SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported) September 16, 1997
-------------------------------
Global Motorsport Group, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
DELAWARE 000-19540 94-1716138
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
16100 JACQUELINE COURT, MORGAN HILL, CA 95037
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 778-0500
----------------------------
CUSTOM CHROME, INC.
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On September 16, 1997, CSI Acquisition Sub, Inc., a Delaware corporation
and a wholly-owned subsidiary of Global Motorsport Group, Inc. (the "Company"),
a Delaware corporation, completed the purchase (the "Purchase") of substantially
all of the assets and the assumption of certain liabilities of Chrome
Specialties, Inc., a Texas corporation ("CSI"). The Purchase was made pursuant
to the terms and conditions of an Asset Acquisition Agreement dated August 8,
1997 ("Agreement"). Under the terms of the Agreement, the Company paid
approximately $36 million ("Purchase Price") for CSI's assets, subject to post-
closing adjustments under certain circumstances. The Purchase Price was
determined through an arms-length negotiation between the parties. The Company
funded the Purchase through a bank financing with Bank of America National Trust
and Savings Association.
CSI is a distributor of aftermarket parts and accessories for Harley-
Davidson motorcycles. CSI's principal operations are located in Fort Forth,
Texas. Following the Purchase, the Company will operate CSI's Texas operations
as a separate subsidiary of the Company under the name "Chrome Specialties,
Inc." The Company has offered employment to all CSI employees and has assumed
CSI's lease for its facilities in Fort Worth, Texas.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
The following financial statements, pro forma consolidated financial
information and exhibits are filed at the end of this report and are part of
this report.
(a) Financial statements of business acquired.
(b) Pro forma consolidated financial information.
(c) Exhibits.
2.1 Asset Acquisition Agreement, dated as of
August 8, 1997, among Global Motorsport
Group, Inc., CSI Acquisition Sub., Inc.
and the Shareholders of Chrome Specialties,
Inc., as amended.
24.1 Consent of Ernst & Young LLP
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: September 23, 1997 GLOBAL MOTORSPORT GROUP, INC.
/s/ James J. Kelly, Jr.
-------------------------------------------
James J. Kelly, Jr.
Executive Vice President, Finance and
Chief Financial Officer
[LETTERHEAD OF ERNST & YOUNG LLP]
Report of Independent Auditors
The Stockholders
Chrome Specialties, Inc.
We have audited the accompanying balance sheet of Chrome Specialties, Inc. (an S
corporation) as of September 30, 1996, and the related statements of income and
retained earnings and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Chrome Specialties, Inc. at
September 30, 1996, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Dallas, Texas
December 13, 1996
Chrome Specialties, Inc.
(An S Corporation)
Balance Sheet
September 30, 1996
ASSETS
Current assets:
Cash $ 1,635,336
Accounts receivable, net of allowance for
doubtful accounts of $50,000 2,063,288
Inventory 9,450,955
Prepaid expenses 220,683
-----------
Total current assets 13,370,262
Property and equipment, at cost:
Furniture and fixtures $337,644
Warehouse machinery & equipment 412,673
Computer software 335,928
Computer equipment 259,946
Automobiles 82,001
Leasehold improvements 131,992
Designs & patents 11,162 1,571,346
--------
Less accumulated depreciation and amortization (706,332)
-----------
Net property and equipment 865,014
Other assets 24,296
-----------
Total assets $14,259,572
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,300,000
Accounts payable 882,053
Accrued liabilities 316,300
-----------
Total current liabilities 2,498,353
Long-term debt 8,960,000
Commitments and contingencies
Stockholders' equity:
Common stock, no par value,
999 shares authorized and issued 1,500
Retained earnings 2,800,219
-----------
2,801,719
Less cost of 333 shares of common stock
held in treasury (500)
-----------
Total stockholders' equity 2,801,219
-----------
Total liabilities and stockholders' equity $14,259,572
===========
See accompanying notes.
Chrome Specialties, Inc.
