<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from __________ to __________
Commission File Number 0-26742
GT BICYCLES, INC.
(Exact name of the registrant as specified in its charter)
Delaware 04-3210830
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3100 West Segerstrom Avenue, Santa Ana, California 92704
(Address of principal executive offices)
(714) 513-7100
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Not Applicable
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $0.001 per share
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 report), 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 the 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. [ ]
As of March 20, 1997, the aggregate market value of the registrant's Common
Stock held by non-affiliates of the Registrant was approximately $39,818,706
based on the closing sales price of $8.00 per share of the Common Stock as of
such date, as reported by The Nasdaq National Market.
As of March 20, 1997, 9,790,532 shares of the registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be filed in
connection with the solicitation of proxies for its 1997 Annual Meeting of
Stockholders to be held June 3, 1997 are incorporated by reference in Items 10,
11, 12, and 13 of Part III hereof.
<PAGE> 2
PART I
Item 1. Business
GENERAL
GT Bicycles, Inc. (the "Company" or "GT Bicycles") is a leading designer,
manufacturer and marketer of mid- to premium-priced mountain and juvenile BMX
bicycles sold under the Company's brand names. The Company's wholly-owned
Riteway Products and Caratti distribution network ("distribution network") is a
leading distributor of the Company's bicycles, parts and accessories, as well as
parts and accessories of other manufacturers, to independent bicycle dealers.
The Company currently offers 143 bicycle models, including 48 mountain bicycle
models, 73 juvenile BMX bicycle models under its GT, Dyno, Robinson, Auburn and
Powerlite brand names and 22 road and specialty bicycle models. In addition to
the Company's broad line of bicycle models, the distribution network offers over
4,500 different parts and accessories, ranging from bicycle frames and
componentry to helmets, locks and apparel. The Company's distribution network
also provides responsive customer service and dealer support, prompt delivery,
high order fill-rates, timely warranty service, dealer training, a comprehensive
parts and accessory catalog and thorough product and market knowledge.
Accordingly, the Company believes that its distribution network provides
national purchasing power, financial stability and integrated inventory
management, together with the service of a regional distributor.
The Company was incorporated on August 6, 1993 and had no operations for the
period August 6, 1993 to November 12, 1993. On November 12, 1993, the Company
acquired all of the outstanding common stock of GT Bicycles California, Inc. and
subsidiaries (collectively, the "Predecessor") in a purchase of common stock.
The Company's name was changed from GT Holdings, Inc. to GT Bicycles, Inc. and
the Predecessor's name was changed from GT Bicycles, Inc. to GT Bicycles
California, Inc. on August 11, 1995. The Company has nine operating
subsidiaries: GT Bicycles California, Inc., GT BMX Products, Inc., Riteway
Distributors, Inc., Riteway Distributors Central, Inc., Riteway Products East,
Inc., Riteway Products North Central, Inc., Riteway Products Japan K.K.
("Riteway Japan"), Riteway Products France S.A.R.L. ("Riteway France") and
Caratti Sport Limited ("Caratti"). The Company's current headquarters and
principal place of business are located at 3100 W. Segerstrom Ave., Santa Ana,
California 92704, and its telephone number is (714) 513-7100. The Company
expects to move its corporate headquarters by May 1997 to 2001 East Dyer Road,
Santa Ana, California 92704.
BACKGROUND
The Company was founded in 1979 by Gary Turner and Richard Long, who were early
innovators in the design, manufacture and sale of juvenile BMX bicycle frames
and forks using advanced designs and materials, including lightweight chromoly.
In 1981 the Company began assembling and selling complete juvenile BMX bicycles
to independent bicycle dealers, and in 1984 the Company responded to an emerging
industry trend by introducing its first adult mountain bicycle. In 1987 in order
to provide vertically integrated distribution of its products to independent
bicycle dealers, the Company acquired Riteway Distributors, Inc, a California
distributor of bicycles, parts and accessories. In 1989 and 1990, the Company
purchased two additional regional bicycle distributors to cover the central and
eastern United States. In July 1995, the Company purchased a fourth distributor
which has a sales territory including Northern Illinois, Wisconsin, Minnesota
and surrounding areas. In 1996, the Company formed a distributor in Japan and
purchased distributors in France and the United Kingdom. The Company's seven
distribution companies provide a regional focus to the independent bicycle
dealers they serve.
PRODUCTS
The Company currently offers a broad line of adult and juvenile bicycling
products in several categories, including: mountain bicycles, juvenile BMX
bicycles, road and specialty bicycles, and parts and accessories. Within each
category the Company strives to continually improve its existing products and
introduce new products that feature some of the most technically sophisticated
materials and componentry in the industry. Bicycles offered by the Company are
sold exclusively under the Company's various brand names, and parts and
accessories are sold under the brand names of the Company and third parties. In
1996, sales of bicycles represented approximately 71% of the Company's net
sales, and sales of parts and accessories represented approximately 29%.
2
<PAGE> 3
The Company's bicycles for the 1997 model year are distributed in the three
major bicycle categories as follows:
<TABLE>
<CAPTION>
Number of
Category 1997 Bicycle Models
-------- -------------------
<S> <C> <C>
Mountain Bicycle Models:
Titanium Front Suspension Bicycle 1
Non Suspension Mountain Bicycle Frame 1
Aluminum Full Suspension Mountain Bicycle Frame 2
Non Suspension Mountain Bicycle Frame 2
Full Suspension Mountain Bicycle 6
Front Suspension Mountain Bicycle 6
Non Suspension Mountain Bicycle 4
Cross Bicycle 1
Chromoly Steel Non Suspension Mountain Bicycle Frame 1
Full Suspension Mountain Bicycle 1
Front Suspension Mountain Bicycle 3
Non Suspension Mountain Bicycle 2
Cross Bicycle 1
Chromoly Steel/Hi-Tensile Steel Front Suspension Mountain Bicycle 3
Non Suspension Mountain Bicycle 6
Cross Bicycle 3
Thermoplastic Full Suspension Mountain Bicycle Frame 2
Full Suspension Mountain Bicycle 3
---
48
Juvenile BMX Bicycle Models:
Aluminum BMX Bicycle Frame 18
BMX Bicycle 17
Chromoly Steel Freestyle Bicycle Frame 4
BMX Bicycle 6
Freestyle Bicycle 7
Chromoly Steel/Hi-Tensile Steel BMX Bicycle 3
Freestyle Bicycle 7
Hi-Tensile Steel BMX Bicycle 11
---
73
Road and Specialty Bicycle Models:
Titanium Road Bicycle Frame 1
Aluminum Road Bicycle Frame 2
Track Bicycle Frame 1
Multi-Sport Road Bicycle Frame 1
Road Bicycle 5
Track Bicycle 1
Multi-Sport Road Bicycle 1
Chromoly Steel Road Bicycle Frame 1
Road Bicycle 1
Chromoly Steel/Hi-Tensile Steel Cruiser Bicycle 6
Recreational Tandem Bicycle 2
---
22
---
Total 143
===
</TABLE>
3
<PAGE> 4
The Company also markets a full line of bicycle parts, including frames, forks,
handlebars, pedals, seats, cranks, derailleurs and freewheels, as well as
bicycle accessories such as pumps, lights, helmets, locks, cyclometers, racks
and bicycle apparel. Some of the parts and accessories are designed and
manufactured by the Company, and most others are manufactured and supplied by
third parties. Parts and accessories designed and manufactured by the Company
are offered and sold under the Company's GT, Dyno, Robinson, Auburn, Powerlite
and Cycle Design brand names. All parts and accessories are offered to
independent bicycle dealers through the Company's distribution network. In
addition, the Company has an exclusive marketing relationship to sell and
distribute three-spoke, hollow-composite wheels which use an innovative patented
long-carbon composite technology under the Company's Spin brand name, together
with other bicycle products that may be developed by the Company utilizing this
technology. This technology enables products manufactured with composite
materials to be aerodynamically shaped and manufactured in volume, while
providing superior strength-to-weight ratios and product rigidity.
In 1996, the Company entered in an exclusive licensing agreement with
Harley-Davidson Motor Company to manufacture and market a Harley Davidson
bicycle and entered into a partnership with a company to manufacture and market
an electric assist bicycle. Both bicycles are expected to be available for
distribution in fiscal 1997 and add to the Company's diverse product line of
bicycles.
RESEARCH AND PRODUCT DEVELOPMENT
GT Bicycles seeks to differentiate its products by providing bicycles with the
latest technology, innovative designs and advanced components and accessories.
The Company's experienced product development team works with the Company's
sales and manufacturing departments, distribution network and Team GT racing
teams to improve existing products and to develop new product ideas. The
Company's product development activities are performed at the Company's Santa
Ana, California facilities and at its research and development facility located
in Longmont, Colorado. The Company utilizes computer-aided design tools and
structural analysis programs to enhance its product development efforts. In
addition, the Company maintains a stress and destructive testing laboratory at
its Colorado facility to collect data and test designs prior to commercial
introduction. Research and product development expenditures in fiscal years
1996, 1995 and 1994 were approximately $1,844,000, $1,596,000 and $1,049,000,
respectively.
The Company manufactures bicycles using many materials, including
chromoly-steel, aluminum, titanium and, most recently, thermoplastics and
composites. In comparison with other materials, the Company believes that
thermoplastic and composite materials offer superior strength-to-weight ratios
while retaining rigidity and can be aerodynamically shaped in volume
manufacturing.
Under an agreement with USA Cycling, the Company was selected as the exclusive
"Official Bicycle Manufacturer" of road and track bicycles for members of the
United States Cycling Team for a period of four years which was extended for
another four years through the year 2000. In connection with this agreement, the
Company cooperated in the development and production of bicycles used by members
of the United States Cycling Team at the 1996 Olympics in Atlanta, Georgia. This
development effort, known as Project '96, focused on, among other things, the
development of superior lightweight, responsive and aerodynamic equipment. The
Company believes that its participation in Project '96 has enhanced its internal
research and product development efforts and brand name recognition.
SALES AND DISTRIBUTION
The Company's products are primarily sold through its distribution network to
independent bicycle dealers throughout the world. In 1987, the Company began
acquiring distribution companies to provide a vertically integrated national
distribution network. This network, now known as Riteway Products and Caratti,
distributes the Company's brand name bicycles and a broad range of parts and
accessories. With the recent acquisition of its Riteway France and Caratti
distributors and the establishment of its Riteway Japan distributor in 1996, the
Company has enhanced its worldwide distribution network. The Company's
distribution network consists of seven wholly-owned subsidiaries located in New
York, Wisconsin, Missouri, California, Japan, France and the United Kingdom
which employ commissioned field sales representatives, telemarketers and
customer service representatives. Each wholly-owned distributor operates on an
independent basis with respect to inventory maintenance, order and invoice
processing, credit management, customer service and local cooperative
advertising. Historically, the distribution network has focused its efforts on
the sale and distribution of bicycles, parts and accessories, while GT Bicycles
has focused on the design, engineering, manufacture and marketing of selected
categories of bicycles and components.
4
<PAGE> 5
The Company sells its juvenile BMX bicycle and related products to independent
bicycle dealers meeting its financial and other criteria on a non-exclusive
basis. The Company believes that selling its juvenile BMX bicycles and parts and
accessories to independent bicycle dealers on a non-exclusive basis
differentiates the Company from many of its competitors and provides greater
market access for the Company's products. The Company grants exclusive marketing
areas for its GT all terra mountain bicycles to independent bicycle dealers in
exchange for their agreement to minimum unit purchase commitments. The Company
performs demographic, geographic and financial analyses when selecting its
authorized independent bicycle dealers and provides initial training and ongoing
promotional assistance. The Company intends to selectively expand the number of
authorized mountain bicycle dealers to include additional dealers which meet the
Company's standards of high quality service and customer support and agree to
certain product commitments.
GT Bicycles currently distributes bicycle products internationally through 56
independent distributors who supply 65 countries and through its wholly-owned
distributors, Riteway Japan, Riteway France and Caratti. The Company sells to
its independent international distributors directly from its Santa Ana,
California facility. In addition, large orders are shipped in containers
directly to these distributors from the Company's Taiwan and People's Republic
of China suppliers. The Company believes that there are opportunities for
expanded sales in foreign markets and intends to increase its sales and
marketing efforts in these markets.
MARKETING
The Company promotes and maintains its leading brand names through focused
promotional efforts such as sponsorship of professional juvenile BMX and
mountain bicycle racing teams; national, regional and local bicycle races;
cooperative advertising programs with independent bicycle dealers; and
participation in most major trade shows. The Company's marketing department
oversees the conception, development and implementation of all aspects of the
advertising, marketing and sales promotion of the Company's products.
GT Bicycles conducts national and international marketing and advertising
programs through a variety of media, including industry periodicals, newspaper
and other print advertisements, television and radio. The Company focuses on
high-profile advertising opportunities that feature its products and Team GT
racing team riders in national cycling magazines and national bicycle television
programs. Each of the Company's independent international distributors is
required to conduct and coordinate marketing and advertising efforts with the
Company in its respective territory. The Company maintains a marketing office in
Belgium to coordinate the marketing efforts of its various independent European
distributors. In addition, the Company and its independent international
distributors participate in the major international industry trade shows.
The Company also focuses advertising and marketing efforts on a "grass-roots"
sponsorship campaign for various national, regional and local races and
organizations. The Company believes that providing financial and technical
support for local and regional organizations and events is a key factor in
maintaining brand name recognition and customer loyalty.
The Company believes that dealer support programs are key factors for marketing
success. The Company provides its independent bicycle dealers with on-site
product presentations and monthly dealer mailings that feature the Company's
latest products and team riders. The Company also maintains a cooperative
advertising program for its authorized independent bicycle dealers and provides
assistance with local advertising and promotional programs.
In addition to its sponsorship of independent teams such as the United States
Cycling Team, United States Triathlon Team, Saturn and Team Shaklee, the Company
also supports and promotes its own Team GT racing and demonstration teams which
have been very successful in their respective cycling categories. The Company
currently supports a GT mountain bicycle racing team, four BMX racing teams and
a number of Freestyle demonstration riders. The Company's freestyle and
demonstration teams perform at varying venues such as NBA Basketball half-time
shows, state fairs, school assemblies, tradeshows and corporate events.
5
<PAGE> 6
MANUFACTURING, ASSEMBLY AND SOURCING
The Company's manufacturing strategy is to use a combination of internal
manufacturing for its higher-end products and outsourcing for its higher volume,
lower cost products in order to maximize flexibility and engineering expertise
while minimizing capital commitments. The Company manufacturers many of its
premium-priced mountain, juvenile BMX and road bicycles, as well as some of its
mid-priced juvenile BMX bicycles, at the Company's Santa Ana, California
facilities. The Company believes that its internal manufacturing capabilities
have allowed it to increase its production flexibility, improve its product
development and engineering processes, enhance its reputation for product
quality and innovation and increase profit margins. The Company outsources the
remaining majority of its production requirements according to its
specifications and manufacturing standards which allows the Company to avoid the
costs and capital requirements attendant to full-scale manufacturing. The
Company currently purchases bicycles from six foreign manufacturers. Although
the Company has established relationships with its principal suppliers and
manufacturing sources, it has no long-term contracts with these suppliers and
competes with other companies for their production capacities. The Company's
relationships with its suppliers are primarily based on the length of time such
companies have supplied the Company. In the event of a delay or disruption in
the supply of bicycles, parts and accessories, the Company believes that it
could arrange for alternative bicycle manufacturing sources within a reasonable
time period on terms that would not be materially different from those currently
available to the Company. Accordingly, the Company does not believe that the
loss of any single source supplier would have material adverse effect on the
Company's business. However, the future success of the Company will depend on
its ability to maintain close relationships with its current suppliers and to
develop long-term relationships with other suppliers that satisfy the Company's
requirements for price, quality and flexibility in scheduling production. See
"Certain Factors That May Affect the Company's Business and Future Results."
The Company's manufacturing operations consist of the forming and welding of the
bicycle frame and fork components for its premium-priced mountain, juvenile BMX
and road bicycles and the assembly of the bicycle frame, fork, components and
accessories. The Company also assembles a relatively small number of bicycles
from frames supplied by independent suppliers. The Company's remaining bicycles
are manufactured to the Company's specifications by independent factories, most
of which are located in Taiwan. The Company monitors its manufacturing process
and tests products that are produced to assure quality and reliability. The
Company also tests externally sourced components and employs field engineers and
independent representatives to oversee the manufacturing operations of the
Company's foreign suppliers to assure compliance with the Company's quality
control standards. The Company's sourcing strategy is to independently develop
innovative product designs and specifications and to require adherence to strict
quality standards by its suppliers. In addition, the Company maintains a stress
and destructive testing laboratory in its Longmont, Colorado facility to aid it
in the design of reliable, high quality products. The Company's parts and
accessories are currently manufactured by various third parties, most of whom
are located in Taiwan and Japan. A substantial majority of the Company's
multi-speed bicycles contain componentry (e.g., derailleurs, brakes, cranks)
that is supplied on a purchase order basis by a Japanese manufacturer which has
a leading position worldwide for the supply of such parts.
The Company's products are manufactured according to plans that reflect
management's estimates of product sales based on recent sales results, current
economic conditions, customer orders and prior experience with manufacturing
sources. In order to be able to quickly fill orders from bicycle dealers, the
Company's wholly-owned distributors maintain significant inventories. The
average lead-time from the commitment to purchase products through production
and shipment ranges from approximately 90 to 120 days in the case of bicycles,
parts and accessories. The Company believes that the close relationships with
its principal manufacturing sources allow it to introduce innovative product
designs and alter production in response to the market demand for its products.
PRODUCT RECALL
In 1995, the Company initiated a product recall which involved a suspension fork
manufactured by a foreign supplier and assembled by a foreign manufacturer on a
mountain bicycle model distributed by the Company. The Company sold
approximately 3,900 bicycles that included the suspension fork and had
approximately 4,000 additional bicycles with the suspension fork in inventory.
