-----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, UyLgvpkgTAk3l0Md8m0vIIlQfuRLMk+SUE4MQtnwWvRorHZrVwosCLgpJlW9G7UG e3QS9XhvitSZh3F+o49PqA== 0000950147-97-000664.txt : 20030213 0000950147-97-000664.hdr.sgml : 20030213 19970926154822 ACCESSION NUMBER: 0000950147-97-000664 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19970628 FILED AS OF DATE: 19970926 SROS: NASD 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 033-92344 FILM NUMBER: 97686399 BUSINESS ADDRESS: STREET 1: 6350 SAN IGNACIO AVENUE STREET 2: STE I-100 CITY: SAN JOSE STATE: CA ZIP: 95119 BUSINESS PHONE: 888-534-9500 MAIL ADDRESS: STREET 1: 10601 N. HAYDEN ROAD STREET 2: SUITE I-100 CITY: SCOTTSDALE STATE: AZ ZIP: 85260 10-K405 1 ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended June 28, 1997 -------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) 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, San Jose, California 95119 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (408) 534-3400 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Not applicable ------------------- ----------------------------------------- 1 Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value ---------------------------- (Title of class) Preferred Stock Purchase Rights ------------------------------- (Title of class) 4 1/4% Convertible Subordinated Debentures due 2000 --------------------------------------------------- (Title of class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant as of September 19, 1997 was $108,593,906 (based on the average of the high and low sales price as reported by The Nasdaq Stock Market on such date). APPLICABLE ONLY TO CORPORATE REGISTRANTS The number of shares outstanding of each of the registrant's classes of common stock, as of September 19, 1997: Class Number of shares - ----- ---------------- Common Stock, $.01 par value 13,832,373 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement relating to the Company's 1997 Annual Meeting of Stockholders to be filed by the Company with the Securities and Exchange Commission within 120 days after the end of the fiscal year are incorporated by reference in Part III of this Form 10-K. 2 PART I. Item 1. Business (a) General development of business ------------------------------- Bell Sports Corp. was incorporated in Delaware in 1989. As used herein, unless the context otherwise clearly requires, the "Company" refers to Bell Sports Corp., its consolidated subsidiaries and its predecessors. The Company is a leading world-wide designer, manufacturer, marketer and distributor of bicycle accessories, bicycle helmets and auto racing helmets. The Company markets its products under the following brand names and trademarks: BELL(R), GIRO(R), RHODE GEAR U.S.A.(R), BLACKBURN(R), VISTALITE(R), BSI(R), BikeXtras(TM), Copper Canyon(TM), Cycletech(TM) and SpokeHedz(TM). For the fiscal year ended June 28, 1997, bicycle accessories, bicycle helmets, bicycles, and auto racing products represented 50%, 35%, 13% and 2%, respectively, of the Company's net sales. The Company is a successor to four principal businesses which engaged in the manufacturing and distribution of bicycle accessories, bicycle helmets, auto racing helmets and motorcycle helmets. In June 1991, the Company ceased manufacturing and marketing motorcycle helmets, although the Company continues to license the trademarks used in connection with the manufacture of such helmets to a third party. In August 1991, the Company established EuroBell S.A. ("EuroBell"), to enhance the Company's ability to compete in the European market. In April 1992, the Company completed an initial public offering of its common stock, par value $.01 ("Common Stock"). In November 1992, the Company acquired Blackburn Designs, Inc. ("Blackburn"), a leading designer and marketer of certain bicycle accessories. In December 1992, the Company completed a secondary public offering of its Common Stock. The Company completed a public offering of convertible subordinated debentures in November 1993. In January 1994, the Company acquired the business of VistaLite, Inc. ("VistaLite"), a leading designer and manufacturer of LED safety lights and headlights for bicycles. In May 1995, the Company acquired substantially all of the assets of SportRack Canada, Inc. ("SportRack"), which designs, manufactures and markets automobile roof rack systems. The Company subsequently sold substantially all of the SportRack assets in July 1997 (the "Sale of SportRack"). In July 1995, the Company completed the merger (the "AMRE Merger") of a subsidiary of the Company with American Recreation Company Holdings, Inc. ("AMRE") pursuant to which AMRE became a wholly owned subsidiary of the Company. AMRE is a world-wide designer, marketer and distributor of bicycle helmets and bicycles accessories. In April 1997, the Company sold the AMRE Service Cycle/Mongoose business (the "Sale of Service Cycle/Mongoose"), which was primarily comprised the design, distribution and marketing of bicycles and certain non-proprietary bicycle parts and accessories. In January 1996, the Company acquired the assets of Giro Sport Design, Inc. and all of the outstanding stock of Giro Sport Design International, Inc. (collectively "Giro"). Giro designs, manufacturers and markets premium bicycle helmets. In November 1996, the Company opened a sales, marketing and distribution office in Sydney, Australia ("Bell Sports Australia") to service the Australian, New Zealand and Pacific Rim Markets. In September 1997, the Company announced that it had retained Montgomery Securities as its financial advisor to assist it in evaluating strategic alternatives to enhance stockholder value. Such alternatives may include, but will not be limited to, a merger, sale, joint venture or other business combination, repurchase of outstanding debt or equity securities, or continuing to pursue a corporate growth strategy. There can be no assurance that a transaction will occur as a result of the evaluation. 3 (b) Financial information about industry segments --------------------------------------------- The Company operates primarily in one line of business -- the manufacturing, marketing and distributing of bicycle accessories and bicycle helmets. The Company also manufactures and markets auto racing helmets. The revenues generated and the identifiable assets used in the auto racing business are not significant to the Company. (c) Narrative description of business --------------------------------- (i) Principal products, markets and distribution channels The Company manufactures, markets and distributes bicycle accessories and bicycle helmets. The Company markets its products in two primary trade channels -- specialty retail and mass merchant. The specialty retail trade channel is comprised of independent bicycle dealers ("IBDs"), sporting good retailers and mail-order catalogs, all of which target the mid-to- premium-priced segment of the consumer market. The mass merchant trade channel appeals to the economy-priced segment of the market and includes retailers such as Wal*Mart, Kmart and Costco Wholesale. The Company has two U.S. divisions which offer products to the specialty retail trade channel -- Specialty Retail Division and Giro. The Company's Specialty Retail Division markets bicycle helmets under the Bell Pro brand name and bicycle accessories under the Rhode Gear, Blackburn, and VistaLite brand names. Sale of merchandise is made through inside sales representatives. Giro offers premium bicycle helmets under the Giro brand name and sunglasses under the Smith brand name. The Giro brand is considered to be one of the most elite brands in the bicycle helmet industry. Giro sells its products through independent sales representatives. The Company also markets a wide range of bicycle accessories and bicycle helmets in the mass merchant trade channel through its Mass Merchant Division. Bicycle helmets are marketed under the brand names -- Bell, BSI and Headwinds. Bicycle accessories are marketed under the brand names -- BikeXtras, Copper Canyon, Cycletech, and SpokeHedz, as well as licensed brand names Fisher Price and Disney. Prior to fiscal 1996, the Bell brand of bicycle helmets was marketed exclusively in the specialty retail trade channel. The Company currently has four international divisions located in Canada, France, Ireland and Australia. Bell Sports Canada, located in Granby, Quebec, has two divisions -- Specialty Retail Division and Mass Merchant Division. The Specialty Retail and Mass Merchant Divisions operate similarly to the U.S. divisions and use most of the same brand names, plus a few which are unique to the Canadian market. EuroBell,located in Roche-La-Moliere, France, manufactures, markets, and distributes bicycle accessories and bicycle helmets. Bicycle accessories are marketed under the Rhode Gear, VistaLite and Blackburn brands. Bicycle helmets are marketed to specialty shops and mass merchants under the Bell and Bike Star brand names, as well as certain private label arrangements. Giro Ireland Limited, located in Limerick, Ireland, manufactures, markets and distributes bicycle helmets across Europe under the Giro brand name. 4 Bell Sports Australia, located in Sydney, Australia, was opened in November 1996 as a sales, marketing and distribution office. The Bell Sports' Australia markets are Australia, New Zealand and the Pacific Rim, and it sells many of the Company's brand name products to the specialty retail and mass merchant trade channels. The Company is also a leading international manufacturer and marketer of auto racing helmets. (ii) Status of new products The Company has ongoing research and development programs directed at enhancing and extending its existing products and developing new products. See "Research and Development Expenditures". The Company does not presently have a new product or new industry segment that requires the investment of a material amount of the total assets of the Company. (iii) Sources and availability of raw materials No single raw material accounts for a significant portion of the cost of the Company's products. The Company's bicycle and auto racing helmets contain plastic expandable polystyrene foam, which is one of the primary materials used in the Company's helmets. Presently, the Company purchases substantially all of its expandable polystyrene from BASF and Polysource, two of several possible suppliers of this material. Metal tubing, readily available from many sources, is used extensively in the manufacturing of bicycle carriers for automobiles. The Company does not have any long-term supply contracts for the purchase of raw materials. Some components and many finished good items, including certain bicycle parts and accessories, are manufactured for the Company by outside suppliers, including suppliers in Central America, Western Europe and the Pacific Rim. (iv) Patents, trademarks and licenses In the course of its business, the Company employs various trademarks, trade names and service marks, including its logos, in the packaging and advertising of its products. The Company believes the strength of its service marks, trademarks and trade names are of considerable value and importance to its business and intends to continue to protect and promote its marks as appropriate. The loss of any significant mark could have a material adverse effect on the Company. The Company also licenses the Bell trademark for use on certain motorcycle, snowmobile and police helmets manufactured by third parties. The Company is the owner of numerous federal registrations and applications filed with the United States Patent and Trademark Office. These registrations constitute evidence of the validity of these marks and the Company's exclusive right to use the marks on its products. The Company may also be entitled to protection under the federal Trademark Act for the Company's unregistered marks. The Company owns 93 United States patents and 57 foreign patents. As of June 28, 1997, the Company had 23 United States patents and 29 foreign patents pending issuance. None of the Company's patents are believed to be material to the Company's financial condition or results of operations. 5 (v) Extent to which the business is seasonal As a result of the timing of the Company's spring selling season, net sales are normally higher in the second half of the fiscal year than the first half. The first quarter of the fiscal year is generally the Company's slowest quarter. Although some selling and administrative expenses are variable with sales, many expenses are incurred evenly throughout the year. Accordingly, low sales in any quarter may adversely affect the Company's operating margins and profitability in such quarter. The Company's quarterly results may also vary depending on such factors, among others, as the timing of new product introductions, major customer shipments, inventory holdings of significant customers, adverse weather conditions and the sales mix of products sold. (vi) Working capital items The timing of the Company's preseason selling programs and spring selling season may cause fluctuations in the levels of inventory and receivables held by the Company from quarter to quarter. The Company supports sales of its products through various seasonal promotions, which include extended payment terms for independent bicycle dealers. Historically, inventories and receivables are higher in the second half of the fiscal year as compared to the first half. (vii) Dependence on single customer The Company sells to small independent bicycle dealers and national mass merchants. In fiscal 1997, 1996 and 1995 approximately 18%, 17% and 13%, respectively, of the Company's sales were to a single customer, Wal*Mart. Due to the Sale of Service Cycle/Mongoose and the Sale of SportRack, the dependence on this customer may increase during fiscal 1998. The loss of this customer, or a significant reduction in sales to this or other large mass merchant customers, could have a material adverse effect on the Company's sales and profitability. The write-off of any significant receivable due from these customers could also adversely impact the Company's profitability. (viii) Backlog orders Historically, there is a backlog of specialty retail orders from October to December as a result of preseason orders placed after the fall trade shows. The backlog of orders decreases over the winter months and is usually insignificant by the end of the Company's third fiscal quarter. The mass merchant trade channel does not operate with a large backlog. At the end of each fiscal year the backlog was not significant. (ix) Business subject to renegotiation The Company does not currently engage in any business with governmental authorities that may be subject to renegotiation of profits or termination of contracts or subcontracts at the election of such authorities. 6 (x) Competitive conditions The markets for the Company's bicycle-related products are highly competitive, and the Company faces competition from a number of sources in each of its product lines. Some competitors are part of large bicycle manufacturers and may be able to better promote bicycle helmet and accessory sales through bicycle sales programs. Competition is based on price, quality, customer service, brand name recognition, product features and style. Although there are no significant technological or manufacturing barriers to enter the bicycle related businesses, factors such as brand recognition, customer relationships and product liability exposure may discourage new competitors from entering the business. Many new competitors have entered the bicycle helmet market in the last five years and pricing pressures have increased significantly as a result of such competition. (xi) Research and development expenditures The Company has an ongoing research and development program directed at enhancing and expanding its existing products and developing new products. The Company's bicycle helmet research and development staff primarily focuses on developing technical product features which can improve helmet aerodynamics, weight, comfort, durability, safety, aesthetics and style in an effort to broaden a helmet's consumer appeal. A separate staff focuses on developing innovative and better performing bicycle accessories. Research and development expenditures in fiscal 1997, 1996 and 1995 were approximately $4.7 million, $4.7 million and $3.3 million, respectively. (xii) Material effects of compliance with environmental regulations In the ordinary course of its business, the Company is required to dispose of certain waste at off-site locations. During fiscal 1993, the Company became aware of an investigation by the Illinois Environmental Protection Agency (the "Illinois Agency") of a waste disposal site, owned by a third party, which was previously utilized by the Company. As a result of that investigation, the Illinois Agency informed the Company that certain of the Company's practices with respect to the identification, storage and disposal of hazardous waste and related reporting requirements may not have complied with the applicable law. On March 14, 1995, the State of Illinois (the "State") filed a complaint with the Illinois Pollution Control Board (the "Pollution Control Board") against the Company and the disposal site owner based on the same allegations. The complaint sought penalties not exceeding statutory maximums and such other relief as the Pollution Control Board determines appropriate. The disposal site owner filed a cross-claim against the Company that seeks to have penalties assessed against the Company and not against the disposal site owner. Any penalties as a result of the cross-claim would be payable to the State. The Pollution Control Board has approved a settlement between the State and the Company pursuant to which the Company paid $69,000 to the State and disposed of certain materials in a container at the waste disposal site at an authorized disposal facility. The cross-claim by the landfill owner is still pending, and the outcome of the cross-claim can not presently be determined. Additionally, the Illinois Agency has been negotiating with the disposal site owner with respect to the procedures and actions necessary to close the disposal site. The extent and nature of any actions which may be taken against the Company with respect to this matter cannot presently be determined. (xiii) Number of employees The Company employed approximately 1,900 persons at June 28, 1997. 7 (d) Financial information about foreign and domestic operations and export sales ---------------------------------------------------------------------------- The financial information required with respect to foreign and domestic operations and export sales of the Company appears in Note 13 to the Consolidated Financial Statements of the Company appearing on page 40 of this Annual Report on Form 10-K. Item 2. Properties The following table sets forth a brief description of the properties of the Company and its subsidiaries: Location General Description - -------- ------------------- San Jose, CA Corporate headquarters and sales, marketing, administration, research and development facility of approximately 63,600 square feet Rantoul, IL Administration, manufacturing, and distribution facility of approximately 322,400 square feet on 34 acres Santa Cruz, CA Giro sales, marketing, administration, manufacturing, distribution and research and development facility of approximately 41,300 square feet Scottsdale, AZ Administration offices of approximately 1,600 square feet York, PA Distribution center with approximately 300,000 square feet Memphis, TN Distribution center with approximately 198,000 square feet Fairfield, CA Distribution center with approximately 254,000 square feet Paris, France EuroBell, S.A. sales and marketing office of approximately 5,000 square feet Roche-La-Moliere, France Administrative, manufacturing and distribution facility of approximately 38,700 square feet on 2.9 acres Limerick, Ireland Giro sales, manufacturing and distribution facility of approximately 18,750 square feet Granby, Quebec Sales, marketing, administration and distribution facilities of approximately 136,000 square feet Calgary, Alberta Distribution facility of approximately 14,000 square feet Sydney, Australia Sales, marketing, administration and distribution facility of approximately 21,500 square feet All locations are leased except for the York, PA facility, which is owned by American Recreation Company, Inc., a wholly owned subsidiary of the Company, and the Roche-La-Moliere facility, which is held under a lease-purchase arrangement. The Memphis, TN distribution center is scheduled to close in November 1997 pursuant to the Company's restructuring plan developed in the third quarter of fiscal 1997. 8 Item 3. Legal Proceedings Due to the nature of its business, the Company at any particular time, may be a defendant in a number of product liability lawsuits for serious personal injury or death allegedly related to the Company's products and, in certain instances, products manufactured by others. Many such lawsuits seek damages in substantial amounts, including punitive damages. As of June 28, 1997, there were 38 lawsuits pending relating to injuries allegedly suffered from products made or sold by the Company. Of the 38 lawsuits, 14 involve motorcycle helmets, 13 involve bicycle helmets, 1 involves an auto racing helmet, 1 involves a bicycle pedal, 7 involve bicycles and 2 involve bicycle accessories. Three of the 38 lawsuits pending against the Company as of June 28, 1997 are scheduled for trial prior to December 31, 1997. During each of the last 5 fiscal years the Company has been served with complaints in the following number of cases: 10 cases in fiscal 1993, 11 cases in fiscal 1994, 5 cases in fiscal 1995, 12 cases in fiscal 1996 and 15 cases in fiscal 1997. Of the 15 cases served in fiscal 1997, which includes Giro and AMRE lawsuits, 4 involve motorcycle helmets, 5 involve bicycles, and 6 involve bicycle helmets. Of these same 15 cases, 3 cases involve a claim relating to death, 5 involve claims relating to serious, permanently disabling injuries, and 7 involve less serious injuries such as broken bones or lacerations. Typical product liability claims include allegations of failure to warn, breach of express and implied warranties, design defects and defects in the manufacturing process. Although the Company sold its motorcycle 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 the disposition, the Company agreed to use its in-house defense team to defend these claims at the purchaser's expense. Included in the 14 motorcycle helmet cases that were being defended by the Company's in-house defense team at June 28, 1997, are lawsuits in which the Company is either a named defendant or is defending claims against the purchaser. One of the cases involves the appeal of a jury verdict rendered against the Company in February 1996 by a Canadian jury. Unless reversed on appeal, the verdict is estimated to be between $3.0 and $4.0 million, which includes associated legal fees and tax implications. 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 amount or costs. The Company believes that the purchaser does not currently have the financial resources to pay any significant judgment, settlement amount or defense costs arising out of any claim. Although the Company cannot predict the outcome of an appeal, the Company currently has adequate cash balances and sources of capital available to satisfy the judgment if the appeal is unsuccessful. Accordingly, the Company currently does not believe the claim will have a material adverse effect on liquidity or the financial condition of the Company. Although the Company maintains product liability insurance, this claim arose during a period in which the Company was self-insured. The Company currently does not have a reserve for this judgment. The Company has licensed the "Bell" trademark for use on motorcycle helmets. The Company believes that it is possible that, by virtue of its status as licenser and the fact that such motorcycle helmets carry the Bell name, the Company could be named as a defendant in an action involving liability for the motorcycle helmets manufactured by the purchaser of the Company's motorcycle helmet business. The philosophy of the Company is to vigorously defend all product liability claims. The Company has developed extensive in-house experience with respect to the defense of claims due to the number of claims lodged against the Company and its vigorous defense posture. The Company also retains certain outside counsel who specialize in product liability and frequently represent the Company. To date the Company has been successful in defending and settling product liability claims, with only one final judgment having been entered against the Company in 1984 in an amount not material to the Company. Although the Company intends to continue to aggressively defend itself against all claims asserted against 9 it, currently pending proceedings and any future claims are subject to the uncertainties attendant to litigation and the ultimate outcome of any such proceedings or claims cannot be predicted. Since 1977, the Company has been intermittently protected to some degree by various product liability insurance policies. There are various periods, however, for which no insurance is available. Due to certain deductibles, self-insured retention levels and aggregate coverage amounts applicable under the Company's insurance policies that do exist, the Company may bear responsibility for a significant portion, if not all, of the defense costs (which include attorney's fees, settlement costs and the cost of satisfying judgments) of any claim asserted against the Company. There can be no assurance that insurance coverage, if available, will be sufficient to cover one or more large claims or that the applicable insurer will be solvent at the time of any covered loss. Certain of the Company's insurers for the periods prior to fiscal 1986 are insolvent. Further, there can be no assurance that the Company will obtain insurance coverage at acceptable levels and costs in the future. Successful assertion against the Company of one or a series of large uninsured claims, or of one or a series of claims exceeding any insurance coverage, could have a material adverse effect on the Company. The Company's current products liability insurance covers claims based on occurrences within the policy period up to a maximum of $5,000,000 for each occurrence and $5,000,000 in the aggregate in excess of the Company's self-insured retention of $2,000,000 per occurrence for helmets and the Company's self-insured retention of $250,000 for other products, including Mongoose bicycles manufactured or sold prior to the Sale of Service Cycle/Mongoose. The policy provides coverage only for products manufactured or sold by the Company and does not provide any coverage with respect to motorcycle helmets. The Company's current insurance policy allows the Company's in-house product liability defense team to manage all claims against the Company. Insurance coverage for products distributed by AMRE prior to the AMRE Merger include various self-insured retentions from $25,000 to $50,000 for all products claims with various coverages in excess of the self-insured retention. The Company continues to utilize its in-house defense team to manage all claims, and monitor those claims handled through a third party administrator, because of pre-existent insurance limitations set forth prior to the acquisition. Insurance coverage for products manufactured by Giro, prior to the acquisition by the Company in January 1996, include self-insured retentions from $25,000 to $150,000 for all product claims with $1.5 million coverage in excess of the self insured retention levels. The Company maintains an active role in the management of all Giro related litigation. Giro claims served after October 1, 1995 are insured under the same coverage provided to the Company. Besides the product liability litigation described above, the Company is not party to any material litigation that, if adversely determined, would have a material effect on its business. See Item 1.(c)(xii) "Material effects of compliance with environmental regulations" for information relating to an investigation by the Illinois Environmental Protection Agency of certain of the Company's off-site waste handling practices. Shareholder Litigation - ---------------------- In February 1995, an AMRE shareholder filed a lawsuit, on his own behalf, and a purported class action, against AMRE and its directors in the Chancery Court of the State of Delaware, alleging various breaches of fiduciary and common law duties and requesting both monetary and injunctive relief. The alleged basis for the claims was the action of AMRE and its directors in connection with the authorization and approval of the AMRE Merger, which was consummated on July 3, 1995. The case was dismissed in March 1997. 10 Item 4. Submission of Matters to a Vote of Securities Holders No matters were submitted to a vote of security holders during the fourth quarter of fiscal 1997. PART II. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Common Stock is traded on The Nasdaq National Market under the symbol "BSPT". The Company's 4 1/4% Convertible Subordinated Debentures due 2000 are traded on The Nasdaq Small Cap Market under the symbol "BSPTG". High Low ------------- ------------- Fiscal Year 1997 1st Quarter $7.625 $5.500 2nd Quarter 7.125 5.625 3rd Quarter 6.375 4.875 4th Quarter 8.125 4.938 Fiscal Year 1996 1st Quarter $14.500 $9.875 2nd Quarter 11.125 7.000 3rd Quarter 9.125 5.500 4th Quarter 10.375 6.000 As of September 19, 1997, there were approximately 1,000 shareholders of record; the Company estimates that, as of such date, there were approximately 11,900 beneficial owners. The Company currently intends to retain future earnings for use in its business, and therefore, does not anticipate paying any dividends in the foreseeable future. 11 Item 6. Selected Financial Data The selected financial data set forth below has been derived from the audited consolidated financial statements of the Company. The following selected financial data should be read in conjunction with the Company's consolidated financial statements and related notes included elsewhere in this report.
