-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GxuDcDm38wxrzDcGqh4P1vhZ7zB4IwTyF1ivQYsky87j9pN+5Dje8iqqg9x6yNYC Bcv4P6GL4yqv2X3PTSIqGw== 0000950147-99-000451.txt : 19990512 0000950147-99-000451.hdr.sgml : 19990512 ACCESSION NUMBER: 0000950147-99-000451 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990327 FILED AS OF DATE: 19990511 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BELL SPORTS CORP CENTRAL INDEX KEY: 0000884063 STANDARD INDUSTRIAL CLASSIFICATION: [3949] IRS NUMBER: 363671789 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19873 FILM NUMBER: 99617231 BUSINESS ADDRESS: STREET 1: 6350 SAN IGNACIO AVENUE STREET 2: STE I-100 CITY: SAN JOSE STATE: CA ZIP: 95119 BUSINESS PHONE: 4085743400 MAIL ADDRESS: STREET 1: 10601 N. HAYDEN ROAD STREET 2: SUITE I-100 CITY: SCOTTSDALE STATE: AZ ZIP: 85260 10-Q 1 3RD QUARTER REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal quarterly period ended March 27, 1999 ------------------------------------------ OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to __________________ Commission file number 0-19873 BELL SPORTS CORP. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 36-3671789 - -------------------------------------------------------------------------------- (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) N/A - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) Yes X No and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date. Class Date Number of shares - -------------------------------------------------------------------------------- Class A Common Stock, $.01 par value April 30, 1999 862,772 Class B Common Stock, $.01 par value April 30, 1999 118,700 Class C Common Stock, $.01 par value April 30, 1999 43,000 BELL SPORTS CORP. INDEX TO FORM 10-Q PART I Page Number ------ Bell Sports Corp. and Subsidiaries Consolidated Balance Sheets as of March 27, 1999, and June 27, 1998 3 Bell Sports Corp. and Subsidiaries Consolidated Statements of Operations for the nine months and three months ended March 27, 1999, and March 28, 1998 4 Bell Sports Corp. and Subsidiaries Consolidated Statements of Cash Flows for the nine months ended March 27, 1999, and March 28, 1998 5 Notes to Consolidated Financial Statements 6 - 11 Management's Discussion and Analysis of Financial Condition and Results of Operations 12 - 15 PART II Items 1 to 6 16 Signatures 17 PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BELL SPORTS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data)
March 27, June 27, 1999 1998 --------- --------- (unaudited) ASSETS - ------ Current assets: Cash and cash equivalents $ 9,181 $ 45,093 Accounts receivable 64,157 63,472 Inventories 47,626 39,679 Deferred taxes 9,636 8,970 Other current assets 6,370 3,264 --------- --------- Total current assets 136,970 160,478 Property, plant and equipment 18,424 20,636 Long-term deferred taxes 9,500 9,500 Goodwill 52,894 54,292 Intangibles and other assets 8,448 2,161 --------- --------- Total assets $ 226,236 $ 247,067 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 10,576 $ 7,663 Accrued compensation and employee benefits 2,550 5,541 Accrued expenses 14,512 16,158 Notes payable and current maturities of long-term debt and capital lease obligations 24,539 679 --------- --------- Total current liabilities 52,177 30,041 Long-term debt 146,907 86,625 Capital lease obligations and other liabilities 4,127 2,142 --------- --------- Total liabilities 203,211 118,808 --------- --------- Commitments and contingencies Stockholders' equity: Series A Preferred Stock; 6% cumulative, $.01 par value; authorized 1,500,000 shares, 1,025,284 shares issued and outstanding at March 27, 1999 52,279 -- Preferred stock; $.01 par value; authorized 1,000,000, none issued at June 27, 1998 -- -- Class A Common Stock; $.01 par value; authorized 900,000 shares; 862,772 shares issued and outstanding at March 27, 1999 9 -- Class B Common Stock; $.01 par value; authorized 150,000 shares, 118,700 shares issued and outstanding at March 27, 1999 1 -- Class C Common Stock; $.01 par value; authorized 50,000 shares, 43,000 shares issued and outstanding at March 27, 1999 -- -- Common Stock; $.01 par value; authorized 25,000,000 shares; 14,410,508 shares issued and 13,915,436 shares outstanding at June 27, 1998 -- 144 Additional paid-in capital (8,060) 143,905 Accumulated other comprehensive income (1,567) (1,111) Accumulated deficit (19,637) (9,461) --------- --------- 23,025 133,477 Treasury stock, at cost, none at March 27, 1999, and 495 shares at June 27, 1998 -- (5,218) --------- --------- Total stockholders' equity 23,025 128,259 --------- --------- Total liabilities and stockholder's equity $ 226,236 $ 247,067 ========= =========
See accompanying notes to these consolidated financial statements BELL SPORTS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited, in thousands)
Nine Months Ended Three Months Ended ------------------------- ------------------------- March 27, March 28, March 27, March 28, 1999 1998 1999 1998 --------- --------- --------- --------- Net sales $ 140,245 $ 138,554 $ 54,306 $ 52,332 Cost of sales 94,749 93,591 36,873 34,132 --------- --------- --------- --------- Gross profit 45,496 44,963 17,433 18,200 Selling, general and administrative expenses 34,931 34,570 11,631 11,894 Foreign exchange (gain) loss 1,905 (71) (34) (36) Amortization of goodwill and intangible assets 1,589 1,735 528 533 Transaction costs 13,100 -- 703 -- Disposal of product line -- (1,300) -- -- Restructuring charges -- 1,228 -- -- Net investment income (936) (1,381) (126) (476) Interest expense 11,153 3,539 4,411 1,189 --------- --------- --------- --------- (Loss) income before income taxes (16,246) 6,643 320 5,096 Benefit (provision) for income taxes 3,183 (2,524) (132) (1,936) --------- --------- --------- --------- (Loss) income before extraordinary items (13,063) 4,119 188 3,160 Extraordinary item: Gain on early extinguishment of debt, net of taxes of $2,006 2,887 -- -- -- --------- --------- --------- --------- Net (loss) income $ (10,176) $ 4,119 $ 188 $ 3,160 ========= ========= ========= =========
See accompanying notes to these consolidated financial statements. BELL SPORTS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, in thousands)
Nine Months Ended ------------------------- March 27, March 28, 1999 1998 --------- --------- CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES: Net income (loss) before extraordinary item $ (13,063) $ 4,119 Adjustments to reconcile net income (loss) before extraordinary items to net cash provided by (used in) operating activities: Amortization of goodwill and intangibles 1,589 1,730 Depreciation 4,172 4,173 Loss on disposal of property, plant, and equipment 1,297 312 Provision for doubtful accounts 512 (588) Provision for inventory obsolescence 2,572 1,695 Deferred income taxes (666) -- Other 2,356 380 Changes in assets and liabilities: Accounts receivable (1,512) 6,373 Inventories (10,705) (12,352) Other assets (3,738) 4,159 Accounts payable 2,947 418 Other liabilities (4,428) (5,349) --------- --------- Net cash provided by (used in) operating activities (18,667) 5,070 --------- --------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Capital expenditures (3,297) (3,610) Proceeds from the sale of SportRack -- 13,427 --------- --------- Net cash provided by (used in) investing activities (3,297) 9,817 --------- --------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Proceeds from issuance of common stock 84 1,119 Proceeds from issuance of senior subordinated notes 110,000 -- Expenditures related to issuance of senior subordinated notes (4,900) -- Proceeds from issuance of senior discount notes 15,000 -- Proceeds from issuance of preferred stock 44,907 -- Repurchase of common stock (142,350) -- Tender of subordinated debentures (57,681) -- Payments on notes payable, long-term debt and capital leases (1,325) (495) Net borrowings (payments) on line of credit agreement 24,000 (18,708) Expenditures related to issuance of line of credit (1,381) -- --------- --------- Net cash used in financing activities (13,646) (18,084) --------- --------- Effect of exchange rate changes on cash (302) (546) --------- --------- Net increase (decrease) in cash and cash equivalents (35,912) (3,743) Cash and cash equivalents at beginning of period 45,093 29,008 --------- --------- Cash and cash equivalents at end of period $ 9,181 $ 25,265 ========= =========
See accompanying notes to these consolidated financial statements BELL SPORTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES The Company - ----------- Bell Sports Corp. and its wholly-owned subsidiaries (collectively, the "Company" or "Bell") is the leading manufacturer and marketer of bicycle helmets worldwide and a leading supplier of a broad line of bicycle accessories in North America. The Company is also a leading supplier of auto racing helmets, a worldwide supplier of bicycle accessories, and a marketer of in-line skating, snowboarding, snow skiing and water sport helmets. On August 17, 1998, the Company consummated the Agreement and Plan of Recapitalization and Merger with HB Acquisition Corporation, a Delaware corporation ("HB Acquisition"), which provided for the merger of HB Acquisition with and into Bell, with Bell continuing as the surviving corporation (the "Bell Merger"). Additionally, the Company completed a tender offer (the "Tender Offer") to purchase $62.5 million aggregate principal amount of its 4 1/4% Convertible Subordinated Debentures due November 2000 (the "Debentures"). The Company's wholly-owned subsidiary, Bell Sports, Inc., consummated the private placement of $110.0 million of its 11% Series A Senior Subordinated Notes due August 15, 2008 (the "Notes") and the Company completed the private placement of $15.0 million of its 14% Senior Discount Notes due August 14, 2009 (the "Discount Notes"). The Discount Notes were subsequently exchanged for New Discount Notes, which retain all of the attributes of the Discount Notes, but which are publicly registered. Principles of Consolidation and Accounting Period - ------------------------------------------------- The consolidated financial statements include the accounts of Bell Sports Corp. and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation. The Company's fiscal year is either a fifty-two or fifty-three week accounting period ending on the Saturday that is nearest to the last day of June. The Company's fiscal third quarter in both 1999 and 1998 had thirteen weeks. Unaudited Information and Basis of Presentation - ----------------------------------------------- The consolidated balance sheet as of March 27, 1999 and statements of operations and cash flows for all periods included in the accompanying financial statements have not been audited. In the opinion of management these financial statements include all normal and recurring adjustments necessary for a fair presentation of such financial information. