-----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, MWgU7dLVeBxqOCStlBGdXb1CczV6T5HKBTtKyt7OgW7u7s3cYH1XXNpv6Y/JqquO 620ayZziY3w5vXmyc7mTrQ== 0000950147-99-001262.txt : 19991117 0000950147-99-001262.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950147-99-001262 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991002 FILED AS OF DATE: 19991115 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: 99751833 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 QUARTERLY REPORT FOR PERIOD ENDING 10-2-99 ================================================================================ 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 OCTOBER 2, 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 identification no.) incorporation or organization) 6350 SAN IGNACIO AVENUE, 95119 SAN JOSE, CALIFORNIA (Zip Code) (Address of principal executive offices) (408) 574-3400 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE REGISTRANTS The number of shares outstanding of each of the registrant's classes of common stock, as of November 8, 1999: Class Number of Shares ----- ---------------- Class A Common Stock, $.01 par value 870,661 Class B Common Stock, $.01 par value 128,200 Class C Common Stock, $.01 par value 50,000 ================================================================================ BELL SPORTS CORP. INDEX TO FORM 10-Q PART I Page Number ----------- Bell Sports Corp. and Subsidiaries Consolidated Balance Sheets as of October 2, 1999 and July 3, 1999 .......................... 3 Bell Sports Corp. and Subsidiaries Consolidated Statements of Operations for the three months ended October 2, 1999 and September 26, 1998 .............................................. 4 Bell Sports Corp. and Subsidiaries Consolidated Condensed Statements of Cash Flows for the three months ended October 2, 1999 and September 26, 1998 ..................................... 5 Notes to Consolidated Financial Statements ....................... 6 - 11 Management's Discussion and Analysis of Financial Condition and Results of Operations ........................................... 12 - 14 PART II Items 1 to 6 ...................................................... 15 Signatures ........................................................ 16 2 PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BELL SPORTS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) October 2, July 3, 1999 1999 --------- --------- ASSETS Current assets: (Unaudited) Cash and cash equivalents $ 7,981 $ 8,875 Accounts receivable 50,047 58,634 Inventories 36,911 43,664 Deferred taxes 10,899 11,366 Other current assets 7,162 6,134 --------- --------- Total current assets 113,000 128,673 Property, plant and equipment 13,201 16,162 Long-term deferred taxes 12,500 12,500 Goodwill 51,944 52,429 Intangibles and other assets 9,462 9,170 --------- --------- Total assets $ 200,107 $ 218,934 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 8,730 $ 9,249 Accrued compensation and employee benefits 2,860 2,580 Accrued expenses 20,366 31,682 Notes payable and current maturities of long-term debt and capital lease obligations 2,306 10,433 --------- --------- Total current liabilities 34,262 53,944 Long-term debt 148,719 148,270 Capital lease obligations and other liabilities 8,295 10,255 --------- --------- Total liabilities 191,276 212,469 --------- --------- Commitments and contingencies Stockholders' equity: Series A Preferred Stock; 6% cumulative, $.01 par value; authorized 1,500,000 shares, 1,034,781 shares issued and outstanding at October 2, 1999 and July 3, 1999 10 10 Class A Common Stock; $.01 par value; authorized 900,000 shares, 870,661 shares issued and outstanding at October 2, 1999 and July 3, 1999 9 9 Class B Common Stock; $.01 par value; authorized 150,000 shares, 128,200 shares issued and outstanding at October 2, 1999 and July 3, 1999 1 1 Class C Common Stock; $.01 par value; authorized 50,000 shares, 50,000 shares issued and outstanding at October 2, 1999 and July 3, 1999 1 1 Additional paid-in capital 53,277 53,210 Accumulated other comprehensive income (1,983) (1,925) Accumulated deficit (42,484) (44,841) --------- --------- Total stockholders' equity 8,831 6,465 --------- --------- Total liabilities and stockholders' equity $ 200,107 $ 218,934 ========= ========= See accompanying notes to these consolidated financial statements. 3 BELL SPORTS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited, in thousands) Three Months Ended --------------------------- October 2, September 26, 1999 1998 ---------- ------------- Net sales $ 46,850 $ 40,918 Cost of sales 29,736 27,374 -------- -------- Gross profit 17,114 13,544 Selling, general and administrative expenses 12,656 11,356 Foreign exchange (gain) loss 15 1,610 Amortization of goodwill and intangible assets 527 562 Transaction costs -- 9,892 Net investment income (106) (601) Interest expense 4,198 2,538 -------- -------- (Loss) income before income taxes (176) (11,813) Benefit (provision) for income taxes 72 1,366 -------- -------- (Loss) income before extraordinary items (104) (10,447) Extraordinary item: Gain on early extinguishment of debt, net of taxes of $2,006 -- 2,887 -------- -------- Net (loss) income $ (104) $ (7,560) ======== ======== See accompanying notes to these consolidated financial statements. 