<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
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
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.)
2001 East Dyer Road, Santa Ana, California 92705
(Address of principal executive offices)
(714) 481-7100
(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. [X]
As of March 17, 1998, the aggregate market value of the registrant's Common
Stock held by non-affiliates of the Registrant was approximately $39,724,000
based on the closing sales price of $6.13 per share of the Common Stock as of
such date, as reported by The Nasdaq National Market.
As of March 17, 1998, there were 9,828,801 shares of the registrant's Common
Stock 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 1998 Annual Meeting of
Stockholders 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 127 bicycle models, including 30 mountain bicycle
models, 65 juvenile BMX bicycle models, and 32 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 eleven 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"), Caratti
Sport Limited ("Caratti") in the United Kingdom, Riteway Products Canada, Ltd.
("Riteway Canada") and Innovations in Composites, Inc. ("Innovations in
Composites").
The Company's current headquarters and principal place of business are located
at 2001 East Dyer Road, Santa Ana, California 92705, and its telephone number is
(714) 481-7100.
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. During the years from
1989 through 1995, the Company purchased three additional domestic distributors,
resulting in full vertical distribution coverage of the continental United
States. In 1996, the Company formed a distributor in Japan and purchased
distributors in France and the United Kingdom, and in 1997, the Company formed a
distributor in Canada. The Company's 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
1997, 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 1998 model year are distributed in the three
major bicycle categories as follows:
<TABLE>
<CAPTION>
NUMBER OF
CATEGORY 1998 BICYCLE MODELS
---------------------------------------------------------------
<S> <C>
Mountain Bicycle Models:
------------------------
GT Full Suspension 11
GT Aluminum 8
GT Chromoly Steel 10
Titanium 1
-----
Total 30
-----
Juvenile BMX Bicycle Models:
----------------------------
GT 25
Dyno 18
Powerlite 14
Robinson 8
-----
Total 65
-----
Road and Specialty Bicycle Models:
----------------------------------
Road 11
Streamline 6
Cruisers 8
Cross/hybrid 2
Tandem 2
Harley-Davidson 1
Charger Electric-Assist 2
-----
Total 32
-----
Total Bicycle Models 127
=====
</TABLE>
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 the 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, 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 with Innovations in Composites, a
majority-owned subsidiary, 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.
The Company has an exclusive licensing agreement with Harley-Davidson Motor
Company to manufacture and market a Harley-Davidson bicycle and certain
Harley-Davidson parts and accessories. The Company has also entered into a
partnership with a third party to manufacture and market electric-assist
bicycles under the Charger brand name. Distribution of the Harley-Davidson and
Charger products began during 1997.
RESEARCH AND PRODUCT DEVELOPMENT
GT Bicycles seeks to differentiate its products by offering 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
3
<PAGE> 4
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 1997, 1996 and 1995 were approximately $2,574,000,
$1,844,000 and $1,596,000, 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 Olympic Games 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, doing business as Riteway Products and
Caratti, distributes the Company's brand name bicycles and a broad range of
parts and accessories. The Company's distribution network consists of eight
subsidiaries -- located in New York, Wisconsin, Missouri, California, Canada,
Japan, France and the United Kingdom (Caratti) -- 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, sales 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.
In the United States, the Company sells products to over 4,000 of an estimated
6,800 independent bicycle dealers, using a sales force of approximately 60 field
representatives and telemarketers. The Company sells parts and accessories and
its juvenile BMX bicycles on a non-exclusive basis to independent bicycle
dealers meeting its financial and other criteria. The Company believes that
selling these products 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 52
independent distributors who supply 69 countries and through its four
subsidiaries: Riteway Canada, Riteway Japan, Riteway France and Caratti (in the
United Kingdom). 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.
4
<PAGE> 5
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. In early 1998, the Company began producing a syndicated juvenile BMX
bicycle program, entitled "Crank", for the Fox Sports Network. 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, 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, three BMX
racing teams and a number of Freestyle demonstration riders. The Company's
freestyle demonstration riders perform at varying venues such as NBA Basketball
half-time shows, state fairs, school assemblies, trade shows and corporate
events.
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
facility. 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 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 its
manufactured products 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
5
<PAGE> 6
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 and 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.
See "Certain Factors That May Affect the Company's Business and Future Results."
PRODUCT RECALLS
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. The CPSC also has the authority to require a
manufacturer or supplier to recall a product, which may involve product repair,
replacement or refunds. Alternatively, the Company can elect to do a voluntary
recall in cooperation with the CPSC. The recalls identified below are voluntary.
In December 1997, the Company's Riteway subsidiaries voluntarily initiated a
product recall in cooperation with the CPSC involving approximately 4,500 Cycle
Design Tag-A-Long bicycle tandem trailers manufactured by another entity and
distributed by Riteway. In late 1997, the Company became aware that a bolt on
the U-joint on two trailers had failed, resulting in the separation of the
trailer from the mother bicycle. The Company worked with the manufacturer and
redesigned the hardware utilizing significantly stronger bolts. The Company has
made public press announcements to make consumers aware of the recall, and has
instituted a program whereby independent bicycle dealers are instructed to
contact affected consumers and retrofit the trailers with replacement bolts. To
date, approximately 1,200 trailers have been retrofitted at an immaterial cost.
The Company has not received claims for any significant injuries related to the
Tag-a-Long, but there can be no assurance that such claims will not be received
in the future.
In March 1998, the Company voluntarily initiated a product recall which involves
approximately 10,000 aluminum juvenile BMX bicycles and frames manufactured and
sold during the years 1995 to 1998. The recall, which is being conducted in
cooperation with the CPSC, includes certain GT Speed Series and Robinson
bicycles and frames. The problem involves cracking in the frames when the
bicycles are subjected to the jumps and other stresses of today's more
aggressive BMX riding. The Company has discontinued the use of these frames and
has designed a significantly stronger frame for use on these BMX bicycles. The
Company has made public press announcements in order to make consumers aware of
the recall, and has also instituted a program whereby independent bicycle
dealers are instructed to contact affected consumers (as required by their
dealer agreements) and install upgraded replacement frames provided by the
Company. It is not possible to predict the actual number of frames which will be
returned, but of those returns which are to be received, it is expected that
over 80% will occur within the next six months and any remaining returns will
occur within two years. The Company has not received any
6
<PAGE> 7
significant claims for injuries or other damages related to the affected frames,
but there can be no assurance that such claims will not be received in the
future.
The Company does not believe that the aggregate cost of the aforementioned
recalls will have a material adverse effect on its results of operations,
financial condition or liquidity. Although the Company has a limited history of
involvement in product recalls, 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, 1997, the Company had 775 full-time and part-time employees. The
Company believes that its relations with its employees are good, and has never
suffered a material work stoppage or slowdown.
In March 1996, the warehouse employees at the Company's facility in St. Louis,
Missouri voted for representation by the Teamster's union. During negotiations
with the Company in September 1997, the Teamsters called a strike, and five of
the Company's employees participated in that strike. In February 1998, another
vote by the warehouse employees resulted in the decertification of the Teamsters
union at the St. Louis location. All of the Company's employees are now
non-union.
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.
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.
7
<PAGE> 8
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; UNCERTAINTY 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. While in the past ten years, there has been a
renewed public interest in bicycling and fitness activities, in the last two
years, there has been a decline in the demand for adult bicycles domestically.
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 by the Company
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 trade
shows. 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.
SUBSTANTIAL LEVERAGE; LIQUIDITY. As of December 31, 1997, the Company's total
indebtedness was approximately $97.3 million, and there was approximately $3.6
million available under its revolving credit facilities for future borrowings.
The revolving credit facility in the current amount of $80.7 million and a term
loan of $11.7 million become due and payable on June 30, 1998. In addition, the
availability of the revolving credit facility will be reduced from $80.0 million
to $60.0 million on May 1, 1998. As of December 31, 1997, the Company had
stockholders' equity of approximately $61.4 million. The Company's high degree
of leverage could have important consequences, including (i) a substantial
portion of the Company's cash flow from operations must be dedicated to debt
service and will not be available for other purposes; (ii) the Company's ability
to obtain additional debt financing in the future for working capital may be
limited; (iii) the Company may be more leveraged than certain of its
competitors, which may place the Company at a competitive disadvantage; and (iv)
the Company's ability to refinance its revolving credit facility and its term
loan due and payable on June 30, 1998 may be adversely affected. The Company
anticipates that it will be required to seek a continuation of the $80.0 million
of availability under its revolving credit facility from its senior secured
lender, which is scheduled to be reduced from $80.0 million to $60.0 million on
May 1, 1998. The Company is negotiating with its existing senior secured lender
and other lenders regarding longer-term financing or the refinancing of its
revolving credit and term loan facilities. However, there can be no assurance
that the Company will be able to obtain a continuation of the $80.0 million of
availability under its revolving credit facility or other financing on
acceptable terms, or at all. The failure to obtain a continuation or other
acceptable financing would have a material adverse affect on the Company's
business, results of operations, financial condition and liquidity.
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.
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,
8
<PAGE> 9
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.
INVENTORY RISKS. The market for bicycles, parts and accessories is subject to
the risk of changing consumer trends. As a result of the necessary lead times
involved in purchasing products from their suppliers, the Company's Riteway
distributors maintain significant inventories so that they can promptly fill
orders from bicycle dealers. Accordingly, in the event that a particular bicycle
model or accessory does not achieve widespread consumer acceptance, the Company
may be required to take significant price markdowns, which 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. In
addition, from time to time, the Company may make recalls of certain of its
products in cooperation with the Consumer Products Safety Commission. Such
product recalls and any potential product defects related thereto may also
result in claims for personal injury. 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.
9
<PAGE> 10
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, Assembly,
Manufacturing, Research and Product
Development, and Riteway West
Distribution Santa Ana, California 355,000 January 31, 2007
GT Bicycles Research and Development
and Manufacturing Longmont, Colorado* 5,600 Monthly
GT Bicycles Special Projects 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 40,000 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
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>
* The Company plans to consolidate its Colorado operations into a
recently-constructed, Company-owned facility by May 1998. The facility consists
of a 30,000 square-foot building on three acres of land in Longmont, Colorado.
Because the facility is larger than needed for the current level of operations,
the Company plans to sublease 15,000 square feet to an independent entity on a
short-term basis.
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,
10
<PAGE> 11
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, 1997.
11
<PAGE> 12
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.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
Fiscal 1997:
1st Quarter $ 14.500 $ 8.000
2nd Quarter $ 10.250 $ 7.750
3rd Quarter $ 8.625 $ 7.375
4th Quarter $ 8.000 $ 5.656
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 316 security holders of record as of March 17, 1998.
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."
12
<PAGE> 13
<TABLE>
<CAPTION>
THE
THE COMPANY PREDECESSOR (1)
----------------------------------------------------------------- ---------
NOVEMBER 12, JANUARY 1,
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, NOVEMBER 11,
1997 1996 1995 1994 1993 1993
--------- --------- --------- --------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Net sales ............................... $ 216,214 $ 208,351 $ 168,933 $ 145,749 $ 20,498 $ 103,250
Cost of sales ........................... 156,349 149,147 124,524 107,690 17,061 78,165
--------- --------- --------- --------- --------- ---------
Gross profit ............................ 59,865 59,204 44,409 38,059 3,437 25,085
Selling, general and administrative
expenses ............................. 48,083 38,450 28,429 25,962 3,491 17,427
Amortization of intangibles and deferred
financing costs ...................... 1,002 739 3,313 5,107 419 67
Nonrecurring charge ..................... -- -- 4,708 -- -- --
--------- --------- --------- --------- --------- ---------
Operating income (loss) ................. 10,780 20,015 7,959 6,990 (473) 7,591
Life insurance proceeds, net ............ -- (1,276) -- -- -- --
Interest expense ........................ 5,586 3,828 6,070 5,233 673 1,374
--------- --------- --------- --------- --------- ---------
Income (loss) before taxes and
extraordinary expense ................ 5,194 17,463 1,889 1,757 (1,146) 6,217
Provision (benefit) for income taxes..... 2,044 5,887 1,027 875 (430) 2,532
--------- --------- --------- --------- --------- ---------
Income (loss) before extraordinary item . 3,150 11,576 862 882 (716) 3,685
Extraordinary loss from early
extinguishment of item ............... -- (1,146) -- -- --
--------- --------- --------- --------- --------- ---------
Net income (loss) ....................... $ 3,150 $ 11,576 $ (284) $ 882 $ (716) $ 3,685
========= ========= ========= ========= ========= =========
Earnings (Loss) per Share (2) (3):
Basic:
Income before extraordinary item ..... $ .32 $ 1.18 $ 0.12 $ 0.13
Extraordinary item ................... -- -- (0.16) --
--------- --------- --------- ---------
Net income (loss) .................... $ .32 $ 1.18 $ (0.04) $ 0.13
========= ========= ========= =========
Diluted:
Income before extraordinary item ..... .32 $ 1.17 $ 0.12 $ 0.12
Extraordinary item ................... -- -- (0.16) --
--------- --------- --------- ---------
Net income (loss) .................... 0.32 $ 1.17 $ (0.04) $ 0.12
========= ========= ========= =========
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
FINANCIAL POSITION:
Working capital .......... $ 28,702 $107,392 $ 72,789 $ 50,526 $ 40,694
Total assets ............. 176,281 156,181 96,693 86,252 77,689
Total debt and capital
lease obligations...... 98,190 78,676 40,429 67,368 60,543
Total stockholders' equity 61,403 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 is not presented due to the non-comparable
capital structure.
(3) In 1997, the Company adopted Statement of Financial Accounting Standards
No. 128, "Earnings per Share", which changes the presentation of earnings
per share data. Prior year data has been restated to conform with the new
standard. See Note 2 to Consolidated Financial Statements.
13
<PAGE> 14
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 many factors,
including but not limited to the following: 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."
OVERVIEW
The Company's gross margins in any period are affected by factors, including but
not limited to 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 independent 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.
1997 RELOCATION OF THE COMPANY'S SOUTHERN CALIFORNIA FACILITIES. In May 1997,
the Company consolidated its southern California manufacturing, distribution,
administrative, and research and development facilities, which had previously
been located in several buildings, to the present facility located on Dyer Road
in Santa Ana, California. In connection with the relocation, the Company
incurred aggregate expenses of approximately $1.0 million, including moving
costs and the write-off of abandoned leasehold improvements at the former
locations. This amount was charged to selling, general and administrative
expenses during the first half of 1997.
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 approximately $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 approximately $0.7 million.
See Note 14 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. The Company also used approximately $37.0 million of
the proceeds from the IPO to retire debt which resulted in the accelerated
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 6 and 13 of Notes to Consolidated
Financial Statements.
14
<PAGE> 15
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,
------------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Net sales .............................................. 100.0% 100.0% 100.0%
Cost of sales .......................................... 72.3 71.6 73.7
----- ----- -----
Gross profit ........................................... 27.7 28.4 26.3
Selling, general and administrative expenses ........... 22.2 18.4 16.8
Amortization of intangibles and deferred financing costs 0.5 0.4 2.0
Nonrecurring charge .................................... -- -- 2.8
----- ----- -----
Operating income ....................................... 5.0 9.6 4.7
Life insurance proceeds, net ........................... -- (0.6) --
Interest expense ....................................... 2.6 1.8 3.6
----- ----- -----
Income before taxes and extraordinary item ............. 2.4 8.4 1.1
Provision for income taxes ............................. 0.9 2.8 0.6
----- ----- -----
Income before extraordinary item ....................... 1.5 5.6 0.5
Extraordinary loss from early extinguishment of debt ... -- -- 0.7
----- ----- -----
Net income (loss) ...................................... 1.5% 5.6% (0.2)%
===== ===== =====
</TABLE>
COMPARISON OF 1997 TO 1996
Net Sales. Net sales for 1997 increased by $7.9 million, or 3.8%, to $216.2
million. The increase was attributable to a $10.3 million increase in foreign
sales, offset by a $2.4 million decrease in domestic sales. The increase in
foreign sales was comprised of a $6.2 million increase in sales of bicycles and
a $4.1 million increase in sales of parts and accessories, and primarily
resulted from the addition and growth of the Company's subsidiaries in the
United Kingdom, France, Japan and Canada, which were purchased or formed during
1996 and 1997. The decrease in domestic sales was comprised of a $1.8 million
decrease in sales of bicycles and a $0.6 million decrease in sales of parts and
accessories. The decrease in bicycle sales was due to lower sales of adult
mountain bicycles, partially offset by higher sales of juvenile bicycles and
specialty bicycles (including the Company's new lines of cruiser,
Harley-Davidson and Charger electric-assist bicycles).
Gross Profit. Gross profit, as a percentage of net sales, was 27.7% in 1997 and
28.4% in 1996. This decrease was primarily attributable to manufacturing
inefficiencies incurred during and following the relocation of the Company's
Santa Ana facility.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $9.6 million, or 25.1% and represented
22.2% of sales in 1997 versus 18.4% of sales in 1996. This increase was
primarily due to the increased selling, marketing and administrative expenses
associated with the new Company-owned distributors in the United Kingdom,
France, Japan and Canada. The remainder of the increase was principally related
to: higher selling and marketing expenses incurred to promote brand equity,
higher product development expenses, and the cost of relocating the Company's
southern California facilities, as discussed above.
Amortization of Intangibles and Deferred Financing Costs. Amortization of
intangibles increased by $0.3 million in 1997, principally due to the inclusion
of a full year's amortization of the goodwill resulting from the 1996
acquisition of Caratti and Riteway France.
Life Insurance Proceeds, net. Included in 1996 net income were net life
insurance proceeds of $1.3 million that the Company received following the death
of its former President and Chief Executive Officer, as discussed above. There
was no such item in 1997.
Interest Expense. Interest expense in 1997 increased by $1.8 million, or 45.9%.
The increase was principally related to the higher level of average borrowings
needed to fund the Company's 1996 acquisition of Caratti and Riteway France,
support the growth of the Company's foreign operations, and fund capital
expenditures. In addition, the Company incurred a higher average interest rate
on its bank credit facility during 1997.
15
<PAGE> 16
Provision for Income Taxes. The Company's effective tax rate was 39.4% in 1997
as compared to 33.7% in 1996. The 5.7% increase principally relates to a 3.9%
benefit received during 1996 in connection with the non-taxable life insurance
proceeds discussed above. The remaining 1.8% increase arose primarily due to the
effect of non-deductible goodwill amortization being absorbed over lower pretax
income in 1997.
COMPARISON OF 1996 TO 1995
Net Sales. Net sales for 1996 increased by $39.4 million, or 23.3%, 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.
Gross Profit. Gross profit, as a percentage of net sales, was 28.4% in 1996 and
26.3% in 1995. This increase 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, or 35.2%, 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 accelerated amortization of related deferred financing costs in
connection with the Company's IPO in October 1995, as discussed above. 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. There was no such charge in 1996.
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 its former President and Chief Executive Officer, as discussed above. 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.
Provision for Income Taxes. 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.
16
<PAGE> 17
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,
1996 1996 1996 1996 1997 1997 1997 1997
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Net sales .................. $ 48,850 $ 44,114 $ 52,435 $ 62,952 $ 51,170 $ 50,769 $ 56,444 $ 57,831
Cost of sales .............. 36,310 30,921 37,041 44,875 37,395 36,972 40,525 41,457
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit ............... 12,540 13,193 15,394 18,077 13,775 13,797 15,919 16,374
Selling, general and
administrative expenses . 7,992 8,644 10,645 11,169 10,762 11,684 13,168 12,469
Amortization of intangibles
and deferred financing
costs ................... 135 136 243 225 233 264 260 245
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income ........... 4,413 4,413 4,506 6,683 2,780 1,849 2,491 3,660
Life insurance proceeds, net -- -- (1,276) -- -- -- --
Interest expense ........... 730 737 1,047 1,314 1,386 1,405 1,352 1,443
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before taxes ........ 3,683 3,676 4,735 5,369 1,394 444 1,139 2,217
Provision for income taxes . 1,473 1,471 1,095 1,848 578 160 461 845
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income ................. $ 2,210 $ 2,205 $ 3,640 $ 3,521 $ 816 $ 284 $ 678 $ 1,372
========== ========== ========== ========== ========== ========== ========== ==========
Earnings per share:
Basic ...................... $ .23 $ .23 $ .37 $ .36 $ .07 $ .04 $ .07 $ .14
========== ========== ========== ========== ========== ========== ========== ==========
Diluted .................... $ .22 $ .22 $ .37 $ .35 $ .07 $ .04 $ .07 $ .14
========== ========== ========== ========== ========== ========== ========== ==========
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 .............. 74.3 70.1 70.6 71.3 73.1 72.8 71.8 71.7
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit ............... 25.7 29.9 29.4 28.7 26.9 27.2 28.2 28.3
Selling, general and
administrative expenses . 16.4 19.6 20.3 17.7 21.0 23.0 23.3 21.6
Amortization of intangibles
and deferred financing
costs ................... 0.3 0.3 0.5 0.4 0.5 0.5 0.5 0.4
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income ........... 9.0 10.0 8.6 10.6 5.4 3.7 4.4 6.3
Life insurance proceeds, net -- -- (2.4) -- -- -- -- --
Interest expense ........... 1.5 1.7 2.0 2.1 2.7 2.8 2.4 2.5
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before taxes ........ 7.5 8.3 9.0 8.5 2.7 0.9 2.0 3.8
Provision for income taxes . 3.0 3.3 2.1 2.9 1.1 0.3 0.8 1.4
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income ................. 4.5% 5.0% 6.9% 5.6% 1.6% 0.6% 1.2% 2.4%
========== ========== ========== ========== ========== ========== ========== ==========
</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 "Business - Certain Factors
That May Affect the Company's Business and Future Results."
17
<PAGE> 18
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 agreement, as most-recently amended in March 1998, 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. These credit agreements expire on June 30, 1998. The Company
is currently in negotiations with the bank and other potential lenders to obtain
a longer-term financing structure or secure replacement financing.
The credit agreements require the Company to maintain certain financial
ratios and other covenants, which, among other things, restrict other
indebtedness, capital expenditures and certain investments. As of December 31,
1997, the Company was in violation of certain financial covenants, for which the
bank has issued a waiver. In addition, the credit agreement was amended in
October 1997 to require the Company to obtain $30,000,000 of unsecured financing
by February 28, 1998; however, such requirement was waived in January 1998.
The total amount of credit available under the domestic revolving credit
facility for advances and letters of credit is limited to the lesser of (a)
$80.0 million through April 30, 1998 and $60.0 million thereafter or (b) the
Company's borrowing base associated with accounts receivable and inventories, as
defined by the agreement, plus an additional $15.0 million available through
April 30, 1998. The borrowing base is reduced each month by $3.0 million and
$3.5 million for Riteway Japan and Riteway France, respectively, which
represents the credit facilities extended by the bank to these locations. At
December 31, 1997, the Company had $65.5 million outstanding under the domestic
revolving credit facility, which incurs interest at the either the bank's
Reference Rate, LIBOR, or Offshore rate plus an applicable margin (as defined by
the agreement). See Note 6 of Notes to Consolidated Financial Statements.
The domestic term loan obtained in August 1996 of $17.0 million is payable in
equal quarterly installments of $1.1 million and matures on the earlier of
September 2000 or the expiration of the domestic revolving credit facility. 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, 1997, the Company had $11.7 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 6 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 the applicable margin. 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 the applicable margin. 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), the applicable
margin, and LIBOR (as defined by the agreement). Interest on the multicurrency
overdraft facility is payable monthly at the bank's prevailing base rate plus
the applicable margin. At December 31, 1997, the amounts outstanding on the
Riteway Japan, Riteway France and Caratti facilities were $1.8 million, $3.3
million and $10.1 million, respectively. See Note 6 of Notes to Consolidated
Financial Statements.
18
<PAGE> 19
The Company obtained additional long-term financing in September 1997 through an
Industrial Development Bond program sponsored by the state of California. The
$5.0 million borrowing, plus interest at 5.87% per annum, is payable in monthly
installments of $65,000 through October 2005. The proceeds of the borrowing must
be used for capital expenditures at the Company's Santa Ana facility. Unused
funds are held in an interest-bearing trust account at a bank. At December 31,
1997, approximately $1.5 million had been disbursed for capital expenditures and
$3.5 million remained available for future disbursements.
The Company's operating activities used cash of $5.3 million in 1997, $14.5
million in 1996 and $8.8 million in 1995. The lower cash outflow in 1997
resulted principally from a smaller increase in trade receivables and inventory
than had occurred in the prior two years, when the Company was experiencing a
more rapid expansion of its business. As is normal industry practice, the
Company maintains relatively high levels of receivables during the winter months
in connection with its credit policies. In addition, the Company's inventory
levels have increased over the past several years as the international
subsidiaries have expanded and the domestic product line has broadened.
The Company's investing activities used cash of $13.6 million in 1997, $17.7
million in 1996 and $4.0 million in 1995. Investing activities were primarily
comprised of capital expenditures at the Company's new Santa Ana facility and a
new research and manufacturing facility in Colorado, along with $3.6 million of
cash held in trust for future capital expenditures at the Santa Ana facility. In
1996, investment activities were primarily comprised of the acquisition of
Caratti and Riteway France. The Company's financing activities resulted in net
cash inflows of $19.5 million in 1997, $32.1 million in 1996 and $12.7 million
in 1995. Additional bank borrowings provided the majority of the financing in
1997 and 1996, while the Company's IPO provided the principal financing in 1995.
The Company anticipates that it will continue to rely on bank and vendor credit
and cash generated from operations in order to finance inventory and accounts
receivable. The Company further anticipates that it will be required to seek a
continuation of the $80.0 million of availability under its revolving credit
facility from its senior secured lender, which is scheduled to be reduced from
$80.0 million to $60.0 million on May 1, 1998. The Company is in the process of
seeking a longer-term financing structure with its existing senior secured
lender and additional and/or replacement financing from other lenders. While the
Company is negotiating with its bank and other potential lenders, there can be
no assurance that the Company will be able to obtain a continuation of the $80.0
million of availability under its revolving credit facility or any other such
financing on similar or acceptable terms, if at all. The Company anticipates
that its average cost of borrowing will be higher in 1998 than it was in 1997.
The failure to obtain any such continuation or any such financing would have a
material adverse effect on the Company's business, results of operations,
financial condition and liquidity. Assuming that the Company is able to obtain
such financing, 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. See "Business - Certain Factors That May Affect the
Company's Business and Future Results - Substantial Leverage; Liquidity".
NEW ACCOUNTING PRONOUNCEMENTS
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"). This
statement replaces the previously-reported primary and fully diluted earnings
per share with basic and diluted earnings per share. Basic earnings per share is
computed by dividing net income (loss) available to common stockholders by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is very similar to the previously-reported primary earnings
per share in that it includes the effect of the additional common shares which
would have been outstanding if dilutive stock options had been exercised. All
earnings per share amounts have been restated to conform to the SFAS No. 128
requirements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Nos. 130 and 131, "Reporting Comprehensive
Income" ("SFAS No. 130") and "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS No. 131"), respectively (collectively, the
"Statements"). The Statements are effective for fiscal years beginning after
December 15, 1997. SFAS No. 130 established standards for reporting of
comprehensive income and its components in annual financial statements. SFAS No.
131 establishes standards for reporting financial and descriptive information
about an enterprise's operating segments in its annual financial statements and
selected segment information in interim financial reports. Reclassification or
restatement of comparative financial statements or financial information for
earlier periods is required upon adoption of SFAS No. 130 and SFAS No. 131,
respectively. Application of the Statements' requirements is not expected to
have a material impact on the Company's consolidated financial position, results
of operations or liquidity.
19
<PAGE> 20
YEAR 2000 COMPLIANCE
The Company has performed a preliminary examination of its major software
applications to determine whether each system is prepared to accommodate the
year 2000. This examination included a review of program code which is
maintained by the Company as well as obtaining confirmation from outside
software vendors that their products are year 2000 compliant. The Company
believes that, based on its current examination, the year 2000 will not have a
material adverse impact on the Company's operations and that the costs to
accommodate the year 2000 will not be material. However, there can be no
assurance that software incompatibility with the year 2000 on the part of the
Company or any of its significant suppliers will not cause an interruption of
operations or other limitations of system functionality, or that the Company
will not incur substantial costs to avoid such occurrences. By the end of 1998,
the Company plans to complete an extensive assessment of the readiness of its
software applications with respect to year 2000 issues and any related
accommodation costs.
