================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal quarterly period ended JANUARY 1, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
COMMISSION FILE NUMBER 0-19873
BELL SPORTS CORP.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 36-3671789
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6350 San Ignacio Avenue,
San Jose, California 95119
(Address of Principal Executive Offices) (Zip Code)
(408) 574-3400
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE REGISTRANTS
The number of shares outstanding of each of the registrant's classes of
common stock, as of February 3, 2000:
Class Number of Shares
----- ----------------
Class A Common Stock, $.01 par value 869,976
Class B Common Stock, $.01 par value 135,650
Class C Common Stock, $.01 par value 45,850
================================================================================
<PAGE>
BELL SPORTS CORP.
INDEX TO FORM 10-Q
PART I
Page Number
-----------
Bell Sports Corp. and Subsidiaries Consolidated Balance Sheets
as of January 1, 2000 and July 3, 1999 ........................... 3
Bell Sports Corp. and Subsidiaries Consolidated Statements of
Operations for the six months and three months ended
January 1, 2000 and December 26, 1998 ............................ 4
Bell Sports Corp. and Subsidiaries Consolidated Condensed
Statements of Cash Flows for the six months ended
January 1, 2000 and December 26, 1998 ............................ 5
Notes to Consolidated Financial Statements ........................ 6 - 11
Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................ 12 - 14
PART II
Items 1 to 6 ....................................................... 15
Signatures ......................................................... 16
2
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BELL SPORTS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA AND PER SHARE DATA)
January 1, July 3,
2000 1999
----------- ----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 6,559 $ 8,875
Accounts receivable 59,830 58,634
Inventories 47,928 43,664
Deferred taxes 10,910 11,366
Other current assets 8,750 6,134
--------- ---------
Total current assets 133,977 128,673
Property, plant and equipment 12,897 16,162
Long-term deferred taxes 12,500 12,500
Goodwill 52,028 52,429
Intangibles and other assets 8,772 9,170
--------- ---------
Total assets $ 220,174 $ 218,934
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,764 $ 9,249
Accrued compensation and employee benefits 3,327 2,580
Accrued expenses 18,821 31,682
Notes payable and current maturities of long-term
debt and capital lease obligations 17,780 10,433
--------- ---------
Total current liabilities 54,692 53,944
Long-term debt 149,187 148,270
Capital lease obligations and other liabilities 8,275 10,255
--------- ---------
Total liabilities 212,154 212,469
--------- ---------
Commitments and contingencies
Stockholders' equity:
Series A Preferred Stock; 6% cumulative, $.01
par value; authorized 1,500,000 shares, 1,033,957
and 1,034,781 shares issued and outstanding at
January 1, 2000 and July 3, 1999, respectively 10 10
Class A Common Stock; $.01 par value; authorized
900,000 shares, 869,976 and 870,661 shares issued
and outstanding at January 1, 2000 and July 3, 1999,
respectively 9 9
Class B Common Stock; $.01 par value; authorized
150,000 shares, 135,650 and 128,200 shares issued
and outstanding at January 1, 2000 and July 3, 1999,
respectively 1 1
Class C Common Stock; $.01 par value; authorized 50,000
shares, 45,850 and 50,000 shares issued and outstanding
at January 1, 2000 and July 3, 1999, respectively 1 1
Additional paid-in capital 53,235 53,210
Accumulated other comprehensive income (2,267) (1,925)
Accumulated deficit (42,969) (44,841)
--------- ---------
Total stockholders' equity 8,020 6,465
--------- ---------
Total liabilities and stockholders' equity $ 220,174 $ 218,934
========= =========
See accompanying notes to these consolidated financial statements.