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. The financial information included herein has been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The interim financial information and the notes thereto should be read in conjunction with the audited financial statements for the fiscal years ended June 27, 1998, June 28, 1997 and June 29, 1996 which are included in the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 1998. Accounts Receivable - ------------------- Accounts receivable at March 27, 1999 and June 27, 1998 are net of allowances for doubtful accounts of $1.6 million and $1.7 million, respectively. Property, Plant and Equipment - ----------------------------- Property, plant and equipment at March 27, 1999 and June 27, 1998 are net of accumulated depreciation of $24.0 million and $21.8 million, respectively. Management's Estimates and Assumptions - -------------------------------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 2 - COMPREHENSIVE INCOME Effective June 28, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting and display of comprehensive income and its components. Comprehensive income is generally defined as all changes in equity during a period except those resulting from investments by owners or distributions to owners. For the Company, comprehensive income for all periods presented consisted solely of net earnings and foreign currency translation adjustments, as follows (in thousands): Nine Months Ended Three Months Ended ------------------- ------------------ March 27, March 28, March 27, March 28, 1999 1998 1999 1998 -------- -------- -------- -------- Net income (loss) $(10,176) $ 4,119 $ 188 $ 3,160 Foreign currency translation adjustment, net of tax (456) (621) 96 (253) -------- -------- -------- -------- Comprehensive income (loss) $(10,632) $ 3,498 $ 284 $ 2,907 ======== ======== ======== ======== NOTE 3 - INVENTORIES Inventories consist of the following components (in thousands): March 27, June 27, 1999 1998 ------------------ ---------------- Raw materials $5,898 $3,539 Work in process 1,810 2,010 Finished goods 39,918 34,130 ------------------ ---------------- Total $47,626 $39,679 ================== ================ NOTE 4 - PRODUCT LIABILITY AND CONTINGENCIES Product Liability - ----------------- The Company is subject to various product liability claims and/or suits brought against it for claims involving damages for personal injuries or deaths. Allegedly, these injuries or deaths relate to the use by claimants of products manufactured by the Company and, in certain cases, products manufactured by others. The ultimate outcome of these existing claims and any potential future claims cannot presently be determined. Management believes that existing product liability claims/suits are defensible and that, based on the Company's past experience and assessment of current claims, the aggregate of defense costs and any uninsured losses will not have a material adverse impact on the Company's liquidity or financial position. The cost of product liability insurance fluctuated greatly in past years and the Company opted to self-insure claims for certain periods. The Company has been covered by product liability insurance since July 1, 1991. This insurance is subject to a self-insured retention. There is no assurance that insurance coverage will be available or economical in the future. The Company sold its motorcycle helmet manufacturing business in June 1991 in a transaction in which the purchaser assumed all responsibility for product liability claims arising out of helmets manufactured prior to the date of disposition and the Company agreed to use its in-house defense team to defend these claims at the purchaser's expense. If the purchaser is for any reason unable to pay a judgment, settlement amount or defense costs arising out of these claims, the Company could be held responsible for the payment of such amounts or costs. The Company believes that the purchaser does not currently have the financial resources to pay any significant judgment, settlement amount, or defense costs arising out of any claim. In February 1996, a Toronto, Canada jury returned a verdict against the Company based on injuries arising out of a 1986 motorcycle accident. The jury found that the Company was 25% responsible for the injuries with the remaining 75% of the fault assigned to the plaintiff and the other defendant. If the judgment is upheld, the amount of the claim for which the Company would be responsible and the legal fees and tax implications associated therewith are estimated to be between $3.0 and $4.0 million (based on current exchange rates). This claim arose during a period in which the Company was self-insured. The Company has filed an appeal of the Canadian verdict. In February 1998, a Wilkes-Barre, Pennsylvania jury returned a verdict against the Company relating to injuries sustained in a 1993 motorcycle accident. The judgment totaled $6.8 million, excluding any interest, fees or costs which may be assessed. This claim arose during a period in which the Company was self-insured. The Company has filed an appeal of the verdict. In June 1998, a Wilmington, Delaware jury returned a verdict against the Company relating to injuries sustained in a 1991 off-road motorcycle accident. The judgment totaled $1.8 million, excluding any interest, fees or costs which may be assessed. The claim is covered by insurance; however, the Company is responsible for a $1.0 million self-insured retention. The Company has filed an appeal of the judgment. Based on management's extensive consultation with legal counsel prosecuting the appeals and the Company's experience in pursuing reversals and settlements after the entry of judgments against it, management currently believes that the ultimate outcome of the pending judgments will not have a material adverse affect on the financial condition of the Company. Accordingly, the Company has only established reserves for estimated costs for the defense of these and other known claims. The Company believes it will have adequate cash balances and sources of capital available to satisfy such pending judgments. However, there can be no assurance that the Company will be successful in appealing or pursuing settlements of these judgments or that the ultimate outcome of the judgments will not have a material adverse effect on the liquidity or financial condition of the Company. Shareholder Litigation - ---------------------- Following the announcement of the Bell Merger, three purported class action lawsuits were filed in Delaware Chancery Court seeking preliminary and permanent injunctive relief against the consummation of the Bell Merger or, alternatively, the recovery of damages in the event the Bell Merger was consummated. The complaints, which were filed by Jeffrey Kaplan, Jerry Krim and Cyrus Schwartz, purported stockholders of the Company, named the Company, HB Acquisition, Chase Capital Partners, CBCI and the Company's then current directors as defendants. To the knowledge of the Company, none of the complaints was served. The complaints alleged, among other things, that the Bell Merger was unfair to the Company's former public stockholders and that certain defendants who were expected to exchange a portion of their shares of Common Stock, options to purchase shares of Common Stock or other Common Stock-based awards held by them for shares of common stock of HB Acquisition in connection with the Bell Merger had a conflict of interest which caused them, and the Company's then current directors, to breach their fiduciary duties to the Company's former stockholders. The complaints sought rescission of the Bell Merger or rescissory damages and an "accounting," in addition to attorney's fees and costs. The lawsuit filed by Jeffrey Kaplan was subsequently withdrawn, without prejudice to refile. Thereafter, on March 10, 1999, the remaining suits were dismissed by the plaintiffs without prejudice, subject to approval by the court. The court approved the dismissals on March 12, 1999. Environmental Litigation - ------------------------ In May 1998, the Company received a De Minimis Notice Letter and Settlement Offer from the United States Environmental Protection Agency ("USEPA") under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. Sections 9601 ET SEQ. for the Operating Industries, Inc. Landfill Superfund Site ("OII Site") in Monterey Park, California. CERCLA imposes liability for the costs of cleaning up, and certain damages resulting from, releases and threatened releases of hazardous substances. Although courts have interpreted CERCLA liability to be joint and several, where feasible, the liability typically is allocated among the responsible parties according to a volumetric or other standard. USEPA apparently has identified the Company as a DE MINIMIS potentially responsible party based on several waste shipments the Company allegedly sent to the site in the