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.
20
<PAGE> 21
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 1998 Annual Meeting of
Stockholders.
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 1998 Annual Meeting of Stockholders.
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 1998
Annual Meeting of Stockholders.
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 1998 Annual Meeting of Stockholders.
21
<PAGE> 22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
<TABLE>
<CAPTION>
Index to Financial Statements Page No.
<S> <C>
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
</TABLE>
(a)(2) Financial Statement Schedules
<TABLE>
<CAPTION>
Index to Financial Statement Schedules Page No.
<S> <C>
Independent Auditors' Report on Financial Statement Schedule........... F-22
Schedule II - Valuation and Qualifying Accounts........................ F-23
</TABLE>
All other schedules are omitted because they are not required or the
required information is included in the financial statements or notes
thereto.
22
<PAGE> 23
(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 and GT (1)
Bicycles, California, Inc. (the "Predecessor"), dated January
19, 1993.
10.3 Employment Agreement between the Predecessor and Michael Haynes, (1)
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 Turner, (1)
dated September 27, 1993.
10.15 Amendment and Restatement of Stockholders Agreement among the (1)
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 The (1)
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>
23
<PAGE> 24
<TABLE>
<S> <C> <C>
10.21 Standard Industrial/Commercial Multi-Tenant Lease between Yale (1)
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 F. (1)
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 Restricted (1)
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, dated (1)
January 1, 1989.
10.31 Termination Agreement between Richard W. Long, Gary Turner, (1)
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 Company (1)
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 Park, (2)
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 and (3)
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 (5)
Michael Haynes, dated November 12, 1996.
10.45 Amendment No. 1 to Employment Agreement between the Company and (5)
William Duehring, dated November 12, 1996.
</TABLE>
24
<PAGE> 25
<TABLE>
<S> <C> <C>
10.46 Employment Agreement between the Company and Robert C. Ippolito, (5)
dated June 10, 1996.
10.47 Employment Agreement between the Company and Charles Cimitile, (5)
dated November 7, 1996.
10.48 Fourth Amendment to Second Amended and Restated Credit Agreement (6)
(Receivables 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
February 13, 1997.
10.49 Lease agreement by and between Zeno Table Company and GT Bicycles, (6)
Inc. for property located at 2001 East Dyer Road, Santa Ana,
California, dated January 3, 1997.
10.50 Fifth Amendment to Second Amended and Restated Credit Agreement (7)
(Receivables 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
March 14, 1997.
10.51 Sixth Amendment to Second Amended and Restated Credit Agreement (8)
(Receivables 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 15, 1997.
10.52 Seventh Amendment to Second Amended and Restated Credit Agreement (8)
(Receivables 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 September 11, 1997.
10.53 Eighth Amendment to Second Amended and Restated Credit Agreement (8)
(Receivables 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 October
23, 1997.
10.54 Ninth Amendment to Second Amended and Restated Credit Agreement *
(Receivables and Inventory); Waiver 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
November 18, 1997.
10.55 Loan Agreement Among GE Capital Public Finance, Inc., as Lender, *
California Economic Development Financing Authority, as Issuer, and
GT Bicycles, Inc. as Borrower, dated as of September 1, 1997.
10.56 Tenth Amendment to Second Amended and Restated Credit Agreement *
(Receivables 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 February 4, 1998.
10.57 Eleventh Amendment to Second Amended and Restated Credit Agreement *
(Receivables and Inventory); Waiver 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 February 27, 1998.
10.58 Twelfth Amendment to Second Amended and Restated Credit Agreement *
(Receivables 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 March 26, 1998.
</TABLE>
25
<PAGE> 26
<TABLE>
<S> <C> <C>
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).
27.1 Amended and Restated Financial Data Schedules - 1996 *
27.2 Financial Data Schedule *
</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 Haynes, (1)
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 Turner, (1)
dated September 27, 1993.
10.27 Incentive Stock Option, Nonqualified Stock Option and Restricted (1)
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, dated (1)
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 (5)
Michael Haynes, dated November 12, 1996.
10.45 Amendment No. 1 to Employment Agreement between the Company and (5)
William Duehring, dated November 12, 1996.
10.46 Employment Agreement between the Company and Robert C. Ippolito, (5)
dated June 10, 1996.
10.47 Employment Agreement between the Company and Charles Cimitile, (5)
dated November 7, 1996.
</TABLE>
26
<PAGE> 27
* 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 on Form 8-K
dated July 3, 1996.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996.
(6) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997.
(7) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997.
(8) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997.
(b) Reports on Form 8-K
During the second quarter of 1997, the Company filed a Form 8-K, dated
April 3, 1997, regarding the Company not meeting analysts' estimates for
sales and net income for the quarter ended March 31, 1997.
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 principal 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).
27
<PAGE> 28
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 April 6, 1998.
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 Executive Officer April 6, 1998
- -----------------------
Michael C. Haynes and Director
(Principal Executive Officer)
/s/ Charles Cimitile Vice President, Finance and April 6, 1998
- -----------------------
Charles Cimitile Chief Financial Officer
(Principal Financial and Principal
Accounting Officer)
/s/ William K. Duehring Chief Operating Officer and April 6, 1998
- -----------------------
William K. Duehring Director
/s/ Robert C. Gay Director April 6, 1998
- -----------------------
Robert C. Gay
/s/ Joseph J. Pretlow Director April 6, 1998
- -----------------------
Joseph J. Pretlow
/s/ Geoffrey S. Rehnert Director April 6, 1998
- -----------------------
Geoffrey S. Rehnert
28
<PAGE> 29
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, 1997 and 1996 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, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Orange County, California
February 25, 1998
F-1
<PAGE> 30
GT BICYCLES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
ASSETS (NOTE 6) 1997 1996
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 588,000 $ --
Trade accounts receivable, net of allowances of $2,334,000 and
$1,634,000 at December 31, 1997 and 1996, respectively 52,418,000 51,843,000
Inventories (note 3) 80,985,000 74,328,000
Prepaid expenses and other current assets 3,098,000 1,980,000
Deferred income taxes (note 8) 1,646,000 1,915,000
------------- -------------
Total current assets 138,735,000 130,066,000
Property, plant and equipment, net (notes 4 and 9) 12,833,000 5,023,000
Goodwill and other intangibles, net (notes 2, 5 and 11) 19,920,000 19,388,000
Other assets (note 11) 1,161,000 1,704,000
Restricted cash (note 6) 3,607,000 --
Deferred income taxes (note 8) 25,000 --
------------- -------------
$ 176,281,000 $ 156,181,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (note 6) $ 92,883,000 $ 4,250,000
Current portion of capital lease obligations (note 9) 462,000 376,000
Accounts payable 11,915,000 12,468,000
Accrued liabilities 4,310,000 4,519,000
Income taxes payable 463,000 1,061,000
------------- -------------
Total current liabilities 110,033,000 22,674,000
Long-term debt, net of current portion (note 6) 4,438,000 73,421,000
Capital lease obligations, net of current portion (note 9) 407,000 629,000
Deferred income taxes (note 8) -- 92,000
Other liabilities -- 212,000
------------- -------------
Total liabilities 114,878,000 97,028,000
------------- -------------
Stockholders' equity (notes 6 and 7):
Preferred stock, $0.001 par value, 5,000,000 shares authorized, none
issued -- --
Common stock, $0.001 par value, 20,000,000 shares authorized,
9,821,000 and 9,781,000 shares issued and outstanding
at December 31, 1997 and 1996, respectively 10,000 10,000
Additional paid-in-capital 47,182,000 46,916,000
Retained earnings 14,608,000 11,458,000
Foreign currency translation adjustment (397,000) 769,000
------------- -------------
Total stockholders' equity 61,403,000 59,153,000
Commitments and contingencies (note 9)
------------- -------------
$ 176,281,000 $ 156,181,000
============= =============
</TABLE>
See accompanying notes to be consolidated financial statements.
F-2
<PAGE> 31
GT BICYCLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net sales $ 216,214,000 $ 208,351,000 $ 168,933,000
Cost of sales 156,349,000 149,147,000 124,524,000
------------- ------------- -------------
Gross profit 59,865,000 59,204,000 44,409,000
Selling, general and administrative expenses 48,083,000 38,450,000 28,429,000
Amortization of intangibles and deferred financing costs 1,002,000 739,000 3,313,000
Nonrecurring charge (note 13) -- -- 4,708,000
------------- ------------- -------------
Operating income 10,780,000 20,015,000 7,959,000
Life insurance proceeds, net of guaranteed severance
payments of $724,000 (note 14) -- (1,276,000) --
Interest expense (note 6) 5,586,000 3,828,000 6,070,000
------------- ------------- -------------
Income before taxes and extraordinary item 5,194,000 17,463,000 1,889,000
Provision for income taxes (note 8) 2,044,000 5,887,000 1,027,000
------------- ------------- -------------
Income before extraordinary item 3,150,000 11,576,000 862,000
Extraordinary loss from early extinguishment of
debt, net of income tax benefit of $978,000 (note 6) -- -- (1,146,000)
------------- ------------- -------------
Net income (loss) $ 3,150,000 $ 11,576,000 $ (284,000)
============= ============= =============
Earnings (loss) per share:
Basic:
Income before extraordinary item $ 0.32 $ 1.18 $ 0.12
Extraordinary item -- -- (0.16)
------------- ------------- -------------
Net income (loss) $ 0.32 $ 1.18 $ (0.04)
============= ============= =============
Diluted:
Income before extraordinary item $ 0.32 $ 1.17 $ 0.12
Extraordinary item -- -- (0.16)
------------- ------------- -------------
Net income (loss) $ 0.32 $ 1.17 $ (0.04)
============= ============= =============
Weighted average common and common equivalent shares:
Basic 9,804,000 9,772,000 7,256,000
============= ============= =============
Diluted 9,918,000 9,932,000 7,403,000
============= ============= =============
</TABLE>
See accompanying notes to be consolidated financial statements.
F-3
<PAGE> 32
GT BICYCLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED FOREIGN
COMMON STOCK ADDITIONAL EARNINGS CURRENCY TOTAL
--------------------- PAID-IN (ACCUMULATED TRANSLATION STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) ADJUSTMENT EQUITY
---------- ------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 6,600,000 $ 7,000 $ 6,607,000 $ 166,000 $ -- $ 6,780,000
Cancellation of shares (note 7) (277,000) -- -- -- -- --
Exercise of warrants (note 7) 292,000 -- -- -- -- --
Issuance of common stock, net of offering
costs 3,150,000 3,000 40,213,000 -- -- 40,216,000
(note 7)
Net loss -- -- -- (284,000) -- (284,000)
---------- ------- ----------- ------------ ----------- ------------
Balance, December 31, 1995 9,765,000 10,000 46,820,000 (118,000) -- 46,712,000
Exercise of options (note 7) 11,000 -- 34,000 -- -- 34,000
Issuance of common stock for employee
stock purchase plan (note 7) 5,000 -- 62,000 -- -- 62,000
Net income -- -- -- 11,576,000 -- 11,576,000
Foreign currency translation adjustment -- -- -- -- 769,000 769,000
---------- ------- ----------- ------------ ----------- ------------
Balance, December 31, 1996 9,781,000 10,000 46,916,000 11,458,000 769,000 59,153,000
Exercise of options (note 7) 16,000 -- 58,000 -- -- 58,000
Issuance of common stock for employee
stock purchase plan (note 7) 24,000 -- 208,000 -- -- 208,000
Net income -- -- -- 3,150,000 -- 3,150,000
Foreign currency translation adjustment -- -- -- -- (1,166,000) (1,166,000)
---------- ------- ----------- ------------ ----------- ------------
Balance, December 31, 1997 9,821,000 $10,000 $47,182,000 $ 14,608,000 $ (397,000) $ 61,403,000
========== ======= =========== ============ =========== ============
</TABLE>
See accompanying notes to be consolidated financial statements.
F-4
<PAGE> 33
GT BICYCLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 3,150,000 $ 11,576,000 $ (284,000)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 2,772,000 1,595,000 4,084,000
Write-off of covenant not to compete -- -- 4,708,000
Extraordinary loss from early extinguishment of debt -- -- 2,124,000
Provisions for discounts and losses on accounts receivable 1,334,000 589,000 343,000
Deferred income taxes, net 152,000 (265,000) 526,000
Foreign currency translation gain (loss) (1,166,000) 769,000 --
Changes in assets and liabilities:
Trade accounts receivable (1,909,000) (11,406,000) (9,974,000)
Inventories (6,657,000) (18,996,000) (6,002,000)
Income taxes payable (598,000) 1,776,000 (1,309,000)
Prepaid expenses and other assets (1,404,000) (966,000) (726,000)
Accounts payable (553,000) 434,000 (2,403,000)
Accrued liabilities (209,000) 211,000 92,000
Other liabilities (212,000) 212,000 --
------------ ------------ ------------
Net cash used in operating activities (5,300,000) (14,471,000) (8,821,000)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property, plant and equipment (9,606,000) (2,408,000) (694,000)
Write-off of leasehold improvements 279,000 -- --
Restricted cash from industrial development bonds (3,607,000) -- --
Investments in unconsolidated affiliates (110,000) (500,000) --
Purchase of Riteway Products North Central, Inc. -- -- (3,267,000)
Purchase of Caratti Sport Limited -- (13,428,000) --
Purchase of Riteway Products France S.A.R.L (587,000) (1,323,000) --
------------ ------------ ------------
Net cash used in investing activities (13,631,000) (17,659,000) (3,961,000)
------------ ------------ ------------
Cash flows from financing activities:
Net borrowings under lines of credit 18,947,000 16,236,000 9,660,000
Borrowings from term loan -- 17,000,000 (37,000,000)
Repayments of term loan (4,250,000) (1,063,000) --
Borrowings from industrial development bonds 5,000,000 -- --
Repayments of industrial development bonds (112,000) -- --
Proceeds from issuance of common stock and warrants 266,000 96,000 40,216,000
Principal payments on capital lease obligations (332,000) (139,000) (167,000)
------------ ------------ ------------
Net cash provided by financing activities 19,519,000 32,130,000 12,709,000
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 588,000 -- (73,000)
Cash and cash equivalents at beginning of year -- -- 73,000
------------ ------------ ------------
Cash and cash equivalents at end of year $ 588,000 $ -- $ --
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 5,599,000 $ 3,692,000 $ 6,248,000
============ ============ ============
Income taxes $ 2,490,000 $ 4,447,000 $ 969,000
============ ============ ============
Supplemental disclosures:
Purchase of Riteway Products North Central, Inc.
Inventories $ -- $ -- $ 2,217,000
Property, plant and equipment -- -- 77,000
Goodwill -- -- 323,000
Covenant not to compete -- -- 650,000
------------ ------------ ------------
Net cash used to acquire business $ -- $ -- $ 3,267,000
============ ============ ============
Purchase of Caratti Sport Limited
Working capital, other than cash $ -- $ 9,194,000 $ --
Property, plant and equipment -- 433,000 --
Goodwill -- 9,871,000 --
Long-term debt -- (5,888,000) --
Noncurrent liabilities -- (182,000) --
------------ ------------ ------------
Net cash used to acquire business $ -- $ 13,428,000 $ --
============ ============ ============
Purchase of Riteway Products France S.A.R.L
Inventories $ -- $ 1,201,000 $ --
Property, plant and equipment -- 54,000 --
Goodwill and other assets 587,000 68,000 --
------------ ------------ ------------
Net cash used to acquire business $ 587,000 $ 1,323,000 $ --
============ ============ ============
Purchase of equipment under capital lease obligations $ 196,000 $ 143,000 $ --
============ ============ ============
</TABLE>
See accompanying notes to be consolidated financial statements.
F-5
<PAGE> 34
GT BICYCLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BUSINESS
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 name of the Company was changed from GT Holdings, Inc. to GT Bicycles, Inc.
on August 11, 1995. The Company consummated an initial public offering ("IPO")
of its common stock in October 1995.
Substantial Leverage and Liquidity
As of December 31, 1997, the Company's total indebtedness was approximately
$97.3 million, and there was approximately $3.6 million available under its
revolving credit facilities for future borrowings. The revolving credit facility
in the current amount of $80.7 million and a term loan of $11.7 million become
due and payable on June 30, 1998. In addition, the availability of the revolving
credit facility will be reduced from $80.0 million to $60.0 million on May 1,
1998. As of December 31, 1997, the Company had stockholders' equity of
approximately $61.4 million. The Company's high degree of leverage could have
important consequences, including (i) a substantial portion of the Company's
cash flow from operations must be dedicated to debt service and will not be
available for other purposes; (ii) the Company's ability to obtain additional
debt financing in the future for working capital may be limited; (iii) the
Company may be more leveraged than certain of its competitors, which may place
the Company at a competitive disadvantage; and (iv) the Company's ability to
refinance its revolving credit facility and its term loan due and payable on
June 30, 1998 may be adversely affected. The Company anticipates that it will be
required to seek a continuation of the $80.0 million of availability under its
revolving credit facility from its senior secured lender, which is scheduled to
be reduced from $80.0 million to $60.0 million on May 1, 1998. The Company is
negotiating with its existing senior secured lender and other lenders regarding
longer-term financing or the refinancing of its revolving credit and term loan
facilities. However, there can be no assurance that the Company will be able to
obtain a continuation of the $80.0 million of availability under its revolving
credit facility or other financing on acceptable terms, or at all. The failure
to obtain a continuation or other acceptable financing would have a material
adverse affect on the Company's business, results of operations, financial
condition and liquidity.
Dependence on Foreign Suppliers
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, including, but not limited to,
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 financial
condition, results of operations and liquidity.
(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") in the United Kingdom, as well as the
majority-owned subsidiaries, Innovations in Composites, Inc. ("Innovations") and
Riteway Products Canada Limited ("Riteway Canada"). Investments in affiliates,
for which the Company has an ownership interest of at least 20% but not
exceeding 50%, are recorded under the equity method of accounting.
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. Accordingly, the purchase price of
each entity was allocated to the assets acquired based on their estimated fair
values. The excess of the purchase price over the fair market values of the net
assets acquired has been recorded as goodwill. Riteway Japan was formed in March
1996 as a wholly-owned subsidiary of the Company. Riteway Canada was formed in
September 1997 as an 85%-owned subsidiary of the Company.
The Company held a 45% ownership interest in Innovations from 1993 through June
1997. In July 1997, the Company increased its ownership level in Innovations to
57% through the purchase of additional common shares. At that date, the Company
changed its method of accounting for Innovations from the equity method to
consolidation (see note 11).
The interest of minority shareholders in the equity of Innovations and Riteway
Canada is included in accrued liabilities on the accompanying balance sheet and
their interest in the earnings of these entities is included in selling, general
and administrative expenses on the accompanying statement of operations. Such
amounts were not material in fiscal 1997.
All significant intercompany balances and transactions have been eliminated in
consolidation.
F-6
<PAGE> 35
GT BICYCLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Foreign Currency Translation
The Company uses the local currency of the respective country as the functional
currency for its overseas operations. Accordingly, assets and liabilities
outside the United States are translated into dollars at the rate of exchange in
effect at the balance sheet date. Income and expense items are translated at the
weighted average exchange rates prevailing during the period. The cumulative
translation gain or loss is included as an adjustment to stockholders' equity.
There were no significant foreign currency transaction gains or losses in the
periods presented.
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 average cost method, which approximates the
first-in, first-out (FIFO) method.
Revenue Recognition
Revenue is recognized and estimated warranty expenses are accrued upon product
shipment.
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.
Research and Product Development Costs
Research and product development costs are expensed as incurred. Selling,
general and administrative expenses of the Company include research and product
development expenses of approximately $2,574,000, $1,844,000 and $1,596,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.
Advertising and Promotion Costs
Advertising costs and 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 $4,879,000, $3,914,000 and $2,685,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
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
F-7
<PAGE> 36
GT BICYCLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
estimated useful lives of the related assets (ranging from 5 to 7 years).
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, 1997 and 1996 consist of goodwill relating to
various acquisitions, covenants not to compete from the acquisition of Riteway
Products North Central, Inc., and trademarks, patents and other items (see note
5). Amortization of intangibles is recorded on a straight-line basis over the
following periods: 25 years for goodwill, the contractual term of five years for
covenants not to compete, and the respective lives ranging from 5 to 25 years
for other intangibles.
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, 1997 and 1996, the Company had forward exchange contracts
outstanding, with maturities of five months or less, to exchange foreign
currencies for approximately $2,200,000 and $3,300,000, respectively.
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.
Earnings (Loss) per Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"). This
statement replaces the previously-reported primary and fully diluted earnings
per share with basic and diluted earnings per share. Basic earnings per share is
computed by dividing net income (loss) available to common stockholders by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is very similar to the previously-reported primary earnings
per share in that it includes the effect of the additional common shares which
would have been outstanding if dilutive stock options had been exercised. All
earnings per share amounts have been restated to conform to the SFAS No. 128
requirements.
F-8
<PAGE> 37
GT BICYCLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table summarizes the calculation of basic and diluted earnings
per share before extraordinary item:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1997 1996 1995
-------------- -------------- -----------
<S> <C> <C> <C>
Numerator:
Basic and diluted earnings per share --
income before extraordinary item $ 3,150,000 $ 11,576,000 $ 862,000
============== ============== ===========
Denominator:
Basic earnings per share -- weighted
average number of common shares 9,804,000 9,772,000 7,256,000
outstanding during the year
Incremental common shares attributable to
assumed exercise of outstanding stock
options 114,000 160,000 147,000
-------------- -------------- -----------
Denominator for diluted earnings per
share 9,918,000 9,932,000 7,403,000
============== ============== ===========
Basic earnings per share $ .32 $ 1.18 $ .12
============== ============== ===========
Diluted earnings per share $ .32 $ 1.17 $ .12
============== ============== ===========
</TABLE>
The calculations of earnings per share before extraordinary item excluded the
effect of the assumed exercise of the following numbers of outstanding common
stock options because their effect was antidilutive: 106,000 in 1997, 2,000 in
1996 and 6,000 in 1995.
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 debt approximates fair value because for each borrowing either (i) the
underlying instrument is a variable note that reprices frequently or (ii)
interest rates have not changed significantly since the inception of the
borrowing. The carrying value of the Company's forward exchange contracts
approximates fair value because of the short-term maturities of these financial
instruments.
Accounting for Stock-Based Compensation
As permitted by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123"), the Company accounts for
stock-based employee compensation plans in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. The Company provides the pro forma net income, pro forma
earnings per share, and stock based compensation plan disclosure requirements
set forth in SFAS No. 123 (see note 7).
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Nos. 130 and 131, "Reporting Comprehensive
Income" ("SFAS No. 130") and "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS No. 131"), respectively (collectively, the
"Statements"). The Statements are effective for fiscal years beginning after
December 15, 1997. SFAS No. 130 established standards for reporting of
comprehensive income and its components in annual financial statements. SFAS No.
131 establishes standards for reporting financial and descriptive information
about an enterprise's operating segments in its annual financial statements and
selected segment information in interim financial reports. Reclassification or
restatement of comparative financial statements or financial information for
earlier periods is required upon
F-9
<PAGE> 38
GT BICYCLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
adoption of SFAS No. 130 and SFAS No. 131, respectively. Application of the
Statements' requirements is not expected to have a material impact on the
Company's consolidated financial position, results of operations or liquidity.
Reclassifications
Certain prior year amounts have been reclassified to conform with the fiscal
1997 presentation.
(3) INVENTORIES
A summary of the components of inventories follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
----------- -----------
<S> <C> <C>
Raw materials $ 678,000 $ 95,000
Work in process 3,124,000 3,659,000
Finished goods and component parts 77,183,000 70,574,000
----------- -----------
$80,985,000 $74,328,000
=========== ===========
</TABLE>
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Land $ 208,000 $ --
Leasehold improvements 3,421,000 538,000
Machinery and equipment 5,130,000 2,321,000
Computer equipment 3,727,000 2,441,000
Vehicles 1,665,000 1,208,000
Office furniture and equipment 1,836,000 1,201,000
Construction in progress - Colorado facility 1,024,000 --
------------ ------------
17,011,000 7,709,000
Less accumulated depreciation and amortization (4,178,000) (2,686,000)
------------ ------------
$ 12,833,000 $ 5,023,000
============ ============
</TABLE>
F-10
<PAGE> 39
GT BICYCLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(5) INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Goodwill $ 21,794,000 $ 20,315,000
Covenants not to compete 650,000 650,000
Trademarks, patents and other 244,000 189,000
------------ ------------
22,688,000 21,154,000
Less accumulated amortization (2,768,000) (1,766,000)
------------ ------------
$ 19,920,000 $ 19,388,000
============ ============
</TABLE>
F-11
<PAGE> 40
GT BICYCLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) LONG-TERM DEBT
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<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 8.17% and 6.84% at
December 31, 1997 and 1996, respectively) $ 65,490,000 $ 51,617,000
Domestic term loan, secured by the assets of the
Company, due quarterly through June 30, 1998.
Interest is payable monthly at various interest rates
described below (weighted average rate of 8.09% and
7.55% at December 31, 1997 and 1996, respectively) 11,688,000 15,938,000
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 1.97% and 1.92% at December 31, 1997 and
1996, respectively) 1,761,000 2,236,000
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 4.38% and 4.31% at December 31, 1997 and
1996, respectively) 3,280,000 3,431,000
Caratti 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 8.25% and 7.35% at December 31, 1997 and 1996,
respectively) 10,149,000 4,449,000
Industrial Development Bonds payable, secured by certain
property and equipment, due monthly through October 31,
2005. Interest is payable monthly at a rate of 5.87% per
annum 4,888,000 --
Promissory note, secured by common shares of
Innovations, due June 30, 2000. Interest is payable
quarterly at a rate of 10.00% per annum 65,000 --
------------ ------------
97,321,000 77,671,000
Less current portion of debt (92,883,000) (4,250,000)
------------ ------------
$ 4,438,000 $ 73,421,000
============ ============
</TABLE>
F-12
<PAGE> 41
GT BICYCLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
At December 31, 1997, future minimum principal payments on long-term debt were
as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1998 $92,883,000
1999 541,000
2000 639,000
2001 609,000
2002 645,000
Thereafter 2,004,000
===========
$97,321,000
===========
</TABLE>
In November 1995, the Company entered into a domestic credit agreement, as most
recently-amended in March 1998, 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. These credit agreements
expire on June 30, 1998. Although the Company is negotiating with the bank to
obtain a longer-term financing structure, there can be no assurance that the
Company will be able to obtain such financing. Accordingly, the outstanding
balances of the revolving credit facilities and the term loan have been
classified in current liabilities at December 31, 1997 (see note 1).
The credit agreements require the Company to maintain certain financial ratios
and other covenants, which, among other things, restrict other indebtedness,
capital expenditures and certain investments. At December 31, 1997, the Company
was in default of certain financial covenants for which the bank has issued a
waiver. In addition, the credit agreement was amended in October 1997 to require
the Company to obtain $30,000,000 of unsecured financing by February 28, 1998;
however, such requirement was waived by the bank in January 1998.
Domestic Revolving Credit Facility
The total amount of credit available under the domestic revolving credit
facility for advances and letters of credit is limited to the lesser of (a)
$80,000,000 through April 30, 1998 and $60,000,000 thereafter, or (b) the
Company's borrowing base associated with accounts receivable and inventories, as
defined by the agreement, plus an additional $15,000,000 available through April
30, 1998. The borrowing base is reduced each month by $3,000,000 and $3,500,000
for Riteway Japan and Riteway France, respectively, which represents the credit
facilities extended by the bank to these locations. The amount individually
available under 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 plus the applicable
margin (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 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, 1997, the
Company had approximately $249,000 of commercial or standby letters of credit
outstanding.
Domestic Term Loan
The domestic term loan with an original amount of $17,000,000 is payable in
equal quarterly installments of $1,250,000 and matures on the earlier of
September 30, 2000 or the expiration of the domestic revolving credit facility.
