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 March 27, 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
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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
(Registrant's telephone number, including area code)
N/A
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Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) Yes X No and (2) has been subject
to such filing requirements for the past 90 days. Yes X No .
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
Class Date Number of shares
- --------------------------------------------------------------------------------
Class A Common Stock, $.01 par value April 30, 1999 862,772
Class B Common Stock, $.01 par value April 30, 1999 118,700
Class C Common Stock, $.01 par value April 30, 1999 43,000
<PAGE>
BELL SPORTS CORP.
INDEX TO FORM 10-Q
PART I
Page
Number
------
Bell Sports Corp. and Subsidiaries Consolidated Balance Sheets as
of March 27, 1999, and June 27, 1998 3
Bell Sports Corp. and Subsidiaries Consolidated Statements of
Operations for the nine months and three months ended March
27, 1999, and March 28, 1998 4
Bell Sports Corp. and Subsidiaries Consolidated Statements of
Cash Flows for the nine months ended March 27, 1999, and
March 28, 1998 5
Notes to Consolidated Financial Statements 6 - 11
Management's Discussion and Analysis of Financial Condition and
Results of Operations 12 - 15
PART II
Items 1 to 6 16
Signatures 17
<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)
<TABLE>
<CAPTION>
March 27, June 27,
1999 1998
--------- ---------
(unaudited)
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 9,181 $ 45,093
Accounts receivable 64,157 63,472
Inventories 47,626 39,679
Deferred taxes 9,636 8,970
Other current assets 6,370 3,264
--------- ---------
Total current assets 136,970 160,478
Property, plant and equipment 18,424 20,636
Long-term deferred taxes 9,500 9,500
Goodwill 52,894 54,292
Intangibles and other assets 8,448 2,161
--------- ---------
Total assets $ 226,236 $ 247,067
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,576 $ 7,663
Accrued compensation and employee benefits 2,550 5,541
Accrued expenses 14,512 16,158
Notes payable and current maturities of long-term debt
and capital lease obligations 24,539 679
--------- ---------
Total current liabilities 52,177 30,041
Long-term debt 146,907 86,625
Capital lease obligations and other liabilities 4,127 2,142
--------- ---------
Total liabilities 203,211 118,808
--------- ---------
Commitments and contingencies
Stockholders' equity:
Series A Preferred Stock; 6% cumulative, $.01 par value;
authorized 1,500,000 shares, 1,025,284 shares
issued and outstanding at March 27, 1999 52,279 --
Preferred stock; $.01 par value; authorized 1,000,000,
none issued at June 27, 1998 -- --
Class A Common Stock; $.01 par value; authorized 900,000
shares; 862,772 shares issued and outstanding at
March 27, 1999 9 --
Class B Common Stock; $.01 par value; authorized 150,000
shares, 118,700 shares issued and outstanding at
March 27, 1999 1 --
Class C Common Stock; $.01 par value; authorized 50,000
shares, 43,000 shares issued and outstanding at
March 27, 1999 -- --
Common Stock; $.01 par value; authorized 25,000,000
shares; 14,410,508 shares issued and 13,915,436
shares outstanding at June 27, 1998 -- 144
Additional paid-in capital (8,060) 143,905
Accumulated other comprehensive income (1,567) (1,111)
Accumulated deficit (19,637) (9,461)
--------- ---------
23,025 133,477
Treasury stock, at cost, none at March 27, 1999, and
495 shares at June 27, 1998 -- (5,218)
--------- ---------
Total stockholders' equity 23,025 128,259
--------- ---------
Total liabilities and stockholder's equity $ 226,236 $ 247,067
========= =========
</TABLE>
See accompanying notes to these consolidated financial statements
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
------------------------- -------------------------
March 27, March 28, March 27, March 28,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 140,245 $ 138,554 $ 54,306 $ 52,332
Cost of sales 94,749 93,591 36,873 34,132
--------- --------- --------- ---------
Gross profit 45,496 44,963 17,433 18,200
Selling, general and administrative expenses 34,931 34,570 11,631 11,894
Foreign exchange (gain) loss 1,905 (71) (34) (36)
Amortization of goodwill and intangible assets 1,589 1,735 528 533
Transaction costs 13,100 -- 703 --
Disposal of product line -- (1,300) -- --
Restructuring charges -- 1,228 -- --
Net investment income (936) (1,381) (126) (476)
Interest expense 11,153 3,539 4,411 1,189
--------- --------- --------- ---------
(Loss) income before income taxes (16,246) 6,643 320 5,096
Benefit (provision) for income taxes 3,183 (2,524) (132) (1,936)
--------- --------- --------- ---------
(Loss) income before extraordinary items (13,063) 4,119 188 3,160
Extraordinary item: Gain on early
extinguishment of debt, net of taxes of
$2,006 2,887 -- -- --
--------- --------- --------- ---------
Net (loss) income $ (10,176) $ 4,119 $ 188 $ 3,160
========= ========= ========= =========
</TABLE>
See accompanying notes to these consolidated financial statements.