3
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
-------------------------- --------------------------
January 1, December 26, January 1, December 26,
2000 1998 2000 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 97,822 $ 85,939 $ 50,972 $ 45,021
Cost of sales 63,857 57,876 34,121 30,502
-------- -------- -------- --------
Gross profit 33,965 28,063 16,851 14,519
Selling, general and
administrative expenses 24,488 23,299 11,832 11,943
Foreign exchange (gain) loss 12 1,949 (3) 330
Amortization of goodwill and
intangible assets 1,079 1,061 552 499
Transaction costs -- 12,388 -- 2,505
Net investment income (175) (810) (69) (209)
Interest expense 8,421 6,742 4,223 4,204
-------- -------- -------- --------
Income (loss) before income taxes 140 (16,566) 316 (4,753)
Provision for (benefit from)
income taxes 57 (3,315) 129 (1,949)
-------- -------- -------- --------
Income (loss) before extraordinary
items 83 (13,251) 187 (2,804)
Extraordinary item: Gain on early
extinguishment of debt, net of taxes
of $2,006 -- 2,887 -- --
-------- -------- -------- --------
Net income (loss) $ 83 $(10,364) $ 187 $ (2,804)
======== ======== ======== ========
</TABLE>
See accompanying notes to these consolidated financial statements.
4
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
Six Months Ended
-----------------------
January 1, December 26,
2000 1998
------- ---------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net cash provided by (used in) operating activities $(7,825) $ (3,390)
------- ---------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Capital expenditures (1,728) (2,341)
Expenditures to acquire intangible assets (557) --
------- ---------
Net cash provided by (used in) investing activities (2,285) (2,341)
------- ---------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from issuance of senior subordinated notes -- 110,000
Expenditures related to issuance of senior
subordinated notes -- (4,700)
Proceeds from issuance of senior discount notes -- 15,000
Proceeds from issuance of preferred stock 25 44,555
Repurchase of common stock -- (142,350)
Tender of subordinated debentures -- (57,681)
Net borrowings (payments) on notes payable, long-term
debt and capital leases 279 (918)
Net borrowings (payments) on line of credit agreement 7,732 5,404
Expenditures related to issuance of line of credit -- (1,381)
------- ---------
Net cash provided by (used in) financing activities 8,036 (32,071)
------- ---------
Effect of exchange rate changes on cash (242) (826)
------- ---------
Net increase (decrease) in cash and cash equivalents (2,316) (38,628)
Cash and cash equivalents at beginning of period 8,875 45,093
------- ---------
Cash and cash equivalents at end of period $ 6,559 $ 6,465
======= =========
See accompanying notes to these consolidated financial statements
5
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Bell Sports Corp. and its wholly-owned subsidiaries (collectively, the
"Company" or "Bell") is the leading manufacturer and marketer of bicycle helmets
worldwide and a leading supplier of a broad line of bicycle accessories in North
America. The Company is also a supplier of bicycle accessories worldwide.
PRINCIPLES OF CONSOLIDATION AND ACCOUNTING PERIOD
The consolidated financial statements include the accounts of Bell Sports
Corp. and its wholly-owned subsidiaries. All material intercompany transactions
and balances have been eliminated in consolidation. The Company's fiscal year is
either a fifty-two or fifty-three week accounting period ending on the Saturday
that is nearest to the last day of June. The Company's fiscal second quarter in
both 2000 and 1999 had thirteen weeks.
UNAUDITED INFORMATION AND BASIS OF PRESENTATION
The consolidated balance sheet as of January 1, 2000 and statements of
operations and of condensed cash flows for all periods included in the
accompanying financial statements have not been audited. In the opinion of
management these financial statements include all normal and recurring
adjustments necessary for a fair presentation of such financial information. The
results of operations for the interim periods are not necessarily indicative of
the results of operations to be expected for the full year.
The financial information included herein has been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to such rules and regulations. The interim financial
information and the notes thereto should be read in conjunction with the audited
financial statements for the fiscal years ended July 3, 1999, June 27, 1998 and
June 28, 1997 which are included in the Company's 1999 Annual Report on Form
10-K.
ACCOUNTS RECEIVABLE
Accounts receivable at January 1, 2000 and July 3, 1999 are net of
allowances for doubtful accounts of $1.2 million and $1.8 million, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at January 1, 2000 and July 3, 1999 are net
of accumulated depreciation of $21.3 million and $23.2 million, respectively.