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 the applicable margin (as defined by the agreement), the
Offshore Rate plus the applicable margin (as defined by the agreement), or a
combination thereof.
F-13
<PAGE> 42
GT BICYCLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 the applicable margin.
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 the applicable margin.
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), the applicable margin, and LIBOR (as defined by the agreement).
Interest on the multicurrency overdraft facility is payable monthly at the
bank's prevailing base rate plus the applicable margin. 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, 1997, the Company had no
commercial letters of credit outstanding.
Industrial Development Bonds
In September 1997, the Company consummated a $5,000,000 borrowing under a
California Economic Development Financing Authority program. Principal and
interest at a 5.87% per annum rate are payable in aggregate monthly installments
of $65,000 through October 2005. Use of the borrowed funds is restricted to the
purchase of qualifying leasehold improvements and production equipment at the
Company's Santa Ana facility. Pending disbursement for such capital
expenditures, the funds have been placed in an interest-bearing bank trust
account and are classified as restricted cash on the balance sheet. Through
December 31, 1997, approximately $1,455,000 had been drawn from the trust fund
to finance capital expenditures. The restricted cash balance at December 31,
1997 consists of the remaining $3,545,000 of borrowings plus $62,000 of interest
earned.
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 7). 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 approximately $1,146,000, net of tax benefits of
approximately $978,000, 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 approximately
347,000 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 7).
F-14
<PAGE> 43
GT BICYCLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(7) 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.
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 approximately 277,000 shares of
Class A common stock by certain stockholders of the Company, the exercise of a
warrant to purchase approximately 292,000 shares of Class B common stock and the
cancellation of the remainder of the warrant to purchase approximately 56,000
shares of Class B common stock by a certain stockholder of the Company and an
11-for-1 stock split (see note 6).
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, 1997 and 1996, there were no
shares of preferred stock outstanding.
At December 31, 1997, 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 approximately $31,000 and $9,000 for the years ended December 31, 1997 and
1996, respectively. 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 and earnings (loss) per share would have been reduced
to the pro forma amounts indicated as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income (loss) As reported $ 3,150,000 $ 11,576,000 $ (284,000)
Pro forma 2,646,000 11,386,000 (306,000)
Diluted earnings (loss) per share As reported $ 0.32 $ 1.17 $ (0.04)
Pro forma 0.27 1.15 (0.04)
</TABLE>
The pro forma net income (loss) and earnings (loss) per share amounts reflect
only options granted in 1997, 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 1,000,000 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
F-15
<PAGE> 44
GT BICYCLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 within ninety days. As of December 31,
1997, there were 286,989 shares 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, 1994 148,500 $ 1.82
Granted 84,511 10.83
Exercised -- N/A
Canceled -- N/A
-------- --------
Options outstanding at December 31, 1995 233,011 5.09
Granted 382,597 10.91
Exercised (10,750) 3.20
Canceled (49,597) 11.13
-------- --------
Options outstanding at December 31, 1996 555,261 8.60
Granted 171,000 6.88
Exercised (15,750) 3.70
Canceled (24,000) 10.36
-------- --------
Options outstanding at December 31, 1997 686,511 $ 8.22
======== ========
</TABLE>
The following table summarizes information about the options outstanding under
the Plan at December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED-
OPTIONS AVERAGE OPTIONS
RANGE OF OUTSTANDING AT WEIGHTED- REMAINING EXERCISABLE AT WEIGHTED-
EXERCISE DECEMBER 31, AVERAGE CONTRACTUAL DECEMBER 31, AVERAGE
PRICES 1997 EXERCISE PRICE LIFE 1997 EXERCISE PRICE
- -------------- -------------- -------------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.82 129,500 $ 1.82 6.88 years 129,500 $ 1.82
$6.50 - $ 8.38 201,597 6.95 9.41 years 17,423 7.69
$9.12 - $14.00 355,414 11.27 8.66 years 95,332 11.24
-------------- ------ -------------- ------
$1.82 - $14.00 686,511 $ 8.22 8.54 years 242,255 $ 5.95
============== ====== ============== ======
</TABLE>
F-16
<PAGE> 45
GT BICYCLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The per share weighted-average fair value of stock options granted during 1997,
1996 and 1995 was $4.13, $7.58 and $6.17, respectively, on the date of grant
using the Black Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Expected life (years) 6 6 6
Risk-free interest rate 7% 7% 7%
Volatility 55% 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 shares
previously granted under the Purchase Plan. The Purchase Plan terminates in
September 2005. As of December 31, 1997, an aggregate 29,066 shares had been
issued and 270,934 shares remain available for future issuance under the
Purchase Plan.
The per share weighted-average fair value of shares issued during 1997 and 1996
was $1.54 and $2.18, respectively, on the date of issuance using the Black
Scholes option-pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Expected life (years) 0.25 0.25
Risk-free interest rate 7% 7%
Volatility 55% 50%
Expected dividend yield -- --
</TABLE>
F-17
<PAGE> 46
GT BICYCLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(8) INCOME TAXES
The provisions for income taxes consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal $ 1,132,000 $ 5,005,000 $ 403,000
State 191,000 989,000 98,000
Foreign 569,000 158,000 --
----------- ----------- -----------
1,892,000 6,152,000 501,000
----------- ----------- -----------
Deferred:
Federal 270,000 (198,000) 386,000
State (118,000) (67,000) 140,000
Foreign -- -- --
----------- ----------- -----------
152,000 (265,000) 526,000
----------- ----------- -----------
$ 2,044,000 $ 5,887,000 $ 1,027,000
=========== =========== ===========
</TABLE>
The provisions for income taxes differ from the amounts computed by applying the
Federal statutory income tax rate to income before income taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Computed "expected" income tax provision 34.0% 34.0% 34.0%
State franchise taxes, net of Federal benefit 0.9 3.4 8.3
Goodwill amortization 5.4 1.2 7.1
Life insurance proceeds -- (3.9) --
Other (0.9) (1.0) 5.0
----------- ----------- -----------
39.4% 33.7% 54.4%
=========== =========== ===========
</TABLE>
The tax-effected temporary differences that give rise to significant portions of
the deferred tax assets and liabilities at December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Accounts receivable $ 103,000 $ 614,000
Inventories 1,123,000 970,000
Covenants not to compete 94,000 56,000
Accrued expenses 580,000 533,000
Tax credit carryforwards, investments and other 271,000 --
----------- -----------
Total deferred tax assets 2,171,000 2,173,000
----------- -----------
Deferred tax liabilities:
State taxes (210,000) (202,000)
Goodwill (9,000) (6,000)
Investments in affiliates (281,000) (142,000)
----------- -----------
Total deferred tax liabilities (500,000) (350,000)
----------- -----------
Net deferred tax asset $ 1,671,000 $ 1,823,000
=========== ===========
</TABLE>
F-18
<PAGE> 47
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, 1997. 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 has not provided for U.S. Federal income and foreign withholding
taxes on its foreign subsidiaries' undistributed earnings as of December 31,
1997 because such earnings are intended to be reinvested indefinitely. If these
earnings are distributed in the future, foreign tax credits would become
available under U.S. law to reduce the effect on the Company's overall tax
liability.
The Company has received notice from the Internal Revenue Service that the
Company's 1995 and 1996 Federal income tax returns will be audited. In addition,
the Company's 1993 and 1994 California income tax returns are currently being
audited by the Franchise Tax Board. 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.
(9) COMMITMENTS AND CONTINGENCIES
Included in computer equipment in the accompanying balance sheet are the
following assets held under capital leases at December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Computer equipment $ 1,325,000 $ 1,129,000
Less accumulated amortization (668,000) (447,000)
----------- -----------
$ 657,000 $ 682,000
=========== ===========
</TABLE>
The Company also leases certain office, manufacturing, warehouse and plant
facilities under noncancelable operating leases. Future minimum lease payments
on capital and operating leases at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
------------ ------------
<S> <C> <C>
1998 $ 465,000 $ 2,909,000
1999 430,000 2,651,000
2000 54,000 2,281,000
2001 8,000 2,044,000
2002 -- 1,941,000
Thereafter -- 10,089,000
------------ ------------
957,000 21,915,000
Less sublease income -- (298,000)
------------ ------------
Total minimum lease payments 957,000 $ 21,617,000
============
Less amount representing interest (88,000)
------------
Present value of net minimum lease payments 869,000
Less current portion (462,000)
------------
Long-term portion $ 407,000
============
</TABLE>
Three 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, 1997,
1996 and 1995 amounted to $802,000, $547,000 and $159,000,
F-19
<PAGE> 48
GT BICYCLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
respectively. Total rent expense, net of sublease income, for the years ended
December 31, 1997, 1996 and 1995 amounted to $2,990,000, $2,116,000 and
$1,207,000, 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.
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, 1997 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.
(10) 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 $250,000, $500,000
and $500,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
(11) INVESTMENTS IN AFFILIATES
As discussed in note 2, the Company held a 45% interest in Innovations, which
manufactures certain bicycle parts, from 1993 through June 1997. During that
period, the Company's investment was included in other assets on the balance
sheet. The Company increased its ownership level to 57% in July 1997, at which
time Innovations was consolidated into the Company's financial statements. The
Company's investment in Innovations was accounted for under the purchase method
and allocated to the assets acquired based on their estimated fair values. The
excess of the Company's investment over its share of the fair value of
Innovations' net assets was recorded as goodwill. Purchases by the Company from
Innovations (which represent most of the Innovations' sales in 1997 and all of
its sales in 1996 and 1995) were $460,000, $1,052,000 and $1,050,000 for the six
months ended June 30, 1997 and the years ended December 31, 1996 and 1995,
respectively.
Included in other assets in the accompanying balance sheet at December 31, 1997
and 1996 is the Company's 50% investment in a partnership which manufactures and
markets an electric-assist bicycle and the Company's 45% investment in a foreign
exporting company.
F-20
<PAGE> 49
GT BICYCLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(12) GEOGRAPHIC DATA
A summary of the Company's net sales, operating income and identifiable assets
by geographic area follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net sales:
United States $ 140,517,000 $ 142,985,000 $ 128,603,000
Europe 53,069,000 47,498,000 24,689,000
Other foreign 22,628,000 17,868,000 15,641,000
------------- ------------- -------------
$ 216,214,000 $ 208,351,000 $ 168,933,000
============= ============= =============
Operating income:
United States $ 8,004,000 $ 19,069,000 $ 7,959,000
Europe 1,916,000 1,387,000 --
Other foreign 860,000 (441,000) --
------------- ------------- -------------
$ 10,780,000 $ 20,015,000 $ 7,959,000
============= ============= =============
Identifiable assets:
United States $ 139,725,000 $ 138,214,000 $ 96,693,000
Europe 29,274,000 15,876,000 --
Other foreign 7,282,000 2,091,000 --
------------- ------------- -------------
$ 176,281,000 $ 156,181,000 $ 96,693,000
============= ============= =============
</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.
(13) 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 $4,708,000 was
recorded to eliminate the remaining unamortized value of the covenants not to
compete.
(14) 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 $1,276,000 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 $724,000.
F-21
<PAGE> 50
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors
GT Bicycles, Inc.:
Under date of February 25, 1998, we reported on the consolidated balance sheets
of GT Bicycles, Inc. and subsidiaries as of December 31, 1997 and 1996, 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, 1997, as
contained in the annual report on Form 10-K for the year ended December 31,
1997. 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 25, 1998
F-22
<PAGE> 51
SCHEDULE II
GT BICYCLES, INC.
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> <C> <C>
Allowance for doubtful accounts
For the year ended December 31, 1995(2) $ 940,000 $ 343,000 $ -- $ (106,000) $1,177,000
========== ========== ======== ========== ==========
For the year ended December 31, 1996(2) $1,177,000 $ 589,000 $254,000 $ (386,000) $1,634,000
========== ========== ======== ========== ==========
For the year ended December 31, 1997 $1,634,000 $1,334,000 $ -- $ (634,000) $2,334,000
========== ========== ======== ========== ==========
</TABLE>
(1) Amount represents allowance for doubtful accounts established in connection
with the acquisition of Caratti Sport Limited.
(2) Certain prior year amounts have been reclassified to conform with the 1997
presentation.
F-23
<PAGE> 1
EXHIBIT 10.54
NINTH AMENDMENT TO SECOND AMENDED
AND RESTATED CREDIT AGREEMENT
(RECEIVABLES AND INVENTORY); WAIVER
This Ninth Amendment to Second Amended and Restated Credit Agreement
(Receivables and Inventory); Waiver (this "Amendment") is entered into as of
November 18, 1997, among Bank of America National Trust and Savings Association
("Bank") and GT Bicycles California, Inc. ("GTBC"), Riteway Products East, Inc.
("East"), Riteway Products North Central, Inc. ("North Central"), Rite-Way
Distributors Central, Inc. ("Central"), Rite-Way Distributors, Inc.
("Distributors"), GT and Bicycles, Inc. ("GT"). GTBC, East, North Central,
Central, and Distributors are sometimes hereinafter referred to collectively as
"Borrowers" and individually as a "Borrower."
RECITALS
A. Bank, Borrowers, and GT are parties to that certain Second Amended and
Restated Credit Agreement (Receivables and Inventory) dated as of August 12,
1996, as modified by amendments dated September 15, 1996, October 15, 1996,
October 31, 1996, February 13, 1997, March 14, 1997, August 15, 1997, September
11, 1997, and October 23, 1997 (as amended, the "Credit Agreement").
B. The parties hereto now desire to amend the Credit Agreement on the
terms and conditions set forth below.
AGREEMENT
NOW, THEREFORE, the parties hereto agree as follows:
1. Definitions. Capitalized terms used but not defined in this Amendment
shall have the meanings ascribed to them in the Credit Agreement.
2. Amendments. The Credit Agreement shall be amended as follows:
(a) In Paragraph 8.5, the figure "0.55" is amended to read "0.45."
(b) Except as hereby amended, all of the terms and conditions of the
Credit Agreement shall remain in full force and effect.
3. Waiver. Bank hereby waives Borrowers' noncompliance with Paragraph 8.5
of the Credit Agreement for the fiscal quarter ended September 30, 1997. This
waiver is specific in time and in intent and does not constitute, nor should it
be construed as, a
- 1 -
<PAGE> 2
waiver of any other right, power or privilege under the Credit Agreement, or
under any agreement, or instrument mentioned in the Credit Agreement, or as a
waiver of any other default of the same or of any other term or provision of the
Credit Agreement.
4. Representations and Warranties. Borrowers represent and warrant to Bank
that: (i) after giving effect to the waiver in Paragraph 3 above, no Event of
Default under Credit Agreement and no event which, with notice or lapse of time
or both, would become an Event of Default has occurred and is continuing; (ii)
after giving effect to the waiver in Paragraph 3 above, Borrowers'
representations and warranties made under the Credit Agreement are true as of
the date hereof; (iii) the making and performance by Borrowers of this Amendment
have been duly authorized by all necessary corporate action; (iv) no consent,
approval, authorization, permit, or license is required in connection with the
making or performance of this Amendment.
5. Conditions. This Amendment will not become effective until Bank has
received the following:
(a) An original of this Amendment, executed by Borrowers and Bank.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first above written.
BANK OF AMERICA NATIONAL GT BICYCLES CALIFORNIA, INC.
TRUST AND SAVINGS ASSOCIATION RITEWAY PRODUCTS EAST, INC.
RITEWAY PRODUCTS NORTH
CENTRAL, INC.
By: /s/ E.M. Amendt RITE-WAY DISTRIBUTORS
--------------------------------- CENTRAL, INC.
E.M. Amendt RITE-WAY DISTRIBUTORS, INC.
Vice President GT BICYCLES, INC.
By: /s/ Michael Haynes
--------------------------------
Michael Haynes
President
- 2 -
<PAGE> 1
EXHIBIT 10.55
LOAN AGREEMENT
Among
GE CAPITAL PUBLIC FINANCE, INC.,
as Lender,
CALIFORNIA ECONOMIC DEVELOPMENT FINANCING AUTHORITY,
as Issuer,
and
GT BICYCLES, INC.,
as Borrower
Dated as of September 1, 1997
This instrument constitutes a security agreement under the California Uniform
Commercial Code.
LOAN AGREEMENT
Lender:
GE Capital Public Finance, Inc.
Suite 470
8400 Normandale Lake Blvd.
Minneapolis, MN 55437
Telephone: (800) 346-3164
Telecopier: (612) 897-5601
Issuer:
California Economic Development Financing Authority
801 K Street, Suite 1700
Sacramento, CA 95814
Attn: Chair
Telephone: (916) 322-8520
Telecopier: (916) 322-7214
Borrower:
GT Bicycles, Inc.
2001 East Dyer Road
Santa Ana, CA 92705
Telephone: (714) 481-7100
Telecopier: (714) 481-7111
THIS LOAN AGREEMENT dated as of September 1, 1997 (this "Agreement")
among GE Capital Public Finance, Inc., a Delaware corporation, as lender (with
its successors and assigns, "Lender"), California Economic Development Financing
Authority, a body public and corporate, and a public instrumentality of the
State of California
<PAGE> 2
(the "State"), as issuer ("Issuer"), and GT Bicycles, Inc. a Delaware
corporation, as borrower ("Borrower").
WHEREAS, the Issuer was established for the purpose of promoting and
encouraging commerce and industry, and generally to foster economic development
in the State and is authorized to provide financing for private activity
economic development projects pursuant to the provisions of Section 15710 et
seq. of the California Government Code (constituting Part 10.2 of Division 3 of
Title 2 of the Government Code of the State of California, as now in effect and
as it may from time to time hereafter be amended or supplemented) (the "Act");
and
WHEREAS, Issuer is authorized to enter into loan agreements,
contracts and other instruments and documents necessary or convenient to obtain
loans for the purpose of facilitating the financing of economic development
projects as described in the Act; and
WHEREAS, in furtherance of the purposes of the Act, Issuer proposes
to finance all or a portion of the acquisition and installation of the Project
(as hereinafter defined) by Borrower pursuant to this Agreement by obtaining a
loan from Lender and lending the proceeds thereof to Borrower; and
WHEREAS, Borrower proposes to borrow the proceeds of the loan made
by Lender to Issuer upon the terms and conditions set forth herein to finance
the acquisition and installation of the Equipment and other property comprising
the Project; and
WHEREAS, Borrower shall make Loan Payments (as hereinafter defined)
directly to Lender as assignee of Issuer, pursuant to the terms set forth in
this Agreement; and
WHEREAS, this Agreement shall not be deemed to constitute a debt or
liability or moral obligation of the State or any political subdivision thereof,
or a pledge of the faith and credit or taxing power of the State or any
political subdivision thereof, but shall be a special obligation payable solely
from the Loan Payments payable hereunder by Borrower to Lender as assignee of
Issuer;
NOW, THEREFORE, for good and valuable consideration, receipt of
which is hereby acknowledged, and in consideration of the premises contained in
this Agreement, Lender, Issuer and Borrower agree as follows:
ARTICLE I
DEFINITIONS AND EXHIBITS
Section 1.01. Definitions. The following terms used herein will have
the meanings indicated below unless the context clearly requires otherwise:
"Acquisition Costs" means the contract price paid or to be paid to
the Vendors or reimbursed to Borrower for any portion of the Project upon
Borrower's acceptance thereof, including administrative, engineering, legal,
financial and other costs incurred by Lender, Issuer, Borrower, Escrow Agent and
Vendors in connection with the acquisition, installation and financing by Lender
of such portion of the Project and costs of issuance that may be paid pursuant
to the Tax Regulatory Agreement, which Acquisition Costs are set forth in
Exhibit A hereto.
<PAGE> 3
"Additional Collateral" means the property identified as Additional
Collateral on Exhibit C attached hereto, together with all replacement parts,
additions, repairs, accessions and accessories incorporated therein and/or
affixed to such property.
"Affiliate" means an affiliate of Lender or any related entity 100%
of whose common stock is directly or indirectly owned by Lender or an affiliate
of Lender.
"Agreement" means this Agreement, including all exhibits hereto, as
any of the same may be supplemented or amended from time to time in accordance
with the terms hereof.
"Borrower" means GT Bicycles, Inc., a Delaware corporation.
"Business Day" means a day other than a Saturday or Sunday on which
banks are generally open for business in New York, New York, San Francisco,
California and Minneapolis, Minnesota.
"Certificate of Acceptance" means a Certificate of Acceptance, in
substantially the form set forth as Exhibit B hereto, whereby Borrower
acknowledges receipt in good condition of particular portions of the Project
identified therein and confirms the date of delivery thereof and certain other
matters.
"Code" means the Internal Revenue Code of 1986, as amended, and
United States Treasury regulations promulgated thereunder.
"Default" means an event that, with giving of notice or passage of
time or both, would constitute an Event of Default as provided in Article XII
hereof.
"Determination of Taxability" means any determination, decision or
decree by the Commissioner of Internal Revenue, or any District Director of
Internal Revenue or any court of competent jurisdiction, or an opinion obtained
by Lender of counsel qualified in such matters and reasonably acceptable to
Issuer and Borrower, that an Event of Taxability shall have occurred. A
Determination of Taxability also shall be deemed to have occurred on the first
to occur of the following:
(a) the date when Borrower files any statement, supplemental
statement, or other tax schedule, return or document, which discloses that an
Event of Taxability shall have occurred; or
(b) the effective date of any federal legislation enacted after
the date of this Agreement or promulgation of any income tax regulation or
ruling by the Internal Revenue Service that causes an Event of Taxability after
the date of this Agreement.
"Environmental Laws" has the meaning ascribed thereto in paragraph
(h) of Article V hereof.
"Equipment" means the property identified in Exhibit A hereto to be
used in connection with Borrower's operations (including, to the extent
permitted pursuant to the Code without jeopardizing the tax-exempt status of the
Interest, certain items originally financed through internal advances of
Borrower in anticipation of obtaining permanent financing through Issuer),
together with all
<PAGE> 4
replacement parts, additions, repairs, accessions and accessories incorporated
therein and/or affixed to such property.
"Escrow Agent" means First Trust of California, National
Association, as escrow agent under the Escrow Agreement, and its successors and
assigns permitted under the Escrow Agreement.
"Escrow Agreement" means the Escrow Agreement dated as of September
1, 1997 among Lender, Issuer, Borrower and Escrow Agent.
"Escrow Fund" means the fund established and held by Escrow Agent
pursuant to the Escrow Agreement.
"Event of Taxability" means the inclusion of interest on the loan
from Lender to Issuer in Lender's gross income (but not including the effect of
any alternative minimum tax, environmental tax, so-called "de minimus rule" or
other similar tax effect) as the result of (i) any act, failure to act or use of
the proceeds of the Loan, (ii) a change in use of the Project, (iii) any
misrepresentation or inaccuracy in any of the representations, warranties or
covenants contained in this Agreement or the Tax Regulatory Agreement by Issuer
or Borrower, (iv) the enactment of any federal legislation after the date of
this Agreement, (v) the promulgation of any income tax regulation or ruling by
the Internal Revenue Service after the date of this Agreement or (vi) the entry
of a non-appealable final judgment or determination by the Internal Revenue
Service or a court of competent jurisdiction.
"Gross-Up Rate" means, with respect to any Interest payment
(including payments made prior to the Event of Taxability), the rate necessary
to calculate an additional payment in an amount sufficient such that the sum of
the Interest payment plus the additional payments would, after being reduced by
the federal tax (including interest and penalties, but not including the effect
of any alternative minimum tax, environmental tax or other similar tax effect)
actually imposed thereon, equal the amount of the Interest payment.
"Interest" means the portion of any payment from Issuer to Lender
designated as and comprising interest as shown in Exhibit A hereto.
"Issuer" means California Economic Development Financing Authority,
acting as issuer under this Agreement.
"Lender" means (i) GE Capital Public Finance, Inc., acting as lender
under this Agreement, (ii) any surviving, resulting or transferee corporation of
GE Capital Public Finance, Inc. and (iii) except where the context requires
otherwise, any assignee(s) of Lender.
"Loan" means the loan from Issuer to Borrower pursuant to this
Agreement.
"Loan Payments" means the loan payments payable by Borrower pursuant
to the provisions of this Agreement as specifically set forth in Exhibit A
hereto. As provided in Article II hereof, Loan Payments shall be payable by
Borrower directly to Lender, as assignee of Issuer, in the amounts and at the
times as set forth in Exhibit A hereto.
"Loan Proceeds" means the total amount of money to be paid pursuant
to Section 2.02 hereof by Lender to Escrow Agent for deposit and application in
accordance with the Escrow Agreement.
<PAGE> 5
"Prepayment Amount" means the amount which Borrower may or must from
time to time pay or cause to be paid to Lender as assignee of Issuer in order to
prepay the Loan, as provided in Section 2.07 hereof, such amounts being set
forth in Exhibit A hereto, together with accrued interest and all other amounts
due hereunder.
"Principal" means the portion of any Loan Payment designated as
principal in Exhibit A hereto.
"Project" means the Equipment and additional property and leasehold
improvements to be acquired, constructed, equipped, installed and used in
connection with Borrower's operations as described in Exhibit A attached hereto.
"Purchase Agreements" means Borrower's purchase agreements or other
contracts with Vendors of the Project.
"Qualified Institutional Buyer" shall have the meaning ascribed
thereto in Rule 144A of the Securities Act of 1933, as amended.
"State" means the State of California.
"Tax Regulatory Agreement" means the Tax Regulatory Agreement of
even date herewith between Borrower and Issuer, as such Tax Regulatory Agreement
may be amended from time to time in accordance with its terms.
"UCC" means the Uniform Commercial Code as adopted and in effect in
the State.
"Vendor" means the contractor, manufacturer or vendor of a portion
of the Project, as well as the agents or dealers of the manufacturer, from whom
Borrower has purchased or is purchasing items of the Project.
Section 1.02. Exhibits. The following exhibits are attached hereto
and made a part hereof:
Exhibit A: Schedule of the Project and Loan Payments describing the
Project and setting forth the Loan Payments and Prepayment Amounts. Issuer
hereby authorizes Lender to insert in Exhibit A the serial or other identifying
numbers relating to the Equipment when available.
Exhibit B: Form of Certificate of Acceptance.
Exhibit C: Description of Additional Collateral.
Exhibit D: Form of Investor's Letter of Representation.
Exhibit E: Schedule of Pending Litigation.
Section 1.03. Rules of Construction. (a) The singular form of any
word used herein, including the terms defined in Section 1.01 hereof, shall
include the plural, and vice versa. The use herein of a word of any gender shall
include correlative words of all genders.
(b) Unless otherwise specified, references to Articles, Sections and
other subdivisions of this Agreement are to the designated Articles, Sections
and other subdivision of this Agreement as originally executed. The words
<PAGE> 6
"hereof," "herein," "hereunder" and words of similar import refer to this
Agreement as a whole.
(c) The headings or titles of the several articles and sections
shall be solely for convenience of reference and shall not affect the meaning,
construction or effect of the provisions hereof.
ARTICLE II
FINANCING OF PROJECT AND TERMS OF LOAN
Section 2.01. Acquisition of Project. Borrower either has
constructed, installed or ordered or shall construct, install or order the
Project pursuant to one or more Purchase Agreements from one or more Vendors.
Borrower shall remain liable to the Vendor or Vendors in respect of its duties
and obligations in accordance with each Purchase Agreement and shall bear the
risk of loss with respect to any loss or claim relating to any portion of the
Project covered by any Purchase Agreement, and neither Lender nor Issuer shall
assume any such liability or risk of loss. Borrower covenants and agrees to pay
or cause to be paid such amounts as may be necessary to complete the
construction, acquisition and installation of the Project and to ensure that the
Project is operational to the extent that the Loan Proceeds are insufficient to
cause such construction, acquisition and installation.
Section 2.02. Loan. Lender hereby agrees, subject to the terms and
conditions of this Agreement, to make a loan to Issuer in the amount of
$5,000,000; Issuer hereby agrees, subject to the terms and conditions of this
Agreement, to borrow such amount from Lender and to lend such amount to
Borrower; and Borrower hereby agrees to borrow such amount from Issuer. Upon
fulfillment of the conditions set forth in Article III hereof, Lender shall
deposit the Loan Proceeds in the Escrow Fund to be held, invested and disbursed
as provided in the Escrow Agreement. Issuer's obligation to repay the loan from
Lender, and Borrower's obligation to repay the Loan, shall commence, and
interest shall begin to accrue, on the date that Loan Proceeds are deposited in
the Escrow Fund.