(An S Corporation)
Statement of Income and Retained Earnings
Year ended September 30, 1996
Sales $ 35,811,390
Cost of sales (21,121,165)
------------
Gross profit 14,690,225
Selling, general and administrative expenses:
Officers' salaries $3,943,750
Other salaries and payroll taxes 2,821,523
Contract labor 50,759
Freight-out 2,486,622
Telephone and utilities 452,741
Rent and related property taxes 539,014
Advertising, promotion and postage 483,529
Office and warehouse supplies 110,628
Packaging and shipping 492,616
Catalogs and printing 569,645
Travel 109,082
Depreciation and amortization 271,958
Insurance 219,552
Repairs and maintenance 28,488
Professional services 324,347
Other 579,933 13,484,187
---------- -----------
Operating income 1,206,038
Other income (expense):
Interest income 30,135
Interest expense, including approximately
$398,000 to stockholders (896,179)
Other income 19,814 (846,230)
---------- -----------
Net income 359,808
Retained earnings at beginning of year 2,440,411
-----------
Retained earnings at end of year $ 2,800,219
============
See accompanying notes.
Chrome Specialties, Inc.
(An S Corporation)
Statement of Cash Flows
Year ended September 30, 1996
OPERATING ACTIVITIES
Net income $ 359,808
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization $ 271,958
Gain on sale of property and equipment (4,021)
Changes in operating assets and liabilities:
Increase in accounts receivable (342,093)
Increase in inventory (1,042,989)
Increase in prepaids (83,614)
Decrease in accounts payable (346,011)
Increase in accrued liabilities 24,447 (1,522,323)
---------- -----------
Net cash used in operating activities (1,162,515)
INVESTING ACTIVITIES
Additions to property and equipment (440,330)
Proceeds from sale of property and equipment 120,826
----------
Net cash used in investing activities (319,504)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 12,150,000
Payments on long-term debt (8,145,000)
Payments on notes payable to stockholders (1,150,000)
----------
Net cash provided by financing activities 2,855,000
-----------
Net increase in cash 1,372,981
Cash at beginning of year 262,355
-----------
Cash at end of year $ 1,635,336
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 896,000
===========
See accompanying notes.
Chrome Specialties, Inc.
(An S Corporation)
Notes to Financial Statements
September 30, 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Chrome Specialties, Inc. (the Company) distributes parts and related products
primarily for Harley Davidson motorcycles throughout the United States, Canada,
Europe, Australia and the Far East. The Company was formed in 1984 and is
located in Fort Worth, Texas.
The Company has elected, for Federal income tax purposes, to be taxed under
subchapter S of the Internal Revenue Code. Under that subchapter the Company is
not taxed on net earnings. Instead, the stockholders report their respective
shares of the Company's net taxable income or loss on their individual Federal
income tax returns.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
INVENTORY
Inventory is stated at the lower of cost or market. Cost is determined using the
average cost method. Inventory consists principally of finished goods
merchandise.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major renewals and betterments are
capitalized. Maintenance and repairs are charged to operations as incurred.
Provisions for depreciation and amortization of property and equipment are
computed using the declining balance method over estimated useful lives of 3 to
7 years, with the exception of leasehold improvements and designs and patents
which are amortized using the straight line method over useful lives of 39.5
years and 15 years, respectively.
REVENUE RECOGNITION AND CREDIT RISK
Sales revenue is generally recognized at the time of shipment. Credit is
extended to customers based upon evaluation of the customer's financial
condition and, generally, collateral is not required. The Company maintains an
allowance for doubtful accounts based upon expected collectibility. Losses from
bad debts have historically been within Management's expectations.
Chrome Specialties, Inc.
(An S Corporation)
Notes to Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
ADVERTISING
The Company expenses the costs of advertising as incurred, except for certain
capitalized catalog costs, which are amortized over the expected period of
future benefits. The total capitalized catalog costs at September 30, 1996, were
approximately $122,000, and advertising expense for the year was approximately
$1,053,000.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates.
2. LONG-TERM DEBT
Long-term debt at September 30, 1996 consists of:
Borrowings from a bank under a $6,500,000 five year
term note bearing interest, as the Company may elect,
at the bank's base rate or at LIBOR plus 1.75%. At
September 30, 1996, the bank's base rate was 8.25% and
LIBOR was 7.125%. Payments of principal of $325,000
plus accrued interest are due quarterly and the loan
matures July 1, 2001. $ 6,500,000
Various notes payable to stockholders bearing interest
at rates ranging from 8% to 10%, with interest payable
quarterly, due in varying amounts through December 29,
2000, secured by substantially all the remaining
assets of the Company. 3,760,000
-----------
10,260,000
Less current portion of long-term debt 1,300,000
-----------
$ 8,960,000
===========
Chrome Specialties, Inc.
