-----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, K9A8wxhJo+FP/lFYq7L+1RmO6mrieVEaFyF5CQ5TorIi+cJAaGu1CJShy5b/MddF 55D3L/3bFvvy3hBAChrqQQ== 0000950147-99-001084.txt : 20000211 0000950147-99-001084.hdr.sgml : 20000211 ACCESSION NUMBER: 0000950147-99-001084 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19990703 FILED AS OF DATE: 19990930 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-K405 SEC ACT: SEC FILE NUMBER: 000-19873 FILM NUMBER: 99720752 BUSINESS ADDRESS: STREET 1: 6350 SAN IGNACIO AVENUE STREET 2: STE I-100 CITY: SAN JOSE STATE: CA ZIP: 95119 BUSINESS PHONE: 4085743400 MAIL ADDRESS: STREET 1: 10601 N. HAYDEN ROAD STREET 2: SUITE I-100 CITY: SCOTTSDALE STATE: AZ ZIP: 85260 10-K405 1 ANNUAL RPT FOR THE FISCAL YR ENDED 07/03/99 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended July 3, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number 0-19873 BELL SPORTS CORP. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 36-3671789 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 6350 San Ignacio Avenue, San Jose, California 95119 - --------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (408) 574-3400 ---------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered - ------------------- ----------------------------------------- Not applicable Securities registered pursuant to Section 12(g) of the Act: 4 1/4% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2000 --------------------------------------------------- (Title of class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of September 23, 1999 was $98,445 (based on the declared fair market value of the stock). For the purposes of this calculation, directors, executive officers and any holder of more than 10% of any class of the Company's stock were considered affiliates of the registrant. APPLICABLE ONLY TO CORPORATE REGISTRANTS The number of shares outstanding of each of the registrant's classes of common stock, as of September 23, 1999: Class Number of shares ----- ---------------- Class A Common Stock, $.01 par value 870,661 Class B Common Stock, $.01 par value 128,200 Class C Common Stock, $.01 par value 56,000 DOCUMENTS INCORPORATED BY REFERENCE None PART I. ITEM 1. BUSINESS (a) GENERAL DEVELOPMENT OF BUSINESS Bell Sports Corp. was incorporated in Delaware in 1989. As used herein, unless the context otherwise clearly requires, the "Company" or "Bell" refers to Bell Sports Corp., its consolidated subsidiaries and its predecessors. The Company is the leading manufacturer and marketer of bicycle helmets worldwide and a leading supplier of a broad line of bicycle accessories in North America. The Company also supplies bicycle accessories worldwide and markets in-line skating, snowboarding, snow skiing and water sport helmets. The Company markets its helmets under the widely recognized Bell, Bell Pro and Giro brand names, and its accessories under such leading brands as Bell, Blackburn, Rhode Gear, VistaLite, and Spoke-Hedz. With a broad, well-diversified, branded product offering marketed across all price points, the Company is a leading supplier of bicycle helmets and accessories to all major distribution channels in the industry, including mass merchants and independent bicycle dealers ("IBDs"). In fiscal 1999, the Company had net sales of $210.9 million. The Company has developed a reputation over its 45-year history for innovation, design, quality and safety and is recognized by bicycling enthusiasts as a market leader in helmet technology and design. To leverage its outstanding reputation and position in bicycle helmets, the Company has pursued strategic acquisitions of complementary bicycle helmet and accessory brands. During the 1990s, the Company increased net sales from $40.4 million in fiscal 1990 to $210.9 million in fiscal 1999. The Company believes the primary drivers of this growth include: (i) the development of innovative bicycle helmets and accessories; (ii) strategic acquisitions; (iii) the successful introduction of the Bell brand, which historically had been reserved for sale to the IBD channel, into the mass merchant channel; (iv) an increase in safety awareness among consumers; and (v) the popularity of bicycling, including specialty segments such as mountain biking. In fiscal 1999, approximately 54%, 44% and 2% of the Company's net sales were derived from the sale of bicycle accessories, bicycle helmets and auto racing helmets, respectively, with approximately 51% attributable to sales to domestic mass merchants, 28% attributable to domestic IBDs and 21% attributable to international sales. Since its founding in 1954, the Company has engaged in the design, manufacture and marketing of: (i) bicycle helmets; (ii) bicycle accessories; (iii) auto racing helmets; and (iv) motorcycle helmets. Since 1989, the Company has sought to enhance its competitive position in the bicycle helmet and accessory markets through a series of strategic acquisitions including: (i) Rhode Gear USA, Inc. ("Rhode Gear") in November 1989; (ii) Blackburn Designs, Inc. ("Blackburn") in November 1992; (iii) VistaLite, Inc. ("VistaLite") in January 1994; (iv) SportRack Canada, Inc. ("SportRack") in May 1995; (v) American Recreation Company Holdings, Inc. ("AMRE") in July 1995; and (vi) Giro Sport Design International, Inc. ("Giro") in January 1996. In 1991, the Company divested its motorcycle helmet business and entered into a long-term licensing agreement for motorcycle helmets to be marketed under the Bell brand name. The Company divested Service Cycle/Mongoose in April 1997 and SportRack in July 1997. In 1999, the Company sold its auto racing helmet business and entered into a long-term royalty-free licensing agreement for auto racing helmets and automotive accessories to be marketed under the Bell brand name. Also in fiscal 1999, in an effort to remain competitive, the Company announced and began to implement a plan to restructure its worldwide operations. Under the plan the Company has closed its Santa Cruz, California, Canada and Ireland manufacturing facilities. In addition, the Company has entered into an agreement to sell the its manufacturing facility in France. This will leave the Company with one manufacturing facility in Rantoul, Illinois. In addition, under the plan, the Company has consolidated its product design and test labs into one global facility, and has announced its plans to close its Australia sales and marketing office. In April 1992, the Company completed an initial public offering of its common stock, par value $.01 ("Common Stock"). In December 1992, the Company completed a secondary public offering of its Common Stock and in November 1993 completed a public offering of its 4 1/4% Convertible Subordinated Debentures due 2000 (the "Debentures"). In August 1998, the Company consummated an Agreement and Plan of Recapitalization and Merger with HB Acquisition Corporation, a Delaware corporation ("HB Acquisition"), which provided for the merger of HB Acquisition with and into Bell, with Bell continuing as the surviving corporation (the "Bell Merger"). Shares of the Company's common stock outstanding at the time of the Bell Merger were converted into the right to receive $10.25 per share in cash. 2 Additionally, the Company completed a tender offer (the "Tender Offer") to repurchase $62.5 million aggregate principal amount of its Debentures. The Company's wholly-owned subsidiary, Bell Sports, Inc. ("BSI"), consummated the private placement of $110.0 million of its 11% Series A Senior Subordinated Notes due August 15, 2008 (the "Series A Notes") and the Company completed the private placement of $15.0 million of its 14% Senior Discount Notes due August 14, 2009 (the "Discount Notes"). The Series A Notes were subsequently exchanged in a transaction that was registered under the Securities Act of 1933 for 11% Series B Senior Subordinated Notes due August 15, 2008 issued by BSI (the "Series B Notes"), which retain all of the attributes of the Series A Notes, but which are publicly registered. BSI's obligations under the Series B Notes are guaranteed on a senior subordinated basis by the Company. (b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The Company operates primarily in one line of business--the designing, manufacturing, marketing and distributing of bicycle accessories and bicycle helmets. The Company also manufactures and markets in-line skating, snowboarding, snow skiing and water sport helmets. The Company's line of business is divided into three reportable segments: products sold to domestic mass merchants, products sold to domestic independent bicycle dealers (IBDs), and products sold in international operations. The international operations meet the aggregation criteria specified under SFAS 131. In 1999, the Company sold its auto racing helmet business and entered into a long-term royalty-free licensing agreement for auto racing helmets and automotive accessories to be marketed under the Bell brand name. (c) NARRATIVE DESCRIPTION OF BUSINESS (i) Principal products, markets and distribution channels The Company primarily manufactures, markets and distributes bicycle helmets and accessories. The Company sells its products primarily through the mass merchant and IBD channels. The Company distributes its products to these retailers through independent, commissioned representatives. The representatives are integral to the Company's efforts to maintain excellent customer relationships. The Company directs its representatives through an experienced in-house sales team of national and regional sales managers and provides store-level support with field merchandisers who visit select customers regularly to assist them with merchandising, point-of-purchase signage and selling techniques. THE MASS MERCHANT CHANNEL. The Company markets a wide range of bicycle accessories and bicycle helmets through the mass merchant channel, including retailers such as Wal-Mart, K-Mart, Costco, Sears and Fred Meyer. Bicycle helmets are marketed through the mass merchant channel under the Bell brand name. Bicycle accessories are marketed through the mass merchant channel under the Bell, Cycletech, Spoke-Hedz and Fisher Price(R) brand names. Prior to fiscal 1996, the Bell brand of bicycle helmets was marketed exclusively in the IBD trade channel. THE IBD CHANNEL. The Company markets premium bicycle helmets and accessories through the IBD channel, which includes bicycle chains, independent bicycle shops, specialized sporting goods stores and mail order catalogs. Bicycle helmets are marketed through the IBD channel under the Bell Pro and Giro brand names. Bicycle accessories are marketed through the IBD channel under the Blackburn, Rhode Gear, and VistaLite brand names. The following is a discussion of each of the Company's international operating divisions: BELL SPORTS CANADA. The Bell Sports division in Canada ("Bell Sports Canada"), located in Granby, Quebec, markets its products to the Canadian IBD and mass merchant channels. Bell Sports Canada markets it products primarily under the same brand names as those in the United States. In addition, Bell Sports Canada distributes non-proprietary accessories in the IBD channel through such companies as RockShox and Race Face. In August 1999, the Company announced plans to close the Canadian facility. Canadian IBD and mass merchant customers will be serviced out of the US facilities and the Calgary, Alberta distribution center. BELL SPORTS EUROPE. Giro Ireland, Limited ("Giro Ireland"), headquartered in Limerick, Ireland, assembles, markets and distributes bicycle helmets across Europe under the Giro brand name. EuroBell S.A. ("EuroBell"), located in Roche La Moliere, France, manufactures, markets and distributes bicycle helmets and bicycle accessories to the IBD and mass merchant channels throughout Europe. EuroBell markets its bicycle helmets in Europe under the Bell, Bell Pro and Bike Star(TM) brand names and certain private label arrangements, and its bicycle accessories under the Bell, Rhode Gear, Blackburn and VistaLite brand names. In May 1999, the Company announced plans to consolidate the assembly and distribution of Giro helmets into the France facility. In addition, the Company has entered into an agreement to sell its manufacturing facility in France. The sale is expected to be completed by October 1999. 3 BELL SPORTS AUSTRALIA. The Bell Sports division in Australia ("Bell Sports Australia"), located in Sydney, Australia, began operating in November 1996 as a sales, marketing and distribution office servicing Australia, New Zealand and the Pacific Rim. Prior to November 1996, the Company marketed its products in Australia through third-party distributors. The division markets bicycle helmets to the IBD and mass merchant channels under the Bell, Bell Pro and Giro brand names and bicycle accessories under the Bell, Rhode Gear, Blackburn and VistaLite brand names, in addition to certain non-proprietary brands such as RockShox and Pearl Izumi. In July 1999, the Company announced plans to close Bell Sports Australia and to continue to service the Australian and New Zealand markets through third party distributors. (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, snow skiing, snowboarding and auto racing helmets contain plastic expandable polystyrene foam, which is one of the primary materials used in the Company's helmets. In fiscal 1999, the Company purchased substantially all of its expandable polystyrene from BASF and Polysource, two of several possible suppliers of this material. During fiscal 1999, the Company sold the assets of its domestic foam molding facility in Rantoul, Illinois. As a result of this transaction, the Company no longer purchases a significant amount of raw expandable polystyrene. The Company also entered into a foam molding agreement with the purchaser of the assets of the Rantoul, Illinois foam molding facility, pursuant to which the purchaser has agreed to provide the Company with foam helmet liners and certain related components. Metal tubing, readily available from many sources, is used extensively in the manufacturing of bicycle carriers (shuttles) for automobiles. The Company does not have any long-term supply contracts for the purchase of raw materials. Some components and many finished good items, including bicycle accessories, are manufactured for the Company by outside suppliers, including suppliers in North America, Western Europe, Taiwan and China. Although the Company believes there are sufficient alternative sources of the raw materials it utilizes in the manufacture of its products, there can be no assurance that the Company would find such alternative suppliers on a timely basis and on terms favorable to the Company. (iv) Patents, trademarks and licenses In the course of its business, the Company employs various trademarks, trade names and service marks, including its logos, in the packaging and advertising of its products. The Company believes the strength of its service marks, trademarks and trade names are of considerable value and importance to its business and intends to continue to protect and promote its marks as appropriate. The loss of any significant mark could have a material adverse effect on the Company. The Company also licenses the Bell trademark for use on certain motorcycle, snowmobile and police helmets manufactured by third parties. In fiscal 1999, the Company sold its auto racing helmet business and entered into a long-term royalty-free licensing agreement for auto racing helmets and automotive accessories to be marketed under the Bell brand name. The Company is the owner of numerous federal trademark registrations and applications filed with the United States Patent and Trademark Office. These registrations constitute evidence of the validity of these marks and the Company's exclusive right to use the marks on its products. The Company may also be entitled to protection under the federal Trademark Act for the Company's unregistered marks. Additionally, the Company owns numerous foreign trademark registrations. The Company owns 65 United States patents and 13 foreign patents. As of July 3, 1999, the Company had 9 United States patents and 4 foreign patents pending issuance. None of the Company's patents are believed to be material to the Company's financial condition or results of operations. Bell(C), Giro(C), Blackburn(C), Rhode Gear(C), VistaLite(C), Copper Canyon Cycling(C), Spoke-Hedz(C) and Bike Star(TM) are registered trademarks of the Company, BSI or its subsidiaries. Other brand names, trademarks, servicemarks or tradenames referred to or incorporated by reference in this Form 10-K are the names or marks of their respective owners. 4 (v) Extent to which the business is seasonal Bicycling is primarily a warm weather sport. Sales of the Company's products reflect, in part, a seasonality of market demand. In fiscal 1999 and 1998, approximately 59% and 58%, respectively, of the Company's net sales occurred during the six months ended July 3, 1999 and June 27, 1998, respectively. The second quarter of the fiscal year is generally the Company's slowest quarter. In addition, quarterly results may vary from year to year due to the timing of new product introductions, major customer shipments, inventory holdings of significant customers, adverse weather conditions and the sales mix of products sold. Accordingly, comparisons of quarterly information of the Company's results of operations may not be indicative of the Company's ongoing performance. (vi) Working capital items The timing of the Company's preseason selling programs and spring selling season may cause fluctuations in the levels of inventory and receivables held by the Company from quarter to quarter. The Company supports sales of its products through various seasonal promotions, which include extended payment terms for independent bicycle dealers. Historically, inventories and receivables are higher in the second half of the fiscal year as compared to the first half. (vii) Dependence on single customer In fiscal 1999, 1998 and 1997, approximately 28%, 21% and 18%, respectively, of the Company's net sales were to a single customer, Wal-Mart. In addition, at the end of fiscal 1999 and 1998, 30% and 27% of the Company's gross accounts receivable were attributed to Wal-Mart. In fiscal 1999, the largest five customers of the Company were Wal-Mart, K-Mart, Costco, The Sports Authority, and Canadian Tire and accounted for 45% of its net sales, and the largest ten customers accounted for 52% of its net sales. The Company has no written agreement or other understanding with Wal-Mart or any of its other customers that relates to future purchases by such customers, and thus such purchases could be discontinued at any time. A termination of or other adverse change in the Company's relationship with, an adverse change in the financial condition of, or a significant reduction in sales to, Wal-Mart or other large customers of the Company, could have a material adverse effect on the Company. The write-off of any significant receivable due from these customers could also adversely impact the Company. (viii) Backlog orders Historically, there is a backlog of specialty retail orders from October to December as a result of preseason orders placed after the fall trade shows. The backlog of orders decreases over the winter months and is usually insignificant by the end of the Company's third fiscal quarter. The mass merchant trade channel does not operate with a large backlog. At the end of each of fiscal years 1999, 1998, and 1997, the backlog was not significant. (ix) Business subject to renegotiation The Company does not currently engage in any business with governmental authorities that may be subject to renegotiation of profits or termination of contracts or subcontracts at the election of such authorities. (x) Competitive conditions The markets for bicycle helmets and accessories are highly competitive, and the Company faces competition from a number of sources in each of its product lines. Some competitors are part of large bicycle manufacturers and may be better able to promote bicycle helmet and accessory sales through bicycle sales programs. Competition is based on price, quality, customer service, brand name recognition, product features and style. Although there are no significant technological or manufacturing barriers to entering the bicycle helmet and accessory businesses, factors such as brand recognition and customer relationships may discourage new competitors from entering the business. New competitors entered the bicycle helmet market in the mid-1990s and pricing pressures increased significantly as a result of such competition. There can be no assurance that additional competitors will not enter the Company's existing markets, nor can there be any assurance that the Company will be able to compete successfully against existing or new competition. 5 (xi) Research and development expenditures The Company has an ongoing research and development program directed at enhancing and expanding its existing products and developing new products. The Company's bicycle helmet research and development staff primarily focuses on developing technical product features which can improve helmet aerodynamics, weight, comfort, durability, safety, fit, aesthetics and style in an effort to broaden a helmet's consumer appeal. A separate staff focuses on developing innovative and better performing bicycle accessories. Research and development expenditures in fiscal 1999, 1998 and 1997 were approximately $3.6 million, $3.6 million and $4.7 million, respectively. (xii) Material effects of compliance with environmental regulations The Company is subject to many federal, state and local requirements relating to the protection of the environment, and the Company has made, and will continue to make, expenditures to comply with such provisions. The Company believes that its operations are in material compliance with these laws and regulations and does not believe that future compliance with such laws and regulations will have a material adverse effect on its results of operations or financial condition. If environmental laws become more stringent, the Company's environmental capital expenditures and costs for environmental compliance could increase in the future. In addition, due to the possibility of unanticipated factual or regulatory developments, the amount and timing of future environmental expenditures could vary substantially from those currently anticipated and could have a material adverse effect on the Company. In May 1998, the Company received a De Minimis Notice Letter and Settlement Offer from the United States Environmental Protection Agency ("USEPA") under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. Sections 9601 et seq. for the Operating Industries, Inc. Landfill Superfund Site ("OII Site") in Monterey Park, California. CERCLA imposes liability for the costs of cleaning up, and certain damages resulting from, releases and threatened releases of hazardous substances. Although courts have interpreted CERCLA liability to be joint and several, where feasible, the liability typically is allocated among the responsible parties according to a volumetric or other standard. USEPA apparently has identified the Company as a de minimis potentially responsible party based on several waste shipments the Company allegedly sent to the site in the late 1970s and in 1980. USEPA's settlement offer to the Company is in the range of $29,000 to $36,000. The settlement would cover all past and expected future costs at the OII Site, and, with limited exceptions, provide the Company with covenants not to sue from the United States and California, and contribution protection from private parties. Accordingly, the Company does not expect this claim to have a material adverse effect on the Company. In another unrelated matter, the Company received a General Notice Letter in October 1998 from USEPA under CERCLA for the Casmalia disposal site in Santa Barbara County, California. USEPA apparently has identified the Company as a de minimis potentially responsible party based on several waste shipments the Company allegedly sent to the site during the 1980s. USEPA's settlement offer to the Company is in the range of $54,000 to $57,000. The benefits of the settlement are similar to those offered by USEPA for the OII site. Accordingly, the Company does not expect this claim to have a material adverse effect on the Company. (xiii) Number of employees The Company employed approximately 961 persons at July 3, 1999. The Company is a party to collective bargaining agreements at one facility, covering approximately 36 employees. The Company's collective bargaining agreement with the Retail, Wholesale and Department Store Union covers employees at the Company's York, Pennsylvania facility and expires in December 2000. (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 14 to the Consolidated Financial Statements of the Company appearing on page 38 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: 6 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 284,696 square feet on 34 acres Santa Cruz, CA Giro sales, marketing, administration, and research and development facility of approximately 50,500 square feet Scottsdale, AZ Administration offices of approximately 1,600 square feet York, PA Distribution center with approximately 300,000 square feet Roche La Moliere, France Administrative, sales, manufacturing and distribution facility of approximately 38,700 square feet on 2.9 acres Limerick, Ireland Giro sales and administrative facility of approximately 18,800 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, Pennsylvania facility and the Roche La Moliere facility, which is held under a lease-purchase arrangement. BSI has executed an agreement pursuant to which the Roche La Moliere facility will be sold. This transaction is expected to be completed in October 1999. ITEM 3. LEGAL PROCEEDINGS The philosophy of the Company is to defend vigorously all product liability claims. Although the Company intends to continue to defend itself aggressively against all claims asserted against it, current pending proceedings and any future claims are subject to uncertainties attendant with litigation and the ultimate outcome of such proceedings or claims cannot be predicted. Due to the self insurance retention amounts in the Company's product insurance coverage, the assertion against the Company of a large number of claims could have a material adverse effect on the Company. In addition, the successful assertion against the Company of any, or a combination of large, uninsured claims, or of one or a combination of claims exceeding applicable insurance coverage, could have a material adverse effect on the Company. Due to certain deductibles, self-insured retention levels and aggregate coverage amounts applicable under the Company's insurance policies, the Company may bear responsibility for a significant portion, if not all, of the defense costs (which include attorney's fees, settlement costs and the cost of satisfying judgments) of any claim asserted against the Company or its subsidiaries. There can be no assurance that the insurance coverage, if available, will be sufficient to cover one or more large claims or that the applicable insurer will be solvent at the time of any covered loss. Further, there can be no assurance that the Company will be able to obtain insurance coverage at acceptable levels and costs in the future. The Company's current product liability insurance for bicycling and auto racing products covers claims based on occurrences within the policy period up to a maximum of $50.0 million in the aggregate in excess of the Company's self-insured retention of $1.0 million per occurrence for bicycle and auto racing helmets and in excess of the Company's self-insured retention of $250,000 for other bicycle-related products. Insurance coverage for products manufactured by Giro, prior to its acquisition by the Company in January 1996, includes self-insured retentions of $0.5 million per occurrence and $1.5 million in the aggregate for all product claims, with $55.0 million coverage in excess of the self-insured retention levels. The Company maintains an active role in the management of all Giro related litigation. Giro claims served after December 31, 1996 are insured under the same coverage provided to the Company. 7 From 1954 to 1991, the Company manufactured, marketed and sold motorcycle helmets. The Company sold its motorcycle helmet manufacturing business in June 1991. Even though the purchaser assumed all responsibility for product liability claims arising out of helmets manufactured prior to the date of the disposition, the Company has paid certain costs associated with the defense of such claims and agreed to use its in-house defense team to defend these claims at the purchaser's expense. If the purchaser is for any reason unable to pay a judgment, settlement amount or defense costs arising out of any claim, the Company could be held responsible for the payment of such amount or costs. The Company believes that the purchaser does not currently have the financial resources to pay any significant judgment, settlement amount or defense costs arising out of any such claims. The Company has licensed the Bell trademark to the purchaser for use on motorcycle helmets. The Company believes that, by virtue of its status as licensor and the fact that such motorcycle helmets carry the Bell name, it is possible that the Company could be named as a defendant in future actions involving liability for motorcycle helmets manufactured by the purchaser of the Company's motorcycle helmet business. In fiscal 1998, the Company secured a ten-year insurance policy from AIG and Chubb, providing coverage for motorcycle helmets manufactured or licensed prior to June 1991. The policy covers up to a maximum of $50.0 million in the aggregate in excess of the Company's self-insured retention of $1.0 million per occurrence, excluding all previous payments made on existing claims, in excess of $2.0 million in the aggregate for known claims or $4.0 million in the aggregate for incurred but not reported claims and new occurrences. The policy covers all claims except the February 1996 and February 1998 judgments against the Company. From 1954 to 1999, the Company manufactured, marketed and sold auto racing helmets. The Company sold its auto racing helmet business in July 1999 and entered into a long-term royalty-free licensing agreement with the purchaser for auto racing helmets and automotive accessories to be marketed under the Bell brand name. The Company retains responsibility for product liability claims relating to auto racing helmets manufactured prior to the sale of the auto racing helmet business. The Company believes that, by virtue of its status as a licensor it could be named as a defendant in actions involving liability for auto racing helmets and automotive accessories manufactured by the purchaser of the Company's auto helmet business. Due to the nature of the business of the Company, at any particular time the Company may be a defendant in a number of product liability lawsuits for serious personal injury or death allegedly related to the Company's products and, in certain instances, products manufactured by others. Many such lawsuits against the Company seek damages, including punitive damages, in substantial amounts. During each of the last five fiscal years the Company has been served with complaints in the following number of cases: 5 cases in fiscal 1995, 12 cases in fiscal 1996, 15 cases in fiscal 1997, 14 cases in fiscal 1998, and 14 cases in fiscal 1999. Of the 14 cases served in fiscal 1999, which includes Giro and AMRE lawsuits, 1 involves bicycles, 5 involve bicycle accessories, 6 involve bicycle helmets, and 2 involve motorcycle helmets. Of these same 14 cases, 2 cases involve a claim relating to death, 3 involve claims relating to serious, permanently disabling injuries, and 9 involve less serious injuries such as fractures or lacerations. Typical product liability claims include allegations of failure to warn, breach of express and implied warranties, design defects and defects in the manufacturing process. As of July 3, 1999, there were 38 lawsuits pending relating to injuries allegedly suffered from products made or sold by the Company. Of the 38 lawsuits, 10 involve motorcycle helmets, 14 involve bicycle helmets, 1 involves an auto racing helmet, 1 involves a bicycle pedal, 9 involve bicycles and 3 involve bicycle accessories. 