SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended July 3, 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.
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(Exact name of registrant as specified in its charter)
Delaware 36-3671789
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
6350 San Ignacio Avenue, San Jose, California 95119
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(Address of principal executive offices) (Zip Code)
(408) 574-3400
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Not applicable
Securities registered pursuant to Section 12(g) of the Act:
4 1/4% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2000
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(Title of class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant as of September 23, 1999 was $98,445 (based
on the declared fair market value of the stock). For the purposes of this
calculation, directors, executive officers and any holder of more than 10% of
any class of the Company's stock were considered affiliates of the registrant.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
The number of shares outstanding of each of the registrant's classes of common
stock, as of September 23, 1999:
Class Number of shares
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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 56,000
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I.
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Bell Sports Corp. was incorporated in Delaware in 1989. As used herein, unless
the context otherwise clearly requires, the "Company" or "Bell" refers to Bell
Sports Corp., its consolidated subsidiaries and its predecessors. The Company 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
also supplies bicycle accessories worldwide and markets in-line skating,
snowboarding, snow skiing and water sport helmets. The Company markets its
helmets under the widely recognized Bell, Bell Pro and Giro brand names, and its
accessories under such leading brands as Bell, Blackburn, Rhode Gear, VistaLite,
and Spoke-Hedz. With a broad, well-diversified, branded product offering
marketed across all price points, the Company is a leading supplier of bicycle
helmets and accessories to all major distribution channels in the industry,
including mass merchants and independent bicycle dealers ("IBDs"). In fiscal
1999, the Company had net sales of $210.9 million.
The Company has developed a reputation over its 45-year history for innovation,
design, quality and safety and is recognized by bicycling enthusiasts as a
market leader in helmet technology and design. To leverage its outstanding
reputation and position in bicycle helmets, the Company has pursued strategic
acquisitions of complementary bicycle helmet and accessory brands. During the
1990s, the Company increased net sales from $40.4 million in fiscal 1990 to
$210.9 million in fiscal 1999. The Company believes the primary drivers of this
growth include: (i) the development of innovative bicycle helmets and
accessories; (ii) strategic acquisitions; (iii) the successful introduction of
the Bell brand, which historically had been reserved for sale to the IBD
channel, into the mass merchant channel; (iv) an increase in safety awareness
among consumers; and (v) the popularity of bicycling, including specialty
segments such as mountain biking.
In fiscal 1999, approximately 54%, 44% and 2% of the Company's net sales were
derived from the sale of bicycle accessories, bicycle helmets and auto racing
helmets, respectively, with approximately 51% attributable to sales to domestic
mass merchants, 28% attributable to domestic IBDs and 21% attributable to
international sales.
Since its founding in 1954, the Company has engaged in the design, manufacture
and marketing of: (i) bicycle helmets; (ii) bicycle accessories; (iii) auto
racing helmets; and (iv) motorcycle helmets. Since 1989, the Company has sought
to enhance its competitive position in the bicycle helmet and accessory markets
through a series of strategic acquisitions including: (i) Rhode Gear USA, Inc.
("Rhode Gear") in November 1989; (ii) Blackburn Designs, Inc. ("Blackburn") in
November 1992; (iii) VistaLite, Inc. ("VistaLite") in January 1994; (iv)
SportRack Canada, Inc. ("SportRack") in May 1995; (v) American Recreation
Company Holdings, Inc. ("AMRE") in July 1995; and (vi) Giro Sport Design
International, Inc. ("Giro") in January 1996. In 1991, the Company divested its
motorcycle helmet business and entered into a long-term licensing agreement for
motorcycle helmets to be marketed under the Bell brand name. The Company
divested Service Cycle/Mongoose in April 1997 and SportRack in July 1997. In
1999, the Company sold its auto racing helmet business and entered into a
long-term royalty-free licensing agreement for auto racing helmets and
automotive accessories to be marketed under the Bell brand name.
Also in fiscal 1999, in an effort to remain competitive, the Company announced
and began to implement a plan to restructure its worldwide operations. Under the
plan the Company has closed its Santa Cruz, California, Canada and Ireland
manufacturing facilities. In addition, the Company has entered into an agreement
to sell the its manufacturing facility in France. This will leave the Company
with one manufacturing facility in Rantoul, Illinois. In addition, under the
plan, the Company has consolidated its product design and test labs into one
global facility, and has announced its plans to close its Australia sales and
marketing office.
In April 1992, the Company completed an initial public offering of its common
stock, par value $.01 ("Common Stock"). In December 1992, the Company completed
a secondary public offering of its Common Stock and in November 1993 completed a
public offering of its 4 1/4% Convertible Subordinated Debentures due 2000 (the
"Debentures").
In August 1998, the Company consummated an 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"). Shares of the Company's common stock outstanding at the time of the
Bell Merger were converted into the right to receive $10.25 per share in cash.
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Additionally, the Company completed a tender offer (the "Tender Offer") to
repurchase $62.5 million aggregate principal amount of its Debentures. The
Company's wholly-owned subsidiary, Bell Sports, Inc. ("BSI"), consummated the
private placement of $110.0 million of its 11% Series A Senior Subordinated
Notes due August 15, 2008 (the "Series A 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 Series A Notes were subsequently exchanged
in a transaction that was registered under the Securities Act of 1933 for 11%
Series B Senior Subordinated Notes due August 15, 2008 issued by BSI (the
"Series B Notes"), which retain all of the attributes of the Series A Notes, but
which are publicly registered. BSI's obligations under the Series B Notes are
guaranteed on a senior subordinated basis by the Company.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company operates primarily in one line of business--the designing,
manufacturing, marketing and distributing of bicycle accessories and bicycle
helmets. The Company also manufactures and markets in-line skating,
snowboarding, snow skiing and water sport helmets. The Company's line of
business is divided into 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 meet
the aggregation criteria specified under SFAS 131. In 1999, the Company sold its
auto racing helmet business and entered into a long-term royalty-free licensing
agreement for auto racing helmets and automotive accessories to be marketed
under the Bell brand name.
(c) NARRATIVE DESCRIPTION OF BUSINESS
(i) Principal products, markets and distribution channels
The Company primarily manufactures, markets and distributes bicycle helmets
and accessories.
The Company sells its products primarily through the mass merchant and IBD
channels. The Company distributes its products to these retailers through
independent, commissioned representatives. The representatives are integral
to the Company's efforts to maintain excellent customer relationships. The
Company directs its representatives through an experienced in-house sales
team of national and regional sales managers and provides store-level
support with field merchandisers who visit select customers regularly to
assist them with merchandising, point-of-purchase signage and selling
techniques.
THE MASS MERCHANT CHANNEL. The Company markets a wide range of bicycle
accessories and bicycle helmets through the mass merchant channel,
including retailers such as Wal-Mart, K-Mart, Costco, Sears and Fred Meyer.
Bicycle helmets are marketed through the mass merchant channel under the
Bell brand name. Bicycle accessories are marketed through the mass merchant
channel under the Bell, Cycletech, Spoke-Hedz and Fisher Price(R) brand
names. Prior to fiscal 1996, the Bell brand of bicycle helmets was marketed
exclusively in the IBD trade channel.
THE IBD CHANNEL. The Company markets premium bicycle helmets and
accessories through the IBD channel, which includes bicycle chains,
independent bicycle shops, specialized sporting goods stores and mail order
catalogs. Bicycle helmets are marketed through the IBD channel under the
Bell Pro and Giro brand names. Bicycle accessories are marketed through the
IBD channel under the Blackburn, Rhode Gear, and VistaLite brand names.
The following is a discussion of each of the Company's international
operating divisions:
BELL SPORTS CANADA. The Bell Sports division in Canada ("Bell Sports
Canada"), located in Granby, Quebec, markets its products to the Canadian
IBD and mass merchant channels. Bell Sports Canada markets it products
primarily under the same brand names as those in the United States. In
addition, Bell Sports Canada distributes non-proprietary accessories in the
IBD channel through such companies as RockShox and Race Face. In August
1999, the Company announced plans to close the Canadian facility. Canadian
IBD and mass merchant customers will be serviced out of the US facilities
and the Calgary, Alberta distribution center.
BELL SPORTS EUROPE. Giro Ireland, Limited ("Giro Ireland"), headquartered
in Limerick, Ireland, assembles, markets and distributes bicycle helmets
across Europe under the Giro brand name. EuroBell S.A. ("EuroBell"),
located in Roche La Moliere, France, manufactures, markets and distributes
bicycle helmets and bicycle accessories to the IBD and mass merchant
channels throughout Europe. EuroBell markets its bicycle helmets in Europe
under the Bell, Bell Pro and Bike Star(TM) brand names and certain private
label arrangements, and its bicycle accessories under the Bell, Rhode Gear,
Blackburn and VistaLite brand names. In May 1999, the Company announced
plans to consolidate the assembly and distribution of Giro helmets into the
France facility. In addition, the Company has entered into an agreement to
sell its manufacturing facility in France. The sale is expected to be
completed by October 1999.
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BELL SPORTS AUSTRALIA. The Bell Sports division in Australia ("Bell Sports
Australia"), located in Sydney, Australia, began operating in November 1996
as a sales, marketing and distribution office servicing Australia, New
Zealand and the Pacific Rim. Prior to November 1996, the Company marketed
its products in Australia through third-party distributors. The division
markets bicycle helmets to the IBD and mass merchant channels under the
Bell, Bell Pro and Giro brand names and bicycle accessories under the Bell,
Rhode Gear, Blackburn and VistaLite brand names, in addition to certain
non-proprietary brands such as RockShox and Pearl Izumi. In July 1999, the
Company announced plans to close Bell Sports Australia and to continue to
service the Australian and New Zealand markets through third party
distributors.
(ii) Status of new products
The Company has ongoing research and development programs directed at
enhancing and extending its existing products and developing new products.
See "Research and Development Expenditures." The Company does not presently
have a new product or new industry segment that requires the investment of
a material amount of the total assets of the Company.
(iii) Sources and availability of raw materials
No single raw material accounts for a significant portion of the cost of
the Company's products. The Company's bicycle, snow skiing, snowboarding
and auto racing helmets contain plastic expandable polystyrene foam, which
is one of the primary materials used in the Company's helmets. In fiscal
1999, the Company purchased substantially all of its expandable polystyrene
from BASF and Polysource, two of several possible suppliers of this
material. During fiscal 1999, the Company sold the assets of its domestic
foam molding facility in Rantoul, Illinois. As a result of this
transaction, the Company no longer purchases a significant amount of raw
expandable polystyrene. The Company also entered into a foam molding
agreement with the purchaser of the assets of the Rantoul, Illinois foam
molding facility, pursuant to which the purchaser has agreed to provide the
Company with foam helmet liners and certain related components. Metal
tubing, readily available from many sources, is used extensively in the
manufacturing of bicycle carriers (shuttles) for automobiles. The Company
does not have any long-term supply contracts for the purchase of raw
materials. Some components and many finished good items, including bicycle
accessories, are manufactured for the Company by outside suppliers,
including suppliers in North America, Western Europe, Taiwan and China.
Although the Company believes there are sufficient alternative sources of
the raw materials it utilizes in the manufacture of its products, there can
be no assurance that the Company would find such alternative suppliers on a
timely basis and on terms favorable to the Company.
(iv) Patents, trademarks and licenses
In the course of its business, the Company employs various trademarks,
trade names and service marks, including its logos, in the packaging and
advertising of its products. The Company believes the strength of its
service marks, trademarks and trade names are of considerable value and
importance to its business and intends to continue to protect and promote
its marks as appropriate. The loss of any significant mark could have a
material adverse effect on the Company. The Company also licenses the Bell
trademark for use on certain motorcycle, snowmobile and police helmets
manufactured by third parties. In fiscal 1999, the Company sold its auto
racing helmet business and entered into a long-term royalty-free licensing
agreement for auto racing helmets and automotive accessories to be marketed
under the Bell brand name.
The Company is the owner of numerous federal trademark registrations and
applications filed with the United States Patent and Trademark Office.
These registrations constitute evidence of the validity of these marks and
the Company's exclusive right to use the marks on its products. The Company
may also be entitled to protection under the federal Trademark Act for the
Company's unregistered marks. Additionally, the Company owns numerous
foreign trademark registrations. The Company owns 65 United States patents
and 13 foreign patents. As of July 3, 1999, the Company had 9 United States
patents and 4 foreign patents pending issuance. None of the Company's
patents are believed to be material to the Company's financial condition or
results of operations.
Bell(C), Giro(C), Blackburn(C), Rhode Gear(C), VistaLite(C), Copper Canyon
Cycling(C), Spoke-Hedz(C) and Bike Star(TM) are registered trademarks of
the Company, BSI or its subsidiaries. Other brand names, trademarks,
servicemarks or tradenames referred to or incorporated by reference in this
Form 10-K are the names or marks of their respective owners.
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(v) Extent to which the business is seasonal
Bicycling is primarily a warm weather sport. Sales of the Company's
products reflect, in part, a seasonality of market demand. In fiscal 1999
and 1998, approximately 59% and 58%, respectively, of the Company's net
sales occurred during the six months ended July 3, 1999 and June 27, 1998,
respectively. The second quarter of the fiscal year is generally the
Company's slowest quarter. In addition, quarterly results may vary from
year to year due to the timing of new product introductions, major customer
shipments, inventory holdings of significant customers, adverse weather
conditions and the sales mix of products sold. Accordingly, comparisons of
quarterly information of the Company's results of operations may not be
indicative of the Company's ongoing performance.
(vi) Working capital items
The timing of the Company's preseason selling programs and spring selling
season may cause fluctuations in the levels of inventory and receivables
held by the Company from quarter to quarter. The Company supports sales of
its products through various seasonal promotions, which include extended
payment terms for independent bicycle dealers. Historically, inventories
and receivables are higher in the second half of the fiscal year as
compared to the first half.
(vii) Dependence on single customer
In fiscal 1999, 1998 and 1997, approximately 28%, 21% and 18%,
respectively, of the Company's net sales were to a single customer,
Wal-Mart. In addition, at the end of fiscal 1999 and 1998, 30% and 27% of
the Company's gross accounts receivable were attributed to Wal-Mart. In
fiscal 1999, the largest five customers of the Company were Wal-Mart,
K-Mart, Costco, The Sports Authority, and Canadian Tire and accounted for
45% of its net sales, and the largest ten customers accounted for 52% of
its net sales. The Company has no written agreement or other understanding
with Wal-Mart or any of its other customers that relates to future
purchases by such customers, and thus such purchases could be discontinued
at any time. A termination of or other adverse change in the Company's
relationship with, an adverse change in the financial condition of, or a
significant reduction in sales to, Wal-Mart or other large customers of the
Company, could have a material adverse effect on the Company. The write-off
of any significant receivable due from these customers could also adversely
impact the Company.
(viii) Backlog orders
Historically, there is a backlog of specialty retail orders from October to
December as a result of preseason orders placed after the fall trade shows.
The backlog of orders decreases over the winter months and is usually
insignificant by the end of the Company's third fiscal quarter. The mass
merchant trade channel does not operate with a large backlog. At the end of
each of fiscal years 1999, 1998, and 1997, the backlog was not significant.
(ix) Business subject to renegotiation
The Company does not currently engage in any business with governmental
authorities that may be subject to renegotiation of profits or termination
of contracts or subcontracts at the election of such authorities.
(x) Competitive conditions
The markets for bicycle helmets and accessories are highly competitive, and
the Company faces competition from a number of sources in each of its
product lines. Some competitors are part of large bicycle manufacturers and
may be better able to promote bicycle helmet and accessory sales through
bicycle sales programs. Competition is based on price, quality, customer
service, brand name recognition, product features and style. Although there
are no significant technological or manufacturing barriers to entering the
bicycle helmet and accessory businesses, factors such as brand recognition
and customer relationships may discourage new competitors from entering the
business. New competitors entered the bicycle helmet market in the
mid-1990s and pricing pressures increased significantly as a result of such
competition. There can be no assurance that additional competitors will not
enter the Company's existing markets, nor can there be any assurance that
the Company will be able to compete successfully against existing or new
competition.
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(xi) Research and development expenditures
The Company has an ongoing research and development program directed at
enhancing and expanding its existing products and developing new products.
The Company's bicycle helmet research and development staff primarily
focuses on developing technical product features which can improve helmet
aerodynamics, weight, comfort, durability, safety, fit, aesthetics and
style in an effort to broaden a helmet's consumer appeal. A separate staff
focuses on developing innovative and better performing bicycle accessories.
Research and development expenditures in fiscal 1999, 1998 and 1997 were
approximately $3.6 million, $3.6 million and $4.7 million, respectively.
(xii) Material effects of compliance with environmental regulations
The Company is subject to many federal, state and local requirements
relating to the protection of the environment, and the Company has made,
and will continue to make, expenditures to comply with such provisions. The
Company believes that its operations are in material compliance with these
laws and regulations and does not believe that future compliance with such
laws and regulations will have a material adverse effect on its results of
operations or financial condition. If environmental laws become more
stringent, the Company's environmental capital expenditures and costs for
environmental compliance could increase in the future. In addition, due to
the possibility of unanticipated factual or regulatory developments, the
amount and timing of future environmental expenditures could vary
substantially from those currently anticipated and could have a material
adverse effect on the Company.
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 1980s.
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.
(xiii) Number of employees
The Company employed approximately 961 persons at July 3, 1999. The Company
is a party to collective bargaining agreements at one facility, covering
approximately 36 employees. The Company's collective bargaining agreement
with the Retail, Wholesale and Department Store Union covers employees at
the Company's York, Pennsylvania facility and expires in December 2000.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The financial information required with respect to foreign and domestic
operations and export sales of the Company appears in Note 14 to the
Consolidated Financial Statements of the Company appearing on page 38 of
this Annual Report on Form 10-K.
ITEM 2. PROPERTIES
The following table sets forth a brief description of the properties of the
Company and its subsidiaries:
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Location General Description
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San Jose, CA Corporate headquarters and sales, marketing,
administration, research and development facility
of approximately 63,600 square feet
Rantoul, IL Administration, manufacturing, and distribution
facility of approximately 284,696 square feet on
34 acres
Santa Cruz, CA Giro sales, marketing, administration, and research
and development facility of approximately 50,500
square feet
Scottsdale, AZ Administration offices of approximately 1,600
square feet
York, PA Distribution center with approximately 300,000
square feet
Roche La Moliere, France Administrative, sales, manufacturing and distribution
facility of approximately 38,700 square feet on 2.9
acres
Limerick, Ireland Giro sales and administrative facility of
approximately 18,800 square feet
Granby, Quebec Sales, marketing, administration and distribution
facilities of approximately 136,000 square feet
Calgary, Alberta Distribution facility of approximately 14,000 square
feet
Sydney, Australia Sales, marketing, administration and distribution
facility of approximately 21,500 square feet
All locations are leased except for the York, Pennsylvania facility and the
Roche La Moliere facility, which is held under a lease-purchase arrangement. BSI
has executed an agreement pursuant to which the Roche La Moliere facility will
be sold. This transaction is expected to be completed in October 1999.
ITEM 3. LEGAL PROCEEDINGS
The philosophy of the Company is to defend vigorously all product liability
claims. Although the Company intends to continue to defend itself aggressively
against all claims asserted against it, current pending proceedings and any
future claims are subject to uncertainties attendant with litigation and the
ultimate outcome of such proceedings or claims cannot be predicted. Due to the
self insurance retention amounts in the Company's product insurance coverage,
the assertion against the Company of a large number of claims could have a
material adverse effect on the Company. In addition, the successful assertion
against the Company of any, or a combination of large, uninsured claims, or of
one or a combination of claims exceeding applicable insurance coverage, could
have a material adverse effect on the Company.
Due to certain deductibles, self-insured retention levels and aggregate coverage
amounts applicable under the Company's insurance policies, the Company may bear
responsibility for a significant portion, if not all, of the defense costs
(which include attorney's fees, settlement costs and the cost of satisfying
judgments) of any claim asserted against the Company or its subsidiaries. There
can be no assurance that the insurance coverage, if available, will be
sufficient to cover one or more large claims or that the applicable insurer will
be solvent at the time of any covered loss. Further, there can be no assurance
that the Company will be able to obtain insurance coverage at acceptable levels
and costs in the future.
The Company's current product liability insurance for bicycling and auto racing
products covers claims based on occurrences within the policy period up to a
maximum of $50.0 million in the aggregate in excess of the Company's
self-insured retention of $1.0 million per occurrence for bicycle and auto
racing helmets and in excess of the Company's self-insured retention of $250,000
for other bicycle-related products.
Insurance coverage for products manufactured by Giro, prior to its acquisition
by the Company in January 1996, includes self-insured retentions of $0.5 million
per occurrence and $1.5 million in the aggregate for all product claims, with
$55.0 million coverage in excess of the self-insured retention levels. The
Company maintains an active role in the management of all Giro related
litigation. Giro claims served after December 31, 1996 are insured under the
same coverage provided to the Company.
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From 1954 to 1991, the Company manufactured, marketed and sold motorcycle
helmets. The Company sold its motorcycle helmet manufacturing business in June
1991. Even though the purchaser assumed all responsibility for product liability
claims arising out of helmets manufactured prior to the date of the disposition,
the Company has paid certain costs associated with the defense of such claims
and 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 any claim, the
Company could be held responsible for the payment of such amount 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 such claims. The Company has licensed the Bell trademark to
the purchaser for use on motorcycle helmets. The Company believes that, by
virtue of its status as licensor and the fact that such motorcycle helmets carry
the Bell name, it is possible that the Company could be named as a defendant in
future actions involving liability for motorcycle helmets manufactured by the
purchaser of the Company's motorcycle helmet business.
In fiscal 1998, the Company secured a ten-year insurance policy from AIG and
Chubb, providing coverage for motorcycle helmets manufactured or licensed prior
to June 1991. The policy covers up to a maximum of $50.0 million in the
aggregate in excess of the Company's self-insured retention of $1.0 million per
occurrence, excluding all previous payments made on existing claims, in excess
of $2.0 million in the aggregate for known claims or $4.0 million in the
aggregate for incurred but not reported claims and new occurrences. The policy
covers all claims except the February 1996 and February 1998 judgments against
the Company.
From 1954 to 1999, the Company manufactured, marketed and sold auto racing
helmets. 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.
Due to the nature of the business of the Company, at any particular time the
Company may be a defendant in a number of product liability lawsuits for serious
personal injury or death allegedly related to the Company's products and, in
certain instances, products manufactured by others. Many such lawsuits against
the Company seek damages, including punitive damages, in substantial amounts.
During each of the last five fiscal years the Company has been served with
complaints in the following number of cases: 5 cases in fiscal 1995, 12 cases in
fiscal 1996, 15 cases in fiscal 1997, 14 cases in fiscal 1998, and 14 cases in
fiscal 1999. Of the 14 cases served in fiscal 1999, which includes Giro and AMRE
lawsuits, 1 involves bicycles, 5 involve bicycle accessories, 6 involve bicycle
helmets, and 2 involve motorcycle helmets. Of these same 14 cases, 2 cases
involve a claim relating to death, 3 involve claims relating to serious,
permanently disabling injuries, and 9 involve less serious injuries such as
fractures or lacerations. Typical product liability claims include allegations
of failure to warn, breach of express and implied warranties, design defects and
defects in the manufacturing process.
As of July 3, 1999, there were 38 lawsuits pending relating to injuries
allegedly suffered from products made or sold by the Company. Of the 38
lawsuits, 10 involve motorcycle helmets, 14 involve bicycle helmets, 1 involves
an auto racing helmet, 1 involves a bicycle pedal, 9 involve bicycles and 3
involve bicycle accessories.
7 of the 38 lawsuits pending against the Company as of July 3, 1999 are
scheduled for trial prior to December 31, 1999. Of the 7 lawsuits scheduled for
trial prior to December 31, 1999, 4 involve bicycle helmet claims. The bicycle
helmet claims include allegations of failure to warn and design defects.
In February 1996, a Toronto, Canada jury returned a verdict against Bell Sports
based on injuries arising out of a 1986 motorcycle accident. The jury found that
Bell Sports 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 Bell Sports would be
responsible and the legal fees associated therewith are estimated to be between
$3.5 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 motorcycling 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 motorcycling 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 $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.
8
<PAGE>
Based on management's extensive consultation with legal counsel prosecuting the
appeals, the Company has established product liability reserves totaling $13.8
million, of which $4.8 million is classified as current. 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.
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.
Other than 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.
See Item 1.(c)(xii) "Material effects of compliance with environmental
regulations" for information relating to a De Minimis Notice Letter and
Settlement Offer from USEPA.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1999.
9
<PAGE>
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Prior to the consummation of the Bell Merger, the Company's common stock was
traded on The Nasdaq National Market under the symbol "BSPT." Shares of the
Company's common stock outstanding at the time of the Bell Merger were converted
into the right to receive $10.25 per share in cash. Currently, there is no
established trading market for any class of the Company's common stock. As of
September 15, 1999 there were 38 holders of record of the Company's Class A
Common Stock, 39 holders of record of the Company's Class B Common Stock and 14
holders of record of the Company's Class C Common Stock.
The Company currently intends to retain future earnings for use in its business,
and therefore, does not anticipate paying any dividends in the foreseeable
future.
During the period covered by this report, the Company sold an aggregate of
13,575 shares of Class A Common Stock, 128,200 shares of Class B Common Stock
and 56,000 shares of Class C Common Stock to certain of its employees pursuant
to the terms of the Company's Investment and Incentive Plan and Class C
Investment and Incentive Plan in transactions exempt from registration under the
Securities Act pursuant to Rule 506 under the Securities Act. The aggregate
price for these shares was $88,461.
On February 1, 1999, the Company issued 16,921 shares of Class A Common Stock to
Mary George, Chief Executive Officer of the Company, at a purchase price of
$0.44 per share upon exercise of an option. The issuance of the shares was
exempt from registration under the Securities Act pursuant to Section 4(2) of
the Securities Act.
On March 12, 1999, the Company issued 23,781 shares of Series A Preferred Stock
and 19,597 shares of Class A Common Stock to Brentwood Associates Buyout Fund
II, L.P., 23,759 shares of Series A Preferred Stock and 19,579 shares of Class A
Common Stock to Charlesbank Bell Sports Holdings, L.P., and 22 shares of Series
A Preferred Stock and 18 shares of Class A Common Stock to Charlesbank
Coinvestment Partners, L.L.C., in exchange for indebtedness of the Company held
by them with an accreted value of $2.4 million. The issuance of the shares was
exempt from registration under the Securities Act pursuant to Section 3(a)(9) of
the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below has been derived from the audited
consolidated financial statements of the Company. The following selected
financial data should be read in conjunction with the Company's consolidated
financial statements and related notes included elsewhere in this report.
<TABLE>
<CAPTION>
(in thousands)
Fiscal Years Ended
------------------------------------------------------------
July 3, June 27, June 28, June 29, July 1,
1999 (1) 1998 (2) 1997 (3) 1996 (4) 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS DATA:
Net sales $ 210,909 $ 207,236 $ 259,534 $ 262,340 $ 102,990
Net income (loss) (26,237) 8,578 (18,188) (12,375) (3,443)
BALANCE SHEET DATA:
Working capital $ 74,729 $ 130,437 $ 130,677 $ 149,474 $ 108,821
Total assets 218,934 247,067 268,754 298,635 186,434
Total debt, less current portion 148,270 87,705 107,688 124,500 89,833
Total stockholders' equity 6,465 128,259 118,965 136,041 75,816
</TABLE>
(1) Results for fiscal 1999 include one-time charges of $13.1 million for the
Bell Merger, $9.0 million for restructuring, $5.3 million for asset
write-offs, and $14.8 million for product liability and other one-time
charges.