4 BELL SPORTS CORP. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (unaudited, in thousands) Three Months Ended ------------------------ October 2, September 26, 1999 1998 ---------- ------------- CASH FLOWS PROVIDED BY OPERATING ACTIVITIES: Net cash provided by operating activities $ 8,399 $ 13,192 ------- --------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Capital expenditures (912) (1,233) Expenditures to acquire intangible assets (557) (7,581) ------- --------- Net cash provided by (used in) investing activities (1,469) (8,814) ------- --------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Proceeds from issuance of senior subordinated notes -- 110,000 Proceeds from issuance of senior discount notes -- 15,000 Proceeds from issuance of preferred stock -- 44,555 Repurchase of common stock -- (142,350) Tender of subordinated debentures -- (62,500) Payments on notes payable, long-term debt and capital leases (39) (136) Net payments on line of credit agreement (7,742) (248) ------- --------- Net cash used in financing activities (7,781) (35,679) ------- --------- Effect of exchange rate changes on cash (43) (199) ------- --------- Net increase (decrease) in cash and cash equivalents (894) (31,500) Cash and cash equivalents at beginning of period 8,875 45,093 ------- --------- Cash and cash equivalents at end of period $ 7,981 $ 13,593 ======= ========= See accompanying notes to these consolidated financial sta tements 5 BELL SPORTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES THE COMPANY Bell Sports Corp. and its wholly-owned subsidiaries (collectively, the "Company" or "Bell") is the leading manufacturer and marketer of bicycle helmets worldwide and a leading supplier of a broad line of bicycle accessories in North America. The Company is also a supplier of bicycle accessories worldwide. PRINCIPLES OF CONSOLIDATION AND ACCOUNTING PERIOD The consolidated financial statements include the accounts of Bell Sports Corp. and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation. The Company's fiscal year is either a fifty-two or fifty-three week accounting period ending on the Saturday that is nearest to the last day of June. The Company's fiscal first quarter in both 2000 and 1999 had thirteen weeks. UNAUDITED INFORMATION AND BASIS OF PRESENTATION The consolidated balance sheet as of October 2, 1999 and statements of operations and of condensed cash flows for all periods included in the accompanying financial statements have not been audited. In the opinion of management these financial statements include all normal and recurring adjustments necessary for a fair presentation of such financial information. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. The financial information included herein has been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The interim financial information and the notes thereto should be read in conjunction with the audited financial statements for the fiscal years ended July 3, 1999, June 27, 1998 and June 28, 1997 which are included in the Company's 1999 Annual Report on Form 10-K. ACCOUNTS RECEIVABLE Accounts receivable at October 2, 1999 and July 3, 1999 are net of allowances for doubtful accounts of $2.2 million and $1.8 million, respectively. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at October 2, 1999 and July 3, 1999 are net of accumulated depreciation of $20.4 million and $23.2 million, respectively. Depreciation expense for the first quarter of fiscal 2000 and 1999 was $1.1 million and $1.4 million, respectively. MANAGEMENT'S ESTIMATES AND ASSUMPTIONS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 6 BELL SPORTS CORP. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - (CONTINUED) NOTE 2 - COMPREHENSIVE INCOME Comprehensive income for the periods presented is calculated as follows: Three Months Ended ---------------------------- October 2, September 26, 1999 1998 ---------- ------------- Net income (loss) $(104) $(7,560) Foreign currency translation adjustment, net of tax (58) 279 ----- ------- Comprehensive income (loss) $(162) $(7,281) ===== ======= NOTE 3 - INVENTORIES Inventories consist of the following components (in thousands): October 2, July 3, 1999 1999 ------- ------- Raw materials $ 3,452 $ 3,579 Work in process 944 1,089 Finished goods 32,515 38,996 ------- ------- Total $36,911 $43,664 ======= ======= NOTE 4 - COMMITMENTS AND CONTINGENCIES PRODUCT LIABILITY The Company is subject to various product liability claims and/or suits brought against it for claims involving damages for personal injuries or deaths. Allegedly, these injuries or