7 of the 38 lawsuits pending against the Company as of July 3, 1999 are scheduled for trial prior to December 31, 1999. Of the 7 lawsuits scheduled for trial prior to December 31, 1999, 4 involve bicycle helmet claims. The bicycle helmet claims include allegations of failure to warn and design defects. In February 1996, a Toronto, Canada jury returned a verdict against Bell Sports based on injuries arising out of a 1986 motorcycle accident. The jury found that Bell Sports was 25% responsible for the injuries with the remaining 75% of the fault assigned to the plaintiff and the other defendant. If the judgment is upheld upon appeal, the amount of the claim for which Bell Sports would be responsible and the legal fees associated therewith are estimated to be between $3.5 and $4.0 million (based on current exchange rates). This claim arose during a period in which the Company was self-insured. The Company has filed an appeal of the Canadian verdict. In February 1998, a Wilkes-Barre, Pennsylvania jury returned a verdict against the Company relating to injuries sustained in a 1993 motorcycling accident. The judgment totaled $6.8 million, excluding any interest, fees or costs which may be assessed. This claim arose during a period in which the Company was self-insured. The Company filed a motion for a new trial which was denied. The Company has filed an appeal of the verdict. In June 1998, a Wilmington, Delaware jury returned a verdict against the Company relating to injuries sustained in a 1991 off-road motorcycling accident. The judgment totaled $1.8 million, excluding any interest, fees or costs which may be assessed. The claim is covered by insurance; however, the Company is responsible for $1.0 million self-insured retention. The Company's post-trial motions have been denied by the trial court and an appeal is pending seeking reversal of the judgment of the trial court. 8 Based on management's extensive consultation with legal counsel prosecuting the appeals, the Company has established product liability reserves totaling $13.8 million, of which $4.8 million is classified as current. These reserves are intended to cover the estimated costs for the defense, payment or settlement of these and other known claims. The Company believes it will have adequate cash balances and sources of capital available to satisfy such pending judgments. However, there can be no assurance that the Company will be successful in appealing or pursuing settlements of these judgments or that the ultimate outcome of the judgments will not have a material adverse effect on the liquidity or financial condition of the Company. Other than the litigation described above, the Company is not party to any material litigation that, if adversely determined, would have a material effect on its business. See Item 1.(c)(xii) "Material effects of compliance with environmental regulations" for information relating to a De Minimis Notice Letter and Settlement Offer from USEPA. 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 1999. 9 PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Prior to the consummation of the Bell Merger, the Company's common stock was traded on The Nasdaq National Market under the symbol "BSPT." Shares of the Company's common stock outstanding at the time of the Bell Merger were converted into the right to receive $10.25 per share in cash. Currently, there is no established trading market for any class of the Company's common stock. As of September 15, 1999 there were 38 holders of record of the Company's Class A Common Stock, 39 holders of record of the Company's Class B Common Stock and 14 holders of record of the Company's Class C Common Stock. The Company currently intends to retain future earnings for use in its business, and therefore, does not anticipate paying any dividends in the foreseeable future. During the period covered by this report, the Company sold an aggregate of 13,575 shares of Class A Common Stock, 128,200 shares of Class B Common Stock and 56,000 shares of Class C Common Stock to certain of its employees pursuant to the terms of the Company's Investment and Incentive Plan and Class C Investment and Incentive Plan in transactions exempt from registration under the Securities Act pursuant to Rule 506 under the Securities Act. The aggregate price for these shares was $88,461. On February 1, 1999, the Company issued 16,921 shares of Class A Common Stock to Mary George, Chief Executive Officer of the Company, at a purchase price of $0.44 per share upon exercise of an option. The issuance of the shares was exempt from registration under the Securities Act pursuant to Section 4(2) of the Securities Act. On March 12, 1999, the Company issued 23,781 shares of Series A Preferred Stock and 19,597 shares of Class A Common Stock to Brentwood Associates Buyout Fund II, L.P., 23,759 shares of Series A Preferred Stock and 19,579 shares of Class A Common Stock to Charlesbank Bell Sports Holdings, L.P., and 22 shares of Series A Preferred Stock and 18 shares of Class A Common Stock to Charlesbank Coinvestment Partners, L.L.C., in exchange for indebtedness of the Company held by them with an accreted value of $2.4 million. The issuance of the shares was exempt from registration under the Securities Act pursuant to Section 3(a)(9) of the Securities Act. 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) Fiscal Years Ended ------------------------------------------------------------ July 3, June 27, June 28, June 29, July 1, 1999 (1) 1998 (2) 1997 (3) 1996 (4) 1995 --------- --------- --------- --------- --------- SUMMARY OF OPERATIONS DATA: Net sales $ 210,909 $ 207,236 $ 259,534 $ 262,340 $ 102,990 Net income (loss) (26,237) 8,578 (18,188) (12,375) (3,443) BALANCE SHEET DATA: Working capital $ 74,729 $ 130,437 $ 130,677 $ 149,474 $ 108,821 Total assets 218,934 247,067 268,754 298,635 186,434 Total debt, less current portion 148,270 87,705 107,688 124,500 89,833 Total stockholders' equity 6,465 128,259 118,965 136,041 75,816
(1) Results for fiscal 1999 include one-time charges of $13.1 million for the Bell Merger, $9.0 million for restructuring, $5.3 million for asset write-offs, and $14.8 million for product liability and other one-time charges. (2) Results for fiscal 1998 include one-time restructuring charges of $1.2 million and a net loss on disposal of product lines and sale of assets of $700,000. (3) Results for fiscal 1997 include a pre-tax loss on disposal of product line of $25.4 million related to the sale of the Service Cycle/Mongoose business and $4.1 million related to one-time restructuring charges. 10 (4) Results for fiscal 1996 include an inventory write-up of $14.1 million related to the AMRE Merger (as defined) and the acquisitions of SportRack and Giro, which was fully charged against cost of sales and $5.9 million related to one-time restructuring charges. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION AND ANALYSIS OF THE COMPANY'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S FINANCIAL STATEMENTS, AND THE RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K. CERTAIN STATEMENTS IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE LITIGATION REFORM ACT. OVERVIEW Bell Sports is the leading manufacturer and marketer of bicycle helmets worldwide and a leading supplier of a broad line of bicycle accessories in North America. The Company is also a supplier of bicycle accessories worldwide. Over its 45-year history, the Company has developed a reputation for innovation, design, quality and safety. Since its founding, the Company has engaged in the manufacture and sale of bicycle helmets, bicycle accessories, auto racing helmets and motorcycle helmets. In 1991, the Company elected to refocus its operations on the growing bicycle helmet and accessory business by divesting its motorcycle helmet business. Under the terms of the agreement providing for the sale of the motorcycle helmet business, the Company entered into a long-term licensing agreement under which the Company agreed to license the Bell brand name to the purchaser for use on motorcycle helmets. In 1999, the Company sold its auto racing helmet business and entered into a long-term royalty-free licensing agreement for auto racing helmets and automotive accessories to be marketed under the Bell brand name. Throughout the 1980s and 1990s, the Company strengthened its position in the bicycle helmet and accessory markets through a series of strategic acquisitions, including: (i) Rhode Gear, a designer and marketer of certain premium bicycle accessories, in November 1989; (ii) Blackburn, a designer and marketer of certain premium bicycle accessories, in November 1992; (iii) VistaLite, a designer and manufacturer of premium LED safety lights and headlights for bicycles, in January 1994; (iv) SportRack, a designer, manufacturer and marketer of automobile roof rack systems, in May 1995; (v) American Recreation Company Holdings, Inc. ("AMRE"), a leading designer, marketer and distributor of bicycle helmets and accessories and marketer of a line of bicycles under the Mongoose brand, in July 1995; and (vi) Giro, a leading designer, manufacturer and marketer of premium bicycle helmets, in January 1996. Through the acquisitions of Rhode Gear, Blackburn, VistaLite and AMRE, the Company became one of the leading marketers and distributors of bicycle accessories in North America. In addition, the acquisition of Giro enhanced the Company's market position in the premium bicycle helmet market segment. Each of the acquisitions described above were accounted for under the purchase method of accounting, and accordingly, the Company's results of operations include the operations of the acquired businesses since their respective dates of acquisition. The Company has also expanded its international presence throughout the 1990s. In 1991, the Company entered the European market by opening a bicycle helmet manufacturing facility in France. In fiscal 1997, the Company continued its international expansion with the opening of a sales, marketing and distribution office in Australia to service the Australian, New Zealand and Pacific Rim markets. The domestic bicycle helmet market experienced significant growth in unit sales during the early 1990s principally due to (i) increased safety awareness among consumers and the adoption of mandatory bicycle helmet legislation by several large states, including California and New York, and (ii) the popularity of bicycling, including speciality segments such as mountain biking. The convergence of these trends led to a significant increase in shelf space, particularly in the mass merchant channel, dedicated to bicycle helmets. As a result, several small helmet manufacturers entered the domestic bicycle helmet market in the early 1990s. In 1995 and 1996, as the increase in demand aided by new mandatory bicycle helmet legislation subsided, mass merchants reduced shelf space dedicated to the segment, driving down price points industry-wide. As a result, the Company reduced prices in an effort to maintain market share, and believes that this strategic decision proved successful as it effectively responded to new competitors and enabled Bell Sports to maintain its leading market position. However, this price pressure significantly reduced the Company's margins and profitability during this period. The Company believes that domestic bicycle helmet demand has stabilized. In fiscal 1996 and 1997, the Company refocused on the profitability of its core businesses through the divestiture of non-strategic and low margin businesses, elimination of duplicative overhead and reduction of distribution and 11 manufacturing costs. As a result, management initiated the following changes: (i) the April 1997 divestiture of Service Cycle/Mongoose, a designer, marketer and distributor of bicycles and certain non-proprietary bicycle parts and accessories; (ii) the divestiture of SportRack in July 1997; (iii) the consolidation of its corporate headquarters into its San Jose, California facility; (iv) the closure of the Memphis, Tennessee distribution facility by consolidating operations into the Company's other existing distribution facilities; and (v) the installation of a new computer system in the warehouses and mass merchant operations to improve operational efficiency and customer service. In fiscal 1999, the Company announced and began to implement a restructuring plan to consolidate manufacturing operations and improve overall Company efficiency. As a part of this plan, the Company: (i) consolidated the Giro and Canada assembly and distribution facilities into the existing Rantoul, Illinois facility; (ii) sold its auto racing helmet business; (iii) announced the closure of its Australia sales and marketing operations together with its decision to service the Australia market with a local distributor; (iv) consolidated the Ireland assembly and distribution facilities into the existing France facility; and (v) entered into an agreement to sell the European manufacturing facility. Unless otherwise noted, the Company's results of operations include the operations of the divested businesses until the date of sale. GENERAL Net sales, as calculated by the Company, are determined by subtracting estimated returns, discounts, allowances and net freight charges from gross sales. The Company's cost of sales and its resulting gross margin (defined as gross profit as a percentage of net sales) are principally determined by the cost of raw materials, the cost of labor to manufacture its products, the overhead expenses of its manufacturing facilities, the cost of sourced products, warehouse costs, freight expenses, royalties and obsolescence expenses. Selling, general and administrative costs consist primarily of sales and marketing expenses, research and development costs and administrative costs. Sales and marketing expenses generally vary with sales volume while administrative costs are relatively fixed in nature. As of July 3, 1999, the Company had domestic net operating losses of approximately $33.0 million, which will be carried forward and begin to expire in 2008. As a result of the Bell Merger, there will be an annual limitation of the loss carryforward which may delay or limit the eventual utilization of the carryforwards. The consolidated return rules limit utilization of acquired net operating loss and other carryforwards to income of the acquired companies in years in which the consolidated group has taxable income. RESTRUCTURING CHARGES, ASSET WRITE-OFFS AND OTHER COSTS RESTRUCTURING CHARGES, ASSET WRITE-OFFS AND OTHER COSTS - 1999 In an effort to remain competitive in an increasingly competitive marketplace, the Company announced a plan to restructure its worldwide operations, leaving it in a better position to focus on sales, marketing, distribution, and product innovation, while operating under a significantly lower cost structure. The plan is set up with three main prongs: 1) consolidation of manufacturing facilities, 2) streamlining of administrative overhead, and 3) divestiture of the auto racing division and the closure of the Australian sales and marketing office. Costs associated with the plan are included in the consolidated statement of operations as restructuring charges, asset write-offs and other costs. CONSOLIDATION OF MANUFACTURING FACILITIES. At the beginning of fiscal 1999, the Company owned and operated five manufacturing facilities around the world. In an effort to reduce duplicative expenses and increase efficiency, the Company has closed its Santa Cruz, California, Canada and Ireland manufacturing facilities. In addition, the Company has entered into an agreement to sell its manufacturing facility in France. The sale is expected to be completed by October 1999. This will leave the Company with one manufacturing facility in Rantoul, Illinois. In the fourth quarter of fiscal 1999, the Company recorded $6,634,000 in restructuring costs, $4,784,000 in asset write-offs, and $1,026,000 in other costs associated with the consolidation of the manufacturing facilities. The restructuring costs are based on estimates of employee severance costs, lease obligations and legal fees. The restructuring costs include $1,968,000 of severance related costs for 206 employees from all areas of responsibility. Of these 206 employees, 173 had been terminated and paid a total of $460,000 as of July 3, 1999. The remaining 33 employees have been notified of their pending termination. The asset write-offs include $3,121,000 of property, plant, and equipment and $1,663,000 of inventory. The assets were written down to net realizable value, based on an estimate of what an independent third party would pay for the assets. Other costs include one-time charges such as the repayment of a grant to the Irish government, transferring of inventory to Rantoul and other miscellaneous expenses. 12 STREAMLINING OF OVERHEAD. In order for the Company to remain competitive, it has consolidated its product design and test labs into one global facility and eliminated administrative positions which were considered duplicative or excessive. In the fourth quarter, the Company recorded $2,005,000 of restructuring costs, $69,000 of asset write-offs, and $941,000 of other costs relating to this streamlining effort. The restructuring costs are based on estimates of employee severance costs, lease obligations and legal fees, and include $800,000 of severance related costs for 59 employees from all areas of responsibility, all of whom had been terminated as of July 3, 1999. A total of $319,000 in severance had been paid as of July 3, 1999. The asset write-offs relate to the write-off of property, plant and equipment rendered unnecessary due to the reduced headcount and consolidated test labs. Other costs include miscellaneous one-time expenses. SALE OF AUTO RACING AND CLOSURE OF AUSTRALIA. In order to remain focused on the Company's core business of bicycle helmets and accessories, the Company has sold its auto racing helmet business, in exchange for an equity position in the purchaser. In addition, the Company has announced the closure of its Australian sales and marketing office. The Company will continue to service the Australian market through a local distributor. In the fourth quarter of fiscal 1999, the Company recorded $331,000 in restructuring costs, $413,000 in asset write-offs, and $325,000 in other costs associated with these moves. The restructuring costs are based on estimates of employee severance costs, lease obligations and legal fees. The restructuring costs include $141,000 of severance related costs for 26 employees from all areas of responsibility, all of whom were notified of their pending termination. No severance-related costs had been paid as of July 3, 1999. The asset write-offs include $170,000 of property, plant, and equipment and $243,000 of inventory and other assets. The assets were written down to net realizable value, based on an estimate of what an independent third party would pay for the assets. Other costs include miscellaneous, one-time expenses related to the sale of the auto racing helmet business. The following table summarizes the classification in the Consolidated Statement of Operations of the charges relating to the restructuring program and other actions (in thousands): Restructuring charges: Manufacturing consolidation $ 6,634 Overhead reduction 2,005 Sale of auto racing and Australia 331 -------- 8,970 -------- Asset write-offs: Manufacturing consolidation 4,784 Overhead reduction 69 Sale of auto racing and Australia 413 -------- 5,266 -------- Other costs: Manufacturing consolidation 1,026 Overhead reduction 941 Sale of auto racing 325 -------- 2,292 -------- $ 16,528 ======== The following table sets forth the details of activity during fiscal 1999 for restructuring charges, asset write-offs and other costs and related accrued expenses (in thousands):
June 27, Cash Non-Cash July 3, 1998 Charges Payments Charges 1999 -------- -------- -------- -------- -------- Restructuring accruals: Manufacturing consolidation $ -- $ 12,444 $ (3,342) $ -- $ 9,102 Overhead reductions -- 3,015 (791) -- 2,224 Sale of auto racing and Australia -- 1,069 (281) -- 788 Restructuring accruals from prior years 1,490 -- (956) (41) 493 -------- -------- -------- -------- -------- $ 1,490 $ 16,528 $ (5,370) $ (41) $ 12,607 ======== ======== ======== ======== ========
13 RESTRUCTURING CHARGES - 1998 During fiscal 1998, the Company formed and approved a plan to restructure its European operations. In connection with this plan, the Company closed its Paris, France, sales and marketing office in December 1997, and consolidated these functions with its Roche La Moliere, France, facility. The key management positions of Giro Ireland and EuroBell were also consolidated. Included in the fiscal 1998 pre-tax income are $1.2 million of estimated restructuring charges related to this plan, including facility closing costs and severance benefits. The following table sets forth the details of activity during fiscal 1998 for restructuring charges and related accrued expenses (in thousands):
June 28, Restructuring Cash Non-cash June 27, 1997 Charges Payments Charges 1998 ------- ------- ------- ------- ------- Restructuring accruals: Lease payments and other facility expenses $ -- $ 191 $ (60) $ -- $ 131 Severance and other employee-related costs -- 820 (573) (198) 49 Asset write-downs -- 181 (140) -- 41 Restructuring accruals from previous years 3,777 -- (2,598) 90 1,269 ------- ------- ------- ------- ------- $ 3,777 $ 1,192 $(3,371) $ (108) $ 1,490 ======= ======= ======= ======= =======
RESTRUCTURING CHARGES - 1997 During 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 loss are $2.7 million of restructuring charges related to this plan. 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 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. The Program called for the consolidation of certain sales and marketing, research and development, manufacturing, finance and management information systems functions. In fiscal 1997, $1.4 million of restructuring charges relating to the Program were recorded, 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 expenses (in thousands):
June 29, Restructuring Cash June 28, 1996 Charges Payments 1997 ------- ------- ------- ------- Restructuring accruals: Lease payments and other facility expenses $ -- $ 983 $ (614) $ 369 Severance and other employee-related costs -- 3,158 (1,741) 1,417 Restructuring accruals from previous years 5,157 -- (3,166) 1,991 ------- ------- ------- ------- $ 5,157 $ 4,141 $(5,521) $ 3,777 ======= ======= ======= =======
COMPARISON OF THE FISCAL YEAR ENDED JULY 3, 1999 WITH THE FISCAL YEAR ENDED JUNE 27, 1998 NET SALES. Net sales for fiscal 1999 increased 2% to $210.9 million in fiscal 1999 from $207.2 million in fiscal 1998. A strong increase in domestic mass merchant sales and flat sales in the domestic IBD market were offset by decreases in international sales. For fiscal 1999, bicycle accessories, bicycle helmets and auto racing helmets represented approximately 54%, 44% and 2%, respectively, of the Company's net sales. For fiscal 1998, bicycle accessories, bicycle helmets and auto racing helmets represented approximately 52%, 46% and 2%, respectively, of the Company's net sales, excluding the results of the divested businesses. GROSS MARGIN. Gross margin decreased to 33% of net sales in fiscal 1999 from 34% of net sales in fiscal 1998. Consistent with the sales trend discussed previously, an increase in domestic mass merchant margins and flat domestic IBD margins were offset by decreased margins from international operations. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative costs were 23% of net sales in both fiscal 1999 and 1998. 14 AMORTIZATION OF INTANGIBLES. Amortization of goodwill and intangible assets decreased slightly to $2.1 million in fiscal 1999 from $2.3 million in fiscal 1998 as a result of certain intangibles becoming fully amortized. TRANSACTION COSTS. During fiscal 1999, in association with the Bell Merger, the Company recorded one-time transaction costs of $13.1 million. PRODUCT LIABILITY COSTS. Due to the nature of the Company's business, at any particular time it may be a defendant in a number of product liability lawsuits for serious personal injury or death allegedly related to the Company's products and, in certain instances, products manufactured by others. Many such lawsuits against the Company seek damages, including punitive damages, in substantial amounts. The Company's philosophy, both in prior fiscal years and in the current fiscal year, is to defend vigorously all product liability claims. Based on the Company's successful history in defending against such claims, the Company, in prior years, had accrued only for the costs associated with defending outstanding cases. However, in fiscal 1999, after extensive consultations with legal counsel prosecuting the appeals, the Company determined that it was necessary to accrue for those cases in which a judgment has been entered against the Company, although the Company will continue to vigorously defend these claims. Accordingly, during fiscal 1999, the Company recorded $12.5 million in product liability costs as a reserve against outstanding judgments against the Company. LOSS ON DISPOSAL OF PRODUCT LINES AND SALE OF ASSETS. During fiscal 1998, the Company negotiated a letter of intent to sell the assets of its domestic foam molding facility in Rantoul, Illinois, and agreed to sublet the building housing the foam molding facility to the purchaser. The Company completed the asset sale and entered into a foam molding supply agreement with the purchaser in fiscal 1999. The Company recorded fiscal 1998 charges of approximately $2.6 million, including a $2.0 million charge related to the divestiture of SportRack, and approximately a $0.6 million charge associated with the sale and related reorganization of the Company's domestic foam molding facility. During fiscal 1998, the Company reversed previously recorded charges of $1.9 million, including a $0.6 million benefit based on the finalization of costs associated with the closure of distribution facilities, and a $1.3 million benefit related to the reversal of the remaining reserve for uncollectible receivables established in fiscal 1997 in connection with the divestiture of Service Cycle/Mongoose. NET INVESTMENT INCOME AND INTEREST EXPENSE. Net investment income decreased to $1.1 million in fiscal 1999 from $1.7 million in fiscal 1998. The decrease was due to the repurchase of shares under the Bell Merger which resulted in lower cash balances to invest. Interest expense increased $11.1 million from $4.7 million in fiscal 1998 to $15.8 million in fiscal 1999. The increase is due to the increased debt issued in connection with the Bell Merger. GAIN ON DEBT TENDER. On August 17, 1998, the Company consummated the Tender Offer at a purchase price of $905, plus accrued and unpaid interest from May 15, 1998 up to, but not including, the date of payment for each $1,000 principal amount of Debentures. An extraordinary gain, stated on an after-tax basis and net of related fees and expenses, of $2.9 million was recorded in connection with the Tender Offer. INCOME TAXES. An income tax benefit of $7.6 million or 23% of the pre-tax loss was reported for fiscal 1999, compared to an income tax provision of $5.3 million or 38% of the pre-tax income, reported for fiscal 1998. The variance in rates between the two years is due to the non-deductibility of certain one-time charges. COMPARISON OF THE FISCAL YEAR ENDED JUNE 27, 1998 WITH THE FISCAL YEAR ENDED JUNE 28, 1997 The Company believes its results of operations in fiscal 1998 are not comparable to those of fiscal 1997 due to the inclusion of results of operations in fiscal 1997 of Service Cycle/Mongoose and SportRack, which were divested in April 1997 and July 1997, respectively. For ease of comparison to fiscal 1998, which does not include the results of the divested businesses, the Company has included adjusted information which excludes the divested businesses from the net sales and gross margin data for fiscal 1997. NET SALES. Net sales decreased 20% to $207.2 million in fiscal 1998 from $259.5 million in fiscal 1997 primarily as a result of the divestiture of Service Cycle/Mongoose and SportRack. Excluding the results of the divested businesses, which combined contributed $50.7 million in net sales in fiscal 1997, net sales decreased $1.6 million or 1% to $207.2 million in fiscal 1998 from $208.8 million in fiscal 1997. The decrease resulted from lower bicycle accessory shipments due to a reduction in the number of days of inventory carried by a major mass merchant, the elimination of certain lower margin products from the 15 Company's sales mix and a decrease in the prices of certain helmets sold in the mass merchant channel. The decrease was largely offset by strong international sales growth and continued strength in the IBD helmet market. For fiscal 1998, bicycle accessories, bicycle helmets and auto racing helmets represented approximately 52%, 46% and 2%, respectively, of the Company's net sales. For fiscal 1997, bicycle accessories, bicycle helmets and auto racing helmets represented approximately 54%, 44% and 2%, respectively, of the Company's net sales, excluding the results of the divested businesses. GROSS MARGIN. Gross margin increased to 34% of net sales in fiscal 1998 from 30% of net sales in fiscal 1997, on an actual basis, and from 32% of net sales on an adjusted basis, excluding the results of the divested businesses. Excluding the results of Service Cycle/Mongoose and SportRack, which had lower gross margins than the Company's other product lines, the increase was primarily attributable to the elimination of certain lower margin products from the Company's sales mix, the introduction of Bell-branded bicycle accessories into the mass merchant channel in December 1997, lower distribution costs due to the closure of the Company's Memphis, Tennessee distribution facility in November 1997, improvements in manufacturing efficiencies and a reduction in manufacturing overhead costs. Despite the decrease in the prices of certain helmets sold in the mass merchant channel, the Company was able to increase its gross margin in that channel by over one percentage point, which was primarily attributable to the Company's cost reduction initiatives. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative costs were 23% of net sales in both fiscal 1998 and 1997. Selling, general and administrative costs decreased by $11.9 million to $48.5 million in fiscal 1998 from $60.4 million in fiscal 1997. The decrease was primarily attributable to continued cost savings produced by the Company's cost reduction initiatives and the divestiture of Service Cycle/Mongoose and SportRack. AMORTIZATION OF INTANGIBLES. Amortization of goodwill and intangible assets decreased to $2.3 million in fiscal 1998 from $3.3 million in fiscal 1997. The decrease was a result of a write-off of intangible assets relating to the divestiture Service Cycle/Mongoose and SportRack. LOSS ON DISPOSAL OF PRODUCT LINES AND SALE OF ASSETS. During fiscal 1998, the Company negotiated a letter of intent to sell the assets of its domestic foam molding facility in Rantoul, Illinois, and agreed to sublet the building housing the foam molding facility to the purchaser. The Company subsequently entered into a foam molding supply agreement with the purchaser. The Company recorded fiscal 1998 charges of approximately $2.6 million, including a $2.0 million charge related to the divestiture of SportRack, and approximately a $0.6 million charge associated with the sale and related reorganization of the Company's domestic foam molding facility. During fiscal 1998, the Company reversed previously recorded charges of $1.9 million, including a $0.6 million benefit based on the finalization of costs associated with the closure of distribution facilities, and a $1.3 million benefit related to the reversal of the remaining reserve for uncollectible receivables established in fiscal 1997 in connection with the divestiture of Service Cycle/Mongoose. In April 1997, the Company completed the sale of its Service Cycle/Mongoose inventory, trademarks and certain other assets to Brunswick Corporation. In connection with the divestiture of Service Cycle/Mongoose, the Company recorded a loss on disposal of product lines of $25.4 million, 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). NET INVESTMENT INCOME AND INTEREST EXPENSE. Net investment income decreased to $1.7 million in fiscal 1998 from $2.9 million in fiscal 1997. The decrease was due to the settlement of an arbitration case related to the handling of certain marketable securities by an outside investment advisor during fiscal 1997. The settlement proceeds, net of related expenses and losses to sell certain securities, were $1.3 million. Interest expense decreased to $4.7 million in fiscal 1998 from $7.3 million in fiscal 1997 as a result of lower average debt balances outstanding. INCOME TAXES. An income tax provision of $5.3 million or 38% of the pre-tax income was reported for fiscal 1998, compared to an income tax benefit of $3.0 million or 14% of the pre-tax loss, reported for fiscal 1997. A majority of the difference in the effective tax rates was due to the write-off of non-tax deductible goodwill in connection with the divestiture of Service Cycle/Mongoose. 