(2) Results for fiscal 1998 include one-time restructuring charges of $1.2
million and a net loss on disposal of product lines and sale of assets of
$700,000.
(3) Results for fiscal 1997 include a pre-tax loss on disposal of product line
of $25.4 million related to the sale of the Service Cycle/Mongoose business
and $4.1 million related to one-time restructuring charges.
10
<PAGE>
(4) Results for fiscal 1996 include an inventory write-up of $14.1 million
related to the AMRE Merger (as defined) and the acquisitions of SportRack
and Giro, which was fully charged against cost of sales and $5.9 million
related to one-time restructuring charges.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF THE COMPANY'S FINANCIAL CONDITION
AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
FINANCIAL STATEMENTS, AND THE RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS
ANNUAL REPORT ON FORM 10-K. CERTAIN STATEMENTS IN "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" CONSTITUTE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE LITIGATION REFORM ACT.
OVERVIEW
Bell Sports is the leading manufacturer and marketer of bicycle helmets
worldwide and a leading supplier of a broad line of bicycle accessories in North
America. The Company is also a supplier of bicycle accessories worldwide. Over
its 45-year history, the Company has developed a reputation for innovation,
design, quality and safety. Since its founding, the Company has engaged in the
manufacture and sale of bicycle helmets, bicycle accessories, auto racing
helmets and motorcycle helmets. In 1991, the Company elected to refocus its
operations on the growing bicycle helmet and accessory business by divesting its
motorcycle helmet business. Under the terms of the agreement providing for the
sale of the motorcycle helmet business, the Company entered into a long-term
licensing agreement under which the Company agreed to license the Bell brand
name to the purchaser for use on motorcycle helmets. In 1999, the Company sold
its auto racing helmet business and entered into a long-term royalty-free
licensing agreement for auto racing helmets and automotive accessories to be
marketed under the Bell brand name.
Throughout the 1980s and 1990s, the Company strengthened its position in the
bicycle helmet and accessory markets through a series of strategic acquisitions,
including: (i) Rhode Gear, a designer and marketer of certain premium bicycle
accessories, in November 1989; (ii) Blackburn, a designer and marketer of
certain premium bicycle accessories, in November 1992; (iii) VistaLite, a
designer and manufacturer of premium LED safety lights and headlights for
bicycles, in January 1994; (iv) SportRack, a designer, manufacturer and marketer
of automobile roof rack systems, in May 1995; (v) American Recreation Company
Holdings, Inc. ("AMRE"), a leading designer, marketer and distributor of bicycle
helmets and accessories and marketer of a line of bicycles under the Mongoose
brand, in July 1995; and (vi) Giro, a leading designer, manufacturer and
marketer of premium bicycle helmets, in January 1996. Through the acquisitions
of Rhode Gear, Blackburn, VistaLite and AMRE, the Company became one of the
leading marketers and distributors of bicycle accessories in North America. In
addition, the acquisition of Giro enhanced the Company's market position in the
premium bicycle helmet market segment. Each of the acquisitions described above
were accounted for under the purchase method of accounting, and accordingly, the
Company's results of operations include the operations of the acquired
businesses since their respective dates of acquisition. The Company has also
expanded its international presence throughout the 1990s. In 1991, the Company
entered the European market by opening a bicycle helmet manufacturing facility
in France. In fiscal 1997, the Company continued its international expansion
with the opening of a sales, marketing and distribution office in Australia to
service the Australian, New Zealand and Pacific Rim markets.
The domestic bicycle helmet market experienced significant growth in unit sales
during the early 1990s principally due to (i) increased safety awareness among
consumers and the adoption of mandatory bicycle helmet legislation by several
large states, including California and New York, and (ii) the popularity of
bicycling, including speciality segments such as mountain biking. The
convergence of these trends led to a significant increase in shelf space,
particularly in the mass merchant channel, dedicated to bicycle helmets. As a
result, several small helmet manufacturers entered the domestic bicycle helmet
market in the early 1990s. In 1995 and 1996, as the increase in demand aided by
new mandatory bicycle helmet legislation subsided, mass merchants reduced shelf
space dedicated to the segment, driving down price points industry-wide. As a
result, the Company reduced prices in an effort to maintain market share, and
believes that this strategic decision proved successful as it effectively
responded to new competitors and enabled Bell Sports to maintain its leading
market position. However, this price pressure significantly reduced the
Company's margins and profitability during this period. The Company believes
that domestic bicycle helmet demand has stabilized.
In fiscal 1996 and 1997, the Company refocused on the profitability of its core
businesses through the divestiture of non-strategic and low margin businesses,
elimination of duplicative overhead and reduction of distribution and
11
<PAGE>
manufacturing costs. As a result, management initiated the following changes:
(i) the April 1997 divestiture of Service Cycle/Mongoose, a designer, marketer
and distributor of bicycles and certain non-proprietary bicycle parts and
accessories; (ii) the divestiture of SportRack in July 1997; (iii) the
consolidation of its corporate headquarters into its San Jose, California
facility; (iv) the closure of the Memphis, Tennessee distribution facility by
consolidating operations into the Company's other existing distribution
facilities; and (v) the installation of a new computer system in the warehouses
and mass merchant operations to improve operational efficiency and customer
service. In fiscal 1999, the Company announced and began to implement a
restructuring plan to consolidate manufacturing operations and improve overall
Company efficiency. As a part of this plan, the Company: (i) consolidated the
Giro and Canada assembly and distribution facilities into the existing Rantoul,
Illinois facility; (ii) sold its auto racing helmet business; (iii) announced
the closure of its Australia sales and marketing operations together with its
decision to service the Australia market with a local distributor; (iv)
consolidated the Ireland assembly and distribution facilities into the existing
France facility; and (v) entered into an agreement to sell the European
manufacturing facility. Unless otherwise noted, the Company's results of
operations include the operations of the divested businesses until the date of
sale.
GENERAL
Net sales, as calculated by the Company, are determined by subtracting estimated
returns, discounts, allowances and net freight charges from gross sales. The
Company's cost of sales and its resulting gross margin (defined as gross profit
as a percentage of net sales) are principally determined by the cost of raw
materials, the cost of labor to manufacture its products, the overhead expenses
of its manufacturing facilities, the cost of sourced products, warehouse costs,
freight expenses, royalties and obsolescence expenses. Selling, general and
administrative costs consist primarily of sales and marketing expenses, research
and development costs and administrative costs. Sales and marketing expenses
generally vary with sales volume while administrative costs are relatively fixed
in nature.
As of July 3, 1999, the Company had domestic net operating losses of
approximately $33.0 million, which will be carried forward and begin to expire
in 2008. As a result of the Bell Merger, there will be an annual limitation of
the loss carryforward which may delay or limit the eventual utilization of the
carryforwards. The consolidated return rules limit utilization of acquired net
operating loss and other carryforwards to income of the acquired companies in
years in which the consolidated group has taxable income.
RESTRUCTURING CHARGES, ASSET WRITE-OFFS AND OTHER COSTS
RESTRUCTURING CHARGES, ASSET WRITE-OFFS AND OTHER COSTS - 1999
In an effort to remain competitive in an increasingly competitive marketplace,
the Company announced a plan to restructure its worldwide operations, leaving it
in a better position to focus on sales, marketing, distribution, and product
innovation, while operating under a significantly lower cost structure.
The plan is set up with three main prongs: 1) consolidation of manufacturing
facilities, 2) streamlining of administrative overhead, and 3) divestiture of
the auto racing division and the closure of the Australian sales and marketing
office. Costs associated with the plan are included in the consolidated
statement of operations as restructuring charges, asset write-offs and other
costs.
CONSOLIDATION OF MANUFACTURING FACILITIES. At the beginning of fiscal 1999, the
Company owned and operated five manufacturing facilities around the world. In an
effort to reduce duplicative expenses and increase efficiency, the Company has
closed its Santa Cruz, California, Canada and Ireland manufacturing facilities.
In addition, the Company has entered into an agreement to sell its manufacturing
facility in France. The sale is expected to be completed by October 1999. This
will leave the Company with one manufacturing facility in Rantoul, Illinois.
In the fourth quarter of fiscal 1999, the Company recorded $6,634,000 in
restructuring costs, $4,784,000 in asset write-offs, and $1,026,000 in other
costs associated with the consolidation of the manufacturing facilities. The
restructuring costs are based on estimates of employee severance costs, lease
obligations and legal fees. The restructuring costs include $1,968,000 of
severance related costs for 206 employees from all areas of responsibility. Of
these 206 employees, 173 had been terminated and paid a total of $460,000 as of
July 3, 1999. The remaining 33 employees have been notified of their pending
termination. The asset write-offs include $3,121,000 of property, plant, and
equipment and $1,663,000 of inventory. The assets were written down to net
realizable value, based on an estimate of what an independent third party would
pay for the assets. Other costs include one-time charges such as the repayment
of a grant to the Irish government, transferring of inventory to Rantoul and
other miscellaneous expenses.
12
<PAGE>
STREAMLINING OF OVERHEAD. In order for the Company to remain competitive, it has
consolidated its product design and test labs into one global facility and
eliminated administrative positions which were considered duplicative or
excessive. In the fourth quarter, the Company recorded $2,005,000 of
restructuring costs, $69,000 of asset write-offs, and $941,000 of other costs
relating to this streamlining effort. The restructuring costs are based on
estimates of employee severance costs, lease obligations and legal fees, and
include $800,000 of severance related costs for 59 employees from all areas of
responsibility, all of whom had been terminated as of July 3, 1999. A total of
$319,000 in severance had been paid as of July 3, 1999. The asset write-offs
relate to the write-off of property, plant and equipment rendered unnecessary
due to the reduced headcount and consolidated test labs. Other costs include
miscellaneous one-time expenses.
SALE OF AUTO RACING AND CLOSURE OF AUSTRALIA. In order to remain focused on the
Company's core business of bicycle helmets and accessories, the Company has sold
its auto racing helmet business, in exchange for an equity position in the
purchaser. In addition, the Company has announced the closure of its Australian
sales and marketing office. The Company will continue to service the Australian
market through a local distributor. In the fourth quarter of fiscal 1999, the
Company recorded $331,000 in restructuring costs, $413,000 in asset write-offs,
and $325,000 in other costs associated with these moves. The restructuring costs
are based on estimates of employee severance costs, lease obligations and legal
fees. The restructuring costs include $141,000 of severance related costs for 26
employees from all areas of responsibility, all of whom were notified of their
pending termination. No severance-related costs had been paid as of July 3,
1999. The asset write-offs include $170,000 of property, plant, and equipment
and $243,000 of inventory and other assets. The assets were written down to net
realizable value, based on an estimate of what an independent third party would
pay for the assets. Other costs include miscellaneous, one-time expenses related
to the sale of the auto racing helmet business.
The following table summarizes the classification in the Consolidated Statement
of Operations of the charges relating to the restructuring program and other
actions (in thousands):
Restructuring charges:
Manufacturing consolidation $ 6,634
Overhead reduction 2,005
Sale of auto racing and Australia 331
--------
8,970
--------
Asset write-offs:
Manufacturing consolidation 4,784
Overhead reduction 69
Sale of auto racing and Australia 413
--------
5,266
--------
Other costs:
Manufacturing consolidation 1,026
Overhead reduction 941
Sale of auto racing 325
--------
2,292
--------
$ 16,528
========
The following table sets forth the details of activity during fiscal 1999 for
restructuring charges, asset write-offs and other costs and related accrued
expenses (in thousands):
<TABLE>
<CAPTION>
June 27, Cash Non-Cash July 3,
1998 Charges Payments Charges 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Restructuring accruals:
Manufacturing consolidation $ -- $ 12,444 $ (3,342) $ -- $ 9,102
Overhead reductions -- 3,015 (791) -- 2,224
Sale of auto racing and Australia -- 1,069 (281) -- 788
Restructuring accruals from prior years 1,490 -- (956) (41) 493
-------- -------- -------- -------- --------
$ 1,490 $ 16,528 $ (5,370) $ (41) $ 12,607
======== ======== ======== ======== ========
</TABLE>
13
<PAGE>
RESTRUCTURING CHARGES - 1998
During fiscal 1998, the Company formed and approved a plan to restructure its
European operations. In connection with this plan, the Company closed its Paris,
France, sales and marketing office in December 1997, and consolidated these
functions with its Roche La Moliere, France, facility. The key management
positions of Giro Ireland and EuroBell were also consolidated. Included in the
fiscal 1998 pre-tax income are $1.2 million of estimated restructuring charges
related to this plan, including facility closing costs and severance benefits.
The following table sets forth the details of activity during fiscal 1998 for
restructuring charges and related accrued expenses (in thousands):
<TABLE>
<CAPTION>
June 28, Restructuring Cash Non-cash June 27,
1997 Charges Payments Charges 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Restructuring accruals:
Lease payments and other facility expenses $ -- $ 191 $ (60) $ -- $ 131
Severance and other employee-related costs -- 820 (573) (198) 49
Asset write-downs -- 181 (140) -- 41
Restructuring accruals from previous years 3,777 -- (2,598) 90 1,269
------- ------- ------- ------- -------
$ 3,777 $ 1,192 $(3,371) $ (108) $ 1,490
======= ======= ======= ======= =======
</TABLE>
RESTRUCTURING CHARGES - 1997
During fiscal 1997, the Company announced plans to significantly downsize the
Scottsdale, Arizona corporate office by consolidating certain Scottsdale
functions with the San Jose, California office. Included in the fiscal 1997
pre-tax loss are $2.7 million of restructuring charges related to this plan.
On June 27, 1995, the Company's stockholders approved the issuance of Common
Stock in connection with the Agreement and Plan of Merger dated February 15,
1995 among the Company, Bell Merger Co., a wholly owned subsidiary of the
Company, and AMRE. In contemplation of the merger, the Company formulated a
program (the "Program") to consolidate and integrate the operations of Bell,
SportRack and AMRE, as well as combine certain product lines. The Program called
for the consolidation of certain sales and marketing, research and development,
manufacturing, finance and management information systems functions. In fiscal
1997, $1.4 million of restructuring charges relating to the Program were
recorded, including facility closing costs, severance and other employee related
costs.
The following table sets forth the details of activity during fiscal 1997 for
restructuring charges and related accrued expenses (in thousands):
<TABLE>
<CAPTION>
June 29, Restructuring Cash June 28,
1996 Charges Payments 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Restructuring accruals:
Lease payments and other facility expenses $ -- $ 983 $ (614) $ 369
Severance and other employee-related costs -- 3,158 (1,741) 1,417
Restructuring accruals from previous years 5,157 -- (3,166) 1,991
------- ------- ------- -------
$ 5,157 $ 4,141 $(5,521) $ 3,777
======= ======= ======= =======
</TABLE>
COMPARISON OF THE FISCAL YEAR ENDED JULY 3, 1999 WITH THE FISCAL YEAR ENDED JUNE
27, 1998
NET SALES. Net sales for fiscal 1999 increased 2% to $210.9 million in fiscal
1999 from $207.2 million in fiscal 1998. A strong increase in domestic mass
merchant sales and flat sales in the domestic IBD market were offset by
decreases in international sales.
For fiscal 1999, bicycle accessories, bicycle helmets and auto racing helmets
represented approximately 54%, 44% and 2%, respectively, of the Company's net
sales. For fiscal 1998, bicycle accessories, bicycle helmets and auto racing
helmets represented approximately 52%, 46% and 2%, respectively, of the
Company's net sales, excluding the results of the divested businesses.
GROSS MARGIN. Gross margin decreased to 33% of net sales in fiscal 1999 from 34%
of net sales in fiscal 1998. Consistent with the sales trend discussed
previously, an increase in domestic mass merchant margins and flat domestic IBD
margins were offset by decreased margins from international operations.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative costs
were 23% of net sales in both fiscal 1999 and 1998.
14
<PAGE>
AMORTIZATION OF INTANGIBLES. Amortization of goodwill and intangible assets
decreased slightly to $2.1 million in fiscal 1999 from $2.3 million in fiscal
1998 as a result of certain intangibles becoming fully amortized.
TRANSACTION COSTS. During fiscal 1999, in association with the Bell Merger, the
Company recorded one-time transaction costs of $13.1 million.
PRODUCT LIABILITY COSTS. Due to the nature of the Company's business, at any
particular time it may be a defendant in a number of product liability lawsuits
for serious personal injury or death allegedly related to the Company's products
and, in certain instances, products manufactured by others. Many such lawsuits
against the Company seek damages, including punitive damages, in substantial
amounts. The Company's philosophy, both in prior fiscal years and in the current
fiscal year, is to defend vigorously all product liability claims. Based on the
Company's successful history in defending against such claims, the Company, in
prior years, had accrued only for the costs associated with defending
outstanding cases.
However, in fiscal 1999, after extensive consultations with legal counsel
prosecuting the appeals, the Company determined that it was necessary to accrue
for those cases in which a judgment has been entered against the Company,
although the Company will continue to vigorously defend these claims.
Accordingly, during fiscal 1999, the Company recorded $12.5 million in product
liability costs as a reserve against outstanding judgments against the Company.
LOSS ON DISPOSAL OF PRODUCT LINES AND SALE OF ASSETS. During fiscal 1998, the
Company negotiated a letter of intent to sell the assets of its domestic foam
molding facility in Rantoul, Illinois, and agreed to sublet the building housing
the foam molding facility to the purchaser. The Company completed the asset sale
and entered into a foam molding supply agreement with the purchaser in fiscal
1999. The Company recorded fiscal 1998 charges of approximately $2.6 million,
including a $2.0 million charge related to the divestiture of SportRack, and
approximately a $0.6 million charge associated with the sale and related
reorganization of the Company's domestic foam molding facility. During fiscal
1998, the Company reversed previously recorded charges of $1.9 million,
including a $0.6 million benefit based on the finalization of costs associated
with the closure of distribution facilities, and a $1.3 million benefit related
to the reversal of the remaining reserve for uncollectible receivables
established in fiscal 1997 in connection with the divestiture of Service
Cycle/Mongoose.
NET INVESTMENT INCOME AND INTEREST EXPENSE. Net investment income decreased to
$1.1 million in fiscal 1999 from $1.7 million in fiscal 1998. The decrease was
due to the repurchase of shares under the Bell Merger which resulted in lower
cash balances to invest. Interest expense increased $11.1 million from $4.7
million in fiscal 1998 to $15.8 million in fiscal 1999. The increase is due to
the increased debt issued in connection with the Bell 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.
INCOME TAXES. An income tax benefit of $7.6 million or 23% of the pre-tax loss
was reported for fiscal 1999, compared to an income tax provision of $5.3
million or 38% of the pre-tax income, reported for fiscal 1998. The variance in
rates between the two years is due to the non-deductibility of certain one-time
charges.
COMPARISON OF THE FISCAL YEAR ENDED JUNE 27, 1998 WITH THE FISCAL YEAR ENDED
JUNE 28, 1997
The Company believes its results of operations in fiscal 1998 are not comparable
to those of fiscal 1997 due to the inclusion of results of operations in fiscal
1997 of Service Cycle/Mongoose and SportRack, which were divested in April 1997
and July 1997, respectively. For ease of comparison to fiscal 1998, which does
not include the results of the divested businesses, the Company has included
adjusted information which excludes the divested businesses from the net sales
and gross margin data for fiscal 1997.
NET SALES. Net sales decreased 20% to $207.2 million in fiscal 1998 from $259.5
million in fiscal 1997 primarily as a result of the divestiture of Service
Cycle/Mongoose and SportRack. Excluding the results of the divested businesses,
which combined contributed $50.7 million in net sales in fiscal 1997, net sales
decreased $1.6 million or 1% to $207.2 million in fiscal 1998 from $208.8
million in fiscal 1997. The decrease resulted from lower bicycle accessory
shipments due to a reduction in the number of days of inventory carried by a
major mass merchant, the elimination of certain lower margin products from the
15
<PAGE>
Company's sales mix and a decrease in the prices of certain helmets sold in the
mass merchant channel. The decrease was largely offset by strong international
sales growth and continued strength in the IBD helmet market.
For fiscal 1998, bicycle accessories, bicycle helmets and auto racing helmets
represented approximately 52%, 46% and 2%, respectively, of the Company's net
sales. For fiscal 1997, bicycle accessories, bicycle helmets and auto racing
helmets represented approximately 54%, 44% and 2%, respectively, of the
Company's net sales, excluding the results of the divested businesses.
GROSS MARGIN. Gross margin increased to 34% of net sales in fiscal 1998 from 30%
of net sales in fiscal 1997, on an actual basis, and from 32% of net sales on an
adjusted basis, excluding the results of the divested businesses. Excluding the
results of Service Cycle/Mongoose and SportRack, which had lower gross margins
than the Company's other product lines, the increase was primarily attributable
to the elimination of certain lower margin products from the Company's sales
mix, the introduction of Bell-branded bicycle accessories into the mass merchant
channel in December 1997, lower distribution costs due to the closure of the
Company's Memphis, Tennessee distribution facility in November 1997,
improvements in manufacturing efficiencies and a reduction in manufacturing
overhead costs. Despite the decrease in the prices of certain helmets sold in
the mass merchant channel, the Company was able to increase its gross margin in
that channel by over one percentage point, which was primarily attributable to
the Company's cost reduction initiatives.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative costs
were 23% of net sales in both fiscal 1998 and 1997. Selling, general and
administrative costs decreased by $11.9 million to $48.5 million in fiscal 1998
from $60.4 million in fiscal 1997. The decrease was primarily attributable to
continued cost savings produced by the Company's cost reduction initiatives and
the divestiture of Service Cycle/Mongoose and SportRack.
AMORTIZATION OF INTANGIBLES. Amortization of goodwill and intangible assets
decreased to $2.3 million in fiscal 1998 from $3.3 million in fiscal 1997. The
decrease was a result of a write-off of intangible assets relating to the
divestiture Service Cycle/Mongoose and SportRack.
LOSS ON DISPOSAL OF PRODUCT LINES AND SALE OF ASSETS. During fiscal 1998, the
Company negotiated a letter of intent to sell the assets of its domestic foam
molding facility in Rantoul, Illinois, and agreed to sublet the building housing
the foam molding facility to the purchaser. The Company subsequently entered
into a foam molding supply agreement with the purchaser. The Company recorded
fiscal 1998 charges of approximately $2.6 million, including a $2.0 million
charge related to the divestiture of SportRack, and approximately a $0.6 million
charge associated with the sale and related reorganization of the Company's
domestic foam molding facility. During fiscal 1998, the Company reversed
previously recorded charges of $1.9 million, including a $0.6 million benefit
based on the finalization of costs associated with the closure of distribution
facilities, and a $1.3 million benefit related to the reversal of the remaining
reserve for uncollectible receivables established in fiscal 1997 in connection
with the divestiture of Service Cycle/Mongoose.
In April 1997, the Company completed the sale of its Service Cycle/Mongoose
inventory, trademarks and certain other assets to Brunswick Corporation. In
connection with the divestiture of Service Cycle/Mongoose, the Company recorded
a loss on disposal of product lines of $25.4 million, comprised of the write-off
of goodwill and intangibles ($14.8 million), disposal and exit costs ($5.4
million) and reorganization costs associated with the distribution network and
operations ($5.2 million).
NET INVESTMENT INCOME AND INTEREST EXPENSE. Net investment income decreased to
$1.7 million in fiscal 1998 from $2.9 million in fiscal 1997. The decrease was
due to the settlement of an arbitration case related to the handling of certain
marketable securities by an outside investment advisor during fiscal 1997. The
settlement proceeds, net of related expenses and losses to sell certain
securities, were $1.3 million. Interest expense decreased to $4.7 million in
fiscal 1998 from $7.3 million in fiscal 1997 as a result of lower average debt
balances outstanding.
INCOME TAXES. An income tax provision of $5.3 million or 38% of the pre-tax
income was reported for fiscal 1998, compared to an income tax benefit of $3.0
million or 14% of the pre-tax loss, reported for fiscal 1997. A majority of the
difference in the effective tax rates was due to the write-off of non-tax
deductible goodwill in connection with the divestiture of Service
Cycle/Mongoose.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its operations, capital expenditures and
working capital requirements from internal cash flow from operations and
borrowings. The Company's working capital decreased to $74.7 million at July 3,
1999 from $130.4 million at June 27, 1998, due mainly to the significant amount
of cash used in the Bell Merger. Cash used in operating activities for fiscal
1999 was $4.3 million as compared to fiscal 1998, when cash provided by
operating activities was $27.5 million. The significant variance is due
primarily to the expenses incurred as a result of the Bell Merger and the
restructuring plans.
The Company's capital expenditures were $4.1 million, $5.5 million and $7.1
million in fiscal 1999, 1998 and 1997, respectively. These amounts primarily
reflect cash outlays for maintaining and upgrading the Company's manufacturing
facilities and equipment including new product tooling and computer systems.
Management estimates that the Company will continue to spend approximately $3.0
million to $4.0 million annually for product tooling and to maintain and upgrade
its facilities and equipment.
In fiscal 1999, in connection with the Bell Merger, the Company used $143.1
million to repurchase its common stock and $57.7 million to retire a portion of
the Debentures. This was partially offset by the net proceeds from the sale of
the Series A Notes of $105.1 million, the net proceeds from the issuance of its
preferred stock of $45.4 million, and the net proceeds from the sale of the
Discount Notes of $15.0 million. The remaining $23.8 million of the Debentures
become due in November 2000.
In August 1998, the Company and its wholly-owned subsidiary, BSI, 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"). BSI's obligations under the Credit Agreement are secured by (a)
substantially all of the tangible and intangible assets of BSI and each
Guarantor, (b) the capital stock of BSI and each Subsidiary Guarantor and (c)
65% of the capital stock of certain foreign subsidiaries of the Company.
The Credit Agreement also contains certain financial covenants, including a
maximum leverage ratio, a minimum fixed charge coverage ratio and a minimum cash
interest coverage ratio. It also contains covenants which restrict the ability
of the Company to pay dividends, incur liens, issue certain types of debt or
equity, engage in mergers, acquisitions or asset sales, or to make capital
expenditures. At July 3, 1999, the Company was in compliance with or had
obtained waivers for all bank covenants.
The Credit Agreement expires in August 2003. As of July 3, 1999, outstanding
borrowings under the Credit Agreement totaled $10.0 million. Based on the
provisions of the Credit Agreement, the Company could have borrowed a maximum of
$59.6 million.
Management believes that cash flow from operations and borrowing availability
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's ability to fund its operations and make planned capital expenditures,
to make scheduled debt payments, to refinance indebtedness and to remain in
compliance with all of the financial covenants under its debt agreements depends
on its future operating performance and cash flow, which in turn are subject to
prevailing economic conditions and to financial, business and other factors,
some of which are beyond the Company's control. In addition, a termination of,
or other adverse change in the Company's relationship with, an adverse change in
the financial condition of, or a significant reduction in sales to Wal-Mart,
which represented approximately 28% of the Company's net sales in fiscal 1999,
could have a material adverse effect on the Company's liquidity and results of
operations.
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.
17
<PAGE>
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, 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 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 July 3, 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
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 July 3, 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of July 3, 1999, the Company maintained a portion of its cash and cash
equivalents in financial instruments with original maturities of three months or
less. These financial instruments are subject to interest rate risk, and will
decline in value if interest rates increase. Due to the short duration of these
financial instruments, an immediate 10 percent increase in interest rates would
not have a material effect on the Company's financial condition.
The Company's outstanding long-term debt at July 3, 1999 bears interest at fixed
rates; therefore, the Company's results of operations would only be affected by
interest rate changes to the extent that variable rate short-term notes payable
are outstanding. Due to the short-term nature and insignificant amount of the
Company's notes payable, an immediate 10 percent change in interest rates would
not have a material effect on the Company's results of operations over the next
fiscal year.