(in thousands, except per share data) Fiscal Years Ended ------------------------------------------------------------------------ June 28, June 29, July 1, July 2, July 3, 1997 1996 1995 1994 1993 -------- -------- ------- ------- ------- Summary of Operations Data: Net sales $259,534 $262,340 $102,990 $116,090 $82,611 (Loss) income from continuing operations (18,188) (12,375) (3,443) 10,459 6,582 (Loss) income before extraordinary items and cumulative effect of change in accounting principle (18,188) (12,375) (3,443) 10,459 6,582 Extraordinary items (298) (Loss) income before cumulative effect of change in accounting principle (18,188) (12,375) (3,443) 10,459 6,284 Cumulative effect of change in accounting for income taxes 700 Net (loss) income $(18,188) $(12,375) $ (3,443) $ 10,459 $ 6,984 Per Common Share: (Loss) income from continuing operations $ (1.33) $ (0.90) $ (0.42) $ 1.27 $ 0.88 Net (loss) income $ (1.33) $ (0.90) $ (0.42) $ 1.27 $ 0.93 Weighted average common shares outstanding 13,722 13,740 8,178 8,245 7,523 Balance Sheet Data: Working capital $130,677 $149,474 $ 108,821 $ 91,044 $ 52,013 Total assets 268,754 298,635 186,434 184,658 82,219 Total debt, less current portion 107,689 124,501 92,934 91,384 3,853 Total stockholders' equity $118,965 $136,041 $ 75,816 $ 75,187 $ 67,658
Results for fiscal 1997 include a pre-tax loss on disposal of product line of $25.4 million related to the Sale of the Service Cycle/Mongoose business. Results for fiscal 1996 include an inventory write-up of $14.1 million related to the AMRE Merger and the acquisitions of SportRack and Giro, which was fully charged against cost of sales. Results for fiscal 1993, which was a 53 week accounting period, include a loss on an early extinguishment of debt which was classified as an extraordinary item. 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations General The Company is a leading world-wide designer, manufacturer, marketer and distributor of bicycle accessories, bicycle helmets and auto racing helmets. The Company sells bicycle helmets and a variety of bicycle accessories, under various brand names such as Bell, Giro, Rhode Gear, Blackburn and VistaLite. In September 1997, subsequent to the Company's fiscal year-end, the Company announced that it had retained Montgomery Securities as its financial advisor to assist it in evaluating strategic alternatives to enhance stockholder value. Such alternatives may include, but will not be limited to, a merger, sale, joint venture or other business combination, repurchase of outstanding debt or equity securities, or continuing to pursue a corporate growth strategy. There can be no assurance that a transaction will occur as a result of the evaluation. In July 1997, subsequent to the Company's fiscal year-end, the Company consummated the sale of substantially all of the SportRack assets (the "Sale of SportRack") for approximately $14 million to an affiliate of Advanced Accessory System Canada, Inc. SportRack designs, manufactures and markets automobile roof rack systems. There was no material gain or loss associated with this transaction. In April 1997, pursuant to a plan developed in the third quarter, the Company consummated the sale of the AMRE Service Cycle/Mongoose business (the "Sale of Service Cycle/Mongoose") to Brunswick Corporation. The sales price approximated $20.5 million. Included in the third quarter of fiscal 1997 pre-tax income are $25.4 million of costs associated with the Sale of Service Cycle/Mongoose. The costs were comprised of the write-off of goodwill and intangibles, $14.8 million, disposal and exit costs, $5.4 million, and reorganization costs associated with the distribution network and operations, $5.2 million. In January 1996, the Company acquired the assets of Giro Sport Design, Inc. and all of the outstanding stock of Giro Sport Design International, Inc. (collectively "Giro"). The Giro acquisition was accounted for as a "purchase" as the term is used under generally accepted accounting principles and is included in the financial statements from the effective date of the acquisition. Certain matters contained herein are forward-looking statements that involve 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, seasonality, adverse outcome from pending litigation, competitive actions, loss of significant customers, timing of major customer shipments, adverse weather conditions, retail environment, pending accounting pronouncements, economic conditions and currency fluctuations. Comparison of the Fiscal Year Ended June 28, 1997 with the Fiscal Year Ended June 29, 1996 Net Sales. Net sales decreased by 1% to $259.5 million in fiscal 1997 from $262.3 million in fiscal 1996. The decrease is primarily attributed to the Sale of Service Cycle/Mongoose in April of 1997, which contributed $16.5 million in net sales in the fiscal 1996 fourth quarter. On an unaudited pro forma basis, excluding Service Cycle/Mongoose net sales for the fourth quarter of fiscal 1996, net sales increased by 6% to $259.5 million in fiscal 1997 from $245.8 million in fiscal 1996. Bicycle accessories net sales increased by $5.8 million or 5% primarily due to strong increases with certain large customers in the mass markets. Bicycle helmet net sales increased by $9.8 million or 12% due to strong net sales in the U.S. Specialty Retail Division, up 24%, and Giro, up 21%. This increases was partially offset by a decline of 11% in the Mass Merchant Division which was due to lower unit volumes coupled with a shift in sales mix to lower price points. Net sales in bicycles decreased by $2.8 million or 8% due to the Sale of Service Cycle/Mongoose. Auto racing helmet net sales increased by $1.0 million or 27%. 13 For the year ended June 28, 1997, bicycle accessories, bicycle helmets, bicycles, and auto racing helmets represented 50%, 35%, 13% and 2%, respectively, of the Company's net sales. For the year ended June 29, 1996, bicycle accessories, bicycle helmets, bicycles, and auto racing helmets represented 49%, 31%, 18% and 2%, respectively, of the Company's net sales. The Company anticipates net sales in fiscal 1998 will be lower than those achieved in fiscal 1997, due to the Sale of Service Cycle/Mongoose and the Sale of SportRack. In fiscal 1997, Service Cycle/Mongoose and SportRack contributed $50.8 million to net sales. Due to the mature nature of the market for bicycle related products, the Company expects modest sales growth in fiscal 1998. Gross Margin. Gross margin increased to 30% of net sales in fiscal 1997 from 29% of net sales in fiscal 1996, when excluding the impact of the inventory write-up associated with the AMRE Merger and the acquisitions of SportRack and Giro. The increase is attributable to the sale of the Service Cycle/Mongoose business in April 1997, which carried gross margins lower than the Company's other product lines, coupled with an increase in the Company's specialty retail bicycle helmet sales, which yield a higher than average gross margin. The Company expects gross margins to increase during fiscal 1998 due to the Sale of Service Cycle/Mongoose in fiscal 1997 which carried lower margins than other Company product lines. Selling, General and Administrative. Selling, general and administrative costs decreased to 23% of net sales for fiscal 1997 from 25% in fiscal 1996. In fiscal 1997, selling, general and administrative costs decreased by $6.4 million or 10% to $60.4 million from $66.8 million in fiscal 1996. The decrease is attributable to lower advertising expenditures of $4.0 million, a full year benefit of cost savings produced by the Company's restructuring plan announced in fiscal 1995 and the Sale of Service Cycle/Mongoose in April 1997. In fiscal 1996, the Company incurred $5.6 million in advertising expenses for a one-time promotional campaign to establish brand name awareness across all trade channels and to educate consumers on the importance of wearing protective headgear for bicycling and in-line skating. Advertising expenditures incurred in fiscal 1997 are more representative of what the Company intends to spend during fiscal 1998. The reductions in selling, general and administrative expenses noted above were offset by increases relating to opening a distribution and sales office in Sydney, Australia during November 1996 and the inclusion of Giro, acquired in January 1996, for a full year. Loss on Disposal of Product Line. In April 1997, pursuant to a plan developed in the third quarter, the Company completed the sale of its Service Cycle/Mongoose inventory, trademarks and certain other assets to Brunswick Corporation. The sales price approximated $20.5 million. Included in the third quarter of fiscal 1997 pre-tax income are $25.4 million of costs associated with the Sale of Service Cycle/Mongoose. The costs were comprised of the write-off of goodwill and intangibles, $14.8 million, disposal and exit costs, $5.4 million, and reorganization costs associated with the distribution network and operations, $5.2 million. Amortization of intangibles. Amortization of goodwill and intangible assets increased to $3.3 million in fiscal 1997 from $2.9 million in fiscal 1996. The increase is due to the inclusion of a full year of amortization related to the Giro acquisition in January 1996, partially off-set by a decrease in amortization as a result of the write-off of certain goodwill and intangibles as part of the Sale of Service Cycle/Mongoose in April 1997. The Company expects amortization to decrease in fiscal 1998 from fiscal 1997 due to the write-off of the Service Cycle/Mongoose goodwill and intangibles which is included in the loss on disposal of product line. Restructuring charges. During the third quarter of fiscal 1997, the Company announced plans to significantly downsize the Scottsdale, Arizona corporate office by consolidating certain Scottsdale 14 functions with the San Jose, California office. This included relocating the corporate headquarters to San Jose. Included in the fiscal 1997 pre-tax income are $2.7 million of restructuring charges related to this plan. During fiscal 1996, the Company commenced significant organizational and office consolidations including closing four offices. Most U.S. sales, marketing and research and development operations were consolidated in San Jose, California and all corporate functions in Scottsdale, Arizona. Substantially all of the Canadian operations were consolidated into one facility in Granby, Quebec. Restructuring charges were $1.5 million and $1.8 million for fiscal 1997 and 1996, respectively relating to these activities. Total restructuring charges were approximately $4.1 million and $5.9 million for fiscal 1997 and 1996, respectively. The Company does not anticipate recording any additional restructuring charges related to these plans in fiscal 1998. Net investment income and interest expense. Net investment income increased slightly in fiscal 1997. The increase is due to the settlement of an arbitration case related to the handling of certain marketable securities by an outside investment advisor during the first quarter of fiscal 1997. The settlement proceeds, net of related expenses and expected losses to sell certain securities were $1.3 million. Excluding this settlement, interest income decreased to $1.6 million in fiscal 1997 from $2.9 million in fiscal 1996. This decline is due to lower levels of cash and marketable securities invested during the year. Interest expense decreased to $7.3 million for fiscal 1997 from $8.7 million for fiscal 1996. The decrease is due to lower debt balances outstanding and lower interest rates for fiscal 1997 when compared to fiscal 1996. The Company anticipates net investment income will increase in fiscal 1998 as a result of higher cash and cash equivalent balances. The increase in cash and cash equivalents is attributed to cash proceeds received from the Sale of Service Cycle/Mongoose and SportRack. The Company also anticipates interest expense to decline as a portion of the cash proceeds from the Sale of Service Cycle/Mongoose and SportRack were used to reduce amounts outstanding on the Company's revolving credit facility. Income taxes. An income tax benefit of $3.0 million or 14% of the pre-tax loss was reported for fiscal 1997 compared to an income tax benefit of $8.3 million or 40% of the pre-tax loss was reported for fiscal 1996. Net operating loss carryforwards of approximately $34.0 million remain available to the Company at June 28, 1997. The major difference in the effective tax rates is the write-off of non-tax deductible goodwill due to the Sale of Service Cycle/Mongoose in April 1997. Comparison of the Fiscal Year Ended June 29, 1996 with the Fiscal Year Ended July 1, 1995 In July 1995, the Company completed the merger of a subsidiary of the Company with American Recreation Holdings, Inc. ("AMRE"), (the "AMRE Merger"), pursuant to which AMRE became a wholly owned subsidiary of the Company. The unaudited pro forma summary presented below is for illustrative purposes only, giving effect to the AMRE Merger, accounted for as a "purchase". Net Sales. Net sales increased by 4% to $262.3 million in fiscal 1996 compared to $253.3 million in fiscal 1995 stated on a pro forma basis. The overall increase is primarily attributed to inclusion of Giro and SportRack sales, which were not included for the entire comparable prior year period. Sales increases were experienced in the bicycle accessories category due to the addition of SportRack and higher sales to the mass merchant channel. Bicycle helmet sales were down 1% due to a weak retail environment in the Company's second and third quarters and inclement weather conditions during the third and fourth 15 quarters. The Company believes it maintained bicycle helmet market share in fiscal 1996 despite an overall decline in bicycle helmet unit sales. This market decline was offset by the acquisition of Giro and the introduction of the Bell helmet brand into the mass merchant trade channel. At June 29, 1996, a total of 25 million children were covered by mandatory helmet legislation, in 14 states. Bicycle sales increased by 7% due to higher domestic Mongoose sales and an increased distribution of Mongoose products in Europe. For the year ended June 29, 1996, bicycle accessories, bicycle helmets, bicycles, and auto racing helmets represented 49%, 31%, 18% and 2%, respectively, of the Company's net sales. For the year ended July 1, 1995, stated on a pro forma basis, bicycle accessories, bicycle helmets, bicycles and auto racing helmets represented 48%, 32%, 18% and 2% respectively of the Company's net sales. Gross Margin. Gross margins increased to 29% of net sales in fiscal 1996, excluding the impact of the inventory write-up, compared to 25% in fiscal 1995, stated on a pro forma basis. The increase is due to improvement in the Bell brand helmet margins from 42% to 46%, improved Mongoose bicycle margins and the inclusion of Giro and SportRack, which provide higher gross margins, during the current fiscal year. The increase in the Bell brand margin was attained in both the specialty retail and the mass merchant channels. Gross margins for fiscal 1996 were 23% including the impact of an inventory write-up. The inventory write-up of $14.1 million, related to the merger with AMRE and the acquisitions of SportRack and Giro has been fully charged against cost of sales during fiscal 1996. Selling, General and Administrative. Selling, general and administrative costs increased to 25% of net sales for fiscal 1996 from 24% in fiscal 1995 stated on a pro forma basis. For fiscal 1996 selling, general and administrative costs increased $5.7 million from $61.1 million in fiscal 1995 stated on a pro forma basis to $66.8 million in fiscal 1996. The increase is attributable to incremental expenditures in excess of $5.6 million for an advertising and promotional campaign to promote the Bell brand and to educate consumers on the importance of wearing bicycle helmets and incremental selling, general and administrative expenses related to SportRack and Giro which were acquired in May 1995 and January 1996, respectively, offset by general and administrative expense savings resulting from the merger with AMRE. Amortization of Intangibles. Amortization of goodwill and intangible assets increased to $2.9 million for fiscal 1996 from $2.3 million in fiscal 1995, stated on a pro forma basis. These increases are due to a full year of amortization of the SportRack intangibles and the inclusion of amortization of intangibles for Giro which was acquired in January 1996. Restructuring Charges. Restructuring charges were $5.9 million in fiscal 1996 compared to $4.6 million in fiscal 1995, stated on a pro forma basis. These costs relate to the consolidation of organizations, facilities, computer systems and product lines related to the merger with AMRE. Net Investment Income and Interest Expense. Net investment income decreased by $1.5 million in fiscal 1996 to $2.9 million from $4.4 million in fiscal 1995, stated on a pro forma basis. The decrease is due to lower cash and marketable securities balances resulting from the cash acquisition of Giro and utilization of cash to reduce outstanding debt balances. Interest expense decreased by $1.2 million in fiscal 1996 to $8.7 million from $9.9 million in fiscal 1995, stated on a pro forma basis. The decrease is attributable to lower outstanding debt balances in fiscal 1996 than fiscal 1995, stated on a pro forma basis. Income Taxes. An income tax benefit of $8.3 million or 40% of the pre-tax loss was reported for fiscal 1996 compared to an income tax benefit of $3.6 million or 32% of the pre-tax loss for fiscal 1995, stated on a pro forma basis. Net operating loss carryforwards of approximately $26.0 million remained available to the Company at June 29, 1996. 16 Financial Position The Company's current ratio decreased to 4.5 to 1 at June 28, 1997 from 5.4 to 1 at June 29, 1996. Cash and cash equivalent and marketable securities decreased to $29.0 million at June 28, 1997 from $31.1 million at June 29, 1996. The decline primarily relates to debt payments of $15.3 million and capital expenditures of $7.1 million offset with proceeds of $20.5 million from the Sale of Service Cycle/Mongoose. Accounts receivable at June 28, 1997 increased slightly to $75.9 million from $75.7 million at June 29, 1996 due to the addition of Bell Sports Australia in fiscal 1997. Accounts receivable are expected to be at lower levels in fiscal 1998 due to the Sale of Service Cycle/Mongoose and the Sale of SportRack. Fiscal year-end receivables did not fully reflect the effect of the Sale of Service Cycle/Mongoose as the Company retained the receivables as part of the sales agreement. As of September 1997, a majority of the Service Cycle/Mongoose receivables had been collected. The Company believes adequate reserves exist for any Service Cycle/Mongoose receivables that may not be collectible. Inventories at June 28, 1997 decreased 22% or $12.9 million to $46.5 million from $59.4 million at June 29, 1996. This decrease predominately relates to the Sale of Service Cycle/Mongoose in April 1997. Goodwill and intangible assets at June 28, 1997 decreased $15.6 million from June 29, 1996, due to write-offs related to the Sale of Service Cycle/Mongoose and $3.3 million of amortization during the fiscal year. Outstanding debt decreased $16.0 million to $107.7 million at June 28, 1997 from $123.7 at June 29, 1996. The decrease is due to the Company utilizing cash from the Sale of Service Cycle/Mongoose to reduce amounts outstanding under its revolving credit facility. Liquidity and Capital Resources The Company's working capital decreased to $130.7 million at June 28, 1997 from $149.5 million at June 29, 1996 as cash was utilized in the reduction of long-term debt obligations. In April 1997, upon the Sale of Service Cycle/Mongoose, the Company amended its $100.0 million multicurrency, secured revolving line of credit ("Revolving Credit") to reduce the line to $60.0 million ("Amended Credit Agreement"). The Amended Credit Agreement grants to the syndicated bank group a security interest in the U.S. accounts receivable and inventories for the term of the facility. The Amended Credit Agreement requires borrowings outstanding under the line of credit to be maintained below $15.0 million for a period of thirty consecutive days between July 1st and September 30th of each fiscal year. Borrowings under the Amended Credit Agreement have been significantly reduced using the proceeds received from the Sale of Service Cycle/Mongoose. Further reductions have been made in the first quarter of fiscal 1998 from the collection of Service Cycle/Mongoose receivables. Subsequent to year end, in July 1997, the Company sold substantially all of the assets of SportRack for approximately $14.0 million. The proceeds were used to reduce the amount outstanding under the Amended Credit Agreement. The Amended Credit Agreement expires in December 1999 and is classified as a long-term liability. Based on the provisions of the agreement, the Company could borrow a maximum of $54.1 million as of June 28, 1997, of which $34.5 million was unused. The Amended Credit Agreement provides the Company with several interest rate options, including U.S. prime, LIBOR plus a margin, Canadian prime plus the applicable LIBOR margin less 0.50%, Canadian banker's acceptance plus the LIBOR margin plus 0.125%, and short-term fixed rates offered by the agent bank in the loan syndication. The LIBOR margin is currently 1.50% per annum, but it can range between 1.00% and 1.50% depending on the Company's interest coverage ratio. Under the Amended Credit 17 Agreement, the Company is required to pay a quarterly commitment fee on the unused portion of the facility at a rate that ranges from 0.20% to 0.30% per annum. At June 28, 1997, the quarterly commitment fee was 0.30% per annum. The Amended Credit Agreement contains certain financial covenants, the most restrictive of which are a minimum interest coverage ratio, a maximum funded debt ratio and a minimum adjusted net worth amount. It also contains covenants that prohibit the payment of cash dividends as well as restrict the amount that the Company can repurchase of its subordinated debt and common stock. At June 28, 1997, the Company was in compliance with all bank covenants. The Company's primary uses of funds during fiscal 1997 relates to debt payments of $15.3 million and capital expenditures of $7.1 million. In fiscal 1997, capital expenditures were made primarily for computer systems and new product tooling. The Company expects to spend approximately $5.0 to $6.0 million on capital expenditures in fiscal 1998. The largest planned expenditures are for new product tooling. The Company announced in September 1997 that it retained Montgomery Securities as its financial advisor to assist the Company in evaluating strategic alternatives designed to enhance shareholder value. Such alternatives may include, but will not be limited to, a merger, sale, joint venture or other business combination, repurchase of outstanding debt or equity securities, or continuing to pursue a corporate growth strategy. There can be no assurance that a transaction will occur as a result of this evaluation. The Company believes its available cash flows from operations and the Amended Credit Agreement should be adequate to satisfy its working capital requirements in fiscal 1998. The Company does not anticipate paying dividends on its Common Stock in the foreseeable future. 18 Item 8. Consolidated Financial Statements and Supplementary Data REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Bell Sports Corp. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Bell Sports Corp. and its subsidiaries at June 28, 1997 and June 29, 1996, and the results of their operations and their cash flows for each of the three fiscal years in the period ended June 28, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Chicago, Illinois August 15, 1997 19 BELL SPORTS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
June 28, June 29, 1997 1996 --------- --------- ASSETS - ------ Current assets: Cash and cash equivalents $ 29,008 $ 23,140 Marketable securities 7,996 Accounts receivable 75,915 75,651 Inventories 46,549 59,413 Deferred taxes and other current assets 16,048 17,285 --------- --------- Total current assets 167,520 183,485 Property, plant and equipment 23,738 24,722 Goodwill 56,471 71,245 Intangibles and other assets 21,025 19,183 --------- --------- Total assets $ 268,754 $ 298,635 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities: Accounts payable $ 11,299 $ 11,797 Accrued compensation and employee benefits 3,998 4,392 Accrued expenses 20,209 16,752 Notes payable and current maturities of long-term debt and capital lease obligations 1,337 1,070 --------- --------- Total current liabilities 36,843 34,011 Long-term debt 106,454 122,919 Capital lease obligations and other liabilities 6,492 5,664 --------- --------- Total liabilities 149,789 162,594 --------- --------- Commitments and contingencies Stockholders' equity: Preferred stock; $.01 par value; authorized 1,000,000 shares, none issued Common stock; $.01 par value; authorized 25,000,000 shares; issued and outstanding: 14,248,114 and 13,753,042 shares in 1997, respectively, and 14,224,360 and 13,700,960 shares in 1996, respectively 143 142 Additional paid-in capital 142,486 141,647 Unrealized holding losses on marketable securities (461) Cumulative foreign currency translation adjustments (407) 81 (Accumulated deficit) retained earnings (18,039) 149 --------- --------- 124,183 141,558 Treasury stock, at cost, 495,072 shares in 1997 and 523,400 shares in 1996 (5,218) (5,517) --------- --------- Total stockholders' equity 118,965 136,041 --------- --------- Total liabilities and stockholders' equity $ 268,754 $ 298,635 ========= =========
See accompanying notes to these consolidated financial statements. 20 BELL SPORTS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
Fiscal years ended ------------------------------------------------ Pro forma (unaudited) June 28, June 29, July 1, July 1, 1997 1996 1995 1995 --------- --------- --------- --------- Net sales $ 259,534 $ 262,340 $ 253,251 $ 102,990 Cost of sales 183,098 201,621 190,948 74,407 --------- --------- --------- --------- Gross profit 76,436 60,719 62,303 28,583 Selling, general and administrative expenses 60,416 66,826 61,125 30,948 Loss on disposal of product line 25,360 Amortization of goodwill and intangible assets 3,320 2,854 2,266 954 Restructuring charges 4,141 5,850 4,618 2,123 Net investment income (2,939) (2,877) (4,427) (4,740) Interest expense 7,289 8,691 9,934 4,633 --------- --------- --------- --------- Net loss before benefit from income taxes (21,151) (20,625) (11,213) (5,335) Benefit from income taxes (2,963) (8,250) (3,589) (1,892) --------- --------- --------- --------- Net loss $ (18,188) $ (12,375) $ (7,624) $ (3,443) ========= ========= ========= ========= Net loss per common share $ (1.33) $ (0.90) $ (0.53) $ (0.42) ========= ========= ========= ========= Weighted average number of common shares outstanding 13,722 13,740 14,284 8,178 ========= ========= ========= =========
See accompanying notes to these consolidated financial statements. 21 BELL SPORTS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands)