deaths relate to the use by claimants of products manufactured by the Company and, in certain cases, products manufactured by others. The ultimate outcome of these existing claims and any potential future claims cannot presently be determined. The cost of product liability insurance fluctuated greatly in past years and the Company opted to self-insure claims for certain periods. The Company has been covered by product liability insurance since July 1, 1991. This insurance is subject to a self-insured retention. There is no assurance that insurance coverage will be available or economical in the future. The Company sold its motorcycle helmet manufacturing business in June 1991 in a transaction in which the purchaser assumed all responsibility for product liability claims arising out of helmets manufactured prior to the date of disposition and the Company agreed to use its in-house defense team to defend these claims at the purchaser's expense. If the purchaser is for any reason unable to pay a judgment, settlement amount or defense costs arising out of these claims, the Company could be held responsible for the payment of such amounts or costs. The Company believes that the purchaser does not currently have the financial resources to pay any significant judgment, settlement amount, or defense costs arising out of any claim. The Company sold its auto racing helmet business in July 1999 and entered into a long-term royalty-free licensing agreement with the purchaser for auto racing helmets and automotive accessories to be marketed under the Bell brand name. The Company retains responsibility for product liability claims relating to auto racing helmets manufactured prior to the sale of the auto racing helmet business. The Company believes that, by virtue of its status as a licensor it could be named as a defendant in actions involving liability for auto racing helmets and automotive accessories manufactured by the purchaser of the Company's auto helmet business. In February 1996, a Toronto, Canada jury returned a verdict against the Company based on injuries arising out of a 1986 motorcycle accident. The jury found that the Company was 25% responsible for the injuries with the remaining 75% of the fault assigned to the plaintiff and the other defendant. If the judgment is upheld upon appeal, the amount of the claim for which the Company would be responsible and the legal fees and tax implications associated therewith are estimated to be between $3.5 and $4.0 million (based on current 7 BELL SPORTS CORP. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - (CONTINUED) exchange rates). This claim arose during a period in which the Company was self-insured. The Company has filed an appeal of the Canadian verdict. In February 1998, a Wilkes-Barre, Pennsylvania jury returned a verdict against the Company relating to injuries sustained in a 1993 motorcycle accident. The judgment totaled $6.8 million, excluding any interest, fees or costs which may be assessed. This claim arose during a period in which the Company was self-insured. The Company filed a motion for a new trial which was denied. The Company has filed an appeal of the verdict. In June 1998, a Wilmington, Delaware jury returned a verdict against the Company relating to injuries sustained in a 1991 off-road motorcycle accident. The judgment totaled $1.8 million, excluding any interest, fees or costs which may be assessed. The claim is covered by insurance; however, the Company is responsible for a $1.0 million self-insured retention. The Company's post-trial motions have been denied by the trial court and an appeal is pending seeking reversal of the judgment of the trial court. Based on management's extensive consultation with legal counsel prosecuting the appeals, the Company has established product liability reserves totaling $13.8 million. These reserves are intended to cover the estimated costs for the defense, payment or settlement of these and other known claims. The Company believes it will have adequate cash balances and sources of capital available to satisfy such pending judgments. ENVIRONMENTAL LITIGATION In May 1998, the Company received a De Minimis Notice Letter and Settlement Offer from the United States Environmental Protection Agency ("USEPA") under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. Sections 9601 ET SEQ. for the Operating Industries, Inc. Landfill Superfund Site ("OII Site") in Monterey Park, California. CERCLA imposes liability for the costs of cleaning up, and certain damages resulting from, releases and threatened releases of hazardous substances. Although courts have interpreted CERCLA liability to be joint and several, where feasible, the liability typically is allocated among the responsible parties according to a volumetric or other standard. USEPA apparently has identified the Company as a DE MINIMIS potentially responsible party based on several waste shipments the Company allegedly sent to the