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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 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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Not applicable
Securities registered pursuant to Section 12(g) of the Act:
4 1/4% Convertible Subordinated Debentures Due 2000
(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 August 18, 2000 was $4,253,036 (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 August 18, 2000:
Class Number of shares
----- ----------------
Common Stock, $.01 par value 999,989
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 2000, the Company had net sales of $244.5 million.
The Company has developed a reputation 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 $244.5 million in fiscal 2000. 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 2000, approximately 55% and 45% of the Company's net sales were
derived from the sale of bicycle accessories and bicycle helmets, respectively,
with approximately 58% attributable to sales to domestic mass merchants, 25%
attributable to domestic IBDs and 17% attributable to international sales.
Since its founding, 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 1999, the Company restructured its worldwide operations by
consolidating its manufacturing and product design and testing facilities. Under
the plan, the Company closed its manufacturing facilities in Santa Cruz,
California, Canada, and Ireland and sold its manufacturing facility in France,
thereby consolidating all manufacturing activities in its Rantoul, Illinois
facility. All product design and testing were consolidated into its Santa Cruz,
California facility.
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 second 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 "1998
Recapitalization"). 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.
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On June 13, 2000, the Company entered into an Agreement and Plan of Merger
(as amended, the "Merger Agreement") with Bell Sports Holdings, L.L.C., a
Delaware limited liability company ("Bell Sports Holdings"), and Andsonica
Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of Bell
Sports Holdings ("Andsonica Acquisition"). The Merger Agreement was amended on
August 3, 2000. The Merger Agreement provided, subject to the conditions
contained therein, for the merger (the "2000 Merger") of Andsonica Acquisition
with and into the Company, with the Company continuing as the surviving
corporation. Bell Sports Holdings and Andsonica Acquisition are both newly
formed entities created by Chartwell Investments II LLC ("Chartwell") for the
purpose of entering into the Merger Agreement and engaging in the transactions
contemplated thereby. The Merger Agreement was approved by the Board of
Directors of the Company prior to its execution and was approved by the
stockholders of the Company by written consent on June 13, 2000.
On August 11, 2000, pursuant to a Certificate of Merger filed with the
Secretary of State of the State of Delaware, Andsonica Acquisition merged with
and into Bell. In the 2000 Merger, (i) all of the issued and outstanding common
shares of Andsonica Acquisition were converted into 943,925 shares of Bell
Common Stock, (ii) each share of Bell's Class A Common Stock and Class B Common
Stock issued and outstanding immediately prior to the 2000 Merger was converted
into the right to receive (i) cash, (ii) cash and 18% Senior Non-Negotiable
Merger Notes of the Company due 2000 ("Merger Notes"), or (iii) common stock of
the Company following the 2000 Merger. Each share of Bell's Series A Preferred
Stock was converted into the right to receive $50.99, in cash, plus accrued but
unpaid dividends. All of Bell's Class C Common Stock was cancelled without
consideration. Immediately following the 2000 Merger, Bell Sports Holdings owned
approximately 94.4% of the equity of 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, and
products sold in international operations. The international operations meet the
aggregation criteria specified under SFAS 131. The financial information
required with respect to industry segments of the Company appears in Note 13 to
the Consolidated Financial Statements of the Company appearing on page 33 of
this Annual Report on Form 10-K.
(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 Toys R Us. Bicycle helmets
are marketed through the mass merchant channel under the Bell, Barbie(R), Fisher
Price(R) and Mongoose(R) brand names. Bicycle accessories are marketed through
the mass merchant channel under the Bell, Cycletech, Spoke-Hedz, Barbie(R),
Fisher Price(R), Mongoose(R) and Kryptonite(R) brand names.
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"), with distribution offices in Calgary, Alberta and Champaign, Illinois,
and sales and marketing offices in San Jose, California, markets its products to
the Canadian IBD and mass merchant channels. Bell Sports Canada markets its
products primarily under the same brand names as those in the United States in
addition to distributing non-proprietary accessories in the IBD channel through
such companies as RockShox and Race Face.
BELL SPORTS EUROPE. Bell Sports Europe, located in Limerick, Ireland,
markets and distributes bicycle helmets and bicycle accessories to the IBD and
mass merchant channels throughout Europe. Bicycle helmets are marketed under the
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Bell, Bell Pro and Bike Star(TM) brand names and certain private label
arrangements, and accessories are marketed under the Bell, Rhode Gear, Blackburn
and VistaLite brand names.
(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. Helmet liners, made from plastic expandable polystyrene
foam, are used in the production of helmets. The Company has entered into a foam
molding agreement with Pactuco, Inc. ("Pactuco"), pursuant to which Pactuco 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 auto racing, motorcycle, snowmobile and police helmets manufactured by
third parties.
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 68 United States patents and 11 foreign patents.
As of July 1, 2000, the Company had 6 United States patents and 5 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.
(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 2000 and
1999, approximately 60% and 59%, respectively, of the Company's net sales
occurred during the six months ended July 1, 2000 and July 3, 1999,
respectively. The first 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.
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(vii) Dependence on single customer
In fiscal 2000, 1999 and 1998, approximately 32%, 28% and 21%,
respectively, of the Company's net sales were to a single customer, Wal-Mart. In
addition, at the end of fiscal 2000 and 1999, 28% and 30% of the Company's gross
accounts receivable were attributed to Wal-Mart. In fiscal 2000, the largest
five customers of the Company were Wal-Mart, Toys R Us, Costco, The Sports
Authority, and Sears and accounted for 44% of its net sales, and the largest ten
customers accounted for 51% 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 2000, 1999 and 1998, 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.
(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 2000, 1999 and 1998 were approximately $4.4 million, $3.6
million and $3.6 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.
(xiii) Number of employees
The Company employed approximately 1,677 persons at July 1, 2000. The
Company is a party to collective bargaining agreements at one facility, covering
approximately 39 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.
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(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 13 to the
Consolidated Financial Statements of the Company appearing on page 33 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:
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
Champaign, IL Distribution facility of approximately 130,844
square feet
Santa Cruz, CA Giro sales, marketing, administration, and
research and development facility of approximately
50,500 square feet
Bentonville, AR Sales offices of approximately 1,425 square feet
Scottsdale, AZ Administration offices of approximately 1,600
square feet
York, PA Distribution center with approximately 300,000
square feet
Limerick, Ireland Sales and administrative facility of approximately
18,000 square feet
Calgary, Alberta Distribution facilities of approximately 38,900
square feet
All locations are leased except for the York, Pennsylvania facility.
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 products
covers claims based on occurrences within the policy period up to a maximum of
$60.0 million in the aggregate in excess of the Company's self-insured retention
of $1.0 million per occurrence for bicycle 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 $60.0 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.
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: 12 cases in fiscal 1996, 15 cases
in fiscal 1997, 14 cases in fiscal 1998, 14 cases in fiscal 1999 and 11 cases in
fiscal 2000. Of the 11 cases served in fiscal 2000, which includes Giro and AMRE
lawsuits, 2 involve bicycles, 1 involves bicycle accessories, 5 involve bicycle
helmets, and 3 involve motorcycle helmets. Of these same 11 cases, 2 cases
involve a claim relating to death, 2 involve claims relating to serious,
permanently disabling injuries, and 7 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 1, 2000, there were 29 lawsuits pending relating to injuries
allegedly suffered from products made or sold by the Company. Of the 29
lawsuits, 8 involve motorcycle helmets, 12 involve bicycle helmets, 1 involves
an auto racing helmet, 6 involve bicycles and 2 involve bicycle accessories.
Three of the 29 lawsuits pending against the Company as of July 1, 2000 are
scheduled for trial prior to December 31, 2000. Of the 3 lawsuits scheduled for
trial prior to December 31, 2000, 1 involves a bicycle helmet claim. The bicycle
helmet claims include allegations of failure to warn and design defects.
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 November
1999, the Company paid the judgment of $3.6 million.
In February 1998, a Wilkes-Barre, Pennsylvania jury returned a verdict
against the Company relating to injuries sustained in a 1993 motorcycle
accident. 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. In
February 2000, the Company lost the case on appeal. In April 2000, the Company
settled the case for $8.9 million.
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.
Based on management's extensive consultation with legal counsel prosecuting
the appeal, the Company has established product liability reserves totaling $2.1
million, of which $1.1 million is classified as current. These reserves are
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intended to cover the estimated costs for the defense, payment or settlement of
this 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 the Company's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On June 13, 2000, stockholders with shares having 844,150 votes (93.4% of
the shares entitled to vote) adopted the Merger Agreement by written consent. On
August 3, 2000, stockholders with shares having 844,150 votes (93.4% of the
shares entitled to vote) adopted the Merger Agreement, as amended, by written
consent.
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PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Currently, there is no established trading market for the Company's common
stock. As of August 18, 2000 there were 21 holders of record of the Company's
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
315 shares of Class A Common Stock, 23,500 shares of Class B Common Stock and
7,900 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 $14,844. As discussed above, all of the shares of the Company's Class
A Common Stock and Class B Common Stock were converted, at the effective time of
the 2000 Merger, into the right to receive (i) cash, (ii) cash and indebtedness
or (iii) Common Stock of the Company as the surviving corporation in the 2000
Merger. All of Bell's Class C Common Stock was cancelled without consideration.