The Company has discontinued the use of this suspension fork and purchased
upgraded replacement forks for the 7,900 bicycles. The Company has attempted to
contact all the affected consumers directly, and instituted a program whereby
independent bicycle dealers were encouraged to contact affected consumers and
install upgraded replacement forks provided by the Company. Approximately 2,200
of the bicycles sold and all of the affected bicycles in inventory have had the
suspension fork replaced with the upgraded replacement fork. According to
regulations promulgated by the Consumer Product Safety Commission ("CPSC"), the
Company, as a manufacturer of consumer goods, is required to advise the CPSC of
defects in its products that could create a substantial risk of injury to
consumers.
6
<PAGE> 7
The CPSC also has the authority to require a manufacturer or supplier to recall
a product, which may involve product repair, replacement or refunds.
Accordingly, upon discovery of the defects in the suspension fork, the Company
provided the CPSC with information about the defective suspension fork and
worked with the CPSC on the Company's voluntary recall. The CPSC has given
notice that they are no longer monitoring the recall. The Company has received a
number of claims for personal injuries allegedly incurred as a result of the
suspension fork. The Company is seeking reimbursement from the manufacturer of
the fork, the manufacturer of the bicycle and their respective insurance
carriers for expenses and damages incurred by the Company related to the recall
and related claims. One insurance carrier has accepted liability for some of the
claims and is investigating others. Even though the Company has filed suit
against the manufacturer of the fork and the manufacturer of the bicycle to
collect the balance of monies owed, there can be no assurance, however, that any
such reimbursement will be made. In such event, the Company does not expect
warranty expenses related to the recall and expenses or damages related to such
claims to be material to the Company's results of operations, financial
condition and liquidity.
Although the Company has a limited history of involvement in product recalls and
has not had a recall on any of the products which it has manufactured, the
Company may be involved in additional product recalls in the future which could
have a material adverse effect on the Company's business, results of operations,
financial condition and liquidity. See "Certain Factors That May Affect the
Company's Business and Future Results."
INTELLECTUAL PROPERTY
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 is the owner of numerous domestic and
international registrations and applications.
The Company currently holds a number of United States patents. Although the
Company believes that such patents are useful in maintaining the Company's
competitive position, it considers other factors such as the Company's
reputation for technology, innovation, quality products, customer service,
dealer support, brand name recognition and distribution network to be its
primary competitive advantages. It is the practice of the Company to require its
employees involved in research and product development activities to execute
confidentiality and invention assignment agreements.
EMPLOYEES
At December 31, 1996, the Company had 734 full-time and part-time employees. On
March 22, 1996, the National Labor Relations Board conducted a certification
election in a unit consisting of some warehouse employees employed by the
Company's Riteway Distributors Central, Inc. subsidiary at its St. Louis,
Missouri location. In that election, the warehouse employees in that subsidiary
voted for representation by the Teamsters union. The results of the election
were certified by the National Labor Relations Board and, therefore, the Company
has an obligation to bargain with that union regarding wages, hours and other
terms and conditions of employment of the employees in that subsidiary. The
Company believes that its relations with its employees are good. The Company has
never suffered a material work stoppage or slowdown.
REGULATION
The Company is subject to Federal, state and local regulations concerning
consumer products, bicycles, the environment and occupational safety and health.
In general, the Company has not experienced difficulty complying with such
regulations. The Company believes that its facilities are in material compliance
with applicable environmental laws, and since inception, the Company has had no
material claims involving environmental matters.
7
<PAGE> 8
CERTAIN FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS AND FUTURE RESULTS
FORWARD-LOOKING STATEMENTS. THIS ANNUAL REPORT CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
THAT INVOLVE RISKS AND UNCERTAINTIES. IN ADDITION, THE COMPANY MAY FROM TIME TO
TIME MAKE ORAL FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS ARE UNCERTAIN AND MAY
BE IMPACTED BY THE FOLLOWING FACTORS. IN PARTICULAR, CERTAIN RISKS AND
UNCERTAINTIES THAT MAY IMPACT THE ACCURACY OF THE FORWARD-LOOKING STATEMENTS
WITH RESPECT TO REVENUES, EXPENSES AND OPERATING RESULTS INCLUDE, WITHOUT
LIMITATION, CYCLES OF DEALER ORDERS, GENERAL ECONOMIC CONDITIONS AND CHANGING
CONSUMER TRENDS, TECHNOLOGICAL ADVANCES AND THE NUMBER AND TIMING OF NEW PRODUCT
INTRODUCTIONS, SHIPMENTS OF PRODUCTS AND COMPONENTRY FROM FOREIGN SUPPLIERS, THE
TIMING OF OPERATING AND ADVERTISING EXPENDITURES AND CHANGES IN THE MIX OF
PRODUCTS ORDERED BY INDEPENDENT BICYCLE DEALERS. AS A RESULT, THE ACTUAL RESULTS
MAY DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS.
BECAUSE OF THESE AND OTHER FACTORS THAT MAY AFFECT THE COMPANY'S OPERATING
RESULTS, PAST FINANCIAL PERFORMANCE SHOULD NOT BE CONSIDERED AN INDICATOR OF
FUTURE PERFORMANCE, AND INVESTORS SHOULD NOT USE HISTORICAL TRENDS TO ANTICIPATE
RESULTS OR TRENDS IN FUTURE PERIODS.
ECONOMIC CONDITIONS; SUSTAINABILITY OF GROWTH. The Company's business is subject
to economic cycles and changing consumer trends. Purchases of discretionary
sporting goods tend to decline in periods of economic uncertainty. Any
significant decline in general economic conditions or continued uncertainties
regarding future economic prospects that affect consumer spending could have a
material adverse effect on the Company's business, results of operations,
financial condition and liquidity. In the past ten years, there has been a
renewed public interest in bicycling and fitness activities. There can be no
assurance that the public interest in bicycling and fitness activities will
continue, or that the Company will continue to grow or be able to sustain the
level of bicycle sales that it historically has achieved. Any general decline in
the size of the bicycle market or in a segment of the bicycle market in which
the Company competes, whether from general economic conditions, a decrease in
the popularity of bicycling or otherwise, could have a material adverse effect
on the Company's business, results of operations, financial condition and
liquidity.
TECHNOLOGICAL ADVANCEMENTS AND NEW PRODUCT INTRODUCTIONS. The bicycle industry,
in recent years, has been characterized by significant technological advances
and frequent new product introductions. The Company believes that the frequent
introduction of new, innovative bicycles, parts and accessories that respond
timely to changing consumer demands and trends will be critical to its future
success. In the past, the Company generally has been successful in the
introduction of its bicycles, parts and accessories. No assurance can be given,
however, that the Company will be able to continue to design and manufacture
products that will achieve commercial success.
QUARTERLY FLUCTUATIONS AND SEASONALITY. Operating results fluctuate on a
quarterly basis due to a variety of factors, including the cycles of dealer
orders, shipment of products from foreign suppliers, the number and timing of
new product introductions, the timing of operating and advertising expenditures
and changes in the mix of products ordered by dealers. Typically, the Company's
operating expenses are higher in the third quarter primarily due to annual
introductions of new bicycle models and participation in annual industry
tradeshows. In addition, the Company's business has seasonal elements based on
bicycle model years, weather, the year-end shopping season and other factors.
The Company believes that factors such as fluctuations in the quarterly
operating results could cause the price of the common stock to fluctuate
substantially.
COMPETITION. The market for bicycles, parts and accessories, both in the United
States and internationally, is highly competitive. In all of its product
categories, the Company competes with other manufacturers and distributors, some
of which have well-recognized brand names and substantial financial,
technological, distribution, advertising and marketing resources. In addition,
there are several bicycle manufacturers and component suppliers with substantial
resources that do not currently compete directly with the Company, but which
could pose significant competition to the Company in the future. There can be no
assurance that the Company will be able to compete successfully in the future.
8
<PAGE> 9
DEPENDENCE ON CERTAIN SUPPLIERS. As is common in the industry, a substantial
majority of the Company's multi-speed bicycles contain componentry supplied on a
purchase order basis by one Japanese manufacturer. Although such supplier has
not indicated any intention to limit or reduce sales of parts to the Company, if
it were to do so, the Company's business, results of operations, financial
condition and liquidity could be adversely affected. In addition, the Company
purchases substantially all of its bicycles that are manufactured overseas from
a limited group of manufacturers, which varies from year to year. The Company
has no long-term contracts with these suppliers and competes with other
companies for their production capacities. Although the Company has established
relationships with its principal suppliers and manufacturing sources, the
Company's future success will depend on its ability to maintain such
relationships and to develop relationships with new suppliers and manufacturing
sources for the production and sale of bicycles, parts and accessories. In the
event of a delay or disruption in the supply of bicycles, parts and accessories,
the Company believes that suitable alternative suppliers could be obtained,
although the transition to other suppliers could result in significant
production delays. Any significant delay or disruption in the supply of
bicycles, parts and accessories could have a material adverse effect on the
Company's business, results of operations, financial condition and liquidity.
PRODUCT LIABILITY. Because of the nature of the Company's business, the Company
at any particular time is a defendant in a number of product liability lawsuits
and expects that this will continue to be the case in the future. These lawsuits
generally seek damages, sometimes in substantial amounts, for personal injuries
allegedly sustained as a result of defects in the Company's products. Although
the Company maintains product liability insurance, due to the uncertainty as to
the nature and extent of manufacturers' and distributors' liability for personal
injuries, there can be no assurance that the product liability insurance
maintained by the Company is or will be adequate to cover product liability
claims or that the applicable insurer will be solvent at the time of any covered
loss. In addition, due to deductibles, self-retention levels and aggregate
coverage amounts applicable under the Company's insurance policies, the Company
will bear responsibility for a significant portion, if not all, of the defense
costs (which include attorneys' fees and expenses incurred in the defense of any
claim) and the related payments to satisfy any judgments associated with any
claim asserted against the Company in excess of any applicable coverage. The
successful assertion or settlement of an uninsured claim, the settlement of a
significant number of insured claims or a claim exceeding the Company's
insurance coverage could have a material adverse effect on the Company's
business, results of operations, financial condition and liquidity. In addition,
there can be no assurance that insurance will remain available, or if available,
will not be prohibitively expensive.
ITEM 2. PROPERTIES
The following chart sets forth all of the facilities leased by the Company and
each distribution subsidiary:
<TABLE>
<CAPTION>
Approximate Date of Termination
Purpose Location Square Footage of Lease
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GT Corporate Headquarters and Assembly
and Riteway West Distribution Santa Ana, California 150,000 June 2, 2003
GT Bicycles Manufacturing and
Research and Product Development Santa Ana, California 31,000 November 30, 1999
GT Bicycles and Research and Development
and Manufacturing Longmont, Colorado 5,600 Monthly
GT Bicycles Harley Davidson Project Boulder, Colorado 350 Monthly
GT Bicycles Administrative Office Hasselt, Belgium 250 Monthly
Riteway Central Distribution St. Louis, Missouri 86,500 April 30, 2001
Riteway Central Distribution Jacksonville, Florida 156,000 July 31, 1999
Riteway East Distribution Cheektowaga, New York 84,000 January 15, 2011
Riteway North Central Distribution Sheboygan, Wisconsin 50,000 July 9, 2000
Riteway Japan Distribution Tokyo, Japan 1,400 January 28, 1999
</TABLE>
9
<PAGE> 10
<TABLE>
<S> <C> <C> <C>
Riteway Japan Distribution Saitama, Japan 10,800 June 30, 1999
Riteway France Distribution Nancy, France 23,000 March 31, 2005
Caratti Distribution Bristol, United Kingdom 40,000 July 29, 1998
Caratti Distribution Bristol, United Kingdom 1,200 May 20, 2001
Caratti Distribution Cheltenham, United Kingdom 2,000 June 21, 1999
</TABLE>
In January 1997, the Company signed a new lease on a building in Santa Ana,
California with approximately 355,000 square feet which terminates January 31,
2007. Concurrent with the execution of the new lease, the Company subleased the
above noted Santa Ana location leases and plans to move out of these facilities
by the end of May 1997 and consolidate its California operations into this new
Santa Ana site.
The Company believes that its present facilities are adequate to meet its
anticipated needs for the next 12 months and suitable space will be available on
reasonable terms, if needed, to accommodate expansion.
ITEM 3. LEGAL PROCEEDINGS
Because of the nature of the Company's business, the Company at any particular
time is a defendant in a number of product liability lawsuits and expects that
this will continue to be the case in the future. These lawsuits generally seek
damages, sometimes in substantial amounts, for personal injuries allegedly
sustained as a result of defects in the Company's products. Although the Company
maintains product liability insurance, due to the uncertainty as to the nature
and extent of manufacturers' and distributors' liability for personal injuries,
there is no assurance that the product liability insurance maintained by the
Company is or will be adequate to cover product liability claims or that the
applicable insurer will be solvent at the time of any covered loss. In addition,
due to deductibles, self-retention levels and aggregate coverage amounts
applicable under the Company's insurance policies, the Company will bear
responsibility for a significant portion, if not all, of the defense costs
(which include attorney fees and expenses incurred in the defense of any claims)
and the related payments to satisfy any judgments associated with any claim
asserted against the Company in excess of any applicable coverage. The
successful assertion or settlement of an uninsured claim, the settlement of a
significant number of insured claims or a claim exceeding the Company's
insurance coverage could have a material adverse effect on the Company's
business, results of operations, financial condition and liquidity. In addition,
there can be no assurance that insurance will remain available, or if available,
will not be prohibitively expensive.
The Company has no material pending legal proceedings, other than routine
litigation incidental to its business including the aforementioned product
liability lawsuits.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1996.
10
<PAGE> 11
PART II
ITEM 5. MARKET VALUE OF THE REGISTRANT'S COMMON STOCK
The Company's Common Stock is traded on the over-the-counter market (The Nasdaq
National Market) under the symbol GTBX. The following table sets forth, for the
periods indicated, the range of high and low closing sales prices for the
Company's Common Stock. The Company's Common Stock first began trading on the
Nasdaq National Market on October 18, 1995.
<TABLE>
<CAPTION>
High Low
--------- ---------
<S> <C> <C>
Fiscal 1995:
------------
4th Quarter $ 14.75 $ 8.50
Fiscal 1996:
------------
1st Quarter $10.875 $ 7.750
2nd Quarter $16.375 $ 9.375
3rd Quarter $15.750 $10.125
4th Quarter $14.375 $11.500
</TABLE>
There were approximately 201 security holders of record as of March 20, 1997.
The Company has not paid dividends and intends to retain earnings for use in the
business for the foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table contains certain selected consolidated financial data and is
qualified by, and should be read in conjunction with, the Consolidated Financial
Statements and Notes thereto and "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations." The selected data as of
December 31, 1996 and 1995 and the selected data for the years ended December
31, 1996, 1995 and 1994 are derived from the Consolidated Financial Statements
of the Company appearing elsewhere herein, which financial statements have been
audited by KPMG Peat Marwick LLP, independent certified public accountants
("KPMG"). The selected data for the period from November 12, 1993 through
December 31, 1993 are derived from the Consolidated Financial Statements of the
Company not included in this Form 10-K, which financial statements have been
audited by KPMG. The selected data for the period from January 1, 1993 through
November 11, 1993 and for the year ended December 31, 1992 are derived from the
Consolidated Financial Statements of the Predecessor not included in this Form
10-K, which financial statements have been audited by KPMG.
11
<PAGE> 12
<TABLE>
<CAPTION>
The Company The Predecessor(1)
----------------------------------------------------- ------------------------
November 12, January 1,
Year ended Year ended Year ended through through Year ended
December 31, December 31, December 31, December 31, November 11, December 31,
1996 1995 1994 1993 1993 1992
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(in thousands, except per share data)
SUMMARY OF OPERATIONS
Net sales ............................... $ 208,351 $ 168,933 $ 145,749 $ 20,498 $ 103,250 $ 93,014
Cost of sales ........................... 149,147 124,524 107,690 17,061 78,165 71,292
--------- --------- --------- --------- --------- ---------
Gross profit ............................ 59,204 44,409 38,059 3,437 25,085 21,722
Selling, general and administrative
expenses ............................. 38,450 28,429 25,962 3,491 17,427 15,190
Amortization of intangibles and
deferred financing costs ............. 739 3,313 5,107 419 67 139
Nonrecurring charge ..................... -- 4,707 -- -- -- --
--------- --------- --------- --------- --------- ---------
Operating income (loss) ................. 20,015 7,960 6,990 (473) 7,591 6,393
Life insurance proceeds, net ............ (1,276) -- -- -- -- --
Interest expense ........................ 3,828 6,070 5,233 673 1,374 1,332
--------- --------- --------- --------- --------- ---------
Income (loss) before taxes and
extraordinary item .................. 17,463 1,890 1,757 (1,146) 6,217 5,061
Income tax expense (benefit) ............ 5,887 1,028 875 (430) 2,532 1,982
--------- --------- --------- --------- --------- ---------
Income (loss) before extraordinary item.. 11,576 862 882 (716) 3,685 3,079
--------- --------- --------- --------- --------- ---------
Extraordinary loss from early
extinguishment of debt ............... -- (1,146) -- -- -- --
--------- --------- --------- --------- --------- ---------
Net income (loss) ....................... $ 11,576 $ (284) $ 882 $ (716) $ 3,685 $ 3,079
========= ========= ========= ========= ========= =========
Net income per share before
extraordinary item(2) ................ $ 1.17 $ 0.12 $ 0.12
Net loss per share for
extraordinary item(2) ................ -- (0.16) --
--------- --------- ---------
Net income (loss) per share(2) .......... $ 1.17 $ (0.04) $ 0.12
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1996 1995 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(in thousands)
FINANCIAL POSITION
Working capital .................... $107,391 $ 72,789 $ 50,526 $ 40,694
Total assets ....................... 156,181 96,693 86,252 77,689
Long-term debt, net of current
portion ......................... 74,050 40,257 66,381 60,543
Total stockholder's equity ......... 59,153 46,712 6,780 5,898
</TABLE>
____________________________
(1) Effective November 12, 1993, the Company acquired the Predecessor in a
leveraged acquisition. The acquisition was accounted for as a purchase
resulting in a new basis for the assets acquired.