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------
March 27, March 28,
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss) before extraordinary item $ (13,063) $ 4,119
Adjustments to reconcile net income (loss) before
extraordinary items to net cash provided by (used in)
operating activities:
Amortization of goodwill and intangibles 1,589 1,730
Depreciation 4,172 4,173
Loss on disposal of property, plant, and equipment 1,297 312
Provision for doubtful accounts 512 (588)
Provision for inventory obsolescence 2,572 1,695
Deferred income taxes (666) --
Other 2,356 380
Changes in assets and liabilities:
Accounts receivable (1,512) 6,373
Inventories (10,705) (12,352)
Other assets (3,738) 4,159
Accounts payable 2,947 418
Other liabilities (4,428) (5,349)
--------- ---------
Net cash provided by (used in) operating activities (18,667) 5,070
--------- ---------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Capital expenditures (3,297) (3,610)
Proceeds from the sale of SportRack -- 13,427
--------- ---------
Net cash provided by (used in) investing activities (3,297) 9,817
--------- ---------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from issuance of common stock 84 1,119
Proceeds from issuance of senior subordinated notes 110,000 --
Expenditures related to issuance of senior subordinated notes (4,900) --
Proceeds from issuance of senior discount notes 15,000 --
Proceeds from issuance of preferred stock 44,907 --
Repurchase of common stock (142,350) --
Tender of subordinated debentures (57,681) --
Payments on notes payable, long-term debt and capital leases (1,325) (495)
Net borrowings (payments) on line of credit agreement 24,000 (18,708)
Expenditures related to issuance of line of credit (1,381) --
--------- ---------
Net cash used in financing activities (13,646) (18,084)
--------- ---------
Effect of exchange rate changes on cash (302) (546)
--------- ---------
Net increase (decrease) in cash and cash equivalents (35,912) (3,743)
Cash and cash equivalents at beginning of period 45,093 29,008
--------- ---------
Cash and cash equivalents at end of period $ 9,181 $ 25,265
========= =========
</TABLE>
See accompanying notes to these consolidated financial statements
<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 leading supplier of auto racing helmets, a worldwide
supplier of bicycle accessories, and a marketer of 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"). The Discount Notes were subsequently exchanged for New
Discount Notes, which retain all of the attributes of the Discount Notes, but
which are publicly registered.
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 third quarter in
both 1999 and 1998 had thirteen weeks.
Unaudited Information and Basis of Presentation
- -----------------------------------------------
The consolidated balance sheet as of March 27, 1999 and statements of operations
and 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 Annual Report on Form 10-K for
the fiscal year ended June 27, 1998.
Accounts Receivable
- -------------------
Accounts receivable at March 27, 1999 and June 27, 1998 are net of allowances
for doubtful accounts of $1.6 million and $1.7 million, respectively.
<PAGE>
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment at March 27, 1999 and June 27, 1998 are net of
accumulated depreciation of $24.0 million and $21.8 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.
NOTE 2 - COMPREHENSIVE INCOME
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. For the Company, comprehensive income for all periods
presented consisted solely of net earnings and foreign currency translation
adjustments, as follows (in thousands):
Nine Months Ended Three Months Ended
------------------- ------------------
March 27, March 28, March 27, March 28,
1999 1998 1999 1998
-------- -------- -------- --------
Net income (loss) $(10,176) $ 4,119 $ 188 $ 3,160
Foreign currency translation
adjustment, net of tax (456) (621) 96 (253)
-------- -------- -------- --------
Comprehensive income (loss) $(10,632) $ 3,498 $ 284 $ 2,907
======== ======== ======== ========
NOTE 3 - INVENTORIES
Inventories consist of the following components (in thousands):
March 27, June 27,
1999 1998
------------------ ----------------
Raw materials $5,898 $3,539
Work in process 1,810 2,010
Finished goods 39,918 34,130
------------------ ----------------
Total $47,626 $39,679
================== ================
NOTE 4 - PRODUCT LIABILITY AND CONTINGENCIES
Product Liability
- -----------------
The Company is subject to various product liability claims and/or suits brought
against it for claims involving damages for personal injuries or deaths.
Allegedly, these injuries or deaths relate to the use by claimants of products
manufactured by the Company and, in certain cases, products manufactured by
others. The ultimate outcome of these existing claims and any potential future
claims cannot presently be determined. Management believes that existing product
liability claims/suits are defensible and that, based on the Company's past
experience and assessment of current claims, the aggregate of defense costs and
any uninsured losses will not have a material adverse impact on the Company's
liquidity or financial position.
<PAGE>
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.
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 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 has filed an
appeal of the judgment.
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 was 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 sought 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. Thereafter, on March 10, 1999, the remaining suits were dismissed by the
plaintiffs without prejudice, subject to approval by the court. The court
approved the dismissals on March 12, 1999.
<PAGE>
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.
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 bonds for 111% of their principle amount, plus accrued
interest.
On August 17, 1998, the Company issued Discount Notes bearing interest at 14%
totaling $15.0 million in a private placement transaction, maturing on August
14, 2009. 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.
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.
<PAGE>
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 Credit Agreement 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 $59.8 million as of March 27, 1999. As of March 27, 1999, there were
borrowings outstanding of $24.0 million 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. 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. At March 27, 1999, the margin for U.S. prime was 0.50% and the margin for
LIBOR was 1.50%. 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 March 27,
1999, the quarterly commitment fee was 0.50% 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 March 27, 1999, the Company was in compliance with all bank
covenants.
Long-term debt consists of the following (in thousands):
March 27, June 27,
1999 1998
--------- ---------
11% Notes $ 110,000 $ --
4 1/4% Debentures 23,750 86,250
14% Discount notes 13,864 --
Borrowings under line of credit 24,000 --
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% 392 936
--------- ---------
172,006 87,186
Less: Current maturities (25,099) (561)
--------- ---------
Total long-term debt $ 146,907 $ 86,625
========= =========
<PAGE>
NOTE 6 - 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 are 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 have not received the full dividends, then such dividends
shall accumulate, 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 remain unpaid.
Stock Options
- -------------
On August 17, 1998, the Company granted an 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 member of management. The options are immediately
exercisable and must be exercised, if at all, 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.
Investment and Incentive Plan
- -----------------------------
In November 1998, the Board of Directors approved two investment plans (the
"Plans") to allow selected employees, directors, consultants and/or advisors of
the company the opportunity to make equity investments in the Company. Under the
Plans, up to 15,000 shares of Series A Preferred Stock, 12,500 shares of Class A
Common Stock, 132,100 shares of Class B Common Stock and 50,000 shares of Class
C Common Stock can be purchased by participants. As of March 27, 1999, 6,849
shares of Series A Preferred Stock, 5,686 shares of Class A Common Stock,
118,700 shares of Class B Common Stock, and 43,000 shares of Class C Common
Stock had been purchased under the Plans.