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 1, JULY 3, JUNE 27, JUNE 28, JUNE 29,
2000 (1) 1999 (2) 1998 (3) 1997 (4) 1996 (5)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS DATA:
Net sales $ 244,457 $ 210,909 $ 207,236 $ 259,534 $ 262,340
Net income (loss) 9,236 (26,237) 8,578 (18,188) (12,375)
BALANCE SHEET DATA:
Working capital $ 59,051 $ 74,729 $ 130,437 $ 130,677 $ 149,474
Total assets 236,292 218,934 247,067 268,754 298,635
Total debt, less current portion 126,510 148,270 87,705 107,688 124,500
Total stockholders' equity 16,244 6,465 128,259 118,965 136,041
</TABLE>
----------
(1) Results for fiscal 2000 include one-time restructuring charges of $370,000
and asset write-offs of $80,000.
(2) Results for fiscal 1999 include one-time charges of $13.1 million for the
1998 Recapitalization, $9.0 million for restructuring, $5.3 million for
asset write-offs, and $14.8 million for product liability and other
one-time charges.
(3) 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.
(4) 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.
(5) 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.
9
<PAGE>
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 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. To further focus on bicycle
helmets and accessories, the Company sold its auto racing helmet business in
1999 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, selling in Canada, Europe, Australia, the Pacific
Rim and Latin America.
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. 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 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 and 2000, the Company implemented 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) closed its Australia
10
<PAGE>
sales and marketing operations together with its decision to service the
Australia market with a local distributor; (iv) consolidated the Ireland
manufacturing facility into the existing France facility; and (v) sold the
France 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 1, 2000, the Company had domestic net operating losses of
approximately $35.4 million, which will be carried forward and begin to expire
in 2008. As a result of the 1998 Recapitalization, 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 AND ASSET WRITE-OFFS - 2000
In June 2000, the Company announced and began implementing a plan to
consolidate its European operations into its Limerick, Ireland facility. In the
fourth quarter of fiscal 2000, the Company recorded $370,000 in restructuring
costs and $80,000 in asset write-offs associated with this consolidation. The
costs are based on estimates of employee severance costs, legal fees and various
other charges. The restructuring costs include $243,000 of severance related
costs for 9 employees from all areas of responsibility, all of whom had been
notified of their pending termination prior to July 1, 2000. No costs related to
the consolidation had been paid as of July 1, 2000.
In fiscal 2000, the Company made certain charges and credits to
restructuring reserves recorded in fiscal 1999 as actual results differed from
expected, the largest of which related to the Company's unexpected ability to
sublease a facility. The following table sets forth the details of activity
during fiscal 2000 for restructuring charges, asset write-offs and other costs
and related accrued expenses (in thousands):
<TABLE>
<CAPTION>
ADJUSTMENTS:
JULY 3, CASH NON-CASH CHARGES JULY 1,
1999 PAYMENTS CHARGES (CREDITS) 2000
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
RESTRUCTURING ACCRUALS:
European restructuring $ -- $ -- $ -- $ 450 $ 450
Manufacturing consolidation 9,102 (5,481) (1,633) (1,103) 885
Overhead reductions 2,224 (261) (1,795) (39) 129
Sale of auto racing and Australia 788 (213) (220) 213 568
Restructuring accruals from prior
years 493 (315) -- -- 178
------- ------- ------- ------- -------
TOTAL $12,607 $(6,270) $(3,648) $ (479) $ 2,210
======= ======= ======= ======= =======
</TABLE>
The remaining restructuring accruals at July 1, 2000 related to the fiscal
1999 restructuring plan consist of $885,000 in lease obligations, $129,000 in
severance payments, and $568,000 in asset write-offs from the closure of the
Australian offices. There are no remaining employees to be terminated relative
to the 1999 restructuring plan.
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.
11
<PAGE>
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
closed its Santa Cruz, California, Canada and Ireland manufacturing facilities,
and sold its manufacturing facility in France, leaving 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 had been notified of their pending
termination prior to fiscal year end. 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.
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 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 prior to fiscal year end. 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
-------
TOTAL RESTRUCTURING 8,970
-------
ASSET WRITE-OFFS:
Manufacturing consolidation 4,784
Overhead reduction 69
Sale of auto racing and Australia 413
-------
TOTAL ASSET WRITE-OFFS 5,266
-------
12
<PAGE>
OTHER COSTS:
Manufacturing consolidation 1,026
Overhead reduction 941
Sale of auto racing 325
-------
TOTAL OTHER COSTS 2,292
-------
TOTAL CHARGES $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>
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>
COMPARISON OF THE FISCAL YEAR ENDED JULY 1, 2000 WITH THE FISCAL YEAR ENDED JULY
3, 1999
NET SALES. Net sales for fiscal 2000 increased 16% to $244.5 million in
fiscal 2000 from $210.9 million in fiscal 1999. The increase was due to a strong
increase in domestic mass merchant sales in addition to increases in IBD and
Canada sales.
For fiscal 2000, bicycle accessories and bicycle helmets represented
approximately 55% and 45%, respectively, of the Company's net 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.
GROSS MARGIN. Gross margin increased to 35% of net sales in fiscal 2000
from 33% of net sales in fiscal 1999. The increase is due primarily to improved
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 have dropped to 21% of net sales in fiscal 2000 compared to 23% in fiscal
1999. The improvement is due primarily to increased efficiency resulting from
the Company's restructuring accomplished in the fourth quarter of fiscal 1999.
AMORTIZATION OF INTANGIBLES. Amortization of goodwill and intangible assets
increased slightly to $2.2 million in fiscal 2000 from $2.1 million in fiscal
1999.
13
<PAGE>
TRANSACTION COSTS. During fiscal 1999, in association with the 1998
Recapitalization, 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.
In fiscal 2000, the Company recorded an additional $929,000 to cover the cost of
judgments paid.
NET INVESTMENT INCOME AND INTEREST EXPENSE. Net investment income decreased
to $418,000 in fiscal 2000 from $1.1 million in fiscal 1999. The decrease was
due to the Company having lower cash balances to invest. Interest expense
increased $2.2 million from $15.8 million in fiscal 1999 to $18.0 million in
fiscal 2000. The increase is due to a full year of interest associated with the
increased debt issued in connection with the 1998 Recapitalization.
OTHER EXPENSE. On July 3, 1999 the Company sold its auto racing helmet
business, in exchange for an equity position in the purchaser. This investment
is accounted for using the equity method. In fiscal 2000, the Company recorded a
$190,000 loss in association with that investment.
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 expense of $6.5 million or 41% of the pre-tax
income was reported for fiscal 2000, compared to an income tax benefit of $7.6
million or 23% of the pre-tax loss, reported for fiscal 1999. The variance in
rates between the two years is due to the non-deductibility of certain one-time
charges taken in fiscal 1999.
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.
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 1998
Recapitalization, 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.
14
<PAGE>
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 1998 Recapitalization 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 1998
Recapitalization.
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.
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 $59.1 million at July 1,
2000 from $74.7 million at July 3, 1999, due mainly to the fact that the $23.7
million in convertible subordinated debentures are now classified as current as
they are due in November 2000. Cash used in operating activities for fiscal 2000
was $21.9 million compared with $4.3 million in fiscal 1999. The significant
increase is due to significantly higher levels of accounts receivable and
inventory, partially offset by a significant increase in net income.
The Company's capital expenditures were $4.2 million, $4.1 million and $5.5
million in fiscal 2000, 1999 and 1998, 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 $4.0
million to $5.0 million annually for product tooling and to maintain and upgrade
its facilities and equipment.
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 was guaranteed by the Company and by certain
of its subsidiaries. BSI's obligations under the Credit Agreement were secured
by (a) substantially all of the tangible and intangible assets of BSI and each
subsidiary 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.
As of July 1, 2000, outstanding borrowings under the Credit Agreement totaled
$34.0 million. Based on the provisions of the Credit Agreement, the Company
could have borrowed a maximum of $60.0 million as of July 1, 2000. The Credit
Agreement was terminated on August 11, 2000, in connection with the consummation
of the 2000 Merger.
On August 11, 2000, the Company and BSI entered into a new credit agreement
(the "New Credit Agreement") to finance a portion of the costs and expenses
related to the 2000 Merger and to support operating capital requirements. The
New Credit Agreement provides up to $75.0 million of revolving bank financing
(the "Revolving Credit Facility") which will be available on a revolving basis
to BSI, subject to certain borrowing base requirements. In addition, the New
Credit Agreement provides up to $110.0 million of term loans ("Term Loans")
which will be available to refinance existing indebtedness of the Company and
BSI. BSI's obligations under the New Credit Agreement are guaranteed by the
Company and by all of BSI's domestic subsidiaries (collectively, the "Subsidiary
Guarantors" and together with the Company, the "Guarantors"). BSI's obligations
under the New Credit Agreement are secured by (a) substantially all of the
15
<PAGE>
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 the
Company's Canadian subsidiary.
On August 11, 2000, the Company and BSI also entered into an Investment
Agreement providing for the sale of up to $50.0 million of Senior Subordinated
Notes of BSI ("New Subordinated Notes"), which New Subordinated Notes will be
accompanied by common stock purchase warrants (the "Warrants") representing up
to 5.5% of the fully-diluted equity of the Company. Finally, the Company issued
$5.5 million of Merger Notes on August 11, 2000 as part of the merger
consideration due under the terms of the Merger Agreement.
BSI borrowed approximately $45.0 million under the Revolving Credit
Facility on August 11, 2000 in order to repay all outstanding balances under the
Credit Agreement and to fund payments upon consummation of the 2000 Merger.
Consummation of the 2000 Merger constituted a change of control under the
Indenture (the "11% Note Indenture") governing the Series B Notes. As a result,
BSI expects to make a change of control offer to repurchase all $110 million
principal amount outstanding of Series B Notes (the "Change of Control Offer").