(2) Earnings per share for the Company for the period November 12, 1993 through
December 31, 1993 is not presented due to the non-comparable period
presented. Earnings per share for the Predecessor for the period January 1,
1993 through November 11, 1993 and for the year ended December 31, 1992 is
not presented due to the non-comparable capital structure.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion and analysis set forth below contains trend analysis and other
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements as a result of the following
factors, among others: cycles of dealer orders, general economic conditions and
changing consumer trends, technological advances and the number and timing of
new product introductions, shipments of products and componentry from foreign
suppliers, the timing of operating and advertising expenditures and changes in
the mix of products ordered by independent bicycle dealers. See "Item 1.
Business - Certain Factors That May Affect the Company's Business and Future
Results."
12
<PAGE> 13
OVERVIEW
The Company's gross margins in any period are affected by, among other factors,
the type and mix of products sold and by the breakdown between domestic and
international sales. Mountain bicycles, which represent the largest portion of
the Company's net sales, are characterized generally by relatively lower gross
margins than juvenile BMX bicycles and parts and accessories sold by the
Company. Gross margins on sales to independent international distributors are
generally lower than gross margins on sales through the Company's distribution
network. However, the majority of international sales are shipped directly to
distributors in containers from the Company's suppliers in Taiwan and the
People's Republic of China and, therefore, the Company incurs significantly less
distribution and other expenses with regard to such sales.
1996 Life Insurance Proceeds, net of Guaranteed Severance Payments. Included in
net income for the year ended December 31, 1996, were net life insurance
proceeds of $1.3 million received by the Company following the death of its
former President and Chief Executive Officer, Richard Long, in July 1996. The
net proceeds consisted of a $2.0 million insurance settlement less guaranteed
payments owed to Richard Long's family of $0.7 million. See Note 13 of Notes to
Consolidated Financial Statements.
1995 Nonrecurring Charge and Extraordinary Loss From Early Extinguishment of
Debt. Concurrent with closing of the Company's initial public offering ("IPO")
on October 18, 1995, certain covenants not to compete from the 1993
reorganization were terminated resulting in a nonrecurring charge of
approximately $4.7 million in October 1995. The Company also used approximately
$37.0 million of the proceeds from the IPO to retire debt which resulted in the
acceleration of the amortization of related deferred financing costs and a
debenture discount totaling approximately $1.1 million, net of taxes. This item
has been accounted for as an extraordinary loss from early extinguishment of
debt in the 1995 Consolidated Financial Statements. See Notes 5 and 12 of Notes
to Consolidated Financial Statements.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of operations data
as a percentage of net sales, for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Net sales ......................................................... 100.0% 100.0% 100.0%
Cost of sales ..................................................... 71.6 73.7 73.9
------- ------- -------
Gross profit ...................................................... 28.4 26.3 26.1
Selling, general and administrative expenses ...................... 18.4 16.8 17.8
Amortization of intangibles and deferred financing costs .......... 0.4 2.0 3.5
Nonrecurring charge ............................................... -- 2.8 --
------- ------- -------
Operating income .................................................. 9.6 4.7 4.8
Life insurance proceeds, net ...................................... (0.6) -- --
Interest expense .................................................. 1.8 3.6 3.6
------- ------- -------
Income before taxes and extraordinary item ........................ 8.4 1.1 1.2
Income tax expense ................................................ (2.8) (0.6) (0.6)
------- ------- -------
Income before extraordinary item .................................. 5.6 0.5 0.6
Extraordinary loss from early extinguishment of debt .............. -- (0.7) --
------- ------- -------
Net income (loss) ................................................. 5.6% (0.2)% 0.6%
======= ======= =======
</TABLE>
COMPARISON OF 1996 TO 1995
Net Sales. Net sales for 1996 increased by 23.3%, or $39.4 million, to $208.4
million. The increase in net sales was attributable to a $5.8 million and $17.9
million increase in domestic and foreign sales of bicycles, respectively, and a
$8.6 million and $7.1 million increase in domestic and foreign sales of parts
and accessories, respectively. The increase in domestic net sales was primarily
attributable to a general increase in the demand for the Company's juvenile
bicycles, parts and accessories. The increase in foreign net sales was primarily
attributable to the inclusion of the Company's new distributors in Japan, France
and the United Kingdom in its results of operations as well as a general
increase in sales to independent international distributors.
13
<PAGE> 14
Gross Profit. Gross profit for 1996 increased as a percentage of net sales from
26.3% to 28.4%. This increase as a percentage of net sales was attributable to a
change in product mix, which included an increase in sales of higher margin
juvenile bicycles and parts and accessories, coupled with higher gross profit
margins in all bicycle product categories which were the result of improved
manufacturing efficiencies and sourcing.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for 1996 increased by $10.0 million to $38.5 million and
increased as a percentage of net sales from 16.8% to 18.4%. This increase was
primarily due to increased administrative costs as a result of the addition of
the new foreign distributors in Japan, France and the United Kingdom, the
inclusion of a full year of administrative costs for Riteway North Central,
Inc., which was purchased in July 1995, and additional personnel costs and
associated overhead required to support the increased revenues of the Company.
Amortization of Intangibles and Deferred Financing Costs. Amortization of
intangibles and deferred financing costs decreased by $2.6 million in 1996 and
decreased as a percentage of net sales from 2.0% to 0.4%. The decrease was
primarily attributable to the termination of certain covenants not to compete
and the acceleration of amortization of related deferred financing costs
associated with a senior term loan in connection with the Company's IPO and the
application of the net proceeds. As a result, amortization of the covenants not
to compete, deferred financing costs on the senior term loan and an unamortized
discount on the senior subordinated debenture were terminated in October 1995.
This decrease was partially offset by the increased amortization of goodwill
from the acquisition of Caratti in July 1996.
Nonrecurring Charge. The nonrecurring charge in 1995 represents a charge taken
by the Company in October 1995 for the termination of certain covenants not to
compete as discussed above. As a result, the Company incurred a $4.7 million
charge in the fourth quarter of 1995. There was no such charge in 1996.
Operating Income. Operating income for 1996 increased by $12.1 million and
increased as a percentage of net sales from 4.7% to 9.6% due to improved gross
profit margins, the elimination of the nonrecurring charge as discussed above
and the reduction of amortization of intangibles and deferred financing costs as
discussed above.
Life Insurance Proceeds, net. Included in the net income for 1996 were net life
insurance proceeds of $1.3 million that the Company received following the death
of former President and Chief Executive Officer, Richard Long, in July 1996. The
net proceeds consisted of a $2.0 million insurance settlement less guaranteed
payments owed to Richard Long's family of $0.7 million. There was no such item
in 1995.
Interest Expense. Interest expense decreased by $2.2 million in 1996 and
decreased as a percentage of sales from 3.6% to 1.8%. The decrease was
attributable to a reduction in debt as proceeds from the IPO were used to retire
a portion of the Company's debt as well as decreased short-term interest rates
under the Company's new revolving credit facility which was obtained in November
1995. This decrease was partially offset by increased interest expense on
additional borrowings in 1996 which were incurred to fund acquisitions and the
expansion of the Company's domestic and foreign operations.
Income Tax Expense. The Company's effective tax rate was 33.7% in 1996 as
compared to 54.4% in 1995. The Company's effective tax rate in 1996 has been
affected by the non-deductibility of the amortization of goodwill and the
non-taxable life insurance proceeds received. The Company's effective tax rate
in 1995 has been affected by the non-deductibility of the amortization of
goodwill and the tax effect of the extraordinary loss from early extinguishment
of debt.
COMPARISON OF 1995 TO 1994
Net Sales. Net sales for 1995 increased by 15.9%, or $23.2 million, to $168.9
million. The increase in net sales was attributable to a $7.4 million increase
in domestic sales of bicycles and a $7.9 million increase in domestic sales of
parts and accessories. International sales also increased by $7.9 million, which
can be attributed to an increase in sales of mountain bicycles, juvenile
bicycles, parts and accessories. The increase in net sales was primarily
attributable to a general increase in the demand for the Company's higher-end
bicycles, parts and accessories.
Gross Profit. Gross profit for 1995 increased slightly as a percentage of net
sales from 26.1% to 26.3%. Gross profit for 1994 was adversely affected by a
$0.6 million adjustment to the cost basis of the inventory resulting from the
1993 reorganization. Excluding this adjustment, gross profit for 1995 as a
percentage of net sales decreased slightly from 26.5% to 26.3%. This decrease as
a percentage of net sales was primarily attributable to a change in product mix
with an increase in lower margin independent international distributor and
mountain bicycle sales, partially offset by an increase in sales of higher
margin parts and accessories.
14
<PAGE> 15
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for 1995 increased by $2.5 million, but decreased as a
percentage of net sales from 17.8% to 16.8%. This decrease as a percentage of
net sales was primarily the result of certain fixed expenses being allocated
over an increased sales base, offset partially by an increase in research and
product development expenses in 1995 and an increase in selling, general and
administrative expenses associated with the acquisition of the distributor,
Riteway North Central, Inc., in July 1995.
Amortization of Intangibles and Deferred Financing Costs. Amortization of
intangibles and deferred financing costs decreased by $1.8 million in 1995 and
decreased as a percentage of net sales from 3.5% to 2.0%. The decrease was
primarily attributable to the termination of certain covenants not to compete
and the acceleration of deferred financing costs. Effective upon the closing of
the Company's IPO in October 1995, the Company and the individuals subject to
the covenants not to compete resulting from a 1993 reorganization agreed to
terminate the covenants not to compete. In addition, the Company used proceeds
from the IPO to prepay a senior term loan and senior subordinated debenture. As
a result, amortization of the covenants not to compete, deferred financing costs
on the senior term loan and unamortized discount on the senior subordinated
debenture were terminated in October 1995. In addition, a portion of the
decrease was attributable to the fact that the covenants not to compete were
amortized on a sum-of-the-years digits basis. This decrease was partially offset
by the increased amortization of goodwill and covenants not to compete from the
acquisition of Riteway North Central, Inc. in July 1995.
Nonrecurring Charge. The nonrecurring charge in 1995 represents a charge taken
by the Company in October 1995 for the termination of certain covenants not to
compete as discussed above. Effective upon the closing of the Company's IPO in
October 1995, the Company and the individuals subject to the covenants not to
compete resulting from a 1993 reorganization agreed to terminate the covenants
not to compete. As a result, the Company incurred a $4.7 million charge in the
fourth quarter of 1995. There was no such charge in 1994.
Operating Income. Operating income for 1995 increased by $1.0 million, but
decreased slightly as a percentage of net sales from 4.8% to 4.7% due to the
nonrecurring charge discussed above.
Interest Expense. Interest expense increased by $0.8 million in 1995 and
remained constant as a percentage of sales at 3.6%. The increase was primarily
attributable to financing a higher amount of inventory and accounts receivable,
as well as increased short-term interest rates under the Company's senior term
loan and senior revolving credit facility.
Income Tax Expense. The Company's effective tax rate was 54.4% in 1995 as
compared to 49.8% in 1994. The Company's effective tax rate has been affected by
the non-deductibility of the amortization of goodwill and the tax effect of the
extraordinary loss from early extinguishment of debt.
Extraordinary Loss From Early Extinguishment of Debt. Effective upon the closing
of the Company's IPO, the Company prepaid a senior term loan and senior
subordinated debenture from the net proceeds of the offering. As a result, the
Company incurred $1.6 million and $0.5 million in extraordinary charges in the
fourth quarter of 1995 relating to the acceleration of deferred financing costs
associated with the senior term loan and the acceleration of the unamortized
discount on the senior subordinated debenture, respectively. The total
extraordinary charges of $2.1 million have been reported net of tax benefits of
approximately $1.0 million.
15
<PAGE> 16
QUARTERLY COMPARISONS
The following table sets forth certain quarterly consolidated statements of
operations data for the periods presented and such data as a percentage of net
sales. This quarterly information is unaudited and has been prepared on the same
basis as the annual consolidated financial statements and, in management's
opinion, reflects all adjustments consisting only of normal recurring
adjustments necessary to present fairly the information set forth therein. The
operating results for any quarter are not necessarily indicative of results for
any future period.
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1995 1995 1995 1995 1996 1996 1996 1996
-------- -------- -------- -------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Net sales ................................ $ 43,939 $ 37,777 $ 38,295 $ 48,922 $ 48,850 $ 44,114 $ 52,435 $ 62,952
Cost of sales ............................ 33,607 27,580 27,604 35,733 36,310 30,921 37,041 44,875
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit ............................. 10,332 10,197 10,691 13,189 12,540 13,193 15,394 18,077
Selling, general and
administrative expenses ............... 6,664 6,438 7,701 7,626 7,992 8,644 10,645 11,169
Amortization of intangibles and
deferred financing costs............... 1,063 1,003 942 305 135 136 243 225
Nonrecurring charge ...................... -- -- -- 4,707 -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Operating income ......................... 2,605 2,756 2,048 551 4,413 4,413 4,506 6,683
Life insurance proceeds, net ............. -- -- -- -- -- -- (1,276) --
Interest expense ......................... 1,743 1,780 1,628 919 730 737 1,047 1,314
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before taxes and
extraordinary item .................... 862 976 420 (368) 3,683 3,676 4,735 5,369
Income tax expense ....................... 382 433 186 27 1,473 1,471 1,095 1,848
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary item .................... 480 543 234 (395) 2,210 2,205 3,640 3,521
Extraordinary loss from early
extinguishment of debt ................ -- -- -- (1,146) -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) ........................ $ 480 $ 543 $ 234 $ (1,541) $ 2,210 $ 2,205 $ 3,640 $ 3,521
======== ======== ======== ======== ======== ======== ======== ========
PERCENTAGE OF NET SALES:
Net Sales ................................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Sales ............................ 76.5 73.0 72.1 73.0 74.3 70.1 70.6 71.3
-------- -------- -------- -------- -------- -------- -------- --------
Gross Profit ............................. 23.5 27.0 27.9 27.0 25.7 29.9 29.4 28.7
Selling, general and
administrative expenses ............... 15.2 17.0 20.1 15.6 16.4 19.6 20.3 17.7
Amortization of intangibles and
deferred financing costs .............. 2.4 2.7 2.5 0.6 0.3 0.3 0.5 0.4
Nonrecurring charge ...................... -- -- -- 9.6 -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Operating income ......................... 5.9 7.3 5.3 1.2 9.0 10.0 8.6 10.6
Life insurance proceeds, net ............. -- -- -- -- -- -- (2.4) --
Interest expense ......................... 3.9 4.7 4.2 1.9 1.5 1.7 2.0 2.1
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before taxes and
extraordinary item .................... 3.0 2.6 1.1 (0.7) 7.5 8.3 9.0 8.5
Income tax expense ....................... 0.9 1.1 0.5 0.1 3.0 3.3 2.1 2.9
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before extraordinary item .. 1.1 1.5 0.6 (0.8) 4.5 5.0 6.9 5.6
Extraordinary loss from early
extinguishment of debt ................ -- -- -- (2.3) -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) ........................ 1.1% 1.5% 0.6% (3.1)% 4.5% 5.0% 6.9% 5.6%
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
Operating results fluctuate on a quarterly basis due to a variety of factors,
including the cycles of dealer orders, shipment of products from foreign
suppliers, the number and timing of new product introductions, the timing of
operating and advertising expenditures and changes in the mix of products
ordered by dealers. Typically, the Company's operating expenses are higher in
the third quarter primarily due to annual introductions of new bicycle models
and participation in annual industry trade shows. In addition, the Company's
business has seasonal elements based upon bicycle model years, weather, the
year-end shopping season and other factors. The Company believes that factors
such as fluctuations in the quarterly operating results could cause the price of
the common stock to fluctuate substantially. See "Certain Factors That May
Affect the Company's Business and Future Results."
16
<PAGE> 17
INFLATION AND FOREIGN CURRENCY EXCHANGE
Inflation has not had a significant impact on the Company's operating results to
date. While a majority of the Company's payments for components and bicycles
purchased from foreign vendors and payments to the Company for its international
sales are made in U.S. dollars, a portion of payments made to vendors are made
in currencies other than the U.S. dollar. Currency fluctuations may adversely
affect prices paid by the Company for bicycle products. The Company from time to
time has entered into short-term, forward exchange contracts to hedge the impact
of foreign currency fluctuations on a small portion of specific purchase
commitments denominated in foreign currencies. See Note 2 of Notes to
Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operating cash needs primarily from bank and vendor
credit and cash generated from operations. In November 1995, the Company entered
into a domestic credit facility, as amended in August 1996, with a bank that
provides for a domestic revolving credit facility and a domestic term loan. The
Company also entered into separate credit agreements with the same bank to
provide separate revolving credit facilities to Riteway Japan, Riteway France
and Caratti.
The total amount of credit available under the domestic revolving credit
facility component of the domestic credit facility for advances and letters of
credit is limited to the lesser of $60.0 million or the Company's borrowing base
associated with accounts receivable and inventories, as defined by the
agreement, plus an additional $5.0 million available from January 1 through
April 30, $6.0 million available from August 1 through October 31 and $3.0
million available from November 1 through November 30 of each year. Subsequent
to December 31, 1996, the total credit available under the domestic revolving
credit facility was increased to $65.0 million from February 7, 1997 through
February 28, 1997, $80.0 million from March 1, 1997 through March 31, 1997,
$75.0 million from April 1, 1997 through April 30, 1997 and $65.0 million from
May 1, 1997 through July 31, 1997. Also subsequent to December 31, 1996, the
$5.0 million additional borrowing base availability from January 1 through April
30 was increased to $11.0 million from February 15, 1997 through March 31, 1997,
reduced to $5.0 million from April 1, 1997 through April 30, 1997 and expanded
to $3.0 million from May 1, 1997 through July 31, 1997. The borrowing base or
credit limit is reduced each month by $3.0 million and $3.5 million for Riteway
Japan and Riteway France, respectively, which represents the credit extended by
the bank to these locations. At December 31, 1996, the Company had $51.6 million
outstanding under the domestic revolving credit facility which incurs interest
at the bank's Reference Rate (as defined by the agreement) or other
miscellaneous rates. The domestic revolving credit facility matures on June 30,
1998. See Note 5 of Notes to Consolidated Financial Statements.
The domestic term loan component of the domestic credit facility obtained in
August 1996 of $17.0 million is payable in equal quarterly installments
commencing December 31, 1996 and matures on September 30, 2000. The domestic
term loan was made up of two disbursements: (1) $14.0 million for the purchase
of Caratti, and (2) $3.0 million for the repayment of Caratti's prior bank debt.