NOTE 7 - RESTRUCTURING
International - Q3
- ------------------
During May 1999, the Company approved and announced a plan to restructure its
international operations. Over the next twelve months, the Company will close
the Irish and Canadian manufacturing facilities. At this time, costs associated
with the restructuring, including severance benefits, facility closing costs,
and capital asset disposal cannot be reasonably estimated.
Giro - Q2
- ---------
During January 1999, the Company announced a plan to restructure its Giro U.S.
operations. This plan was significantly revised and approved in May 1999. Over
the next twelve months, the Company will consolidate Giro's Santa Cruz,
California manufacturing and distribution operations with Bell's Rantoul,
Illinois facility. At this time, costs associated with the revised
restructuring, including severance benefits, facility closing costs, and capital
asset disposal cannot be reasonably estimated.
<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 leading supplier of auto racing helmets, a
worldwide supplier of bicycle accessories, and has recently begun marketing
in-line skating, snowboarding, snow skiing and water sport helmets. 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"). The Discount Notes were subsequently exchanged for New
Discount Notes, which retain all of the attributes of the Discount Notes, but
which are publicly registered.
RESULTS OF OPERATIONS
NET SALES. Net sales for the third quarter of fiscal 1999 increased 4% to $54.3
million from $52.3 million in the fiscal 1998 third quarter, due primarily to
strong bicycle helmet and accessories sales in the U.S. in the mass merchant
channel. Year to date, net sales increased 1% to $140.2 million from $138.6
million in the first three quarters of fiscal 1998, due primarily to strong
bicycle helmet and accessories sales in the U.S. in both the mass merchant and
independent bicycle dealer channels.
The product line sales mix for the nine month and three month periods are as
follows:
Nine Months Ended Three Months Ended
--------------------- ----------------------
March 27, March 28, March 27, March 28,
1999 1998 1999 1998
--------- --------- --------- ---------
Product Line Sales Mix:
Bicycle accessories 53% 52% 52% 50%
Bicycle helmets 45% 45% 46% 48%
Auto Racing helmets 2% 3% 2% 2%
GROSS MARGIN. Gross margins for the third quarter of fiscal 1999 decreased to
32% of net sales, from 35% in the fiscal 1998 third quarter. Year to date, gross
margins remained relatively flat at 32% in fiscal 1999 compared to 33% in fiscal
1998. The decreases are due to the product mix and unfavorable manufacturing
variances.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative costs,
as a percentage of net sales, decreased to 21%, from 23% in the fiscal 1998
third quarter, due primarily to lower marketing expenses. Year to date, selling,
general, and administrative costs remained constant at 25% of net sales for both
fiscal 1999 and fiscal 1998.
<PAGE>
AMORTIZATION OF INTANGIBLES. Amortization of goodwill and intangible assets
decreased slightly to $528,000 in the third quarter of fiscal 1999 compared to
$533,000 for the comparable prior year period. Year to date, amortization of
intangibles decreased to $1.6 million in fiscal 1999 from $1.7 million in fiscal
1998. The decrease is due to certain intangibles becoming fully amortized.
TRANSACTION COSTS. In the first half of fiscal 1999, the Company estimated costs
related to the Bell Merger at $13.0 million. In the third quarter of fiscal
1999, the Company recorded an additional $0.7 million of costs related to the
merger.
GAIN ON DEBT TENDER. On August 17, 1998, the Company consummated the Tender
Offer at a purchase price of $905, plus accrued and unpaid interest from May 15,
1998 up to, but not including, the date of payment for each $1,000 principal
amount of Debentures. An extraordinary gain, stated on an after-tax basis and
net of related fees and expenses, of $2.9 million was recorded in connection
with the Tender Offer.
NET INVESTMENT INCOME. Net investment income decreased to $126,000 in the third
quarter of fiscal 1999 compared to $476,000 in the third quarter of fiscal 1998.
Year to date net investment income decreased to $936,000 in fiscal 1999 from
$1,381,000 in fiscal 1998. The decrease is due to lower cash balances being
invested resulting from the Bell Merger.
INTEREST EXPENSE. Interest expense increased to $4.4 million in the third
quarter of fiscal 1999 from $1.2 million in the comparable prior year period.
Year to date interest expense increased to $11.2 million in fiscal 1999 from
$3.5 million in fiscal 1998. The increase is due to the issuance of the Notes
and Discount Notes, partially offset by a $62.5 million reduction in debt
resulting from the Tender Offer.
INCOME TAXES. The effective tax rate was 41% for the third quarter of fiscal
1999 and 20% year to date for fiscal 1999. The effective tax rate was 38% for
both the second quarter of fiscal 1998 and the first nine months of fiscal 1998.
The variance on the year to date rates is due to the non-deductibility of the
transaction costs. The Company anticipates the effective tax rate for the
remainder of fiscal 1999 to remain at 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 $84.8 million at March
27, 1999 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 lower inventory balances.
The Company's capital expenditures were $3.3 million for the first nine months
of fiscal 1999. The Company estimates it will spend a total of 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 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.
<PAGE>
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 March 27, 1999, the Company was in compliance with all bank
covenants.
The Credit Agreement expires in August 2003. As of March 27, 1999, outstanding
borrowings under the Credit Agreement totaled $24.0 million. Based on the
provisions of the Credit Agreement, the Company could have borrowed a maximum of
$59.8 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.
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 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, Giro Ireland, EuroBell
and Bell Sports Australia are currently year 2000 compliant.
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 March 27, 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 believes such equipment is year
2000 compliant but has not completed its testing of such equipment. Testing is
expected to be completed by May 1999. 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.
<PAGE>
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 March 27, 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. 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") began 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 operations and cash flows. To date, the company has
experienced no impact from the transition.
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 will 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.
<PAGE>
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.
<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
<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: MAY 11, 1999
--------------
BELL SPORTS CORP.
/s/ Richard S Willis Executive Vice President, Chief Financial
- ------------------------------ Officer and Treasurer (Principal financial
and accounting officer)
<PAGE>
BELL SPORTS CORP.