BSI will pay for Series B Notes which are tendered in the Change of Control
Offer and will pay monies to permit the Company to repurchase all $23.75 million
principal outstanding of the Company's 4 1/4% Debentures due November 15, 2000
with borrowings under the Term Loans, and if necessary, with proceeds from the
sale of New Subordinated Notes. Additionally, in connection with the Change of
Control Offer, BSI anticipates soliciting consents to amend the 11% Note
Indenture (the "Indenture Amendment"). If such Indenture Amendment is executed,
BSI will borrow under the Term Loans and issue additional New Subordinated
Notes, if necessary, to pay monies to the Company to retire $5.5 million of
Merger Notes issued at the closing of the 2000 Merger plus accrued interest
thereon and approximately $16.9 million of the Company's 14% Senior Discount
Notes. Subject to compliance with covenants and borrowing base requirements in
the New Credit Agreement, BSI had, as of August 11, 2000, $25.6 million
available for borrowing under the Revolving Credit Facility portion of its New
Credit Agreement.
Management believes that cash flow from operations and borrowing
availability under the Revolving Credit Facility of its New Credit Agreement
will provide adequate funds for the Company's foreseeable working capital needs,
planned capital expenditures and debt service obligations. 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 32% of the Company's net sales in fiscal 2000, could
have a material adverse effect on the Company's liquidity and results of
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of July 1, 2000, 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 1, 2000 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.
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 1, 2000, and had no
significant foreign exchange contract activity during fiscal 2000.
16
<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 1, 2000 and July 3, 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended July 1, 2000 in conformity with accounting principles generally
accepted in the United States. 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 auditing standards generally accepted in the
United States, 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.
/s/ PRICEWATERHOUSECOOPERS LLP
San Francisco, California
July 27, 2000, except for Note 15, as to which the date is August 11, 2000
17
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JULY 1, JULY 3,
2000 1999
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,604 $ 8,875
Accounts receivable 83,222 58,634
Inventories 50,191 43,664
Deferred taxes 5,476 11,366
Other current assets 6,946 6,134
--------- ---------
TOTAL CURRENT ASSETS 151,439 128,673
Property, plant and equipment 13,366 16,162
Long-term deferred taxes 12,500 12,500
Goodwill 50,953 52,429
Intangibles and other assets 8,034 9,170
--------- ---------
TOTAL ASSETS $ 236,292 $ 218,934
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 13,100 $ 9,249
Accrued compensation and employee benefits 5,403 2,580
Accrued expenses 15,679 31,682
Notes payable and current maturities of
long-term debt and capital lease obligations 58,285 10,433
--------- ---------
TOTAL CURRENT LIABILITIES 92,467 53,944
Long-term debt, less current maturities 126,510 148,270
Capital lease obligations, less current maturities,
and other liabilities 1,071 10,255
--------- ---------
TOTAL LIABILITIES 220,048 212,469
--------- ---------
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Series A Preferred Stock; 6% cumulative, $.01 par
value; authorized 1,500,000 shares, 1,032,967
and 1,034,781 shares issued and outstanding
at July 1, 2000 and July 3, 1999, respectively 10 10
Class A Common Stock; $.01 par value; authorized
900,000 shares, 869,155 and 870,661 shares issued
and outstanding at July 1, 2000 and July 3, 1999,
respectively 9 9
Class B Common Stock; $.01 par value; authorized
150,000 shares, 129,750 and 128,200 shares issued
and outstanding at July 1, 2000 and July 3, 1999,
respectively 1 1
Class C Common Stock; $.01 par value; 57,500 and
50,000 shares authorized at July 1, 2000 and
July 3, 1999 respectively, 46,350 and 50,000
shares issued and outstanding at July 1, 2000
and July 3, 1999, respectively 1 1
Additional paid-in capital 53,260 53,210
Accumulated other comprehensive income (loss) (3,890) (1,925)
Accumulated deficit (33,147) (44,841)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 16,244 6,465
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 236,292 $ 218,934
========= =========
See accompanying notes to these consolidated financial statements.
18
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------
JULY 1, JULY 3, JUNE 27,
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 244,457 $ 210,909 $ 207,236
Cost of sales 158,031 140,673 137,672
--------- --------- ---------
Gross profit 86,426 70,236 69,564
--------- --------- ---------
Selling, general and administrative expenses 50,171 48,338 48,562
Foreign exchange (gain) loss 64 1,734 (45)
Amortization of goodwill and intangible assets 2,170 2,117 2,260
Transaction costs -- 13,100 --
Product liability costs 929 12,500 --
Restructuring charges (772) 8,970 1,192
Asset write-offs 293 5,266 --
Other costs -- 2,292 --
Loss on disposal of product lines and sale of assets -- -- 700
--------- --------- ---------
Operating expenses 52,855 94,317 52,669
--------- --------- ---------
Income (loss) from operations 33,571 (24,081) 16,895
Net investment income (418) (1,073) (1,716)
Interest expense 18,011 15,768 4,715
Other expense 190 -- --
--------- --------- ---------
Net income (loss) before provision for
(benefit from) income taxes 15,788 (38,776) 13,896
Provision for (benefit from) income taxes 6,552 (9,652) 5,318
--------- --------- ---------
Net income (loss) before extraordinary items 9,236 (29,124) 8,578
Extraordinary item: Gain on early extinguishment
of debt, net of taxes of $2,006 -- 2,887 --
--------- --------- ---------
Net income (loss) $ 9,236 $ (26,237) $ 8,578
========= ========= =========
</TABLE>
See accompanying notes to these consolidated financial statements.
19
<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
--------------------- --------------------- --------------------- ---------------------
Shares Amount Shares Amount Shares Amount Shares Amount
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
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
Activity under the management
investment and incentive plans -- -- (2) -- (2) -- 2 --
Sale of EuroBell -- -- -- -- -- -- -- --
Net income -- -- -- -- -- -- -- --
Currency translation adjustment,
net of tax benefit of $826 -- -- -- -- -- -- -- --
Comprehensive income (loss)
--------- --------- --------- --------- --------- --------- --------- ---------
BALANCE AT JULY 1, 2000 -- $ -- 1,033 $ 10 869 $ 9 130 $ 1
========= ========= ========= ========= ========= ========= ========= =========
<CAPTION>
Accum.
Other Retained
Class C Common Additional Comp. Earnings Comp. Total
--------------------- Paid-In Income (Accum. Treasury Income Stockholders'
Shares Amount Capital (loss) Deficit) Stock (loss) Equity
--------- --------- --------- --------- --------- ------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 50 $ 1 586 -- -- -- 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 50 1 53,210 (1,925) (44,841) -- 6,465
Activity under the management
investment and incentive plans (4) -- 50 -- -- -- -- 50
Sale of EuroBell -- -- -- -- 2,458 -- -- 2,458
Net income -- -- -- -- 9,236 -- $ 9,236 9,236
Currency translation adjustment,
net of tax benefit of $826 -- -- -- (1,965) -- -- (1,965) (1,965)
---------
Comprehensive income (loss) $ 7,271
--------- --------- --------- --------- --------- ------ ========= ---------
BALANCE AT JULY 1, 2000 46 $ 1 $ 53,260 $ (3,890) $ (33,147) $ -- $ 16,244
========= ========= ========= ========= ========= ====== =========
</TABLE>
See accompanying notes to these consolidated financial statements
20
<PAGE>
BELL SPORTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------
JULY 1, JULY 3, JUNE 27,
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) before extraordinary items $ 9,236 $ (29,124) $ 8,578
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Amortization of goodwill and intangibles 2,170 2,117 2,260
Depreciation 4,138 5,529 5,549
Loss on disposal of property, plant and equipment 764 2,997 434
Provision for doubtful accounts 1,349 907 1,077
Loss on disposal of product lines and sale of assets -- -- 700
Provision for inventory obsolescence 2,656 4,592 2,340
Deferred income taxes -- (5,396) 3,997
Other 2,967 3,155 --
Changes in assets and liabilities, net of
adjustments for acquisitions and dispositions:
Accounts receivable (26,445) 3,816 8,542
Inventories (11,140) (8,557) (371)
Other assets 5,045 (5,062) 5,310
Accounts payable 3,951 1,620 (2,300)
Other liabilities (16,629) 19,069 (8,623)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (21,938) (4,337) 27,493
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,194) (4,149) (5,496)
Expenditures to acquire intangible assets (557) -- --
Proceeds from the sale of SportRack -- -- 13,427
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (4,751) (4,149) 7,931
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of costs 50 247 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 (182) (579) (489)
Net borrowings (payments) on line of credit agreement 24,479 9,869 (19,067)
Expenditures related to issuance of line of credit agreement -- (1,381) --
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 24,347 (27,168) (18,136)
--------- --------- ---------
Effect of exchange rate changes on cash (929) (564) (1,203)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (3,271) (36,218) 16,085
Cash and cash equivalents at beginning of period 8,875 45,093 29,008
--------- --------- ---------
Cash and cash equivalents at end of period $ 5,604 $ 8,875 $ 45,093
========= ========= =========
</TABLE>
See accompanying notes to these consolidated financial statements
21
<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 in-line
skating, snowboarding, snow skiing and water sport helmets.
On June 13, 2000, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Bell Sports Holdings, L.L.C., a Delaware limited
liability company ("Bell Sports Holdings"), and Andsonica Acquisition Corp., a
Delaware corporation ("Andsonica Acquisition"). Andsonica Acquisition is a
newly-organized corporation formed by Chartwell Investments II L.L.C. for the
purpose of entering into the Merger Agreement and engaging in the transactions
contemplated thereby. The Merger Agreement provides for the merger (the "2000
Merger") of Andsonica Acquisition with and into the Company. Following the 2000
Merger, the separate corporate existence of Andsonica Acquisition will cease and
the Company will continue as the surviving corporation. Subject to the terms and
conditions of the Merger Agreement, at the Effective Time of the 2000 Merger (as
defined in the Merger Agreement), each outstanding share of Bell's Class A
Common Stock and Bell's Class B Common Stock will be converted into the right to
receive (i) cash, (ii) cash and indebtedness of Bell or (iii) stock of the
Surviving Corporation (collectively, the "Merger Consideration"). Each share of
Bell's Series A Preferred Stock will be converted into $50.99, in cash, plus
accrued but unpaid dividends. All of Bell's Class C Common Stock will be
cancelled without consideration. The consummation of the 2000 Merger, which is
subject to satisfaction of customary conditions, is anticipated in August 2000.