late 1970s and in 1980. USEPA's settlement offer to the Company is in the range of $29,000 to $36,000. The settlement would cover all past and expected future costs at the OII Site, and, with limited exceptions, provide the Company with covenants not to sue from the United States and California, and contribution protection from private parties. Accordingly, the Company does not expect this claim to have a material adverse effect on the Company. In another unrelated matter, the Company received a General Notice Letter in October, 1998 from USEPA under CERCLA for the Casmalia disposal site in Santa Barbara County, California. USEPA apparently has identified the Company as a DE MINIMIS potentially responsible party based on several waste shipments the Company allegedly sent to the site during the 1980's. USEPA's settlement offer to the Company is in the range of $54,000 to $57,000. The benefits of the settlement are similar to those offered by USEPA for the OII site. Accordingly, the Company does not expect this claim to have a material adverse effect on the Company. NOTE 5 - NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS On August 17, 1998, the Company's wholly-owned subsidiary, Bell Sports, Inc. issued Notes totaling $110.0 million, bearing interest at 11%, maturing on August 15, 2008. Interest on the Notes is payable on February 15 and August 15 of each year. The Notes are redeemable, in whole or in part, at the option of Bell Sports, Inc. at any time on or after August 15, 2003, in cash, at specified redemption prices. In addition, prior to August 15, 2001, the Company may redeem up to 35% of the bonds for 111% of their principle amount, plus accrued interest. On August 17, 1998, the Company issued Discount Notes bearing interest at 14% totaling $15.0 million in a private placement transaction, maturing on August 14, 2009. Interest on the Discount Notes accrues on June 1 and December 1 of each year. On March 12, 1999, Discount Notes with an accreted value of $2.4 million were exchanged for 47.6 thousand shares of Series A Preferred Stock and 39.2 thousand shares of Class A Common Stock. On August 17, 1998, the Company consummated the Tender Offer at a purchase price of $905, plus accrued and unpaid interest from May 15, 1998 up to, but not including, the date of payment for each $1,000 principal amount of the Debentures. Accordingly, the Company realized an extraordinary gain, stated on an after-tax basis and net of related fees and expenses, of $2.9 million. The Debentures remaining outstanding of $23.8 million are redeemable at the Company's option at any time on or after November 15, 1996, at specified redemption prices. In August 1998, the Company and its wholly-owned subsidiary, Bell Sports, Inc. (the "Borrower") entered into a $60.0 million senior secured revolving credit facility ("Credit Agreement"). The Credit Agreement is guaranteed by the Company and by certain of its subsidiaries (collectively, the "Subsidiary Guarantors" and together with the Company, the "Guarantors"). The Borrower's obligations under the Credit Agreement are secured by (a) substantially all of the tangible and intangible assets of the Borrower and each Guarantor, (b) the capital stock of the Borrower and each Subsidiary Guarantor and (c) 65% of the capital stock of certain foreign subsidiaries of the Company. The Credit Agreement expires on August 17, 2003. The aggregate amount of borrowings permitted under the Credit Agreement is limited by a borrowing base formula equal to a percentage of the eligible domestic accounts receivable and inventory of the Borrower and the Subsidiary Guarantors plus an amount allowed for the retirement of convertible debt. The Credit Agreement provides for mandatory repayments from time to time to the extent the amount outstanding thereunder exceeds the maximum amount permitted under the borrowing base. Based on the provisions of the Credit Agreement, the Borrower could borrow a maximum of $59.8 million as of March 27, 1999. As of March 27, 1999, there were borrowings outstanding of $24.0 million under the Credit Agreement. The Credit Agreement provides the Company with the option of borrowing based either on the U.S. prime plus a margin or LIBOR plus a margin. The margin for the U.S. prime can fluctuate between 0.0% and 1.0%, and the margin for LIBOR loans can fluctuate between 1.0% and 2.0% based on the Company's earnings and debt. At March 27, 1999, the margin for U.S. prime was 0.50% and the margin for LIBOR was 1.50%. Under the Credit Agreement, the Borrower is required to pay a quarterly commitment fee on the unused portion of the facility at a rate that ranges from 0.375% to 0.50% per annum, based on a pricing ratio. At March 27, 1999, the quarterly commitment fee was 0.50% per annum. The Credit Agreement contains certain financial covenants, including a maximum leverage ratio, a minimum fixed charge coverage ratio and a minimum cash interest coverage ratio. It also contains covenants which restrict the ability of the Company to pay dividends, incur liens, issue certain types of debt or equity, engage in mergers, acquisitions or asset sales, or to make capital expenditures. At March 27, 1999, the Company was in compliance with all bank covenants. Long-term debt consists of the following (in thousands): March 27, June 27, 1999 1998 --------- --------- 11% Notes $ 110,000 $ -- 4 1/4% Debentures 23,750 86,250 14% Discount notes 13,864 -- Borrowings under line of credit 24,000 -- Notes collateralized by certain equipment due at various dates through December 2000 and bearing interest at fixed rates ranging from 2.9% to 10.3% 392 936 --------- --------- 172,006 87,186 Less: Current maturities (25,099) (561) --------- --------- Total long-term debt $ 146,907 $ 86,625 ========= ========= NOTE 6 - STOCKHOLDERS' EQUITY Preferred Stock - --------------- In connection with the Bell Merger, the Company issued Series A Preferred Stock, par value $.01 (the "Series A Preferred Stock"). Each holder is entitled to receive dividends on each share at the rate of six percent (6%) per annum (computed on the basis of $50.99 per share), if, as and when declared by the Board of Directors of the Company, subject to certain restrictions. Dividends on the shares of Series A Preferred Stock are payable on June 30, September 30, December 31, and March 31 of each year (a "Dividend Payment Date"), commencing September 30, 1998. If, on any Dividend Payment Date, the holders of the Series A Preferred Stock have not received the full dividends, then such dividends shall accumulate, whether or not earned or declared, with additional dividends thereon, compounded quarterly, at the dividend rate of six percent (6%) per annum, for each succeeding full quarterly dividend period during which such dividends remain unpaid. Stock Options - ------------- On August 17, 1998, the Company granted an option to purchase 20,511 shares of Series A Preferred Stock at an exercise price of $36.15 per share and 16,921 shares of Class A Common Stock, $.01 par value at an exercise price of $.44 per share (the "Options") to a member of management. The options are immediately exercisable and must be exercised, if at all, on or before August 27, 2006. Compensation expense of approximately $307,000 was recorded in selling, general and administrative expenses during the first quarter of fiscal 1999 related to the grant of the Options. Investment and Incentive Plan - ----------------------------- In November 1998, the Board of Directors approved two investment plans (the "Plans") to allow selected employees, directors, consultants and/or advisors of the company the opportunity to make equity investments in the Company. Under the Plans, up to 15,000 shares of Series A Preferred Stock, 12,500 shares of Class A Common Stock, 132,100 shares of Class B Common Stock and 50,000 shares of Class C Common Stock can be purchased by participants. As of March 27, 1999, 6,849 shares of Series A Preferred Stock, 5,686 shares of Class A Common Stock, 118,700 shares of Class B Common Stock, and 43,000 shares of Class C Common Stock had been purchased under the Plans. NOTE 7 - RESTRUCTURING International - Q3 - ------------------ During May 1999, the Company approved and announced a plan to restructure its international operations. Over the next twelve months, the Company will close the Irish and Canadian manufacturing facilities. At this time, costs associated with the restructuring, including severance benefits, facility closing costs, and capital asset disposal cannot be reasonably estimated. Giro - Q2 - --------- During January 1999, the Company announced a plan to restructure its Giro U.S. operations. This plan was significantly revised and approved in May 1999. Over the next twelve months, the Company will consolidate Giro's Santa Cruz, California manufacturing and distribution operations with Bell's Rantoul, Illinois facility. At this time, costs associated with the revised restructuring, including severance benefits, facility closing costs, and capital asset disposal cannot be reasonably estimated. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Bell Sports is the leading manufacturer and marketer of bicycle helmets worldwide and a leading supplier of a broad line of bicycle accessories in North America. The Company is also a leading supplier of auto racing helmets, a worldwide supplier of bicycle accessories, and has recently begun marketing in-line skating, snowboarding, snow skiing and water sport helmets. The Company has developed a reputation over its 44-year history for innovation, design, quality and safety. On August 17, 1998, the Company consummated the Agreement and Plan of Recapitalization and Merger with HB Acquisition Corporation, a Delaware corporation ("HB Acquisition"), which provided for the merger of HB Acquisition with and into Bell, with Bell continuing as the surviving corporation (the "Bell Merger"). Additionally, the Company completed a tender offer (the "Tender Offer") to purchase $62.5 million aggregate principal amount of its 4 1/4% Convertible Subordinated Debentures due November 2000 (the "Debentures"). The Company's wholly-owned subsidiary, Bell Sports, Inc., consummated the private placement of $110.0 million of its 11% Series A Senior Subordinated Notes due August 15, 2008 (the "Notes") and the Company completed the private placement of $15.0 million of its 14% Senior Discount Notes due August 14, 2009 (the "Discount Notes"). The Discount Notes were subsequently exchanged for New Discount Notes, which retain all of the attributes of the Discount Notes, but which are publicly registered. RESULTS OF OPERATIONS NET SALES. Net sales for the third quarter of fiscal 1999 increased 4% to $54.3 million from $52.3 million in the fiscal 1998 third quarter, due primarily to strong bicycle helmet and accessories sales in the U.S. in the mass merchant channel. Year to date, net sales increased 1% to $140.2 million from $138.6 million in the first three quarters of fiscal 1998, due primarily to strong bicycle helmet and accessories sales in the U.S. in both the mass merchant and independent bicycle dealer channels. The product line sales mix for the nine month and three month periods are as follows: Nine Months Ended Three Months Ended --------------------- ---------------------- March 27, March 28, March 27, March 28, 1999 1998 1999 1998 --------- --------- --------- --------- Product Line Sales Mix: Bicycle accessories 53% 52% 52% 50% Bicycle helmets 45% 45% 46% 48% Auto Racing helmets 2% 3% 2% 2% GROSS MARGIN. Gross margins for the third quarter of fiscal 1999 decreased to 32% of net sales, from 35% in the fiscal 1998 third quarter. Year to date, gross margins remained relatively flat at 32% in fiscal 1999 compared to 33% in fiscal 1998. The decreases are due to the product mix and unfavorable manufacturing variances. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative costs, as a percentage of net sales, decreased to 21%, from 23% in the fiscal 1998 third quarter, due primarily to lower marketing expenses. Year to date, selling, general, and administrative costs remained constant at 25% of net sales for both fiscal 1999 and fiscal 1998. AMORTIZATION OF INTANGIBLES. Amortization of goodwill and intangible assets decreased slightly to $528,000 in the third quarter of fiscal 1999 compared to $533,000 for the comparable prior year period. Year to date, amortization of intangibles decreased to $1.6 million in fiscal 1999 from $1.7 million in fiscal 1998. The decrease is due to certain intangibles becoming fully amortized. TRANSACTION COSTS. In the first half of fiscal 1999, the Company estimated costs related to the Bell Merger at $13.0 million. In the third quarter of fiscal 1999, the Company recorded an additional $0.7 million of costs related to the merger. GAIN ON DEBT TENDER. On August 17, 1998, the Company consummated the Tender Offer at a purchase price of $905, plus accrued and unpaid interest from May 15, 1998 up to, but not including, the date of payment for each $1,000 principal amount of Debentures. An extraordinary gain, stated on an after-tax basis and net of related fees and expenses, of $2.9 million was recorded in connection with the Tender Offer. NET INVESTMENT INCOME. Net investment income decreased to $126,000 in the third quarter of fiscal 1999 compared to $476,000 in the third quarter of fiscal 1998. Year to date net investment income decreased to $936,000 in fiscal 1999 from $1,381,000 in fiscal 1998. The decrease is due to lower cash balances being invested resulting from the Bell Merger. INTEREST EXPENSE. Interest expense increased to $4.4 million in the third quarter of fiscal 1999 from $1.2 million in the comparable prior year period. Year to date interest expense increased to $11.2 million in fiscal 1999 from $3.5 million in fiscal 1998. The increase is due to the issuance of the Notes and Discount Notes, partially offset by a $62.5 million reduction in debt resulting from the Tender Offer. INCOME TAXES. The effective tax rate was 41% for the third quarter of fiscal 1999 and 20% year to date for fiscal 1999. The effective tax rate was 38% for both the second quarter of fiscal 1998 and the first nine months of fiscal 1998. The variance on the year to date rates is due to the non-deductibility of the transaction costs. The Company anticipates the effective tax rate for the remainder of fiscal 1999 to remain at 41%. LIQUIDITY AND FINANCIAL RESOURCES The Company has historically funded its operations, capital expenditures and working capital requirements from internal cash flow from operations and borrowings. The Company's working capital decreased to $84.8 million at March 27, 1999 from $130.4 million at June 27, 1998. The decrease is primarily attributable to the use of cash in connection with the Bell Merger and the Tender Offer coupled with lower inventory balances. The Company's capital expenditures were $3.3 million for the first nine months of fiscal 1999. The Company estimates it will spend a total of approximately $5.1 million on capital expenditures in fiscal 1999 for product tooling and to maintain and upgrade its facilities and equipment. In August 1998, the Company and its wholly-owned subsidiary, Bell Sports, Inc. entered into a $60.0 million senior secured revolving credit facility ("Credit Agreement"). The Credit Agreement is guaranteed by the Company and by certain of its subsidiaries (collectively, the "Subsidiary Guarantors" and together with the Company, the "Guarantors"). The Borrower's obligations under the Credit Agreement are secured by (a) substantially all of the tangible and intangible assets of the Borrower and each Guarantor, (b) the capital stock of the Borrower and each Subsidiary Guarantor and (c) 65% of the capital stock of certain foreign subsidiaries of the Company. The Credit Agreement also contains certain financial covenants, including a maximum leverage ratio, a minimum fixed charge coverage ratio and a minimum cash interest coverage ratio. It also contains covenants which restrict the ability of the Company to pay dividends, incur liens, issue certain types of debt or equity, engage in mergers, acquisitions or asset sales, or to make capital expenditures. At March 27, 1999, the Company was in compliance with all bank covenants. The Credit Agreement expires in August 2003. As of March 27, 1999, outstanding borrowings under the Credit Agreement totaled $24.0 million. Based on the provisions of the Credit Agreement, the Company could have borrowed a maximum of $59.8 million. Management believes that cash flows from operations and borrowings available under the Credit Agreement will provide adequate funds for the Company's foreseeable working capital needs, planned capital expenditures, debt service obligations and the ultimate outcome of pending product liability judgments. The Company does not anticipate paying dividends on its Preferred or Common Stock in the foreseeable future. YEAR 2000 COMPLIANCE The year 2000 problem, which is common to most corporations, concerns the inability of information systems, including computer software programs as well as other systems dependent on computerized information such as phones, voicemail, security systems and elevators (collectively, "Non-IT Systems"), to properly recognize and process date sensitive information related to the year 2000 and beyond. The Company believes that it will be able to achieve year 2000 compliance by the end of 1999 and does not currently anticipate any material disruption of its operations as a result of any failure by the Company to be year 2000 compliant. However, to the extent the Company is unable to achieve year 2000 compliance, the Company's business and results of operations could be materially affected. This could be caused by computer-related failures in a number of areas including, but not limited to, the Company's financial systems, manufacturing and warehouse management systems, phone system and electricity supply. The Company has performed a preliminary examination of its major software applications to determine whether each system is prepared to accommodate the year 2000. In fiscal 1998, through routine upgrades, the Company made the computer software programs used at the Company's domestic facilities and at Bell Sports Canada year 2000 compliant. These upgrades include, but are not limited to, the manufacturing, financial, customer and vendor purchase order processing and warehouse management systems. In fiscal 1999, the Company expects to further upgrade these programs to a year 2000 level certified by the Company's outside software vendors. The computer software programs of Giro, Giro Ireland, EuroBell and Bell Sports Australia are currently year 2000 compliant. All year 2000 efforts with respect to the Company and its subsidiaries' computer software programs are being made through internal resources and through routine software upgrades provided by the Company's software vendors. The Company has not incurred significant separately identifiable costs related to year 2000 issues through March 27, 1999 and does not expect to incur significant additional costs in order to make its computer software programs year 2000 compliant. The Company's internal resources consist of an information technology support team comprised of approximately fifteen full-time employees, covering both technical and application areas. The Company has not hired additional employees, either full-time or contract, in order to address year 2000 issues and expects all such issues will be adequately addressed by the existing team. The Company employs certain manufacturing processes that utilize computer controlled manufacturing equipment. The Company believes such equipment is year 2000 compliant but has not completed its testing of such equipment. Testing is expected to be completed by May 1999. In the event the Company