Unrealized Cumulative Holding Foreign Retained Total Additional Losses on Currency Earnings Stock- Common Common Paid-In Marketable Translation (Accumulated Treasury holders' Shares Stock Capital Securities Adjustments Deficit) Stock Equity ------ ----- ------- ---------- ----------- -------- ----- ------ Balance at July 2, 1994 8,099 $ 81 $ 63,731 $ (4,551) $ (41) $ 15,967 $ 75,187 Exercise of stock options 67 1 589 590 Change in unrealized holding losses on marketable securities 3,268 3,268 Currency translation adjustment 214 214 Net loss (3,443) (3,443) --------- --------- --------- --------- --------- --------- --------- --------- Balance at July 1, 1995 8,166 82 64,320 (1,283) 173 12,524 75,816 Issuance of stock and stock options for AMRE merger 5,988 59 77,152 77,211 Exercise of stock options 70 1 175 176 Purchase of treasury stock (523) $ (5,517) (5,517) Change in unrealized holding losses on marketable securities 822 822 Currency translation adjustment (92) (92) Net loss (12,375) (12,375) --------- --------- --------- --------- --------- --------- --------- --------- Balance at June 29, 1996 13,701 142 141,647 (461) 81 149 (5,517) 136,041 Exercise of stock options 24 1 1,138 1,139 Issuance of treasury stock 28 (299) 299 0 Change in unrealized holding losses on marketable securities 461 461 Currency translation adjustment (488) (488) Net loss (18,188) (18,188) --------- --------- --------- --------- --------- --------- --------- --------- Balance at June 28, 1997 13,753 $ 143 $ 142,486 $ 0 $ (407) $ (18,039) $ (5,218) $ 118,965 ========= ========= ========= ========= ========= ========= ========= =========
See accompanying notes to these consolidated financial statements. 22 BELL SPORTS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Fiscal years ended ---------------------------------- June 28, June 29, July 1, 1997 1996 1995 -------- -------- -------- CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES: Net loss $(18,188) $(12,375) $ (3,443) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Write-off of goodwill and intangibles 14,531 Amortization of goodwill and intangibles 3,338 2,854 954 Depreciation 6,222 6,059 3,971 Loss on disposal of property, plant and equipment 1,599 1,299 Provision for doubtful accounts 4,553 2,481 1,024 Provision for inventory obsolescence 2,876 3,602 4,183 Deferred income taxes (2,827) (7,546) (2,612) Changes in assets and liabilities, net of adjustments for acquisitions and dispositions: Accounts receivable (4,976) (14,819) 8,594 Inventories (7,782) 8,296 (1,097) Other assets (684) 717 (527) Accounts payable (288) 852 (1,267) Other liabilities 2,536 (13,370) (1,524) -------- -------- -------- Net cash provided by (used in) operating activities 910 (21,950) 8,256 -------- -------- -------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Capital expenditures (7,058) (5,312) (5,198) Proceeds from the sale of Service Cycle/Mongoose 20,515 Acquisition of other businesses, net of cash acquired (1,493) (16,789) (3,822) Net sales (purchases) of marketable securities 8,458 29,779 24,778 -------- -------- -------- Net cash provided by investing activities 20,422 7,678 15,758 -------- -------- -------- CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES: Proceeds from issuance common stock, net of costs 176 123 Treasury stock purchases (5,517) Issuance of other long-term debt 1,843 Payments on notes payable, long-term debt and capital leases (869) (4,076) (835) Net payments on line of credit agreement (14,403) (25,099) -------- -------- -------- Net cash (used in) provided by financing activities (15,272) (34,516) 1,131 -------- -------- -------- Effect of exchange rate changes on cash (192) (90) 117 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 5,868 (48,878) 25,262 Cash and cash equivalents at beginning of period 23,140 72,018 46,756 -------- -------- -------- Cash and cash equivalents at end of period $ 29,008 $ 23,140 $ 72,018 ======== ======== ========
See accompanying notes to these consolidated financial statements 23 BELL SPORTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - The Company And Its Significant Accounting Policies Bell Sports Corp. and its wholly owned subsidiaries ("the Company" or "Bell") design, manufacture, market and distribute bicycle accessories, bicycle helmets and automotive racing helmets. 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. In July 1995, the Company completed the merger (the "AMRE Merger") of a subsidiary of the Company with American Recreation Company Holdings, Inc. ("AMRE") pursuant to which AMRE became a wholly owned subsidiary of the Company. The unaudited pro forma information presented in these Consolidated Financial Statements is for illustrative purposes only, giving effect to the AMRE Merger, accounted for as a "purchase", as such term is used under generally accepted accounted principles. (Loss) Income Per Share Information - ----------------------------------- (Loss) income per common and common equivalent share is computed using the weighted average number of common stock and common stock equivalent share outstanding during the periods, using the treasury stock method for stock options and warrants. Fully diluted net (loss) income per common share for the fiscal years ended June 28, 1997, June 29, 1996 and July 1, 1995 have not been presented since an assumed conversion (using the if-converted method, which includes the adjustment of reported net income for interest charges on a net-of-tax basis) of the Company's convertible subordinated debentures (the "Debentures") bearing interest at 4-1/4% per annum (see Note 5) would be anti-dilutive. Accounts Receivable and Concentration of Credit Risk - ---------------------------------------------------- Accounts receivable at June 28, 1997 and June 29, 1996 are net of allowances for doubtful accounts of $5.0 million and $3.5 million, respectively. The Company's principal customers operate in the mass merchant or sporting goods retail markets or operate as independent bicycle dealers. The customers are not geographically concentrated. As of June 28, 1997, and June 29, 1996, respectively, 23% and 21% of the Company's gross accounts receivable were attributed to one mass merchant customer. In addition, one mass merchant customer accounted for 18%, 17% and 13% of net sales during each of the fiscal years ended 1997, 1996 and 1995, respectively. Cash and Cash Equivalents - ------------------------- The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. 24 Marketable Securities - --------------------- Consistent with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"), all marketable securities have been classified as available-for-sale securities and are reported at fair value with unrealized holding gains and losses reported in stockholders' equity until realized. A decline in the market value of the security below cost that is deemed other than temporary is charged to earnings resulting in the establishment of a new cost basis for the security. The fair value of the marketable securities was obtained from published market quotes or outside professional pricing sources. The Company uses specific identification as the basis for determining cost in computing realized gains and losses. Inventories - ----------- Inventories are stated at the lower of cost (first-in, first-out basis) or market (net realizable value). Costs included in inventories are landed purchased cost on sourced items, and raw materials, direct labor and manufacturing overhead on manufactured items. Property, Plant and Equipment - ----------------------------- Property, plant and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements and capital lease assets are amortized using the straight-line method over the shorter of the base lease term or the estimated useful lives of the related assets. Maintenance and repair costs are expensed as incurred. Goodwill and Intangible Assets - ------------------------------ The excess of the acquisition cost over the fair value of the net identifiable assets of businesses acquired in purchase transactions has been included in goodwill and is amortized on a straight-line basis over twenty-five to forty years and is recorded net of accumulated amortization of $5.5 million and $4.0 million at June 28, 1997 and June 29, 1996, respectively. Other intangible assets, which include non-compete agreements, acquisition costs, patents and trademarks, and other items, are amortized over their estimated economic lives, ranging from two to seventeen years. Accumulated amortization for intangible assets totaled $4.2 million and $3.1 million at June 28, 1997 and June 29, 1996, respectively. The Company's policy is to account for goodwill and all other intangible assets at the lower of amortized cost or net realizable value. As part of an ongoing review of the valuation and amortization of intangible assets, management assesses the carrying value of the Company's intangible assets to determine if changes in facts and circumstances suggest that it may be impaired. If this review indicates that the intangibles will not be recoverable, as determined by a nondiscounted cash flow analysis over the remaining amortization period, the carrying value of the Company's intangibles would be reduced to its estimated fair market value. Management's Estimates and Assumptions - -------------------------------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 25 Research and Development Expense - -------------------------------- Research and developmental costs are charged to expense as incurred. These costs totaled $4.7 million, $4.7 million and $3.3 million for fiscal 1997, 1996 and 1995, respectively. Advertising Costs - ----------------- Advertising and related costs are expensed as incurred, except for ad production costs which are expensed in the fiscal year in which the ad is first run. These costs amounted to $9.1 million, $14.7 million and $6.2 million for fiscal years ended 1997, 1996 and 1995, respectively. Translation of Foreign Currency - ------------------------------- Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at the rates of exchange on the balance sheet date. Revenue and expense items are translated at the average rates of exchange prevailing during the fiscal year. Translation adjustments are recorded in the cumulative foreign currency translation adjustment component of stockholders' equity. Foreign Exchange Contracts - -------------------------- The Company periodically enters into forward foreign exchange contracts in managing its foreign currency risk. Forward exchange contracts are used to hedge various intercompany and external commitments with foreign subsidiaries and inventory purchases denominated in foreign currencies. Exchange contracts usually have maturities of less than one year. The Company has no significant outstanding foreign exchange contracts at June 28, 1997, and has had no significant foreign exchange contract activity during the fiscal year then ended. Income Taxes - ------------ Consistent with the provisions of SFAS No. 109 "Accounting for Income Taxes" ("SFAS 109"), the Company uses the liability method of accounting for income taxes, which is an asset and liability approach for financial accounting and reporting of income taxes. Deferred tax assets and liabilities are recorded based upon temporary differences between the tax basis of assets and liabilities and their carrying values for financial reporting purposes. A valuation allowance is provided for deferred tax assets when management concludes it is more likely than not that some portion of the deferred tax assets will not be realized. Accounting for Stock-Based Compensation - --------------------------------------- In October 1995, SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") was issued. SFAS 123 encourages, but does not require, companies to record compensation cost for stock-based compensation plans at fair value. The Company has elected to continue to recognize compensation expense based on the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). 26 Recent Accounting Pronouncements - -------------------------------- In February 1997, SFAS No. 128, "Earnings per Share" ("SFAS 128") was issued. Under SFAS 128, primary earnings per share is replaced by basic earnings per share and fully diluted earnings per share is replaced by diluted earnings per share. In June 1997, SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130") was issued. SFAS 130 establishes standards for the reporting of comprehensive income and its components in a full set of general-purpose financial statements for periods beginning after December 15, 1997. Reclassification of financial statements for earlier periods for comparative purposes is required. 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. The Company will adopt SFAS 128 in fiscal 1998 and SFAS 130 and SFAS 131 in fiscal 1999 and does not expect such adoptions to have a material effect on the consolidated financial statements. Reclassifications - ----------------- Certain prior year amounts have been reclassified to conform with the current year presentation. NOTE 2 - Net Investment Income Net investment income consists of the following (in thousands):
June 28, June 29, July 1, 1997 1996 1995 ---------- ----------- ----------- Dividend income $ 184 $ 610 $ 1,919 Interest income 1,646 3,130 4,329 Proceeds from settlement of arbitration case 1,815 Realized gains on sale of marketable securities 10 Realized losses on sale of marketable securities (654) (779) (1,031) Investment fees and other (52) (84) (487) ----------- ----------- ----------- Total $ 2,939 $ 2,877 $ 4,740 =========== =========== ===========
The fiscal 1997 investment income amount includes proceeds from the settlement of an arbitration case related to the handling of certain marketable securities by an outside investment advisor. The settlement proceeds, net of related expenses and expected losses to sell certain securities, were $1.3 million. 27 NOTE 3 - Inventories Inventories consist of the following components (in thousands): June 28, June 29, 1997 1996 ------------ ------------ Raw materials $ 5,865 $ 5,330 Work in process 2,125 2,315 Finished goods 38,559 51,768 ------------ ------------ Total $ 46,549 $ 59,413 ============ ============ Included in cost of sales for fiscal 1996 is approximately $14.1 million pertaining to the write-up to fair value of finished goods related to the merger with AMRE and the acquisitions of SportRack and Giro. NOTE 4 - Property, Plant And Equipment Property, plant and equipment consists of the following (in thousands):
June 28, June 29, Estimated 1997 1996 useful life ----------- ----------- ------------- Land, buildings and leasehold improvements $ 9,703 $ 9,523 3-38 years Machinery, equipment and tooling 21,239 21,215 3-10 years Office equipment 9,408 7,478 3-7 years Other 475 570 3-7 years ----------- ----------- 40,825 38,786 Less: Accumulated depreciation and amortization (17,087) (14,064) ----------- ----------- Total $ 23,738 $ 24,722 =========== ===========
NOTE 5 - Bank Credit Facilities And Long-Term Debt In April 1997, upon the Sale of Service Cycle/Mongoose, the Company amended its $100.0 million multicurrency, secured revolving line of credit ("Revolving Credit") to reduce the line to $60.0 million ("Amended Credit Agreement"). The Amended Credit Agreement grants to the syndicated bank group a security interest in the U.S. accounts receivable and inventories for the term of the facility. The Amended Credit Agreement requires borrowings outstanding under the line of credit to be maintained below $15.0 million for a period of thirty consecutive days between July 1st and September 30th of each fiscal year. Borrowings under the Amended Credit Agreement have been significantly reduced using the proceeds received from the Sale of Service Cycle/Mongoose. Further reductions have been made in the first quarter of fiscal 1998 from the collection of Service Cycle/Mongoose receivables. Subsequent to year end, in July 1997, the Company sold substantially all of the assets of SportRack for approximately $14.0 million. The proceeds were used to reduce the amount outstanding under the Amended Credit Agreement. The Amended Credit Agreement expires in December 1999 and is classified as a long-term liability. Based on the provisions of the agreement, the Company could borrow a maximum of $54.1 million as of June 28, 1997, of which $34.5 million was unused. The Amended Credit Agreement provides the Company with several interest rate options, including U.S. prime, LIBOR plus a margin, Canadian prime plus the applicable LIBOR margin less 0.50%, Canadian banker's acceptance plus the LIBOR margin plus 0.125%, and short-term fixed rates offered by the agent 28 bank in the loan syndication. The LIBOR margin is currently 1.50% per annum, but it can range between 1.00% and 1.50% depending on the Company's interest coverage ratio. Under the Amended Credit Agreement, the Company is required to pay a quarterly commitment fee on the unused portion of the facility at a rate that ranges from 0.20% to 0.30% per annum. At June 28, 1997, the quarterly commitment fee was 0.30% per annum. The Amended Credit Agreement contains certain financial covenants, the most restrictive of which are a minimum interest coverage ratio, a maximum funded debt ratio and a minimum adjusted net worth amount. It also contains covenants that prohibit the payment of cash dividends as well as restrict the amount that the Company can repurchase of its subordinated debt and common stock. At June 28, 1997, the Company was in compliance with all bank covenants. On November 16, 1993, the Company issued an aggregate principal amount of $86.25 million of Convertible Subordinated Debentures (the "Debentures"), at par value. Interest on the Debentures is payable on May 15 and November 15 of each year. The Debentures are redeemable, in whole or in part, at the option of the Company at any time on or after November 15, 1996, at specified redemption prices. Principal is due at maturity on November 15, 2000. The Debentures are convertible by the holder at any time prior to maturity, unless previously redeemed, into shares of the Common Stock at a conversion price of $54.06 per share, subject to adjustment in certain events. For the fiscal years ended June 28, 1997, June 29, 1996 and July 1, 1995, interest expense relating to the Debentures totaled $4.1 million in each year. This amount includes $384,000 of amortization expense relating to debt issuance costs. Unamortized debt issuance costs relating to the Debentures total $1.3 million and $1.7 million at June 28, 1997 and June 29, 1996, respectively. Such costs are amortized on a straight-line basis over seven years. The fair value of the Debentures at June 28, 1997, based on their quoted market price of $85 at the close of business on June 28, 1997, was approximately $73.3 million. Long-term debt consists of the following (in thousands):
June 28, June 29, 1997 1996 ------------ ------------ 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% $ 1,841 $ 2,304 Revolving credit agreement, maturing December 1999, bearing interest at 4.63% 19,591 35,138 4 1/4% convertible subordinated debentures maturing November 2000 86,250 86,250 ------------ ------------ 107,682 123,692 Less: Current maturities 1,228 773 ------------ ------------ Total long-term debt $ 106,454 $ 122,919 ============ ============
Scheduled maturities, by fiscal year, of long-term debt are as follows (in thousands): 1998 $ 1,228 1999 442 2000 19,762 2001 86,250 29 NOTE 6 - Stockholders' Equity Stock Options The Company may grant, under various employee stock option plans (the "Plans"), options to purchase up to 1,825,000 shares of Common Stock to officers and key employees. Under the various Plans, the exercise price of options granted may not be less than the fair market value of the Common Stock at the date of grant. The options must be exercised within ten years of the date of grant and typically vest equally over a three year period. Under the 1993 Outside Directors Stock Option Plan (the "Directors' Plan"), stock options for up to 200,000 shares may be granted to directors who are not employees of the Company. Each non-employee director receives an option to purchase 2,000 shares of Common Stock on the date of the Company's annual meeting of stockholders at an exercise price equal to the fair market value of the Common Stock on the date of grant. The options must be exercised within ten years of the date of grant and vest equally over a three-year period. Each non-employee director also receives immediately exercisable options to purchase Common Stock, with an exercise price per share equal to 50% of the fair market value of the Common Stock at the date of grant, in lieu of a cash retainer fee. The number of shares subject to each option is determined by dividing $10,000 by 50% of the fair market value of the Common Stock on the date of grant. In April 1997, the Company provided Brunswick Corporation a three year option to purchase 600,000 shares of the Company's Common Stock at an exercise price of $7.50 per share pursuant to the sale of the Service Cycle/Mongoose business. See Note 9. The options are immediately exercisable and must be exercised within three years of the date of grant. On August 27, 1996, the Management Stock Incentive Committee (the "Committee") of the Board of Directors (the "Board") adopted a program permitting employees eligible to participate in the Company's bonus program to elect to forego their fiscal 1997 operating bonus and return all outstanding stock options granted after April 1992 in exchange for replacement stock options. In general, employees eligible to participate in the Company's bonus program are eligible for 10% to 75% of their annual base salary if the Company meets or exceeds certain Board approved net operating income goals. Senior management with long tenure agreed to cancel 40% of their existing stock options, excluding stock options granted prior to April 1992, to increase the number of stock options available for grant, thereby facilitating the broadening of participation in the stock option program and enabling the Company to create a voluntary program by which other employees participating in the Company's bonus program would be able to replace existing stock options in exchange for foregoing their fiscal 1997 operating bonus. Under the replacement program, the number of shares of Common Stock subject to a replacement option to be granted to an eligible employee was determined by multiplying 80% of such employee's estimated fiscal 1997 operating bonus. Each replacement option had an exercise price per share of $7.06 per share, the average of the high and low transaction prices of a share of Common Stock as reported by The Nasdaq Stock Market, and will become exercisable in equal one-third increments over an eighteen month period with respect to options replacing cancelled options and over a three year period for replacement options granted in excess of their existing options. Options with respect to 966,242 shares with exercise prices ranging from $8.50 to $17.37 per share were exchanged under the replacement program. The replacement program replaced certain stock options that were issued under a previous stock option replacement program implemented by the Committee in March 1995. Stock options with respect to 676,501 shares with exercise prices ranging from $23.25 to $38.37 per share were exchanged. 30 The following table summarizes option activity:
Number Weighted of shares average underlying options exercise Options price exercisable -------------------- Options outstanding at July 3, 1994 1,016,540 $24.44 Options granted 918,001 $14.26 Options exercised (76,114) $ 4.23 Options canceled (676,501) $27.93 Options terminated (29,251) $29.95 -------------------- Options outstanding at July 1, 1995 1,152,675 $15.92 61,000 Options granted 909,688 $ 9.19 Options exercised (70,607) $ 1.31 Options canceled (75,000) $13.67 Options terminated (70,167) $18.28 -------------------- Options outstanding at June 29, 1996 1,846,589 $13.33 549,660 Options granted 1,075,605 $ 7.21 Options exercised (23,754) $ 0.46 Options terminated (566,677) $13.10 -------------------- Options outstanding at June 28, 1997 2,331,763 $ 8.19 1,130,635 ====================
Options Outstanding as at June 28, 1997:
Weighted average Range of Number Weighted average remaining contractual exercise prices of shares exercise price life (years) - ------------------------- ------------------ ----------------------- ------------------------ $1.713 - $3.125 62,810 $ 2.22 8.5 $ 6.25 - $ 7.88 1,940,750 $ 7.25 9.2 $ 8.50 - $10.80 109,036 $ 9.86 6.6 $12.94 - $15.12 166,167 $13.81 7.5 $16.12 - $19.75 23,000 $17.07 6.9 $28.25 - $42.37 30,000 $37.66 6.3 ------------------ 2,331,763 ==================
Options Exercisable at June 28, 1997: Range of Number Weighted average exercise prices of shares exercise price - ------------------------- ------------------ ----------------------- $1.713 - $3.125 62,810 $ 2.22 $ 6.25 - $ 7.88 856,844 $ 7.25 $ 8.50 - $10.80 65,706 $ 9.86 $12.94 - $15.12 98,277 $13.94 $16.12 - $19.75 16,998 $17.34 $28.25 - $42.37 30,000 $37.66 ------------------ 1,130,635 ================== 31 The Company continues to apply APB 25 for stock-based compensation. As required, the Company has adopted the disclosure provisions of SFAS 123 for employee stock options. The fair value of options granted during fiscal years 1997 and 1996 was computed using the Black-Scholes option pricing model. The weighted-average assumptions used for stock option grants were an expected volatility of the market price of the Company's Common Stock of 46.4%; weighted-average expected life of the options of approximately 4.4 years, no dividend yield and risk-free interest rates ranging from 4.89% to 6.56%. The interest rates are effective for option grant dates made throughout the year. Adjustments for forfeitures are made as they occur. The total value of options granted for the years ended June 28, 1997 and June 29, 1996 was computed as approximately $1,405,000 and $75,000, respectively. If the Company had accounted for these stock options issued to employees in accordance with SFAS 123, the effect on net loss and loss per share for each fiscal year would have been as follows (in thousands, except per share data):
June 28, 1997 June 29, 1996 ----------------------------- -------------------------------- Net Loss EPS Net Loss EPS ------------- ------------- ------------- ------------- As Reported $(18,188) $ (1.33) $(12,375) $ (0.90) Pro Forma $(19,045) $ (1.39) $(12,421) $ (0.90)