The 2000 Merger will constitute a change of control under the Indenture
governing the outstanding 11% Notes due 2008 issued by Bell Sports, Inc., a
wholly-owned subsidiary of the Company, and as a result, Bell Sports, Inc.
expects to make a change of control offer to repurchase the Notes after the
consummation of the 2000 Merger.
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 years ending July 1, 2000 and June 27, 1998
were 52 week periods. The fiscal year ending July 3, 1999 was a 53 week period.
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 1, 2000 and July 3, 1999 are net of allowances
for doubtful accounts of $1.5 million and $1.8 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 1, 2000 and July 3, 1999,
respectively, 28% and 30% of the Company's gross accounts receivable were
attributed to one mass merchant customer. In addition, the same mass merchant
customer accounted for 32%, 28%, and 21% of net sales during fiscal 2000, 1999,
and 1998, respectively.
22
<PAGE>
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.
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 $11.1 million and $9.2
million at July 1, 2000 and July 3, 1999, 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
3 to 17 years. Accumulated amortization for intangible assets totaled $5.6 and
$4.5 million at July 1, 2000 and July 3, 1999, 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 $4.4 million, $3.6 million and $3.6 million for fiscal 2000, 1999 and
1998, 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 $7.2 million, $5.7 million and $5.5 million for
fiscal 2000, 1999 and 1998, 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 significant
outstanding foreign exchange contracts at July 1, 2000, 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.
23
<PAGE>
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected to continue to recognize compensation expense based
on the intrinsic value method.
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 - INVENTORIES
Inventories consist of the following components (in thousands):
JULY 1, JULY 3,
2000 1999
------- -------
Raw materials $ 4,895 $ 3,579
Work in process 1,349 1,089
Finished goods 43,947 38,996
------- -------
Total $50,191 $43,664
======= =======
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
JULY 1, JULY 3, ESTIMATED
2000 1999 USEFUL LIFE
-------- -------- -----------
<S> <C> <C> <C>
Land, buildings and leasehold improvements $ 8,286 $ 9,397 3-38 years
Machinery, equipment and tooling 20,851 21,634 3-10 years
Office equipment 5,614 7,977 3-7 years
Other 328 346 3-7 years
-------- --------
Gross property, plant and equipment 35,079 39,354
Less: Accumulated depreciation and amortization (21,713) (23,192)
-------- --------
Net property, plant and equipment $ 13,366 $ 16,162
======== ========
</TABLE>
NOTE 5 - BANK CREDIT FACILITIES AND LONG-TERM DEBT
In August 1998, the Company's wholly-owned subsidiary, Bell Sports, Inc.
("BSI"), issued senior subordinated notes totaling $110.0 million, bearing
interest at 11%, maturing on August 15, 2008 (the "Notes"). 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 2000 Merger
will constitute a change of control under the indenture governing the
outstanding Notes, and as a result, BSI expects to make a change of control
offer (the "Change of Control Offer") for all outstanding $110 million of the
Notes.
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:
24
<PAGE>
BELL SPORTS, INC.
JULY 1,
2000
--------
SUMMARIZED BALANCE SHEET DATA: (UNAUDITED)
Current assets $169,336
Total assets 218, 585
Current liabilities 68,237
Total liabilities 179,319
Stockholder's equity 39,266
FOR THE
YEAR ENDED
JULY 1,
2000
--------
SUMMARIZED STATEMENT OF OPERATIONS DATA: (UNAUDITED)
Net sales $244,457
Gross profit 86,426
Net Income 13,432
In August 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. If the Change
of Control Offer is successful, the Company expects to redeem the Discount
Notes.
In August 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 $23.7 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 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. At the time of the
2000 Merger, the Company expects the Credit Agreement to be terminated and
replaced with a new credit agreement.
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 $60.0 million as of July 1, 2000. As of July 1, 2000, there were borrowings
outstanding of $34.0 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 1, 2000, the margin for U.S. prime was
0.25% and the margin for LIBOR was 1.25%. 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 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 July 1, 2000, the Company was in compliance with all bank
covenants.
25
<PAGE>
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
JULY 1, JULY 3,
2000 1999
-------- --------
<S> <C> <C>
11% senior subordinated debentures maturing August, 2008 $110,000 $110,000
4 1/4% convertible subordinated debentures maturing November 2000 23,749 23,750
14% senior discount notes due August, 2009 16,510 14,434
Borrowings under lines of credit 34,479 10,000
Notes collateralized by certain equipment -- 391
-------- --------
184,738 158,575
Less: Current maturities 58,228 10,305
-------- --------
Total long-term debt $126,510 $148,270
======== ========
</TABLE>
Scheduled maturities, by fiscal year, of long-term debt are as follows (in
thousands):
2001 $58,228
2002 -
2003 -
2004 -
2005 -
Thereafter 126,510
--------
Total $184,738
========
NOTE 6 - STOCKHOLDERS' EQUITY
STOCK OPTIONS
All stock option plans were terminated at the time of the 1998
Recapitalization. The Company currently has no stock option plans. Pursuant to
the 1998 Recapitalization 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. Activity under
the previous stock option plans was as follows:
NUMBER WEIGHTED
OF SHARES AVERAGE
UNDERLYING EXERCISE OPTIONS
OPTIONS PRICE EXERCISABLE
---------- -------- ----------
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 $0.44 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 in fiscal 1999 related to the grant of the Options.
During fiscal year 1999, the options to purchase Class A Common Stock were
exercised. The options to purchase Series A Preferred Stock remain outstanding
as of July 1, 2000. These options were exercised prior to the 2000 Merger.
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 and 1998 was
computed using the Black-Scholes option pricing model. There were no options
granted during fiscal 2000. The weighted-average assumptions used for stock
option grants for fiscal years 1999 and 1998 were an expected volatility of the
market price of the Company's Common and Preferred Stock of 0% and 41%,
respectively; weighted-average expected life of the options of approximately 3.5
years and 4.9 years, respectively; no dividend yield; and risk-free interest
26
<PAGE>
rate of 6.50% for both periods. 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 3, 1999
and June 27, 1998 was computed as approximately $456,000 and $949,000,
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 1, JULY 3, JUNE 27,
2000 1999 1998
-------- -------- --------
Net income (loss):
As reported $ 9,236 $(26,237) $ 8,578
Pro forma for SFAS 123 9,236 (27,735) 7,463
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.
PREFERRED STOCK
In connection with the 1998 Recapitalization, 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
years 2000 or 1999.
At the time of the 2000 Merger, each share of Series A Preferred Stock will
be converted into the right to receive $50.99, in cash, plus accrued but unpaid
dividends.
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, as amended, 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
57,500 shares of Class C Common Stock can be purchased by participants. As of
July 1, 2000, 14,532 shares of Series A Preferred Stock, 12,069 shares of Class
A Common Stock, 129,750 shares of Class B Common Stock, and 46,350 shares of
Class C Common Stock were outstanding under the Plans.
In the 2000 Merger, each share of Bell's Class A Common Stock and Class B
Common Stock issued and outstanding immediately prior to the 2000 Merger will be
converted into the right to receive (i) cash, (ii) cash and 18% Senior
Non-Negotiable Merger Notes of the Company due 2000 ("Merger Notes"), or (iii)
common stock of the Company following the 2000 Merger. Each share of Bell's
Series A Preferred Stock will be converted into the right to receive $50.99, in
cash, plus accrued but unpaid dividends. All of Bell's Class C Common Stock will
be cancelled without consideration.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
PRODUCT LIABILITY
The Company is subject to various product liability claims and/or suits
brought against it for claims involving damages for personal injuries or deaths.
Allegedly, these injuries or deaths relate to the use by claimants of products
manufactured by the Company and, in certain cases, products manufactured by
others. The ultimate outcome of these existing claims and any potential future
claims cannot presently be determined.
The cost of product liability insurance fluctuated greatly in past years
and the Company opted to self-insure claims for certain periods. The Company has
been covered by product liability insurance since July 1, 1991. This insurance
is subject to a self-insured retention. There is no assurance that insurance
coverage will be available or economical in the future.
The Company sold its motorcycle helmet manufacturing business in June 1991
in a transaction in which the purchaser assumed all responsibility for product
liability claims arising out of helmets manufactured prior to the date of
disposition and the Company agreed to use its in-house defense team to defend
these claims at the purchaser's expense. If the purchaser is for any reason
unable to pay a judgment, settlement amount or defense costs arising out of
these claims, the Company could be held responsible for the payment of such
27
<PAGE>
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. In November
1999, the Company paid the judgment of $3.6 million.
In February 1998, a Wilkes-Barre, Pennsylvania jury returned a verdict
against the Company relating to injuries sustained in a 1993 motorcycle
accident. 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. In
February 2000, the Company lost the case on appeal. In April 2000, the Company
settled the case for $8.9 million.
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 appeal, the Company has established product liability reserves totaling $2.1
million of which $1.1 million is classified as current. These reserves are
intended to cover the estimated costs for the defense, payment or settlement of
this and other known claims. The Company believes it will have adequate cash
balances and sources of capital available to satisfy such pending judgments.
