<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 27, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES ACT OF 1934
For Transition Period from __________ to __________
Commission File Number 0001067447
THE DERBY CYCLE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 31-1038896
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Daniel S. Lynch
The Derby Cycle Corporation
300 First Stamford Place (5th Floor)
Stamford, Connecticut 06902-6765
(Address of principal executive offices, including zip code)
Telephone:(203) 961 1666
(Registrant's telephone number, including area code)
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 .
The number of shares outstanding of each class of common stock, as of June 27,
1999 were:
Class A $0.01 par value 46,920
Class C $0.01 par value 23,430
<PAGE>
THE DERBY CYCLE CORPORATION
JUNE 1999 FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
PART I
------
<S> <C>
ITEM 1. FINANCIAL STATEMENTS....................................................... 1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................................. 18
PART II
-------
ITEM 1. LEGAL PROCEEDINGS.......................................................... 30
ITEM 2. CHANGES IN SECURITIES...................................................... 31
ITEM 3. EXHIBITS AND REPORTS ON FORM 8-K........................................... 32
</TABLE>
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PART I
------
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Balance Sheets as of December 31, 1998 and June 27, 1999 (unaudited)............. 2
Unaudited Consolidated Statements of Income for the quarter and six months ended June 28,
1998 and June 27, 1999........................................................................ 3
Unaudited Consolidated Statement of Shareholders' (Deficit) for the six months ended June
27, 1999...................................................................................... 4
Unaudited Consolidated Statements of Cash Flows for the six months ended June 28, 1998
and June 27, 1999............................................................................. 5
Notes to the Consolidated Financial Statements................................................ 7
</TABLE>
1
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The Derby Cycle Corporation
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
Assets Dec 31, Jun 27,
1998 1999
unaudited
---------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................... $ 17,453 $ 9,452
Receivables, net.................................................................... 66,801 102,813
Inventories......................................................................... 105,264 94,053
Other current assets................................................................ 9,586 9,152
---------- -----------
Total current assets............................................................. 199,104 215,470
---------- -----------
Property, plant, and equipment, net................................................... 49,514 43,621
Intangibles, net...................................................................... 20,600 38,103
Other assets.......................................................................... - 3,013
Prepaid pension assets................................................................ 56,072 54,483
---------- -----------
Total assets..................................................................... $ 325,290 $ 354,690
---------- -----------
Liabilities and Shareholders' (Deficit)
Current liabilities:
Accounts payable.................................................................... $ 34,394 $ 39,854
Accrued liabilities................................................................. 20,161 29,640
Income taxes payable................................................................ 8,452 4,584
Short-term borrowings............................................................... 60,831 42,988
Other current liabilities........................................................... 2,103 3,590
---------- -----------
Total current liabilities........................................................ 125,941 120,656
---------- -----------
Other liabilities:
Long-term debt...................................................................... 165,870 178,512
Excess of assets acquired over cost of acquisitions................................. 11,120 10,536
Deferred income taxes............................................................... 18,896 14,912
Other liabilities................................................................... 4,224 8,993
---------- -----------
Total liabilities................................................................ 326,051 333,609
---------- -----------
Minority interest..................................................................... 627 644
Commitments and contingencies:
Preferred stock with redemption rights, $0.01 par value, 25,000 shares authorized,
issued, and outstanding of Series A and 3,000 shares authorized, issued, and
outstanding of Series B............................................................. 45,432 46,496
Stock rights.......................................................................... 23,300 23,300
Shareholders' equity(deficit):
Class A common stock, $0.01 par value, 200,000 shares authorized, 44,200 and 46,920
shares issued and outstanding as of December 31, 1998 and June 27, 1999
respectively....................................................................... 1 1
Class B common stock, $0.01 par value, 15,000 shares authorized, no shares issued
and outstanding as of December 31, 1998 and June 27, 1999.......................... - -
Class C common stock, $0.01 par value, 30,000 shares authorized, 23,430 issued and
outstanding as of June 27, 1999.................................................... - -
Additional paid-in capital.......................................................... 22,499 48,649
Accumulated deficit................................................................. (87,346) (90,990)
Accumulated other comprehensive income.............................................. (5,274) (7,019)
---------- -----------
Total shareholders' (deficit).................................................... (70,120) (49,359)
---------- -----------
Total liabilities and shareholders' (deficit).................................... $ 325,290 $ 354,690
========== ===========
</TABLE>
2
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The Derby Cycle Corporation
Unaudited Consolidated Statements of Income
(Dollars in thousands, except per unit and unit data)
<TABLE>
<CAPTION>
Quarter ended Six months ended
------------------------ ------------------------
Jun 28, Jun 27, Jun 28, Jun 27,
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues................................................ $ 150,846 $ 165,131 $ 272,284 $ 303,518
Cost of sales............................................... (111,977) (123,966) (202,289) (229,386)
--------- --------- --------- ---------
Gross profit........................................... 38,869 41,165 69,995 74,132
Selling, general, and administrative expenses............... (25,175) (29,042) (47,959) (55,363)
Recapitalization costs.................................... (5,671) - (5,671) -
Restructuring charge...................................... - (7,468) - (8,461)
--------- --------- --------- ---------
Operating income....................................... 8,023 4,655 16,365 10,308
Other income (expense):
Interest expense.......................................... (4,088) (6,721) (5,906) (13,238)
Interest income........................................... 498 158 582 244
Other expense, net........................................ (913) - (1,051) -
--------- --------- --------- ---------
Income before income taxes, minority interest and
extraordinary item.................................... 3,520 (1,908) 9,990 (2,686)
Provision for income taxes.................................. (2,293) 564 (4,172) 130
Minority interest........................................... (16) (15) (16) (24)
--------- --------- --------- ---------
Income (loss) before extraordinary item................ 1,211 (1,359) 5,802 (2,580)
Extraordinary item - loss on early extinguishment of debt
(net of tax).............................................. (348) - (348) -
--------- --------- --------- ---------
Net income (loss)...................................... 863 (1,359) 5,454 (2,580)
Dividends on preferred stock................................ (961) (1,064) (961) (1,064)
--------- --------- --------- ---------
Net income (loss) applicable to common stockholders.... $ (98) $ (2,423) $ 4,493 $ (3,644)
========= ========= ========= =========
Net income (loss) applicable to common stockholders
per share................................................. $ (2.99) $ (34.65) $ 164.24 $ (56.37)
========= ========= ========= =========
Extraordinary item applicable to common stockholders
per share................................................. $ (10.60) $ - $ (12.72) $ -
========= ========= ========= =========
Weighted average number of shares of common stock
outstanding............................................... 32,826 69,931 27,356 64,641
========= ========= ========= =========
</TABLE>
3
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The Derby Cycle Corporation
Unaudited Consolidated Statement of Shareholders' (Deficit)
(Dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Capital Paid-In Accumulated Comprehensive
Stock Investment Capital Deficit Income Total
------ ---------- ---------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
January 1, 1999.................. $ 1 $ - $ 22,499 $ (87,346) $ (5,274) $(70,120)
Comprehensive income-
Net income..................... - - - (3,644) - (3,644)
Net gain on derivative
instruments................... - - - - 307 307
Translation adjustments........ - - - - (2,052) (2,052)
------ ---------- ---------- ----------- ------------ --------
Total comprehensive income....... - - - (3,644) (1,745) (5,389)
Issue of common stock.......... - - 26,150 - - 26,150
------ ---------- ---------- ----------- ------------ --------
June 27, 1999.................... $ 1 $ - $ 48,649 $ (90,990) $ (7,019) $(49,359)
====== ========== ========== =========== ============ ========
</TABLE>
4
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The Derby Cycle Corporation
Unaudited Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Six months ended
--------------------
Jun 28, Jun 27,
1998 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................................... $ 5,454 $ (2,580)
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation..................................................................... 4,992 4,921
Amortization..................................................................... (247) 955
Extraordinary loss on early extinguishment of debt............................... 348 -
Minority interest................................................................ 16 24
Loss on swaps.................................................................... 1,051 -
Net periodic pension income...................................................... (2,467) (2,616)
Recapitalization costs........................................................... 5,671 -
Net changes in operating assets and liabilities, net of acquisitions-
(Increase) decrease in receivables............................................... (29,301) (28,087)
(Increase) decrease in inventories............................................... (298) 22,775
(Increase) decrease in other current assets...................................... 762 1,176
Increase (decrease) in accounts payable.......................................... (8,471) 1,037
Increase (decrease) in accrued liabilities....................................... 5,617 9,816
Increase (decrease) in income taxes payable...................................... 2,586 (3,513)
Increase (decrease) in other current liabilities................................. 991 1,549
Increase (decrease) in deferred income taxes.................................... 681 (2,882)
Increase (decrease) in other liabilities......................................... (300) 6,170
------- --------
Net cash (used in) provided by operating activities........................... (12,915) 8,745
------- --------
Cash flows from investing activities:
Purchases of property, plant, and equipment......................................... (3,514) (2,297)
Proceeds of property, plant, & equipment dispositions............................... 448 89
Cash paid for acquisitions, net of cash acquired.................................... - (43,445)
Purchase of minority interest....................................................... (1,933) (246)
------- --------
Net cash used in investing activities......................................... $ (4,999) $(45,899)
------- --------
</TABLE>
5
<PAGE>
The Derby Cycle Corporation
Unaudited Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Six months ended
--------------------------
Jun 28, Jun 27,
1998 1999
------- --------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from stock issue........................................................... $ 63,000 $ 26,150
Redemption of shares in subsidiaries................................................ (146,159) -
Repayment of Series A, B and C Senior Notes, net.................................... (53,334) -
Proceeds from Senior Note issue..................................................... 161,867 -
Proceeds from Subordinated Note issue............................................... - 20,000
Short term borrowings, net, prior to Recapitalization............................... 45,894 -
Repayment of short term borrowings at Recapitalization.............................. (82,721) -
Proceeds from short term borrowings at Recapitalization............................. 84,914 -
Short term borrowings, net, post Recapitalization................................... (17,759) (17,840)
Repayment of term loan.............................................................. (9,057) -
Deferred financing costs............................................................ (11,359) (273)
Recapitalization costs.............................................................. (5,671) -
Contributions made to pension plans................................................. (1,238) (41)
Net contribution by DICSA........................................................... 1,600 -
Secured promissory note issue and amount due on issue of common stock.............. - (3,013)
--------- --------
Net cash provided by financing activities.................................... 29,977 24,983
--------- --------
Effect of exchange rate changes....................................................... (964) 4,170
--------- --------
Net increase (decrease) in cash and cash equivalents.................................. 11,099 (8,001)
Cash and cash equivalents, beginning of period........................................ 15,426 17,453
--------- --------
Cash and cash equivalents, end of period.............................................. $ 26,525 $ 9,452
========= ========
Supplemental cash flow information:
Interest paid....................................................................... $ 3,876 $ 10,496
Income taxes paid................................................................... $ 905 $ 6,265
========= ========
</TABLE>
6
<PAGE>
The Derby Cycle Corporation
Notes to Consolidated Financial Statements
1. Nature of the Business and Basis of Presentations
The consolidated financial statements for the quarter and six months ended June
28, 1998 and June 27, 1999 together with the balance sheet as of June 27, 1999
included herein have not been audited by independent public accountants, but in
the opinion of The Derby Cycle Corporation (the "Company"), all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the financial position at June 27, 1999 and the results of operations and the
cash flows for the periods presented herein have been made. The results of
operations for the quarter and six months ended June 27, 1999 are not
necessarily indicative of the operating results for the full fiscal year.
The consolidated financial statements included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Although the Company believes that the disclosures made are adequate to make the
information not misleading, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
regulations. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-K for the year ended December 31, 1998.
The combined financial statements have been prepared to reflect the financial
position and results of operations of the bicycle and bicycle component
businesses of Derby International Corporation S.A. ("DICSA"), a Luxembourg
holding company through May 14, 1998. Up to that date DICSA owned shares, either
directly or indirectly, in a number of bicycle and bicycle component companies
worldwide that predominantly operate as stand-alone entities. Each of the
companies manufactures, assembles and/or distributes bicycles and bicycle
components. These bicycle and bicycle component companies, collectively referred
to as the "The Derby Bicycle Group", have significant operations in The
Netherlands ("Gazelle"), the United Kingdom ("Raleigh UK" and "Sturmey
Archer"), Canada ("Raleigh Canada"), Germany ("Derby Germany"), South Africa
("Probike") and the United States (the "Derby USA" division of the Company). The
Derby Bicycle Group owns or licenses many of the most recognized brands in the
bicycle industry, including leading global brands such as Raleigh, Diamond Back,
Nishiki (for USA only) and Univega, and leading national brands such as Gazelle
in The Netherlands and Kalkhoff, Musing, Winora and Staiger in Germany.
Effective May 14, 1998, DICSA reorganized its businesses in connection with a
recapitalization agreement (the "Recapitalization") so that each of its bicycle
and bicycle component companies are owned directly or indirectly by The Derby
Cycle Corporation, a Delaware corporation with operations in the United States.
The accompanying consolidated financial statements have been prepared to reflect
the financial position and results of operations of the Company and its
subsidiaries from May 14, 1998 through June 27, 1999. Accordingly, the
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States and are
presented in United States dollars.
References to the "Company" throughout this document mean The Derby Bicycle
Group through May 14, 1998 and The Derby Cycle Corporation and its subsidiaries
from May 14, 1998 through June 27, 1999.
The accompanying consolidated financial statements, herein referred to as the
consolidated financial statements, have been prepared as if the Company had been
in existence for all periods presented. DICSA's historical basis in the assets
and liabilities of the Company has been carried over. All material inter-company
transactions and balances between entities included in these combined financial
statements have been eliminated. Certain expenses were originally recorded by
DICSA on behalf of the Company, such as headquarters' management costs and other
corporate expenses. These amounts have
7
<PAGE>
been allocated in their entirety in the Company's financial statements, as such
costs were incurred on behalf of the Company except for an immaterial amount
that related to DICSA. Management believes this allocation is reasonable and
represents the expenses as if the Company had been a stand-alone operation.
For the purposes of calculating the net income (loss) applicable to common
shareholders, the common shares outstanding used assumes that the conversion of
pre-existing stock at the time of the Recapitalization is applicable to earlier
years.
2. Inventories
Inventories are stated at the lower of cost or net realizable value, with cost
determined on a first in, first out ("FIFO") basis. A provision is made for
obsolete, slow moving and defective items where appropriate.
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
Dec 31, Jun 27,
1998 1999
unaudited
-------- ---------
<S> <C> <C>
Finished products................................................... $ 48,498 $ 60,062
Work in process..................................................... 9,686 7,706
Raw materials....................................................... 47,080 26,285
-------- ---------
Total inventories................................................. $105,264 $ 94,053
======== =========
</TABLE>
The market for bicycles, parts and accessories is subject to the risk of
changing consumer trends. In the event that a particular bicycle model or
accessory does not achieve widespread consumer acceptance, and the Company holds
excess inventory of that bicycle model, part or accessory, 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 and financial
condition.
3. Derivative Financial Instruments
Adoption of SFAS 133
The Company elected to adopt SFAS 133 as of October 1, 1998.
For the six months ended June 28, 1998 income and expense related to the
marking-to-market of the Company's derivative instruments are included in the
statement of income: a profit of $558,000 on the marking-to-market of the
forward foreign exchange contracts is shown within cost of sales; a loss of
$1,051,000 on the marking-to-market of the swaps is shown as other (expense).
For the six months ended June 27, 1999 income and expense related to the
marking-to-market of derivative instruments subsequent to the adoption of SFAS
133 are included in accumulated other comprehensive income: a net gain of
$223,000 on the marking-to-market of the forward foreign exchange contracts, the
expiration of one of the currency options and a gain of $84,000 on the marking-
to-market of the remaining currency options and interest rate cap. The net gain
of $1,376,000 in accumulated other comprehensive income at June 27, 1999 will be
released to income in the years 1999 to 2001 as the related sales, purchases or
interest expense occurs.
4. Short-Term Borrowings
The Company has indebtedness available under a seven year revolving credit
agreement (the "Revolving Credit Agreement") of DM214.0 million ($113.8
million).
8
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The Company was not in compliance with certain of its financial covenants as of
June 27, 1999 under the Revolving Credit Agreement. These covenants include a
minimum level of adjusted EBITDA, a minimum interest coverage and a maximum
amount of loans out. The impact of the restructuring charge and the underlying
results of the UK businesses reduced adjusted EBITDA, while the issue of secured
promissory notes to partially finance the issue of shares to executives of the
Company increased loans out. The lenders under the Revolving Credit Agreement
granted the Company a waiver on July 27, 1999 effective to August 27, 1999 with
respect to the Company's non compliance of these covenants. The Company is
currently in discussion with the members of the syndicated revolving credit
facility in order to reset the levels of the financial covenants in the
Revolving Credit Agreement on a going forward basis.
5. Long term debt
On February 4, 1999 the Company issued $20 million principal amount in a
subordinated note (the "Subordinated Note") to Vencap Holding (1992) PTE Ltd.
which matures in 2010 and bears interest at 19% compounded daily. As of December
31, 1998, and June 27, 1999, long-term debt consists of the following (in
thousands):
<TABLE>
<CAPTION>
Dec 31, Jun 27,
1998 1999
unaudited
-------- ---------
<S> <C> <C>
10% $100,000,000 Senior Notes...................................... $100,000 $ 100,000
9 3/8% DM110,000,000 Senior Notes.................................. 65,870 58,512
19% $20,000,000 Subordinated Note.................................. - 20,000
-------- ---------
Long-term debt................................................... $165,870 $ 178,512
======== =========
</TABLE>
Management believes that there was no material difference between the fair value
and book value of the 10 percent $100,000,000 and the 9 3/8 percent
DM110,000,000 Senior Notes as of December 31, 1998 or both the Senior and
Subordinated Notes as of June 27, 1999.
6. Contingencies
International Operations; Dependence on Foreign Suppliers and Sales
A significant portion of the Company's operations are conducted in foreign
countries and are subject to the risks that are inherent in operating abroad,
including, without limitation, the risks associated with foreign governmental
regulation, foreign taxes, import duties and trade restrictions. The Company's
business is highly dependent upon products manufactured by foreign suppliers
located primarily in Taiwan, Japan and the People's Republic of China. A
substantial majority of the Company's multi-speed bicycles contain components
supplied on a purchase order basis by one Japanese manufacturer. The Company's
business is also subject to the risks generally associated with doing business
abroad, such as delays in shipment and foreign governmental regulations which
could have a material adverse effect on the results of operations and financial
condition of the Company. In addition, several of the Company's manufacturing
operations are unionized.
Product Liability
Because of the nature of the Company's business, the Company at any particular
time is a defendant in a number of product liability lawsuits and expects that
this will continue to be the case in the future. These lawsuits generally seek
damages, sometimes in substantial amounts, for personal injuries allegedly
sustained as a result of defects in the Company's products. Although the Company
maintains product liability insurance, due to the uncertainty as to the nature
and extent of manufacturers' and distributors' liability for personal injuries,
there 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 may bear
9
<PAGE>
responsibility for a significant portion 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 and financial condition. In addition, there can be no assurance that
insurance will remain available or, if available, will not be prohibitively
expensive.
Common stock and Preferred stock
On October 20, 1998, the Company entered into an employment contract with Gary
Matthews as Chief Executive Officer with effect from mid January 1999. The
contract is for a four year term with a three year extension.
Pursuant to a Management Stock Purchase Agreement dated October 20, 1998, Gary
Matthews purchased 1,500 shares of the Company's common stock for $1,000 per
share. Gary Matthews paid for such shares with a secured promissory note, shown
within other assets in the balance sheet, that is non-recourse except for 20
percent of the principal amount and all of the accrued interest. Upon the
termination of Gary Matthews' employment with the Company, the Company has the
right or is required to repurchase, depending on the reason for such
termination, such common stock.
On February 4, 1999 the Company issued 18,950 shares of Class C common stock to
DC Cycle L.L.C., a wholly owned subsidiary of Thayer Equity Investors III, L.P.
("Thayer") and 3,800 shares of Class C common stock to Perseus Cycle L.L.C., a
wholly owned subsidiary of Perseus Capital, L.L.C. ("Perseus") for the
acquisition of Diamond Back
On April 1, 1999 and June 1, 1999 the Company issued Class A and Class C common
shares to executives of the Company for $1,000 per share as follows :
<TABLE>
<CAPTION>
Number of Shares
----------------
Class A Class C
------- -------
<S> <C> <C>
April 1, 1999....................................... 1,120 280
June 1, 1999........................................ 400 100
------- -------
1,520 380
======= =======
</TABLE>
The issue of shares to executives of the Company was partly financed by the
issue of secured promissory notes, shown within other assets in the balance
sheet. $125,000 was due on issue at June 27, 1999 and has since been received.
