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Global Motorsport Group Inc – ‘10-Q’ for 10/31/98

As of: Tuesday, 12/15/98 · For: 10/31/98 · Accession #: 929624-98-2015 · File #: 0-19540

  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

12/15/98  Global Motorsport Group Inc       10-Q       10/31/98    2:50K                                    Donneley R R & S… Inc/FA

Quarterly Report — Form 10-Q
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Form 10-Q for Period Ended 10/31/98                   19     91K 
 2: EX-27       Financial Data Schedule                                2      6K

10-Q — Form 10-Q for Period Ended 10/31/98
Document Table of Contents

Page	(sequential)	\|	(alphabetic)	Top
			Alternative Formats (Word, et al.) Condensed Consolidated Financial Statements Exhibits and Reports on Form 8-K Item 2 Legal Proceedings Management's Discussion and Analysis of Financial Condition and Results of Operations
1	1st Page - Filing Submission
2	Item 1. Condensed Consolidated Financial Statements
"	Item 2
8	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
17	Item 2. Legal Proceedings
18	Item 6. Exhibits and Reports on Form 8-K

10-Q 1st Page of 19 TOC ↑Top Previous Next ↓Bottom Just 1st
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION  
WASHINGTON, D.C. 20549  

FORM 10-Q 
(Mark One)                                                                      

[x]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES        
EXCHANGE ACT OF 1934                                                  

For the quarterly period ended October 31, 1998                                 

OR  

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES        
EXCHANGE ACT OF 1934                                                  

For the transition period from _______________ to _____________                 

Commission File Number  0-19540 
                       -------

GLOBAL MOTORSPORT GROUP, INC. 
--------------------------------------------------------------------------------
(Exact name or registrant as specified in its charter)  

Delaware                                           94-171638  
--------------------------------------------------------------------------------
(State or other jurisdiction or                    IRS Employer Identification  
incorporation or organization)                                                  

16100 Jacqueline Court, Morgan Hill, California              95037            
--------------------------------------------------------------------------------
(Address of principal executive offices)                   (Zip code)           

Registrant's telephone number including area code    408-778-0500               
                                                 -------------------------------

--------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last       
report.                                                                         

 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of   
1934 during the preceding 12 months (or for such shorter period that the        
registrant was required to file such reports) and (2) has been subject to such  
filing requirements for the past 90 days.                                       

Yes     X  .    No       .                                                      
-----         -----                                                 

   Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.                             

                                                                [Download Table]

                                                                     
                                                     Outstanding at  
           Class                                    December 10, 1998

 Common Stock, $.001 par value                          5,182,973    

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GLOBAL MOTORSPORT GROUP, INC. 

FORM 10-Q 
FOR THE THREE AND NINE MONTH PERIODS ENDED OCTOBER 31, 1998 

                                                        [Enlarge/Download Table]

PART I.     FINANCIAL INFORMATION                                                 PAGE NO.
-------     ---------------------                                                 --------
                                                                                          
     Item 1.      Condensed Consolidated Financial Statements                             

                  Condensed Consolidated Balance Sheets at                                
                  October 31, 1998 and January 31, 1998 (Unaudited)                   3   

                  Condensed Consolidated Statements of Operations for the                 
                  three and nine month periods ended October 31, 1998 and 1997            
                  (Unaudited)                                                         4   

                  Condensed Consolidated Statements of Cash Flows for the                 
                  nine month periods ended October 31, 1998 and 1997 (Unaudited)      5   

                  Notes to Condensed Consolidated Financial Statements                6   

     Item 2.      Management's Discussion and Analysis of Financial                       
                  Condition and Results of Operations                                 8   


PART II.          OTHER INFORMATION                                                       
--------          -----------------                                                       
                                                                                          
     Item 2.      Legal proceedings                                                   17  

     Item 6.      Exhibits and Reports on Form 8-K                                    20  

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GLOBAL MOTORSPORT GROUP, INC. 
CONDENSED CONSOLIDATED BALANCE SHEETS 
(In thousands, except share data) 
(Unaudited) 

                                                                [Download Table]

                                                       October 31  January 31
                                                          1998        1998   
                                                                             

ASSETS                                                                       
Current assets:                                                              
Cash and cash equivalents.............................   $  1,379    $  1,432
Accounts receivable, net..............................     13,403      12,958
Merchandise inventories...............................     53,941      66,338
Deferred income taxes.................................      3,055       3,079
Prepaid income taxes..................................      1,026       1,926
Deposits and prepaid expenses.........................      2,519       2,614
                                                         --------    --------
                                                           75,323      88,347

Property and equipment, net...........................     18,450      18,408
Other assets..........................................     34,874      35,327
                                                         --------    --------
                                                         $128,647    $142,082
                                                         ========    ========

LIABILITIES AND SHAREHOLDERS' EQUITY                                         

Current liabilities:                                                         
Current maturities of long-term debt and                                     
 capital lease obligations............................   $  4,137    $  4,176
Bank borrowings.......................................         --      13,741
Accounts payable......................................      4,372       6,757
Accrued expenses and other liabilities................      6,824       4,775
                                                         --------    --------
                                                           15,333      29,449

Long-term debt and capital lease obligations..........     46,998      52,302
Deferred income taxes.................................        858         988

Shareholders' equity:                                                        
 Common stock, $.001 par value; 20,000,000                                   
   shares authorized; 5,458,973 issued and 5,182,973                         
   shares outstanding as of October 31, 1998, and                            
   5,358,312 issued and 5,082,312 shares outstanding                         
   as of January 31, 1998.............................          6           5
 Additional paid-in capital...........................     30,077      28,977
 Retained earnings....................................     35,375      30,361
                                                         --------    --------
                                                           65,458      59,343
Commitments and contingencies                                                
                                                         --------    --------
                                                         $128,647    $142,082
                                                         ========    ========