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
10.1* Merchandise Sourcing Agreement between Bell Sports and DS-MAX
U.S.A., Inc., dated February 18, 1999
27* Financial Data Schedule
- ----------------------------------
* Filed herewith
MERCHANDISE SOURCING AGREEMENT
This Merchandise Sourcing Agreement (this "Agreement") is made and entered into
as of the 18TH day of FEBRUARY, 1999, by and between DS-MAX U.S.A. Inc., a
California corporation ("Company"), and Bell Sports, Inc. a California
corporation ("BSI"), Bell Sports Canada Inc., a Quebec, Canada corporation
("BSC") and Bell Sports Australia Pty Ltd., an Australian corporation ("BSA")
(collectively "Bell").
WHEREAS Bell is in the business of obtaining and selling to third parties
various types of bicycle helmets and other bicycle accessories;
AND WHEREAS the Company and its related companies are in the business of, among
other things, locating independent product and service suppliers in Asia and
facilitating product acquisition from Asia and business operations in Asia for
merchandisers;
AND WHEREAS Bell desires to have the Company facilitate Bell's purchase of
bicycle helmets and bicycle accessories in Asia;
AND WHEREAS the Company desires to facilitate Bell's purchase of bicycle helmets
and bicycle accessories in Asia;
NOW THEREFORE in consideration of the mutual covenants and promises contained in
this Agreement, the parties hereto agree as follows:
ARTICLE 1
APPOINTMENT
1.1 Retention
---------
Bell hereby retains the Company as Bell's sole and exclusive buying agent for
the purchase, in accordance with the terms hereof, of bicycle helmets and
bicycle accessories manufactured in, and distributed from China, Taiwan, Hong
Kong, Thailand, Indonesia, Pakistan, India, South Korea and Singapore ("Asia")
for use by BSI, BSC and BSA (individually "Product" and collectively
"Products"). The parties acknowledge that the definition of Products shall
exclude, and this Agreement shall not relate to, unless otherwise agreed: (i)
any bicycle helmet or bicycle accessory manufactured outside of Asia; (ii) any
bicycle helmet or bicycle accessory manufactured by Bell or any of its
affiliates; (iii) any bicycle helmet or bicycle accessory acquired for use by
any division of Bell other than BSI, BSC or BSA, unless otherwise agreed, or
(iv) the purchase by Bell or its affiliates of product lines for which Bell or
its affiliates act as a distributor, including, without limitation, the Smith,
Fizyk, Rock Shox and Vittoria Tires product lines.
<PAGE>
2
1.2 Acceptance
----------
The Company hereby agrees to be Bell's sole buying agent for Bell's purchase, in
accordance with the terms hereof, of Product.
ARTICLE II
SERVICES AND COMPENSATION
-------------------------
2.1 Orders
------
Bell will place orders for Products with suppliers identified by the Company and
approved by Bell, and the Company will serve as Bell's buying agent to purchase
such Products. Bell will send purchase orders to the Company and the Company
will forward Bell's purchase orders to the suppliers.
2.2 Advances
--------
To permit Bell to pay its Asian suppliers in accordance with the suppliers'
terms or the terms of Bell's purchase order, the Company may from time to time
advance on Bell's behalf and for Bell's account only a revolving line of credit
with the Company ("Loan Advance"). Any Loan Advance required to pay expenses
associated with Product, including (without limitation) payments to suppliers,
cost of samples, courier costs, third party costs and all other associated
expenses (hereinafter collectively the "Purchase Price") shall be repaid within
45 days of Bell's receipt of the Products for which the Loan Advance was made
without regard to the date of the Loan Advance. No interest will accrue on any
such Loan Advance providing however that in the event of any default in the
timely repayment of the Loan Advance, interest shall accrue from the date of
default to the date of payment at the rate of 1.5% per month. If Bell defaults
in repayment of any Loan Advance, in addition to any other rights and remedies
available to the Company, the full outstanding aggregate balance of Loan
Advances may at the Company's sole and absolute discretion become immediately
due and payable, without further demand by the Company and the Company may cease
rendering any or all services provided by it pursuant to this Agreement.
2.3 Compensation
------------
Bell shall pay the Company as compensation for its services pursuant to this
Agreement, a fee equal to 6% of the Purchase Price net of any taxes (the "Fee")
within 45 days from Bell's receipt of the Products on which the Fee is based.
For the purposes of this Agreement receipt of the Product by Bell shall be
deemed to have occurred upon the date which is the later of the date specified
for delivery of the Product as set out in Bell's Purchase Order or the Product
is available for shipment from the port of origin. The Fee will not be included
in the Purchase Price of the Products but will be separately designated on the
invoice.
<PAGE>
3
2.4 No Liability
------------
The Company shall not take title to or possession of any Products, shall not
have any interest in any Products, shall not have any obligation to accept
returns, and shall not bear the responsibility for the risk of loss of Product.
ARTICLE III
COVENANTS OF THE COMPANY
3.1 Conduct of Business Generally
-----------------------------
The Company agrees to conduct its business, including, without limitation, to
use its personnel, facilities, goodwill, know-how, computer systems,
communications network and financial resources, to (i) identify sources of
Product and (ii) ensure that requisitions for Product placed by Bell with
sources identified by the Company result in timely delivery to Bell of Products
of quality and price acceptable to Bell. Without limiting the foregoing, the
Company agrees that it will:
(a) provide staff and internal systems sufficient to satisfy its obligations
hereunder and to permit Bell to eliminate personnel involved in the
sourcing of Product;
(b) assist in the negotiation of the most favorable pricing and other terms
relating to the purchase of Product by Bell;
(c) act as a liaison between Bell's design and marketing personnel and sources
of Product regarding design and engineering issues;
(d) Provide adequate facilities in Hong Kong to accommodate office show rooms,
meeting space and the test facility referenced in Section 3.3; and
(e) Provide adequate supervision of all persons employed or engaged by it in
connection with the satisfaction of its obligations hereunder.