The pro forma effects of applying SFAS 123 may not be representative of the effects on reported net income and earnings per share for future years since options vest over several years an additional awards are made each year. Rights Plan On September 22, 1994, the Board declared a dividend of one preferred stock purchase right (a "Right") for each outstanding share of Common Stock. The dividend was awarded on October 3, 1994, to the holders of record of the Common Stock at the close of business on October 3, 1994. One Right is also associated with each share of Common Stock issued after October 3, 1994. When the Rights become exercisable, each Right will entitle the holder thereof (with certain exceptions) to purchase from the Company one one-hundredth of a share of the Series A Junior Participating Preferred Stock, $.01 par value (the "Preferred Shares"), of the Company at a price of $75.00 per one one-hundredth of a Preferred Share, subject to adjustment (the "Exercise Price"). Under certain circumstances, each Right (other than those which have become void) will entitle the holder to purchase, at the Exercise Price, Common Stock having a then current market value of two times the Exercise Price; or, if the Company is acquired in a merger or other business combination, each such Right will entitle the holder to purchase, at the Exercise Price, common stock of the acquirer having a then current market value of two times the Exercise Price. The Rights become exercisable 10 business days after any person has acquired, or announced its intention to commence a tender offer for, 15% or more of the Common Stock. The Rights will also become exercisable 10 business days after a determination by the disinterested members of the Board (as defined in the Stockholders Rights Agreement dated as of September 22, 1994 and amended by the First Amendment dated as of February 15, 1995) that any person beneficially owning 10% or more of the Common Stock intends to utilize its position to seek short-term financial gain to the detriment of the best long-term interests of the Company and its stockholders. Under specified conditions, the Company will be entitled to redeem the Rights at $.01 per Right. 32 Stock Repurchase Program On August 24, 1995, the Company announced a stock repurchase program authorizing the repurchase of up to 10% of the outstanding shares of the Company's Common Stock from time to time in open market or private transactions. The timing of any repurchase and the price and number of shares repurchased will depend on market conditions and other factors. As of June 28, 1997, the Company had repurchased a total of 523,400 shares at an aggregate purchase price of approximately $5.5 million, of which 28,328 shares were utilized under a restricted stock award program. Shares repurchased may be retired or used for general corporate purposes. NOTE 7 - Commitments And Contingencies Product Liability - ----------------- The Company is subject to various product liability claims and/or suits brought against it for claims involving damages for personal injuries or deaths. Allegedly, these injuries or deaths relate to the use by claimants of products manufactured by the Company and, in certain cases, products manufactured by others. The ultimate outcome of these existing claims and any potential future claims cannot presently be determined. 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 the judgment, settlement amount or defense costs arising out of this or any other claim, 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 this or any other claim. On February 2, 1996, a Toronto, Canada jury returned a verdict against Bell based on injuries arising out of a 1986 motorcycle accident. The jury found that Bell 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 Bell would be responsible and the legal fees and tax implications associated therewith are estimated to be between $3.0 and $4.0 million. The Company has filed an appeal of the Canadian verdict. Although the Company cannot predict the outcome of an appeal, the Company currently has adequate cash balances and sources of capital available to satisfy the judgment if the appeal is unsuccessful. Accordingly, the Company currently does not believe the claim will have a material adverse effect on liquidity or the financial condition of the Company. Although the Company maintains product liability insurance, this claim arose during a period in which the Company was self-insured. The Company currently does not have a reserve for this judgment. Environmental Litigation - ------------------------ In the ordinary course of its business, the Company is required to dispose of certain waste at off-site locations. During 1993, the Company became aware of an investigation by the Illinois Environmental Protection Agency (the "Illinois Agency") of a waste disposal site, owned by a third party, which was 33 previously utilized by the Company. As a result of that investigation, the Illinois Agency informed the Company that certain of the Company's practices with respect to the identification, storage and disposal of hazardous waste and related reporting requirements may not have complied with the applicable law. On March 14, 1995, the State of Illinois (the "State") filed a complaint with the Illinois Pollution Control Board (the "Pollution Control Board") against the Company and the disposal site owner based on the same allegations. The complaint sought penalties not exceeding statutory maximums and such other relief as the Pollution Control Board determines appropriate. The disposal site owner filed a cross-claim against the Company that seeks to have penalties assessed against the Company and not against the disposal site owner. Any penalties as a result of the cross-claim would be payable to the State. The Illinois Pollution Control Board has approved a settlement between the State and the Company pursuant to which the Company paid $69,000 to the State and disposed of certain materials in a container at the waste disposal site at an authorized disposal facility. The cross-claim by the landfill owner is still pending, and the outcome of the cross-claim can not presently be determined. Additionally, the Illinois Agency has been negotiating with the disposal site owner with respect to the procedures and actions necessary to close the disposal site. The extent and nature of any actions which may be taken against the Company with respect to this matter cannot presently be determined. Shareholder Litigation - ---------------------- In February 1995, an AMRE shareholder filed a lawsuit, on his own behalf, and a purported class action, against AMRE and its directors in the Chancery Court of the State of Delaware, alleging various breaches of fiduciary and common law duties and requesting both monetary and injunctive relief. The alleged basis for the claims was the action of AMRE and its directors in connection with the authorization and approval of the AMRE Merger, which was consummated on July 3, 1995. The case was dismissed in March 1997. Leases - ------ The Company leases certain equipment and facilities under various noncancellable capital and operating leases. The total expense under these operating leases amounted to approximately $4.0 million, $3.4 million and $1.9 million for the fiscal years ended 1997, 1996 and 1995, respectively. At June 28, 1997, the future minimum annual rental commitments under all noncancellable leases were as follows (in thousands): Operating Capital Leases Leases ------------ ------------- 1998 $ 3,780 $ 240 1999 3,771 240 2000 3,387 240 2001 2,999 240 2002 2,036 204 Thereafter 13,816 884 ------------ ------------- Total minimum lease commitments $29,789 2,048 ============ Less: Interest portion 705 ------------- Present value of capital lease obligations 1,343 Less: Current portion 109 ------------- Total long-term capital lease obligations $1,234 ============= 34 NOTE 8 - Fair Value of Financial Instruments The carrying amount of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and short-term debt approximates fair value because of the short maturity of these instruments. The following table presents the carrying amounts and estimated fair value of the Company's other financial instruments (in thousands): June 28, 1997 June 29, 1996 --------------------- ------------------------ Carrying Fair Carrying Fair Amount Value Amount Value Marketable securities $ 7,996 $ 7,996 Long-term debt (Note 5) $106,454 $94,745 122,919 102,561 The estimated fair values of marketable securities and the convertible debentures are based on quoted market prices. The estimated fair value of other long-term debt approximates its carrying value. NOTE 9 - Acquisitions and Dispositions On May 15, 1995, the Company purchased, for $3.3 million, substantially all of the assets of SportRack, a Canadian designer, manufacturer and marketer of automobile roof rack systems. Effective July 3, 1995, the Company completed, for Common Stock, the merger ("AMRE Merger") of a subsidiary of the Company with American Recreation Company Holdings, Inc. ("AMRE") a designer, marketer and distributor of bicycles, related bicycle parts and accessories and bicycle helmets in the United States and Canada. The purchase price of $76.0 million was computed by converting each of the 8.7 million outstanding shares of AMRE Common Stock into .6890 shares of Bell Common Stock and multiplying the result by $12.70, the average of the Bell Common Stock between June 9, 1995 and June 22, 1995. The purchase price was increased by an additional $1.2 million attributable to outstanding AMRE stock options, which were converted into Bell stock options. The purchase price has been allocated to the fair value of the net assets of AMRE. The purchase price was approximately $52.8 million greater than the fair value of the identifiable net assets acquired, and, accordingly, goodwill was increased by this amount. Unaudited pro forma financial information for fiscal 1995 is presented in the Consolidated Statements of Operations assuming the Company consummated the AMRE Merger at the beginning of the 1995 fiscal year. Pro forma adjustments have been made to adjust net investment income and interest expense for the effects of a required pre-payment of related party obligations, to increase amortization expense for goodwill and other intangibles, and to reflect pro forma tax effects. On January 22, 1996, the Company acquired, for $16.8 million, substantially all of the assets of privately-owned, Giro Sport Design, Inc. of California and all outstanding shares of Giro Sport Design International, Inc., the holding company which owns Giro's Ireland operation (collectively "Giro"). Giro designs, manufactures and markets premium bicycle helmets in North America, Europe and other parts of the world. Acquisitions were accounted for as purchase transactions from their respective effective dates. Accordingly, their results of operations have been included in the accompanying statements of operations from the effective dates of the acquisitions. The impact of these acquisitions, other than AMRE, were not significant. On April 29, 1997, pursuant to a plan developed in the third quarter, the Company completed the sale of its Service Cycle/Mongoose inventory, trademarks and certain other assets to Brunswick Corporation. The sales price approximated $20.5 million. As part of the sales transaction, the Company provided Brunswick Corporation a three year option to purchase 600,000 shares of the Company's common stock at an exercise price of $7.50 per share. The Company retained and 35 will collect customer accounts receivable related to the Service Cycle/Mongoose business, which were approximately $19.4 million at April 29, 1997. At June 28, 1997 the outstanding accounts receivable balance was approximately $5.9 million. As a result of the Service Cycle/Mongoose disposal, the Company announced plans to reorganize its North American distribution network and operations to better utilize facilities. Included in the third quarter of fiscal 1997 pre-tax income are $25.4 million of costs associated with the Sale of Service Cycle/Mongoose. The costs were comprised of the write-off of goodwill and intangibles, $14.8 million, disposal and exit costs, $5.4 million, and reorganization costs associated with the distribution network and operations, $5.2 million. Subsequent to the Company's Fiscal year-end, on July 2, 1997, the Company completed the sale of substantially all of the assets of SportRack, which designs, manufactures and markets automobile roof rack systems, for approximately $14 million to an affiliate of Advanced Accessory System Canada, Inc. There was no material gain or loss associated with this transaction. NOTE 10 - Restructuring Charges and Other One-Time Charges Restructuring Charges - 1997 - ---------------------------- During the third quarter of fiscal 1997, the Company announced plans to significantly downsize the Scottsdale, Arizona corporate office by consolidating certain Scottsdale functions with the San Jose, California office. Included in the fiscal 1997 pre-tax income are $2.7 million of restructuring charges related to this plan. Also included in the fiscal 1997 pre-tax income are $1.5 million of restructuring charges related to the Program, as defined below, including facility closing costs, severance and other employee related costs. The following table sets forth the details of activity during fiscal 1997 for restructuring charges and related accrued liabilities (in thousands): June 29, Restructuring Cash June 28, 1996 charges payments 1997 ------- ------------- --------- -------- Lease payments and other facility expenses $ 942 $ 983 $(1,065) $ 860 Severance and other employee related costs 4,215 3,158 (4,456) 2,917 ------- ------- ------- ------- Total $ 5,157 $ 4,141 $(5,521) $ 3,777 ======= ======= ======= ======= On June 27, 1995, the Company's stockholders approved the issuance of Common Stock in connection with the Agreement and Plan of Merger dated February 15, 1995 among the Company, Bell Merger Co., a wholly owned subsidiary of the Company, and American Recreation Company Holdings, Inc. ("AMRE"). In contemplation of the merger, the Company formulated a program (the "Program") to consolidate and integrate the operations of Bell, SportRack and AMRE, as well as combine certain product lines. This Program called for the consolidation of certain sales and marketing, research and development, manufacturing, finance and management information systems functions. Restructuring Charges - 1996 - ---------------------------- During fiscal 1996, the Company commenced significant organizational and office consolidations including closing the Cerritos, Providence, Commack and Calgary offices. Most U.S. sales, marketing and research and development operations were consolidated in San Jose, California and all corporate functions in 36 Scottsdale, Arizona. Substantially all of the Canadian operations were consolidated into one facility in Granby, Quebec. These consolidations were finalized during the first half of fiscal 1997. Included in fiscal 1996 pre-tax income is $5.9 million related to restructuring charges, including facility closing costs, severance and other employee related costs and costs to combine computer systems. The Company eliminated 35 positions in sales and marketing, research and development, finance and manufacturing. The other employee costs are due to various employees relocating to San Jose or Scottsdale. The costs to combine computer systems related to an implementation study and the write-off of redundant software costs. The following table sets forth the details of activity during fiscal 1996 for restructuring charges and related accrued liabilities (in thousands):
Acquisition accrual Restruc- Non- July 1, recorded turing Cash cash June 29, 1995 to goodwill charges payments charges 1996 -------- ------------- ----------- ------------ --------- --------- Lease payments and other facility expenses $ 769 $ 1,951 $ 528 $ (1,755) $ (551) $ 942 Severance and other employee related costs 453 7,965 2,328 (6,531) 4,215 Computer systems 2,994 (2,994) -------- ------------- ----------- ------------ ---------- ----------- Total $1,222 $ 9,916 $ 5,850 $ (11,280) $ (551) $ 5,157 ======== ============= =========== ============ ========== ===========
Restructuring Charges - 1995 - ---------------------------- Included in fiscal 1995 pre-tax income is $2.1 million related to restructuring charges, including facility closing costs, reductions in the carrying value of assets, severance and other employee related costs. The Company eliminated 25 positions, in sales and marketing, research and development, finance and manufacturing. The following table sets forth the details of activity during fiscal 1995 for restructuring charges and related accrued liabilities (in thousands):
1995 Cash Non-cash July 1, Accrual Payments Charges 1995 ---------- ------------ ------------- --------- Lease payments and other facility expenses $ 769 $ 769 Severance and other employee related costs 672 $(219) 453 Asset write-downs 682 $(682) ---------- ------------ ------------- --------- Total $2,123 $(219) $(682) $1,222 ========== ============ ============= =========
Other One-Time Charges - ---------------------- In fiscal 1995, the Company made a strategic decision to market its Bell helmet brand across all trade channels, including the mass merchant trade channel. As a result of this branding change, the Company recorded in the fourth quarter charges of $2.4 million, which reduced gross profit, for the discontinuation of certain product tooling and inventory. These charges primarily relate to the combination of the Company's bicycle helmet product line with AMRE's helmet product line. 37 NOTE 11 - Income Taxes Pre-tax (loss) income by jurisdiction for each fiscal year follows (in thousands): June 28, June 29, July 1, 1997 1996 1995 -------- -------- --------- Domestic $(23,882) $(22,395) $ (3,963) Foreign 2,731 1,770 (1,372) -------- -------- -------- Total $(21,151) $(20,625) $ (5,335) ======== ======== ======== The (benefit) provision for income taxes for each fiscal year follows (in thousands):
June 28, June 29, July 1, 1997 1996 1995 -------- ------- ------- Current (benefit) expense: U.S. Federal $ (757) $(1,254) $ 100 State and local 153 Foreign 601 482 ------- ------- ------- Total current (156) (772) 253 Deferred tax (benefit) expense: U.S. Federal (2,200) (6,402) (1,933) State and local (568) (1,144) (309) Foreign (59) (370) ------- ------- ------- Total deferred (2,827) (7,546) (2,612) Impact of stock option deduction credited to equity 20 68 467 ------- ------- ------- Total income tax benefit $(2,963) $(8,250) $(1,892) ======= ======= =======
The (benefit) provision for income taxes for each fiscal year differs from the U.S. statutory federal income tax rate for the following reasons: June 28, June 29, July 1, 1997 1996 1995 ------- ------- ------- Statutory U.S. rate (34.0)% (34.0)% (34.0)% Tax exempt investment income (0.1) (0.2) (11.5) Nondeductible goodwill 24.8 2.9 2.2 State income tax (2.7) (5.5) 1.8 Effective international tax rate (1.5) (0.6) Other items, net (0.5) (2.6) 6.0 ------ ------ ------ Effective tax benefit rate (14.0)% (40.0)% (35.5)% ====== ====== ====== The majority of the nondeductible goodwill included in permanent differences under the effective tax rate calculation for the year ended June 28, 1997 is the write-off of goodwill due to the Sale of Service Cycle/Mongoose. See Note 9. 38 Deferred income tax assets and (liabilities) are comprised of the following (in thousands): June 28, June 29, 1997 1996 -------- -------- Net operating losses and other tax loss carryforwards $ 14,142 $ 12,494 Inventory and accounts receivable reserves 3,692 4,468 Accrued liabilities 6,066 4,545 Package design costs capitalized for tax purposes 780 746 Other 915 578 -------- -------- Gross deferred tax assets 25,595 22,831 Depreciation (858) (65) Other (276) (1,388) -------- -------- Gross deferred tax liability (1,134) (1,453) Deferred tax assets valuation allowance (1,970) (1,305) -------- -------- Net deferred tax assets 22,491 20,073 Less: current portion (10,228) (11,116) -------- -------- Long term deferred tax assets $ 12,263 $ 8,957 ======== ======== Domestic net operating losses totaling approximately $34 million will be carried forward and begin to expire in 2007. Utilization of loss carryforwards in future years may be subject to limitations if substantial changes in the Company's ownership should occur. General business tax credits were accounted for under the flow-through method and totaled approximately $630,000. The credits will be carried forward and will begin to expire in 2009 and minimum tax credits totaling approximately $500,000 will be carried forward with an indefinite life. The deferred tax assets valuation allowance at June 28, 1997 and June 29, 1996 was required primarily for net operating loss carryforwards and accounting reserves that, in management's view, will not be realized in the foreseeable future. The Company has not provided for U.S. federal income and foreign withholding taxes of certain non-U.S. subsidiaries' undistributed earnings as of June 28, 1997, because such earnings are intended to be reinvested indefinitely. If these earnings were distributed, the withholding tax would be due and foreign tax credits should become available under current law to reduce the resulting U.S. income tax liability. 39 NOTE 12 - Additional Cash Flow Statement Information The Company's non-cash investing and financing activities and cash payments for interest and income taxes for each fiscal year are summarized below (in thousands):
June 28, June 29, July 1, 1997 1996 1995 ---------- ----------- ----------- Additional paid in capital arising from tax benefits associated with the exercise of stock options $ 20 $ 68 $ 67 Issuance of stock and stock options for AMRE merger 77,211 Purchase price adjustment to accrued liabilities and goodwill 200 Liabilities assumed in lieu of a cash payment in connection with the acquisition of SportRack 1,382 Cash paid during the period for: Interest $ 7,050 $ 8,816 $ 4,183 Income taxes 748 116 2,180
NOTE 13 - Foreign Operations And Export Sales Information regarding geographic sales, net income and identifiable assets are as follows (in thousands):
United States Europe Canada Total ----------- --------- -------- --------- Year ending June 28, 1997: Sales to unaffiliated customers $212,634 $21,419 $25,481 $259,534 Net (loss) income (20,778) 1,441 1,149 (18,188) Total assets 233,189 8,581 26,984 268,754 Year ending June 29, 1996: Sales to unaffiliated customers $222,613 $17,408 $22,319 $262,340 Net (loss) income (13,644) 688 581 (12,375) Total assets 262,568 10,956 25,111 298,635 Year ending July 1, 1995: Sales to unaffiliated customers $ 88,430 $14,325 $ 235 $102,990 Net loss (3,347) (5) (91) (3,443) Total assets 172,245 9,632 4,557 186,434
Included in the figures for the United States in the above table are sales and income in the Pacific Rim, and the assets of Bell Sports Australia, which are not significant enough to be broken-out in the periods depicted. 40 NOTE 14 - Quarterly Financial Data (Unaudited) The unaudited information presented below has been prepared in accordance with generally accepted accounting principles for interim financial information. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of financial position and results of operations have been made. Quarterly financial data is as follows (in thousands, except per share data): 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter --------- --------- ---------- ---------- Year ending June 28, 1997: Net sales $62,068 $56,623 $70,575 $70,268 Gross profit 17,508 16,006 20,713 22,209 Net income (loss) 3 (475) (21,943) 4,227 Net income (loss) per share 0.00 (0.03) (1.59) 0.31 Year ending June 29, 1996: Net sales $57,675 $56,215 $67,442 $81,009 Gross profit 10,135 8,442 19,916 22,226 Net (loss) income (5,372) (7,724) 713 8 Net (loss) income per share (0.38) (0.56) 0.05 0.00 41 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant Directors of the Registrant - --------------------------- The information contained under the headings "Nominees for Directors", "Members of Board of Directors Continuing in Office" and "Section 16 (a) Beneficial Ownership Reporting Compliance" in the Proxy Statement is incorporated herein by reference. Executive Officers of the Registrant - ------------------------------------ Information with respect to executive officers of the Company as of September 1997, is set forth below:
Name Age Positions and Offices - ---- --- --------------------- Terry G. Lee 48 Chairman and Chief Executive Officer Harry H. Manko 70 Vice Chairman and Director Mary J. George 47 President and Chief Operating Officer Howard A. Kosick 43 President - U.S. Group Robert Alan McCaughen 43 President - Canada Linda K. Bounds 42 Chief Financial Officer, Senior Vice President, Secretary and Treasurer John A. Williams 37 Vice President of Finance and Corporate Controller
Terry G. Lee, Director, Chairman and Chief Executive Officer. Mr Lee also served as President of the Company until the completion of the AMRE Merger. He joined Bell Helmets, Inc. (a predecessor of the Company, "Bell Helmets") as President and Chief Operating Officer and a Director in 1984, and became Chief Executive Officer in 1986. He was also a stockholder and consultant to Echelon Sports Corporation (a predecessor of the Company) prior to its acquisition by the Company in 1989. Prior to joining Bell Helmets, Mr. Lee spent 14 years with Wilson Sporting Goods, a subsidiary of Pepsico, Inc., where his last position was Senior Vice President - Sales and Distribution. Mr. Lee became Chief Executive Officer and Chairman of the Company in November 1989. Harry H. Manko, Vice Chairman and Director. Mr. Manko has been a Director of the Company and the Vice Chairman of the Company since July 1995. Mr. Manko headed AMRE and its predecessors for 41 years. Mr. Manko become Chairman of the Board and a Director of AMRE in April 1993. From 1984 to 1993, Mr. Manko was President and Chief Executive Officer of American Recreation Group, L.P. ("ARG"), a predecessor of AMRE. Mr. Manko currently serves as the President of the Bicycle Products Supplier Association, previously named Bicycle Wholesale Distributor Association ("BWDA"). He formerly served as the Treasurer of BWDA and as President of the Bicycle Institute of America. Mary J. George, President and Chief Operating Officer. Ms. George joined the Company in October 1994 as the Senior Vice President of Marketing and Strategic Planning, became President - Specialty Retail Division in July 1995, became President - North America in December 1995, and became President and Chief Operating Officer in April 1997. Prior to joining the Company, Ms. George served as President of Denar Corporation from January 1993 to August 1994 and as President of The WestPointe Group from January 1991 to December 1992. Ms. George was Chief Executive Officer of Kids William & Clarissa (formerly Avitar Marketing) from September 1990 to December 1990 and served as its President and Chief Operating Officer from January 1989 to September 1990. 42 Howard A. Kosick, President - U.S. Group. Mr. Kosick joined Bell in October 1989 as its Chief Financial Officer, Secretary, Treasurer and Senior Vice President, became Executive Vice President in 1992, and became U.S. Group President in April 1997. From 1981 until October 1989, he served in various financial management positions for Household Manufacturing, Inc. Mr. Kosick is a Certified Public Accountant. Robert Alan McCaughen, President - Canada. Mr. McCaughen joined the Company in July 1995, in connection with the AMRE Merger as President of Denrich Sporting Goods. Mr. McCaughen became President - Canada in August 1995. Previously, Mr. McCaughen served as President of Denrich Sporting Goods Canada, LTD. ("Denrich") since August 1991, when AMRE acquired Denrich. Mr. McCaughen also served as President and was one of the founders of Denrich's predecessor company which commenced operations in 1989. Linda K. Bounds, Chief Financial Officer, Senior Vice President, Secretary and Treasurer. Ms. Bounds joined the Company in February 1990, became a Vice President in 1993, and Chief Financial Officer, Executive Vice President, Secretary and Treasurer in April 1997. From 1984 to 1990, she served in various financial management positions for Celestial Seasonings, Inc. Ms. Bounds is a Certified Public Accountant. John A. Williams, Vice President of Finance and Corporate Controller (Chief Accounting Officer). Mr. Williams joined the Company in December 1995 as Director of Finance and became Vice President of Finance and Corporate Controller in April 1997. Prior to joining the Company, Mr. Williams served in various financial management positions at Microage Computer Corp. from October 1994 to December 1995, and as a Senior Audit Manager at Price Waterhouse LLP from 1990 to October 1994. Item 11. Executive Compensation Except for the information relating to Item 13 hereof and except for information referred to in Item 402(a)(8) of Regulation S-K, the information contained under the headings "Executive Officer Compensation" and "Election of Directors - Directors Meetings and Committees" in the Proxy Statement is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information contained under the heading "Security Ownership of Directors, Executives, Officers and Principal Stockholders" in the Proxy Statement is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions Except for the information relating to Item 11 hereof and except for information referred to in Item 402 (a)(8) of Regulation S-K, the information contained under the headings "Executive Officer Compensation", "Election of Directors - Directors Meetings and Committees" and "Certain Relationships and Related Transactions" in the Proxy Statement is incorporated herein by reference. 