================================================================================
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 OCTOBER 2, 1999
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.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3671789
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
6350 SAN IGNACIO AVENUE, 95119
SAN JOSE, CALIFORNIA (Zip Code)
(Address of principal executive offices)
(408) 574-3400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE REGISTRANTS
The number of shares outstanding of each of the registrant's classes of common
stock, as of November 8, 1999:
Class Number of Shares
----- ----------------
Class A Common Stock, $.01 par value 870,661
Class B Common Stock, $.01 par value 128,200
Class C Common Stock, $.01 par value 50,000
================================================================================
<PAGE>
BELL SPORTS CORP.
INDEX TO FORM 10-Q
PART I
Page Number
-----------
Bell Sports Corp. and Subsidiaries Consolidated Balance Sheets
as of October 2, 1999 and July 3, 1999 .......................... 3
Bell Sports Corp. and Subsidiaries Consolidated Statements of
Operations for the three months ended October 2, 1999 and
September 26, 1998 .............................................. 4
Bell Sports Corp. and Subsidiaries Consolidated Condensed
Statements of Cash Flows for the three months ended October 2,
1999 and September 26, 1998 ..................................... 5
Notes to Consolidated Financial Statements ....................... 6 - 11
Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................... 12 - 14
PART II
Items 1 to 6 ...................................................... 15
Signatures ........................................................ 16
2
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BELL SPORTS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
October 2, July 3,
1999 1999
--------- ---------
ASSETS
Current assets: (Unaudited)
Cash and cash equivalents $ 7,981 $ 8,875
Accounts receivable 50,047 58,634
Inventories 36,911 43,664
Deferred taxes 10,899 11,366
Other current assets 7,162 6,134
--------- ---------
Total current assets 113,000 128,673
Property, plant and equipment 13,201 16,162
Long-term deferred taxes 12,500 12,500
Goodwill 51,944 52,429
Intangibles and other assets 9,462 9,170
--------- ---------
Total assets $ 200,107 $ 218,934
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,730 $ 9,249
Accrued compensation and employee benefits 2,860 2,580
Accrued expenses 20,366 31,682
Notes payable and current maturities of long-term
debt and capital lease obligations 2,306 10,433
--------- ---------
Total current liabilities 34,262 53,944
Long-term debt 148,719 148,270
Capital lease obligations and other liabilities 8,295 10,255
--------- ---------
Total liabilities 191,276 212,469
--------- ---------
Commitments and contingencies
Stockholders' equity:
Series A Preferred Stock; 6% cumulative, $.01 par
value; authorized 1,500,000 shares, 1,034,781
shares issued and outstanding at October 2, 1999
and July 3, 1999 10 10
Class A Common Stock; $.01 par value; authorized
900,000 shares, 870,661 shares issued and
outstanding at October 2, 1999 and July 3, 1999 9 9
Class B Common Stock; $.01 par value; authorized
150,000 shares, 128,200 shares issued and
outstanding at October 2, 1999 and July 3, 1999 1 1
Class C Common Stock; $.01 par value; authorized
50,000 shares, 50,000 shares issued and outstanding
at October 2, 1999 and July 3, 1999 1 1
Additional paid-in capital 53,277 53,210
Accumulated other comprehensive income (1,983) (1,925)
Accumulated deficit (42,484) (44,841)
--------- ---------
Total stockholders' equity 8,831 6,465
--------- ---------
Total liabilities and stockholders' equity $ 200,107 $ 218,934
========= =========
See accompanying notes to these consolidated financial statements.
3
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands)
Three Months Ended
---------------------------
October 2, September 26,
1999 1998
---------- -------------
Net sales $ 46,850 $ 40,918
Cost of sales 29,736 27,374
-------- --------
Gross profit 17,114 13,544
Selling, general and administrative expenses 12,656 11,356
Foreign exchange (gain) loss 15 1,610
Amortization of goodwill and intangible assets 527 562
Transaction costs -- 9,892
Net investment income (106) (601)
Interest expense 4,198 2,538
-------- --------
(Loss) income before income taxes (176) (11,813)
Benefit (provision) for income taxes 72 1,366
-------- --------
(Loss) income before extraordinary items (104) (10,447)
Extraordinary item: Gain on early extinguishment
of debt, net of taxes of $2,006 -- 2,887
-------- --------
Net (loss) income $ (104) $ (7,560)
======== ========
See accompanying notes to these consolidated financial statements.