3.2 Order Placement, Product Shipment, Rejected Product
---------------------------------------------------
The Company will place orders for Product on behalf of Bell only upon written
instruction from Bell and only upon such terms and specifications as Bell shall
designate. The Company is not authorized to place any such order with a source
other than the specific source approved by Bell for that order.
<PAGE>
4
The Company will, at Bell's direction, (i) coordinate shipment of Product,
including consolidations, coordination and delivery thereof and (ii) prepare the
documentation related to Product shipments. The Company will, at Bell's request,
assist in expediting Product shipment.
The Company will, at Bell's request, return Products rejected by Bell or the
Company and, at Bell's request, make appropriate claims against the source of
such rejected Product, including, without limitation, claims for refund or
credit.
3.3 Sampling, Test Facility and Quality Control
-------------------------------------------
The Company will assist Bell in ensuring that Product purchased by Bell is
manufactured in accordance with Bell's specifications. Without limiting the
foregoing, the Company will without discretion, in conformity with standards,
specifications and other direction supplied from time to time by Bell: (i)
collect samples of Product and arrange for the shipment thereof to locations in
the United States, the test facility referenced below, or otherwise, (ii)
establish, staff, maintain and operate a test facility to test Product samples,
(iii) coordinate certification testing with outside labs, and (iv) provide
quality control of in-plant production prior to shipping. Bell may, at its
expense, inspect the test facility at any time and may observe the Company's
in-plant production quality control processes, in each case, in order to ensure
compliance with Bell's specifications.
3.4 Invoices and Document Control
-----------------------------
The Company will obtain from sources of Product purchased by the Company on
behalf of Bell, and will deliver to Bell, copies of all invoices for such
purchases. The Company will provide document control including, purchase orders,
invoices, shipping documents, and process control records relating to the
manufacture and testing of components and finished goods.
3.5 Compliance with Law
-------------------
In connection with the satisfaction of its obligations under this Agreement, the
directors, officers, employees or agents of the Company and their respective
affiliates will comply with all applicable law, and none of them (i) will use
any funds for unlawful contributions, gifts, entertainment or other unlawful
expenses related to political activity, (ii) make any direct or indirect
unlawful payments to government officials or others or establish or maintain any
unlawful or unrecorded funds, (iii) violate any of the provisions of The Foreign
Corrupt Practices Act of 1977, or any rules or regulations promulgated
thereunder or (iv) receive any illegal discounts or rebates or violate any
antitrust laws.
3.6 Exclusivity
-----------
While this Agreement is in effect, the Company will not act as a buying agent
for any other person or entity of goods that would be included within the
definition of Product if purchased by Bell hereunder and will not purchase
Product other than pursuant to this Agreement.
<PAGE>
5
ARTICLE IV
COVENANTS OF BELL
-----------------
4.1 Insurance
---------
Bell shall maintain at its sole expense throughout the term of this Agreement
product liability insurance naming the Company as a named additional insured
party with an insurer and in an amount reasonably acceptable to the Company.
Bell shall deliver to the Company within 10 days of the execution of this
Agreement certificates of insurance evidencing the coverage required by this
section.
4.2 Assistance
----------
BSI shall assist, at the Company's request, in the identification, hiring and
training of personnel by the Company necessary to meet its obligations
hereunder, further, Bell shall provide all specifications, protocols, directions
and instructions to the Company as contemplated by Section 3.3 of this
Agreement.
4.3 Fees and Loans
--------------
Bell shall pay Fees and repay Loan Advances as and when same are due.
4.4 Exclusivity
-----------
While the Agreement is in effect, Bell shall not purchase Products other than
pursuant to this Agreement.
ARTICLE V
TRADEMARKS
5.1 Trademarks
----------
Bell may not use the trademarks or trade names of the Company or its affiliates
without prior written consent of the Company. The Company and its affiliates may
not use the trademarks, trade names or design patents of Bell or any of its
affiliates without prior written consent of Bell. Nothing contained herein shall
limit in any respect Bell's use and application of its trademarks, trade names
or design patents.
<PAGE>
6
ARTICLE VI
TERM, TERMINATION AND EFFECT OF TERMINATION
6.1 Term
----
The Term of this Agreement shall commence from the date of execution of this
Agreement and unless terminated as hereinafter provided, this Agreement and the
appointment of the Company hereunder shall continue in force indefinitely. There
will be a period of transition during which Bell will begin to transition
purchases of Product to the Company. Effective April 1, 1999, Bell will place
with the Company all purchase orders for Product. The Company shall be entitled
to Fees on all Products shipped on or after (but not before) April 1, 1999.
6.2 Immediate Termination By Either Party
-------------------------------------
Upon the occurrence of any of the following events, either party may terminate
this Agreement effective immediately upon written notice to the other:
(a) The other party shall be or become insolvent as defined in the
Bankruptcy Code, or is not generally paying its debts as such debts
become due; makes any general assignment for the benefit of
creditors; or becomes involved in a receivership, reorganization or
any other law for the relief of debtors.
(b) The other party shall fail to perform properly in all material
respects its obligations hereunder and such failure shall not be
remedied within fifteen (15) days after receipt of written notice
pursuant to Section 8.2.
6.3 Termination on Notice by Either Party
-------------------------------------
Either Party may terminate this Agreement at any time by giving the other party
at least ninety (90) days prior written notice. Loan Advances and Fees will be
due on all Product ordered during such ninety (90) day period.