Besides the litigation described above, the Company is not party to any
material litigation that, if adversely determined, would have a material effect
on the Company's financial position.
LEASE OBLIGATIONS
The Company leases certain equipment and facilities under various
noncancellable capital and operating leases. The total expense under these
operating leases for fiscal 2000, 1999 and 1998 amounted to approximately $3.0
million, $4.0 million and $4.2 million, respectively.
At July 1, 2000, the future minimum annual rental commitments under all
noncancellable leases were as follows (in thousands):
OPERATING CAPITAL
LEASES LEASES
------- -------
2001 $ 3,354 $ 62
2002 2,680 --
2003 2,471 --
2004 2,361 --
2005 2,141 --
Thereafter 8,046 --
------- -------
Total minimum lease commitments $21,053 62
=======
Less: Interest portion 5
-------
Present value of capital lease obligations 57
Less: Current portion 57
-------
Total long-term capital lease obligations $ --
=======
NOTE 8 - 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):
28
<PAGE>
<TABLE>
<CAPTION>
JULY 1, 2000 JULY 3, 1999
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
4 1/4% convertible subordinated debentures
maturing November 2000 $ 23,749 $ 23,037 $ 23,750 $ 19,416
11% senior subordinated debentures
maturing August 2008 110,000 111,100 110,000 111,650
</TABLE>
As there has been no significant trading in the above debentures, the
estimated fair value of the debentures is based on a comparison to the quoted
market prices for similar instruments in the marketplace. The estimated fair
value of other long-term debt held by the Company 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 5.
NOTE 9 - DISPOSITIONS
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 bicycle 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 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 valued at approximately $2.1 million. In connection with
that transaction, the Company entered 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.
NOTE 10 - RESTRUCTURING CHARGES, ASSET WRITE-OFFS AND OTHER COSTS
RESTRUCTURING CHARGES AND ASSET WRITE-OFFS - 2000
In June 2000, the Company announced and began implementing a plan to
consolidate its European operations into its Limerick, Ireland facility. In the
fourth quarter of fiscal 2000, the Company recorded $370,000 in restructuring
costs and $80,000 in asset write-offs associated with this consolidation. The
costs are based on estimates of employee severance costs, legal fees and various
other charges. The restructuring costs include $243,000 of severance related
costs for 9 employees from all areas of responsibility, all of whom had been
notified of their pending termination prior to July 1, 2000. No costs related to
the consolidation had been paid as of July 1, 2000.
In fiscal 2000, the Company made certain charges and credits to
restructuring reserves recorded in fiscal 1999 as actual results differed from
expected, the largest of which related to the Company's unexpected ability to
sublease a facility. The following table sets forth the details of activity
during fiscal 2000 for restructuring charges, asset write-offs and other costs
and related accrued expenses (in thousands):
29
<PAGE>
<TABLE>
<CAPTION>
ADJUSTMENTS:
JULY 3, CASH NON-CASH CHARGES JULY 1,
1999 PAYMENTS CHARGES (CREDITS) 2000
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
RESTRUCTURING ACCRUALS:
European restructuring $ -- $ -- $ -- $ 450 $ 450
Manufacturing consolidation 9,102 (5,481) (1,633) (1,103) 885
Overhead reductions 2,224 (261) (1,795) (39) 129
Sale of auto racing and Australia 788 (213) (220) 213 568
Restructuring accruals from prior years 493 (315) -- -- 178
------- ------- ------- ------- -------
TOTAL $12,607 $(6,270) $(3,648) $ (479) $ 2,210
======= ======= ======= ======= =======
</TABLE>
The remaining restructuring accruals at July 1, 2000 related to the fiscal
1999 restructuring plan consist of $885,000 in lease obligations, $129,000 in
severance payments, and $568,000 in asset write-offs from the closure of the
Australian offices. There are no remaining employees to be terminated relative
to the 1999 restructuring plan.
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
closed its Santa Cruz, California, Canada and Ireland manufacturing facilities,
and sold its manufacturing facility in France, leaving 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 had been notified of their pending
termination prior to fiscal year end. 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.
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 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 prior to fiscal year end. 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.
30
<PAGE>
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
-------
TOTAL RESTRUCTURING 8,970
-------
ASSET WRITE-OFFS:
Manufacturing consolidation 4,784
Overhead reduction 69
Sale of auto racing and Australia 413
-------
TOTAL ASSET WRITE-OFFS 5,266
-------
OTHER COSTS:
Manufacturing consolidation 1,026
Overhead reduction 941
Sale of auto racing 325
-------
TOTAL OTHER COSTS 2,292
-------
TOTAL CHARGES $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
------- ------- ------- ------- -------
TOTAL $ 1,490 $16,528 $(5,370) $ (41) $12,607
======= ======= ======= ======= =======
</TABLE>
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):
31
<PAGE>
<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
------- ------- ------- ------- -------
TOTAL $ 3,777 $ 1,192 $(3,371) $ (108) $ 1,490
======= ======= ======= ======= =======
</TABLE>
NOTE 11 - INCOME TAXES
Pre-tax income (loss) by jurisdiction for each fiscal year are as follows
(in thousands):
JULY 1, JULY 3, JUNE 27,
2000 1999 1998
-------- -------- --------
Domestic $ 15,599 $(27,625) $ 9,496
Foreign 189 (6,258) 4,400
-------- -------- --------
Total $ 15,788 $(33,883) $ 13,896
======== ======== ========
The provision for (benefit from) income taxes for each fiscal year is as
follows (in thousands):
<TABLE>
<CAPTION>
JULY 1, JULY 3, JUNE 27,
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Current expense (benefit):
U.S. Federal $ -- $ -- $ 75
State and local 79 50 60
Foreign 305 -- 1,123
------- ------- -------
Total current 384 50 1,258
------- ------- -------
Deferred tax expense (benefit):
U.S. Federal 5,585 (4,463) 3,368
State and local 679 (1,068) 722
Foreign (96) (2,165) (93)
------- ------- -------
Total deferred 6,168 (7,696) 3,997
------- ------- -------
Impact of stock option deduction credited to equity -- -- 63
------- ------- -------
Total income tax provision (benefit) $ 6,552 $(7,646) $ 5,318
======= ======= =======
</TABLE>
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 1, JULY 3, JUNE 27,
2000 1999 1998
------ ------ ------
Statutory U.S. rate 34.0% (34.0)% 34.0%
Nondeductible recapitalization costs -- 8.4 --
Tax exempt investment income -- -- (0.2)
Nondeductible goodwill 2.9 -- --
State income tax 4.2 (3.0) 5.0
Effective international tax rate (0.1) 6.6 (2.4)
Other items, net 0.5 (1.0) 1.6
------ ------ ------
Effective tax expense/(benefit) rate 41.5% (23.0)% 38.0%
====== ====== ======
32
<PAGE>
Deferred income tax assets and (liabilities) are comprised of the following
(in thousands):
JULY 1, JULY 3,
2000 1999
-------- --------
Net operating losses and other tax loss carryforwards $ 13,696 $ 12,888
Inventory and accounts receivable reserves 1,155 1,614
Accrued liabilities 4,043 10,876
Package design costs capitalized for tax purposes 587 726
-------- --------
Gross deferred tax assets 19, 481 26,104
-------- --------
Depreciation (348) (480)
Other (518) (899)
-------- --------
Gross deferred tax liability (866) (1,379)
-------- --------
Deferred tax assets valuation allowance (340) (1,108)
-------- --------
Net deferred tax assets 18,275 23,617
Less: current portion (4,426) (11,366)
-------- --------
Net long-term deferred tax assets $ 13,849 $ 12,251
======== ========
Domestic net operating losses totaling approximately $35.4 million will be
carried forward and begin to expire in 2008. As a result of the 1998
Recapitalization, 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 $637,000 were accounted for
under the flow-through method and are being carried forward. Minimum tax credits
totaling approximately $610,000 are also being carried forward.
The deferred tax assets valuation allowance at July 1, 2000 and July 3,
1999 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 1, 2000, 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 12 - 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 1, JULY 3, JUNE 27,
2000 1999 1998
------- ------- -------
Additional paid in capital arising from tax
benefits associated with the exercise of
stock options $ -- $ 4 $ 63
Cash paid during the period for:
Interest 17,115 10,717 4,100
Income taxes 712 492 795
NOTE 13 - SEGMENT REPORTING
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.
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, interest expense and other
33
<PAGE>
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. Accounting policies for management
reporting are those described in the summary of significant accounting policies
in Note 2.
<TABLE>
<CAPTION>
MASS
MERCHANTS IBD INTERNATIONAL OTHER (1) TOTAL
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDING JULY 1, 2000:
Sales to unaffiliated customers $ 142,690 $ 60,225 $ 41,542 $ -- $ 244,457
EBITDA 33,484 4,852 2,588 (595) 40,329
Depreciation and amortization 530 2,161 412 3,205 6,308
Net interest expense(income) -- 16 583 16,994 17,593
Capital expenditures 866 1,303 539 1,486 4,194
Total assets 80,234 39,422 21,430 95,206 236,292
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
</TABLE>
----------
(1) The "Other" designation includes corporate expenditures and expenditures
related to the Company's U.S. manufacturing and distribution facilities.
