helmet Components. The parties will then meet and, in good
faith, negotiate an appropriate adjustment to the existing or future pricing for
the applicable Helmet Components to reflect the cost of the environmental
compliance requirements.
MANUFACTURING AND PRODUCT DEVELOPMENT AGREEMENT-- PAGE 14
<PAGE>
8.3 Owner and Operator Manufacturer and Customer hereby expressly
------------------
acknowledge that the long term and day-to-day management of Manufacturer's
operations in Rantoul, Illinois shall be under the direct control of
Manufacturer and that, for purposes of this Agreement and all local, state and
federal environmental health and safety laws, rules and regulations,
(collectively, "Environmental Laws") Manufacturer is the owner and operator of
its equipment and the operator of the premises on which its equipment is
located.
8.4 Permits Manufacturer shall be responsible to apply for, pay for, and
-------
obtain all necessary permits, licenses, certificates, or authorizations
(collectively, "Permits") required by any government authority having
jurisdiction over Manufacturer's operations in Rantoul, Illinois. Customer
shall cooperate with Manufacturer in transferring to Manufacturer any existing
Permits covering or relating to Manufacturer's operations if such Permits are
transferable.
8.5 Notice of Violations With respect to its operations in Rantoul,
--------------------
Illinois, Manufacturer shall promptly notify Customer if (i) Manufacturer is
served with notice of a material violation of any Environmental Laws, (ii)
proceedings are commenced against Manufacturer that could lead to suspension,
fines or revocation of Manufacturer's environmental permits, or (iii) any of
Manufacturer's environmental Permits are revoked.
MANUFACTURING AND PRODUCT DEVELOPMENT AGREEMENT-- PAGE 15
<PAGE>
ARTICLE IX
WARRANTY/CHANGES IN MANUFACTURING PROCESS
9.1 LIMITED EXPRESS WARRANTY THE LIMITED EXPRESS WARRANTY AS SET FORTH
------------------------
HEREIN IS EXCLUSIVE AND IN LIEU OF ALL OTHER WARRANTIES OF MANUFACTURER EXPRESS
OR IMPLIED, INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR
USE AND OF CONSEQUENTIAL DAMAGES BUT IS NOT EXCLUSIVE AND IN LIEU OF OR
OTHERWISE IN LIMITATION OF, THE EXPRESS WARRANTIES, REPRESENTATIONS AND
OBLIGATIONS OF MANUFACTURER CONTAINED IN THIS AGREEMENT. MANUFACTURER WARRANTS
THAT IT WILL USE ITS BEST MANUFACTURING METHODS TO SEE THAT EACH HELMET
COMPONENT IT MANUFACTURES HEREUNDER SHALL (I) CONFORM TO THE SPECIFICATIONS, THE
PRODUCT QUALITY STANDARDS OF CUSTOMER AND THE PROTOTYPE AND PRODUCTION SAMPLES
APPROVED BY CUSTOMER, AND (II) BE FREE OF DEFECTS IN MATERIALS AND WORKMANSHIP.
THIS LIMITED EXPRESS WARRANTY RUNS ONLY TO CUSTOMER. SUBJECT TO THE PROVISIONS
OF SECTION 5.3, IN NO EVENT SHALL MANUFACTURER BE LIABLE FOR ANY BREACH OF
WARRANTY IN ANY AMOUNT EXCEEDING THE PURCHASE PRICE OF THE PRODUCT.
9.2 Limited Express Warranty Term Should a Helmet Component become
-----------------------------
unusable within the first ninety (90) days of usage due to a defect in materials
or workmanship, Manufacturer will, at its sole option, either repair or replace
the Helmet Component.
MANUFACTURING AND PRODUCT DEVELOPMENT AGREEMENT-- PAGE 16
<PAGE>
9.3 Original Purchaser This Limited Express Warranty is valid only to the
------------------
Customer, as the original purchaser, who purchased the Helmet Component or New
Helmet Component directly from Manufacturer. This Limited Express Warranty
cannot be transferred or assigned by the Customer.