At December 31, 1996, the Company had $15.9 million in principal outstanding
under the domestic term loan which incurs interest at the bank's Reference Rate
(as defined by the agreement) or other miscellaneous rates. See Note 5 of Notes
to Consolidated Financial Statements.
The Riteway Japan credit facility consists of a $3.0 million revolving credit
facility with interest on borrowings payable monthly at the bank's base rate
plus 1.25%. The Riteway France credit facility consists of a $3.5 million
revolving credit facility with interest on borrowings payable monthly at the
bank's base rate plus 1.00%. The Caratti credit facility consists of a
multicurrency revolving credit facility, a multicurrency overdraft facility and
a multicurrency facility for the issuance of irrevocable commercial letters of
credit in an aggregate amount equal to the lesser of $10.0 million (or its
equivalent from time to time in optional currencies, as defined by the
agreement) or Caratti's borrowing base associated with accounts receivable and
inventories, as defined by the agreement. The amount individually available
under the irrevocable commercial letters of credit is $1.5 million (or its
equivalent from time to time in optional currencies, as defined by the
agreement). The overdraft facility is repayable on demand by the bank. Interest
on borrowings under the multicurrency revolving credit facility is payable
monthly at the sum of the MLA Cost (as defined by the agreement), a margin of
1.25% and LIBOR (as defined by the agreement). Interest on the multicurrency
overdraft facility is payable monthly at the bank's prevailing base rate plus
1.25%. The Riteway Japan, Riteway France and Caratti credit facilities mature on
June 30, 1998. At December 31, 1996, the amounts outstanding on the Riteway
Japan, Riteway France and Caratti facilities were $2.2 million, $3.4 million and
$4.5 million, respectively. See Note 5 of Notes to Consolidated Financial
Statements.
17
<PAGE> 18
The Company's operating activities used cash of approximately $15.7 million in
1996, $8.8 million in 1995 and $6.0 million in 1994. Inventories increased by
approximately $30.0 million in 1996 which includes inventory purchased in the
acquisitions of Caratti and Riteway France, $8.2 million in 1995 which includes
inventory purchased in the acquisition of Riteway North Central, Inc. and $6.1
million in 1994. The increases in inventories were primarily due to growth in
the Company's sales. The Company maintains increasing levels of inventory
primarily to offer a broad product line and to increase order fill-rates. Trade
accounts receivable increased by approximately $17.6 million in 1996 which
includes trade accounts receivable purchased in the acquisition of Caratti, $9.9
million in 1995 and $6.3 million in 1994. The Company's capital expenditures
totaled approximately $2.9 million in 1996 which includes property and equipment
purchased in the acquisitions of Caratti and Riteway France, $0.8 million in
Fiscal 1995 which includes property and equipment purchased in the acquisition
of Riteway Products North Central, Inc. and $0.9 million in 1994. In July 1996,
the Company obtained an overadvance credit of approximately $14.0 on its
domestic revolving credit facility that was used to purchase Caratti. In August
1996, the $14.0 million overadvance credit was rolled over into the domestic
term loan.
The Company anticipates that it will continue to rely on bank and vendor credit
and cash generated from operations in order to finance anticipated higher
inventory and accounts receivable levels. The Company believes that cash from
operations, its bank and vendor credit and its existing working capital will be
sufficient to satisfy the Company's anticipated working capital and capital
expenditure requirements through the next 12 months. Nonetheless, the Company
may seek additional sources of capital as necessary or appropriate to finance
acquisitions or otherwise finance the Company's operations. There can be no
assurance, however, that such funds, if needed, will be available.
Subsequent to December 31, 1996, the Company entered into a new operating lease
on a building in Santa Ana, California to consolidate its California operations
into one facility which should be completed by the end of May 1997. This new
lease terminates January 31, 2007 and based on 1996 monthly rent expense will
result in an incremental average annual increase in rent expense of
approximately $876,000. See Note 8 of Notes to Consolidated Financial
Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data of the Company required by this
Item are set forth at the pages indicated at Item 14(a)(1) and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
18
<PAGE> 19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required hereunder is incorporated by reference from the
sections entitled "Nominees" and "Other Executive Officers" of the Company's
Proxy Statement filed in connection with its 1997 Annual Meeting of Stockholders
to be held on June 3, 1997.
ITEM 11. EXECUTIVE COMPENSATION
The information required hereunder is incorporated by reference from the
sections entitled "Executive Compensation" of the Company's Proxy Statement
filed in connection with its 1997 Annual Meeting of Stockholders to be held on
June 3, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required hereunder is incorporated by reference from the
sections entitled "Security Ownership of Management and Certain Beneficial
Owners" of the Company's Proxy Statement filed in connection with its 1997
Annual Meeting of Stockholders to be held on June 3, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required hereunder is incorporated by reference from the
sections entitled "Executive Compensation" and "Compensation Committee
Interlocks and Insider Participation" of the Company's Proxy Statement filed in
connection with its 1997 Annual Meeting of Stockholders to be held on June 3,
1997.
19
<PAGE> 20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
Index to Financial Statements Page No.
----------------------------- --------
Independent Auditors' Report................................ F-1
Consolidated Balance Sheets................................. F-2
Consolidated Statements of Operations....................... F-3
Consolidated Statements of Stockholders' Equity............. F-4
Consolidated Statements of Cash Flows....................... F-5
Notes to Consolidated Financial Statements.................. F-6
(a)(2) Financial Statement Schedules
Index to Financial Statement Schedules Page No.
-------------------------------------- --------
Independent Auditors' Report on Financial Statement Schedule F-19
Schedule II - Valuation and Qualifying Accounts............. F-20
All other schedules are omitted because they are not required or the
required information is included in the financial statements or
notes thereto.
20
<PAGE> 21
(a)(3) Exhibits
Index to Exhibits
-----------------
<TABLE>
<CAPTION>
Exhibit No. Description Location
----------- ----------- --------
<S> <C> <C>
3.4 Amended and Restated Certificate of Incorporation (1)
3.6 Restated Bylaws of the Company (1)
3.7 Specimen Certificate of Common Stock. (1)
10.1 Form of Indemnification Agreement between the officers and (1)
directors and the Company.
10.2 Sponsorship Agreement between the U.S. Cycling Federation (1)
and GT Bicycles, California, Inc. (the "Predecessor"), dated
January 19, 1993.
10.3 Employment Agreement between the Predecessor and Michael (1)
Haynes, dated September 27, 1993.
10.4 Employment Agreement between the Predecessor and William (1)
Duehring, dated September 27, 1993.
10.5 Employment Agreement between the Predecessor and William (1)
Galloway, dated September 27, 1993.
10.7 Employment Agreement between the Predecessor and Gary (1)
Turner, dated September 27, 1993.
10.15 Amendment and Restatement of Stockholders Agreement among (1)
the Company, Bain Capital Fund IV, L.P., Bain Capital Fund
IV-B, L.P., BCIP Associates, BCIP Trust Associates, L.P.,
Jackson National Life Insurance Company, Richard W. Long,
Gary Turner, Michael Haynes, William Galloway and William
Duehring, dated November 12, 1993 and Amendment thereto
dated September 28, 1995.
10.18 Standard Industrial/Commercial Single-Tenant Lease between (1)
The Equitable Life Assurance Society of the United States and
the Predecessor for the property located at 3100 West
Segerstrom Avenue, Santa Ana, California, dated June 3, 1993.
10.19 Lease by and between Parkway Associates, L.P., a Wisconsin (1)
limited partnership, and Riteway North, for the property located
at 2932 Behrens Parkway, Sheboygan, Wisconsin, dated July
10, 1995.
10.20 Standard Industrial/Commercial Multi-Tenant Lease between (1)
Gates-Warner and the Company, for the property located at
1303 East Warner Avenue, Santa Ana, California, dated May
30, 1995.
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
<S> <C> <C>
10.21 Standard Industrial/Commercial Multi-Tenant Lease between (1)
Yale Street Associates and the Predecessor for the property
located at 2330 South Yale Street, Santa Ana, California, dated
October 14, 1994.
10.24 Lease Agreement by and between Herbert O. Jones and Virginia (1)
F. Jones and the Predecessor for the property located at 711 1st
Avenue, Longmont, Colorado, dated September 1, 1992.
10.27 Incentive Stock Option, Nonqualified Stock Option and (1)
Restricted Stock Purchase Plan 1993.
10.28 Form of Incentive Option Agreement. (1)
10.29 GT Bicycles, Inc. Profit Sharing Plan (Amended and Restated), (1)
dated January 1, 1989.
10.30 First Amendment to GT Bicycles, Inc. Profit Sharing Plan, (1)
dated January 1, 1989.
10.31 Termination Agreement between Richard W. Long, Gary (1)
Turner, Michael Haynes, William Galloway and William
Duehring and the Company, dated August 11, 1995.
10.32 Distributorship Agreement for Shimano Standard Bicycle (1)
Components, Shimano XTR(R) and Dura-Ace(R) Bicycle
Components by and between Shimano Inc. and Riteway
Products dated July 1, 1995.
10.33 GT Bicycles, Inc. 1995 Employee Stock Purchase Plan. (1)
10.40 Lease Agreement between 25 Dewberry Lane, Inc. and the (1)
Company for the property located at 25 Dewberry Lane,
Cheektowaga, New York, dated November 7, 1995.
10.41 Lease Agreement by and between Stone Mountain Industrial (2)
Park, Inc. and GT Bicycles, Inc. for property located at 8291
Forshee Drive, Westside Industrial Park, Jacksonville, Florida,
dated May 2, 1996.
10.42 Second Amended and Restated Credit Agreement (Receivables (3)
and Inventory) among the Company, GT Bicycles California,
Inc., Riteway Products East, Inc., Riteway Products North
Central, Inc., Riteway Distributors Central, Inc., Riteway
Distributors, Inc. and Bank of America, N.T. and S.A., dated
August 12, 1996.
10.43 Agreement for the sale and purchase of the whole of the issued (4)
share capital of Caratti Sport Limited, dated July 3, 1996,
between the Company and Mark Brinley Aldo Edwards, Sarah
Edwards and Philip Brinley Antonio Edwards.
10.44 Amendment No. 1 to Employment Agreement between the *
Company and Michael Haynes, dated November 12, 1996.
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
<S> <C> <C>
10.45 Amendment No. 1 to Employment Agreement between the *
Company and William Duehring, dated November 12, 1996.
10.46 Employment Agreement between the Company and Robert C. *
Ippolito, dated June 10, 1996.
10.47 Employment Agreement between the Company and Charles *
Cimitile, dated November 7, 1996.
21.1 Subsidiaries of the Registrant. *
23.1 Consent of KPMG Peat Marwick LLP. *
24.1 Power of Attorney (included on the Signature Page of this
Annual Report on Form 10K).
</TABLE>
Executive Compensation Plans and Arrangements
---------------------------------------------
<TABLE>
<CAPTION>
Exhibit No. Description Location
----------- ----------- --------
<S> <C> <C>
10.1 Form of Indemnification Agreement between the officers and (1)
directors and the Company.
10.3 Employment Agreement between the Predecessor and Michael (1)
Haynes, dated September 27, 1993.
10.4 Employment Agreement between the Predecessor and William (1)
Duehring, dated September 27, 1993.
10.5 Employment Agreement between the Predecessor and William (1)
Galloway, dated September 27, 1993.
10.7 Employment Agreement between the Predecessor and Gary (1)
Turner, dated September 27, 1993.
10.27 Incentive Stock Option, Nonqualified Stock Option and (1)
Restricted Stock Purchase Plan 1993.
10.28 Form of Incentive Option Agreement. (1)
10.29 GT Bicycles, Inc. Profit Sharing Plan (Amended and Restated), (1)
dated January 1, 1989.
10.30 First Amendment to GT Bicycles, Inc. Profit Sharing Plan, (1)
dated January 1, 1989.
10.33 GT Bicycles, Inc. 1995 Employee Stock Purchase Plan. (1)
10.44 Amendment No. 1 to Employment Agreement between the *
Company and Michael Haynes, dated November 12, 1996.
10.45 Amendment No. 1 to Employment Agreement between the *
Company and William Duehring, dated November 12, 1996.
10.46 Employment Agreement between the Company and Robert C. *
Ippolito, dated June 10, 1996.
</TABLE>
23
<PAGE> 24
<TABLE>
<S> <C>
10.47 Employment Agreement between the Company and Charles *
Cimitile, dated November 7, 1996.
</TABLE>
- ----------------------
* Filed herewith.
(1) Incorporated by reference to the referenced exhibit number to the Company's
Registration Statement on Form S-1, Reg. No. 33-95802.
(2) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996.
(3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996.
(4) Incorporated by reference to the Company's Current Report of Form 8-K dated
July 3, 1996.
(b) Reports on Form 8-K
During the third quarter of 1996, the Company filed a Form 8-K, dated July
3, 1996, and a Form 8-K/A, dated September 16, 1996, regarding the
acquisition of Caratti Sport Limited.
This Form 10-K includes references to registered trademarks and brand names of
the Company and of manufacturers whose products are sold by the Company. The
Company's trademarks and brand names include GT(R), GT Bicycles(R), GT all
terra(R), Dyno(R), Powerlite(R), Auburn(R), Robinson(R), Crestline(R), Cycle
Design(R), GT Triple Triangle Design(R), Groove Tube(R) and Spin(R).
24
<PAGE> 25
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized, in the City of Santa Ana,
State of California, on March 28, 1997.
GT BICYCLES, INC.
By: /s/ MICHAEL C. HAYNES
-----------------------------------
Michael C. Haynes
President, Chief Executive Officer
and Director
We, the undersigned directors and officers of GT Bicycles, Inc., do hereby
constitute and appoint Michael C. Haynes our true and lawful attorney and agent,
with full powers of substitution to do any and all acts and things in our name
and behalf in our capacities as directors and officers and to execute any and
all instruments for us and in our names in the capacities indicated below, which
said attorney and agent may deem necessary or advisable to enable said
corporation to comply with the Securities Exchange Act of 1934, as amended, and
any rules, regulations and requirements of the Securities and Exchange
Commission, in connection with this Annual Report on Form 10-K, including
specifically but without limitation, power and authority to sign for us or any
of us in our names in the capacities indicated below, any and all amendments
hereto; and we do hereby ratify and confirm all that said attorney and agent,
shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ MICHAEL C. HAYNES President, Chief March 28, 1997
- ------------------------- Executive Officer and Director
Michael C. Haynes (Principal Executive Officer)
/s/ CHARLES CIMITILE Vice President, Finance and March 28, 1997
- ------------------------- Chief Financial Officer
Charles Cimitile (Principal Financial and Principal
Accounting Officer)
/s/ ROBERT C. GAY Director March 28, 1997
- -------------------------
Robert C. Gay
/s/ GEOFFREY S. REHNERT Director March 28, 1997
- -------------------------
Geoffrey S. Rehnert
25
<PAGE> 26
INDEPENDENT AUDITORS' REPORT
The Board of Directors
GT Bicycles, Inc.:
We have audited the consolidated balance sheets of GT Bicycles, Inc. and
subsidiaries as of December 31, 1996 and 1995 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of GT Bicycles, Inc.