Section 2.03. Interest. The principal amount of the loan from Lender
to Issuer and the Loan hereunder outstanding from time to time shall bear
interest (computed on the basis of actual days elapsed in a 360-day year) at the
rate of six and five hundredths percent (6.05%) per annum. Interest accruing on
the principal balance of such loans outstanding from time to time shall be
payable as provided in Exhibit A and upon earlier demand in accordance with the
terms hereof or prepayment in accordance with Section 2.07 hereof. Upon the
occurrence of a Determination of Taxability, Borrower shall, with respect to
future interest payments, begin making Loan Payments calculated at the Gross-Up
Rate. In addition, Borrower shall make immediately upon demand of Lender a
payment to Lender sufficient to supplement prior Loan Payments to the Gross-Up
Rate.
Section 2.04. Payments. Issuer shall pay the principal of, premium,
if any in accordance with Section 2.07 hereof, and interest on the loan from
Lender to Issuer, but only out of the amounts paid by Borrower pursuant to this
Agreement. Borrower shall pay to Lender, as assignee of Issuer, Loan Payments,
in the amounts and on the dates set forth in Exhibit A hereto. As security for
its obligation to pay the principal of, premium, if any in accordance with
Section 2.07 hereof, and interest on the loan from Lender, Issuer assigns to
Lender all of Issuer's right to receive Loan Payments from Borrower hereunder,
<PAGE> 7
all of Issuer's rights hereunder (except for the right to receive any Additional
Payments to the extent payable to Issuer, any rights of Issuer to
indemnification and rights of notice, inspection and consent) and all of
Issuer's right, title and interest in and to the Equipment and Additional
Collateral, and Issuer irrevocably constitutes and appoints Lender and any
present or future officer or agent of Lender as its lawful attorney, with full
power of substitution and resubstitution, and in the name of Issuer or
otherwise, to collect the Loan Payments and any other payments due hereunder and
to sue in any court for such Loan Payments or other payments, to exercise all
rights hereunder with respect to the Equipment and/or Additional Collateral, and
to withdraw or settle any claims, suits or proceedings pertaining to or arising
out of this Agreement upon any terms. Such Loan Payments and other payments
shall be made by Borrower directly to Lender, as Issuer's assignee, and shall be
credited against Issuer's payment obligations hereunder. No provision, covenant
or agreement contained in this Agreement or any obligation imposed on Issuer
herein, or the breach thereof, shall constitute or give rise to or impose upon
Issuer a pecuniary liability, a charge upon its general credit or taxing powers
or a pledge of its general revenues. In making the agreements, provisions and
covenants set forth in this Agreement, Issuer has not obligated itself except
with respect to the application of the Loan Payments to be paid by Borrower
hereunder. All amounts required to be paid by Borrower hereunder shall be paid
in lawful money of the United States of America in immediately available funds.
No recourse shall be had by Lender or Borrower for any claim based on this
Agreement or the Tax Regulatory Agreement against any director, officer,
employee, counsel or agent of Issuer alleging personal liability on the part of
such person, unless such claim is based on the willful dishonesty of or
intentional violation of law by such person.
Section 2.05 Payment on Non-Business Days. Whenever any payment to
be made hereunder shall be stated to be due on a day which is not a Business
Day, such payment may be made on the next succeeding Business Day, and such
extension of time shall in such case be included in the computation of interest
or the fees hereunder, as the case may be.
Section 2.06. Loan Payments To Be Unconditional. The obligations of
Borrower to make the Loan Payments required under this Article II and to make
other payments hereunder and to perform and observe the covenants and agreements
contained herein shall be absolute and unconditional in all events, without
abatement, diminution, deduction, setoff or defense for any reason, including
(without limitation) any failure of the Project to be delivered or installed,
any defects, malfunctions, breakdowns or infirmities in the Project or any
accident, condemnation, destruction or unforeseen circumstances. Notwithstanding
any dispute between Borrower and any of Issuer, Lender, any Vendor or any other
person, Borrower shall make all Loan Payments when due and shall not withhold
any Loan Payments pending final resolution of such dispute, nor shall Borrower
assert any right of set-off or counterclaim against its obligation to make such
payments required under this Agreement.
Section 2.07. Prepayments. (a) Borrower may, in its discretion,
prepay the Loan in whole at any time by paying the applicable Prepayment Amount.
(b) Borrower shall prepay the Loan in whole or in part at any time
pursuant to Article X hereof by paying the applicable Prepayment Amount.
(c) Borrower shall prepay the Loan in full immediately upon demand
of Lender after the occurrence of an Event of Default by paying the applicable
Prepayment Amount.
<PAGE> 8
(d) Borrower shall prepay the Loan in full immediately upon demand
of Lender after the occurrence of a Determination of Taxability by paying the
applicable Prepayment Amount plus an amount necessary to supplement the prior
Loan Payments to the Gross-Up Rate.
(e) The amounts due hereunder shall be repaid in part, without
penalty or premium, with funds remaining in the Escrow Fund upon termination of
the Escrow Agreement as provided in Sections 2.03 or 2.04 of the Escrow
Agreement.
(f) Borrower may prepay the Loan in full at any time as provided in
Sections 9.02 or 9.03 hereof by paying the applicable Prepayment Amount.
Upon any prepayment in part of the Loan, the prepayment shall be
applied first to interest accrued thereon and next to the Principal portion of
the Loan Payments in the inverse order of maturity.
Section 2.08. Special Obligations. The loan from Lender to Issuer as
provided herein, together with the interest thereon, shall not be deemed to
constitute a debt or liability of the State or any political subdivision thereof
or a pledge of the faith and credit of the State or any political subdivision
thereof, but shall be payable solely from the funds provided therefor pursuant
to this Agreement. The loan from Lender to Issuer as provided herein is only a
special obligation of Issuer as provided by the Act, and Issuer shall under no
circumstances be obligated to pay such loan and the interest and premium, if
any, thereon or any Acquisition Cost except from Loan Payments received from
Borrower and other funds pledged therefor.
Neither the faith and credit nor the taxing power of the State or
any political subdivision of the State, is pledged to the payment of the
principal of, premium, if any, or interest on the loan from Lender to Issuer as
provided herein, nor is the State or any political subdivision of the State, in
any manner obligated to make any appropriation for such payment. Issuer has no
taxing power.
Section 2.09. Additional Payments. Borrower shall pay to the Issuer
or to Lender, as appropriate, the following "Additional Payments" in addition to
the Loan Payments payable by Borrower: such amounts incurred by Lender or Issuer
after the closing as shall be required by Lender or Issuer in payment of any
reasonable costs and expenses incurred in connection with the performance or
enforcement of this Agreement, and the financing of the Project, including but
not limited to: (a) application, commitment or financing fees, if any; (b)
indemnification payments pursuant to Section 8.03 and 8.06 hereof; all taxes and
assessments of any type or character charged to the Issuer or Lender affecting
the amount available to the Issuer from payments to be received hereunder or in
any way arising due to the transactions contemplated hereby (including taxes and
assessments assessed or levied by any public agency or governmental authority of
whatsoever character having power to levy taxes or assessments), but excluding
franchise taxes based upon the capital and/or income of the Issuer or Lender and
taxes based upon or measured by the net income of the Issuer or Lender; (c) the
reasonable fees and expenses of such accountants, consultants, attorneys and
other experts as may be engaged by Issuer or Lender to prepare audits, financial
statements, reports or opinions or to provide such other services required under
this Agreement, or otherwise in connection with the enforcement of the Loan; (d)
insurance premiums not paid hereunder; and (e) all other reasonable, direct and
necessary administrative costs of Lender or Issuer and such other charges
required to be paid in order to enforce its rights under this Agreement. Such
<PAGE> 9
Additional Payments shall be billed to Borrower by Lender or Issuer, as the case
may be, from time to time, together with a statement certifying that the amount
so billed has been paid for one or more of the items described, or that such
amount is then payable for such items. Amounts so billed shall be due and
payable by Borrower within 30 days after receipt of the bill by Borrower.
ARTICLE III
CONDITIONS PRECEDENT
Lender's agreement to make the loan to Issuer hereunder and to
disburse the Loan Proceeds shall be subject to the condition precedent that
Lender shall have received all of the following, each in form and substance
satisfactory to Lender:
(a) This Agreement, properly executed on behalf of Issuer and
Borrower, and each of the Exhibits hereto properly completed.
(b) The Tax Regulatory Agreement, properly executed on behalf of
Issuer and Borrower.
(c) The Escrow Agreement, properly executed on behalf of Issuer,
Lender, Borrower and Escrow Agent.
(d) A certificate of the Secretary or an Assistant Secretary of
Borrower, certifying as to (i) the resolutions of the board of directors and, if
required, the shareholders of Borrower, authorizing the execution, delivery and
performance of this Agreement, the Escrow Agreement and the Tax Regulatory
Agreement and any related documents, (ii) the bylaws of Borrower, and (iii) the
signatures of the officers or agents of Borrower authorized to execute and
deliver this Agreement, the Escrow Agreement and the Tax Regulatory Agreement
and other instruments, agreements and certificates on behalf of Borrower.
(e) Currently certified copies of the Certificate of
Incorporation of Borrower.
(f) A Certificate of Good Standing issued as to Borrower by the
Secretary of the State of the state of Borrower's incorporation not more than 10
days prior to the date hereof.
(g) A Certificate of Status--Foreign Corporation issued by the
Secretary of State of the State dated not more than 10 days prior to the date of
closing.
(h) Certificates of the insurance required hereunder, containing
a lender's loss payable clause or endorsement in favor of Lender.
(i) A completed and executed Form 8038 or evidence of filing
thereof with the Secretary of Treasury.
(j) A resolution or evidence of other official action taken by
or on behalf of Issuer to authorize the transactions contemplated hereby.
(k) Evidence that the financing of the Project has been approved
by the "applicable elected representative" of the State after a public hearing
held upon reasonable notice.
<PAGE> 10
(l) A true and correct copy of any and all leases pursuant to
which Borrower is leasing the property where the Equipment or the Additional
Collateral will be located, together with a landlord's disclaimer and consent
with respect to each such lease.
(m) A true and correct copy of any and all mortgages, deeds of
trust or similar agreements (whether or not Borrower is a party to any such
agreement) relating to the property where the Equipment or the Additional
Collateral will be located, together with a mortgagee's waiver with respect to
each such mortgage, deed of trust or similar agreement.
(n) As applicable, financing statements executed by Borrower, as
debtor, and naming Issuer, as secured party, and Lender, as assignee, and/or the
original certificate of title or manufacturer's certificate of origin and title
application if any of the Equipment or Additional Collateral is subject to
certificate of title laws.
(o) Current searches of appropriate filing offices showing that
(i) no state, federal tax liens or judgment liens have been filed and remain in
effect against Borrower, (ii) no financing statements have been filed and remain
in effect against Borrower relating to the Equipment or the Additional
Collateral except those financing statements filed by Lender, (iii) Lender has
duly filed all financing statements necessary to perfect the security interest
created pursuant to this Agreement and (iv) Lender has duly filed all financing
statements necessary to perfect the transfer of Issuer's interest in this
Agreement and the Loan Payments.
(p) An opinion of counsel to Borrower, addressed to Lender and
Issuer, in form and substance acceptable to Lender and Issuer.
(q) An opinion of counsel to Issuer, addressed to Lender and
Borrower, in form and substance acceptable to Lender and Borrower.
(r) An opinion of special counsel, addressed to Lender, Issuer
and Borrower, in form and substance acceptable to Lender, Issuer and Borrower.
(s) Payment of Lender's fees, commissions and expenses required
by Section 13.01 hereof.
(t) Payment of Issuer's fees, commissions and expenses incurred
in connection with this Agreement and the transactions contemplated hereby.
(u) An investor letter of representation executed by Lender and
addressed to Issuer and Borrower, in the form attached hereto as Exhibit D.
(v) Any other documents or items required by Lender.
Lender's agreement to make the loan to Issuer hereunder, to disburse
the Loan Proceeds and to consider approval of any disbursement from the Escrow
Fund shall be subject to the further conditions precedent that on the date
thereof:
(w) Lender shall have received each of the items required for a
disbursement pursuant to the Escrow Agreement;
(x) Lender shall have received in form and substance
satisfactory to Lender Vendor invoice(s) and/or bill(s) of sale relating to the
Project and, if such invoices have been paid by Issuer or Borrower, evidence of
payment
<PAGE> 11
thereof and, if applicable, evidence of official intent to reimburse such
payment as required by the Code;
(y) the representations and warranties contained in Articles IV
and V hereof are correct on and as of the date of such disbursement as though
made on and as of such date, except to the extent that such representations and
warranties relate solely to an earlier date; and
(z) no event has occurred and is continuing, or would result
from such loan to Issuer or the Loan which constitutes a Default, an Event of
Default or a Determination of Taxability.
(aa) Borrower has provided to Lender all of the UCC releases
that Lender requires in order that Lender, as assignee of Issuer, will have a
valid first priority perfected security interest in the Equipment and the
Additional Collateral.
ARTICLE IV
REPRESENTATIONS, WARRANTIES AND COVENANTS OF ISSUER
Issuer represents, warrants and covenants for the benefit of Lender
and Borrower, as follows:
(a) Issuer is a body public and corporate, and a public
instrumentality of the State, organized and existing by virtue of the laws of
the State.
(b) Issuer will exercise its best efforts to preserve and keep
in full force and effect its existence as a body public and corporate, and a
public instrumentality of the State.
(c) Issuer is authorized under the Act to enter into this
Agreement, the Escrow Agreement, the Tax Regulatory Agreement and the
transactions contemplated hereby and to perform all of its obligations
hereunder.
(d) Issuer has duly authorized the execution and delivery of
this Agreement, the Escrow Agreement and the Tax Regulatory Agreement under the
terms and provisions of the resolution adopted by its Board of Directors, and
further represents, covenants and warrants that all requirements have been met
and procedures have occurred in order to ensure the enforceability of this
Agreement, the Escrow Agreement and the Tax Regulatory Agreement against Issuer.
Issuer has taken all necessary action and has complied with all provisions of
the Act, including but not limited to the making of the findings required by the
Act, required to make this Agreement, the Escrow Agreement and the Tax
Regulatory Agreement the valid and binding obligation of Issuer.
(e) The authorized officer of the Board of Directors of Issuer
executing this Agreement and any related documents has been duly authorized to
execute and deliver this Agreement, the Escrow Agreement and the Tax Regulatory
Agreement and such related documents under the terms and provisions of a
resolution of Issuer or by other appropriate official action.
(f) This Agreement, the Escrow Agreement and the Tax Regulatory
Agreement are legal, valid and binding obligations of Issuer, enforceable in
accordance with their respective terms, except to the extent limited by
<PAGE> 12
bankruptcy, reorganization or other laws of general application relating to or
affecting the enforcement of creditors' rights, to the application of equitable
principles, and to the limitations on enforcement remedies against public
entities in California.
(g) Issuer has assigned to Lender all of Issuer's rights in the
Equipment, the Additional Collateral and this Agreement (except any
indemnification payable to Issuer, rights to notice, the right to receive
Additional Payments to the extent payable to Issuer and any rights to inspection
and consent hereunder) including the assignment of all rights in the security
interest granted to Issuer by Borrower.
(h) Issuer will not pledge, mortgage or assign this Agreement or
its duties and obligations hereunder to any person, firm or corporation, except
as provided under the terms hereof.
(i) None of the execution and delivery of this Agreement, the
Escrow Agreement or the Tax Regulatory Agreement, the consummation of the
transactions contemplated hereby or the fulfillment of or compliance with the
terms and conditions of this Agreement, the Escrow Agreement or the Tax
Regulatory Agreement violates any law, rule, regulation or order, conflicts with
or results in a breach of any of the terms, conditions or provisions of any
restriction or any agreement or instrument to which Issuer is now a party or by
which it is bound or constitutes a default under any of the foregoing or results
in the creation or imposition of any prohibited lien, charge or encumbrance of
any nature whatsoever upon any of the property or assets of Issuer under the
terms of any instrument or agreement.
(j) There is no action, suit, proceeding, claim, inquiry or
investigation, at law or in equity, before or by any court, regulatory agency,
public board or body pending or, to the best of Issuer's knowledge, threatened
against or affecting Issuer, challenging Issuer's authority to enter into this
Agreement, the Escrow Agreement or the Tax Regulatory Agreement or any other
action wherein an unfavorable ruling or finding would adversely affect the
enforceability of this Agreement, the Escrow Agreement or the Tax Regulatory
Agreement or any other transaction of Issuer which is similar hereto, or the
exclusion of the Interest from gross income for federal tax purposes under the
Code, or would materially and adversely affect any of the transactions
contemplated by this Agreement.
(k) Issuer will submit or cause to be submitted to the Internal
Revenue Service a Form 8038 (or other information reporting statement) at the
time and in the form required by the Code.
(l) The financing of the Project has been approved by an
"applicable elected representative" (as defined in Section 147(f) of the Code)
of the State after a public hearing held upon reasonable notice.
(m) Issuer will comply fully at all times with provisions
contained in the Tax Regulatory Agreement that directly relate to Issuer, and
Issuer will not take any action, or omit to take any action, which, if taken or
omitted, respectively, would violate the Tax Regulatory Agreement.
(n) Issuer will take no action that would cause the Interest to
become includable in gross income for federal income tax purposes under the Code
(including, without limitation, intentional acts under Treas. Reg. Section
1.148-2(c) or consenting to a deliberate action within the meaning of Treas.
Reg. Section 1.141
<PAGE> 13
2(d)), and Issuer will take and will cause its officers, employees and agents
to take all affirmative actions legally within its power necessary to ensure
that the Interest does not become includable in gross income of the recipient
for federal income tax purposes under the Code (including, without limitation,
the calculation and payment of any rebate required to preserve such exclusion).
(o) To the best knowledge of Issuer, no member, officer or other
official of Issuer has any financial interest whatsoever in Borrower or in the
transactions contemplated by this Agreement.
ARTICLE V
REPRESENTATIONS, WARRANTIES AND COVENANTS OF BORROWER
Borrower represents, warrants and covenants for the benefit of
Lender and Issuer, as follows:
(a) Borrower is a corporation duly organized, validly existing
and in good standing under the laws of the state of Delaware, has power to enter
into this Agreement and by proper corporate action has duly authorized the
execution and delivery of this Agreement, the Escrow Agreement and the Tax
Regulatory Agreement. Borrower is in good standing and is duly licensed or
qualified to transact business in the State and in all jurisdictions where the
character of the property owned or leased or the nature of the business
transacted by it makes such licensing or qualification necessary.
(b) Borrower has been fully authorized to execute and deliver
this Agreement, the Escrow Agreement and the Tax Regulatory Agreement under the
terms and provisions of the resolution of its board of directors, or by other
appropriate official approval, and further represents, covenants and warrants
that all requirements have been met, and procedures have occurred in order to
ensure, to the extent permitted by law, the enforceability of this Agreement,
the Escrow Agreement and the Tax Regulatory Agreement and this Agreement, the
Escrow Agreement and the Tax Regulatory Agreement have been duly authorized,
executed and delivered.
(c) The officer of Borrower executing this Agreement, the Escrow
Agreement and the Tax Regulatory Agreement and any related documents has been
duly authorized to execute and deliver this Agreement, the Escrow Agreement and
the Tax Regulatory Agreement and such related documents under the terms and
provisions of a resolution of Borrower's board of directors.
(d) This Agreement, the Escrow Agreement and the Tax Regulatory
Agreement constitute valid and legally binding obligations of Borrower,
enforceable against Borrower in accordance with their respective terms, except
to the extent limited by bankruptcy, reorganization or other laws and equitable
principles of general application relating to effecting the enforcement of
creditors' rights.
(e) The execution and delivery of this Agreement, the Escrow
Agreement and the Tax Regulatory Agreement, the consummation of the transactions
contemplated hereby and the fulfillment of the terms and conditions hereof do
not and will not violate any law, rule, regulation or order, conflict with or
result in a breach of any of the terms or conditions of the articles of
incorporation or bylaws of Borrower or of any corporate restriction or of any
agreement or instrument to which Borrower is now a party and do not and will not
<PAGE> 14
constitute a default under any of the foregoing or result in the creation or
imposition of any liens, charges or encumbrances of any nature upon any of the
property or assets of Borrower contrary to the terms of any instrument or
agreement.
(f) The authorization, execution, delivery and performance of
this Agreement by Borrower do not require submission to, approval of, or other
action by any governmental authority or agency, which action with respect to
this Agreement has not been taken and which is final and nonappealable or will
not be taken within the time required by this Agreement or by applicable law.
(g) Except as has been disclosed in Exhibit E hereto, there is
no action, suit, proceeding, claim, inquiry or investigation, at law or in
equity, before or by any court, regulatory agency, public board or body pending
or, to the best of Borrower's knowledge, threatened against or affecting
Borrower, challenging Borrower's authority to enter into this Agreement, the
Escrow Agreement or the Tax Regulatory Agreement or any other action wherein an
unfavorable ruling or finding would adversely affect the enforceability of this
Agreement, the Escrow Agreement or the Tax Regulatory Agreement or any other
transaction of Borrower which is similar hereto, or the exclusion of the
Interest from gross income for federal tax purposes under the Code, or would
materially and adversely affect any of the transactions contemplated by this
Agreement.
(h) The property at which the Equipment and the Additional
Collateral is located is properly zoned for its current and anticipated use and
the use of the Equipment and the Additional Collateral and the operation of the
Project and will not violate any applicable zoning, land use, environmental or
similar law or restriction. Borrower has or will have at the time the related
disbursement is requested from the Escrow Fund all licenses and permits to use
the Equipment and the Additional Collateral and operate the Project. Borrower
has or will have at the time the related disbursement is requested from the
Escrow Fund obtained all permits, licenses and other authorizations which are
required under federal, state and local laws relating to emissions, discharges,
releases of pollutants, contaminants, hazardous or toxic materials, or wastes
into ambient air, surface water, ground water or land, or otherwise relating to
the manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants or hazardous or toxic
materials or wastes ("Environmental Laws") at the Borrower's facilities or in
connection with the operation of its facilities. Except as previously disclosed
to Lender in writing, Borrower and all activities of the Borrower at its
facilities comply with all Environmental Laws and with all terms and conditions
of any required permits, licenses and authorizations applicable to Borrower with
respect thereto. Except as previously disclosed to Lender in writing, Borrower
is also in compliance with all limitations, restrictions, conditions, standards,
prohibitions, requirements, obligations, schedules and timetables contained in
Environmental Laws or contained in any plan, order, decree, judgment or notice
of which Borrower is aware. Except as previously disclosed to Lender in writing,
Borrower is not aware of, nor has Borrower received notice of, any events,
conditions, circumstances, activities, practices, incidents, actions or plans
which may interfere with or prevent continued compliance with, or which may give
rise to any liability under, any Environmental Laws.
(i) The Project will be used to manufacture and distribute
bicycles and bicycle related parts and accessories or for the production of
other tangible personal property.
<PAGE> 15
(j) Borrower owns or will own the Project and intends to operate
the Project, or cause the Project to be operated, as an "economic development
project," within the meaning of the Act, until the date on which all of the Loan
Payments have been fully paid or the applicable Prepayment Amount has been fully
paid.
(k) Borrower will not take any action that would cause the
Interest to become includable in gross income of the recipient for federal
income tax purposes under the Code (including, without limitation, intentional
acts under Treas. Reg. Section 1.148-2(c) or deliberate action within the
meaning of Treas. Reg. Section 1.141-2(d)), and Borrower will take and will
cause its officers, employees and agents to take all affirmative actions legally
within its power necessary to ensure that the Interest does not become
includable in gross income of the recipient for federal income tax purposes
under the Code (including, without limitation, the calculation and payment of
any rebate required to preserve such exclusion).
(l) Borrower has heretofore furnished to Lender the audited
financial statements of Borrower for its fiscal years ended December 31, 1993,
December 31, 1994, December 31, 1995 and December 31, 1996 and the unaudited
financial statement of Borrower for the months ended June 30, 1997, and those
statements fairly present the financial condition of Borrower on the dates
thereof and the results of its operations and cash flows for the periods then
ended and were prepared in accordance with generally accepted accounting
principles. Since the date of the most recent financial statements, there has
been no material adverse change in the business, properties or condition
(financial or otherwise) of Borrower.
(m) Borrower has paid or caused to be paid to the proper
authorities when due all federal, state and local taxes required to be withheld
by it. Borrower has filed all federal, state and local tax returns which are
required to be filed, and Borrower has paid or caused to be paid to the
respective taxing authorities all taxes as shown on said returns or on any
assessment received by it to the extent such taxes have become due.
(n) Borrower has or will have good and absolute title to all
Equipment, Additional Collateral and all proceeds thereof, free and clear of all
mortgages, security interests, liens and encumbrances except for the security
interest created pursuant to this Agreement.
(o) All financial and other information provided to Lender by or
on behalf of Borrower in connection with Borrower's request for the Loan
contemplated hereby is true and correct in all material respects, and Borrower
has not failed to provide Lender with any material information with respect to
Borrower or its financial or operating condition.
(p) Borrower has provided to Lender signed financing statements
sufficient when filed to perfect the security interest created pursuant to this
Agreement. When such financing statements are filed in the offices noted
therein, Lender, as assignee of Issuer, will have a valid and perfected security
interest in the Equipment and the Additional Collateral, subject to no other
security interest, assignment, lien or encumbrance. None of the Equipment or the
Additional Collateral is or will become a permanent fixture on real estate. None
of the Equipment or the Additional Collateral constitutes a replacement of,
substitution for or accessory to any property of Borrower subject to a lien of
any kind. Borrower leases the real property where the Equipment and the
<PAGE> 16
Additional Collateral will be located pursuant to the lease dated January 3,
1997 between Borrower and Zeno Table Company, a California corporation.
(q) Upon delivery and installation of the Equipment, Borrower
will provide to Issuer and Lender a completed and executed copy of the
Certificate of Acceptance attached hereto as Exhibit B.
(r) Borrower will aid and assist Issuer in connection with
preparing and submitting to the Internal Revenue Service a Form 8038 (or other
applicable information reporting statement) at the time and in the form required
by the Code.
(s) Borrower will comply fully at all times with the Tax
Regulatory Agreement, and Borrower will not take any action, or omit to take any
action, which, if taken or omitted, respectively, would violate the Tax
Regulatory Agreement, and the representations and warranties contained in the
Tax Regulatory Agreement are true and correct.
(t) Expenses for work done by officers or employees of Borrower
in connection with the Project will be included as an Acquisition Cost, if at
all, only to the extent (i) such persons were specifically employed for such
particular purpose, (ii) the expenses do not exceed the actual cost thereof and
(iii) such expenses are treated or capable of being treated (whether or not so
treated) on the books of Borrower as a capital expenditure in conformity with
generally accepted accounting principles applied on a consistent basis.
(u) Any costs incurred with respect to that part of the Project
paid from the Loan Proceeds shall be treated or capable of being treated on the
books of Borrower as capital expenditures in conformity with generally accepted
accounting principles applied on a consistent basis.
(v) No part of the Loan Proceeds will be used to finance
inventory or rolling stock or will be used for working capital or to finance any
other cost not constituting an Acquisition Cost.
(w) No person other than Borrower is in occupancy or possession
of any portion of the real property where the Equipment and the Additional
Collateral are located.
(x) The Project is property of the character subject to the
allowance for depreciation under Section 167 of the Code.
(y) To the best of Borrower's knowledge, no member, officer or
other official of Issuer has any financial interest whatsoever in Borrower or in
the transactions contemplated by this Agreement.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF LENDER
Lender represents and warrants for the benefit of Issuer and
Borrower, as follows:
(a) Lender is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, has power to enter into
this Agreement and by proper corporate action has duly authorized the execution
and
<PAGE> 17
delivery of this Agreement, the Escrow Agreement and the Tax Regulatory
Agreement.