Following the issue of stock in connection with the Diamond Back acquisition,
the employment of Gary Matthews and the management stock plan, the stock in the
Company (at issue price plus accrued dividends) is held by the following
shareholders and their affiliates (in thousands except number data) :
10
<PAGE>
<TABLE>
<CAPTION>
Derby
Thayer Internat-
Number Capital Perseus ional
of Partners Capital Corpor- Manage-
Shares L.L.C. L.L.C. ation S.A ment Total
------ -------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Preferred stock
Series A..................... 25,000 $ 37,500 $ - $ - $ - $37,500
Accrued dividend $200 per
share pa.................... 5,665 - - - 5,665
Series B..................... 3,000 - - 3,000 - 3,000
Accrued dividend 9.75% pa.... - - - 331 - 331
-------- ------- --------- ------- -------
$ 43,165 $ - $ 3,331 $ - $46,496
======== ======= ========= ======= =======
Stock rights
Class A common............... 8,300 - - 8,300 - 8,300
Class B common............... 15,000 - - 15,000 - 15,000
-------- ------- --------- ------- -------
$ - $ - $ 23,300 $ - $23,300
======== ======= ========= ======= =======
Paid in capital
Class A common............... 25,220 12,500 10,000 - 2,720 25,220
Class C common............... 23,430 18,950 3,800 - 680 23,430
-------- ------- --------- ------- -------
$ 31,450 $13,800 $ - $ 3,400 $48,650
======== ======= ========= ======= =======
Retained equity
-------- ------- --------- ------- -------
Class A common............... 21,700 $ - $ - $ 21,700 $ - $21,700
======== ======= ========= ======= =======
</TABLE>
7. Acquisitions
On February 4, 1999, the Company acquired the assets (and assumed certain
liabilities) of the Diamond Back Group for $43,445,000 in cash. The Diamond Back
Group consists of Diamond Back International Company Limited, a private British
Virgin Islands company ("Diamond Back"), Western States Import Company Inc., a
Delaware corporation ("Western States") and Bejka Trading A.B., a private
Swedish company ("Bejka"), each of which is engaged in the bicycle, bicycle
parts and accessories and fitness equipment distribution business. Western
States and Bejka had worldwide revenues of approximately $62.9 million and $3.1
million, respectively, in 1998. Diamond Back was essentially a holding company
for the company's intellectual property and did not generate material revenues.
The Company financed the acquisition of the Diamond Back Group by issuing a
$20,000,000 Subordinated Note and $22,750,000 in Class C common stock.
11
<PAGE>
The acquisition was accounted for under the purchase method with the purchase
price allocated as follows (in thousands):
<TABLE>
<S> <C>
Accounts receivable............................................... $ 12,173
Inventories....................................................... 19,086
Other current assets.............................................. 773
Property, plant, and equipment.................................... 613
Intangibles....................................................... 4,750
Goodwill.......................................................... 14,361
Liabilities assumed............................................... (8,311)
Purchase price............................................... -----------
$ 43,445
===========
</TABLE>
The intangibles acquired comprise the intellectual property rights formerly
owned by the Diamond Back Group including the Diamond Back and Avenir
trademarks. In line with normal group policy intellectual property will be
amortized over a period of 15 years.
The goodwill arising on the acquisition of $14,361,000 will be amortized over 40
years.
The results of the Diamond Back Group are included in the consolidated financial
statements from February 4, 1999. A pro forma consolidated income statement
incorporating the results of the Diamondback Group on the basis that the group
was acquired on January 1, 1998 is as follows.
The Derby Cycle Corporation
Unaudited Pro Forma Consolidated Statements of Income
(Dollars in thousands, except per unit and unit data)
<TABLE>
<CAPTION>
Quarter ended Six months ended
------------------------ -----------------------
Jun 28, Jun 27, Jun 28, Jun 27,
1998 1999 1998 1999
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Net revenues ........................................................ $ 169,459 $ 165,131 $ 304,836 $ 307,779
Net income (loss) applicable to common stockholders.................. (745) (2,423) 1,921 (4,635)
Net income (loss) applicable to common stockholders per share........ $ (13.54) $ (34.65) $ 38.34 $ (67.06)
========== ========== ========= ==========
Weighted average number of shares of common stock outstanding........ 55,036 69,931 50,106 69,115
========== ========== ========= ==========
</TABLE>
8. Stock option plan
The Company has established one stock option plan: The Derby Cycle Corporation
1998 Stock Option Plan.
On October 21, 1998, the Board of Directors of the Company adopted The Derby
Cycle Corporation 1998 Stock Option Plan (the "Stock Plan"), which authorizes
grants of stock options (including options intended to qualify as "incentive
stock options" within the meaning of Section 422 of the Internal Revenue Code).
The Stock Plan authorizes the Company's Board of Directors to grant options at
any time in such quantity, at such price, on such terms and subject to such
conditions as established by the board. The Company issued stock options to
purchase 1,625 shares of the Company's Class A common stock for $1,000 per share
which vest over three years, and performance-based stock options to purchase
3,250 shares of Class A common stock for $1,000 per share to Gary Matthews.
12
<PAGE>
On April 1, 1999 and June 1, 1999 the Company issued stock options to purchase a
total of 4,240 shares of Class A common stock and 1,060 shares of Class B common
stock to executives of the Company. 3,800 of these options vest over four years
while the remaining 1,500 options are performance based.
In October 1995, SFAS 123 "Accounting for Stock-Based Compensation" was issued.
The Company has adopted the disclosure provisions of SFAS 123 in 1999, but opted
to remain under the expense recognition provisions of Accounting Principles
Board (APB) Opinion No 25, "Accounting for Stock Issued to Employees" in
accounting for options granted under the Stock Option Plans. Had compensation
expense for share options granted under these schemes been determined based on
fair value at the grant dates in accordance with SFAS 123, the Company's net
income and earnings per share for the quarter and six months ended June 27, 1999
would have been reduced to the pro-forma amounts shown below:
<TABLE>
<CAPTION>
Quarter Six months
ended ended
Jun 27, 1999 Jun 27, 1999
un-audited un-audited
------------ ------------
<S> <C> <C>
Approximate net income ($ thousands)
As reported........................................................................ (2,423) (3,644)
Diluted by share options........................................................... (2,558) (3,827)
Earnings per share ($)
As reported........................................................................ (34.65) (56.37)
Diluted by share options........................................................... (32.71) (53.94)
</TABLE>
The movement in options outstanding during the six months ended June 27, 1999 is
summarized in the following table:
<TABLE>
<CAPTION>
Number of Weighted
shares average
subject to exercise
option price
---------- ---------
<S> <C> <C>
Outstanding at January 1, 1999..................................................... 0 $ 0
Granted during 1999................................................................ 10,175 $ 1,000
Outstanding at June 27, 1999....................................................... 10,175 $ 1,000
Exercisable at June 27, 1999....................................................... 0 $ 0
</TABLE>
The weighted average fair value of options granted in the quarter ended June 27,
1999 and the quarter ended March 28, 1999 was estimated at $198.01 and $118.39
as at the date of grant using the Black-Scholes stock option pricing model. The
following weighted average assumptions were used: dividend yield of 0% per
annum, annual standard deviation (volatility) of 0% per annum, risk free
interest rate of 5.52% and expected term of 4.0 and 3.0 years respectively.
The exercise price for options outstanding at June 27, 1999 is $1,000 and a
remaining contractual life of 9.59 years.
13
<PAGE>
9. Segmental Information: Reportable business segments
The Company manages its business in seven reportable segments as shown in the
following tables. Consolidation adjustments, certain small operating companies,
non operating companies and the headquarters are included in "Other companies".
The reportable segments are managed separately because each business has
differing customer requirements, either as a result of the regional environment
of the country or differences in products and services offered. A summary of
revenues, operating income, and identifiable assets categorized by the business
segment is as follows (in thousands):
<TABLE>
<CAPTION>
Quarter ended Six months ended
------------------------ ----------------------
Jun 28, Jun 27, Jun 28, Jun 27,
1998 1999 1998 1999
un- un- un- un-
audited audited audited audited
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues:
Raleigh UK.............................................. $ 24,125 $ 21,278 $ 39,763 $ 34,586
Gazelle, The Netherlands................................ 35,897 39,725 66,448 74,463
Derby Germany........................................... 44,582 49,979 84,917 95,225
Derby USA............................................... 21,355 37,736 32,527 59,038
Raleigh Canada.......................................... 12,978 6,536 24,609 18,086
Sturmey Archer, UK and The Netherlands.................. 7,131 5,552 14,055 11,767
Probike, South Africa................................... 3,537 3,133 7,554 6,934
Other companies......................................... 1,241 1,192 2,411 3,419
--------- --------- --------- ---------
Total net revenues................................. $ 150,846 $ 165,131 $ 272,284 $ 303,518
========= ========= ========= =========
Operating income:
Raleigh UK.............................................. $ 2,713 $ 365 $ 1,246 $ (1,939)
Gazelle, The Netherlands................................ 5,544 6,082 10,390 11,284
Derby Germany........................................... 2,947 3,692 6,427 6,670
Derby USA............................................... 297 1,442 (118) 724
Raleigh Canada.......................................... 1,379 677 2,270 1,712
Sturmey Archer, UK and The Netherlands.................. 289 302 728 502
Probike, South Africa................................... 63 15 246 243
Other companies......................................... 462 (4) 847 (427)
--------- --------- --------- ---------
Underlying operating income....................... $ 13,694 $ 12,571 $ 22,036 $ 18,769
Recapitalization costs........................ (5,671) - (5,671) -
Restructuring charge.......................... - (7,914) - (8,461)
--------- --------- --------- ---------
Total operating income............................. $ 8,023 $ 4,657 $ 16,365 $ 10,308
========= ========= ========= =========
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Dec 31, Jun 27,
1998 1999
unaudited
---------- ---------
<S> <C> <C>
Identifiable assets
Raleigh UK.......................................................................... $ 67,719 $ 67,771
Gazelle, The Netherlands............................................................ 55,784 47,728
Derby Germany....................................................................... 91,789 86,903
Derby USA........................................................................... 36,356 79,137
Raleigh Canada...................................................................... 13,997 13,913
Sturmey Archer, UK and The Netherlands.............................................. 25,060 24,936
Probike, South Africa............................................................... 11,993 6,993
Other companies..................................................................... 22,592 27,309
---------- ---------
Total identifiable assets...................................................... $ 325,290 $ 354,690
========== =========
</TABLE>
10. Recent developments
Raleigh UK intends to cease manufacturing steel bicycle frames altogether by the
end of 1999 due to increased consumer demand for aluminum frames. Steel frames
manufactured by Raleigh UK currently account for approximately 50% of all frames
sold by Raleigh UK, with the balance being fabricated from aluminum and imported
from Asia.
The Company is currently negotiating the sale of that part of the factory site
that will be released. The Company intends to use the proceeds from the sale of
the site either to pay expenses associated with the restructuring or to pay down
the Company's revolving credit facility, or a combination thereof.
Other components of the restructuring include the streamlining of Raleigh UK's
product development and marketing functions.
The consolidation of Raleigh UK's bicycle operations together with the other
restructuring activities will produce greater efficiencies and help re-build the
profitability. The nature of these changes requires them to be phased over the
balance of 1999, and the precise number and timing of associated lay-offs will
not be defined until more detailed work has been completed.
In July 1999 the Company restructured its corporate management and established
its headquarters in Stamford, CT to organize the finance and marketing functions
of the Company. This is the first step to running the Company on a global basis
which will enable the Company to obtain the scale benefits of being the largest
player in the international bicycle business.
15
<PAGE>
11. Lyon Investments B.V. Summarized Financial Information
Lyon Investments B.V. ("Lyon"), a Dutch company, is a wholly owned subsidiary of
the Company which is a co-issuer of $20,250,000 of the $100,000,000 of 10
percent Senior Notes and all of the DM110,000,000 of 93/8 percent Senior Notes.
As co-issuers, Lyon and the Company are joint and severally liable with respect
to the Senior Notes. The following summarized financial information sets forth
the combined financial position and results of operations of Lyon, together with
its subsidiaries, Derby Nederland B.V. and Engelbert Wiener Bike Parts GmbH.
Derby Nederland B.V. is a holding company owning 100 percent of Koniklijke
Gazelle B.V., Sturmey-Archer Europa B.V. and Raleigh B.V.
Lyon Investments B.V.
Summarized Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
Dec 31, Jun 27,
1998 1999
Assets un-audited
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................... $ 8,470 $ 6,526
Receivables, net.................................................................... 15,875 19,639
Inventories......................................................................... 26,433 16,864
Loans to internal group companies................................................... 137,768 121,623
Other current assets................................................................ 3,002 3,861
Total current assets........................................................... ------------ ------------
191,548 168,513
Property, plant and equipment, net....................................................... ------------ ------------
11,552 9,697
Intangibles, net......................................................................... 2,715 2,284
Prepaid pension asset.................................................................... 16,920 16,115
------------ ------------
Total assets................................................................... $ 222,735 $ 196,609
============ ============
Liabilities and Shareholder's (Deficit)
Current liabilities:
Loans from internal group companies................................................. $ 105,273 $ 88,410
Short-term borrowings............................................................... 43,979 33,076
Other current liabilities........................................................... 24,015 24,078
Total current liabilities...................................................... ------------ ------------
173,267 145,564
------------ ------------
Other liabilities:
10% $100,000,000 Senior Notes....................................................... 20,250 20,250
93/8% DM110,000,000 Senior Notes.................................................... 65,870 58,512
Other liabilities................................................................... 5,971 5,640
------------ ------------
Total liabilities.............................................................. 265,358 229,966
------------ ------------
Shareholder's (deficit).................................................................. (42,623) (33,357)
------------ ------------
Total liabilities and shareholder's (deficit).................................. $ 222,735 $ 196,609
============ ============
</TABLE>
16
<PAGE>
Lyon Investments B.V.
Unaudited Summarized Consolidated Statements of Income
(Dollars in thousands)
<TABLE>
<CAPTION>
Quarter ended Six months ended
------------------------ -------------------------
Jun 28, Jun 27, Jun 28, Jun 27,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues.............................................. $ 42,905 $ 48,421 $ 82,003 $ 91,244
Cost of sales............................................. (31,217) (35,745) (61,191) (67,765)
----------- ----------- ----------- -----------
Gross profit.................................... 11,688 12,676 20,812 23,479
Selling, general, and administrative expenses............. (4,650) (6,080) (9,121) (11,530)
Restructuring charge...................................... - (129) - (249)
----------- ----------- ----------- -----------
Operating income................................ 7,038 6,467 11,691 11,700
Other income (expense)
Interest expense..................................... (2,611) (3,764) (3,042) (7,853)
Interest income...................................... 270 1,779 277 3,825
Other income (expense) net.......................... - - - -
----------- ----------- ----------- -----------
Income before income taxes...................... 4,697 4,482 8,926 7,672
Provision for income taxes................................ (1,590) (1,519) (3,046) (2,633)
----------- ----------- ----------- -----------
Net income...................................... $ 3,107 $ 2,963 $ 5,880 $ 5,039
=========== =========== =========== ===========
</TABLE>
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company is a world-leading designer, manufacturer and marketer of bicycles.
The Company holds the leading market share in the United Kingdom, The
Netherlands, Canada and Ireland, holds the leading market share in the adult
bicycle market in Germany and is also the second largest supplier to independent
bicycle dealers ("IBDs") in the United States. Competing primarily in the
medium-to premium-priced market, the Company owns or licenses many of the most
recognized brand names in the bicycle industry, including leading global brands
such as Raleigh, Diamond Back, Nishiki and Univega, and leading regional brands
such as Gazelle in The Netherlands and Kalkhoff, Musing, Winora and Staiger in
Germany. The Company designs, manufactures and markets a wide range of bicycles
in all major product categories: (i) all-terrain or mountain bicycles ("MTBs"),
(ii) city bicycles, also called touring or upright bicycles, (iii) hybrid
bicycles, also called comfort or cross bicycles, (iv) juvenile bicycles,
including bicycle motocross ("BMX") bicycles, and (v) race/road bicycles. The
Company distributes branded bicycles through extensive local market networks of
IBDs as well as through national retailers, and distributes private label
bicycles through mass merchandisers and specialty stores.
Through a series of acquisitions and plant expansions, the Company has created a
global bicycle business distinguished by its leading market positions, low cost
production, extensive distribution network and reputation for high quality.
Organized in 1986 for the purpose of acquiring the Raleigh, Gazelle and Sturmey
Archer businesses from TI Group plc, the Company expanded into the United States
and Germany in 1988. Since then, the Company has acquired additional well-known
brands and leveraged its existing manufacturing plants and component sourcing
operations to lower unit costs for its acquired businesses.
On February 4, 1999, the Company acquired the assets (and assumed certain
liabilities) of the Diamond Back Group for approximately $43.4 million in cash.
The Diamond Back Group consisted of Diamond Back International Company Limited,
a private British Virgin Islands company ("Diamond Back"), Western States Import
Company Inc., a Delaware corporation ("Western States") and Bejka Trading A.B.,
a private Swedish company ("Bejka"), each of which is engaged in the bicycle,
bicycle parts and accessories and fitness equipment distribution business.
Western States and Bejka had worldwide revenues of approximately $62.9 million
and $3.1 million, respectively, in 1998. Diamond Back was essentially a holding
company for the company's intellectual property and did not generate material
revenues. The Company financed the acquisition of the Diamond Back Group by
issuing $20 million principal amount in a Subordinated Note to Vencap Holding
(1992) PTE Ltd. and $22.75 million in Class C common stock to DC Cycle, L.L.C.
and Perseus Cycle L.L.C. The Subordinated Note matures in 2010 and bears
interest at an annual rate of 19% compounded daily.
Since 1990, the Company has invested in labor-saving flexible production
machinery and restructured the workforces at its manufacturing locations. From
1992 to 1993, taking advantage of substantial incentives from the German
government, the Company built a factory in Rostock, in the former German
Democratic Republic.
The Company's operations are concentrated in the United Kingdom, The
Netherlands, Germany, the United States and Canada, with manufacturing
operations in these countries, each led by experienced local management.
The Company maintains marketing or purchasing operations in five additional
countries. Each local operation manages national distribution channels, dealer
service and working capital and benefits from shared product design and
manufacturing technologies as well as from economies of scale generated by the
Company's aggregate purchasing power. Consequently, each local operation has the
flexibility to respond to shifts in local market demand and product preference.
18
<PAGE>
In 1998, 55% of the Company's net revenues were denominated in currencies within
the European Monetary System, 18% were denominated in pounds sterling, 15% were
denominated in US dollars and 12% were denominated in other currencies. The
Company reduces its currency exposure by maintaining operations in the major
markets in which it sells its products. The Company further mitigates foreign
exchange risk by purchasing currency options and entering into forward purchase
contracts. The acquisition of the Diamond Back Group increases the proportion of
the Company's net revenues denominated in US dollars to approximately 25%.
Results of Operations
All comparisons in the following discussion and analysis are against the
corresponding quarter and six month periods ended June 28, 1998, unless
otherwise stated.
<TABLE>
<CAPTION>
Units sold: Quarter ended Six months ended
------------------------ ------------------------
Thousands of bicycles Jun 28, Jun 27, Jun 28, Jun 27,
1998 1999 1998 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Raleigh UK................................................. 132 125 213 195
Gazelle.................................................... 99 108 186 200
Derby Germany.............................................. 187 200 353 378
Derby USA.................................................. 86 161 127 246
Raleigh Canada............................................. 144 74 267 205
Probike.................................................... 25 26 56 59
Other companies and group transactions..................... 6 4 3 5
---------- ---------- ---------- ----------
Total units sold...................................... 679 698 1,205 1,288
========== ========== ========== ==========
</TABLE>
Units sold. Units sold increased by 19 thousand units and 83 thousand units for
the quarter and six months ended June 1999. Diamond Back sales were 81 thousand
units and 126 thousand units in the quarter and six months ended June 1999.
Raleigh Canada's private label sales fell by 63 thousand units and 54 thousand
units in the quarter and six months ended June 1999 as mass merchants started
the year over-stocked and have experienced weak bicycle retail sales.
Particularly strong growth was seen at Gazelle and Derby Germany in the IBD
sector following successful product range launches in the fall leading to an
increase in sales volumes of approximately 7%. Sales at Raleigh UK fell by
approximately 5% and action has been taken to improve the competitiveness of the
product line for 1999 and to further incentivize retailers to sell Raleigh,
which has arrested the decline.
<TABLE>
<CAPTION>
Net revenues: Quarter ended Six months ended
------------------------ ------------------------
$ millions Jun 28, Jun 27, Jun 28, Jun 27,
1998 1999 1998 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Raleigh UK................................................. $ 24.1 $ 21.3 $ 39.8 $ 34.6
Gazelle.................................................... 35.9 39.7 66.4 74.5
Derby Germany.............................................. 44.6 50.0 84.9 95.2
Derby USA.................................................. 21.4 37.7 32.5 59.0
Raleigh Canada............................................. 13.0 6.5 24.6 18.1
Sturmey Archer............................................. 7.1 5.6 14.1 11.8
Probike.................................................... 3.5 3.1 7.6 6.9
Other companies and group transactions..................... 1.2 1.2 2.4 3.4
---------- ---------- ---------- ----------
Total net revenues.................................... $ 150.8 $ 165.1 $ 272.3 $ 303.5
========== ========== ========== ==========
</TABLE>
Net Revenues. Net revenues increased by $14.3 million and $31.2 million to
$165.1 million and $303.5 million for the quarter and six months ended June 1999
in line with the increase in units sold and a 4-5% increase in average price
achieved through growth in the high value Dutch and German markets accompanied
by a reduction in the low value Canadian market. $20.4 million of the increase
in bicycle
19
<PAGE>
sales, a $6.5 million increase in the sales of parts and accessories and $1.8
million sales of fitness equipment in the six months ended June 1999 were
generated by Diamond Back. Sturmey Archer's revenues for the six months ended
June 1999 dropped by $1.2 million in the engineering components business
following the loss of one major customer during the first quarter of 1998 and
other business since. New business is being negotiated to come on stream in the
fourth quarter. Sturmey Archer's sales of bicycle hubs dropped by $0.7 million
in the six months ended June 1999 as competition increased in the European hub
market and the re-designed seven-speed hub was not introduced in time for the
introduction of 1999 bicycle models at the autumn 1998 trade shows.