16 LIQUIDITY AND CAPITAL RESOURCES The Company has historically funded its operations, capital expenditures and working capital requirements from internal cash flow from operations and borrowings. The Company's working capital decreased to $74.7 million at July 3, 1999 from $130.4 million at June 27, 1998, due mainly to the significant amount of cash used in the Bell Merger. Cash used in operating activities for fiscal 1999 was $4.3 million as compared to fiscal 1998, when cash provided by operating activities was $27.5 million. The significant variance is due primarily to the expenses incurred as a result of the Bell Merger and the restructuring plans. The Company's capital expenditures were $4.1 million, $5.5 million and $7.1 million in fiscal 1999, 1998 and 1997, respectively. These amounts primarily reflect cash outlays for maintaining and upgrading the Company's manufacturing facilities and equipment including new product tooling and computer systems. Management estimates that the Company will continue to spend approximately $3.0 million to $4.0 million annually for product tooling and to maintain and upgrade its facilities and equipment. In fiscal 1999, in connection with the Bell Merger, the Company used $143.1 million to repurchase its common stock and $57.7 million to retire a portion of the Debentures. This was partially offset by the net proceeds from the sale of the Series A Notes of $105.1 million, the net proceeds from the issuance of its preferred stock of $45.4 million, and the net proceeds from the sale of the Discount Notes of $15.0 million. The remaining $23.8 million of the Debentures become due in November 2000. In August 1998, the Company and its wholly-owned subsidiary, BSI, entered into a $60.0 million senior secured revolving credit facility ("Credit Agreement"). The Credit Agreement is guaranteed by the Company and by certain of its subsidiaries (collectively, the "Subsidiary Guarantors" and together with the Company, the "Guarantors"). BSI's obligations under the Credit Agreement are secured by (a) substantially all of the tangible and intangible assets of BSI and each Guarantor, (b) the capital stock of BSI and each Subsidiary Guarantor and (c) 65% of the capital stock of certain foreign subsidiaries of the Company. The Credit Agreement also contains certain financial covenants, including a maximum leverage ratio, a minimum fixed charge coverage ratio and a minimum cash interest coverage ratio. It also contains covenants which restrict the ability of the Company to pay dividends, incur liens, issue certain types of debt or equity, engage in mergers, acquisitions or asset sales, or to make capital expenditures. At July 3, 1999, the Company was in compliance with or had obtained waivers for all bank covenants. The Credit Agreement expires in August 2003. As of July 3, 1999, outstanding borrowings under the Credit Agreement totaled $10.0 million. Based on the provisions of the Credit Agreement, the Company could have borrowed a maximum of $59.6 million. Management believes that cash flow from operations and borrowing availability under the Credit Agreement will provide adequate funds for the Company's foreseeable working capital needs, planned capital expenditures, debt service obligations and the ultimate outcome of pending product liability judgments. The Company's ability to fund its operations and make planned capital expenditures, to make scheduled debt payments, to refinance indebtedness and to remain in compliance with all of the financial covenants under its debt agreements depends on its future operating performance and cash flow, which in turn are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond the Company's control. In addition, a termination of, or other adverse change in the Company's relationship with, an adverse change in the financial condition of, or a significant reduction in sales to Wal-Mart, which represented approximately 28% of the Company's net sales in fiscal 1999, could have a material adverse effect on the Company's liquidity and results of operations. YEAR 2000 COMPLIANCE The year 2000 problem, which is common to most corporations, concerns the inability of information systems, including computer software programs as well as other systems dependent on computerized information such as phones, voicemail, security systems and elevators (collectively, "Non-IT Systems"), to properly recognize and process date sensitive information related to the year 2000 and beyond. The Company believes that it will be able to achieve year 2000 compliance by the end of calendar 1999 and does not currently anticipate any material disruption of its operations as a result of any failure by the Company to be year 2000 compliant. However, to the extent the Company is unable to achieve year 2000 compliance, the Company's business and results of operations could be materially affected. This could be caused by computer-related failures in a number of areas including, but not limited to, the Company's financial systems, manufacturing and warehouse management systems, phone system and electricity supply. 17 The Company has performed a preliminary examination of its major software applications to determine whether each system is prepared to accommodate the year 2000. In fiscal 1998, through routine upgrades, the Company made the computer software programs used at the Company's domestic facilities and at Bell Sports Canada year 2000 compliant. These upgrades include, but are not limited to, the manufacturing, financial, customer and vendor purchase order processing and warehouse management systems. In fiscal 1999, the Company has further upgraded these programs to a year 2000 level certified by the Company's outside software vendors. The computer software programs of Giro, Giro Ireland, EuroBell and Bell Sports Australia are currently year 2000 compliant. All year 2000 efforts with respect to the Company and its subsidiaries' computer software programs have been and are being made through internal resources and through routine software upgrades provided by the Company's software vendors. The Company has not incurred significant separately identifiable costs related to year 2000 issues through July 3, 1999 and does not expect to incur significant additional costs in order to make its computer software programs year 2000 compliant. The Company's internal resources consist of an information technology support team comprised of approximately fifteen full-time employees, covering both technical and application areas. The Company has not hired additional employees, either full-time or contract, in order to address year 2000 issues and expects all such issues will be adequately addressed by the existing team. The Company employs certain manufacturing processes that utilize computer controlled manufacturing equipment. The Company has determined that such equipment is year 2000 compliant. However, in the event of a failure, the Company believes that it could revert to the manual processes previously employed or outsource such work with minimal incremental manufacturing cost. The Company's facilities staff currently is investigating the status of the Company's Non-IT Systems with respect to year 2000 compliance. The Company expects that its Non-IT Systems will be year 2000 compliant before the end of 1999. The Company is utilizing internal resources to address the year 2000 compliance of its Non-IT Systems and has not incurred significant separately identifiable costs related to the year 2000 issues through July 3, 1999 and does not expect to incur significant additional costs in order to upgrade its Non-IT Systems to year 2000 compliance. In addition to reviewing its internal systems, the Company has polled or is in the process of polling its outside software and other vendors, customers and freight carriers to determine whether they are year 2000 compliant and to attempt to identify any potential issues. The Company's outside software vendors have confirmed that they are year 2000 compliant, including the products utilized by the Company. Based on the responses it has received from its customers, the Company believes that its mass merchant customers will be year 2000 compliant before the end of 1999. If the Company's customers and vendors do not achieve year 2000 compliance before the end of 1999, the Company may experience a variety of problems which may have a material adverse effect on the Company. Among other things, to the extent the Company's customers are not year 2000 compliant by the end of 1999, such customers may lose electronic data interchange capabilities at the beginning of the year 2000. Where EDI communication would no longer be available, the Company expects to utilize voice, facsimile and/or mail communication in order to receive customer orders and process customer billings. To the extent the Company's vendors are not year 2000 compliant by the end of 1999, such vendors may fail to deliver ordered materials and products to the Company and may fail to bill the Company properly and promptly. Consequently, the Company may not have the correct inventory to send to its customers and may experience a shortage or surplus of inventory. Although the Company does not currently have a plan for addressing these potential problems, with respect to its vendors, the Company has alternative sources of supply. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of July 3, 1999, the Company maintained a portion of its cash and cash equivalents in financial instruments with original maturities of three months or less. These financial instruments are subject to interest rate risk, and will decline in value if interest rates increase. Due to the short duration of these financial instruments, an immediate 10 percent increase in interest rates would not have a material effect on the Company's financial condition. The Company's outstanding long-term debt at July 3, 1999 bears interest at fixed rates; therefore, the Company's results of operations would only be affected by interest rate changes to the extent that variable rate short-term notes payable are outstanding. Due to the short-term nature and insignificant amount of the Company's notes payable, an immediate 10 percent change in interest rates would not have a material effect on the Company's results of operations over the next fiscal year. 18 In the past, the Company has periodically entered into forward foreign exchange contracts in managing its foreign currency risk. The Company has no significant outstanding foreign exchange contracts at July 3, 1999, and had no significant foreign exchange contract activity during fiscal 1999. 19 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Bell Sports Corp. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Bell Sports Corp. and its subsidiaries at July 3, 1999 and June 27, 1998, and the results of their operations and their cash flows for each of the three years in the period ended July 3, 1999, 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP San Francisco, California September 8, 1999 20 BELL SPORTS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data) July 3, June 27, 1999 1998 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 8,875 $ 45,093 Accounts receivable 58,634 63,472 Inventories 43,664 39,679 Deferred taxes 11,366 8,970 Other current assets 6,134 3,264 --------- --------- Total current assets 128,673 160,478 Property, plant and equipment 16,162 20,636 Long-term deferred taxes 12,500 9,500 Goodwill 52,429 54,292 Intangibles and other assets 9,170 2,161 --------- --------- Total assets $ 218,934 $ 247,067 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 9,249 $ 7,663 Accrued compensation and employee benefits 2,580 5,541 Accrued expenses 31,682 16,158 Notes payable and current maturities of long-term debt and capital lease obligations 10,433 679 --------- --------- Total current liabilities 53,944 30,041 Long-term debt, less current maturities 148,270 86,625 Capital lease obligations, less current maturities, and other liabilities 10,255 2,142 --------- --------- Total liabilities 212,469 118,808 --------- --------- Commitments and contingencies Stockholders' equity: Series A Preferred Stock; 6% cumulative, $.01 par value; authorized 1,500,000 shares, 1,034,781 shares issued and outstanding at July 3, 1999 10 -- Preferred stock; $.01 par value; authorized 1,000,000 shares, none issued and outstanding at June 27, 1998 -- -- Class A Common Stock; $.01 par value; authorized 900,000 shares, 870,661 shares issued and outstanding at July 3, 1999 9 -- Class B Common Stock; $.01 par value; authorized 150,000 shares, 128,200 shares issued and outstanding at July 3, 1999 1 -- Class C Common Stock; $.01 par value; authorized 56,500 shares, 56,000 shares issued and outstanding at July 3, 1999 1 -- Common Stock; $.01 par value; authorized 25,000,000 shares, 14,410,508 shares issued and 13,915,436 shares outstanding at June 27, 1998 -- 144 Additional paid-in capital 53,210 143,905 Accumulated other comprehensive income (loss) (1,925) (1,111) Accumulated deficit (44,841) (9,461) --------- --------- 6,465 133,477 Treasury stock, at cost, none at July 3, 1999 and 495,072 shares at June 27, 1998 -- (5,218) --------- --------- Total stockholders' equity 6,465 128,259 --------- --------- Total liabilities and stockholders' equity $ 218,934 $ 247,067 ========= ========= See accompanying notes to these consolidated financial statements. 21 BELL SPORTS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands) Fiscal years ended ----------------------------------- July 3, June 27, June 28, 1999 1998 1997 --------- --------- --------- Net sales $ 210,909 $ 207,236 $ 259,534 Cost of sales 140,673 137,672 183,098 --------- --------- --------- Gross profit 70,236 69,564 76,436 --------- --------- --------- Selling, general and administrative expenses 48,338 48,562 60,574 Foreign exchange (gain) loss 1,734 (45) (158) Amortization of goodwill and intangible assets 2,117 2,260 3,320 Transaction costs 13,100 -- -- Product liability costs 12,500 -- -- Restructuring charges 8,970 1,192 4,141 Asset write-offs 5,266 -- -- Other costs 2,292 -- -- Loss on disposal of product lines and sale of assets -- 700 25,360 --------- --------- --------- Operating expenses 94,317 52,669 93,237 --------- --------- --------- Income (loss) from operations (24,081) 16,895 (16,801) Net investment income (1,073) (1,716) (2,939) Interest expense 15,768 4,715 7,289 --------- --------- --------- Net income (loss) before provision for (benefit from) income taxes (38,776) 13,896 (21,151) Provision for (benefit from) income taxes (9,652) 5,318 (2,963) --------- --------- --------- Net income (loss) before extraordinary items (29,124) 8,578 (18,188) Extraordinary item: Gain on early extinguishment of debt, net of taxes of $2,006 2,887 -- -- --------- --------- --------- Net income (loss) $ (26,237) $ 8,578 $ (18,188) ========= ========= ========= See accompanying notes to these consolidated financial statements. 22 BELL SPORTS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
Common Stock Series A Preferred Class A Common Class B Common Class C Common ----------------- ----------------- ----------------- ----------------- ----------------- Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Balance at June 29, 1996 13,701 $ 142 -- $ -- -- $ -- -- $ -- -- $ -- Exercise of stock options 24 1 -- -- -- -- -- -- -- -- Issuance of treasury stock 28 -- -- -- -- -- -- -- -- -- Net loss -- -- -- -- -- -- -- -- -- -- Change in unrealized holding losses on marketable securities, net of taxes of $75 -- -- -- -- -- -- -- -- -- -- Currency translation adjustment, net of tax benefit of $80 -- -- -- -- -- -- -- -- -- -- Comprehensive income (loss) ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Balance at June 28, 1997 13,753 143 -- -- -- -- -- -- -- -- Exercise of stock options 166 1 -- -- -- -- -- -- -- -- Cancellation of shares (4) -- -- -- -- -- -- -- -- -- Net income -- -- -- -- -- -- -- -- -- -- Currency translation adjustment, net of tax benefit of $431 -- -- -- -- -- -- -- -- -- -- Comprehensive income (loss) ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Balance at June 27, 1998 13,915 144 -- -- -- -- -- -- -- -- Exchange of shares (488) (5) 97 1 80 1 -- -- -- -- Exchange of stock options -- -- -- -- -- -- -- -- -- -- Cancellation of treasury stock -- (5) -- -- -- -- -- -- -- -- Repurchase of common stock (13,432) (134) -- -- -- -- -- -- -- -- Issuance of stock for Bell Merger -- -- 874 9 721 7 -- -- -- -- Issuance of stock options -- -- -- -- -- -- -- -- -- -- Exercise of stock options 5 -- -- -- 17 -- -- -- -- -- Issuance of stock under the management investment and incentive plans -- -- 16 -- 14 -- 128 1 56 1 Exchange of debt for equity -- -- 48 -- 39 1 -- -- -- -- Net loss -- -- -- -- -- -- -- -- -- -- Currency translation adjustment, net of tax benefit of $243 -- -- -- -- -- -- -- -- -- -- Comprehensive income (loss) ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Balance at July 3, 1999 -- $ -- 1,035 $ 10 871 $ 9 128 $ 1 56 $ 1 ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= Accumulated Retained Additional Other Earnings Total Paid-In Comprehensive (Accumulated Treasury Comprehensive Stockholders' Capital Income (loss) Deficit) Stock Income(loss) Equity --------- --------- --------- --------- --------- --------- Balance at June 29, 1996 $ 141,647 $ (380) $ 149 $ (5,517) $ 136,041 Exercise of stock options 1,138 -- -- -- 1,139 Issuance of treasury stock (299) -- -- 299 -- Net loss -- -- (18,188) -- $ (18,188) (18,188) Change in unrealized holding losses on marketable securities, net of taxes of $75 -- 461 -- -- 461 461 Currency translation adjustment, net of tax benefit of $80 -- (488) -- -- (488) (488) --------- Comprehensive income (loss) $ (18,215) --------- --------- --------- --------- ========= --------- Balance at June 28, 1997 142,486 (407) (18,039) (5,218) 118,965 Exercise of stock options 1,419 -- -- -- 1,420 Cancellation of shares -- -- -- -- -- Net income -- -- 8,578 -- $ 8,578 8,578 Currency translation adjustment, net of tax benefit of $431 -- (704) -- -- (704) (704) --------- Comprehensive income (loss) $ 7,874 --------- --------- --------- --------- ========= --------- Balance at June 27, 1998 143,905 (1,111) (9,461) (5,218) 128,259 Exchange of shares 3 -- -- -- -- Exchange of stock options -- -- (5,447) -- (5,447) Cancellation of treasury stock (4,929) -- (284) 5,218 -- Repurchase of common stock (134,140) -- (3,412) -- (137,686) Issuance of stock for Bell Merger 44,984 -- -- -- 45,000 Issuance of stock options 307 -- -- -- 307 Exercise of stock options 45 -- -- -- 45 Issuance of stock under the management investment and incentive plans 586 -- -- -- 588 Exchange of debt for equity 2,449 -- -- -- 2,450 Net loss -- -- (26,237) -- $ (26,237) (26,237) Currency translation adjustment, net of tax benefit of $243 -- (814) -- -- (814) (814) --------- Comprehensive income (loss) $ (27,051) --------- --------- --------- --------- ========= --------- Balance at July 3, 1999 $ 53,210 $ (1,925) $ (44,841) $ -- $ 6,465 ========= ========= ========= ========= =========
See accompanying notes to these consolidated financial statements 23 BELL SPORTS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Fiscal years ended ----------------------------------- July 3, June 27, June 28, 1999 1998 1997 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) before extraordinary items $ (29,124) $ 8,578 $ (18,188) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Write-off of goodwill and intangibles -- -- 14,531 Amortization of goodwill and intangibles 2,117 2,260 3,338 Depreciation 5,529 5,549 6,222 Loss on disposal of property, plant and equipment 2,997 434 1,599 Provision for doubtful accounts 907 1,077 4,553 Loss on disposal of product lines and sale of assets -- 700 -- Provision for inventory obsolescence 4,592 2,340 2,876 Deferred income taxes (5,396) 3,997 (2,827) Other 3,155 -- -- Changes in assets and liabilities, net of adjustments for acquisitions and dispositions: Accounts receivable 3,816 8,542 (4,976) Inventories (8,557) (371) (7,782) Other assets (5,062) 5,310 (684) Accounts payable 1,620 (2,300) (288) Other liabilities 19,069 (8,623) 2,536 --------- --------- --------- Net cash provided by (used in) operating activities (4,337) 27,493 910 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (4,149) (5,496) (7,058) Proceeds from the sale of Service Cycle/Mongoose -- -- 20,515 Acquisition of other businesses, net of cash acquired -- -- (1,493) Net sales of marketable securities -- -- 8,458 Proceeds from the sale of SportRack -- 13,427 -- --------- --------- --------- Net cash provided by (used in) investing activities (4,149) 7,931 20,422 --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock, net of costs 247 1,420 -- Proceeds from issuance of senior subordinated notes, net of costs 105,100 -- -- Proceeds from issuance of senior discount notes 15,000 -- -- Proceeds from issuance of preferred stock 45,387 -- -- Repurchase of common stock (143,130) -- -- Tender of subordinated debentures, net of costs (57,681) -- -- Payments on notes payable, long-term debt and capital lease obligations (579) (489) (869) Net borrowings (payments) on line of credit agreement 9,869 (19,067) (14,403) Expenditures related to issuance of line of credit agreement (1,381) -- -- --------- --------- --------- Net cash used in financing activities (27,168) (18,136) (15,272) --------- --------- --------- Effect of exchange rate changes on cash (564) (1,203) (192) --------- --------- --------- Net increase (decrease) in cash and cash equivalents (36,218) 16,085 5,868 Cash and cash equivalents at beginning of period 45,093 29,008 23,140 --------- --------- --------- Cash and cash equivalents at end of period $ 8,875 $ 45,093 $ 29,008 ========= ========= =========
See accompanying notes to these consolidated financial statements 24 BELL SPORTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - THE COMPANY Bell Sports Corp. ("the Company" or "Bell") is the leading manufacturer and marketer of bicycle helmets worldwide and a leading supplier of a broad line of bicycle accessories in North America. Bell is also a leading supplier of auto racing, in-line skating, snowboarding, snow skiing and water sport helmets. On July 29, 1998, American Recreation Company Holding, Inc, ("AMRE") a wholly-owned subsidiary of the Company, was merged into Bell Sports, Inc, also a wholly-owned subsidiary of the Company (the "AMRE Merger"). On August 17, 1998, the Company consummated the Agreement and Plan of Recapitalization and Merger (the "Plan") with HB Acquisition Corporation, a Delaware corporation ("HB Acquisition") and affiliate of Charlesbank Capital Partners, LLC ("Charlesbank") and Brentwood Associates Buyout Fund II, L.P. ("Brentwood"). The Plan provided for the merger of HB Acquisition with and into Bell, with Bell continuing as the surviving corporation (the "Bell Merger"). Under the agreement, each share of common stock of the Company was converted into the right to receive $10.25 in cash. On July 3, 1999, the Company sold its auto racing helmet business and entered into a long-term royalty-free licensing agreement for auto racing helmets and automotive accessories to be marketed under the Bell brand name. NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND ACCOUNTING PERIOD The consolidated financial statements include the accounts of Bell Sports Corp. and its wholly owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation. The Company's fiscal year is either a 52 or 53 week accounting period ending on the Saturday that is nearest to the last day of June. The fiscal year ended July 3, 1999 was a 53 week period. The fiscal years ending June 27, 1998 and June 28, 1997 were 52 week periods. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK Accounts receivable at July 3, 1999 and June 27, 1998 are net of allowances for doubtful accounts of $1.8 million and $1.7 million, respectively. The Company's principal customers operate in the mass merchant, sporting goods or independent bicycle dealer retail markets worldwide. The customers are not geographically concentrated. As of July 3, 1999 and June 27, 1998, respectively, 30% and 27% of the Company's gross accounts receivable were attributed to one mass merchant customer. In addition, the same mass merchant customer accounted for 28%, 21% and 18% of net sales during fiscal 1999, 1998 and 1997, respectively. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out basis) or market (net realizable value). Costs included in inventories are (i) landed purchased cost on sourced items and (ii) raw materials, direct labor and manufacturing overhead on manufactured items. 25 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements and capital lease assets are amortized using the straight-line method over the shorter of the base lease term or the estimated useful lives of the related assets. Maintenance and repair costs are expensed as incurred. GOODWILL AND INTANGIBLE ASSETS The excess of the acquisition cost over the fair value of the net identifiable assets of businesses acquired in purchase transactions has been included in goodwill, is amortized on a straight-line basis over 25 to 40 years, and is recorded net of accumulated amortization of $9.2 million and $7.3 million at July 3, 1999 and June 27, 1998, 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 2 to 17 years. Accumulated amortization for intangible assets totaled $4.5 million and $5.1 million at July 3, 1999 and June 27, 1998, respectively. The Company's policy is to account for goodwill and all other intangible assets at the lower of amortized cost or net realizable value. As part of an ongoing review of the valuation and amortization of intangible assets, management assesses the carrying value of the Company's intangible assets to determine if changes in facts and circumstances suggest that it may be impaired. If this review indicates that the intangibles will not be recoverable, as determined by a nondiscounted cash flow analysis over the remaining amortization period, the carrying value of the Company's intangibles would be reduced to its estimated fair market value. MANAGEMENT'S ESTIMATES AND ASSUMPTIONS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RESEARCH AND DEVELOPMENT EXPENSE Research and development costs are expensed as incurred. These costs totaled $3.6 million, $3.6 million and $4.7 million for fiscal 1999, 1998 and 1997, 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 $5.7 million, $5.5 million and $9.1 million for fiscal 1999, 1998 and 1997, 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 outstanding foreign exchange contracts at July 3, 1999, and had no significant foreign exchange contract activity during the fiscal year then ended. INCOME TAXES The Company uses the liability method of accounting for income taxes, which is an asset and liability approach for financial accounting and reporting of income taxes. Deferred tax assets and liabilities are recorded based upon temporary differences between the tax basis of assets and liabilities and their carrying values for financial reporting purposes. A valuation allowance is provided for deferred tax assets when management concludes it is more likely than not that some portion of the deferred tax assets will not be realized. 26 ACCOUNTING FOR STOCK-BASED COMPENSATION The Company has elected to continue to recognize compensation expense based on the intrinsic value method. RECLASSIFICATIONS The Company has reclassified certain amounts in the fiscal 1998 and fiscal 1997 consolidated financial statements in order to conform to the presentation adopted for fiscal 1999. RECENT ACCOUNTING PRONOUNCEMENT In June 1998, Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") was issued. SFAS 133 establishes a new model for accounting for derivatives and hedging activities and supersedes and amends a number of existing standards. SFAS 133 is required to be adopted by the Company for fiscal year 2001. Upon initial application, all derivatives are required to be recognized in the statement of financial position as either assets or liabilities and measured at fair value. In addition, all hedging relationships must be reassessed and documented pursuant to the provisions of SFAS 133. As the Company does not currently invest in derivatives, the adoption of SFAS 133 is not expected to have a material effect on the results of operations or the consolidated financial statements. NOTE 3 - NET INVESTMENT INCOME Net investment income consists of the following (in thousands): July 3, June 27, June 28, 1999 1998 1997 ------- ------- ------- Dividend income $ -- $ -- $ 184 Interest income 1,073 1,716 1,646 Proceeds from settlement of arbitration case -- -- 1,815 Realized losses on sale of marketable securities -- -- (654) Investment fees and other -- -- (52) ------- ------- ------- $ 1,073 $ 1,716 $ 2,939 ======= ======= ======= The fiscal 1997, net investment income amount included 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 losses to sell certain securities, were $1.3 million. NOTE 4 - INVENTORIES Inventories consist of the following components (in thousands): July 3, June 27, 1999 1998 ------- ------- Raw materials $ 3,579 $ 3,539 Work in process 1,089 2,010 Finished goods 38,996 34,130 ------- ------- $43,664 $39,679 ======= ======= 27 NOTE 5 - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following (in thousands): July 3, June 27, Estimated 1999 1998 useful life -------- -------- ----------- Land, buildings and leasehold improvements $ 9,397 $ 9,809 3-38 years Machinery, equipment and tooling 21,634 24,468 3-10 years Office equipment 7,977 7,363 3-7 years Other 346 786 3-7 years -------- -------- 39,354 42,426 Less: Accumulated depreciation and amortization (23,192) (21,790) -------- -------- $ 16,162 $ 20,636 ======== ======== NOTE 6 - BANK CREDIT FACILITIES AND LONG-TERM DEBT On August 17, 1998, the Company's wholly-owned subsidiary, Bell Sports, Inc., issued Notes totaling $110.0 million, bearing interest at 11%, maturing on August 15, 2008. Interest on the Notes is payable on February 15 and August 15 of each year. The Notes are redeemable, in whole or in part, at the option of Bell Sports, Inc. at any time on or after August 15, 2003, in cash, at specified redemption prices. In addition, prior to August 15, 2001, the Company may redeem up to 35% of the bonds for 111% of their principal amount, plus accrued interest. The Company has fully and unconditionally guaranteed the Notes. Separate financial statements and other disclosures relating to Bell Sports, Inc. have not been made, as management believes that such information is not material to holders of the Notes. Summarized financial information regarding Bell Sports, Inc. is as follows: BELL SPORTS, INC. July 3, 1999 ------------ SUMMARIZED BALANCE SHEET DATA: (unaudited) Current assets $145,526 Total assets 199,061 Current liabilities 53,379 Total liabilities 173,720 Stockholder's equity 25,341 For the Year Ended July 3, 1999 ------------ SUMMARIZED STATEMENT OF OPERATIONS DATA: (unaudited) Net sales $210,909 Gross profit 70,236 Net loss before extraordinary items 26,734 Net loss 26,734 On August 17, 1998, the Company issued Discount Notes bearing interest at 14% totaling $15.0 million and maturing on August 14, 2009 to a related party in a private placement transaction. Interest on the Discount Notes accrues on June 1 and December 1 of each year. On March 12, 1999, Discount Notes with an accreted value of $2.4 million were exchanged for 47.6 thousand shares of Series A Preferred Stock and 39.2 thousand shares of Class A Common Stock. On August 17, 1998, the Company consummated a tender offer to purchase $62.5 million aggregate principal amount of its 4 1/4% Convertible Subordinated Debentures ("Debentures") due November, 2000. The debentures were purchased at a price of $905, plus accrued and unpaid interest from May 15, 1998 up to, but not including, the date of payment for each $1,000 principal amount of the Debentures. Accordingly, the Company realized an extraordinary gain, stated on an after-tax basis and net of related fees and expenses, of $2.9 million. The Debentures remaining outstanding of $23.8 million are redeemable at the Company's option at any time at specified redemption prices. In August 1998, the Company and its wholly-owned subsidiary, Bell Sports, Inc. (the "Borrower"), entered into a $60.0 million senior secured revolving credit facility ("Credit Agreement"). The Credit Agreement is guaranteed by the Company 28 and by certain of its subsidiaries (collectively, the "Subsidiary Guarantors" and together with the Company, the "Guarantors"). The Borrower's obligations under the Credit Agreement are secured by (a) substantially all of the tangible and intangible assets of the Borrower and each Guarantor, (b) the capital stock of the Borrower and each Subsidiary Guarantor and (c) 65% of the capital stock of certain foreign subsidiaries of the Company. The Credit Agreement expires on August 17, 2003. The aggregate amount of borrowings permitted under the Credit Agreement is limited by a borrowing base formula equal to a percentage of the eligible domestic accounts receivable and inventory of the Borrower and the Subsidiary Guarantors plus an amount allowed for the retirement of convertible debt. The Credit Agreement provides for mandatory repayments from time to time to the extent the amount outstanding thereunder exceeds the maximum amount