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Orange County, California
February 19, 1997
F-1
<PAGE> 27
GT BICYCLES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
ASSETS (NOTE 5) 1996 1995
------------ ------------
<S> <C> <C>
Current assets:
Trade accounts receivable, net of allowance for doubtful accounts of
$1,633,804 and $1,177,300 at December 31, 1996 and 1995, respectively $ 51,842,764 $ 34,722,143
Inventories (note 3) 74,328,222 44,335,889
Income taxes receivable -- 1,065,153
Deferred income taxes (note 7) 1,915,000 1,558,000
Prepaid expenses and other assets 1,979,741 831,668
------------ ------------
Total current assets 130,065,727 82,512,853
Property, plant and equipment, net (notes 4 and 8) 5,023,101 2,840,811
Goodwill, net of accumulated amortization of $1,461,403 and $852,788
at December 31, 1996 and 1995, respectively 18,689,343 9,427,023
Covenants not to compete, net of accumulated amortization of $195,000 and
$65,000 at December 31, 1996 and 1995, respectively 455,000 585,000
Other assets (note 10) 1,948,052 1,327,089
------------ ------------
$156,181,223 $ 96,692,776
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (note 5) $ 4,250,000 --
Current portion of capital lease obligations (note 8) 376,697 172,301
Accounts payable 12,468,016 5,647,271
Accrued liabilities 4,518,794 3,904,405
Income taxes payable 1,060,945 --
------------ ------------
Total current liabilities 22,674,452 9,723,977
Long-term debt, net of current portion (note 5) 73,420,840 39,610,136
Capital lease obligations, net of current portion (note 8) 629,054 646,635
Deferred income taxes (note 7) 92,000 --
Other liabilities 212,240 --
------------ ------------
Total liabilities 97,028,586 49,980,748
Stockholders' equity (notes 5 and 6):
Preferred stock, $0.001 par value, 5,000,000 shares authorized, none
issued -- --
Common stock, $0.001 par value, 20,000,000 shares authorized,
9,781,097 and 9,764,586 shares issued and outstanding
at December 31, 1996 and 1995, respectively 9,781 9,765
Additional paid-in-capital 46,916,372 46,820,306
Retained earnings (accumulated deficit) 11,457,761 (118,043)
Foreign currency translation adjustment 768,723 --
------------ ------------
Total stockholders' equity 59,152,637 46,712,028
Commitments and contingencies (note 8)
Subsequent events (notes 5 and 8)
------------ ------------
$156,181,223 $ 96,692,776
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 28
GT BICYCLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Net sales $ 208,351,320 $ 168,933,302 $ 145,749,374
Cost of sales 149,147,403 124,524,440 107,690,275
------------- ------------- -------------
Gross profit 59,203,917 44,408,862 38,059,099
Selling, general and administrative expenses 38,450,313 28,428,975 25,961,752
Amortization of intangibles and deferred financing costs 738,610 3,312,777 5,106,541
Nonrecurring charge (note 12) -- 4,707,545 --
------------- ------------- -------------
Operating income 20,014,994 7,959,565 6,990,806
Life insurance proceeds, net of guaranteed severance
payments of $724,429 (note 13) (1,275,571) -- --
Interest expense (note 5) 3,827,910 6,070,143 5,234,148
------------- ------------- -------------
Income before taxes and extraordinary item 17,462,655 1,889,422 1,756,658
Income tax expense (note 7) 5,886,851 1,027,474 874,740
------------- ------------- -------------
Income before extraordinary item 11,575,804 861,948 881,918
Extraordinary loss from early extinguishment of
debt, net of income tax benefit of $978,461 (note 5) -- (1,145,858) --
------------- ------------- -------------
Net income (loss) $ 11,575,804 ($ 283,910) $ 881,918
============= ============= =============
Net income (loss) per common and common
equivalent share:
Income before extraordinary item $ 1.17 $ 0.12 $ 0.12
Extraordinary item -- (0.16) --
------------- ------------- -------------
Net income (loss) $ 1.17 ($ 0.04) $ 0.12
============= ============= =============
Weighted average common and
common equivalent shares 9,931,929 7,375,944 7,085,597
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 29
GT BICYCLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained Foreign
Additional Earnings Currency Total
Common Stock Paid-in (Accumulated Translation Stockholders'
Shares Amount Capital Deficit) Adjustment Equity
------------ ------------ ------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 6,600,000 $ 6,600 $ 6,607,645 ($ 716,051) $ -- $ 5,898,194
Net income -- -- -- 881,918 -- 881,918
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1994 6,600,000 6,600 6,607,645 165,867 -- 6,780,112
Cancellation of shares (note 6) (277,057) (277) -- -- -- (277)
Exercise of warrants (note 6) 291,643 292 -- -- -- 292
Issuance of common stock, net of offering
costs (note 6) 3,150,000 3,150 40,212,661 -- -- 40,215,811
Net loss -- -- -- (283,910) -- (283,910)
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1995 9,764,586 9,765 46,820,306 (118,043) -- 46,712,028
Exercise of options (note 6) 10,750 10 34,365 -- -- 34,375
Issuance of common stock for employee
stock purchase plan (note 6) 5,761 6 61,701 -- -- 61,707
Net income -- -- -- 11,575,804 -- 11,575,804
Foreign currency translation adjustment -- -- -- -- 768,723 768,723
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1996 9,781,097 $ 9,781 $ 46,916,372 $ 11,457,761 $ 768,723 $ 59,152,637
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 30
GT BICYCLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 11,575,804 $( 283,910) $ 881,918
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 1,594,565 4,084,398 5,745,363
Write-off of covenant not to compete -- 4,707,545 --
Extraordinary loss from early extinguishment of debt -- 2,124,319 --
Provisions for discounts and losses on accounts receivable 202,863 236,521 299,500
Deferred income taxes (265,000) 526,000 (1,330,000)
Foreign currency translation adjustment 768,723 -- --
Changes in assets and liabilities:
Trade accounts receivable (11,019,660) (9,868,226) (6,259,271)
Inventories (18,996,473) (6,001,588) (6,068,864)
Income taxes 1,776,444 (1,309,284) (56,523)
Prepaid expenses and other assets (966,295) (725,710) (163,278)
Accounts payable 434,348 (2,402,743) (421,235)
Accrued liabilities 211,498 91,972 1,372,237
Other liabilities 212,240 -- (39,092)
------------ ------------ ------------
Net cash used in operating activities (14,470,943) (8,820,706) (6,039,245)
Cash flows from investing activities:
Purchases of property, plant and equipment (2,408,219) (694,244) (850,541)
Investment in unconsolidated affiliate (500,000) -- (350,000)
Purchase of Riteway Products North Central, Inc. -- (3,266,570) --
Purchase of Caratti Sport Limited (13,427,494)
Purchase of Riteway Products France S.A.R.L (1,323,129) -- --
------------ ------------ ------------
Net cash used in investing activities (17,658,842) (3,960,814) (1,200,541)
Cash flows from financing activities:
Net borrowings under lines of credit 16,235,662 9,660,136 5,775,000
Borrowings from term loan 17,000,000 -- --
Repayments of term loan (1,062,500) (37,000,000) --
Payment of financing costs -- -- (156,500)
Proceeds from issuance of common stock and warrants 96,082 40,215,826 --
Principal payments on capital lease obligations (139,459) (167,631) --
------------ ------------ ------------
Net cash provided by financing activities 32,129,785 12,708,331 5,618,500
Net decrease in cash and cash equivalents -- (73,189) (1,621,286)
Cash and cash equivalents at beginning of year -- 73,189 1,694,475
------------ ------------ ------------
Cash and cash equivalents at end of year $ -- $ -- $ 73,189
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 3,691,695 $ 6,248,332 $ 5,457,732
============ ============ ============
Income taxes $ 4,446,806 $ 969,125 $ 2,274,104
============ ============ ============
Supplemental disclosures:
Purchase of Riteway Products North Central, Inc.
Inventories $ -- $ 2,217,262 $ --
Property, plant and equipment -- 77,000 --
Goodwill -- 323,000 --
Covenant not to compete -- 650,000 --
Prepaid expenses -- 2,517 --
Other liabilities -- (3,209) --
------------ ------------ ------------
Net cash used to acquire business $ -- $ 3,266,570 $ --
============ ============ ============
Purchase of Caratti Sport Limited
Working capital, other than cash $ 9,193,955 $ -- $ --
Property, plant and equipment 432,788 -- --
Goodwill 9,870,931 -- --
Long-term debt (5,887,542) -- --
Noncurrent liabilities (182,638) -- --
------------ ------------ ------------
Net cash used to acquire business $ 13,427,494 $ -- $ --
============ ============ ============
Purchase of Riteway Products France S.A.R.L
Inventories $ 1,201,309 $ -- $ --
Property, plant and equipment 53,601 -- --
Other assets 68,219 -- --
------------ ------------ ------------
Net cash used to acquire business $ 1,323,129 $ -- $ --
============ ============ ============
Purchase of equipment under capital lease obligations $ 142,918 $ -- $ 986,567
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 31
GT BICYCLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF THE COMPANY
GT Bicycles, Inc. (the "Company") is a leading designer, manufacturer and
marketer of mid- to premium-priced mountain and juvenile BMX bicycles sold
under the Company's brand names. The Company's Riteway Products and Caratti
distribution network is a leading distributor of the Company's bicycles, parts
and accessories, as well as parts and accessories of other manufacturers to
independent bicycle dealers.
The Company's business is highly dependent on products manufactured by foreign
suppliers located primarily in Taiwan and Japan and to a lesser extent the
People's Republic of China. The Company's business is subject to the risks
generally associated with doing business abroad, such as delays in shipment,
foreign governmental regulation, adverse fluctuations in foreign exchange
rates, difficulties in collecting receivables, embargoes, tariffs, exchange
controls, trade disputes, changes in economic conditions and political turmoil
in the countries in which the Company's manufacturing sources are located. The
Company cannot predict the effect that such factors will have on its business
arrangements with foreign suppliers or manufacturing sources. Any significant
delay or disruption in supply of bicycles or bicycle parts and accessories
could have a material adverse effect on the Company's business, results of
operations and financial condition.
The Company's name was changed from GT Holdings, Inc. to GT Bicycles, Inc. on
August 11, 1995.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements of the Company include the wholly owned
subsidiaries, GT Bicycles California, Inc., GT BMX Products, Inc., Riteway
Distributors, Inc., Riteway Distributors Central, Inc., Riteway Products East,
Inc., Riteway Products North Central, Inc., Riteway Products Japan K.K.
("Riteway Japan"), Riteway Products France S.A.R.L. ("Riteway France") and
Caratti Sport Limited ("Caratti"). Riteway Products North Central, Inc.,
Riteway France and Caratti were acquired in July 1995, April 1996 and July
1996, respectively, and have been accounted for under the purchase method of
accounting and, accordingly, the purchase price of each entity was allocated to
assets acquired based on their estimated fair values. The excess of the
purchase price over the fair market values net of assets acquired has been
recorded as goodwill. Riteway Products North Central, Inc., Riteway France and
Caratti have been included in the Company's consolidated results of operations
since the date of acquisition. Riteway Japan was formed in March 1996 as a
wholly-owned subsidiary of the Company. All significant intercompany balances
and transactions have been eliminated in consolidation.
Investments in affiliates, owned between 20% but not exceeding 50%, are
recorded under the equity method of accounting.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investments with original maturities of three
months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market ("net realizable value").
Cost is determined using the first-in, first-out ("FIFO") method.
Revenue Recognition
Revenue is recognized and estimated warranty expenses are accrued upon product
shipment.
F-6
<PAGE> 32
GT BICYCLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company contracts with independent overseas manufacturers for the
production of certain goods ordered by its international distributors and, in
most cases, arranges for the shipment of the goods directly to these
international distributors. All sales orders by international distributors are
placed directly with the Company. The Company recognizes revenue for these
transactions at the time of shipment of goods from the contract manufacturer.
For sales transactions with certain international distributors, the Company
arranges for a portion of the total sales price to be billed directly by the
contract manufacturer. The Company includes in net sales and cost of sales the
amount billed by the contract manufacturer and the amount paid by the Company
for the goods, respectively. The portion billed by the contract manufacturer
for these transactions is generally secured by an irrevocable letter of credit
opened by the international distributor.
In other cases, the contract manufacturer may grant credit to the international
distributor and the Company guarantees payments for the goods. There were no
credit arrangements outstanding at December 31, 1996 and 1995 between the
Company's contract manufacturers and its international distributors for which
the Company was contingently liable.
Research and Development Costs
Research and development costs are expensed as incurred. Selling, general and
administrative expenses of the Company include research and development
expenses of approximately $1,363,000, $1,410,000 and $873,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.
Advertising and Promotion Costs
Advertising costs are expensed as incurred. Promotion costs are expensed as
incurred or the first time the promotional event/advertising takes place.
Selling, general and administrative expenses of the Company include advertising
and promotion costs of approximately $3,914,000, $2,685,000 and $1,981,000 for
the years ended December 31, 1996, 1995 and 1994, respectively. At December
31, 1996 and 1995 there were no deferred promotional costs.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. The cost of additions and
improvements are capitalized, while maintenance and repairs are expensed as
incurred. Depreciation is computed on the straight-line method over the
estimated useful lives of the related assets. Assets held under capital leases
and leasehold improvements are amortized over the lesser of the estimated
useful lives of the assets or the related lease terms.
Intangible Assets
Intangible assets at December 31, 1996 and 1995 consist of covenants not to
compete from the acquisition of Riteway Products North Central, Inc. and
goodwill. Amortization of the covenants not to compete is recorded on a
straight-line basis over the related contractual term of five years.
Amortization of goodwill is recorded on a straight-line basis over 25 years.
In connection with the Company's initial public offering ("IPO") in October
1995, certain covenants not to compete and deferred financing costs were
written-off (see notes 5 and 12).
The Company recognized amortization expense on the covenants not compete,
goodwill and deferred financing costs of $130,000, $608,610 and $0 for the year
ended December 31, 1996, respectively, $2,750,965, $404,734 and $157,078 for
the year ended December 31, 1995, respectively, and $4,550,239, $357,892 and
$198,410 for the year ended December 31, 1994, respectively.
F-7
<PAGE> 33
GT BICYCLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of," the Company reviews identifiable intangibles and goodwill
for impairment whenever events or circumstances indicate the carrying amount
may not be recoverable based upon a comparison of the asset carrying value to
the expected future cash flows (undiscounted and without interest charges).
Income Taxes
The Company accounts for income taxes under the provisions of Financial
Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes."
SFAS No. 109 requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax assets
and liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
Forward Exchange Contracts
The Company from time to time enters into short-term, forward exchange
contracts to hedge the impact of foreign currency fluctuations on specific
purchase commitments denominated in foreign currencies. The gains and losses
on these contracts are included in the value of the assets which they were
intended to hedge. At December 31, 1996, the Company had forward exchange
contracts outstanding, with maturities of three months or less, to exchange
foreign currencies for approximately $3.3 million. At December 31, 1995, there
were no forward exchange contracts outstanding.
Stock Split
On March 23, 1994, the Company's Board of Directors approved a 600-for-1 Class
A and Class B common stock split. In connection with the Company's IPO, the
Company effected a recapitalization whereby all outstanding shares of Class A
and Class B common stock were converted into 11 shares of common stock. All
share and per share data have been restated to reflect the stock split and
recapitalization.
Use of Estimates
Company management has made a number of estimates and assumptions relating to
the reporting of assets and liabilities in conformity with generally accepted
accounting principles. Actual results could differ from these estimates.
Net Income (Loss) Per Share
The calculation of net income (loss) per share was determined by dividing the
net income (loss) by the weighted average common and common equivalent shares
outstanding when dilutive. The Company has granted certain stock options (see
note 6) which have been treated as common stock equivalents in computing both
primary and fully diluted net income per share. In accordance with Securities
and Exchange Commission Staff Accounting Bulletin No. 83, shares issued and
share options granted within one year of the IPO have been included in the
calculation of common share equivalents, using the treasury stock method to
determine the dilutive effect of the issuances, as if they were outstanding for
all periods presented even if they were antidilutive. The calculation of
common share equivalents assumes that the proceeds of common shares and share
options issued within one year of the IPO were used to repurchase common shares
at the IPO price of $14.00 per share. Primary earnings per share approximates
fully diluted earnings per share for all periods presented. All share data has
been retroactively adjusted for the stock split.
F-8
<PAGE> 34
GT BICYCLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Fair Value of Financial Instruments
In fiscal year 1995, the Company adopted Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments."
The carrying amount of cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities approximates fair value because of the
short-term maturity of these financial instruments. The carrying amount
reported for long-term debt approximates fair value because the underlying
instrument is a variable rate note that reprices frequently. The carrying
value of the Company's forward exchange contracts approximates fair value
because of the short-term maturity of these financial instruments of three
months or less.
Accounting for Stock-Based Compensation
Prior to January 1, 1996, the Company accounted for its stock option plan and
stock purchase plan in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and
related interpretations. As such, compensation expense would be recorded on
the date of grant only if the current market price of the underlying stock
exceeded the exercise price. On January 1, 1996, the Company adopted Statement
of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock- Based Compensation", which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply
the provisions of APB Opinion No. 25 and provide pro forma net income and pro
forma net income per share disclosures for employee stock option grants made in
1995 and future years as if the fair- value-based method defined in SFAS No.
123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
(3) INVENTORIES
A summary of the components of inventories follows:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
----------- -----------
<S> <C> <S>
Raw materials $ 94,635 $ 328,067
Work in process 3,658,968 1,436,613
Finished goods and component parts 70,574,619 42,571,209
----------- -----------
$74,328,222 $44,335,889
=========== ===========
</TABLE>
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
----------- -----------
<S> <C> <C>
Machinery and equipment $ 2,321,069 $ 884,586
Computer equipment 2,441,048 1,806,114
Vehicles 1,208,433 487,961
Office furniture and equipment 1,201,057 464,040
Leasehold improvements 537,978 447,408
----------- -----------
7,709,585 4,090,109
Less accumulated depreciation and amortization (2,686,484) (1,249,298)
----------- -----------
$ 5,023,101 $ 2,840,811
=========== ===========
</TABLE>
F-9
<PAGE> 35
GT BICYCLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(5) LONG-TERM DEBT
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Domestic revolving credit facility, secured by the
assets of the Company, due June 30, 1998. Interest is
payable monthly at various interest rates described
below (weighted average rate of 6.84% at December 31, $ 51,617,000 $ 39,610,136
1996)
Domestic term loan, secured by the assets of the
Company, due September 30, 2000. Interest is payable
monthly at various interest rates described below
(weighted average rate of 7.55% at December 31, 1996) 15,937,500 --
Riteway Japan revolving credit facility, secured by the
assets of the Company, due June 30, 1998. Interest is
payable monthly at rate described below (weighted
average rate of 1.92% at December 31, 1996) 2,235,999 --
Riteway France revolving credit facility, secured by the
assets of the Company, due June 30, 1998. Interest is
payable monthly at rate described below (weighted
average rate of 4.31% at December 31, 1996) 3,430,961 --
Caratti multicurrency revolving credit facility, secured
by the assets of Caratti, due June 30, 1998. Interest
is payable monthly at rate described below (weighted
average rate of 7.35% at December 31, 1996) 4,449,380 --
------------ ------------
77,670,840 39,610,136
Less current portion of domestic term loan (4,250,000) --
------------ ------------
$ 73,420,840 $ 39,610,136
============ ============
</TABLE>
In November 1995, the Company entered into a domestic credit facility, as
amended in August 1996, with a bank that provides for a domestic revolving
credit facility and a domestic term loan. The Company also entered into
separate credit agreements with the same bank to provide separate credit
facilities to Riteway Japan, Riteway France and Caratti.
The domestic credit facility requires the Company to maintain certain financial
ratios and other covenants, which, among other things, restrict other
indebtedness, capital expenditures and certain investments. The Company was in
compliance with all such requirements and covenants at December 31, 1996.
Domestic Revolving Credit Facility
The total amount of the credit available under the domestic revolving credit
facility component of the domestic credit facility for advances and letters of
credit is limited to the lesser of $60,000,000 or the Company's borrowing base
associated with accounts receivable and inventories, as defined by the
agreement, plus an additional $5,000,000 available from January 1 through April
30, $6,000,000 available from August 1 through October 31 and $3,000,000
available from November 1 through November 30 of each year. Subsequent to
December 31, 1996, the total credit available under the domestic revolving
credit facility was increased to $65,000,000 from February 7, 1997 through
February 28, 1997, $80,000,000 from March 1, 1997 through March 31, 1997,
$75,000,000 from
F-10
<PAGE> 36
GT BICYCLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
April 1, 1997 through April 30, 1997 and $65,000,000 from May 1, 1997 through
July 31, 1997. Also subsequent to December 31, 1996, the $5,000,000 additional
borrowing base availability from January 1 through April 30 was increased to
$11,000,000 from February 15, 1997 through March 31, 1997, reduced to
$5,000,000 from April 1, 1997 through April 30, 1997 and expanded to $3,000,000
from May 1, 1997 through July 31, 1997. The borrowing base or credit limit is
reduced each month by $3,000,000 and $3,500,000 for Riteway Japan and Riteway
France, respectively, which represents the credit extended by the bank to these
locations. The amount individually available under the commercial and standby
letters of credit is $15,000,000. The Company has the option to pay interest on
borrowings under the domestic revolving credit facility at the bank's Reference
Rate (as defined by the agreement), the LIBOR Rate plus the applicable margin
(as defined by the agreement), the Offshore Rate plus the applicable margin (as
defined by the agreement), or, until March 31, 1997, the CD Rate plus the
applicable margin (as defined by the agreement), or a combination thereof. The
Company must pay a commitment fee on a quarterly basis equal to .25% (per
annum) of the unused amount of the credit up to the revolving credit limit. At
December 31, 1996, the Company had no commercial or standby letters of credit
outstanding.