site in the late 1970s and in 1980. USEPA's settlement offer to the Company is in the range of $29,000 to $36,000. The settlement would cover all past and expected future costs at the OII Site, and, with limited exceptions, provide the Company with covenants not to sue from the United States and California, and contribution protection from private parties. Accordingly, the Company does not expect this claim to have a material adverse effect on the Company. In another unrelated matter, the Company received a General Notice Letter in October 1998 from USEPA under CERCLA for the Casmalia disposal site in Santa Barbara County, California. USEPA apparently has identified the Company as a de minimis potentially responsible party based on several waste shipments the Company allegedly sent to the site during the 1980's. USEPA's settlement offer to the Company is in the range of $54,000 to $57,000. The benefits of the settlement are similar to those offered by USEPA for the OII site. Accordingly, the Company does not expect this claim to have a material adverse effect on the Company. Besides the litigation described above, the Company is not party to any material litigation that, if adversely determined, would have a material effect on its business. 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 Notes for 111% of their principal amount, plus accrued interest. The Company has fully and unconditionally guaranteed the Notes. Separate financial statements and other disclosures relating to 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: 8 BELL SPORTS CORP. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - (CONTINUED) BELL SPORTS, INC. October 2, 1999 ----------- SUMMARIZED BALANCE SHEET DATA: (unaudited) Current assets $129,849 Total assets 180,509 Current liabilities 35,001 Total liabilities 151,852 Stockholder's equity 28,657 Three Months Ended October 2, 1999 ------------ SUMMARIZED STATEMENT OF OPERATIONS DATA: (unaudited) Net sales $46,850 Gross profit 17,114 Net income 914 On August 17, 1998, the Company issued Discount Notes bearing interest at 14% totaling $15.0 million and maturing on August 14, 2009 to a related party in a private placement transaction. Interest on the Discount Notes accrues on June 1 and December 1 of each year. On March 12, 1999, Discount Notes with an accreted value of $2.4 million were exchanged for 47.6 thousand shares of Series A Preferred Stock and 39.2 thousand shares of Class A Common Stock. The Company has also issued 4 1/4% Convertible Subordinated Debentures ("Debentures") due November, 2000, of which $23.8 million were outstanding at October 2, 1999. The Debentures 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. ("BSI"), entered into a $60.0 million senior secured revolving credit facility ("Credit Agreement") expiring on August 17, 2003. The Credit Agreement provides for mandatory repayments from time to time to the extent the amount outstanding thereunder exceeds the maximum amount permitted under the borrowing base. Based on the provisions of the Credit Agreement, the Company could borrow a maximum of $48.6 million as of October 2, 1999. As of October 2, 1999, there were borrowings outstanding of $2.0 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 October 2, 1999, the margin for U.S. prime was 0.75% and the margin for LIBOR was 1.75%. Under the Credit Agreement, the Borrower is required to pay a quarterly commitment fee on the unused portion of the facility at a rate that ranges from 0.375% to 0.50% per annum, based on a pricing ratio. At October 2, 1999, the quarterly commitment fee was 0.5% per annum. The Credit Agreement contains certain financial covenants, including a maximum leverage ratio, a minimum fixed charge coverage ratio and a minimum cash interest coverage ratio. It also contains covenants which restrict the ability of the Company to pay dividends, incur liens, issue certain types of debt or equity, engage in mergers, acquisitions or asset sales, or to make capital expenditures. At October 2, 1999, the Company was in compliance with or had obtained waivers for all bank covenants. 9 BELL SPORTS CORP. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - (CONTINUED) Long-term debt consists of the following (in thousands):
October 2, July 3, 1999 1999 -------- -------- 11% senior subordinated debentures maturing August, 2008 $110,000 $110,000 4 1/4% convertible subordinated debentures maturing November 2000 23,750 23,750 14% senior discount notes due August, 2009 14,924 14,434 Borrowings under line of credit 2,000 10,000 Notes collateralized by certain equipment due at various dates through December 2000 and bearing interest at fixed rates ranging from 2.9% to 10.3% 303 391 -------- -------- 150,977 158,575 Less: Current maturities 2,258 10,305 -------- -------- Total long-term debt $148,719 $148,270 ======== ========