determines that such equipment cannot readily be made year 2000 compliant, the Company believes that it could revert to the manual processes previously employed or outsource such work with minimal incremental manufacturing cost. The Company's facilities staff currently is investigating the status of the Company's Non-IT Systems with respect to year 2000 compliance. The Company expects that its Non-IT Systems will be year 2000 compliant before the end of 1999. The Company is utilizing internal resources to address the year 2000 compliance of its Non-IT Systems and has not incurred significant separately identifiable costs related to the year 2000 issues through March 27, 1999 and does not expect to incur significant additional costs in order to upgrade its Non-IT Systems to year 2000 compliance. In addition to reviewing its internal systems, the Company has polled or is in the process of polling its outside software and other vendors, customers and freight carriers to determine whether they are year 2000 compliant and to attempt to identify any potential issues. The Company's outside software vendors have confirmed that they are year 2000 compliant, including the products utilized by the Company. Based on the responses it has received from its customers, the Company believes that its mass merchant customers will be year 2000 compliant before the end of 1999. If the Company's customers and vendors do not achieve year 2000 compliance before the end of 1999, the Company may experience a variety of problems which may have a material adverse effect on the Company. Among other things, to the extent the Company's customers are not year 2000 compliant by the end of 1999, such customers may lose electronic data interchange capabilities at the beginning of the year 2000. Where EDI communication would no longer be available, the Company expects to utilize voice, facsimile and/or mail communication in order to receive customer orders and process customer billings. To the extent the Company's vendors are not year 2000 compliant by the end of 1999, such vendors may fail to deliver ordered materials and products to the Company and may fail to bill the Company properly and promptly. Consequently, the Company may not have the correct inventory to send to its customers and may experience a shortage or surplus of inventory. Although the Company does not currently have a plan for addressing these potential problems, with respect to its vendors, the Company has alternative sources of supply. INTRODUCTION OF THE EURO The European Economic and Monetary Union and the introduction of a new currency (the "Euro") began in Europe on January 1, 1999. The new currency enables the European Union ("EU") to blend the economies of EU's member states into one large market with unrestricted and unencumbered trade across borders. The change of currencies in Europe may affect the Company's business operations in Europe as well as having systems and accounting issues for the Company. The Company is currently evaluating the impact of the Euro, if any, on the Company's financial position, results of operations and cash flows. To date, the company has experienced no impact from the transition. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") was issued. SFAS 131 revises information regarding the reporting of operating segments. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS 131 will be adopted by the Company at the end of fiscal 1999. In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") was issued. SFAS 133 establishes a new model for accounting for derivatives and hedging activities and supercedes and amends a number of existing standards. SFAS 133 is required to be adopted by the Company at the beginning of fiscal 2000. Upon initial application, all derivatives are required to be recognized in the statement of financial position as either assets or liabilities and measured at fair value. In addition, all hedging relationships must be reassessed and documented pursuant to the provisions of SFAS 133. The adoption of SFAS 133 is not expected to have a significant impact on the financial results of the Company. Certain matters contained herein are forward-looking statements that are based on management's beliefs as well as on assumptions made by and information currently available to management. When used herein, the words "expect," "anticipate," "intend," "plan," "believe," "estimate," and similar expressions are intended to identify such forward-looking statements. Such statements involve known and unknown risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. These include, but are not limited to: economic and market conditions, competitive activities or other business conditions, dependence on key customers, fluctuations in sales, profitability or working capital, weather conditions, currency fluctuations, and results of pending litigation. BELL SPORTS CORP. PART II ITEM 1 Legal Proceedings None ITEM 2 Changes in Securities None ITEM 3 Defaults Upon Senior Securities None ITEM 4 Submission of Matters to a Vote of Security Holders None ITEM 5 Other Information None ITEM 6 Exhibits and Reports on Form 8-K (a) Exhibit Index Page 18 (b) None SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DATE: MAY 11, 1999 -------------- BELL SPORTS CORP. /s/ Richard S Willis Executive Vice President, Chief Financial - ------------------------------ Officer and Treasurer (Principal financial and accounting officer) BELL SPORTS CORP. INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION - -------------------------------------------------------------------------------- 10.1* Merchandise Sourcing Agreement between Bell Sports and DS-MAX U.S.A., Inc., dated February 18, 1999 27* Financial Data Schedule - ---------------------------------- * Filed herewith EX-10.1 2 MERCHANDISE SOURCING AGREEMENT DATED FEB. 18, 1999 MERCHANDISE SOURCING AGREEMENT This Merchandise Sourcing Agreement (this "Agreement") is made and entered into as of the 18TH day of FEBRUARY, 1999, by and between DS-MAX U.S.A. Inc., a California corporation ("Company"), and Bell Sports, Inc. a California corporation ("BSI"), Bell Sports Canada Inc., a Quebec, Canada corporation ("BSC") and Bell Sports Australia Pty Ltd., an Australian corporation ("BSA") (collectively "Bell"). WHEREAS Bell is in the business of obtaining and selling to third parties various types of bicycle helmets and other bicycle accessories; AND WHEREAS the Company and its related companies are in the business of, among other things, locating independent product and service suppliers in Asia and facilitating product acquisition from Asia and business operations in Asia for merchandisers; AND WHEREAS Bell desires to have the Company facilitate Bell's purchase of bicycle helmets and bicycle accessories in Asia; AND WHEREAS the Company desires to facilitate Bell's purchase of bicycle helmets and bicycle accessories in Asia; NOW THEREFORE in consideration of the mutual covenants and promises contained in this Agreement, the parties hereto agree as follows: ARTICLE 1 APPOINTMENT 1.1 Retention --------- Bell hereby retains the Company as Bell's sole and exclusive buying agent for the purchase, in accordance with the terms hereof, of bicycle helmets and bicycle accessories manufactured in, and distributed from China, Taiwan, Hong Kong, Thailand, Indonesia, Pakistan, India, South Korea and Singapore ("Asia") for use by BSI, BSC and BSA (individually "Product" and collectively "Products"). The parties acknowledge that the definition of Products shall exclude, and this Agreement shall not relate to, unless otherwise agreed: (i) any bicycle helmet or bicycle accessory manufactured outside of Asia; (ii) any bicycle helmet or bicycle accessory manufactured by Bell or any of its affiliates; (iii) any bicycle helmet or bicycle accessory acquired for use by any division of Bell other than BSI, BSC or BSA, unless otherwise agreed, or (iv) the purchase by Bell or its affiliates of product lines for which Bell or its affiliates act as a distributor, including, without limitation, the Smith, Fizyk, Rock Shox and Vittoria Tires product lines. 2 1.2 Acceptance ---------- The Company hereby agrees to be Bell's sole buying agent for Bell's purchase, in accordance with the terms hereof, of Product. ARTICLE II SERVICES AND COMPENSATION ------------------------- 2.1 Orders ------ Bell will place orders for Products with suppliers identified by the Company and approved by Bell, and the Company will serve as Bell's buying agent to purchase such Products. Bell will send purchase orders to the Company and the Company will forward Bell's purchase orders to the suppliers. 2.2 Advances -------- To permit Bell to pay its Asian suppliers in accordance with the suppliers' terms or the terms of Bell's purchase order, the Company may from time to time advance on Bell's behalf and for Bell's account only a revolving line of credit with the Company ("Loan Advance"). Any Loan Advance required to pay expenses associated with Product, including (without limitation) payments to suppliers, cost of samples, courier costs, third party costs and all other associated expenses (hereinafter collectively the "Purchase Price") shall be repaid within 45 days of Bell's receipt of the Products for which the Loan Advance was made without regard to the date of the Loan Advance. No interest will accrue on any such Loan Advance providing however that in the event of any default in the timely repayment of the Loan Advance, interest shall accrue from the date of default to the date of payment at the rate of 1.5% per month. If Bell defaults in repayment of any Loan Advance, in addition to any other rights and remedies available to the Company, the full outstanding aggregate balance of Loan Advances may at the Company's sole and absolute discretion become immediately due and payable, without further demand by the Company and the Company may cease rendering any or all services provided by it pursuant to this Agreement. 