18
<PAGE>
In the past, the Company has periodically entered into forward foreign exchange
contracts in managing its foreign currency risk. The Company has no significant
outstanding foreign exchange contracts at July 3, 1999, and had no significant
foreign exchange contract activity during fiscal 1999.
19
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Bell Sports Corp.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Bell Sports
Corp. and its subsidiaries at July 3, 1999 and June 27, 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended July 3, 1999, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
San Francisco, California
September 8, 1999
20
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
July 3, June 27,
1999 1998
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 8,875 $ 45,093
Accounts receivable 58,634 63,472
Inventories 43,664 39,679
Deferred taxes 11,366 8,970
Other current assets 6,134 3,264
--------- ---------
Total current assets 128,673 160,478
Property, plant and equipment 16,162 20,636
Long-term deferred taxes 12,500 9,500
Goodwill 52,429 54,292
Intangibles and other assets 9,170 2,161
--------- ---------
Total assets $ 218,934 $ 247,067
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,249 $ 7,663
Accrued compensation and employee benefits 2,580 5,541
Accrued expenses 31,682 16,158
Notes payable and current maturities of long-term debt
and capital lease obligations 10,433 679
--------- ---------
Total current liabilities 53,944 30,041
Long-term debt, less current maturities 148,270 86,625
Capital lease obligations, less current maturities,
and other liabilities 10,255 2,142
--------- ---------
Total liabilities 212,469 118,808
--------- ---------
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 July 3, 1999 10 --
Preferred stock; $.01 par value; authorized
1,000,000 shares, none issued and outstanding
at June 27, 1998 -- --
Class A Common Stock; $.01 par value; authorized
900,000 shares, 870,661 shares issued and
outstanding at July 3, 1999 9 --
Class B Common Stock; $.01 par value; authorized
150,000 shares, 128,200 shares issued and
outstanding at July 3, 1999 1 --
Class C Common Stock; $.01 par value; authorized
56,500 shares, 56,000 shares issued and
outstanding at July 3, 1999 1 --
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 53,210 143,905
Accumulated other comprehensive income (loss) (1,925) (1,111)
Accumulated deficit (44,841) (9,461)
--------- ---------
6,465 133,477
Treasury stock, at cost, none at July 3, 1999
and 495,072 shares at June 27, 1998 -- (5,218)
--------- ---------
Total stockholders' equity 6,465 128,259
--------- ---------
Total liabilities and stockholders' equity $ 218,934 $ 247,067
========= =========
See accompanying notes to these consolidated financial statements.
21
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
Fiscal years ended
-----------------------------------
July 3, June 27, June 28,
1999 1998 1997
--------- --------- ---------
Net sales $ 210,909 $ 207,236 $ 259,534
Cost of sales 140,673 137,672 183,098
--------- --------- ---------
Gross profit 70,236 69,564 76,436
--------- --------- ---------
Selling, general and
administrative expenses 48,338 48,562 60,574
Foreign exchange (gain) loss 1,734 (45) (158)
Amortization of goodwill and
intangible assets 2,117 2,260 3,320
Transaction costs 13,100 -- --
Product liability costs 12,500 -- --
Restructuring charges 8,970 1,192 4,141
Asset write-offs 5,266 -- --
Other costs 2,292 -- --
Loss on disposal of product lines
and sale of assets -- 700 25,360
--------- --------- ---------
Operating expenses 94,317 52,669 93,237
--------- --------- ---------
Income (loss) from operations (24,081) 16,895 (16,801)
Net investment income (1,073) (1,716) (2,939)
Interest expense 15,768 4,715 7,289
--------- --------- ---------
Net income (loss) before provision
for (benefit from) income taxes (38,776) 13,896 (21,151)
Provision for (benefit from)
income taxes (9,652) 5,318 (2,963)
--------- --------- ---------
Net income (loss) before
extraordinary items (29,124) 8,578 (18,188)
Extraordinary item: Gain on early
extinguishment of debt, net of
taxes of $2,006 2,887 -- --
--------- --------- ---------
Net income (loss) $ (26,237) $ 8,578 $ (18,188)
========= ========= =========
See accompanying notes to these consolidated financial statements.
22
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock Series A Preferred Class A Common Class B Common Class C Common
----------------- ----------------- ----------------- ----------------- -----------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 29, 1996 13,701 $ 142 -- $ -- -- $ -- -- $ -- -- $ --
Exercise of stock options 24 1 -- -- -- -- -- -- -- --
Issuance of treasury stock 28 -- -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- -- -- --
Change in unrealized holding
losses on marketable
securities, net of taxes
of $75 -- -- -- -- -- -- -- -- -- --
Currency translation adjustment,
net of tax benefit of $80 -- -- -- -- -- -- -- -- -- --
Comprehensive income (loss)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Balance at June 28, 1997 13,753 143 -- -- -- -- -- -- -- --
Exercise of stock options 166 1 -- -- -- -- -- -- -- --
Cancellation of shares (4) -- -- -- -- -- -- -- -- --
Net income -- -- -- -- -- -- -- -- -- --
Currency translation adjustment,
net of tax benefit of $431 -- -- -- -- -- -- -- -- -- --
Comprehensive income (loss)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Balance at June 27, 1998 13,915 144 -- -- -- -- -- -- -- --
Exchange of shares (488) (5) 97 1 80 1 -- -- -- --
Exchange of stock options -- -- -- -- -- -- -- -- -- --
Cancellation of treasury stock -- (5) -- -- -- -- -- -- -- --
Repurchase of common stock (13,432) (134) -- -- -- -- -- -- -- --
Issuance of stock for
Bell Merger -- -- 874 9 721 7 -- -- -- --
Issuance of stock options -- -- -- -- -- -- -- -- -- --
Exercise of stock options 5 -- -- -- 17 -- -- -- -- --
Issuance of stock under the
management investment and
incentive plans -- -- 16 -- 14 -- 128 1 56 1
Exchange of debt for equity -- -- 48 -- 39 1 -- -- -- --
Net loss -- -- -- -- -- -- -- -- -- --
Currency translation adjustment,
net of tax benefit of $243 -- -- -- -- -- -- -- -- -- --
Comprehensive income (loss)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Balance at July 3, 1999 -- $ -- 1,035 $ 10 871 $ 9 128 $ 1 56 $ 1
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
<CAPTION>
Accumulated Retained
Additional Other Earnings Total
Paid-In Comprehensive (Accumulated Treasury Comprehensive Stockholders'
Capital Income (loss) Deficit) Stock Income(loss) Equity
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 29, 1996 $ 141,647 $ (380) $ 149 $ (5,517) $ 136,041
Exercise of stock options 1,138 -- -- -- 1,139
Issuance of treasury stock (299) -- -- 299 --
Net loss -- -- (18,188) -- $ (18,188) (18,188)
Change in unrealized holding
losses on marketable
securities, net of taxes
of $75 -- 461 -- -- 461 461
Currency translation adjustment,
net of tax benefit of $80 -- (488) -- -- (488) (488)
---------
Comprehensive income (loss) $ (18,215)
--------- --------- --------- --------- ========= ---------
Balance at June 28, 1997 142,486 (407) (18,039) (5,218) 118,965
Exercise of stock options 1,419 -- -- -- 1,420
Cancellation of shares -- -- -- -- --
Net income -- -- 8,578 -- $ 8,578 8,578
Currency translation adjustment,
net of tax benefit of $431 -- (704) -- -- (704) (704)
---------
Comprehensive income (loss) $ 7,874
--------- --------- --------- --------- ========= ---------
Balance at June 27, 1998 143,905 (1,111) (9,461) (5,218) 128,259
Exchange of shares 3 -- -- -- --
Exchange of stock options -- -- (5,447) -- (5,447)
Cancellation of treasury stock (4,929) -- (284) 5,218 --
Repurchase of common stock (134,140) -- (3,412) -- (137,686)
Issuance of stock for
Bell Merger 44,984 -- -- -- 45,000
Issuance of stock options 307 -- -- -- 307
Exercise of stock options 45 -- -- -- 45
Issuance of stock under the
management investment and
incentive plans 586 -- -- -- 588
Exchange of debt for equity 2,449 -- -- -- 2,450
Net loss -- -- (26,237) -- $ (26,237) (26,237)
Currency translation adjustment,
net of tax benefit of $243 -- (814) -- -- (814) (814)
---------
Comprehensive income (loss) $ (27,051)
--------- --------- --------- --------- ========= ---------
Balance at July 3, 1999 $ 53,210 $ (1,925) $ (44,841) $ -- $ 6,465
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to these consolidated financial statements
23
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Fiscal years ended
-----------------------------------
July 3, June 27, June 28,
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) before extraordinary items $ (29,124) $ 8,578 $ (18,188)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Write-off of goodwill and intangibles -- -- 14,531
Amortization of goodwill and intangibles 2,117 2,260 3,338
Depreciation 5,529 5,549 6,222
Loss on disposal of property, plant
and equipment 2,997 434 1,599
Provision for doubtful accounts 907 1,077 4,553
Loss on disposal of product lines
and sale of assets -- 700 --
Provision for inventory obsolescence 4,592 2,340 2,876
Deferred income taxes (5,396) 3,997 (2,827)
Other 3,155 -- --
Changes in assets and liabilities, net of
adjustments for acquisitions and dispositions:
Accounts receivable 3,816 8,542 (4,976)
Inventories (8,557) (371) (7,782)
Other assets (5,062) 5,310 (684)
Accounts payable 1,620 (2,300) (288)
Other liabilities 19,069 (8,623) 2,536
--------- --------- ---------
Net cash provided by (used in) operating activities (4,337) 27,493 910
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,149) (5,496) (7,058)
Proceeds from the sale of Service Cycle/Mongoose -- -- 20,515
Acquisition of other businesses,
net of cash acquired -- -- (1,493)
Net sales of marketable securities -- -- 8,458
Proceeds from the sale of SportRack -- 13,427 --
--------- --------- ---------
Net cash provided by (used in) investing activities (4,149) 7,931 20,422
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of costs 247 1,420 --
Proceeds from issuance of senior subordinated notes,
net of costs 105,100 -- --
Proceeds from issuance of senior discount notes 15,000 -- --
Proceeds from issuance of preferred stock 45,387 -- --
Repurchase of common stock (143,130) -- --
Tender of subordinated debentures, net of costs (57,681) -- --
Payments on notes payable, long-term debt
and capital lease obligations (579) (489) (869)
Net borrowings (payments) on line
of credit agreement 9,869 (19,067) (14,403)
Expenditures related to issuance of line
of credit agreement (1,381) -- --
--------- --------- ---------
Net cash used in financing activities (27,168) (18,136) (15,272)
--------- --------- ---------
Effect of exchange rate changes on cash (564) (1,203) (192)
--------- --------- ---------
Net increase (decrease) in cash
and cash equivalents (36,218) 16,085 5,868
Cash and cash equivalents
at beginning of period 45,093 29,008 23,140
--------- --------- ---------
Cash and cash equivalents at end of period $ 8,875 $ 45,093 $ 29,008
========= ========= =========
</TABLE>
See accompanying notes to these consolidated financial statements
24
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
Bell Sports Corp. ("the Company" or "Bell") is the leading manufacturer and
marketer of bicycle helmets worldwide and a leading supplier of a broad line of
bicycle accessories in North America. Bell is also a leading supplier of auto
racing, in-line skating, snowboarding, snow skiing and water sport helmets.
On July 29, 1998, American Recreation Company Holding, Inc, ("AMRE") a
wholly-owned subsidiary of the Company, was merged into Bell Sports, Inc, also a
wholly-owned subsidiary of the Company (the "AMRE Merger").
On August 17, 1998, the Company consummated the Agreement and Plan of
Recapitalization and Merger (the "Plan") with HB Acquisition Corporation, a
Delaware corporation ("HB Acquisition") and affiliate of Charlesbank Capital
Partners, LLC ("Charlesbank") and Brentwood Associates Buyout Fund II, L.P.
("Brentwood"). The Plan provided for the merger of HB Acquisition with and into
Bell, with Bell continuing as the surviving corporation (the "Bell Merger").
Under the agreement, each share of common stock of the Company was converted
into the right to receive $10.25 in cash.
On July 3, 1999, the Company sold its auto racing helmet business and entered
into a long-term royalty-free licensing agreement for auto racing helmets and
automotive accessories to be marketed under the Bell brand name.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND ACCOUNTING PERIOD
The consolidated financial statements include the accounts of Bell Sports Corp.
and its wholly owned subsidiaries. All material intercompany transactions and
balances have been eliminated in consolidation. The Company's fiscal year is
either a 52 or 53 week accounting period ending on the Saturday that is nearest
to the last day of June. The fiscal year ended July 3, 1999 was a 53 week
period. The fiscal years ending June 27, 1998 and June 28, 1997 were 52 week
periods.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK
Accounts receivable at July 3, 1999 and June 27, 1998 are net of allowances for
doubtful accounts of $1.8 million and $1.7 million, respectively.
The Company's principal customers operate in the mass merchant, sporting goods
or independent bicycle dealer retail markets worldwide. The customers are not
geographically concentrated. As of July 3, 1999 and June 27, 1998, respectively,
30% and 27% of the Company's gross accounts receivable were attributed to one
mass merchant customer. In addition, the same mass merchant customer accounted
for 28%, 21% and 18% of net sales during fiscal 1999, 1998 and 1997,
respectively.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out basis) or
market (net realizable value). Costs included in inventories are (i) landed
purchased cost on sourced items and (ii) raw materials, direct labor and
manufacturing overhead on manufactured items.
25
<PAGE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation is provided using the straight-line method over
the estimated useful lives of the related assets. Leasehold improvements and
capital lease assets are amortized using the straight-line method over the
shorter of the base lease term or the estimated useful lives of the related
assets. Maintenance and repair costs are expensed as incurred.
GOODWILL AND INTANGIBLE ASSETS
The excess of the acquisition cost over the fair value of the net identifiable
assets of businesses acquired in purchase transactions has been included in
goodwill, is amortized on a straight-line basis over 25 to 40 years, and is
recorded net of accumulated amortization of $9.2 million and $7.3 million at
July 3, 1999 and June 27, 1998, respectively. Other intangible assets, which
include non-compete agreements, acquisition costs, patents and trademarks, and
other items, are amortized over their estimated economic lives, ranging from 2
to 17 years. Accumulated amortization for intangible assets totaled $4.5 million
and $5.1 million at July 3, 1999 and June 27, 1998, respectively. The Company's
policy is to account for goodwill and all other intangible assets at the lower
of amortized cost or net realizable value. As part of an ongoing review of the
valuation and amortization of intangible assets, management assesses the
carrying value of the Company's intangible assets to determine if changes in
facts and circumstances suggest that it may be impaired. If this review
indicates that the intangibles will not be recoverable, as determined by a
nondiscounted cash flow analysis over the remaining amortization period, the
carrying value of the Company's intangibles would be reduced to its estimated
fair market value.
MANAGEMENT'S ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development costs are expensed as incurred. These costs totaled
$3.6 million, $3.6 million and $4.7 million for fiscal 1999, 1998 and 1997,
respectively.
ADVERTISING COSTS
Advertising and related costs are expensed as incurred, except for ad production
costs, which are expensed in the fiscal year in which the ad is first run. These
costs amounted to $5.7 million, $5.5 million and $9.1 million for fiscal 1999,
1998 and 1997, respectively.
TRANSLATION OF FOREIGN CURRENCY
Assets and liabilities of foreign subsidiaries are translated into U.S. dollars
at the rates of exchange on the balance sheet date. Revenue and expense items
are translated at the average rates of exchange prevailing during the fiscal
year. Translation adjustments are recorded in the cumulative foreign currency
translation adjustment component of stockholders' equity.
FOREIGN EXCHANGE CONTRACTS
The Company periodically enters into forward foreign exchange contracts in
managing its foreign currency risk. Forward exchange contracts are used to hedge
various intercompany and external commitments with foreign subsidiaries and
inventory purchases denominated in foreign currencies. Exchange contracts
usually have maturities of less than one year. The Company has no outstanding
foreign exchange contracts at July 3, 1999, and had no significant foreign
exchange contract activity during the fiscal year then ended.
INCOME TAXES
The Company uses the liability method of accounting for income taxes, which is
an asset and liability approach for financial accounting and reporting of income
taxes. Deferred tax assets and liabilities are recorded based upon temporary
differences between the tax basis of assets and liabilities and their carrying
values for financial reporting purposes. A valuation allowance is provided for
deferred tax assets when management concludes it is more likely than not that
some portion of the deferred tax assets will not be realized.
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ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected to continue to recognize compensation expense based on
the intrinsic value method.
RECLASSIFICATIONS
The Company has reclassified certain amounts in the fiscal 1998 and fiscal 1997
consolidated financial statements in order to conform to the presentation
adopted for fiscal 1999.
RECENT ACCOUNTING PRONOUNCEMENT
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.
NOTE 3 - NET INVESTMENT INCOME
Net investment income consists of the following (in thousands):
July 3, June 27, June 28,
1999 1998 1997
------- ------- -------
Dividend income $ -- $ -- $ 184
Interest income 1,073 1,716 1,646
Proceeds from settlement of arbitration case -- -- 1,815
Realized losses on sale of marketable securities -- -- (654)
Investment fees and other -- -- (52)
------- ------- -------
$ 1,073 $ 1,716 $ 2,939
======= ======= =======
The fiscal 1997, net investment income amount included proceeds from the
settlement of an arbitration case related to the handling of certain marketable
securities by an outside investment advisor. The settlement proceeds, net of
related expenses and losses to sell certain securities, were $1.3 million.
NOTE 4 - INVENTORIES
Inventories consist of the following components (in thousands):
July 3, June 27,
1999 1998
------- -------
Raw materials $ 3,579 $ 3,539
Work in process 1,089 2,010
Finished goods 38,996 34,130
------- -------
$43,664 $39,679
======= =======
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NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
July 3, June 27, Estimated
1999 1998 useful life
-------- -------- -----------
Land, buildings and leasehold improvements $ 9,397 $ 9,809 3-38 years
Machinery, equipment and tooling 21,634 24,468 3-10 years
Office equipment 7,977 7,363 3-7 years
Other 346 786 3-7 years
-------- --------
39,354 42,426
Less: Accumulated depreciation
and amortization (23,192) (21,790)
-------- --------
$ 16,162 $ 20,636
======== ========
NOTE 6 - BANK CREDIT FACILITIES AND LONG-TERM DEBT
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 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:
BELL SPORTS, INC.
July 3, 1999
------------
SUMMARIZED BALANCE SHEET DATA: (unaudited)
Current assets $145,526
Total assets 199,061
Current liabilities 53,379
Total liabilities 173,720
Stockholder's equity 25,341
For the
Year Ended
July 3, 1999
------------
SUMMARIZED STATEMENT OF OPERATIONS DATA: (unaudited)
Net sales $210,909
Gross profit 70,236
Net loss before extraordinary items 26,734
Net loss 26,734
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.
On August 17, 1998, the Company consummated a tender offer to purchase $62.5
million aggregate principal amount of its 4 1/4% Convertible Subordinated
Debentures ("Debentures") due November, 2000. The debentures were purchased at a
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 at specified redemption prices.
In August 1998, the Company and its wholly-owned subsidiary, Bell Sports, Inc.
(the "Borrower"), entered into a $60.0 million senior secured revolving credit
facility ("Credit Agreement"). The Credit Agreement is guaranteed by the Company
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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 $59.6 million as of July 3, 1999. As of July 3, 1999, there were borrowings
outstanding of $10.0 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 July 3, 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 July 3,
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 July 3, 1999, the Company was in compliance with or had
obtained waivers for all bank covenants.
Long-term debt consists of the following (in thousands):
July 3, June 27,
1999 1998
-------- --------
11% senior subordinated debentures maturing August, 2008 $110,000 $ --
4 1/4% convertible subordinated debentures maturing
November 2000 23,750 86,250
14% senior discount notes due August, 2009 14,434 --
Borrowings under line of credit 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% 391 936
-------- --------
158,575 87,186
Less: Current maturities 10,305 561
-------- --------
Total long-term debt $148,270 $ 86,625
======== ========
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Scheduled maturities, by fiscal year, of long-term debt are as follows (in
thousands):
2000 $ 10,305
2001 23,836
2002 --
2003 --
2004 --
Thereafter 124,434
--------
Total $158,575
========
NOTE 7 - STOCKHOLDERS' EQUITY
STOCK OPTIONS
Pursuant to the Bell Merger on August 17, 1998, the Company entered into
agreements with all individuals holding stock options, whereby the holder was to
receive, at the time of the merger, a cash payment equal to the excess, if any,
of $10.25 per share over the applicable per share exercise price. All stock
option plans were terminated at the time of the Bell Merger. The Company
currently has no stock option plans. Activity under the previous stock option
plans was as follows:
Number
of shares Weighted
underlying average Options
options exercise price exercisable
---------- ---------- ----------
Options outstanding at June 29, 1996 1,846,589 13.33 549,660
Options granted 2,041,847 7.21
Options exercised (23,754) 0.46
Options canceled (966,242) 13.92
Options terminated (566,677) 13.10
----------
Options outstanding at June 28, 1997 2,331,763 8.19 1,130,635
Options granted 220,484 8.84
Options exercised (165,935) 7.09
Options terminated (194,706) 9.23
----------
Options outstanding at June 27, 1998 2,191,606 8.25 1,670,035
Options exercised (1,883,816) 7.35
Options cancelled (307,790) 13.75
----------
Options outstanding at July 3, 1999 -- -- --
==========
On August 17, 1998, the Company granted options 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 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. During fiscal year 1999, the options to purchase Class A
Common Stock were exercised.
As required, the Company has adopted the disclosure provisions of SFAS No. 123
"Accounting for Stock Based Compensation" ("SFAS 123") for employee stock
options. The fair value of options granted during fiscal years 1999, 1998 and
1997 was computed using the Black-Scholes option pricing model. The
weighted-average assumptions used for stock option grants for fiscal years 1999,
1998 and 1997 were an expected volatility of the market price of the Company's
Common and Preferred Stock of 0%, 41% and 46%, respectively; weighted-average
expected life of the options of approximately 3.5 years, 4.9 years and 4.4
years, respectively; no dividend yield; and risk-free interest rate of 6.50%,
6.50% and 4.89 to 6.59% respectively. The interest rates are effective for
option grant dates made throughout the year. Adjustments for forfeitures are
made as they occur. The total value of options granted for the years ended July
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<PAGE>
3, 1999, June 27, 1998, and June 28, 1997 was computed as approximately
$456,000, $949,000, and $1,405,000, respectively. If the Company had accounted
for these stock options issued to employees in accordance with SFAS 123, the
effect on net income (loss) for each fiscal year would have been reported as
follows (in thousands):
Year Ended
------------------------------------------
July 3, 1999 June 27, 1998 June 28, 1997
------------ ------------- -------------
Net income (loss):
As reported $(26,237) $ 8,578 $(18,188)
Pro forma for SFAS 123 (27,735) 7,463 (19,045)
The pro forma effects of applying SFAS 123 may not be representative of the
effects on reported net income for future years since options vest over several
years and additional option awards are made each year.
STOCK REPURCHASE
On August 24, 1995, the Company announced a stock repurchase program authorizing
the repurchase of up to 10% of the outstanding shares of the Company's Common
Stock from time to time in open market or private transactions. The timing of
any repurchase and the price and number of shares repurchased were to depend on
market conditions and other factors. In fiscal 1997, the Company repurchased a
total of 523,400 shares at an aggregate purchase price of approximately $5.5
million, of which 28,328 shares were utilized under a restricted stock award
program. No shares were repurchased in fiscal 1998. The remaining outstanding
shares were retired at the time of the Bell Merger.
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. No dividends were paid in fiscal year 1999.
INVESTMENT AND INCENTIVE PLAN
In November 1998, the Board of Directors approved the Investment and Incentive
Plan and the Class C Investments and Incentive Plan (collectively 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 56,500 shares of Class
C Common Stock can be purchased by participants. As of July 3, 1999, 16,346
shares of Series A Preferred Stock, 13,575 shares of Class A Common Stock,
128,200 shares of Class B Common Stock, and 56,000 shares of Class C Common
Stock had been purchased under the Plans.
NOTE 8 - 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.
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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 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 of which $4.8 million is classified as current. 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
32
<PAGE>
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.
LEASE OBLIGATIONS
The Company leases certain equipment and facilities under various noncancellable
capital and operating leases. The total expense under these operating leases
amounted to approximately $4.0 million, $4.2 million and $4.0 million, for
fiscal 1999, 1998 and 1997, respectively.
At July 3, 1999, the future minimum annual rental commitments under all
noncancellable leases were as follows (in thousands):
Operating Capital
Leases Leases
------- -------
2000 $ 3,421 $ 231
2001 3,294 230
2002 2,605 167
2003 2,334 167
2004 1,704 160
Thereafter 10,187 490
------- -------
Total minimum lease commitments $23,545 1,445
=======
Less: Interest portion 414
-------
Present value of capital lease obligations 1,031
Less: Current portion 128
-------
Total long-term capital lease obligations $ 903
=======
NOTE 9 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts receivable, accounts
payable, accrued expenses and short-term debt approximates fair value because of
the short maturity of these instruments. The following table presents the
carrying amounts and estimated fair value of the Company's other financial
instruments (in thousands):
July 3, 1999 June 27, 1998
------------------- -------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-------- -------- -------- --------
4 1/4% convertible subordinated
debentures maturing November 2000 $ 23,750 $ 19,416 $ 86,625 $ 72,825
11% senior subordinated debentures
maturing August 2008 110,000 111,650 -- --
The estimated fair value of the debentures is based on quoted market prices. The
estimated fair value of other long-term debt approximates its carrying value,
based on current rates available to the Company for debt with similar terms. For
more information regarding long-term debt, see Note 6.
NOTE 10 - DISPOSITIONS
In July, 1999, the Company sold the assets of its auto racing helmet business to
Bell Racing Company ("Bell Racing") in exchange for an equity interest in Bell
Racing then valued at approximately $1,225,000 with a contingent payment of
additional equity in Bell Racing of approximately $875,000 upon the satisfaction
of certain conditions. In connection with that transaction, the Company entered
33
<PAGE>
into a long-term royalty-free licensing agreement for Bell Racing to market auto
racing helmets and auto accessories under the Bell name. The Company also agreed
to provide Bell Racing with certain transition services and entered into a
sublease with respect to a portion of its manufacturing facility in Rantoul,
Illinois. Bell Racing is controlled by Hayden Capital Investments, LC ("Hayden
Investments"). The Chairman of the Company's board of directors is the Managing
Member of Hayden Investments and the Chairman and Chief Executive Officer of
Bell Racing. The Company expensed costs associated with the sale of $0.2 million
in fiscal 1999.
In September 1998, the Company sold the assets of its domestic foam molding
operations in Rantoul, Illinois, and entered into a facility sublease with the
purchaser. In addition, the Company entered into an agreement with the purchaser
pursuant to which the purchaser has agreed to provide the Company with foam
helmet liners and certain related components. The Company recorded a charge in
fiscal year 1998 of approximately $0.6 million in connection with the sale and
related reorganization of the Company's domestic foam molding facility. No
significant gain or loss was incurred upon consummation of the sale in September
1998.
On July 2, 1997, the Company completed the sale of substantially all of the
assets of SportRack (the "Sale of SportRack"), which designs, manufactures and
markets automobile roof rack systems, for $13.4 million to an affiliate of
Advanced Accessory System Canada, Inc. Subsequently, the Company recorded a loss
on the Sale of SportRack of approximately $2.0 million in fiscal 1998 in
connection with a purchase price adjustment related to such sale.