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GLOBAL MOTORSPORT GROUP, INC. 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 
(In thousands, except per share data) 
(Unaudited) 

                                                        [Enlarge/Download Table]


                                             For three months ended    For nine months ended
                                                   October 31               October 31      
                                                                                            

                                               1998          1997        1998          1997 
                                               ----          ----        ----          ---- 

Sales, net................................   $38,526       $30,450    $128,647       $94,455
Cost of Sales.............................    23,637        19,498      79,835        59,334
                                             -------       -------    --------       -------
       Gross Profit.......................    14,889        10,952      48,812        35,121
                                             -------       -------    --------       -------

Operating Expenses                                                                          
       Selling, general & administrative..    10,739         9,643      31,365        24,162
       Cost associated with unsolicited                                                     
             tender offer.................     1,556            --       3,263            --
       Product development................       376           347       1,041         1,048
                                             -------       -------    --------       -------

Operating income..........................     2,218           962      13,143         9,911

Interest expense..........................       869           814       3,498         1,687
                                             -------       -------    --------       -------

Income before income taxes................     1,349           148       9,645         8,224

Income taxes..............................     1,172            66       4,631         3,274
                                             -------       -------    --------       -------

Net Income................................   $   177       $    82    $  5,014       $ 4,950
                                             =======       =======    ========       =======

Net Income per share, basic...............   $  0.03       $  0.02    $   0.97       $  0.97
                                             =======       =======    ========       =======

Net income per share, diluted.............   $  0.03       $  0.02    $   0.92       $  0.94
                                             =======       =======    ========       =======

Shares outstanding:                                                                         

    Basic................................. 5,174,000     5,056,000   5,160,000     5,126,000
    Diluted............................... 5,365,000     5,314,000   5,472,000     5,260,000

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GLOBAL MOTORSPORT GROUP, INC. 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 
(In Thousands)  
(Unaudited) 

                                                        [Enlarge/Download Table]

                                                                    For the nine months ended
                                                                            October 31,      
                                                                      1998             1997  
                                                                     ------           ------ 
                                                                                             
Cash flows from operating activities:                                                        
  Net income...................................................... $  5,014         $  4,950 
  Adjustments to reconcile net income to net cash provided                                   
    by operating activities:                                                                 
      Depreciation and amortization...............................    3,557            2,097 
      Deferred income tax.........................................     (106)              -- 
      Changes in items affecting operations:                                                 
        Accounts receivable.......................................     (444)           1,219 
        Merchandise inventories...................................   12,397              981 
        Deposits & prepaid expenses...............................      996              181 
        Accounts payable, accrued expenses & other liabilities....     (338)           3,806 
                                                                   --------         -------- 

Net cash provided by operating activities.........................   21,076           13,234 
                                                                   --------         -------- 

Cash flows from investing activities:                                                        
  Purchase of intangible assets in connection with acquisition....     (733)         (26,376)
  Purchase of equipment in connection with acquisition............       --             (770)
  Purchase of net current assets in connection with acquisition...       --          (12,383)
  Acquisition costs...............................................       --           (1,966)
  Additions to property and equipment.............................   (2,413)          (3,474)
                                                                   --------         -------- 

  Net cash used in investing activities...........................   (3,146)         (44,969)
                                                                   --------         -------- 

Cash flows from financing activities:                                                        
  Bank repayment, net.............................................  (13,741)          (2,369)
  Borrowing (repayment) on capital lease obligations and                                     
    long-term debt................................................   (5,343)          38,646 
  Issuance of common stock........................................    1,101              786 
  Repurchase of common stock......................................       --           (3,489)
                                                                   --------         -------- 

Net cash provided (used) by financing activities..................  (17,983)          33,574 
                                                                   --------         -------- 

Net change in cash and cash equivalents...........................      (53)           1,839 
Cash and cash equivalents at beginning of period..................    1,432               40 
                                                                   --------         -------- 

Cash and cash equivalents at end of period........................ $  1,379         $  1,879 
                                                                   ========         ======== 

Supplemental disclosures of cash paid during the period:                                     

  Interest........................................................ $  3,498         $  1,878 
                                                                   ========         ======== 

  Income taxes.................................................... $  1,581         $  3,107 
                                                                   ========         ======== 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  
----------------------------------------------------------------  

Note 1 - Basis of Presentation                                                  
------------------------------                                                  

  The accompanying unaudited interim condensed consolidated financial statements
have been prepared in conformity with generally accepted accounting principles, 
consistent with those applied in and should be read in conjunction with, the    
audited consolidated financial statements for the fiscal year ended January 31, 
1998 included in the Annual Report on Form 10-K filed by Global Motorsport      
Group, Inc. (the "Company") with the Securities and Exchange Commission. The    
interim financial information is unaudited, but reflects all normal recurring   
adjustments which are, in the opinion of management, necessary to provide a fair
statement of results for the interim periods presented. The results for the     
interim periods are not necessarily indicative of results to be expected for the
fiscal year.                                                                    

Note 2 - Earnings Per Share Calculation                                         
---------------------------------------                                         

The Company has adopted Statement of Financial Accounting Standard ("SFAS") 
No. 128, Earnings Per Share. In accordance with SFAS No. 128, basic net income  
per share is computed using the weighted average number of common shares        
outstanding during the period. Diluted net income per share is computed using   
the weighted average number of common and dilutive common equivalent shares     
outstanding during the period, using the treasury stock method for options and  
warrants, after giving effect to contingently issuable shares under acquisition 
agreements. The Company has restated net income per share for all periods       
presented in accordance with SFAS No. 128.                                      