ARTICLE VII
LIMITATION ON WARRANTIES AND RELIANCE; INDEMNIFICATION
7.1 Limitations on Warranties and Reliance
--------------------------------------
Bell hereby acknowledges that the Company's expertise is in facilitating
business operations in Asia and that the Company's expertise or knowledge about
any aspect of the design, engineering or manufacture of bicycle helmets or
bicycle accessories is limited to the training, standards, direction and other
information provided to the Company with respect to Product testing and
compliance by Bell. The Company shall be entitled to rely entirely upon Bell to
<PAGE>
7
provide appropriate product specifications and for compliance with all
applicable legal requirements, including (without limitation) those related to
consumer product safety and, other than for acts of gross negligence or
intentional misconduct, it shall incur no liability for or in respect of any
action taken, suffered or omitted by it in good faith and in accordance with
such standards and direction. The Company makes no warranties whatsoever
regarding the Products and shall and does hereby assign to Bell any warranty
with respect thereto to which the Company may be entitled. Bell expressly agrees
that any claim it may have arising out of or related in any manner whatsoever to
the Products, other than claims for breaches of this Agreement, shall be
asserted against the actual manufacturer and not against the Company. EXCEPT FOR
MATTERS EXPRESSLY COVERED BY THIS AGREEMENT THE COMPANY DISCLAIMS ANY AND ALL
WARRANTIES, EXPRESS OR IMPLIED (INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF
FITNESS FOR A PARTICULAR PURPOSE) RELATED IN ANY MANNER WHATSOEVER TO THE
PRODUCTS.
7.2 Indemnification by BSI
----------------------
BSI agrees to indemnify and hold harmless (in accordance with the provisions of
and subject to the limitations set forth in Section 7.4) the Company and its
affiliates and their directors, officers, employees, agents, attorneys and
consultants and their successors and assigns (the "Company Group Members") from
and against any and all Losses and Expenses incurred by the Company Group
Members in connection with or arising from: (a) any breach, or alleged breach,
by Bell or other failure of Bell to perform any of the covenants of Bell
contained in this Agreement; and (b) any Third Party Product Liability Claim,
except to the extent such Third Party Product Liability Claim results from the
gross negligence or intentional misconduct of any Company Group Member with
respect to the fulfillment of this Agreement.
7.3 Indemnification by the Company
------------------------------
The Company agrees to indemnify and hold harmless (in accordance with the
provisions of and subject to the limitations set forth in Section 7.4) Bell and
its affiliates and their directors, officers, employees, agents, attorneys and
consultants and their successors and assigns (the "Bell Group Members") from and
against any and all Losses and Expenses incurred by the Bell Group Members in
connection with or arising from any breach, or alleged breach, by the Company or
other failure of the Company to perform any of the covenants of the Company
contained in this Agreement, excluding Product Liability Claims with respect to
which, and only to the extent that BSI is required to provide indemnification
pursuant to Section 7.2(b).
7.4 Additional Limitations
----------------------
(a) An indemnifying party shall have no obligation to pay
indemnification for any Loss or Expense to the extent that recovery
for such Loss or Expense is actually paid to the indemnified party
under any policy of insurance. To the extent that an indemnified
party is subsequently paid by an insurance company for any Loss or
Expense with respect to which payment was previously received by
the indemnified party hereunder, the indemnified party shall
promptly, upon receipt of the insurance proceeds, reimburse the
indemnifying party from the insurance proceeds in an amount up to
the indemnifying party's prior payment to the indemnified party
with respect to such Loss or Expense.
<PAGE>
8
(b) In calculating any Loss or Expense there shall be deducted the
amount of any income tax benefit available to any indemnified
person (or any of its affiliates) with respect to such Loss or
Expense (after giving effect to the tax effect of receipt of the
indemnification payments).
7.5 Notice of Claims
----------------
(a) If the Company believes that it has suffered or incurred any Loss
or incurred any Expense for which the Company believes BSI is
required to provide indemnification pursuant to Section 7.2, the
Company shall so notify Bell promptly in writing describing such
Loss or Expense, the amount thereof, if known, and the method of
computation of such Loss or Expense, all with reasonable
particularity and containing a reference to the provisions of this
Agreement in respect of which such Loss or Expense shall have
occurred. If any action at law or suit in equity is instituted by
or against a third party with respect to which the Company intends
to claim any liability or expense as Loss or Expense under this
Article VII, the Company shall notify Bell promptly in writing of
such action or suit.
(b) If Bell believes that it has suffered or incurred any Loss or
incurred any Expense for which Bell believes the Company is
required to provide indemnification pursuant to Section 7.3, Bell
shall so notify the Company promptly in writing describing such
Loss or Expense, the amount thereof, if known, and the method of
computation of such Loss or Expense, all with reasonable
particularity and containing a reference to the provisions of this
Agreement in respect of which such Loss or Expense shall have
occurred. If any action at law or suit in equity is instituted by
or against a third party with respect to which Bell intends to
claim any liability or expense as Loss or Expense under this
Article VII, Bell shall notify the Company promptly in writing of
such action or suit.
(c) The amount to which an indemnified person shall be entitled under
this Article VII shall be determined: (i) by the written agreement
between the indemnified person and the indemnifying party; (ii) by
final judgment or decree of a court of competent jurisdiction; or
(iii) by any other means to which the indemnified person and the
indemnifying party shall agree. The judgment or decree of a court
shall be deemed final when the time for appeal, if any, shall have
expired and no appeal shall have been taken or when all appeals
taken have been finally determined. The indemnified person shall
have the burden of proof in establishing the amount of the Loss and
Expense suffered by it.
<PAGE>
9
(d) Notwithstanding the foregoing, the failure of any person hereto to
give any notice described in this Section 7.5 shall not relieve any
party hereto of its obligations hereunder, except to the extent
such failure shall have prejudiced such party.
7.6 Third Party Claims
------------------
(a) Subject to Section 7.6(b), any person indemnified under this
Article VII shall have the right to conduct and control, through
counsel of its choosing, any Third Party Claim and the person
indemnified may compromise or settle the same, provided that the
indemnified person shall give the indemnifying party at least 10
days' advance notice of any proposed compromise or settlement. The
indemnified person shall permit the indemnifying party to
participate in the defense of any Third Party Claim through counsel
chosen by it, provided that the fees and expenses of such counsel
shall be borne by the indemnifying party. Subject to Section
7.6(b), any compromise or settlement with respect to a claim for
money damages effected after the indemnifying party by notice to
the indemnified person shall have disapproved such compromise or
settlement shall discharge the indemnifying party from liability
with respect to the subject matter thereof, and no amount in
respect thereof shall be claimed as Loss or Expense under this
Article VII.