(An S Corporation)
Notes to Financial Statements (continued)
2. LONG-TERM DEBT (CONTINUED)
Maturities of long-term debt are as follows for the years ending September 30:
1998 $1,910,000
1999 2,950,000
2000 2,300,000
2001 1,800,000
----------
$8,960,000
==========
Under the loan agreement providing for the $6,500,000 term loan, the Company has
additional borrowing facilities as follows:
A revolving line of credit of $5,000,000, up to $750,000 of which may be
utilized for letters of credit, with interest at LIBOR plus 1.50% or the
bank's base rate (as the Company may elect), subject to collateral
availability. Interest is payable monthly with the outstanding principal
balance payable on the maturity date of July 1, 1998. There were no
borrowings under this line of credit at September 30, 1996. However, a
letter of credit for $184,000 was outstanding at September 30, 1996.
A $1,000,000 line of credit (limited to 75% of Extended Receivables, as
defined), which bears interest at LIBOR plus 1.50% or the bank's base rate
(as the Company may elect). Interest is payable monthly with the
outstanding principal balance payable on the maturity date of July 1, 1997.
There were no borrowings under this line of credit at September 30, 1996.
Amounts available under the loan agreement are limited in the aggregate to 80%
of Qualified Accounts Receivable, as defined, plus 55% to 65% of Eligible
Inventory, as defined. Borrowings under the loan agreement are collateralized by
all inventory, equipment, accounts receivable and substantially all other assets
of the Company. The loan agreement contains various restrictive covenants
including, but not limited to, net worth requirements, liquidity ratios and
limitations on capital expenditures and additional indebtedness.
Based on the floating nature of the interest rates provided in the long-term
debt facilities and the interest rates provided in the shareholder loan
agreements, management of the Company believes the fair value of these financial
instruments approximates their carrying value.
Chrome Specialties, Inc.
(An S Corporation)
Notes to Financial Statements (continued)
3. COMMITMENTS AND CONTINGENCIES
The Company leases certain office and warehouse facilities and office equipment
under operating leases. Total rent expense of approximately $401,000 for these
leases was recognized for the year ended September 30, 1996.
Future minimum lease payments are as follows for the years ending September 30:
1997 $321,052
1998 333,349
1999 237,249
--------
$891,650
========
The Company is from time-to-time involved in litigation in the ordinary course
of business. Management believes the outcome of all pending matters at September
30, 1996, will not have a material adverse effect on the Company's financial
position or results of operation.
GLOBAL MOTORSPORT GROUP, INC.
Pro Forma Consolidated Financial Information
--------------------------------------------
The following presents unaudited pro forma consolidated statements of operations
for Global Motorsport Group, Inc. and Subsidiaries (Global Motorsport) for the
year ended January 31, 1997 and the six months ended July 31, 1997, and includes
the unaudited statements of operations of Chrome Specialties, Inc. for the 12
month period ended January 31, 1997 and the six month period ended July 31,
1997, and gives effect to the Chrome Specialties, Inc. Acquisition as if it had
occurred as of February 1, 1996.
The following unaudited pro forma consolidated balance sheet gives effect to the
transaction described above, as if all of such events occurred on July 31, 1997.
The following unaudited pro forma consolidated financial data does not purport
to represent what Global Motorsport's results of operations or financial
condition would have been had such transactions in fact occurred at the
beginning of the period or to project Global Motorsport's results of operations
or financial position in or for any future period. The unaudited pro forma
consolidated financial data should be read in conjunction with the Global
Motorsport consolidated financial statements and accompanying notes thereto
contained in their Annual Report filed on Form 10-K.
GLOBAL MOTORSPORT GROUP, INC.