43 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K The consolidated financial statements, other financial data and consolidated financial schedules of the Company and its subsidiaries, listed below are included as part of this report: Page No. - -------- 20 Consolidated balance sheets - June 28, 1997 and June 29, 1996 21 Consolidated statements of operations - Years ended June 28, 1997, June 29, 1996, July 1, 1995 on a pro forma basis, and July 1, 1995. 23 Consolidated statements of cash flows - Years ended June 28, 1997, June 29, 1996 and July 1, 1995 24 Notes to consolidated financial statements 19 Report of independent accountants on consolidated financial statements 49 Schedule II - Valuation and qualifying accounts S-1 Report of independent accountants on financial statement schedule All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 44 (a)(3) Exhibits Except for the documents that are marked with an asterisk, each of the documents listed below has heretofore been filed (file number 0-19873) by the Company with the Securities and Exchange Commission (the "Commission") and each such document is incorporated herein by reference. The documents that are marked with an asterisk are filed herewith. Number Description - ------ ----------- 3(i) Restated Certificate of Incorporation of the Registrant, as amended by the Certificate of Designation of Series A Junior Participating Preferred Stock of the Registrant and as further amended on June 27, 1995 (Exhibit 4 (1) to the Registrant's Registration Statement on Form S-8, File No. 33-94296) 3 (ii) Bylaws of the Registrant (Exhibit 4 (2) to the Registrant's Registration Statement on Form S-8, File No. 33-94296) 4.1 Certificate of Designation of Series A Junior Participating Preferred Stock of Bell Sports Corp. (Exhibit 4 (2) to the Registrant's Registration Statement on Form S-4, File No. 33-92344) 4.2 Stockholders Rights Agreement (the "Stockholders Rights Agreement") dated as of September 22, 1994 between the Registrant and Harris Trust & Savings Bank, as Rights Agent (Exhibit 1 of the Registrant's Registration Statement on Form 8-A dated September 27, 1994) 4.3 First Amendment dated February 15, 1995 to the Stockholders Rights Agreement (Exhibit 4 of the Registrant's Current Report on Form 8-K dated February 15, 1995) 4.4 Indenture, dated as of November 15, 1993, between the Registrant (Exhibit 4 (1) to the Registrant's Current Report on Form 8-K dated October 26, 1993) 10.1 Employment Agreement dated as of June 13, 1995 among Registrant, Bell Sports, Inc. and Terry G. Lee (Exhibit 10 (1) to the Registrant's Annual Report on Form 10-K for the fiscal year ended July 1, 1995) 10.2 Severance Agreement dated as of January 3, 1995 among Registrant, Bell Sports, Inc. and Terry G. Lee (Exhibit 10 (2) to the Registrant's Quarterly Report on Form 10-Q, for the quarter ended December 31, 1994) 10.3* Phantom Stock Unit Agreement dated as of September 23, 1997 between Registrant and Terry G. Lee 10.4 Employment Agreement dated as of June 13, 1995 among Registrant, Bell Sports, Inc. and Howard A. Kosick (Exhibit 10 (1) to the Registrant's Annual Report on Form 10-K for the fiscal year ended July 1, 1995) 10.5* Memorandum of Understanding dated September 25, 1997 between Registrant, Bell Sports, Inc. and Howard A. Kosick 10.6 Severance Agreement dated as of January 3, 1995 among Registrant, Bell Sports, Inc. and Howard A. Kosick (Exhibit 10 (4) to the Registrant's Quarterly Report on Form 10-Q, for the quarter ended December 31, 1994) 10.7* Phantom Stock Unit Agreement dated as of September 23, 1997 between Registrant and Howard A. Kosick 45 10.8 Employment Agreement dated as of June 13, 1995 among Registrant, American Recreation Company Holdings, Inc. and Harry H. Manko (Exhibit 10 (1) to the Registrant's Annual Report on Form 10-K for the fiscal year ended July 1, 1995) 10.9* Employment Agreement dated as of August 29, 1997 among Registrant, American Recreation Company Holdings, Inc. and Mary J. George 10.10* Phantom Stock Unit Agreement dated as of September 23, 1997 between Registrant and Mary J. George 10.11 Employment Agreement dated as of April 25, 1997 among Registrant, Bell Sports, Inc. and Linda K. Bounds (Exhibit 10 (2) to the Registrant's Quarterly Report on Form 10-Q, for the quarter ended March 29, 1997) 10.12* Phantom Stock Unit Agreement dated as of September 23, 1997 between Registrant and Linda K. Bounds 10.13* Severance Agreement dated September 24, 1997 between Registrant, Bell Sports, Inc. and Robert A. McCaughen 10.14* Memorandum reference Employment Contract Outline for Robert A. McCaughen dated April 10, 1997 10.15 Restated and Amended 1991 Management Stock Incentive Plan (Exhibit 10 (24) to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 27, 1992) 10.16 Restated and Amended 1992 Management Stock Incentive Plan (Exhibit 4 (3) to the Registrant's Registration Statement on Form S-8, File No. 33-94296) 10.17 American Recreation Company Holdings, Inc. Stock Option Plan (Exhibit 4 (3) to the Registrant's Registration Statement on Form S-8, File No. 33-94298) 10.18 Restated and Amended 1992 Outside Directors Stock Option Plan, (Exhibit 10 (25) to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 27, 1992) 10.19 Restated and Amended 1993 Outside Directors Stock Option Plan, (Exhibit 10 (1) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 28, 1996) 10.20 1996 Stock Option Plan (Exhibit 4 (c) to the Registrant's Registration Statement on Form S-8, File No. 333-4468) 10.21 U.S. $100,000,000 Multicurrency Credit Agreement dated as of February 15, 1996 Among Bell Sports Corp., the guarantors party thereto, the banks party thereto, and Harris Trust and Savings Bank as Agent (Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 30, 1996) 10.22 First Amendment to Credit Agreement dated April 22, 1996 between Bell Sports Corp., the guarantors party thereto, the banks party thereto, and Harris Trust and Savings Bank as Agent (Exhibit 10 (14) to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 29, 1996) 10.23 Second Amendment to the Credit Agreement dated August 9, 1996 between Bell Sports Corp., the guarantors party thereto, the banks party thereto, and Harris Trust and Savings Bank as Agent (Exhibit 10 (15) to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 29, 1996) 46 10.24 Third Amendment to the Credit Agreement dated April 28, 1997 between Bell Sports Corp., the guarantors party thereto, the banks party thereto, and Harris Trust and Savings Bank as Agent (Exhibit 10 (5) to the Registrant's Current Report on Form 8-K dated April 29, 1997) 10.25 Form of Vehicle Lease Agreement between Bell Sports, Inc. and Mission Leasing, (Exhibit 10 (77) to the Registrant's Registration Statement on Form S-1, File No. 33-45868) 10.26 Form of Equipment Lease Agreement between Bell Sports, Inc. and Mission Leasing, (Exhibit 10 (78) to the Registrant's Registration Statement on Form S-1, File No. 33-45868) 10.27 Lease of Aircraft between Bell Sports, Inc. and Hayden Leasing, L.C. dated November 1, 1995, (Exhibit 10 (18) to the Registrant's Annual Report on Form 10-K dated June 29, 1996) 10.28 Post Merger Stockholders Agreement dated as of February 15, 1995 between the Registrant and CB Capital Investors, Inc., Harry H. Manko and Stephen A. Silverstein. (Exhibit 10 (2) to the Registrant's Current Report on Form 8-K dated February 15, 1995) 11* Statement re: computation of per share earnings 21* Subsidiaries of the Registrant 23* Consent of Price Waterhouse 27* Financial data schedule - ----------- * Filed herewith Exhibits 10.1 through 10.20 listed are the management contracts and compensatory plans or arrangements required to be filed as exhibits hereto pursuant to the requirements of Item 601 of Regulation S-K. 47 Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities indicated on this 16th day of September, 1997. Name /s/ Terry G. Lee Chairman and Chief - ------------------------------------------------- Executive Officer Terry G. Lee (principal executive officer) /s/ Linda K. Bounds Chief Financial Officer, - ------------------------------------------------- Secretary and Treasurer Linda K. Bounds (principal financial officer) /s/ John A. Williams Vice President of Finance - ------------------------------------------------- and Corporate Controller John A. Williams (principal accounting officer) /s/ Harry H. Manko Vice Chairman and Director - ------------------------------------------------- Harry H. Manko /s/ Phillip D. Matthews Director - ------------------------------------------------- Phillip D. Matthews /s/ Arnold L. Chavkin Director - ------------------------------------------------- Arnold L. Chavkin /s/ Michael R. Hannon Director - ------------------------------------------------- Michael R. Hannon /s/ Kenneth K. Harkness Director - ------------------------------------------------- Kenneth K. Harkness /s/ W. Leo Kiely, III Director - ------------------------------------------------- W. Leo Kiely, III /s/ Frederick W. Winter Director - ------------------------------------------------- Frederick W. Winter /s/ Christopher Wright Director - ------------------------------------------------- Christopher Wright 48 BELL SPORTS CORP SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For each of the three fiscal years in the period ended June 28, 1997 (in thousands) Additions ---------------------- ---------- ---------- ---------- ---------- ---------- Balance at Charged to Charged to Balance at beginning costs and other end of of period expenses accounts Deductions period ---------- ---------- ---------- ---------- ---------- June 28, 1997: Deferred tax asset valuation allowance $ 1,305 $ 655 $ 1,970 Allowance for doubtful accounts $ 3,448 $ 4,553 $ 2,980 $ 5,021 Inventory valuation allowance $ 6,599 $ 2,876 $ 6,149 $ 3,326 June 29, 1996 Deferred tax asset valuation allowance $ 2,001 $ (362) $ (334) $ 1,305 Allowance for doubtful accounts $ 647 $ 2,481 $ 1,996(a) $ 1,676 $ 3,448 Inventory valuation allowance $ 1,298 $ 3,602 $ 9,696(a) $ 7,997 $ 6,599 July 1, 1995 Deferred tax asset valuation allowance $ 3,348 $ (15) $(1,332) $ 2,001 Allowance for doubtful accounts $ 763 $ 519 $ 635 $ 647 Inventory valuation allowance $ 576 $ 4,183 $ 3,461 $ 1,298 (a) Acquisition accrual recorded to goodwill 49 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Stockholders of Bell Sports Corp. Our audits of the consolidated financial statements referred to in our report dated August 15, 1997 appearing on page 19 of the 1997 Annual Report to Stockholders of Bell Sports Corp. also included an audit of the Financial Statement Schedule listed in Item 14 of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PRICE WATERHOUSE LLP Chicago, Illinois August 15, 1997 S-1 EX-10.3 2 PHANTOM STOCK UNIT AGREEMENT - LEE PHANTOM STOCK UNIT AGREEMENT ---------------------------- PHANTOM STOCK UNIT AGREEMENT dated as of September 23, 1997, effective as of August 28, 1997 (the "Effective Date"), between Bell Sports Corp., a Delaware corporation (the "Company"), and Terry G. Lee (the "Executive"). WHEREAS, the Company is engaged primarily in the business of designing, manufacturing, producing, distributing, marketing, advertising and selling auto racing helmets, bicycle helmets, bicycle accessories and related products; WHEREAS, the Executive currently serves as the Chairman of the Board and Chief Executive Officer of the Company; WHEREAS, the Executive's abilities and services are unique and essential to the prospects of the Company; and WHEREAS, the Company and the Executive desire to enter into this Agreement to further align the interests of the Executive with the interests of the stockholders of the Company by providing additional incentives to the Executive based upon future increases in the value of the shares of common stock, $.01 par value, of the Company ("Common Stock"). NOW, THEREFORE, in consideration of the premises and the mutual agreements contained herein, the parties hereby agree as follows: 1. Phantom Stock Compensation. (a) As additional compensation for the services provided by the Executive to the Company, effective as of the Effective Date, the Company grants to the Executive, and the Executive is credited with, 21,763 phantom stock units ("Units"). The Units shall, subject to the provisions of this Agreement, become vested cumulatively as follows: (1) On each of the first two annual anniversaries of the Effective Date, one-half of the total number of Units granted hereunder, subject to adjustment as provided in Section 1(c) hereof, shall become vested; and (2) Notwithstanding anything to the contrary contained in this Section 1(a), all Units shall become vested upon a "Change in Control" of the Company, as such term is defined in Appendix A to this Agreement. All Units which shall have become vested pursuant to this Section 1(a) are hereinafter referred to as "Vested Units." (b) The Company shall pay to the Executive as additional compensation (the "Phantom Stock Benefit") an amount, determined as of the Valuation Date (as hereinafter defined), equal to the product of (1) the number of Units then credited to the Executive hereunder which shall have become Vested Units pursuant to Section 1(a) hereof (after giving effect to the adjustments provided for in Section 1(c) below) multiplied by (2) the Value (as hereinafter defined) of one share of Common Stock on the Valuation Date. The Phantom Stock Benefit shall be paid to the Executive in cash, subject to any applicable payroll or other taxes required to be withheld, not later than the 30th day following the Valuation Date. Nothing in this Section 1 shall be deemed to grant to the Executive any right in or to, or any right to purchase or otherwise acquire, any shares of Common Stock (or any securities convertible into Common Stock). (c) In the event of a change in the number of outstanding shares of Common Stock by reason of any dividend payable in shares of Common Stock, or by reason of any stock split, reverse stock split or combination of shares, the number of Units credited to the Executive hereunder shall be increased or decreased, as the case may be, in the same proportion. Any such adjustment shall be made by the good faith determination of the Board, which determination shall be conclusive. (d) If the Company shall spin-off a significant subsidiary or shall make a substantial non-cash distribution to its stockholders, in partial liquidation or otherwise (excluding, however, any Change in Control of the Company or any transaction or change described in Section 1(c) hereof, and it is reasonable to expect that the future Value of the Common Stock would be materially affected thereby, the Board shall modify the formula for determining the Phantom Stock Benefit in an equitable manner to maintain the economic benefit granted to the Executive pursuant to this Section 1. (e) For purposes of this Agreement, the following terms shall have the meanings set forth below: (1) "Valuation Date" shall mean the earliest of (A) the date, for each Unit granted hereunder, on which such Unit becomes a Vested Unit, (B) the date of termination of the Executive's employment other than for "Cause" (as defined in the Employment Agreement among the Company, Bell Sports, Inc. and the Executive dated as of June 13, 1995) and (C) the effective date of any Change in Control. (2) "Value" shall mean the arithmetic average of the Market Price (as hereinafter defined) of a share of Common Stock for the 10 trading days preceding the Valuation Date, but in no event shall the Value be less than the price per share of Common Stock paid prior to the Valuation Date in any tender offer subject to Section 14(d) of the Securities Exchange Act of 1934, as amended (or any statute hereafter substituted therefor), which results in a Change in Control, - 2 - as such price per share shall be adjusted by the good faith determination of the Board to reflect any change described in Section 1(c) occurring subsequent to such tender offer. (3) "Market Price" shall mean for any day the closing price of a share of Common Stock, as reported in The Wall Street Journal as NASDAQ National Market Issues. (f) In the absence of manifest error, the determination of the amount of the Phantom Stock Benefit by the Board in accordance with this Section 1 shall be binding upon the Executive and the Company. 2. Federal and State Withholding. The Company shall deduct from the amounts payable to the Executive pursuant to this Agreement the amount of all required federal and state withholding taxes in accordance with the Executive's Form W-4 on file with the Company and all applicable social security taxes. 3. Assignment. The rights and benefits of the Executive hereunder shall not be assignable, whether by voluntary or involuntary assignment or transfer. This Agreement shall be binding upon, and shall inure to the benefit of, the successors and assigns of the Company, and the heirs, executors and administrators of the Executive. 4. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and personally delivered, sent by certified or registered mail or sent by overnight courier service as follows: if to the Executive, to the Executive's address as set forth in the records of the Company, and if to the Company, to the address of its principal executive offices, attention: Chief Financial Officer, with a copy to Larry A. Barden, Esq., Sidley & Austin, One First National Plaza, Chicago, Illinois 60603, or to any other address designated by any party hereto by notice similarly given. 5. Costs. In the event that a dispute shall arise between the parties hereto and such dispute is resolved by a court of competent jurisdiction, all reasonable attorneys' fees and costs of the Company and the Executive and all other costs and expenses of the Company and the Executive associated with such dispute shall be borne by the Company; provided that if it is determined that the claims of the Executive were without reasonable basis, each party shall bear such party's own attorneys' fees and costs. 6. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Illinois without regard to principles of conflict of laws. - 3 - 7. Amendment and Waiver. The provisions of this Agreement may be amended or waived only by the written agreement of the Company and the Executive, and no course of conduct or failure or delay in enforcing the provisions of this Agreement shall affect the validity, binding effect or enforceability of this Agreement. 8. Counterparts. This Agreement may be executed in two counterparts, each of which shall be deemed to be an original and both of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. BELL SPORTS CORP. By /s/ Linda K. Bounds ---------------------------------- Linda K. Bounds Senior Vice President and Chief Financial Officer EXECUTIVE: /s/ Terry G. Lee ----------------------------------- Terry G. Lee - 4 - Appendix A ---------- For purposes of the Phantom Stock Unit Agreement dated as of September 23, 1997 between Bell Sports Corp. (the "Company") and Terry G. Lee, "Change in Control" shall mean: (1) the acquisition by any individual, entity or group (a "Person"), including any "person" within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), of beneficial ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act, of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change in Control: (A) any acquisition directly from the Company (excluding any acquisition resulting from the exercise of a conversion or exchange privilege in respect of outstanding convertible or exchangeable securities), (B) any acquisition by the Company, (C) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, (D) any acquisition by any corporation pursuant to a reorganization, merger or consolidation involving the Company, if, immediately after such reorganization, merger or consolidation, each of the conditions described in clauses (i), (ii) and (iii) of section (3) of this definition shall be satisfied; and provided further that, for purposes of clause (B), if any Person (other than the Company or any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company) shall become the beneficial owner of 20% or more of the Outstanding Company Common Stock or 20% or more of the Outstanding Company Voting Securities by reason of an acquisition by the Company and such Person shall, after such acquisition by the Company, become the beneficial owner of any additional shares of the Outstanding Company Common Stock or any additional Outstanding Voting Securities and such beneficial ownership is publicly announced, such additional beneficial ownership shall constitute a Change in Control; (2) individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least 66-2/3% of such Board; provided, however, that any individual who becomes a director of the Company subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by the vote of at least 66-2/3% of the directors then comprising the Incumbent Board shall be deemed to have been a member of the Incumbent Board; and provided further, that no individual who was A-1 initially elected as a director of the Company as a result of an actual or threatened election contest, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act, or any other actual or threatened solicitation of proxies or consents by or on behalf of any Person other than the Board shall be deemed to have been a member of the Incumbent Board; (3) approval by the stockholders of the Company of a reorganization, merger or consolidation unless, in any such case, immediately after such reorganization, merger or consolidation, (i) more than 60% of the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and more than 60% of the combined voting power of the then outstanding securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals or entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation and in substantially the same proportions relative to each other as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (ii) no Person (other than the Company, any employee benefit plan (or related trust) sponsored or maintained by the Company or the corporation resulting from such reorganization, merger or consolidation (or any corporation controlled by the Company) and any Person which beneficially owned, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 20% or more of the Outstanding Company Common Stock or the Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of the then outstanding shares of common stock of such corporation or 20% or more of the combined voting power of the then outstanding securities of such corporation entitled to vote generally in the election of directors and (iii) at least 66-2/3% of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such reorganization, merger or consolidation; or (4) approval by the stockholders of the Company of (i) a plan of complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company other than to a corporation with respect to which, immediately after such sale or other disposition, (A) more than 60% of the then outstanding shares of common stock thereof and more than 60% of the combined voting power of the then outstanding securities thereof entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the A-2 individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such sale or other disposition and in substantially the same proportions relative to each other as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (B) no Person (other than the Company, any employee benefit plan (or related trust) sponsored or maintained by the Company or such corporation (or any corporation controlled by the Company) and any Person which beneficially owned, immediately prior to such sale or other disposition, directly or indirectly, 20% or more of the Outstanding Company Common Stock or the Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of the then outstanding shares of common stock thereof or 20% or more of the combined voting power of the then outstanding securities thereof entitled to vote generally in the election of directors and (C) at least 66-2/3% of the members of the board of directors thereof were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition. A-3 EX-10.5 3 MEMO OF UNDERSTANDING - KOSICK Memorandum to Terry Lee September 25, 1997 MEMORANDUM -- CONFIDENTIAL TO: Terry Lee CC: Phil Matthews Linda Bounds FROM: Howard Kosick DATE: September 25, 1997 RE: Howard A. Kosick Employment Agreement I am documenting our mutual understanding with respect to my Employment Agreement (copy attached). In conjunction with the U.S. reorganization program announced on April 1, 1997, the Scottsdale Corporate Office has been downsized and most Corporate functions, including the CFO function, have been relocated to San Jose. To help facilitate the Company's reorganization program, I have agreed to serve as U.S. Group President in San Jose. Commuting costs to San Jose and temporary living costs while there will continue to be reimbursed by the Company for this period. By signing below, Bell Sports Corp. and Bell Sports, Inc. (collectively, the "Company") acknowledge and agree that I continue to have the right to terminate my employment pursuant to Section 4(e)(i) of my Employment Agreement for "Good Reason" (as defined in Section 4(e)(ii)(E) of my Employment Agreement) at any time during the term of my Employment Agreement and that my service as U.S. Group President has not waived, and will not waive, my right to do so. At such time as I may elect to terminate my employment pursuant to Section 4(e)(i), I will receive the payments and benefits specified by that Section, except as expressly provided in the following paragraph of this Memorandum. If I elect to terminate my employment pursuant to Section 4(e)(i), consistent with past practice for severed employees, my stock options will fully vest and remain exercisable through the severance period (the two-year period commencing on my termination of employment) and for 90 days thereafter. In addition, my unvested restricted stock grants and phantom stock units as of the date of my termination of employment would become fully vested. (This would apply to options to purchase 2,361 shares if they do not otherwise become vested on February 27, 1998 and to 5,441 phantom stock units if they do not otherwise vest on August 28, 1998 and August 28, 1999). Memorandum to Terry Lee September 25, 1997 Page Two The Company also acknowledges that if I do not elect to terminate my employment prior to December 1, 1997 then the Company shall pay me $100,000 by December 15, 1997. Such payment shall be in lieu of any further bonus payments which may become due pursuant to my Employment Agreement or my Severance Agreement dated January 3, 1995 in the event of my termination of employment. Except as expressly provided in the preceding paragraph of this Memorandum, the understandings set forth herein are not intended to limit or affect any of my rights under my Employment Agreement or my Severance