4
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
Three Months Ended
------------------------
October 2, September 26,
1999 1998
---------- -------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net cash provided by operating activities $ 8,399 $ 13,192
------- ---------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Capital expenditures (912) (1,233)
Expenditures to acquire intangible assets (557) (7,581)
------- ---------
Net cash provided by (used in) investing
activities (1,469) (8,814)
------- ---------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
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 (39) (136)
Net payments on line of credit agreement (7,742) (248)
------- ---------
Net cash used in financing activities (7,781) (35,679)
------- ---------
Effect of exchange rate changes on cash (43) (199)
------- ---------
Net increase (decrease) in cash and cash equivalents (894) (31,500)
Cash and cash equivalents at beginning of period 8,875 45,093
------- ---------
Cash and cash equivalents at end of period $ 7,981 $ 13,593
======= =========
See accompanying notes to these consolidated financial sta tements
5
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Bell Sports Corp. and its wholly-owned subsidiaries (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 supplier of bicycle accessories worldwide.
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
both 2000 and 1999 had thirteen weeks.
UNAUDITED INFORMATION AND BASIS OF PRESENTATION
The consolidated balance sheet as of October 2, 1999 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 July 3, 1999, June 27, 1998 and
June 28, 1997 which are included in the Company's 1999 Annual Report on Form
10-K.
ACCOUNTS RECEIVABLE
Accounts receivable at October 2, 1999 and July 3, 1999 are net of
allowances for doubtful accounts of $2.2 million and $1.8 million, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at October 2, 1999 and July 3, 1999 are net
of accumulated depreciation of $20.4 million and $23.2 million, respectively.
Depreciation expense for the first quarter of fiscal 2000 and 1999 was $1.1
million and $1.4 million, respectively.
MANAGEMENT'S ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
6
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
NOTE 2 - COMPREHENSIVE INCOME
Comprehensive income for the periods presented is calculated as follows:
Three Months Ended
----------------------------
October 2, September 26,
1999 1998
---------- -------------
Net income (loss) $(104) $(7,560)
Foreign currency translation adjustment,
net of tax (58) 279
----- -------
Comprehensive income (loss) $(162) $(7,281)
===== =======
NOTE 3 - INVENTORIES
Inventories consist of the following components (in thousands):
October 2, July 3,
1999 1999
------- -------
Raw materials $ 3,452 $ 3,579
Work in process 944 1,089
Finished goods 32,515 38,996
------- -------
Total $36,911 $43,664
======= =======
NOTE 4 - COMMITMENTS AND CONTINGENCIES
PRODUCT LIABILITY
The Company is subject to various product liability claims and/or suits
brought against it for claims involving damages for personal injuries or deaths.
Allegedly, these injuries or deaths relate to the use by claimants of products
manufactured by the Company and, in certain cases, products manufactured by
others. The ultimate outcome of these existing claims and any potential future
claims cannot presently be determined.
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 a judgment, settlement amount or defense costs arising out of
these claims, the Company could be held responsible for the payment of such
amounts or costs. The Company believes that the purchaser does not currently
have the financial resources to pay any significant judgment, settlement amount,
or defense costs arising out of any claim.
The Company sold its auto racing helmet business in July 1999 and entered
into a long-term royalty-free licensing agreement with the purchaser for auto
racing helmets and automotive accessories to be marketed under the Bell brand
name. The Company retains responsibility for product liability claims relating
to auto racing helmets manufactured prior to the sale of the auto racing helmet
business. The Company believes that, by virtue of its status as a licensor it
could be named as a defendant in actions involving liability for auto racing
helmets and automotive accessories manufactured by the purchaser of the
Company's auto helmet business.