On April 29, 1997, the Company completed the sale of its Service Cycle/Mongoose
inventory, trademarks and certain other assets (the "Sale of Service
Cycle/Mongoose") to Brunswick Corporation for a sales price of $21.1 million. As
part of the sales transaction, the Company provided Brunswick Corporation a
three-year option to purchase 600,000 shares of the Company's Common Stock at an
exercise price of $7.50 per share. The Company retained customer accounts
receivable related to the Service Cycle/Mongoose business of approximately $19.4
million.
In connection with the Sale of Service Cycle/Mongoose, the Company announced
plans to reorganize its North American distribution network and operations to
better utilize the distribution facilities. Included in the fiscal 1997 pre-tax
loss were $25.4 million of costs associated with the Sale of Service
Cycle/Mongoose. The costs were comprised of the write-off of goodwill and
intangibles ($14.8 million), disposal and exit costs ($5.4 million), and
reorganization costs associated with the distribution network and operations
($5.2 million). During fiscal 1998, the Company reversed charges of $1.9
million, including a $600,000 benefit based on the finalization of costs
associated with the closure of distribution facilities, and $1.3 million benefit
related to the reversal of the remaining reserve for uncollectible receivables
established in fiscal 1997 in connection with the divestiture of Service
Cycle/Mongoose.
NOTE 11 - RESTRUCTURING CHARGES, ASSET WRITE-OFFS AND OTHER COSTS
RESTRUCTURING CHARGES, ASSET WRITE-OFFS AND OTHER COSTS - 1999
In an effort to remain competitive in an increasingly competitive marketplace,
the Company announced a plan to restructure its worldwide operations, leaving it
in a better position to focus on sales, marketing, distribution, and product
innovation, while operating under a significantly lower cost structure.
The plan is set up with three main prongs: 1) consolidation of manufacturing
facilities, 2) streamlining of administrative overhead, and 3) divestiture of
the auto racing division and the closure of the Australian sales and marketing
office. Costs associated with the plan are included in the consolidated
statement of operations as restructuring charges, asset write-offs and other
costs.
CONSOLIDATION OF MANUFACTURING FACILITIES. At the beginning of fiscal 1999, the
Company owned and operated five manufacturing facilities around the world. In an
effort to reduce duplicative expenses and increase efficiency, the Company has
closed its Santa Cruz, California, Canada and Ireland manufacturing facilities.
In addition, the Company has entered into an agreement to sell its manufacturing
facility in France. The sale is expected to be completed by October 1999. This
will leave the Company with one manufacturing facility in Rantoul, Illinois.
In the fourth quarter of fiscal 1999, the Company recorded $6,634,000 in
restructuring costs, $4,784,000 in asset write-offs, and $1,026,000 in other
costs associated with the consolidation of the manufacturing facilities. The
restructuring costs are based on estimates of employee severance costs, lease
obligations and legal fees. The restructuring costs include $1,968,000 of
severance related costs for 206 employees from all areas of responsibility. Of
these 206 employees, 173 had been terminated and paid a total of $460,000 as of
July 3, 1999. The remaining 33 employees have been notified of their pending
termination. The asset write-offs include $3,121,000 of property, plant, and
equipment and $1,663,000 of inventory. The assets were written down to net
realizable value, based on an estimate of what an independent third party would
pay for the assets. Other costs include one-time charges such as the repayment
of a grant to the Irish government, transferring of inventory to Rantoul and
other miscellaneous expenses.
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STREAMLINING OF OVERHEAD. In order for the Company to remain competitive, it has
consolidated its product design and test labs into one global facility and
eliminated administrative positions which were considered duplicative or
excessive. In the fourth quarter, the Company recorded $2,005,000 of
restructuring costs, $69,000 of asset write-offs, and $941,000 of other costs
relating to this streamlining effort. The restructuring costs are based on
estimates of employee severance costs, lease obligations and legal fees, and
include $800,000 of severance related costs for 59 employees from all areas of
responsibility, all of whom had been terminated as of July 3, 1999. A total of
$319,000 in severance had been paid as of July 3, 1999. The asset write-offs
relate to the write-off of property, plant and equipment rendered unnecessary
due to the reduced headcount and consolidated test labs. Other costs include
miscellaneous one-time expenses.
SALE OF AUTO RACING AND CLOSURE OF AUSTRALIA. In order to remain focused on the
Company's core business of bicycle helmets and accessories, the Company has sold
its auto racing helmet business, in exchange for an equity position in the
purchaser. In addition, the Company has announced the closure of its Australian
sales and marketing office. The Company will continue to service the Australian
market through a local distributor. In the fourth quarter of fiscal 1999, the
Company recorded $331,000 in restructuring costs, $413,000 in asset write-offs,
and $325,000 in other costs associated with these moves. The restructuring costs
are based on estimates of employee severance costs, lease obligations and legal
fees. The restructuring costs include $141,000 of severance related costs for 26
employees from all areas of responsibility, all of whom were notified of their
pending termination. No severance-related costs had been paid as of July 3,
1999. The asset write-offs include $170,000 of property, plant, and equipment
and $243,000 of inventory and other assets. The assets were written down to net
realizable value, based on an estimate of what an independent third party would
pay for the assets. Other costs include miscellaneous, one-time expenses related
to the sale of the auto racing helmet business.
The following table summarizes the classification in the Consolidated Statement
of Operations of the charges relating to the restructuring program and other
actions (in thousands):
Restructuring charges:
Manufacturing consolidation $ 6,634
Overhead reduction 2,005
Sale of auto racing and Australia 331
--------
8,970
--------
Asset write-offs:
Manufacturing consolidation 4,784
Overhead reduction 69
Sale of auto racing and Australia 413
--------
5,266
--------
Other costs:
Manufacturing consolidation 1,026
Overhead reduction 941
Sale of auto racing 325
--------
2,292
--------
$ 16,528
========
The following table sets forth the details of activity during fiscal 1999 for
restructuring charges, asset write-offs and other costs and related accrued
expenses (in thousands):
<TABLE>
<CAPTION>
June 27, Cash Non-Cash July 3,
1998 Charges Payments Charges 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Restructuring accruals:
Manufacturing consolidation $ -- $ 12,444 $ (3,342) $ -- $ 9,102
Overhead reductions -- 3,015 (791) -- 2,224
Sale of auto racing and Australia -- 1,069 (281) -- 788
Restructuring accruals from prior years 1,490 -- (956) (41) 493
-------- -------- -------- -------- --------
$ 1,490 $ 16,528 $ (5,370) $ (41) $ 12,607
======== ======== ======== ======== ========
</TABLE>
35
<PAGE>
RESTRUCTURING CHARGES - 1998
During fiscal 1998, the Company formed and approved a plan to restructure its
European operations. In connection with this plan, the Company closed its Paris,
France, sales and marketing office in December 1997, and consolidated these
functions with its Roche La Moliere, France, facility. The key management
positions of Giro Ireland and EuroBell were also consolidated. Included in the
fiscal 1998 pre-tax income are $1.2 million of estimated restructuring charges
related to this plan, including facility closing costs and severance benefits.
The following table sets forth the details of activity during fiscal 1998 for
restructuring charges and related accrued expenses (in thousands):
<TABLE>
<CAPTION>
June 28, Restructuring Cash Non-cash June 27,
1997 Charges Payments Charges 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Restructuring accruals:
Lease payments and other facility expenses $ -- $ 191 $ (60) $ -- $ 131
Severance and other employee-related costs -- 820 (573) (198) 49
Asset write-downs -- 181 (140) -- 41
Restructuring accruals from previous years 3,777 -- (2,598) 90 1,269
------- ------- ------- ------- -------
$ 3,777 $ 1,192 $(3,371) $ (108) $ 1,490
======= ======= ======= ======= =======
</TABLE>
RESTRUCTURING CHARGES - 1997
During fiscal 1997, the Company announced plans to significantly downsize the
Scottsdale, Arizona corporate office by consolidating certain Scottsdale
functions with the San Jose, California office. Included in the fiscal 1997
pre-tax loss are $2.7 million of restructuring charges related to this plan.
On June 27, 1995, the Company's stockholders approved the issuance of Common
Stock in connection with the Agreement and Plan of Merger dated February 15,
1995 among the Company, Bell Merger Co., a wholly owned subsidiary of the
Company, and AMRE. In contemplation of the merger, the Company formulated a
program (the "Program") to consolidate and integrate the operations of Bell,
SportRack and AMRE, as well as combine certain product lines. The Program called
for the consolidation of certain sales and marketing, research and development,
manufacturing, finance and management information systems functions. In fiscal
1997, $1.4 million of restructuring charges relating to the Program were
recorded, including facility closing costs, severance and other employee related
costs.
The following table sets forth the details of activity during fiscal 1997 for
restructuring charges and related accrued expenses (in thousands):
<TABLE>
<CAPTION>
June 29, Restructuring Cash June 28,
1996 Charges Payments 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Restructuring accruals:
Lease payments and other facility expenses $ -- $ 983 $ (614) $ 369
Severance and other employee-related costs -- 3,158 (1,741) 1,417
Restructuring accruals from previous years 5,157 -- (3,166) 1,991
------- ------- ------- -------
$ 5,157 $ 4,141 $(5,521) $ 3,777
======= ======= ======= =======
</TABLE>
36
<PAGE>
NOTE 12 - INCOME TAXES
Pre-tax income (loss) by jurisdiction for each fiscal year are as follows (in
thousands):
July 3, June 27, June 28,
1999 1998 1997
-------- -------- --------
Domestic $(27,625) $ 9,496 $(23,882)
Foreign (6,258) 4,400 2,731
-------- -------- --------
Total $(33,883) $ 13,896 $(21,151)
======== ======== ========
The provision for (benefit from) income taxes for each fiscal year is as follows
(in thousands):
July 3, June 27, June 28,
1999 1998 1997
-------- -------- --------
Current expense (benefit):
U.S. Federal $ -- $ 75 $ (757)
State and local 50 60 --
Foreign -- 1,123 601
-------- -------- --------
Total current 50 1,258 (156)
-------- -------- --------
Deferred tax expense (benefit):
U.S. Federal (4,463) 3,368 (2,200)
State and local (1,068) 722 (568)
Foreign (2,165) (93) (59)
-------- -------- --------
Total deferred (7,696) 3,997 (2,827)
-------- -------- --------
Impact of stock option deduction
credited to equity -- 63 20
-------- -------- --------
Total income tax provision (benefit) $ (7,646) $ 5,318 $ (2,963)
======== ======== ========
The provision for (benefit from) income taxes for each fiscal year differs from
the U.S. statutory federal income tax rate for the following reasons:
July 3, June 27, June 28,
1999 1998 1997
-------- -------- --------
Statutory U.S. rate (34.0)% 34.0% (34.0)%
Nondeductible recapitalization costs 8.4 -- --
Tax exempt investment income -- (0.2) (0.1)
Nondeductible goodwill -- -- 24.8
State income tax (3.0) 5.0 (2.7)
Effective international tax rate 6.6 (2.4) (1.5)
Other items, net (1.0) 1.6 (0.5)
-------- -------- --------
Effective tax expense/(benefit) rate (23.0)% 38.0% (14.0)%
======== ======== ========
The majority of the nondeductible goodwill included in permanent differences
under the effective tax rate calculation for the year ended June 28, 1997 is the
write-off of goodwill due to the Sale of Service Cycle/ Mongoose.
Deferred income tax assets and (liabilities) are comprised of the following (in
thousands):
37
<PAGE>
July 3, June 27,
1999 1998
-------- --------
Net operating losses and other tax loss carryforwards $ 12,888 $ 11,810
Inventory and accounts receivable reserves 1,614 1,485
Accrued liabilities 10,876 4,778
Package design costs capitalized for tax purposes 726 910
-------- --------
Gross deferred tax assets 26,104 18,983
-------- --------
Depreciation (480) (760)
Other (899) (456)
-------- --------
Gross deferred tax liability (1,379) (1,216)
-------- --------
Deferred tax assets valuation allowance (1,108) (1,798)
-------- --------
Net deferred tax assets 23,617 15,969
Less: current portion (11,366) (8,970)
-------- --------
Net long-term deferred tax assets $ 12,251 $ 6,999
======== ========
Domestic net operating losses totaling approximately $33.0 million will be
carried forward and begin to expire in 2008. As a result of the Bell Merger,
there will be an annual limitation of the loss carryforward which may delay or
limit the eventual utilization of the carryforwards. The consolidated return
rules limit utilization of acquired net operating loss and other carryforwards
to income of the acquired companies in years in which the consolidated group has
taxable income.
General business tax credits of approximately $630,000 were accounted for under
the flow-through method and are being carried forward. Minimum tax credits
totaling approximately $600,000 are also being carried forward.
The deferred tax assets valuation allowance at July 3, 1999 and June 27, 1998
was required primarily for net operating loss carryforwards and accounting
reserves that, in management's view, will not be realized in the foreseeable
future.
The Company has not provided for U.S. federal income and foreign withholding
taxes of certain non-U.S. subsidiaries' undistributed earnings as of July 3,
1999, because such earnings are intended to be reinvested indefinitely. If these
earnings were distributed, the withholding tax would be due and foreign tax
credits should become available under current law to reduce the resulting U.S.
income tax liability.
NOTE 13 - ADDITIONAL CASH FLOW STATEMENT INFORMATION
The Company's non-cash investing and financing activities and cash payments for
interest and income taxes for each fiscal year are summarized below (in
thousands):
July 3, June 27, June 28,
1999 1998 1997
-------- -------- --------
Additional paid in capital arising from
tax benefits associated with the
exercise of stock options $ 4 $ 63 $ 20
Cash paid during the period for:
Interest 10,717 4,100 7,050
Income taxes 492 795 748
NOTE 14 - SEGMENT REPORTING
Effective for the year ended July 3, 1999, the Company has adopted Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments
of an Enterprise and Related Information." Prior period amounts have been
reclassified and presented to conform to the requirements of SFAS 131.
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 under SFAS 131 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.
38
<PAGE>
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>
YEAR ENDING JULY 3, 1999:
Sales to unaffiliated customers $106,774 $ 60,077 $ 44,058 $ -- $210,909
EBITDA 18,009 2,494 3,812 3,277 27,592
Depreciation and amortization 144 2,086 1,257 4,159 7,646
Net interest expense(income) -- (18) 529 14,184 14,695
Capital expenditures 374 2,211 917 647 4,149
Total assets 59,176 27,996 29,335 102,427 218,934
YEAR ENDING JUNE 27, 1998:
Sales to unaffiliated customers 95,100 61,387 50,749 -- 207,236
EBITDA 11,851 6,199 6,973 1,573 26,596
Depreciation and amortization 129 2,183 1,060 4,437 7,809
Net interest expense(income) -- -- 186 2,813 2,999
Capital expenditures 100 2,473 1,258 1,665 5,496
Total assets 48,573 36,754 18,250 143,490 247,067
YEAR ENDING JUNE 28, 1997:
Sales to unaffiliated customers 137,168 63,219 59,147 -- 259,534
EBITDA 9,496 3,365 7,681 1,700 22,242
Depreciation and amortization 1,143 1,981 1,919 4,499 9,542
Net interest expense(income) (51) -- 1,310 3,091 4,350
Capital expenditures 878 1,758 1,438 2,984 7,058
Total assets 58,275 34,931 43,323 132,225 268,754
</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:
Fiscal year ended
------------------------------------------
July 3, 1999 June 27, 1998 June 28, 1997
------------ ------------- -------------
EBITDA $ 27,592 $ 26,596 $ 22,242
Less:
Depreciation 5,529 5,549 6,222
Amortization 2,117 2,260 3,320
One-time foreign exchange loss
and compensation expense for
stock options 1,899 -- --
Transaction costs 13,100 -- --
Product liability costs 12,500 -- --
Restructuring charges 8,970 1,192 4,141
Asset write-offs 5,266 -- --
Other costs 2,292 -- --
Loss on disposal of product lines
and sale of assets -- 700 25,360
Net investment income (1,073) (1,716) (2,939)
Interest expense 15,768 4,715 7,289
-------- -------- --------
Net income (loss) before provision
for (benefit from) income taxes $(38,776) $ 13,896 $(21,151)
======== ======== ========
39
<PAGE>
Long-lived assets by geographical area for the periods presented were as
follows:
July 3, 1999 June 27, 1998 June 28, 1997
------------ ------------- -------------
United States $ 74,219 $ 73,531 $ 77,359
International 3,542 3,558 9,375
-------- -------- --------
Total $ 77,761 $ 77,089 $ 86,734
======== ======== ========
NOTE 15 - SUMMARY QUARTERLY FINANCIAL DATA (UNAUDITED)
The unaudited information presented below has been prepared in accordance with
generally accepted accounting principles for interim financial information. In
the opinion of management, all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation of financial position
and results of operations have been made.
Summary quarterly financial data is as follows (in thousands):
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
YEAR ENDING JULY 3, 1999:
Net sales $ 40,918 $ 45,021 $ 54,306 $ 70,664
Gross profit 13,544 14,519 17,433 24,740
Net income (7,281) (2,804) 188 (16,340)
YEAR ENDING JUNE 27, 1998:
Net sales $ 43,632 $ 42,590 $ 52,332 $ 68,682
Gross profit 13,477 13,286 18,200 24,601
Net income (loss) 637 322 3,160 4,459
40
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
To the Company's knowledge, based solely on review of the copies of such reports
furnished to the Company and certain other representations that no other reports
were required, during the year ended July 3, 1999, all Section 16(a) filing
requirements applicable to its officers, directors and greater than ten-percent
beneficial owners were complied with.
DIRECTORS OF THE REGISTRANT
Each director serves a term expiring at the next annual meeting of stockholders,
or until his successor shall have been elected and qualified.
TERRY G. LEE, Director and Chairman, age 50. Mr. Lee has served the Company in
various capacities since 1984. He joined Bell Helmets, Inc. (a predecessor of
the Company, "Bell Helmets") as Director and the President and Chief Operating
Officer in 1984, and became Chief Executive Officer in 1986 and Chairman in
1989. Mr. Lee served as President of the Company from 1984 until the
consummation of the AMRE Merger in 1995. Mr. Lee was also a stockholder and
consultant to Echelon Sports Corporation (a predecessor of the Company) prior to
its acquisition by the Company in 1989. Prior to joining Bell Helmets, Mr. Lee
was employed by Wilson Sporting Goods for 14 years, where his last position was
Senior Vice President - Sales and Distribution.
MARY J. GEORGE, Director and Chief Executive Officer, age 49. Ms. George joined
the Company in October 1994 as the Senior Vice President of Marketing and
Strategic Planning, became President--Specialty Retail Division in July 1995,
became President--North America in December 1995, and became President and Chief
Operating Officer in April 1997. Ms. George continued as President, and became
Chief Executive Officer and Director in August 1998. Prior to joining the
Company, Ms. George served as President of Denar Corporation from January 1993
to August 1994, and as President of the WestPointe Group from January 1991 to
December 1992.
WILLIAM M. BARNUM, JR., Director, age 45. Mr. Barnum became a Director of the
Company in August 1998. He joined Brentwood in 1984 and is presently a managing
member of Brentwood Private Equity, L.L.C. Mr. Barnum is a Director of Classroom
Connect Holdings, Inc., Aspen Marketing Group, Inc., WorldPoint Logistics, Inc.,
and Quicksilver Corporation.
KIM G. DAVIS, Director, age 45. Mr. Davis became a Director of the Company in
August 1998. Mr. Davis is a Managing Director and co-founder of Charlesbank, a
private investment firm and the successor to Harvard Private Capital Group,
Inc., which he joined in 1998. Charlesbank is the investment advisor to
Charlesbank Equity Fund IV, Limited Partnership. From 1995 to 1998, Mr. Davis
was a private investor, and from 1988 to 1994, he was a General Partner of
Kohlberg & Co. He is a Director of Westinghouse Air Brake Company.
JOHN F. HETTERICK, Director, age 53. Mr. Hetterick became a Director of the
Company in August 1998. Since 1997, Mr. Hetterick has been an independent
consultant in the consumer products industry. From 1992 to 1997, Mr. Hetterick
was President and Chief Executive Officer of Rollerblade, Inc., a manufacturer
of in-line skates. Mr. Hetterick also served as President of Tonka
International, a division of Tonka Corporation, from 1989 to 1991, and Vice
President of Marketing of Pepsi-Cola International from 1986 to 1989.
EDWARD L. MCCALL, Director, age 32. Mr. McCall became a Director of the Company
in August 1998. He joined Brentwood in 1993 and is presently a managing member
of Brentwood Private Equity, L.L.C. and Brentwood Private Equity Management,
L.L.C. Mr. McCall is currently a director of Classroom Connect Holdings, Inc.,
and Racquetball & Fitness Clubs, Inc.
41
<PAGE>
TIM R. PALMER, Director, age 42. Mr. Palmer became a Director of the Company in
August 1998. He is a Managing Director and co-founder of Charlesbank, a private
investment firm and the successor to Harvard Private Capital Group, Inc., which
he joined in 1990. Charlesbank is the investment advisor to Charlesbank Equity
Fund IV, Limited Partnership. He is a Director of The WMF Group, Ltd.
JOHN M. SULLIVAN, Director, age 63. Mr. Sullivan became a Director of the
Company in August 1998. From October 1987 to January 1993, Mr. Sullivan was
Chairman of the Board and Chief Executive Officer of Prince Holdings, Inc. He is
presently Chairman of the Board of Directors of Silver Cinemas International,
Inc., and a Director of The Scotts Company.
EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to executive officers of the Company is set forth
below:
NAME AGE POSITIONS AND OFFICES
- ---- --- ---------------------
Terry G. Lee 50 Chairman
Mary J. George 49 Chief Executive Officer
William L. Bracy 58 President and Chief Operations Officer
Richard S Willis 39 Executive Vice President and Chief Financial Officer
Kwai Kong 36 Vice President--R&D and Manufacturing
Blair Clark 41 President-Giro
TERRY G. LEE, Director and Chairman. Mr. Lee has served the Company in various
capacities since 1984. He joined Bell Helmets, Inc. (a predecessor of the
Company, "Bell Helmets") as Director and the President and Chief Operating
Officer in 1984, and became Chief Executive Officer in 1986 and Chairman in
1989. Mr. Lee served as President of the Company from 1984 until the
consummation of the AMRE Merger in 1995. Mr. Lee was also a stockholder and
consultant to Echelon Sports Corporation (a predecessor of the Company) prior to
its acquisition by the Company in 1989. Prior to joining Bell Helmets, Mr. Lee
was employed by Wilson Sporting Goods for 14 years, where his last position was
Senior Vice President - Sales and Distribution.
MARY J. GEORGE, Director and Chief Executive Officer. Ms. George joined the
Company in October 1994 as the Senior Vice President of Marketing and Strategic
Planning, became President--Specialty Retail Division in July 1995, became
President--North America in December 1995, and became President and Chief
Operating Officer in April 1997. Ms. George continued as President, and became
Chief Executive Officer and Director in August 1998. Prior to joining the
Company, Ms. George served as President of Denar Corporation from January 1993
to August 1994, and as President of the WestPointe Group from January 1991 to
December 1992.
WILLIAM L. BRACY, President and Chief Operations Officer. Mr. Bracy joined Bell
in January 1998 as U.S. Group President. In February 1999 he became Chief
Operations Officer and in July 1999, he became President. Prior to joining Bell,
Mr. Bracy served as Executive Vice President of Mattel Europa and as a President
of Mattel Games, both divisions of Mattel, Inc., from September 1995 to December
1997. From August 1990 to September 1995, Mr. Bracy served as President for
Lenox Brands and Lenox China & Crystal, both divisions of Lenox, Inc.
RICHARD S WILLIS, Executive Vice President and Chief Financial Officer. Mr.
Willis joined the Company in April 1999 as Executive Vice President and Chief
Financial Officer. Previously, Mr. Willis served as Executive Vice President and
Chief Financial Officer of Petersen Publishing from October 1995 to April 1999,
and as a Director from December 1996 to April 1999. From 1993 to 1995, Mr.
Willis served as the Executive Vice President and Chief Financial Officer of two
divisions of World Color and from 1990 to 1993 as the Chief Financial Officer
and Secretary of Aster Publishing Company.
KWAI KONG, Vice President--R&D and Manufacturing. Mr. Kong joined Bell in
January 1994, when VistaLite was purchased by the Company, as Director, Design
Engineering. In June 1995, he became Vice President--Research and Development
and, in June 1998, became Vice President--R&D and Manufacturing. Prior to
joining the Company, Mr. Kong was President and Chief Executive Officer of
VistaLite, of which he was also a co-founder. VistaLite was purchased by Bell in
January 1994.
42
<PAGE>
BLAIR CLARK, President--Giro. Mr. Clark joined Giro, a division of Bell, in May
1994 as Vice President of Sales. In July 1998, he became President--Giro. Prior
to joining Bell, Mr. Clark was General Manager of Scott USA.
ITEM 11. EXECUTIVE OFFICER COMPENSATION
SUMMARY COMPENSATION TABLE
The table below summarizes the annual and long-term compensation paid to each of
the Company's Chief Executive Officer and the four next most highly compensated
executive officers (the "Named Executive Officers") for all services rendered to
the Company during the last three fiscal years, in accordance with the
Securities and Exchange Commission ("SEC") rules relating to disclosure of
executive compensation.
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
--------------------------- ------------------------
Restricted Securities All Other
Name and Fiscal Stock Underlying Compen-
Principal Position Year Salary Bonus Awards($)(1) Options(#) sation (2)
- ------------------ ---- ------ ----- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Terry G. Lee 1999 $356,735 $4,260
Chairman 1998 410,962 $152,750 $200,000 5,773
1997 392,885 50,000 209,363 5,155
Mary J. George 1999 366,347 6,099
Chief Executive Officer 1998 298,209 265,000 700,000 5,411
1997 239,962 50,000 148,500 3,193
William L. Bracy 1999 271,160 6,034
President and Chief 1998 115,464 75,000
Operations Officer 1997
Kwai Kong 1999 155,769 150,000 4,866
Vice President--Research 1998 119,164 82,475 5,467
and Development 1997 113,401 24,190 3,163
Blair Clark 1999 157,212 3,456
President--Giro 1998 130,404 26,087 4,487
1997 78,192 769
</TABLE>
(1) Fiscal 1998 awards consist solely of restricted phantom stock units.
Phantom stock units were granted as of August 28, 1997 to the Named
Executive Officers as follows: Mr. Lee 21,763 units and Ms. George 10,881
units. In addition, in accordance with the terms of her employment
agreement with the Company, 32,324 and 30,769 phantom stock units were
granted to Ms. George on August 23, 1997 and September 12, 1997,
respectively. The phantom stock units vested in full at the time of the
Bell Merger. During Fiscal 1997, each of Mr. Lee and Ms. George were
awarded 7,082 shares of restricted stock. Each restricted stock award was
originally to vest incrementally in equal installments on the first three
anniversaries of the date of award, but were vested in full in connection
with the Bell Merger. At the end of Fiscal 1999, there were no phantom
stock units outstanding.