9.4 Liability Insurance In support of their obligations under this
-------------------
Agreement and for a period of one year after its termination, both Manufacturer
and Customer agree to maintain and pay for separate liability insurance covering
helmets and Helmet Components manufactured, sold or distributed hereunder in an
amount not less than one million U.S. dollars ($1,000,000.00). Each such
insurance policy shall provide that the other party must be given at least
thirty (30) days written notice before any amendment, termination or
cancellation of such policy. Within thirty (30) days following the execution of
this Agreement and within thirty (30) days after each anniversary thereof during
the term of this Agreement, each party will provide the other with a copy of its
certificate(s) of insurance verifying the existence of the liability insurance
required hereunder. If, for any reason, such insurance cannot be renewed, the
insured shall take reasonable action to provide other assurance or support
against losses that would otherwise have been covered by such policy, such
action to be mutually agreed to by both parties.
MANUFACTURING AND PRODUCT DEVELOPMENT AGREEMENT-- PAGE 17
<PAGE>
9.5 Manufacturing Process Changes Manufacturer reserves the right to make
-----------------------------
changes in its manufacturing process and equipment without liability provided
that the Specifications of the Helmet Components have been met and Manufacturer
has advised Customer of any material changes and Customer has not reasonably
objected thereto.
9.6 Tooling (A) Customer owned tooling is to be in the possession of
-------
Manufacturer and Manufacturer is to use such tooling exclusively for the purpose
of meeting its obligations under this Agreement. The obligations of the parties
concerning normal care, repair, maintenance and replacement of tooling is set
forth below in Sections 9.6(B) and 9.6(C).
(B) With respect to Customer owned tooling in the possession of
Manufacturer, Manufacturer's obligation therefor is to provide, at Manufacturer
expense, normal care of such tooling including during use thereof in
Manufacturer's operations.
(C) With respect to Customer owned tooling in the possession of
Manufacturer requiring repair, maintenance or replacement, Customer agrees to
pay for the same to the extent related to normal wear and tear. Manufacturer
shall be solely responsible for any repair, maintenance or replacement costs
attributable to Manufacturer's negligent use, storage or handling of any such
tooling. Manufacturer shall provide Customer with reasonable advance notice of
the tooling requiring repair,
MANUFACTURING AND PRODUCT DEVELOPMENT AGREEMENT-- PAGE 18
<PAGE>
maintenance or replacement and Customer shall promptly advise Manufacturer of
what steps Manufacturer is to take with respect to such tooling. If Customer
fails to so provide notice to Manufacturer, then Manufacturer shall take such
action as it deems necessary and appropriate with respect to such tooling
keeping in mind the need for use of such tooling in production to meet
Customer's delivery schedule. Any payment due Manufacturer under this Section
9.6 for tooling repair, maintenance or replacement shall be paid within thirty
(30) days from Customer's receipt of an invoice for such materials.
ARTICLE X
NEW PRODUCT DEVELOPMENT
10.1 Intent of the Parties It is the intent of the parties to: (i)
---------------------
cooperate in the development of New Helmet Components; (ii) use new materials as
the same become available; and (iii) incorporate new technologies in the New
Helmet Components as the same become available.
10.2 Engineering Charges In the event that Customer desires to have
-------------------
Manufacturer's engineers and manufacturing staff participate in the research and
development of New Helmet Components, Customer shall advise Manufacturer thereof
and provide sufficient information concerning the project for Manufacturer to
develop an estimate of reimbursable, non-reoccurring engineering fees and costs
for such project.
MANUFACTURING AND PRODUCT DEVELOPMENT AGREEMENT-- PAGE 19
<PAGE>
Manufacturer shall provide Customer with a written estimate as to the estimated
reimbursable, non-reoccurring engineering fees and costs for such project (the
"New Product Project"). The parties shall then meet and negotiate a mutually
acceptable project cost and schedule for the New Product Project.