NOTE 6 - DISPOSITIONS AND RESTRUCTURING In September 1999, the Company sold its European manufacturing facility in Roche La Moliere, France. In addition, the Company entered into an agreement with the purchaser pursuant to which the purchaser has agreed to provide the Company with helmets. The Company recorded a charge in fiscal 1999 of approximately $2.5 million in connection with the sale and related reorganization of the Company's European manufacturing facility. No material gain or loss was recognized upon consummation of the sale in September 1999. 10 BELL SPORTS CORP. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - (CONTINUED) In the fourth quarter of fiscal 1999, the Company recorded charges of $16.5 million associated with the consolidation of manufacturing facilities, the streamlining of administrative overhead, the divestiture of the Company's former auto racing division and the closure of the Australian sales a marketing office. At July 3, 1999, the Company had $12.6 million outstanding in accruals related to these actions. Activity in these accruals for the first quarter of fiscal 2000 were as follows: July 3, Cash Non-cash July 3, 1999 Payments Charges 1999 -------- -------- -------- ------- ACCRUALS: Manufacturing consolidation $ 9,102 $(2,108) $(1,192) $5,802 Overhead reductions 2,224 (991) (1,115) 118 Sale of auto racing and Australia 788 (186) (200) 402 Restructuring accruals from prior years 493 (184) -- 309 -------- ------- ------- ------ $ 12,607 $(3,469) $(2,507) $6,631 ======== ======= ======= ====== NOTE 7 - SEGMENT INFORMATION The Company has three reportable segments: products sold to domestic mass merchants, products sold to domestic independent bicycle dealers (IBDs), and products sold in international operations. The international operations have been combined into one reportable segment as they share a majority of the aggregation criteria and are not individually reportable. The Company's domestic mass merchant segment markets a wide range of bicycle accessories and bicycle helmets through the mass merchant channel, including retailers such as Wal-Mart and K-Mart. The domestic IBD segment markets premium bicycle helmets and accessories to independent bicycle dealers such as bicycle chains, independent bicycle shops, specialized sporting goods stores, and mail order catalogs. International operations include sales of bicycle accessories and helmets sold to both mass merchant and IBD channels in Canada, Europe and Australia, in addition to distributing third party products. The Company evaluates the performance of, and allocates resources to the reportable segments based on net sales and EBITDA. For internal purposes, EBITDA is defined as earnings before investment income and interest expense, income taxes, depreciation, amortization, and certain one-time charges such as transaction costs, product liability costs, restructuring charges, asset write-offs, other costs, loss on disposal of product line and sale of assets and other one-time costs such as foreign exchange loss and compensation expense related to the grant of stock options.
Mass Merchants IBD International Other (1) Total -------------- ------- ------------- --------- ------- THREE MONTHS ENDING OCTOBER 2, 1999: Sales to unaffiliated customers $26,428 $14,614 $5,808 $ -- $46,850 EBITDA 5,119 559 (86) (48) 5,544 THREE MONTHS ENDING SEPTEMBER 26, 1998: Sales to unaffiliated customers 20,168 14,418 6,332 -- 40,918 EBITDA 2,062 700 (278) 1,410 3,894 TOTAL ASSETS: October 2, 1999 53,150 30,481 14,394 102,082 200,107 July 3, 1999 59,176 27,996 29,335 102,427 218,934
- ---------- (1) The "Other" designation includes corporate expenditures and expenditures related to the Company's U.S. manufacturing facility. EBITDA for the periods shown is reconciled to Net income before income taxes as follows: 11 BELL SPORTS CORP. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - (CONTINUED) Three Months Ended ------------------------ October 2, September 1999 26, 1998 ------- -------- EBITDA $ 5,544 $ 3,894 Less: Depreciation 1,101 1,427 Amortization 527 562 One-time compensation expense for stock options -- 307 Transaction costs -- 11,474 Net investment income (106) (601) Interest expense 4,198 2,538 ------- -------- Net income (loss) before provision for (benefit from) income taxes $ (176) $(11,813) ======= ======== 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Bell Sports is the leading manufacturer and marketer of bicycle helmets worldwide and a leading supplier of a broad line of bicycle accessories in North America. The Company is also a supplier of bicycle accessories worldwide. Over its 45-year history, the Company has developed a reputation for innovation, design, quality and safety. RESULTS OF OPERATIONS NET SALES. Net sales for the first quarter of fiscal 2000 of $46.9 million increased 15% from $40.9 in the fiscal 1999 first quarter. The increase is primarily attributable to strong sales in the U.S. mass merchant and specialty retail channels. European sales also increased over the prior year quarter. For the first quarter of fiscal 2000, bicycle accessories and bicycle helmets represented approximately 59% and 41%, respectively, of net sales. For the fiscal 1999 first quarter, bicycle accessories, bicycle helmets and auto racing helmets represented approximately 57%, 41% and 2%, respectively, of the Company's net sales. In July 1999, the Company sold its auto racing helmet business. GROSS MARGIN. Gross margins increased to 37% of net sales in the fiscal 2000 first quarter from 33% in the prior year quarter. The increase is mainly due to production efficiencies resulting from the manufacturing consolidations completed by the Company in the fiscal 1999 fourth quarter. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative costs as a percentage of net sales improved to 27% for the first quarter of fiscal 2000 from 28% for the prior year first quarter. AMORTIZATION OF INTANGIBLES. Amortization of goodwill and intangible assets decreased to $527,000 in the Company's first quarter of fiscal 1999 compared to $562,000 for the comparable prior year period. The slight decrease is due to certain intangibles becoming fully amortized. FOREIGN EXCHANGE LOSS. Foreign exchange loss for the first quarter of fiscal 2000 decreased to $15,000 from $1,610,000 in the prior year quarter. The high foreign exchange losses in the prior year quarter were due to the unusually high level of cash movement related to the August 1998 merger of Bell and HB Acquisition Corporation (the "Bell Merger"). NET INVESTMENT INCOME. Net investment income decreased to $106,000 in the first three months of fiscal 2000 compared to $601,000 in the first quarter of fiscal 1999 due to significantly lower cash balances. INTEREST EXPENSE. Interest expense increased to $4.2 million in the first quarter of fiscal 2000 from $2.5 million in the comparable prior year period due to the higher level of debt outstanding for the entire quarter. INCOME TAXES. The effective tax rate was 41% for the first quarter of fiscal 2000 and 12% for the first quarter of fiscal 1999. The increase is attributable to the non-deductibility of certain costs associated with the Bell Merger incurred in the prior year quarter. LIQUIDITY AND FINANCIAL RESOURCES The Company has historically funded its operations, capital expenditures and working capital requirements from internal cash flow from operations and borrowings. The Company's working capital increased slightly to $78.7 million at October 2, 1999 from $74.7 million at July 3, 1999. The Company's capital expenditures were $0.9 million in the fiscal 2000 first quarter compared to $1.2 million in the fiscal 1999 first quarter. The Company estimates it will spend approximately $3.8 million on capital expenditures in fiscal 2000 for product tooling and to maintain and upgrade its facilities and equipment. In August 1998, the Company and its wholly-owned subsidiary, Bell Sports, Inc. ("BSI"), entered into a $60.0 million senior secured revolving credit facility ("Credit Agreement") expiring on August 17, 2003. The Credit Agreement provides for mandatory repayments from time to time to the extent the amount outstanding thereunder exceeds the maximum amount permitted under the borrowing base. Based on the provisions of the Credit Agreement, the Company could borrow 13 a maximum of $48.6 million as of October 2, 1999. As of October 2, 1999, there were borrowings outstanding of $2.0 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 October 2, 1999, the margin for U.S. prime was 0.75% and the margin for LIBOR was 1.75%. Under the Credit Agreement, the Borrower is required to pay a quarterly commitment fee on the unused portion of the facility at a rate that ranges from 0.375% to 0.50% per annum, based on a pricing ratio. At October 2, 1999, the quarterly commitment fee was 0.5% per annum. The Credit Agreement contains certain financial covenants, including a maximum leverage ratio, a minimum fixed charge coverage ratio and a minimum cash interest coverage ratio. It also contains covenants which restrict the ability of the Company to pay dividends, incur liens, issue certain types of debt or equity, engage in mergers, acquisitions or asset sales, or to make capital expenditures. At October 2, 1999, the Company was in compliance with or had obtained waivers for all bank covenants. Management believes that cash flows from operations and borrowings available under the Credit Agreement will provide adequate funds for the Company's foreseeable working capital needs, planned capital expenditures, debt service obligations and the ultimate outcome of pending product liability 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 calendar 1999 and does not currently anticipate any material disruption of its operations as a result of any failure by the Company to be year 2000 compliant. However, to the extent the Company is unable to achieve year 2000 compliance, the Company's business and results of operations