Gross Profit. Gross profit for the quarter and six months ended June 1999
increased by $2.3 million, and $4.1 million but on increased revenue dollars,
this represented a margin decrease of 0.9 and 1.3 percentage points to 24.9% and
24.4% for those periods. Gross margins at Raleigh UK dropped in the first
quarter from 17.9% to 9.8%, and in the second quarter from 29.0% to 18.4%
compared with a year ago, accounting for a 1.1 percentage point decrease in
gross margin of the Company for the six months ended June 1999. The thin margins
at Raleigh UK arose due to a combination of weak product mix, weak distribution
channel mix, and lower cost recovery on the low production volumes, together
with aggressive discounting on the sale of obsolete models in the first quarter.
Following the adoption of SFAS 133, the Company reports changes in the mark-to-
market value of its foreign currency forward cover contracts and currency
options in other comprehensive income in 1999. This differs from 1998 when $0.3
million adverse and $0.6 million favorable changes in the mark-to-market value
of foreign currency forward cover contracts for the quarter and six months ended
June 1998 were included in cost of sales, which impacted year ago margins by 0.2
percentage points adversely in the quarter, and 0.2 percentage points favorably
in the six months ended June 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $3.9 million and $7.4 million to $29.0
million and $55.4 million for the quarter and six months ended June 1999.
Expenses at Diamond Back of $4.5 million and $7.0 million for the quarter and
six months ended June 1999 accounted for nearly all of the increase.
Restructuring Charge. In order to reduce product costs and selling, general and
administrative expenses and maximize the synergy benefits from the Diamond Back
acquisition, the Company has started restructuring its businesses in UK and the
Raleigh distribution operations in Germany, The Netherlands, Belgium and
Ireland, as well as reviewing the logistics of Raleigh and Diamond Back
distribution in USA and establishing its new headquarters, estimated to cost $10
million in aggregate.
Raleigh UK intends to cease manufacturing steel bicycle frames altogether by the
end of 1999 due to increased consumer demand for aluminum frames. Steel frames
manufactured by the company currently account for approximately 50% of all
frames sold by the company, with the balance being fabricated from aluminum and
imported from Asia. The company has granted an option to a property developer
for the sale of the factory site that will be released. The company intends to
use the proceeds from the sale of the site either to pay expenses associated
with the restructuring or to pay down the Company's revolving credit facility,
or a combination thereof. Other components of the restructuring at Raleigh UK
include streamlining the company's product development and marketing functions.
Management of the Raleigh distribution operations in Germany, The Netherlands
and Belgium, previously run on a stand-alone basis, has been combined with the
Gazelle and Derby Germany operations, although the results are still included in
Other Companies in this discussion for ease of comparison. The Raleigh Ireland
warehouse has been closed, leaving only a sales force in Ireland.
In July 1999 the Company restructured its corporate management and established
its headquarters in Stamford, CT to organize the finance and marketing
functions of the Company on a global basis.
20
<PAGE>
These restructuring steps are projected to reduce on-going product costs and
selling expenses by $2 million in the current year and by $5 million in 2000.
Further restructuring costs of some $1.5 million are planned for the second half
of 1999, but had not been committed as at June 27, 1999 and consequently have
not been provided for in these financial statements.
<TABLE>
<CAPTION>
Operating income: Quarter ended Six months ended
--------------------------- ---------------------------
$ millions Jun 28, Jun 27, Jun 28, Jun 27,
1998 1999 1998 1999
------------ ---------- ------------- ----------
<S> <C> <C> <C> <C>
Raleigh UK................................................. $ 2.7 $ 0.4 $ 1.2 $ (1.9)
Gazelle.................................................... 5.5 6.1 10.4 11.3
Derby Germany.............................................. 2.9 3.7 6.4 6.7
Derby USA.................................................. 0.3 1.4 (0.1) 0.7
Raleigh Canada............................................. 1.4 0.7 2.3 1.7
Sturmey Archer............................................. 0.3 0.3 0.7 0.5
Probike.................................................... 0.1 - 0.3 0.2
Other companies and group transactions..................... 0.5 - 0.9 (0.4)
------------ ---------- ------------- ----------
Underlying operating income.......................... $ 13.7 $ 12.6 $ 22.1 $ 18.8
Recapitalization costs........................... (5.7) - (5.7) -
Restructuring charge............................. - (7.9) - (8.5)
------------ ---------- ------------- ----------
Total operating income................................ $ 8.0 $ 4.7 $ 16.4 $ 10.3
============ ========== ============= ==========
</TABLE>
Operating Income. Underlying operating income of $12.6 million and $18.8 million
for the first quarter and six months ended June 1999 decreased by $1.1 million
and $3.3 million due to the lower gross margin and higher selling, general and
administrative expenses. Diamond Back made a loss of $0.2 million in the
quarter, which diluted the operating margin.
<TABLE>
<CAPTION>
Interest expense: Quarter ended Six months ended
--------------------------- ---------------------------
$ millions Jun 28, Jun 27, Jun 28, Jun 27,
1998 1999 1998 1999
------------ ---------- ------------- ----------
<S> <C> <C> <C> <C>
Senior Notes............................................... $ 2.5 $ 3.9 $ 3.4 $ 7.8
Subordinated Note.......................................... - 1.0 - 1.7
Revolving Credit Facility.................................. 0.7 1.1 1.2 2.3
Other interest............................................. 0.7 0.2 0.9 0.5
Amortization of deferred financing costs................... 0.2 0.5 0.4 0.9
------------ ---------- ------------- ----------
$ 4.1 $ 6.7 $ 5.9 $ 13.2
============ ========== ============= ==========
</TABLE>
Interest expense. Interest expense increased by $2.6 million and $7.3 million to
$6.7 million and $13.2 million for the quarter and six months ended June 1999
due to the increased debt and higher interest rate margin following the
Recapitalization and the acquisition of Diamond Back. Interest on the
Subordinated Note is paid-in-kind by way of the issue of further subordinated
notes.
<TABLE>
<CAPTION>
Provision for income taxes: Quarter ended Six months ended
--------------------------- ---------------------------
$ millions Jun 28, Jun 27, Jun 28, Jun 27,
1998 1999 1998 1999
------------ ---------- ------------- ----------
<S> <C> <C> <C> <C>
Current taxes.............................................. $ 2.2 $ 1.4 $ 3.5 $ 2.8
Deferred taxes............................................. 0.1 (2.0) 0.7 (2.9)
------------ ---------- ------------- ----------
$ 2.3 $ (0.6) $ 4.2 $ (0.1)
============ ========== ============= ==========
</TABLE>
21
<PAGE>
Provision for Income Taxes. Most of the reduction in income arose in
jurisdictions where the Company is in a tax loss position, principally the UK,
and so reduced the liability to deferred taxes. Only a portion of the reduction
in income arose in The Netherlands, where most of the Company's tax liability
arises, which created savings in the provision for current taxes of $0.8 million
and $0.7 million in the quarter and six months ended June 1999.
Net Income. Net income decreased by $2.2 million and $8.0 million to give losses
of $1.4 million and S2.6 million in the quarter and six months ended June 1999.
The decrease was primarily the result of the increase in interest expense, and
the restructuring charge as discussed above, offset by the recapitalization
costs of $5.7 million in 1998.
<TABLE>
<CAPTION>
EBITDA: Quarter ended Six months ended
---------------------------- ---------------------
$ millions Jun 28, Jun 27, Jun 28, Jun 27,
1998 1999 1998 1999
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Raleigh UK................................................. $ 3.1 $ 0.7 $ 2.1 $ (1.2)
Gazelle.................................................... 5.5 6.4 10.3 11.9
Derby Germany.............................................. 3.9 4.7 8.6 8.7
Derby USA.................................................. 0.9 1.7 0.6 1.2
Raleigh Canada............................................. 1.8 1.0 3.1 2.4
Sturmey Archer............................................. 0.3 0.3 0.7 0.5
Probike.................................................... 0.1 - 0.3 0.3
Other companies and group transactions..................... (0.3) (0.3) (0.2) (1.3)
----------- ----------- --------- ---------
Total EBITDA.......................................... $ 15.3 $ 14.5 $ 25.5 $ 22.5
=========== =========== ========= =========
</TABLE>
EBITDA. EBITDA of $14.5 million and $22.5 million for the quarter and six months
ended June 1999 decreased by $0.8 million and $3.0 million due to changes in
underlying operating income explained above.
EBITDA is calculated as follows:
<TABLE>
<CAPTION>
Quarter ended Six months ended
----------------------- -----------------------
EBITDA Jun 28, Jun 27, Jun 28, Jun 27,
$ millions 1998 1999 1998 1999
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
Underlying operating income................................ $ 13.7 $ 12.6 $ 22.1 $ 18.8
Depreciation............................................... 2.4 2.4 5.0 4.9
Amortization
Intangibles............................................ - 0.2 0.1 0.3
Investment grants...................................... (0.1) (0.1) (0.2) (0.3)
Pension transition asset............................... (0.6) (0.6) (1.3) (1.2)
Positive goodwill...................................... - 0.1 - 0.2
Negative goodwill...................................... (0.1) (0.1) (0.2) (0.2)
----------- --------- --------- ---------
$ 15.3 $ 14.5 $ 25.5 $ 22.5
=========== ========= ========= =========
</TABLE>
Liquidity and capital resources
Demand for bicycles in the Company's principal markets is seasonal,
characterized in most cases by a majority of consumer sales in the spring and
summer months. The exceptions to this are in the United Kingdom, South Africa
and Ireland, where consumer sales are typically higher in the last four months
of the calendar year due to increased sales of juvenile bicycles in the months
preceding Christmas: accordingly, dealers' peak purchasing months in those
countries are October and November when they build inventory in anticipation of
Christmas sales of juvenile bicycles. Excluding this holiday seasonality,
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the Company's working capital requirements are greatest during February, March
and April (the Company's "Peak Season") as receivable levels increase. The
Company offers extended credit terms on sales during the months prior to the
Peak Season, although the Company encourages early payments through trade
discounts.
Finished goods inventory remains relatively constant throughout the fiscal year
and the level of raw materials increases and decreases normally only to
accommodate production needs. Work in process represents, on average, eight
days' production. Inventory levels reach a minimum at the end of the Peak
Season.
Net cash flows used in operating activities increased $21.6 million to a $8.7
million inflow for the first half of 1999 from $12.9 million used in 1998. This
improvement was principally due to a $22.8 million reduction in inventories and
$13.7 million higher increase in accounts payable and accrued liabilities,
offset by $12.0 million higher interest and tax payments. The payment period for
accounts payable has extended by 11 days compared with year ago leading to an
increase in accounts payable of $1.0 million in the first half compared with a
decrease of $8.5 million in the first half of 1998. Following a change in the
fiscal year end in The Netherlands in 1997, payment of tax due for 1997 and 1998
of $3.8 million was deferred until 1999. This, together with estimated tax
payments relating to 1999 of $1.5 million, was paid in the first half of 1999,
resulting in an increase in taxes paid to $6.3 million in the first half of this
year compared with $0.9 million year ago. Interest of $10.5 million was paid in
the first half of 1999 compared with $3.9 million year ago due to the increased
principal amount of Senior Notes and higher coupon. The net cash flow provided
by operating activities of $8.7 million in the first half of 1999 was used to
repay drawings under the revolving credit facility which decreased by $17.8
million as a result of this and the application of cash balances of $8.0
million.
On February 4, 1999, the Company acquired the assets (and assumed certain
liabilities) of the Diamond Back Group for $43.4 million. The Company financed
the acquisition of the Diamond Back Group by issuing a $20.0 million
Subordinated Note and $22.75 million in Class C common stock.
The actuarial valuation of the UK pension schemes carried out as at April 1998
showed that the schemes were in surplus based on UK funding criteria and
employer's contributions ceased from mid-year 1998. The Dutch pension scheme has
been in surplus and no employer's contributions have been made for a number of
years. As a result, the Company's contributions to its defined benefit pension
plans were less than $0.1 million in the six months ended June 1999, compared
with $1.2 million in the six months ended June 1998. The Company adopted SFAS
87, "Employers' Accounting for Pensions" on January 1, 1993. The impact of
adopting SFAS 87 was the recognition of a transition asset of $37.8 million. The
transition asset is being amortized into income over 15 years. Net periodic
pension income was $2.5 million and $2.6 million in the first half of 1998 and
1999 respectively. Net periodic pension income includes amortization of the
transition asset into income of $1.3 million and $1.2 million in the first half
of both 1998 and 1999.
The Company's capital expenditures were $3.5 million and $2.3 million in the
first half of 1998 and 1999, being (i) on-going cost reduction projects, (ii)
replacements and (iii) items required to satisfy statutory environmental and
health and safety legislation.
The Company is primarily financed by equity purchased by Thayer, Perseus DFS and
management as part of the Recapitalization and subsequently, plus the Retained
Equity of, in aggregate, $134.2 million and debt in the form of Senior Notes and
the revolving credit facility. The Company incurred significant indebtedness in
connection with the Recapitalization. As of June 27, 1999, the Company had
$221.5 million of combined indebtedness, comprising $158.5 of Senior Notes, a
$20.0 million Subordinated Note, $42.7 million of borrowings under the revolving
credit facility and $0.3 million of borrowings under the South African credit
facility. The Senior Notes are issued under Indentures which contain certain
covenants that, among other things, restrict the ability of the Company and its
Restricted Subsidiaries to incur additional indebtedness, pay dividends, redeem
capital stock, redeem subordinated obligations, make investments, undertake
sales of assets and subsidiary stock, engage in transactions with affiliates,
23
<PAGE>
issue capital stock, permit liens to exist, operate in other lines of business,
engage in certain sale and leaseback transactions and engage in mergers,
consolidations or sales of all or substantially all the assets of the Company.
Accordingly, certain activities or transactions that the Company may want to
pursue or enter into may be restricted or prohibited, and such restrictions and
prohibitions could, from time to time, impact available cash on hand and the
liquidity of the Company.
The Company uses derivative financial instruments including currency swaps,
interest rate swaps, interest rate caps, forward foreign exchange contracts, and
currency options. The Company enters into currency and interest rate swaps such
that the notional principal amount is equal to the principal amount of the
underlying debt. The swaps achieve the effect of synthetically converting the
original United States dollar denominated debt into several other foreign
currencies and converting the interest rate on the debt from United States
dollar rates to those applicable for that currency. The Company enters into
forward foreign exchange contracts and options to minimize the impact of
currency movements, principally on purchases of inventory and sales of goods
denominated in currencies other than the subsidiaries' functional currencies.
Interest rate caps have been purchased to limit the blended interest rate paid
on the revolving credit facility to under 8% over the next 2 years. Currency
basket options have been purchased to substantially maintain the value of
foreign operating profits upon conversion into US dollars, in order to protect
the ability to service the US senior notes from the effect of changes in foreign
exchange rates.
A Revolving Credit Agreement provides for a seven-year DM214 million secured
senior revolving credit facility to be made available to the Company's operating
companies. Borrowings under this revolving credit facility are available subject
to a borrowing base determined as a percentage of eligible assets. The Company's
borrowings peak in February/March/April each year. The Company believes that it
has adequate headroom on its funding requirements for the next year.
Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk from changes in foreign currency exchange
rates and interest rates. In order to manage the risk arising from these
exposures, the Company enters into a variety of foreign currency and interest
rate contracts and options.
Foreign Currency Exchange Rate Risk
The Company has foreign currency exposures related to buying and selling in
currencies other than the functional currencies in which it operates. The
Company's net trading position is long in the Euro, Canadian Dollar and South
African Rand, arising from its revenues in those currencies, and short of the
New Taiwan Dollar, Japanese Yen and US Dollar as a result of components
purchased in those currencies. The Company has a natural currency hedge against
Pounds Sterling arising from its position as both an importer and exporter in
UK. Sturmey Archer also has a competitive exposure to the currencies of Japan
and Germany in which its two main competitors manufacture.
The Company generally introduces its new bicycle model ranges annually in the
fall of each year, at a similar time to most of its competitors. Product
specifications, component costs and selling prices are kept as stable as
possible during the model year to satisfy the requirements of mass-merchandisers
and facilitate orderly marketing of branded products amongst IBDs. The Company
takes out foreign currency forward exchange contracts or options in the fall to
hedge most of its foreign currency trading transaction exposure for the upcoming
season. These foreign currency forward exchange contracts and options have been
designated as hedges as defined in SFAS 133 and the mark-to-market value of $1.1
million at December 31, 1998 was therefore included in accumulated other
comprehensive income. The potential loss in fair value for such financial
instruments from a hypothetical 10% adverse change in quoted foreign currency
exchange rates would be approximately $4.1 million for 1998. Each year the
Company changes the specification of its products to endeavor to optimize its
competitive position and margins. Most of the Company's competitors purchase
comparable components from similar sources to the Company and are believed not
to hedge beyond the current season. To stay competitive the Company does not
generally hedge its transaction exposure beyond the end of the season.
Management believes the likelihood of obtaining a competitive advantage would
not justify the cost of hedging beyond the end of the season.
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<PAGE>
Sales and purchases in currencies other than the functional currencies in which
the Company operates were $31.6 million and $106.9 million respectively in 1998,
treating the currencies within the European Exchange Rate Mechanism as one.
The foreign currency element of the Company's debt under the Senior Notes and
the revolving credit facility has, since September 1998, generally been arranged
to align with the denomination of the book value of net assets. By doing this,
the Company reduces the translation exposure of net worth to changes in foreign
currency exchange rates. The three principal exceptions are: (1) $38 million of
net assets denominated in Pounds Sterling arising from the Company's relatively
large presence in UK, (2) $38 million of foreign pension assets in UK and The
Netherlands, and, (3) $5 million denominated in South African Rand due to limits
placed by the South African Reserve Bank on the maximum indebtedness allowed by
foreign owned corporations, based on the balance sheet as at December 31, 1998.
The Company generates most of its trading income in foreign currencies. In order
to ensure that such trading income can be converted to yield sufficient US
Dollars to service 67% of the interest on the $100 million 10% Senior Notes
through May 2001, currency options were purchased in 1998. These currency
options are for $6.7 million per year, selling Df6 million, GBP2 million
and C$1.2 million. At December 31, 1998 the mark-to-market value of these
currency options was $0.1 million. As the purchaser of options has no
obligations to exercise them, any weakening of the value of the US Dollar can do
no more than reduce the fair value of these currency options to zero.
Up to May 14, 1998, interest and currency swaps were held which achieved the
effect of synthetically converting the original US Dollar denominated Series A
and Series C Senior Notes into foreign currency debt of those countries where
the Company had operations. This converted the interest on the debt from US
Dollars to those foreign currencies in which trading income was generated. Derby
USA generated sufficient trading income to service the 7.66% Series B Senior
Note, withstanding certain one time items.
Interest Rate Risk
The weighted average interest rate on the Senior Notes was 6.9% in 1998 through
May 13, 1998 and 10.3% effective May 14, 1998, after taking into account the
effect of any swaps and including amortization of deferred financing costs. The
other major element of the Company's interest expense was on the revolving
credit facilities. These were at floating rates of 1% above the London Interbank
Offered Rate through May 13, 1998 and 2% thereafter. This produced weighted
average interest rates on the revolving credit facilities of 6.6% in 1998, after
taking into account the effect of any swaps and including amortization of
deferred financing costs. A hypothetical one percentage point shift in floating
interest rates would have a $0.7 million approximate impact on annual interest
expense. As interest rates on the revolving credit facility have been capped at
7.9% effective August 1998 through July 2001, increases in floating interest
rates above that level would only have limited impact on expense.
Commodity Price Risk
The business of the Company does not carry a significant direct exposure to the
prices of commodities.
Unsecured status of Senior Notes and asset encumbrance
The Indentures permit the Company to incur certain secured indebtedness,
including indebtedness under the Revolving Credit Agreement, which is secured
and guaranteed by the obligors thereunder through a first priority fully
protected security interest in all the assets, properties and undertakings of
the Company and each other obligor thereunder where available and cost effective
to do so, and to the extent permissible by local laws. The Company has
indebtedness available under the Revolving Credit Agreement of DM214.0 million
($113.8 million). As of June 27, 1999, the Company had indebtedness outstanding
under the Revolving Credit Agreement of approximately $42.7 million. Borrowings
under the South African Credit Facility are secured by a security interest in
certain of the assets of the Company's South African subsidiaries. The Notes are
unsecured and therefore do not have the benefit of any such collateral.
Accordingly, if an event of default were to occur under the Revolving Credit
Agreement or the South African Credit Facility, the lenders thereunder would
have the right to foreclose upon the collateral securing such indebtedness to
the exclusion of the holders of the Notes, notwithstanding the existence of an
event of default with respect to the Notes. In such event, the assets
25
<PAGE>
constituting such collateral would first be used to repay in full all amounts
outstanding under the Revolving Credit Agreement or the South African Credit
Facility, as applicable, resulting in all or a portion of the assets of the
Issuers being unavailable to satisfy the claims of holders of the Notes and
other unsecured indebtedness of the Issuers. The Company may also incur other
types of secured indebtedness under the Indentures, including up to $20 million
in indebtedness of any type, indebtedness of an acquired company where the
Company would have been able to incur $1.00 of additional indebtedness under its
Consolidated Coverage Ratio, indebtedness in respect of performance bonds,
bankers' acceptances, letters of credit, and the like, purchase money
indebtedness and capitalized lease obligations in an aggregate amount not
exceeding $10 million, indebtedness incurred by foreign subsidiaries not
exceeding $5 million, and indebtedness incurred by a securitization entity.