10.3 Inventions In the course of the research and development for the New
----------
Product Project which is paid for by Customer as provided hereinabove and
subject to the provisions of Section 10.4 below, if an employee or agent of
Manufacturer or consultant under contract with Manufacturer, solely or jointly,
conceives of, invents or develops a concept, invention or idea or reduces the
same to practice, which is copyrightable or patentable and which relates to the
New Product Project (collectively referred to as the "Inventions"), Manufacturer
agrees that it will promptly make full written disclosure to the Customer of the
Invention that all such Inventions belong exclusively to Customer, without
regard to the origin thereof, and that it will hold the same in trust for the
sole right and benefit of the Customer and hereby assigns to the Customer or its
designee, all its right, title, and interest in and to any such Inventions.
Whenever requested by Customer, Manufacturer shall, at Customer's sole cost and
expense, execute, and shall use its best efforts to cause its agents and
employees to execute, any and all documents that counsel for Customer may deem
reasonably
MANUFACTURING AND PRODUCT DEVELOPMENT AGREEMENT-- PAGE 20
<PAGE>
necessary for the protection of Customer's interest in the Inventions.
10.4 Manufacturer's License Rights In the event that Inventions are made
-----------------------------
as provided in Section 10.3 above, Manufacturer and Customer shall negotiate in
good faith the appropriateness of granting Manufacturer a nonexclusive, royalty-
free, irrevocable, perpetual, worldwide license to make, have made, modify, use
and sell such Invention for or in a product which is non-competitive with a
product of Customer.
ARTICLE XI
CONFIDENTIAL INFORMATION
11.1 Confidential Information Manufacturer and Customer agree at all
------------------------
times during the term of this Agreement and thereafter, to hold in strictest
confidence, and not to use, except for the benefit of the other party, or to
disclose to any person, firm or corporation without written authorization of the
other party any Confidential Information of the other party. The term
"Confidential Information" means any party's proprietary information, technical
data, trade secrets or know-how, including, but not limited to, research,
product plans, products, services, customer lists and customers (including, but
not limited to, customers of the party), markets, software, developments,
inventions, processes, formulas, technology, designs, drawings, engineering,
hardware configuration
MANUFACTURING AND PRODUCT DEVELOPMENT AGREEMENT-- PAGE 21
<PAGE>
information, marketing, finances or other business information disclosed to a
party by the other party either directly or indirectly, in writing, orally or by
drawings or observation of parts or equipment.
11.2 Exclusions from Obligation of Confidentiality The parties further
---------------------------------------------
agree and understand that Confidential Information does not include any of the
---
foregoing items which:
(A) has become publicly known or is known to the public or described in a
printed document available to the public; or
(B) was made generally available to the public through no wrongful act of
a party; or
(C) was previously known by the party at the time of disclosure to that
party; or
(D) was independently developed by a party not having access to the
Confidential Information; or
(E) was received from a third party who was not under confidentiality
obligations to the party as to the item or items involved.
11.3 Third Party Confidential Information It is the understanding and
------------------------------------
intent of the parties that, during the term hereof and thereafter, none of the
obligations set forth herein in this Agreement shall obligate, nor shall such
terms be interpreted to obligate, either party to disclose to the other party or
use for the benefit of the other party any confidential
MANUFACTURING AND PRODUCT DEVELOPMENT AGREEMENT-- PAGE 22
<PAGE>
information which a party has received from a third party under an obligation of
confidentiality between such party and a third party.
ARTICLE XII
TERM/RENEWAL/TERMINATION
12.1 Term/Renewal This Agreement shall be in full force and effect from
------------
the effective date of this Agreement for a period of five (5) years. Unless
terminated as provided below, this Agreement will automatically renew, under the
same terms and conditions, for additional five (5) year terms, provided,
however, that either party hereto may, upon one hundred twenty (120) days prior
written notice to the other, terminate this Agreement either upon the expiration
of the initial term or at any time thereafter.