Domestic Term Loan
The domestic term loan component of the domestic credit facility with an
original amount of $17,000,000 is payable in equal quarterly installments
commencing December 31, 1996 and matures on September 30, 2000. The domestic
term loan is made up of two disbursements: 1) $14,000,000 for the purchase of
Caratti, and 2) $3,000,000 for the repayment of Caratti's prior bank debt. The
Company has the option to pay interest on borrowings under the domestic term
loan at the bank's Reference Rate (as defined by the agreement), the LIBOR Rate
plus 1.85% (as defined by the agreement), the Offshore Rate plus 1.85% (as
defined by the agreement), or a combination thereof.
Maturities of the domestic term loan debt are as follows:
<TABLE>
<CAPTION>
Year Ending
-----------
<S> <C>
1997 $ 4,250,000
1998 4,250,000
1999 4,250,000
2000 3,187,500
------------
$ 15,937,500
============
</TABLE>
Riteway Japan Credit Facility
The Riteway Japan credit facility consists of a $3,000,000 revolving credit
facility. Interest on borrowings under the revolving credit facility is payable
monthly at the bank's base rate plus 1.25%.
Riteway France Credit Facility
The Riteway France credit facility consists of a $3,500,000 revolving credit
facility. Interest on borrowings under the revolving credit facility is payable
monthly at the bank's base rate plus 1.00%.
Caratti Credit Facility
The Caratti credit facility consists of a multicurrency revolving credit
facility, a multicurrency overdraft facility and a multicurrency facility for
the issuance of irrevocable commercial letters of credit in an aggregate amount
equal to the lesser of $10,000,000 (or its equivalent from time to time in
optional currencies, as defined by the agreement) or Caratti's borrowing base
associated with accounts receivable and inventories, as defined by the
agreement. The amount individually available under the irrevocable commercial
letters of credit is $1,500,000 (or its equivalent from time to time in
optional currencies, as defined by the agreement). The overdraft facility is
repayable on demand by the bank. Interest on borrowings under the
multicurrency revolving credit facility is payable monthly at the sum of the
MLA Cost (as defined by the agreement), a margin of 1.25% and LIBOR (as
F-11
<PAGE> 37
GT BICYCLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
defined by the agreement). Interest on the multicurrency overdraft facility is
payable monthly at the bank's prevailing base rate plus 1.25%. Caratti must
pay a commitment fee on a quarterly basis equal to .25% (per annum) of the
unused amount of the credit up to $10,000,000. At December 31, 1996, the
Company had no commercial letters of credit outstanding.
Extraordinary Loss from Early Extinguishment of Debt
In October 1995, the Company repaid all outstanding indebtedness under a senior
term loan and senior subordinated debenture with the proceeds from the IPO (see
note 6). In connection with the repayment of the senior term loan and senior
subordinated debenture, the Company incurred substantial charges relating to
the acceleration of the amortization of related deferred financing costs
associated with the senior term loan and the acceleration of the unamortized
debenture discount associated with the senior subordinated debenture. The costs
related to this transaction of $1,145,858, net of tax benefits of $978,461, are
reflected in the consolidated statement of operations as an extraordinary loss
from early extinguishment of debt for the year ended December 31, 1995.
Under the terms of the senior subordinated debenture agreement, the Company
issued shares of its Class B common stock and warrants to purchase 347,424
shares of its Class B common stock to the holders of the debenture. In
connection with the Company's IPO, some of these warrants were exercised and
the remaining warrants were canceled (see note 6).
(6) STOCKHOLDERS' EQUITY
In October 1995, the Company completed its IPO, selling 3,150,000 shares of
common stock. The offering provided the Company with approximately $40,200,000
in proceeds, net of offering costs of approximately $800,000. The Company
utilized approximately $37,000,000 of the net proceeds to retire long-term debt
(see note 5).
In connection with the Company's IPO, the Company effected a recapitalization
whereby each share of Class A common stock and Class B common stock was
exchanged for one share of common stock. This recapitalization also reflects a
contribution to capital for the cancellation of 277,057 shares of Class A
common stock by certain stockholders of the Company, the exercise of a warrant
to purchase 291,643 shares of Class B common stock and the cancellation of the
remainder of the warrant to purchase 55,781 shares of Class B common stock by a
certain stockholder of the Company and an 11-for-1 stock split (see notes 2 and
5).
In addition to the common stock, the Company is authorized to issue up to
5,000,000 shares of $.001 par value preferred stock, in one or more series and
to fix the rights, preferences and privileges thereof, including voting rights,
term of redemption, redemption prices, liquidation preferences, number of
shares constituting any series or the designation of such series, without
further vote or action by the stockholders. As of December 31, 1996 and 1995,
there were no shares of preferred stock outstanding.
At December 31, 1996, the Company has two stock-based compensation plans, which
are described below. The Company applies APB Opinion No. 25 in accounting for
its stock-based compensation plans, accordingly, no compensation cost has been
recognized for its stock option plan in the financial statements. Compensation
cost that has been charged against income for the employee stock purchase plan
was $9,256 for the year ended December 31, 1996. There was no related
compensation cost in the year ended December 31, 1995. Had compensation cost
for these plans been determined based on the fair value at the grant dates
consistent with the method of SFAS No. 123, the Company's net income would have
been reduced to the pro forma amounts indicated as follows:
F-12
<PAGE> 38
GT BICYCLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C> <C>
Net income (loss) As reported $ 11,575,804 $ (283,910)
Pro forma $ 11,385,889 $ (305,894)
Net income (loss) per share As reported $ 1.17 $ (0.04)
Pro forma $ 1.17 $ (0.04)
</TABLE>
The pro forma net income (loss) and per share amounts reflect only options
granted in 1996 and 1995. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not reflected in the
pro forma amounts presented above because compensation cost is reflected over
the option's vesting period of four years and compensation cost for options
granted prior to January 1, 1995 is not considered.
Stock Option Plan
During November 1993, the Company adopted the GT Bicycles, Inc. Incentive Stock
Option, Nonqualified Stock Option and Restricted Stock Purchase Plan - 1993
(the "Plan"). The Plan contains two components: a stock option component and a
restricted share purchase component. The purpose of the Plan is to provide
incentives to selected employees, officers and non-employee directors of the
Company for increased efforts and successful achievements on behalf of the
Company.
The Plan, as amended, provides for the granting of up to 660,000 shares of the
Company's common stock in the form of stock options or rights to purchase
restricted shares. Awards or offers under the Plan, vesting periods and the
exercise price of the options or the purchase price for restricted shares are
determined by the Board of Directors of the Company. However, the exercise
price of the shares of common stock covered by the incentive stock options
shall not be less than the fair market value of such shares on the date the
incentive stock option was granted. Options granted under the Plan expire ten
years after the date of the grant. Offers to purchase restricted shares
terminate automatically if not accepted with ninety days. As of December 31,
1996, 93,989 shares remain available for grant.
Activity in the Plan is summarized as follows:
<TABLE>
<CAPTION>
Weighted-Average
Shares Exercise Price
--------- --------------
<S> <C> <C>
Options outstanding at December 31, 1993 148,500 $ 1.82
Granted -- N/A
Exercised -- N/A
Expired or canceled -- N/A
---------
Options outstanding at December 31, 1994 148,500 $ 1.82
Granted 84,511 $ 10.83
Exercised -- N/A
Expired or canceled -- N/A
---------
Options outstanding at December 31, 1995 233,011 $ 5.09
Granted 382,597 $ 10.91
Exercised (10,750) $ 3.20
Expired or canceled (49,597) $ 11.13
---------
Options outstanding at December 31, 1996 555,261 $ 8.60
=========
</TABLE>
F-13
<PAGE> 39
GT BICYCLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table summarizes information about the options outstanding under
the Plan at December 31, 1996:
<TABLE>
<CAPTION>
Weighted-
Options Average Options
Range of Outstanding at Weighted- Remaining Exercisable at Weighted-
Exercise December 31, Average Contractual December 31, Average
Prices 1996 Exercise Price Life 1996 Exercise Price
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.82 140,250 $1.82 6.88 years 140,250 $1.82
$7.75 - $12.00 405,011 $10.81 9.54 years 19,879 $8.91
$14.00 10,000 $14.00 9.50 years - -
--------- ---------
$1.82 - $14.00 555,261 $8.60 8.87 years 160,129 $2.70
========= =========
</TABLE>
The per share weighted-average fair value of stock options granted during 1996
and 1995 was $7.58 and $6.17 on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Expected life (years) 6 6
Risk-free interest rate 7% 7%
Volatility 50% 50%
Expected dividend yield - -
</TABLE>
Employee Stock Purchase Plan
In September 1995, the Company's Employee Stock Purchase Plan (the "Purchase
Plan") was adopted by the Board of Directors, covering an aggregate of 300,000
shares of common stock. The Purchase Plan was implemented by three-month
offerings with purchases occurring at three- month intervals commencing on
April 1, 1996. The Purchase Plan is administered by the Stock Option Committee
of the Board of Directors of the Company. Employees are eligible to
participate if they have been employed by the Company for at least one year.
The Purchase Plan permits eligible employees to purchase common stock through
payroll deductions, which may not exceed 15% of an employee's compensation.
The price of the stock purchased under the Purchase Plan is 85% of the lower of
the fair market value of common stock at the beginning of the three-month
offering period or on the applicable purchase date. No employee may purchase
more than 1,000 shares in any plan year. Employees may end their participation
in the offering at any time during the offering period, and participation ends
automatically on termination of employment. The Board may at any time amend or
terminate the Purchase Plan, except that no such amendment or termination may
adversely affect options previously granted under the Purchase Plan. The
Purchase Plan terminates in September 2005. As of December 31, 1996, 5,761
shares had been issued and 294,239 shares remain available for future issuance
under the Purchase Plan.
The per share weighted-average fair value of shares issued during 1996 was
$2.18 on the date of issuance using the Black Scholes option-pricing model with
the following weighted-average assumptions:
<TABLE>
<CAPTION>
1996
---------
<S> <C>
Expected life (years) 0.25
Risk-free interest rate 7%
Volatility 50%
Expected dividend yield -
</TABLE>
F-14
<PAGE> 40
GT BICYCLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal $ 5,005,076 $ 403,487 $ 1,707,827
State 988,500 97,987 496,913
Foreign 158,275 -- --
----------- ----------- -----------
6,151,851 501,474 2,204,740
----------- ----------- -----------
Deferred:
Federal (198,000) 386,000 (1,030,000)
State (67,000) 140,000 (300,000)
Foreign -- -- --
----------- ----------- -----------
(265,000) 526,000 (1,330,000)
----------- ----------- -----------
$ 5,886,851 $ 1,027,474 $ 874,740
=========== =========== ===========
</TABLE>
Total income tax expense differs from the amount computed by applying the
Federal statutory income tax rate to income before income taxes as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Computed "expected" income tax expense $ 5,937,303 $ 642,403 $ 597,264
State franchise taxes, net of Federal benefit 608,190 157,071 130,095
Goodwill amortization 202,535 135,412 121,682
Life insurance proceeds (680,000) -- --
Other (181,177) 92,588 25,699
----------- ----------- -----------
$ 5,886,851 $ 1,027,474 $ 874,740
=========== =========== ===========
</TABLE>
The tax effected temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at December 31, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Accounts receivable $ 614,000 $ 506,000
Inventories 970,000 795,000
Covenants not to compete 56,000 --
Accrued expenses 533,000 411,000
----------- -----------
Total deferred tax assets 2,173,000 1,712,000
----------- -----------
Deferred tax liabilities:
State taxes (202,000) (154,000)
Goodwill (6,000) --
Investments (142,000) --
----------- -----------
Total deferred tax liabilities (350,000) (154,000)
----------- -----------
Net deferred tax asset $ 1,823,000 $ 1,558,000
=========== ===========
</TABLE>
F-15
<PAGE> 41
GT BICYCLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Based upon the Company's historical pre-tax earnings, management believes it is
more likely than not that the Company will realize the benefit of the existing
deferred tax asset at December 31, 1996. Management believes the existing net
deductible temporary differences will reverse during periods in which the
Company generates net taxable income, however, there can be no assurance that
the Company will generate any earnings or any specific level of continuing
earnings in future years. Certain tax planning or other strategies will be
implemented, if necessary, to supplement income from operations to fully
realize recorded tax benefits.
The Company is in the process of an audit by the Internal Revenue Service of
the Company's December 31, 1993 Federal income tax return. The Company has
received notice from the Franchise Tax Board that they intend to audit the
Company's December 31, 1994 and 1993 California income tax returns. The
Company has also received notice from the New York State Department of Taxation
and Finance that they intend to audit the December 31, 1995, 1994 and 1993
income tax returns. In the opinion of management, these examinations will not
have a material adverse effect on the Company's consolidated financial
position, results of operations or liquidity.
(8) COMMITMENTS AND CONTINGENCIES
Included in computer equipment in the accompanying balance sheet are the
following assets held under capital leases at December 31, 1996:
<TABLE>
<S> <C>
Computer equipment $ 1,129,485
Less accumulated amortization (447,287)
-----------
$ 682,198
===========
</TABLE>
The Company also leases certain office, manufacturing, warehouse and plant
facilities under noncancelable operating leases. Subsequent to December 31,
1996, the Company entered into a new operating lease on a building in
California to consolidate its California operations into one facility which
should be completed by May 1997. Future minimum lease payments on capital and
operating leases at December 31, 1996, including this new operating lease
signed subsequent to December 31, 1996, are as follows:
<TABLE>
<CAPTION>
Capital Operating
----------- -----------
<S> <C> <C>
1997 $ 461,092 $ 2,585,000
1998 371,695 2,745,000
1999 328,360 2,491,000
2000 3,447 2,281,000
2001 -- 2,051,000
Thereafter -- 11,889,000
----------- -----------
Total minimum lease payments 1,164,594 $24,042,000
===========
Lease amount representing interest 158,843
-----------
Present value of net minimum lease payments 1,005,751
Less current portion 376,697
-----------
Long-term portion $ 629,054
===========
</TABLE>
Two of the operating leases included above are with partnerships in which
certain stockholders and employees of the Company have an ownership interest.
Management believes that all lease arrangements with related parties are at
arm's length terms. Related party rental expense included in the accompanying
consolidated statements of operations for the years ended December 31, 1996,
1995 and 1994 amounted to $547,036, $159,062 and $406,195, respectively. Total
rent expense for the years ended December 31, 1996, 1995 and 1994 amounted to
$2,116,321, $1,207,115 and $1,178,330, respectively.
The Company is obligated to pay annual management fees not to exceed $100,000
per annum to an affiliate of one the Company's significant stockholders.
F-16
<PAGE> 42
GT BICYCLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company has guaranteed certain debts of a manufacturing company amounting
to approximately $52,000 (see note 2). Additionally, the Company granted the
manufacturing company a $100,000 line of credit facility which was increased to
$250,000 on August 31, 1994 and a $100,000 term loan. The term loan is
convertible to capital upon the manufacturing company meeting certain earnings
levels as defined in the agreement. As of December 31, 1996, $250,000 remains
outstanding under the credit facility and $100,000 remains outstanding under
the term loan.
From time to time, the Company enters into purchase commitments for the
procurement of certain bicycle components, parts and accessories. The Company
expects to use the items to be procured under purchase commitments outstanding
at December 31, 1996 in the normal course of business.
The Company is a defendant in various product liability claims. Management
believes that the allegations in most of the claims are substantially without
merit and that others may be settled or lost, resulting in expenses incurred by
the Company. Management has accrued an estimate of the Company's eventual
liability related to these claims. In the opinion of management, any defense,
judgment or settlement of these claims will not have a material adverse effect
on the Company's consolidated financial position, results of operations or
liquidity.
The Company is also involved as plaintiff and defendant in various claims and
legal actions arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or liquidity.
(9) EMPLOYEE BENEFITS
The Company has a profit sharing plan covering substantially all employees who
have worked for the Company at least 12 months. The Company's annual
contributions to the plan are determined at the discretion of the Board of
Directors. Plan contributions expensed by the Company totaled approximately
$500,000, $500,000 and $459,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
(10) INVESTMENTS IN AFFILIATES
Included in other assets in the accompanying balance sheets at December 31,
1996 and 1995 is the Company's minority interest investment (45% at December
31, 1996 and 1995) in a manufacturing company. The investment is accounted for
under the equity method. The Company has an exclusive agreement with the
manufacturing company to distribute its bicycle products. The agreement
requires the Company to maintain certain inventory levels and sales levels of
the manufacturing company's products as agreed upon by the Company and the
manufacturing company on a quarterly basis. Purchases by the Company from the
manufacturing company, which represent all of the manufacturing company's
sales, were $1,052,137, $1,049,939 and $541,051 for the years ended December
31, 1996, 1995 and 1994, respectively. In addition, the Company paid the
manufacturing company amounts under a research and development arrangement
totaling $38,000 for the year ended December 31, 1994. No such payments were
made in the years ended December 31, 1996 and 1995.
Also included in other assets in the accompanying balance sheet at December 31,
1996 is the the Company's 50% investment in a partnership which manufactures
and markets an electric assist bicycle.