permitted under the borrowing base. Based on the provisions of the Credit Agreement, the Borrower could borrow a maximum of $59.6 million as of July 3, 1999. As of July 3, 1999, there were borrowings outstanding of $10.0 million under the Credit Agreement. The Credit Agreement provides the Company with the option of borrowing based either on the U.S. prime rate plus a margin or LIBOR plus a margin. The margin for the U.S. prime rate can fluctuate between 0.0% and 1.0%, and the margin for LIBOR loans can fluctuate between 1.0% and 2.0% based on the Company's earnings and debt. At July 3, 1999, the margin for U.S. prime was 0.75% and the margin for LIBOR was 1.75%. Under the Credit Agreement, the Borrower is required to pay a quarterly commitment fee on the unused portion of the facility at a rate that ranges from 0.375% to 0.50% per annum, based on a pricing ratio. At July 3, 1999, the quarterly commitment fee was 0.5% per annum. The Credit Agreement contains certain financial covenants, including a maximum leverage ratio, a minimum fixed charge coverage ratio and a minimum cash interest coverage ratio. It also contains covenants which restrict the ability of the Company to pay dividends, incur liens, issue certain types of debt or equity, engage in mergers, acquisitions or asset sales, or to make capital expenditures. At July 3, 1999, the Company was in compliance with or had obtained waivers for all bank covenants. Long-term debt consists of the following (in thousands): July 3, June 27, 1999 1998 -------- -------- 11% senior subordinated debentures maturing August, 2008 $110,000 $ -- 4 1/4% convertible subordinated debentures maturing November 2000 23,750 86,250 14% senior discount notes due August, 2009 14,434 -- Borrowings under line of credit 10,000 -- Notes collateralized by certain equipment due at various dates through December 2000 and bearing interest at fixed rates ranging from 2.9% to 10.3% 391 936 -------- -------- 158,575 87,186 Less: Current maturities 10,305 561 -------- -------- Total long-term debt $148,270 $ 86,625 ======== ======== 29 Scheduled maturities, by fiscal year, of long-term debt are as follows (in thousands): 2000 $ 10,305 2001 23,836 2002 -- 2003 -- 2004 -- Thereafter 124,434 -------- Total $158,575 ======== NOTE 7 - STOCKHOLDERS' EQUITY STOCK OPTIONS Pursuant to the Bell Merger on August 17, 1998, the Company entered into agreements with all individuals holding stock options, whereby the holder was to receive, at the time of the merger, a cash payment equal to the excess, if any, of $10.25 per share over the applicable per share exercise price. All stock option plans were terminated at the time of the Bell Merger. The Company currently has no stock option plans. Activity under the previous stock option plans was as follows: Number of shares Weighted underlying average Options options exercise price exercisable ---------- ---------- ---------- Options outstanding at June 29, 1996 1,846,589 13.33 549,660 Options granted 2,041,847 7.21 Options exercised (23,754) 0.46 Options canceled (966,242) 13.92 Options terminated (566,677) 13.10 ---------- Options outstanding at June 28, 1997 2,331,763 8.19 1,130,635 Options granted 220,484 8.84 Options exercised (165,935) 7.09 Options terminated (194,706) 9.23 ---------- Options outstanding at June 27, 1998 2,191,606 8.25 1,670,035 Options exercised (1,883,816) 7.35 Options cancelled (307,790) 13.75 ---------- Options outstanding at July 3, 1999 -- -- -- ========== On August 17, 1998, the Company granted options to purchase 20,511 shares of Series A Preferred Stock at an exercise price of $36.15 per share and 16,921 shares of Class A Common Stock at an exercise price of $.44 per share (the "Options") to a member of management. The Options are immediately exercisable and must be exercised, if at all, on or before August 27, 2006. Compensation expense of approximately $307,000 was recorded in selling, general and administrative expenses during the first quarter of fiscal 1999 related to the grant of the Options. During fiscal year 1999, the options to purchase Class A Common Stock were exercised. As required, the Company has adopted the disclosure provisions of SFAS No. 123 "Accounting for Stock Based Compensation" ("SFAS 123") for employee stock options. The fair value of options granted during fiscal years 1999, 1998 and 1997 was computed using the Black-Scholes option pricing model. The weighted-average assumptions used for stock option grants for fiscal years 1999, 1998 and 1997 were an expected volatility of the market price of the Company's Common and Preferred Stock of 0%, 41% and 46%, respectively; weighted-average expected life of the options of approximately 3.5 years, 4.9 years and 4.4 years, respectively; no dividend yield; and risk-free interest rate of 6.50%, 6.50% and 4.89 to 6.59% respectively. The interest rates are effective for option grant dates made throughout the year. Adjustments for forfeitures are made as they occur. The total value of options granted for the years ended July 30 3, 1999, June 27, 1998, and June 28, 1997 was computed as approximately $456,000, $949,000, and $1,405,000, respectively. If the Company had accounted for these stock options issued to employees in accordance with SFAS 123, the effect on net income (loss) for each fiscal year would have been reported as follows (in thousands): Year Ended ------------------------------------------ July 3, 1999 June 27, 1998 June 28, 1997 ------------ ------------- ------------- Net income (loss): As reported $(26,237) $ 8,578 $(18,188) Pro forma for SFAS 123 (27,735) 7,463 (19,045) The pro forma effects of applying SFAS 123 may not be representative of the effects on reported net income for future years since options vest over several years and additional option awards are made each year. STOCK REPURCHASE 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 were to depend on market conditions and other factors. In fiscal 1997, the Company 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. No shares were repurchased in fiscal 1998. The remaining outstanding shares were retired at the time of the Bell Merger. PREFERRED STOCK In connection with the Bell Merger, the Company issued Series A Preferred Stock, par value $.01 (the "Series A Preferred Stock"). Each holder is entitled to receive dividends on each share at the rate of six percent (6%) per annum (computed on the basis of $50.99 per share), if, as and when declared by the Board of Directors of the Company, subject to certain restrictions. Dividends on the shares of Series A Preferred Stock are payable on June 30, September 30, December 31, and March 31 of each year (a "Dividend Payment Date"), commencing September 30, 1998. If, on any Dividend Payment Date, the holders of the Series A Preferred Stock have not received the full dividends, then such dividends shall accumulate, whether or not earned or declared, with additional dividends thereon, compounded quarterly, at the dividend rate of six percent (6%) per annum, for each succeeding full quarterly dividend period during which such dividends remain unpaid. No dividends were paid in fiscal year 1999. INVESTMENT AND INCENTIVE PLAN In November 1998, the Board of Directors approved the Investment and Incentive Plan and the Class C Investments and Incentive Plan (collectively the "Plans") to allow selected employees, directors, consultants and/or advisors of the company the opportunity to make equity investments in the Company. Under the Plans, up to 15,000 shares of Series A Preferred Stock, 12,500 shares of Class A Common Stock, 132,100 shares of Class B Common Stock and 56,500 shares of Class C Common Stock can be purchased by participants. As of July 3, 1999, 16,346 shares of Series A Preferred Stock, 13,575 shares of Class A Common Stock, 128,200 shares of Class B Common Stock, and 56,000 shares of Class C Common Stock had been purchased under the Plans. NOTE 8 - COMMITMENTS AND CONTINGENCIES PRODUCT LIABILITY The Company is subject to various product liability claims and/or suits brought against it for claims involving damages for personal injuries or deaths. Allegedly, these injuries or deaths relate to the use by claimants of products manufactured by the Company and, in certain cases, products manufactured by others. The ultimate outcome of these existing claims and any potential future claims cannot presently be determined. The cost of product liability insurance fluctuated greatly in past years and the Company opted to self-insure claims for certain periods. The Company has been covered by product liability insurance since July 1, 1991. This insurance is subject to a self-insured retention. There is no assurance that insurance coverage will be available or economical in the future. 31 The Company sold its motorcycle helmet manufacturing business in June 1991 in a transaction in which the purchaser assumed all responsibility for product liability claims arising out of helmets manufactured prior to the date of disposition and the Company agreed to use its in-house defense team to defend these claims at the purchaser's expense. If the purchaser is for any reason unable to pay a judgment, settlement amount or defense costs arising out of these claims, the Company could be held responsible for the payment of such amounts or costs. The Company believes that the purchaser does not currently have the financial resources to pay any significant judgment, settlement amount, or defense costs arising out of any claim. The Company sold its auto racing helmet business in July 1999 and entered into a long-term royalty-free licensing agreement with the purchaser for auto racing helmets and automotive accessories to be marketed under the Bell brand name. The Company retains responsibility for product liability claims relating to auto racing helmets manufactured prior to the sale of the auto racing helmet business. The Company believes that, by virtue of its status as a licensor it could be named as a defendant in actions involving liability for auto racing helmets and automotive accessories manufactured by the purchaser of the Company's auto helmet business. In February 1996, a Toronto, Canada jury returned a verdict against the Company based on injuries arising out of a 1986 motorcycle accident. The jury found that the Company was 25% responsible for the injuries with the remaining 75% of the fault assigned to the plaintiff and the other defendant. If the judgment is upheld upon appeal, the amount of the claim for which the Company would be responsible and the legal fees and tax implications associated therewith are estimated to be between $3.5 and $4.0 million (based on current exchange rates). This claim arose during a period in which the Company was self-insured. The Company has filed an appeal of the Canadian verdict. In February 1998, a Wilkes-Barre, Pennsylvania jury returned a verdict against the Company relating to injuries sustained in a 1993 motorcycle accident. The judgment totaled $6.8 million, excluding any interest, fees or costs which may be assessed. This claim arose during a period in which the Company was self-insured. The Company filed a motion for a new trial which was denied. The Company has filed an appeal of the verdict. In June 1998, a Wilmington, Delaware jury returned a verdict against the Company relating to injuries sustained in a 1991 off-road motorcycle accident. The judgment totaled $1.8 million, excluding any interest, fees or costs which may be assessed. The claim is covered by insurance; however, the Company is responsible for a $1.0 million self-insured retention. The Company's post-trial motions have been denied by the trial court and an appeal is pending seeking reversal of the judgment of the trial court. Based on management's extensive consultation with legal counsel prosecuting the appeals, the Company has established product liability reserves totaling $13.8 million of which $4.8 million is classified as current. These reserves are intended to cover the estimated costs for the defense, payment or settlement of these and other known claims. The Company believes it will have adequate cash balances and sources of capital available to satisfy such pending judgments. ENVIRONMENTAL LITIGATION In May 1998, the Company received a De Minimis Notice Letter and Settlement Offer from the United States Environmental Protection Agency ("USEPA") under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. Sections 9601 ET SEQ. for the Operating Industries, Inc. Landfill Superfund Site ("OII Site") in Monterey Park, California. CERCLA imposes liability for the costs of cleaning up, and certain damages resulting from, releases and threatened releases of hazardous substances. Although courts have interpreted CERCLA liability to be joint and several, where feasible, the liability typically is allocated among the responsible parties according to a volumetric or other standard. USEPA apparently has identified the Company as a DE MINIMIS potentially responsible party based on several waste shipments the Company allegedly sent to the site in the late 1970s and in 1980. USEPA's settlement offer to the Company is in the range of $29,000 to $36,000. The settlement would cover all past and expected future costs at the OII Site, and, with limited exceptions, provide the Company with covenants not to sue from the United States and California, and contribution protection from private parties. Accordingly, the Company does not expect this claim to have a material adverse effect on the Company. In another unrelated matter, the Company received a General Notice Letter in October 1998 from USEPA under CERCLA for the Casmalia disposal site in Santa Barbara County, California. USEPA apparently has identified the Company as a de minimis potentially responsible party based on several waste shipments the Company allegedly sent to the site during the 1980's. USEPA's settlement offer 32 to the Company is in the range of $54,000 to $57,000. The benefits of the settlement are similar to those offered by USEPA for the OII site. Accordingly, the Company does not expect this claim to have a material adverse effect on the Company. Besides the litigation described above, the Company is not party to any material litigation that, if adversely determined, would have a material effect on its business. LEASE OBLIGATIONS 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, $4.2 million and $4.0 million, for fiscal 1999, 1998 and 1997, respectively. At July 3, 1999, the future minimum annual rental commitments under all noncancellable leases were as follows (in thousands): Operating Capital Leases Leases ------- ------- 2000 $ 3,421 $ 231 2001 3,294 230 2002 2,605 167 2003 2,334 167 2004 1,704 160 Thereafter 10,187 490 ------- ------- Total minimum lease commitments $23,545 1,445 ======= Less: Interest portion 414 ------- Present value of capital lease obligations 1,031 Less: Current portion 128 ------- Total long-term capital lease obligations $ 903 ======= NOTE 9 - 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): July 3, 1999 June 27, 1998 ------------------- ------------------- Carrying Carrying Amount Fair Value Amount Fair Value -------- -------- -------- -------- 4 1/4% convertible subordinated debentures maturing November 2000 $ 23,750 $ 19,416 $ 86,625 $ 72,825 11% senior subordinated debentures maturing August 2008 110,000 111,650 -- -- The estimated fair value of the debentures is based on quoted market prices. The estimated fair value of other long-term debt approximates its carrying value, based on current rates available to the Company for debt with similar terms. For more information regarding long-term debt, see Note 6. NOTE 10 - DISPOSITIONS In July, 1999, the Company sold the assets of its auto racing helmet business to Bell Racing Company ("Bell Racing") in exchange for an equity interest in Bell Racing then valued at approximately $1,225,000 with a contingent payment of additional equity in Bell Racing of approximately $875,000 upon the satisfaction of certain conditions. In connection with that transaction, the Company entered 33 into a long-term royalty-free licensing agreement for Bell Racing to market auto racing helmets and auto accessories under the Bell name. The Company also agreed to provide Bell Racing with certain transition services and entered into a sublease with respect to a portion of its manufacturing facility in Rantoul, Illinois. Bell Racing is controlled by Hayden Capital Investments, LC ("Hayden Investments"). The Chairman of the Company's board of directors is the Managing Member of Hayden Investments and the Chairman and Chief Executive Officer of Bell Racing. The Company expensed costs associated with the sale of $0.2 million in fiscal 1999. In September 1998, the Company sold the assets of its domestic foam molding operations in Rantoul, Illinois, and entered into a facility sublease with the purchaser. In addition, the Company entered into an agreement with the purchaser pursuant to which the purchaser has agreed to provide the Company with foam helmet liners and certain related components. The Company recorded a charge in fiscal year 1998 of approximately $0.6 million in connection with the sale and related reorganization of the Company's domestic foam molding facility. No significant gain or loss was incurred upon consummation of the sale in September 1998. On July 2, 1997, the Company completed the sale of substantially all of the assets of SportRack (the "Sale of SportRack"), which designs, manufactures and markets automobile roof rack systems, for $13.4 million to an affiliate of Advanced Accessory System Canada, Inc. Subsequently, the Company recorded a loss on the Sale of SportRack of approximately $2.0 million in fiscal 1998 in connection with a purchase price adjustment related to such sale. On April 29, 1997, the Company completed the sale of its Service Cycle/Mongoose inventory, trademarks and certain other assets (the "Sale of Service Cycle/Mongoose") to Brunswick Corporation for a sales price of $21.1 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 customer accounts receivable related to the Service Cycle/Mongoose business of approximately $19.4 million. In connection with the Sale of Service Cycle/Mongoose, the Company announced plans to reorganize its North American distribution network and operations to better utilize the distribution facilities. Included in the fiscal 1997 pre-tax loss were $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). During fiscal 1998, the Company reversed charges of $1.9 million, including a $600,000 benefit based on the finalization of costs associated with the closure of distribution facilities, and $1.3 million benefit related to the reversal of the remaining reserve for uncollectible receivables established in fiscal 1997 in connection with the divestiture of Service Cycle/Mongoose. NOTE 11 - RESTRUCTURING CHARGES, ASSET WRITE-OFFS AND OTHER COSTS RESTRUCTURING CHARGES, ASSET WRITE-OFFS AND OTHER COSTS - 1999 In an effort to remain competitive in an increasingly competitive marketplace, the Company announced a plan to restructure its worldwide operations, leaving it in a better position to focus on sales, marketing, distribution, and product innovation, while operating under a significantly lower cost structure. The plan is set up with three main prongs: 1) consolidation of manufacturing facilities, 2) streamlining of administrative overhead, and 3) divestiture of the auto racing division and the closure of the Australian sales and marketing office. Costs associated with the plan are included in the consolidated statement of operations as restructuring charges, asset write-offs and other costs. CONSOLIDATION OF MANUFACTURING FACILITIES. At the beginning of fiscal 1999, the Company owned and operated five manufacturing facilities around the world. In an effort to reduce duplicative expenses and increase efficiency, the Company has closed its Santa Cruz, California, Canada and Ireland manufacturing facilities. In addition, the Company has entered into an agreement to sell its manufacturing facility in France. The sale is expected to be completed by October 1999. This will leave the Company with one manufacturing facility in Rantoul, Illinois. In the fourth quarter of fiscal 1999, the Company recorded $6,634,000 in restructuring costs, $4,784,000 in asset write-offs, and $1,026,000 in other costs associated with the consolidation of the manufacturing facilities. The restructuring costs are based on estimates of employee severance costs, lease obligations and legal fees. The restructuring costs include $1,968,000 of severance related costs for 206 employees from all areas of responsibility. Of these 206 employees, 173 had been terminated and paid a total of $460,000 as of July 3, 1999. The remaining 33 employees have been notified of their pending termination. The asset write-offs include $3,121,000 of property, plant, and equipment and $1,663,000 of inventory. The assets were written down to net realizable value, based on an estimate of what an independent third party would pay for the assets. Other costs include one-time charges such as the repayment of a grant to the Irish government, transferring of inventory to Rantoul and other miscellaneous expenses. 34 STREAMLINING OF OVERHEAD. In order for the Company to remain competitive, it has consolidated its product design and test labs into one global facility and eliminated administrative positions which were considered duplicative or excessive. In the fourth quarter, the Company recorded $2,005,000 of restructuring costs, $69,000 of asset write-offs, and $941,000 of other costs relating to this streamlining effort. The restructuring costs are based on estimates of employee severance costs, lease obligations and legal fees, and include $800,000 of severance related costs for 59 employees from all areas of responsibility, all of whom had been terminated as of July 3, 1999. A total of $319,000 in severance had been paid as of July 3, 1999. The asset write-offs relate to the write-off of property, plant and equipment rendered unnecessary due to the reduced headcount and consolidated test labs. Other costs include miscellaneous one-time expenses. SALE OF AUTO RACING AND CLOSURE OF AUSTRALIA. In order to remain focused on the Company's core business of bicycle helmets and accessories, the Company has sold its auto racing helmet business, in exchange for an equity position in the purchaser. In addition, the Company has announced the closure of its Australian sales and marketing office. The Company will continue to service the Australian market through a local distributor. In the fourth quarter of fiscal 1999, the Company recorded $331,000 in restructuring costs, $413,000 in asset write-offs, and $325,000 in other costs associated with these moves. The restructuring costs are based on estimates of employee severance costs, lease obligations and legal fees. The restructuring costs include $141,000 of severance related costs for 26 employees from all areas of responsibility, all of whom were notified of their pending termination. No severance-related costs had been paid as of July 3, 1999. The asset write-offs include $170,000 of property, plant, and equipment and $243,000 of inventory and other assets. The assets were written down to net realizable value, based on an estimate of what an independent third party would pay for the assets. Other costs include miscellaneous, one-time expenses related to the sale of the auto racing helmet business. The following table summarizes the classification in the Consolidated Statement of Operations of the charges relating to the restructuring program and other actions (in thousands): Restructuring charges: Manufacturing consolidation $ 6,634 Overhead reduction 2,005 Sale of auto racing and Australia 331 -------- 8,970 -------- Asset write-offs: Manufacturing consolidation 4,784 Overhead reduction 69 Sale of auto racing and Australia 413 -------- 5,266 -------- Other costs: Manufacturing consolidation 1,026 Overhead reduction 941 Sale of auto racing 325 -------- 2,292 -------- $ 16,528 ======== The following table sets forth the details of activity during fiscal 1999 for restructuring charges, asset write-offs and other costs and related accrued expenses (in thousands):
June 27, Cash Non-Cash July 3, 1998 Charges Payments Charges 1999 -------- -------- -------- -------- -------- Restructuring accruals: Manufacturing consolidation $ -- $ 12,444 $ (3,342) $ -- $ 9,102 Overhead reductions -- 3,015 (791) -- 2,224 Sale of auto racing and Australia -- 1,069 (281) -- 788 Restructuring accruals from prior years 1,490 -- (956) (41) 493 -------- -------- -------- -------- -------- $ 1,490 $ 16,528 $ (5,370) $ (41) $ 12,607 ======== ======== ======== ======== ========
35 RESTRUCTURING CHARGES - 1998 During fiscal 1998, the Company formed and approved a plan to restructure its European operations. In connection with this plan, the Company closed its Paris, France, sales and marketing office in December 1997, and consolidated these functions with its Roche La Moliere, France, facility. The key management positions of Giro Ireland and EuroBell were also consolidated. Included in the fiscal 1998 pre-tax income are $1.2 million of estimated restructuring charges related to this plan, including facility closing costs and severance benefits. The following table sets forth the details of activity during fiscal 1998 for restructuring charges and related accrued expenses (in thousands):
June 28, Restructuring Cash Non-cash June 27, 1997 Charges Payments Charges 1998 ------- ------- ------- ------- ------- Restructuring accruals: Lease payments and other facility expenses $ -- $ 191 $ (60) $ -- $ 131 Severance and other employee-related costs -- 820 (573) (198) 49 Asset write-downs -- 181 (140) -- 41 Restructuring accruals from previous years 3,777 -- (2,598) 90 1,269 ------- ------- ------- ------- ------- $ 3,777 $ 1,192 $(3,371) $ (108) $ 1,490 ======= ======= ======= ======= =======
RESTRUCTURING CHARGES - 1997 During 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 loss are $2.7 million of restructuring charges related to this plan. 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 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. The Program called for the consolidation of certain sales and marketing, research and development, manufacturing, finance and management information systems functions. In fiscal 1997, $1.4 million of restructuring charges relating to the Program were recorded, 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 expenses (in thousands):
June 29, Restructuring Cash June 28, 1996 Charges Payments 1997 ------- ------- ------- ------- Restructuring accruals: Lease payments and other facility expenses $ -- $ 983 $ (614) $ 369 Severance and other employee-related costs -- 3,158 (1,741) 1,417 Restructuring accruals from previous years 5,157 -- (3,166) 1,991 ------- ------- ------- ------- $ 5,157 $ 4,141 $(5,521) $ 3,777 ======= ======= ======= =======
36 NOTE 12 - INCOME TAXES Pre-tax income (loss) by jurisdiction for each fiscal year are as follows (in thousands): July 3, June 27, June 28, 1999 1998 1997 -------- -------- -------- Domestic $(27,625) $ 9,496 $(23,882) Foreign (6,258) 4,400 2,731 -------- -------- -------- Total $(33,883) $ 13,896 $(21,151) ======== ======== ======== The provision for (benefit from) income taxes for each fiscal year is as follows (in thousands): July 3, June 27, June 28, 1999 1998 1997 -------- -------- -------- Current expense (benefit): U.S. Federal $ -- $ 75 $ (757) State and local 50 60 -- Foreign -- 1,123 601 -------- -------- -------- Total current 50 1,258 (156) -------- -------- -------- Deferred tax expense (benefit): U.S. Federal (4,463) 3,368 (2,200) State and local (1,068) 722 (568) Foreign (2,165) (93) (59) -------- -------- -------- Total deferred (7,696) 3,997 (2,827) -------- -------- -------- Impact of stock option deduction credited to equity -- 63 20 -------- -------- -------- Total income tax provision (benefit) $ (7,646) $ 5,318 $ (2,963) ======== ======== ======== The provision for (benefit from) income taxes for each fiscal year differs from the U.S. statutory federal income tax rate for the following reasons: July 3, June 27, June 28, 1999 1998 1997 -------- -------- -------- Statutory U.S. rate (34.0)% 34.0% (34.0)% Nondeductible recapitalization costs 8.4 -- -- Tax exempt investment income -- (0.2) (0.1) Nondeductible goodwill -- -- 24.8 State income tax (3.0) 5.0 (2.7) Effective international tax rate 6.6 (2.4) (1.5) Other items, net (1.0) 1.6 (0.5) -------- -------- -------- Effective tax expense/(benefit) rate (23.0)% 38.0% (14.0)% ======== ======== ======== 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. Deferred income tax assets and (liabilities) are comprised of the following (in thousands): 37 July 3, June 27, 1999 1998 -------- -------- Net operating losses and other tax loss carryforwards $ 12,888 $ 11,810 Inventory and accounts receivable reserves 1,614 1,485 Accrued liabilities 10,876 4,778 Package design costs capitalized for tax purposes 726 910 -------- -------- Gross deferred tax assets 26,104 18,983 -------- -------- Depreciation (480) (760) Other (899) (456) -------- -------- Gross deferred tax liability (1,379) (1,216) -------- -------- Deferred tax assets valuation allowance (1,108) (1,798) -------- -------- Net deferred tax assets 23,617 15,969 Less: current portion (11,366) (8,970) -------- -------- Net long-term deferred tax assets $ 12,251 $ 6,999 ======== ======== Domestic net operating losses totaling approximately $33.0 million will be carried forward and begin to expire in 2008. As a result of the Bell Merger, there will be an annual limitation of the loss carryforward which may delay or limit the eventual utilization of the carryforwards. The consolidated return rules limit utilization of acquired net operating loss and other carryforwards to income of the acquired companies in years in which the consolidated group has taxable income. General business tax credits of approximately $630,000 were accounted for under the flow-through method and are being carried forward. Minimum tax credits totaling approximately $600,000 are also being carried forward. The deferred tax assets valuation allowance at July 3, 1999 and June 27, 1998 was required primarily for net operating loss carryforwards and accounting reserves that, in management's view, will not be realized in the foreseeable future. The Company has not provided for U.S. federal income and foreign withholding taxes of certain non-U.S. subsidiaries' undistributed earnings as of July 3, 1999, because such earnings are intended to be reinvested indefinitely. If these earnings were distributed, the withholding tax would be due and foreign tax credits should become available under current law to reduce the resulting U.S. income tax liability. NOTE 13 - ADDITIONAL CASH FLOW STATEMENT INFORMATION The Company's non-cash investing and financing activities and cash payments for interest and income taxes for each fiscal year are summarized below (in thousands): July 3, June 27, June 28, 1999 1998 1997 -------- -------- -------- Additional paid in capital arising from tax benefits associated with the exercise of stock options $ 4 $ 63 $ 20 Cash paid during the period for: Interest 10,717 4,100 7,050 Income taxes 492 795 748 NOTE 14 - SEGMENT REPORTING Effective for the year ended July 3, 1999, the Company has adopted Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information." Prior period amounts have been reclassified and presented to conform to the requirements of SFAS 131. The Company has three reportable segments: products sold to domestic mass merchants, products sold to domestic independent bicycle dealers (IBDs), and products sold in international operations. The international operations have been combined into one reportable segment under SFAS 131 as they share a majority of the aggregation criteria and are not individually reportable. The Company's domestic mass merchant segment markets a wide range of bicycle accessories and bicycle helmets through the mass merchant channel, including retailers such as Wal-Mart and K-Mart. The domestic IBD segment markets premium bicycle helmets and accessories to independent bicycle dealers such as bicycle chains, independent bicycle shops, specialized sporting goods stores, and mail order catalogs. International operations include sales of bicycle accessories and helmets sold to both mass merchant and IBD channels in Canada, Europe and Australia, in addition to distributing third party products. 38 The Company evaluates the performance of, and allocates resources to the reportable segments based on net sales and EBITDA. For internal purposes, EBITDA is defined as earnings before investment income and interest expense, income taxes, depreciation, amortization, and certain one-time charges such as transaction costs, product liability costs, restructuring charges, asset write-offs, other costs, loss on disposal of product line and sale of assets and other one-time costs such as foreign exchange loss and compensation expense related to the grant of stock options.