12.2 Termination This Agreement may be terminated at any time in the
-----------
event that the other party shall fail to perform any of its obligations
hereunder and such failure is not remedied by such party within thirty (30) days
after receipt of written notice by the party providing notice of such failure.
Either party may also terminate this Agreement upon a change in control
affecting the other party. No such termination shall affect either party's
obligations hereunder prior to the date of that termination.
MANUFACTURING AND PRODUCT DEVELOPMENT AGREEMENT-- PAGE 23
<PAGE>
ARTICLE XIII
MISCELLANEOUS
13.1 Written Modifications Any term or condition of this Agreement may be
---------------------
waived or modified in writing at any time by any party hereto which is entitled
to the benefits thereof. This Agreement may be amended with respect to any
provision contained herein by a written instrument duly executed on behalf of
each party hereto.
13.2 Notices All notices and other communications which are required to
-------
be or may be given under this Agreement shall be deemed to have been duly given
if made in writing and delivered (a) in person or by courier, (b) by facsimile
transmission, or (c) by certified first class mail, postage prepaid, return
receipt requested; to the parties hereto at the following addresses:
To Manufacturer: Mark A. Gowing
Vice President of Operations
Pactuco, Inc.
1641 West Central Avenue
Lompoc, California 93438
To Customer: William L. Bracy
President-US Group
Bell Sports, Inc.
6350 San Ignacio Avenue
San Jose, California 95119
or to such other addresses as any party shall have furnished to the other by
notice given in accordance with this Section. Notice shall be effective, (a) if
delivered in person or by
MANUFACTURING AND PRODUCT DEVELOPMENT AGREEMENT-- PAGE 24
<PAGE>
courier or by facsimile transmission, upon actual receipt by the intended
recipient, or (b) if mailed upon the date of delivery as shown by the return
receipt therefore.
13.3 Successors and Assigns The rights and obligations of a party to
----------------------
this Agreement may not be assigned without the written consent of the other
party, which consent will not be unreasonably withheld, provided, that following
the Closing, Customer may, without the consent of Manufacturer, assign its
rights and obligations hereunder to Bell Sports Corp., a Delaware corporation,
or to any corporation or partnership controlled (directly or indirectly) by Bell
Sports Corp., so long as (i) the assignee shall assume, in writing, all of
Customer's obligations to Manufacturer hereunder and (ii) Customer shall not be
released from any of its obligations hereunder by reason of such assignment.
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their successors and permitted assigns. The successors and permitted
assigns hereunder, shall include without limitation, any permitted assignee as
well as the successors in interest to such permitted assignee (whether by
merger, liquidation (including successive mergers or liquidations) or
otherwise).
13.4 Entire Agreement This Agreement constitutes the entire agreement
----------------
between the parties hereto and supersedes all prior agreements, representations,
warranties, statements,
MANUFACTURING AND PRODUCT DEVELOPMENT AGREEMENT-- PAGE 25
<PAGE>
promises, information, arrangements, and understanding, whether oral or written,
express or implied, with respect to the subject matter hereof, provided that
nothing contained herein shall limit the obligations or rights of the parties
under the AGREEMENT FOR PURCHASE AND SALE OF ASSETS AND ASSUMPTION OF CERTAIN
LIABILITIES of even date herewith.
13.5 Governing Law This Agreement and its validity, construction,
-------------
enforcement, and interpretation shall be governed by the substantive (including
735 ILCS 105/5-1 et.seq. but otherwise without regard to the conflicts of law
provisions) laws of the State of Illinois relating to contracts made and
performable in such state.
13.6 Invalid Provisions If any provision of this Agreement is deemed or
------------------
held to be illegal, invalid, or unenforceable, this Agreement shall be
considered divisible and inoperative as to such provision to the extent it is
deemed to be illegal, invalid, or unenforceable, and in all other respects this
Agreement shall remain in full force and effect
13.7 Consultation with Counsel Manufacturer and Customer acknowledge that
-------------------------
they have reviewed this Agreement and all ancillary agreements, exhibits and
documents with their respective legal counsel.