The Named Executive Officers have purchased shares of restricted stock, in
each case at fair market value on the date of purchase, from the Company in
accordance with the Company's Investment and Incentive Plan and the
Company's Class C Investment and Incentive Plan. At the end of Fiscal 1999,
Ms. George held 36,800 unvested shares of Class B Common Stock with a
market value of $22,816 and 3,000 unvested shares of Class C Common Stock
with a market value of $30; Mr. Bracy held 11,500 unvested shares of Class
B Common Stock with a market value of $7,130 and 12,000 unvested shares of
Class C Common Stock with a market value of $120; Mr. Kong held 6,440
unvested shares of Class B Common Stock with a market value of $3,993 and
7,000 unvested shares of Class C Common Stock with a market value of $70;
Mr. Clark held 5,520 unvested shares of Class B Common Stock with a market
value of $3,422 and 4,000 unvested shares of Class C Common Stock with a
market value of $40. The unvested shares lack voting rights and are subject
to repurchase by the Company under specified circumstances.
43
<PAGE>
(2) The Fiscal 1999 amounts include the following annual Company contributions
to the Bell Sports Corp. Employees' Retirement and 401(k) Plan: Mr. Lee
$3,332, Ms. George $5,375, Mr. Bracy $4,015, Mr. Kong $4,594, and Mr. Clark
$3,456. The Fiscal 1999 amounts also include the following life insurance
premiums paid by the Company: Mr. Lee $928, Ms. George $724, Mr. Bracy
$2,019, and Mr. Kong $272.
OPTION GRANTS IN LAST FISCAL YEAR
The table below provides information relating to grants of stock options by the
Company during Fiscal 1999 to each of the Named Executive Officers. The Company
has never granted any stock appreciation rights.
<TABLE>
<CAPTION>
% of Total
Number of Stock Options Potential Realizable Value at Assumed
Securities Granted to Market Annual Rates of Stock Price Appreciation
Underlying Employees Price at for Eight-Year Option Term (3)
Options in Fiscal Exercise date of Expiration ------------------------------------
Name Granted (#)(1) Year Price Grant Date 0% 5% 10%
- ---- ------------- ---- ------ ------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mary J. George (1) 20,511 100% $36.15 $50.99 08/27/06 $ 304,383 $ 803,733 $1,500,412
Mary J. George (2) 16,921 100% 0.44 0.62 08/27/06 3,046 8,055 15,043
</TABLE>
(1) This award constitutes a grant of options to purchase Series A Preferred
Stock.
(2) This aware constitutes a grate of options to purchase Class A Common Stock
(3) The gains shown in these columns result from calculations assuming 0%, 5%,
and 10% growth rates as set by the SEC and are not intended to forecast
future stock price performance.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
Each holder of an option to purchase Common Stock previously issued by the
Company that was outstanding at the time of the Bell Merger received in respect
thereof a cash payment equal to the excess, if any, of $10.25 per share subject
to the option over the applicable exercise price. Messrs. Lee, Kong and Clark
received $667,868, $67,402 and $23,700, respectively, in respect to options held
by them at the time of the Bell Merger.
With the exception of Ms. George, none of the Named Executive Officers exercised
stock options during fiscal 1999 and, with the exception of Ms. George, none of
the Named Executive Officers held any options to acquire any Company stock at
the end of fiscal 1999. The table below provides certain information relating to
the options exercised by Ms. George during fiscal 1999 and the options held by
her at the end of fiscal 1999.
<TABLE>
<CAPTION>
Shares Number of Securities Underlying Value of Unexercised
Acquired on Value Unexercised Options at FY-End In-the-Money Options at FY-End
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mary J. George (1) 16,921 10,491 20,511 -- 304,383 --
</TABLE>
(1) Shares acquired by Ms. George were shares of Class A Common Stock. Options
outstanding at July 3, 1999 provide for the purchase of shares of Series A
Preferred Stock.
DIRECTOR COMPENSATION
In fiscal 1999, each non-employee director who was not affiliated with Brentwood
or Charlesbank was given the opportunity to purchase 3,500 shares of Class B
Common Stock at the fair market value of $0.62 per share.
44
<PAGE>
EMPLOYMENT AGREEMENTS
The Company has an employment agreement with Mr. Lee which provides that he will
serve as Chairman of the Board of the Company for a term expiring in August,
2000, unless terminated earlier in the event of the employee's death or
disability, termination by the Company with or without cause (as defined in the
agreement) or termination by the employee with or without good reason (as
defined in the agreement.) The agreement provides for an annual salary of
$207,500, with annual cash bonuses based on actual operating income as compared
to projected operating income targets approved by the Board of Directors, up to
a maximum annual bonus of 125% of Mr. Lee's then existing base salary. Under the
agreement, Mr. Lee will be paid regardless of any services performed, and even
if his service is terminated with or without cause. Under the employment
agreement, Mr. Lee is entitled to participate in the Company's benefit plans and
programs, and entitled to reimbursement for any deductibles and co-payments
related to medical expenses. The agreement also contains a non-compete
provision, by which Mr. Lee is prohibited from competing against the Company (as
defined) for a period of 5 years from the date of the Bell Merger. As
consideration for this agreement, Mr. Lee is being paid a total of $1.5 million
in three equal annual installments, beginning at the date of the Bell Merger.
The Company has an employment agreement with Ms. George which provides that she
will serve as President and Chief Executive Officer of the Company. The
employment agreement is for a term ending on August 17, 2003 unless terminated
earlier in the event of Ms. George's death or disability, termination by the
Company with or without cause (as defined in the agreement) or termination by
Ms. George. The agreement provides for an annual base salary of $350,000,
subject to annual increases in the discretion of the Company, and annual cash
bonuses in accordance with the Company's management incentive program. Under the
agreement, Ms. George is entitled to participate in the Company's benefit plans
and programs, reimbursement for any deductibles and co-payments related to
medical expenses and reimbursement of automobile expenses and her expenses for
commuting to San Jose. In the event of early termination of Ms. George's
employment by the Company without cause or voluntarily by Ms. George, the
Company will continue to pay Ms. George her base salary and all other benefits,
excluding bonus, for 18 months and, in the case of termination of her employment
by the Company without cause, any outstanding, unexercisable stock options
become exercisable. Effective July 1, 1999, Ms. George relinquished her position
as President. Per the employment agreement, unless Ms. George consents, any
material diminution of her significant duties would allow her to terminate her
employment and receive the compensation noted above. Ms. George has signed a
memo consenting to the change in duties.
The Company has a Memorandum Reference Employment with Mr. Bracy, which provides
for him to serve as US Group President of the Company. The memorandum calls for
a base salary of $250,000 with annual increases at the discretion of the Company
and annual cash bonuses in accordance with the Company's bonus policy. Upon Mr.
Bracy's appointment as President, his salary increased to $290,000. Under the
terms of the memorandum, Mr. Bracy is entitled to participate in the Company's
benefit plans and programs, reimbursement for any deductibles and co-payments
related to medical expenses and a $400 per month automobile allowance. Under the
terms of a separate Severance Agreement with Mr. Bracy, in the event of early
termination of his employment by the Company other than by reason of a
nonqualifying termination, the Company will pay Mr. Bracy an amount equal to his
highest annual base salary. Additionally, medical, dental, accident, disability
and life insurance plans will continue for one year following such termination.
Mr. Willis has signed an offer letter with the Company which provides for him to
serve as Executive Vice President and Chief Financial Officer of the Company.
The letter calls for a base salary of $250,000 with annual increases at the
discretion of Bell. Mr. Willis is entitled to participate in the Company's
benefit plans and programs and to receive reimbursement for any deductibles and
co-payments related to medical expenses. He is also eligible for an annual bonus
equal to 50% of his annual base salary, determined in accordance with the
Company's bonus policy. In the event of involuntary termination without cause,
the letter calls for Mr. Willis to receive his base salary and related benefits
for a period of one year following the date of termination.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee of the Board of Directors consists of Ed McCall, John
Hetterick and Kim Davis. The committee meets regularly to discuss compensation
issues. The committee bases executive compensation on the overall performance of
the Company, the individual performance of the executive, and market
considerations.
45
<PAGE>
Mr. McCall is a Managing Member of Brentwood Private Equity, L.L.C. Mr. Davis is
a Managing Director of Charlesbank Bell Sports Holdings, Limited Partnership.
See "Item 13. Certain Relationships and Related Transactions."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of September 1, 1999 concerning
beneficial ownership of the Company's Series A Preferred Stock, Class A Common
Stock, Class B Common Stock, and Class C Common Stock by each person known by
the Company to own beneficially more than five percent of the outstanding shares
of any class of the Company's stock, each director, each Named Executive Officer
and all directors and executive officers of the Company as a group.
Each share of the Company's Class A Common Stock, Class B Common Stock and Class
C Common Stock is entitled to one vote on each matter presented, provided that
any shares of Class B Common Stock or Class C Common Stock issued pursuant to
one of the Company's Investment and Incentive Plans are not entitled to vote
until fully vested. In general, the Series A Preferred Stock is non-voting.
The Company and its stockholders have entered into a Shareholders Agreement (the
"Shareholders Agreement") pursuant to which each stockholder has agreed, among
other things, in any election of directors, to vote for three nominees
designated by Charlesbank Bell Sports Holdings, Limited Partnership
("Charlesbank"), three nominees designated by Brentwood Associates Buyout Fund
II, L.P. ("Brentwood"), and for as long as her employment agreement so requires,
for Mary George. Charlesbank and Brentwood have also agreed to vote their shares
together in a manner upon which they shall mutually agree with respect to any
matter presented in which they are entitled to vote.
Unless otherwise noted below and except as described above in connection with
the Shareholders Agreement, the listed persons have sole voting and dispositive
power with respect to the shares of Company stock owned by them, subject to
community property laws if applicable.
AMOUNT AND
NATURE OF
NAME AND ADDRESS OF BENEFICIAL PERCENT
BENEFICIAL OWNER TITLE OF CLASS OWNERSHIP OF CLASS
---------------- -------------- --------- --------
Brentwood Associates
Buyout Fund II, L.P.(1) Series A Preferred Stock 434,953 42.0%
Class A Common Stock 358,839 41.2%
Class B Common Stock - *
Class C Common Stock - *
Charlesbank Bell
Sports Holdings,
Limited Partnership(2) Series A Preferred Stock 434,555 42.0%
Class A Common Stock 358,507 41.2%
Class B Common Stock - *
Class C Common Stock - *
CB Capital Investors, L.P.(3) Series A Preferred Stock 97,087 9.4%
Class A Common Stock 80,097 9.2%
Class B Common Stock - *
Class C Common Stock - *
William M. Barnum, Jr.(4) Series A Preferred Stock 434,953 42.0%
Class A Common Stock 358,839 41.2%
Class B Common Stock - *
Class C Common Stock - *
46
<PAGE>
William L. Bracy(5) Series A Preferred Stock 2,233 *
Class A Common Stock 1,855 *
Class B Common Stock 12,500 9.8%
Class C Common Stock 12,000 21.4%
Blair Clark(6) Series A Preferred Stock 631 *
Class A Common Stock 524 *
Class B Common Stock 6,000 4.7%
Class C Common Stock 4,000 7.1%
Kim G. Davis(7) Series A Preferred Stock 434,555 42.0%
Class A Common Stock 358,507 41.2%
Class B Common Stock - *
Class C Common Stock - *
Mary J. George(8) Series A Preferred Stock 20,511 2.0%
Class A Common Stock 16,921 1.9%
Class B Common Stock 40,000 31.2%
Class C Common Stock 3,000 5.4%
John F. Hetterick(9) Series A Preferred Stock 3,880 *
Class A Common Stock 3,196 *
Class B Common Stock 3,500 2.7%
Class C Common Stock - *
Kwai Kong(10) Series A Preferred Stock 505 *
Class A Common Stock 419 *
Class B Common Stock 7,000 5.5%
Class C Common Stock 7,000 12.5%
Terry G. Lee Series A Preferred Stock 4,849 *
Class A Common Stock 3,975 *
Class B Common Stock - *
Class C Common Stock - *
Edward L. McCall(11) Series A Preferred Stock 434,953 42.0%
Class A Common Stock 358,839 41.2%
Class B Common Stock - *
Class C Common Stock - *
Tim R. Palmer(12) Series A Preferred Stock 434,555 42.0%
Class A Common Stock 358,507 41.2%
Class B Common Stock - *
Class C Common Stock - *
John M. Sullivan(13) Series A Preferred Stock 3,879 *
Class A Common Stock 3,196 *
Class B Common Stock 3,500 2.7%
Class C Common Stock - *
Richard S Willis Series A Preferred Stock 9,555 *
Class A Common Stock 7,937 *
Class B Common Stock 12,500 9.8%
Class C Common Stock 12,000 21.4%
Graham Webb Series A Preferred Stock 505 *
Class A Common Stock 419 *
Class B Common Stock 7,000 5.5%
Class C Common Stock 5,000 8.9%
All directors and
executive officers
as a group (12 persons) Series A Preferred Stock 46,043 4.4%
Class A Common Stock 38,023 4.4%
Class B Common Stock 85,000 66.3%
Class C Common Stock 38,000 67.9%
47
<PAGE>
- ----------
* Less than one percent.
(1) The address for Brentwood Associates Buyout Fund II, L.P. is 11150 Santa
Monica Boulevard, Suite 1200, Los Angeles, California 90025.
(2) The address for Charlesbank Bell Sports Holdings, Limited Partnership, is
600 Atlantic Avenue, 26th Floor, Boston, Massachusetts 02210-2203.
(3) The address for CB Capital Investors, L.P. is 380 Madison Avenue, 12th
Floor, New York, New York 10017.
(4) Mr. Barnum is a managing member of Brentwood Private Equity, L.L.C. and as
such, may be deemed to beneficially own the 434,953 shares of Series A
Preferred Stock and 358,839 shares of Class A Common Stock owned by
Brentwood, with shared voting and investment power over the shares. Mr.
Barnum disclaims beneficial ownership of those shares. Mr. Barnum's address
is 11150 Santa Monica Boulevard, Suite 1200, Los Angeles, California 90025.
(5) 11,500 shares of the Class B Common Stock and 12,000 shares of the Class C
Common Stock owned by Mr. Bracy were issued under the Company's Incentive
and Investment Plan and the Company's Class C Incentive and Investment Plan
and have not vested. Mr. Bracy's address is 6350 San Ignacio, San Jose,
California 95119.
(6) 5,520 shares of the Class B Common Stock and 4,000 shares of the Class C
Common Stock owned by Mr. Clark were issued under the Company's Incentive
and Investment Plan and the Company's Class C Incentive and Investment Plan
and have not vested. Mr. Clark's address is 380 Encinal Street, Santa Cruz,
California 95060.
(7) Mr. Davis is a managing director of Charlesbank and as such, may be deemed
to beneficially own the 434,555 shares of Series A Preferred Stock and
358,507 shares of Class A Common Stock owned by Charlesbank, with shared
voting and investment power over the shares. Mr. Davis disclaims beneficial
ownership of those shares. Mr. Davis' address is 600 Atlantic Avenue, 26th
Floor, Boston, Massachusetts 02210-2203.
(8) The shares of Series A Preferred Stock beneficially owned by Ms. George
include 20,511 shares issuable upon the exercise of options which are
currently exercisable. 36,800 shares of the Class B Common Stock and 3,000
shares of the Class C Common Stock owned by Ms. George were issued under
the Company's Incentive and Investment Plan and the Company's Class C
Incentive and Investment Plan and have not vested. Ms. George's address is
6350 San Ignacio, San Jose, California 95119.
(9) 3,220 shares of the Class B Common Stock owned by Mr. Hetterick were issued
under the Company's Incentive and Investment Plan and have not vested.
(10) 6,440 shares of the Class B Common Stock and 7,000 shares of the Class C
Common Stock owned by Mr. Kong were issued under the Company's Incentive
and Investment Plan and the Company's Class C Incentive and Investment Plan
and have not vested. Mr. Kong's address is 6350 San Ignacio, San Jose,
California 95119.
(11) Mr. McCall is a managing member of Brentwood Private Equity, L.L.C. and
Brentwood Private Equity Management, L.L.C. As such, he may be deemed to
beneficially own the 434,953 shares of Series A Preferred Stock and 358,839
shares of Class A Common Stock owned by Brentwood, with shared voting and
investment power over the shares. Mr. McCall disclaims beneficial ownership
of those shares. Mr. McCall's address is 11150 Santa Monica Boulevard, Los
Angeles, California 90025.
(12) Mr. Palmer is a managing director of Charlesbank and as such, may be deemed
to beneficially own the 434,555 shares of Series A Preferred Stock and
358,507 shares of Class A Common Stock owned by Charlesbank, with shared
voting and investment power over the shares. Mr. Palmer disclaims
beneficial ownership of those shares. Mr. Palmer's address is 600 Atlantic
Avenue, 26th Floor, Boston, Massachusetts 02210-2203.
(13) 3,220 shares of the Class B Common Stock owned by Mr. Sullivan were issued
under the Company's Incentive and Investment Plan and have not vested.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to a Corporate Development and Administrative Services Agreement
entered into in connection with the closing of the Bell Merger among Brentwood
Private Equity, L.L.C. ("BPE"), an affiliate of Brentwood, Charlesbank (together
48
<PAGE>
with BPE, the "Advisors"), Bell and BSI, as amended from time to time (the
"Services Agreement"), the Advisors have agreed to assist in the corporate
development activities of the Company by providing services to the Company,
including (i) assistance in analyzing, structuring and negotiating the terms of
investments and acquisitions, (ii) researching, identifying, contacting, meeting
and negotiating with prospective sources of debt and equity financing, (iii)
preparing, coordinating and conducting presentations to prospective sources of
debt and equity financing, (iv) assistance in structuring and establishing the
terms of debt and equity financing and (v) assistance and advice in connection
with the preparation of the Company's financial and operating plans. Pursuant to
the Services Agreement, the Advisors are entitled to receive: (i) upon the
occurrence of certain events, monitoring fees equal to 1% of the aggregate
amount of investment in the Company by the Advisors; (ii) aggregate financial
advisory fees equal to 1.5% of the acquisition cost of the Company's completed
acquisitions, as described above; and (iii) reimbursement of their reasonable
fees and expenses incurred from time to time (a) in performing the services
rendered thereunder and (b) in connection with any investment in, financing of,
or sale, distribution or transfer of any interest in the Company by the Advisors
or any person or entity associated with the Advisors. Upon the closing of the
Bell Merger, the Investors, together, were paid a fee of approximately $3.0
million, in the aggregate, and reimbursed for out of pocket expenses in
connection with the negotiation of the Bell Merger and for providing certain
financial advisory and investment banking services to Bell and BSI including the
arrangement and negotiation of the Credit Facility, the arrangement and
negotiation of the Notes and for other management consulting services.
In connection with the Bell Merger, the Company entered into the Shareholders
Agreement with its stockholders which provides for, among other things, (i)
certain restrictions and rights related to the transfer, sale or purchase of
Bell's Common Stock and Preferred Stock, (ii) certain rights relating to the
election of the Board of Directors described in Item 12 hereof and (iii) certain
registration rights relating to the Company's Class A Common Stock.
In July 1997, the Company sold SportRack to Advanced Accessory Systems Canada
Inc. ("AAS"). An affiliate of CB Capital Investors, L.P. is a principal
stockholder of the parent company of AAS. On July 27, 1998, the Company and AAS
entered into an agreement (the "AAS Agreement") pertaining to an adjustment to
the purchase price of SportRack pursuant to which the Company paid AAS $2.0
million and the Company and AAS agreed to share any amounts that the Company is
able to recover from insurance carriers or other third parties with respect to
the amounts paid by the Company to certain former executives pursuant to the AAS
Agreement.
In July 1999, the Company sold its auto racing helmet business to Bell Racing
Company ("Bell Racing") in exchange for an equity interest in Bell Racing then
valued at approximately $1,225,000 with a contingent payment of additional
equity in Bell Racing of approximately $875,000 upon the satisfaction of certain
conditions. In connection with that transaction, the Company entered into a
long-term royalty-free licensing agreement with Bell Racing to permit Bell
Racing to market auto racing helmets and auto accessories under the Bell name.
The Company also agreed to provide Bell Racing with certain transition services
and entered into a sublease with respect to a portion of its manufacturing
facility in Rantoul, Illinois. Bell Racing is controlled by Hayden Capital
Investments, LC ("Hayden Investments"). Mr. Lee is the Managing Member of Hayden
Investments and the Chairman of Bell Racing. In connection with the consummation
of the transaction, Hayden Investments became entitled to receive a payment
equal to 1% of the aggregate capital invested in Bell Racing in accordance with
the terms of a corporate services and development agreement between Hayden
Investments and Bell Racing.
During fiscal 1998, in connection with the relocation of Mr. Bracy's primary
residence, the Company made a non-interest bearing secured loan of $150,000,
$112,500 of which remains outstanding at July 3, 1999. The loan is due upon the
earlier of (I) termination of employment, (ii) dissolution or liquidation of the
Company, or (iii) April 8, 2001. Half of any bonus award earned by Mr. Bracy
will be applied to reduce the outstanding balance of such loan.
During fiscal 1999, in connection with the Company's Investment and Incentive
Plan and Class C Investment and Incentive Plan, the Company issued loans to
allow certain participants to purchase Company stock. The loans bear interest at
an annual rate of 7% and become due in annual installments from September 1999
through September 2003. Under the plans, loans were issued to Mr. Bracy for
$115,011, Mr. Kong for $26,010, and Mr. Clark for $32,500, all of which were
outstanding as of July 3, 1999.
On August 17, 1998, the Company issued its 14% Senior Discount Debenture due
2009 to Charlesbank in an aggregate principal amount of $14,742,500. For each
$1,000 principal amount the issue price was $508.73 and the amount of the
original issue discount was $491.27. The debenture matures on August 14, 2009,
and the yield to maturity is 14% per annum. Interest on the principal amount of
the debenture will begin to accrue on August 15, 2003 and will be payable in
cash on each succeeding August 15 and February 15. On March 12, 1999, the
Company exchanged a portion of this debenture with an accreted value of $1.2
million for 23,781 shares of Series A Preferred Stock and 19,597 shares of Class
A Common Stock.
On August 17, 1998, the Company issued its 14% Senior Discount Debenture due
2009 to Brentwood in an aggregate principal amount of $14,742,500. For each
$1,000 principal amount the issue price was $508.73 and the amount of the
original issue discount was $491.27. The debenture matures on August 14, 2009,
and the yield to maturity is 14% per annum. Interest on the principal amount of
the debenture will begin to accrue on August 15, 2003 and will be payable in
cash on each succeeding August 15 and February 15. On March 12, 1999, the
Company exchanged a portion of this debenture with an accreted value of $1.2
million for 23,781 shares of Series A Preferred Stock and 19,597 shares of Class
A Common Stock.
Mr. Lee is a general partner of Mission Leasing and Hayden Leasing ("Hayden
Leasing"), general partnerships. On November 1, 1995, the Company entered into a
lease agreement with Hayden Leasing pursuant to which the Company leased an
airplane for a monthly fee of $3,000 during Fiscal 1999. This lease agreement
terminates on June 30, 2000.
See "Compensation Committee Interlocks and Insider Participation" and
"Employment Agreements".
49
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The consolidated financial statements, other financial data and consolidated
financial schedules of the Company and its subsidiaries, listed below are
included as part of this report:
Page No.
- --------
21 Consolidated balance sheets - July 3, 1999 and June 27, 1998
22 Consolidated statements of operations - Years ended July 3, 1999,
June 27, 1998 and June 28, 1997
24 Consolidated statements of cash flows - Years ended July 3, 1999,
June 27, 1998 and June 28, 1997
25 Notes to consolidated financial statements
54 Schedule II - Valuation and qualifying accounts
55 Report of independent accountants on financial statement schedule
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
50
<PAGE>
(a)(3) EXHIBITS
NUMBER DESCRIPTION
- ------ -----------
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 4.2 to the Company's Current
Report on Form 8-K dated August 17, 1998 (the "August 1998 8-K")).
3.2 Bylaws of the Company (incorporated by reference to Exhibit 4.3 to
the August 1998 8-K).
3.3 Articles of Incorporation of BSI (incorporated by reference to
Exhibit 3.3 to the Company's Registration Statement on Form S-4,
File No. 333-65115 (the "Form S-4")).
3.4 Amended and Restated Bylaws of BSI (incorporated by reference to
Exhibit 3.4 to the Form S-4).
4.1 Shareholders Agreement, dated as of August 17, 1998, among the
Company and the stockholders party thereto (incorporated by
reference to Exhibit 4.1 to the Form S-4).
4.2 Indenture, dated as of November 15, 1993, between the Company and
Harris Trust and Savings Bank, as Trustee, relating to the Company's
4 1/4% Convertible Subordinated Debentures due 2000 (incorporated by
reference to Exhibit 4.1 to the Company's Current Report on Form 8-K
dated October 26, 1993).
4.3* Supplemental Indenture, dated as of August 17, 1998, between the
Company and Harris Trust and Savings Bank, as Trustee, relating to
the Company's 4 1/4% Convertible Subordinated Debentures due 2000.
4.4 Indenture, dated as of August 17, 1998, among the Company, BSI and
Harris Trust and Savings Bank, as Trustee, relating to BSI's Series
A and Series B Senior Subordinated Notes due 2008 (incorporated by
reference to Exhibit 4.1 to the August 1998 8-K).
4.5* Debenture Purchase Agreement, dated as of August 17, 1998, among
Bell Sports Corp., Charlesbank Bell Sports Holdings, Limited
Partnership and Brentwood Associates Buyout Fund II, L.P.
4.6* 14% Senior Discount Debenture due 2009, dated August 17, 1998,
issued by the Company to Charlesbank Bell Sports Holdings, Limited
Partnership.
4.7* 14% Senior Discount Debenture due 2009, dated August 17, 1998,
issued by the Company to Brentwood Associates Buyout Fund II, L.P.
10.1 Credit Agreement, dated August 17, 1998, among BSI, the Company, the
financial institutions parties thereto as Lenders, Societe Generale
and DLJ Capital Funding, Inc. (incorporated by reference to Exhibit
10.1 to the Form S-4).
10.2 Borrower Pledge and Security Agreement, dated August 17, 1998,
between BSI and Societe Generale (incorporated by reference to
Exhibit 10.2 to the Form S-4).
10.3 Guarantor Pledge and Security Agreement, dated August 17, 1998,
among the Company, Giro Sport Design International, Inc. and Societe
Generale (incorporated by reference to Exhibit 10.3 to the Form
S-4).
10.4 Corporate Development and Administrative Services Agreement, dated
August 17, 1998 among the Company, BSI, Charlesbank Capital
Partners, LLC and Brentwood Private Equity, L.L.C. (incorporated by
reference to Exhibit 10.4 to the Form S-4).
10.5 Amended and Restated Employment Agreement, dated as of February 17,
1998, among the Company, BSI and Terry G. Lee (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 28, 1998 (the "March 1998 10-Q")).
10.6 Noncompetition Agreement dated December 8, 1997 between the Company,
BSI and Terry G. Lee (incorporated by reference to Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
December 27, 1997 (the "December 1997 10-Q")).
51
<PAGE>
10.7 Amended and Restated Employment Agreement, dated as of February 17,
1998, among the Company, BSI and Mary J. George (incorporated by
reference to Exhibit 10.2 to the March 1998 10-Q).
10.8 The Company's Series A Preferred Stock Option Agreement between the
Company and Mary J. George dated August 17, 1998 (incorporated by
reference to Exhibit 10.2 to the September 1998 10-Q).
10.9 The Company's Class A Common Stock Option Agreement between the
Company and Mary J. George dated August 17, 1998 (incorporated by
reference to Exhibit 10.3 to the September 1998 10-Q).
10.10* Memorandum of Understanding, dated July 15, 1999, between the
Company and Mary J. George.
10.11 Memorandum reference Employment Outline for Bill Bracy, dated
November 26, 1997 (incorporated by reference to Exhibit 10.6 to the
December 1997 10-Q).