(b) This Agreement the Escrow Agreement and the Tax Regulatory
Agreement constitute valid and legally binding obligations of Lender,
enforceable against Lender in accordance with their respective terms, except to
the extent limited by bankruptcy, reorganization or other laws of general
application relating to effecting the enforcement of creditors' rights.
(c) The execution and delivery of this Agreement, the Escrow
Agreement and the Tax Regulatory Agreement, the consummation of the transactions
contemplated hereby and the fulfillment of the terms and conditions hereof do
not and will not violate any law, rule, regulation or order, conflict with or
result in a breach of any of the terms or conditions of the articles or
certificate of incorporation or bylaws of Lender or of any corporate restriction
or of any agreement or instrument to which Lender is now a party and do not and
will not constitute a default under any of the foregoing or result in the
creation or imposition of any liens, charges or encumbrances of any nature upon
any of the property or assets of Lender contrary to the terms of any instrument
or agreement.
(d) There is no action, suit, proceeding, claim, inquiry or
investigation, at law or in equity, before or by any court, regulatory agency,
public board or body pending or, to the best of Lender's knowledge, threatened
against or affecting Lender, challenging Lender's authority to enter into this
Agreement, the Escrow Agreement or the Tax Regulatory Agreement or any other
action wherein an unfavorable ruling or finding would adversely affect the
enforceability of this Agreement, the Escrow Agreement or the Tax Regulatory
Agreement or any other transaction of Lender which is similar hereto, or the
exclusion of the Interest from gross income for federal income tax purposes
under the Code, or would materially and adversely affect any of the transactions
contemplated by this Agreement.
(e) Lender has sufficient knowledge and experience in financial and
business matters, including purchase and ownership of municipal and other
tax-exempt obligations, to be able to evaluate the risks and merits of the
investment represented by this Agreement including the payments of principal of,
premium, if any, and interest on the loan from Lender to Issuer and the Loan
Payments, and is able to bear the economic risk of such investment. Lender has
made its own inquiry and analysis with respect to Borrower, Issuer, this
Agreement, the payments of principal of, premium, if any, and interest on the
loan from Lender to Issuer and the Loan Payments and the security therefor, and
other material factors affecting the security and payment of this Agreement, the
payments of principal of, premium, if any, and interest on the loan from Lender
to Issuer and the Loan Payments.
(f) Lender has either been supplied with or has had access to
information, including financial statements and other financial information
which it has requested and has had the opportunity to ask questions and receive
answers concerning Borrower, Issuer, this Agreement the payments of principal
of, premium, if any, and interest on the loan from Lender to Issuer and the Loan
Payments and the security therefor, so that it has been able to make its
decision to make the Loan Proceeds available in accordance with the provisions
hereof and of the Escrow Agreement in exchange for the right to receive the
payments of principal of, premium, if any, and interest on the loan from Lender
to Issuer and the Loan Payments and enter into and perform its obligations under
this Agreement.
<PAGE> 18
(g) Lender acknowledges that this Agreement, including the right to
receive payments of principal of, premium, if any, and interest on the loan from
Lender to Issuer and Loan Payments (i) are not being registered or otherwise
qualified for sale under the "Blue Sky" laws and regulations of any state, (ii)
shall not be listed on any stock or other securities exchange and (iii) shall be
issued in a form which may not be readily marketable.
(h) Lender acknowledges that this Agreement, including the right to
receive payments of principal of, premium, if any, and interest on the loan from
Lender to Issuer and Loan Payments, have not been registered under the
Securities Act of 1933, as amended, and that such registration is not legally
required. Lender represents to Issuer that it is entering into this Agreement,
including obtaining the right to receive payments of, premium, if any, and
interest on the loan from Lender to Issuer and Loan Payments, for investment for
its own account and not with a present view toward resale or the distribution
thereof, except for sale to an affiliate or a related entity whose voting common
stock is directly or indirectly 100% owned by an affiliate of Lender.
(i) Lender agrees to take normal and reasonable precautions and
exercise due care to maintain the confidentiality of all non-public information
provided to it by Borrower or any of its subsidiaries in connection with this
Agreement and agrees and undertakes that neither it nor any of its affiliates
shall use any such information for any purpose or in any manner other than
pursuant to the terms contemplated by this Agreement. Lender may disclose such
information (i) at the request of any regulatory authority or in connection with
an examination of Lender by any such authority; (ii) pursuant to subpoena or
other court process; (iii) when required to do so in accordance with the
provisions of any applicable law; (iv) at the express direction or any other
agency of any state of the United States of America or of any other jurisdiction
in which Lender conducts its business; and (v) to Lender's independent auditors
and other professional agents.
ARTICLE VII
TITLE TO EQUIPMENT AND ADDITIONAL COLLATERAL; SECURITY INTEREST
Section 7.01. Title to the Equipment and Additional Collateral.
Legal title to the Equipment and Additional Collateral and any and all repairs,
replacements, substitutions and modifications to such Equipment and Additional
Collateral shall be in Borrower. Borrower will at all times protect and defend,
at its own cost and expense, its title from and against all claims, liens and
legal processes of creditors of Borrower, and keep all Equipment and Additional
Collateral free and clear of all such claims, liens and processes.
Section 7.02. Security Interest in Equipment and Additional
Collateral. This Agreement is intended to constitute a security agreement within
the meaning of the UCC. As security for Borrower's payment to Lender, as
assignee of Issuer, of Loan Payments and all other amounts payable to Lender
hereunder, or any other obligation of Borrower to Lender (whether direct or
indirect and whether now existing or hereafter arising), Borrower hereby grants
to Issuer, and Issuer hereby assigns to Lender, a security interest constituting
a first lien on the Equipment and the Additional Collateral, all repairs,
replacements, substitutions and modifications thereto or thereof and all
proceeds of the foregoing. Borrower agrees to execute such additional documents,
including financing statements, assignments, affidavits, notices, releases and
similar instruments, in form satisfactory to Lender, and take such other actions
that
<PAGE> 19
Lender deems necessary or appropriate to establish and maintain the security
interest created by this Section, and Borrower hereby designates and appoints
Lender as its agent, and grants to Lender a power of attorney (which is coupled
with an interest), to execute on behalf of Borrower such additional documents
and to take such other actions. If requested by Lender, Borrower shall obtain a
landlord and/or mortgagee's consent and waiver with respect to the property
where the Equipment or the Additional Collateral is located. If requested by
Lender, Borrower shall conspicuously mark the Equipment and the Additional
Collateral with appropriate lettering, labels or tags, and maintain such
markings, so as clearly to disclose Lender's security interest in the Equipment
and the Additional Collateral.
Section 7.03. Change in Name or Corporate Structure of Borrower;
Change in Location of Borrower's Principal Place of Business. Borrower's chief
executive office is located at the address set forth above, and all of
Borrower's records relating to its business and the Equipment and the Additional
Collateral are kept at such location. Borrower hereby agrees to provide written
notice to Lender and Issuer of any change or proposed change in its name,
corporate structure, place of business or chief executive office or change or
proposed change in the location of the Equipment or the Additional Collateral.
Such notice shall be provided 30 days in advance of the date that such change or
proposed change is planned to take effect. Borrower does business, and has done
business, only under its own name.
Section 7.04. Liens and Encumbrances to Title. Borrower shall not,
directly or indirectly, create, incur, assume or suffer to exist any mortgage,
pledge, lien, charge, encumbrance or claim on or with respect to the Equipment
or the Additional Collateral (together, "Liens") other than the respective
rights of Lender and Issuer as herein provided. Borrower shall promptly, at its
own expense, take such action as may be necessary duly to discharge or remove
any such Lien. Borrower shall reimburse Lender for any expenses incurred by
Lender to discharge or remove any Lien.
Section 7.05. Personal Property. The parties hereby agree that the
Equipment and the Additional Collateral are, and during the period this
Agreement is in force will remain, personal property and, when subjected to use
by Borrower hereunder, will not be or become permanent fixtures; provided,
however, that if contrary to the parties' intent the Equipment or the Additional
Collateral is or may be deemed to be a fixture, Borrower shall cause filings to
be made with the applicable government officials or filing offices to create and
preserve for Lender as assignee of Issuer a perfected first priority security
interest in the Equipment and the Additional Collateral.
Section 7.06. Assignment of Insurance. As additional security for
the payment and performance of Borrower's obligations hereunder, Borrower hereby
assigns to Lender, as assignee of Issuer, any and all moneys (including, without
limitation, proceeds of insurance and refunds of unearned premiums) due or to
become due under, and all other rights of Borrower with respect to, any and all
policies of insurance now or at any time hereafter covering the Equipment or the
Additional Collateral or any evidence thereof or any business records or
valuable papers pertaining thereto, and Borrower hereby directs the issuer of
any such policy to pay all such moneys directly to Lender. Borrower hereby
assigns to Lender, as assignee of Issuer, any and all moneys due or to become
due with respect to any condemnation proceeding affecting the Equipment or the
Additional Collateral. At any time, whether before or after the occurrence of
any Event of Default, Lender may (but need not), in Lender's name or in
Borrower's name, execute and deliver proof of claim, receive all such moneys,
<PAGE> 20
endorse checks and other instruments representing payment of such moneys, and
adjust, litigate, compromise or release any claim against the issuer of any such
policy or party in any condemnation proceeding.
Section 7.07. Occupancy. (a) Borrower hereby irrevocably grants to
Lender the right to occupy the property where the Equipment and the Additional
Collateral are located (the "Premises") at any time after the occurrence and
during the continuance of an Event of Default.
(b) Lender may occupy the Premises only to hold, sell, store,
liquidate, realize upon or otherwise dispose of the Equipment and/or the
Additional Collateral and for other purposes that Lender may in good faith deem
to be related or incidental purposes.
(c) The right of Lender to occupy the Premises shall cease and
terminate upon the earlier of (1) payment in full and discharge of all
obligations of Borrower and Issuer hereunder, and (2) final sale or disposition
of all of the Equipment and/or the Additional Collateral and delivery of all
such Equipment and/or Additional Collateral to purchasers.
(d) Lender shall not be obligated to pay or account for any rent or
other compensation for the occupancy of the Premises. Borrower will pay, or
reimburse Lender for, all taxes, fees, duties, levies, charges and expenses at
any time incurred by or imposed upon Lender by reason of the execution,
delivery, existence, recordation, performance or enforcement of this Section.
Section 7.08. Agreement as Financing Statement. To the extent
permitted by applicable law, a carbon, photographic or other reproduction of
this Agreement or of any financing statements signed by Borrower is sufficient
as a financing statement in any state to perfect the security interests granted
in this Agreement. Pursuant to Section 5451 of the Government Code of the State
of California, the pledge of Loan Payments, the Equipment and the Additional
Collateral by Issuer for the repayment of the principal of, premium, if any, and
interest on the loan from Lender to Issuer constitutes a first lien and security
interest which immediately attaches to such Loan Payments, the Equipment and the
Additional Collateral, all repairs, replacements, substitutions and
modifications thereto or thereof and all proceeds of the foregoing, and is
effective and binding against Issuer, Borrower, their successors, purchasers of
the Equipment and the Additional Collateral, creditors, and all others asserting
rights therein irrespective of whether those parties have notice of the pledge,
irrespective of whether such amounts, the Equipment and the Additional
Collateral is or may be deemed to be a fixture and without the need for any
physical delivery, recordation, filing or further act.
ARTICLE VIII
AFFIRMATIVE COVENANTS OF BORROWER
So long as the Loan shall remain unpaid, Borrower will comply with
the following requirements:
Section 8.01. Reporting Requirements. Borrower will deliver, or
cause to be delivered, to Lender, and to Issuer if requested by Issuer, each of
the following, which shall be in form and detail acceptable to Lender and
Issuer, as to information requested by Issuer:
<PAGE> 21
(a) as soon as available, and in any event within 120 days after
the end of each fiscal year of Borrower, audited financial statements of
Borrower with the unqualified opinion of independent certified public
accountants selected by Borrower and acceptable to Lender, which annual
financial statements shall include the balance sheet of Borrower as at the end
of such fiscal year and the related statements of income, retained earnings and
cash flows of Borrower for the fiscal year then ended, all in reasonable detail
and prepared in accordance with generally accepted accounting principles applied
on a basis consistent with the accounting practices applied in the financial
statements referred to in Article V hereof, together with (i) a report signed by
such accountants stating that in making the investigations necessary for said
opinion they obtained no knowledge, except as specifically stated, of any
Default or Event of Default hereunder and all relevant facts in reasonable
detail to evidence, and the computations as to, whether or not Borrower is in
compliance with the requirements set forth in Section 8.09 hereof; and (ii) a
certificate of the chief financial officer of Borrower stating that such
financial statements have been prepared in accordance with generally accepted
accounting principles applied on a basis consistent with the accounting
practices reflected in the annual financial statements referred to in Article V
hereof and whether or not such officer has knowledge of the occurrence of any
Default or Event of Default hereunder and, if so, stating in reasonable detail
the facts with respect thereto.
(b) as soon as available, and in any event within 120 days after
the end of each fiscal year of Borrower, Borrower shall provide to Lender
financial projections for the then current fiscal year, which annual projections
shall include the projected balance sheet of Borrower, the related projected
statement of income and a statement of facts and assumptions used to generate
such projections;
(c) as soon as available and in any event within 90 days after
the end of each fiscal quarter of Borrower, an unaudited/internal balance sheet
and statements of income and retained earnings of Borrower as at the end of and
for such month and for the year to date period then ended, in reasonable detail
and stating in comparative form the figures for the corresponding date and
periods in the previous year, all prepared in accordance with generally accepted
accounting principles applied on a basis consistent with the accounting
practices reflected in the financial statements referred to in Article V hereof
and certified by the chief financial officer of Borrower, subject to year-end
audit adjustments; and accompanied by a certificate of that officer stating (i)
that such financial statements have been prepared in accordance with generally
accepted accounting principles applied on a basis consistent with the accounting
practices reflected in the financial statements referred to in Article V hereof,
(ii) whether or not such officer has knowledge of the occurrence of any Default
or Event of Default hereunder not theretofore reported and remedied and, if so,
stating in reasonable detail the facts with respect thereto, and (iii) all
relevant facts in reasonable detail to evidence, and the computations as to,
whether or not Borrower is in compliance with the requirements set forth in
Section 8.09 hereof;
(d) immediately after the commencement thereof, notice in
writing of all litigation and of all proceedings before any governmental or
regulatory agency affecting Borrower of the type described in Article V hereof
or which seek a monetary recovery against Borrower in excess of $1,000,000;
provided, however, no such notice shall be required in connection with product
liability cases under which the potential liability of Borrower not covered by
insurance does not exceed $1,000,000;
<PAGE> 22
(e) as promptly as practicable (but in any event not later than
five Business Days) after an officer of Borrower obtains knowledge of the
occurrence of any event that constitutes a Default or an Event of Default
hereunder, notice of such occurrence, together with a detailed statement by a
responsible officer of Borrower of the steps being taken by Borrower to cure the
effect of such Default or Event of Default;
(f) promptly upon knowledge thereof, notice of any loss or
destruction of or damage to any Equipment or Additional Collateral or of any
material adverse change in any Equipment or Additional Collateral;
(g) promptly upon their distribution, copies of all financial
statements, reports and proxy statements that Borrower shall have sent to its
stockholders, including, without limitation 10-K and 10-Q reports;
(h) promptly after the amending thereof, copies of any and all
amendments to Borrower's certificate of incorporation, articles of incorporation
or bylaws;
(i) promptly upon knowledge thereof, notice of the violation by
Borrower of any law, rule or regulation that would have a material adverse
effect on the financial or operating condition of Borrower;
(j) promptly upon knowledge thereof, notice of any material
adverse change in the financial or operating condition of Borrower; and
(k) within sixty days of the receipt of a written request from
Issuer, a written report to Issuer, as of the end of Borrower's fiscal year,
stating the status of the Project, the outstanding and unpaid balance of the
Loan, the number of full-time and part-time employees of Borrower employed at
the Project during such prior fiscal year, and supplying such current
information as Issuer shall reasonably request regarding other matters covered
in Borrower's application for tax-exempt financing.
Section 8.02. Books and Records; Inspection and Examination.
Borrower will keep accurate books of record and account for itself pertaining to
the Project and the Additional Collateral and pertaining to Borrower's business
and financial condition and such other matters as Lender and/or Issuer may from
time to time request in which true and complete entries will be made in
accordance with generally accepted accounting principles consistently applied
and, upon request of Lender and/or Issuer, will permit any officer, employee,
attorney or accountant for Lender and/or Issuer to audit, review, make extracts
from, or copy any and all corporate and financial books, records and properties
of Borrower at all times during ordinary business hours, and to discuss the
affairs of Borrower with any of its directors, officers, employees or agents.
Borrower will permit Lender and/or Issuer, or its employees, accountants,
attorneys or agents, to examine and copy any or all of its records and to
examine and inspect the Project and the Additional Collateral at any time during
Borrower's business hours upon reasonable prior written notice; provided,
however, Lender and Issuer shall not have access to any product development
information or trade secrets. Audits and reviews of the corporate and financial
books, records and properties of Borrower will by limited to once annually if
Borrower is required to pay the costs of such audit or review and twice annually
if the costs of such audit or review are paid by Lender; provided, however, upon
the occurrence of an Event of Default, the number of audits and reviews will not
be limited.
<PAGE> 23
Section 8.03. Compliance With Laws; Environmental Indemnity.
Borrower will (a) comply with the requirements of applicable laws and
regulations, the noncompliance with which would materially and adversely affect
its business or its financial condition, (b) comply with all applicable
Environmental Laws and regulations and obtain any permits, licenses or similar
approvals required by any such laws or regulations and (c) use and keep the
Project and the Additional Collateral, and will require that others use and keep
the Project and the Additional Collateral, only for lawful purposes, without
violation of any federal, state or local law, statute or ordinance. Borrower
shall secure all permits and licenses, if any, necessary for the installation
and operation of the Project and the Additional Collateral. Borrower shall
comply in all respects (including, without limitation, with respect to the use,
maintenance and operation of each item of the Project and the Additional
Collateral) with all laws of the jurisdictions in which its operations involving
any component of Project or Additional Collateral may extend and of any
legislative, executive, administrative or judicial body exercising any power or
jurisdiction over the items of the Project or the Additional Collateral or its
interest or rights under this Agreement. Borrower will indemnify, defend and
hold Lender harmless from and against any claims, loss or damage to which Lender
may be subjected as a result of any past, present or future existence, use,
handling, storage, transportation or disposal of any hazardous waste or
substance or toxic substance by Borrower or on property owned, leased or
controlled by Borrower. This indemnification shall survive the termination of
this Agreement and payment of the indebtedness hereunder.
Section 8.04. Payment of Taxes and Other Claims. Borrower will pay
or discharge, when due, (a) all taxes, assessments and governmental charges
levied or imposed upon it or upon its income or profits, upon any properties
belonging to it (including, without limitation, the Project and the Additional
Collateral) or upon or against the creation, perfection or continuance of the
security interest created pursuant to this Agreement, prior to the date on which
penalties attach thereto, (b) all federal, state and local taxes required to be
withheld by it, and (c) all lawful claims for labor, materials and supplies
which, if unpaid, might by law become a lien or charge upon any properties of
Borrower; provided, that Borrower shall not be required to pay any such tax,
assessment, charge or claim whose amount, applicability or validity is being
contested in good faith by appropriate proceedings. Borrower will pay, as the
same respectively come due, all taxes and governmental charges of any kind
whatsoever that may at any time be lawfully assessed or levied against or with
respect to the Project or the Additional Collateral, as well as all gas, water,
steam, electricity, heat, power, telephone, utility and other charges incurred
in the operation, maintenance, use, occupancy and upkeep of the Project or the
Additional Collateral.
Section 8.05. Maintenance of Project and Additional Collateral. (a)
Borrower shall, at its own expense, maintain, preserve and keep the Project and
the Additional Collateral in good repair, working order and condition, and shall
from time to time make all repairs and replacements necessary to keep the
Project and the Additional Collateral in such condition, and in compliance with
state and federal laws, ordinary wear and tear excepted. Borrower shall maintain
the Project and the Additional Collateral in a condition suitable for
certification by the manufacturer thereof (if certification is available) and in
conformance with all manufacturer's recommended maintenance requirements. In the
event that any parts or accessories forming part of any item or items of the
Project and the Additional Collateral become worn out, lost, destroyed, damaged
beyond repair or otherwise rendered unfit for use, Borrower, at its own expense
and expeditiously, will replace or cause the replacement of such parts or
<PAGE> 24
accessories by replacement parts or accessories free and clear of all liens and
encumbrances and with a value and utility at least equal to that of the parts or
accessories being replaced (assuming that such replaced parts and accessories
were otherwise in good working order and repair). All such replacement parts and
accessories shall be deemed to be incorporated immediately into and to
constitute an integral portion of the Project and the Additional Collateral and,
as such, shall be subject to the terms of this Agreement. Neither Lender nor
Issuer shall have any responsibility in any of these matters, or for the making
of improvements or additions to the Project and the Additional Collateral.
(b) Borrower will defend the Project and the Additional Collateral
against all claims or demands of all persons (other than Lender) claiming the
Project, the Additional Collateral or any interest therein.
(c) Borrower will keep the Equipment and the Additional Collateral
free and clear of all security interests, liens and encumbrances except the
security interest created pursuant to this Agreement.
Section 8.06. Insurance. (a) Borrower shall, at its own expense,
procure and maintain continuously in effect: (i) public liability insurance for
personal injuries, death or damage to or loss of property arising out of or in
any way relating to the Project or the Additional Collateral sufficient to
protect Lender and Issuer from liability in all events, with a coverage limit of
not less than $1,000,000 per occurrence unless a different coverage minimum with
respect to any component of the Project or Additional Collateral is required by
Lender and approved by Issuer, and (ii) insurance against such hazards as Lender
may require, including, but not limited to, all-risk casualty and property
insurance, in an amount equal to the greater of the full replacement cost of the
Project and the Additional Collateral with new property having substantially
similar specifications or the applicable Prepayment Amount.
(b) If required by State law, Borrower shall carry workers'
compensation insurance covering all employees on, in, near or about the Project,
and upon request, shall furnish to Lender certificates evidencing such coverage.
(c) All insurance policies required by this Article shall be taken
out and maintained with insurance companies with an A.M. Best Company, Inc.
rating of "A8" or better; and shall contain a provision that the insurer shall
not cancel or revise coverage thereunder without giving written notice to the
insured parties at least thirty (30) days before the cancellation or revision
becomes effective. No insurance shall be subject to any co-insurance clause.
Each insurance policy required by this Article shall name Lender as an
additional insured party and loss payee without regard to any breach of warranty
or other act or omission of Borrower and shall include a lender's loss payable
endorsement for the benefit of Lender. Prior to the delivery of Project,
Borrower shall deposit with Lender evidence satisfactory to Lender of such
insurance and, prior to the expiration thereof, shall provide Lender evidence of
all renewals or replacements thereof.
(d) As among Lender, Borrower and Issuer, Borrower assumes all risks
and liabilities from any cause whatsoever, whether or not covered by insurance,
for loss or damage to any portion of the Project and the Additional Collateral
and for injury to or death of any person or damage to any property, whether such
injury or death be with respect to agents or employees of Borrower or of third
parties, and whether such property damage be to Borrower's property or the
property of others. Whether or not covered by insurance, Borrower hereby assumes
responsibility for and agrees to reimburse Lender and Issuer for and
<PAGE> 25
will indemnify, defend and hold harmless Lender and Issuer and its members,
agents, officers, directors and attorneys at Borrower's expense from and against
all liabilities, obligations, losses, damages, penalties, claims, actions, costs
and expenses (including reasonable attorneys' fees) of whatsoever kind and
nature, imposed on, incurred by or asserted against Lender or Issuer that in any
way relate to or arise out of this Agreement, the transactions contemplated
hereby and the Project or the Additional Collateral, including but not limited
to, (i) the construction, installation, selection, manufacture, purchase,
acceptance or rejection of the Project or the Additional Collateral or the
ownership of the Project or the Additional Collateral, (ii) the delivery, lease,
possession, maintenance, use, condition, return or operation of the Project or
the Additional Collateral, (iii) the condition of the Project or the Additional
Collateral sold or otherwise disposed of after possession by Borrower, (iv) any
patent or copyright infringement, (v) the conduct of Borrower, its officers,
employees and agents, (vi) a breach of Borrower of any of its covenants or
obligations hereunder; (vii) any claim, loss, cost or expense involving alleged
damage to the environment relating to the Project or the Additional Collateral,
including, but not limited to investigation, removal, cleanup and remedial
costs; and (viii) any untrue statement or alleged untrue statement of any
material fact or omission or alleged omission to state a material fact necessary
to make the statements made, in light of the circumstances under which they were
made, not misleading in connection with this Agreement, the Escrow Agreement and
the Tax Regulatory Agreement or the transactions contemplated thereby, (ix) any
violation of any environmental law, rule or regulation or the release of any
hazardous or toxic substance on or near the premises on which the Project or
Additional Collateral is located, (x) the ownership of any item of the Project
or Additional Collateral governed hereby, (xi) any act of negligence of
Borrower, its officers, agents, contractors, servants, employees, licensees or
invitees in connection with the Project or Additional Collateral or this
Agreement, the Escrow Agreement and the Tax Regulatory Agreement, (xii) the
recovery of claims under insurance policies on the Project or Additional
Collateral, (xiii) any accident in connection with the operation, use,
condition, possession, storage or return of any item of the Project or
Additional Collateral, any of the foregoing of which result in damage to
property or the injury to or death of any person, including without limitation
latent and other defects, whether or not discernible by Lender, Issuer or
Borrower. All amounts payable by Borrower pursuant to the immediately preceding
sentence shall be paid immediately upon demand of Issuer or Lender, as the case
may be. The provisions of this Section 8.06(d) shall survive the termination of
this Agreement.
Section 8.07. Preservation of Corporate Existence. Borrower will
preserve and maintain its corporate existence and all of its rights, privileges
and franchises necessary or desirable in the normal conduct of its business; and
shall conduct its business in an orderly, efficient and regular manner.
Section 8.08. Performance by Lender. If Borrower at any time fails
to perform or observe any of the covenants or agreements contained in this
Agreement, and if such failure shall continue for a period of thirty calendar
days after Lender gives Borrower written notice thereof (or in the case of the
agreements contained in Sections 8.05 and 8.06 hereof, immediately upon the
occurrence of such failure, without notice or lapse of time), Lender may, but
need not, perform or observe such covenant on behalf and in the name, place and
stead of Borrower (or, at Lender's option, in Lender's name) and may, but need
not, take any and all other actions which Lender may reasonably deem necessary
to cure or correct such failure (including, without limitation, the payment of
taxes, the satisfaction of security interests, liens or encumbrances, the
<PAGE> 26
performance of obligations owed to account debtors or other obligors, the
procurement and maintenance of insurance, the execution of assignments, security
agreements and financing statements, and the endorsement of instruments); and
Borrower shall thereupon pay to Lender on demand the amount of all moneys
reasonably expended and all reasonable costs and expenses (including reasonable
attorneys' fees and legal expenses) incurred by Lender in connection with or as
a result of the performance or observance of such agreements or the taking of
such action by Lender, together with interest thereon from the date expended or
incurred at the lesser of 18% per annum or the highest rate permitted by law. To
facilitate the performance or observance by Lender of such covenants of
Borrower, Borrower hereby irrevocably appoints Lender, or the delegate of
Lender, acting alone, as the attorney in fact of Borrower with the right (but
not the duty) from time to time to create, prepare, complete, execute, deliver,
endorse or file in the name and on behalf of Borrower any and all instruments,
documents, assignments, security agreements, financing statements, applications
for insurance and other agreements and writings required to be obtained,
executed, delivered or endorsed by Borrower under this Agreement.