  Reconciliation of basic and diluted net income per share (in thousands, except
per share data):                                                                

                                                        [Enlarge/Download Table]

                              Three months ended October 31, 1998  Three months ended October 31, 1997
                              -----------------------------------  -----------------------------------
                              Net Income       Shares        EPS   Net Income       Shares        EPS 
                              ----------       ------        ---   ----------       ------        --- 
                                                                                                      
Basic net income per share          $177        5,174       $0.03         $82        5,056       $0.02
Effect of dilutive shares             --          191          --          --          258          --
                                    ----        -----       -----         ---        -----       -----
Diluted net income per share        $177        5,365       $0.03         $82        5,314       $0.02
                                    ====        =====       =====         ===        =====       =====


                              Nine months ended October 31, 1998   Nine months ended October 31, 1997 
                              ----------------------------------   -----------------------------------
                              Net Income       Shares       EPS    Net Income       Shares        EPS 
                              ----------       ------       ---    ----------       ------        --- 
                                                                                                      
Basic net income per share        $5,014        5,160       $0.97      $4,950        5,126       $0.97
Effect of dilutive shares             --          312          --          --          134          --
                                  ------        -----       -----      ------        -----       -----
Diluted net income per share      $5,014        5,472       $0.92      $4,950        5,260       $0.94
                                  ======        =====       =====      ======        =====       =====

Note 3 - Agreement and Plan of Merger                                           
-------------------------------------                                           

 On November 8, 1998, the Company entered into an Agreement and Plan of Merger
(the "Stonington Merger Agreement") by and among the Company, Stonington        
Acquisition Corp., a Delaware corporation ("Parent") and GLOBAL MOTORSPORT      
GROUP, INC. Acquisition Corp., a                                                

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Delaware corporation and wholly-owned subsidiary of Parent ("Purchaser").       
Pursuant to the Stonington Merger Agreement, Parent and Purchaser filed on      
November 16, 1998 a Tender Offer with the Securities and Exchange Commission,   
relating to an offer to purchase (the "Offer") all of the Company's issued and  
outstanding shares of common stock (the "Shares") at a price of $19.50 per      
Share, net to the seller in cash, without interest, upon the terms and subject  
to the conditions set forth in Purchaser's Offer to Purchase, dated November 16,
1998, and in the related Letter of Transmittal. The Offer expired on December   
14, 1998, and Purchaser accepted for payment all Shares validly tendered and not
withdrawn as of 12:00 midnight, New York City time, on December 14, 1998.       

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ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND       
RESULTS OF OPERATIONS                                       

This Quarterly Report on Form 10-Q contains 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. Actual results  
could differ materially from those projected in the forward-looking statements  
as a result of, among other things, the risk factors set forth below under      
"Factors That May Affect Future Results."                                       

RESULTS OF OPERATIONS                                                 

     Net sales increased 26.5% to $38,526,000 for the three months ended October
31, 1998 when compared to the same period of last year. Net sales increased     
36.2% to $128,647,000 for the nine months ended October 31, 1998 from           
$94,455,000 for the same period of the prior fiscal year. Net sales in the three
and nine months ended October 31, 1998 included $8.4 million and $30.1 million, 
respectively, in revenues generated by the Company's Chrome Specialties         
subsidiary. This subsidiary was acquired by the Company in September, 1997.     
Excluding sales generated by Chrome Specialties, net sales in the three and nine
month period ended October 31, 1998 increased 14.9% and 9.2% respectively       
compared to the same periods of the prior year. Net sales in the three and nine 
month periods ended October 31, 1998 increased approximately 12.9% and 8.4%     
respectively, when compared to the pro forma combined sales of Custom Chrome and
Chrome Specialties for the same periods of the prior year. Sales growth in the  
period was the result of increased product shipments to a wide range of domestic
customers. International shipments were down during the period by 2.0% due to   
the strength of the U.S. dollar, the Company's selling currency, and poor       
economic conditions in Europe and the Far East. International sales accounted   
for 18.0% of total sales for the nine months ended October 31, 1998.            

    Gross profit as a percentage of sales was 38.6% and 37.9% respectively, in
the three and nine month periods ended October 31, 1998 compared with 36.0% and 
37.2%, respectively, in the same periods of last year. Gross margins were higher
in the current year quarter and nine months when compared to the same periods of
the prior year due to improved product gross margins on parts imported from Far 
Eastern countries where currencies have weakened compared to the U.S. dollar. In
addition, in the current year there was a higher sales mix of product imported  
from Far Eastern countries which resulted from problems encountered in the prior
year with the importation of the Company's products from the Far East (primarily
Taiwan) as a result of compliance deficiencies noted by the U.S. Customs        
Service. These deficiencies delayed the release of these traditionally high     
gross margin products to the Company's distribution centers for sale to         
customers. Management has taken steps to correct these deficiencies and return  
the transit times to historical norms.                                          

   Selling, general and administrative expenses were $10.7 million and $31.4
million or 27.8% and 24.4% of net sales, respectively, for the three and nine   
month periods ended October 31, 1998, compared with $9.6 million and $24.2      
million or 31.7% and 25.6% of net sales, respectively, in the same periods last 
year. The increase in the absolute amount of selling, general and administrative
expense levels over the prior year is principally attributable to the higher    
expense levels associated with managing both the Company's historical operations
and the operations of Chrome Specialties                                        

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which was acquired by the Company in September, 1997. Additionally, selling,    
general and administrative expenses for the three and nine months ended October 
31, 1998 includes $332,000 and $996,000 resulting from amortization of the      
excess of the Chrome Specialties purchase price over the net tangible assets    
acquired and other intangible assets related to the acquisition.                