Restrictive Loan Covenants
The Revolving Credit Agreement contains a number of covenants that, among other
things, restrict the ability of the Company and its subsidiaries to dispose of
shares in any subsidiary, dispose of assets, incur additional indebtedness,
engage in mergers and acquisitions, exercise certain options, make investments,
incur guaranty obligations, make loans, make capital distributions, enter into
joint ventures, repay the Notes, make loans or pay any dividend or distribution
to the Issuers for any reason other than (among other things) to pay interest
(but not principal or Additional Amounts) owing in respect of the Notes, incur
liens and encumbrances and permit the amount of receivables and inventory to
exceed specified thresholds.
The Company was not in compliance with certain of its financial covenants as of
June 27, 1999 under the Revolving Credit Agreement. These covenants include a
minimum level of adjusted EBITDA, a minimum interest coverage and a maximum
amount of loans out. The impact of the restructuring charge and the underlying
results of the UK businesses reduced adjusted EBITDA, while the issue of secured
promissory notes to partially finance the issue of shares to executives of the
Company increased loans out. The lenders under the Revolving Credit Agreement
granted the Company a waiver on July 27, 1999 effective to August 27, 1999 with
respect to the Company's non compliance of these covenants. The Company is
currently in discussion with the members of the Company's syndicated revolving
credit facility in order to reset the levels of the financial covenants in the
Revolving Credit Agreement on a going forward basis.
The ability of the Company to comply with the covenants and other provisions of
the Revolving Credit Agreement may be affected by changes in general economic
and competitive conditions and by financial, business and other factors that are
beyond the Company's control. The failure to comply with the provisions of the
Revolving Credit Agreement could result in an event of default thereunder, and,
depending upon the actions of the lenders thereunder, all amounts borrowed under
the Revolving Credit Agreement, together with accrued interest, could be
declared due and payable. If the Company were not able to repay all amounts
borrowed under the Revolving Credit Agreement, together with accrued interest,
the lenders thereunder would have the right to proceed against the collateral
granted to them to secure such indebtedness. If the indebtedness outstanding
under the Revolving Credit Agreement were to be accelerated, there can be no
assurance that the assets of the Company would be sufficient to repay in full
such indebtedness, and there can be no assurance that there would be sufficient
assets remaining after such repayments to pay amounts due in respect of any or
all of the Notes.
In addition, the Indentures contain certain covenants that, among other things,
restrict the ability of the Company and its Restricted Subsidiaries to incur
additional indebtedness, pay dividends on and redeem capital stock, redeem
certain subordinated obligations, make investments, undertake sales of assets
and subsidiary stock, engage in certain transactions with affiliates, sell or
issue capital stock, permit liens to exist, operate in other lines of business,
engage in certain sale and leaseback transactions and engage in mergers,
consolidations or sales of all or substantially all the assets of the Company. A
failure to comply with the restrictions contained in either of the Indentures
could result in an event of default under such Indenture.
Information Technology--Year 2000
The Company is in the process of implementing a plan designed to ensure that all
application software used in connection with the Company's management
information systems, including internally
26
<PAGE>
developed systems, software purchased from outside vendors and embedded chips at
the Company's manufacturing facilities, will manage and manipulate data
involving the transition of dates from 1999 to 2000 without functional or data
abnormality and without inaccurate results related to such dates. Due to the
fact that existing software often defines each year with two digits rather than
four digits, the Company's computers that have date-sensitive software may
recognize a date using "00" as occurring in the year 1900 rather than the year
2000, which would result in such abnormalities and inaccuracies and lead to
disruptions of the Company's operations, including a temporary inability to
process customer orders, send invoices or engage in other normal business
activities. Many of the Company's existing computer systems will need to be
retired, replaced or remediated prior to the year 2000. Retirement, replacement
and remediation may require that, over the next few years, a substantial portion
of the Company's management information systems spending be allocated to such
activities. The Company is currently in the process of replacing and upgrading
the computer systems of its United States and Canadian operations. The Company
spent a total of approximately $2.3 million in 1998 and expects to spend $1.1
million in 1999 to achieve "Year 2000 compliance" for all of its operations. At
June, 1999 all the compliance plans of the Company's operations were more than
75% completed. The Company plans to complete all Year 2000 compliance efforts by
the third quarter of 1999. The costs and timing of such efforts, however, are
based upon management's best estimates, which are derived using assumptions
relating to, among other things, the availability of certain resources, the
timing of actions taken by third parties and other factors. Additional
expenditures beyond the Company's projections may be necessary. In the event
that the Company materially underestimates the amount of funds or the time
necessary to resolve identified problems or that any information systems relied
upon by the Company for critical functions are not substantially Year 2000
compliant in a timely manner, there could be a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's plan for the Year 2000 calls for communication with significant
suppliers and customers to determine the readiness of third parties' remediation
of their own Year 2000 issues. As part of its assessment, the Company is
evaluating the level of validation it will require of third parties to ensure
their Year 2000 readiness. The Company believes that the purchasing patterns of
customers and potential customers may be affected by Year 2000 issues as
companies expend significant resources to correct or patch their current
software systems for Year 2000 compliance. These expenditures may result in
reduced funds available to purchase the Company's products, which could result
in a material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that any Year 2000 compliance
problems of the Company's customers or suppliers will not have a material
adverse effect on the Company's business, financial condition and results of
operations.
To date, the Company has not encountered any material Year 2000 issues
concerning its computer systems. Accordingly, the Company has not at this time
developed a contingency plan if it fails to achieve Year 2000 compliance and
does not plan to develop such a plan until it learns of material impediments in
timely implementation of its plans for the Year 2000.
Risk of Foreign Exchange Rate Fluctuations; Introduction of The Euro
The Company's business is conducted by operating subsidiaries in many countries,
and, accordingly, the Company's results of operations are subject to currency
translation risk and currency transaction risk. With respect to currency
translation risk, the results of operations of each of these operating
subsidiaries are reported in the relevant local currency and then translated
into US dollars at the applicable currency exchange rate for inclusion in the
Company's financial statements. The appreciation of the US dollar against the
local currencies of the operating subsidiaries will have a negative impact on
the Company's sales and operating margin. Conversely, the depreciation of the US
dollar against such currencies will have a positive impact. Fluctuations in the
exchange rate between the US dollar and the other currencies in which the
Company conducts its operations may also affect the book value of the Company's
assets and the amount of the Company's shareholders' equity. In addition, to the
extent indebtedness of the Company is denominated in different currencies,
changes in the values of such currencies relative to other currencies in which
the Company conducts its operations may have a negative impact on the Company's
ability to meet principal and interest obligations in respect of such
indebtedness.
27
<PAGE>
In addition to currency translation risk, the Company incurs currency
transaction risk to the extent that the Company's operations involve
transactions in differing currencies. Fluctuations in currency exchange rates
will impact the Company's results of operations to the extent that the costs
incurred by the operating subsidiaries are denominated in currencies that differ
from the currencies in which the related sale proceeds are denominated. To
mitigate such risk, the Company enters into forward purchase contracts primarily
relating to the Pound Sterling, the US Dollar, the Dutch Guilder, the Deutsche
Mark, the New Taiwan Dollar and the Yen. The Company does not enter into forward
purchase agreements for speculative purposes. Given the volatility of currency
exchange rates, there can be no assurance that the Company will be able
effectively to manage its currency transaction risks or that any volatility in
currency exchange rates will not have a material adverse effect on the Company's
business, financial condition or results of operations.
Under the treaty on the European Economic and Monetary Union (the "Treaty"), to
which the Federal Republic of Germany and The Netherlands are signatories, on
January 1, 1999, a European single currency (the "Euro") replaced some of the
currencies of the member states of the European Union (the "EU"), including the
Deutsche Mark and Dutch Guilder.
Following introduction of the Euro, the existing sovereign currencies (the
"legacy currencies") of the eleven participating member countries of the EU (the
"participating countries") who adopted the Euro as their common legal currency
are scheduled to remain legal tender in the participating countries as
denominations of the Euro until January 1, 2002 (the "transition period"). The
Euro conversion may impact the Company's competitive position as the Company may
incur increased costs to conduct business in an additional currency during the
transition period. Additionally, the participating countries' pursuit of a
single monetary policy through the European Central Bank may affect the
economies of significant markets of the Company. The Company will also need to
maintain and in certain circumstances develop information systems software to
(1) convert legacy currency amounts to Euro; (2) convert one legacy currency to
another; (3) perform prescribed rounding calculations to effect currency
conversions; and (4) permit transactions to take place in both legacy currencies
and the Euro during the transition period. Since the Company conducts extensive
business operations in, and exports its products to, several of the
participating countries, there can be no assurance that the conversion to the
Euro will not have a material adverse effect on the Company's business,
financial condition or results of operations. Similarly, in the event that the
Company materially underestimates the costs, timeliness and adequacy of
modifications to its information systems software, there could be a material
adverse effect on the Company's business, financial condition and results of
operations.
Substantial Leverage and Debt Service Obligations
The Company incurred substantial indebtedness in connection with the
Recapitalization and acquisition of Diamond Back and has a highly leveraged
capital structure. As of June 27, 1999, the Company had combined total
indebtedness of $221.5 million (including all indebtedness and guarantees of
indebtedness under the Revolving Credit Agreement and indebtedness under the
South African Credit Facility, but excluding, in each case, unused commitments
thereunder), preferred stock of $46.5 million, stock rights of $23.3 million and
the shareholders' deficit was $49.4 million. The Company's ability to make
scheduled interest payments and repayment of principal is dependent upon its
future operating performance, which, in turn, is subject to general economic and
competitive conditions and to financial, business and other factors, many of
which are beyond the Company's control. Although the Company believes that,
based on current operations, it will have sufficient cash flow from operations
to service its obligations with respect to its indebtedness, there can be no
assurance that the Company will be able to meet such obligations. In the event
that the Company is unable to generate cash flow from operations that is
sufficient to service its obligations in respect of its indebtedness, the
Company may be required to take certain actions, including delaying or reducing
capital expenditures, attempting to restructure or refinance its indebtedness,
selling material assets or operations or seeking additional equity. There can be
no assurance that the Company will be able to generate cash flow from operations
that is sufficient to service its obligations in respect of its indebtedness or
that any of such actions could be effected or would be effective to allow the
Company to service such obligations.
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<PAGE>
Forward looking statements
This discussion contains certain forward-looking statements that involve risks
and uncertainties. In addition, the Company may from time to time make oral
forward-looking statements. As discussed in the Company's prospectus on Form S-
4A filed with the SEC on December 4, 1998, actual results are uncertain and may
be impacted by the various 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 customer orders, general economic and competitive
conditions and changing consumer trends, foreign exchange rates, technological
advances and the number and timing of new product introductions, shipments of
products and components from foreign suppliers, the timing of operating and
advertising expenditures and changes in the mix of products ordered by
independent bicycle dealers and mass merchants. As a result, the actual results
may differ materially from those projected in the forward-looking statements.
Because of these and other factors that may affect the Company's operating
results, past financial performance should not be considered an indicator of
future performance, and investors should not use historical trends to anticipate
results or trends in future periods.
29
<PAGE>
PART II
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ITEM 1. LEGAL PROCEEDINGS
Product Liability
Due to the nature of the Company's business, the Company is a defendant in a
number of product liability lawsuits. The plaintiffs in these lawsuits generally
seek damages, in amounts that may be material, for personal injuries allegedly
sustained as a result of alleged defects in the Company's products. Although the
Company maintains product liability insurance, due to the uncertainty as to the
nature and extent of manufacturers' and distributors' liability for personal
injuries, there can be no assurance that the product liability insurance
maintained by the Company is or will be adequate to cover product liability
claims or that the applicable insurer will be solvent at the time of any covered
loss. In addition, due to deductibles, self-retention levels and aggregate
coverage amounts applicable under the Company's insurance policies, the Company
will bear responsibility for a significant portion, if not all, of the defense
costs (which include attorneys' fees and expenses incurred in the defense of any
claim) and the related payments to satisfy any judgments associated with any
claim asserted against the Company in excess of any applicable coverage. The
settlement of a significant number of insured claims, the settlement of a claim
exceeding the Company's insurance coverage or the successful assertion or
settlement of an uninsured claim could have a material adverse effect on the
Company's business, financial condition or results of operations. There can be
no assurance that insurance will remain available, or, if available, will not be
prohibitively expensive. The deductible under the Company's insurance policies
is currently $250,000 per claim; however, prior to 1993, the deductible was $1.0
million per claim. Not all claims arising during the period in which the
Company's deductible was $1.0 million have been resolved and it is possible that
additional claims may be filed. The aggregate amount of liability under existing
and potential claims could exceed the reserves established by the Company for
product liability claims.
Product Recalls
Although the Company has not recently experienced a significant product recall,
the Company has, in the past, recalled certain bicycle models. If the Company
were required to make a significant product recall, such a recall could have a
material adverse effect on the Company's business, financial condition or
results of operations. In common with the rest of the bicycle industry,
components fitted to its bicycles may be subject to a recall program of the
component supplier.
Liability For Environmental Matters
The Company is subject to a wide variety of governmental requirements related to
environmental protection including, among other things, the management of
hazardous substances and wastes. Although the Company has made and will continue
to make significant expenditures related to its environmental compliance
obligations, there can be no assurance that the Company will at all times be in
compliance with all such requirements. Moreover, the Company's existing and
historical operations, including the operations of its predecessors, expose the
Company to the risk of clean-up liabilities or environmental or personal injury
claims related to releases and emissions of hazardous substances and wastes.
Such liabilities and claims could require the Company to incur material costs
related to such releases or to the investigation or remediation of contaminated
property. Also, changes in existing environmental requirements or the imposition
of additional environmental liabilities related to existing or historical
operations could result in substantial cost to the Company.
30
<PAGE>
ITEM 2. CHANGES IN SECURITIES
On April 1, 1999 and June 1, 1999 the Company issued a total of 1,520 shares of
Class A and 380 shares of Class C common stock to executives of the Company for
a total of $1,900,000. 300 shares of Class A common stock issued to Gary
Matthews were, effective from the date of issue, converted to Class C common
stock.
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ITEM 3. EXHIBITS AND REPORTS ON FORM 8-K
a) Index to Exhibits:
1) Amended and Restated Certificate of Incorporation of The Derby Cycle
Corporation.
2) Employment Agreement made as of June 1, 1999 between The Derby Cycle
Corporation and Daniel S. Lynch.
3) Management Stock Purchase Agreement dated as of June 1, 1999 between The
Derby Cycle Corporation and Daniel S. Lynch.
Reports on Form 8-K
Report on Form 8-K filed May 7, 1999.
SIGNATURES
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT, that each person whose signature appears below
constitutes and appoints Simon J. Goddard, his true and lawful attorney-in-fact
and agent, with full power of substitution and re-substitution, for him and in
his name, place and stead, in any and all capacities (including his capacity as
a director and/or officer of The Derby Cycle Corporation), the Quarterly Report
on Form 10-Q filed pursuant to the Securities Exchange Act of 1934, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Registration Statement and power of attorney have been signed by the following
persons in the capacities and on the dates indicated:
32
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
<S> <C> <C>
President, Chief
Executive Officer and
Director (principal
/s/ Gary S. Matthews executive officer) August 11, 1999
- ---------------------------------
GARY S. MATTHEWS
Chief Financial
Officer (principal
financial and
/s/ Daniel S. Lynch accounting officer) August 11, 1999
- ---------------------------------
DANIEL S. LYNCH
Chairman of the
/s/ Frederic V. Malek Board and Director August 11, 1999
- ---------------------------------
FREDERIC V. MALEK
/s/ Alan J. Finden-Crofts Director August 11, 1999
- ---------------------------------
ALAN J. FINDEN-CROFTS
/s/ A. Edward Gottesman Director August 11, 1999
- ---------------------------------
A. EDWARD GOTTESMAN
/s/ Frank H. Pearl Director August 11, 1999
- ---------------------------------
FRANK H. PEARL
/s/ Carl J. Rickertsen Director August 11, 1999
- ---------------------------------
CARL J. RICKERTSEN
/s/ Thomas H. Thomsen Director August 11, 1999
- ---------------------------------
THOMAS H. THOMSEN
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on
its behalf by the undersigned, thereunto duly authorized, in the city of
Nottingham, England on August 11, 1999.
The Derby Cycle Corporation
By: /s/ Simon J. Goddard
- ---------------------------------
Name: SIMON J. GODDARD
Title: Company secretary
33
<PAGE>
EXHIBIT 1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
THE DERBY CYCLE CORPORATION
_______________________________
ARTICLE ONE
The name of the Corporation is The Derby Cycle Corporation.
ARTICLE TWO
The address of the Corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle 19801. The name of its registered agent at
such address is the Corporation Trust Company.
ARTICLE THREE
The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware.
ARTICLE FOUR
Part A. Authorized Shares
The total number of shares of capital stock which the Corporation has
authority to issue is 273,100 shares, consisting of:
(i) 25,000 shares of Preferred Stock, Series A, par value $.01 per
share ("Series A Preferred Stock");
(ii) 3,000 shares of Preferred Stock, Series B, par value $.01 per
share ("Series B Preferred Stock");
(iii) 100 shares of Preferred Stock, Series C, par value $.01 per
share ("Series C Preferred Stock");
(iv) 200,000 shares of Class A Common Stock, par value $.01 per
share ("Class A Common Stock") ;
(v) 15,000 shares of Class B Common Stock, par value $.01 per share
("Class B Common Stock");
(vi) 30,000 shares of Class C Common Stock, par value $.01 per share
("Class C
<PAGE>
Common Stock"; and together with the Class A Common Stock and
the Class B Common Stock, the "Common Stock").
The Series A Preferred Stock, the Series B Preferred Stock and the
Series C Preferred Stock are referred to collectively as the "Preferred Stock."
The Preferred Stock and the Common Stock are referred to collectively as the
"Shares." The Preferred Stock shall have the rights, preferences and
limitations set forth in Part B. The Common Stock shall have the rights,
preferences and limitations set forth in Part C. The Shares shall have the
Distribution rights and be subject to the general terms set forth in Part D.
Capitalized terms used but not otherwise defined in Part A, Part B, Part C or
Part D of this ARTICLE FOUR are defined in Part E of this ARTICLE FOUR.
Part B. Preferred Stock
Section 1. Dividends.
1A. When and as declared by the Corporation's Board of Directors and
to the extent permitted under the General Corporation Law, the Corporation shall
pay preferential dividends in cash to the holders of Preferred Stock as provided
in this Section 1 and Part D of this ARTICLE FOUR. Dividends on each share of
the Series A Preferred Stock (a "Series A Preferred Share") shall accrue on a
daily basis at the rate of twenty percent (20%) per annum of the sum of the
Liquidation Amount thereof plus all accumulated and unpaid dividends thereon
from and including the date of issuance of such Series A Preferred Share to and
including the first to occur of (i) the date on which the Liquidation Amount of
such Series A Preferred Share (plus all accrued and accumulated but unpaid
dividends thereon) is paid to the holder thereof, (ii) the date on which such
Series A Preferred Share is converted to Class A Common Stock as set forth
herein or (iii) the date on which such Series A Preferred Share is otherwise
acquired by the Corporation. Dividends on each share of the Series B Preferred
Stock (a "Series B Preferred Share") shall accrue on a daily basis at the rate
of nine and three-quarters percent (9.75%) per annum of the sum of the
Liquidation Amount thereof plus all accumulated and unpaid dividends thereon
from and including the date of issuance of such Series B Preferred Share to and
including the first to occur of (i) the date on which the Liquidation Amount of
such Series B Preferred Share (plus all accrued and accumulated but unpaid
dividends thereon) is paid to the holder thereof, (ii) the date on which such
Series B Preferred Share is redeemed as set forth herein or (iii) the date on
which such Series B Preferred Share is otherwise acquired by the Corporation.
Dividends on each share of the Series C Preferred Stock (a "Series C Preferred
Share") shall accrue at the rate of nineteen percent (19%) per annum, compounded
daily, for an annual effective yield of twenty and nine-tenths percent (20.9%)
on the sum of the Liquidation Amount thereof plus all accumulated and unpaid
dividends thereon from and including the date of issuance of such Series C
Preferred Share to and including the first to occur of (i) the date on which the
Liquidation Amount of such Series C Preferred Share (plus all accrued and
accumulated but unpaid dividends thereon) is paid to the holder thereof, or (ii)
the date on which such Series C Preferred Share is otherwise acquired by the
Corporation. Dividends on each Series C Preferred Share outstanding from time
to time shall be computed on the basis of a 360-day year, actual days elapsed
from the date of issuance of such Series C Preferred Share. Such dividends
shall accrue whether or not they have been declared and whether or not there are
profits, surplus or other funds of the Corporation legally available for the
payment of dividends. The date on which the Corporation initially issues any
Preferred Share (as defined below) shall be deemed to be its "date
<PAGE>
of issuance" regardless of the number of times transfer of such Preferred Share
is made on the stock records maintained by or for the Corporation and regardless
of the number of certificates which may be issued to evidence such Preferred
Share. The Series A Preferred Shares, the Series B Preferred Shares and the
Series C Preferred Shares are referred to collectively as the "Preferred
Shares."