MANUFACTURING AND PRODUCT DEVELOPMENT AGREEMENT-- PAGE 26
<PAGE>
13.8 Counterparts This Agreement may be executed in several counterparts,
------------
each of which shall be deemed an original, but all of which shall constitute one
and the same instrument.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be duly executed as of the date and year first above written.
PACTUCO, INC.
a California corporation
(Manufacturer)
Dated: September 22, 1998: By: /s/ Mark A. Gowing
-------------------------------------
Mark A. Gowing,
Vice President of Operations
BELL SPORTS, INC.
a California corporation
(Customer)
Dated: September 22, 1998: By: /s/ L. Kwai Kong
-------------------------------------
Kwai Kong,
Vice President-R&D
MANUFACTURING AND PRODUCT DEVELOPMENT AGREEMENT-- PAGE 27
<PAGE>
EXHIBIT 10.2
BELL SPORTS CORP.
Series A Preferred Stock Option
Stock Option (the "Option") granted by Bell Sports Corp., a Delaware
corporation (the "Company"), to Mary J. George ("George") dated as of August
17th, 1998.
1. Grant of Option.
---------------
This certificate evidences the grant by the Company on August 17th, 1998 to
George of an option to purchase, in whole or in part, on the terms herein
provided, a total of 20,511 shares of Series A Preferred Stock, $.01 par value
(the "Series A Preferred Stock"), of the Company (the "Shares") at $36.15 per
Share. The final exercise date of this Option is August 27, 2006. It is intended
that the Option evidenced by this certificate shall be a non-statutory option.
2. Exercise of Option.
------------------
Each election to exercise this Option shall be in writing, signed by George
or George's executor or administrator or the person or persons to whom this
Option is transferred by will or the applicable laws of descent and distribution
(the "Legal Representative"), and received by the Company at its principal
office, accompanied by this certificate, and payment in full, unless exercised
under Section 3 below. The purchase price may be paid by delivery of cash,
certified check, bank draft, money order or stock of the Company, or by delivery
of cash, certified check, bank draft, money order or stock of the Company, or by
delivery of any combination of the foregoing. In the event that this Option is
exercised by the Legal Representative, the Company shall be under no obligation
to deliver Shares hereunder unless and until the Company is satisfied as to the
authority of the person or persons exercising this Option.
3. Net Issue Exercise.
------------------
In lieu of exercising this Option under Section 2 above, George may elect
at any time to receive shares of Series A Preferred Stock equal to the value of
this Option (or the portion thereof being canceled) by surrender of this Option
at the principal office of the Company together with notice of such election in
which event the Company shall issue to the holder hereof a number of shares of
the Series A Preferred Stock computed using the following formula:
X = Y (A-B)
-------
A
<PAGE>
Where X = The number of shares of Series A Preferred Stock to be issued to
George.
Y = The number of shares of Series A Preferred Stock purchasable under
this Option.
A = The fair market value of one share of the Company's Series A Preferred
Stock.
B = Exercise Price (as adjusted to the date of such calculations.).
For purposes of this Section 3, the fair market value of the Series A
Preferred Stock shall mean the average of the closing bid and asked prices of
the Series A Preferred Stock quoted in the over-the-counter market summary or
the closing price quoted on any exchange on which the Series A Preferred Stock
is listed, whichever is applicable, as published in the Eastern Edition of The
---
Wall Street Journal for the ten trading days prior to the date of determination
- -------------------
of fair market value. If the Series A Preferred Stock is not traded over-the-
counter or on an exchange, the fair market value shall be determined in good
faith by the Board of Directors of the Company.