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 upon appeal, 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 $3.5 and $4.0 million (based on current
7
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
exchange rates). This claim arose during a period in which the Company was
self-insured. The Company has filed an appeal of the Canadian verdict.
In February 1998, a Wilkes-Barre, Pennsylvania jury returned a verdict
against the Company relating to injuries sustained in a 1993 motorcycle
accident. The judgment totaled $6.8 million, excluding any interest, fees or
costs which may be assessed. This claim arose during a period in which the
Company was self-insured. The Company filed a motion for a new trial which was
denied. The Company has filed an appeal of the verdict.
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's post-trial
motions have been denied by the trial court and an appeal is pending seeking
reversal of the judgment of the trial court.
Based on management's extensive consultation with legal counsel prosecuting
the appeals, the Company has established product liability reserves totaling
$13.8 million. These reserves are intended to cover the estimated costs for the
defense, payment or settlement 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.
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 ("OII Site") in Monterey Park, California. CERCLA imposes
liability for the costs of cleaning up, and certain damages resulting from,
releases and threatened releases of hazardous substances. Although courts have
interpreted CERCLA liability to be joint and several, where feasible, the
liability typically is allocated among the responsible parties according to a
volumetric or other standard. USEPA apparently has identified the Company as a
DE MINIMIS potentially responsible party based on several waste shipments the
Company allegedly sent to the site in the late 1970s and in 1980. USEPA's
settlement offer to the Company is in the range of $29,000 to $36,000. The
settlement would cover all past and expected future costs at the OII Site, and,
with limited 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 received a General Notice Letter
in October 1998 from USEPA under CERCLA for the Casmalia disposal site in Santa
Barbara County, California. 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 during the 1980's. USEPA's settlement offer
to the Company is in the range of $54,000 to $57,000. The benefits of the
settlement are similar to those offered by USEPA for the OII site. Accordingly,
the Company does not expect this claim to have a material adverse effect on the
Company.
Besides the litigation described above, the Company is not party to any
material litigation that, if adversely determined, would have a material effect
on its business.
NOTE 5 - 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, bearing interest at 11%, maturing on
August 15, 2008. 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. In addition, prior to August 15, 2001, the Company may redeem
up to 35% of the Notes for 111% of their principal amount, plus accrued
interest. The Company has fully and unconditionally guaranteed the Notes.
Separate financial statements and other disclosures relating to Bell Sports,
Inc. have not been made, as management believes that such information is not
material to holders of the Notes. Summarized financial information regarding
Bell Sports, Inc. is as follows:
8
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
BELL SPORTS, INC.
October 2,
1999
-----------
SUMMARIZED BALANCE SHEET DATA: (unaudited)
Current assets $129,849
Total assets 180,509
Current liabilities 35,001
Total liabilities 151,852
Stockholder's equity 28,657
Three
Months Ended
October 2,
1999
------------
SUMMARIZED STATEMENT OF OPERATIONS DATA: (unaudited)
Net sales $46,850
Gross profit 17,114
Net income 914
On August 17, 1998, the Company issued Discount Notes bearing interest at
14% totaling $15.0 million and maturing on August 14, 2009 to a related party in
a private placement transaction. Interest on the Discount Notes accrues on June
1 and December 1 of each year. On March 12, 1999, Discount Notes with an
accreted value of $2.4 million were exchanged for 47.6 thousand shares of Series
A Preferred Stock and 39.2 thousand shares of Class A Common Stock.
The Company has also issued 4 1/4% Convertible Subordinated Debentures
("Debentures") due November, 2000, of which $23.8 million were outstanding at
October 2, 1999. The Debentures are redeemable at the Company's option at any
time at specified redemption prices.
In August 1998, the Company and its wholly-owned subsidiary, Bell Sports,
Inc. ("BSI"), entered into a $60.0 million senior secured revolving credit
facility ("Credit Agreement") expiring on August 17, 2003. 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 Company could borrow
a maximum of $48.6 million as of October 2, 1999. As of October 2, 1999, there
were borrowings outstanding of $2.0 million under the Credit Agreement.