MANAGEMENT'S ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
6
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 2 - COMPREHENSIVE INCOME
Comprehensive income for the periods presented is calculated as follows:
Six Months Ended Three Months Ended
------------------------ ------------------------
January 1, December 26, January 1, December 26,
2000 1998 2000 1998
---- ---- ---- ----
Net income (loss) $ 83 $(10,364) $ 187 $(2,804)
Foreign currency translation
adjustment, net of tax (342) (552) (284) (831)
----- -------- ----- -------
Comprehensive income (loss) $(259) $(10,916) $(162) $(3,635)
===== ======== ===== =======
NOTE 3 - INVENTORIES
Inventories consist of the following components (in thousands):
January 1, July 3,
2000 1999
---- ----
Raw materials $4,336 $3,579
Work in process 1,293 1,089
Finished goods 42,299 38,996
------- -------
Total $47,928 $43,664
======= =======
NOTE 4 - COMMITMENTS AND CONTINGENCIES
PRODUCT LIABILITY
The Company is subject to various product liability claims and/or suits
brought against it for claims involving damages for personal injuries or deaths.
Allegedly, these injuries or deaths relate to the use by claimants of products
manufactured by the Company and, in certain cases, products manufactured by
others. The ultimate outcome of these existing claims and any potential future
claims cannot presently be determined.
The cost of product liability insurance fluctuated greatly in past years
and the Company opted to self-insure claims for certain periods. The Company has
been covered by product liability insurance since July 1, 1991. This insurance
is subject to a self-insured retention. There is no assurance that insurance
coverage will be available or economical in the future.
The Company sold its 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. In the
second quarter of fiscal 2000, the Company paid the judgment of $3.6 million.
Based on management's extensive consultation with legal counsel, the
Company has established product liability reserves totaling $10.1 million. These
reserves are intended to cover the estimated costs for the defense, payment or
settlement of known claims. Management believes it will have adequate cash
balances and sources of capital available to satisfy any payments necessary.
7
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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, management 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 $27,000 to $36,000. The benefits of the
settlement are similar to those offered by USEPA for the OII site. Accordingly,
management does not expect this claim to have a material adverse effect on the
Company.
Besides the litigation described above, management is not aware of any
material litigation that, if adversely determined, would have a material effect
on the Company's financial liabilities.
NOTE 5 - NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
On August 17, 1998, the Company's wholly-owned subsidiary, Bell Sports,
Inc. ("BSI"), 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 BSI at any time on or after August 15, 2003, in cash, at specified
redemption prices. In addition, prior to August 15, 2001, BSI may redeem up to
35% of the Notes for 111% of their principal amount, plus accrued interest. The
Company has fully and unconditionally guaranteed the Notes. Separate financial
statements and other disclosures relating to BSI 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.
January 1, 2000
---------------
SUMMARIZED BALANCE SHEET DATA: (unaudited)
Current assets $151,394
Total assets 201,425
Current liabilities 54,219
Total liabilities 172,495
Stockholder's equity 28,930
Six Months Ended
January 1, 2000
------------------
SUMMARIZED STATEMENT OF OPERATIONS DATA: (unaudited)
Net sales $97,822
Gross profit 33,965
Net income 2,142
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.
8
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company has also issued 4 1/4% Convertible Subordinated Debentures
("Debentures") due November 2000, of which $23.8 million were outstanding at
January 1, 2000. The Debentures are redeemable at the Company's option at any
time at specified redemption prices.
In August 1998, the Company and BSI entered into a $60.0 million senior
secured revolving credit facility ("Credit Agreement") expiring on August 17,
2003. The Credit Agreement provides for mandatory repayments from time to time
to the extent the amount outstanding thereunder exceeds the maximum amount
permitted under the borrowing base. Based on the provisions of the Credit
Agreement, the Company could borrow a maximum of $55.1 million as of January 1,
2000. As of January 1, 2000, there were borrowings outstanding of $17.0 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 January 1, 2000, 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 January 1, 2000, the quarterly commitment fee was 0.50% per
annum.