10.12 Severance Agreement, dated December 1, 1997, between the Company,
BSI and Bill Bracy (incorporated by reference to Exhibit 10.7 to the
December 1997 10-Q).
10.13 Promissory Note, dated April 8, 1998, between BSI and Bill Bracy
(incorporated by reference to Exhibit 10.4 to the March 1998 10-Q).
10.14 Collateral Pledge Agreement, dated April 8, 1998, between BSI and
Bill Bracy (incorporated by reference to Exhibit 10.5 to the March
1998 10-Q).
10.15* Employment Offer Letter, dated May 25, 1999, between the Company and
Richard S Willis.
10.16 Form of Vehicle Lease Agreement between BSI and Mission Leasing
(incorporated by reference to Exhibit 10.77 to the Company's
Registration Statement on Form S-1, File No. 33-45868 (the "Form
S-1")).
10.17 Form of Equipment Lease between BSI and Mission Leasing
(incorporated by reference to Exhibit 10.78 to the Form S-1).
10.18 Lease of Aircraft between BSI and Hayden Leasing, L.C. dated
November 1, 1995 (incorporated by reference to Exhibit 10.18 to the
Company's Annual Report on Form 10-K for the fiscal year ended June
29, 1996).
10.19 The Company's Investment and Incentive Plan, dated December 21, 1998
(incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended December 26,
1998 (the "December 1998 10-Q")).
10.20 The Company's Class C Investment and Incentive Plan, dated December
21, 1998 (incorporated by reference to Exhibit 10.2 to the December
1998 10-Q).
10.21* Form of Promissory Note between the Company and certain employees,
secured by shares issued under the Company's Investment and
Incentive Plan.
10.22 Manufacturing and Product Development Agreement between BSI and
Pactuco, Inc. dated September 22, 1998 (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 26, 1998 (the "September 1998 10-Q")).
10.23 Merchandise Sourcing Agreement between BSI and DS-MAX U.S.A., Inc.
dated February 18, 1999 (incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the quarter ended
March 29, 1999).
21* Subsidiaries of the Registrant
27.1* Financial data schedule for 1999
- ----------
* Filed herewith
Exhibits 10.4 through 10.15 and 10.19 through 10.21 listed are the management
contracts and compensatory plans or arrangements required to be filed as
exhibits hereto pursuant to the requirements of Item 601 of Regulation S-K.
Documents not filed herewith have previously been filed by the Company with the
Securities and Exchange Commission, File No. 0-19873.
52
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities indicated
on this 24th day of September, 1999.
Name
- ----
/s/ Mary J. George Director and Chief Executive Officer
- ------------------------------ (principal executive officer)
Mary J. George
/s/ Richard S Willis Executive Vice President and Chief Financial
- ------------------------------ Officer, (principal financial and accounting
Richard S Willis officer)
/s/ Terry G. Lee Director and Chairman
- ------------------------------
Terry G. Lee
/s/ William M. Barnum, Jr. Director
- ------------------------------
William M. Barnum, Jr.
/s/ Kim G. Davis Director
- ------------------------------
Kim G. Davis
/s/ John F. Hetterick Director
- ------------------------------
John F. Hetterick
/s/ Edward L. McCall Director
- ------------------------------
Edward L. McCall
/s/ Tim R. Palmer Director
- ------------------------------
Tim R. Palmer
/s/ John M. Sullivan Director
- ------------------------------
John M. Sullivan
53
<PAGE>
BELL SPORTS CORP.
SCHEDULE II - VALUATION
AND QUALIFYING ACCOUNTS
For each of the three fiscal years
in the period ended July 3, 1999
(in thousands)
<TABLE>
<CAPTION>
Additions
---------------------
Balance at Charged to
beginning costs and Charged to Balance at
of period expenses other accounts Deductions end of period
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
JULY 3, 1999
Deferred tax asset
valuation allowance $ 1,798 $ -- $ -- $ 690 $ 1,108
Allowance for
doubtful accounts $ 1,690 $ 907 $ -- $ 829 $ 1,768
Inventory valuation
allowance $ 2,299 $ 4,592 $ -- $ 4,008 $ 2,883
JUNE 27, 1998
Deferred tax asset
valuation allowance $ 1,970 $ -- $ -- $ 172 $ 1,798
Allowance for
doubtful accounts $ 5,021 $ 1,077 $(1,300)(a) $ 3,108 $ 1,690
Inventory valuation
allowance $ 3,326 $ 2,340 $ -- $ 3,367 $ 2,299
JUNE 28, 1997
Deferred tax asset
valuation allowance $ 1,305 $ 665 $ -- $ -- $ 1,970
Allowance for
doubtful accounts $ 3,448 $ 4,553 $ -- $ 2,980 $ 5,021
Inventory valuation
allowance $ 6,599 $ 2,876 $ -- $ 6,149 $ 3,326
</TABLE>
(a) Reversal to Loss on Disposal of Product Line.
54
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
and Stockholders of
Bell Sports Corp.
Our audits of the consolidated financial statements referred to in our report
dated September 8, 1999 appearing in this Form 10-K also included an audit of
the Financial Statement Schedule listed in Item 14 of this Form 10-K. In our
opinion, this Financial Statement Schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
PRICEWATERHOUSECOOPERS LLP
San Francisco, California
September 8, 1999
55
- --------------------------------------------------------------------------------
BELL SPORTS CORP.
TO
HARRIS TRUST AND SAVINGS BANK
TRUSTEE
----------
SUPPLEMENTAL INDENTURE
DATED AS OF AUGUST 17, 1998
TO
INDENTURE
DATED AS OF NOVEMBER 15, 1993
----------
$86,250,000
4 1/4% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2000
- --------------------------------------------------------------------------------
<PAGE>
This SUPPLEMENTAL INDENTURE, dated as of August 17, 1998 (this
"Supplemental Indenture"), is executed by Bell Sports Corp., a Delaware
corporation (the "Company"), and Harris Trust and Savings Bank, an Illinois
banking corporation (the "Trustee"), to amend the Indenture, dated as of
November 15, 1993 (the "Indenture"), between the Company and the Trustee,
pursuant to which the Company issued $86,250,000 aggregate principal amount of 4
1/4% Convertible Subordinated Debentures due November 15, 2000 (the
"Securities").
WHEREAS, the Indenture provides that a Holder of a Security may convert it
into Common Stock at any time prior to the close of business on November 15,
2000;
WHEREAS, the Company has entered into an Agreement and Plan of
Recapitalization and Merger, dated as of February 17, 1998, as amended as of
April 8, 1998 (the "Merger Agreement"), with HB Acquisition Corporation, a
Delaware corporation ("HB Acquisition"), providing for, among other things, the
merger (the "Merger") of HB Acquisition with and into the Company, with the
Company continuing as the surviving corporation;
WHEREAS, the Merger Agreement also provides for the conversion of each
share of Common Stock outstanding immediately prior to the Effective Time (as
defined in the Merger Agreement) of the Merger (other than (i) shares of Common
Stock held by HB Acquisition or shares of Common Stock held directly or
indirectly by the Company and (ii) shares of Common Stock held by individuals
perfecting appraisal rights) into the right to receive $10.25 in cash;
-2-
<PAGE>
WHEREAS, the Effective Time of the Merger was ________ on Monday, August
17, 1998;
WHEREAS, Section 1211 of the Indenture provides that, in the case of any
merger of another Person into the Company (other than a merger which does not
result in any reclassification, conversion, exchange or cancellation of
outstanding Common Stock of the Company), the Person resulting from such merger
shall execute and deliver to the Trustee a supplemental indenture providing that
the Holder of each Security then outstanding shall have the right thereafter,
during the period such Security shall be convertible as specified in Section
1201 of the Indenture, to convert such Security only into the kind and amount of
securities, cash and other property receivable upon such merger by a holder of
the number of shares of Common Stock of the Company into which such Security
might have been converted immediately prior to such merger;
WHEREAS, the Conversion Price has never been required to be adjusted as
provided in Section 1204 of the Indenture;
WHEREAS, the Company is the surviving corporation in the Merger and the
Person obligated to deliver cash upon conversion of the Securities;
WHEREAS, Section 901 of the Indenture permits the Company, when authorized
by a Board Resolution, and the Trustee, without the consent of any Holder, to
enter into one or more indentures supplemental to the Indenture, in form
satisfactory to the Trustee, to make provision with respect to the conversion
rights of Holders pursuant to the requirements of Article Twelve thereof;
-3-
<PAGE>
and
WHEREAS, the Company has duly authorized the execution and delivery of this
Supplemental Indenture and all things necessary to make this Supplemental
Indenture a valid agreement of the Company, in accordance with its terms, have
been done.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the Company
and the Trustee execute this Supplemental Indenture without the consent of any
Holder pursuant to Sections 901 and Article Twelve of the Indenture and agree as
follows:
1. Section 1201 of the Indenture is amended to read in its entirety as
follows:
SECTION 1201. CONVERSION PRIVILEGE AND CONVERSION PRICE.
Subject to and upon compliance with the provisions of this Article, at the
option of the Holder thereof, any Security or any portion of the principal
amount thereof which is $1,000 or an integral multiple of $1,000 may be
converted at the principal amount thereof, or of such portion thereof, into a
right to receive cash in an amount (the "Conversion Amount") determined by
dividing the principal amount to be converted by the conversion price of $54.06
(the "Conversion Price"), rounding the quotient to the nearest 1/100th and
multiplying that quotient (as so rounded) by $10.25. Such conversion right shall
expire at the close of business on November 15, 2000; provided, that in case a
Security or portion thereof is called for redemption or delivered for repurchase
to Article Fourteen, such conversion right in respect of the Security or portion
so called shall expire at the close of business on the Redemption Date or the
Repurchase Date (as defined in Article Fourteen), as the case may be, unless the
Company defaults in making the payment due upon redemption or repurchase. No
further adjustments shall be made to the Conversion Price.
2. Section 1202 of the Indenture is amended to read in its entirety as
follows:
-4-
<PAGE>
SECTION 1202. EXERCISE OF CONVERSION PRIVILEGE.
In order to exercise the conversion privilege, the Holder of any Security
to be converted shall surrender such Security, duly endorsed or assigned to the
Company or in blank, at any office or agency of the Company maintained for that
purpose pursuant to Section 1002, accompanied by written notice of conversion in
the form provided on the Security (or such other notice as is acceptable to the
Company) at such office or agency that the Holder elects to convert such
Security or, if less than the entire principal amount thereof is to be
converted, the portion thereof to be converted. Securities surrendered for
conversion during the period from the close of business on any Regular Record
Date next preceding any Interest Payment Date to the opening of business on such
Interest Payment Date (the "Interest Period") shall (except in the case of
Securities or portions thereof called for redemption on a Redemption Date during
such Interest Period) be accompanied by payment of an amount equal to the
interest payable on such Interest Payment Date on the principal amount of
Securities being surrendered for conversion; provided, however, that no such
payment need be made if there shall exist a default in payment of interest on
the Securities as of the Date of Conversion (as defined in the next paragraph).
Subject to the provisions of Section 307 relating to the payment of Defaulted
Interest by the Company, the interest payment with respect to a Security called
for redemption on a Redemption Date during the period from the close of business
on any Regular Record Date next preceding any Interest Payment Date to the
opening of business on such Interest Payment Date shall be payable on such
Interest Payment Date to the Holder of such Security at the close of business on
such Regular Record Date notwithstanding the conversion of such Security after
such Regular Record Date and prior to such Interest Payment Date, and the Holder
converting such Security need not include a payment of such interest payment
amount upon surrender of such Security for conversion. Except as provided in the
two preceding sentences and subject to the fourth paragraph of Section 307, no
payment or adjustment shall be made upon any conversion on account of any
interest accrued on the Securities surrendered for conversion. All payments
required by this paragraph to be made by Holder upon the surrender of Securities
for conversion shall be made in New York Clearing House funds or other funds
acceptable to the Company.
Securities shall be deemed to have been converted immediately prior to the
close of business on the day of surrender of such Securities for conversion in
accordance with the foregoing provisions (the "Date of Conversion"), and at such
time the rights of the Holders of such Securities as Holders shall cease. As
promptly as practicable on or after the Date of Conversion, the Company shall
deliver a check in payment of the Conversion Amount, without interest, at such
office or agency.
In the case of any Security which is converted in part only, upon such
conversion the Company shall execute and the Trustee shall authenticate and
deliver to the Holder thereof, at the expense of the Company, a new Security or
Securities of authorized denominations in aggregate principal amount equal to
the unconverted portion of the principal amount of such Security.
3. Section 1206 of the Indenture is amended to read in its entirety as
follows:
-5-
<PAGE>
SECTION 1206. NOTICE OF CERTAIN TRANSACTIONS.
In case of the voluntary or involuntary dissolution, liquidation or winding
up of the Company, then the Company shall cause to be filed at each office or
agency maintained for the purpose of conversion of Securities pursuant to
Section 1002, and shall cause to be mailed to all Holders at their last
addresses as they shall appear in the Security Register, at least 20 days prior
to the applicable effective date, a notice stating the date on which such
dissolution, liquidation or winding up is expected to become effective.
4. The Indenture is amended to delete Sections 1203, 1204, 1205, 1207,
1208, 1209 and 1211.
5. Section 205 of the Indenture is amended to read in its entirety as
follows:
SECTION 205. FORM OF CONVERSION NOTICE.
The undersigned Holder of this Security hereby irrevocably exercises the
option to convert this Security, or portion hereof (which is $1,000 or an
integral multiple thereof) below designated, into an amount in cash in
accordance with the terms of the Indenture, and directs that the check
deliverable in payment upon such conversion and any Securities representing any
unconverted principal amount hereof, be issued and delivered to the undersigned
unless a different name has been indicated below. If Securities are to be issued
in the name of a person other than the undersigned, the undersigned will pay all
transfer taxes payable with respect thereto. Any amount required to be paid by
the undersigned on account of interest accompanies this Security.
Dated:
------------------------------ ----------------------------------------
Signature
If cash is to be delivered or Principal amount to be converted (if
Securities are to be registered less than all):
in the name of a Person other $_____.00
than the Holder, please print such
Person's name and address:
----------------------------------------
Social Security or other
Taxpayer Identification Number
- ------------------------------------
Name
- ------------------------------------
Street Address
- ------------------------------------
City, State and Zip Code
-6-
<PAGE>
6. The Registrar shall imprint or otherwise affix conspicuously on every
Security authenticated and issued in exchange or substitution for an outstanding
Security that is presented for exchange or registration of transfer a legend and
a Notice of Conversion in substantially the following form:
PURSUANT TO A SUPPLEMENTAL INDENTURE, DATED AS OF AUGUST 17, 1998, THE
RIGHT TO CONVERT THIS SECURITY INTO COMMON STOCK HAS BEEN CHANGED INTO A
RIGHT TO CONVERT IT INTO A CASH AMOUNT DETERMINED BY DIVIDING THE PRINCIPAL
AMOUNT TO BE CONVERTED BY THE CONVERSION PRICE OF $54.06, ROUNDING THE
QUOTIENT TO THE NEAREST 1/100TH, AND MULTIPLYING THAT QUOTIENT (AS SO
ROUNDED) BY $10.25. NO FURTHER ADJUSTMENT SHALL BE MADE TO THE CONVERSION
PRICE.
NOTICE OF CONVERSION
The undersigned Holder of this Security hereby irrevocably exercises the
option to convert this Security, or portion hereof (which is $1,000 or an
integral multiple thereof) below designated, into an amount in cash in
accordance with the terms of the Indenture, and directs that the check
deliverable in payment upon such conversion and any Securities representing any
unconverted principal amount hereof, be issued and delivered to the undersigned
unless a different name has been indicated below. If Securities are to be issued
in the name of a person other than the undersigned, the undersigned will pay all
transfer taxes payable with respect thereto. Any amount required to be paid by
the undersigned on account of interest accompanies this Security.
Dated:
------------------------------ ----------------------------------------
Signature
If cash is to be delivered or Principal amount to be converted (if
Securities are to be registered less than all):
in the name of a Person other $_____.00
than the Holder, please print such
Person's name and address:
----------------------------------------
Social Security or other
Taxpayer Identification Number
- ------------------------------------
Name
- ------------------------------------
Street Address
- ------------------------------------
City, State and Zip Code
-7-
<PAGE>
7. For all purposes of this Supplemental Indenture, except as otherwise
herein expressly provided or unless the context otherwise requires: (i) the
capitalized terms and phrases used in this Supplemental Indenture that are
defined in the Indenture have the meanings attributed to them in the Indenture,
and the definitions of those terms and phrases contained in the Indenture are
incorporated by reference in this Supplemental Indenture; and (ii) the words
"herein," "hereof," "hereby" and other words of similar import used in this
Supplemental Indenture refer to this Supplemental Indenture as a whole and not
to any particular section of it.
8. The Trustee accepts the amendment of the Indenture effected by this
Supplemental Indenture and shall execute the trust created by the Indenture, as
so amended, but only upon the terms and conditions set forth in the Indenture,
as so amended, including the terms and provisions defining and limiting the
liabilities and responsibilities of the Trustee, which terms and provisions
shall in like manner define and limit its liabilities in the performance of the
trust created by the Indenture, as so amended. Without limiting the generality
of the foregoing, the Trustee (a) has no responsibility for the correctness of
the recitals of fact set forth in this Supplemental Indenture, which are
statements only of the Company, (b) makes no representations as to the validity
or sufficiency of this Supplemental Indenture and (c) shall incur no liability
or responsibility in respect of any invalidity of this Supplemental Indenture.
9. Except as expressly amended hereby, the Indenture is in all respects
ratified and confirmed and its terms, conditions and provisions remain in full
force and effect.
-8-
<PAGE>
10 . This Supplemental Indenture shall form a part of the Indenture for all
purposes, and every Holder of Securities heretofore or hereafter authenticated
and delivered under the Indenture shall be bound hereby.
11. This Supplemental Indenture shall be governed by and construed in
accordance with the laws of the State of Illinois.
12. This instrument may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same instrument.
-9-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed, and their respective seals to be hereunto affixed
and attested, all as of the day and year first above written.
BELL SPORTS CORP.
By: /s/ Terry G. Lee
------------------------------------
Name: Terry G. Lee
Title: Chairman and Chief Executive
Officer
Attest:
/s/ Linda K. Bounds
- -----------------------------------
Linda K. Bounds
Secretary
HARRIS TRUST and SAVINGS BANK,
AS TRUSTEE
By:
------------------------------------
Name:
Title:
Attest:
- -----------------------------------
<PAGE>
STATE OF ARIZONA )
) ss:
COUNTY OF MARICOPA )
On this ____ day of August, 1998, before me a Notary Public in and for said
country and state, personally appeared _____________________ and
____________________, to me personally known and known to me to be the same
persons who executed the within foregoing instrument, who, being by me duly
sworn, did depose, acknowledge and say: That they are, respectively, the
______________________ and _____________________ of Bell Sports Corp., one of
the corporations described in and which executed the foregoing instrument; that
they know the seal of said corporation; and that the seal affixed to said
instrument is the seal of said corporation; that said instrument was signed and
sealed on behalf of the said corporation by authority of its Board of Directors;
and they acknowledged the execution of said instrument to be the voluntary act
and deed of said corporation by it voluntarily executed.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal this day
of ______________, 1998.
----------------------------------------
NOTARY PUBLIC
My Commission Expires: __________
[Notarial Seal]
<PAGE>
STATE OF ILLINOIS )
) ss:
COUNTY OF COOK )
On this ____ day of _____________, 1997, before me, a Notary Public in and
for said country and state, personally appeared _________________________ and
______________________, to me personally known and known to me to be the same
persons who executed the within foregoing instrument, who, being by me duly
sworn, did depose, acknowledge and say: That they are, respectively, the
______________________ and ___________________, of Harris Trust and Savings
Bank, an Illinois banking corporation described in and which executed the
foregoing instrument; that they know the seal of said association; and that the
seal affixed to said instrument is the seal of said association; that said
instrument was signed and sealed on behalf of the said association by authority
of its Board of Directors; and they acknowledged the execution of said
instrument to be the voluntary act and deed of said association by it
voluntarily executed.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal this day
of ______________, 1998.
----------------------------------------
NOTARY PUBLIC
My Commission Expires: __________
[Notarial Seal]
DEBENTURE PURCHASE AGREEMENT
Dated as of August 17,1998
Between
BELL SPORTS CORP.
as the Issuer,
and
CHARLESBANK BELL SPORTS HOLDINGS, LIMITED PARTNERSHIP
AND
BRENTWOOD ASSOCIATES BUYOUT FUND II, L.P.
as the Purchasers
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS.............................................2
SECTION 1.01. Certain Defined Terms........................................2
SECTION 1.02. Computation of Time Periods..................................4
SECTION 1.03. Accounting Terms.............................................4
ARTICLE II
DEBENTURE AND WARRANT PURCHASE...............................................4
SECTION 2.01. Authorization of Debentures..................................4
SECTION 2.02. Purchase and Sale of Debentures..............................5
SECTION 2.03. The Closing..................................................5
SECTION 2.04. Use of Proceeds..............................................5
SECTION 2.05. Representations of the Purchasers............................5
ARTICLE III
CONDITIONS...................................................................7
SECTION 3.01. Conditions Precedent to Closing..............................7
ARTICLE IV
REPRESENTATIONS AND WARRANTIES...............................................8
SECTION 4.01. Representations and Warranties of the Issuer.................8
ARTICLE V
EVENTS OF DEFAULT...........................................................10
SECTION 5.01. Events of Default...........................................10
ARTICLE VI
MISCELLANEOUS...............................................................11
-i-
<PAGE>
SECTION 6.01. Complete Agreement; Modification of Agreement; Sale of
Interest....................................................11
SECTION 6.02. No Waiver by Holders of the Debentures......................12
SECTION 6.03. Remedies....................................................13
SECTION 6.04. MUTUAL WAIVER OF JURY TRIAL.................................13
SECTION 6.05. Severability................................................13
SECTION 6.06. Parties.....................................................13
SECTION 6.07. Conflict of Terms...........................................13
SECTION 6.08. Authorized Signatories......................................13
SECTION 6.09. GOVERNING LAW...............................................14
SECTION 6.10. Notices.....................................................14
SECTION 6.11. Survival....................................................15
SECTION 6.12. Section Titles..............................................16
SECTION 6.13. Counterparts................................................16
EXHIBITS
Exhibit A - Form of Debenture
-ii-
<PAGE>
DEBENTURE PURCHASE AGREEMENT
This DEBENTURE PURCHASE AGREEMENT dated as of August 17, 1998 is made
between Bell Sports Corp., a Delaware corporation (the "ISSUER"), and
Charlesbank Bell Sports Holdings, Limited Partnership, a Massachusetts limited
partnership ("CHARLESBANK"), and Brentwood Associates Buyout Fund II, L.P., a
Delaware limited partnership ("BRENTWOOD" and together with Charlesbank, the
"PURCHASERS")
PRELIMINARY STATEMENTS:
A. Pursuant to an Agreement and Plan of Merger and Recapitalization dated
February 7, 1998, as amended on April 8, 1998 (the "MERGER
AGREEMENT"), between the Issuer and HB Acquisition Corporation, a
Delaware Corporation ("HBAC") controlled by the Purchasers, HBAC was
merged (the "MERGER") with and into the Issuer with the Issuer
continuing as the surviving corporation (the "SURVIVING CORPORATION")
B. Pursuant to the Merger Agreement, each outstanding of common stock of
the Issuer, $0.01 par value per share (the "COMMON STOCK") (other than
shares of Common Stock held by HBAC or held directly or indirectly by
the Company or held by individuals perfecting appraisal rights), was
exchanged for $10.25 in cash.
C. In connection with the Merger, on June 30, 1998, the Company commenced
a tender offer (as amended on July 24, 1998, the "TENDER OFFER"), for
up to $62.5 million in principal aggregate amount of its existing 4
1/4% Convertible Subordinated Debentures.
D. In connection with the Merger, by means of a Confidential Preliminary
Offering Memorandum dated July 27, 1998, BSI offered (the "OFFERING")
to sell $110.0 million aggregate principal amounts of its Senior
Subordinated Notes due 2008 (the "BSI NOTES") pursuant to a Purchase
Agreement dated August 10, 1998 (the "PURCHASE AGREEMENT") among Bell
Sports, Inc., a wholly-owned subsidiary of the Company ("BSI"), the
Company, Donaldson, Lufkin & Jenrette Securities Corporation, SG Cowen
Securities Corporation and NationsBank Montgomery Securities LLC
(collectively, the "INITIAL PURCHASERS").
E. In connection with the Merger, BSI entered into a Credit Agreement
dated August 17, 1998, (the "CREDIT AGREEMENT") pursuant to finance
the fees and expenses to be paid in the Merger.
F. As a result of the Merger, the Purchasers shall beneficially own
approximately 87% of the equity of the Issuer.
<PAGE>
G. The Issuer proposes to issue and sell to the Purchasers an aggregate
of $29,485,000 face amount 14% Senior Discount Debentures due 2009 for
aggregate proceeds of $15.0 million and the Purchasers wish to
purchase such Debentures.
H. Accordingly, in consideration of the mutual agreements contained
herein, and subject to the terms and conditions hereof, the parties
hereto agree as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.01. CERTAIN DEFINED TERMS. As used in this Agreement, the
following terms shall have the following meanings (such meanings to be equally
applicable to both the singular and plural forms of the terms defined):
"ACCRETED VALUE" means, as of any date of determination, the sum
(rounded to the nearest whole dollar) of (a) the initial offering price of
each $1,000 in principal amount at maturity of Debentures and (b) the
portion of the excess of the principal amount of Debentures over such
initial offering price which shall have been accreted thereon through such
date, such amount to be so accreted on a daily basis at the rate of 14.00%
per annum compounded semi-annually on each June 1 and December 1 from the
date of issuance of the Debenture through the date of determination. On or
after June 1, 2003, the Accreted Value of each Debenture shall be equal to
its principal amount at maturity.
"AGREEMENT" shall mean this Debenture Purchase Agreement, including
all amendments, modifications and supplements hereto and any appendices,
exhibits or schedules to any of the foregoing, and shall refer to this
Agreement as the same may be in effect at the time such reference becomes
operative.
"BUSINESS DAY" means a day of the year on which banks are not required
or authorized by law to close in Boston, Massachusetts or Los Angeles,
California.
"COMMISSION" shall mean the Securities and Exchange Commission or any
other Federal agency then administering the Securities Act and other
Federal securities laws.
"DEBENTURE" and "DEBENTURES" have the meanings specified in Section
2.01.
"DEFAULT" means any Event of Default or any event that would
constitute an Event of Default but for the requirement that notice be given
or time elapse or both.
"EXISTING CONVERTIBLE DEBENTURES" has the meaning specified in the
Preliminary Statements.
-2-
<PAGE>
"MATERIAL ADVERSE EFFECT" means a material adverse effect on (a) the
business, condition (financial or otherwise), operations, performance,
properties or prospects of the Issuer and its Subsidiaries taken as a
whole.
"MATURITY DATE" means the earlier of August 14, 2009 and the date of
termination in whole of the Debenture Obligations.
"PERSON" means an individual, partnership, corporation (including a
business trust), limited liability company, joint stock company, trust,
unincorporated association, joint venture or other entity, or a government
or any political subdivision or agency thereof.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or
any similar Federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"SOLVENT" means, with respect to any Person on a particular date, that
on such date (a) the fair value of the property of such Person is greater
than the total amount of liabilities, including, without limitation,
contingent liabilities, of such Person, (b) the present fair salable value
of the assets of such Person is not less than the amount that will be
required to pay the probable liability of such Person on its debts as they
become absolute and matured, (c) such Person does not intend to, and does
not believe that it will, incur debts or liabilities beyond such Person's
ability to pay such debts and liabilities as they mature and (d) such
Person is not engaged in business or a transaction, and is not about to
engage in business or a transaction, for which such Person's property would
constitute an unreasonably small capital. The amount of contingent
liabilities at any time shall be computed as the amount that, in the light
of all the facts and circumstances existing at such time, represents the
amount that can reasonably be expected to become an actual or matured
liability.