1B. Dividend Reference Dates. To the extent not paid on December 31
of each year, beginning December 31, 1998 (the "Preferred Dividend Reference
Dates"), all dividends which have accrued on each Preferred Share outstanding
during the twelve-month period (or other period in the case of the initial
Preferred Dividend Reference Date) ending upon each such Preferred Dividend
Reference Date shall be accumulated and shall remain accumulated dividends with
respect to such Preferred Share until paid to the holder thereof.
Section 2. Priority of Preferred Stock on Dividends and Redemptions.
2A. Series C Preferred Shares. So long as any accrued but unpaid
dividends on the Series C Preferred Shares remain outstanding, without the prior
written consent of the holders of a majority of the outstanding Series C
Preferred Shares, the Corporation shall not, nor shall it permit any Subsidiary
to, (i) redeem, purchase or otherwise acquire directly or indirectly any Junior
A Securities, nor shall the Corporation directly or indirectly pay or declare
any dividend or make any distribution upon any Junior A Securities (including
any redemptions, purchases or acquisitions pursuant to Section 8 of Part C
hereof) or (ii) issue any equity security with rights equal or superior to the
rights of the Series C Preferred Shares.
2B. Series A Preferred Shares and Series B Preferred Shares. So long
as any accrued but unpaid dividends on the Series A Preferred Shares or the
Series B Preferred Shares remains outstanding, without the prior written consent
of (a) the holders of a majority of the outstanding Series A Preferred Shares
and (b) the holders of a majority of the outstanding Series B Preferred Shares,
the Corporation shall not, nor shall it permit any Subsidiary to, redeem,
purchase or otherwise acquire directly or indirectly any Junior B Securities,
nor shall the Corporation directly or indirectly pay or declare any dividend or
make any distribution upon any Junior B Securities.
Section 3. Voting Rights. The holders of Series A Preferred Stock
shall be entitled to notice of all stockholders meetings in accordance with the
Corporation's bylaws, and except as otherwise provided by law or as provided
herein, the holders of the Series A Preferred Stock shall be entitled to vote on
all matters submitted to the stockholders for a vote together with the holders
of the Class A Common Stock voting together as a single class with each share of
Class A Common Stock entitled to one vote per share and each Series A Preferred
Share entitled to 1.5 votes per share. Except as otherwise provided by law or as
provided herein, the holders of Series B Preferred Stock and the Series C
Preferred Stock shall not be entitled to voting rights.
Section 4. Conversion.
4A. At any time (a) prior to the first anniversary of the Closing
Date or (b) in connection with an Approved Sale or a transaction described in
Section 10(b) of the Shareholders' Agreement occurring prior to the date that is
eighteen months after the Closing Date, each holder of Series A Preferred Stock
may convert all or any portion of the Series A Preferred Shares held by
<PAGE>
such holder into shares of Class A Common Stock as follows: each Series A
Preferred Share shall be convertible into (i) one-half share of Class A Common
Stock and (ii) the number of shares of Class A Common Stock determined by
dividing the Liquidation Amount of such Series A Preferred Stock as of its date
of issuance by $1,000 (subject to adjustment as provided in Section 7B of this
Part B).
4B. At any time in connection with an Initial Public Offering, all
outstanding Series A Preferred Shares (other than Series A Preferred Shares as
to which the holders thereof have exercised their voluntary conversion rights
under Section 4A or 4C of this Part B) shall be converted automatically into
shares of Class A Common Stock or, if the outstanding shares of Class A Common
Stock are converted into another equity security of the Corporation in
connection with such Initial Public Offering (the "IPO Stock"), into shares of
such IPO Stock as follows: each Series A Preferred Share shall be converted
into (i) one-half share of Class A Common Stock (or such number of shares of the
IPO Stock into which one-half share of Class A Common Stock is converted) plus
(ii) such number of shares of Class A Common Stock or IPO Stock (as applicable)
having a Fair Market Value (as of the effective date of the Initial Public
Offering with respect to which such conversion occurs) equal to the Liquidation
Amount (plus all accrued and accumulated but unpaid dividends thereon) of such
Series A Preferred Share.
4C. In connection with an Initial Public Offering occurring prior to
the date that is eighteen months after the Closing Date, each holder of Series A
Preferred Stock may, in lieu of mandatory conversion, pursuant to Section 4B of
this Part B, of the Series A Preferred Shares held by such holder, convert all
or any portion of such Series A Preferred Shares into shares of IPO Stock as
follows: each Series A Preferred Share shall be converted into (i) one-half
share of Class A Common Stock and (ii) the number of shares of Class A Common
Stock determined by dividing the Liquidation Amount of such Series A Preferred
Stock as of its date of issuance by $1,000 (subject to adjustment as provided in
Section 7B of this Part B).
4D. At any time in connection with a transfer of Shares pursuant to
Section 10(a) of the Shareholders' Agreement or an Approved Sale, each holder of
Series A Preferred Stock may convert all or any portion of such Series A
Preferred Shares into shares of Class A Common Stock as follows: each Series A
Preferred Share shall be convertible into (i) one-half share of Class A Common
Stock plus (ii) such number of shares of Class A Common Stock having a Fair
Market Value (as of the close of business on the day on which such conversion is
to occur) equal to the Liquidation Amount (plus all accrued and accumulated but
unpaid dividends thereon) of such Series A Preferred Share.
4E. At any time in connection with a transfer of Shares pursuant to
Section 10(a) of the Shareholders' Agreement or an Approved Sale, each holder of
Series B Preferred Stock may convert all or any portion of such Series B
Preferred Shares which are to be sold under Section 10(a) of the Shareholders'
Agreement or an Approved Sale into shares of Class A Common Stock as follows:
each Series B Preferred Share shall be convertible into such number of shares of
Class A Common Stock having a Fair Market Value (as of the close of business on
the day on which such conversion is to occur) equal to the Liquidation Amount
(plus all accrued and accumulated but unpaid dividends thereon) of such Series B
Preferred Share.
<PAGE>
4F. Except as otherwise provided herein, each conversion of Preferred
Stock pursuant to this Section 4 or Section 5A below shall be deemed to have
been effected as of the close of business on the date on which the certificate
or certificates representing the Preferred Stock to be converted have been
surrendered for conversion at the principal office of the Corporation. At the
time any such conversion has been effected, the rights of the holder of the
Preferred Stock converted as a holder of such Preferred Stock shall cease and if
applicable, the Person or Persons in whose name or names any certificate or
certificates for shares of Class A Common Stock are to be issued upon such
conversion shall be deemed to have become the holder or holders of record of the
shares of Class A Common Stock represented thereby.
4G. As soon as possible after a conversion pursuant to this Section 4
or Section 5A below has been effected (but in any event within five business
days), the Corporation shall deliver to the converting holder:
(a) a certificate or certificates representing the number of
shares of Class A Common Stock issuable by reason of such conversion in such
name or names and such denomination or denominations as the converting holder
has specified; and
(b) a certificate representing any Preferred Shares which were
represented by the certificate or certificates delivered to the Corporation in
connection with such conversion but which were not converted.
4H. The issuance of certificates for shares of Class A Common Stock
or Class B Common Stock upon conversion of Preferred Stock pursuant to this
Section 4 or Section 5A below or pursuant to the Exchange Agreements shall be
made without charge to the holders of such Preferred Stock for any issuance tax
in respect thereof or other cost incurred by the Corporation in connection with
such conversion and the related issuance of shares of Class A Common Stock or
Class B Common Stock. Upon conversion of each share of Preferred Stock pursuant
to this Section 4 or Section 5A below or upon exercise of rights set forth in
the Exchange Agreements, the Corporation shall take all such actions as are
necessary in order to insure that the Class A Common Stock issuable with respect
to such conversion shall be validly issued, fully paid and nonassessable, free
and clear of all taxes, liens, charges and encumbrances with respect to the
issuance thereof.
4I. The Corporation shall assist and cooperate with any holder of
Shares required to make any governmental filings or obtain any governmental
approval prior to or in connection with any conversion of Preferred Shares
hereunder (including, without limitation, making any filings required to be made
by the Corporation).
4J. The Corporation shall at all times reserve and keep available out
of its authorized but unissued shares of Class A Common Stock, solely for the
purpose of issuance upon the conversion of the Preferred Stock pursuant to this
Section 4 or Section 5A below, such number of shares of Class A Common Stock
issuable upon the conversion of all outstanding Preferred Shares. All shares of
Class A Common Stock which are so issuable shall, when issued, be duly and
validly issued, fully paid and nonassessable and free from all taxes, liens and
charges. The Corporation shall take all such actions as may be necessary to
assure that all such shares of Class A Common Stock may be so issued without
violation of any applicable law or governmental regulation
<PAGE>
or any requirements of any domestic securities exchange upon which shares of
Class A Common Stock may be listed (except for official notice of issuance which
shall be immediately delivered by the Corporation upon each such issuance). The
Corporation shall not take any action which would cause the number of authorized
but unissued shares of Class A Common Stock to be less than the number of such
shares required to be reserved hereunder for issuance upon conversion of the
Preferred Stock pursuant to this Section 4 and Section 5A below.
Section 5. Put Rights.
5A. (i) Upon a proposed Sale of the Corporation or (ii) at any time
after the tenth anniversary of the Closing Date, each holder of Series A
Preferred Stock (the "Series A Offering Holder") shall have the right to require
the Corporation to repurchase (the "Series A Put") all or any portion of the
Series A Preferred Shares held by such holder at a price per Series A Preferred
Share equal to the Series A Put Price by delivering a written notice to the
Corporation at the Corporation's principal place of business or at such other
address as the Corporation may, by written notice to all holders of Preferred
Stock, designate, specifying the number of Series A Preferred Shares that such
holder desires that the Corporation repurchase (the "Series A Put Notice"). A
Series A Put Notice relating to a proposed Sale of the Corporation must be
delivered not later than 10 days after the date on which the Corporation
notifies a Series A Offering Holder of a proposed Sale of the Corporation. The
"Series A Put Price" shall mean (x) an amount of cash equal to the Liquidation
Amount (plus all accrued and accumulated but unpaid dividends thereon through
the date of the Put Closing) of each Series A Preferred Share specified by a
Series A Offering Holder in its Series A Put Notice plus (y) one-half share of
Class A Common Stock.
5B. (i) Upon a proposed Sale of the Corporation or (ii) at any time
after the fourth anniversary of the Closing Date, each holder of Series B
Preferred Stock (the "Series B Offering Holder") shall have the right to require
the Corporation to repurchase (the "Series B Put") all or any portion of the
Series B Preferred Shares held by such holder for cash at a price per Series B
Preferred Share equal to the Liquidation Amount (plus all accrued and
accumulated but unpaid dividends thereon through the date of the Put Closing) of
each Series B Preferred Share specified by such Series B Offering Holder (the
"Series B Put Price") to be repurchased by the Corporation in a written notice
delivered to the Corporation at the Corporation's principal place of business or
at such other address as the Corporation may, by written notice to all holders
of Preferred Stock, designate, specifying the number of Series B Preferred
Shares that such holder desires that the Corporation repurchase (the "Series B
Put Notice"). A Series B Put Notice relating to a proposed Sale of the
Corporation must be delivered not later than 10 days after the date on which the
Corporation notifies a Series B Offering Holder of a proposed Sale of the
Corporation.
5C. Upon a proposed Change of Control each holder of Series C
Preferred Stock (the "Series C Offering Holder") shall have the right to require
the Corporation to repurchase (the "Series C Put") all or any portion of the
Series C Preferred Shares held by such holder at a price per Series C Preferred
Share equal to the Series C Put Price (as defined below) by delivering a written
notice to the Corporation at the Corporation's principal place of business or at
such other address as the Corporation may, by written notice to all holders of
Preferred Stock, designate, specifying the number of Series C Preferred Shares
that such holder desires that the Corporation repurchase (the "Series C Put
Notice," and together with the Series A Put Notice and the Series B Put Notices,
the
<PAGE>
"Put Notices"). A Series C Put Notice relating to a proposed Change of
Control must be delivered not later than 15 days after the date on which the
Corporation notifies a Series C Offering Holder of a proposed Change of Control.
The "Series C Put Price" shall mean (i) with respect to any Series C Put
occurring on or before February 3, 2003, an amount of cash equal to one hundred
and one percent (101%) of the Liquidation Amount (plus all accrued and
accumulated but unpaid dividends thereon through the date of the Put Closing) of
each Series C Preferred Share specified by a Series C Offering Holder in its
Series C Put Notice and (ii) with respect to any Series C Put occurring after
February 3, 2003, an amount of cash equal to the Liquidation Amount (plus all
accrued and accumulated but unpaid dividends thereon through the date of the Put
Closing) of each Series C Preferred Share specified by a Series C Offering
Holder in its Series C Put Notice. A Series A Offering Holder, a Series B
Offering Holder and a Series C Offering Holder shall be referred to herein as an
"Offering Holder."
5D. The Corporation shall purchase, and the Offering Holder shall
sell, the number of Preferred Shares specified in the Series A Put Notice,
Series B Put Notice or the Series C Put Notice, as the case may be, at a
mutually agreeable place (the "Put Closing") (i) on a date that is not later
than thirty days after the delivery of the Series A Put Notice or the Series B
Put Notice, as the case may be, in the case of the exercise of a put right
pursuant to Section 5A(ii) or 5B(ii), (ii) immediately prior to the consummation
of the Sale of the Corporation in the case of the exercise of a put right
pursuant to Section 5A(i) or 5B(i) or (iii) on the repurchase date specified in
the Change of Control Offer delivered to the holders of the Senior Notes
pursuant to Section 4.08 of the Indentures in the case of the exercise of a put
right pursuant to Section 5C; provided, however, the Corporation shall not be
obligated to purchase any Preferred Shares upon exercise of the rights specified
in Sections 5A(i), 5B(i) and 5C if the related proposed Sale of the Corporation
or Change of Control, as the case may be, is not consummated; and provided
further that if, other than in connection with a Sale of the Corporation or
Change of Control, as the case may be, the Corporation is prohibited by law from
repurchasing any Preferred Shares or if any such repurchase would result in a
default under any Financing Documents, then the Corporation may defer such
repurchase until such prohibitions no longer exist or such default would no
longer occur; and provided further that the holders of Series C Preferred Shares
shall not have any rights pursuant to this Section 5 of Part B of this ARTICLE
FOURTH that are greater than the rights of the holders of the Senior
Subordinated Notes under that certain GSIC Subordination Deed. The Corporation
shall use its commercially reasonable efforts to obtain any consent necessary to
permit such payments. In the event the Corporation is prohibited by law or any
Financing Document from repurchasing all of the Preferred Shares as to which Put
Notices have been given, the Corporation shall repurchase the maximum number of
Preferred Shares which it is permitted to repurchase without violating such laws
or creating a default under such Financing Documents, selected from among the
Preferred Shares held by all Offering Holders pro rata in proportion to the
aggregate Series A Put Price, Series B Put Price or Series C Put Price, as the
case may be, payable in respect of all of the Preferred Shares specified in the
respective Put Notices of each such Offering Holder.
5E. At any Put Closing, each Offering Holder shall deliver to the
Corporation certificates representing the Preferred Shares to be repurchased by
the Corporation from such Offering Holder and the Corporation shall deliver to
such Offering Holder:
(a) the Series A Put Price, the Series B Put Price or the Series
C Put Price,
<PAGE>
as the case may be, for each Preferred Share to be purchased by the Corporation
by cashier's or certified check payable to such Offering Holder or by wire
transfer of immediately available funds to an account designated by such
Offering Holder; and
(b) a certificate representing any Preferred Shares which were
represented by the certificate or certificates delivered to the Corporation in
connection with such Put Closing but which were not purchased at the Put
Closing.
Section 6. Redemptions.
6A. The Corporation may at any time redeem all or any portion of the
Series B Preferred Shares then outstanding. On any such redemption, the
Corporation shall pay a purchase price per Series B Preferred Share equal to the
Series B Put Price as of the date of the redemption. Any redemption of less than
all of the Series B Preferred Shares shall be made pro rata from all holders of
Series B Preferred Shares in proportion to their respective Series B Put Price.
6B. At any time after the fifth anniversary of the Closing Date, the
Corporation may redeem all or any portion of the Series A Preferred Shares then
outstanding. On any such redemption, the Corporation shall pay a purchase price
per Series A Preferred Share equal to the Series A Put Price as of the date of
the redemption. Any redemption of less than all of the Series A Preferred Shares
shall be made pro rata from all holders of Series A Preferred Shares in
proportion to their respective Series A Put Price.
6C. At any time after the first anniversary of the Loan Closing Date,
the Corporation may redeem all or any portion of the Series C Preferred Shares
then outstanding. On any such redemption, the Corporation shall pay a purchase
price per Series C Preferred Share equal to the Liquidation Amount (plus all
accrued and accumulated but unpaid dividends thereon) as of the date of the
redemption plus a premium equal to the percentage set forth in Section 2.5.1.1
of the GSIC Loan Agreement of the Liquidation Amount (plus all accrued and
accumulated but unpaid dividends thereon) of the Series C Preferred Shares then
outstanding. Redemptions of Series C Preferred Shares pursuant to this Section
6C shall be made in connection with and at the same time as a prepayment of the
Senior Subordinated Notes pursuant to Section 2.5 of the GSIC Loan Agreement.
Any redemption of less than all of the Series C Preferred Shares shall be made
pro rata from all holders of Series C Preferred Shares in proportion to the
Liquidation Amount (plus all accrued and accumulated but unpaid dividends
thereon) of the Series C Preferred Shares held by such holders.
6D. The Corporation shall redeem all of the Series C Preferred Shares
then outstanding on May 31, 2009. The Corporation shall pay a purchase price
per Series C Preferred Share equal to the Liquidation Amount (plus all accrued
and accumulated but unpaid dividends thereon) as of the date of the redemption.
6E. The Corporation shall mail written notice of each redemption
of any Preferred Shares to each record holder thereof and to each record holder
of Class C Common Shares not more than 60 days nor less than 10 days prior to
the date on which such redemption is to be made. In case fewer than the total
number of Preferred Shares represented by any certificate are redeemed, a new
<PAGE>
certificate representing the number of unredeemed Preferred Shares of the same
series shall be issued to the holder thereof without cost to such holder within
ten business days after surrender of the certificate representing the redeemed
Preferred Shares.
6F. Any Preferred Shares which are redeemed or otherwise acquired by
the Corporation shall be canceled and shall not be reissued, sold or
transferred.
Section 7. Anti-Dilution Provisions.
7A. Subdivision or Combination of Class A Common Stock. If the
Corporation at any time (i) subdivides (by any stock split, stock dividend,
recapitalization or otherwise) shares of Class A Common Stock into a larger
number of shares or (ii) combines (by reverse stock split or otherwise) shares
of Class A Common Stock into a smaller number of shares, then the Series A
Preferred Shares shall be subdivided or combined, as the case may be, in the
same manner and the Liquidation Amount (and all accrued and accumulated but
unpaid dividends thereon) shall be reduced proportionately or increased
proportionately, as the case may be, in good faith by the Board of Directors of
the Corporation.
7B. Issuance of Shares of Class A Common Stock below Fair Market
Value. In the event that prior to the first anniversary of the Closing Date the
Corporation issues (i) Common Stock for less than its fair market value, or (ii)
rights to acquire Common Stock for an exercise or conversion price less than the
fair market value of the Common Stock to be acquired, in each case as determined
in good faith by the independent auditors of the Corporation, the number of
shares into which each Series A Preferred Share may be converted under clause
(ii) of Sections 4A and 4C hereof shall be adjusted under customary weighted-
average antidilution provisions applicable to convertible instruments of this
type so that the fair market value of the Conversion Element after taking into
account such issuance is the same as prior to such issuance. Any application of
the adjustment required hereunder shall be made by unanimous vote of the Board
of Directors acting in good faith. This Section 7B shall not apply to any
issuances to which Section 7A applies, to any issuances to which the preemptive
rights under Section 12(a) of the Shareholders' Agreement do not apply, to any
issuances of Class B Common Stock pursuant to the Exchange Agreement, to any
issuances of Class A Common Stock pursuant to the exercise of the Redemption
Right, or to any issuance of Class A Common Stock in connection with the
conversion of Class C Common Stock.
Section 8. Other Provisions Applicable to Series C Preferred
Shares. Notwithstanding anything contained herein to the Contrary, the holders
of the Series C Preferred Shares shall be entitled to the rights and privileges
of a Lender (i) set forth in Sections 4, 6.2, 6.3, 6.4 and 6.10 of the GSIC Loan
Agreement and subject to the restrictions set forth in Sections 6.1, and 6.6 of
the GSIC Loan Agreement and (ii) under the GSIC Stockholders Agreement.
Part C. Common Stock
Except as otherwise provided in this Part C or in Part D of this
ARTICLE FOUR or as otherwise required by applicable law, all shares of Common
Stock shall be identical in all respects and shall entitle the holders thereof
to the same rights and privileges, subject to the same qualifications,
limitations and restrictions.
<PAGE>
Section 1. Voting Rights. Except as otherwise required by
applicable law or as provided herein, holders of the Class A Common Stock and
the Class C Common Stock shall be entitled to one vote per share on all matters
to be voted on by the stockholders of the Corporation and shall vote together as
one class with the holders of Series A Preferred Stock, and the holders of Class
B Common Stock shall not be entitled to voting rights.
Section 2. Conversion of Class B Common Stock.