Section 8.09. Financial Covenants. (a) Borrower will maintain at all
times its ratio of Debt (as defined below) to Tangible Net Worth (as defined
below) at not more than 3.50 to 1.00. "Debt" shall mean (i) all items of
indebtedness or liability which in accordance with generally accepted accounting
principles or federal tax law would be included in determining total liabilities
as shown on the liabilities side of a balance sheet, (ii) indebtedness secured
by any mortgage, pledge, lien or security interest existing on property owned by
Borrower, whether or not the indebtedness secured thereby shall have been
assumed, and (iii) guaranties and endorsements (other than for purposes of
collection in the ordinary course of business) by Borrower and other contingent
obligations of Borrower in respect of, or to purchase or otherwise acquire,
indebtedness of others. "Tangible Net Worth" means the excess of:
(a) the tangible assets of Borrower, which, in accordance with
generally accepted accounting principles, are tangible assets, after deducting
adequate reserves in each case where, in accordance with generally accepted
accounting principles, a reserve is proper over
(b) all Debt of Borrower; provided, however, that (i) inventory
shall be taken into account on the basis of the cost (determined on a first-in,
first-out basis) or current market value, whichever is lower, (ii) in no event
shall there be included as such tangible assets patents, trademarks, trade
names, copyrights, licenses, good will, advances or loans to, or receivables
from, directors, officers, employees or affiliates, prepaid or intangible
assets, amounts relating to covenants not to compete, pensions assets, deferred
charges or treasury stock or any securities or Debt of Borrower or any other
securities unless the same are readily marketable in the United States of
America or entitled to be used as a credit against federal income tax
liabilities, (iii) securities included as such tangible assets shall be taken
into account at their current market price or cost, whichever is lower, and (iv)
any write-up in the book value of any assets shall not be taken into account.
(b) Borrower will maintain for each fiscal year from and after
fiscal year 1996 its Debt Service Coverage Ratio (as defined below) at not less
than 1.20 to 1.00. "Debt Service Coverage Ratio" means the ratio of (i)
Borrower's Cash Flow Available for Debt Service (as defined below) to (ii)
Borrower's Debt Service (as defined below). "Cash Flow Available for Debt
Service" of Borrower
<PAGE> 27
means, with respect to the applicable period of determination, Borrower's
income, plus depreciation and amortization. "Debt Service" of Borrower means,
with respect to the applicable period of determination, the aggregate of (i) all
installments of principal on term Debt, or any Debt that is not revolving, of
Borrower that are due on demand or accelerated or during the period of
determination, (ii) all installments of rent under capitalized lease obligations
(to the extent not already accounted for in computation of net income or Debt)
of Borrower that are due on demand or during the period of determination and
(iii) distributions and dividends to stockholders and advances to affiliates of
Borrower during the period of determination.
(c) Borrower will maintain, on a consolidated basis, at all times
during the term of this Agreement its Tangible Net Worth at not less than 32
million dollars.
Section 8.10. Limitations of Liability. In no event, whether as a
result of breach of contract, warranty, tort (including negligence or strict
liability), indemnity or otherwise, shall Lender, its assignees, if any, or
Issuer be liable for any special, consequential, incidental, punitive or penal
damages including, but not limited to, loss of profit or revenue, loss of use of
the Project or any associated equipment, service materials or software, damage
to associated equipment, service materials or software, cost of capital, cost of
substitute property, service materials or software, facilities, services or
replacement power or down time costs.
ARTICLE IX
NEGATIVE COVENANTS OF BORROWER
So long as the Loan shall remain unpaid, Borrower agrees that:
Section 9.01. Lien. Borrower will not create, incur or suffer to
exist any mortgage, deed of trust, pledge, lien, security interest, assignment
or transfer upon or of any of the Equipment or the Additional Collateral except
for the security interest created pursuant to this Agreement.
Section 9.02. Sale of Assets. Except as otherwise permitted
hereunder, Borrower will not sell, lease, assign, transfer or otherwise dispose
of all or a substantial part of its assets or of any of the Project or the
Additional Collateral or any interest therein (whether in one transaction or in
a series of transactions); provided, however, that Borrower may at its option
prepay its obligations hereunder in full in connection with any such proposed
lease, assignment, transfer or disposition of all or a substantial part of its
assets as provided in Section 2.07(f) hereof.
Section 9.03. Consolidation and Merger. Borrower will not
consolidate with or merge into any person, or permit any other person to merge
into it, or acquire (in a transaction analogous in purpose or effect to a
consolidation or merger) all or substantially all of the assets of any other
person; provided, however, that such transactions are permitted if:
(a) Either (i) Borrower will be the surviving corporation or (ii)
the successor corporation (if other than Borrower) shall be a person organized
and existing under the laws of the United States of America or a state thereof
and such successor corporation shall expressly assume the due and punctual
payment of all amounts due hereunder and the due and punctual performance and
observance of all the covenants and conditions hereof and Lender and Issuer
shall have
<PAGE> 28
received a legal opinion, in form and substance satisfactory to Lender and
Issuer, to the effect that this Agreement is the legal, valid and binding
obligation of such successor corporation enforceable in accordance with its
terms;
(b) Lender and Issuer shall have received an opinion of bond
counsel, in form and substance satisfactory to Lender and Issuer, to the effect
that under then existing laws the consummation of such merger, consolidation,
sale or conveyance would not cause the interest hereunder to become includable
in gross income under the Code or adversely affect the validity of this
Agreement; and
(c) After giving effect to the proposed merger, consolidation, sale
or conveyance, Borrower or the successor corporation, as the case may be, shall
be in compliance with the financial covenants contained in Section 8.09 hereof
and no Default or Event of Default shall have occurred and be continuing
hereunder or would result from such transaction; and provided, finally, that
Borrower may at its option prepay its obligations hereunder in full in
connection with any such proposed transaction as provided in Section 2.07(f)
hereof.
Section 9.04. Accounting. Borrower will not adopt, permit or consent
to any material change in accounting principles or any change in its fiscal year
other than as required by generally accepted accounting principles unless
Borrower provides restated financial statements prepared on a consistent basis
and satisfies the financial covenants contained in Section 8.09 hereof with and
without giving effect to such change.
Section 9.05. Transfers. Borrower will not in any manner transfer
any property without prior or present receipt of full and adequate consideration
other than in the ordinary course of business and which in the aggregate are not
material.
Section 9.06. Other Defaults. Borrower will not permit any breach,
default or event of default to occur under any note, loan agreement, indenture,
lease, mortgage, contract for deed, security agreement or other contractual
obligation in an amount greater than $500,000 binding upon Borrower which
results in an acceleration of Borrower's obligations thereunder or under which
the applicable creditor has exercised rights and remedies or any judgment,
decree, order or determination applicable to Borrower.
Section 9.07. Place of Business. Borrower will not permit any of the
Equipment or the Additional Collateral or any records pertaining to the
Equipment or the Additional Collateral to be located in any state or area in
which, in the event of such location, a financing statement covering such
Equipment or Additional Collateral would be required to be, but has not in fact
been, filed in order to perfect the security interest created pursuant to this
Agreement.
Section 9.08. Modifications and Substitutions. (a) Borrower will not
make any material alterations, modifications or additions to the Equipment or
the Additional Collateral which cannot be removed without materially damaging
the functional capabilities or economic value of the Project or the Additional
Collateral, as the case may be, unless after making such alterations,
modifications or additions the Equipment and Additional Collateral is of equal
or greater economic value, utility and useful life. Upon delivery of the
Equipment or the Additional Collateral to Lender and at the request of Lender,
<PAGE> 29
Borrower, at its sole cost and expense, will remove all alterations,
modifications and additions and repair the Equipment as necessary to return the
Equipment or the Additional Collateral to the condition in which it was
furnished, ordinary wear and tear and permitted modifications excepted.
(b) Notwithstanding the provisions of subparagraph (a) of this
section, Borrower may, with the prior written consent of Lender and Issuer,
substitute for parts, elements, portions or all of the Project or Additional
Collateral, other parts, elements, portions, equipment or facilities; provided,
however, that any substitutions made pursuant to Borrower's obligations to make
repairs referenced under any provision of this Agreement shall not require such
prior written consent. Borrower shall provide such documents or assurances as
Lender and Issuer may reasonably request to maintain or confirm the security
interest assigned to Lender in the Equipment and the Additional Collateral as so
modified or substituted.
Section 9.09. Use of the Project. Borrower will not install, use,
operate or maintain the Project or the Additional Collateral improperly,
carelessly, in violation of any applicable law or in a manner contrary to that
contemplated by this Agreement.
ARTICLE X
DAMAGE AND DESTRUCTION;
USE OF NET PROCEEDS
Borrower shall provide a complete written report to Lender and
Issuer immediately upon any loss, theft, damage or destruction of any portion of
the Equipment or Additional Collateral and of any accident involving any portion
of the Equipment or Additional Collateral. If all or any part of the Project or
Additional Collateral is lost, stolen, destroyed or damaged beyond repair
("Damaged Property"), Borrower shall as soon as practicable after such event
either: (a) replace the same at Borrower's sole cost and expense with property
having substantially similar specifications and of equal or greater economic
value, utility and useful life to the Damaged Property immediately prior to the
time of the loss occurrence, whereupon such replacement equipment shall be
substituted in this Agreement and the other related documents by appropriate
endorsement or amendment; or (b) pay the applicable Prepayment Amount of the
Damaged Property. Borrower shall notify Lender and Issuer of which course of
action it will take within fifteen (15) calendar days after the loss occurrence.
If, within forty-five (45) calendar days of the loss occurrence, (a) Borrower
fails to notify Lender and Issuer; (b) Borrower, Issuer and Lender fail to
execute an amendment to this Agreement to delete the Damaged Property and add
the replacement property or (c) Borrower fails to pay the applicable Prepayment
Amount, then Lender may, at its sole discretion, declare the applicable
Prepayment Amount to be immediately due and payable, and Borrower is required to
pay the same. The Net Proceeds of insurance with respect to the Damaged Property
shall be made available by Lender to be applied to discharge Borrower's
obligation under this Article. The payment of the Prepayment Amount and the
termination of Lender's interest in the Damaged Property is subject to the terms
of Section 2.07 hereof. For purposes of this Article, the term "Net Proceeds"
shall mean the amount remaining from the gross proceeds of any insurance claim
or condemnation award after deducting all expenses (including reasonable
attorneys' fees) incurred in the collection of such claim or award.
ARTICLE XI
<PAGE> 30
ASSIGNMENT, SUBLEASING AND SELLING
Section 11.01. Assignment by Lender. Subject to the conditions
contained herein, this Agreement, and the right to receive payments of principal
of, premium, if any, and interest on the loan from Lender to Issuer and Loan
Payments, as assignee of Issuer, directly from Borrower, may be transferred,
assigned and reassigned in whole or in part by Lender without the consent of
Borrower or Issuer to an Affiliate or Qualified Institutional. In the event of a
sale or transfer to an Affiliate, Lender shall certify to Issuer and Borrower
that such transferee entity is an Affiliate. In the event of a sale or transfer
to a Qualified Institutional Buyer, Lender shall provide to Issuer and Borrower
a written statement representing that such transferee is a Qualified
Institutional Buyer and such transferee shall deliver to Issuer and Borrower a
letter of representations substantially in the form of Exhibit D hereto which
shall contain a certification that the transferee is a Qualified Institutional
Buyer as provided in this Agreement. In the event that such assignment or
reassignment is made to a bank or trust company as trustee for holders of
certificates representing interests in this Agreement, such bank or trust
company agrees to maintain, or cause to be maintained, a book-entry system by
which a record of the names and addresses of such holders as of any particular
time is kept and agrees, upon request of Issuer or Borrower, to furnish such
information to Issuer or Borrower. Upon assignment, Borrower will reflect in a
book-entry the assignee designated in the written request of assignment or in a
written certification of an Affiliate delivered to Issuer and Borrower pursuant
to this Section, and shall agree to make all payments to the assignee designated
in such written request, notwithstanding any claim, defense, setoff or
counterclaim whatsoever (whether arising from a breach of this Agreement or
otherwise) that Issuer and Borrower may from time to time have against Lender or
the assignee. Issuer and Borrower agree to execute all documents, including
notices of assignment and chattel mortgages or financing statements, which may
be reasonably requested by Lender or its assignee to protect their interest in
the Equipment and in this Agreement. Lender or assignee shall pay all reasonable
expenses of Issuer, including reasonable fees and expenses of counsel, in
connection with such transfer and assignment.
Section 11.02. No Sale or Assignment by Borrower. Except as
otherwise provided herein, this Agreement and the interest of Borrower in the
Project and the Additional Collateral may not be sold, assumed, assigned or
encumbered by Borrower.
ARTICLE XII
EVENTS OF DEFAULT AND REMEDIES
Section 12.01. Events of Default. The following constitute "Events
of Default" under this Agreement:
(a) failure by Borrower to pay to Lender, as assignee of Issuer,
when due any Loan Payment or to pay any other payment required to be paid
hereunder and the continuation of such failure for a period of ten (10) days;
(b) failure by Borrower to maintain insurance on the Project or
the Additional Collateral in accordance with Section 8.06 hereof;
(c) failure by Borrower or Issuer to observe and perform any
other covenant, condition or agreement contained herein, in the Escrow
Agreement, in the Tax Regulatory Agreement or in any other document or agreement
executed in
<PAGE> 31
connection herewith on its part to be observed or performed for a period of 30
days after written notice is given to Borrower or Issuer, as the case may be,
specifying such failure and requesting that it be remedied; provided, however,
that, if the failure stated in such notice cannot be corrected within such
30-day period, Lender will not unreasonably withhold its consent to an extension
of such time if corrective action is instituted by Borrower or Issuer, as the
case may be, within the applicable period and diligently pursued until the
default is corrected;
(d) initiation by Issuer of a proceeding under any federal or
state bankruptcy or insolvency law seeking relief under such laws concerning the
indebtedness of Issuer;
(e) Borrower or any guarantor shall be or become insolvent, or
admit in writing its inability to pay its or his debts as they mature, or make
an assignment for the benefit of creditors; or Borrower or any guarantor shall
apply for or consent to the appointment of any receiver, trustee or similar
officer for it or for all or any substantial part of its property; or such
receiver, trustee or similar officer shall be appointed without the application
or consent of Borrower or any guarantor, as the case may be; or Borrower or any
guarantor shall institute (by petition, application, answer, consent or
otherwise) any bankruptcy, insolvency, reorganization, arrangement, readjustment
of debt, dissolution, liquidation or similar proceeding relating to it under the
laws of any jurisdiction; or any such proceeding shall be instituted (by
petition, application or otherwise) against Borrower or any guarantor; or any
judgment, writ, warrant of attachment or execution or similar process shall be
issued or levied against a substantial part of the property of Borrower or any
guarantor;
(f) determination by Lender that any representation or warranty
made by Borrower, Issuer or any guarantor herein, in the Tax Regulatory
Agreement or in any other document executed in connection herewith was untrue in
any material respect when made;
(g) an Event of Taxability shall occur; or
(h) the occurrence of a default or an event of default under any
instrument, agreement or other document evidencing or relating to any
indebtedness or other monetary obligation of Borrower in an amount greater than
$500,000 and which results in the acceleration of such monetary obligation or
the exercise of rights and remedies with respect thereto.
Section 12.02. Remedies on Default. Whenever any Event of Default
shall have occurred and be continuing, Lender, as assignee of Issuer, shall have
the right, at its sole option without any further demand or notice, to take any
one or any combination of the following remedial steps insofar as the same are
available to secured parties under Article 9 of the UCC in effect in the State
from time to time and which are otherwise accorded to Lender, as assignee of
Issuer, by applicable law:
(a) by notice to Issuer and Borrower, declare the entire unpaid
principal amount of the Loan then outstanding, all interest accrued and unpaid
thereon and all amounts payable under this Agreement to be forthwith due and
payable, whereupon the Loan, all such accrued interest and all such amounts
shall become and be forthwith due and payable, without presentment, notice of
dishonor, protest or further notice of any kind, all of which are hereby
expressly waived by Borrower;
<PAGE> 32
(b) take possession of the Equipment and/or Additional Collateral
wherever situated, without any court order or other process of law and without
liability for entering the premises, and lease, sublease or make other
disposition of the Equipment and/or Additional Collateral for use over a term in
a commercially reasonable manner, all for the account of Lender, provided that
Borrower shall remain directly liable for the deficiency, if any, between the
rent or other amounts paid by a lessee or sublessee of the Equipment and/or the
Additional Collateral pursuant to such lease or sublease during the same period
of time, after deducting all costs and expenses, including reasonable attorneys'
fees and expenses, incurred with respect to the recovery, repair and storage of
the Equipment and/or Additional Collateral during such period of time;
(c) take possession of the Equipment and/or the Additional
Collateral wherever situated, without any court order or other process of law
and without liability for entering the premises, and sell the Equipment and/or
Additional Collateral in a commercially reasonable manner. All proceeds from
such sale shall be applied in the following manner:
FIRST, to pay all proper and reasonable costs and expenses
associated with the recovery, repair, storage and sale of the Equipment and/or
Additional Collateral, including reasonable attorneys' fees and expenses;
SECOND, to pay (i) Lender the amount of all unpaid Loan Payments
or other obligations (whether direct or indirect owed by Borrower to Lender), if
any, which are then due and owing, together with interest and late charges
thereon, (ii) Lender the then applicable Prepayment Amount (taking into account
the payment of past-due Loan Payments as aforesaid), plus a pro rata allocation
of interest, at the rate utilized to calculate the Loan Payments, from the next
preceding due date of a Loan Payment until the date of payment by the buyer, and
(iii) any other amounts due hereunder, including indemnity payments, taxes,
charges, reimbursement of any advances and other amounts payable to Lender or
Issuer hereunder; and
THIRD, to pay the remainder of the sale proceeds, purchase
moneys or other amounts paid by a buyer of the Equipment and/or Additional
Collateral to Borrower;
(d) proceed by appropriate court action to enforce specific
performance by Issuer or Borrower of the applicable covenants of this Agreement
or to recover for the breach thereof, including the payment of all amounts due
from Borrower. Borrower shall pay or repay to Lender or Issuer all costs of such
action or court action, including, without limitation, reasonable attorneys'
fees; and
(e) take whatever action at law or in equity may appear necessary or
desirable to enforce its rights with respect to the Equipment and/or Additional
Collateral. Borrower shall pay or repay to Lender or Issuer all costs of such
action or court action, including, without limitation, reasonable attorneys'
fees.
Notwithstanding any other remedy exercised hereunder, Borrower shall
remain obligated to pay to Lender any unpaid portion of the Prepayment Amount.
Section 12.03. Return of Equipment and Additional Collateral. Upon
an Event of Default, Borrower shall within fifteen (15) calendar days after
notice from Lender, at its own cost and expense: (a) perform any testing and
repairs
<PAGE> 33
required to place the Equipment and Additional Collateral in the condition
required by Article VIII; (b) if deinstallation, disassembly or crating is
required, cause the Equipment and Additional Collateral to be deinstalled,
disassembled and crated by an authorized manufacturer's representative or such
other service person as is satisfactory to Lender; and (c) deliver the Equipment
and the Additional Collateral to a location specified by Lender, freight and
insurance prepaid by Borrower. If Borrower refuses to deliver the Equipment or
the Additional Collateral in the manner designated, Lender may enter upon
Borrower's premises where the Equipment or Additional Collateral is kept and
take possession of the Equipment or Additional Collateral and charge to Borrower
the costs of such taking. Borrower hereby expressly waives any damages
occasioned by such taking.
Section 12.04. No Remedy Exclusive. No remedy herein conferred upon
or reserved to Lender or Issuer is intended to be exclusive and every such
remedy shall be cumulative and shall be in addition to every other remedy given
under this Agreement or now or hereafter existing at law or in equity. No delay
or omission to exercise any right or power accruing upon any Event of Default
shall impair any such right or power or shall be construed to be a waiver
thereof, but any such right or power may be exercised from time to time and as
often as may be deemed expedient. In order to entitle Lender or Issuer to
exercise any remedy reserved to it in this Article, it shall not be necessary to
give any notice other than such notice as may be required by this Article. All
remedies herein conferred upon or reserved to Lender or Issuer shall survive the
termination of this Agreement.
Section 12.05. Late Charge. Any Loan Payment not paid by Borrower on
the due date thereof shall, to the extent permissible by law, bear a late charge
equal to the lesser of five cents ($.05) per dollar of the delinquent amount or
the lawful maximum, and Borrower shall be obligated to pay the same immediately
upon receipt of Lender's written invoice therefor.
ARTICLE XIII
MISCELLANEOUS
Section 13.01. Costs and Expenses of Lender. Borrower shall pay to
Lender and Issuer, in addition to the Loan Payments payable by Borrower
hereunder, such amounts in each year as shall be required by Lender or Issuer in
payment of any reasonable costs and expenses incurred by Lender and Issuer in
connection with the execution, performance or enforcement of this Agreement,
including but not limited to payment of all reasonable fees, costs and expenses
and all administrative costs of Lender and Issuer in connection with the Project
and Additional Collateral, expenses (including, without limitation, attorneys'
fees and disbursements), fees of auditors or attorneys, insurance premiums not
otherwise paid hereunder and all other direct and necessary administrative costs
of Lender and Issuer or charges required to be paid by it in order to comply
with the terms of, or to enforce its rights under, this Agreement. Such costs
and expenses shall be billed to Borrower by Lender or Issuer, as the case may
be, from time to time, together with a statement certifying that the amount so
billed has been paid by Lender or Issuer, as the case may be, for one or more of
the items above described, or that such amount is then payable by Lender or
Issuer, as the case may be, for such items. Amounts so billed shall be due and
payable by Borrower within 30 days after receipt of the bill by Borrower.
Section 13.02. Disclaimer of Warranties. LENDER AND ISSUER MAKE NO
WARRANTY OR REPRESENTATION, EITHER EXPRESS OR IMPLIED, AS TO THE VALUE, DESIGN,
<PAGE> 34
CONDITION, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR FITNESS FOR
USE OF THE PROJECT, OR ANY OTHER WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED,
WITH RESPECT THERETO. In no event shall Lender or Issuer be liable for any loss
or damage in connection with or arising out of this Agreement, the Project or
the existence, furnishing, functioning or Borrower's use of any item or products
or services provided for in this Agreement.
Section 13.03. Notices. All notices, certificates, requests, demands
and other communications provided for hereunder or under the Escrow Agreement or
the Tax Regulatory Agreement shall be in writing and shall be (a) personally
delivered, (b) sent by first class United States mail, (c) sent by overnight
courier of national reputation, or (d) transmitted by telecopy, in each case
addressed to the party to whom notice is being given at its address as set forth
above and, if telecopied, transmitted to that party at its telecopier number set
forth above or, as to each party, at such other address or telecopier number as
may hereafter be designated by such party in a written notice to the other party
complying as to delivery with the terms of this Section. All such notices,
requests, demands and other communications shall be deemed to have been given on
(a) the date received if personally delivered, (b) when deposited in the mail if
delivered by mail, (c) the date sent if sent by overnight courier, or (d) the
date of transmission if delivered by telecopy. If notice to Borrower of any
intended disposition of the Equipment and/or Additional Collateral or any other
intended action is required by law in a particular instance, such notice shall
be deemed commercially reasonable if given (in the manner specified in this
Section) at least ten (10) calendar days prior to the date of intended
disposition or other action.
Section 13.04. Further Assurance and Corrective Instruments. Issuer
and Borrower hereby agree that they will, from time to time, execute,
acknowledge and deliver, or cause to be executed, acknowledged and delivered,
such further acts, instruments, conveyances, transfers and assurances, as Lender
reasonably deems necessary or advisable for the implementation, correction,
confirmation or perfection of this Agreement, the Escrow Agreement or the Tax
Regulatory Agreement and any rights of Lender hereunder or thereunder.
Section 13.05. Binding Effect; Time of the Essence. This Agreement
shall inure to the benefit of and shall be binding upon Lender, Issuer, Borrower
and their respective successors and assigns. Time is of the essence.
Section 13.06. Severability. In the event any provision of this
Agreement shall be held invalid or unenforceable by any court of competent
jurisdiction, such holding shall not invalidate or render unenforceable any
other provision hereof.
Section 13.07. Amendments. To the extent permitted by law, the terms
of this Agreement shall not be waived, altered, modified, supplemented or
amended in any manner whatsoever except by written instrument signed by the
parties hereto, and then such waiver, consent, modification or change shall be
effective only in the specific instance and for the specific purpose given.
Borrower, Issuer and Lender agree that Borrower and Lender may amend
Exhibit A to this Agreement solely to more specifically identify the Project
being financed hereunder at such time as such identification is possible. Such
amendment shall be effected by written instrument signed by Borrower and Lender,
with written notice provided to Issuer. Issuer's agreement to the amendment
referred to in this paragraph shall not be required. Such amendment may take
<PAGE> 35
the form of a Payment Request Form in the form attached to the Escrow Agreement
as Exhibit A executed by Borrower and Lender.
Section 13.08. Execution in Counterparts. This Agreement may be
executed in several counterparts, each of which shall be an original and all of
which shall constitute one and the same instrument, and any of the parties
hereto may execute this Agreement by signing any such counterpart, provided that
only the original marked "Original: 1 of 6" on the execution page thereof shall
constitute chattel paper under the UCC.
Section 13.09. Applicable Law. This Agreement shall be governed by
and construed in accordance with the laws of the State.
Section 13.10. Captions. The captions or headings in this Agreement
are for convenience only and in no way define, limit or describe the scope or
intent of any provisions or sections of this Agreement.
Section 13.11. Entire Agreement. This Agreement, the Tax Regulatory
Agreement, the Escrow Agreement and the exhibits hereto and thereto constitute
the entire agreement among Lender, Issuer, Borrower and Escrow Agent. There are
no understandings, agreements, representations or warranties, express or
implied, not specified herein or in such documents regarding this Agreement or
the Project financed hereby.
Section 13.12. Usury. It is the intention of the parties hereto to
comply with any applicable usury laws; accordingly, it is agreed that,
notwithstanding any provisions to the contrary in this Agreement, in no event
shall this Agreement require the payment or permit the collection of interest or
any amount in the nature of interest or fees in excess of the maximum permitted
by applicable law.
Section 13.13. Waiver of Jury Trial. lender and borrower hereby
waive their respective rights to a jury trial of any claim or cause of action
based upon or arising out of, directly or indirectly, this agreement, any of the
related documents, any dealings among lender or borrower relating to the subject
matter of the transactions contemplated by this agreement or any related
transactions, and/or the relationship that is being established among lender and
borrower. the scope of this waiver is intended to be all encompassing of any and
all disputes that may be filed in any court (including, without limitation,
contract claims, tort claims, breach of duty claims and all other common law and
statutory claims). this waiver is irrevocable, meaning that it may not be
modified either orally or in writing, and this waiver shall apply to any
subsequent amendments, renewals, supplements or modifications to this agreement,
any related documents, or to any other documents or agreements relating to the
transactions contemplated by this agreement or any related transactions. in the
event of litigation, this agreement may be filed as a written consent to a trial
by the court.
[REMAINDER OF PAGE INTENTIONALLY BLANK; EXECUTION PAGE FOLLOWS.]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
in their respective corporate names by their duly authorized officers, all as of
the date first written above.
Lender: GE CAPITAL PUBLIC FINANCE, INC.
<PAGE> 36
/s/ Philip Long
--------------------------------
By: Philip Long
Title: Vice President
Issuer: CALIFORNIA ECONOMIC DEVELOPMENT
FINANCING AUTHORITY
/s/ Christopher Holben
--------------------------------
By: Christopher Holben
Title: Chair
Borrower: GT BICYCLES, INC.
/s/ Charles Cimitile
--------------------------------
By: Charles Cimitile
Title: Chief Financial Officer
<PAGE> 37
EXHIBIT A TO LOAN AGREEMENT
SCHEDULE OF PROJECT AND LOAN PAYMENTS
Description of Project
The following Project is the subject of the Loan Agreement dated as of
September 1, 1997 among GE Capital Public Finance, Inc. ("Lender"), California
Economic Development Financing Authority ("Issuer"), and GT Bicycles, Inc.
("Borrower").
<TABLE>
<CAPTION>
Description Manufacturer,
Quantity of Project Contractor or Vendor Serial Number
- ------------ ----------------------- ---------------------------------------------- --------------
<S> <C> <C> <C>
ACCESSORIE AIR COMPRESSOR SYSTEMS, INC.