Mass Merchants IBD International Other (1) Total -------- -------- -------- -------- -------- YEAR ENDING JULY 3, 1999: Sales to unaffiliated customers $106,774 $ 60,077 $ 44,058 $ -- $210,909 EBITDA 18,009 2,494 3,812 3,277 27,592 Depreciation and amortization 144 2,086 1,257 4,159 7,646 Net interest expense(income) -- (18) 529 14,184 14,695 Capital expenditures 374 2,211 917 647 4,149 Total assets 59,176 27,996 29,335 102,427 218,934 YEAR ENDING JUNE 27, 1998: Sales to unaffiliated customers 95,100 61,387 50,749 -- 207,236 EBITDA 11,851 6,199 6,973 1,573 26,596 Depreciation and amortization 129 2,183 1,060 4,437 7,809 Net interest expense(income) -- -- 186 2,813 2,999 Capital expenditures 100 2,473 1,258 1,665 5,496 Total assets 48,573 36,754 18,250 143,490 247,067 YEAR ENDING JUNE 28, 1997: Sales to unaffiliated customers 137,168 63,219 59,147 -- 259,534 EBITDA 9,496 3,365 7,681 1,700 22,242 Depreciation and amortization 1,143 1,981 1,919 4,499 9,542 Net interest expense(income) (51) -- 1,310 3,091 4,350 Capital expenditures 878 1,758 1,438 2,984 7,058 Total assets 58,275 34,931 43,323 132,225 268,754
(1) The "Other" designation includes corporate expenditures and expenditures related to the Company's U.S. manufacturing facility. EBITDA for the periods shown is reconciled to Net income before income taxes as follows: Fiscal year ended ------------------------------------------ July 3, 1999 June 27, 1998 June 28, 1997 ------------ ------------- ------------- EBITDA $ 27,592 $ 26,596 $ 22,242 Less: Depreciation 5,529 5,549 6,222 Amortization 2,117 2,260 3,320 One-time foreign exchange loss and compensation expense for stock options 1,899 -- -- Transaction costs 13,100 -- -- Product liability costs 12,500 -- -- Restructuring charges 8,970 1,192 4,141 Asset write-offs 5,266 -- -- Other costs 2,292 -- -- Loss on disposal of product lines and sale of assets -- 700 25,360 Net investment income (1,073) (1,716) (2,939) Interest expense 15,768 4,715 7,289 -------- -------- -------- Net income (loss) before provision for (benefit from) income taxes $(38,776) $ 13,896 $(21,151) ======== ======== ======== 39 Long-lived assets by geographical area for the periods presented were as follows: July 3, 1999 June 27, 1998 June 28, 1997 ------------ ------------- ------------- United States $ 74,219 $ 73,531 $ 77,359 International 3,542 3,558 9,375 -------- -------- -------- Total $ 77,761 $ 77,089 $ 86,734 ======== ======== ======== NOTE 15 - SUMMARY QUARTERLY FINANCIAL DATA (UNAUDITED) The unaudited information presented below has been prepared in accordance with generally accepted accounting principles for interim financial information. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of financial position and results of operations have been made. Summary quarterly financial data is as follows (in thousands): 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter -------- -------- -------- -------- YEAR ENDING JULY 3, 1999: Net sales $ 40,918 $ 45,021 $ 54,306 $ 70,664 Gross profit 13,544 14,519 17,433 24,740 Net income (7,281) (2,804) 188 (16,340) YEAR ENDING JUNE 27, 1998: Net sales $ 43,632 $ 42,590 $ 52,332 $ 68,682 Gross profit 13,477 13,286 18,200 24,601 Net income (loss) 637 322 3,160 4,459 40 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 To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company and certain other representations that no other reports were required, during the year ended July 3, 1999, all Section 16(a) filing requirements applicable to its officers, directors and greater than ten-percent beneficial owners were complied with. DIRECTORS OF THE REGISTRANT Each director serves a term expiring at the next annual meeting of stockholders, or until his successor shall have been elected and qualified. TERRY G. LEE, Director and Chairman, age 50. Mr. Lee has served the Company in various capacities since 1984. He joined Bell Helmets, Inc. (a predecessor of the Company, "Bell Helmets") as Director and the President and Chief Operating Officer in 1984, and became Chief Executive Officer in 1986 and Chairman in 1989. Mr. Lee served as President of the Company from 1984 until the consummation of the AMRE Merger in 1995. Mr. Lee 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 was employed by Wilson Sporting Goods for 14 years, where his last position was Senior Vice President - Sales and Distribution. MARY J. GEORGE, Director and Chief Executive Officer, age 49. Ms. George joined the Company in October 1994 as the Senior Vice President of Marketing and Strategic Planning, became President--Specialty Retail Division in July 1995, became President--North America in December 1995, and became President and Chief Operating Officer in April 1997. Ms. George continued as President, and became Chief Executive Officer and Director in August 1998. 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. WILLIAM M. BARNUM, JR., Director, age 45. Mr. Barnum became a Director of the Company in August 1998. He joined Brentwood in 1984 and is presently a managing member of Brentwood Private Equity, L.L.C. Mr. Barnum is a Director of Classroom Connect Holdings, Inc., Aspen Marketing Group, Inc., WorldPoint Logistics, Inc., and Quicksilver Corporation. KIM G. DAVIS, Director, age 45. Mr. Davis became a Director of the Company in August 1998. Mr. Davis is a Managing Director and co-founder of Charlesbank, a private investment firm and the successor to Harvard Private Capital Group, Inc., which he joined in 1998. Charlesbank is the investment advisor to Charlesbank Equity Fund IV, Limited Partnership. From 1995 to 1998, Mr. Davis was a private investor, and from 1988 to 1994, he was a General Partner of Kohlberg & Co. He is a Director of Westinghouse Air Brake Company. JOHN F. HETTERICK, Director, age 53. Mr. Hetterick became a Director of the Company in August 1998. Since 1997, Mr. Hetterick has been an independent consultant in the consumer products industry. From 1992 to 1997, Mr. Hetterick was President and Chief Executive Officer of Rollerblade, Inc., a manufacturer of in-line skates. Mr. Hetterick also served as President of Tonka International, a division of Tonka Corporation, from 1989 to 1991, and Vice President of Marketing of Pepsi-Cola International from 1986 to 1989. EDWARD L. MCCALL, Director, age 32. Mr. McCall became a Director of the Company in August 1998. He joined Brentwood in 1993 and is presently a managing member of Brentwood Private Equity, L.L.C. and Brentwood Private Equity Management, L.L.C. Mr. McCall is currently a director of Classroom Connect Holdings, Inc., and Racquetball & Fitness Clubs, Inc. 41 TIM R. PALMER, Director, age 42. Mr. Palmer became a Director of the Company in August 1998. He is a Managing Director and co-founder of Charlesbank, a private investment firm and the successor to Harvard Private Capital Group, Inc., which he joined in 1990. Charlesbank is the investment advisor to Charlesbank Equity Fund IV, Limited Partnership. He is a Director of The WMF Group, Ltd. JOHN M. SULLIVAN, Director, age 63. Mr. Sullivan became a Director of the Company in August 1998. From October 1987 to January 1993, Mr. Sullivan was Chairman of the Board and Chief Executive Officer of Prince Holdings, Inc. He is presently Chairman of the Board of Directors of Silver Cinemas International, Inc., and a Director of The Scotts Company. EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to executive officers of the Company is set forth below: NAME AGE POSITIONS AND OFFICES - ---- --- --------------------- Terry G. Lee 50 Chairman Mary J. George 49 Chief Executive Officer William L. Bracy 58 President and Chief Operations Officer Richard S Willis 39 Executive Vice President and Chief Financial Officer Kwai Kong 36 Vice President--R&D and Manufacturing Blair Clark 41 President-Giro TERRY G. LEE, Director and Chairman. Mr. Lee has served the Company in various capacities since 1984. He joined Bell Helmets, Inc. (a predecessor of the Company, "Bell Helmets") as Director and the President and Chief Operating Officer in 1984, and became Chief Executive Officer in 1986 and Chairman in 1989. Mr. Lee served as President of the Company from 1984 until the consummation of the AMRE Merger in 1995. Mr. Lee 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 was employed by Wilson Sporting Goods for 14 years, where his last position was Senior Vice President - Sales and Distribution. MARY J. GEORGE, Director and Chief Executive 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. Ms. George continued as President, and became Chief Executive Officer and Director in August 1998. 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. WILLIAM L. BRACY, President and Chief Operations Officer. Mr. Bracy joined Bell in January 1998 as U.S. Group President. In February 1999 he became Chief Operations Officer and in July 1999, he became President. Prior to joining Bell, Mr. Bracy served as Executive Vice President of Mattel Europa and as a President of Mattel Games, both divisions of Mattel, Inc., from September 1995 to December 1997. From August 1990 to September 1995, Mr. Bracy served as President for Lenox Brands and Lenox China & Crystal, both divisions of Lenox, Inc. RICHARD S WILLIS, Executive Vice President and Chief Financial Officer. Mr. Willis joined the Company in April 1999 as Executive Vice President and Chief Financial Officer. Previously, Mr. Willis served as Executive Vice President and Chief Financial Officer of Petersen Publishing from October 1995 to April 1999, and as a Director from December 1996 to April 1999. From 1993 to 1995, Mr. Willis served as the Executive Vice President and Chief Financial Officer of two divisions of World Color and from 1990 to 1993 as the Chief Financial Officer and Secretary of Aster Publishing Company. KWAI KONG, Vice President--R&D and Manufacturing. Mr. Kong joined Bell in January 1994, when VistaLite was purchased by the Company, as Director, Design Engineering. In June 1995, he became Vice President--Research and Development and, in June 1998, became Vice President--R&D and Manufacturing. Prior to joining the Company, Mr. Kong was President and Chief Executive Officer of VistaLite, of which he was also a co-founder. VistaLite was purchased by Bell in January 1994. 42 BLAIR CLARK, President--Giro. Mr. Clark joined Giro, a division of Bell, in May 1994 as Vice President of Sales. In July 1998, he became President--Giro. Prior to joining Bell, Mr. Clark was General Manager of Scott USA. ITEM 11. EXECUTIVE OFFICER COMPENSATION SUMMARY COMPENSATION TABLE The table below summarizes the annual and long-term compensation paid to each of the Company's Chief Executive Officer and the four next most highly compensated executive officers (the "Named Executive Officers") for all services rendered to the Company during the last three fiscal years, in accordance with the Securities and Exchange Commission ("SEC") rules relating to disclosure of executive compensation.
Long-Term Compensation Annual Compensation Awards --------------------------- ------------------------ Restricted Securities All Other Name and Fiscal Stock Underlying Compen- Principal Position Year Salary Bonus Awards($)(1) Options(#) sation (2) - ------------------ ---- ------ ----- ------------ ---------- ---------- Terry G. Lee 1999 $356,735 $4,260 Chairman 1998 410,962 $152,750 $200,000 5,773 1997 392,885 50,000 209,363 5,155 Mary J. George 1999 366,347 6,099 Chief Executive Officer 1998 298,209 265,000 700,000 5,411 1997 239,962 50,000 148,500 3,193 William L. Bracy 1999 271,160 6,034 President and Chief 1998 115,464 75,000 Operations Officer 1997 Kwai Kong 1999 155,769 150,000 4,866 Vice President--Research 1998 119,164 82,475 5,467 and Development 1997 113,401 24,190 3,163 Blair Clark 1999 157,212 3,456 President--Giro 1998 130,404 26,087 4,487 1997 78,192 769
(1) Fiscal 1998 awards consist solely of restricted phantom stock units. Phantom stock units were granted as of August 28, 1997 to the Named Executive Officers as follows: Mr. Lee 21,763 units and Ms. George 10,881 units. In addition, in accordance with the terms of her employment agreement with the Company, 32,324 and 30,769 phantom stock units were granted to Ms. George on August 23, 1997 and September 12, 1997, respectively. The phantom stock units vested in full at the time of the Bell Merger. During Fiscal 1997, each of Mr. Lee and Ms. George were awarded 7,082 shares of restricted stock. Each restricted stock award was originally to vest incrementally in equal installments on the first three anniversaries of the date of award, but were vested in full in connection with the Bell Merger. At the end of Fiscal 1999, there were no phantom stock units outstanding. The Named Executive Officers have purchased shares of restricted stock, in each case at fair market value on the date of purchase, from the Company in accordance with the Company's Investment and Incentive Plan and the Company's Class C Investment and Incentive Plan. At the end of Fiscal 1999, Ms. George held 36,800 unvested shares of Class B Common Stock with a market value of $22,816 and 3,000 unvested shares of Class C Common Stock with a market value of $30; Mr. Bracy held 11,500 unvested shares of Class B Common Stock with a market value of $7,130 and 12,000 unvested shares of Class C Common Stock with a market value of $120; Mr. Kong held 6,440 unvested shares of Class B Common Stock with a market value of $3,993 and 7,000 unvested shares of Class C Common Stock with a market value of $70; Mr. Clark held 5,520 unvested shares of Class B Common Stock with a market value of $3,422 and 4,000 unvested shares of Class C Common Stock with a market value of $40. The unvested shares lack voting rights and are subject to repurchase by the Company under specified circumstances. 43 (2) The Fiscal 1999 amounts include the following annual Company contributions to the Bell Sports Corp. Employees' Retirement and 401(k) Plan: Mr. Lee $3,332, Ms. George $5,375, Mr. Bracy $4,015, Mr. Kong $4,594, and Mr. Clark $3,456. The Fiscal 1999 amounts also include the following life insurance premiums paid by the Company: Mr. Lee $928, Ms. George $724, Mr. Bracy $2,019, and Mr. Kong $272. OPTION GRANTS IN LAST FISCAL YEAR The table below provides information relating to grants of stock options by the Company during Fiscal 1999 to each of the Named Executive Officers. The Company has never granted any stock appreciation rights.
% of Total Number of Stock Options Potential Realizable Value at Assumed Securities Granted to Market Annual Rates of Stock Price Appreciation Underlying Employees Price at for Eight-Year Option Term (3) Options in Fiscal Exercise date of Expiration ------------------------------------ Name Granted (#)(1) Year Price Grant Date 0% 5% 10% - ---- ------------- ---- ------ ------ -------- ---------- ---------- ---------- Mary J. George (1) 20,511 100% $36.15 $50.99 08/27/06 $ 304,383 $ 803,733 $1,500,412 Mary J. George (2) 16,921 100% 0.44 0.62 08/27/06 3,046 8,055 15,043
(1) This award constitutes a grant of options to purchase Series A Preferred Stock. (2) This aware constitutes a grate of options to purchase Class A Common Stock (3) The gains shown in these columns result from calculations assuming 0%, 5%, and 10% growth rates as set by the SEC and are not intended to forecast future stock price performance. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES Each holder of an option to purchase Common Stock previously issued by the Company that was outstanding at the time of the Bell Merger received in respect thereof a cash payment equal to the excess, if any, of $10.25 per share subject to the option over the applicable exercise price. Messrs. Lee, Kong and Clark received $667,868, $67,402 and $23,700, respectively, in respect to options held by them at the time of the Bell Merger. With the exception of Ms. George, none of the Named Executive Officers exercised stock options during fiscal 1999 and, with the exception of Ms. George, none of the Named Executive Officers held any options to acquire any Company stock at the end of fiscal 1999. The table below provides certain information relating to the options exercised by Ms. George during fiscal 1999 and the options held by her at the end of fiscal 1999.
Shares Number of Securities Underlying Value of Unexercised Acquired on Value Unexercised Options at FY-End In-the-Money Options at FY-End Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable - ---- ------------ ------------ ----------- ------------- ----------- ------------- Mary J. George (1) 16,921 10,491 20,511 -- 304,383 --
(1) Shares acquired by Ms. George were shares of Class A Common Stock. Options outstanding at July 3, 1999 provide for the purchase of shares of Series A Preferred Stock. DIRECTOR COMPENSATION In fiscal 1999, each non-employee director who was not affiliated with Brentwood or Charlesbank was given the opportunity to purchase 3,500 shares of Class B Common Stock at the fair market value of $0.62 per share. 44 EMPLOYMENT AGREEMENTS The Company has an employment agreement with Mr. Lee which provides that he will serve as Chairman of the Board of the Company for a term expiring in August, 2000, unless terminated earlier in the event of the employee's death or disability, termination by the Company with or without cause (as defined in the agreement) or termination by the employee with or without good reason (as defined in the agreement.) The agreement provides for an annual salary of $207,500, with annual cash bonuses based on actual operating income as compared to projected operating income targets approved by the Board of Directors, up to a maximum annual bonus of 125% of Mr. Lee's then existing base salary. Under the agreement, Mr. Lee will be paid regardless of any services performed, and even if his service is terminated with or without cause. Under the employment agreement, Mr. Lee is entitled to participate in the Company's benefit plans and programs, and entitled to reimbursement for any deductibles and co-payments related to medical expenses. The agreement also contains a non-compete provision, by which Mr. Lee is prohibited from competing against the Company (as defined) for a period of 5 years from the date of the Bell Merger. As consideration for this agreement, Mr. Lee is being paid a total of $1.5 million in three equal annual installments, beginning at the date of the Bell Merger. The Company has an employment agreement with Ms. George which provides that she will serve as President and Chief Executive Officer of the Company. The employment agreement is for a term ending on August 17, 2003 unless terminated earlier in the event of Ms. George's death or disability, termination by the Company with or without cause (as defined in the agreement) or termination by Ms. George. The agreement provides for an annual base salary of $350,000, subject to annual increases in the discretion of the Company, and annual cash bonuses in accordance with the Company's management incentive program. Under the agreement, Ms. George is entitled to participate in the Company's benefit plans and programs, reimbursement for any deductibles and co-payments related to medical expenses and reimbursement of automobile expenses and her expenses for commuting to San Jose. In the event of early termination of Ms. George's employment by the Company without cause or voluntarily by Ms. George, the Company will continue to pay Ms. George her base salary and all other benefits, excluding bonus, for 18 months and, in the case of termination of her employment by the Company without cause, any outstanding, unexercisable stock options become exercisable. Effective July 1, 1999, Ms. George relinquished her position as President. Per the employment agreement, unless Ms. George consents, any material diminution of her significant duties would allow her to terminate her employment and receive the compensation noted above. Ms. George has signed a memo consenting to the change in duties. The Company has a Memorandum Reference Employment with Mr. Bracy, which provides for him to serve as US Group President of the Company. The memorandum calls for a base salary of $250,000 with annual increases at the discretion of the Company and annual cash bonuses in accordance with the Company's bonus policy. Upon Mr. Bracy's appointment as President, his salary increased to $290,000. Under the terms of the memorandum, Mr. Bracy is entitled to participate in the Company's benefit plans and programs, reimbursement for any deductibles and co-payments related to medical expenses and a $400 per month automobile allowance. Under the terms of a separate Severance Agreement with Mr. Bracy, in the event of early termination of his employment by the Company other than by reason of a nonqualifying termination, the Company will pay Mr. Bracy an amount equal to his highest annual base salary. Additionally, medical, dental, accident, disability and life insurance plans will continue for one year following such termination. Mr. Willis has signed an offer letter with the Company which provides for him to serve as Executive Vice President and Chief Financial Officer of the Company. The letter calls for a base salary of $250,000 with annual increases at the discretion of Bell. Mr. Willis is entitled to participate in the Company's benefit plans and programs and to receive reimbursement for any deductibles and co-payments related to medical expenses. He is also eligible for an annual bonus equal to 50% of his annual base salary, determined in accordance with the Company's bonus policy. In the event of involuntary termination without cause, the letter calls for Mr. Willis to receive his base salary and related benefits for a period of one year following the date of termination. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The compensation committee of the Board of Directors consists of Ed McCall, John Hetterick and Kim Davis. The committee meets regularly to discuss compensation issues. The committee bases executive compensation on the overall performance of the Company, the individual performance of the executive, and market considerations. 45 Mr. McCall is a Managing Member of Brentwood Private Equity, L.L.C. Mr. Davis is a Managing Director of Charlesbank Bell Sports Holdings, Limited Partnership. See "Item 13. Certain Relationships and Related Transactions." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information as of September 1, 1999 concerning beneficial ownership of the Company's Series A Preferred Stock, Class A Common Stock, Class B Common Stock, and Class C Common Stock by each person known by the Company to own beneficially more than five percent of the outstanding shares of any class of the Company's stock, each director, each Named Executive Officer and all directors and executive officers of the Company as a group. Each share of the Company's Class A Common Stock, Class B Common Stock and Class C Common Stock is entitled to one vote on each matter presented, provided that any shares of Class B Common Stock or Class C Common Stock issued pursuant to one of the Company's Investment and Incentive Plans are not entitled to vote until fully vested. In general, the Series A Preferred Stock is non-voting. The Company and its stockholders have entered into a Shareholders Agreement (the "Shareholders Agreement") pursuant to which each stockholder has agreed, among other things, in any election of directors, to vote for three nominees designated by Charlesbank Bell Sports Holdings, Limited Partnership ("Charlesbank"), three nominees designated by Brentwood Associates Buyout Fund II, L.P. ("Brentwood"), and for as long as her employment agreement so requires, for Mary George. Charlesbank and Brentwood have also agreed to vote their shares together in a manner upon which they shall mutually agree with respect to any matter presented in which they are entitled to vote. Unless otherwise noted below and except as described above in connection with the Shareholders Agreement, the listed persons have sole voting and dispositive power with respect to the shares of Company stock owned by them, subject to community property laws if applicable. AMOUNT AND NATURE OF NAME AND ADDRESS OF BENEFICIAL PERCENT BENEFICIAL OWNER TITLE OF CLASS OWNERSHIP OF CLASS ---------------- -------------- --------- -------- Brentwood Associates Buyout Fund II, L.P.(1) Series A Preferred Stock 434,953 42.0% Class A Common Stock 358,839 41.2% Class B Common Stock - * Class C Common Stock - * Charlesbank Bell Sports Holdings, Limited Partnership(2) Series A Preferred Stock 434,555 42.0% Class A Common Stock 358,507 41.2% Class B Common Stock - * Class C Common Stock - * CB Capital Investors, L.P.(3) Series A Preferred Stock 97,087 9.4% Class A Common Stock 80,097 9.2% Class B Common Stock - * Class C Common Stock - * William M. Barnum, Jr.(4) Series A Preferred Stock 434,953 42.0% Class A Common Stock 358,839 41.2% Class B Common Stock - * Class C Common Stock - * 46 William L. Bracy(5) Series A Preferred Stock 2,233 * Class A Common Stock 1,855 * Class B Common Stock 12,500 9.8% Class C Common Stock 12,000 21.4% Blair Clark(6) Series A Preferred Stock 631 * Class A Common Stock 524 * Class B Common Stock 6,000 4.7% Class C Common Stock 4,000 7.1% Kim G. Davis(7) Series A Preferred Stock 434,555 42.0% Class A Common Stock 358,507 41.2% Class B Common Stock - * Class C Common Stock - * Mary J. George(8) Series A Preferred Stock 20,511 2.0% Class A Common Stock 16,921 1.9% Class B Common Stock 40,000 31.2% Class C Common Stock 3,000 5.4% John F. Hetterick(9) Series A Preferred Stock 3,880 * Class A Common Stock 3,196 * Class B Common Stock 3,500 2.7% Class C Common Stock - * Kwai Kong(10) Series A Preferred Stock 505 * Class A Common Stock 419 * Class B Common Stock 7,000 5.5% Class C Common Stock 7,000 12.5% Terry G. Lee Series A Preferred Stock 4,849 * Class A Common Stock 3,975 * Class B Common Stock - * Class C Common Stock - * Edward L. McCall(11) Series A Preferred Stock 434,953 42.0% Class A Common Stock 358,839 41.2% Class B Common Stock - * Class C Common Stock - * Tim R. Palmer(12) Series A Preferred Stock 434,555 42.0% Class A Common Stock 358,507 41.2% Class B Common Stock - * Class C Common Stock - * John M. Sullivan(13) Series A Preferred Stock 3,879 * Class A Common Stock 3,196 * Class B Common Stock 3,500 2.7% Class C Common Stock - * Richard S Willis Series A Preferred Stock 9,555 * Class A Common Stock 7,937 * Class B Common Stock 12,500 9.8% Class C Common Stock 12,000 21.4% Graham Webb Series A Preferred Stock 505 * Class A Common Stock 419 * Class B Common Stock 7,000 5.5% Class C Common Stock 5,000 8.9% All directors and executive officers as a group (12 persons) Series A Preferred Stock 46,043 4.4% Class A Common Stock 38,023 4.4% Class B Common Stock 85,000 66.3% Class C Common Stock 38,000 67.9% 47 - ---------- * Less than one percent. (1) The address for Brentwood Associates Buyout Fund II, L.P. is 11150 Santa Monica Boulevard, Suite 1200, Los Angeles, California 90025. (2) The address for Charlesbank Bell Sports Holdings, Limited Partnership, is 600 Atlantic Avenue, 26th Floor, Boston, Massachusetts 02210-2203. (3) The address for CB Capital Investors, L.P. is 380 Madison Avenue, 12th Floor, New York, New York 10017. (4) Mr. Barnum is a managing member of Brentwood Private Equity, L.L.C. and as such, may be deemed to beneficially own the 434,953 shares of Series A Preferred Stock and 358,839 shares of Class A Common Stock owned by Brentwood, with shared voting and investment power over the shares. Mr. Barnum disclaims beneficial ownership of those shares. Mr. Barnum's address is 11150 Santa Monica Boulevard, Suite 1200, Los Angeles, California 90025. (5) 11,500 shares of the Class B Common Stock and 12,000 shares of the Class C Common Stock owned by Mr. Bracy were issued under the Company's Incentive and Investment Plan and the Company's Class C Incentive and Investment Plan and have not vested. Mr. Bracy's address is 6350 San Ignacio, San Jose, California 95119. (6) 5,520 shares of the Class B Common Stock and 4,000 shares of the Class C Common Stock owned by Mr. Clark were issued under the Company's Incentive and Investment Plan and the Company's Class C Incentive and Investment Plan and have not vested. Mr. Clark's address is 380 Encinal Street, Santa Cruz, California 95060. (7) Mr. Davis is a managing director of Charlesbank and as such, may be deemed to beneficially own the 434,555 shares of Series A Preferred Stock and 358,507 shares of Class A Common Stock owned by Charlesbank, with shared voting and investment power over the shares. Mr. Davis disclaims beneficial ownership of those shares. Mr. Davis' address is 600 Atlantic Avenue, 26th Floor, Boston, Massachusetts 02210-2203. (8) The shares of Series A Preferred Stock beneficially owned by Ms. George include 20,511 shares issuable upon the exercise of options which are currently exercisable. 36,800 shares of the Class B Common Stock and 3,000 shares of the Class C Common Stock owned by Ms. George were issued under the Company's Incentive and Investment Plan and the Company's Class C Incentive and Investment Plan and have not vested. Ms. George's address is 6350 San Ignacio, San Jose, California 95119. (9) 3,220 shares of the Class B Common Stock owned by Mr. Hetterick were issued under the Company's Incentive and Investment Plan and have not vested. (10) 6,440 shares of the Class B Common Stock and 7,000 shares of the Class C Common Stock owned by Mr. Kong were issued under the Company's Incentive and Investment Plan and the Company's Class C Incentive and Investment Plan and have not vested. Mr. Kong's address is 6350 San Ignacio, San Jose, California 95119. (11) Mr. McCall is a managing member of Brentwood Private Equity, L.L.C. and Brentwood Private Equity Management, L.L.C. As such, he may be deemed to beneficially own the 434,953 shares of Series A Preferred Stock and 358,839 shares of Class A Common Stock owned by Brentwood, with shared voting and investment power over the shares. Mr. McCall disclaims beneficial ownership of those shares. Mr. McCall's address is 11150 Santa Monica Boulevard, Los Angeles, California 90025. (12) Mr. Palmer is a managing director of Charlesbank and as such, may be deemed to beneficially own the 434,555 shares of Series A Preferred Stock and 358,507 shares of Class A Common Stock owned by Charlesbank, with shared voting and investment power over the shares. Mr. Palmer disclaims beneficial ownership of those shares. Mr. Palmer's address is 600 Atlantic Avenue, 26th Floor, Boston, Massachusetts 02210-2203. (13) 3,220 shares of the Class B Common Stock owned by Mr. Sullivan were issued under the Company's Incentive and Investment Plan and have not vested. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Pursuant to a Corporate Development and Administrative Services Agreement entered into in connection with the closing of the Bell Merger among Brentwood Private Equity, L.L.C. ("BPE"), an affiliate of Brentwood, Charlesbank (together 48 with BPE, the "Advisors"), Bell and BSI, as amended from time to time (the "Services Agreement"), the Advisors have agreed to assist in the corporate development activities of the Company by providing services to the Company, including (i) assistance in analyzing, structuring and negotiating the terms of investments and acquisitions, (ii) researching, identifying, contacting, meeting and negotiating with prospective sources of debt and equity financing, (iii) preparing, coordinating and conducting presentations to prospective sources of debt and equity financing, (iv) assistance in structuring and establishing the terms of debt and equity financing and (v) assistance and advice in connection with the preparation of the Company's financial and operating plans. Pursuant to the Services Agreement, the Advisors are entitled to receive: (i) upon the occurrence of certain events, monitoring fees equal to 1% of the aggregate amount of investment in the Company by the Advisors; (ii) aggregate financial advisory fees equal to 1.5% of the acquisition cost of the Company's completed acquisitions, as described above; and (iii) reimbursement of their reasonable fees and expenses incurred from time to time (a) in performing the services rendered thereunder and (b) in connection with any investment in, financing of, or sale, distribution or transfer of any interest in the Company by the Advisors or any person or entity associated with the Advisors. Upon the closing of the Bell Merger, the Investors, together, were paid a fee of approximately $3.0 million, in the aggregate, and reimbursed for out of pocket expenses in connection with the negotiation of the Bell Merger and for providing certain financial advisory and investment banking services to Bell and BSI including the arrangement and negotiation of the Credit Facility, the arrangement and negotiation of the Notes and for other management consulting services. In connection with the Bell Merger, the Company entered into the Shareholders Agreement with its stockholders which provides for, among other things, (i) certain restrictions and rights related to the transfer, sale or purchase of Bell's Common Stock and Preferred Stock, (ii) certain rights relating to the election of the Board of Directors described in Item 12 hereof and (iii) certain registration rights relating to the Company's Class A Common Stock. In July 1997, the Company sold SportRack to Advanced Accessory Systems Canada Inc. ("AAS"). An affiliate of CB Capital Investors, L.P. is a principal stockholder of the parent company of AAS. On July 27, 1998, the Company and AAS entered into an agreement (the "AAS Agreement") pertaining to an adjustment to the purchase price of SportRack pursuant to which the Company paid AAS $2.0 million and the Company and AAS agreed to share any amounts that the Company is able to recover from insurance carriers or other third parties with respect to the amounts paid by the Company to certain former executives pursuant to the AAS Agreement. In July 1999, the Company sold its auto racing helmet business to Bell Racing Company ("Bell Racing") in exchange for an equity interest in Bell Racing then valued at approximately $1,225,000 with a contingent payment of additional equity in Bell Racing of approximately $875,000 upon the satisfaction of certain conditions. In connection with that transaction, the Company entered into a long-term royalty-free licensing agreement with Bell Racing to permit Bell Racing to market auto racing helmets and auto accessories under the Bell name. The Company also agreed to provide Bell Racing with certain transition services and entered into a sublease with respect to a portion of its manufacturing facility in Rantoul, Illinois. Bell Racing is controlled by Hayden Capital Investments, LC ("Hayden Investments"). Mr. Lee is the Managing Member of Hayden Investments and the Chairman of Bell Racing. In connection with the consummation of the transaction, Hayden Investments became entitled to receive a payment equal to 1% of the aggregate capital invested in Bell Racing in accordance with the terms of a corporate services and development agreement between Hayden Investments and Bell Racing. During fiscal 1998, in connection with the relocation of Mr. Bracy's primary residence, the Company made a non-interest bearing secured loan of $150,000, $112,500 of which remains outstanding at July 3, 1999. The loan is due upon the earlier of (I) termination of employment, (ii) dissolution or liquidation of the Company, or (iii) April 8, 2001. Half of any bonus award earned by Mr. Bracy will be applied to reduce the outstanding balance of such loan. During fiscal 1999, in connection with the Company's Investment and Incentive Plan and Class C Investment and Incentive Plan, the Company issued loans to allow certain participants to purchase Company stock. The loans bear interest at an annual rate of 7% and become due in annual installments from September 1999 through September 2003. Under the plans, loans were issued to Mr. Bracy for $115,011, Mr. Kong for $26,010, and Mr. Clark for $32,500, all of which were outstanding as of July 3, 1999. On August 17, 1998, the Company issued its 14% Senior Discount Debenture due 2009 to Charlesbank in an aggregate principal amount of $14,742,500. For each $1,000 principal amount the issue price was $508.73 and the amount of the original issue discount was $491.27. The debenture matures on August 14, 2009, and the yield to maturity is 14% per annum. Interest on the principal amount of the debenture will begin to accrue on August 15, 2003 and will be payable in cash on each succeeding August 15 and February 15. On March 12, 1999, the Company exchanged a portion of this debenture with an accreted value of $1.2 million for 23,781 shares of Series A Preferred Stock and 19,597 shares of Class A Common Stock. On August 17, 1998, the Company issued its 14% Senior Discount Debenture due 2009 to Brentwood in an aggregate principal amount of $14,742,500. For each $1,000 principal amount the issue price was $508.73 and the amount of the original issue discount was $491.27. The debenture matures on August 14, 2009, and the yield to maturity is 14% per annum. Interest on the principal amount of the debenture will begin to accrue on August 15, 2003 and will be payable in cash on each succeeding August 15 and February 15. On March 12, 1999, the Company exchanged a portion of this debenture with an accreted value of $1.2 million for 23,781 shares of Series A Preferred Stock and 19,597 shares of Class A Common Stock. Mr. Lee is a general partner of Mission Leasing and Hayden Leasing ("Hayden Leasing"), general partnerships. On November 1, 1995, the Company entered into a lease agreement with Hayden Leasing pursuant to which the Company leased an airplane for a monthly fee of $3,000 during Fiscal 1999. This lease agreement terminates on June 30, 2000. See "Compensation Committee Interlocks and Insider Participation" and "Employment Agreements". 49 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. - -------- 21 Consolidated balance sheets - July 3, 1999 and June 27, 1998 22 Consolidated statements of operations - Years ended July 3, 1999, June 27, 1998 and June 28, 1997 24 Consolidated statements of cash flows - Years ended July 3, 1999, June 27, 1998 and June 28, 1997 25 Notes to consolidated financial statements 54 Schedule II - Valuation and qualifying accounts 55 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. 50 (a)(3) EXHIBITS NUMBER DESCRIPTION - ------ ----------- 3.1 Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K dated August 17, 1998 (the "August 1998 8-K")). 3.2 Bylaws of the Company (incorporated by reference to Exhibit 4.3 to the August 1998 8-K). 3.3 Articles of Incorporation of BSI (incorporated by reference to Exhibit 3.3 to the Company's Registration Statement on Form S-4, File No. 333-65115 (the "Form S-4")). 3.4 Amended and Restated Bylaws of BSI (incorporated by reference to Exhibit 3.4 to the Form S-4). 4.1 Shareholders Agreement, dated as of August 17, 1998, among the Company and the stockholders party thereto (incorporated by reference to Exhibit 4.1 to the Form S-4). 4.2 Indenture, dated as of November 15, 1993, between the Company and Harris Trust and Savings Bank, as Trustee, relating to the Company's 4 1/4% Convertible Subordinated Debentures due 2000 (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated October 26, 1993). 4.3* Supplemental Indenture, dated as of August 17, 1998, between the Company and Harris Trust and Savings Bank, as Trustee, relating to the Company's 4 1/4% Convertible Subordinated Debentures due 2000. 4.4 Indenture, dated as of August 17, 1998, among the Company, BSI and Harris Trust and Savings Bank, as Trustee, relating to BSI's Series A and Series B Senior Subordinated Notes due 2008 (incorporated by reference to Exhibit 4.1 to the August 1998 8-K). 4.5* Debenture Purchase Agreement, dated as of August 17, 1998, among Bell Sports Corp., Charlesbank Bell Sports Holdings, Limited Partnership and Brentwood Associates Buyout Fund II, L.P. 4.6* 14% Senior Discount Debenture due 2009, dated August 17, 1998, issued by the Company to Charlesbank Bell Sports Holdings, Limited Partnership. 4.7* 14% Senior Discount Debenture due 2009, dated August 17, 1998, issued by the Company to Brentwood Associates Buyout Fund II, L.P. 10.1 Credit Agreement, dated August 17, 1998, among BSI, the Company, the financial institutions parties thereto as Lenders, Societe Generale and DLJ Capital Funding, Inc. (incorporated by reference to Exhibit 10.1 to the Form S-4). 10.2 Borrower Pledge and Security Agreement, dated August 17, 1998, between BSI and Societe Generale (incorporated by reference to Exhibit 10.2 to the Form S-4). 10.3 Guarantor Pledge and Security Agreement, dated August 17, 1998, among the Company, Giro Sport Design International, Inc. and Societe Generale (incorporated by reference to Exhibit 10.3 to the Form S-4). 10.4 Corporate Development and Administrative Services Agreement, dated August 17, 1998 among the Company, BSI, Charlesbank Capital Partners, LLC and Brentwood Private Equity, L.L.C. (incorporated by reference to Exhibit 10.4 to the Form S-4). 10.5 Amended and Restated Employment Agreement, dated as of February 17, 1998, among the Company, BSI and Terry G. Lee (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 28, 1998 (the "March 1998 10-Q")). 10.6 Noncompetition Agreement dated December 8, 1997 between the Company, BSI and Terry G. Lee (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 27, 1997 (the "December 1997 10-Q")). 51 10.7 Amended and Restated Employment Agreement, dated as of February 17, 1998, among the Company, BSI and Mary J. George (incorporated by reference to Exhibit 10.2 to the March 1998 10-Q). 10.8 The Company's Series A Preferred Stock Option Agreement between the Company and Mary J. George dated August 17, 1998 (incorporated by reference to Exhibit 10.2 to the September 1998 10-Q). 10.9 The Company's Class A Common Stock Option Agreement between the Company and Mary J. George dated August 17, 1998 (incorporated by reference to Exhibit 10.3 to the September 1998 10-Q). 10.10* Memorandum of Understanding, dated July 15, 1999, between the Company and Mary J. George. 10.11 Memorandum reference Employment Outline for Bill Bracy, dated November 26, 1997 (incorporated by reference to Exhibit 10.6 to the December 1997 10-Q). 10.12 Severance Agreement, dated December 1, 1997, between the Company, BSI and Bill Bracy (incorporated by reference to Exhibit 10.7 to the December 1997 10-Q). 10.13 Promissory Note, dated April 8, 1998, between BSI and Bill Bracy (incorporated by reference to Exhibit 10.4 to the March 1998 10-Q). 10.14 Collateral Pledge Agreement, dated April 8, 1998, between BSI and Bill Bracy (incorporated by reference to Exhibit 10.5 to the March 1998 10-Q). 10.15* Employment Offer Letter, dated May 25, 1999, between the Company and Richard S Willis. 10.16 Form of Vehicle Lease Agreement between BSI and Mission Leasing (incorporated by reference to Exhibit 10.77 to the Company's Registration Statement on Form S-1, File No. 33-45868 (the "Form S-1")). 10.17 Form of Equipment Lease between BSI and Mission Leasing (incorporated by reference to Exhibit 10.78 to the Form S-1). 10.18 Lease of Aircraft between BSI and Hayden Leasing, L.C. dated November 1, 1995 (incorporated by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the fiscal year ended June 29, 1996). 10.19 The Company's Investment and Incentive Plan, dated December 21, 1998 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 26, 1998 (the "December 1998 10-Q")). 10.20 The Company's Class C Investment and Incentive Plan, dated December 21, 1998 (incorporated by reference to Exhibit 10.2 to the December 1998 10-Q). 10.21* Form of Promissory Note between the Company and certain employees, secured by shares issued under the Company's Investment and Incentive Plan. 10.22 Manufacturing and Product Development Agreement between BSI and Pactuco, Inc. dated September 22, 1998 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 26, 1998 (the "September 1998 10-Q")). 10.23 Merchandise Sourcing Agreement between BSI and DS-MAX U.S.A., Inc. dated February 18, 1999 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 29, 1999). 21* Subsidiaries of the Registrant 27.1* Financial data schedule for 1999 - ---------- * Filed herewith Exhibits 10.4 through 10.15 and 10.19 through 10.21 listed are the management contracts and compensatory plans or arrangements required to be filed as exhibits hereto pursuant to the requirements of Item 601 of Regulation S-K. Documents not filed herewith have previously been filed by the Company with the Securities and Exchange Commission, File No. 0-19873. 52 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 24th day of September, 1999. Name - ---- /s/ Mary J. George Director and Chief Executive Officer - ------------------------------ (principal executive officer) Mary J. George /s/ Richard S Willis Executive Vice President and Chief Financial - ------------------------------ Officer, (principal financial and accounting Richard S Willis officer) /s/ Terry G. Lee Director and Chairman - ------------------------------ Terry G. Lee /s/ William M. Barnum, Jr. Director - ------------------------------ William M. Barnum, Jr. /s/ Kim G. Davis Director - ------------------------------ Kim G. Davis /s/ John F. Hetterick Director - ------------------------------ John F. Hetterick /s/ Edward L. McCall Director - ------------------------------ Edward L. McCall /s/ Tim R. Palmer Director - ------------------------------ Tim R. Palmer /s/ John M. Sullivan Director - ------------------------------ John M. Sullivan 53 BELL SPORTS CORP. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For each of the three fiscal years in the period ended July 3, 1999 (in thousands)
Additions --------------------- Balance at Charged to beginning costs and Charged to Balance at of period expenses other accounts Deductions end of period ------- ------- ------- ------- ------- JULY 3, 1999 Deferred tax asset valuation allowance $ 1,798 $ -- $ -- $ 690 $ 1,108 Allowance for doubtful accounts $ 1,690 $ 907 $ -- $ 829 $ 1,768 Inventory valuation allowance $ 2,299 $ 4,592 $ -- $ 4,008 $ 2,883 JUNE 27, 1998 Deferred tax asset valuation allowance $ 1,970 $ -- $ -- $ 172 $ 1,798 Allowance for doubtful accounts $ 5,021 $ 1,077 $(1,300)(a) $ 3,108 $ 1,690 Inventory valuation allowance $ 3,326 $ 2,340 $ -- $ 3,367 $ 2,299 JUNE 28, 1997 Deferred tax asset valuation allowance $ 1,305 $ 665 $ -- $ -- $ 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
(a) Reversal to Loss on Disposal of Product Line. 54 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 September 8, 1999 appearing in this Form 10-K 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. PRICEWATERHOUSECOOPERS LLP San Francisco, California September 8, 1999 55 EX-4.3 2 SUPPLEMENTAL INDENTURE - -------------------------------------------------------------------------------- BELL SPORTS CORP. TO HARRIS TRUST AND SAVINGS BANK TRUSTEE ---------- SUPPLEMENTAL INDENTURE DATED AS OF AUGUST 17, 1998 TO INDENTURE DATED AS OF NOVEMBER 15, 1993 ---------- $86,250,000 4 1/4% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2000 - -------------------------------------------------------------------------------- This SUPPLEMENTAL INDENTURE, dated as of August 17, 1998 (this "Supplemental Indenture"), is executed by Bell Sports Corp., a Delaware corporation (the "Company"), and Harris Trust and Savings Bank, an Illinois banking corporation (the "Trustee"), to amend the Indenture, dated as of November 15, 1993 (the "Indenture"), between the Company and the Trustee, pursuant to which the Company issued $86,250,000 aggregate principal amount of 4 1/4% Convertible Subordinated Debentures due November 15, 2000 (the "Securities"). WHEREAS, the Indenture provides that a Holder of a Security may convert it into Common Stock at any time prior to the close of business on November 15, 2000; WHEREAS, the Company has entered into an Agreement and Plan of Recapitalization and Merger, dated as of February 17, 1998, as amended as of April 8, 1998 (the "Merger Agreement"), with HB Acquisition Corporation, a Delaware corporation ("HB Acquisition"), providing for, among other things, the merger (the "Merger") of HB Acquisition with and into the Company, with the Company continuing as the surviving corporation; WHEREAS, the Merger Agreement also provides for the conversion of each share of Common Stock outstanding immediately prior to the Effective Time (as defined in the Merger Agreement) of the Merger (other than (i) shares of Common Stock held by HB Acquisition or shares of Common Stock held directly or indirectly by the Company and (ii) shares of Common Stock held by individuals perfecting appraisal rights) into the right to receive $10.25 in cash; -2- WHEREAS, the Effective Time of the Merger was ________ on Monday, August 17, 1998; WHEREAS, Section 1211 of the Indenture provides that, in the case of any merger of another Person into the Company (other than a merger which does not result in any reclassification, conversion, exchange or cancellation of outstanding Common Stock of the Company), the Person resulting from such merger shall execute and deliver to the Trustee a supplemental indenture providing that the Holder of each Security then outstanding shall have the right thereafter, during the period such Security shall be convertible as specified in Section 1201 of the Indenture, to convert such Security only into the kind and amount of securities, cash and other property receivable upon such merger by a holder of the number of shares of Common Stock of the Company into which such Security might have been converted immediately prior to such merger; WHEREAS, the Conversion Price has never been required to be adjusted as provided in Section 1204 of the Indenture; WHEREAS, the Company is the surviving corporation in the Merger and the Person obligated to deliver cash upon conversion of the Securities; WHEREAS, Section 901 of the Indenture permits the Company, when authorized by a Board Resolution, and the Trustee, without the consent of any Holder, to enter into one or more indentures supplemental to the Indenture, in form satisfactory to the Trustee, to make provision with respect to the conversion rights of Holders pursuant to the requirements of Article Twelve thereof; -3- and WHEREAS, the Company has duly authorized the execution and delivery of this Supplemental Indenture and all things necessary to make this Supplemental Indenture a valid agreement of the Company, in accordance with its terms, have been done. NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Company and the Trustee execute this Supplemental Indenture without the consent of any Holder pursuant to Sections 901 and Article Twelve of the Indenture and agree as follows: 1. Section 1201 of the Indenture is amended to read in its entirety as follows: SECTION 1201. CONVERSION PRIVILEGE AND CONVERSION PRICE. Subject to and upon compliance with the provisions of this Article, at the option of the Holder thereof, any Security or any portion of the principal amount thereof which is $1,000 or an integral multiple of $1,000 may be converted at the principal amount thereof, or of such portion thereof, into a right to receive cash in an amount (the "Conversion Amount") determined by dividing the principal amount to be converted by the conversion price of $54.06 (the "Conversion Price"), rounding the quotient to the nearest 1/100th and multiplying that quotient (as so rounded) by $10.25. Such conversion right shall expire at the close of business on November 15, 2000; provided, that in case a Security or portion thereof is called for redemption or delivered for repurchase to Article Fourteen, such conversion right in respect of the Security or portion so called shall expire at the close of business on the Redemption Date or the Repurchase Date (as defined in Article Fourteen), as the case may be, unless the Company defaults in making the payment due upon redemption or repurchase. No further adjustments shall be made to the Conversion Price. 2. Section 1202 of the Indenture is amended to read in its entirety as follows: -4- SECTION 1202. EXERCISE OF CONVERSION PRIVILEGE. In order to exercise the conversion privilege, the Holder of any Security to be converted shall surrender such Security, duly endorsed or assigned to the Company or in blank, at any office or agency of the Company maintained for that purpose pursuant to Section 1002, accompanied by written notice of conversion in the form provided on the Security (or such other notice as is acceptable to the Company) at such office or agency that the Holder elects to convert such Security or, if less than the entire principal amount thereof is to be converted, the portion thereof to be converted. Securities surrendered for conversion during the period from the close of business on any Regular Record Date next preceding any Interest Payment Date to the opening of business on such Interest Payment Date (the "Interest Period") shall (except in the case of Securities or portions thereof called for redemption on a Redemption Date during such Interest Period) be accompanied by payment of an amount equal to the interest payable on such Interest Payment Date on the principal amount of Securities being surrendered for conversion; provided, however, that no such payment need be made if there shall exist a default in payment of interest on the Securities as of the Date of Conversion (as defined in the next paragraph). Subject to the provisions of Section 307 relating to the payment of Defaulted Interest by the Company, the interest payment with respect to a Security called for redemption on a Redemption Date during the period from the close of business on any Regular Record Date next preceding any Interest Payment Date to the opening of business on such Interest Payment Date shall be payable on such Interest Payment Date to the Holder of such Security at the close of business on such Regular Record Date notwithstanding the conversion of such Security after such Regular Record Date and prior to such Interest Payment Date, and the Holder converting such Security need not include a payment of such interest payment amount upon surrender of such Security for conversion. Except as provided in the two preceding sentences and subject to the fourth paragraph of Section 307, no payment or adjustment shall be made upon any conversion on account of any interest accrued on the Securities surrendered for conversion. All payments required by this paragraph to be made by Holder upon the surrender of Securities for conversion shall be made in New York Clearing House funds or other funds acceptable to the Company. Securities shall be deemed to have been converted immediately prior to the close of business on the day of surrender of such Securities for conversion in accordance with the foregoing provisions (the "Date of Conversion"), and at such time the rights of the Holders of such Securities as Holders shall cease. As promptly as practicable on or after the Date of Conversion, the Company shall deliver a check in payment of the Conversion Amount, without interest, at such office or agency. In the case of any Security which is converted in part only, upon such conversion the Company shall execute and the Trustee shall authenticate and deliver to the Holder thereof, at the expense of the Company, a new Security or Securities of authorized denominations in aggregate principal amount equal to the unconverted portion of the principal amount of such Security. 3. Section 1206 of the Indenture is amended to read in its entirety as follows: -5- SECTION 1206. NOTICE OF CERTAIN TRANSACTIONS. In case of the voluntary or involuntary dissolution, liquidation or winding up of the Company, then the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of Securities pursuant to Section 1002, and shall cause to be mailed to all Holders at their last addresses as they shall appear in the Security Register, at least 20 days prior to the applicable effective date, a notice stating the date on which such dissolution, liquidation or winding up is expected to become effective. 4. The Indenture is amended to delete Sections 1203, 1204, 1205, 1207, 1208, 1209 and 1211. 5. Section 205 of the Indenture is amended to read in its entirety as follows: SECTION 205. FORM OF CONVERSION NOTICE. The undersigned Holder of this Security hereby irrevocably exercises the option to convert this Security, or portion hereof (which is $1,000 or an integral multiple thereof) below designated, into an amount in cash in accordance with the terms of the Indenture, and directs that the check deliverable in payment upon such conversion and any Securities representing any unconverted principal amount hereof, be issued and delivered to the undersigned unless a different name has been indicated below. If Securities are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. Any amount required to be paid by the undersigned on account of interest accompanies this Security. Dated: ------------------------------ ---------------------------------------- Signature If cash is to be delivered or Principal amount to be converted (if Securities are to be registered less than all): in the name of a Person other $_____.00 than the Holder, please print such Person's name and address: ---------------------------------------- Social Security or other Taxpayer Identification Number - ------------------------------------ Name - ------------------------------------ Street Address - ------------------------------------ City, State and Zip Code -6- 6. The Registrar shall imprint or otherwise affix conspicuously on every Security authenticated and issued in exchange or substitution for an outstanding Security that is presented for exchange or registration of transfer a legend and a Notice of Conversion in substantially the following form: PURSUANT TO A SUPPLEMENTAL INDENTURE, DATED AS OF AUGUST 17, 1998, THE RIGHT TO CONVERT THIS SECURITY INTO COMMON STOCK HAS BEEN CHANGED INTO A RIGHT TO CONVERT IT INTO A CASH AMOUNT DETERMINED BY DIVIDING THE PRINCIPAL AMOUNT TO BE CONVERTED BY THE CONVERSION PRICE OF $54.06, ROUNDING THE QUOTIENT TO THE NEAREST 1/100TH, AND MULTIPLYING THAT QUOTIENT (AS SO ROUNDED) BY $10.25. NO FURTHER ADJUSTMENT SHALL BE MADE TO THE CONVERSION PRICE. NOTICE OF CONVERSION The undersigned Holder of this Security hereby irrevocably exercises the option to convert this Security, or portion hereof (which is $1,000 or an integral multiple thereof) below designated, into an amount in cash in accordance with the terms of the Indenture, and directs that the check deliverable in payment upon such conversion and any Securities representing any unconverted principal amount hereof, be issued and delivered to the undersigned unless a different name has been indicated below. If Securities are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. Any amount required to be paid by the undersigned on account of interest accompanies this Security. Dated: ------------------------------ ---------------------------------------- Signature If cash is to be delivered or Principal amount to be converted (if Securities are to be registered less than all): in the name of a Person other $_____.00 than the Holder, please print such Person's name and address: ---------------------------------------- Social Security or other Taxpayer Identification Number - ------------------------------------ Name - ------------------------------------ Street Address - ------------------------------------ City, State and Zip Code -7- 7. For all purposes of this Supplemental Indenture, except as otherwise herein expressly provided or unless the context otherwise requires: (i) the capitalized terms and phrases used in this Supplemental Indenture that are defined in the Indenture have the meanings attributed to them in the Indenture, and the definitions of those terms and phrases contained in the Indenture are incorporated by reference in this Supplemental Indenture; and (ii) the words "herein," "hereof," "hereby" and other words of similar import used in this Supplemental Indenture refer to this Supplemental Indenture as a whole and not to any particular section of it. 8. The Trustee accepts the amendment of the Indenture effected by this Supplemental Indenture and shall execute the trust created by the Indenture, as so amended, but only upon the terms and conditions set forth in the Indenture, as so amended, including the terms and provisions defining and limiting the liabilities and responsibilities of the Trustee, which terms and provisions shall in like manner define and limit its liabilities in the performance of the trust created by the Indenture, as so amended. Without limiting the generality of the foregoing, the Trustee (a) has no responsibility for the correctness of the recitals of fact set forth in this Supplemental Indenture, which are statements only of the Company, (b) makes no representations as to the validity or sufficiency of this Supplemental Indenture and (c) shall incur no liability or responsibility in respect of any invalidity of this Supplemental Indenture. 9. Except as expressly amended hereby, the Indenture is in all respects ratified and confirmed and its terms, conditions and provisions remain in full force and effect. -8- 10 . This Supplemental Indenture shall form a part of the Indenture for all purposes, and every Holder of Securities heretofore or hereafter authenticated and delivered under the Indenture shall be bound hereby. 11. This Supplemental Indenture shall be governed by and construed in accordance with the laws of the State of Illinois. 