2A. A holder of shares of Class B Common Stock (a "Converting
Holder") acquired as a result of the exercise of rights by another Person under
Section 10(a) of the Shareholders' Agreement to sell the Selling Percentage (as
defined in the Shareholders' Agreement) of Class B Common Stock shall have the
right to convert each share of Class B Common Stock so acquired into Class A
Common Stock in accordance with the provisions of this Section 2A. The
Converting Holder shall receive in exchange for each share of Class B Common
Stock a number of shares of Class A Common Stock having the value equal to the
price paid for such Class B Common Stock by the Converting Holder (which, for
this purpose, shall not exceed the Implied Class B Purchase Price (as defined in
the Shareholders' Agreement) of such stock); the value of a share of Class A
Common Stock for this purpose shall equal the price paid by the Converting
Holder for each share of Class A Common Stock acquired by the Converting Holder
in the transaction in which such Class B Common Stock was acquired. A
Converting Holder may exercise the foregoing conversion right at any time within
six (6) months after such Class B Common Stock is acquired by providing written
notice of such conversion to the Corporation.
2B. Immediately prior to the effectiveness of an Initial Public
Offering, each share of Class B Common Stock shall be converted into such number
of shares of Class A Common Stock determined by dividing (i) the amount that the
holder of such Class B Common Stock would have received had the Company made
liquidation distributions pursuant to Part D of Article Four of the Certificate
of Incorporation in an amount equal to the aggregate fair market value of the
capital stock of the Company immediately prior to the effectiveness of such
Initial Public Offering implied from the price and amount of equity securities
to be sold in the Initial Public Offering by (ii) the price per share to be
received by the Company in the Initial Public Offering (adjusted so as to
eliminate the effect of any stock splits or similar transaction which will occur
in connection with such Initial Public Offering).
2C. Except as otherwise provided herein, each conversion of Class B
Common Stock pursuant to Section 2A or Section 2B hereof shall be deemed to have
been effected as of the close of business on the date on which the certificate
or certificates representing the Class B Common Stock to be converted have been
surrendered for conversion at the principal office of the Corporation. At the
time any such conversion has been effected, the rights of the holder of the
Class B Common Stock converted as a holder of Class B Common Stock shall cease
and if applicable, the Person or Persons in whose name or names any certificate
or certificates for shares of Class A Common Stock are to be issued upon such
conversion shall be deemed to have become the holder or holders of record of the
shares of Class A Common Stock represented thereby.
2D. As soon as possible after a conversion pursuant to Section 2A or
Section 2B hereof has been effected (but in any event within five business
days), the Corporation shall deliver
<PAGE>
to the converting holder:
(a) a certificate or certificates representing the number of
shares of Class A Common Stock issuable by reason of such conversion in such
name or names and such denomination or denominations as the converting holder
has specified; and
(b) a certificate representing any shares of Class B Common
Stock which were represented by the certificate or certificates delivered to the
Corporation in connection with such conversion but which were not converted.
2E. The issuance of certificates for shares of Class A Common Stock
upon conversion of Class B Common Stock pursuant to Section 2A or Section 2B
hereof shall be made without charge to the holders of such Class B Common Stock
for any issuance tax in respect thereof or other cost incurred by the
Corporation in connection with such conversion and the related issuance of
shares of Class A Common Stock. Upon conversion of each share of Class B Common
Stock pursuant to Section 2A or Section 2B hereof, the Corporation shall take
all such actions as are necessary in order to insure that the Class A Common
Stock issuable with respect to such conversion shall be validly issued, fully
paid and nonassessable, free and clear of all taxes, liens, charges and
encumbrances with respect to the issuance thereof.
2F. The Corporation shall assist and cooperate with any holder of
Shares required to make any governmental filings or obtain any governmental
approval prior to or in connection with any conversion of shares of Class B
Common Stock hereunder (including, without limitation, making any filings
required to be made by the Corporation).
2G. All shares of Class A Common Stock which are so issuable shall,
when issued, be duly and validly issued, fully paid and nonassessable and free
from all taxes, liens, charges and encumbrances. The Corporation shall take all
such actions as may be necessary to assure that all such shares of Class A
Common Stock may be so issued without violation of any applicable law or
governmental regulation or any requirements of any domestic securities exchange
upon which shares of Class A Common Stock may be listed (except for official
notice of issuance which shall be immediately delivered by the Corporation upon
each such issuance). The Corporation shall not take any action which would
cause the number of authorized but unissued shares of Class A Common Stock to be
less than the number of such shares required to be reserved hereunder for
issuance upon conversion of the Class B Common Stock pursuant to Section 2A and
Section 2B hereof.
2H. The Corporation shall at all times reserve and keep available
out of its authorized but unissued shares of Class A Common Stock, solely for
the purpose of issuance upon the conversion of the Class B Common Stock pursuant
to this Section 2, such number of shares of Class A Common Stock issuable upon
the conversion of all outstanding shares of Class B Common Stock. All shares of
Class A Common Stock which are so issuable shall, when issued, be duly and
validly issued, fully paid and nonassessable and free from all taxes, liens and
charges. The Corporation shall take all such actions as may be necessary to
assure that all such shares of Class A Common Stock may be so issued without
violation of any applicable law or governmental regulation or any requirements
of any domestic securities exchange upon which shares of Class A Common
<PAGE>
Stock may be listed (except for official notice of issuance which shall be
immediately delivered by the Corporation upon each such issuance). The
Corporation shall not take any action which would cause the number of authorized
but unissued shares of Class A Common Stock to be less than the number of such
shares required to be reserved hereunder for issuance upon conversion of the
Preferred Stock pursuant to this Section 2.
Section 3. Dividends on Class C Common Stock.
3A. When and as declared by the Corporation's Board of Directors and
to the extent permitted under the General Corporation Law, the Corporation shall
pay preferential dividends in cash to the holders of Class C Common Stock as
provided in this Section 3A and Part D of this ARTICLE FOUR. Dividends on each
share of the Class C Common Stock (a "Class C Common Share") shall accrue on a
daily basis at the rate of twenty percent (20%) per annum of the sum of the
Liquidation Amount thereof plus all accumulated and unpaid dividends thereon
from and including the date of issuance of such Class C Common Share to and
including the first to occur of (i) the date on which the Liquidation Amount of
such Class C Common Share (plus all accrued and accumulated but unpaid dividends
thereon) is paid to the holder thereof, (ii) the date on which such Class C
Common Share is converted to Class A Common Stock as set forth herein or (iii)
the date on which such Class C Common Share is otherwise acquired by the
Corporation. Such dividends shall accrue whether or not they have been declared
and whether or not there are profits, surplus or other funds of the Corporation
legally available for the payment of dividends. The date on which the
Corporation initially issues any Class C Common Share shall be deemed to be the
"date of issuance" of all Class C Common Shares (whether or not such Class C
Common Share was issued on such date) regardless of the number of times transfer
of any Class C Common Share is made on the stock records maintained by or for
the Corporation and regardless of the number of certificates which may be issued
to evidence any Class C Common Share.
3B. Dividend Reference Dates. Dividends on the Class C Common
Shares, if and when declared by the Board of Directors, shall be payable
quarterly in cash on December 31, March 31, June 30, and September 30 of each
year, beginning on December 31, 1999 (each, a "Common Dividend Payment Date").
Dividends shall accrue on such accumulated dividends at the rate or rates
specified in Section 3A and all dividends which have accrued on each Class C
Common Share outstanding during the three-month period (or other period in the
case of the initial Common Dividend Reference Date) ending upon each such Common
Dividend Reference Date shall be accumulated and shall remain accumulated
dividends with respect to such Class C Common Share until paid to the holder
thereof. If and when the Board of Directors declares a dividend on the Class A
Common Stock, holders of Class C Common Shares shall participate in such
dividends on a share-by-share basis. Any dividend paid to holders of Class C
Common Shares as a result of a dividend declared on Class A Common Stock shall
be credited against accruing dividends.
Section 4. Priority of Class C Common Stock on Dividends and
Redemptions. So long as any accrued but unpaid dividends on the Class C Common
Shares remains outstanding, without the prior written consent of the holders of
a majority of the outstanding Class C Common Shares, the Corporation shall not,
nor shall it permit any Subsidiary to, redeem, purchase or otherwise acquire
directly or indirectly any Junior B Securities, nor shall the Corporation
directly or indirectly pay or declare any dividend or make any distribution upon
any Junior B Securities.
<PAGE>
Section 5. Conversion.
5A. At any time, each holder of Class C Common Stock may convert all
or any portion of the Class C Common Shares held by such holder into shares of
Class A Common Stock as follows: each Class C Common Share shall be convertible
into (i) one share of Class A Common Stock and (ii) the number of shares of
Class A Common Stock determined by dividing the accrued and accumulated but
unpaid dividends on such Class C Common Stock through the date of conversion by
$1,000 (subject to adjustment as provided in Section 7B of this Part C).
5B. Except as otherwise provided herein, each conversion of Class C
Common Stock pursuant to this Section 5 shall be deemed to have been effected as
of the close of business on the date on which the certificate or certificates
representing the Class C Common Stock to be converted have been surrendered for
conversion at the principal office of the Corporation. At the time any such
conversion has been effected, the rights of the holder of the Class C Common
Stock converted as a holder of such Class C Common Stock shall cease and if
applicable, the Person or Persons in whose name or names any certificate or
certificates for shares of Class A Common Stock are to be issued upon such
conversion shall be deemed to have become the holder or holders of record of the
shares of Class A Common Stock represented thereby.
5C. As soon as possible after a conversion pursuant to this Section 5
has been effected (but in any event within five business days), the Corporation
shall deliver to the converting holder:
(a) a certificate or certificates representing the number of
shares of Class A Common Stock issuable by reason of such conversion in such
name or names and such denomination or denominations as the converting holder
has specified; and
(b) a certificate representing any Class C Common Shares which
were represented by the certificate or certificates delivered to the Corporation
in connection with such conversion but which were not converted.
5D. The issuance of certificates for shares of Class A Common Stock
upon conversion of Class C Common Stock pursuant to this Section 5 shall be made
without charge to the holders of such Class C Common Stock for any issuance tax
in respect thereof or other cost incurred by the Corporation in connection with
such conversion and the related issuance of shares of Class A Common Stock.
5E. The Corporation shall assist and cooperate with any holder of
Class C Common Shares required to make any governmental filings or obtain any
governmental approval prior to or in connection with any conversion of Class C
Common Shares hereunder (including, without limitation, making any filings
required to be made by the Corporation).
5F. The Corporation shall at all times reserve and keep available
out of its authorized but unissued shares of Class A Common Stock, solely for
the purpose of issuance upon the conversion of the Class C Common Stock pursuant
to this Section 5, such number of shares of Class A Common Stock issuable upon
the conversion of all outstanding Class C Common Shares.
<PAGE>
All shares of Class A Common Stock which are so issuable shall, when issued, be
duly and validly issued, fully paid and nonassessable and free from all taxes,
liens and charges. The Corporation shall take all such actions as may be
necessary to assure that all such shares of Class A Common Stock may be so
issued without violation of any applicable law or governmental regulation or any
requirements of any domestic securities exchange upon which shares of Class A
Common Stock may be listed (except for official notice of issuance which shall
be immediately delivered by the Corporation upon each such issuance). The
Corporation shall not take any action which would cause the number of authorized
but unissued shares of Class A Common Stock to be less than the number of such
shares required to be reserved hereunder for issuance upon conversion of the
Class C Common Stock pursuant to this Section 5.
Section 6. Mandatory Redemption of Class C Common Stock.
6A. The Corporation shall redeem all of the Class C Common Shares
then outstanding on May 31, 2009. The Corporation shall pay a purchase price
per Class C Common Share equal to the Liquidation Amount (plus all accrued and
accumulated but unpaid dividends thereon) of such Class C Common Share as of the
date of the redemption.
6B. At any time after August 3, 2000, the Corporation may redeem all
or any portion of the Class C Common Shares then outstanding. On any such
redemption, the Corporation shall pay a purchase price per Class C Common Shares
equal to the product of (i) the Class C Common Redemption Premium and (ii) the
Liquidation Amount (plus all accrued and accumulated but unpaid dividends
thereon) of such Class C Common Share as of the Class C Redemption Date (as
defined below). Redemptions made pursuant to this Section 6B shall apply only to
the Class C Common Shares that are outstanding on the Class C Redemption Date.
Any redemption of less than all of the Class C Common Shares shall be made pro
rata from all holders of Class C Common Shares in proportion to the Liquidation
Amount of the Class C Common Shares held by such holders.
6C. The Corporation shall mail written notice of each redemption of
any Class C Common Shares to each record holder thereof not more than 60 days
nor less than 10 days prior to the date on which such redemption is to be made
(the "Class C Redemption Date"). In case fewer than the total number of Class C
Common Shares represented by any certificate are redeemed, a new certificate
representing the number of unredeemed Class C Common Shares shall be issued to
the holder thereof without cost to such holder within ten business days after
surrender of the certificate representing the redeemed Class C Common Shares.
6D. Any Class C Common Shares which are redeemed or otherwise
acquired by the Corporation shall be canceled and shall not be reissued, sold or
transferred.
Section 7. Anti-Dilution Provisions.
7A. Subdivision or Combination of Class A Common Stock. If the
Corporation at any time (i) subdivides (by any stock split, stock dividend,
recapitalization or otherwise) shares of Class A Common Stock into a larger
number of shares or (ii) combines (by reverse stock split or otherwise) shares
of Class A Common Stock into a smaller number of shares, then the Class C
<PAGE>
Common Shares shall be subdivided or combined, as the case may be, in the same
manner and the Liquidation Amount (and all accrued and accumulated but unpaid
dividends thereon) shall be reduced proportionately or increased
proportionately, as the case may be, in good faith by the Board of Directors of
the Corporation.
7B. Issuance of Shares of Class A Common Stock below Fair Market
Value. If the Corporation issues (i) Common Stock for less than its fair market
value, or (ii) rights to acquire Common Stock for an exercise or conversion
price less than the fair market value of the Common Stock to be acquired, in
each case as determined in good faith by the independent auditors of the
Corporation, the number of shares into which each Class C Common Share may be
converted under clause (ii) of Sections 5A and 5C hereof shall be adjusted under
customary weighted-average antidilution provisions applicable to convertible
instruments of this type so that the fair market value of the Conversion Element
after taking into account such issuance is the same as prior to such issuance.
Any application of the adjustment required hereunder shall be made by unanimous
vote of the Board of Directors acting in good faith. This Section 7B shall not
apply to any issuances to which Section 7A applies, to any issuances to which
the preemptive rights under Section 12(a) of the Shareholders' Agreement do not
apply, to any issuances of Class B Common Stock pursuant to the Exchange
Agreement, or to any issuances of Class A Common Stock pursuant to the exercise
of the Redemption Right, or any issuance of Class A Common Stock in connection
with the conversion of Class C Common Stock.
Section 8. Put Rights.
8A. Upon a proposed Sale of the Corporation each holder of Class C
Common Stock (the "Class C Offering Holder") shall have the right to require the
Corporation to repurchase (the "Class C Put") all or any portion of the Class C
Common Shares held by such holder at a price per Class C Common Share equal to
the Class C Put Price by delivering a written notice to the Corporation at the
Corporation's principal place of business or at such other address as the
Corporation may, by written notice to all holders of Class C Common Stock,
designate, specifying the number of Class C Common Shares that such holder
desires that the Corporation repurchase (the "Class C Put Notice"). A Class C
Put Notice relating to a proposed Sale of the Corporation must be delivered not
later than 10 days after the date on which the Corporation notifies a Class C
Offering Holder of a proposed Sale of the Corporation. The "Class C Put Price"
shall mean an amount of cash equal to the Liquidation Amount (plus all accrued
and accumulated but unpaid dividends thereon through the date of the Class C Put
Closing) of each Class C Common Share specified by a Class C Offering Holder in
its Class C Put Notice.
8B. The Corporation shall purchase, and the Class C Offering Holder
shall sell, the number of Class C Common Shares specified in the Class C Put
Notice at a mutually agreeable place (the "Class C Put Closing") on the
repurchase date specified in the Change of Control Offer delivered to the
holders of the Senior Notes pursuant to Section 4.08 of the Indentures in the
case of the exercise of the Class C Put; provided, however, the Corporation
shall not be obligated to purchase any Class C Common Shares upon exercise of
the rights specified in Sections 8A if the related proposed Sale of the
Corporation is not consummated; and provided further that if, other than in
connection with a Sale of the Corporation, the Corporation is prohibited by law
from repurchasing any Class C Common Shares or if any such repurchase would
result in a default under any Financing
<PAGE>
Documents, then the Corporation may defer such repurchase until such
prohibitions no longer exist or such default would no longer occur. The
Corporation shall use its commercially reasonable efforts to obtain any consent
necessary to permit such payments. In the event the Corporation is prohibited by
law or any Financing Document from repurchasing all of the Class C Common Shares
as to which Put Notices have been given, the Corporation shall repurchase the
maximum number of Class C Common Shares which it is permitted to repurchase
without violating such laws or creating a default under such Financing
Documents, selected from among the Class C Common Shares held by all Class C
Offering Holders pro rata in proportion to the aggregate Class C Put Price,
payable in respect of all of the Class C Common Shares specified in the
respective Class C Put Notices of each such Class C Offering Holder.
8C. At any Class C Put Closing, each Class C Offering Holder shall
deliver to the Corporation certificates representing the Class C Common Shares
to be repurchased by the Corporation from such Class C Offering Holder and the
Corporation shall deliver to such Class C Offering Holder:
(a) the Class C Put Price for each Class C Common Share to be
purchased by the Corporation by cashier's or certified check payable to such
Class C Offering Holder or by wire transfer of immediately available funds to an
account designated by such Class C Offering Holder; and
(b) a certificate representing any Class C Common Shares which
were represented by the certificate or certificates delivered to the Corporation
in connection with such Class C Put Closing but which were not purchased at the
Class C Put Closing.
Part D. Distribution Rights and General Terms
Section 1. Distributions. At the time of each Distribution, such
Distribution shall be made to the holders of Shares in the following priority:
1A. The holders of Series C Preferred Stock shall be entitled to
receive the entirety of such Distribution (ratably among such holders based upon
the aggregate amount of accrued and accumulated but unpaid dividends on the
Series C Preferred Shares held by each such holder as of the time of such
Distribution) up to an amount equal to the aggregate accrued and accumulated but
unpaid dividends on the outstanding shares of Series C Preferred Stock as of the
time of such Distribution, and no Distribution or any portion thereof shall be
made under Sections 1B, 1C, 1D or 1E below until the entire amount of accrued
and accumulated but unpaid dividends on the outstanding shares of Series C
Preferred Stock as of the time of such Distribution has been paid in full.
1B. After the aggregate accrued and accumulated but unpaid dividends
on the outstanding Series C Preferred Shares has been paid in full pursuant to
Section 1A above, the holders of Series C Preferred Stock shall be entitled to
receive all or a portion of any Distribution (ratably among such holders based
upon the aggregate amount of Liquidation Amount of the Series C Preferred Shares
held by each such holder as of the time of the Distribution) equal to the
aggregate Liquidation Amount of the outstanding Series C Preferred Shares as of
the time of such Distribution
<PAGE>
less amounts previously paid under this Section 1B, if any. No Distribution or
any portion thereof shall be made under Sections 1C, 1D or 1E below until the
entire amount of the Liquidation Amount of the outstanding Series C Preferred
Shares as of the time of such Distribution has been paid in full.
1C. After the amounts required to be paid pursuant to Sections 1A and
1B above have been paid in full, the holders of Series A Preferred Stock, Series
B Preferred Stock and Class C Common Stock, together as a group, shall be
entitled to receive the entirety of such Distribution (ratably among such
holders based upon the aggregate amount of accrued and accumulated but unpaid
dividends on the Series A Preferred Shares, the Series B Preferred Shares and
the Class C Common Shares held by each such holder as of the time of such
Distribution) up to an amount equal to the aggregate accrued and accumulated but
unpaid dividends on the outstanding shares of Series A Preferred Stock, Series B
Preferred Stock and Class C Common Stock, respectively, as of the time of such
Distribution, and no Distribution or any portion thereof shall be made under
Sections 1D or 1E below until the entire amount of accrued and accumulated but
unpaid dividends on the outstanding shares of Series A Preferred Stock, Series B
Preferred Stock and Class C Common Stock, respectively, as of the time of such
Distribution has been paid in full.
1D. After the amounts required to be paid pursuant to Sections 1A,
1B and 1C above have been paid in full, the holders of Series A Preferred Stock,
Series B Preferred Stock and Class C Common Stock, together as a group, shall be
entitled to receive all or a portion of any Distribution (ratably among such
holders based upon the aggregate Liquidation Amount of the Series A Preferred
Shares, the Series B Preferred Shares and the Class C Common Shares, as the case
may be, held by each such holder as of the time of the Distribution) equal to
the aggregate Liquidation Amount of the outstanding Series A Preferred Shares,
Series B Preferred Shares and Class C Common Shares, as the case may be, as of
the time of such Distribution (with the holders of Series A Preferred Shares
entitled to receive the aggregate Liquidation Amount of such Series A Preferred
Shares, the holders of the Series B Preferred Shares entitled to receive the
aggregate Liquidation Amount of such Series B Preferred Shares and the holders
of the Class C Common Shares entitled to receive the aggregate Liquidation
Amount of such Class C Common Shares, less, in each case, amounts previously
paid in respect of such Shares under this Section 1D, if any). No Distribution
or any portion thereof shall be made under Section 1E below until the entire the
Liquidation Amount of the outstanding Series A Preferred Shares, Series B
Preferred Shares and Class C Common Shares, respectively, as of the time of such
Distribution has been paid in full.