The Credit Agreement contains certain financial covenants, including a
maximum leverage ratio, a minimum fixed charge coverage ratio and a minimum cash
interest coverage ratio. It also contains covenants which restrict the ability
of the Company to pay dividends, incur liens, issue certain types of debt or
equity, engage in mergers, acquisitions or asset sales, or to make capital
expenditures. At January 1, 2000, the Company was in compliance with or had
obtained waivers for all bank covenants.
Long-term debt consists of the following (in thousands):
January 1, July 3,
2000 1999
---- ----
11% senior subordinated debentures maturing
August 2008 $110,000 $110,000
4 1/4% convertible subordinated debentures
maturing November 2000 23,750 23,750
14% senior discount notes due August 2009 15,437 14,434
Borrowings under line of credit 17,732 10,000
Notes collateralized by certain equipment -- 391
-------- --------
166,919 158,575
Less: current maturities 17,732 10,305
-------- --------
Total long-term debt $149,187 $148,270
======== ========
NOTE 6 - DISPOSITIONS AND RESTRUCTURING
In September 1999, the Company sold its European manufacturing facility in
Roche La Moliere, France. In addition, the Company entered into an agreement
with the purchaser pursuant to which the purchaser has agreed to provide the
Company with helmets. The Company recorded a charge in fiscal 1999 of
approximately $2.5 million in connection with the sale and related
reorganization of the Company's European manufacturing facility. No material
gain or loss was recognized upon consummation of the sale in September 1999.
In the fourth quarter of fiscal 1999, the Company recorded charges of $16.5
million associated with the consolidation of manufacturing facilities, the
streamlining of administrative overhead, the divestiture of the Company's former
auto racing division and the closure of the Australian sales and marketing
office. At January 1, 2000, the remaining reserves related primarily to
facilities leases. Activity in these accruals for the first two quarters of
fiscal 2000 was as follows:
9
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
July 3, Cash Non-cash January 1,
1999 Payments Charges 2000
-------- ------- ------- ------
ACCRUALS:
Manufacturing consolidation $ 9,102 $(3,993) $(1,767) $3,342
Overhead reductions 2,224 (1,037) (1,159) 28
Sale of auto racing and Australia 788 (531) (200) 57
Restructuring accruals from prior years 493 (278) -- 215
------- ------- ------- ------
$12,607 $(5,839) $(3,126) $3,642
======= ======= ======= ======
NOTE 7 - SEGMENT INFORMATION
The Company has three reportable segments: products sold to domestic mass
merchants, products sold to domestic independent bicycle dealers (IBDs), and
products sold in international operations. The international operations have
been combined into one reportable segment as they share a majority of the
aggregation criteria and are not individually reportable. The Company's domestic
mass merchant segment markets a wide range of bicycle accessories and bicycle
helmets through the mass merchant channel, including retailers such as Wal-Mart
and K-Mart. The domestic IBD segment markets premium bicycle helmets and
accessories to independent bicycle dealers such as bicycle chains, independent
bicycle shops, specialized sporting goods stores, and mail order catalogs.
International operations include sales of bicycle accessories and helmets sold
to both mass merchant and IBD channels in Canada, Europe and, in fiscal 1999,
Australia, in addition to distributing third party products.
The Company evaluates the performance of, and allocates resources to, the
reportable segments based on net sales and EBITDA. For internal purposes, EBITDA
is defined as earnings before investment income and interest expense, income
taxes, depreciation, amortization, and certain one-time charges such as
transaction costs, product liability costs, restructuring charges, asset
write-offs, other costs, loss on disposal of product line and sale of assets and
other one-time costs such as foreign exchange loss and compensation expense
related to the grant of stock options.