For the quarter and nine months ended October 31, 1998, the Company   
incurred $1.6 million and $3.3 million in costs associated with matters related 
to litigation and an unsolicited tender offer commenced by Golden Cycle, LLP.   
See "Legal Proceedings" below. The Company expects to continue to incur         
significant costs on this matter until such time as the matter is resolved.     

    Product development expenses were $376,000 and $1,041,000 or 1.0% and 0.8%
of net sales, respectively, for the three and nine month periods ended October  
31, 1998.  Product development expenses as a percentage of net sales have       
decreased from the 1.1% for the three and nine month periods in the prior year  
due to the consolidation of the operations of Chrome Specialties, which has no  
material product development expenditures.                                      

 Interest expense increased to $0.9 million and $3.5 million or 2.3% and
2.7% of net sales, respectively, for the three and nine month periods ended     
October 31, 1998. This is compared to $0.8 million and $1.7 million or 2.7% and 
1.8% for the same periods in the prior year. The higher interest in the current 
period resulted from higher bank borrowings used to complete the acquisition of 
the net assets of Chrome Specialties in September, 1997. The lower interest     
expense in the current quarter compared to the three months ended July 31, 1998 
reflects the Company's reduction of bank borrowings in the period as the result 
of cash flow from operations and reduced working capital.                       

     The Company's effective consolidated income tax rate was 86.9% and 48.0% in
the three and nine months ended October 31, 1998, respectively. This compares   
with 44.6% and 39.8% in the same periods in the prior year. The current three   
and nine month period includes a $725,000 charge in the income tax provision    
related to a judgement rendered by the United States Tax Court on various       
petitions for redetermination raised by the Company (see Legal Proceedings,     
Internal Revenue Service Matters). This charge accounts for the significant     
increase in the effective income tax rate.                                      

LIQUIDITY AND CAPITAL RESOURCES                                       

On September 16, 1997, the Company completed the acquisition of       
substantially all of the assets, and assumed certain liabilities, of Chrome     
Specialties, Inc. Chrome Specialties was a privately held, independent,         
wholesale distributor of aftermarket parts and accessories for Harley Davidson  
motorcycles, which operated from its 100,000 sq. ft. warehouse and headquarters 
in Fort Worth, Texas.                                                           

In connection with the acquisition of Chrome Specialties, the Company 
entered into a $73.5 million credit agreement which: (i) provided funding for   
the acquisition price for Chrome Specialties, Inc.; (ii) provided funding to    
retire $15,000,000 of Senior Secured Notes; and (iii) provided the Company      
additional working capital borrowing ability. Borrowings under the new credit   
facility bear interest at the Bank's Base Rate or the London Interbank Borrowing
Rate plus 1.75%. The agreement provides that the interest rate reduces as the   
Company reduces the initial debt level. In                                      

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addition, the Company has fixed the rate for two-thirds of the borrowing by     
means of a swap transaction. The financing agreement required the Company to    
achieve or maintain certain financial results or ratios, and restricts the      
Company's ability to pay dividends, repurchase common stock, make further       
acquisitions and effect certain other transactions without the Bank's consent.  
For the period for September 16, 1998 to January 31, 1998, the Company was not  
in compliance with a number of its covenants under the credit agreement. The    
syndicate of Banks provided waivers for these violations in return for a fee, a 
.25% interest rate increase and certain modifications of the agreement. The   
Company was also not in compliance with one covenant under the credit agreement,
as modified by the waiver previously received, during the quarter ended October 
31, 1998. The syndicate of Banks has provided a waiver for the current violation
in return for the continuation of the .25% interest rate increase and a fee. As 
the result of the Stonington tender offer (see Change of Control Matters), which
closes December 14, 1998, it is anticipated that the Company's debt will be paid
off pursuant to change of control provisions in the agreement. Stonington has   
arranged for a new credit agreement with a syndicate of banks to pay off the    
Company's debt and provide working capital funds for the future operations of   
the Company.                                                                    

   Net cash provided by operating activities in the period ended October 31,
1998 was $21,076,000 compared with $13,234,000 in the same period of the prior  
year. In the period ended October 31, 1998, the Company made capital            
expenditures for computer and software equipment necessary to convert to a new  
enterprise software system and tooling for new products. The Company believes   
that cash flow from operations and funds from the working capital line of credit
will be adequate to meet its capital and cash requirements at least through the 
next 12 months.                                                                 

CHANGE OF CONTROL MATTERS                                             

On November 8, 1998, the Company entered into an Agreement and Plan of
Merger (the "Stonington Merger Agreement") by and among the Company, Stonington 
Acquisition Corp., a Delaware corporation ("Parent") and GLOBAL MOTORSPORT      
GROUP, INC. Acquisition Corp., a Delaware corporation and wholly-owned          
subsidiary of Parent ("Purchaser"). Pursuant to the Stonington Merger Agreement,
Parent and Purchaser filed on November 16, 1998 a Tender Offer Statement on     
Schedule 14D-1 with the Securities and Exchange Commission, relating to an offer
to purchase (the "Offer") all of the Company's issued and outstanding shares of 
common stock (the "Shares") at a price of $19.50 per Share, net to the seller in
cash, without interest, upon the terms and subject to the conditions set forth  
in Purchaser's Offer to Purchase, dated November 16, 1998, and in the related   
Letter of Transmittal. The Offer expired on December 14, 1998, and Purchaser    
accepted for payment all Shares validly tendered and not withdrawn as of 12:00  
midnight, New York City time, on December 14, 1998.                             