(b) If the remedy sought in any Third Party Claim is solely money
damages and will have no continuing effect on the business,
reputation or future business prospects of any indemnified person,
the indemnifying party shall have 15 business days after receipt of
the notice referred to in the last sentence of Section 7.6(a) to
notify the indemnified person that it elects to conduct and control
such Third Party Claim. If the indemnifying party gives the
foregoing notice, the indemnifying party shall have the right to
undertake, conduct and control, through counsel of its own choosing
and at the sole expense of the indemnifying party, the conduct and
settlement of such Third Party Claim, and the indemnified person
shall cooperate with the indemnifying party in connection
therewith; provided that (i) the indemnifying party shall not
thereby permit to exist any lien, encumbrance or other adverse
charge upon any asset of any indemnified person; (ii) the
indemnifying party shall permit the indemnified person to
participate in such conduct or settlement through counsel chosen by
the indemnified person, but the fees and expenses of such counsel
shall be borne by the indemnified person except as provided in
clause(iii) below; and (iii) the indemnifying party shall agree
promptly to reimburse to the extent required under this Article VII
the indemnified person for the full amount of any Loss arising from
or relating to such Third Party Claim and all related Expense
incurred by the indemnified person, except fees and expenses of
counsel for the indemnified person incurred after the assumption of
the conduct and control of such Third Party Claim by the
indemnifying party. So long as the indemnifying party is contesting
any such Third Party Claim in good faith, the indemnified person
shall not pay or settle any such Third Party Claim. Notwithstanding
the foregoing, the indemnified person shall have the right to pay
or settle any such Third Party Claim, provided that in such event
the indemnified person shall waive any right to indemnity therefor
by the indemnifying party, and no amount in respect thereof shall
be claimed as Loss or Expense under this Article VII.
<PAGE>
10
7.7 Certain Definitions
-------------------
As used in this Article VII the following terms have the meanings specified or
referred to in this Section 7.7 and shall be equally applicable to both the
singular and plural forms.
"Expenses" means any and all reasonable expenses incurred in connection with
investigating, defending or asserting any claim, action, suit or proceeding
incident to any matter indemnified against hereunder (including, without
limitation, court filing fees, court costs, arbitration fees or costs, witness
fees, and reasonable fees and disbursements of legal counsel, investigators,
consultants, expert witnesses, accountants and other professionals).
"Losses" means any and all losses, costs, obligations, liabilities, settlement
payments, awards, judgments, fines, penalties, damages, expenses, deficiencies
or other charges.
"Product Liability Claim" means a claim that a defective Product caused personal
injury.
"Third Party Claim" means a third party claim, action, suit, proceeding,
investigation or other claim giving rise to a claim for indemnification under
this Agreement.
"Third Party Product Liability Claim" means a Third Party Claim that is a
Product Liability Claim.
7.8 Covenant Not To Sue
-------------------
Bell agrees that it will not pursue any Product Liability Claim against any
Company Group Member other than with respect to Product Liability Claims
resulting from the gross negligence or intentional misconduct of a Company Group
Member.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Independent Contractor
----------------------
The relationship between the Company and Bell is that of principal (Bell) and
buying agent (Company). This Agreement does not and is not intended to create in
any manner or for any purpose whatsoever and nothing in it shall be construed to
create an employer-employee, partnership or joint venture relationship or any
other relationship other than that of principal and Independent Contractor. The
Company's authority as a buying agent shall be limited to the authority
expressly granted by Bell in, or in accordance with, this Agreement.
<PAGE>
11
The Company shall be solely responsible for the payment of any and all
compensation to any of its employees or agents performing services on its behalf
in furtherance of the Company's obligations hereunder, and shall also be
responsible for all federal, state, local and other taxes applicable to any such
payments to its employees and agents. The Company agrees to indemnify and hold
harmless Bell from any claim or liability relating to the payment or nonpayment
of applicable taxes.
8.2 Notices
-------
All notices, requests, offers and other communications required or permitted to
be made under this Agreement shall be in writing and shall be deemed to have
been duly given when received if personally delivered; when transmitted if
transmitted by telecopy, electronic or digital transmission method; the day
after sent, if sent for next day delivery to a domestic address by a recognized
overnight delivery service (e.g. Federal Express); and upon receipt, if sent by
certified or registered mail, return receipt requested. In each case notice
shall be sent to:
To the Company or its affiliates at: DS-MAX U.S.A. Inc.
15 Chrysler Street
Irvine, CA 92618
Attention: Mr. Lawrence Tenebaum
With a copy to: DS-MAX U.S.A. Inc.
250 Granton Drive
Richmond Hill, ON
Canada L4B 1H7
Attention: Mr. Robert N. Feldman
To Bell: Bell Sports, Inc.
6350 San Ignacio Avenue
San Jose, CA 95119
Attention: Mr. Bill Bracy
Or at such other address as either party most recently may have designated in
writing to the other party.
<PAGE>
12
8.3 Assignment
----------
Neither this Agreement nor any of the rights or obligations hereunder may be
assigned by any party without the prior written consent of the other party.
8.4 Sole and Entire Agreement
-------------------------
This Agreement constitutes the sole and entire existing agreement between the
parties with respect to the subject matter hereof, and completely and correctly
expresses all of the rights and obligations of the parties. All prior
agreements, conditions, practices, customs, usages and obligations are
completely superseded and revoked, insofar as any such prior agreement,
condition, practice, custom, usage or obligation might have given rise to any
enforceable right.
8.5 Waivers
-------
The waiver in any particular instance or series of instances of any term or
condition of this Agreement or any breach hereof by any party shall not
constitute a waiver of such term or condition or of any breach thereof in any
other instance.
8.6 Amendment
---------
This Agreement is subject to amendment only by subsequent written agreement
between, and executed by, the parties hereto. Commencement or continuation of
any custom, practice or usage by any party shall not constitute an amendment
hereof or otherwise give rise to enforceable rights or create obligations of any
party.