Agreement and, except as expressly provided in the preceding paragraph, shall be in addition to, and not in limitation of, any rights I may have under my Severance Agreement. This Memorandum supersedes my Memorandum to you dated April 4, 1997, which Memorandum shall have no further force or effect. Terry, I look forward to the continuing challenges of the U.S. President's role and expect that I can continue to have a meaningful impact on the operations of the business. If the foregoing is consistent with our mutual understanding, please acknowledge the Company's acceptance of this arrangement by executing this Memorandum in the space provided below and returning a copy thereof to me. /s/ Howard A. Kosick Acknowledged and agreed: BELL SPORTS CORP. BELL SPORTS, INC. By: /s/ Terry G. Lee ---------------------- Terry G. Lee HAK/er EX-10.7 4 PHANTOM STOCK UNIT AGREEMENT - KOSICK PHANTOM STOCK UNIT AGREEMENT ---------------------------- PHANTOM STOCK UNIT AGREEMENT dated as of September 23, 1997, effective as of August 28, 1997 (the "Effective Date"), between Bell Sports Corp., a Delaware corporation (the "Company"), and Howard A. Kosick (the "Executive"). WHEREAS, the Company is engaged primarily in the business of designing, manufacturing, producing, distributing, marketing, advertising and selling auto racing helmets, bicycle helmets, bicycle accessories and related products; WHEREAS, the Executive currently serves as the U.S. Group President of the Company; WHEREAS, the Executive's abilities and services are unique and essential to the prospects of the Company; and WHEREAS, the Company and the Executive desire to enter into this Agreement to further align the interests of the Executive with the interests of the stockholders of the Company by providing additional incentives to the Executive based upon future increases in the value of the shares of common stock, $.01 par value, of the Company ("Common Stock"). NOW, THEREFORE, in consideration of the premises and the mutual agreements contained herein, the parties hereby agree as follows: 1. Phantom Stock Compensation. (a) As additional compensation for the services provided by the Executive to the Company, effective as of the Effective Date, the Company grants to the Executive, and the Executive is credited with, 5,441 phantom stock units ("Units"). The Units shall, subject to the provisions of this Agreement, become vested cumulatively as follows: (1) On each of the first two annual anniversaries of the Effective Date, one-half of the total number of Units granted hereunder, subject to adjustment as provided in Section 1(c) hereof, shall become vested; and (2) Notwithstanding anything to the contrary contained in this Section 1(a), all Units shall become vested upon a "Change in Control" of the Company, as such term is defined in Appendix A to this Agreement. All Units which shall have become vested pursuant to this Section 1(a) are hereinafter referred to as "Vested Units." (b) The Company shall pay to the Executive as additional compensation (the "Phantom Stock Benefit") an amount, determined as of the Valuation Date (as hereinafter defined), equal to the product of (1) the number of Units then credited to the Executive hereunder which shall have become Vested Units pursuant to Section 1(a) hereof (after giving effect to the adjustments provided for in Section 1(c) below) multiplied by (2) the Value (as hereinafter defined) of one share of Common Stock on the Valuation Date. The Phantom Stock Benefit shall be paid to the Executive in cash, subject to any applicable payroll or other taxes required to be withheld, not later than the 30th day following the Valuation Date. Nothing in this Section 1 shall be deemed to grant to the Executive any right in or to, or any right to purchase or otherwise acquire, any shares of Common Stock (or any securities convertible into Common Stock). (c) In the event of a change in the number of outstanding shares of Common Stock by reason of any dividend payable in shares of Common Stock, or by reason of any stock split, reverse stock split or combination of shares, the number of Units credited to the Executive hereunder shall be increased or decreased, as the case may be, in the same proportion. Any such adjustment shall be made by the good faith determination of the Board, which determination shall be conclusive. (d) If the Company shall spin-off a significant subsidiary or shall make a substantial non-cash distribution to its stockholders, in partial liquidation or otherwise (excluding, however, any Change in Control of the Company or any transaction or change described in Section 1(c) hereof, and it is reasonable to expect that the future Value of the Common Stock would be materially affected thereby, the Board shall modify the formula for determining the Phantom Stock Benefit in an equitable manner to maintain the economic benefit granted to the Executive pursuant to this Section 1. (e) For purposes of this Agreement, the following terms shall have the meanings set forth below: (1) "Valuation Date" shall mean the earliest of (A) the date, for each Unit granted hereunder, on which such Unit becomes a Vested Unit, (B) the date of termination of the Executive's employment other than for "Cause" (as defined in the Employment Agreement among the Company, Bell Sports, Inc. and the Executive dated as of June 13, 1995) and (C) the effective date of any Change in Control. (2) "Value" shall mean the arithmetic average of the Market Price (as hereinafter defined) of a share of Common Stock for the 10 trading days preceding the Valuation Date, but in no event shall the Value be less than the price per share of Common Stock paid prior to the Valuation Date in any tender offer subject to Section 14(d) of the Securities Exchange Act of 1934, as amended (or any statute hereafter substituted therefor), which results in a Change in Control, - 2 - as such price per share shall be adjusted by the good faith determination of the Board to reflect any change described in Section 1(c) occurring subsequent to such tender offer. (3) "Market Price" shall mean for any day the closing price of a share of Common Stock, as reported in The Wall Street Journal as NASDAQ National Market Issues. (f) In the absence of manifest error, the determination of the amount of the Phantom Stock Benefit by the Board in accordance with this Section 1 shall be binding upon the Executive and the Company. 2. Federal and State Withholding. The Company shall deduct from the amounts payable to the Executive pursuant to this Agreement the amount of all required federal and state withholding taxes in accordance with the Executive's Form W-4 on file with the Company and all applicable social security taxes. 3. Assignment. The rights and benefits of the Executive hereunder shall not be assignable, whether by voluntary or involuntary assignment or transfer. This Agreement shall be binding upon, and shall inure to the benefit of, the successors and assigns of the Company, and the heirs, executors and administrators of the Executive. 4. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and personally delivered, sent by certified or registered mail or sent by overnight courier service as follows: if to the Executive, to the Executive's address as set forth in the records of the Company, and if to the Company, to the address of its principal executive offices, attention: Chief Executive Officer, with a copy to Larry A. Barden, Esq., Sidley & Austin, One First National Plaza, Chicago, Illinois 60603, or to any other address designated by any party hereto by notice similarly given. 5. Costs. In the event that a dispute shall arise between the parties hereto and such dispute is resolved by a court of competent jurisdiction, all reasonable attorneys' fees and costs of the Company and the Executive and all other costs and expenses of the Company and the Executive associated with such dispute shall be borne by the Company; provided that if it is determined that the claims of the Executive were without reasonable basis, each party shall bear such party's own attorneys' fees and costs. 6. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Illinois without regard to principles of conflict of laws. - 3 - 7. Amendment and Waiver. The provisions of this Agreement may be amended or waived only by the written agreement of the Company and the Executive, and no course of conduct or failure or delay in enforcing the provisions of this Agreement shall affect the validity, binding effect or enforceability of this Agreement. 8. Counterparts. This Agreement may be executed in two counterparts, each of which shall be deemed to be an original and both of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. BELL SPORTS CORP. By /s/ Terry G. Lee ---------------------------------- Terry G. Lee Chairman of the Board and Chief Executive Officer EXECUTIVE: /s/ Howard A. Kosick ----------------------------------- Howard A. Kosick - 4 - Appendix A ---------- For purposes of the Phantom Stock Unit Agreement dated as of September 23, 1997 between Bell Sports Corp. (the "Company") and Howard A. Kosick, "Change in Control" shall mean: (1) the acquisition by any individual, entity or group (a "Person"), including any "person" within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), of beneficial ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act, of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change in Control: (A) any acquisition directly from the Company (excluding any acquisition resulting from the exercise of a conversion or exchange privilege in respect of outstanding convertible or exchangeable securities), (B) any acquisition by the Company, (C) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, (D) any acquisition by any corporation pursuant to a reorganization, merger or consolidation involving the Company, if, immediately after such reorganization, merger or consolidation, each of the conditions described in clauses (i), (ii) and (iii) of section (3) of this definition shall be satisfied; and provided further that, for purposes of clause (B), if any Person (other than the Company or any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company) shall become the beneficial owner of 20% or more of the Outstanding Company Common Stock or 20% or more of the Outstanding Company Voting Securities by reason of an acquisition by the Company and such Person shall, after such acquisition by the Company, become the beneficial owner of any additional shares of the Outstanding Company Common Stock or any additional Outstanding Voting Securities and such beneficial ownership is publicly announced, such additional beneficial ownership shall constitute a Change in Control; (2) individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least 66-2/3% of such Board; provided, however, that any individual who becomes a director of the Company subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by the vote of at least 66-2/3% of the directors then comprising the Incumbent Board shall be deemed to have been a member of the Incumbent Board; and provided further, that no individual who was A-1 initially elected as a director of the Company as a result of an actual or threatened election contest, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act, or any other actual or threatened solicitation of proxies or consents by or on behalf of any Person other than the Board shall be deemed to have been a member of the Incumbent Board; (3) approval by the stockholders of the Company of a reorganization, merger or consolidation unless, in any such case, immediately after such reorganization, merger or consolidation, (i) more than 60% of the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and more than 60% of the combined voting power of the then outstanding securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals or entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation and in substantially the same proportions relative to each other as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (ii) no Person (other than the Company, any employee benefit plan (or related trust) sponsored or maintained by the Company or the corporation resulting from such reorganization, merger or consolidation (or any corporation controlled by the Company) and any Person which beneficially owned, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 20% or more of the Outstanding Company Common Stock or the Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of the then outstanding shares of common stock of such corporation or 20% or more of the combined voting power of the then outstanding securities of such corporation entitled to vote generally in the election of directors and (iii) at least 66-2/3% of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such reorganization, merger or consolidation; or (4) approval by the stockholders of the Company of (i) a plan of complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company other than to a corporation with respect to which, immediately after such sale or other disposition, (A) more than 60% of the then outstanding shares of common stock thereof and more than 60% of the combined voting power of the then outstanding securities thereof entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the A-2 individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such sale or other disposition and in substantially the same proportions relative to each other as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (B) no Person (other than the Company, any employee benefit plan (or related trust) sponsored or maintained by the Company or such corporation (or any corporation controlled by the Company) and any Person which beneficially owned, immediately prior to such sale or other disposition, directly or indirectly, 20% or more of the Outstanding Company Common Stock or the Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of the then outstanding shares of common stock thereof or 20% or more of the combined voting power of the then outstanding securities thereof entitled to vote generally in the election of directors and (C) at least 66-2/3% of the members of the board of directors thereof were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition. A-3 EX-10.9 5 AMENDMENT TO EMPLOYMENT AGREEMENT AMENDMENT TO EMPLOYMENT AGREEMENT This Amendment dated as of August 29, 1997, effective as of July 1, 1997, to Employment Agreement dated April 11, 1997 (the "Employment Agreement") is entered into among Mary J. George (the "Executive"), Bell Sports Corp., a Delaware corporation (the "Holding Company"), and Bell Sports, Inc., a California corporation (the "Operating Company"). Except as otherwise provided in Appendix A hereto, the Holding Company and the Operating Company are collectively referred to herein as the "Company." WHEREAS, the Executive currently serves as President and Chief Operating Officer of both the Holding Company and the Operating Company pursuant to the terms of the Employment Agreement; and WHEREAS, the Company and the Executive desire to amend the Employment Agreement as set forth herein. NOW, THEREFORE, in consideration of the premises and the mutual agreements contained herein, the parties hereby agree that the Employment Agreement shall be amended as set forth below, effective as of July 1, 1997. 1. The first sentence of Section 3(a) of the Employment Agreement is amended to read in its entirety as follows: "During the Employment Period, the Company shall pay to the Executive an annual base salary at the rate of $300,000 per annum, payable in accordance with the Company's executive payroll policy." 2. The fifth sentence of Section 3(c)(i) of the Employment Agreement is amended to read in its entirety as follows, and Appendix A to this Amendment shall be Appendix A to the Employment Agreement: "All restricted phantom stock units awarded pursuant to this Section 3(c)(i) shall become fully vested upon the earlier to occur of the termination of the Employment Period or a 'Change in Control' of the Company, as such term is defined in Appendix A to this Agreement; provided, however, that in the event of the termination of the Executive's employment voluntarily by the Executive pursuant to Section 4(e) hereof or by the Company for "Cause" pursuant to Section 4(c) hereof (as such term is defined in such section), no such restricted phantom stock units shall vest, and all such restricted phantom stock units shall be forfeited." 3. Section 3(e) of the Employment Agreement is amended to read in its entirety as follows: "(e) Perquisites. During the Employment Period, the Executive shall be entitled to (i) the use of an automobile and reimbursement by the Company for all expenses relating to the operation thereof and (ii) reimbursement for all expenses relating to the Executive's commuting by commercial airline between the San Jose and Los Angeles metropolitan areas." 4. Section 3(h) of the Employment Agreement is amended by adding the following sentence at the end thereof: "In addition, the Executive shall be reimbursed for all medical and dental expenses that are not covered under the medical and dental plans otherwise covering the Executive." IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. BELL SPORTS CORP. By /s/ Terry G. Lee ---------------------------------- Terry G. Lee Chairman of the Board and Chief Executive Officer BELL SPORTS, INC. By /s/ Terry G. Lee ---------------------------------- Terry G. Lee Chairman of the Board and Chief Executive Officer EXECUTIVE: /s/ Mary J. George ------------------------------------ Mary J. George - 2 - Appendix A ---------- For purposes of the Employment Agreement dated April 11, 1997, as amended as of August 29, 1997, among Mary J. George, Bell Sports Corp. (the "Company") and Bell Sports, Inc., "Change in Control" shall mean: (1) the acquisition by any individual, entity or group (a "Person"), including any "person" within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), of beneficial ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act, of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change in Control: (A) any acquisition directly from the Company (excluding any acquisition resulting from the exercise of a conversion or exchange privilege in respect of outstanding convertible or exchangeable securities), (B) any acquisition by the Company, (C) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, (D) any acquisition by any corporation pursuant to a reorganization, merger or consolidation involving the Company, if, immediately after such reorganization, merger or consolidation, each of the conditions described in clauses (i), (ii) and (iii) of section (3) of this definition shall be satisfied; and provided further that, for purposes of clause (B), if any Person (other than the Company or any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company) shall become the beneficial owner of 20% or more of the Outstanding Company Common Stock or 20% or more of the Outstanding Company Voting Securities by reason of an acquisition by the Company and such Person shall, after such acquisition by the Company, become the beneficial owner of any additional shares of the Outstanding Company Common Stock or any additional Outstanding Voting Securities and such beneficial ownership is publicly announced, such additional beneficial ownership shall constitute a Change in Control; (2) individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least 66-2/3% of such Board; provided, however, that any individual who becomes a director of the Company subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by the vote of at least 66-2/3% of the directors then comprising the Incumbent Board shall be deemed to have been a member of the - 3 - Incumbent Board; and provided further, that no individual who was initially elected as a director of the Company as a result of an actual or threatened election contest, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act, or any other actual or threatened solicitation of proxies or consents by or on behalf of any Person other than the Board shall be deemed to have been a member of the Incumbent Board; (3) approval by the stockholders of the Company of a reorganization, merger or consolidation unless, in any such case, immediately after such reorganization, merger or consolidation, (i) more than 60% of the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and more than 60% of the combined voting power of the then outstanding securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals or entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation and in substantially the same proportions relative to each other as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (ii) no Person (other than the Company, any employee benefit plan (or related trust) sponsored or maintained by the Company or the corporation resulting from such reorganization, merger or consolidation (or any corporation controlled by the Company) and any Person which beneficially owned, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 20% or more of the Outstanding Company Common Stock or the Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of the then outstanding shares of common stock of such corporation or 20% or more of the combined voting power of the then outstanding securities of such corporation entitled to vote generally in the election of directors and (iii) at least 66-2/3% of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such reorganization, merger or consolidation; or (4) approval by the stockholders of the Company of (i) a plan of complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company other than to a corporation with respect to which, immediately after such sale or other disposition, (A) more than 60% of the then outstanding shares of common stock thereof and more than 60% of the combined voting power of the then outstanding securities thereof entitled to vote generally in the election of directors is then beneficially - 4 - owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such sale or other disposition and in substantially the same proportions relative to each other as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (B) no Person (other than the Company, any employee benefit plan (or related trust) sponsored or maintained by the Company or such corporation (or any corporation controlled by the Company) and any Person which beneficially owned, immediately prior to such sale or other disposition, directly or indirectly, 20% or more of the Outstanding Company Common Stock or the Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of the then outstanding shares of common stock thereof or 20% or more of the combined voting power of the then outstanding securities thereof entitled to vote generally in the election of directors and (C) at least 66-2/3% of the members of the board of directors thereof were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition. - 5 - EX-10.10 6 PHANTOM STOCK UNIT AGREEMENT - GEORGE PHANTOM STOCK UNIT AGREEMENT ---------------------------- PHANTOM STOCK UNIT AGREEMENT dated as of September 23, 1997, effective as of August 28, 1997 (the "Effective Date"), between Bell Sports Corp., a Delaware corporation (the "Company"), and Mary J. George (the "Executive"). WHEREAS, the Company is engaged primarily in the business of designing, manufacturing, producing, distributing, marketing, advertising and selling auto racing helmets, bicycle helmets, bicycle accessories and related products; WHEREAS, the Executive currently serves as the President and Chief Operating Officer of the Company; WHEREAS, the Executive's abilities and services are unique and essential to the prospects of the Company; and WHEREAS, the Company and the Executive desire to enter into this Agreement to further align the interests of the Executive with the interests of the stockholders of the Company by providing additional incentives to the Executive based upon future increases in the value of the shares of common stock, $.01 par value, of the Company ("Common Stock"). NOW, THEREFORE, in consideration of the premises and the mutual agreements contained herein, the parties hereby agree as follows: 1. Phantom Stock Compensation. (a) As additional compensation for the services provided by the Executive to the Company, effective as of the Effective Date, the Company grants to the Executive, and the Executive is credited with, 10,881 phantom stock units ("Units"). The Units shall, subject to the provisions of this Agreement, become vested cumulatively as follows: (1) On each of the first two annual anniversaries of the Effective Date, one-half of the total number of Units granted hereunder, subject to adjustment as provided in Section 1(c) hereof, shall become vested; and (2) Notwithstanding anything to the contrary contained in this Section 1(a), all Units shall become vested upon a "Change in Control" of the Company, as such term is defined in Appendix A to this Agreement. All Units which shall have become vested pursuant to this Section 1(a) are hereinafter referred to as "Vested Units." (b) The Company shall pay to the Executive as additional compensation (the "Phantom Stock Benefit") an amount, determined as of the Valuation Date (as hereinafter defined), equal to the product of (1) the number of Units then credited to the Executive hereunder which shall have become Vested Units pursuant to Section 1(a) hereof (after giving effect to the adjustments provided for in Section 1(c) below) multiplied by (2) the Value (as hereinafter defined) of one share of Common Stock on the Valuation Date. The Phantom Stock Benefit shall be paid to the Executive in cash, subject to any applicable payroll or other taxes required to be withheld, not later than the 30th day following the Valuation Date. Nothing in this Section 1 shall be deemed to grant to the Executive any right in or to, or any right to purchase or otherwise acquire, any shares of Common Stock (or any securities convertible into Common Stock). (c) In the event of a change in the number of outstanding shares of Common Stock by reason of any dividend payable in shares of Common Stock, or by reason of any stock split, reverse stock split or combination of shares, the number of Units credited to the Executive hereunder shall be increased or decreased, as the case may be, in the same proportion. Any such adjustment shall be made by the good faith determination of the Board, which determination shall be conclusive. (d) If the Company shall spin-off a significant subsidiary or shall make a substantial non-cash distribution to its stockholders, in partial liquidation or otherwise (excluding, however, any Change in Control of the Company or any transaction or change described in Section 1(c) hereof, and it is reasonable to expect that the future Value of the Common Stock would be materially affected thereby, the Board shall modify the formula for determining the Phantom Stock Benefit in an equitable manner to maintain the economic benefit granted to the Executive pursuant to this Section 1. (e) For purposes of this Agreement, the following terms shall have the meanings set forth below: (1) "Valuation Date" shall mean the earliest of (A) the date, for each Unit granted hereunder, on which such Unit becomes a Vested Unit, (B) the date of termination of the Executive's employment other than for "Cause" (as defined in the Employment Agreement among the Company, Bell Sports, Inc. and the Executive dated as of April 11, 1997, as amended as of August 29, 1997) and (C) the effective date of any Change in Control. (2) "Value" shall mean the arithmetic average of the Market Price (as hereinafter defined) of a share of Common Stock for the 10 trading days preceding the Valuation Date, but in no event shall the Value be less than the price per share of Common Stock paid prior to the Valuation Date in any tender offer subject to Section 14(d) of the Securities Exchange Act of 1934, as amended (or any statute hereafter - 2 - substituted therefor), which results in a Change in Control, as such price per share shall be adjusted by the good faith determination of the Board to reflect any change described in Section 1(c) occurring subsequent to such tender offer. (3) "Market Price" shall mean for any day the closing price of a share of Common Stock, as reported in The Wall Street Journal as NASDAQ National Market Issues. (f) In the absence of manifest error, the determination of the amount of the Phantom Stock Benefit by the Board in accordance with this Section 1 shall be binding upon the Executive and the Company. 