2.3 Compensation ------------ Bell shall pay the Company as compensation for its services pursuant to this Agreement, a fee equal to 6% of the Purchase Price net of any taxes (the "Fee") within 45 days from Bell's receipt of the Products on which the Fee is based. For the purposes of this Agreement receipt of the Product by Bell shall be deemed to have occurred upon the date which is the later of the date specified for delivery of the Product as set out in Bell's Purchase Order or the Product is available for shipment from the port of origin. The Fee will not be included in the Purchase Price of the Products but will be separately designated on the invoice. 3 2.4 No Liability ------------ The Company shall not take title to or possession of any Products, shall not have any interest in any Products, shall not have any obligation to accept returns, and shall not bear the responsibility for the risk of loss of Product. ARTICLE III COVENANTS OF THE COMPANY 3.1 Conduct of Business Generally ----------------------------- The Company agrees to conduct its business, including, without limitation, to use its personnel, facilities, goodwill, know-how, computer systems, communications network and financial resources, to (i) identify sources of Product and (ii) ensure that requisitions for Product placed by Bell with sources identified by the Company result in timely delivery to Bell of Products of quality and price acceptable to Bell. Without limiting the foregoing, the Company agrees that it will: (a) provide staff and internal systems sufficient to satisfy its obligations hereunder and to permit Bell to eliminate personnel involved in the sourcing of Product; (b) assist in the negotiation of the most favorable pricing and other terms relating to the purchase of Product by Bell; (c) act as a liaison between Bell's design and marketing personnel and sources of Product regarding design and engineering issues; (d) Provide adequate facilities in Hong Kong to accommodate office show rooms, meeting space and the test facility referenced in Section 3.3; and (e) Provide adequate supervision of all persons employed or engaged by it in connection with the satisfaction of its obligations hereunder. 3.2 Order Placement, Product Shipment, Rejected Product --------------------------------------------------- The Company will place orders for Product on behalf of Bell only upon written instruction from Bell and only upon such terms and specifications as Bell shall designate. The Company is not authorized to place any such order with a source other than the specific source approved by Bell for that order. 4 The Company will, at Bell's direction, (i) coordinate shipment of Product, including consolidations, coordination and delivery thereof and (ii) prepare the documentation related to Product shipments. The Company will, at Bell's request, assist in expediting Product shipment. The Company will, at Bell's request, return Products rejected by Bell or the Company and, at Bell's request, make appropriate claims against the source of such rejected Product, including, without limitation, claims for refund or credit. 3.3 Sampling, Test Facility and Quality Control ------------------------------------------- The Company will assist Bell in ensuring that Product purchased by Bell is manufactured in accordance with Bell's specifications. Without limiting the foregoing, the Company will without discretion, in conformity with standards, specifications and other direction supplied from time to time by Bell: (i) collect samples of Product and arrange for the shipment thereof to locations in the United States, the test facility referenced below, or otherwise, (ii) establish, staff, maintain and operate a test facility to test Product samples, (iii) coordinate certification testing with outside labs, and (iv) provide quality control of in-plant production prior to shipping. Bell may, at its expense, inspect the test facility at any time and may observe the Company's in-plant production quality control processes, in each case, in order to ensure compliance with Bell's specifications. 3.4 Invoices and Document Control ----------------------------- The Company will obtain from sources of Product purchased by the Company on behalf of Bell, and will deliver to Bell, copies of all invoices for such purchases. The Company will provide document control including, purchase orders, invoices, shipping documents, and process control records relating to the manufacture and testing of components and finished goods. 3.5 Compliance with Law ------------------- In connection with the satisfaction of its obligations under this Agreement, the directors, officers, employees or agents of the Company and their respective affiliates will comply with all applicable law, and none of them (i) will use any funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to political activity, (ii) make any direct or indirect unlawful payments to government officials or others or establish or maintain any unlawful or unrecorded funds, (iii) violate any of the provisions of The Foreign Corrupt Practices Act of 1977, or any rules or regulations promulgated thereunder or (iv) receive any illegal discounts or rebates or violate any antitrust laws. 3.6 Exclusivity ----------- While this Agreement is in effect, the Company will not act as a buying agent for any other person or entity of goods that would be included within the definition of Product if purchased by Bell hereunder and will not purchase Product other than pursuant to this Agreement. 5 ARTICLE IV COVENANTS OF BELL ----------------- 4.1 Insurance --------- Bell shall maintain at its sole expense throughout the term of this Agreement product liability insurance naming the Company as a named additional insured party with an insurer and in an amount reasonably acceptable to the Company. Bell shall deliver to the Company within 10 days of the execution of this Agreement certificates of insurance evidencing the coverage required by this section. 4.2 Assistance ---------- BSI shall assist, at the Company's request, in the identification, hiring and training of personnel by the Company necessary to meet its obligations hereunder, further, Bell shall provide all specifications, protocols, directions and instructions to the Company as contemplated by Section 3.3 of this Agreement. 4.3 Fees and Loans -------------- Bell shall pay Fees and repay Loan Advances as and when same are due. 4.4 Exclusivity ----------- While the Agreement is in effect, Bell shall not purchase Products other than pursuant to this Agreement. ARTICLE V TRADEMARKS 5.1 Trademarks ---------- Bell may not use the trademarks or trade names of the Company or its affiliates without prior written consent of the Company. The Company and its affiliates may not use the trademarks, trade names or design patents of Bell or any of its affiliates without prior written consent of Bell. Nothing contained herein shall limit in any respect Bell's use and application of its trademarks, trade names or design patents. 6 ARTICLE VI TERM, TERMINATION AND EFFECT OF TERMINATION 6.1 Term ---- The Term of this Agreement shall commence from the date of execution of this Agreement and unless terminated as hereinafter provided, this Agreement and the appointment of the Company hereunder shall continue in force indefinitely. There will be a period of transition during which Bell will begin to transition purchases of Product to the Company. Effective April 1, 1999, Bell will place with the Company all purchase orders for Product. The Company shall be entitled to Fees on all Products shipped on or after (but not before) April 1, 1999. 6.2 Immediate Termination By Either Party ------------------------------------- Upon the occurrence of any of the following events, either party may terminate this Agreement effective immediately upon written notice to the other: (a) The other party shall be or become insolvent as defined in the Bankruptcy Code, or is not generally paying its debts as such debts become due; makes any general assignment for the benefit of creditors; or becomes involved in a receivership, reorganization or any other law for the relief of debtors. (b) The other party shall fail to perform properly in all material respects its obligations hereunder and such failure shall not be remedied within fifteen (15) days after receipt of written notice pursuant to Section 8.2. 6.3 Termination on Notice by Either Party ------------------------------------- Either Party may terminate this Agreement at any time by giving the other party at least ninety (90) days prior written notice. Loan Advances and Fees will be due on all Product ordered during such ninety (90) day period. ARTICLE VII LIMITATION ON WARRANTIES AND RELIANCE; INDEMNIFICATION 7.1 Limitations on Warranties and Reliance -------------------------------------- Bell hereby acknowledges that the Company's expertise is in facilitating business operations in Asia and that the Company's expertise or knowledge about any aspect of the design, engineering or manufacture of bicycle helmets or bicycle accessories is limited to the training, standards, direction and other information provided to the Company with respect to Product testing and compliance by Bell. The Company shall be entitled to rely entirely upon Bell to 7 provide appropriate product specifications and for compliance with all applicable legal requirements, including (without limitation) those related to consumer product safety and, other than for acts of gross negligence or intentional misconduct, it shall incur no liability for or in respect of any action taken, suffered or omitted by it in good faith and in accordance with such standards and direction. The Company makes no warranties whatsoever regarding the Products and shall and does hereby assign to Bell any warranty with respect thereto to which the Company may be entitled. Bell expressly agrees that any claim it may have arising out of or related in any manner whatsoever to the Products, other than claims for breaches of this Agreement, shall be asserted against the actual manufacturer and not against the Company. EXCEPT FOR MATTERS EXPRESSLY COVERED BY THIS AGREEMENT THE COMPANY DISCLAIMS ANY AND ALL WARRANTIES, EXPRESS OR IMPLIED (INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE) RELATED IN ANY MANNER WHATSOEVER TO THE PRODUCTS. 