The Credit Agreement provides the Company with the option of borrowing
based either on the U.S. prime rate plus a margin or LIBOR plus a margin. The
margin for the U.S. prime rate 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. At October 2, 1999, the margin for U.S. prime was
0.75% and the margin for LIBOR was 1.75%. 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. At October 2, 1999, the quarterly commitment fee was 0.5% per
annum.
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 October 2, 1999, the Company was in compliance with or had
obtained waivers for all bank covenants.
9
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
October 2, July 3,
1999 1999
-------- --------
<S> <C> <C>
11% senior subordinated debentures maturing August, 2008 $110,000 $110,000
4 1/4% convertible subordinated debentures maturing November 2000 23,750 23,750
14% senior discount notes due August, 2009 14,924 14,434
Borrowings under line of credit 2,000 10,000
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% 303 391
-------- --------
150,977 158,575
Less: Current maturities 2,258 10,305
-------- --------
Total long-term debt $148,719 $148,270
======== ========
</TABLE>
NOTE 6 - DISPOSITIONS AND RESTRUCTURING
In September 1999, the Company sold its European manufacturing facility in
Roche La Moliere, France. In addition, the Company entered into an agreement
with the purchaser pursuant to which the purchaser has agreed to provide the
Company with helmets. The Company recorded a charge in fiscal 1999 of
approximately $2.5 million in connection with the sale and related
reorganization of the Company's European manufacturing facility. No material
gain or loss was recognized upon consummation of the sale in September 1999.
10
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
In the fourth quarter of fiscal 1999, the Company recorded charges of $16.5
million associated with the consolidation of manufacturing facilities, the
streamlining of administrative overhead, the divestiture of the Company's former
auto racing division and the closure of the Australian sales a marketing office.
At July 3, 1999, the Company had $12.6 million outstanding in accruals related
to these actions. Activity in these accruals for the first quarter of fiscal
2000 were as follows:
July 3, Cash Non-cash July 3,
1999 Payments Charges 1999
-------- -------- -------- -------
ACCRUALS:
Manufacturing consolidation $ 9,102 $(2,108) $(1,192) $5,802
Overhead reductions 2,224 (991) (1,115) 118
Sale of auto racing and Australia 788 (186) (200) 402
Restructuring accruals from prior
years 493 (184) -- 309
-------- ------- ------- ------
$ 12,607 $(3,469) $(2,507) $6,631
======== ======= ======= ======
NOTE 7 - SEGMENT INFORMATION
The Company has three reportable segments: products sold to domestic mass
merchants, products sold to domestic independent bicycle dealers (IBDs), and
products sold in international operations. The international operations have
been combined into one reportable segment as they share a majority of the
aggregation criteria and are not individually reportable. The Company's domestic
mass merchant segment markets a wide range of bicycle accessories and bicycle
helmets through the mass merchant channel, including retailers such as Wal-Mart
and K-Mart. The domestic IBD segment markets premium bicycle helmets and
accessories to independent bicycle dealers such as bicycle chains, independent
bicycle shops, specialized sporting goods stores, and mail order catalogs.
International operations include sales of bicycle accessories and helmets sold
to both mass merchant and IBD channels in Canada, Europe and Australia, in
addition to distributing third party products.
The Company evaluates the performance of, and allocates resources to the
reportable segments based on net sales and EBITDA. For internal purposes, EBITDA
is defined as earnings before investment income and interest expense, income
taxes, depreciation, amortization, and certain one-time charges such as
transaction costs, product liability costs, restructuring charges, asset
write-offs, other costs, loss on disposal of product line and sale of assets and
other one-time costs such as foreign exchange loss and compensation expense
related to the grant of stock options.
<TABLE>
<CAPTION>
Mass Merchants IBD International Other (1) Total
-------------- ------- ------------- --------- -------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDING OCTOBER 2, 1999:
Sales to unaffiliated customers $26,428 $14,614 $5,808 $ -- $46,850
EBITDA 5,119 559 (86) (48) 5,544
THREE MONTHS ENDING SEPTEMBER 26, 1998:
Sales to unaffiliated customers 20,168 14,418 6,332 -- 40,918
EBITDA 2,062 700 (278) 1,410 3,894
TOTAL ASSETS:
October 2, 1999 53,150 30,481 14,394 102,082 200,107
July 3, 1999 59,176 27,996 29,335 102,427 218,934
</TABLE>
- ----------
(1) The "Other" designation includes corporate expenditures and expenditures
related to the Company's U.S. manufacturing facility.