1E. After the amounts required to be paid pursuant to Sections 1A,
1B, 1C and 1D above have been paid in full, the remainder of a Distribution (if
any) shall be distributed as follows:
(a) first, 100% to the holders of the outstanding Class A Common Stock and
the holders of the Series A Preferred Stock (ratably among such
holders based on the Unpaid Acquisition Cost of each such holder until
such time as each such holder shall have received its Unpaid
Acquisition Costs);
(b) second, 100% to the holders of the outstanding Class B Common Stock
(ratably among such holders based on the number of shares of Class B
Common Stock held by each such holder) until such time as each such
holder shall have received $1,000
<PAGE>
(subject to adjustment by the Board of Directors of the Corporation
for stock splits, stock dividends, reverse stock splits and other
similar transactions) for each share of Class B Common Stock held by
such holder less any amounts previously distributed under this clause
(b);
(c) third, 100% to the holders of the outstanding Class A Common Stock and
the holders of the Series A Preferred Stock (ratably among such
holders based on the number of shares of Deemed Common Stock,
respectively, represented by the shares held by each such holder)
until such time as each such holder shall have received an IRR equal
to 25% in respect of all of the shares of Class A Common Stock and
Series A Preferred Shares held by such holder;
(d) fourth, 100% to the holders of the outstanding Class B Common Stock
(ratably among such holders based on the number of shares of Class B
Common Stock held by each such holder) until such time as each such
holder shall have received an IRR equal to 20% in respect of all of
the shares of Class B Common Stock held by such holder on the date of
determination; and
(e) fifth, 100% to the holders of the outstanding Common Stock and Series
A Preferred Stock (ratably among such holders based on the number of
shares of Deemed Common Stock, respectively, represented by the shares
held by each such holder).
Notwithstanding the foregoing, in the event that the holders of Class C Common
Shares would be entitled to receive distributions on the Class A Common Shares
that such Class C Common Shares are convertible into in an amount greater than
the distributions such holders are entitled to receive in respect of such Class
C Common Shares, then for the purposes of this Part D, all of the issued and
outstanding Class C Common Shares shall be deemed to be converted to Class A
Common Shares in accordance with the provisions of Section 5 of Part C of this
ARTICLE FOURTH, and the holders thereof shall be entitled to receive
distributions pursuant to Section 1E above in lieu of and not in addition to the
distributions such holders of the Class C Common Shares would otherwise receive
pursuant to Sections 1C and 1D above.
Section 2. Stock Splits and Stock Dividends. The Corporation shall
not in any manner subdivide (by stock split, stock dividend, merger,
consolidation or otherwise) or combine (by reverse stock split, stock dividend,
merger, consolidation or otherwise) any of the outstanding shares of Class A
Common Stock unless all shares of Class A Common Stock, are to be
proportionately subdivided or combined. The Corporation shall not in any manner
subdivide (by stock split, stock dividend, merger, consolidation or otherwise)
or combine (by reverse stock split, stock dividend, merger, consolidation or
otherwise) any of the outstanding Series A unless all shares of Class A Common
Stock, are to be proportionately subdivided or combined. All such subdivisions
and combinations of Common Stock shall be payable to the holders of Class A
Common Stock only in Class A Common Stock. All subdivisions and combinations of
Preferred Stock shall be payable to the holders of Series A Preferred Stock only
in Series A Preferred Stock. In no event shall a stock split or stock dividend
constitute a payment of Liquidation Amount (or accrued but unpaid dividends
thereon).
<PAGE>
Section 3. Registration of Transfer. The Corporation shall keep
at its principal office (or such other place as the Corporation reasonably
designates) a register for the registration of Shares. Upon the surrender of
any certificate representing shares of any class of Shares at such place, the
Corporation shall, at the request of the registered holder of such certificate,
execute and deliver a new certificate or certificates in exchange therefor
representing in the aggregate the number of shares of such class represented by
the surrendered certificate, and the Corporation forthwith shall cancel such
surrendered certificate. Each such new certificate will be registered in such
name and will represent such number of shares of such class as is requested by
the holder of the surrendered certificate and shall be substantially identical
in form to the surrendered certificate. The issuance of new certificates shall
be made without charge to the holders of the surrendered certificates for any
issuance tax in respect thereof or other cost incurred by the Corporation in
connection with such issuance.
Section 4. Replacement. Upon receipt of evidence reasonably
satisfactory to the Corporation (an affidavit of the registered holder will be
satisfactory) of the ownership and the loss, theft, destruction or mutilation of
any certificate evidencing one or more shares of any class of Shares, and in the
case of any such loss, theft or destruction, upon receipt of indemnity
reasonably satisfactory to the Corporation (provided that if the holder is a
financial institution or other institutional investor its own agreement will be
satisfactory), or, in the case of any such mutilation upon surrender of such
certificate, the Corporation shall (at its expense) execute and deliver in lieu
of such certificate a new certificate of like kind representing the number of
shares of such class represented by such lost, stolen, destroyed or mutilated
certificate and dated the date of such lost, stolen, destroyed or mutilated
certificate, and with respect to Preferred Stock, dividends shall accrue on the
Preferred Stock represented by such new certificate from the date to which
dividends have been fully paid on such lost, stolen, destroyed or mutilated
certificate.
Section 5. Notices. Except as otherwise expressly provided
hereunder, all notices referred to herein shall be in writing and shall be
delivered by registered or certified mail, return receipt requested and postage
prepaid, or by reputable overnight courier service, charges prepaid, and shall
be deemed to have been given when so mailed or sent (i) to the Corporation, at
its principal executive offices and (ii) to any stockholder, at such holder's
address as it appears in the stock records of the Corporation (unless otherwise
indicated by any such holder).
Section 6. Amendment and Waiver. No amendment or waiver of any
provision of this ARTICLE FOUR shall be effective without the prior written
consent of the holders of a majority of the then outstanding Shares with voting
power voting as a single class; provided that no amendment as to any terms or
provisions of, or for the benefit of, any class or series of Shares that
adversely affects the powers, preferences or special rights of such class or
series of Shares shall be effective without the prior consent of the holders of
a majority of the then outstanding shares of such affected class or series of
Shares, voting as a single class; provided further, that no amendment which
treats holders of the same class or series differently shall be effective
without the prior consent of the holders of a majority of the then outstanding
shares of each such group within the class or series which is treated
differently, each voting as a separate class; and, provided further, that no
amendment of the terms or provisions of any class or series of Shares which
adversely affects the powers, preferences or special rights of any other class
or series of Shares (not including any such effects resulting solely from the
issuance of a new class or series of Shares) shall be effective without
<PAGE>
the prior consent of the holders of a majority of the then outstanding shares of
such affected class or series of Shares, voting as a single class.
Part E. Definitions.
"Approved Sale" shall have the same meaning as in the Shareholders'
Agreement.
"Change of Control" shall have the same meaning as in the GSIC Loan
Agreement.
"Change of Control Offer" shall have the same meaning as in the
Indentures.
"Class C Common Redemption Premium" means the percentage set forth
below for any redemption of Class C Common Shares pursuant to Section 6B of Part
C of this ARTICLE FOURTH during the 12-month periods indicated below:
12-Months Period Percentage
---------------- ----------
August 3, 2000 through August 3, 2001....... 103%
August 4, 2001 through August 4, 2002....... 102%
August 5, 2002 through August 5, 2003....... 101%
After August 5, 2003........................ 100%
"Closing Date" means the date on which the closing of the transactions
contemplated by the Recapitalization Agreement occurs.
"Conversion Element" means (a) the right to convert Series A Preferred
Shares under clause (ii) of Section 4A of Part B of this ARTICLE FOUR or under
clause (ii) of Section 4C of Part B of this ARTICLE FOUR or (b) the right to
convert Class C Common Shares under Section 5A of Part C of this ARTICLE FOUR.
"Corporation" means The Derby Cycle Corporation.
"Deemed Common Stock" has the meaning given such term in the
Shareholders' Agreement.
"Distribution" means each distribution made by the Corporation to
holders of Shares, whether in cash, property, or securities of the Corporation
and whether by dividend, liquidating distributions or otherwise; provided that
none of the following shall be a Distribution: (a) any redemption or repurchase
by the Corporation of any Shares pursuant to Section 4 or Section 5 of Part B of
this ARTICLE FOUR, (b) any redemption or repurchase by the Corporation of any
Shares pursuant to Section 8 of Part C of this ARTICLE FOUR, or (c) any
recapitalization or exchange of any Shares, or any subdivision (by stock split,
stock dividend or otherwise) or any combination (by reverse stock split, stock
dividend or otherwise) of any outstanding Shares.
"DM Indenture" means the Indenture dated as of May 14, 1998 by and
among the Borrower, Lyon and IBJ Schroder Bank and Trust Company, as Trustee
governing the 9 3/8% Senior
<PAGE>
Notes due May 14, 2008 in an original principal amount equal to DM 110,000,000
issued by Borrower and Lyon Investments B.V.
"Dollar Indenture" means the Indenture dated as of May 14, 1998 by and
among the Borrower, Lyon and IBJ Schroder Bank and Trust Company, as Trustee
governing the 10% Senior Notes due May 14, 2008 in original principal amount
equal to US $100,000,000 issued by the Borrower and Lyon Investments B.V.
"Exchange Agreements" means the Exchange Agreements as defined in the
Recapitalization Agreement.
"Fair Market Value" means (1) with respect to a conversion pursuant to
Section 4B of Part B of this ARTICLE FOUR, in the event of an Initial Public
Offering in which equity securities of the Corporation are offered and sold to
the public pursuant to an effective registration statement under the Securities
Act of 1933, as amended (the "Securities Act"), the price per share at which the
IPO Stock is offered to the public in the Initial Public Offering, (2) with
respect to an Initial Public Offering other than as described in clause (1)
above, the last sale price of the IPO Stock prior to the close of business on
the date of determination on the principal national securities exchange where
the IPO Stock is traded or, if not traded on a national securities exchange, the
average of the highest bid and lowest asked prices for the IPO Stock on the
NASDAQ National Market (if the IPO Stock is listed on the NASDAQ National
Market) or another automated quotation system (if the IPO Stock is not listed on
the NASDAQ National Market) on the date of determination (or if such date is not
a trading day, the last trading day prior to the date of determination), and (3)
with respect to a conversion pursuant to Section 4D or Section 4E of Part B of
this ARTICLE FOUR, the price per share of Class A Common Stock to be sold
pursuant to the provision of Section 10(a) of the Shareholders' Agreement or the
Approved Sale, as the case may be.
"Financing Documents" has the meaning given such term in the
Recapitalization Agreement.
"General Corporation Law" means the General Corporation Law of the
State of Delaware, as amended from time to time.
"GSIC Loan Agreement" means that certain Senior Subordinated Loan
Agreement dated as of February 3, 1999 by and between the Corporation and the
Vencap Holdings (1992) Ptd Ltd.
"GSIC Stockholders Agreement" shall have the same meaning as the term
"Stockholders' Agreement" as such term is defined in the GSIC Loan Agreement.
"GSIC Subordination Deed" shall have the same meaning as the term
"Subordination Deed" as such term is defined in the GSIC Loan Agreement.
"Indentures" means, collectively, the DM Indenture and the Dollar
Indenture.
"Initial Public Offering" means a public offering and sale of the
Corporation's
<PAGE>
common equity securities, other than in connection with a business combination
with or acquisition of any other Person (unless, upon consummation of such
business combination or acquisition, the holders of Series A Preferred Stock are
eligible to sell to the public at least 25% of the Deemed Common Stock then held
by them pursuant to sales within nine months after the effective date of such
business combination or acquisition, pursuant to Rule 144 under such Securities
Act), representing not less than 25% of the outstanding capital stock of the
Corporation on a fully diluted basis (i) pursuant to an effective registration
statement under the Securities Act of 1933, as amended, if immediately
thereafter the Corporation has publicly held equity securities listed on a
national securities exchange or the NASD automated quotation system or (ii) made
on any recognized stock exchange in any country which is a member of the
Organization of Economic Cooperation and Development. An Initial Public Offering
shall also be deemed to occur on the date on which the holders of Series A
Preferred Stock have the right to sell a number of shares of Common Stock
pursuant to registration statements effective under the Securities Act which
equals at least 25% of the Deemed Common Stock owned by such holders immediately
after the first sale of Common Stock to the public pursuant to an effective
registration statement under the Securities Act (after eliminating the effect of
any subsequent stock split, subdivision or combination of stock or stock
dividends in respect of such Common Stock).
"IRR" means, with respect to any Share, the annual interest rate
(compounded annually) which when used to calculate the net present value as of
the Closing Date of all Payment Inflows received by a holder of such Share in
respect of such Share as of the date of determination causes the difference
between such net present value and all Payment Outflows made in respect of such
Share as of such date of determination to equal zero. The IRR shall be
determined by the Company's regular outside accounting firm.
"Junior A Securities" means the Class A Common Stock, the Class B
Common Stock, the Class C Common Stock, the Series A Preferred Stock, the Series
B Preferred Stock and any other capital stock or other equity securities of the
Corporation, other than the Series C Preferred Stock.
"Junior B Securities" means the Class A Common Stock, the Class B
Common Stock and any other capital stock or other equity securities of the
Corporation, other than the Class C Common Stock and the Preferred Stock.
"Lender" shall have the same meaning as in the GSIC Loan Agreement.
"Liquidation Amount" means (a) with respect to any Series A Preferred
Share as of any particular date an amount equal to $1,000, (b) with respect to
any Series B Preferred Share as of any particular date an equal to $1,000, (c)
with respect to any Series C Preferred Share as of any particular date an amount
equal to $1,000, and (d) with respect to any Class C Common Share as of any
particular date an amount equal to $1,000.
"Loan Closing Date" shall mean the Closing Date as such term is
defined in the GSIC Loan Agreement.
"Payment Inflows" means, with respect to any Share and as of the date
of
<PAGE>
determination, the sum of (i) all payments of cash and cash equivalents made
by the Corporation prior to and through and including such date of determination
in respect of such Share (excluding, for this purpose, any payments made
pursuant to Sections 1C or 1D of Part D of this Article FOUR) and (ii) the fair
market value (determined in good faith by the independent auditors of the
Corporation) of any property (other than cash or cash equivalents and Qualified
Company Securities) distributed by the Corporation prior to and through and
including such date of determination in respect of such Share (excluding, for
this purpose, any property distributed pursuant to Sections 1C or 1D of Part D
of this Article FOUR).
"Payment Outflows" means, with respect to any Share, the purchase
price paid in cash or cash equivalents in respect of such Share (for this
purpose, the cash purchase price paid in respect of (i) any share of Class A
Common Stock issued on or prior to the Closing Date or upon conversion of Class
C Common Stock, (ii) any share of Class A Common Stock issued upon conversion of
a Series A Preferred Share under clause (ii) of Section 4A or clause (ii) of
Section 4C of Part B hereof, (iii) any share of Class A Common Stock issuable
under clause (i) of Sections 4A, 4B, 4C and 4D of Part B hereof, shall be deemed
to be $1,000 per share and (iv) any share of Class A Common Stock or Class B
Common Stock issued in exchange for a Senior RIC Share shall be deemed to be
$1,000 per share (subject, in each case, to adjustment by the Board of Directors
of the Corporation for stock splits, stock dividends, reverse stock splits and
other similar transactions)).
"Person" means an individual, a partnership, a corporation, a limited
liability company, a limited liability, an association, a joint stock company, a
trust, a joint venture, an unincorporated organization or a governmental entity
or any department, agency or political subdivision thereof.
"Qualified Company Securities" means securities of the Company
received as a result of (i) conversions of securities provided for in this
Certificate of Incorporation, (ii) adjustments under Sections 7A or 7B of Part B
and Sections 7A or 7B of Part C of ARTICLE FOUR hereof, and (iii) stock
dividends, stock splits, combinations, subdivision, or reclassifications and
similar distributions of Common Stock which apply to all holders of the class of
Common Stock receiving such distributions.
"Recapitalization Agreement" means that certain Recapitalization
Agreement entered into by and among the Corporation, Derby International
Corporation S.A. (a societe anonyme under Luxembourg law), DC Cycle, L.L.C. (a
Delaware limited liability company), Derby Finance S.a.r.l (a Luxembourg
corporation) and Perseus Cycle, L.L.C. (a Delaware limited liability company) as
of March 11, 1998, as amended.
"Redemption Right" has the meaning given such term in the Shareholders
Agreement.
"Sale of the Corporation" means any transaction or series of
transactions pursuant to which any Person or Persons acquires (i) capital stock
of the Corporation possessing voting power under normal circumstances to elect a
majority of the Corporation's Board of Directors (whether by merger,
consolidation or sale or transfer of the Corporation's capital stock) or (ii)
all or substantially all of the Corporation's assets determined on a
consolidated basis; provided that a Sale of the Corporation shall not be deemed
to occur unless it will result in a "Change of Control" as that term
<PAGE>
is defined in that certain Indenture dated May 14, 1998, entered into among the
Company, Lyon Investments B.V. and IBJ Schroder Bank and Trust Company, as
Trustee.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Notes" means, collectively, (i) the 9 3/8% Senior Notes due
May 14, 2008 in an original principal amount equal to DM 110,000,000 governed by
the DM Indenture and (ii) the 10% Senior Notes due May 14, 2008 in an original
principal amount equal to US $100,000,000 governed by the Dollar Indenture.
"Senior RIC Share" has the meaning assigned to such term in the
Exchange Agreement.
"Senior Subordinated Notes" shall have the same meaning as in the GSIC
Loan Agreement.
"Shareholders' Agreement means that certain shareholders' agreement
dated May 14, 1998, by and between the Corporation, DC Cycle, L.L.C., Derby
Finance S.a.r.l and Perseus Cycle, L.L.C., as amended.
"Subsidiary" means any corporation of which a majority of the shares
of outstanding capital stock possessing the voting power (under ordinary
circumstances) in electing the Board of Directors are, at the time as of which
any determination is being made, owned by the Corporation either directly or
indirectly.
"Unpaid Acquisition Costs" in the case of a holder of shares of Class
A Common Stock and/or Series A Preferred Shares and as of the date of any
Distribution shall mean (a) the sum of (i) $1,000 for each share of Class A
Common Stock outstanding on the Closing Date or issued pursuant to the Exchange
Agreements or issued upon the conversion of Class C Common Stock, and the amount
paid for each share of Class A Common Stock issued after the Closing Date (other
than shares referred to in clause (iii) of this definition) which is held by
such holder on such date (regardless of when acquired), (ii) $500 for each
Series A Preferred Share outstanding on the Closing Date and one-half of the
fair market value (as determined in good faith by the independent auditors of
the Corporation) of a share of Class A Common Stock for and as of each Series A
Preferred Share issued after the Closing Date which is held by such holder on
such date and (iii) with respect to a share of Class A Common Stock held by such
holder on such date and acquired by such holder pursuant to clause (ii) of
Section 4B and Section 4D of Part B of this ARTICLE FOUR, the aggregate
Liquidation Amount of the Series A Preferred Shares converted into such shares
of Class A Common Stock (plus all accrued and accumulated but unpaid dividends
thereon) as of the date of conversion less (b) all amounts distributed to such
holder (including amounts distributed to any predecessor holders of such shares
of Class A Common Stock or Series A Preferred Shares) prior to such date under
clause (a) of Section 1E of Part D of this ARTICLE FOUR.
<PAGE>
ARTICLE FIVE
The Corporation is to have perpetual existence.
ARTICLE SIX
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors of the Corporation is expressly authorized to
make, alter or repeal the by-laws of the Corporation.
ARTICLE SEVEN
Meetings of stockholders may be held within or without the State of
Delaware, as the by-laws of the Corporation may provide. The books of the
Corporation may be kept outside the State of Delaware at such place or places as
may be designated from time to time by the Board of Directors or in the by-laws
of the Corporation. Election of directors need not be by written ballot unless
the by-laws of the Corporation so provide.
ARTICLE EIGHT
To the fullest extent permitted by the General Corporation Law, a
director of this Corporation shall not be liable to the Corporation or its
stockholders for monetary damages for a breach of fiduciary duty as a director.
Any repeal or modification of this ARTICLE EIGHT shall not adversely affect any
right or protection of a director of the Corporation existing at the time of
such repeal or modification.
ARTICLE NINE
The Corporation expressly elects not to be governed by Section 203 of
the General Corporation Law.
ARTICLE TEN
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this certificate of incorporation in the manner now
or hereafter prescribed herein and by the laws of the State of Delaware, and all
rights conferred upon stockholders herein are granted subjected to this
reservation.
<PAGE>
EXHIBIT 2
EXECUTION COPY
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of June 1, 1999, between The Derby Cycle
Corporation, a Delaware corporation (the "Company"), and Dan S. Lynch
("Executive").
In consideration of the mutual covenants contained herein and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Employment. The Company shall employ Executive, and Executive
hereby accepts employment with the Company, upon the terms and conditions set
forth in this Agreement for the period beginning on the date hereof and ending
as provided in paragraph 4 hereof (the "Employment Period").
2. Position and Duties.
(a) During the Employment Period, Executive shall serve as the Chief
Financial Officer of the Company and shall have the normal duties,
responsibilities and authority of the Chief Financial Officer, subject to the
power of the Company's President and the Company's board of directors ("Board")
to expand or limit such duties, responsibilities and authority and to override
actions of officers of the Company.