<TABLE>
<CAPTION>
Mass Merchants IBD International Other (1) Total
-------------- ------- ------------- --------- --------
<S> <C> <C> <C> <C> <C>
SIX MONTHS ENDING JANUARY 1, 2000:
Sales to unaffiliated customers $52,620 $28,684 $16,518 $ -- $ 97,822
EBITDA 9,567 1,614 586 (196) 11,571
SIX MONTHS ENDING DECEMBER 26, 1998:
Sales to unaffiliated customers $39,739 $28,120 $18,080 $ -- $ 85,939
EBITDA 3,933 1,152 424 2,029 7,538
THREE MONTHS ENDING JANUARY 1, 2000:
Sales to unaffiliated customers $26,192 $14,070 $10,710 $ -- $ 50,972
EBITDA 4,458 1,055 672 (148) 6,027
THREE MONTHS ENDING DECEMBER 26, 1998:
Sales to unaffiliated customers $19,572 $13,701 $11,748 $ -- $ 45,021
EBITDA 1,874 449 702 619 3,644
TOTAL ASSETS:
January 1, 2000 $54,938 $34,886 $19,621 $110,729 $220,174
July 3, 1999 59,176 27,996 29,335 102,427 218,934
</TABLE>
- ----------
(1) The "Other" designation includes corporate expenditures and expenditures
related to the Company's U.S. manufacturing facility.
10
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
EBITDA for the periods shown is reconciled to net income before income
taxes as follows:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
------------------------ ------------------------
January 1, December 26, January 1, December 26,
2000 1998 2000 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
EBITDA $ 11,571 $ 7,538 $ 6,027 $ 3,644
Less:
Depreciation 2,106 2,825 1,005 1,398
Amortization 1,079 1,061 552 499
One-time foreign exchange loss and
compensation expense for stock options -- 1,898 -- --
Transaction costs -- 12,388 -- 2,505
Net investment income (175) (810) (69) (209)
Interest expense 8,421 6,742 4,223 4,204
-------- -------- ------- -------
Net income (loss) before provision for
(benefit from) income taxes $ 140 $(16,566) $ 316 $(4,753)
======== ======== ======= =======
</TABLE>
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Bell Sports is the leading manufacturer and marketer of bicycle helmets
worldwide and a leading supplier of a broad line of bicycle accessories in North
America. The Company is also a supplier of bicycle accessories worldwide. Over
its 45-year history, the Company has developed a reputation for innovation,
design, quality and safety.
RESULTS OF OPERATIONS
NET SALES. Net sales for the second quarter of fiscal 2000 of $51.0 million
increased 13% from $45.0 in the fiscal 1999 second quarter. Year to date net
sales of $97.8 million increased 14% from $85.9 million in fiscal 1999. The
quarterly and year to date increases are due primarily to strong U.S. sales in
the mass merchant channel. Additional increases have come from the U.S.
specialty retail channel and from Canadian sales.
For the second quarter of fiscal 2000, bicycle accessories and bicycle
helmets represented approximately 51% and 49%, respectively, of net sales. Year
to date, bicycle accessories and bicycle helmets represented approximately 55%
and 45%, respectively, of net sales. For the fiscal 1999 second quarter, bicycle
accessories, bicycle helmets and auto racing helmets represented approximately
50%, 48% and 2%, respectively, of the Company's net sales. Year to date, bicycle
accessories, bicycle helmets and auto racing helmets represented approximately
53%, 45% and 2%, respectively, of net sales. In July 1999, the Company sold its
auto racing helmet business.
GROSS MARGIN. Gross margins for the second quarter of fiscal 2000 increased
to 33% of net sales from 32% in the prior year quarter. Year to date, gross
margins increased to 35% of net sales from 33% in the prior year. The increase
is mainly due to better sourcing of accessories and production efficiencies
resulting from the manufacturing consolidations completed by the Company in the
fiscal 1999 fourth quarter.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
costs as a percentage of net sales improved to 23% for the second quarter of
fiscal 2000 from 27% for the prior year second quarter. Year to date, selling,
general and administrative costs as a percentage of net sales have dropped to
25% in fiscal 2000 from 27% in fiscal 1999. The decrease is due to increased
efficiency due to the Company's restructuring accomplished in the fourth quarter
of fiscal 1999.