EBITDA for the periods shown is reconciled to Net income before income
taxes as follows:
11
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Three Months Ended
------------------------
October 2, September
1999 26, 1998
------- --------
EBITDA $ 5,544 $ 3,894
Less:
Depreciation 1,101 1,427
Amortization 527 562
One-time compensation expense for stock options -- 307
Transaction costs -- 11,474
Net investment income (106) (601)
Interest expense 4,198 2,538
------- --------
Net income (loss) before provision for
(benefit from) income taxes $ (176) $(11,813)
======= ========
12
<PAGE>
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. The Company is also a supplier of bicycle accessories worldwide. Over
its 45-year history, the Company has developed a reputation for innovation,
design, quality and safety.
RESULTS OF OPERATIONS
NET SALES. Net sales for the first quarter of fiscal 2000 of $46.9 million
increased 15% from $40.9 in the fiscal 1999 first quarter. The increase is
primarily attributable to strong sales in the U.S. mass merchant and specialty
retail channels. European sales also increased over the prior year quarter.
For the first quarter of fiscal 2000, bicycle accessories and bicycle
helmets represented approximately 59% and 41%, respectively, of net sales. For
the fiscal 1999 first quarter, bicycle accessories, bicycle helmets and auto
racing helmets represented approximately 57%, 41% and 2%, respectively, of the
Company's net sales. In July 1999, the Company sold its auto racing helmet
business.
GROSS MARGIN. Gross margins increased to 37% of net sales in the fiscal
2000 first quarter from 33% in the prior year quarter. The increase is mainly
due to production efficiencies resulting from the manufacturing consolidations
completed by the Company in the fiscal 1999 fourth quarter.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
costs as a percentage of net sales improved to 27% for the first quarter of
fiscal 2000 from 28% for the prior year first quarter.
AMORTIZATION OF INTANGIBLES. Amortization of goodwill and intangible assets
decreased to $527,000 in the Company's first quarter of fiscal 1999 compared to
$562,000 for the comparable prior year period. The slight decrease is due to
certain intangibles becoming fully amortized.
FOREIGN EXCHANGE LOSS. Foreign exchange loss for the first quarter of
fiscal 2000 decreased to $15,000 from $1,610,000 in the prior year quarter. The
high foreign exchange losses in the prior year quarter were due to the unusually
high level of cash movement related to the August 1998 merger of Bell and HB
Acquisition Corporation (the "Bell Merger").
NET INVESTMENT INCOME. Net investment income decreased to $106,000 in the
first three months of fiscal 2000 compared to $601,000 in the first quarter of
fiscal 1999 due to significantly lower cash balances.
INTEREST EXPENSE. Interest expense increased to $4.2 million in the first
quarter of fiscal 2000 from $2.5 million in the comparable prior year period due
to the higher level of debt outstanding for the entire quarter.
INCOME TAXES. The effective tax rate was 41% for the first quarter of
fiscal 2000 and 12% for the first quarter of fiscal 1999. The increase is
attributable to the non-deductibility of certain costs associated with the Bell
Merger incurred in the prior year quarter.
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 increased slightly to $78.7 million at
October 2, 1999 from $74.7 million at July 3, 1999.
The Company's capital expenditures were $0.9 million in the fiscal 2000
first quarter compared to $1.2 million in the fiscal 1999 first quarter. The
Company estimates it will spend approximately $3.8 million on capital
expenditures in fiscal 2000 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. ("BSI"), entered into a $60.0 million senior secured revolving credit
facility ("Credit Agreement") expiring on August 17, 2003. 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 Company could borrow
13
<PAGE>
a maximum of $48.6 million as of October 2, 1999. As of October 2, 1999, there
were borrowings outstanding of $2.0 million under the Credit Agreement.