FACTORS THAT MAY EFFECT FUTURE RESULTS                                          

RECENT ACCOUNTING PRONOUNCEMENTS                                                

 In June, 1997, SFAS No. 130, Reporting Comprehensive Income was issued.
SFAS No. 130 requires disclosure of components of comprehensive income on an    
annual and interim basis. Comprehensive income includes all changes in equity   
during a reporting period, except those resulting from investments by owners and
distributions to owners. SFAS No. 130 is effective for                          

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fiscal years beginning after December 15, 1997. The Company adopted this        
statement for its year ending January 31, 1999. For the three and nine month    
periods ended October 31, 1998 and 1997, the Company did not have any components
of other comprehensive income.                                                  

     In July 1997, SFAS NO. 131, Disclosures About Segments of an Enterprise and
Related Information, was issued. SFAS No. 131 requires certain financial and    
supplementary information to be disclosed on an annual and interim basis for    
each reportable segment of an enterprise. SFAS No. 131 is effective for fiscal  
year beginning after December 15, 1997. Unless impracticable, companies will be 
required to restate prior period information upon adoption. The Company will    
adopt this statement in its year ended January 31, 1999 financial statements.   

   In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and hedging Activities." SFAS   
No. 133 establishes methods of accounting for derivative financial instruments  
and hedging activities related to those instruments as well as other hedging    
activities. The Company expects that the adoption of SFAS No. 133 will have no  
material impact on its financial position, results of operations or cash flows. 

DEPENDENCE ON, AND COMPETITION WITH, HARLEY DAVIDSON                  

  The Company is the largest independent supplier of aftermarket parts and
accessories for Harley Davidson motorcycles. The Company's past success has     
depended, and the Company's future growth depends, in large part on the         
popularity of Harley Davidson motorcycles and the continued success of Harley   
Davidson in maintaining a significant market share of motorcycle sales and the  
number of units sold in the super heavyweight class. In particular, the         
Company's continued growth in earnings is in large part dependent upon          
continuing demand for Harley Davidson motorcycles and upon Harley Davidson's    
ability to meet such demand. As competition in the heavyweight cruiser class of 
motorcycles also increases, the market for new Harley Davidson motorcycles may  
decline, or if the popularity of existing Harley Davidson motorcycles were to   
decline, the Company's business, including earnings, could be materially        
adversely affected.                                                             

    In addition, it appears that the Company's stock price has in the past and
may in the future be affected by fluctuations in the price of Harley Davidson's 
stock. Adverse results in any of Harley Davidson's businesses, including its    
non-motorcycle businesses, could adversely affect the price of Harley Davidson's
stock, which could, in turn, adversely affect the Company's stock price.        

 The Company also competes with Harley Davidson in the sale of parts and
accessories for both new and used Harley Davidson motorcycles to Harley         
Davidson's franchised dealers, most of which are also customers of the Company. 
Harley Davidson has substantially greater financial, marketing, manufacturing   
and technical resources than the Company. There can be no assurance that the    
Company will be able to compete effectively with Harley Davidson in the future. 

From time to time, the Company and Harley Davidson have had disputes  
regarding alleged infringement of certain of each other's trademarks and        
patents, and certain litigation related thereto was settled in 1990. There can  
be no assurance that other disputes, including those which could lead to        
litigation regarding trademarks, patents or other matters, will not occur in the
future between the Company and Harley Davidson.                                 

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COMPETITION WITH OTHERS                                               

The market for the Company's products is highly competitive. Key      
competitive factors in the parts and accessories aftermarket for Harley Davidson
motorcycles include the ability to promptly fill orders from inventory, the     
range of unique products offered and the speed and cost of product delivery. The
Company's competitors include independent distributors ranging in size from     
small to large, and the proximity of any distributor to a particular dealer and 
the availability of unique products is often a competitive advantage.           
Accordingly, even small local distributors may be able to compete effectively   
against the Company. In addition, the Company competes with Harley Davidson in  
the sales of parts and accessories to Harley Davidson franchised dealers. There 
can be no assurance that the Company will be able to compete successfully in the
future with small distributors or with Harley Davidson.                         

    In 1995, the Federal Trade Commission (the "FTC") voted to dissolve a 1954
consent decree against Harley Davidson which, among other things, had prohibited
Harley Davidson from imposing exclusive dealing requirements upon its dealers.  
This consent decree was lifted pursuant to the FTC's "sunset" policy, which     
presumes that decrees which are more than 20 years old should be eliminated. In 
response to extensive public comments to the FTC urging that it keep this       
consent decree in force, Harley Davidson reported that it had no plans to change
its dealer agreements in order to require exclusive dealings. However, there can
be no assurance that Harley Davidson will not impose such exclusive dealing     
requirements upon its dealers who now purchase parts and accessories from the   
Company; nor can there be any assurance that, if Harley Davidson decided to     
impose such requirements upon its dealers, that a legal challenge to prevent    
such an action would be successful. If Harley Davidson is successful in imposing
exclusive dealing requirements on its dealers, such requirements could have a   
material adverse effect on the Company's business.                              

DEPENDENCE ON KEY PERSONNEL                                           

   The Company's success depends, in part, upon the continued performance of
Joseph Piazza who serves as President and Chief Executive Officer, and other key
executives, including James J. Kelly, Jr. (Executive Vice President, Finance),  
R. Steven Fisk (Senior Vice President, purchasing, Operations and Product       
Development), Dennis Navarra (Vice President, Administration), Joseph Piazza,   
Jr. (Vice President, Sales) Frederick Saunders (Vice President, marketing) and  
Gustav Kuelbs (President, Chrome Specialties, Inc.). In addition, the Company's 
success also depends in part on the continued performance of certain other key  
employees. Although incentives exist for these individuals to remain with the   
Company, the loss of the services of any one of them could have a material      
adverse effect on the business of the Company. In addition, recent litigation   
against the Company has strained the Company's management resources and there   
can be no assurance that such developments will not have a material adverse     
effect on the Company. See "Item 2. - Legal Proceedings".                       