2. Federal and State Withholding. The Company shall deduct from the amounts payable to the Executive pursuant to this Agreement the amount of all required federal and state withholding taxes in accordance with the Executive's Form W-4 on file with the Company and all applicable social security taxes. 3. Assignment. The rights and benefits of the Executive hereunder shall not be assignable, whether by voluntary or involuntary assignment or transfer. This Agreement shall be binding upon, and shall inure to the benefit of, the successors and assigns of the Company, and the heirs, executors and administrators of the Executive. 4. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and personally delivered, sent by certified or registered mail or sent by overnight courier service as follows: if to the Executive, to the Executive's address as set forth in the records of the Company, and if to the Company, to the address of its principal executive offices, attention: Chief Executive Officer, with a copy to Larry A. Barden, Esq., Sidley & Austin, One First National Plaza, Chicago, Illinois 60603, or to any other address designated by any party hereto by notice similarly given. 5. Costs. In the event that a dispute shall arise between the parties hereto and such dispute is resolved by a court of competent jurisdiction, all reasonable attorneys' fees and costs of the Company and the Executive and all other costs and expenses of the Company and the Executive associated with such dispute shall be borne by the Company; provided that if it is determined that the claims of the Executive were without reasonable basis, each party shall bear such party's own attorneys' fees and costs. 6. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Illinois without regard to principles of conflict of laws. - 3 - 7. Amendment and Waiver. The provisions of this Agreement may be amended or waived only by the written agreement of the Company and the Executive, and no course of conduct or failure or delay in enforcing the provisions of this Agreement shall affect the validity, binding effect or enforceability of this Agreement. 8. Counterparts. This Agreement may be executed in two counterparts, each of which shall be deemed to be an original and both of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. BELL SPORTS CORP. By /s/ Terry G. Lee --------------------------------- Terry G. Lee Chairman of the Board and Chief Executive Officer EXECUTIVE: /s/ Mary J. George ---------------------------------- Mary J. George - 4 - Appendix A ---------- For purposes of the Phantom Stock Unit Agreement dated as of September 23, 1997 between Bell Sports Corp. (the "Company") and Mary J. George, "Change in Control" shall mean: (1) the acquisition by any individual, entity or group (a "Person"), including any "person" within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), of beneficial ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act, of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change in Control: (A) any acquisition directly from the Company (excluding any acquisition resulting from the exercise of a conversion or exchange privilege in respect of outstanding convertible or exchangeable securities), (B) any acquisition by the Company, (C) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, (D) any acquisition by any corporation pursuant to a reorganization, merger or consolidation involving the Company, if, immediately after such reorganization, merger or consolidation, each of the conditions described in clauses (i), (ii) and (iii) of section (3) of this definition shall be satisfied; and provided further that, for purposes of clause (B), if any Person (other than the Company or any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company) shall become the beneficial owner of 20% or more of the Outstanding Company Common Stock or 20% or more of the Outstanding Company Voting Securities by reason of an acquisition by the Company and such Person shall, after such acquisition by the Company, become the beneficial owner of any additional shares of the Outstanding Company Common Stock or any additional Outstanding Voting Securities and such beneficial ownership is publicly announced, such additional beneficial ownership shall constitute a Change in Control; (2) individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least 66-2/3% of such Board; provided, however, that any individual who becomes a director of the Company subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by the vote of at least 66-2/3% of the directors then comprising the Incumbent Board shall be deemed to have been a member of the Incumbent Board; and provided further, that no individual who was A-1 initially elected as a director of the Company as a result of an actual or threatened election contest, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act, or any other actual or threatened solicitation of proxies or consents by or on behalf of any Person other than the Board shall be deemed to have been a member of the Incumbent Board; (3) approval by the stockholders of the Company of a reorganization, merger or consolidation unless, in any such case, immediately after such reorganization, merger or consolidation, (i) more than 60% of the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and more than 60% of the combined voting power of the then outstanding securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals or entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation and in substantially the same proportions relative to each other as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (ii) no Person (other than the Company, any employee benefit plan (or related trust) sponsored or maintained by the Company or the corporation resulting from such reorganization, merger or consolidation (or any corporation controlled by the Company) and any Person which beneficially owned, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 20% or more of the Outstanding Company Common Stock or the Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of the then outstanding shares of common stock of such corporation or 20% or more of the combined voting power of the then outstanding securities of such corporation entitled to vote generally in the election of directors and (iii) at least 66-2/3% of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such reorganization, merger or consolidation; or (4) approval by the stockholders of the Company of (i) a plan of complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company other than to a corporation with respect to which, immediately after such sale or other disposition, (A) more than 60% of the then outstanding shares of common stock thereof and more than 60% of the combined voting power of the then outstanding securities thereof entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the A-2 individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such sale or other disposition and in substantially the same proportions relative to each other as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (B) no Person (other than the Company, any employee benefit plan (or related trust) sponsored or maintained by the Company or such corporation (or any corporation controlled by the Company) and any Person which beneficially owned, immediately prior to such sale or other disposition, directly or indirectly, 20% or more of the Outstanding Company Common Stock or the Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of the then outstanding shares of common stock thereof or 20% or more of the combined voting power of the then outstanding securities thereof entitled to vote generally in the election of directors and (C) at least 66-2/3% of the members of the board of directors thereof were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition. A-3 EX-10.12 7 PHANTOM STOCK UNIT AGREEMENT - BOUNDS PHANTOM STOCK UNIT AGREEMENT ---------------------------- PHANTOM STOCK UNIT AGREEMENT dated as of September 23, 1997, effective as of August 28, 1997 (the "Effective Date"), between Bell Sports Corp., a Delaware corporation (the "Company"), and Linda K. Bounds (the "Executive"). WHEREAS, the Company is engaged primarily in the business of designing, manufacturing, producing, distributing, marketing, advertising and selling auto racing helmets, bicycle helmets, bicycle accessories and related products; WHEREAS, the Executive currently serves as the Senior Vice President, Chief Financial Officer, Treasurer and Secretary of the Company; WHEREAS, the Executive's abilities and services are unique and essential to the prospects of the Company; and WHEREAS, the Company and the Executive desire to enter into this Agreement to further align the interests of the Executive with the interests of the stockholders of the Company by providing additional incentives to the Executive based upon future increases in the value of the shares of common stock, $.01 par value, of the Company ("Common Stock"). NOW, THEREFORE, in consideration of the premises and the mutual agreements contained herein, the parties hereby agree as follows: 1. Phantom Stock Compensation. (a) As additional compensation for the services provided by the Executive to the Company, effective as of the Effective Date, the Company grants to the Executive, and the Executive is credited with, 5,441 phantom stock units ("Units"). The Units shall, subject to the provisions of this Agreement, become vested cumulatively as follows: (1) On each of the first two annual anniversaries of the Effective Date, one-half of the total number of Units granted hereunder, subject to adjustment as provided in Section 1(c) hereof, shall become vested; and (2) Notwithstanding anything to the contrary contained in this Section 1(a), all Units shall become vested upon a "Change in Control" of the Company, as such term is defined in Appendix A to this Agreement. All Units which shall have become vested pursuant to this Section 1(a) are hereinafter referred to as "Vested Units." (b) The Company shall pay to the Executive as additional compensation (the "Phantom Stock Benefit") an amount, determined as of the Valuation Date (as hereinafter defined), equal to the product of (1) the number of Units then credited to the Executive hereunder which shall have become Vested Units pursuant to Section 1(a) hereof (after giving effect to the adjustments provided for in Section 1(c) below) multiplied by (2) the Value (as hereinafter defined) of one share of Common Stock on the Valuation Date. The Phantom Stock Benefit shall be paid to the Executive in cash, subject to any applicable payroll or other taxes required to be withheld, not later than the 30th day following the Valuation Date. Nothing in this Section 1 shall be deemed to grant to the Executive any right in or to, or any right to purchase or otherwise acquire, any shares of Common Stock (or any securities convertible into Common Stock). (c) In the event of a change in the number of outstanding shares of Common Stock by reason of any dividend payable in shares of Common Stock, or by reason of any stock split, reverse stock split or combination of shares, the number of Units credited to the Executive hereunder shall be increased or decreased, as the case may be, in the same proportion. Any such adjustment shall be made by the good faith determination of the Board, which determination shall be conclusive. (d) If the Company shall spin-off a significant subsidiary or shall make a substantial non-cash distribution to its stockholders, in partial liquidation or otherwise (excluding, however, any Change in Control of the Company or any transaction or change described in Section 1(c) hereof, and it is reasonable to expect that the future Value of the Common Stock would be materially affected thereby, the Board shall modify the formula for determining the Phantom Stock Benefit in an equitable manner to maintain the economic benefit granted to the Executive pursuant to this Section 1. (e) For purposes of this Agreement, the following terms shall have the meanings set forth below: (1) "Valuation Date" shall mean the earliest of (A) the date, for each Unit granted hereunder, on which such Unit becomes a Vested Unit, (B) the date of termination of the Executive's employment other than for "Cause" (as defined in the Employment Agreement among the Company, Bell Sports, Inc. and the Executive dated as of April 25, 1997) and (C) the effective date of any Change in Control. (2) "Value" shall mean the arithmetic average of the Market Price (as hereinafter defined) of a share of Common Stock for the 10 trading days preceding the Valuation Date, but in no event shall the Value be less than the price per share of Common Stock paid prior to the Valuation Date in any tender offer subject to Section 14(d) of the Securities - 2 - Exchange Act of 1934, as amended (or any statute hereafter substituted therefor), which results in a Change in Control, as such price per share shall be adjusted by the good faith determination of the Board to reflect any change described in Section 1(c) occurring subsequent to such tender offer. (3) "Market Price" shall mean for any day the closing price of a share of Common Stock, as reported in The Wall Street Journal as NASDAQ National Market Issues. (f) In the absence of manifest error, the determination of the amount of the Phantom Stock Benefit by the Board in accordance with this Section 1 shall be binding upon the Executive and the Company. 2. Federal and State Withholding. The Company shall deduct from the amounts payable to the Executive pursuant to this Agreement the amount of all required federal and state withholding taxes in accordance with the Executive's Form W-4 on file with the Company and all applicable social security taxes. 3. Assignment. The rights and benefits of the Executive hereunder shall not be assignable, whether by voluntary or involuntary assignment or transfer. This Agreement shall be binding upon, and shall inure to the benefit of, the successors and assigns of the Company, and the heirs, executors and administrators of the Executive. 4. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and personally delivered, sent by certified or registered mail or sent by overnight courier service as follows: if to the Executive, to the Executive's address as set forth in the records of the Company, and if to the Company, to the address of its principal executive offices, attention: Chief Executive Officer, with a copy to Larry A. Barden, Esq., Sidley & Austin, One First National Plaza, Chicago, Illinois 60603, or to any other address designated by any party hereto by notice similarly given. 5. Costs. In the event that a dispute shall arise between the parties hereto and such dispute is resolved by a court of competent jurisdiction, all reasonable attorneys' fees and costs of the Company and the Executive and all other costs and expenses of the Company and the Executive associated with such dispute shall be borne by the Company; provided that if it is determined that the claims of the Executive were without reasonable basis, each party shall bear such party's own attorneys' fees and costs. 6. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Illinois without regard to principles of conflict of laws. - 3 - 7. Amendment and Waiver. The provisions of this Agreement may be amended or waived only by the written agreement of the Company and the Executive, and no course of conduct or failure or delay in enforcing the provisions of this Agreement shall affect the validity, binding effect or enforceability of this Agreement. 8. Counterparts. This Agreement may be executed in two counterparts, each of which shall be deemed to be an original and both of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. BELL SPORTS CORP. By /s/ Terry G. Lee --------------------------------- Terry G. Lee Chairman of the Board and Chief Executive Officer EXECUTIVE: /s/ Linda K. Bounds ----------------------------------- Linda K. Bounds - 4 - Appendix A ---------- For purposes of the Phantom Stock Unit Agreement dated as of September 23, 1997 between Bell Sports Corp. (the "Company") and Linda K. Bounds, "Change in Control" shall mean: (1) the acquisition by any individual, entity or group (a "Person"), including any "person" within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), of beneficial ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act, of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change in Control: (A) any acquisition directly from the Company (excluding any acquisition resulting from the exercise of a conversion or exchange privilege in respect of outstanding convertible or exchangeable securities), (B) any acquisition by the Company, (C) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, (D) any acquisition by any corporation pursuant to a reorganization, merger or consolidation involving the Company, if, immediately after such reorganization, merger or consolidation, each of the conditions described in clauses (i), (ii) and (iii) of section (3) of this definition shall be satisfied; and provided further that, for purposes of clause (B), if any Person (other than the Company or any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company) shall become the beneficial owner of 20% or more of the Outstanding Company Common Stock or 20% or more of the Outstanding Company Voting Securities by reason of an acquisition by the Company and such Person shall, after such acquisition by the Company, become the beneficial owner of any additional shares of the Outstanding Company Common Stock or any additional Outstanding Voting Securities and such beneficial ownership is publicly announced, such additional beneficial ownership shall constitute a Change in Control; (2) individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least 66-2/3% of such Board; provided, however, that any individual who becomes a director of the Company subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by the vote of at least 66-2/3% of the directors then comprising the Incumbent Board shall be deemed to have been a member of the Incumbent Board; and provided further, that no individual who was A-1 initially elected as a director of the Company as a result of an actual or threatened election contest, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act, or any other actual or threatened solicitation of proxies or consents by or on behalf of any Person other than the Board shall be deemed to have been a member of the Incumbent Board; (3) approval by the stockholders of the Company of a reorganization, merger or consolidation unless, in any such case, immediately after such reorganization, merger or consolidation, (i) more than 60% of the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and more than 60% of the combined voting power of the then outstanding securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals or entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation and in substantially the same proportions relative to each other as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (ii) no Person (other than the Company, any employee benefit plan (or related trust) sponsored or maintained by the Company or the corporation resulting from such reorganization, merger or consolidation (or any corporation controlled by the Company) and any Person which beneficially owned, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 20% or more of the Outstanding Company Common Stock or the Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of the then outstanding shares of common stock of such corporation or 20% or more of the combined voting power of the then outstanding securities of such corporation entitled to vote generally in the election of directors and (iii) at least 66-2/3% of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such reorganization, merger or consolidation; or (4) approval by the stockholders of the Company of (i) a plan of complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company other than to a corporation with respect to which, immediately after such sale or other disposition, (A) more than 60% of the then outstanding shares of common stock thereof and more than 60% of the combined voting power of the then outstanding securities thereof entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the A-2 individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such sale or other disposition and in substantially the same proportions relative to each other as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (B) no Person (other than the Company, any employee benefit plan (or related trust) sponsored or maintained by the Company or such corporation (or any corporation controlled by the Company) and any Person which beneficially owned, immediately prior to such sale or other disposition, directly or indirectly, 20% or more of the Outstanding Company Common Stock or the Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of the then outstanding shares of common stock thereof or 20% or more of the combined voting power of the then outstanding securities thereof entitled to vote generally in the election of directors and (C) at least 66-2/3% of the members of the board of directors thereof were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition. A-3 EX-10.13 8 SEVERANCE AGREEMENT - MCCAUGHEN SEVERANCE AGREEMENT THIS AGREEMENT is entered into as of the 24th day of September, 1997 among Bell Sports Corp., a Delaware corporation (the "Company"), Bell Sports Canada Inc., a corporation existing under the laws of Canada and an indirect wholly owned subsidiary of the Company (the "Subsidiary"), and Robert Alan McCaughen ("the Executive"). W I T N E S S E T H WHEREAS, the Executive currently serves as a key employee of the Subsidiary and his services and knowledge are valuable to the Company and the Subsidiary in connection with the management of the operating facilities, divisions and departments of the Subsidiary; and WHEREAS, the Board (as defined in Section 1) has determined that it is in the best interests of the Company and its stockholders to secure the Executive's continued services and to ensure the Executive's continued dedication and objectivity in the event of any threat or occurrence of, or negotiation or other action that could lead to, or create the possibility of, a Change in Control (as defined in Section 1) of the Company, without concern as to whether the Executive might be hindered or distracted by personal uncertainties and risks created by any such possible Change in Control, and to encourage the Executive's full attention and dedication to the Company, the Board has authorized the Company to enter into this Agreement. NOW, THEREFORE, for and in consideration of the premises and the mutual covenants and agreements herein contained, the Company and the Executive hereby agree as follows: 1. Definitions. As used in this Agreement, the following terms shall have the respective meanings set forth below: (a) "Board" means the Board of Directors of the Company. (b) "Cause" means (1) a material breach by the Executive of those duties and responsibilities of the Executive which do not differ in any material respect from the duties and responsibilities of the Executive during the 90-day period immediately prior to a Change in Control (other than as a result of incapacity due to physical or mental illness) which is demonstrably willful and deliberate on the Executive's part, which is committed in bad faith or without reasonable belief that such breach is in the best interests of the Company and which is not remedied in a reasonable period of time after receipt of written notice from the Company specifying such breach or (2) the commission by the Executive of a felony involving moral turpitude. (c) "Change in Control" means: (1) the acquisition by any individual, entity or group (a "Person"), including any "person" within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), of beneficial ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act, of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change in Control: (A) any acquisition directly from the Company (excluding any acquisition resulting from the exercise of a conversion or exchange privilege in respect of outstanding convertible or exchangeable securities), (B) any acquisition by the Company, (C) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, (D) any acquisition by any corporation pursuant to a reorganization, merger or consolidation involving the Company, if, immediately after such reorganization, merger or consolidation, each of the conditions described in clauses (i), (ii) and (iii) of subsection (3) of this Section (1)(c) shall be satisfied; and provided further that, for purposes of clause (B), if any Person (other than the Company or any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company) shall become the beneficial owner of 20% or more of the Outstanding Company Common Stock or 20% or more of the Outstanding Company Voting Securities by reason of an acquisition by the Company and such Person shall, after such acquisition by the Company, become the beneficial owner of any additional shares of the Outstanding Company Common Stock or any additional Outstanding Voting Securities and such beneficial ownership is publicly announced, such additional beneficial ownership shall constitute a Change in Control; (2) individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least 66-2/3% of such Board; provided, however, that any individual who becomes a director of the Company subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by the vote of at least 66-2/3% of the directors then comprising the Incumbent Board shall be deemed to have been a member of the Incumbent Board; and provided further, that no individual who was initially elected as a director of the Company as a result of an actual or threatened election contest, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act, or any other actual or threatened solicitation of proxies or consents by or on behalf of any Person other than the Board shall be deemed to have been a member of the Incumbent Board; -2- (3) approval by the stockholders of the Company of a reorganization, merger or consolidation unless, in any such case, immediately after such reorganization, merger or consolidation, (i) more than 60% of the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and more than 60% of the combined voting power of the then outstanding securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals or entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation and in substantially the same proportions relative to each other as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (ii) no Person (other than the Company, any employee benefit plan (or related trust) sponsored or maintained