The Credit Agreement provides the Company with the option of borrowing
based either on the U.S. prime rate plus a margin or LIBOR plus a margin. The
margin for the U.S. prime rate 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. At October 2, 1999, the margin for U.S. prime was
0.75% and the margin for LIBOR was 1.75%. 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. At October 2, 1999, the quarterly commitment fee was 0.5% per
annum.
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 October 2, 1999, the Company was in compliance with or had
obtained waivers for all bank covenants.
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.
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 calendar 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 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 has further
upgraded these programs to a year 2000 level certified by the Company's outside
software vendors. The computer software programs of Giro Ireland and Bell Sports
Europe are currently year 2000 compliant.
All year 2000 efforts with respect to the Company and its subsidiaries'
computer software programs have been and 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 October 2, 1999 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 has determined that such
equipment is year 2000 compliant. However, in the event of a failure, 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
14
<PAGE>
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 October 2, 1999 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. Based on the responses it has received from its
customers, the Company believes 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. To the extent the Company's
vendors are not year 2000 compliant by the end of 1999, such vendors may fail to
deliver ordered materials and products to the Company and may fail to bill the
Company properly and promptly. Consequently, the Company may not have the
correct inventory to send to its customers and may experience a shortage or
surplus of inventory. Although the Company does not currently have a plan for
addressing these potential problems, with respect to its vendors, the Company
has alternative sources of supply.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") was
issued. SFAS 133 establishes a new model for accounting for derivatives and
hedging activities and supersedes and amends a number of existing standards.
SFAS 133 is required to be adopted by the Company for fiscal year 2001. 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. As the Company does not
currently invest in derivatives, the adoption of SFAS 133 is not expected to
have a material effect on the results of operations or the consolidated
financial statements.
FORWARD-LOOKING STATEMENTS
Certain matters contained herein are forward-looking statements that are
based on management's beliefs as well as on assumptions made by and information
currently available to management. When used herein, the words "expect,"
"anticipate," "intend," "plan," "believe," "estimate," and similar expressions
are intended to identify such forward-looking statements. Such statements
involve known and unknown 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: economic and market conditions, competitive
activities or other business conditions, dependence on key customers,
fluctuations in sales, profitability or working capital, weather conditions,
currency fluctuations, and results of pending litigation.
15
<PAGE>
BELL SPORTS CORP.
PART II
ITEM 1 Legal Proceedings
None
ITEM 2 Changes in Securities
None
ITEM 3 Defaults Upon Senior Securities
None
ITEM 4 Submission of Matters to a Vote of Security Holders
None
ITEM 5 Other Information
None
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibit Index Page 18
(b) None
16
<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, 1999
BELL SPORTS CORP.
By: /s/ Richard S Willis
-------------------------------
Richard S Willis
Executive Vice President and Chief
Financial Officer (principal
financial and accounting officer)
17
<PAGE>
BELL SPORTS CORP.
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
27* Financial Data Schedule
- ----------
* Filed herewith
18
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-01-2000
<PERIOD-START> JUL-04-1999
<PERIOD-END> OCT-02-1999
<EXCHANGE-RATE> 1
<CASH> 7,981
<SECURITIES> 0
<RECEIVABLES> 52,207
<ALLOWANCES> 2,160
<INVENTORY> 40,150
<CURRENT-ASSETS> 113,000
<PP&E> 33,639
<DEPRECIATION> 20,438
<TOTAL-ASSETS> 200,107
<CURRENT-LIABILITIES> 34,262
<BONDS> 150,977
0
10
<COMMON> 11
<OTHER-SE> 8,810
<TOTAL-LIABILITY-AND-EQUITY> 200,107
<SALES> 46,850
<TOTAL-REVENUES> 46,850
<CGS> 29,736
<TOTAL-COSTS> 29,736
<OTHER-EXPENSES> 13,092
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,198
<INCOME-PRETAX> (176)
<INCOME-TAX> (72)
<INCOME-CONTINUING> (104)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (104)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