could be materially affected. This could be caused by computer-related failures in a number of areas including, but not limited to, the Company's financial systems, manufacturing and warehouse management systems, phone system and electricity supply. The Company has performed a preliminary examination of its major software applications to determine whether each system is prepared to accommodate the year 2000. In fiscal 1998, through routine upgrades, the Company made the computer software programs used at the Company's domestic facilities and at Bell Sports Canada year 2000 compliant. These upgrades include, but are not limited to, the manufacturing, financial, customer and vendor purchase order processing and warehouse management systems. In fiscal 1999, the Company has further upgraded these programs to a year 2000 level certified by the Company's outside software vendors. The computer software programs of Giro Ireland and Bell Sports Europe are currently year 2000 compliant. All year 2000 efforts with respect to the Company and its subsidiaries' computer software programs have been and are being made through internal resources and through routine software upgrades provided by the Company's software vendors. The Company has not incurred significant separately identifiable costs related to year 2000 issues through October 2, 1999 and does not expect to incur significant additional costs in order to make its computer software programs year 2000 compliant. The Company's internal resources consist of an information technology support team comprised of approximately fifteen full-time employees, covering both technical and application areas. The Company has not hired additional employees, either full-time or contract, in order to address year 2000 issues and expects all such issues will be adequately addressed by the existing team. The Company employs certain manufacturing processes that utilize computer controlled manufacturing equipment. The Company has determined that such equipment is year 2000 compliant. However, in the event of a failure, the Company believes that it could revert to the manual processes previously employed or outsource such work with minimal incremental manufacturing cost. The Company's facilities staff currently is investigating the status of the Company's Non-IT Systems with respect to year 2000 compliance. The Company expects that its Non-IT Systems will be year 2000 compliant before the end of 14 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 October 2, 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. 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. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") was issued. SFAS 133 establishes a new model for accounting for derivatives and hedging activities and supersedes and amends a number of existing standards. SFAS 133 is required to be adopted by the Company for fiscal year 2001. Upon initial application, all derivatives are required to be recognized in the statement of financial position as either assets or liabilities and measured at fair value. In addition, all hedging relationships must be reassessed and documented pursuant to the provisions of SFAS 133. As the Company does not currently invest in derivatives, the adoption of SFAS 133 is not expected to have a material effect on the results of operations or the consolidated financial statements. FORWARD-LOOKING STATEMENTS Certain matters contained herein are forward-looking statements that are based on management's beliefs as well as on assumptions made by and information currently available to management. When used herein, the words "expect," "anticipate," "intend," "plan," "believe," "estimate," and similar expressions are intended to identify such forward-looking statements. Such statements involve known and unknown risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. These include, but are not limited to: economic and market conditions, competitive activities or other business conditions, dependence on key customers, fluctuations in sales, profitability or working capital, weather conditions, currency fluctuations, and results of pending litigation. 15 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 16 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: November 9, 1999 BELL SPORTS CORP. By: /s/ Richard S Willis ------------------------------- Richard S Willis Executive Vice President and Chief Financial Officer (principal financial and accounting officer) 17 BELL SPORTS CORP. INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION - ------ ----------- 27* Financial Data Schedule - ---------- * Filed herewith 18 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 3-MOS JUL-01-2000 JUL-04-1999 OCT-02-1999 1 7,981 0 52,207 2,160 40,150 113,000 33,639 20,438 200,107 34,262 150,977 0 10 11 8,810 200,107 46,850 46,850 29,736 29,736 13,092 0 4,198 (176) (72) (104) 0 0 0 (104) 0 0
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