by the Company or the corporation resulting from such reorganization, merger or consolidation (or any corporation controlled by the Company) and any Person which beneficially owned, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 20% or more of the Outstanding Company Common Stock or the Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of the then outstanding shares of common stock of such corporation or 20% or more of the combined voting power of the then outstanding securities of such corporation entitled to vote generally in the election of directors and (iii) at least 66-2/3% of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such reorganization, merger or consolidation; or (4) approval by the stockholders of the Company of (i) a plan of complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company other than to a corporation with respect to which, immediately after such sale or other disposition, (A) more than 60% of the then outstanding shares of common stock thereof and more than 60% of the combined voting power of the then outstanding securities thereof entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such sale or other disposition and in substantially the same proportions relative to each other as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and the Outstanding Company -3- Voting Securities, as the case may be, (B) no Person (other than the Company, any employee benefit plan (or related trust) sponsored or maintained by the Company or such corporation (or any corporation controlled by the Company) and any Person which beneficially owned, immediately prior to such sale or other disposition, directly or indirectly, 20% or more of the Outstanding Company Common Stock or the Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of the then outstanding shares of common stock thereof or 20% or more of the combined voting power of the then outstanding securities thereof entitled to vote generally in the election of directors and (C) at least 66-2/3% of the members of the board of directors thereof were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition. (d) "Code" means the Internal Revenue Code of 1986, as amended. (e) "Date of Termination" means (1) the effective date on which the Executive's employment by the Company or the Subsidiary terminates as specified in a prior written notice by the Company or the Executive, as the case may be, to the other, delivered pursuant to Section 11 or (2) if the Executive's employment by the Company and the Subsidiary terminates by reason of death, the date of death of the Executive. (f) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (g) "Good Reason" means, without the Executive's express written consent, the occurrence of any of the following events after a Change in Control: (1) any of (i) the assignment to the Executive of any duties inconsistent in any material respect with the Executive's position(s), duties, responsibilities or status with the Company or the Subsidiary immediately prior to such Change in Control, (ii) a change in the Executive's reporting responsibilities, titles or offices with the Company or the Subsidiary as in effect immediately prior to such Change in Control, (iii) any removal or involuntary termination of the Executive from the Company or the Subsidiary otherwise than as expressly permitted by this Agreement or any failure to re-elect the Executive to any position with the Company or the Subsidiary held by the Executive immediately prior to such Change in Control or (iv) any breach by the Company or the Subsidiary of any employment agreement among the Company and/or the Subsidiary and the Executive then in effect; (2) a reduction by the Company or the Subsidiary in the Executive's rate of annual base salary as in effect -4- immediately prior to such Change in Control or as the same may be increased from time to time thereafter; (3) any requirement of the Company or the Subsidiary that the Executive be based anywhere other than at the facility where the Executive is located at the time of the Change in Control; (4) the failure of the Company or the Subsidiary to (i) continue in effect any employee benefit plan or compensation plan in which the Executive is participating immediately prior to such Change in Control, unless the Executive is permitted to participate in other plans providing the Executive with substantially comparable benefits, or the taking of any action by the Company or the Subsidiary which would adversely affect the Executive's participation in or materially reduce the Executive's benefits under any such plan, (ii) provide the Executive and the Executive's dependents welfare benefits (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs) in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive immediately prior to such Change in Control or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies, (iii) provide fringe benefits in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive immediately prior to such Change in Control or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies, (iv) provide the Executive with paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive immediately prior to such Change in Control or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies, or (v) reimburse the Executive promptly for all reasonable employment expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive immediately prior to such Change in Control, or if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies; or (5) the failure of the Company to obtain the assumption agreement from any successor as contemplated in Section 10(b). -5- For purposes of this Agreement, any good faith determination of Good Reason made by the Executive shall be conclusive; provided, however, that an isolated, insubstantial and inadvertent action taken in good faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive shall not constitute Good Reason. (h) "Nonqualifying Termination" means a termination of the Executive's employment (1) by the Company or the Subsidiary for Cause, (2) by the Executive for any reason other than a Good Reason, (3) as a result of the Executive's death or (4) by the Company and the Subsidiary due to the Executive's absence from his duties with the Company and the Subsidiary on a full-time basis for at least 180 consecutive days as a result of the Executive's incapacity due to physical or mental illness. (i) "Termination Period" means the period of time beginning with a Change in Control and ending on the earliest to occur of (1) the Executive's death and (2) two years following such Change in Control. 2. Obligations of the Executive. The Executive agrees that in the event any person or group attempts a Change in Control, he shall not voluntarily leave the employ of the Company or the Subsidiary without Good Reason (a) until such attempted Change in Control terminates or (b) if a Change in Control shall occur, until 90 days following such Change in Control. For purposes of the foregoing subsection (a), Good Reason shall be determined as if a Change in Control had occurred when such attempted Change in Control became known to the Board. 3. Payments Upon Termination of Employment. (a) If during the Termination Period the employment of the Executive shall terminate, other than by reason of a Nonqualifying Termination, then the Company shall pay to the Executive (or the Executive's beneficiary or estate), as compensation for services rendered to the Company and the Subsidiary: (1) within 30 days following the Date of Termination, a lump-sum cash amount equal to the sum of: (i) the Executive's full annual base salary from the Company and its affiliated companies through the Date of Termination, to the extent not theretofore paid, (ii) the Executive's annual bonus in an amount at least equal to the average annualized (for any fiscal year consisting of less than 12 full months) bonus paid or payable, including by reason of any deferral, to the Executive by the Company and its affiliated companies in respect of the three fiscal years of the Company immediately preceding the fiscal year in which the Change -6- in Control occurs, multiplied by a fraction, the numerator of which is the number of days in the fiscal year in which the Date of Termination occurs through the Date of Termination and the denominator of which is 365 or 366, as applicable, and (iii) any compensation previously deferred by the Executive (together with any interest and earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid; plus (2) within 30 days following the Date of Termination, a lump-sum cash amount in an amount equal to the Executive's highest annual base salary from the Company and its affiliated companies in effect during the 12-month period prior to the Date of Termination; provided, however, that any amount paid pursuant to this Section 3(a)(2) shall be paid in lieu of any other amount of severance relating to salary or bonus continuation to be received by the Executive upon termination of employment of the Executive under any severance plan, policy or arrangement of the Company. (b) (1) For a period of one year commencing on the Date of Termination, the Company shall continue to keep in full force and effect all medical, dental, accident, disability and life insurance plans with respect to the Executive and his dependents with the same level of coverage, upon the same terms and otherwise to the same extent as such plans shall have been in effect immediately prior to the Date of Termination. Notwithstanding the foregoing sentence, if any of the medical, dental, accident, disability or life insurance plans then in effect generally with respect to other peer executives of the Company and its affiliated companies would be more favorable to the Executive, such plan coverage shall be substituted for the analogous plan coverage provided to the Executive immediately prior to the Date of Termination, and the Company or the Subsidiary, as the case may be, and the Executive shall share the costs of such plan coverage in the same proportion as such costs were shared immediately prior to the Date of Termination. The obligation of the Company and the Subsidiary to continue coverage of the Executive and the Executive's dependents under such plans shall cease at such time as the Executive and the Executive's dependents obtain comparable coverage under another plan, including a plan maintained by a new employer. Execution of this Agreement by the Executive shall not be considered a waiver of any rights or entitlements the Executive and the Executive's dependents may have under applicable law to continuation of coverage under the group medical plan maintained by the Company or its affiliated companies. (2) The Company shall reimburse the Executive for Executive's expenditures for obtaining outplacement services, provided that the Company shall have no obligation to reimburse the Executive in an amount which exceeds 10% of the Executive's -7- highest annual base salary from the Company and its affiliated companies in effect during the 12-month period prior to the Date of Termination. (c) If during the Termination Period the employment of the Executive shall terminate by reason of a Nonqualifying Termination, then the Company shall pay to the Executive within 30 days following the Date of Termination, a lump-sum cash amount equal to the sum of (1) the Executive's full annual base salary from the Company and its affiliated companies through the Date of Termination, to the extent not theretofore paid and (2) any compensation previously deferred by the Executive (together with any interest and earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid. 4. Certain Reductions in Payments. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company or its affiliated companies to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any adjustment required under this Section 4) (in the aggregate, the "Total Payments") would be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), and if it is determined that (A) the amount remaining after the Total Payments are reduced by an amount equal to the Excise Tax is less than (B) the maximum amount that may be paid or distributed to or for the benefit of the Executive without resulting in the imposition of the Excise Tax, then the payments due hereunder shall be reduced so that the Total Payments are One Dollar ($1) less than such maximum amount. (b) All determinations required to be made under this Section 4, including whether and when a reduction in the amount payable hereunder pursuant to Section 4(a) is required and the amount of any such reduction and the assumptions to be utilized in arriving at such determination, shall be made by the Company's public accounting firm (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company or the Executive. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Executive shall appoint another nationally recognized public accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion -8- that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company, the Subsidiary and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that the reduction in the amount payable hereunder pursuant to Section 4(a) will not have been made consistent with the calculations required to be made hereunder. In that event the Executive thereafter shall promptly pay to the Company the amount of the required reduction. 5. Withholding Taxes. The Company may withhold, or in the event of payments made by the Subsidiary, the Subsidiary may withhold, from all payments due to the Executive (or his beneficiary or estate) hereunder all taxes which, by applicable federal, state, local or other law, the Company or the Subsidiary, as the case may be, is required to withhold therefrom. 6. Reimbursement of Expenses. If any contest or dispute shall arise under this Agreement involving termination of the Executive's employment with the Company or the Subsidiary or involving the failure or refusal of the Company or the Subsidiary to perform fully in accordance with the terms hereof, the Company shall reimburse the Executive on a current basis, for all legal fees and expenses, if any, incurred by the Executive in connection with such contest or dispute, together with interest at a rate equal to the Prime Rate as published in the "Money Rates" section of The Wall Street Journal, but in no event higher than the maximum legal rate permissible under applicable law, such interest to accrue from the date the Company receives the Executive's statement for such fees and expenses through the date of payment thereof; provided, however, that in the event the resolution of any such contest or dispute includes a finding denying, in total, the Executive's claims in such contest or dispute, the Executive shall be required to reimburse the Company, over a period of 12 months from the date of such resolution, for all sums advanced to the Executive pursuant to this Section 6. 7. Operative Event. Notwithstanding any provision herein to the contrary, no amounts shall be payable hereunder unless and until there is a Change in Control at a time when the Executive is employed by the Company and the Subsidiary. 8. Termination of Agreement. (a) This Agreement shall be effective on the date hereof and shall continue until terminated by the Company as provided in paragraph (b) of this Section 8; provided, however, that this Agreement shall terminate in any event upon the first -9- to occur of (i) the Executive's death and (ii) termination of the Executive's employment with the Company prior to a Change in Control. (b) The Company shall have the right prior to a Change in Control, in its sole discretion, pursuant to action by the Board, to approve the termination of this Agreement, which termination shall not become effective until the date fixed by the Board for such termination, which date shall be at least 180 days after notice thereof is given by the Company to the Executive in accordance with Section 11; provided, however, that no such action shall be taken by the Board during any period of time when the Board has knowledge that any person has taken steps reasonably calculated to effect a Change in Control until, in the opinion of the Board, such person has abandoned or terminated its efforts to effect a Change in Control; and provided further, that in no event shall this Agreement be terminated in the event of a Change in Control. 9. Scope of Agreement. Nothing in this Agreement shall be deemed to entitle the Executive to continued employment with the Company or its subsidiaries, and if the Executive's employment with the Company shall terminate prior to a Change in Control, then the Executive shall have no further rights under this Agreement; provided, however, that any termination of the Executive's employment following a Change in Control shall be subject to all of the provisions of this Agreement. 10. Successors; Binding Agreement. (a) This Agreement shall not be terminated by any merger or consolidation of the Company whereby the Company is or is not the surviving or resulting corporation or as a result of any transfer of all or substantially all of the assets of the Company. In the event of any such merger, consolidation or transfer of assets, the provisions of this Agreement shall be binding upon the surviving or resulting corporation or the person or entity to which such assets are transferred. (b) The Company agrees that concurrently with any merger, consolidation or transfer of assets referred to in paragraph (a) of this Section 10, it will cause any successor or transferee unconditionally to assume, by written instrument delivered to the Executive (or his beneficiary or estate), all of the obligations of the Company hereunder. Failure of the Company to obtain such assumption prior to the effectiveness of any such merger, consolidation or transfer of assets shall be a breach of this Agreement and shall entitle the Executive to compensation and other benefits from the Company in the same amount and on the same terms as the Executive would be entitled hereunder if the Executive's employment were terminated following a Change in Control other than by reason of a Nonqualifying Termination. For purposes of implementing the foregoing, the date on which any -10- such merger, consolidation or transfer becomes effective shall be deemed the Date of Termination. (c) This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amounts would be payable to the Executive hereunder had the Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to such person or persons appointed in writing by the Executive to receive such amounts or, if no person is so appointed, to the Executive's estate. 11. Notice. (a) For purposes of this Agreement, all notices and other communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given when delivered or five days after deposit in the United States mail, certified and return receipt requested, postage prepaid, addressed (1) if to the Executive, to his residence as reflected on the books and records of the Company and if to the Company, to Bell Sports Corp., 6350 San Ignacio Avenue, San Jose, California 95119 attention President, with copies to the Secretary and the Chairman of the Compensation Committee of the Board of Directors of Bell Sports Corp., or (2) to such other address as a party may have furnished to the others in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. (b) A written notice of the Executive's Date of Termination by the Company or the Executive, as the case may be, to the other, shall (i) indicate the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) specify the termination date (which date shall be not less than 15 days after the giving of such notice). The failure by the Executive or the Company to set forth in such notice any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company hereunder or preclude the Executive or the Company from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. 12. Full Settlement; Resolution of Disputes. (a) The Company's obligation to make any payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action -11- which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, such amounts shall not be reduced whether or not the Executive obtains other employment. (b) If there shall be any dispute between the Company and the Executive in the event of any termination of the Executive's employment, then, unless and until there is a final, nonappealable judgment by a court of competent jurisdiction declaring that such termination was for Cause, that the determination by the Executive of the existence of Good Reason was not made in good faith, or that the Company is not otherwise obligated to pay any amount or provide any benefit to the Executive and his dependents or other beneficiaries, as the case may be, under paragraphs (a) and (b) of Section 3, the Company shall pay all amounts, and provide all benefits, to the Executive and his dependents or other beneficiaries, as the case may be, that the Company would be required to pay or provide pursuant to paragraphs (a) and (b) of Section 3 as though such termination were by the Company without Cause or by the Executive with Good Reason; provided, however, that the Company shall not be required to pay any disputed amounts pursuant to this paragraph except upon receipt of an undertaking by or on behalf of the Executive to repay all such amounts to which the Executive is ultimately adjudged by such court not to be entitled. 13. Employment with Subsidiaries. Employment with the Company for purposes of this Agreement shall include employment with any corporation or other entity in which the Company has a direct or indirect ownership interest of 50% or more of the total combined voting power of the then outstanding securities of such corporation or other entity entitled to vote generally in the election of directors. 14. Governing Law; Validity. The interpretation, construction and performance of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of California without regard to the principle of conflicts of laws. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which other provisions shall remain in full force and effect. 15. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original and all of which together shall constitute one and the same instrument. 16. Joint and Several Obligation. Each duty and obligation of the Company hereunder shall be the joint and several duty and obligation of the Company and the Subsidiary. -12- 17. Miscellaneous. No provision of this Agreement may be modified or waived unless such modification or waiver is agreed to in writing and signed by the Executive, by a duly authorized officer of the Company and by a duly authorized officer of the Subsidiary. No waiver by a party hereto at any time of any breach by another party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. Failure by the Executive, the Company or the Subsidiary to insist upon strict compliance with any provision of this Agreement or to assert any right the Executive, the Company or the Subsidiary may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. The rights of, and benefits payable to, the Executive, his estate or his beneficiaries pursuant to this Agreement are in addition to any rights of, or benefits payable to, the Executive, his estate or his beneficiaries under any other employee benefit plan or compensation program of the Company. -13- IN WITNESS WHEREOF, the Company and the Subsidiary have each caused this Agreement to be executed by a duly authorized officer of the Company or the Subsidiary, as the case may be, and the Executive has executed this Agreement as of the day and year first above written. BELL SPORTS CORP. By: /s/ Terry G. Lee ---------------------------- Terry G. Lee Chairman of the Board and Chief Executive Officer BELL SPORTS CANADA INC. By: /s/ Terry G. Lee ---------------------------- Terry G. Lee Chairman /s/ Robert Alan McCaughen ----------------------------- Robert Alan McCaughen -14- EX-10.14 9 EMPLOYMENT CONTRACT OUTLINE - MCCAUGHEN BELL SPORTS MEMORANDUM 6350 San Ignacio Avenue, San Jose, CA 95119, USA. (408) 574-3400; FAX (408) 224-9129 DATE: 10 April 1997 TO: Al McCaughen FROM: Mary George REF: Employment Contract Outline for Al McCaughen - -------------------------------------------------------------------------------- Based on our conversations, we have agreed to the following compensation package. * Title will continue to be President, Canada reporting to me. * Salary will increase to $150,000 US effective July 1, 1997. * Eligible for 50% bonus level under the current company bonus plan. * Bell Sports agrees to make a lump sum payment of $80,000 US at the conclusion of relocation to cover all costs associated with your move. * Agreement will be in effect through June 30, 1999. * An additional bonus plan, details to be developed between Mary George and Al McCaughen. /s/ R. A. McCaughen April 21, 1997 - ------------------------------- -------------- Al McCaughen Date EX-11 10 COMPUTATION OF PER SHARE EARNINGS BELL SPORTS CORP. EXHIBIT 11 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (In Thousands, Except Per Share Amounts) June 28, June 29, July 1, 1997 1996 1995 -------- -------- -------- Net loss $(18,188) $(12,375) $ (3,443) Net effect of convertible subordinated debentures (using the if-converted method) 2,427 2,427 2,609 -------- -------- -------- Adjusted net loss $(15,761) $ (9,948) $ (834) ======== ======== ======== Weighted average number of common and common equivalent shares outstanding - primary 13,808 13,838 8,178 Additional shares assuming conversion of convertible subordinated debentures 1,595 1,595 1,595 -------- -------- -------- Adjusted average shares outstanding for fully diluted computation 15,403 15,433 9,773 ======== ======== ======== Per share amount - fully diluted $ (1.02) $ (0.64) $ (0.09) ======== ======== ======== EX-21 11 SUBSIDIARIES OF THE REGISTRANT BELL SPORTS CORP. EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT 1. Bell Sports, Inc., a California corporation (a wholly owned subsidiary) 2. Euro Bell S.A., a French corporation (99% owned by Bell Sports, Inc.) 3. American Recreation Company Holdings, Inc. ("AMRE"), a Delaware corporation (a wholly owned subsidiary) 4. American Recreation Company, Inc., a Delaware corporation (a wholly owned subsidiary of AMRE) 5. Bell Sports Canada, Inc., a Canadian corporation (50% owned subsidiary of Bell Sports, Inc. and 50% owned by American Recreation Company, Inc.) 6. Giro Sport Design International, Inc., a California corporation (a wholly owned subsidiary of Bell Sports, Inc.) 7. Giro Ireland Limited, an Ireland corporation (a wholly owned subsidiary of Giro Sport Design International, Inc.) 8. Bell Sports Australia Pty Limited, an Australian corporation (a wholly owned subsidiary of Bell Sports, Inc.) EX-23 12 CONSENT OF PRICE WATERHOUSE CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Forms S-8 (No. 33-53634, No. 33-53636, No. 33-53638, No. 33-56366, No. 33-56368, No. 33-77134, No. 33-77136, No. 33-94296, No. 33-94298, No. 333-4468, No. 333-4470, No. 333-4472, and No. 333-22879) of Bell Sports Corp. of our report dated August 15, 1997 appearing on page 19 of this Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page S-1 of the Form 10-K. /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP Chicago, Illinois September 25, 1997 EX-27 13 FDS --
5 1,000 U.S. Dollars 12-MOS JUN-28-1997 JUN-30-1996 JUN-28-1997 1 29,008 0 80,935 5,020 46,549 167,520 40,825 17,087 268,754 36,843 112,946 0 0 143 118,822 268,754 259,534 259,534 183,098 183,098 67,876 0 7,289 (21,151) 2,963 (18,188) 0 0 0 (18,188) (1.33) (1.33)
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