4. Application of Shareholders Agreement and Employment Agreement.
--------------------------------------------------------------
If at the time this Option is exercised pursuant to Section 2 or Section 3
above, the Company or any successor in interest is a party to a Shareholders
Agreement among the Company, George and other shareholders dated as of August
17, 1998 (the "Shareholders Agreement") or any successor agreement restricting
the transfer of any outstanding shares of its Series A Preferred Stock, this
Option may be exercised only if the Shares so acquired are made subject to the
transfer restrictions set forth in that Shareholders Agreement or successor
agreement (or if more than one agreement is then in effect, the agreement
specified by the Board of Directors of the Company). Furthermore, this Option
and the Shares acquired upon exercise are subject to the restrictions of Section
5 of the Amended and Restated Employment Agreement among George, the Company and
Bell Sports, Inc., a California corporation, dated as of February 17, 1998, as
amended, or any comparable provision of any successor agreement among the
parties thereto.
5. Withholding.
-----------
No Shares will be transferred pursuant to the exercise of this Option
unless and until the person exercising this Option remits to the Company an
amount sufficient to satisfy any federal, state or local withholding tax
requirements, or makes other arrangements satisfactory to the Company with
regard to such taxes.
6. Nontransferability of Option.
----------------------------
-2-
<PAGE>
This Option is not transferable by George other than by will or the laws of
descent and distribution, and is exercisable during George's lifetime only by
George.
7. GOVERNING LAW. This Option may be amended by the Board of Directors of the
-------------
Company with the consent of George.
8. AMENDMENT. This option shall be governed by, and construed in accordance
---------
with, the laws (other than the conflict of laws rules) of the State of
Delaware.
[THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK]
-3-
<PAGE>
IN WITNESS WHEREOF, the Company has caused to be executed under its
corporate seal by its duly authorized officer. This Option shall take effect as
a sealed instrument.
BELL SPORTS CORP.
By /s/ LINDA K. BOUNDS
---------------------------------
Name: Linda K. Bounds
Title: Chief Financial Officer,
Secretary and Treasurer
Dated: August 17, 1998
---------------
<PAGE>
EXHIBIT 10.3
BELL SPORTS CORP.
Class A Common Stock Option
Stock Option (the "Option") granted by Bell Sports Corp., a Delaware
corporation (the "Company"), to Mary J. George ("George") dated as of August
17th, 1998.
1. Grant of Option.
----------------
This certificate evidences the grant by the Company on August 17th, 1998 to
George of an option to purchase, in whole or in part, on the terms herein
provided, a total of 16,921 shares of Class A Common Stock, $.01 par value (the
"Class A Common Stock"), of the Company (the "Shares") at $.44 per Share. The
final exercise date of this Option is August 27, 2006. It is intended that the
Option evidenced by this certificate shall be a non-statutory option.
2. Exercise of Option.
-------------------
Each election to exercise this Option shall be in writing, signed by George
or George's executor or administrator or the person or persons to whom this
Option is transferred by will or the applicable laws of descent and
distribution (the "Legal Representative"), and received by the Company at
its principal office, accompanied by this certificate, and payment in full,
unless exercised under Section 3 below. The purchase price may be paid by
delivery of cash, certified check, bank draft, money order or stock of the
Company, or by delivery of any combination of the foregoing. In the event
that this Option is exercised by the Legal Representative, the Company
shall be under no obligation to deliver Shares hereunder unless and until
the Company is satisfied as to the authority of the person or persons
exercising this Option.
3. Net Issue Exercise.
-------------------
In lieu of exercising this Option under Section 2 above, George may elect
at any time to receive shares of Class A Common Stock equal to the value of this
Option (or the portion thereof being canceled) by surrender of this Option at
the principal office of the Company together with notice of such election in
which event the Company shall issue to the holder hereof a number of shares of
the Class A common Stock computed using the following formula:
X = Y(A-B)
------
A
<PAGE>
Where X - The number of shares of Class A Common Stock to be issued to George.