SEASONALITY AND WEATHER                                               

    The Company's net sales for its last two quarters of any particular fiscal
year are generally lower than the net sales for the first two quarters of such  
year. This decrease in net sales is due to a lower number of orders by dealers  
in anticipation of, and during, the cold weather months, during                 

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which motorcycle riding decreases relative to the warm weather months. In       
particular, the Company's operating results may be negatively affected by       
adverse weather conditions, especially in the Spring and Summer months. Any such
decrease has a significant impact on the Company's quarterly operating expenses,
which remain relatively constant throughout the year. The Company seeks to      
mitigate this seasonality through various promotional efforts and incentives,   
but no assurance can be given that such seasonality will not have a material    
adverse effect on the Company's revenues and earnings during this period.       

DEPENDENCE ON THIRD PARTY AND FOREIGN MANUFACTURING RELATIONSHIPS;    
TAIWANESE POLITICAL VOLATILITY                                        

  A significant portion of the Company's products are purchased from third
party manufacturers, often through independent trading companies. Although the  
Company believes it has close working relationships with its trading companies  
and most of its suppliers, the Company does not have long-term arrangements with
these parties, and, therefore, cannot be assured that products will be delivered
on a timely basis or on terms favorable to the Company in the future. In        
addition, any disruption in the Company's trading company or manufacturing      
relationships could result in supply delays. Many of the Company's suppliers are
located in Asia, and, therefore, the Company is subject to certain risks        
associated with dealing with foreign suppliers, including currency exchange     
fluctuations, trade restrictions and changes in tariff and freight rates, any of
which could materially and adversely affect the Company. Moreover, many of the  
Company's suppliers are located in Taiwan, and the Company's relationships with 
such suppliers are subject to disruption in the event of any change in the      
volatile political and military relationship between Taiwan and the People's    
Republic of China.                                                              

    A substantial number of the Company's products are manufactured in Taiwan,
South Korea, Japan and Mexico. Consequently, the availability and cost of       
products manufactured overseas could be adversely affected if political or      
economic conditions in these countries were to deteriorate. In addition,        
although the prices for the products purchased by the Company are stated in     
United States dollars, because the prices often are not determined until the    
manufacturing process is completed, the Company bears risk with respect to      
changes in exchange rates. The cost of products could also be affected by the   
tariff structure imposed on imports or other trade policies of the United States
or other governments, which could adversely affect operations. The Company      
attempts to minimize this risk by maintaining a pricing policy with its dealers 
that allows the Company to change its prices at any time. In certain            
circumstances, the Company also contracts to purchase foreign currencies at     
fixed prices in the future for major foreign currency exposures. In addition,   
because the Company has relationships with United States manufacturers, the     
Company believes that it is capable of obtaining many of the products presently 
sourced overseas from domestic sources, although not necessarily at prices as   
favorable to the Company as non-U.S. manufacturers are able to provide. In this 
manner, the Company believes that it can also reduce its exposure to currency   
fluctuations and other risks of manufacturing outside the United States.        

MANAGEMENT OF GROWTH                                                  

     The Company's success depends in part on its ability to manage growth, both
domestically and internationally. Such growth will require the Company to       
enhance its operational, management                                             

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information and financial control systems. In addition, continued growth will   
require the Company to increase the personnel in its sales, marketing and       
customer support departments. If the Company is unable to successfully enhance  
its systems or to hire a sufficient number of employees with the appropriate    
levels of experience in a timely manner, the Company's business, financial      
condition and results of operations could be materially and adversely affected. 

INTERNATIONAL OPERATIONS                                              

In the fiscal years ended 1998, 1997 and 1996, international sales    
accounted for 17%, 19% and 20%, respectively, of the Company's total net sales. 
The Company expects that international sales will continue to represent a       
significant portion of its net sales in the future. The Company's results of    
operations may be adversely affected by fluctuations in exchange rates,         
difficulties in collecting accounts receivable, tariffs and difficulties in     
obtaining export licenses. Moreover, the Company's international sales may be   
adversely affected by lower sales levels that typically occur during the summer 
months in Europe and other parts of the world. International sales and          
operations are also subject to risks such as the imposition of governmental     
controls, political instability, trade restrictions and changes in regulatory   
requirements, difficulties in staffing and managing international operations,   
generally longer payment cycles and potential insolvency of international       
dealers. There can be no assurance that these factors will not have a material  
adverse effect on the Company's future international sales and, consequently, on
the Company's business, financial condition and results of operations.          

COMPLIANCE WITH ENVIRONMENTAL LAWS                                    

Both federal and state authorities have various environmental control 
requirements relating to air, water and noise pollution that affect the business
operations of the Company. The Company endeavors to ensure that all its         
facilities comply with applicable environmental requirements. However, there can
be no assurance that its operations do not violate such requirements or that any
steps taken by the Company to remediate any former noncompliance with such      
requirements would not have a material effect on the Company's operations.      