F-17
<PAGE> 43
GT BICYCLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(11) GEOGRAPHIC DATA
A summary of the Company's net sales, operating income and identifiable assets
by geographic area follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Net sales:
United States $ 142,985,320 $ 128,603,302 $ 113,348,374
Europe 47,497,867 24,689,218 17,235,672
Other foreign 17,868,133 15,640,782 15,165,328
------------- ------------- -------------
$ 208,351,320 $ 168,933,302 $ 145,749,374
============= ============= =============
Operating income:
United States $ 19,069,034 $ 7,959,565 $ 6,990,806
Europe 1,386,826 -- --
Other foreign (440,866) -- --
------------- ------------- -------------
$ 20,014,994 $ 7,959,565 $ 6,990,806
============= ============= =============
Identifiable assets:
United States $ 142,030,812 $ 96,692,776 $ 86,251,536
Europe 15,875,630 -- --
Other foreign 2,090,906 -- --
Eliminations (3,816,125) -- --
------------- ------------- -------------
$ 156,181,223 $ 96,692,776 $ 86,251,536
============= ============= =============
</TABLE>
No single customer accounted for more than 10% of net sales for each year or
10% of trade accounts receivable at the end of each year. Identifiable assets
by geographic area are those assets used by the Company in each location.
(12) NONRECURRING CHARGE
In connection with the Company's IPO in October 1995, certain covenants not to
compete were terminated. As a result, a nonrecurring charge of $4,707,545 was
recorded to eliminate the remaining unamortized value of the covenants not to
compete.
(13) LIFE INSURANCE PROCEEDS, NET OF GUARANTEED SEVERANCE PAYMENTS
Included in net income for the year ended December 31, 1996, were net life
insurance proceeds of $1,275,571 that the Company received following the death
of former President and Chief Executive Officer, Richard Long, in July 1996.
The net proceeds consisted of a $2,000,000 insurance settlement less guaranteed
payments owed to Richard Long's family of $724,429.
F-18
<PAGE> 44
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors
GT Bicycles, Inc.:
Under date of February 19, 1997, we reported on the consolidated balance sheets
of GT Bicycles, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1996,
as contained in the annual report on Form 10-K for the year ended December 31,
1996. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated financial
statement schedule as listed in Item 14(a)(2) of the Form 10-K. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Orange County, California
February 19, 1997
F-19
<PAGE> 45
SCHEDULE II
GT BICYCLES, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Additions
----------------------
Balance at Charged to Balance at
beginning costs and end
Description of period expenses Other(1) Deductions of period
- ----------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C>
Allowance for doubtful accounts
For the year ended December 31, 1994 $ 641,279 $ 299,500 $ -- $ -- $ 940,779
========== ========== ========== =========== ==========
For the year ended December 31, 1995 $ 940,779 $ 236,521 $ -- $ -- $1,177,300
========== ========== ========== =========== ==========
For the year ended December 31, 1996 $1,177,300 $ 202,863 $ 253,641 $ -- $1,633,804
========== ========== ========== =========== ==========
</TABLE>
(1) Amount represents allowance for doubtful accounts established in connection
with the acquisition of Caratti Sport Limited.
F-20
<PAGE> 46
INDEX TO ATTACHED EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
10.44 Amendment No. 1 to Employment Agreement between the
Company and Michael Haynes, dated November 12, 1996.
10.45 Amendment No. 1 to Employment Agreement between the
Company and William Duehring, dated November 12, 1996.
10.46 Employment Agreement between the Company and Robert C.
Ippolito, dated June 10, 1996.
10.47 Employment Agreement between the Company and Charles
Cimitile, dated November 7, 1996.
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.44
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
This Amendment No. 1 to Employment Agreement is made as of November 12,
1996, by and between GT Bicycles, Inc., a Delaware corporation (the "Company"),
as the successor of GTB Acquisition Corporation, a Delaware corporation and
Michael C. Haynes (the "Executive").
RECITALS
A. The Company and the Executive entered into an Employment
Agreement dated as of September 27, 1993.
B. The Company and Executive desire to amend the Employment
Agreement as provided herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties hereby agree as follows:
1. Section 4.1 of the Employment Agreement is hereby amended to
read in full as follows:
"4.1 Base Salary. During the term hereof, the Company shall
pay the Executive a base salary at the rate of $312,000 per annum,
effective as of October 1, 1996. For fiscal years beginning after
December 31, 1996, such annual rate shall be increased by an amount
equal to (i) base salary for the preceding fiscal year multiplied by
(ii) the greater of two and three-fifths percent (2.6%) or fifty percent
(50%) of the percentage increase, if any, during the preceding calendar
year in the Consumer Price Index maintained for the standard
metropolitan statistical area, including or closest to Orange County,
California. Such base salary, as from time to time increased, is
hereafter referred to as the "Base Salary," and shall be payable in
accordance with the payroll practices of the Company for its
executives."
2. Except as modified as provided herein, the Employment Agreement
shall continue in full force and effect according to the terms thereof.
IN WITNESS WHEREOF, the parties have executed this Amendment No. 1 as
of the day and year first above written.
GT BICYCLES, INC.
By:________________________________
Its:_______________________________
___________________________________
Michael C. Haynes
<PAGE> 1
EXHIBIT 10.45
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
This Amendment No. 1 to Employment Agreement is made as of November 12,
1996, by and between GT Bicycles, Inc., a Delaware corporation (the "Company"),
as the successor of GTB Acquisition Corporation, a Delaware corporation and
William Duehring (the "Executive").
RECITALS
A. The Company and the Executive entered into an Employment
Agreement dated as of September 27, 1993.
B. The Company and Executive desire to amend the Employment
Agreement as provided herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties hereby agree as follows:
1. Section 4.1 of the Employment Agreement is hereby amended to
read in full as follows:
"4.1 Base Salary. During the term hereof, the Company shall
pay the Executive a base salary at the rate of $228,000 per annum,
effective as of October 1, 1996. For fiscal years beginning after
December 31, 1996, such annual rate shall be increased by an amount
equal to (i) base salary for the preceding fiscal year multiplied by
(ii) the greater of two and three-fifths percent (2.6%) or fifty percent
(50%) of the percentage increase, if any, during the preceding calendar
year in the Consumer Price Index maintained for the standard
metropolitan statistical area, including or closest to Orange County,
California. Such base salary, as from time to time increased, is
hereafter referred to as the "Base Salary," and shall be payable in
accordance with the payroll practices of the Company for its
executives."
2. Except as modified as provided herein, the Employment Agreement
shall continue in full force and effect according to the terms thereof.
IN WITNESS WHEREOF, the parties have executed this Amendment No. 1 as
of the day and year first above written.
GT BICYCLES, INC.
By:__________________________________
Its:_________________________________
_____________________________________
William Duehring
<PAGE> 1
Exhibit 10.46
EMPLOYMENT AGREEMENT
I
PARTIES
This Employment Agreement (the "Agreement") is made on June 10, 1996
by and between GT BICYCLES, INC. (hereinafter "Employer"), and ROBERT C.
IPPOLITO (hereinafter "Employee").
II
RECITALS
2.1 Employer is engaged in the business of manufacturing, distributing and
marketing bicycles, and related parts and accessories in the specialty
Independent Bicycle Dealer (IBD) market.
2.2 Employer desires to retain the services of Employee and Employee
desires to be so engaged under the terms of this Agreement.
2.3 In consideration of the mutual promises, covenants and conditions
contained herein, the parties hereto agree as follows:
III
AGREEMENT
3.1 POSITION: Employer hereby hires Employee as Vice President of
Corporate Development. Employee shall do and perform all services and acts
necessary or advisable to carry out
<PAGE> 2
Robert C. Ippolito
Employment Agreement
Page 2
Employee's duties subject always to the direct supervision and control of the
Board of Directors of Employer.
3.2 TIME AND EFFORT: Employee shall devote his entire productive time,
attention, knowledge and skill to the business and interests of Employer.
Employer shall be entitled to all the benefits and profits arising from or
incident to any and all services performed by Employee pursuant to this
Agreement.
3.3 TERM: The term ("Term") of this Agreement shall commence on
approximately June 1, 1996 and shall continue for an initial period of three (3)
years and shall thereafter automatically renew from year to year, unless sooner
terminated as provided herein.
3.4 NOTICE PROVISION: In the event Employer elects not to renew this
agreement either at the conclusion of the initial five-year period or at the
conclusion of any subsequent one-year term, written notice shall be required to
be given by Employer to Employee six months in advance of the expiration term of
this agreement with the exception in that Employer terminates Employee due to
cause.
<PAGE> 3
Robert C. Ippolito
Employment Agreement
Page 3
IV
COMPENSATION
4.1 MINIMUM COMPENSATION: Employer agrees to pay Employee and Employee
agrees to accept as compensation for the services and obligations set forth
herein as a Minimum Compensation the sum of $ 105,000 per annum, which sum shall
be paid to Employee by Employer in equal semi- monthly installments to be
tendered to Employee on the first and fifteenth day of each month, or at such
other intervals as may be mutually agreed by Employer and Employee.
4.2 ADDITIONAL ANNUAL COMPENSATION: Employer may, but is not obligated
to, pay Employee as Additional Annual Compensation, during each calendar year
ending during the Term of this Agreement, such sums as may annually be
determined by the Board of Directors, including bonus, regular and
cost-of-living increases and adjustments. It is expected that employee's
additional annual compensation (AKA "bonus") will range between fifteen and
twenty-five percent (15-25%) of his annual minimum compensation.
V
EMPLOYEE BENEFITS
5.1 EMPLOYER POLICY: Employee shall be eligible for all employee benefits
adopted by Employer during the Term of his Agreement, as set forth in the
Employee Manual of Employer, including profit sharing and Employee Stock
Purchase program.
<PAGE> 4
Robert C. Ippolito
Employment Agreement
Page 4
5.2 BUSINESS EXPENSES: Employer will reimburse Employee for all
reasonable business expenses incurred by Employee in the performance of
Employee's duties provided that:
(a) Each such expenditure qualifies as a proper deduction of
Employer for federal income tax purposes; and
(b) Employee furnishes to Employer adequate records and other
documentary evidence required to substantiate such expenditures as a proper
deduction for federal income tax purposes. Any reimbursed expense payment to
Employee that is disallowed, in whole or in part, as a deductible business
expense of Employer for federal income tax purposes shall be immediately repaid
to Employer by Employee to the full extent of such disallowance.
VI
TERMINATION
6.1 FOR CAUSE: If Employee willfully breaches or habitually neglects the
duties to be performed by Employee under this Agreement, Employer may, at its
option, immediately terminate this Agreement.
6.2 OTHER TERMINATION: This Agreement shall terminate upon:
(a) The death or legal incapacity of Employee;
(b) The filing of any petition by or against Employer under any
chapter of the Bankruptcy Act, or other federal or state
<PAGE> 5
Robert C. Ippolito
Employment Agreement
Page 5
insolvency or bankruptcy act, and the continuance thereof for thirty (30) days;
(c) The appointment of a receiver or trustee to take possession of
all or substantially all of the assets of Employer, and the continuance thereof
for thirty (30) days;
(d) A general assignment for the benefit of creditors of Employer,
and the continuance thereof for thirty (30) days;
(e) The dissolution and winding up of the business of Employer.
VII
NONDISCLOSURE OF INFORMATION CONCERNING BUSINESS
Employee shall not at any time, whether during or subsequent to the term of
Employee's employment, unless specifically consented to in writing by Employer,
either directly or indirectly use, divulge, disclose or communicate to any
person, firm, or corporation, in any manner whatsoever, any confidential
information concerning any matters affecting or relating to the business of
Employer, including, but not limited to the names, buying habits, or practices
of any of its customers, its marketing methods and related data, the names of
any of its vendors or suppliers, costs of materials, the prices it obtains or
has obtained or at which it sells or has sold its products or services,
manufacturing and sales
<PAGE> 6
Robert C. Ippolito
Employment Agreement
Page 6
costs, lists or other written records used in Employer's business, compensation
paid to employees and other terms of employment, or any other confidential
information of, about, or concerning the business of Employer, its manner of
operation, or other confidential data of any kind, nature, or description. The
parties hereby stipulate that as between them, the foregoing matters are
important, material, confidential, and proprietary and affect the successful
conduct of Employer's business and its goodwill, and that any breach of any
term of this paragraph is a material breach of this Agreement.
VIII
PROPRIETARY INTEREST AND BOOKS AND RECORDS
8.1 INVENTIONS: All inventions, improvements, ideas and disclosures
(whether or not patentable) conceived or reduced to practice (actually or
constructively) by Employee during the term of this Agreement which are directly
or indirectly related to Employer's business shall be the property of Employer.
Employee shall execute and deliver to Employer, at Employer's expense, all
instruments of assignment necessary to vest title to such intangible rights in
Employer, and, if requested, to execute all
<PAGE> 7
Robert C. Ippolito
Employment Agreement
Page 7
applications for issuance of Letters Patent in the United States or abroad and
assignments thereof.
8.2 EXCLUSIONS: This Article does not apply to any invention which
qualifies fully under the provisions of California Labor Code Section 2870, the
provisions of which are as follows:
"Any provision in an employment agreement which provides that an
employee shall assign or offer to assign any of his or her rights in
an invention to his or her employer shall not apply to an invention
for which no equipment, supplies, facility, or trade secret
information of the employer was used and which was developed entirely
on the employee's own time, and (a) which does not relate (1) to the
business of the employer or (2) to the employer's actual or
demonstrably anticipated research or development, or (b) which does
not result from any work performed by the employee for the employer.
Any provision which purports to apply to such an invention is to that
extent against the public policy of this state and is to that extent
void and unenforceable."
8.3 BOOKS AND RECORDS: All equipment, notebooks, documents, memoranda,
reports, files, samples, books, correspondence, lists, and all other written and
graphic records affecting or relating to the business of Employer which Employee
shall prepare, use, construct, observe, possess, or control shall be and remain
the sole and exclusive property of Employer.
In the event of termination of employment for any reason whatsoever,
whether voluntary or involuntary, Employee shall promptly deliver to Employer
all equipment, notebooks, documents,
<PAGE> 8
Robert C. Ippolito
Employment Agreement
Page 8
memoranda, reports, files, samples, books, correspondence, lists, or other
written or graphic records relating to the business of Employer which are or
have been in the possession of under the control of Employee.
IX
COMPETITION
9.1 COMPETING BUSINESS:
(a) During the term of this Agreement, Employee shall not directly
or indirectly own an interest in, operate, join, control, or participate in, or
serve as an officer, director, employee of, or an independent contractor or
consultant to any proprietorship, corporation, partnership, or other entity
producing, designing, providing, soliciting orders for, selling, distributing,
or marketing products, goods, equipment, or services which directly or
indirectly compete with the products, goods, equipment and services of Employer.
(b) During the one (1) year period following termination of this
Agreement, for any reason, Employee shall not undertake any activity competitive
with the business of Employer, whether as an officer, director, employee,
independent contractor, consultant, partner, shareholder, or principal of any
corporation, partnership, proprietorship, or other entity if the loyal and
<PAGE> 9
Robert C. Ippolito
Employment Agreement
Page 9
complete fulfillment of the duties of the competitive activity would require
Employee to reveal or otherwise use, any confidential business information or
trade secrets of Employer to which Employee had access.
9.2 BUSINESS PLANNING: During the term of this Agreement, Employee shall
not undertake planning for, or, organization of any business activity
competitive with the business of Employer, or combine or conspire with other
employees or representatives of Employer for the purpose of organizing any
business activity competitive with the business of Employer.
9.3 SOLICITATION OF EMPLOYEES: During the term of this Agreement and for
a one (1) year period following termination of this Agreement, for any reason,
Employee shall not directly or indirectly, or by action in concert with others,
induce or influence, or seek to induce or influence, any employee, agent,
independent contractor, or other business affiliate of Employer to terminate his
relationship with Employer.
9.4 SOLICITATION OF INDEPENDENT BICYCLE DEALER (IBD) CUSTOMER ACCOUNTS:
During the term of this Agreement, and for a six-month period following
termination of this Agreement, for any reason, Employee shall not, directly or
indirectly, for himself or any other person, firm or corporation, divert, take
away, call on, or solicit, any of the IBD customer accounts of Employer or its
<PAGE> 10
Robert C. Ippolito
Employment Agreement
Page 10
affiliates, subsidiaries or licensees, including, but not limited to, those IBD
customer accounts which Employee called upon, solicited, or became acquainted
with while engaged as an employee of Employer.
X
REMEDIES
10.1 SCOPE OF COVENANTS: Each of the covenants of Employee contained in
this Agreement shall be construed as a separate and independent covenant
covering the respective subject matter of the covenant in each of the separate
counties and states in the United States in which Employer transacts business.
To the extent that any covenant shall be determined to be judicially
unenforceable in any one or more county or state, that covenant shall not be
affected with respect to every other county and state, each covenant being
construed as severable and independent.
10.2 INJUNCTIVE RELIEF: Employee acknowledges that should he violate any
of the covenants contained in this Agreement, it will be difficult to determine
the resulting damages to Employer and, in addition to any other remedies it may
have, Employer shall be entitled to temporary and permanent injunctive relief
without the necessity of proving actual damages.
<PAGE> 11
Robert C. Ippolito
Employment Agreement
Page 11
XI
NOTICE
All notices, requests, demands and other communication required or
permitted to be given under the terms of this Agreement shall be in writing and
shall be deemed to have been duly given if delivered personally, given by
prepaid telegram or mailed first class, postage prepaid or by registered or
certified mail as follows:
If to Employer: GT BICYCLES, INC.
3100 W. Segerstrom Avenue
Santa Ana, CA 92704
If to Employee: ROBERT C. IPPOLITO
30 Jeanette Drive
Massapequa, NY 11758
XII
MISCELLANEOUS
12.1 DELEGATION OF DUTIES: Employee may not delegate the services and
obligations he is required to perform under this Agreement. The parties agree
that as between them, the services to be performed hereunder are personal and
any attempt by Employee to delegate his duties hereunder shall be null and void.
12.2 AMENDMENT: This Agreement may be modified or amended only by and
to the extent of the written agreement of Employer and Employee.
<PAGE> 12
Robert C. Ippolito
Employment Agreement
Page 12
12.3 SUCCESSORS: This Agreement shall be binding upon and shall insure
to the benefit of the successors and assigns of the parties to the extent this
Agreement is assignable.