AMORTIZATION OF INTANGIBLES. Amortization of goodwill and intangible assets
increased slightly to $552,000 in the Company's second quarter of fiscal 2000
compared to $499,000 for the comparable prior year period. Year to date,
amortization remained constant at $1.1 million for both fiscal 2000 and fiscal
1999.
FOREIGN EXCHANGE. Foreign exchange gain of $3,000 for the second quarter
increased from the prior year quarter loss of $330,000. Year to date, the
foreign exchange loss for fiscal 2000 decreased to $12,000 from $1,949,000 in
the prior year. The high foreign exchange losses in the prior year were due to
the unusually high level of cash movement related to the August 1998 merger of
Bell and HB Acquisition Corporation (the "Bell Merger").
NET INVESTMENT INCOME. Net investment income decreased to $69,000 in the
second quarter of fiscal 2000 compared to $209,000 in the second quarter of
fiscal 1999. Year to date, net investment income decreased to $175,000 from
$810,000. The decrease was due to significantly lower cash balances.
INTEREST EXPENSE. Interest expense for the second quarter of fiscal 2000 of
$4.2 million remained constant from the prior year. Year to date, interest
expense increased to $8.4 million from $6.7 million in the prior year. The year
to date increase is due to the higher level of debt outstanding for the entire
period, as the increase in debt occurred midway through the first quarter of
fiscal 1999.
12
<PAGE>
INCOME TAXES. The effective tax rate was 41% for the second quarter of both
fiscal 2000 and fiscal 1999. Year to date the effective tax rate was 41% for
fiscal 2000 compared to 20% for fiscal 1999. The increase is attributable to the
non-deductibility of certain costs associated with the Bell Merger incurred in
the prior year.
LIQUIDITY AND FINANCIAL RESOURCES
The Company has historically funded its operations, capital expenditures
and working capital requirements from internal cash flow from operations and
borrowings. The Company's working capital increased slightly to $79.3 million at
January 1, 2000 from $74.7 million at July 3, 1999.
The Company's capital expenditures were $1.7 million for the first six
months of fiscal 2000, compared to $2.3 million in fiscal 1999. The Company
estimates it will spend approximately $3.8 million on capital expenditures in
fiscal 2000 for product tooling and to maintain and upgrade its facilities and
equipment.
In August 1998, the Company and BSI, entered into a $60.0 million senior
secured revolving credit facility ("Credit Agreement") expiring on August 17,
2003. The Credit Agreement provides for mandatory repayments from time to time
to the extent the amount outstanding thereunder exceeds the maximum amount
permitted under the borrowing base. Based on the provisions of the Credit
Agreement, the Company could borrow a maximum of $55.1 million as of January 1,
2000. As of January 1, 2000, there were borrowings outstanding of $17.0 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 loans 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 January 1, 2000, 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 January 1, 2000, the quarterly commitment fee was 0.50% per
annum.
The Credit Agreement contains certain financial covenants, including a
maximum leverage ratio, a minimum fixed charge coverage ratio and a minimum cash
interest coverage ratio. It also contains covenants which restrict the ability
of the Company to pay dividends, incur liens, issue certain types of debt or
equity, engage in mergers, acquisitions or asset sales, or to make capital
expenditures. At January 1, 2000, the Company was in compliance with or had
obtained waivers for all bank covenants.
Management believes that cash flows from operations and borrowings
available under the Credit Agreement will provide adequate funds for the
Company's foreseeable working capital needs, planned capital expenditures, debt
service obligations and the ultimate outcome of pending product liability
claims. The Company does not anticipate paying dividends on its Preferred or
Common Stock in the foreseeable future.
YEAR 2000 COMPLIANCE
The Year 2000 problem, which is common to most corporations, concerns the
inability of information systems, including computer software programs as well
as other systems dependent on computerized information such as phones,
voicemail, security systems and elevators (collectively, "Non-IT Systems"), to
properly recognize and process date sensitive information related to the year
2000 and beyond.