   In the past, the Company utilized a chrome plating and polishing process,
and was subject to a variety of laws and regulations relating to environmental  
matters. During the year ended January 31, 1994, the Company discontinued in-   
house chrome plating of its products, and currently subcontracts such work to   
outside vendors. The Company endeavors to ensure that all its facilities comply 
with applicable environmental regulations and standards. Compliance with such   
standards has not, to date, had a material adverse effect on the Company's      
capital expenditures, earnings or competitive position, and no material capital 
expenditures are anticipated for the remainder of this fiscal year. Although the
Company believes it is in compliance with all applicable environmental          
requirements, there can be no assurance that this operation did not violate such
requirements or that compliance or noncompliance with any environmental         
requirements would not have a material adverse effect on the Company's          
operations.                                                                     

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EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS                            

     The Board of Directors has the authority to issue up to 1,000,000 shares of
undesignated Preferred Stock and to determine the rights, preferences,          
privileges and restrictions of such shares without further vote or action by the
Company's stockholders. The rights of the holders of Common Stock will be       
subject to, and may be adversely effected by, the rights of the holders of any  
Preferred Stock that may be issued in the future. The issuance, or possible     
issuance, of Preferred Stock could have the effect of making it more difficult  
for third parties to acquire a majority of the outstanding voting stock of the  
Company. In addition, on November 13, 1996, the Board of Directors approved a   
Preferred Shares Rights Plan and subsequently issued preferred share rights to  
the Company's stockholders. On November 9, 1998, the Company amended the Rights 
Plan to exclude from the definition of "Acquiring Person" the acquisition by    
Parent and Purchaser of 15% or more of the Common Stock pursuant to the         
Stonington Merger Agreement. The Rights Plan, as well as certain provisions of  
the Company's Amended and Restated Certificate of Incorporation and Bylaws and  
the Delaware law, could delay or make difficult a merger, tender offer or proxy 
contest involving the Company.                                                  

POSSIBLE VOLATILITY OF STOCK PRICE                                    

The Company's stock price may be subject to significant volatility,   
particularly on a quarterly basis. Any shortfall in revenue or earnings from    
levels expected or projected by securities analysts or others could have an     
immediate and significant adverse effect on the trading price of the Company's  
common stock in any given period. Additionally, the Company may not learn of, or
be able to confirm, revenue or earnings shortfalls until late in the fiscal     
quarter or following the end of the quarter, which could result in an even more 
immediate and adverse effect on the trading of the Company's common stock.      

RELIANCE UPON THIRD PARTIES                                           

  The Company employs the services of various independent representatives,
the most significant of which is Zodiac Enterprises, Ltd. ("Zodiac"), to        
expedite the activities of its foreign manufacturers and to act as a purchasing 
agent for the Company. The Company has been doing business with Zodiac since    
1984. Under the terms of the agreement between Zodiac and the Company, Zodiac is
an agent for the Company to purchase and manufacture products in Taiwan. The    
agreement provides that Zodiac will supply the Company with products that meet  
certain specifications designated by the Company and, when necessary, provide   
the tooling that is necessary to manufacture such products. The Company's       
agreement with Zodiac is renewed annually, and can be terminated by the Company 
at any time on 90 days notice and by either party 90 days prior to the end of   
each annual period. Products purchased through Zodiac represented, 18%, 11% and 
9% of the Company's net sales in the fiscal years ended January 31, 1996, 1997, 
and 1998, respectively. Chrome Specialties foreign product sourcing is also     
substantially from Taiwan where it employs the services of a trading company,   
Harness, Inc. ("Harness") to expedite its product purchase from numerous local  
manufacturing sources. As a result of the acquisition of Chrome Specialties, the
Company has chosen Harness as its main source for both Chrome Specialties and   
Custom Chrome products imported from Taiwan. As a result, it is anticipated that
the Company expects to increase its product sourcing from, and accordingly, its 
reliance upon Harness in the                                                    

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future. In addition, Chrome Specialties sources manufactured products from      
Mexico. If Zodiac's or Harness's services were discontinued for any reason, the 
Company believes it could replace such services in a timely manner by its own   
capabilities and using other trading companies. In many cases, the Company would
expect to continue using the same manufacturers. There can be no assurance,     
however, that it would not experience temporary supply delays.                  

Although the Company, in certain instances, has chosen to purchase its
entire supply of certain products from a single manufacturer, the Company does  
not regard any single manufacturer as essential to its operations. The Company  
did not purchase products representing more that 2.0% of its total sales from   
any single manufacturer during the fiscal year ended January 31, 1996, 1997, or 
1998. As to products for which there is a single supplier, the Company has, in  
many cases, pre-qualified an acceptable alternative source and believes that    
such an alternative source could commence delivery of volume production         
quantities within several months. In certain cases, the Company also seeks to   
mitigate the potential adverse consequences of sole sources by maintaining      
adequate levels of finished goods inventory in stock and in transit.            
Nonetheless, the loss of a single source supplier or a major trading Company    
relationship could have short-term adverse effects on operations.               

IMPACT OF THE YEAR 2000 ISSUE                                         

The year 2000 issue results from computer programs written using a two
digit date field rather than four to define the applicable year. The Company's  
current main computer program utilizing a two digit date field may recognize a  
date using "00" as the year 1900 rather than the year 2000. This could          
potentially result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process     
transactions, send invoices and engage in other similar normal business         
activities. Because of the nature of the business market in which it operates,  
the Company's operations are highly dependent on its extensive central computer 
system which allows it to purchase numerous small dollar orders from numerous   
suppliers, warehouse these parts five warehouse locations nationwide and accept 
and ship numerous small sales orders from customers each business day. The      
Company is in the process of installing a new computer software system, which   
will increase operational and financial efficiencies and information analysis.  
The upgrade of the Company's current computer system was not directly the result
of the Year 2000 software issue. The new enterprise system recognizes dates     
beyond December 31, 1999 and it addresses a substantial portion of the Year 2000
issue as it impacts the Company. The total cost of the new computer system      
upgrade is estimated at $3 million dollars. The cost of this project, as it     
related to the year 2000 issue, is not expected to have a material effect on the
operations of the Company and will be funded through operating cash flows.      