Y - The number of shares of Class A Common Stock purchasable under this
Option.
A - The fair market value of one share of the Company's Class A Common
Stock.
B - Exercise Price (as adjusted to the date of such calculations.).
For purposes of this Section 3, the fair market value of the Class A Common
Stock shall mean the average of the closing bid and asked prices of the Class A
Common Stock quoted in the over-the-counter market summary or the closing price
quoted on any exchange on which the Class A common Stock is listed, whichever is
applicable, as published in the Eastern Edition of The Wall Street Journal for
-----------------------
the ten trading days prior to the date of determination of fair market value. If
the Class A Common Stock is not traded over-the-counter or on an exchange, the
fair market value shall be determined in good faith by the Board of Directors of
the Company.
4. Application of Shareholders Agreement and Employment Agreement.
--------------------------------------------------------------
If at the time this Option is exercised pursuant to Section 2 or Section 3
above, the Company or any successor in interest is a party to a Shareholders
Agreement among the Company, George and the other shareholders dated as of
August 17th, 1998 (the "Shareholders Agreement") or any successor agreement
restricting the transfer of any outstanding shares of its Class A Common Stock,
this Option may be exercised only if the Shares so acquired are made subject to
the transfer restrictions set forth in that Shareholders Agreement or successor
agreement (or if more than one agreement is then in effect, the agreement
specified by the Board of Directors of the Company.) Furthermore, this Option
and the Shares acquired upon exercise are subject to the restrictions of Section
5 of the Amended and Restated Employment Agreement among George, the Company and
Bell Sports, Inc., a California corporation, dated as of February 17, 1998, as
amended, or any comparable provision of any successor agreement among the
parties thereto.
5. Withholding.
-----------
No Shares will be transferred pursuant to the exercise of this Option
unless and until the person exercising this Option remits to the Company an
amount sufficient to satisfy any federal, state or local withholding tax
requirements, or make other arrangements satisfactory to the Company with regard
to such taxes.
6. Nontransferability of Option.
----------------------------
This Option is not transferable by George other than by will or the laws of
descent and distribution, and is exercisable during George's lifetime only by
George.
-2-
<PAGE>
7. Governing Law. This Option may be amended by the Board of Directors of the
-------------
Company with the consent of George.
8. Amendment. This Option shall be governed by, and constructed in accordance
---------
with, the laws (other than the conflict of laws rules) of the State
of Delaware.
[The remainder of this page has been intentionally left blank.]
-3-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Option to be executed under
its corporate seal by its duly authorized officer. This Option shall take effect
as a sealed instrument.
BELL SPORTS CORP.
By /s/ LINDA K. BOUNDS
----------------------------
Name: Linda K. Bounds
Title: Chief Financial
Officer, Secretary
and Treasurer
Dated: August 17, 1998
---------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-03-1999
<PERIOD-START> JUN-28-1998
<PERIOD-END> SEP-26-1998
<EXCHANGE-RATE> 1
<CASH> 13,593
<SECURITIES> 0
<RECEIVABLES> 44,372
<ALLOWANCES> 1,548
<INVENTORY> 40,837
<CURRENT-ASSETS> 108,243
<PP&E> 41,096
<DEPRECIATION> 21,726
<TOTAL-ASSETS> 200,645
<CURRENT-LIABILITIES> 25,507
<BONDS> 151,957
0
49,505
<COMMON> 8
<OTHER-SE> (26,332)
<TOTAL-LIABILITY-AND-EQUITY> 200,645
<SALES> 40,918
<TOTAL-REVENUES> 40,918
<CGS> 27,374
<TOTAL-COSTS> 27,374
<OTHER-EXPENSES> 22,819
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,538
<INCOME-PRETAX> (11,813)
<INCOME-TAX> 1,366
<INCOME-CONTINUING> (10,447)
<DISCONTINUED> 0
<EXTRAORDINARY> 2,887
<CHANGES> 0
<NET-INCOME> (7,560)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