13
<PAGE>
All Year 2000 efforts with respect to the Company and its subsidiaries'
computer software programs were made through internal resources and through
routine software upgrades provided by the Company's software vendors. The
Company did not incur significant separately identifiable costs related to Year
2000 issues through January 1, 2000 and does not expect to incur significant
additional costs related to Year 2000 issues. 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 did not hire additional employees, either full-time or contract, in
order to address Year 2000 issues.
The Company employs certain manufacturing processes that utilize computer
controlled manufacturing equipment. Prior to January 1, 2000, the Company
determined that such equipment was Year 2000 compliant. The Company's Non-IT
Systems were also determined to be Year 2000 compliant prior to January 1, 2000.
The Company utilized internal resources to address the Year 2000 compliance of
its Non-IT Systems and did not incur significant separately identifiable costs
related to Year 2000 issues through January 1, 2000 and does not expect to incur
significant additional Year 2000 costs.
In addition to reviewing its internal systems, the Company polled 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 confirmed that they were Year
2000 compliant, including the products utilized by the Company.
As of this date, the Company has experienced no material Year 2000 related
failures. This includes both the Company's internal hardware and software
systems and the basic utility services of its providers. The Company is also not
aware of any Year 2000 related problems at any of its customers or critical
suppliers that could adversely affect its business operations. The Company will
continue to monitor its own systems and those of its business partners to
identify and address any potential risk situation related to the Year 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") was
issued. SFAS 133 establishes a new model for accounting for derivatives and
hedging activities and supersedes and amends a number of existing standards.
SFAS 133 is required to be adopted by the Company for fiscal year 2001. Upon
initial application, all derivatives are required to be recognized in the
statement of financial position as either assets or liabilities and measured at
fair value. In addition, all hedging relationships must be reassessed and
documented pursuant to the provisions of SFAS 133. As the Company does not
currently invest in derivatives, the adoption of SFAS 133 is not expected to
have a material effect on the results of operations or the consolidated
financial statements.
FORWARD-LOOKING STATEMENTS
Certain matters contained herein are forward-looking statements that are
based on management's beliefs as well as on assumptions made by and information
currently available to management. When used herein, the words "expect,"
"anticipate," "intend," "plan," "believe," "estimate," and similar expressions
are intended to identify such forward-looking statements. Such statements
involve known and unknown risks and uncertainties that could cause actual
results to differ materially from those in the forward-looking statements. These
include, but are not limited to: economic and market conditions, competitive
activities or other business conditions, dependence on key customers,
fluctuations in sales, profitability or working capital, weather conditions,
currency fluctuations, and results of pending litigation.
14
<PAGE>
BELL SPORTS CORP.
PART II
ITEM 1 LEGAL PROCEEDINGS
None
ITEM 2 CHANGES IN SECURITIES
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 OTHER INFORMATION
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index Page 17
(b) None
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: February 4, 2000
BELL SPORTS CORP.
By: /s/ Richard S Willis
--------------------------------
Richard S Willis
Executive Vice President, Chief
Operating Officer and Chief
Financial Officer (principal
financial and accounting officer)
16
<PAGE>
BELL SPORTS CORP.
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
27* Financial Data Schedule
- ----------
* Filed herewith
17
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-01-2000
<PERIOD-START> JUL-04-1999
<PERIOD-END> JAN-01-2000
<EXCHANGE-RATE> 1
<CASH> 6,559
<SECURITIES> 0
<RECEIVABLES> 61,042
<ALLOWANCES> 1,212
<INVENTORY> 47,928
<CURRENT-ASSETS> 133,977
<PP&E> 34,158
<DEPRECIATION> 21,261
<TOTAL-ASSETS> 220,174
<CURRENT-LIABILITIES> 54,692
<BONDS> 166,919
0
10
<COMMON> 11
<OTHER-SE> 7,999
<TOTAL-LIABILITY-AND-EQUITY> 220,174
<SALES> 97,822
<TOTAL-REVENUES> 97,822
<CGS> 63,857
<TOTAL-COSTS> 63,857
<OTHER-EXPENSES> 25,404
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,421
<INCOME-PRETAX> 140
<INCOME-TAX> 57
<INCOME-CONTINUING> 83
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 83
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