12. This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. -9- IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed, and their respective seals to be hereunto affixed and attested, all as of the day and year first above written. BELL SPORTS CORP. By: /s/ Terry G. Lee ------------------------------------ Name: Terry G. Lee Title: Chairman and Chief Executive Officer Attest: /s/ Linda K. Bounds - ----------------------------------- Linda K. Bounds Secretary HARRIS TRUST and SAVINGS BANK, AS TRUSTEE By: ------------------------------------ Name: Title: Attest: - ----------------------------------- STATE OF ARIZONA ) ) ss: COUNTY OF MARICOPA ) On this ____ day of August, 1998, before me a Notary Public in and for said country and state, personally appeared _____________________ and ____________________, to me personally known and known to me to be the same persons who executed the within foregoing instrument, who, being by me duly sworn, did depose, acknowledge and say: That they are, respectively, the ______________________ and _____________________ of Bell Sports Corp., one of the corporations described in and which executed the foregoing instrument; that they know the seal of said corporation; and that the seal affixed to said instrument is the seal of said corporation; that said instrument was signed and sealed on behalf of the said corporation by authority of its Board of Directors; and they acknowledged the execution of said instrument to be the voluntary act and deed of said corporation by it voluntarily executed. IN WITNESS WHEREOF, I have hereunto set my hand and official seal this day of ______________, 1998. ---------------------------------------- NOTARY PUBLIC My Commission Expires: __________ [Notarial Seal] STATE OF ILLINOIS ) ) ss: COUNTY OF COOK ) On this ____ day of _____________, 1997, before me, a Notary Public in and for said country and state, personally appeared _________________________ and ______________________, to me personally known and known to me to be the same persons who executed the within foregoing instrument, who, being by me duly sworn, did depose, acknowledge and say: That they are, respectively, the ______________________ and ___________________, of Harris Trust and Savings Bank, an Illinois banking corporation described in and which executed the foregoing instrument; that they know the seal of said association; and that the seal affixed to said instrument is the seal of said association; that said instrument was signed and sealed on behalf of the said association by authority of its Board of Directors; and they acknowledged the execution of said instrument to be the voluntary act and deed of said association by it voluntarily executed. IN WITNESS WHEREOF, I have hereunto set my hand and official seal this day of ______________, 1998. ---------------------------------------- NOTARY PUBLIC My Commission Expires: __________ [Notarial Seal] EX-4.5 3 DEBENTURE PURCHASE AGREEMENT DEBENTURE PURCHASE AGREEMENT Dated as of August 17,1998 Between BELL SPORTS CORP. as the Issuer, and CHARLESBANK BELL SPORTS HOLDINGS, LIMITED PARTNERSHIP AND BRENTWOOD ASSOCIATES BUYOUT FUND II, L.P. as the Purchasers TABLE OF CONTENTS PAGE ARTICLE I DEFINITIONS AND ACCOUNTING TERMS.............................................2 SECTION 1.01. Certain Defined Terms........................................2 SECTION 1.02. Computation of Time Periods..................................4 SECTION 1.03. Accounting Terms.............................................4 ARTICLE II DEBENTURE AND WARRANT PURCHASE...............................................4 SECTION 2.01. Authorization of Debentures..................................4 SECTION 2.02. Purchase and Sale of Debentures..............................5 SECTION 2.03. The Closing..................................................5 SECTION 2.04. Use of Proceeds..............................................5 SECTION 2.05. Representations of the Purchasers............................5 ARTICLE III CONDITIONS...................................................................7 SECTION 3.01. Conditions Precedent to Closing..............................7 ARTICLE IV REPRESENTATIONS AND WARRANTIES...............................................8 SECTION 4.01. Representations and Warranties of the Issuer.................8 ARTICLE V EVENTS OF DEFAULT...........................................................10 SECTION 5.01. Events of Default...........................................10 ARTICLE VI MISCELLANEOUS...............................................................11 -i- SECTION 6.01. Complete Agreement; Modification of Agreement; Sale of Interest....................................................11 SECTION 6.02. No Waiver by Holders of the Debentures......................12 SECTION 6.03. Remedies....................................................13 SECTION 6.04. MUTUAL WAIVER OF JURY TRIAL.................................13 SECTION 6.05. Severability................................................13 SECTION 6.06. Parties.....................................................13 SECTION 6.07. Conflict of Terms...........................................13 SECTION 6.08. Authorized Signatories......................................13 SECTION 6.09. GOVERNING LAW...............................................14 SECTION 6.10. Notices.....................................................14 SECTION 6.11. Survival....................................................15 SECTION 6.12. Section Titles..............................................16 SECTION 6.13. Counterparts................................................16 EXHIBITS Exhibit A - Form of Debenture -ii- DEBENTURE PURCHASE AGREEMENT This DEBENTURE PURCHASE AGREEMENT dated as of August 17, 1998 is made between Bell Sports Corp., a Delaware corporation (the "ISSUER"), and Charlesbank Bell Sports Holdings, Limited Partnership, a Massachusetts limited partnership ("CHARLESBANK"), and Brentwood Associates Buyout Fund II, L.P., a Delaware limited partnership ("BRENTWOOD" and together with Charlesbank, the "PURCHASERS") PRELIMINARY STATEMENTS: A. Pursuant to an Agreement and Plan of Merger and Recapitalization dated February 7, 1998, as amended on April 8, 1998 (the "MERGER AGREEMENT"), between the Issuer and HB Acquisition Corporation, a Delaware Corporation ("HBAC") controlled by the Purchasers, HBAC was merged (the "MERGER") with and into the Issuer with the Issuer continuing as the surviving corporation (the "SURVIVING CORPORATION") B. Pursuant to the Merger Agreement, each outstanding of common stock of the Issuer, $0.01 par value per share (the "COMMON STOCK") (other than shares of Common Stock held by HBAC or held directly or indirectly by the Company or held by individuals perfecting appraisal rights), was exchanged for $10.25 in cash. C. In connection with the Merger, on June 30, 1998, the Company commenced a tender offer (as amended on July 24, 1998, the "TENDER OFFER"), for up to $62.5 million in principal aggregate amount of its existing 4 1/4% Convertible Subordinated Debentures. D. In connection with the Merger, by means of a Confidential Preliminary Offering Memorandum dated July 27, 1998, BSI offered (the "OFFERING") to sell $110.0 million aggregate principal amounts of its Senior Subordinated Notes due 2008 (the "BSI NOTES") pursuant to a Purchase Agreement dated August 10, 1998 (the "PURCHASE AGREEMENT") among Bell Sports, Inc., a wholly-owned subsidiary of the Company ("BSI"), the Company, Donaldson, Lufkin & Jenrette Securities Corporation, SG Cowen Securities Corporation and NationsBank Montgomery Securities LLC (collectively, the "INITIAL PURCHASERS"). E. In connection with the Merger, BSI entered into a Credit Agreement dated August 17, 1998, (the "CREDIT AGREEMENT") pursuant to finance the fees and expenses to be paid in the Merger. F. As a result of the Merger, the Purchasers shall beneficially own approximately 87% of the equity of the Issuer. G. The Issuer proposes to issue and sell to the Purchasers an aggregate of $29,485,000 face amount 14% Senior Discount Debentures due 2009 for aggregate proceeds of $15.0 million and the Purchasers wish to purchase such Debentures. H. Accordingly, in consideration of the mutual agreements contained herein, and subject to the terms and conditions hereof, the parties hereto agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.01. CERTAIN DEFINED TERMS. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "ACCRETED VALUE" means, as of any date of determination, the sum (rounded to the nearest whole dollar) of (a) the initial offering price of each $1,000 in principal amount at maturity of Debentures and (b) the portion of the excess of the principal amount of Debentures over such initial offering price which shall have been accreted thereon through such date, such amount to be so accreted on a daily basis at the rate of 14.00% per annum compounded semi-annually on each June 1 and December 1 from the date of issuance of the Debenture through the date of determination. On or after June 1, 2003, the Accreted Value of each Debenture shall be equal to its principal amount at maturity. "AGREEMENT" shall mean this Debenture Purchase Agreement, including all amendments, modifications and supplements hereto and any appendices, exhibits or schedules to any of the foregoing, and shall refer to this Agreement as the same may be in effect at the time such reference becomes operative. "BUSINESS DAY" means a day of the year on which banks are not required or authorized by law to close in Boston, Massachusetts or Los Angeles, California. "COMMISSION" shall mean the Securities and Exchange Commission or any other Federal agency then administering the Securities Act and other Federal securities laws. "DEBENTURE" and "DEBENTURES" have the meanings specified in Section 2.01. "DEFAULT" means any Event of Default or any event that would constitute an Event of Default but for the requirement that notice be given or time elapse or both. "EXISTING CONVERTIBLE DEBENTURES" has the meaning specified in the Preliminary Statements. -2- "MATERIAL ADVERSE EFFECT" means a material adverse effect on (a) the business, condition (financial or otherwise), operations, performance, properties or prospects of the Issuer and its Subsidiaries taken as a whole. "MATURITY DATE" means the earlier of August 14, 2009 and the date of termination in whole of the Debenture Obligations. "PERSON" means an individual, partnership, corporation (including a business trust), limited liability company, joint stock company, trust, unincorporated association, joint venture or other entity, or a government or any political subdivision or agency thereof. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or any similar Federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "SOLVENT" means, with respect to any Person on a particular date, that on such date (a) the fair value of the property of such Person is greater than the total amount of liabilities, including, without limitation, contingent liabilities, of such Person, (b) the present fair salable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay such debts and liabilities as they mature and (d) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's property would constitute an unreasonably small capital. The amount of contingent liabilities at any time shall be computed as the amount that, in the light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. "SUBSIDIARY" of any Person means any corporation, partnership, joint venture, limited liability company, trust or estate of which (or in which) more than 50% of (a) the issued and outstanding capital stock having ordinary voting power to elect a majority of the Board of Directors of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency), (b) the interest in the capital or profits of such limited liability company, partnership or joint venture or (c) the beneficial interest in such trust or estate is at the time directly or indirectly owned or controlled by such Person, by such Person and one or more of its other Subsidiaries or by one or more of such Person's other Subsidiaries. SECTION 1.02. COMPUTATION OF TIME PERIODS. In this Agreement in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each mean "to but excluding". -3- SECTION 1.03. ACCOUNTING TERMS. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles consistent with those applied in the preparation of the financial statements referred to in Section 4.01(f) ("GAAP"). ARTICLE II DEBENTURE AND WARRANT PURCHASE SECTION 2.01. AUTHORIZATION OF DEBENTURES. The Issuer has been authorized to issue and sell on the Closing Date its 14% Senior Discount Debentures due 2009 in the form attached hereto as Exhibit A (herein, together with any 14% Senior Discount Debentures issued in exchange therefor or replacement thereof, called the "DEBENTURES" and each individually, a "DEBENTURE"). SECTION 2.02. PURCHASE AND SALE OF DEBENTURES. Subject to the terms and conditions of this Agreement and on the basis of the representations and warranties set forth herein, the Issuer agrees to sell to each of the Purchasers and each of the Purchasers agrees to purchase from the Issuer on the Closing Date in the form attached as Exhibit A hereto. SECTION 2.03. THE CLOSING. The purchase and sale of the Debentures will take place in a closing at the offices of Ropes & Gray, 885 Third Avenue, New York, New York. The closing shall take place at 9:00 a.m. New York time on August 17, 1998 (the "CLOSING DATE") or at such other time and place as the parties hereto shall mutually agree. On the Closing Date, the Issuer will deliver to each of the Purchasers (x) a Debenture in the principal amount of $14,742,500 in the form attached hereto as Exhibit A; and the Purchasers shall each in exchange therefor pay the Issuer $7,500,000 (the "ISSUE PRICE"), in immediately available funds by wire transfer to the account specified in writing to the Purchasers before the Closing Date. SECTION 2.04. USE OF PROCEEDS. The Issuer will apply the proceeds from the sale of the Debentures on the Closing Date to satisfy its obligations in connection with the Transactions. SECTION 2.05. REPRESENTATIONS OF THE PURCHASERS. Each of the Purchasers hereby, severally but not jointly, represents and warrants to the Issuer that: (a) AUTHORIZATION. The Purchaser has full power and authority to execute, deliver and perform this Agreement and to acquire the Debentures; this Agreement and the Debentures constitute the valid and legally binding obligation of such Purchaser, enforceable against such Purchaser in accordance with their respective terms. (b) PURCHASE ENTIRELY FOR OWN ACCOUNT. Except as may be consistent with Section 6.01 hereof, the Debentures to be received by such Purchaser and will be acquired for investment for such Purchaser's own account, not -4- as a nominee or agent and not with a view to the distribution of any part thereof. Except as may be consistent with Section 6.01 hereof, such Purchaser has no present intention of selling, granting any participation in, or otherwise distributing the same. Such Purchaser does not have any contract, undertaking, agreement or arrangement with any Person to sell, transfer, or grant participation to such Person or to any third Person, with respect to the Debentures. (c) RESTRICTED SECURITIES. Such Purchaser understands that the Debentures may not be sold, transferred, or otherwise disposed of without registration under the Securities Act, or an exemption therefrom, and that in the absence of an effective registration statement covering the Debentures or an available exemption from registration under the Securities Act, the Debentures must be held indefinitely. (d) FORMATION. Such Purchaser represents that it was not organized for the purpose of making an investment in the Issuer. (e) SUITABILITY. Such Purchaser is an "accredited investor" as such term is defined in Rule 501(a) promulgated pursuant to the Securities Act. (f) FINANCIAL CONDITION. Such Purchaser's financial condition is such that it is able to bear the risk of holding the Securities for an indefinite period of time and can bear the loss of its entire investment in the Debentures. (g) EXPERIENCE. Such Purchaser has such knowledge and experience in financial and business matters and in making high risk investments of this type that it is capable of evaluating the merits and risks of the purchase of the Debentures. (h) RECEIPT OF INFORMATION. Such Purchaser has been furnished access to the business records of the Issuer and such additional information and documents as the Purchaser has requested and has been afforded an opportunity to ask questions of and receive answers from representatives of the Issuer concerning the terms and conditions of this Agreement and the purchase of the Debentures, the Issuer's business, operations, market potential, capitalization, financial condition and prospects, and all other matters deemed relevant by the Purchaser. (i) LEGENDS. The Debentures shall be imprinted with a legend in substantially the following form: "THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED." -5- "FOR PURPOSES OF SECTION 1272, 1273 AND 1275 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED, THIS SECURITY IS BEING ISSUED WITH ORIGINAL ISSUE DISCOUNT; FOR EACH $1,000 PRINCIPAL AMOUNT OF THIS SECURITY, THE ISSUE PRICE IS $508.73, THE AMOUNT OF ORIGINAL ISSUE DISCOUNT IS $491.27, THE ISSUE DATE IS AUGUST 17, 1998 AND THE YIELD TO MATURITY IS 14.00% PER ANNUM." (j) TRANSFERABILITY. The Debentures may not be transferred or assigned without compliance with applicable Federal and state securities laws by the transferor and the transferee in accordance with the legend described in Section 2.05(i) hereof. ARTICLE III CONDITIONS SECTION 3.01. CONDITIONS PRECEDENT TO CLOSING. This Agreement shall become effective upon the satisfaction of the following conditions precedent: (a) The Merger Agreement shall be in full force and effect and the transactions contemplated by the Merger Agreement shall have been consummated strictly in accordance with the terms of the Merger Agreement, the Merger, without any waiver or amendment not consented to by the Purchasers of any term, provision or condition set forth therein, and in compliance with all applicable laws. (b) The Certificate of Merger with respect to the Merger shall have been filed with the Secretary of State of the State of Delaware and shall have become effective. (c) This Agreement or counterparts thereof shall have been duly executed and delivered by the Issuer and the Purchasers. (d) The Purchasers shall have received the Debentures executed by the Issuer and payable to the Purchasers; (e) The Tender Offer shall have been consummated with respect to the purchase of at least $35.0 million aggregate principal amount of Convertible Notes. -6- (f) The Credit Agreement shall have been executed by the parties thereto and the initial borrowing, if any, under such Agreement shall be concurrently funded. (g) The Offering shall have been consummated. ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. REPRESENTATIONS AND WARRANTIES OF THE ISSUER. The Issuer represents and warrants as follows: (a) The Issuer (i) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, (ii) is duly qualified and in good standing as a foreign corporation in each other jurisdiction in which it owns or leases property or in which the conduct of its business requires it to so qualify or be licensed except where the failure to so qualify or be licensed could not have a Material Adverse Effect and (iii) has all requisite corporate power and authority (including, without limitation, all governmental licenses, permits and other approvals) to own or lease and operate its properties and to carry on its business as now conducted and as proposed to be conducted. All of the outstanding capital stock of the Issuer has been validly issued, is fully paid and non-assessable and, immediately following the consummation of the Merger, free and clear of all liens except liens consisting of restrictions on the transfer of such stock contained in the Shareholders Agreement. (b) The execution, delivery and performance by each of the Issuer and its Subsidiaries of this Agreement, the Debentures, each other Debenture Document and the consummation of the Merger and the other transactions contemplated hereby and thereby are within the corporate powers of the Issuer and such Subsidiaries, have been duly authorized by all necessary corporate action, and do not (i) contravene the charter or bylaws of the Issuer or any of its Subsidiaries, (ii) violate any law, order, writ, judgment, injunction, decree, determination or award, (iii) conflict with or result in the breach of, or constitute a default under, any contract, loan agreement, indenture, mortgage, deed of trust, lease or other instrument binding on or affecting the Issuer, any of its Subsidiaries or any of their properties or (iv) result in or require the creation or imposition of any lien upon or with respect to any of the properties of the Issuer. Neither the Issuer nor any of its Subsidiaries is in violation of any such law, rule, regulation, order, writ, judgment, injunction, decree, determination or award or in breach of any such contract, loan agreement, indenture, mortgage, deed of trust, lease or other instrument, the violation or breach of which could have a Material Adverse Effect. (c) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body or any other third party is required for the due execution, delivery, recordation, filing or performance by the Issuer of this Agreement or the Debentures. -7- (d) This Agreement has been, and each of the Debentures, when delivered on the Closing Date will have been, duly executed and delivered by the Issuer. This Agreement is, and each of the Debentures when delivered hereunder will be, the legal, valid and binding obligation of each of the Issuer and any of its Subsidiaries that are a party thereto, enforceable against the Issuer and such Subsidiaries in accordance with its terms. (e) The Issuer is not an "investment company," or an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended. The issuance of the Debentures and the application of the proceeds or repayment thereof by the Issuer, nor the consummation of the other transactions contemplated hereby, will violate any provision of such Act or any rule, regulation or order of the Commission thereunder. (f) Each of the Issuer and its Subsidiaries is, and will be after giving effect to the Merger, individually and together with its Subsidiaries, Solvent. (g) The Issuer is not in default (i) under the Issuer's Certificate of Incorporation or By-laws or any Debenture, indenture, mortgage, lease, agreement, contract, purchase order or other instrument, document or agreement to which it is a party or by which it or any of its property is bound or affected or (ii) with respect to any order, writ, injunction or decree of any court or any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, in each case which could have a Material Adverse Effect. There exists no condition, event or act which after notice, lapse of time, or both, could constitute a default by the Issuer under any of the foregoing which could have a Material Adverse Effect. The Issuer is not and, to the best of the Issuer's knowledge, no third party is, in default under any agreement, contract or other instrument, document, or agreement to which the Issuer is a party or by which any of them or any of their property is affected, which default would have a Material Adverse Effect. ARTICLE V EVENTS OF DEFAULT SECTION 5.01. EVENTS OF DEFAULT. If any of the following events ("EVENTS OF DEFAULT") shall occur and be continuing: (a) the Issuer shall fail to pay (i) any principal of the Debentures when the same becomes due and payable or (ii) any interest on the Debentures for a period of 5 Business Days after the same shall become due and payable; or -8- (b) Debt that is outstanding in a principal amount of at least $5,000,000 either individually or in the aggregate (but excluding Debt outstanding hereunder) of the Issuer or any of its Subsidiaries (as the case may be), is not paid when due at its final maturity; or any such Debt shall be declared to be due and payable or required to be prepaid or redeemed (other than by a regularly scheduled required prepayment or redemption), purchased or defeased, or an offer to prepay, redeem, purchase or defease such Debt shall be required to be made, in each case as to the entirety of such Debt prior to the stated maturity thereof; or (c) the Issuer or any of its Significant Subsidiaries shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Issuer or any of its Significant Subsidiaries seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization , arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against it (but not instituted by it) that is being diligently contested by it in good faith, either such proceeding shall remain undismissed or unstayed for a period of 45 days or any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, it or any substantial part of its property) shall occur; then, and in any such event, the holders of at least 51% of the principal amount of the Debentures by notice to the Issuer, may declare the Debenture, all interest thereon and all other amounts payable under this Agreement to be forthwith due and payable, whereupon the Accreted Value of the Debentures, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Issuer; PROVIDED, HOWEVER, that in the event of an actual or deemed entry of an order for relief with respect to the Issuer or any of its Significant Subsidiaries under the Federal Bankruptcy Code, the Accreted Value of the Debentures, all such interest and all such amounts shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Issuer. ARTICLE VI MISCELLANEOUS SECTION 6.01. COMPLETE AGREEMENT; MODIFICATION OF AGREEMENT; SALE OF INTEREST. This Agreement and the Debenture constitute the complete agreement between the parties with respect to the subject matter hereof and may not be modified, altered or amended except by an agreement in writing signed by the Issuer and the holders of at least 51% of the outstanding aggregate principal amount of the Debentures or the purchasers. The Issuer hereby consents to the sale by the Purchasers of participations, assignment, transfer or other disposition, at any time or times, of any of the Debentures or of any portion thereof or interest therein, including, without limitation, the Purchasers' -9- rights, title, interests, remedies, powers or duties thereunder, whether evidenced by a writing or not. The Issuer agrees that it will cooperate with the Purchasers in any manner requested by the Purchasers to effect the sale of participations in or assignments of any of the Debentures or to issue new debentures, the proceeds of which shall be used to redeem the Debentures issued hereunder, or of any portion thereof or interest therein, including, without limitation, assistance in the preparation of appropriate disclosure documents or placement memoranda, execution of an indenture containing covenants limiting the ability of the Issuer and its subsidiaries to effect certain transactions, including if requested covenants in substantially in the form of the covenants contained in the BSI Notes and issuing new debentures under any such indenture, making appropriate representations and warranties to any purchaser of such Debentures, adopting additional provisions regarding redemption at the option of the Issuer, and any other action reasonably requested by the Purchasers. No amendment or waiver of any provision of this Agreement or the Debentures, nor consent to any departure by the Issuer therefrom, shall in any event be effective unless the same shall be in writing and signed by the holders of at least 51% of the outstanding aggregate principal amount of the Debentures or the Purchasers, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 6.02. NO WAIVER BY HOLDERS OF THE DEBENTURES. The failure, at any time or times, of the Holders of the Debentures to require strict performance by the Issuer of any provisions of this Agreement and any of the other Debenture Documents shall not waive, affect or diminish any right of the Holders of the Debentures thereafter to demand strict compliance and performance therewith. Any suspension or waiver by the Holders of the Debentures of an Event of Default by the Issuer under the Debenture Documents shall not suspend, waive or affect any other Event of Default by the Issuer under this Agreement and any of the other Debenture Documents whether the same is prior or subsequent thereto and whether of the same or of a different type. None of the undertakings, agreements, warranties, covenants and representations of the Issuer contained in this Agreement or any of the other Debenture Documents and no Event of Default by the Issuer under this Agreement and no defaults by the Issuer under any of the other Debenture Documents shall be deemed to have been suspended or waived by the Holders of the Debentures unless such suspension or waiver is by an instrument in writing signed by the Holders of at least 51% of the outstanding principal amount of the Debentures and directed to the Issuer specifying such suspension or waiver. SECTION 6.03. REMEDIES. The rights and remedies of the Holders of the Debentures under this Agreement shall be cumulative and nonexclusive of any other rights and remedies which they may have under any other agreement, including without limitation, the Debenture Documents, by operation of law or otherwise. SECTION 6.04. MUTUAL WAIVER OF JURY TRIAL. THE PARTIES DESIRE THAT ALL DISPUTES HEREUNDER BE RESOLVED BY A JUDGE APPLYING APPLICABLE STATE AND FEDERAL LAWS (RATHER THAN ARBITRATION RULES). THEREFORE, THE PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT OR PROCEEDING BROUGHT TO ENFORCE OR DEFEND ANY RIGHTS OR REMEDIES UNDER THIS AGREEMENT, ANY OF THE OTHER Debenture DOCUMENTS OR ANY OF THE OTHER AGREEMENTS. -10- SECTION 6.05. SEVERABILITY. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. SECTION 6.06. PARTIES. This Agreement and the Debentures shall be binding upon, and inure to the benefit of, the successors of the Issuer and the Purchasers and the holders of the Debentures, and the assigns, transferees and endorsees of the Purchasers and the holders of the Debentures. Nothing in this Agreement or the Debentures, express or implied, shall give to any person, other than the parties hereto and their successors hereunder, any benefit or any legal or equitable right, remedy or claim under this Agreement. SECTION 6.07. CONFLICT OF TERMS. Except as otherwise provided in this Agreement or the Debentures by specific reference to the applicable provisions of this Agreement, if any provision contained in this Agreement is in conflict with, or inconsistent with, any provision in the Debentures, the provision contained in this Agreement shall govern and control. SECTION 6.08. AUTHORIZED SIGNATORIES. Until the Purchasers and the Holders of the Debentures shall be notified by the Issuer to the contrary, the signature upon any document or instrument delivered pursuant hereto of a duly authorized officer of the Issuer shall bind the Issuer and be deemed to be the act of the Issuer affixed pursuant to and in accordance with resolutions duly adopted by the Issuer's Board of Directors. SECTION 6.09. GOVERNING LAW. THIS AGREEMENT AND THE OBLIGATIONS ARISING HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES THEREOF REGARDING CONFLICT OF LAWS THAT WOULD CAUSE THE APPLICATION OF THE DOMESTIC SUBSTANTIVE LAWS OF ANY OTHER JURISDICTION, AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. SECTION 6.10. NOTICES. Except as otherwise provided herein, whenever it is provided herein that any notice, demand, request, consent, approval, declaration, election or other communication shall or may be given to or served upon any of the parties by another, or whenever any of the parties desires to give or serve upon another any communication with respect to this Agreement, each such notice, demand, request, consent, approval, declaration or other communication shall be in writing and shall be delivered in person with receipt acknowledged, or telecopied and confirmed immediately in writing by a copy mailed by registered or certified mail, return receipt requested, postage prepaid, addressed as hereafter set forth, or mailed by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: -11- (a) If to the Purchasers, to CHARLESBANK BELL SPORTS HOLDINGS, LIMITED PARTNERSHIP c/o Charlesbank Equity Fund IV, Limited Partnership 600 Atlantic Avenue Boston, Massachusetts 02210 Attn: Tim R. Palmer Tami E. Nason, Esq. Telephone: (617) 619-5400 Facsimile: (617) 619-5402 and BRENTWOOD ASSOCIATES BUYOUT FUND II, L.P. c/o Brentwood Associates Private Equity 1150 Santa Monica Boulevard, Suite 1200 Los Angeles, California 90025 Attn: William M. Barnum, Jr. Telephone: (310) 477-6611 Facsimile: (310) 477-1011 with copies to: ROPES & GRAY One International Place Boston, Massachusetts 02110 Attn: Larry Jordan Rowe, Esq. Telephone: (617) 951-7000 Facsimile: (617) 951-7050 (b) If to the Issuer, at BELL SPORTS CORP. 6350 San Ignacio Avenue San Jose, California 95119 Attn: Mary J. George Facsimile.: (408) 224-9129 -12- or at such other address as may be substituted by notice given as herein provided. The giving of any notice required hereunder may be waived in writing by the party entitled to receive such notice. Every notice, demand, request, consent, approval, declaration or other communication hereunder shall be deemed to have been duly given or served on the date on which personally delivered, with receipt acknowledged, or the date of the telecopy transmission, or three Business Days after the same shall have been deposited in the United States mail. Failure or delay in delivering copies of any notice, demand, request, consent, approval, declaration or other communication to the persons designated above to receive copies shall in no way adversely affect the effectiveness of such notice, demand, request, consent, approval, declaration or other communication. SECTION 6.11. SURVIVAL. The representations and warranties of the Issuer in this Agreement shall survive the execution, delivery and acceptance hereof by the parties hereto and the closing of the transactions described herein or related hereto. SECTION 6.12. SECTION TITLES. The Section titles and Table of Contents contained in this Agreement are and shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto. SECTION 6.13. COUNTERPARTS. This Agreement may be executed in any number of separate counterparts, each of which shall, collectively and separately, constitute one agreement. [THE REST OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK] -13- [Debenture Purchase Agreement] IN WITNESS WHEREOF, this Agreement has been duly executed as of the date first written above. BELL SPORTS CORP. By: /s/ Mary J. George ------------------------------------ Name: Mary J. George Title: Chief Executive Officer CHARLESBANK BELL SPORTS HOLDINGS, LIMITED PARTNERSHIP By: Charlesbank Equity Fund IV, Limited Partnership, a general partner By: Charlesbank Equity Fund IV GP, Limited Partnership By: /s/ Tim R. Palmer ------------------------------------ Authorized Signatory By: /s/ Kim Davis ------------------------------------ Authorized Signatory BRENTWOOD ASSOCIATES BUYOUT FUND II, L.P. By: Brentwood Private Equity LLC, a general partner By: /s/ William M. Barnum ------------------------------------ Managing Member -14- EX-4.6 4 SR DISC. DEBNTRE CHARLESBANK BELL SPORTS HLD BELL SPORTS CORP. This Debenture has not been registered under the Securities Act of 1933 and may not be sold, offered for sale, pledged or hypothecated in the absence of a registration statement in effect with respect to the securities under such Act or an opinion of counsel satisfactory to the Issuer that such registration is not required. FOR PURPOSES OF SECTION 1272, 1273 AND 1275 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED, THIS SECURITY IS BEING ISSUED WITH ORIGINAL ISSUE DISCOUNT; FOR EACH $1,000 PRINCIPAL AMOUNT OF THIS SECURITY, THE ISSUE PRICE IS $508.73, THE AMOUNT OF ORIGINAL ISSUE DISCOUNT IS $491.27, THE ISSUE DATE IS AUGUST 17, 1998 AND THE YIELD TO MATURITY IS 14.00% PER ANNUM. 