EBITDA for the periods shown is reconciled to Net income before income
taxes as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------
JULY 1, JULY 3, JUNE 27,
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
EBITDA $ 40,329 $ 27,592 $ 26,596
Less:
Depreciation 4,138 5,529 5,549
Amortization 2,170 2,117 2,260
One-time foreign exchange loss and compensation
expense for stock options -- 1,899 --
Transaction costs -- 13,100 --
Product liability costs 929 12,500 --
Restructuring charges (772) 8,970 1,192
Asset write-offs 293 5,266 --
Other costs -- 2,292 --
Loss on disposal of product lines and sale of assets -- -- 700
Net investment income (418) (1,073) (1,716)
Interest expense 18,011 15,768 4,715
Other expense 190 -- --
-------- -------- --------
Net income (loss) before provision for (benefit
from) income taxes $ 15,788 $(38,776) $ 13,896
======== ======== ========
</TABLE>
34
<PAGE>
Long-lived assets by geographical area for the periods presented were as
follows:
JULY 3, JULY 3, JUNE 27,
2000 1999 1998
------- ------- -------
United States $83,623 $74,219 $73,531
International 1,230 3,542 3,558
------- ------- -------
Total $84,853 $77,761 $77,089
======= ======= =======
NOTE 14 - 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 1, 2000:
Net sales $ 46,850 $ 50,972 $ 68,883 $ 77,752
Gross profit 17,114 16,851 24,442 28,019
Net income (104) 187 4,016 5,137
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)
NOTE 15 - SUBSEQUENT EVENT
On August 11, 2000, pursuant to a Certificate of Merger filed with the
Secretary of State of the State of Delaware, Andsonica Acquisition merged with
and into Bell. In the 2000 Merger, (i) all of the issued and outstanding common
shares of Andsonica Acquisition were converted into 943,925 shares of Bell
Common Stock, (ii) each share of Bell's Class A Common Stock and Class B Common
Stock issued and outstanding immediately prior to the 2000 Merger was converted
into the right to receive (i) cash, (ii) cash and 18% Senior Non-Negotiable
Merger Notes of the Company due 2000, or (iii) common stock of the Company
following the 2000 Merger. Each share of Bell's Series A Preferred Stock was
converted into the right to receive $50.99, in cash, plus accrued but unpaid
dividends. All of Bell's Class C Common Stock was cancelled without
consideration. Immediately following the 2000 Merger, Bell Sports Holdings owned
approximately 94.4% of the equity of the Company.
35
<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
The following table sets forth information concerning the executive
officers and directors of the Company as of August 18, 2000 (1):
Name Age Position
---- --- --------
Mary J. George 50 Director and Chairman
Richard S Willis 40 Director, President and Chief Executive Officer
Todd R. Berman 43 Director
Michael S. Shein 36 Director
Kwai Kong 37 Executive Vice President--R&D and Manufacturing
----------
(1) Terry G. Lee, who served as Director and Chairman of the Company during
fiscal 2000, ceased being employed by the Company on August 11, 2000, upon
the consummation of the 2000 Merger. William M. Barnum, Jr., Kim G. Davis,
John F. Hetterick, Edward L. McCall, Tim R. Palmer and John M. Sullivan,
each of whom served as directors of the Company during fiscal 2000, ceased
being directors on August 11, 2000, upon the consummation of the 2000
Merger. William L. Bracy, who served as President of the Company during
fiscal 2000, terminated his employment with the Company in August 2000.
Each director serves a term expiring at the next annual meeting of
stockholders, or until his successor shall have been elected and qualified.
MARY J. GEORGE, Director and Chairman. 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. Ms. George became Chairman
on August 11, 2000 upon the consummation of the 2000 Merger. 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. She is a director of Bell Racing and Remedytemps, Inc.
RICHARD S WILLIS, Director, President and Chief Executive Officer. Mr.
Willis joined the Company in April 1999 as Executive Vice President and Chief
Financial Officer and became Chief Operations Officer in December 1999. Mr.
Willis became President and Chief Executive Officer and Director on August 11,
2000 upon the consummation of the 2000 Merger. 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.
TODD R. BERMAN, Director. Mr. Berman became a director of the Company on
August 11, 2000. Mr. Berman is a co-founder and President of Chartwell, an
advisor to, and manager of, private equity funds that invest in growth
financings and buyouts of middle market companies. Mr. Berman has been with
Chartwell, Chartwell Investments Inc. or its predecessor since 1992. He received
his A.B. from Brown University and an M.B.A. from Columbia University Graduate
School of Business.
MICHAEL S. SHEIN, Director. Mr. Shein became a director of the Company on
August 11, 2000. Mr. Shein is a Managing Director and co-founder of Chartwell.
Mr. Shein has been with Chartwell, Chartwell Investments Inc. or its predecessor
since 1992. Mr. Shein received a B.S. summa cum laude from The Wharton School at
the University of Pennsylvania.
KWAI KONG, Executive 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.
36
<PAGE>
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
---------------------------- ------------
FISCAL RESTRICTED STOCK ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARDS($)(1) COMPENSATION (2)
--------------------------- ---- -------- -------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Terry G. Lee 2000 $207,500 $200,000 $ -- $ 4,814
Chairman 1999 356,735 -- -- 4,260
1998 410,962 152,750 200,000 5,773
Mary J. George 2000 370,193 421,875 -- 6,229
Chief Executive Officer 1999 366,347 -- -- 6,099
1998 298,209 265,000 700,000 5,411
Richard S Willis 2000 279,808 412,500 -- 4,272
Executive Vice President, Chief Operations 1999 62,500 -- -- 64
Officer and Chief Financial Officer 1998 -- -- -- --
William L. Bracy 2000 290,000 261,000 7,553
President 1999 271,160 -- 6,034
1998 115,464 75,000 -- --
Kwai Kong 2000 173,077 75,000 -- 7,179
Executive Vice President-R&D and 1999 155,769 150,000 -- 4,866
Manufacturing 1998 119,164 82,475 -- 5,467
</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
1998 Recapitalization.
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 2000,
Ms. George held 25,600 unvested shares of Class B Common Stock with a
market value of $15,872 and 3,000 unvested shares of Class C Common Stock
with a market value of $1,860; Mr. Willis held 8,000 unvested shares of
Class B Common Stock with a market value of $4,960 and 12,000 unvested
shares of Class C Common Stock with a market value of $7,440; Mr. Bracy
held 8,000 unvested shares of Class B Common Stock with a market value of
$4,960 and 12,000 unvested shares of Class C Common Stock with a market
value of $7,440; Mr. Kong held 6,640 unvested shares of Class B Common
Stock with a market value of $4,117 and 7,000 unvested shares of Class C
Common Stock with a market value of $4,340. The unvested shares lack voting
rights and are subject to repurchase by the Company under specified
circumstances. Upon consummation of the 2000 Merger, all shares of Class B
Common Stock became fully vested and all shares of Class C Common Stock
were cancelled without consideration.
(2) The Fiscal 2000 amounts include the following annual Company contributions
to the Bell Sports Corp. Employees' Retirement and 401(k) Plan: Mr. Lee
$4,262, Ms. George $5,187, Mr. Willis $3,750, Mr. Bracy $5,231, and Mr.
Kong $6,899. The Fiscal 2000 amounts also include the following life
insurance premiums paid by the Company: Mr. Lee $552, Ms. George $1,042,
Mr. Willis $522, Mr. Bracy $2,322, and Mr. Kong $280.
OPTION GRANTS IN LAST FISCAL YEAR
No options were granted by the Company in Fiscal 2000.
37
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
None of the Named Executive Officers exercised stock options during fiscal
2000 and, with the exception of Ms. George, none of the Named Executive Officers
held any options to acquire any Company stock at the end of fiscal 2000. The
table below provides certain information relating to the options held by Ms.
George at the end of fiscal 2000.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE OPTIONS AT FY-END FY-END
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mary J. George (1) -- -- 20,511 -- 304,383 --
</TABLE>
----------
(1) Options outstanding at July 1, 2000 provide for the purchase of shares of
Series A Preferred Stock.
DIRECTOR COMPENSATION
No directors received compensation for service as a director of the Company
in fiscal 2000.
NEW EMPLOYMENT AGREEMENTS
In connection with the consummation of the 2000 Merger, the Company entered
into new employment agreements with Mary George and Richard Willis.
The Company's employment agreement with Ms. George provides that she will
serve as Chairman of the Company for a term ending on August 11, 2004, 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 with or without good reason (as defined in the
agreement). The agreement will automatically be renewed for successive one year
terms unless terminated by either party on at least 180 days notice. The
agreement provides for an annual base salary of $425,000, subject to annual
increases in the discretion of the board, and annual cash bonuses based upon
achievement of EBITDA targets set annually by the board, up to a maximum of 150%
of Ms. George's then base salary. The agreement also provides that Ms. George is
to receive an option to acquire common stock of the Company equal to 12.5% of
the option pool set aside for management (which pool shall not be less than 15%
of the outstanding shares of common stock of the Company on August 11, 2000)
less that number of options having an aggregate exercise price of $600,000.
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. On August 11, 2005, whether or not Ms.
George is then employed by the Company, but provided that she has not disparaged
the Company, the Company will forgive her amended and restated promissory note
dated August 11, 2000 in the face amount of $600,0000. In the event of early
termination of Ms. George's employment by the Company without cause or by Ms.
George with good reason, the Company will continue to pay Ms. George her base
salary and all health for 18 months, Ms. George will be entitled to a pro-rated
bonus through her termination date, and she will have the right to sell to the
Company any or all of her equity interests in the Company (including awarded but
unexercisable options or restricted securities which will be terminated at their
fair market value).
The Company's employment agreement with Mr. Willis provides that he will
serve as President and Chief Executive Officer of the Company for a term ending
on August 11, 2004, unless terminated earlier in the event of Mr. Willis's death
or disability, termination by the Company with or without cause (as defined in
the agreement) or termination by Mr. Willis with or without good reason (as
defined in the agreement). The agreement will automatically be renewed for
successive one year terms unless terminated by either party on at least 180 days
notice. The agreement provides for an annual base salary of $400,000, subject to
annual increases in the discretion of the board, and annual cash bonuses based
upon achievement of EBITDA targets set annually by the board, up to a maximum of
150% of Mr. Willis's then base salary. The agreement also provides that Mr.