"SUBSIDIARY" of any Person means any corporation, partnership, joint
venture, limited liability company, trust or estate of which (or in which)
more than 50% of (a) the issued and outstanding capital stock having
ordinary voting power to elect a majority of the Board of Directors of such
corporation (irrespective of whether at the time capital stock of any other
class or classes of such corporation shall or might have voting power upon
the occurrence of any contingency), (b) the interest in the capital or
profits of such limited liability company, partnership or joint venture or
(c) the beneficial interest in such trust or estate is at the time directly
or indirectly owned or controlled by such Person, by such Person and one or
more of its other Subsidiaries or by one or more of such Person's other
Subsidiaries.
SECTION 1.02. COMPUTATION OF TIME PERIODS. In this Agreement in the
computation of periods of time from a specified date to a later specified date,
the word "from" means "from and including" and the words "to" and "until" each
mean "to but excluding".
-3-
<PAGE>
SECTION 1.03. ACCOUNTING TERMS. All accounting terms not specifically
defined herein shall be construed in accordance with generally accepted
accounting principles consistent with those applied in the preparation of the
financial statements referred to in Section 4.01(f) ("GAAP").
ARTICLE II
DEBENTURE AND WARRANT PURCHASE
SECTION 2.01. AUTHORIZATION OF DEBENTURES. The Issuer has been authorized
to issue and sell on the Closing Date its 14% Senior Discount Debentures due
2009 in the form attached hereto as Exhibit A (herein, together with any 14%
Senior Discount Debentures issued in exchange therefor or replacement thereof,
called the "DEBENTURES" and each individually, a "DEBENTURE").
SECTION 2.02. PURCHASE AND SALE OF DEBENTURES. Subject to the terms and
conditions of this Agreement and on the basis of the representations and
warranties set forth herein, the Issuer agrees to sell to each of the Purchasers
and each of the Purchasers agrees to purchase from the Issuer on the Closing
Date in the form attached as Exhibit A hereto.
SECTION 2.03. THE CLOSING. The purchase and sale of the Debentures will
take place in a closing at the offices of Ropes & Gray, 885 Third Avenue, New
York, New York. The closing shall take place at 9:00 a.m. New York time on
August 17, 1998 (the "CLOSING DATE") or at such other time and place as the
parties hereto shall mutually agree. On the Closing Date, the Issuer will
deliver to each of the Purchasers (x) a Debenture in the principal amount of
$14,742,500 in the form attached hereto as Exhibit A; and the Purchasers shall
each in exchange therefor pay the Issuer $7,500,000 (the "ISSUE PRICE"), in
immediately available funds by wire transfer to the account specified in writing
to the Purchasers before the Closing Date.
SECTION 2.04. USE OF PROCEEDS. The Issuer will apply the proceeds from the
sale of the Debentures on the Closing Date to satisfy its obligations in
connection with the Transactions.
SECTION 2.05. REPRESENTATIONS OF THE PURCHASERS. Each of the Purchasers
hereby, severally but not jointly, represents and warrants to the Issuer that:
(a) AUTHORIZATION. The Purchaser has full power and authority to
execute, deliver and perform this Agreement and to acquire the Debentures;
this Agreement and the Debentures constitute the valid and legally binding
obligation of such Purchaser, enforceable against such Purchaser in
accordance with their respective terms.
(b) PURCHASE ENTIRELY FOR OWN ACCOUNT. Except as may be consistent
with Section 6.01 hereof, the Debentures to be received by such Purchaser
and will be acquired for investment for such Purchaser's own account, not
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as a nominee or agent and not with a view to the distribution of any part
thereof. Except as may be consistent with Section 6.01 hereof, such
Purchaser has no present intention of selling, granting any participation
in, or otherwise distributing the same. Such Purchaser does not have any
contract, undertaking, agreement or arrangement with any Person to sell,
transfer, or grant participation to such Person or to any third Person,
with respect to the Debentures.
(c) RESTRICTED SECURITIES. Such Purchaser understands that the
Debentures may not be sold, transferred, or otherwise disposed of without
registration under the Securities Act, or an exemption therefrom, and that
in the absence of an effective registration statement covering the
Debentures or an available exemption from registration under the Securities
Act, the Debentures must be held indefinitely.
(d) FORMATION. Such Purchaser represents that it was not organized for
the purpose of making an investment in the Issuer.
(e) SUITABILITY. Such Purchaser is an "accredited investor" as such
term is defined in Rule 501(a) promulgated pursuant to the Securities Act.
(f) FINANCIAL CONDITION. Such Purchaser's financial condition is such
that it is able to bear the risk of holding the Securities for an
indefinite period of time and can bear the loss of its entire investment in
the Debentures.
(g) EXPERIENCE. Such Purchaser has such knowledge and experience in
financial and business matters and in making high risk investments of this
type that it is capable of evaluating the merits and risks of the purchase
of the Debentures.
(h) RECEIPT OF INFORMATION. Such Purchaser has been furnished access
to the business records of the Issuer and such additional information and
documents as the Purchaser has requested and has been afforded an
opportunity to ask questions of and receive answers from representatives of
the Issuer concerning the terms and conditions of this Agreement and the
purchase of the Debentures, the Issuer's business, operations, market
potential, capitalization, financial condition and prospects, and all other
matters deemed relevant by the Purchaser.
(i) LEGENDS. The Debentures shall be imprinted with a legend in
substantially the following form:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN
EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL,
REASONABLY SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH
REGISTRATION IS NOT REQUIRED."
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"FOR PURPOSES OF SECTION 1272, 1273 AND 1275 OF THE INTERNAL REVENUE CODE
OF 1986, AS AMENDED, THIS SECURITY IS BEING ISSUED WITH ORIGINAL ISSUE
DISCOUNT; FOR EACH $1,000 PRINCIPAL AMOUNT OF THIS SECURITY, THE ISSUE
PRICE IS $508.73, THE AMOUNT OF ORIGINAL ISSUE DISCOUNT IS $491.27, THE
ISSUE DATE IS AUGUST 17, 1998 AND THE YIELD TO MATURITY IS 14.00% PER
ANNUM."
(j) TRANSFERABILITY. The Debentures may not be transferred or assigned
without compliance with applicable Federal and state securities laws by the
transferor and the transferee in accordance with the legend described in
Section 2.05(i) hereof.
ARTICLE III
CONDITIONS
SECTION 3.01. CONDITIONS PRECEDENT TO CLOSING. This Agreement shall become
effective upon the satisfaction of the following conditions precedent:
(a) The Merger Agreement shall be in full force and effect and the
transactions contemplated by the Merger Agreement shall have been
consummated strictly in accordance with the terms of the Merger Agreement,
the Merger, without any waiver or amendment not consented to by the
Purchasers of any term, provision or condition set forth therein, and in
compliance with all applicable laws.
(b) The Certificate of Merger with respect to the Merger shall have
been filed with the Secretary of State of the State of Delaware and shall
have become effective.
(c) This Agreement or counterparts thereof shall have been duly
executed and delivered by the Issuer and the Purchasers.
(d) The Purchasers shall have received the Debentures executed by the
Issuer and payable to the Purchasers;
(e) The Tender Offer shall have been consummated with respect to the
purchase of at least $35.0 million aggregate principal amount of
Convertible Notes.
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(f) The Credit Agreement shall have been executed by the parties
thereto and the initial borrowing, if any, under such Agreement shall be
concurrently funded.
(g) The Offering shall have been consummated.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION 4.01. REPRESENTATIONS AND WARRANTIES OF THE ISSUER. The Issuer
represents and warrants as follows:
(a) The Issuer (i) is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its
incorporation, (ii) is duly qualified and in good standing as a foreign
corporation in each other jurisdiction in which it owns or leases property
or in which the conduct of its business requires it to so qualify or be
licensed except where the failure to so qualify or be licensed could not
have a Material Adverse Effect and (iii) has all requisite corporate power
and authority (including, without limitation, all governmental licenses,
permits and other approvals) to own or lease and operate its properties and
to carry on its business as now conducted and as proposed to be conducted.
All of the outstanding capital stock of the Issuer has been validly issued,
is fully paid and non-assessable and, immediately following the
consummation of the Merger, free and clear of all liens except liens
consisting of restrictions on the transfer of such stock contained in the
Shareholders Agreement.
(b) The execution, delivery and performance by each of the Issuer and
its Subsidiaries of this Agreement, the Debentures, each other Debenture
Document and the consummation of the Merger and the other transactions
contemplated hereby and thereby are within the corporate powers of the
Issuer and such Subsidiaries, have been duly authorized by all necessary
corporate action, and do not (i) contravene the charter or bylaws of the
Issuer or any of its Subsidiaries, (ii) violate any law, order, writ,
judgment, injunction, decree, determination or award, (iii) conflict with
or result in the breach of, or constitute a default under, any contract,
loan agreement, indenture, mortgage, deed of trust, lease or other
instrument binding on or affecting the Issuer, any of its Subsidiaries or
any of their properties or (iv) result in or require the creation or
imposition of any lien upon or with respect to any of the properties of the
Issuer. Neither the Issuer nor any of its Subsidiaries is in violation of
any such law, rule, regulation, order, writ, judgment, injunction, decree,
determination or award or in breach of any such contract, loan agreement,
indenture, mortgage, deed of trust, lease or other instrument, the
violation or breach of which could have a Material Adverse Effect.
(c) No authorization or approval or other action by, and no notice to
or filing with, any governmental authority or regulatory body or any other
third party is required for the due execution, delivery, recordation,
filing or performance by the Issuer of this Agreement or the Debentures.
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(d) This Agreement has been, and each of the Debentures, when
delivered on the Closing Date will have been, duly executed and delivered
by the Issuer. This Agreement is, and each of the Debentures when delivered
hereunder will be, the legal, valid and binding obligation of each of the
Issuer and any of its Subsidiaries that are a party thereto, enforceable
against the Issuer and such Subsidiaries in accordance with its terms.
(e) The Issuer is not an "investment company," or an "affiliated
person" of, or "promoter" or "principal underwriter" for, an "investment
company," as such terms are defined in the Investment Company Act of 1940,
as amended. The issuance of the Debentures and the application of the
proceeds or repayment thereof by the Issuer, nor the consummation of the
other transactions contemplated hereby, will violate any provision of such
Act or any rule, regulation or order of the Commission thereunder.
(f) Each of the Issuer and its Subsidiaries is, and will be after
giving effect to the Merger, individually and together with its
Subsidiaries, Solvent.
(g) The Issuer is not in default (i) under the Issuer's Certificate of
Incorporation or By-laws or any Debenture, indenture, mortgage, lease,
agreement, contract, purchase order or other instrument, document or
agreement to which it is a party or by which it or any of its property is
bound or affected or (ii) with respect to any order, writ, injunction or
decree of any court or any Federal, state, municipal or other governmental
department, commission, board, bureau, agency or instrumentality, domestic
or foreign, in each case which could have a Material Adverse Effect. There
exists no condition, event or act which after notice, lapse of time, or
both, could constitute a default by the Issuer under any of the foregoing
which could have a Material Adverse Effect. The Issuer is not and, to the
best of the Issuer's knowledge, no third party is, in default under any
agreement, contract or other instrument, document, or agreement to which
the Issuer is a party or by which any of them or any of their property is
affected, which default would have a Material Adverse Effect.
ARTICLE V
EVENTS OF DEFAULT
SECTION 5.01. EVENTS OF DEFAULT. If any of the following events ("EVENTS OF
DEFAULT") shall occur and be continuing:
(a) the Issuer shall fail to pay (i) any principal of the Debentures
when the same becomes due and payable or (ii) any interest on the
Debentures for a period of 5 Business Days after the same shall become due
and payable; or
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(b) Debt that is outstanding in a principal amount of at least
$5,000,000 either individually or in the aggregate (but excluding Debt
outstanding hereunder) of the Issuer or any of its Subsidiaries (as the
case may be), is not paid when due at its final maturity; or any such Debt
shall be declared to be due and payable or required to be prepaid or
redeemed (other than by a regularly scheduled required prepayment or
redemption), purchased or defeased, or an offer to prepay, redeem, purchase
or defease such Debt shall be required to be made, in each case as to the
entirety of such Debt prior to the stated maturity thereof; or
(c) the Issuer or any of its Significant Subsidiaries shall make a
general assignment for the benefit of creditors; or any proceeding shall be
instituted by or against the Issuer or any of its Significant Subsidiaries
seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation,
winding up, reorganization , arrangement, adjustment, protection, relief,
or composition of it or its debts under any law relating to bankruptcy,
insolvency or reorganization or relief of debtors, or seeking the entry of
an order for relief or the appointment of a receiver, trustee, or other
similar official for it or for any substantial part of its property and, in
the case of any such proceeding instituted against it (but not instituted
by it) that is being diligently contested by it in good faith, either such
proceeding shall remain undismissed or unstayed for a period of 45 days or
any of the actions sought in such proceeding (including, without
limitation, the entry of an order for relief against, or the appointment of
a receiver, trustee, custodian or other similar official for, it or any
substantial part of its property) shall occur;
then, and in any such event, the holders of at least 51% of the principal amount
of the Debentures by notice to the Issuer, may declare the Debenture, all
interest thereon and all other amounts payable under this Agreement to be
forthwith due and payable, whereupon the Accreted Value of the Debentures, all
such interest and all such amounts shall become and be forthwith due and
payable, without presentment, demand, protest or further notice of any kind, all
of which are hereby expressly waived by the Issuer; PROVIDED, HOWEVER, that in
the event of an actual or deemed entry of an order for relief with respect to
the Issuer or any of its Significant Subsidiaries under the Federal Bankruptcy
Code, the Accreted Value of the Debentures, all such interest and all such
amounts shall automatically become and be due and payable, without presentment,
demand, protest or any notice of any kind, all of which are hereby expressly
waived by the Issuer.
ARTICLE VI
MISCELLANEOUS
SECTION 6.01. COMPLETE AGREEMENT; MODIFICATION OF AGREEMENT; SALE OF
INTEREST. This Agreement and the Debenture constitute the complete agreement
between the parties with respect to the subject matter hereof and may not be
modified, altered or amended except by an agreement in writing signed by the
Issuer and the holders of at least 51% of the outstanding aggregate principal
amount of the Debentures or the purchasers. The Issuer hereby consents to the
sale by the Purchasers of participations, assignment, transfer or other
disposition, at any time or times, of any of the Debentures or of any portion
thereof or interest therein, including, without limitation, the Purchasers'
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rights, title, interests, remedies, powers or duties thereunder, whether
evidenced by a writing or not. The Issuer agrees that it will cooperate with the
Purchasers in any manner requested by the Purchasers to effect the sale of
participations in or assignments of any of the Debentures or to issue new
debentures, the proceeds of which shall be used to redeem the Debentures issued
hereunder, or of any portion thereof or interest therein, including, without
limitation, assistance in the preparation of appropriate disclosure documents or
placement memoranda, execution of an indenture containing covenants limiting the
ability of the Issuer and its subsidiaries to effect certain transactions,
including if requested covenants in substantially in the form of the covenants
contained in the BSI Notes and issuing new debentures under any such indenture,
making appropriate representations and warranties to any purchaser of such
Debentures, adopting additional provisions regarding redemption at the option of
the Issuer, and any other action reasonably requested by the Purchasers.
No amendment or waiver of any provision of this Agreement or the
Debentures, nor consent to any departure by the Issuer therefrom, shall in any
event be effective unless the same shall be in writing and signed by the holders
of at least 51% of the outstanding aggregate principal amount of the Debentures
or the Purchasers, and then such waiver or consent shall be effective only in
the specific instance and for the specific purpose for which given.
SECTION 6.02. NO WAIVER BY HOLDERS OF THE DEBENTURES. The failure, at any
time or times, of the Holders of the Debentures to require strict performance by
the Issuer of any provisions of this Agreement and any of the other Debenture
Documents shall not waive, affect or diminish any right of the Holders of the
Debentures thereafter to demand strict compliance and performance therewith. Any
suspension or waiver by the Holders of the Debentures of an Event of Default by
the Issuer under the Debenture Documents shall not suspend, waive or affect any
other Event of Default by the Issuer under this Agreement and any of the other
Debenture Documents whether the same is prior or subsequent thereto and whether
of the same or of a different type. None of the undertakings, agreements,
warranties, covenants and representations of the Issuer contained in this
Agreement or any of the other Debenture Documents and no Event of Default by the
Issuer under this Agreement and no defaults by the Issuer under any of the other
Debenture Documents shall be deemed to have been suspended or waived by the
Holders of the Debentures unless such suspension or waiver is by an instrument
in writing signed by the Holders of at least 51% of the outstanding principal
amount of the Debentures and directed to the Issuer specifying such suspension
or waiver.
SECTION 6.03. REMEDIES. The rights and remedies of the Holders of the
Debentures under this Agreement shall be cumulative and nonexclusive of any
other rights and remedies which they may have under any other agreement,
including without limitation, the Debenture Documents, by operation of law or
otherwise.
SECTION 6.04. MUTUAL WAIVER OF JURY TRIAL. THE PARTIES DESIRE THAT ALL
DISPUTES HEREUNDER BE RESOLVED BY A JUDGE APPLYING APPLICABLE STATE AND FEDERAL
LAWS (RATHER THAN ARBITRATION RULES). THEREFORE, THE PARTIES HERETO WAIVE ALL
RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT OR PROCEEDING BROUGHT TO ENFORCE OR
DEFEND ANY RIGHTS OR REMEDIES UNDER THIS AGREEMENT, ANY OF THE OTHER Debenture
DOCUMENTS OR ANY OF THE OTHER AGREEMENTS.
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SECTION 6.05. SEVERABILITY. Wherever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
SECTION 6.06. PARTIES. This Agreement and the Debentures shall be binding
upon, and inure to the benefit of, the successors of the Issuer and the
Purchasers and the holders of the Debentures, and the assigns, transferees and
endorsees of the Purchasers and the holders of the Debentures. Nothing in this
Agreement or the Debentures, express or implied, shall give to any person, other
than the parties hereto and their successors hereunder, any benefit or any legal
or equitable right, remedy or claim under this Agreement.
SECTION 6.07. CONFLICT OF TERMS. Except as otherwise provided in this
Agreement or the Debentures by specific reference to the applicable provisions
of this Agreement, if any provision contained in this Agreement is in conflict
with, or inconsistent with, any provision in the Debentures, the provision
contained in this Agreement shall govern and control.
SECTION 6.08. AUTHORIZED SIGNATORIES. Until the Purchasers and the Holders
of the Debentures shall be notified by the Issuer to the contrary, the signature
upon any document or instrument delivered pursuant hereto of a duly authorized
officer of the Issuer shall bind the Issuer and be deemed to be the act of the
Issuer affixed pursuant to and in accordance with resolutions duly adopted by
the Issuer's Board of Directors.
SECTION 6.09. GOVERNING LAW. THIS AGREEMENT AND THE OBLIGATIONS ARISING
HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND PERFORMED IN
SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES THEREOF REGARDING CONFLICT OF LAWS
THAT WOULD CAUSE THE APPLICATION OF THE DOMESTIC SUBSTANTIVE LAWS OF ANY OTHER
JURISDICTION, AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA.
SECTION 6.10. NOTICES. Except as otherwise provided herein, whenever it is
provided herein that any notice, demand, request, consent, approval,
declaration, election or other communication shall or may be given to or served
upon any of the parties by another, or whenever any of the parties desires to
give or serve upon another any communication with respect to this Agreement,
each such notice, demand, request, consent, approval, declaration or other
communication shall be in writing and shall be delivered in person with receipt
acknowledged, or telecopied and confirmed immediately in writing by a copy
mailed by registered or certified mail, return receipt requested, postage
prepaid, addressed as hereafter set forth, or mailed by registered or certified
mail, return receipt requested, postage prepaid, addressed as follows:
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(a) If to the Purchasers, to
CHARLESBANK BELL SPORTS HOLDINGS, LIMITED PARTNERSHIP
c/o Charlesbank Equity Fund IV, Limited Partnership
600 Atlantic Avenue
Boston, Massachusetts 02210
Attn: Tim R. Palmer
Tami E. Nason, Esq.
Telephone: (617) 619-5400
Facsimile: (617) 619-5402
and
BRENTWOOD ASSOCIATES BUYOUT FUND II, L.P.
c/o Brentwood Associates Private Equity
1150 Santa Monica Boulevard, Suite 1200
Los Angeles, California 90025
Attn: William M. Barnum, Jr.
Telephone: (310) 477-6611
Facsimile: (310) 477-1011
with copies to:
ROPES & GRAY
One International Place
Boston, Massachusetts 02110
Attn: Larry Jordan Rowe, Esq.
Telephone: (617) 951-7000
Facsimile: (617) 951-7050
(b) If to the Issuer, at
BELL SPORTS CORP.
6350 San Ignacio Avenue
San Jose, California 95119
Attn: Mary J. George
Facsimile.: (408) 224-9129
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or at such other address as may be substituted by notice given as herein
provided. The giving of any notice required hereunder may be waived in writing
by the party entitled to receive such notice. Every notice, demand, request,
consent, approval, declaration or other communication hereunder shall be deemed
to have been duly given or served on the date on which personally delivered,
with receipt acknowledged, or the date of the telecopy transmission, or three
Business Days after the same shall have been deposited in the United States
mail. Failure or delay in delivering copies of any notice, demand, request,
consent, approval, declaration or other communication to the persons designated
above to receive copies shall in no way adversely affect the effectiveness of
such notice, demand, request, consent, approval, declaration or other
communication.
SECTION 6.11. SURVIVAL. The representations and warranties of the Issuer in
this Agreement shall survive the execution, delivery and acceptance hereof by
the parties hereto and the closing of the transactions described herein or
related hereto.
SECTION 6.12. SECTION TITLES. The Section titles and Table of Contents
contained in this Agreement are and shall be without substantive meaning or
content of any kind whatsoever and are not a part of the agreement between the
parties hereto.
SECTION 6.13. COUNTERPARTS. This Agreement may be executed in any number of
separate counterparts, each of which shall, collectively and separately,
constitute one agreement.
[THE REST OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK]
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[Debenture Purchase Agreement]
IN WITNESS WHEREOF, this Agreement has been duly executed as of the date
first written above.
BELL SPORTS CORP.
By: /s/ Mary J. George
------------------------------------
Name: Mary J. George
Title: Chief Executive Officer
CHARLESBANK BELL SPORTS HOLDINGS,
LIMITED PARTNERSHIP
By: Charlesbank Equity Fund IV, Limited
Partnership, a general partner
By: Charlesbank Equity Fund IV GP,
Limited Partnership
By: /s/ Tim R. Palmer
------------------------------------
Authorized Signatory
By: /s/ Kim Davis
------------------------------------
Authorized Signatory
BRENTWOOD ASSOCIATES
BUYOUT FUND II, L.P.
By: Brentwood Private Equity LLC,
a general partner
By: /s/ William M. Barnum
------------------------------------
Managing Member
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BELL SPORTS CORP.
This Debenture has not been registered under the Securities Act of
1933 and may not be sold, offered for sale, pledged or hypothecated in
the absence of a registration statement in effect with respect to the
securities under such Act or an opinion of counsel satisfactory to the
Issuer that such registration is not required.
FOR PURPOSES OF SECTION 1272, 1273 AND 1275 OF THE INTERNAL REVENUE
CODE OF 1986, AS AMENDED, THIS SECURITY IS BEING ISSUED WITH ORIGINAL
ISSUE DISCOUNT; FOR EACH $1,000 PRINCIPAL AMOUNT OF THIS SECURITY, THE
ISSUE PRICE IS $508.73, THE AMOUNT OF ORIGINAL ISSUE DISCOUNT IS
$491.27, THE ISSUE DATE IS AUGUST 17, 1998 AND THE YIELD TO MATURITY
IS 14.00% PER ANNUM.
14% SENIOR DISCOUNT DEBENTURE DUE 2009
$14,742,500 August 17, 1998
FOR VALUE RECEIVED, the undersigned, BELL SPORTS CORP. a Delaware
corporation (the "Issuer") HEREBY PROMISES TO PAY to the order of CHARLESBANK
BELL SPORTS HOLDINGS, LIMITED PARTNERSHIP (the "Payee"), on or before August 14,
2009, the principal sum of FOURTEEN MILLION SEVEN HUNDRED FORTY-TWO THOUSAND AND
FIVE HUNDRED DOLLARS ($14,742,500). From August 15, 2003 until the Maturity
Date, the unpaid principal amount of this Debenture from time to time shall
accrue and bear daily interest at a rate per annum which shall at all times
equal fourteen percent (14%) (computed on the basis of a 360-day year of twelve
30-day months), compounded semi-annually, and overdue principal, and to the
extent not prohibited by applicable law, overdue installments of interest, shall
accrue and bear interest at a rate per annum which shall at all times equal two
percent (2%) in excess of the rate then in effect, compounded semi-annually.
Both principal and interest are payable in lawful money of the United
States of America to the Payee in immediately available funds at the depositary
institution specified in writing by the Payee. All payments made on account of
principal hereof shall be recorded by the Payee and, prior to any transfer
hereof, endorsed on the grid attached hereto which is part of this Debenture.
1. THE DEBENTURES. This Debenture is one of an issue of Debentures of the Issuer
(the "DEBENTURES") issued pursuant to the Debenture Purchase Agreement dated as
of August 17, 1998, by and among the Issuer and the Purchasers named therein (as
amended and supplemented from time to time, the "PURCHASE AGREEMENT"). This
<PAGE>
Debenture is subject to the terms and provisions of the Purchase Agreement terms
defined in the Purchase Agreement and not otherwise defined herein are used
herein as so defined. In case an Event of Default shall occur, the Accreted
Value of this Debenture together with accrued and unpaid interest hereon may
become or be declared to be due and payable in the manner and with the effect
provided in the Purchase Agreement.
2. PAYMENT PROVISIONS. The Issuer covenants that so long as any of the
Debentures is outstanding:
2.1. PAYMENT AT MATURITY OF DEBENTURES. On August 14, 2009 (the "MATURITY
DATE") or on any accelerated maturity of this Debenture, the Issuer will pay the
Accreted Value of this Debenture, together with all accrued and unpaid interest,
if any, hereon.
2.2. PAYMENT AND ACCRUAL OF INTEREST. Interest on the principal amount of
this Debenture shall be paid in cash from the first Interest Payment Date (as
defined below) occurring after August 15, 2003 until the Maturity Date. From and
after August 15, 2003, interest shall accrue at the stated rate set forth above
on each August 15 and February 15 and shall be payable on each August 15 and
February 15 (or, if any such date is not a Business Day, the Business Day
immediately preceding such date), commencing on February 15, 2004 and ending on
August 14, 2009 (each an "INTEREST PAYMENT DATE").
2.3. Permanent Retirement of Debentures. Debentures prepaid in full or
otherwise acquired by the Issuer shall be permanently retired and cancelled and
shall not under any circumstance be reissued or resold.
2.4. SELECTION OF DEBENTURES FOR PREPAYMENT. Each prepayment permitted by
this Debenture shall be made so that the Debentures then held by each Holder
shall be prepaid in a principal amount which shall bear the same ratio, as
nearly as may be, to the total principal amount being prepaid as the principal
amount of such Debentures held by such Holder shall bear to the aggregate
principal amount of all such Debentures then outstanding.