Pro Forma Consolidated Statement of Operations
For the year ended January 31, 1997
(In thousands, except for per share data)
(Unaudited)
Global Motor-
Sport, Inc. Chrome Pro Forma Pro Forma
Actual Specialties, Inc.(1) Adjustments As Adjusted
-------- ------------------ ------------ ------------
Sales, net $108,557 $35,557 $(1,736)(2) $142,378
Cost of Sales 64,834 21,243 -- 86,077
-------- ------- ------- --------
Gross profit 43,723 14,314 (1,736) 56,301
-------- ------- ------- --------
Operating expenses: (1,736)(2)
Selling, general & administrative 27,039 13,249 (2,476)(3) 36,076
Product Development 1,723 -- -- 1,723
-------- ------- ------- --------
28,762 13,249 (4,212) 37,799
-------- ------- ------- --------
Operating Income 14,961 1,065 2,476 18,502
Interest expense 1,915 831 1,866(4) 4,612
-------- ------- ------- --------
Income before income taxes 13,046 234 610 13,890
Income Taxes 5,174 -- 338(5) 5,512
-------- ------- ------- --------
Net income $ 7,872 $ 234 $ 272 $ 8,378
======== ======= ======= ========
Net income per share $ 1.48 $ 1.57
======== ========
Weighted average shares outstanding 5,327 5,327
======== ========
- -------------------------
See accompanying footnotes to Unaudited Pro Forma Consolidated Statement of
Operations.
GLOBAL MOTORSPORT GROUP, INC.
Notes to Unaudited Pro Forma Consolidated Statement of Operations
For the year ended January 31, 1997
Note 1 Reflects the historical data for the period from February 1, 1996 to
January 31, 1997 for Chrome Specialties, Inc., which is not included
in Global Motorsport Group, Inc.'s operations. Prior to the
acquisition, Chrome Specialties, Inc. filed income tax returns under
subchapter S of the U.S. Federal Income Tax Code. Therefore, all
taxable income of Chrome Specialties, Inc. passed through to its
shareholders.
Note 2 Reflects reclassification of amounts recorded as sales by Chrome
Specialties, Inc. which Global Motorsport historically presents as
recovered expenses.
Note 3 Reflects adjustment to (i) non-recurring salaries and bonuses paid to
previous owners (ii) amortization for the excess of purchase price
over the net tangible assets acquired (goodwill) over 25 years and
other intangible assets over 5 to 7 years using straight line method
as follows:
(in thousands)
Salary and bonus adjustments $(3,810)
Amortization 1,334
-------
$(2,476)
=======
Note 4 Reflects adjustment for interest expenses incurred for net borrowings
associated with the acquisition.
Note 5 Reflects an adjustment to income tax expense on a pro forma basis at
the effective tax rate for Global Motorsport Group, Inc., for the year
ended January 31, 1997.
GLOBAL MOTORSPORT GROUP, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JULY 31, 1997
(In thousands, except for per share data)
(Unaudited)
Global Motor-
Sport, Inc. Chrome Pro Forma Pro Forma
Actual Specialties, Inc.(1) Adjustments As Adjusted
------- ------------------ ------------ -----------
Sales, net $64,004 $20,746 $ (738)(2) $84,012
Cost of Sales 39,836 12,410 -- 52,246
------- ------- ------- -------
Gross profit 24,168 8,336 (738) 31,766
------- ------- ------- -------
Operating expenses: (738)(2)
Selling, general & administrative 14,509 5,626 280 (3) 19,677
Product Development 711 - - 711
------- ------- ------- -------
15,220 5,626 (458) 20,388
------- ------- ------- -------
Operating Income 8,948 2,710 (280) 11,378
Interest expense 872 400 885 (4) 2,157
------- ------- ------- -------
Income before income taxes 8,076 2,310 (1,165) 9,221
Income Taxes 3,209 -- 458 (5) 3,667
------- ------- ------- -------
Net income $ 4,867 $ 2,310 $(1,623) $ 5,554
======= ======= ======= =======
Net income per share $0.93 $ 1.06
======= =======
Weighted average shares outstanding 5,224 5,224
======= =======
- -----------------------------
See accompanying footnotes to Unaudited Pro Forma Consolidated Statement of
Operations.
GLOBAL MOTORSPORT GROUP, INC.