---------------------------------------
COMPRESSED AIR SYSTEM
---------------------
1 TW-0 BALANCER ZERO GRAVITY TYPE
1 ABT-5 BALANCER TROLLEY
1 AES-5 END STOP
1 U-350-SD SCREWDRIVER
1 ASH-250C-15MSZ COIL HOSE ASSEMBLY
.50 5.50 LABOR LABOR-INSTALL AIR LINES
1 MISC PIPE PARTS
1 C21 COUPLER
.00 1.00 LABOR REPAIR BROKEN LINE AT SEGERSTR
00 11.00 LABOR LABOR
1 MISC PIPE PARTS
2 C21 COUPLER
100 C20-44 QUICK DISCONNECT
100 406 HOSE BARB
100 7330 FERRULE - W/O
60 CP21-03 PLUG - W/O
0 1 UPS FREIGHT
0 500 63262 3/8 AIR HOSE (BLACK)
1 UPS FREIGHT
18 AT5-9 9FT TRACK
18 AT5-9 9FT TRACK
10 TW-0 BALANCER ZERO GRAVITY TYPE
18 AMP-5 MOUNTING BRACKET
10 ABT-5 BALANCER TROLLEY
18 AB-5 ANGLE BRACKET
13 2FAN2F-N2M FREE ANGLE HOSE FITTING
9 AT5-9 9FT TRACK
16 AJH-5 JOINT HANGER BRACKET
10 AES-5 END STOP
1 US-LT30B-11 SCREWDRIVER INLINE PUSH
1 ALPHA-70 BOTTOM BRACKET TOOL
1 ALPHA-60 REAR WHEEL TOOL
1 U-350-D FRONT DERAIL TOOL
1 U-410-D REAR DERAIL TOOL
1 U-350-SD SCREWDRIVER
1 U-350-D FRONT DERAIL TOOL
</TABLE>
A-1
<PAGE> 38
<TABLE>
<CAPTION>
Description Manufacturer,
Quantity of Project Contractor or Vendor Serial Number
- ------------ ----------------------- ---------------------------------------------- --------------
<S> <C> <C> <C>
1 U-410-SD REAR BRAKE TOOL
1 UX-450-SD SEAT POST M6 TOOL
12 ASH-250C-15MSZ COIL HOSE ASSEMBLY
.00 21.00 LABOR LABOR
1 MISC PIPE PARTS
500 63262 3/8 AIR HOSE (BLACK)
1 MISC PARTS
1 SCISSOR-LIFT
60 MISC 3/4" PIPE PLUG
1 6.1981.0 OIL FILTER
2 6.1945.0 FILTER MAT - 38 1/4x38 1/4
1 MANUAL-B CS-121 PARTS & SERVICE MANUAL
1 MISC PIPE PARTS
2 2 AT5-4 FOUR FOOT TRACK
1 1 AMP-5 MOUNTING BRACKET
1 1 AB-5 ANGLE BRACKET
5 5 ABT-5 BALANCER TROLLEY
5 TW-0 BALANCER ZERO GRAVITY TYPE
3 3 AES-5 END STOP
2 2 AEP-5 END CAP
1 U-350-D FRONT DERAIL TOOL
1 U-350-D FRONT DERAIL TOOL
1 US-LT31PB-11 SEAT COLLAR
1 US-LT30B-11C WATER BOTTLE SCREW
1 1 ABT-5 BALANCER TROLLEY
1 TW-0 BALANCER ZERO GRAVITY TYPE
1 1 AES-5 END STOP
1 1010P3 IMPACT WRENCH
2 2 AT5-4 FOUR FOOT TRACK
1 1 AMP-5 MOUNTING BRACKET
1 1 AB-5 ANGLE BRACKET
2 2 ABT-5 BALANCER TROLLEY
2 TW-0 BALANCER ZERO GRAVITY TYPE
2 2 AES-5 END STOP
2 2 AEP-5 END CAP
1 A-1010PQ CHAIN STAY SEAT PIVOT
1 A-1010PQ CHAIN STAY SEAT PIVOT
2 C-351 RIVNUT
1000 63262 3/8 AIR HOSE (BLACK)
100 C20-44 QUICK DISCONNECT
100 406 HOSE BARB
100 7330B FERRULE
25 MISC 3/4x1/4 BUSHING
1 CS-121 KAESER 100 HP AIR COMPRESSOR
1 KLD-450 DESICCANT DRYER
1 660V150 AIR RECEIVER
1 AAC300B4 GAUGE * (INCL.)
1 FIG-8C-3/4X150 SAFETY RELIEF VALVE *
</TABLE>
A-2
<PAGE> 39
<TABLE>
<CAPTION>
Description Manufacturer,
Quantity of Project Contractor or Vendor Serial Number
- ------------ ----------------------- ---------------------------------------------- --------------
<S> <C> <C> <C>
1 ALF-850 AIR LINE FILTER
1 ORF-550 OIL REMOVAL FILTER
2 ADT-190 TRAP
1 INBOUND FREIGHT ON DRYER & COMPRESSOR
2 C21 COUPLER
103 C20-44 QUICK DISCONNECT
10 CP21 PLUG
101 406 HOSE BARB
3 461 BARB
4 7328 FERRULE - W/O
50 ###-##-#### KELLEM GRIP
1 855 CRIMPER
528 63262 3/8 AIR HOSE (BLACK)
85 MISC 3/4 PIPE
5 MISC 3/4 TEE
4 MISC 3/4 90'S
4 MISC 3/4 PLUG
2 MISC 3/4 x CLOSE NIPPLE
1 MISC 3/4 x 1/4 BUSHING
9 MISC PIPE HANGERS
100 7330B FERRULE
14 AT5-9 9FT TRACK
12 AT5-9 9FT TRACK
3 ABT-5 BALANCER TROLLEY
14 AMP-5 MOUNTING BRACKET
14 AB-5 ANGLE BRACKET
7 AT5-9 9FT TRACK
2 AT5-4 FOUR FOOT TRACK
1 AMP-5 MOUNTING BRACKET
1 AB-5 ANGLE BRACKET
5 ABT-5 BALANCER TROLLEY
3 AES-5 END STOP
2 AEP-5 END CAP
1 ABT-5 BALANCER TROLLEY
1 AES-5 END STOP
2 AT5-4 FOUR FOOT TRACK
1 AMP-5 MOUNTING BRACKET
1 AB-5 ANGLE BRACKET
2 ABT-5 BALANCER TROLLEY
2 AES-5 END STOP
2 AEP-5 END CAP
7 2 TW-0 BALANCER ZERO GRAVITY TYPE
7 1 ABT-5 BALANCER TROLLEY
7 5 ASH-250C-15MSZ COIL HOSE ASSEMBLY
7 5 2FAN2F-N2M FREE ANGLE HOSE FITTING
7 1 AES-5 END STOP
1 ALPHA-70 BOTTOM BRACKET TOOL
1 ALPHA-60 REAR WHEEL TOOL
</TABLE>
A-3
<PAGE> 40
<TABLE>
<CAPTION>
Description Manufacturer,
Quantity of Project Contractor or Vendor Serial Number
- ------------ ----------------------- ---------------------------------------------- --------------
<S> <C> <C> <C>
1 U-350-D FRONT DERAIL TOOL
1 U-410-D REAR DERAIL TOOL
1 U-350-D FRONT DERAIL TOOL
0 1 U-410-SD REAR BRAKE TOOL
1 UX-450-SD SEAT POST M6 TOOL
</TABLE>
<PAGE> 41
<TABLE>
<CAPTION>
Description Manufacturer,
Quantity of Project Contractor or Vendor Serial Number
- ------------ ----------------------- ---------------------------------------------- --------------
<S> <C> <C> <C>
WELDING MACHINES SOUTHERN CALIFORNIA AIRGAS
---------------- --------------------------
Item Number Item Description
----------- ----------------
RELEASE #: 586
** Location: 32 **
*TWE80416 16 0 TWECO BG20R-8 TIG. TORCH
*TWE18DWC 16 0 TWECO DINSE CONNECTOR
*TWEBGPTS 1 0 TWECO TUNGSTEN SHARPENER
*TWEBGPTSGW 1 0 TWECO TUNG SHARPENER GRIN WHEEL
*TWEBGRHR 6 0 ROD HANDLER
*MISCSV4X51LV 6 0 TWECO-CIGWELD WELD HOOD
WEC40V76 16 0 WC 40V76 121/2WTR HOSE
WEC40V77 16 0 WC 40V77 121/2ARG HOSE
*WECWC36 16 0 WELDCRAFT 6 FT. CABLE COV
BERBS300 16 0 300A STEEL GROUND CLAMP
TWET120 16 0 SOLDER TWECOLUG
CAB84 160 0 8/4 PRIMARY CABLE
CAB10 160 0 1/0 WELDING CABLE
RELEASE #: 586
TWET68 60 0 POWER CABLE TWECOLUG
TWET62 15 0 SOLDER TWECOLUG
*THD101025 16 0 THERMAL ARC 400 GTSW TIG
*THD102008 16 0 THERMAL ARC FOOT CONTROL
</TABLE>
<TABLE>
<CAPTION>
CNC MACHINE CASTILLO ELECTRIC
----------- -----------------
PROVIDE 20A CIRCUIT FOR NEW CNC MACHINE IN PRODUCT DEVELOPMENT (BID)
<S> <C> <C>
VC08 1.00 1.00 EACH
TOTAL AMOUNT DUE
NEW CNC FOR PRODUCT DEVELOPMENT
97286
</TABLE>
A-5
<PAGE> 42
<TABLE>
<CAPTION>
Description Manufacturer,
Quantity of Project Contractor or Vendor Serial Number
- ------------ ----------------------- ---------------------------------------------- --------------
<S> <C> <C> <C>
Overhead Crane
Heat Treat System
Wheelbuilding Equipment
Racking
Welding Equipment
Welding Stations
Forklifts
Order Picker
Assembly Lines
CNC Machining
Computers
Tool Room Equipment
Cut Off Equipment
Fabrication Upgrades
Quality Control Equipment
Auto Taper Equipment
Bending Equipment
Compressed Air Systems
Composite Expansion
Tech Shop Equipment
Bike Test Equipment
Butting Equipment
Additional Laser Miter
Polishing Equipment
Ball Burnish Equipment
Bead Blast System
Annodize System
Chrome Plating System
</TABLE>
The Project and the Additional Collateral are located at the following address.
Prior to the relocation of the Equipment and/or the Additional Collateral or
portion thereof, Borrower will provide 30 days' prior written notice to Lender
and Issuer:
2001 East Dyer Road
Santa Ana, CA 92705
A-6
<PAGE> 43
EXHIBIT B TO LOAN AGREEMENT
FORM OF CERTIFICATE OF ACCEPTANCE
I, the undersigned, hereby certify that I am the duly qualified and
acting ______________________ of GT Bicycles, Inc. ("Borrower") and, with
respect to the Loan Agreement dated as of September 1, 1997 (the "Agreement") by
and among Borrower, GE Capital Public Finance, Inc. ("Lender") and California
Economic Development Financing Authority ("Issuer"), that:
1. The portion of the Project described in Exhibit A to the Agreement
(the "Project") has been delivered and installed in accordance with Borrower's
specifications and has been accepted by Borrower.
2. Borrower has obtained from a reputable insurance company qualified
to do business in the State (as defined in the Agreement) insurance with respect
to all risks required to be covered thereby pursuant to Section 8.06 of the
Agreement.
3. Attached to this Certificate of Acceptance are Vendor invoice(s)
and/or bill(s) of sale relating to the Project and, if such invoices have been
paid by Borrower, evidence of payment thereof and, if applicable, evidence of
official intent to reimburse such payment as required by the Code (as defined in
the Agreement).
4. Borrower hereby directs Lender, on behalf of Issuer, to pay the Loan
Proceeds (as defined in the Agreement) as follows:
5. All of the representations and warranties of Borrower contained in
the Agreement are true and correct as of the date hereof and no Default or Event
of Default has occurred thereunder.
Dated: , 19 .
---------------------------- --
GT BICYCLES, INC.
Borrower
By:
---------------------------------
Title:
---------------------------------
Date:
---------------------------------
<PAGE> 44
EXHIBIT C TO LOAN AGREEMENT
DESCRIPTION OF ADDITIONAL COLLATERAL
1. Office Furnishings and workstations as described in Westfall Interior
Systems, Inc. invoice #22000 dated May 22, 1997.
2. (1) Lot each of Pallet Racks, Row Spacers and Column Guards; (25) Ups;
(50) pair of Beams as described in LeDoux Industries invoice #572 dated
10/5/96 and #943 dated 10/27/96.
3. (1) Meridian PBX system
4. (1) Canon NP-8530 Copier: S/N NCM05049 with stapler/sorter S/N
ZCE27249.
5. (1) LMI TM-156 Laser Workstation: S/N TM156-2200-1-1134
6. (1) Carousel System including AIMS software system; computers and
peripherals including the following:
(3) HP Laserjet 5 printers: S/N's JPKK055689; JPKK055691;
JPKK055693
(1) Bar Code Scanner: S/N 503814
(1) Remstar conveyor: vendor #123266 with Lift platform
No. Item Number Quantity Item Description
- -------- ----------- ------------- -----------------------------------
31 SP3 1 **** CON'T ON NEXT PAGE ****
32 MN 1 M.N. S/N # 00AU01518
33 MS 1 MOUSE S/N # 00297109, 00297111
34 MS 1 MOUSE S/N # 00240637
35 MD 1 MODEM S/N # 21LF21G7VLT7
36 MN 1 M.N. S/N # 000U00559, 00403
37 MN 1 M.N. S/N # 000U00573
38 NW 1 NET C S/N # 182GA664, 1829A6DB
39 NW 1 NET C S/N # 1829A6DA
40 SP2 1 ==========================
41 AC3200 3 Q MOUSE PAD (NO CHARGE)
42 SP2 1 ==========================
43 PO 1 P. O. # 19357
C-1
<PAGE> 45
SCHEDULE OF LOAN PAYMENTS
GE Capital Public Finance, Inc.
Amortization Schedule
Funding Date..........................................Sep.-17-97
Coupon Rate................................................5.87%
<TABLE>
<CAPTION>
Payment Payment Loan Principal Interest Principal Prepayment
Date Number Payment Component Component Balance* Amount*
- ------------ ------- ---------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sep-17-97 0 0.00 0.00 0.00 5,000,000.00 5,100,000.00
Nov-01-97 1 65,539.66 29,667.44 35,872.22 4,970,332.56 5,069,739.21
Dec-01-97 2 65,539.66 41,226.45 24,313.21 4,929,106.11 5,027,688.24
---------- --------- ---------
131,079.32 70,893.89 60,185.43
Jan-01-98 3 65,539.66 41,428.11 24,111.54 4,887,678.00 4,985,431.56
Feb-01-98 4 65,539.66 41,630.77 23,908.89 4,846,047.23 4,942,968.18
Mar-01-98 5 65,539.66 41,834.41 23,705.25 4,804,212.82 4,900,297.08
Apr-01-98 6 65,539.66 42,039.05 23,500.61 4,762,173.77 4,857,417.25
May-01-98 7 65,539.66 42,244.69 23,294.97 4,719,929.08 4,814,327.66
Jun-01-98 8 65,539.66 42,451.34 23,088.32 4,677,477.74 4,771,027.29
Jul-01-98 9 65,539.66 42,659.00 22,880.66 4,634,818.74 4,727,515.12
Aug-01-98 10 65,539.66 42,867.67 22,671.99 4,591,951.07 4,683,790.09
Sep-01-98 11 65,539.66 43,077.36 22,462.29 4,548,873.71 4,639,851.18
Oct-01-98 12 65,539.66 43,288.09 22,251.57 4,505,585.62 4,595,697.33
Nov-01-98 13 65,539.66 43,499.84 22,039.82 4,462,085.75 4,551,327.50
Dec-01-98 14 65,539.66 43,712.62 21,827.04 4,418,373.16 4,506,740.63
---------- --------- ---------
786,475.91 510,732.95 275,742.95
Jan-01-99 15 65,539.66 43,926.45 21,613.21 4,374,446.71 4,461,935.65
Feb-01-99 16 65,539.66 44,141.32 21,398.34 4,330,305.39 4,416,911.50
Mar-01-99 17 65,539.66 44,357.25 21,182.41 4,285,948.14 4,371,667.10
Apr-01-99 18 65,539.66 44,574.23 20,965.43 4,241,373.91 4,326,301.39
May-01-99 19 65,539.66 44,792.27 20,747.39 4,196.581.64 4,280,513.27
Jun-01-99 20 65,539.66 45,011.38 20,528.28 4,151,570.26 4,234,601.66
Jul-01-99 21 65,539.66 45,231.56 20,308.10 4,106,338.70 4,188,465.47
Aug-01-99 22 65,539.66 45,452.82 20,086.84 4,060,885.88 4,142,103.60
Sep-01-99 23 65,539.66 45,675.16 19,864.50 4,015,210.72 4,095,514.93
Oct-01-99 24 65,539.66 45,898.59 19,641.07 3,969,312.13 4,048,698.38
Nov-01-99 25 65,539.66 46,123.11 19,416.55 3,923,189.03 4,001,652.81
Dec-01-99 26 65,539.66 46,348.73 19,190.93 3,876,840.30 3,954,377.11
---------- --------- ---------
786,475.91 541,532.86 244,943.05
</TABLE>
Page 1
<PAGE> 46
<TABLE>
<CAPTION>
Payment Payment Loan Principal Interest Principal Prepayment
Date Number Payment Component Component Balance* Amount*
- ------------ ------- ---------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Jan-01-00 27 65,539.66 46,575.45 18,964.21 3,830,264.85 3,906,870.15
Feb-01-00 28 65,539.66 46,803.28 18,736.38 3,783,461.57 3,859,130.80
Mar-01-00 29 65,539.66 47,032.23 18,507.43 3,736,429.34 3,811,157.93
Apr-01-00 30 65,539.66 47,262.29 18,277.37 3,689,167.05 3,762,950.39
May-01-00 31 65,539.66 47,493.48 18,046.18 3,641,673.57 3,714,507.04
Jun-01-00 32 65,539.66 47,725.81 17,813.85 3,593,947.76 3,665,826.72
Jul-01-00 33 65,539.66 47,959.26 17,580.39 3,545,988.50 3,616,908.27
Aug-01-00 34 65,539.66 48,193.87 17,345.79 3,497,794.63 3,567,750.53
Sep-01-00 35 65,539.66 48,429.61 17,110.05 3,449,365.02 3,518,352.32
Oct-01-00 36 65,539.66 48,666.52 16,873.14 3,400,698.51 3,468,712.48
Nov-01-00 37 65,539.66 48,904.58 16,635.08 3,351,793.93 3,418,829.81
Dec-01-00 38 65,539.66 49,143.80 16,395.86 3,302,650.13 3,368,703.13
---------- --------- ---------
786,475.91 574,190.17 212,285.74
Jan-01-01 39 65,539.66 49,384.20 16,155.46 3,253,265.93 3,318,331.25
Feb-01-01 40 65,539.66 49,625.77 15,913.89 3,203,640.17 3,267,712.97
Mar-01-01 41 65,539.66 49,868.52 15,671.14 3,153,771.65 3,216,847.08
Apr-01-01 42 65,539.66 50,112.46 15,427.20 3,103,659.19 3,165,732.37
May-01-01 43 65,539.66 50,357.59 15,182.07 3,053,301.60 3,114,367.63
Jun-01-01 44 65,539.66 50,603.93 14,935.73 3,002,697.67 3,062,751.62
Jul-01-01 45 65,539.66 50,851.46 14,688.20 2,951,846.21 3,010,883.13
Aug-01-01 46 65,539.66 51,100.21 14,439.45 2,900,746.00 2,958,760.92
Sep-01-01 47 65,539.66 51,350.18 14,189.48 2,849,395.82 2,906,383.74
Oct-01-01 48 65,539.66 51,601.36 13,938.29 2,797,794.46 2,853,750.35
Nov-01-01 49 65,539.66 51,853.78 13,685.88 2,745,940.68 2,800,859.49
Dec-01-01 50 65,539.66 52,107.43 13,432.23 2,693,833.24 2,747,709.91
---------- --------- ---------
786,475.91 608,816.89 177,659.02
Jan-01-02 51 65,539.66 52,362.32 13,177.33 2,641,470.92 2,694,300.34
Feb-01-02 52 65,539.66 52,618.46 12,921.20 2,588,852.45 2,640,629.50
Mar-01-02 53 65,539.66 52,875.86 12,663.80 2,535,976.60 2,586,696.13
Apr-01-02 54 65,539.66 53,134.51 12,405.15 2,482,842.09 2,532,498.93
May-01-02 55 65,539.66 53,394.42 12,145.24 2,429,447.67 2,478,036.62
Jun-01-02 56 65,539.66 53,655.61 11,884.05 2,375,792.06 2,423,307.90
Jul-01-02 57 65,539.66 53,918.08 11,621.58 2,321,873.98 2,368,311.46
Aug-01-02 58 65,539.66 54,181.83 11,357.83 2,267,692.16 2,313,046.00
Sep-01-02 59 65,539.66 54,446.86 11,092.79 2,213,245.29 2,257,510.20
Oct-01-02 60 65,539.66 54,713.20 10,826.46 2,158,532.09 2,201,702.73
Nov-01-02 61 65,539.66 54,980.84 10,558.82 2,103,551.25 2,145,622.28
Dec-01-02 62 65,539.66 55,249.79 10,289.87 2,048,301.46 2,089,267.49
---------- --------- ---------
786,475.91 645,531.78 140,944.13
</TABLE>
Page 2
<PAGE> 47
<TABLE>
<CAPTION>
Payment Payment Loan Principal Interest Principal Prepayment
Date Number Payment Component Component Balance* Amount*
- ------------ ------- ---------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Jan-01-03 63 65,539.66 55,520.05 10,019.61 1,992,781.41 2,032,637.04
Feb-01-03 64 65,539.66 55,791.64 9,748.02 1,936,989.78 1,975,729.57
Mar-01-03 65 65,539.66 56,064.55 9,475.11 1,880,925.23 1,918,543.73
Apr-01-03 66 65,539.66 56,338.80 9,200.86 1,824,586.43 1,861,078.15
May-01-03 67 65,539.66 56,614.39 8,925.27 1,767,972.04 1,803,331.43
Jun-01-03 68 65,539.66 56,891.33 8,648.33 1,711,080.71 1,745,302.32
Jul-01-03 69 65,539.66 57,169.62 8,370.04 1,653,911.08 1,686,989.31
Aug-01-03 70 65,539.66 57,449.28 8,090.38 1,596,461.81 1,628,391.04
Sep-01-03 71 65,539.66 57,730.30 7,809.36 1,538,731.51 1,569,506.14
Oct-01-03 72 65,539.66 58,012.70 7,526.96 1,480,718.31 1,510,333.19
Nov-01-03 73 65,539.66 58,296.48 7,243.18 1,422,422.33 1,450,870.78
Dec-01-03 74 65,539.66 58,581.64 6,958.02 1,363,840.69 1,391,117.50
--------- --------- --------
786,475.91 684,460.77 102,015.13
Jan-01-04 75 65,539.66 58,868.20 6,671.45 1,304,972.49 1,331,071.94
Feb-01-04 76 65,539.66 59,156.17 6,383.49 1,245,816.32 1,270,732.64
Mar-01-04 77 65,539.66 59,445.54 6,094.12 1,186,370.78 1,210,098.19
Apr-01-04 78 65,539.66 59,736.33 5,803.33 1,126,634.45 1,149,167.14
May-01-04 79 65,539.66 60,028.54 5,511.12 1,066,605.91 1,087,938.03
Jun-01-04 80 65,539.66 60,322.18 5,217.48 1,006,283.73 1,026,409.40
Jul-01-04 81 65,539.66 60,617.25 4,922.40 945,666.48 964,579.81
Aug-01-04 82 65,539.66 60,913.77 4,625.89 884,752.70 902,447.76
Sep-01-04 83 65,539.66 61,211.74 4,327.92 823,540.96 840,011.78
Oct-01-04 84 65,539.66 61,511.17 4,028.49 762,029.79 777,270.38
Nov-01-04 85 65,539.66 61,812.06 3,727.60 700,217.72 714,222.08
Dec-01-04 86 65,539.66 62,114.43 3,425.23 638,103.30 650,865.36
--------- --------- --------
786,475.91 725,737.39 60,738.51
Jan-01-05 87 65,539.66 62,418.27 3,121.39 575,685.03 587,198.73
Feb-01-05 88 65,539.66 62,723.60 2,816.06 512,961.43 523,220.66
Mar-01-05 89 65,539.66 63,030.42 2,509.24 449,931.00 458,929.62
Apr-01-05 90 65,539.66 63,338.75 2,200.91 386,592.26 394,324.10
May-01-05 91 65,539.66 63,648.58 1,891.08 322,943.68 329,402.55
Jun-01-05 92 65,539.66 63,959.93 1,579.73 258,983.75 264,163.43
Jul-01-05 93 65,539.66 64,272.80 1,266.86 194,710.96 198,605.18
Aug-01-05 94 65,539.66 64,587.20 952.46 130,123.76 132,726.23
Sep-01-05 95 65,539.66 64,903.14 636.52 65,220.62 66,525.03
Oct-01-05 96 65,539.66 65,220.62 319.04 0.00 0.00
--------- --------- ------
655,396.59 638,103.30 17,293.29
TOTAL 6,291,807.26 5,000,000.00 1,291,807.26
============ ============ ============
</TABLE>
* After payment of Loan Payment due opposite Prepayment Amount.