14% SENIOR DISCOUNT DEBENTURE DUE 2009 $14,742,500 August 17, 1998 FOR VALUE RECEIVED, the undersigned, BELL SPORTS CORP. a Delaware corporation (the "Issuer") HEREBY PROMISES TO PAY to the order of CHARLESBANK BELL SPORTS HOLDINGS, LIMITED PARTNERSHIP (the "Payee"), on or before August 14, 2009, the principal sum of FOURTEEN MILLION SEVEN HUNDRED FORTY-TWO THOUSAND AND FIVE HUNDRED DOLLARS ($14,742,500). From August 15, 2003 until the Maturity Date, the unpaid principal amount of this Debenture from time to time shall accrue and bear daily interest at a rate per annum which shall at all times equal fourteen percent (14%) (computed on the basis of a 360-day year of twelve 30-day months), compounded semi-annually, and overdue principal, and to the extent not prohibited by applicable law, overdue installments of interest, shall accrue and bear interest at a rate per annum which shall at all times equal two percent (2%) in excess of the rate then in effect, compounded semi-annually. Both principal and interest are payable in lawful money of the United States of America to the Payee in immediately available funds at the depositary institution specified in writing by the Payee. All payments made on account of principal hereof shall be recorded by the Payee and, prior to any transfer hereof, endorsed on the grid attached hereto which is part of this Debenture. 1. THE DEBENTURES. This Debenture is one of an issue of Debentures of the Issuer (the "DEBENTURES") issued pursuant to the Debenture Purchase Agreement dated as of August 17, 1998, by and among the Issuer and the Purchasers named therein (as amended and supplemented from time to time, the "PURCHASE AGREEMENT"). This Debenture is subject to the terms and provisions of the Purchase Agreement terms defined in the Purchase Agreement and not otherwise defined herein are used herein as so defined. In case an Event of Default shall occur, the Accreted Value of this Debenture together with accrued and unpaid interest hereon may become or be declared to be due and payable in the manner and with the effect provided in the Purchase Agreement. 2. PAYMENT PROVISIONS. The Issuer covenants that so long as any of the Debentures is outstanding: 2.1. PAYMENT AT MATURITY OF DEBENTURES. On August 14, 2009 (the "MATURITY DATE") or on any accelerated maturity of this Debenture, the Issuer will pay the Accreted Value of this Debenture, together with all accrued and unpaid interest, if any, hereon. 2.2. PAYMENT AND ACCRUAL OF INTEREST. Interest on the principal amount of this Debenture shall be paid in cash from the first Interest Payment Date (as defined below) occurring after August 15, 2003 until the Maturity Date. From and after August 15, 2003, interest shall accrue at the stated rate set forth above on each August 15 and February 15 and shall be payable on each August 15 and February 15 (or, if any such date is not a Business Day, the Business Day immediately preceding such date), commencing on February 15, 2004 and ending on August 14, 2009 (each an "INTEREST PAYMENT DATE"). 2.3. Permanent Retirement of Debentures. Debentures prepaid in full or otherwise acquired by the Issuer shall be permanently retired and cancelled and shall not under any circumstance be reissued or resold. 2.4. SELECTION OF DEBENTURES FOR PREPAYMENT. Each prepayment permitted by this Debenture shall be made so that the Debentures then held by each Holder shall be prepaid in a principal amount which shall bear the same ratio, as nearly as may be, to the total principal amount being prepaid as the principal amount of such Debentures held by such Holder shall bear to the aggregate principal amount of all such Debentures then outstanding. 2.5. NOTICE OF PREPAYMENTS. Notice of each prepayment of Debentures shall be given not fewer than three nor more than thirty days before the prepayment date, in each case by mailing to each Holder a notice of intention to prepay specifying the date of prepayment, the provision hereof pursuant to which such prepayment is being made, the aggregate amount of the Debentures to be prepaid on such date, the principal amount of the Debentures to be prepaid on such date held by the Holder to whom such notice is sent, and the premium, if any, and accrued interest applicable to such prepayment. 2.6. PAYMENT AND INTEREST CUT-OFF. Upon each prepayment of Debentures, in whole or in part, the Issuer will pay to the Holders thereof the amount of their Debentures to be prepaid together with unpaid interest in respect thereof accrued to the prepayment date. The amount of Debentures to be prepaid shall become due and payable on the prepayment date, and from and after said date (unless the Issuer shall default in paying the amount then due) interest thereon shall cease to accrue. -2- 2.7. ACQUISITION OF DEBENTURES. The Issuer will not, and will not permit any of its affiliates to, purchase, redeem, or otherwise acquire any Debenture except upon the payment or prepayment thereof in accordance with the terms of such Debenture. 2.8. PAYMENTS ON BUSINESS DAYS. Whenever any payment to be made hereunder shall be stated to be due on a day that is not a Business Day, such payment shall be made on the immediately preceding Business Day. 3. DEFINITIONS. "Significant Subsidiary" means a Subsidiary which would qualify as a Significant subsidiary as that term is defined under Regulation S-X under the United States federal securities laws. "Subsidiary" of any Person means any corporation, partnership, joint venture, limited liability company, trust or estate of which (or in which) more than 50% of (a) the issued and outstanding capital stock having ordinary voting power to elect a majority of the Board of Directors of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency), (b) the interest in the capital or profits of such limited liability company, partnership or joint venture or (c) the beneficial interest in such trust or estate is at the time directly or indirectly owned or controlled by such Person, by such Person and one or more of its other Subsidiaries or by one or more of such Person's other Subsidiaries and specifically includes Bell Sports, Inc., a California corporation, and each of its Subsidiaries. "Substantive Consolidation" shall mean the entry of any order by a court of competent jurisdiction by which the assets and liabilities of the Issuer and any Subsidiary of the Issuer, or any other person or entity, are treated on a consolidated basis, whether under Section 105 of the Bankruptcy Code, 11 U.S.C. section 105, or under any other applicable bankruptcy insolvency or similar law now or hereafter in effect. 4. SEPARATE LIABILITY AND SEPARATE EXISTENCE; NO GUARANTIES; WAIVER OF SUBSTANTIVE CONSOLIDATION. By acceptance of this Debenture, each holder hereof acknowledges and agrees, for itself and for each of its participants, transferees, successors and assigns and for the direct and legally enforceable benefit of each present and future holder of any indebtedness heretofore or hereafter incurred by any present or future Subsidiary of the Issuer, that: 4.1. This Debenture and the indebtedness evidenced hereby are the liability solely of the Issuer; -3- 4.2. No Subsidiary of the Issuer, and no other person or entity, has guaranteed or otherwise assumed any liability with respect to the payment of this Debenture or the indebtedness evidenced hereby; 4.3. The holders of this Debenture will never ask, demand, accept, receive or retain (a) any guarantee or other assurance of payment of this Debenture or the indebtedness evidenced hereby from any present or future Subsidiary of the Issuer or (b) any security interest or lien upon any property now owned or hereafter acquired by any present or future Subsidiary of the Issuer as security for the payment of this Debenture or the indebtedness evidenced hereby; 4.4. The Issuer is a separate legal entity from each Subsidiary of the Issuer, and the assets of the Subsidiaries of the Issuer are not available to the holders of this Debenture to meet or satisfy the liabilities of the Issuer, and 4.5. The holders of this Debenture hereby waive and release, absolutely, unconditionally, irrevocably and forever, will never assert, initiate, prosecute or otherwise seek relief upon or in, and will never support any other person or entity in asserting, initiating, prosecuting or otherwise seeking relief upon or in, any right, remedy, claim, action or other proceeding for, or any other relief that has the effect of, Substantive Consolidation. 5. AMENDMENTS. This Debenture may be amended by a writing executed by the Holder hereof and the Issuer; PROVIDED THAT, neither the interest rate, Interest Payment Date, and Maturity Date nor the provisions of Section 4 may be amended, waived, released or otherwise discharged, except upon the written consent of the holders of "Designated Senior Indebtedness", as that term is defined in the Indenture dated as of August 17, 1998 by and between Bell Sports, Inc., a California corporation, and Harris Trust and Savings Bank, as trustee, governing the 11% Senior Subordinated Notes Due 2008 of Bell Sports, Inc. 6. HOLDER. The term "Holder" shall mean with respect to this Debenture the payee hereof unless such payee shall have presented this Debenture to the Issuer for transfer and the transferee shall have been entered into the register kept for such purpose by the Issuer at its principal office pursuant to the Purchase Agreement as a subsequent holder, in which case the term "Holder" shall mean such subsequent holder. 7. MISCELLANEOUS. Presentment for payment, demand, notice of dishonor, protest and notice of protest are hereby waived and all other demands and notices in connection with the delivery, acceptance, performance and enforcement of this Debenture. Issuer agrees that this Debenture shall be construed, governed and enforced in accordance with the laws of the State of Delaware, without regard to principles of conflicts of law. BELL SPORTS CORP. By: /s/ Mary J. George ------------------------------------- Mary George President and Chief Executive Officer -4- EX-4.7 5 SR DISC. DEBNTRE BRENTONWOOD ASSOC BUYOUT BELL SPORTS CORP. This Debenture has not been registered under the Securities Act of 1933 and may not be sold, offered for sale, pledged or hypothecated in the absence of a registration statement in effect with respect to the securities under such Act or an opinion of counsel satisfactory to the Issuer that such registration is not required. FOR PURPOSES OF SECTION 1272, 1273 AND 1275 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED, THIS SECURITY IS BEING ISSUED WITH ORIGINAL ISSUE DISCOUNT; FOR EACH $1,000 PRINCIPAL AMOUNT OF THIS SECURITY, THE ISSUE PRICE IS $508.73, THE AMOUNT OF ORIGINAL ISSUE DISCOUNT IS $491.27, THE ISSUE DATE IS AUGUST 17, 1998 AND THE YIELD TO MATURITY IS 14.00% PER ANNUM. 14% SENIOR DISCOUNT DEBENTURE DUE 2009 $14,742,500 August 17, 1998 FOR VALUE RECEIVED, the undersigned, BELL SPORTS CORP. a Delaware corporation (the "Issuer") HEREBY PROMISES TO PAY to the order of BRENTWOOD ASSOCIATES BUYOUT FUND II, L.P. (the "Payee"), on or before August 14, 2009, the principal sum of FOURTEEN MILLION SEVEN HUNDRED FORTY-TWO THOUSAND AND FIVE HUNDRED DOLLARS ($14,742,500). From August 15, 2003 until the Maturity Date, the unpaid principal amount of this Debenture from time to time shall accrue and bear daily interest at a rate per annum which shall at all times equal fourteen percent (14%) (computed on the basis of a 360-day year of twelve 30-day months), compounded semi-annually, and overdue principal, and to the extent not prohibited by applicable law, overdue installments of interest, shall accrue and bear interest at a rate per annum which shall at all times equal two percent (2%) in excess of the rate then in effect, compounded semi-annually. Both principal and interest are payable in lawful money of the United States of America to the Payee in immediately available funds at the depositary institution specified in writing by the Payee. All payments made on account of principal hereof shall be recorded by the Payee and, prior to any transfer hereof, endorsed on the grid attached hereto which is part of this Debenture. 1. THE DEBENTURES. This Debenture is one of an issue of Debentures of the Issuer (the "DEBENTURES") issued pursuant to the Debenture Purchase Agreement dated as of August 17, 1998, by and among the Issuer and the Purchasers named therein (as amended and supplemented from time to time, the "PURCHASE AGREEMENT"). This Debenture is subject to the terms and provisions of the Purchase Agreement terms defined in the Purchase Agreement and not otherwise defined herein are used herein as so defined. In case an Event of Default shall occur, the Accreted Value of this Debenture together with accrued and unpaid interest hereon may become or be declared to be due and payable in the manner and with the effect provided in the Purchase Agreement. 2. PAYMENT PROVISIONS. The Issuer covenants that so long as any of the Debentures is outstanding: 2.1. PAYMENT AT MATURITY OF DEBENTURES. On August 14, 2009 (the "MATURITY DATE") or on any accelerated maturity of this Debenture, the Issuer will pay the Accreted Value of this Debenture, together with all accrued and unpaid interest, if any, hereon. 2.2. PAYMENT AND ACCRUAL OF INTEREST. Interest on the principal amount of this Debenture shall be paid in cash from the first Interest Payment Date (as defined below) occurring after August 15, 2003 until the Maturity Date. From and after August 15, 2003, interest shall accrue at the stated rate set forth above on each August 15 and February 15 and shall be payable on each August 15 and February 15 (or, if any such date is not a Business Day, the Business Day immediately preceding such date), commencing on February 15, 2004 and ending on August 14, 2009 (each an "INTEREST PAYMENT DATE"). 2.3. PERMANENT RETIREMENT OF DEBENTURES. Debentures prepaid in full or otherwise acquired by the Issuer shall be permanently retired and cancelled and shall not under any circumstance be reissued or resold. 2.4. SELECTION OF DEBENTURES FOR PREPAYMENT. Each prepayment permitted by this Debenture shall be made so that the Debentures then held by each Holder shall be prepaid in a principal amount which shall bear the same ratio, as nearly as may be, to the total principal amount being prepaid as the principal amount of such Debentures held by such Holder shall bear to the aggregate principal amount of all such Debentures then outstanding. 2.5. NOTICE OF PREPAYMENTS. Notice of each prepayment of Debentures shall be given not fewer than three nor more than thirty days before the prepayment date, in each case by mailing to each Holder a notice of intention to prepay specifying the date of prepayment, the provision hereof pursuant to which such prepayment is being made, the aggregate amount of the Debentures to be prepaid on such date, the principal amount of the Debentures to be prepaid on such date held by the Holder to whom such notice is sent, and the premium, if any, and accrued interest applicable to such prepayment. 2.6. PAYMENT AND INTEREST CUT-OFF. Upon each prepayment of Debentures, in whole or in part, the Issuer will pay to the Holders thereof the amount of their Debentures to be prepaid together with unpaid interest in respect thereof accrued to the prepayment date. The amount of Debentures to be prepaid shall become due and payable on the prepayment date, and from and after said date (unless the Issuer shall default in paying the amount then due) interest thereon shall cease to accrue. -2- 2.7. ACQUISITION OF DEBENTURES. The Issuer will not, and will not permit any of its affiliates to, purchase, redeem, or otherwise acquire any Debenture except upon the payment or prepayment thereof in accordance with the terms of such Debenture. 2.8. PAYMENTS ON BUSINESS DAYS. Whenever any payment to be made hereunder shall be stated to be due on a day that is not a Business Day, such payment shall be made on the immediately preceding Business Day. 3. DEFINITIONS. "Significant Subsidiary" means a Subsidiary which would qualify as a Significant subsidiary as that term is defined under Regulation S-X under the United States federal securities laws. "Subsidiary" of any Person means any corporation, partnership, joint venture, limited liability company, trust or estate of which (or in which) more than 50% of (a) the issued and outstanding capital stock having ordinary voting power to elect a majority of the Board of Directors of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency), (b) the interest in the capital or profits of such limited liability company, partnership or joint venture or (c) the beneficial interest in such trust or estate is at the time directly or indirectly owned or controlled by such Person, by such Person and one or more of its other Subsidiaries or by one or more of such Person's other Subsidiaries and specifically includes Bell Sports, Inc., a California corporation, and each of its Subsidiaries. "Substantive Consolidation" shall mean the entry of any order by a court of competent jurisdiction by which the assets and liabilities of the Issuer and any Subsidiary of the Issuer, or any other person or entity, are treated on a consolidated basis, whether under Section 105 of the Bankruptcy Code, 11 U.S.C. section 105, or under any other applicable bankruptcy insolvency or similar law now or hereafter in effect. 4. SEPARATE LIABILITY AND SEPARATE EXISTENCE; NO GUARANTIES; WAIVER OF SUBSTANTIVE CONSOLIDATION. By acceptance of this Debenture, each holder hereof acknowledges and agrees, for itself and for each of its participants, transferees, successors and assigns and for the direct and legally enforceable benefit of each present and future holder of any indebtedness heretofore or hereafter incurred by any present or future Subsidiary of the Issuer, that: 4.1. This Debenture and the indebtedness evidenced hereby are the liability solely of the Issuer; -3- 4.2. No Subsidiary of the Issuer, and no other person or entity, has guaranteed or otherwise assumed any liability with respect to the payment of this Debenture or the indebtedness evidenced hereby; 4.3. The holders of this Debenture will never ask, demand, accept, receive or retain (a) any guarantee or other assurance of payment of this Debenture or the indebtedness evidenced hereby from any present or future Subsidiary of the Issuer or (b) any security interest or lien upon any property now owned or hereafter acquired by any present or future Subsidiary of the Issuer as security for the payment of this Debenture or the indebtedness evidenced hereby; 4.4. The Issuer is a separate legal entity from each Subsidiary of the Issuer, and the assets of the Subsidiaries of the Issuer are not available to the holders of this Debenture to meet or satisfy the liabilities of the Issuer, and 4.5. The holders of this Debenture hereby waive and release, absolutely, unconditionally, irrevocably and forever, will never assert, initiate, prosecute or otherwise seek relief upon or in, and will never support any other person or entity in asserting, initiating, prosecuting or otherwise seeking relief upon or in, any right, remedy, claim, action or other proceeding for, or any other relief that has the effect of, Substantive Consolidation. 5. AMENDMENTS. This Debenture may be amended by a writing executed by the Holder hereof and the Issuer; PROVIDED THAT, neither the interest rate, Interest Payment Date, and Maturity Date nor the provisions of Section 4 may be amended, waived, released or otherwise discharged, except upon the written consent of the holders of "Designated Senior Indebtedness", as that term is defined in the Indenture dated as of August 17, 1998 by and between Bell Sports, Inc., a California corporation, and Harris Trust and Savings Bank, as trustee, governing the 11% Senior Subordinated Notes Due 2008 of Bell Sports, Inc. 6. HOLDER. The term "Holder" shall mean with respect to this Debenture the payee hereof unless such payee shall have presented this Debenture to the Issuer for transfer and the transferee shall have been entered into the register kept for such purpose by the Issuer at its principal office pursuant to the Purchase Agreement as a subsequent holder, in which case the term "Holder" shall mean such subsequent holder. 7. MISCELLANEOUS. Presentment for payment, demand, notice of dishonor, protest and notice of protest are hereby waived and all other demands and notices in connection with the delivery, acceptance, performance and enforcement of this Debenture. Issuer agrees that this Debenture shall be construed, governed and enforced in accordance with the laws of the State of Delaware, without regard to principles of conflicts of law. BELL SPORTS CORP. By: /s/ Mary J. George ------------------------------------- Mary George President and Chief Executive Officer -4- EX-10.10 6 MEMORANDUM OF UNDERSTANDING Mary J. George 33822 Bridgehampton Dana Pointe, California 92677 July 15, 1999 Mr. Terry G. Lee Chairman of the Board Bell Sports Corp. 6350 San Ignacio Avenue San Jose, CA 95119 Dear Terry, As you know, on February 2, 1999, the Compensation and Organization Committee of the Board of Directors of Bell Sports Corp. (the "Company") decided to promote Bill Bracy to be the President of the Company and Bell Sports, Inc. ("BSI"), effective July 1, 1999. I suggested Bill's promotion and have agreed to relinquish the position of President of the Company and BSI. I will retain the position of Chief Executive Officer of each of the Company and BSI. Section 2.1 of my employment agreement with the Company and BSI, dated as of February 17, 1998 (the "Employment Agreement"), provides that I will be employed as the President and Chief Executive Officer of each of the Company and BSI. Section 4.6 of the Employment Agreement also provides that unless I consent in writing, upon the occurrence of an event falling within the definition of "Good Reason" I may terminate my employment and be entitled to receive specified payments and benefits. I am providing the consent set forth below because the promotion of Bill Bracy could be deemed an event falling within that definition. I hereby consent to the promotion of Bill Bracy to be the President of the Company and BSI and to the concurrent assignment to him by the board of Directors of the Company and/or the Board of Directors of BSI; of duties and responsibilities consistent with that promotion, even though certain of those duties and responsibilities may have previously been assigned to me. Further, it is understood that this agreement does not effect any other terms of employment between the Company and me. Very Truly Yours, /s/ Mary J. George ---------------------------------------- Mary J. George Acknowledged, /s/ Terry G. Lee - ----------------------------------- 7/22/99 EX-10.15 7 EMPLOYMENT OFFER LETTER May 25, 1999 Mr. Richard S. Willis 2168 Adair Street San Marino, CA 91108 Dear Rich, This letter will confirm our offer to you to become Executive Vice President and Chief Financial Officer reporting to Mary George at our San Jose facility effective Monday, April 5, 1999. The following benefits are provided as a part of the overall benefits package: 1. Your base compensation will be at an annual rate of $250,000 (pay periods bi-weekly) with a bonus opportunity of up to 50% of your annual salary. The incentive plan will be explained in more detail upon your arrival at Bell Sports. 2. Your bonus eligibility will begin July 1, 1999, the beginning of our fiscal year 2000. You must be a regular full time employee at the time of distribution to be eligible to receive bonus payments. 3. You will have the opportunity to Participate in the Bell Sports Investment and Incentive Plans. Your maximum investment will be $500,000. This amount will entitle you to 9,555 Series A Preferred shares, 7,937 Class A Common shares, 12,500 Class B Common shares and 12,000 Class C common shares. 4. A performance review will be completed six (6) months from your date of hire. Salary reviews are conducted annually. 5. You will begin to accrue vacation at the rate of 1.54 hours per week, after your first thirty days of service. You are eligible to accrue two (2) weeks of vacation time a year, through your fifth year of service. 6. You will be eligible to join the Bell Sports insurance plan within 30 days of your hire date, during any other open enrollment period or within thirty days of a qualified event. The next expected open enrollment period is December of 1999, with a benefit start date of January 1, 2000. You have a choice of two health programs. The first is a group health program through General American with a payroll deduction of $11.00 per week for individual coverage and $34.00 per week for family. The second is Kaiser HMO with a payroll deduction of $8.00 per week for individual coverage, $21.00 for single plus one and $28.00 per week for family coverage. Dental coverage is through General American and is included in the above rates. In addition, you will be reimbursed for all medical and dental expenses for yourself and your covered dependents that are not covered under these medical and dental plans including any and all deductibles and co-payments. 7. You become eligible for the Bell Sports 401(k) Retirement program on the next January 1st, April 1st, July 1st or October 1st, following six months of service. This plan features a rollover provision which would allow you to immediately rollover any 401(k) funds that you may have into the Bell Sports Plan. 8. This offer is contingent upon your agreeing to and signing the Bell Sports standard "Confidentiality and Non-Competition Agreement." 9. Taxes, by law, are required to be withheld on all forms of compensation and benefits provided you by Bell Sports. If you have any questions regarding your tax implications, you should consider contacting your tax advisor/tax preparer. 10. You should note that Bell Sports is an at-will employer and that your employment can be terminated by either party at any time with or without cause. 11. For involuntary termination without cause, the Company will continue to pay your Base Salary and all other benefits including those outlined in point number 6 above, (excluding Bonus and 401K) for a period of one year following the date of termination. If there are any questions about our offer, please call and we will discuss. As you know, I am extremely excited about the opportunities here at Bell Sports and sincerely hope that you will become a part of this dynamic organization. I look forward to the opportunity of working with you. Sincerely, /s/ Mary J. George - ----------------------------------- Mary George Chief Executive Officer My signature confirms acceptance of the position. /s/ Richard Willis 9/23/99 - ----------------------------------- ----------------- Richard Willis Date EX-10.21 8 PROMISSORY NOTE __________, 1999 $____________ PROMISSORY NOTE FOR VALUE RECEIVED, the undersigned ("Maker") hereby promises to pay to the order of Bell Sports Corp., a Delaware corporation ("Payee"), the principal amount of _______________________ Dollars ($___________). Such loan shall be full recourse to the Maker and shall bear interest at an annual rate of 7% and shall be repaid in five annual installments payable on ____________ __ of each of 1999, 2000, 2001, 2002 and 2003, the first four installments of which shall each be in the amount of $___________ and the fifth installment of which shall be in the amount of $___________; provided, however, that all or any portion of the principal amount and accrued interest due on this Promissory Note may be prepaid at any time without premium or penalty at the option of the Maker, such prepayments to be applied against unpaid installments in inverse order of maturity, latest to earliest. If Maker's employment with Payee, or, if Maker is employed solely by any subsidiary of Payee, with such subsidiary, terminates for any reason, the provisions of Section 8 of the Bell Sports Corp. Investment and Incentive Plan shall apply. Upon an "event of default" (as hereinafter defined), the holder hereof may declare the unpaid principal amount and accrued interest hereunder immediately due and payable (unless there shall have occurred an event of default under paragraph (ii) below in which case the entire unpaid principal amount and accrued interest shall automatically become so due and payable). In addition, the holder hereof shall have and may exercise with respect to the Pledged Shares (as hereinafter defined) all rights and remedies of a pledgee of shares of capital stock permitted by applicable law upon an "event of default." An "event of default" shall mean any one of the following events: (i) default in the payment of any principal amounts or accrued interest on this Note when such amounts become due and payable, if such default shall continue for five days after the date when due; or (ii) (A) the commencement by the Maker of a voluntary case under Title 11 of the United States Code, as from time to time in effect, or the authorization of the commencement of such a voluntary case; or (B) the filing against the Maker of a petition commencing an involuntary case under said Title 11; or (C) the seeking of relief by the Maker as a debtor under any applicable law, other than said Title 11, of any jurisdiction relating to the liquidation or reorganization of debtors or to the modification or alteration of the rights of creditors, or the Maker's consent to or acquiescence in such relief; or (D) the entry of an order by a court of competent jurisdiction (1) finding the Maker to be bankrupt or insolvent, (2) ordering or approving any modification or alteration of the rights of the creditors of the Maker, or (3) assuming custody of, or appointing a receiver or other custodian for, all or a substantial part of the property of the Maker; or (E) the Maker's assignment for the benefit of, or entry into a composition with, the creditors of the Maker, or the Maker's appointment or consent to the appointment of a receiver or other custodian for all or a substantial part of the property of the Maker. -2- On and after the occurrence of an event of default, unpaid principal amounts and accrued interest hereunder shall, to the extent permitted by applicable law, carry interest at a floating rate per annum equal to the base interest rate announced from time to time by [Bank], plus four percent (4%), said interest being payable together with said unpaid principal amounts and accrued interest. All payments hereunder shall be made in lawful money of the United States of America at Payee's office in San Jose, California or at such other place as the holder hereof shall designate in writing to Maker. The Maker hereby grants to the Payee a security interest in ______ shares of the Series A Preferred Stock of Bell Sports Corp., $.01 par value, issued to the Maker (the "Series A Preferred Pledged Shares"). The Maker hereby grants to the Payee a security interest in _____ shares of the Class A Common Stock of Bell Sports Corp., $.01 par value, issued to the Maker (the "Class A Pledged Shares," and together with the Series A Preferred Pledged Shares, the "Pledged Shares"). Payee will release such security interests in all or any portion of the Pledged Shares upon payment in full of this Promissory Note. To perfect such security interests, Maker has delivered to Payee simultaneously herewith Certificate(s) No. ______ evidencing the Pledged Shares, together with a stock power duly endorsed in blank. Prior to the exercise of any right or remedy hereunder by the Payee, Maker shall remain the holder of record of the Pledged Shares with all rights and privileges of such a holder of record under applicable law. -3- The Maker hereby waives presentment, demand, notice, protest, and all other demands, notices and defenses (other than payment) in connection with the delivery, acceptance, performance and enforcement of this Promissory Note, and agrees to pay the holder's reasonable legal and other fees and expenses incurred in connection with the enforcement hereof. IN WITNESS WHEREOF, I have hereunto set my hand under seal this ____ day of __________________, 1999. MAKER:________________________ Name: EX-21 9 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. Bell Sports Canada, Inc., a Canadian corporation (a wholly owned subsidiary of Bell Sports, Inc.) 4. Giro Sport Design International, Inc., a California corporation (a wholly owned subsidiary of Bell Sports, Inc.) 5. Giro Ireland Limited, an Ireland corporation (a wholly owned subsidiary of Giro Sport Design International, Inc.) 6. Bell Sports Australia Pty Limited, an Australian corporation (a wholly owned subsidiary of Bell Sports, Inc.) 7. Bell Sports Ireland Limited, an Ireland corporation (a wholly owned subsidiary of Bell Sports, Inc.) 8. Bell Sports International Limited, an Ireland corporation (a wholly owned subsidiary of Bell Sports, Inc.) EX-27 10 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JULY 3, 1999 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS JUL-03-1999 JUL-03-1999 8,875 0 60,401 1,767 43,664 128,673 39,354 23,192 218,934 53,944 158,525 0 10 11 6,444 218,934 210,909 210,909 140,673 140,673 93,244 0 15,768 (38,776) (9,652) (29,124) 0 2,887 0 (26,237) 0 0
-----END PRIVACY-ENHANCED MESSAGE-----