8.7 Separability
------------
If any one or more provisions, clauses, paragraphs, subclauses or subparagraphs
contained in this Agreement shall for any reason be held to be invalid, illegal,
void or unenforceable, the same shall not affect any other provision, clause,
paragraph, subclause or subparagraph of this Agreement, but this Agreement shall
be construed as if such invalid, illegal, void or unenforceable provision,
clause, paragraph, subclause or subparagraph had never been contained herein.
<PAGE>
13
8.8 Duration of Rights
------------------
Rights and obligations created by or arising under this Agreement shall
terminate automatically upon termination of this Agreement, except as otherwise
expressly provided herein. The agreements contained in Section 4.1, 8.11 and
Article VII shall survive the termination of this agreement.
8.9 Captions; Definitions
---------------------
Any captions of articles, sections, subsections or paragraphs of this Agreement
are solely for the convenience of the parties and are not a part of this
Agreement or to be used for the interpretation of this Agreement or any
provision hereof. Capitalized terms used herein without definition have the
meanings assigned them in the Agreement.
8.10 Applicable Law
--------------
The parties hereto hereby irrevocably submit in any suit, action or proceeding
arising out of or related to this Agreement or any of the transactions
contemplated hereby or thereby to the jurisdiction and venue of state and
federal courts located in Santa Clara County, California and hereby waive any
and all objections to such jurisdiction that they may have under the laws of the
State of California or the United States and they hereby waive any and all
claims that such suit, action or proceeding is brought in an inconvenient forum
that they may have under the laws of the State of California or the United
States.
8.11 Confidentiality
---------------
(a) The parties agree that the terms of this Agreement are to be held
confidential and shall not be disclosed to any other person or
entity, except as required by law or legal process, and except that
either party may disclose the terms hereof to its legal counsel or
other advisors.
(b) The parties recognize that the sales techniques, operations
manuals, memoranda, corporate documents, financial documents, trade
information, purchase schedules, vendor schedules, manufacturing
sources, catalogues, price lists, customer lists, pricing structure
and other information used by them in the purchasing, promotion,
<PAGE>
14
distribution or sale of products is confidential information
(hereinafter "Confidential Information"). The parties also
recognize that the Confidential Information of each of the parties
(1) was designed and developed by such party at great expense and
over lengthy periods of time; (2) is secret, confidential and
unique; (3) constitutes the exclusive property and/or trade secrets
of such party, and (4) that any use of the Confidential Information
by the other of them for any purpose other than in accordance with
this Agreement and in furtherance of obligations hereunder would be
wrongful and would cause irreparable injury to the aggrieved party
for which damages are not an adequate remedy.
(c) Except as its duties hereunder may require, or as each party may
otherwise consent in writing, the parties will not at any time
disclose or use, either during the term or after the expiration or
termination of this Agreement, the Confidential Information of the
other party. The parties agree that they will not use or disclose
any confidential information obtained from a competitor.
(d) Bell and the Company agree that in the event either party commits a
breach or threatens to commit a breach of any of the provisions of
this Section 8.11 the other party (the "Aggrieved Party") shall
have the right and remedy to have the provisions of this Section
8.11 specifically enforced by any court having jurisdiction, it
being acknowledged and agreed that any such breach or threatened
breach will cause immediate irreparable injury to the Aggrieved
Party and that money damages will not provide an adequate remedy at
law for any such breach or threatened breach. Such right and remedy
shall be in addition to, and not in lieu of, any other rights and
remedies available to the Aggrieved Party under this Agreement or
at law or in equity.
8.12 Counterparts
------------
This Agreement may be executed in one or more counterparts, each of which shall
be deemed an original, but all of which together shall constitute one and the
same instrument.
8.13 Covenant not to Compete and Confidentiality
-------------------------------------------
During the term of this Agreement, neither the Company nor any of its officers,
directors, stockholders, employees, agents, representatives or any affiliates,
if any thereof will (1) engage in the same or similar line of business as that
carried on by Bell; or (2) directly or indirectly, serve, advise or be employed
<PAGE>
15
by any individual firm or corporation or other business or entity engaged in the
same or similar line of business as that carried on by Bell; or (3) represent,
offer for sale or sell any bicycle accessories, helmets, bicycle or other goods
that are similar to or competitive with the Products.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement or
caused this Agreement to be duly executed on their respective behalf, by their
respective officers thereunto duly authorized, all as of the day and year first
above written.
SIGNED, SEALED AND DELIVERED ) DS-MAX U.S.A. INC.
In the presence of )
) per:
) Lawrence Tenebaum
) Chief Executive Officer
)
) BELL SPORTS, INC.
)
) per:
) Bill Bracy
) Group President
)
) BELL SPORTS CANADA, INC.
)
) per:
) Josh Greenberg
) President
)
) BELL SPORTS
) AUSTRALIA PTY LTD.
)
)
) per:
) Roger Dulhunty
) General Manager
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<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-03-1999
<PERIOD-START> JUN-28-1998
<PERIOD-END> MAR-27-1998
<EXCHANGE-RATE> 1
<CASH> 9,181
<SECURITIES> 0
<RECEIVABLES> 65,806
<ALLOWANCES> 1,649
<INVENTORY> 47,626
<CURRENT-ASSETS> 136,970
<PP&E> 42,415
<DEPRECIATION> 23,991
<TOTAL-ASSETS> 226,236
<CURRENT-LIABILITIES> 52,177
<BONDS> 151,034
0
52,279
<COMMON> 10
<OTHER-SE> (29,254)
<TOTAL-LIABILITY-AND-EQUITY> 226,236
<SALES> 140,245
<TOTAL-REVENUES> 140,245
<CGS> 94,749
<TOTAL-COSTS> 94,749
<OTHER-EXPENSES> 50,589
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<INTEREST-EXPENSE> 11,153
<INCOME-PRETAX> (16,246)
<INCOME-TAX> 3,183
<INCOME-CONTINUING> (13,063)
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<EXTRAORDINARY> 2,887
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<NET-INCOME> (10,176)
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</TABLE>