Willis is to receive an option to acquire common stock of the Company equal to
20% of the option pool set aside for management. Under the agreement, Mr. Willis
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. In the event of early termination of
Mr. Willis's employment by the Company without cause or by Mr. Willis with good
reason, the Company will continue to pay Mr. Willis his base salary and all
health for 18 months, Mr. Willis will be entitled to a pro-rated bonus through
his termination date, and he will have the right to sell to the Company any or
all of his equity interests in the Company (including awarded but unexercisable
options or restricted securities which will be terminated at their fair market
value).
38
<PAGE>
OLD EMPLOYMENT AGREEMENTS
Prior to the consummation of the 2000 Merger, the Company had the following
employment agreements with Named Executive Officers.
The Company had an employment agreement with Mr. Lee which provided that he
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 was to be paid regardless of any services performed, and even
if his service was terminated with or without cause. Under the employment
agreement, Mr. Lee was 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 contained a non-compete
provision, by which Mr. Lee was prohibited from competing against the Company
(as defined) for a period of 5 years from the date of the 1998 Recapitalization.
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 1998
Recapitalization.
The Company had an employment agreement with Ms. George which provided that
she serve as President and Chief Executive Officer of the Company. The
employment agreement was 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 provided 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 was 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 was to 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
consented, 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. Upon completion of the
2000 Merger, Ms. George relinquished her title as Chief Executive Officer and
become the Executive Chairman of the Board.
The Company had a Memorandum Reference Employment with Mr. Bracy, which
provided for him to serve as US Group President of the Company. The memorandum
called 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 was 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 was to pay Mr. Bracy
an amount equal to his highest annual base salary. Additionally, medical,
dental, accident, disability and life insurance plans was to continue for one
year following such termination.
In July 2000, Mr. Bracy signed a separation agreement with the Company.
Under the terms of the agreement, Mr. Bracy left the Company on August 4, 2000
and received as severance his employee bonus of $261,000 and a payment of
$290,000, equal to his highest annual base salary. In addition, the Company will
keep in force all medical, dental, accident, disability and life insurance plans
for a period of one year from the date of termination. Mr. Bracy was be required
to repay outstanding loans to the Company of $112,500 and $91,161. (See "Item
13. Certain Relationships and Related Transactions" for more information
relating to these loans.)
Mr. Willis signed an offer letter with the Company which provided for him
to serve as Executive Vice President and Chief Financial Officer of the Company.
The letter called for a base salary of $250,000 with annual increases at the
discretion of Bell. Mr. Willis was 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 was 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 called for Mr. Willis to receive his base salary and related benefits
for a period of one year following the date of termination. Upon completion of
the 2000 Merger, Mr. Willis became President and Chief Executive Officer of the
Company.
39
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Until the consummation of the 2000 Merger, the compensation committee of
the Board of Directors consisted of Ed McCall, John Hetterick and Kim Davis. The
committee met regularly to discuss compensation issues. The committee based
executive compensation on the overall performance of the Company, the individual
performance of the executive, and market considerations.
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 August 18, 2000 concerning
beneficial ownership of the Company's 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 Common Stock is entitled to one vote on each
matter presented
Unless otherwise noted below, 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.
PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER COMMON STOCK OF CLASS
------------------------------------ ------------ --------
Chartwell Investments II, L.P. (a) .................... 943,925 94.4%
Chartwell Coinvestors II, L.P. (b) .................... 943,925 94.4%
Mary J. George (c) .................................... 10,800 1.1%
Richard S Willis (d) .................................. 4,672 *
Todd R. Berman (e) .................................... 943,925 94.4%
Michael S. Shein (e) .................................. 943,925 94.4%
Kwai Kong (f) ......................................... 1,364 *
All directors and officers as a group (5 persons) ..... 960,761 96.1%
----------
* Less than one percent.
(a) Chartwell Investments II, L.P., a Delaware limited partnership, is a voting
member, and as such has the right to elect one of the managers, of Bell
Sports Holdings, L.L.C., a Delaware limited liability company, which owns
943,925 shares of common stock of the Company. Chartwell Manager LLC, a
Delaware limited liability company, is the General Partner of Chartwell
Investments II, L.P. As a result, Chartwell Manager LLC may be deemed to
beneficially own all of the shares of the Company beneficially owned by
Chartwell Investments II, L.P. Chartwell Investments II LLC, a Delaware
limited liability company, is the manager of Chartwell Manager LLC and as
such may be deemed to beneficially own all of the shares of the Company
beneficially owned by Chartwell Manager LLC. Todd Berman and Michael Shein,
both of whom are directors of the Company, are the managers of Chartwell
Investments II LLC and consequently, may be deemed to beneficially own all
of the shares of the Company beneficially owned by Chartwell Investments II
LLC. However, the Company has been advised by each of Chartwell Manager
LLC, Chartwell Investments II LLC, Mr. Berman and Mr. Shein that each
disclaims beneficial ownership of such shares of the Company. The address
for Chartwell Investments II, L.P. is c/o Chartwell Investments II LLC, 717
Fifth Avenue, 23rd Floor, New York, New York 10022.
(b) Chartwell Coinvestors II, L.P., a Delaware limited partnership, is a voting
member, and as such has the right to elect one of the managers, of Bell
Sports Holdings, L.L.C., a Delaware limited liability company, which owns
943,925 shares of common stock of the Company. Chartwell Manager LLC, a
Delaware limited liability company, is the General Partner of Chartwell
Coinvestors II, L.P. As a result, Chartwell Manager LLC may be deemed to
beneficially own all of the shares of the Company beneficially owned by
Chartwell Coinvestors II, L.P. Chartwell Investments II LLC, a Delaware
limited liability company, is the manager of Chartwell Manager LLC and as
such may be deemed to beneficially own all of the shares of the Company
beneficially owned by Chartwell Manager LLC. Todd Berman and Michael Shein,
both of whom are directors of the Company, are the managers of Chartwell
Investments II LLC and consequently, may be deemed to beneficially own all
of the shares of the Company beneficially owned by Chartwell Investments II
40
<PAGE>
LLC. However, the Company has been advised by each of Chartwell Manager
LLC, Chartwell Investments II LLC, Mr. Berman and Mr. Shein that each
disclaims beneficial ownership of such shares of the Company. The address
for Chartwell Coinvestors II, L.P. is c/o Chartwell Investments II LLC, 717
Fifth Avenue, 23rd Floor, New York, New York 10022.
(c) Ms. George's address is 6350 San Ignacio, San Jose, California 95119.
(d) Mr. Willis' address is 6350 San Ignacio, San Jose, California 95119.
(e) Chartwell Investments II, L.P. and Chartwell Coinvestors II, L.P. are the
voting members, and as such have the right to elect the managers, of Bell
Sports Holdings, L.L.C., which owns 943,925 shares of common stock of the
Company. Chartwell Manager LLC is the General Partner of both Chartwell
Investments II, L.P. and Chartwell Coinvestors II, L.P. As a result,
Chartwell Manager LLC may be deemed to beneficially own all of the shares
of the Company beneficially owned by Chartwell Investments II, L.P. and
Chartwell Coinvestors II, L.P. Chartwell Investments II LLC is the manager
of Chartwell Manager LLC and as such may be deemed to beneficially own all
of the shares of the Company beneficially owned by Chartwell Manager LLC.
Todd Berman and Michael Shein, both of whom are directors of the Company,
are the managers of Chartwell Investments II LLC and consequently, may be
deemed to beneficially own all of the shares of the Company beneficially
owned by Chartwell Investments II LLC. Mr. Berman and Mr. Shein are also
the managers of Bell Sports Holdings, L.L.C. The address of each of Mr.
Berman and Mr. Shein is c/o Chartwell Investments II LLC, 717 Fifth Avenue,
23rd Floor, New York, New York 10022.
(f) Mr. Kong's address is 6350 San Ignacio, San Jose, California 95119.
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 1998 Recapitalization among
Brentwood Private Equity, L.L.C. ("BPE"), an affiliate of Brentwood, Charlesbank
(together 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
1998 Recapitalization, 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 1998 Recapitalization 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. The Services Agreement will be terminated upon consummation of the
2000 Merger.
In connection with the 2000 Merger, Charlesbank and Brentwood each entered
into a Securities Agreement with Bell Sports Holdings, Andsonica, and the
Company, pursuant to which they agreed to vote all of their Common Stock in
favor of the Merger Agreement and the transactions contemplated thereby.
Charlesbank and Brentwood also agreed not to dispose of any Common Stock or 14%
Senior Discount Notes held by them. Charlesbank and Brentwood also each entered
into a Noncompetition and Nonsolicitation Agreement with Bell Sports Holdings,
which limits their ability to engage in specified competitive activity and to
solicit employees of the Company until July 31, 2002.
In connection with the 2000 Merger, BSI entered into an agreement with
Chartwell, providing for the payment of fees and reimbursement of expenses to
Chartwell for acting as financial advisor with respect to obtaining, structuring
and negotiating the New Credit Agreement and the Investment Agreement. Andsonica
Acquisition, which merged with and into the Company in the 2000 Merger, also
entered into an agreement with Chartwell, providing for the payment of fees and
reimbursement of expenses to Chartwell for acting as financial advisor with
respect to obtaining, structuring and negotiating the $107 million aggregate
equity financing transactions contemplated in the Merger Agreement. Fees
totaling $3,045,000, equal to 1% of the aggregate capitalization of Andsonica
Acquisition, the Company and BSI (including the total committed debt financing
41
<PAGE>
under the Credit Agreement and the Investment Agreement), and approximately
$175,000 for reimbursement of expenses were paid at the closing of the 2000
Merger pursuant to these two advisory agreements. Mr. Berman and Mr. Shein are
directors of both the Company and BSI and both are managers of Chartwell.