Page 3
<PAGE> 48
DESCRIPTION OF ADDITIONAL COLLATERAL
CONTINUED
(1) Carousel System with all attachments and accessories, including, but not
limited to:
- ------- ---------------------- ---------------- -------------------------------
NO. ITEM NUMBER QUANTITY ITEM DESCRIPTION
- ------- ---------------------- ---------------- -------------------------------
1 SPC 3 MICRO Q PENTIUM PCI SYSTEM
2 CPUI5133 3 INTEL PENTIUM 133MHZ CPU
3 CPUF505 3 586 COOLING FAN BALL BEARING
4 MB51263 3 A+ P5 TRITON VX MB 512K CACHE
5 MBSP1000 3 PS/2 MOUSE ADAPTER FOR MAIN B
6 RC73300 6 8 MB SIMM EDO 2X32
7 MSDO6000 3 DOS 6.22 3.5" W/SYSTEM OEM
8 MSW3100 3 WINDOWS FOR WORKGROUPS 3.11
9 CS1210 3 3D 182 MINI TOWER 230W PS
10 FD1100 3 TEAC 1.44M FLOPPY DRIVE
11 HDW1090 3 WESTERN DIGITAL 1.2GB IDE H.D.
12 KBNM1000 3 NMB ENHANCED CLICK [LARGE] KB
13 VDS32500 3 S3 A+ 765 PCI VGA 1MB MPEG
14 MNSC1400 3 SCEPTRE 14" CRT DDC MONITOR
15 MKMS1005 3 MS PS/2 MOUSE 11 W/SYSTEM
16 NWTK2005 3 TK 32BIT PCI REG COMBO
17 MDUS2150 1 USK SPORTSTER 33.6 INT (OEM)
18 SP1 1 **** ASSEMBLED & TESTED ****
19 SYS 1 SYS. S/N #54222, 54223
20 SYS 1 SYS. S/N #54225
21 MB 1 M.B. S/N #073677514, 515
22 MB 1 M.B. S/N #07367765_
23 FD 1 F.D. S/N #_______________
24 FD 1 F.D. S/N #1,906175
25 __ 1 ___ S/N #1066247, 1049709
26 __ 1 H.D. S/N #0269867
27 __ 1 K.B. S/N #12971598, 12971581
28 __ 1 K.B. S/N #12971580
29 VD 1 VIDEO S/N #205225, 205211
30 VD 1 VIDEO S/N #205219
C-2
<PAGE> 49
DESCRIPTION OF ADDITIONAL COLLATERAL
CONTINUED
(1) Carousel System with all attachments and accessories, including, but not
limited to:
- ------- ---------------------- ---------------- -------------------------------
NO. ITEM NUMBER QUANTITY ITEM DESCRIPTION
- ------- ---------------------- ---------------- -------------------------------
1 CPQP1010 1 COMPAQ PROLIANT 2500 6/200
2 SPC 1 PENTIUM PRO SERVER SYSTEM
3 SPC 1 COMPAQ STOCK NO. 250980-001
4 SPC 1 200 MHZ PENTIUM PRO PROCESSOR
5 SPC 1 32MB HI-SPEED ECC MEMORY
6 SPC 1 TOWER-CASE WITH POWER SUPPLY
7 SPC 1 BUILT-IN SERIAL/PARALLEL
8 SPC 1 BUILT-IN SVGA PORT
9 SPC 1 INTERNAL CD-ROM DRIVE
10 SPC 1 KEYBOARD & MOUSE
11 SP2 1 ===============================
12 CTAD3025 1 ADAPTEC AHA-294OUW KIT SCSI
13 HDSE2105 1 BARRACUDA 2.1GB ST32171W UW
14 HDSE2105 1 BARRACUDA 2.1GB ST32171W UW
15 MNSC1400 1 SCEPTRE 14" CRT DDC MONITOR
16 TBSE2000 1 SEAGATE 8GB INT DAT.DDS-2 5.2
17 SP2 1 ===============================
18 SP1 1 **** ASSEMBLED & TESTED ****
19 SP2 1 ===============================
20 TPDE5600 2 DEC 4mm 120M 4-8GB DATA TAPE
21 AC3200 1 Q MOUSE PAD (NO CHARGE)
22 SP2 1 ===============================
23 SYS 1 SYS. S/N # D706HWB10175
24 TB 1 TAPE S/N # GC00AS3
25 HD 1 H.D. S/N #je499322
26 HD 1 H.D. S/N je500816
27 MN 1 M.N. S/N # 703wa000u00410
2 CBPI1005 3 10FT 1EEE 1284 PRINTER CABLE
3 BA1100 1 BAR CODE CCD SCANNER
C-3
<PAGE> 50
DESCRIPTION OF ADDITIONAL COLLATERAL
CONTINUED
(1) Kenworth Model T2000 Truck with Transport Trailer: S/N 1XKTDB9XBVJ738695
with all attachments and accessories, including, but not limited to:
ADDITIONS TO CUSTOMERS TRAILER:
-- INSTALL 110 VOLT ELECTRICAL + (1) AIR COUPLER AT CURBSIDE
WORKBENCH
-- INSTALL 4-ROW 5 TIRE STORAGE RACK UNDER CURBSIDE WORKBENCH
-- INSTALL EXTERIOR ROADSIDE WATER HOSE SPIGOT AT 5TH DECK
EXTERIOR
-- INSTALL AIR COUPLER "T" AT ROADSIDE WORKBENCH TOP
-- INSTALL (2) EXTERIOR "T" AIR RECEPTACLES AHEAD AND BEHIND
CURBSIDE DOOR
-- INSTALL ROADSIDE WORKBENCH SHELVING (3-4)
-- INSTALL CUSTOMERS BENCH GRINDER
-- REWIRE REAR FLUORESCENT LIGHTS ON SEPARATE SWITCH
-- INSTALL CUSTOMERS FRONT CHANNEL SPEAKERS IN CAR STORAGE AREA
-- INSTALL CUSTOMERS A/V COMPONENTS IN WARDROBE CABINET
-- MOUNT CUSTOMERS SPEAKERS AT ROOF AREA OF CAR STORAGE
-- FABRICATE AND INSTALL REAR ENTRY STEP WITH HAND RAILS
-- FABRICATE AND INSTALL (2) HAND RAILS AT REAR CURBSIDE STEP
-- REWORK AWNING RAFTER POLE STORAGE BRACKETS TO ACCOMMODATE
BIKE STORAGE
-- INSTALL ADDITIONAL AWNING DOORWAY AT FRONT
-- REMOVE CUSTOMERS TRAILER DECALS
-- INSTALL PREPAINTED WHITE ALUMINUM SKINS AT PARTITION WALLS
-- SUPPLY RACHET AND AXLE STRAPS, TIE-DOWN ASSEMBLIES
-- REWORK TRIANGULAR LIGHT BRACES AND POWDERCOAT WHITE
-- INSTALL ADDITIONAL BATTERY/CHARGE SYSTEM FOR A AUDIO
COMPONENTS
-- INSTALL NEW TRAILER/TRUCK DECAL GRAPHICS
C-4
<PAGE> 51
DESCRIPTION OF ADDITIONAL COLLATERAL
CONTINUED
(3) Altair Welder TWX2 Systems w/FC: S/N's Y6251, Y 6234, Y6250 with all
attachments and accessories, including, but not limited to:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
QUANTITY QUANTITY CYLINDERS
-----------------
ITEM NUMBER _______ ___ SHIPPED RETURNED ITEM DESCRIPTION UNIT
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
** Location 550 **
PANYC300TWX2Y37 3 0 WELDER TWX2 SYSTEM W/FC EA
S/N'S Y6251, Y6234 AND Y6250
SET UP 480 VOLT 3 PHASE
DEMO FOOT PEDALS WILL BE REPLACED WHEN RECEIVED FROM FACTORY
BER3500SS 3 0 WATER CIRCULATOR EA
WELWP2012 3 0 TIG TORCH WP-20 12' EA
*WELBS1 3 0 WEL B5-1 SWITCH BOOT EA
*WELSW-1 3 0 WEL SW-1 BULB SWITCH EA
ESB45V11 3 0 ADAPTOR POWER CABLE EA
WELWC310 3 0 CABLE COVER NYLON ZIPPERE EA
COMPC-84 75 0 CABLE PRIMARY #8/4 FT
COMCABLE-10 45 0 CABLE WELDING #1/0 FT
CUT 1/0 CABLE INTO 3 15' SECTIONS AND ASSEMBLY WITH GROUND CLAMP
TWET120 6 0 CABLE LUG 1 THRU 2/0 EA
TWESGC300 3 0 CLAMP GROUND 300 AMP EA
ESDBW25 3 0 BW-25 STRAIN RELIEF EA
</TABLE>
C-5
<PAGE> 52
EXHIBIT D TO LOAN AGREEMENT
FORM OF INVESTOR'S LETTER OF REPRESENTATION
California Economic Development
Financing Authority
801 K Street, Suite 1700
Sacramento, CA 95814
GT Bicycles, Inc.
2001 East Dyer Road
Santa Ana, CA 92705
Re: Loan Agreement dated as of September 1, 1997 by and among GE
Capital Public Finance, Inc. ("Lender"), California Economic
Development Financing Authority ("Issuer") and GT Bicycles,
Inc. ("Borrower")
Ladies and Gentlemen:
The undersigned, as Lender under the Loan Agreement described above
(the "Loan Agreement"), hereby represents to you that:
1. The undersigned has duly authorized, by all necessary action, the
making of the Loan contemplated pursuant to the terms and provisions of the Loan
Agreement.
2. We have sufficient knowledge and experience in financial and
business matters, including purchase and ownership of municipal and other
tax-exempt obligations, to be able to evaluate the risks and merits of the
investment represented by the Issuer Payments, the Loan Payments (capitalized
terms used herein and not otherwise defined shall have the meanings given such
terms in the Loan Agreement) and the Loan Agreement. We are able to bear the
economic risks of such investment.
3. We understand that the obligations of Issuer to make payments under
the Loan Agreement (the "Issuer Payments") under the Loan Agreement are special,
limited obligations payable solely from amounts paid to Issuer from Borrower
pursuant to the terms of the Loan Agreement and that notwithstanding anything to
the contrary contained in the Loan Agreement, Issuer shall not be obligated to
make Issuer Payments, or pay any portion of the purchase price of the Equipment
or make any other payment or advance any moneys or be liable for any other costs
or expenses in connection with the Equipment, the Issuer Payments, the Loan
Payments or the Loan Agreement, except from the amounts paid to Issuer from
Borrower pursuant to the Loan Agreement, and no such payment shall constitute a
charge against the general credit of the Issuer. We further understand that
Issuer shall not be directly or indirectly or contingently or morally obligated
to use any other moneys or assets of Issuer to pay Issuer Payments or any
portion of the purchase price of the Equipment or for all or any portion of such
other costs or expenses.
D-1
<PAGE> 53
4. We acknowledge that we have either been supplied with or have been
given access to information, including financial statements and other financial
information which we have requested, and we have had the opportunity to ask
questions and receive answers concerning Borrower, the Issuer Payments, the Loan
Payments, the Loan Agreement and the security therefor, so that we have been
able to make the Loan on the terms as set forth in the Loan Agreement. We
acknowledge that we have not relied upon the Issuer for any information in
connection with the Loan, except as set forth in Article IV of the Loan
Agreement.
5. We have made our own inquiry and analysis with respect to the Loan
Agreement, the Issuer Payments, the Loan Payments and the security therefor, and
other material factors affecting the security and payment of such payments set
forth in the Loan Agreement. We are aware that the business of the Borrower
involves certain economic variables and risks that could adversely affect the
security for the payments to be made by the Issuer to the Lender under the terms
of the Loan Agreement. We have examined drafts in final form of the basic legal
documents relating to the Loan Agreement, including the proposed legal opinions
to be delivered by Borrower's counsel and Kutak Rock, as Lender's and special
counsel.
6. We understand that the Loan Agreement (including the right to
receive Issuer Payments and Loan Payments under the terms of the Loan Agreement)
(a) is not being registered or otherwise qualified for sale under the "Blue Sky"
laws and regulations of any state, (b) will not be listed in any stock or other
securities exchange, (c) will not carry a rating from any rating service and (d)
will be delivered in a form which may not be readily marketable.
7. We understand that the Loan Agreement (including the right to Issuer
Payments and Loan Payments under the terms of the Loan Agreement) has not been
registered under the Securities Act of 1933, as amended. We represent to you
that we are purchasing the Loan for investment for our own account and not with
a present view toward resale or the distribution thereof, in that we do not
intend to resell or otherwise dispose of all or any part of our interests in the
Loan, except for sale to an Affiliate. Except for a transfer to an entity which
Lender has certified to Issuer and Borrower that such entity is an Affiliate, we
agree not to sell, transfer or otherwise dispose of or permit such Affiliate to
sell, transfer or otherwise dispose of all or part of our interest in the Loan
except in accordance with the requirements of the Loan Agreement.
8. We agree to indemnify and hold harmless the Issuer with respect to
any claim asserted against Issuer that is based upon our sale, transfer or other
disposition of our interests in the Loan Agreement in violation of the
provisions hereof or of the Loan Agreement, other than any claim that is based
upon the gross negligence or willful misconduct of Issuer.
9. We have executed and delivered this letter in connection with the
execution and delivery of the Loan Agreement as an inducement to Issuer to cause
the execution and delivery of the Loan Agreement to us. Only the addressees
hereof may rely upon this letter.
GE CAPITAL PUBLIC FINANCE, INC.
By:
-------------------------------
Authorized Officer
D-2
<PAGE> 54
EXHIBIT E TO LOAN AGREEMENT
SCHEDULE OF PENDING LITIGATION
[None]
<PAGE> 1
EXHIBIT 10.56
TENTH AMENDMENT TO SECOND AMENDED
AND RESTATED CREDIT AGREEMENT
(RECEIVABLES AND INVENTORY)
This Tenth Amendment to Second Amended and Restated Credit Agreement
(Receivables and Inventory) (this "Amendment") is entered into as of February 4,
1998, among Bank of America National Trust and Savings Association ("Bank") and
GT Bicycles California, Inc. ("GTBC"), Riteway Products East, Inc. ("East"),
Riteway Products North Central, Inc. ("North Central"), Rite-Way Distributors
Central, Inc. ("Central"), Rite-Way Distributors, Inc. ("Distributors"), GT and
Bicycles, Inc. ("GT"). GTBC, East, North Central, Central, and Distributors are
sometimes hereinafter referred to collectively as "Borrowers" and individually
as a "Borrower."
RECITALS
A. Bank, Borrowers, and GT are parties to that certain Second Amended
and Restated Credit Agreement (Receivables and Inventory) dated as of August 12,
1996, as modified by amendments dated September 15, 1996, October 15, 1996,
October 31, 1996, February 13, 1997, March 14, 1997, August 15, 1997, September
11, 1997, October 23, 1997, and November 18, 1997 (as amended, the "Credit
Agreement").
B. The parties hereto now desire to amend the Credit Agreement on the
terms and conditions set forth below.
AGREEMENT
NOW, THEREFORE, the parties hereto agree as follows:
1. Definitions. Capitalized terms used but not defined in this Amendment
shall have the meanings ascribed to them in the Credit Agreement.
2. Amendments. The Credit Agreement shall be amended as follows:
(a) Subparagraphs (iii) and (iv) of the definition of "Borrowing
Base" in Paragraph 1.1 are amended in full to read as follows:
"(iii) During the period from and including the date hereof to
and including February 27, 1998 only, $11,000,000;
(iv) During the period from and including February 28, 1998 to
and including April 30, 1998 only, $5,000,000;"
(b) A new Subparagraph (v) is added to the definition of "Borrowing
Base" in Paragraph 1.1 as follows:
"(v) During the period from and including the date hereof to
and including February 28, 1998 only, $4,000,000;
-1-
<PAGE> 2
(c) The definition of "Supplemental Overadvance Portion" is added
to Paragraph 1.1 in alphabetical order as follows:
"`Supplemental Overadvance Portion' means all or such part of
the outstanding principal balance of credit provided under the
Revolving Facility which at any time exceeds the sum of
subparagraphs (a)(i) through (a)(iv), inclusive, of the Borrowing
base."
(d) Paragraph 2.2(c) is amended in full to read as follows:
"(c) Excluding advances comprising the Supplemental Overadvance
Portion, advances under the Revolving Facility shall bear interest
at a rate per annum equal to the Reference Rate plus the Applicable
Margin or, subject to the requirements set forth in Section 2.6,
the Offshore Rate plus the Applicable Margin, the LIBOR Rate plus
the Applicable Margin, or, until March 31, 1997 only, the CD Rate
plus the Applicable Margin, or a combination thereof; provided,
however, that no more than seven designations of optional interest
rates under the Revolving Facility and Term Loan may be in effect
at any one time. No CD Rate Portion may be outstanding after March
31, 1997. Advances under the Supplemental Overadvance Portion shall
bear interest at a rate per annum equal to the Reference Rate plus
three and one-half (3.5) percentage points."
(e) New Paragraphs 8.6(l) and 8.6(m) are added as follows:
"(l) indebtedness owing by Riteway Products Canada Ltd. to
Deutsche Financial Services, a division of Deutsche Bank Canada,
under a line of credit not to exceed at any one time CD$9,000,000
(the "Deutsche Financing"); and
(m) obligations owing by GT to Deutsche Financial Services, a
division of Deutsche Bank Canada, under a guaranty supporting the
Deutsche Financing."
(f) A new Paragraph 8.7(o) is added as follows:
"(o) liens on certain personal property owned by Riteway
Products Canada Ltd. securing the Deutsche Financing."
(g) Except as hereby amended, all of the terms and conditions of
the Credit Agreement shall remain in full force and effect.
3. Fee. Concurrently with the execution of this Amendment, Borrowers
will pay to Bank a fee of $10,000.
4. Representations and Warranties. Borrowers and GT represent and
warrant to Bank that: (i) no Event of Default under Credit Agreement and no
event which, with notice or lapse of time or both, would become an Event of
Default has occurred and is continuing; (ii) Borrowers' and GT's representations
and warranties made under the Credit Agreement are true as of the date hereof;
(iii) the making and performance by Borrowers and GT of this Amendment have been
duly authorized by all necessary corporate action; (iv) no consent, approval,
authorization, permit, or license is required in connection with the making or
performance of this Amendment.
-2-
<PAGE> 3
5. Conditions. This Amendment will not become effective until Bank has
received the following:
(a) An original of this Amendment, executed by Borrowers, GT, and
Bank; and
(b) The fee provided in Paragraph 3 above.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first above written.
BANK OF AMERICA NATIONAL GT BICYCLES CALIFORNIA, INC.
TRUST AND SAVINGS ASSOCIATION RITEWAY PRODUCTS EAST, INC.
RITEWAY PRODUCTS NORTH
CENTRAL, INC.
By: /s/ E. M. AMENDT RITE-WAY DISTRIBUTORS
----------------------------- CENTRAL, INC.
E.M. Amendt RITE-WAY DISTRIBUTORS, INC.
Vice President GT BICYCLES, INC.
By: /s/ MICHAEL HAYNES
-------------------------
Michael Haynes
President
-3-
<PAGE> 1
EXHIBIT 10.57
ELEVENTH AMENDMENT TO SECOND AMENDED
AND RESTATED CREDIT AGREEMENT
(RECEIVABLES AND INVENTORY); WAIVER
This Eleventh Amendment to Second Amended and Restated Credit Agreement
(Receivables and Inventory); Waiver (this "Amendment") is entered into as of
February 27, 1998, among Bank of America National Trust and Savings Association
("Bank") and GT Bicycles California, Inc. ("GTBC"), Riteway Products East, Inc.
("East"), Riteway Products North Central, Inc. ("North Central"), Rite-Way
Distributors Central, Inc. ("Central"), Rite-Way Distributors, Inc.
("Distributors"), GT and Bicycles, Inc. ("GT"). GTBC, East, North Central,
Central, and Distributors are sometimes hereinafter referred to collectively as
"Borrowers" and individually as a "Borrower."
RECITALS
A. Bank, Borrowers, and GT are parties to that certain Second Amended
and Restated Credit Agreement (Receivables and Inventory) dated as of August 12,
1996, as modified by amendments dated September 15, 1996, October 15, 1996,
October 31, 1996, February 13, 1997, March 14, 1997, August 15, 1997, September
11, 1997, October 23, 1997, November 18, 1997, and February 4, 1998, (as
amended, the "Credit Agreement").
B. The parties hereto now desire to amend the Credit Agreement on the
terms and conditions set forth below.
AGREEMENT
NOW, THEREFORE, the parties hereto agree as follows:
1. Definitions. Capitalized terms used but not defined in this Amendment
shall have the meanings ascribed to them in the Credit Agreement.
2. Amendments. The Credit Agreement shall be amended as follows:
(a) In subparagraph (iii) of the definition of "Borrowing Base" in
Paragraph 1.1, the words "February 27, 1998" are amended to read "March 31,
1998."
(b) In subparagraph (iv) of the definition of "Borrowing Base" in
Paragraph 1.1, the words "February 28, 1998" are amended to read "April 1,
1998."
(c) In subparagraph (v) of the definition of "Borrowing Base" in
Paragraph 1.1, the words "February 28, 1998" are amended to read "March 31,
1998."
(d) In the definition of "Revolving Credit Limit" in Paragraph 1.1,
the words "February 28, 1998" are amended to read "March 31, 1998."
(e) Except as hereby amended, all of the terms and conditions of
the Credit Agreement shall remain in full force and effect.
-1-
<PAGE> 2
3. Waiver. Bank hereby waives Borrowers' and GT's noncompliance with
Paragraphs 8.4 and 8.27 of the Credit Agreement for the fiscal quarter ended
December 31, 1997. This waiver is specific in time and in intent and does not
constitute, nor should it be construed as, a waiver of any other right, power or
privilege under the Credit Agreement, or under any agreement or instrument
mentioned in the Credit Agreement, or as a waiver of any other default of the
same or of any other term or provision of the Credit Agreement.
4. Fee. Concurrently with the execution of this Amendment, Borrowers
will pay to Bank a fee of $5,000.
5. Representations and Warranties. Borrowers and GT represent and
warrant to Bank that: (i) after giving effect to the waiver in Paragraph 3
above, no Event of Default under the Credit Agreement and no event which, with
notice or lapse of time or both, would become an Event of Default has occurred
and is continuing; (ii) after giving effect to the waiver in Paragraph 3 above,
Borrowers' and GT's representations and warranties made under the Credit
Agreement are true as of the date hereof; (iii) the making and performance by
Borrowers and GT of this Amendment have been duly authorized by all necessary
corporate action; (iv) no consent, approval, authorization, permit, or license
is required in connection with the making or performance of this Amendment.
6. Conditions. This Amendment will not become effective until Bank has
received the following:
(a) An original of this Amendment, executed by Borrowers, GT, and
Bank.
(b) The fee provided in Paragraph 4 above.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first above written.
BANK OF AMERICA NATIONAL GT BICYCLES CALIFORNIA, INC.
TRUST AND SAVINGS ASSOCIATION RITEWAY PRODUCTS EAST, INC.
RITEWAY PRODUCTS NORTH
CENTRAL, INC.
By: /s/ E.M. Amendt RITE-WAY DISTRIBUTORS
------------------------------- CENTRAL, INC.
E.M. Amendt RITE-WAY DISTRIBUTORS, INC.
Vice President GT BICYCLES, INC.
By: /s/ Michael Haynes
-------------------------
Michael Haynes
President
-2-
<PAGE> 1
EXHIBIT 10.58
[LETTERHEAD OF BANK OF AMERICA] AMENDMENT TO DOCUMENTS
TWELFTH AMENDMENT TO SECOND AMENDED
AND RESTATED CREDIT AGREEMENT
(RECEIVABLES AND INVENTORY)
This Twelfth Amendment to Second Amended and Restated Credit Agreement
(Receivables and Inventory) (this "Amendment") is entered into as of March 26,
1998, among Bank of America National Trust and Savings Association ("Bank") and
GT Bicycles California, Inc. ("GTBC"), Riteway Products East, Inc. ("East"),
Riteway Products North Central, Inc. ("North Central"), Rite-Way Distributors
Central, Inc. ("Central"), Rite-Way Distributors, Inc. ("Distributors"), GT and
Bicycles, Inc. ("GT"). GTBC, East, North Central, Central, and Distributors are
sometimes hereinafter referred to collectively as "Borrowers" and individually
as a "Borrower."
RECITALS
A. Bank, Borrowers, and GT are parties to that certain Second Amended
and Restated Credit Agreement (Receivables and Inventory) dated as of August 12,
1996, as modified by amendments dated September 15, 1996, October 15, 1996,
October 31, 1996, February 13, 1997, March 14, 1997, August 15, 1997, September
11, 1997, October 23, 1997, November 18, 1997, February 4, 1998, and February
27, 1998 (as amended, the "Credit Agreement").
B. The parties hereto now desire to amend the Credit Agreement on the
terms and conditions set forth below.
AGREEMENT
NOW, THEREFORE, the parties hereto agree as follows:
1. Definitions. Capitalized terms used but not defined in this Amendment
shall have the meanings ascribed to them in the Credit Agreement.
2. Amendments. The Credit Agreement shall be amended as follows:
(a) In subparagraph (iii) of the definition of "Borrowing Base" in
Paragraph 1.1, the words "March 31, 1998" are amended to read "April 30, 1998."
(b) In subparagraph (iv) of the definition of "Borrowing Base" in
Paragraph 1.1, the words "April 1, 1998" are amended to read "May 1, 1998."
-1-
<PAGE> 2
(c) In subparagraph (v) of the definition of "Borrowing Base" in
Paragraph 1.1, the words "March 31, 1998" are amended to read "April 30, 1998."
(d) In the definition of "Revolving Credit Limit" in Paragraph 1.1,
the words "March 31, 1998" are amended to read "the earlier of the closing of a
loan transaction with Bankamerica Business Credit or April 30, 1998."
(e) Paragraph 2.2(c) is amended by adding the following language at
the end thereof:
"Notwithstanding any other provision of this paragraph 2.2(c) or
of the definition of Applicable Margin, the first Twenty Million
Dollars ($20,000,000) outstanding under the Revolving Facility
shall bear interest at the Reference Rate plus three and one-half
percentage points (3.5%) or, subject to the provisions of
Paragraph 2.6, the Offshore Rate plus four percentage points
(4.0%) or the LIBOR Rate plus four percentage points (4.0%.) All
further sums outstanding under the Revolving Facility shall bear
interest as provided above."
(f) Except as hereby amended, all of the terms and conditions of
the Credit Agreement shall remain in full force and effect.
3. Fee. Concurrently with the execution of this Amendment, Borrowers
will pay to Bank a fee of $5,000.
4. Representations and Warranties. Borrowers and GT represent and
warrant to Bank that after giving effect to waivers granted prior hereto: (i) no
Event of Default under the Credit Agreement and no event which, with notice or
lapse of time or both, would become an Event of Default has occurred and is
continuing; (ii) Borrowers' and GT's representations and warranties made under
the Credit Agreement are true as of the date hereof; (iii) the making and
performance by Borrowers and GT of this Amendment have been duly authorized by
all necessary corporate action; (iv) no consent, approval, authorization,
permit, or license is required in connection with the making or performance of
this Amendment.
5. Conditions. This Amendment will not become effective until Bank has
received the following:
(a) An original of this Amendment, executed by Borrowers, GT, and
Bank.
(b) The fee provided in Paragraph 3 above.
SIGNATURES NEXT PAGE
-2-
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first above written.
BANK OF AMERICA NATIONAL GT BICYCLES CALIFORNIA, INC.
TRUST AND SAVINGS ASSOCIATION RITEWAY PRODUCTS EAST, INC.
RITEWAY PRODUCTS NORTH
CENTRAL, INC.
By: /s/ Henry P. Rogers RITE-WAY DISTRIBUTORS
------------------------------- CENTRAL, INC.
Henry P. Rogers RITE-WAY DISTRIBUTORS, INC.
Vice President GT BICYCLES, INC.
By: /s/ Michael Haynes
--------------------------
Michael Haynes
President
-3-
<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 Canada Limited
Riteway Products Japan K.K.
Riteway Products France S.A.R.L.
Caratti Sport Limited
Innovations in Composites, Inc.
<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 25,
1998, relating to the consolidated balance sheets of GT Bicycles, Inc. and
subsidiaries as of December 31, 1997 and 1996, 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, 1997, and related schedule,
which reports appear in the December 31, 1997 annual report on Form 10-K of GT
Bicycles, Inc.
KPMG PEAT MARWICK LLP
Orange County, California
April 6, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> DEC-31-1996 JUN-30-1996 SEP-30-1996
<CASH> 0 0 1,071
<SECURITIES> 0 0 0
<RECEIVABLES> 53,477 38,207 41,660
<ALLOWANCES> 1,634 1,378 1,618
<INVENTORY> 74,328 45,433 66,257
<CURRENT-ASSETS> 130,066 88,315 110,549
<PP&E> 7,709 6,079 8,020
<DEPRECIATION> 2,686 2,383 3,219
<TOTAL-ASSETS> 156,181 100,363 137,301
<CURRENT-LIABILITIES> 22,674 13,533 21,581
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 10 10 10
<OTHER-SE> 59,143 51,132 54,778
<TOTAL-LIABILITY-AND-EQUITY> 156,181 100,363 137,301
<SALES> 208,351 92,964 145,399
<TOTAL-REVENUES> 208,351 92,964 145,399
<CGS> 149,147 67,231 104,272
<TOTAL-COSTS> 149,147 67,231 104,272
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 589 201 187
<INTEREST-EXPENSE> 3,828 1,467 2,514
<INCOME-PRETAX> 17,463 7,359 12,094
<INCOME-TAX> 5,887 2,944 4,309
<INCOME-CONTINUING> 11,576 4,415 8,055
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 11,576 4,415 8,055
<EPS-PRIMARY> 1.18 .45 .82
<EPS-DILUTED> 1.17 .45 .81
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 588
<SECURITIES> 0
<RECEIVABLES> 54,752
<ALLOWANCES> 2,334
<INVENTORY> 80,985
<CURRENT-ASSETS> 138,735
<PP&E> 17,011
<DEPRECIATION> 4,178
<TOTAL-ASSETS> 176,281
<CURRENT-LIABILITIES> 110,033
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 61,393
<TOTAL-LIABILITY-AND-EQUITY> 176,281
<SALES> 216,214
<TOTAL-REVENUES> 216,214
<CGS> 156,349
<TOTAL-COSTS> 156,349
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,334
<INTEREST-EXPENSE> 5,586
<INCOME-PRETAX> 5,194
<INCOME-TAX> 2,044
<INCOME-CONTINUING> 3,150
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,150
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
</TABLE>