7.2 Indemnification by BSI ---------------------- BSI agrees to indemnify and hold harmless (in accordance with the provisions of and subject to the limitations set forth in Section 7.4) the Company and its affiliates and their directors, officers, employees, agents, attorneys and consultants and their successors and assigns (the "Company Group Members") from and against any and all Losses and Expenses incurred by the Company Group Members in connection with or arising from: (a) any breach, or alleged breach, by Bell or other failure of Bell to perform any of the covenants of Bell contained in this Agreement; and (b) any Third Party Product Liability Claim, except to the extent such Third Party Product Liability Claim results from the gross negligence or intentional misconduct of any Company Group Member with respect to the fulfillment of this Agreement. 7.3 Indemnification by the Company ------------------------------ The Company agrees to indemnify and hold harmless (in accordance with the provisions of and subject to the limitations set forth in Section 7.4) Bell and its affiliates and their directors, officers, employees, agents, attorneys and consultants and their successors and assigns (the "Bell Group Members") from and against any and all Losses and Expenses incurred by the Bell Group Members in connection with or arising from any breach, or alleged breach, by the Company or other failure of the Company to perform any of the covenants of the Company contained in this Agreement, excluding Product Liability Claims with respect to which, and only to the extent that BSI is required to provide indemnification pursuant to Section 7.2(b). 7.4 Additional Limitations ---------------------- (a) An indemnifying party shall have no obligation to pay indemnification for any Loss or Expense to the extent that recovery for such Loss or Expense is actually paid to the indemnified party under any policy of insurance. To the extent that an indemnified party is subsequently paid by an insurance company for any Loss or Expense with respect to which payment was previously received by the indemnified party hereunder, the indemnified party shall promptly, upon receipt of the insurance proceeds, reimburse the indemnifying party from the insurance proceeds in an amount up to the indemnifying party's prior payment to the indemnified party with respect to such Loss or Expense. 8 (b) In calculating any Loss or Expense there shall be deducted the amount of any income tax benefit available to any indemnified person (or any of its affiliates) with respect to such Loss or Expense (after giving effect to the tax effect of receipt of the indemnification payments). 7.5 Notice of Claims ---------------- (a) If the Company believes that it has suffered or incurred any Loss or incurred any Expense for which the Company believes BSI is required to provide indemnification pursuant to Section 7.2, the Company shall so notify Bell promptly in writing describing such Loss or Expense, the amount thereof, if known, and the method of computation of such Loss or Expense, all with reasonable particularity and containing a reference to the provisions of this Agreement in respect of which such Loss or Expense shall have occurred. If any action at law or suit in equity is instituted by or against a third party with respect to which the Company intends to claim any liability or expense as Loss or Expense under this Article VII, the Company shall notify Bell promptly in writing of such action or suit. (b) If Bell believes that it has suffered or incurred any Loss or incurred any Expense for which Bell believes the Company is required to provide indemnification pursuant to Section 7.3, Bell shall so notify the Company promptly in writing describing such Loss or Expense, the amount thereof, if known, and the method of computation of such Loss or Expense, all with reasonable particularity and containing a reference to the provisions of this Agreement in respect of which such Loss or Expense shall have occurred. If any action at law or suit in equity is instituted by or against a third party with respect to which Bell intends to claim any liability or expense as Loss or Expense under this Article VII, Bell shall notify the Company promptly in writing of such action or suit. (c) The amount to which an indemnified person shall be entitled under this Article VII shall be determined: (i) by the written agreement between the indemnified person and the indemnifying party; (ii) by final judgment or decree of a court of competent jurisdiction; or (iii) by any other means to which the indemnified person and the indemnifying party shall agree. The judgment or decree of a court shall be deemed final when the time for appeal, if any, shall have expired and no appeal shall have been taken or when all appeals taken have been finally determined. The indemnified person shall have the burden of proof in establishing the amount of the Loss and Expense suffered by it. 9 (d) Notwithstanding the foregoing, the failure of any person hereto to give any notice described in this Section 7.5 shall not relieve any party hereto of its obligations hereunder, except to the extent such failure shall have prejudiced such party. 7.6 Third Party Claims ------------------ (a) Subject to Section 7.6(b), any person indemnified under this Article VII shall have the right to conduct and control, through counsel of its choosing, any Third Party Claim and the person indemnified may compromise or settle the same, provided that the indemnified person shall give the indemnifying party at least 10 days' advance notice of any proposed compromise or settlement. The indemnified person shall permit the indemnifying party to participate in the defense of any Third Party Claim through counsel chosen by it, provided that the fees and expenses of such counsel shall be borne by the indemnifying party. Subject to Section 7.6(b), any compromise or settlement with respect to a claim for money damages effected after the indemnifying party by notice to the indemnified person shall have disapproved such compromise or settlement shall discharge the indemnifying party from liability with respect to the subject matter thereof, and no amount in respect thereof shall be claimed as Loss or Expense under this Article VII. (b) If the remedy sought in any Third Party Claim is solely money damages and will have no continuing effect on the business, reputation or future business prospects of any indemnified person, the indemnifying party shall have 15 business days after receipt of the notice referred to in the last sentence of Section 7.6(a) to notify the indemnified person that it elects to conduct and control such Third Party Claim. If the indemnifying party gives the foregoing notice, the indemnifying party shall have the right to undertake, conduct and control, through counsel of its own choosing and at the sole expense of the indemnifying party, the conduct and settlement of such Third Party Claim, and the indemnified person shall cooperate with the indemnifying party in connection therewith; provided that (i) the indemnifying party shall not thereby permit to exist any lien, encumbrance or other adverse charge upon any asset of any indemnified person; (ii) the indemnifying party shall permit the indemnified person to participate in such conduct or settlement through counsel chosen by the indemnified person, but the fees and expenses of such counsel shall be borne by the indemnified person except as provided in clause(iii) below; and (iii) the indemnifying party shall agree promptly to reimburse to the extent required under this Article VII the indemnified person for the full amount of any Loss arising from or relating to such Third Party Claim and all related Expense incurred by the indemnified person, except fees and expenses of counsel for the indemnified person incurred after the assumption of the conduct and control of such Third Party Claim by the indemnifying party. So long as the indemnifying party is contesting any such Third Party Claim in good faith, the indemnified person shall not pay or settle any such Third Party Claim. Notwithstanding the foregoing, the indemnified person shall have the right to pay or settle any such Third Party Claim, provided that in such event the indemnified person shall waive any right to indemnity therefor by the indemnifying party, and no amount in respect thereof shall be claimed as Loss or Expense under this Article VII. 10 7.7 Certain Definitions ------------------- As used in this Article VII the following terms have the meanings specified or referred to in this Section 7.7 and shall be equally applicable to both the singular and plural forms. "Expenses" means any and all reasonable expenses incurred in connection with investigating, defending or asserting any claim, action, suit or proceeding incident to any matter indemnified against hereunder (including, without limitation, court filing fees, court costs, arbitration fees or costs, witness fees, and reasonable fees and disbursements of legal counsel, investigators, consultants, expert witnesses, accountants and other professionals). "Losses" means any and all losses, costs, obligations, liabilities, settlement payments, awards, judgments, fines, penalties, damages, expenses, deficiencies or other charges. "Product Liability Claim" means a claim that a defective Product caused personal injury. "Third Party Claim" means a third party claim, action, suit, proceeding, investigation or other claim giving rise to a claim for indemnification under this Agreement. "Third Party Product Liability Claim" means a Third Party Claim that is a Product Liability Claim. 