The computer software system being installed is a standard enterprise 
package acquired from a reputable third party supplier. This package is already 
utilized by the Chrome Specialties division of the Company where it has been    
operating for 18 months. Based on this the Company believes that the risk       
involved in the implementation of the system is not significant.                

     In addition, although the Company has identified general contingency plans,
such as the identification and, if necessary, replacement of non-compliant      
product suppliers, a formal contingency plan will not be established until mid- 
1999 when more information is available with                                    

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respect to non-compliant suppliers and non-critical systems. The Company is     
unable to determine the effect of the failure of systems because of the Year    
2000 issues by the Company or its suppliers or customers, but any significant   
failures could have an adverse material effect on the Company's results of      
operations and financial conditions.                                            

ITEM 2.   LEGAL PROCEEDINGS                                                     

DELAWARE STATE FIDUCIARY DUTY LITIGATION                              

   On April 7, 1998, Golden Cycle, LLP ("Golden Cycle") filed a complaint in
Delaware Chancery Court against the Company and each member of its Board of     
Directors, alleging interference with corporate franchise, breach of fiduciary  
duty and fraud. The action, as subsequently amended, alleges various actions or 
inactions by the Board of Directors relating to Golden Cycle's now expired      
tender offer of April 7, 1998 and its consent solicitations. On April 9, 1998,  
Golden Cycle filed a motion seeking, among other things, preliminary injunctive 
relief. A hearing on Golden Cycle's motion for preliminary injunctive relief was
held on May 8, 1998 and, on May 20, 1998, the Chancery Court issued an order    
denying Golden Cycle's request in all respects. Although the Chancery Court     
denied Golden Cycle's request for preliminary injunctive relief, that order was 
not a final judgement on Golden Cycle's claims.                                 

  On November 12, 1998, Golden Cycle filed a second motion for preliminary
injunctive relief seeking, among other things, invalidation of any termination  
fee and expense reimbursement provisions in the Stonington Merger Agreement and 
delay of the close of the Offer. A hearing on Golden Cycle's motion for         
preliminary injunctive relief was held on December 7, 1998 and, on December 10, 
1998, the Chancery Court issued an order denying Golden Cycle's request in all  
respects.                                                                       

INTERNAL REVENUE SERVICE MATTERS                                      

In March, 1996 the Company received a Notice of Deficiency from the   
Internal Revenue Service (IRS) arising out of an examination of its income tax  
returns for the years ended January 31, 1992, 1993 and 1994. The Notice asserted
that the Company had underpaid its income taxes in those years by approximately 
$4.3 million due to the IRS disallowance of deductions primarily for            
compensation related issues. Based on the advice of outside tax counsel, the    
Company petitioned the U.S. Tax Court for a redetermination of these alleged    
deficiencies citing numerous errors in the IRS's allegation. In addition, the   
Company asserted that it is due additional tax deductions totaling at least $3.1
million in the tax periods which were examined.                                 

     On September 2, 1998, the United States Tax Court rendered decisions on the
Company's various petitions for redetermination. Based on the decisions of the  
Court, $3.9 million of the income tax underpayment alleged by the IRS was       
redetermined in the Company's favor. The Court did not allow the Company's claim
for additional tax deductions in the periods which were examined. The company   
has recorded a $725,000 charge in the income tax provision for the three and    
nine months. The Company, based on the advice and opinion of outside experts,   
intends to file an appeal with respect to the Tax Court's denial of additional  
tax deductions.                                                                 

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GLOBAL MOTORSPORT GROUP, INC. 

                                                                [Download Table]

PART II.    OTHER INFORMATION                              
--------    -----------------                              
                                                           
    Item 6.       Exhibits and Reports on Form 8-K         

                  a.   Exhibits                            

                       Exhibit 27 - Financial Data Schedule

                  b.   Reports on Form 8-K                 

                       None.                               

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SIGNATURE 

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 thereunto duly authorized.                                          

                               GLOBAL MOTORSPORT GROUP, INC.

Date: December 15, 1998              /s/ James J. Kelly, Jr.                    
--------------------------         -----------------------          
                     James J. Kelly, Jr.
                                   Executive Vice President, Finance
                             and Chief Financial Officer

                          (Principal Financial and
                     Accounting Officer)

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Dates Referenced Herein and Documents Incorporated by Reference

		Referenced-On Page
This ‘10-Q’ Filing	Date	First	Last	Other Filings

	12/31/99	16
	1/31/99	11
Filed on:	12/15/98	19		SC 14D1/A, SC 14D9/A
	12/14/98	7	10
	12/10/98	1	17	SC 13G/A, SC 14D1/A
	12/7/98	17
	11/16/98	7	10	DEFC14A, SC 14D1, SC 14D9
	11/12/98	17		PRRN14A, SC 13D/A
	11/9/98	15		SC 13D/A
	11/8/98	6	10
For Period End:	10/31/98	1	11
	9/16/98	10
	9/2/98	17
	7/31/98	9		10-Q
	5/20/98	17		DEFA14A, SC 14D9/A
	5/8/98	17		10-K405
	4/9/98	17
	4/7/98	17		PREC14A, SC 14D1
	1/31/98	2	15	10-K405, NT 10-K
	12/15/97	11		10-Q
	10/31/97	2	11	10-Q
	9/16/97	9		8-K, DEF 14A
	1/31/97	15	16	10-K405
	11/13/96	15		8-K
	1/31/96	15	16	10-K/A
	1/31/94	14	17
	1/31/93	17
	1/31/92	17
				List all Filings

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Global Motorsport Group Inc – ‘10-Q’ for 10/31/98

As of: Tuesday, 12/15/98 · For: 10/31/98 · Accession #: 929624-98-2015 · File #: 0-19540

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