In connection with the 2000 Merger, BSI also entered into a management
consulting agreement with Chartwell pursuant to which Chartwell provides BSI
with certain management, advisory and consulting services for an annual fee
equal to the greater of (i) 2% of EBITDA of BSI and its subsidiaries for the
applicable fiscal year or (ii) $800,000, plus reimbursement of expenses. The
term of the management consulting agreement is 10 years commencing at the
closing of the 2000 Merger and is renewable for additional one year periods
unless the board of directors of BSI gives prior written notice of non-renewal
to Chartwell. Mr. Berman and Mr. Shein are directors of both the Company and BSI
and both are managers of Chartwell. BSI paid Chartwell $0.4 million as the first
installment of the fiscal 2001 management fee at the closing of the 2000 Merger.
In connection with the 1998 Recapitalization, 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 1999, the Company sold its auto racing helmet business to Bell
Racing Company ("Bell Racing") in exchange for an equity interest in Bell Racing
valued at approximately $2.1 million. 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 and Chief Executive Officer 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 1, 2000. 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, of which $92,082 was outstanding at July 1, 2000, and to Mr.
Kong for $26,010, of which $20,824 was outstanding at July 1, 2000.
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 August 31, 2000.
In April 2000, the Company issued a $600,000 promissory note to Ms. George.
The note bears interest at the rate of 6% per annum. Ms. George has pledged her
investment in the Company and her outstanding options as collateral for the
note. The note is due upon the earlier of (i) termination of employment, (ii)
the dissolution or liquidation of the Company, or (iii) the date of any bonus
paid in fiscal 2006. The first $100,000 of any bonus paid to Ms. George will be
applied to the outstanding balance of the note.
See "Compensation Committee Interlocks and Insider Participation" and
"Employment Agreements".
42
<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.
--------
18 Consolidated balance sheets - July 1, 2000 and July 3, 1999
19 Consolidated statements of operations - Years ended July 1, 2000, July
3, 1999 and June 27, 1998
21 Consolidated statements of cash flows - Years ended July 1, 2000, July
3, 1999 and June 27, 1998
22 Notes to consolidated financial statements
48 Schedule II - Valuation and qualifying accounts
49 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.
43
<PAGE>
(a)(3) EXHIBITS
NUMBER DESCRIPTION
------ -----------
2.1 Agreement and Plan of Merger, dated June 13, 2000, among Bell Sports
Holdings, Andsonica Acquisition and the Company (incorporated by
reference to Exhibit 2 to the Company's Current Report on Form 8-K
dated June 13, 2000).
2.2 First Amendment to the Agreement and Plan of Merger, dated August 3,
2000 among Bell Sports Holdings, Andsonica Acquisition and the Company
(incorporated by reference to Exhibit 2.2 to the Company's Current
Report on Form 8-K dated August 21, 2000 (the "August 2000 8-K")).
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the August 2000 8-K).
3.2 Amended and Restated Bylaws of the Company (incorporated by reference
to Exhibit 3.2 to the August 2000 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
(incorporated by reference to Exhibit 4.3 to the Company's Annual
Report on form 10-K for the year ending July 3, 1999).
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 Company's Current Report on Form 8-K
dated August 21, 2000 (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. (incorporated by
reference to Exhibit 4.5 to the Company's Annual Report on form 10-K
for the year ending July 3, 1999).
4.6 14% Senior Discount Debenture due 2009, dated August 17, 1998, issued
by the Company to Charlesbank Bell Sports Holdings, Limited
Partnership (incorporated by reference to Exhibit 4.6 to the Company's
Annual Report on form 10-K for the year ending July 3, 1999).
4.7 14% Senior Discount Debenture due 2009, dated August 17, 1998, issued
by the Company to Brentwood Associates Buyout Fund II, L.P.
(incorporated by reference to Exhibit 4.7 to the Company's Annual
Report on form 10-K for the year ending July 3, 1999).
4.8 Form of 18% Senior Non-negotiable Merger Note due 2000 (incorporated
by reference to Exhibit 4.1 to the August 2000 8-K).
4.9 Investment Agreement, dated August 11, 2000, by and among BSI, the
Company and First Union Investors, Inc., GarMark Partners, L.P. and
Fleet Corporate Finance, Inc. (incorporated by reference to Exhibit
4.2 to the August 2000 8-K).
4.10 Form of Warrant of the Company (incorporated by reference to Exhibit
4.3 to the August 2000 8-K).
4.11 Form of 13% Senior Subordinated Note due August 15, 2008 of BSI
(incorporated by reference to Exhibit 4.4 to the August 2000 8-K).
44
<PAGE>
4.12 Form of Securities Holders and Registration Rights Agreement by and
among Bell Sports Holdings, the Company and the Investors signatory
thereto (incorporated by reference to Exhibit 4.5 to the August 2000
8-K).
4.13 Securities Agreement, dated June 13, 2000, among Bell Sports Holdings,
Andsonica Acquisition, the Company and the security holders listed
therein (incorporated by reference to Exhibit 4.6 to the August 2000
8-K).
4.14 Noncompetition and Nonsolicitation Agreement, dated June 13, 2000,
among the Company, Charlesbank Capital Partners LLC, Brentwood Private
Equity LLC and Bell Sports Holdings (incorporated by reference to
Exhibit 4.7 to the August 2000 8-K).
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")).
10.7 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).
10.8 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).
10.9 Memorandum of Understanding, dated July 15, 1999, between the Company
and Mary J. George (incorporated by reference to Exhibit 10.10 to the
Company's Annual Report on form 10-K for the year ending July 3,
1999).
10.10 Employment Agreement, dated August 11, 2000 among the Company, BSI
and Mary J. George (incorporated by reference to Exhibit 10.2 to the
August 2000 8-K).
10.11 Amended and Restated Promissory Note, dated August 11, 2000 between
BSI and Mary J. George (incorporated by reference to Exhibit 10.3 to
the August 2000 8-K).
10.12 Amended and Restated Collateral Pledge Agreement, dated August 11,
2000 between BSI and Mary J. George (incorporated by reference to
Exhibit 10.4 to the August 2000 8-K).
45
<PAGE>
10.13 Memorandum reference Employment Outline for Bill Bracy, dated November
26, 1997 (incorporated by reference to Exhibit 10.6 to the December
1997 10-Q).
10.14 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).
10.15* Separation Agreement, dated July 5, 2000, between the Company, BSI and
Bill Bracy.
10.16 Promissory Note, dated April 8, 1998, between BSI and Bill Bracy
(incorporated by reference to Exhibit 10.4 to the March 1998 10-Q).
10.17 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).
10.18 Employment Agreement, dated August 11, 2000, among the Company, BSI
and Richard S Willis (incorporated by reference to Exhibit 10.5 to the
August 2000 8-K).
10.19 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).
10.20 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")).
10.21 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).
10.22 Form of Promissory Note between the Company and certain employees,
secured by shares issued under the Company's Investment and Incentive
Plan (incorporated by reference to Exhibit 10.21 to the Company's
Annual Report on form 10-K for the year ending July 3, 1999).
10.23 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")).
10.24 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).
10.25 Revolving Credit and Term Loan Agreement, dated August 11, 2000, by
and among BSI, the Company, Fleet National Bank, First Union National
Bank and certain other lending institutions (collectively, the
"Lenders"), First Union National Bank, as syndication agent for the
Lenders and Fleet National Bank, as administrative agent for the
Lenders (incorporated by reference to Exhibit 10.1 to the August 2000
8-K).
21* Subsidiaries of the Registrant
27.1* Financial data schedule for 2000
----------
* Filed herewith
Exhibits 10.4 through 10.18 and 10.20 through 10.22 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.
46
<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 23rd day of August, 2000.
NAME
----
/s/ Richard S Willis Director and Chief Executive Officer
------------------------------- (principal executive officer and principal
Richard S Willis financial and accounting officer)
/s/ Mary J. George Director and Chairman
-------------------------------
Mary J. George
/s/ Todd R. Berman Director
-------------------------------
Todd R. Berman
/s/ Michael S. Shein Director
-------------------------------
Michael S. Shein
47
<PAGE>
BELL SPORTS CORP.
SCHEDULE II - VALUATION
AND QUALIFYING ACCOUNTS
FOR EACH OF THE THREE FISCAL YEARS
IN THE PERIOD ENDED JULY 1, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
--------------------
CHARGED
BALANCE AT TO COSTS CHARGED TO BALANCE
BEGINNING AND OTHER AT END OF
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
JULY 1, 2000
Deferred tax asset
valuation allowance $ 1,108 $ -- $ -- $ 768 $ 340
Allowance for doubtful
accounts $ 1,768 $ 1,349 $ -- $ 1,665 $ 1,452
Inventory valuation
allowance $ 2,883 $ 2,446 $ -- $ 3,880 $ 1,449
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
</TABLE>
----------
(a) Reversal to Loss on Disposal of Product Line.
48
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors
and Stockholders of
Bell Sports Corp.
Our audits of the consolidated financial statements referred to in our report
dated July 27, 2000, except for Note 15, as to which the date is August 11,
2000, appearing in this Form 10-K also included an audit of the financial
statement schedules listed in Item 14 of this Form 10-K. In our opinion, these
financial statement schedules present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
/s/ PRICEWATERHOUSECOOPERS LLP
San Francisco, California
July 27, 2000
49