Notes to Unaudited Pro Forma Consolidated Statement of Operations
For six months ended July 31, 1997
NOTE 1 Reflects the historical data for the period from February 1, 1997 to July
31, 1997 for Chrome Specialties, inc., which is not included in Global
Motorsport Group, Inc.'s operations. Prior to the acquisition, Chrome
Specialties, Inc. filed income tax returns under subchapter S of the
U.S. Federal Income Tax Code. Therefore, all taxable income of Chrome
Specialties, Inc. passed through to its shareholders.
NOTE 2 Reflects reclassification of amounts recorded as sales by Chrome
Specialties, Inc. which Global Motorsport historically presents as
recovered expenses.
NOTE 3 Reflects adjustment to (i) non-recurring salaries and bonuses paid to
previous owners (ii) amortization for the excess of purchase price over
the net tangible assets acquired (goodwill) over 25 years and other
intangible assets over 5 to 7 years using straight line method as
follows:
(in thousands)
Salary and bonus adjustments $(387)
Amortization 667
------
$ 280
======
NOTE 4 Reflects adjustment for interest expense incurred for net borrowings
associated with the acquisition.
NOTE 5 Reflects an adjustment to income tax expense on a pro forma basis at the
effective tax rate for Global Motorsport Group, Inc., for the six months
ended July 31, 1997.
GLOBAL MOTORSPORT GROUP, INC.
Pro Forma Consolidated Balance Sheet
July 31, 1997
(In thousands)
(unaudited)
Global Motor-
Sport, Inc. Chrome Pro Forma Pro Forma
Actual Specialties, Inc.(1) Adjustments As Adjusted
------------- ------------------- ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 3,168 $ (387) $ 387 (2) $ 3,168
Accounts receivable, net 10,539 3,198 (100)(3) 13,637
Merchandise inventories 46,330 10,219 (250)(3) 56,299
Deferred income taxes 1,334 1,334
Prepaid income taxes 2,378 2,378
Deposits and prepaid expenses 2,254 247 2,501
------- ------- ------- --------
66,003 13,277 37 79,317
Property and equipment, net 17,435 765 18,200
Other assets 8,103 47 28,076 (4) 36,226
------- ------- ------- --------
$91,541 $14,089 $28,113 $133,743
======= ======= ======= ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Current maturities of long-term debt $(2,025) (5)
and capital lease obligations $ 3,297 $ 1,304 (1,304) (2) $ 1,272
Bank borrowings 3,899 3,899
Accounts payable 3,120 603 3,723
Accrued expenses and other liabilities 3,035 479 2,620 (6) 6,134
------- ------- ------- --------
13,351 2,386 (709) 15,028
40,525 (5)
Long-term debt and capital lease obligations 16,011 8,306 (8,306) (2) 56,536
Deferred income taxes 817 817
Shareholders' equity:
Common stock 5 1 (1) (2) 5
Additional paid in capital 28,412 28,412
Retained Earnings 32,945 3,396 (3,396) (2) 32,945
------- ------- ------- --------
61,362 3,397 (3,397) 61,362
Commitment and contingencies ------- ------- ------- --------
$91,541 $14,089 $28,113 $133,743
======= ======= ======= ========
- -----------------------------
See accompanying footnotes to Unaudited Pro Forma Consolidated Balance Sheet.
GLOBAL MOTORSPORT GROUP, INC.
Notes to Unaudited Pro Forma Consolidated Balance Sheet
July 31, 1997
NOTE 1 Reflects the unaudited historical cost balance sheet of Chrome
Specialties, Inc. at July 31, 1997.
NOTE 2 Reflects a reduction for assets and liabilities not included in the
acquisition.
NOTE 3 Reflects an adjustment based on an evaluation of the fair values of
assets acquired.
NOTE 4 Reflects adjustments to reflect the acquisition under the purchase method
of accounting, as follows:
Purchase price $38,256
Other direct acquisition costs 2,500
-------
40,756
Less fair value of net assets
acquired 13,780
-------
26,976
Accruals 1,100
-------
Cost in excess of fair value $28,076
=======
Allocation of excess cost:
Goodwill $26,576
Non-compete agreements 500
Deferred debt issue costs 1,000
-------
$28,076
=======
NOTE 5 Reflects the net effect of borrowings incurred to finance the acquisition
and classification of current portions.
NOTE 6 Reflects the accrual of acquisition costs incurred and not yet paid.