7.8 Covenant Not To Sue ------------------- Bell agrees that it will not pursue any Product Liability Claim against any Company Group Member other than with respect to Product Liability Claims resulting from the gross negligence or intentional misconduct of a Company Group Member. ARTICLE VIII GENERAL PROVISIONS 8.1 Independent Contractor ---------------------- The relationship between the Company and Bell is that of principal (Bell) and buying agent (Company). This Agreement does not and is not intended to create in any manner or for any purpose whatsoever and nothing in it shall be construed to create an employer-employee, partnership or joint venture relationship or any other relationship other than that of principal and Independent Contractor. The Company's authority as a buying agent shall be limited to the authority expressly granted by Bell in, or in accordance with, this Agreement. 11 The Company shall be solely responsible for the payment of any and all compensation to any of its employees or agents performing services on its behalf in furtherance of the Company's obligations hereunder, and shall also be responsible for all federal, state, local and other taxes applicable to any such payments to its employees and agents. The Company agrees to indemnify and hold harmless Bell from any claim or liability relating to the payment or nonpayment of applicable taxes. 8.2 Notices ------- All notices, requests, offers and other communications required or permitted to be made under this Agreement shall be in writing and shall be deemed to have been duly given when received if personally delivered; when transmitted if transmitted by telecopy, electronic or digital transmission method; the day after sent, if sent for next day delivery to a domestic address by a recognized overnight delivery service (e.g. Federal Express); and upon receipt, if sent by certified or registered mail, return receipt requested. In each case notice shall be sent to: To the Company or its affiliates at: DS-MAX U.S.A. Inc. 15 Chrysler Street Irvine, CA 92618 Attention: Mr. Lawrence Tenebaum With a copy to: DS-MAX U.S.A. Inc. 250 Granton Drive Richmond Hill, ON Canada L4B 1H7 Attention: Mr. Robert N. Feldman To Bell: Bell Sports, Inc. 6350 San Ignacio Avenue San Jose, CA 95119 Attention: Mr. Bill Bracy Or at such other address as either party most recently may have designated in writing to the other party. 12 8.3 Assignment ---------- Neither this Agreement nor any of the rights or obligations hereunder may be assigned by any party without the prior written consent of the other party. 8.4 Sole and Entire Agreement ------------------------- This Agreement constitutes the sole and entire existing agreement between the parties with respect to the subject matter hereof, and completely and correctly expresses all of the rights and obligations of the parties. All prior agreements, conditions, practices, customs, usages and obligations are completely superseded and revoked, insofar as any such prior agreement, condition, practice, custom, usage or obligation might have given rise to any enforceable right. 8.5 Waivers ------- The waiver in any particular instance or series of instances of any term or condition of this Agreement or any breach hereof by any party shall not constitute a waiver of such term or condition or of any breach thereof in any other instance. 8.6 Amendment --------- This Agreement is subject to amendment only by subsequent written agreement between, and executed by, the parties hereto. Commencement or continuation of any custom, practice or usage by any party shall not constitute an amendment hereof or otherwise give rise to enforceable rights or create obligations of any party. 8.7 Separability ------------ If any one or more provisions, clauses, paragraphs, subclauses or subparagraphs contained in this Agreement shall for any reason be held to be invalid, illegal, void or unenforceable, the same shall not affect any other provision, clause, paragraph, subclause or subparagraph of this Agreement, but this Agreement shall be construed as if such invalid, illegal, void or unenforceable provision, clause, paragraph, subclause or subparagraph had never been contained herein. 13 8.8 Duration of Rights ------------------ Rights and obligations created by or arising under this Agreement shall terminate automatically upon termination of this Agreement, except as otherwise expressly provided herein. The agreements contained in Section 4.1, 8.11 and Article VII shall survive the termination of this agreement. 8.9 Captions; Definitions --------------------- Any captions of articles, sections, subsections or paragraphs of this Agreement are solely for the convenience of the parties and are not a part of this Agreement or to be used for the interpretation of this Agreement or any provision hereof. Capitalized terms used herein without definition have the meanings assigned them in the Agreement. 8.10 Applicable Law -------------- The parties hereto hereby irrevocably submit in any suit, action or proceeding arising out of or related to this Agreement or any of the transactions contemplated hereby or thereby to the jurisdiction and venue of state and federal courts located in Santa Clara County, California and hereby waive any and all objections to such jurisdiction that they may have under the laws of the State of California or the United States and they hereby waive any and all claims that such suit, action or proceeding is brought in an inconvenient forum that they may have under the laws of the State of California or the United States. 8.11 Confidentiality --------------- (a) The parties agree that the terms of this Agreement are to be held confidential and shall not be disclosed to any other person or entity, except as required by law or legal process, and except that either party may disclose the terms hereof to its legal counsel or other advisors. (b) The parties recognize that the sales techniques, operations manuals, memoranda, corporate documents, financial documents, trade information, purchase schedules, vendor schedules, manufacturing sources, catalogues, price lists, customer lists, pricing structure and other information used by them in the purchasing, promotion, 14 distribution or sale of products is confidential information (hereinafter "Confidential Information"). The parties also recognize that the Confidential Information of each of the parties (1) was designed and developed by such party at great expense and over lengthy periods of time; (2) is secret, confidential and unique; (3) constitutes the exclusive property and/or trade secrets of such party, and (4) that any use of the Confidential Information by the other of them for any purpose other than in accordance with this Agreement and in furtherance of obligations hereunder would be wrongful and would cause irreparable injury to the aggrieved party for which damages are not an adequate remedy. (c) Except as its duties hereunder may require, or as each party may otherwise consent in writing, the parties will not at any time disclose or use, either during the term or after the expiration or termination of this Agreement, the Confidential Information of the other party. The parties agree that they will not use or disclose any confidential information obtained from a competitor. (d) Bell and the Company agree that in the event either party commits a breach or threatens to commit a breach of any of the provisions of this Section 8.11 the other party (the "Aggrieved Party") shall have the right and remedy to have the provisions of this Section 8.11 specifically enforced by any court having jurisdiction, it being acknowledged and agreed that any such breach or threatened breach will cause immediate irreparable injury to the Aggrieved Party and that money damages will not provide an adequate remedy at law for any such breach or threatened breach. Such right and remedy shall be in addition to, and not in lieu of, any other rights and remedies available to the Aggrieved Party under this Agreement or at law or in equity. 8.12 Counterparts ------------ This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 8.13 Covenant not to Compete and Confidentiality ------------------------------------------- During the term of this Agreement, neither the Company nor any of its officers, directors, stockholders, employees, agents, representatives or any affiliates, if any thereof will (1) engage in the same or similar line of business as that carried on by Bell; or (2) directly or indirectly, serve, advise or be employed 15 by any individual firm or corporation or other business or entity engaged in the same or similar line of business as that carried on by Bell; or (3) represent, offer for sale or sell any bicycle accessories, helmets, bicycle or other goods that are similar to or competitive with the Products. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement or caused this Agreement to be duly executed on their respective behalf, by their respective officers thereunto duly authorized, all as of the day and year first above written. SIGNED, SEALED AND DELIVERED ) DS-MAX U.S.A. INC. In the presence of ) ) per: ) Lawrence Tenebaum ) Chief Executive Officer ) ) BELL SPORTS, INC. ) ) per: ) Bill Bracy ) Group President ) ) BELL SPORTS CANADA, INC. ) ) per: ) Josh Greenberg ) President ) ) BELL SPORTS ) AUSTRALIA PTY LTD. ) ) ) per: ) Roger Dulhunty ) General Manager EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 9-MOS JUL-03-1999 JUN-28-1998 MAR-27-1998 1 9,181 0 65,806 1,649 47,626 136,970 42,415 23,991 226,236 52,177 151,034 0 52,279 10 (29,254) 226,236 140,245 140,245 94,749 94,749 50,589 0 11,153 (16,246) 3,183 (13,063) 0 2,887 0 (10,176) 0 0
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