2.5. NOTICE OF PREPAYMENTS. Notice of each prepayment of Debentures shall
be given not fewer than three nor more than thirty days before the prepayment
date, in each case by mailing to each Holder a notice of intention to prepay
specifying the date of prepayment, the provision hereof pursuant to which such
prepayment is being made, the aggregate amount of the Debentures to be prepaid
on such date, the principal amount of the Debentures to be prepaid on such date
held by the Holder to whom such notice is sent, and the premium, if any, and
accrued interest applicable to such prepayment.
2.6. PAYMENT AND INTEREST CUT-OFF. Upon each prepayment of Debentures, in
whole or in part, the Issuer will pay to the Holders thereof the amount of their
Debentures to be prepaid together with unpaid interest in respect thereof
accrued to the prepayment date. The amount of Debentures to be prepaid shall
become due and payable on the prepayment date, and from and after said date
(unless the Issuer shall default in paying the amount then due) interest thereon
shall cease to accrue.
-2-
<PAGE>
2.7. ACQUISITION OF DEBENTURES. The Issuer will not, and will not permit
any of its affiliates to, purchase, redeem, or otherwise acquire any Debenture
except upon the payment or prepayment thereof in accordance with the terms of
such Debenture.
2.8. PAYMENTS ON BUSINESS DAYS. Whenever any payment to be made hereunder
shall be stated to be due on a day that is not a Business Day, such payment
shall be made on the immediately preceding Business Day.
3. DEFINITIONS.
"Significant Subsidiary" means a Subsidiary which would qualify as a
Significant subsidiary as that term is defined under Regulation S-X under
the United States federal securities laws.
"Subsidiary" of any Person means any corporation, partnership, joint
venture, limited liability company, trust or estate of which (or in which)
more than 50% of (a) the issued and outstanding capital stock having
ordinary voting power to elect a majority of the Board of Directors of such
corporation (irrespective of whether at the time capital stock of any other
class or classes of such corporation shall or might have voting power upon
the occurrence of any contingency), (b) the interest in the capital or
profits of such limited liability company, partnership or joint venture or
(c) the beneficial interest in such trust or estate is at the time directly
or indirectly owned or controlled by such Person, by such Person and one or
more of its other Subsidiaries or by one or more of such Person's other
Subsidiaries and specifically includes Bell Sports, Inc., a California
corporation, and each of its Subsidiaries.
"Substantive Consolidation" shall mean the entry of any order by a
court of competent jurisdiction by which the assets and liabilities of the
Issuer and any Subsidiary of the Issuer, or any other person or entity, are
treated on a consolidated basis, whether under Section 105 of the
Bankruptcy Code, 11 U.S.C. section 105, or under any other applicable
bankruptcy insolvency or similar law now or hereafter in effect.
4. SEPARATE LIABILITY AND SEPARATE EXISTENCE; NO GUARANTIES; WAIVER OF
SUBSTANTIVE CONSOLIDATION. By acceptance of this Debenture, each holder hereof
acknowledges and agrees, for itself and for each of its participants,
transferees, successors and assigns and for the direct and legally enforceable
benefit of each present and future holder of any indebtedness heretofore or
hereafter incurred by any present or future Subsidiary of the Issuer, that:
4.1. This Debenture and the indebtedness evidenced hereby are the liability
solely of the Issuer;
-3-
<PAGE>
4.2. No Subsidiary of the Issuer, and no other person or entity, has
guaranteed or otherwise assumed any liability with respect to the payment of
this Debenture or the indebtedness evidenced hereby;
4.3. The holders of this Debenture will never ask, demand, accept, receive
or retain (a) any guarantee or other assurance of payment of this Debenture or
the indebtedness evidenced hereby from any present or future Subsidiary of the
Issuer or (b) any security interest or lien upon any property now owned or
hereafter acquired by any present or future Subsidiary of the Issuer as security
for the payment of this Debenture or the indebtedness evidenced hereby;
4.4. The Issuer is a separate legal entity from each Subsidiary of the
Issuer, and the assets of the Subsidiaries of the Issuer are not available to
the holders of this Debenture to meet or satisfy the liabilities of the Issuer,
and
4.5. The holders of this Debenture hereby waive and release, absolutely,
unconditionally, irrevocably and forever, will never assert, initiate, prosecute
or otherwise seek relief upon or in, and will never support any other person or
entity in asserting, initiating, prosecuting or otherwise seeking relief upon or
in, any right, remedy, claim, action or other proceeding for, or any other
relief that has the effect of, Substantive Consolidation.
5. AMENDMENTS. This Debenture may be amended by a writing executed by the Holder
hereof and the Issuer; PROVIDED THAT, neither the interest rate, Interest
Payment Date, and Maturity Date nor the provisions of Section 4 may be amended,
waived, released or otherwise discharged, except upon the written consent of the
holders of "Designated Senior Indebtedness", as that term is defined in the
Indenture dated as of August 17, 1998 by and between Bell Sports, Inc., a
California corporation, and Harris Trust and Savings Bank, as trustee, governing
the 11% Senior Subordinated Notes Due 2008 of Bell Sports, Inc.
6. HOLDER. The term "Holder" shall mean with respect to this Debenture the payee
hereof unless such payee shall have presented this Debenture to the Issuer for
transfer and the transferee shall have been entered into the register kept for
such purpose by the Issuer at its principal office pursuant to the Purchase
Agreement as a subsequent holder, in which case the term "Holder" shall mean
such subsequent holder.
7. MISCELLANEOUS. Presentment for payment, demand, notice of dishonor, protest
and notice of protest are hereby waived and all other demands and notices in
connection with the delivery, acceptance, performance and enforcement of this
Debenture. Issuer agrees that this Debenture shall be construed, governed and
enforced in accordance with the laws of the State of Delaware, without regard to
principles of conflicts of law.
BELL SPORTS CORP.
By: /s/ Mary J. George
-------------------------------------
Mary George
President and Chief Executive Officer
-4-
BELL SPORTS CORP.
This Debenture has not been registered under the Securities Act of
1933 and may not be sold, offered for sale, pledged or hypothecated in
the absence of a registration statement in effect with respect to the
securities under such Act or an opinion of counsel satisfactory to the
Issuer that such registration is not required.
FOR PURPOSES OF SECTION 1272, 1273 AND 1275 OF THE INTERNAL REVENUE
CODE OF 1986, AS AMENDED, THIS SECURITY IS BEING ISSUED WITH ORIGINAL
ISSUE DISCOUNT; FOR EACH $1,000 PRINCIPAL AMOUNT OF THIS SECURITY, THE
ISSUE PRICE IS $508.73, THE AMOUNT OF ORIGINAL ISSUE DISCOUNT IS
$491.27, THE ISSUE DATE IS AUGUST 17, 1998 AND THE YIELD TO MATURITY
IS 14.00% PER ANNUM.
14% SENIOR DISCOUNT DEBENTURE DUE 2009
$14,742,500 August 17, 1998
FOR VALUE RECEIVED, the undersigned, BELL SPORTS CORP. a Delaware
corporation (the "Issuer") HEREBY PROMISES TO PAY to the order of BRENTWOOD
ASSOCIATES BUYOUT FUND II, L.P. (the "Payee"), on or before August 14, 2009, the
principal sum of FOURTEEN MILLION SEVEN HUNDRED FORTY-TWO THOUSAND AND FIVE
HUNDRED DOLLARS ($14,742,500). From August 15, 2003 until the Maturity Date, the
unpaid principal amount of this Debenture from time to time shall accrue and
bear daily interest at a rate per annum which shall at all times equal fourteen
percent (14%) (computed on the basis of a 360-day year of twelve 30-day months),
compounded semi-annually, and overdue principal, and to the extent not
prohibited by applicable law, overdue installments of interest, shall accrue and
bear interest at a rate per annum which shall at all times equal two percent
(2%) in excess of the rate then in effect, compounded semi-annually.
Both principal and interest are payable in lawful money of the United
States of America to the Payee in immediately available funds at the depositary
institution specified in writing by the Payee. All payments made on account of
principal hereof shall be recorded by the Payee and, prior to any transfer
hereof, endorsed on the grid attached hereto which is part of this Debenture.
1. THE DEBENTURES. This Debenture is one of an issue of Debentures of the Issuer
(the "DEBENTURES") issued pursuant to the Debenture Purchase Agreement dated as
of August 17, 1998, by and among the Issuer and the Purchasers named therein (as
amended and supplemented from time to time, the "PURCHASE AGREEMENT"). This
Debenture is subject to the terms and provisions of the Purchase Agreement terms
defined in the Purchase Agreement and not otherwise defined herein are used
herein as so defined. In case an Event of Default shall occur, the Accreted
<PAGE>
Value of this Debenture together with accrued and unpaid interest hereon may
become or be declared to be due and payable in the manner and with the effect
provided in the Purchase Agreement.
2. PAYMENT PROVISIONS. The Issuer covenants that so long as any of the
Debentures is outstanding:
2.1. PAYMENT AT MATURITY OF DEBENTURES. On August 14, 2009 (the "MATURITY
DATE") or on any accelerated maturity of this Debenture, the Issuer will pay the
Accreted Value of this Debenture, together with all accrued and unpaid interest,
if any, hereon.
2.2. PAYMENT AND ACCRUAL OF INTEREST. Interest on the principal amount of
this Debenture shall be paid in cash from the first Interest Payment Date (as
defined below) occurring after August 15, 2003 until the Maturity Date. From and
after August 15, 2003, interest shall accrue at the stated rate set forth above
on each August 15 and February 15 and shall be payable on each August 15 and
February 15 (or, if any such date is not a Business Day, the Business Day
immediately preceding such date), commencing on February 15, 2004 and ending on
August 14, 2009 (each an "INTEREST PAYMENT DATE").
2.3. PERMANENT RETIREMENT OF DEBENTURES. Debentures prepaid in full or
otherwise acquired by the Issuer shall be permanently retired and cancelled and
shall not under any circumstance be reissued or resold.
2.4. SELECTION OF DEBENTURES FOR PREPAYMENT. Each prepayment permitted by
this Debenture shall be made so that the Debentures then held by each Holder
shall be prepaid in a principal amount which shall bear the same ratio, as
nearly as may be, to the total principal amount being prepaid as the principal
amount of such Debentures held by such Holder shall bear to the aggregate
principal amount of all such Debentures then outstanding.
2.5. NOTICE OF PREPAYMENTS. Notice of each prepayment of Debentures shall
be given not fewer than three nor more than thirty days before the prepayment
date, in each case by mailing to each Holder a notice of intention to prepay
specifying the date of prepayment, the provision hereof pursuant to which such
prepayment is being made, the aggregate amount of the Debentures to be prepaid
on such date, the principal amount of the Debentures to be prepaid on such date
held by the Holder to whom such notice is sent, and the premium, if any, and
accrued interest applicable to such prepayment.
2.6. PAYMENT AND INTEREST CUT-OFF. Upon each prepayment of Debentures, in
whole or in part, the Issuer will pay to the Holders thereof the amount of their
Debentures to be prepaid together with unpaid interest in respect thereof
accrued to the prepayment date. The amount of Debentures to be prepaid shall
become due and payable on the prepayment date, and from and after said date
(unless the Issuer shall default in paying the amount then due) interest thereon
shall cease to accrue.
-2-
<PAGE>
2.7. ACQUISITION OF DEBENTURES. The Issuer will not, and will not permit
any of its affiliates to, purchase, redeem, or otherwise acquire any Debenture
except upon the payment or prepayment thereof in accordance with the terms of
such Debenture.
2.8. PAYMENTS ON BUSINESS DAYS. Whenever any payment to be made hereunder
shall be stated to be due on a day that is not a Business Day, such payment
shall be made on the immediately preceding Business Day.
3. DEFINITIONS.
"Significant Subsidiary" means a Subsidiary which would qualify as a
Significant subsidiary as that term is defined under Regulation S-X under
the United States federal securities laws.
"Subsidiary" of any Person means any corporation, partnership, joint
venture, limited liability company, trust or estate of which (or in which)
more than 50% of (a) the issued and outstanding capital stock having
ordinary voting power to elect a majority of the Board of Directors of such
corporation (irrespective of whether at the time capital stock of any other
class or classes of such corporation shall or might have voting power upon
the occurrence of any contingency), (b) the interest in the capital or
profits of such limited liability company, partnership or joint venture or
(c) the beneficial interest in such trust or estate is at the time directly
or indirectly owned or controlled by such Person, by such Person and one or
more of its other Subsidiaries or by one or more of such Person's other
Subsidiaries and specifically includes Bell Sports, Inc., a California
corporation, and each of its Subsidiaries.
"Substantive Consolidation" shall mean the entry of any order by a
court of competent jurisdiction by which the assets and liabilities of the
Issuer and any Subsidiary of the Issuer, or any other person or entity, are
treated on a consolidated basis, whether under Section 105 of the
Bankruptcy Code, 11 U.S.C. section 105, or under any other applicable
bankruptcy insolvency or similar law now or hereafter in effect.
4. SEPARATE LIABILITY AND SEPARATE EXISTENCE; NO GUARANTIES; WAIVER OF
SUBSTANTIVE CONSOLIDATION. By acceptance of this Debenture, each holder hereof
acknowledges and agrees, for itself and for each of its participants,
transferees, successors and assigns and for the direct and legally enforceable
benefit of each present and future holder of any indebtedness heretofore or
hereafter incurred by any present or future Subsidiary of the Issuer, that:
4.1. This Debenture and the indebtedness evidenced hereby are the liability
solely of the Issuer;
-3-
<PAGE>
4.2. No Subsidiary of the Issuer, and no other person or entity, has
guaranteed or otherwise assumed any liability with respect to the payment of
this Debenture or the indebtedness evidenced hereby;
4.3. The holders of this Debenture will never ask, demand, accept, receive
or retain (a) any guarantee or other assurance of payment of this Debenture or
the indebtedness evidenced hereby from any present or future Subsidiary of the
Issuer or (b) any security interest or lien upon any property now owned or
hereafter acquired by any present or future Subsidiary of the Issuer as security
for the payment of this Debenture or the indebtedness evidenced hereby;
4.4. The Issuer is a separate legal entity from each Subsidiary of the
Issuer, and the assets of the Subsidiaries of the Issuer are not available to
the holders of this Debenture to meet or satisfy the liabilities of the Issuer,
and
4.5. The holders of this Debenture hereby waive and release, absolutely,
unconditionally, irrevocably and forever, will never assert, initiate, prosecute
or otherwise seek relief upon or in, and will never support any other person or
entity in asserting, initiating, prosecuting or otherwise seeking relief upon or
in, any right, remedy, claim, action or other proceeding for, or any other
relief that has the effect of, Substantive Consolidation.
5. AMENDMENTS. This Debenture may be amended by a writing executed by the Holder
hereof and the Issuer; PROVIDED THAT, neither the interest rate, Interest
Payment Date, and Maturity Date nor the provisions of Section 4 may be amended,
waived, released or otherwise discharged, except upon the written consent of the
holders of "Designated Senior Indebtedness", as that term is defined in the
Indenture dated as of August 17, 1998 by and between Bell Sports, Inc., a
California corporation, and Harris Trust and Savings Bank, as trustee, governing
the 11% Senior Subordinated Notes Due 2008 of Bell Sports, Inc.
6. HOLDER. The term "Holder" shall mean with respect to this Debenture the payee
hereof unless such payee shall have presented this Debenture to the Issuer for
transfer and the transferee shall have been entered into the register kept for
such purpose by the Issuer at its principal office pursuant to the Purchase
Agreement as a subsequent holder, in which case the term "Holder" shall mean
such subsequent holder.
7. MISCELLANEOUS. Presentment for payment, demand, notice of dishonor, protest
and notice of protest are hereby waived and all other demands and notices in
connection with the delivery, acceptance, performance and enforcement of this
Debenture. Issuer agrees that this Debenture shall be construed, governed and
enforced in accordance with the laws of the State of Delaware, without regard to
principles of conflicts of law.
BELL SPORTS CORP.
By: /s/ Mary J. George
-------------------------------------
Mary George
President and Chief Executive Officer
-4-
Mary J. George
33822 Bridgehampton
Dana Pointe, California 92677
July 15, 1999
Mr. Terry G. Lee
Chairman of the Board
Bell Sports Corp.
6350 San Ignacio Avenue
San Jose, CA 95119
Dear Terry,
As you know, on February 2, 1999, the Compensation and Organization Committee of
the Board of Directors of Bell Sports Corp. (the "Company") decided to promote
Bill Bracy to be the President of the Company and Bell Sports, Inc. ("BSI"),
effective July 1, 1999. I suggested Bill's promotion and have agreed to
relinquish the position of President of the Company and BSI. I will retain the
position of Chief Executive Officer of each of the Company and BSI.
Section 2.1 of my employment agreement with the Company and BSI, dated as of
February 17, 1998 (the "Employment Agreement"), provides that I will be employed
as the President and Chief Executive Officer of each of the Company and BSI.
Section 4.6 of the Employment Agreement also provides that unless I consent in
writing, upon the occurrence of an event falling within the definition of "Good
Reason" I may terminate my employment and be entitled to receive specified
payments and benefits. I am providing the consent set forth below because the
promotion of Bill Bracy could be deemed an event falling within that definition.
I hereby consent to the promotion of Bill Bracy to be the President of the
Company and BSI and to the concurrent assignment to him by the board of
Directors of the Company and/or the Board of Directors of BSI; of duties and
responsibilities consistent with that promotion, even though certain of those
duties and responsibilities may have previously been assigned to me. Further, it
is understood that this agreement does not effect any other terms of employment
between the Company and me.
Very Truly Yours,
/s/ Mary J. George
----------------------------------------
Mary J. George
Acknowledged,
/s/ Terry G. Lee
- -----------------------------------
7/22/99
May 25, 1999
Mr. Richard S. Willis
2168 Adair Street
San Marino, CA 91108
Dear Rich,
This letter will confirm our offer to you to become Executive Vice President and
Chief Financial Officer reporting to Mary George at our San Jose facility
effective Monday, April 5, 1999.
The following benefits are provided as a part of the overall benefits package:
1. Your base compensation will be at an annual rate of $250,000 (pay periods
bi-weekly) with a bonus opportunity of up to 50% of your annual salary. The
incentive plan will be explained in more detail upon your arrival at Bell
Sports.
2. Your bonus eligibility will begin July 1, 1999, the beginning of our fiscal
year 2000. You must be a regular full time employee at the time of
distribution to be eligible to receive bonus payments.
3. You will have the opportunity to Participate in the Bell Sports Investment
and Incentive Plans. Your maximum investment will be $500,000. This amount
will entitle you to 9,555 Series A Preferred shares, 7,937 Class A Common
shares, 12,500 Class B Common shares and 12,000 Class C common shares.
4. A performance review will be completed six (6) months from your date of
hire. Salary reviews are conducted annually.
5. You will begin to accrue vacation at the rate of 1.54 hours per week, after
your first thirty days of service. You are eligible to accrue two (2) weeks
of vacation time a year, through your fifth year of service.
6. You will be eligible to join the Bell Sports insurance plan within 30 days
of your hire date, during any other open enrollment period or within thirty
days of a qualified event. The next expected open enrollment period is
December of 1999, with a benefit start date of January 1, 2000. You have a
choice of two health programs. The first is a group health program through
General American with a payroll deduction of $11.00 per week for individual
coverage and $34.00 per week for family. The second is Kaiser HMO with a
payroll deduction of $8.00 per week for individual coverage, $21.00 for
single plus one and $28.00 per week for family coverage. Dental coverage is
through General American and is included in the above rates. In addition,
you will be reimbursed for all medical and dental expenses for yourself and
your covered dependents that are not covered under these medical and dental
plans including any and all deductibles and co-payments.
7. You become eligible for the Bell Sports 401(k) Retirement program on the
next January 1st, April 1st, July 1st or October 1st, following six months
of service. This plan features a rollover provision which would allow you
to immediately rollover any 401(k) funds that you may have into the Bell
Sports Plan.
8. This offer is contingent upon your agreeing to and signing the Bell Sports
standard "Confidentiality and Non-Competition Agreement."
9. Taxes, by law, are required to be withheld on all forms of compensation and
benefits provided you by Bell Sports. If you have any questions regarding
your tax implications, you should consider contacting your tax advisor/tax
preparer.
10. You should note that Bell Sports is an at-will employer and that your
employment can be terminated by either party at any time with or without
cause.
<PAGE>
11. For involuntary termination without cause, the Company will continue to pay
your Base Salary and all other benefits including those outlined in point
number 6 above, (excluding Bonus and 401K) for a period of one year
following the date of termination.
If there are any questions about our offer, please call and we will discuss. As
you know, I am extremely excited about the opportunities here at Bell Sports and
sincerely hope that you will become a part of this dynamic organization. I look
forward to the opportunity of working with you.
Sincerely,
/s/ Mary J. George
- -----------------------------------
Mary George
Chief Executive Officer
My signature confirms acceptance of the position.
/s/ Richard Willis 9/23/99
- ----------------------------------- -----------------
Richard Willis Date
__________, 1999 $____________
PROMISSORY NOTE
FOR VALUE RECEIVED, the undersigned ("Maker") hereby promises to pay to the
order of Bell Sports Corp., a Delaware corporation ("Payee"), the principal
amount of _______________________ Dollars ($___________). Such loan shall be
full recourse to the Maker and shall bear interest at an annual rate of 7% and
shall be repaid in five annual installments payable on ____________ __ of each
of 1999, 2000, 2001, 2002 and 2003, the first four installments of which shall
each be in the amount of $___________ and the fifth installment of which shall
be in the amount of $___________; provided, however, that all or any portion of
the principal amount and accrued interest due on this Promissory Note may be
prepaid at any time without premium or penalty at the option of the Maker, such
prepayments to be applied against unpaid installments in inverse order of
maturity, latest to earliest.
If Maker's employment with Payee, or, if Maker is employed solely by any
subsidiary of Payee, with such subsidiary, terminates for any reason, the
provisions of Section 8 of the Bell Sports Corp. Investment and Incentive Plan
shall apply.
Upon an "event of default" (as hereinafter defined), the holder hereof may
declare the unpaid principal amount and accrued interest hereunder immediately
due and payable (unless there shall have occurred an event of default under
paragraph (ii) below in which case the entire unpaid principal amount and
accrued interest shall automatically become so due and payable). In addition,
the holder hereof shall have and may exercise with respect to the Pledged Shares
(as hereinafter defined) all rights and remedies of a pledgee of shares of
capital stock permitted by applicable law upon an "event of default." An "event
of default" shall mean any one of the following events:
<PAGE>
(i) default in the payment of any principal amounts or accrued interest on
this Note when such amounts become due and payable, if such default shall
continue for five days after the date when due; or
(ii) (A) the commencement by the Maker of a voluntary case under Title 11
of the United States Code, as from time to time in effect, or the authorization
of the commencement of such a voluntary case; or
(B) the filing against the Maker of a petition commencing an
involuntary case under said Title 11; or
(C) the seeking of relief by the Maker as a debtor under any
applicable law, other than said Title 11, of any jurisdiction relating to the
liquidation or reorganization of debtors or to the modification or alteration of
the rights of creditors, or the Maker's consent to or acquiescence in such
relief; or
(D) the entry of an order by a court of competent jurisdiction (1)
finding the Maker to be bankrupt or insolvent, (2) ordering or approving any
modification or alteration of the rights of the creditors of the Maker, or (3)
assuming custody of, or appointing a receiver or other custodian for, all or a
substantial part of the property of the Maker; or
(E) the Maker's assignment for the benefit of, or entry into a
composition with, the creditors of the Maker, or the Maker's appointment or
consent to the appointment of a receiver or other custodian for all or a
substantial part of the property of the Maker.
-2-
<PAGE>
On and after the occurrence of an event of default, unpaid
principal amounts and accrued interest hereunder shall, to the extent permitted
by applicable law, carry interest at a floating rate per annum equal to the base
interest rate announced from time to time by [Bank], plus four percent (4%),
said interest being payable together with said unpaid principal amounts and
accrued interest.
All payments hereunder shall be made in lawful money of the United States
of America at Payee's office in San Jose, California or at such other place as
the holder hereof shall designate in writing to Maker.
The Maker hereby grants to the Payee a security interest in ______ shares
of the Series A Preferred Stock of Bell Sports Corp., $.01 par value, issued to
the Maker (the "Series A Preferred Pledged Shares"). The Maker hereby grants to
the Payee a security interest in _____ shares of the Class A Common Stock of
Bell Sports Corp., $.01 par value, issued to the Maker (the "Class A Pledged
Shares," and together with the Series A Preferred Pledged Shares, the "Pledged
Shares"). Payee will release such security interests in all or any portion of
the Pledged Shares upon payment in full of this Promissory Note.
To perfect such security interests, Maker has delivered to Payee
simultaneously herewith Certificate(s) No. ______ evidencing the Pledged Shares,
together with a stock power duly endorsed in blank. Prior to the exercise of any
right or remedy hereunder by the Payee, Maker shall remain the holder of record
of the Pledged Shares with all rights and privileges of such a holder of record
under applicable law.
-3-
<PAGE>
The Maker hereby waives presentment, demand, notice, protest, and all other
demands, notices and defenses (other than payment) in connection with the
delivery, acceptance, performance and enforcement of this Promissory Note, and
agrees to pay the holder's reasonable legal and other fees and expenses incurred
in connection with the enforcement hereof.
IN WITNESS WHEREOF, I have hereunto set my hand under seal this ____ day of
__________________, 1999.
MAKER:________________________
Name:
BELL SPORTS CORP.
EXHIBIT 21 - SUBSIDIARIES OF
THE REGISTRANT
1. Bell Sports, Inc., a California corporation (a wholly owned subsidiary)
2. Euro Bell S.A., a French corporation (99% owned by Bell Sports, Inc.)
3. Bell Sports Canada, Inc., a Canadian corporation (a wholly owned subsidiary
of Bell Sports, Inc.)
4. Giro Sport Design International, Inc., a California corporation (a wholly
owned subsidiary of Bell Sports, Inc.)
5. Giro Ireland Limited, an Ireland corporation (a wholly owned subsidiary of
Giro Sport Design International, Inc.)
6. Bell Sports Australia Pty Limited, an Australian corporation (a wholly
owned subsidiary of Bell Sports, Inc.)
7. Bell Sports Ireland Limited, an Ireland corporation (a wholly owned
subsidiary of Bell Sports, Inc.)
8. Bell Sports International Limited, an Ireland corporation (a wholly owned
subsidiary of Bell Sports, Inc.)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JULY 3,
1999 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-03-1999
<PERIOD-END> JUL-03-1999
<CASH> 8,875
<SECURITIES> 0
<RECEIVABLES> 60,401
<ALLOWANCES> 1,767
<INVENTORY> 43,664
<CURRENT-ASSETS> 128,673
<PP&E> 39,354
<DEPRECIATION> 23,192
<TOTAL-ASSETS> 218,934
<CURRENT-LIABILITIES> 53,944
<BONDS> 158,525
0
10
<COMMON> 11
<OTHER-SE> 6,444
<TOTAL-LIABILITY-AND-EQUITY> 218,934
<SALES> 210,909
<TOTAL-REVENUES> 210,909
<CGS> 140,673
<TOTAL-COSTS> 140,673
<OTHER-EXPENSES> 93,244
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,768
<INCOME-PRETAX> (38,776)
<INCOME-TAX> (9,652)
<INCOME-CONTINUING> (29,124)
<DISCONTINUED> 0
<EXTRAORDINARY> 2,887
<CHANGES> 0
<NET-INCOME> (26,237)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