12.4 ENTIRE AGREEMENT: This Agreement contains the entire agreement of
the parties hereto and supersedes any prior written or oral agreement between
them relating to the subject matter contained herein.
12.5 GOVERNING LAW: This Agreement shall be governed by and construed
in accordance with the laws of the State of California. If any legal action is
necessary to enforce the terms and conditions of this Agreement, Employer and
Employee agree that the Superior Court of California, County of Orange, shall be
the sole venue and jurisdiction for the bringing of such action.
12.6 SECTION HEADINGS: The various section headings are inserted for
convenience of reference only and shall not affect the meaning or interpretation
of this Agreement or any section thereof.
12.7 SEVERABILITY: If any term, provision, covenant or condition of
this Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, the remainder of the provisions hereof shall remain in full
force and effect and shall in no way be affected, impaired or invalidated.
12.8 ATTORNEY FEES: If any legal action is necessary to enforce the
terms and conditions of this Agreement, the prevailing
<PAGE> 13
Robert C. Ippolito
Employment Agreement
Page 13
party shall be entitled to recover all costs of suit and reasonable attorney
fees as determined by the court.
12.9 COUNTERPARTS: This Agreement may be executed in one or more
counterparts which, taken together, shall constitute one agreement.
XIII
EXECUTION
The parties hereto have executed this Agreement, which shall be effective
as of the date first mentioned above.
EMPLOYER:
GT BICYCLES, INC.
By: __________________________________
Richard W. Long, President
EMPLOYEE:
___________________________________
Robert C. Ippolito
<PAGE> 1
EXHIBIT 10.47
EMPLOYMENT AGREEMENT
I
PARTIES
This Employment Agreement (the "Agreement") is made on November 7, 1996 by
and between GT BICYCLES, INC. (hereinafter "Employer"), and CHARLES CIMITILE
(hereinafter "Employee").
II
RECITALS
2.1 Employer is engaged in the business of manufacturing, distributing and
marketing bicycles, and related parts and accessories in the specialty
Independent Bicycle Dealer (IBD) market.
2.2 Employer desires to retain the services of Employee and Employee
desires to be so engaged under the terms of this Agreement.
2.3 In consideration of the mutual promises, covenants and conditions
contained herein, the parties hereto agree as follows:
III
AGREEMENT
3.1 POSITION: Employer hereby hires Employee as Vice President of Finance
and Chief Financial Officer. The Employee's duties and responsibilities will be
as are usual and customary for
<PAGE> 2
Charles Cimitile
Employment Agreement
Page 2
a CFO of a company similar in size and operations to the Employer. In addition
to the foregoing, the Employee shall be included on the Senior Management Team
and shall report directly to the CEO during the entire term as defined below.
Employee shall do and perform all services and acts necessary or advisable to
carry out Employee's duties subject always to the direct supervision and
control of the Board of Directors of Employer.
3.2 TIME AND EFFORT: Employee shall devote his entire productive time,
attention, knowledge and skill to the business and interests of Employer.
Employer shall be entitled to all the benefits and profits arising from or
incident to any and all services performed by Employee pursuant to this
Agreement.
3.3 TERM: The term ("Term") of this Agreement shall commence on
approximately December 1, 1996 and shall continue for an initial period of
three (3) years and shall thereafter automatically renew from year to year,
unless sooner terminated as provided herein.
3.4 NOTICE PROVISION: In the event Employer elects not to renew this
agreement either at the conclusion of the initial three-year period or at the
conclusion of any subsequent one-year term, written notice shall be required to
be given by Employer to Employee six months in advance of the expiration term
of this agreement with the exception in that Employer terminates Employee due
to cause. Reciprocal notice to be provided by Employee to Employer, same terms
as described above.
<PAGE> 3
Charles Cimitile
Employment Agreement
Page 3
IV
COMPENSATION
4.1 MINIMUM COMPENSATION: Employer agrees to pay Employee and Employee
agrees to accept as compensation for the services and obligations set forth
herein as a Minimum Compensation the sum of $ 175,000 per annum, which sum
shall be paid to Employee by Employer in equal semi-monthly installments to be
tendered to Employee on the first and fifteenth day of each month, or at such
other intervals as may be mutually agreed by Employer and Employee. The
minimum compensation will be increased annually on the Employee's anniversary
date by at least the increase in the applicable CPI Index (for or closest to
Orange County) for the previous year.
4.2 ADDITIONAL ANNUAL COMPENSATION: Employer may, but is not obligated
to, pay Employee as Additional Annual Compensation, during each calendar year
ending during the Term of this Agreement, such sums as may annually be
determined by the Board of Directors, including bonus, regular and annual
cost-of-living increases. It is expected that employee's additional annual
compensation (AKA "bonus") will approximately be 75% of annual minimum
compensation based on achieving Employer's yearly earnings forecasts.
<PAGE> 4
Charles Cimitile
Employment Agreement
Page 4
4.3 EQUITY PARTICIPATION: Upon commencement of employment or grant date,
Stock Options representing 60,000 shares will be granted. The exercise price
shall be equal to market value on the grant date and the vesting period will be
four years.
V
EMPLOYEE BENEFITS
5.1 EMPLOYER POLICY: Employee shall be eligible for all employee benefits
adopted by Employer during the Term of his Agreement, as set forth in the
Employee Manual of Employer, including profit sharing and Employee Stock
Purchase program.
5.2 BUSINESS EXPENSES: Employer will reimburse Employee for all
reasonable business expenses incurred by Employee in the performance of
Employee's duties provided that:
(a) Employee furnishes to Employer adequate records and other
documentary evidence required to substantiate such expenditures as proper
business expenses and Employee receives proper approval.
5.3 VACATION: Employee shall be eligible for 20 business days vacation
annually.
<PAGE> 5
Charles Cimitile
Employment Agreement
Page 5
VI
TERMINATION
6.1 This Agreement may only be terminated for cause or death or legal
incapacity of employee.
6.2 FOR CAUSE: If Employee willfully breaches or habitually neglects the
duties to be performed by Employee under this Agreement, Employer may, at its
option, immediately terminate this Agreement for cause.
6.2.1 "Cause" means that the Employee shall have, in the judgment
of the Chairman of the Board of Directors, the Chief Executive Officer or a
majority of the Board of Directors of the Company: (i) committed a felony, or
committed an act of fraud, embezzlement or theft in connection with his duties
with the Company or in the course of employment with the Company; (ii) willfully
caused significant damage to property of the Company; (iii) been convicted of a
criminal offense (consisting of a misdemeanor involving acts of dishonesty or
moral turpitude, or a felony); (iv) engaged in the habitual and disabling use of
alcohol or drugs; (v) been absent from work for excessive periods of time
(vacation and illness excepted); (vi) breached one or more of the covenants
under this Agreement in any material respect including, without limitation,
Sections 7, 8 and 9 hereof; (vii) willfully disobeyed reasonable and lawful
directives of the Chairman of the
<PAGE> 6
Charles Cimitile
Employment Agreement
Page 6
Board of Directors, the Board of Directors of the Company or the Chief
Executive Officer; or (viii) committed an act of gross negligence or willful
malfeasance.
6.3 OTHER TERMINATION: This Agreement shall terminate upon:
(a) The death or legal incapacity of Employee;
VII
NONDISCLOSURE OF INFORMATION CONCERNING BUSINESS
Employee shall not at any time, whether during or subsequent to the term of
Employee's employment, unless specifically consented to in writing by Employer,
either directly or indirectly use, divulge, disclose or communicate to any
person, firm, or corporation, in any manner whatsoever, any confidential
information concerning any matters affecting or relating to the business of
Employer, including, but not limited to the names, buying habits, or practices
of any of its customers, its marketing methods and related data, the names of
any of its vendors or suppliers, costs of materials, the prices it obtains or
has obtained or at which it sells or has sold its products or services,
manufacturing and sales costs, lists or other written records used in Employer's
business, compensation paid to employees and other terms of employment, or any
other confidential information of, about, or concerning the business of
Employer, its manner of operation, or other
<PAGE> 7
Charles Cimitile
Employment Agreement
Page 7
confidential data of any kind, nature, or description, except (i) while
employed by Employer, in the business of and for the benefit of the Employer
or, (ii) when required to do so by a court of competent jurisdiction, by any
governmental agency having supervisory authority over the business of the
Employer or by any administrative or legislative body having similar authority
over the Employer or Employee. The parties hereby stipulate that as between
them, the foregoing matters are important, material, confidential, and
proprietary and affect the successful conduct of Employer's business and its
goodwill, and that any breach of any term of this paragraph is a material
breach of this Agreement. For purposes of this Agreement, "confidential
information" shall mean information not generally available to the public
(other than by Employee's breach of the terms hereof).
VIII
PROPRIETARY INTEREST AND BOOKS AND RECORDS
8.1 INVENTIONS: All inventions, improvements, ideas and disclosures
(whether or not patentable) conceived or reduced to practice (actually or
constructively) by Employee during the term of this Agreement which are directly
or indirectly related to Employer's business shall be the property of Employer.
Employee shall execute and deliver to Employer, at Employer's expense, all
<PAGE> 8
Charles Cimitile
Employment Agreement
Page 8
instruments of assignment necessary to vest title to such intangible rights in
Employer, and, if requested, to execute all applications for issuance of
Letters Patent in the United States or abroad and assignments thereof.
8.2 EXCLUSIONS: This Article does not apply to any invention which
qualifies fully under the provisions of California Labor Code Section 2870, the
provisions of which are as follows:
"Any provision in an employment agreement which provides that an
employee shall assign or offer to assign any of his or her rights in
an invention to his or her employer shall not apply to an invention
for which no equipment, supplies, facility, or trade secret
information of the employer was used and which was developed entirely
on the employee's own time, and (a) which does not relate (1) to the
business of the employer or (2) to the employer's actual or
demonstrably anticipated research or development, or (b) which does
not result from any work performed by the employee for the employer.
Any provision which purports to apply to such an invention is to that
extent against the public policy of this state and is to that extent
void and unenforceable."
8.3 BOOKS AND RECORDS: All equipment, notebooks, documents, memoranda,
reports, files, samples, books, correspondence, lists, and all other written and
graphic records affecting or relating to the business of Employer which Employee
shall prepare, use, construct, observe, possess, or control shall be and remain
the sole and exclusive property of Employer.
<PAGE> 9
Charles Cimitile
Employment Agreement
Page 9
In the event of termination of employment for any reason whatsoever,
whether voluntary or involuntary, Employee shall promptly deliver to Employer
all equipment, notebooks, documents, memoranda, reports, files, samples, books,
correspondence, lists, or other written or graphic records relating to the
business of Employer which are or have been in the possession of under the
control of Employee.
IX
COMPETITION
9.1 COMPETING BUSINESS:
(a) During the term of this Agreement, Employee shall not directly
or indirectly own an interest in, operate, join, control, or participate in, or
serve as an officer, director, employee of, or an independent contractor or
consultant to any proprietorship, corporation, partnership, or other entity
producing, designing, providing, soliciting orders for, selling, distributing,
or marketing products, goods, equipment, or services which directly or
indirectly compete with the products, goods, equipment and services of Employer;
provided, however, that nothing herein shall be construed to prohibit Employee
from investing in any publicly-traded or privately-held company so long as
Employee's beneficial ownership of any class of such company's securities does
<PAGE> 10
Charles Cimitile
Employment Agreement
Page 10
not exceed 3.0% of all such securities. Employee is to disclose ownership of
competing business interests to Employer, if any.
(b) During the one (1) year period following termination of this
Agreement, for any reason, Employee shall not undertake any activity competitive
with the business of Employer, whether as an officer, director, employee,
independent contractor, consultant, partner, shareholder, or principal of any
corporation, partnership, proprietorship, or other entity if the loyal and
complete fulfillment of the duties of the competitive activity would require
Employee to reveal or otherwise use, any confidential business information or
trade secrets of Employer to which Employee had access.
9.2 BUSINESS PLANNING: During the term of this Agreement, Employee shall
not undertake planning for, or, organization of any business activity
competitive with the business of Employer, or combine or conspire with other
employees or representatives of Employer for the purpose of organizing any
business activity competitive with the business of Employer.
9.3 SOLICITATION OF EMPLOYEES: During the term of this Agreement and for
a one (1) year period following termination of this Agreement, for any reason,
Employee shall not directly or indirectly, or by action in concert with others,
induce or influence, or seek to induce or influence, any employee, agent,
<PAGE> 11
Charles Cimitile
Employment Agreement
Page 11
independent contractor, or other business affiliate of Employer to terminate
his relationship with Employer.
9.4 SOLICITATION OF INDEPENDENT BICYCLE DEALER (IBD) CUSTOMER ACCOUNTS:
During the term of this Agreement, and for a six-month period following
termination of this Agreement, for any reason, Employee shall not, directly or
indirectly, for himself or any other person, firm or corporation, divert, take
away, call on, or solicit, any of the IBD customer accounts of Employer or its
affiliates, subsidiaries or licensees, including, but not limited to, those IBD
customer accounts which Employee called upon, solicited, or became acquainted
with while engaged as an employee of Employer.
X
REMEDIES
10.1 SCOPE OF COVENANTS: Each of the covenants of Employee contained in
this Agreement shall be construed as a separate and independent covenant
covering the respective subject matter of the covenant in each of the separate
counties and states in the United States in which Employer transacts business.
To the extent that any covenant shall be determined to be judicially
unenforceable in any one or more county or state, that covenant shall not be
<PAGE> 12
Charles Cimitile
Employment Agreement
Page 12
affected with respect to every other county and state, each covenant being
construed as severable and independent.
10.2 INJUNCTIVE RELIEF: Employee acknowledges that should he violate any
of the covenants contained in this Agreement, it will be difficult to determine
the resulting damages to Employer and, in addition to any other remedies it may
have, Employer shall be entitled to temporary and permanent injunctive relief
without the necessity of proving actual damages.
XI
NOTICE
All notices, requests, demands and other communication required or
permitted to be given under the terms of this Agreement shall be in writing and
shall be deemed to have been duly given if delivered personally, given by
prepaid telegram or mailed first class, postage prepaid or by registered or
certified mail as follows:
If to Employer: GT BICYCLES, INC.
3100 W. Segerstrom Avenue
Santa Ana, CA 92704
If to Employee: CHARLES CIMITILE
10564 Maple Chase Drive
Boca Raton, FL 33498
(or current address to be
supplied by Employee)
<PAGE> 13
Charles Cimitile
Employment Agreement
Page 13
XII
MISCELLANEOUS
12.1 DELEGATION OF DUTIES: Employee may not delegate the services and
obligations he is required to perform under this Agreement. The parties agree
that as between them, the services to be performed hereunder are personal and
any attempt by Employee to delegate his duties hereunder shall be null and void.
12.2 AMENDMENT: This Agreement may be modified or amended only by and to
the extent of the written agreement of Employer and Employee.
12.3 SUCCESSORS: This Agreement shall be binding upon and shall insure to
the benefit of the successors and assigns of the parties to the extent this
Agreement is assignable.
12.4 ENTIRE AGREEMENT: This Agreement contains the entire agreement of the
parties hereto and supersedes any prior written or oral agreement between them
relating to the subject matter contained herein.
12.5 GOVERNING LAW: This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
If any legal action is necessary to enforce the terms and conditions of
this Agreement, Employer and Employee agree that the
<PAGE> 14
Charles Cimitile
Employment Agreement
Page 14
Superior Court of California, County of Orange, shall be the sole venue and
jurisdiction for the bringing of such action.
12.6 SECTION HEADINGS: The various section headings are inserted for
convenience of reference only and shall not affect the meaning or interpretation
of this Agreement or any section thereof.
12.7 SEVERABILITY: If any term, provision, covenant or condition of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the provisions hereof shall remain in full force
and effect and shall in no way be affected, impaired or invalidated.
12.8 ATTORNEY FEES: If any legal action is necessary to enforce the terms
and conditions of this Agreement, the prevailing party shall be entitled to
recover all costs of suit and reasonable attorney fees as determined by the
court.
12.9 COUNTERPARTS: This Agreement may be executed in one or more
counterparts which, taken together, shall constitute one agreement.
<PAGE> 15
Charles Cimitile
Employment Agreement
Page 15
XIII
EXECUTION
The parties hereto have executed this Agreement, which shall be effective
as of the date first mentioned above.
EMPLOYER:
GT BICYCLES, INC.
By: __________________________________
Michael Haynes, President
EMPLOYEE:
___________________________________
Charles Cimitile
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
GT Bicycles California, Inc.
GT BMX Products, Inc.
Riteway Distributors, Inc.
Riteway Distributors Central, Inc.
Riteway Products East, Inc.
Riteway Products North Central, Inc.
Riteway Products Japan K.K.
Riteway Products France S.A.R.L.
Caratti Sport Limited
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
GT Bicycles, Inc.:
We consent to incorporation by reference in the registration statement (No.
333-2576) on Form S-8 of GT Bicycles, Inc. of our reports dated February 19,
1997, relating to the consolidated balance sheets of GT Bicycles, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1996, and related schedule,
which reports appear in the December 31, 1996 annual report on Form 10-K of GT
Bicycles, Inc.
KPMG PEAT MARWICK LLP
Orange County, California
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS OF GT BICYCLES, INC. AND SUBSIDIARIES AS OF 12/31/96 AND
12/31/95 AND FOR THE THREE YEAR PERIOD ENDED 12/31/96 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-K FOR DEC 31, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 53,477
<ALLOWANCES> (1,634)
<INVENTORY> 74,328
<CURRENT-ASSETS> 130,066
<PP&E> 7,709
<DEPRECIATION> (2,686)
<TOTAL-ASSETS> 156,181
<CURRENT-LIABILITIES> 22,674
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 59,143
<TOTAL-LIABILITY-AND-EQUITY> 156,181
<SALES> 208,351
<TOTAL-REVENUES> 208,351
<CGS> 149,147
<TOTAL-COSTS> 149,147
<OTHER-EXPENSES> 37,913
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,828
<INCOME-PRETAX> 17,463
<INCOME-TAX> 5,887
<INCOME-CONTINUING> 11,576
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,576
<EPS-PRIMARY> 1.17
<EPS-DILUTED> 1.17
</TABLE>