(b) During the Employment Period, Executive shall report to the
Company's President and shall devote his best efforts and his full business time
and attention (except for permitted vacation periods and reasonable periods of
illness or other incapacity) to the business and affairs of the Company and its
subsidiaries. Executive shall perform his duties and responsibilities to the
Company and its subsidiaries hereunder to the best of his abilities in a
diligent, trustworthy and businesslike manner. The Executive and the Company
hereby agree that the Executive's principal office will be located in the
Stamford, Connecticut area.
3. Compensation and Benefits.
(a) During the Employment Period, Executive's base salary shall be
$250,000 per annum or such higher rate as the Board may designate from time to
time (the "Base Salary"), which salary shall be payable in regular installments
in accordance with the Company's general payroll practices. In addition, during
the Employment Period, Executive shall be entitled to participate in all of the
Company's employee benefit programs (including medical, pension and life
insurance) for which senior executive employees of the Company are generally
eligible, and Executive shall be entitled to four weeks of paid vacation each
year, which if not taken during any year may not be carried forward to any
subsequent year. Such vacation shall be taken at such time or times as the
Company's President approves in advance. To the extent such information is not
received prior to the date hereof, the Company shall provide information to the
Executive regarding all benefits that will be available to him as soon as
reasonably possible after commencement of the Employment Period.
<PAGE>
(b) For each calendar year during the Employment Period, beginning
with calendar year 2000, (i) the Company shall pay to the Executive a bonus
("Executive Bonus") of up to fifty percent (50%) of his Base Salary based upon
the achievement of financial targets for the Company for such fiscal year, with
such financial targets to be determined by the Board on or about the first
quarter of each such calendar year and (ii) Executive shall be eligible for an
additional discretionary bonus, with the grant and amount of such bonus, if any,
to be at the sole discretion of the Company's President and Board; provided
that, Executive's 1999 fiscal year bonus shall be no less than seventy-five
thousand United States dollars ($75,000).
(c) During the Employment Period, the Company shall reimburse
Executive for all reasonable expenses incurred by him in the course of
performing his duties and responsibilities under this Agreement which are
consistent with the Company's policies in effect from time to time with respect
to travel, entertainment and other business expenses, subject to the Company's
requirements with respect to reporting and documentation of such expenses.
4. Termination.
(a) The Employment Period shall continue until Executive's
resignation, death or Disability or until the Board determines in its good faith
judgment that termination of Executive's employment is in the best interests of
the Company; provided that:
(i) the Executive hereby agrees not to resign from the Company
without Good Reason until and unless the Executive provides to the Company
three months prior written notice and an opportunity to cure; and
(ii) if the Company terminates the Executive's employment without
Cause, or the Executive terminates his employment for Good Reason, the
Company shall (i) continue to pay the Executive's Base Salary for a one
year period after termination, with such payment made, at the Company's
sole option, either as a lump sum amount or in accordance with the
Company's general payroll practices (ii) shall, during such one year
period, provide health coverage, under the same conditions as existed at
the time of termination and (iii) shall pay, on a pro-rata basis, Executive
his Executive Bonus for the year which termination occurs, with such pro-
rata bonus to be paid at such time as other executives of the Company are
paid similar bonuses.
(b) Except as otherwise expressly provided herein, all of Executive's
rights to salary, bonuses, fringe benefits and other compensation hereunder
which accrue or become payable after the termination or expiration of the
Employment Period shall cease upon such termination or expiration. The Company
may offset any amounts Executive owes it or its subsidiaries against any amounts
it owes Executive hereunder.
(c) For purposes of this Agreement, "Cause" shall mean (i) the
commission of a felony or other crime involving moral turpitude or the
commission of any other act or omission involving material dishonesty,
disloyalty or fraud with respect to the Company or any of its subsidiaries or
any of their customers or suppliers, (ii) chronic drug or alcohol abuse or other
repeated conduct causing the Company or any of its subsidiaries substantial
public disgrace or disrepute or economic harm, (iii) substantial and repeated
failure to perform duties as reasonably
-2-
<PAGE>
directed by the Board or the Company's President, after having been given twenty
days' written notice and opportunity to cure (iv) gross negligence or willful
misconduct with respect to the Company or any of its subsidiaries or (v) any
other material breach of this Agreement.
(d) For purposes of this Agreement, "Good Reason" shall mean (i) a
material breach of this Agreement by the Company, (ii) a material change in the
Executive's duties or responsibilities, (iii) a change in the Executive's
reporting relationship so that he no longer reports directly to the Company's
President, and (iv) a relocation of the Executive's work site to a location 75
miles or more from the Stamford, Connecticut area or such other location as
established by the Company during the Summer of 1999.
(e) For the purposed of this Agreement, "Disability" shall mean a
disability through any illness, injury, accident, or condition of either a
physical or psychological nature and, as a result, the Executive is, with or
without reasonable accommodation, unable to perform the functions of the
services contemplated hereunder for (a) a period of 75 consecutive days, or (b)
for shorter periods aggregating 100 days during any 12 month period during the
Employment Period.
5. Confidential Information. Executive acknowledges that the non-
public information, observations and data (including trade secrets) obtained by
him while employed by the Company and its subsidiaries concerning the business
or affairs of the Company, and its subsidiaries ("Confidential Information") are
the property of the Company or such subsidiaries. Therefore, Executive agrees
that he shall not disclose to any unauthorized person or use for his own
purposes any Confidential Information without the prior written consent of the
Board .
6. Non-Compete, Non-Solicitation.
(a) In further consideration of the compensation to be paid to
Executive hereunder, Executive acknowledges that in the course of his employment
with the Company and its subsidiaries he shall become familiar with the
Company's trade secrets and with other Confidential Information concerning the
Company and its subsidiaries and that his services shall be of special, unique
and extraordinary value to the Company and its subsidiaries. Therefore,
Executive agrees that, during the Employment Period and for one year thereafter
(the "Noncompete Period"), he shall not directly or indirectly own any interest
in (other than an interest of 5% or less in any publicly-traded company),
manage, control, participate in, consult with, render services for, or in any
manner engage in any business competing with the businesses of the Company or
its subsidiaries, as such businesses exist, within any geographical area in
which the Company or its subsidiaries engage in such businesses.
(b) During the Noncompete Period, Executive shall not directly or
indirectly through another entity (i) induce or attempt to induce any employee
of the Company or any of its subsidiary to leave the employ of the Company or
such subsidiary, or in any way interfere with the relationship between the
Company or any of its subsidiary and any employee thereof, (ii) hire any person
who was an employee of the Company or any of its subsidiary at any time during
the Employment Period or (iii) induce or attempt to induce any customer,
supplier, licensee, licensor, franchisee or other business relation of the
Company or any of its subsidiaries to cease doing business with the Company or
such subsidiary, or in any way interfere with the relationship between any such
customer, supplier, licensee or business relation and the Company or any of its
subsidiaries
-3-
<PAGE>
(including, without limitation, making any negative or disparaging statements or
communications regarding the Company or its subsidiaries).
(c) If, at the time of enforcement of paragraphs 5 or 6 of this
Agreement, a court holds that the restrictions stated herein are unreasonable
under circumstances then existing, the parties hereto agree that the maximum
period, scope or geographical area reasonable under such circumstances shall be
substituted for the stated period, scope or area. In the event a breach or
threatened breach of this Agreement, the Company or its successors or assigns,
in addition to other rights and remedies existing in their favor, shall be
entitled to specific performance and/or injunctive or other equitable relief
from a court of competent jurisdiction in order to enforce, or prevent any
violations of, the provisions hereof (without posting a bond or other security).
7. Executive's Representations. Executive hereby represents and
warrants to the Company that (i) the execution, delivery and performance of this
Agreement by Executive do not and shall not conflict with, breach, violate or
cause a default under any contract, agreement, instrument, order, judgment or
decree to which Executive is a party or by which he is bound, (ii) except as set
forth on Schedule A, Executive is not a party to or bound by any employment
agreement, noncompete agreement or confidentiality agreement with any other
person or entity and (iii) upon the execution and delivery of this Agreement by
the Company, this Agreement shall be the valid and binding obligation of
Executive, enforceable in accordance with its terms. Executive hereby
acknowledges and represents that he has consulted with independent legal counsel
regarding his rights and obligations under this Agreement and that he fully
understands the terms and conditions contained herein.
8. Complete Agreement. This Agreement, those documents expressly
referred to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties and supersede and preempt any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
9. Governing Law. The validity, construction, interpretation,
administration and effect of this Agreement shall be governed, construed and
interpreted under the laws of the state of New York without giving any effect to
any choice of law rules of any state.
10. Signing Bonus and Attorney's Fees.
(a) On the date hereof, the Company paid Executive a signing bonus of
thirty-five thousand United States dollars (US$35,000) (the "Signing Bonus").
Executive hereby agrees to repay to the Company such Signing Bonus (the "Signing
Bonus Repayment") if prior to the first anniversary of the date hereof Executive
either (i) resigns from the Company without Good Reason or (ii) is dismissed by
the Company with Cause, with such Signing Bonus Payment being made by Executive
in immediately available funds within 15 days of such resignation or dismissal,
as the case may be.
(b) The Company shall pay the Executive's reasonable attorneys' fees
for the preparation and negotiation of this Agreement and related documents
entered into on the date hereof;
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<PAGE>
provided that, the Company's obligations to reimburse such attorney's fee shall
in no event exceed seven thousand five hundred United States dollars (US$7,500).
11. Arbitration. Sections 4.7 and 4.8 of the Management Stock
Purchase Agreement, dated as of the date hereof between the parties hereto, is
hereby incorporated herein by reference.
* * * * *
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
THE DERBY CYCLE CORPORATION
By:__________________________________
Its:_________________________________
_____________________________________
DAN S. LYNCH
<PAGE>
EXHIBIT 3
EXECUTION COPY
MANAGEMENT STOCK PURCHASE AGREEMENT
This MANAGEMENT STOCK PURCHASE AGREEMENT (this "Agreement") is dated as of
June 1, 1999, by and between Derby Cycle Corporation, a Delaware corporation
(the "Company") and Dan S. Lynch ("Employee").
This Agreement provides for the purchase by Employee of (a) 400 shares of
the Company's Class A Common Stock, par value $.01 per share (the "Class A
Common Stock") and (b) 100 shares of the Company's Class C Common Stock, par
value $.01 per share (the "Class C Common Stock;" and together with the Class A
Common Stock, the "Common Stock"), upon the terms and subject to the conditions
set forth herein. Capitalized terms used but not defined herein shall have the
meaning assigned to such terms in that certain Amended and Restated
Shareholders' Agreement dated February 3, 1999, by and among the Company and
certain shareholders of the Company (the "Shareholders' Agreement").
NOW, THEREFORE, in consideration of the mutual undertakings contained
herein, the parties agree as follows:
ARTICLE 1. PURCHASE OF STOCK.
1.1 Purchase and Sale of Stock. On the date hereof, the Company agrees to
sell Employee and Employee agrees to purchase from the Company (a) 400 shares of
Class A Common Stock and (b) 100 shares of Class C Common Stock, all at a
purchase price of $1,000.00 per share for an aggregate purchase price of
$500,000. Upon execution of this Agreement, (i) Employee will deliver to the
Company (A) a check for $125,000 and (B) an executed promissory note in the form
attached hereto as Exhibit A in the principal amount of $375,000, and (ii) the
Company shall deliver to Employee a certificate or certificates representing the
Common Stock.
1.2 Pledge of Stock. Employee hereby grants to the Company a security
interest in the Common Stock purchased by Employee hereunder to secure the
payment of the promissory note. In the event of Employee's death or disability
or in the event that Employee's employment with the Company or its subsidiaries
is terminated for any reason, the promissory note shall become immediately due
and payable, and Employee hereby authorizes the Company and its subsidiaries to
deduct such amount from any amount owed by the Company to Employee. Employee
shall be liable for any deficiency.
1.3 Shareholders' Agreement. The Company's obligations under this
Agreement are expressly conditioned upon Employee becoming a party to the
Shareholders' Agreement.
ARTICLE 2. REPRESENTATIONS AND WARRANTIES.
2.1 Representations and Warranties of Employee. As a material inducement
to the Company to enter into this Agreement and sell the Common Stock, Employee
hereby represents and warrants to the Company that:
<PAGE>
(a)(i) this Agreement constitutes a legal, valid and binding
obligation of Employee, enforceable against Employee in accordance with its
terms, (ii) the execution, delivery and performance of this Agreement by
Employee does not and will not conflict with, breach, violate or cause a
breach of or default under any agreement, contract, instrument, order,
judgment or decree to which Employee is a party or by which he is bound,
and (iii) Employee is not a party to or bound by any employment agreement
or noncompete agreement with any other person or entity.
(b) Employee is acquiring the Common Stock purchased hereunder or
acquired pursuant hereto for his own account with the present intention of
holding such securities for purposes of investment, and Employee has no
intention of selling such securities in a public distribution in violation
of the federal securities laws or any applicable state securities laws.
(c) Employee is financially able to bear the economic risk of an
investment in the Common Stock, including the total loss thereof.
(d) Employee is able to bear the economic risk of the investment in
the Common Stock for an indefinite period of time and Employee understands
that the Common Stock has not been registered under the Securities Act and
cannot be sold unless subsequently registered under the Securities Act or
an exemption from such registration is available.
(e) Employee has had an opportunity to ask questions and receive
answers concerning the terms and conditions of the purchase of the Common
Stock and has had full access to such other information concerning the
Company as Employee has requested. Employee has reviewed, or has had an
opportunity to review, the following documents: (i) the Company's
Certificate of Incorporation and Bylaws; (ii) all material information
provided by the Company or its subsidiaries to any person providing
financing to the Company or its subsidiaries, including, but not limited
to, the Company's pro forma balance sheet, as well as financial
projections, estimates, forecasts, budgets, summaries, reports and other
related documents.
(f) No commission, fee or other remuneration is to be paid or given
directly or indirectly, to any person or entity for soliciting Employee to
purchase the Common Stock.
(g) Employee is employed by the Company or one of its subsidiaries,
is sophisticated in financial matters and is able to evaluate the risks and
benefits of the investment in the Common Stock and has determined that such
investment in the Common Stock is suitable for Employee, based upon
Employee's financial situation and needs, as well as Employee's other
securities holdings.
2.2 Representations and Warranties of the Company. As a material
inducement to the Employee to enter into this Agreement and purchase the Common
Stock, the Company hereby represents and warrants that:
(a) this Agreement constitutes a legal, valid and binding obligation
of the Company, enforceable against the Company in accordance with its
terms and the execution, delivery and performance of this Agreement by the
Company does not and will not conflict
-2-
<PAGE>
with, breach, violate or cause a default under any agreement, contract,
instrument, order, judgment or decree to which the Company is a party or by
which it is bound;
(b) the Company is a corporation duly organized, validly existing and
in good standing under the laws of Delaware and is qualified to do business
in every jurisdiction in which its ownership of property or conduct of
business requires it to qualify, except where the lack of such
qualification would not have a material adverse effect on the financial
condition of the Company. The Company has all requisite corporate power and
authority to carry out the transactions contemplated by this Agreement; and
(c) as of immediately following the consummation of the transactions
contemplated hereby, all of the outstanding shares of the Common Stock
shall be duly and validly issued and authorized, fully paid, nonassessable
and free and clear of all encumbrances.
ARTICLE 3. TRANSFERABILITY
3.1 Transfer of Stock. No Common Stock held by Employee may be sold,
transferred, assigned, pledged or otherwise disposed of (a "Transfer") by
Employee other than as provided in Section 3.3 hereof. Any attempt by Employee
to Transfer any Common Stock in violation of this Article 3 shall be null and
void, and the Company shall not give any effect to such attempted Transfer in
the stock records of the Company.
3.2 Legend. Each certificate evidencing the Common Stock and each
certificate issued in exchange for or upon the transfer of the Common Stock (if
such shares remain Common Stock upon such transfer) will be stamped or otherwise
imprinted with a legend in substantially the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN
ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 (THE "ACT") OR ANY STATE
SECURITIES LAW OR REGULATION.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT
TO CERTAIN REPURCHASE OPTIONS AND OTHER PROVISIONS SET FORTH
IN A MANAGEMENT STOCK PURCHASE AGREEMENT BETWEEN DERBY CYCLE
CORPORATION (THE "COMPANY") AND EMPLOYEE DATED AS OF JUNE 1,
1999, AS AMENDED AND MODIFIED FROM TIME TO TIME, A COPY OF
WHICH MAY BE OBTAINED BY THE HOLDER HEREOF AT THE COMPANY'S
PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO
SUBJECT TO THE AMENDED AND RESTATED SHAREHOLDERS' AGREEMENT
DATED AS OF FEBRUARY
-3-
<PAGE>
3, 1999, AMONG COMPANY AND CERTAIN SHAREHOLDERS THEREOF. A
COPY OF SUCH SHAREHOLDERS' AGREEMENT WILL BE FURNISHED
WITHOUT CHARGE BY THE COMPANY TO THE HOLDER HEREOF UPON
WRITTEN REQUEST."
The Company will imprint such legends on certificates evidencing the Common
Stock outstanding prior to the date hereof. The legend set forth in the third
paragraph above shall be removed from the certificates pursuant to the terms of
the Shareholders' Agreement.
3.3 Transfer Restriction.
(a) Employee may not transfer the Common Stock held by
Employee except pursuant to (i) a Public Sale, (ii) a Sale of the
Company, (iii) a Permitted Transfer, (iv) Section 3.4 hereof, or (v)
Section 3.5 hereof.
"Permitted Transfer" means a transfer (1) by will or the laws of descent or
(2) to Employee's spouse or lineal descendants (whether natural or adopted) and
any trust solely for the benefit of such Employee's spouse and/or immediate
family.
"Permitted Transferee" means any person who receives Common Stock in a
Permitted Transfer.
(b) Except pursuant to a Sale of the Company or a Public Sale,
Employee may not Transfer any Common Stock of the Company without first
delivering to the Company (i) a written notice setting forth the date, price and
other terms of such Transfer, which notice shall be delivered to the Company at
least thirty (30) days prior to the consummation of such Transfer and (ii) if
the Company so requests, (A) an opinion of counsel acceptable in form and
substance to the Company that registration under the Securities Act is not
required in connection with such Transfer, (B) a written agreement (reasonably
satisfactory to the Company), whereby the transferee agrees to be bound by the
obligations applicable to the Employee hereunder (including, without limitation,
becoming a party to the Shareholders' Agreement and complying with the
restrictions on Transfer of Common Stock as set forth in this Section 3), and
(C) such further evidence as the Company may reasonably require to confirm to
the Company's satisfaction that such sale, transfer or disposition is in
compliance with the terms of this Agreement and the Shareholders' Agreement.
3.4 Right of First Refusal.
(a) After the seventh anniversary of the date hereof, Employee may
transfer Common Stock in accordance with the provisions of this Section 3.4. At
least 60 days prior to making any transfer, Employee shall deliver a written
notice (the "Sale Notice") to the Company. The Sale Notice will disclose in
reasonable detail the identity of the prospective transferee(s) and the terms
and conditions of the proposed transfer. Employee shall not consummate any such
transfer until 60 days after the Sale Notice has been delivered to the Company,
unless the Company has notified Employee in writing that it will not exercise
its rights under this Section 3.4. The date of the first to occur of such events
is referred to herein as (the "Authorization Date").
-4-
<PAGE>
(b) The Company may elect to purchase all or any portion of the
Common Stock to be transferred upon the same terms and conditions as those set
forth in the Sale Notice (the "Right of First Refusal") by delivering a written
notice of such election to Employee within 30 days after the receipt of the Sale
Notice by the Company (the "Election Notice"). If the Company has not elected to
purchase all of the Common Stock specified in the Sale Notice, Employee may
transfer the Common Stock not purchased by the Company to the prospective
transferee(s) as specified in the Sale Notice at a price and on terms no more
favorable to the transferee(s) thereof than specified in the Sale Notice during
the 60-day period immediately following the Authorization Date. Any Common Stock
not so transferred within such 60-day period must be reoffered to the Company in
accordance with the provisions of this Section 3.4 in connection with any
subsequent proposed transfer.
(c) The restrictions contained in this Section 3.4 will not apply
with respect to transfers of Common Stock pursuant to (i) a Public Sale, (ii) a
Sale of the Company, (iii) a Permitted Transfer, or (iv) Section 3.5 hereof.
3.5 Repurchase of Stock.
(a) In the event that Employee's employment with the Company is
terminated for any reason, the Common Stock held by Employee and Employee's
Permitted Transferees (collectively, the "Employee Group") will be repurchased
by the Company pursuant to the terms and conditions set forth in this Section
3.5 (the "Repurchase") at a price per share equal to the Fair Market Value
thereof determined as of the date of Employees termination (the "Termination
Date"); provided that, in the case of a termination for Cause by the Company or
a voluntary termination of employment by Employee (other than due to Retirement
or for Good Reason), such Repurchase shall be at the option of the Company (the
"Repurchase Option").
(b) The Company shall exercise the Repurchase by delivery of written
notice (the "Repurchase Notice") to each member of the Employee Group. The
Repurchase Notice shall set forth the number of shares of Common Stock to be
acquired from each member of the Employee Group, the aggregate consideration to
be paid for such shares of Common Stock, and the time and place for the closing
of the transaction.
(c) The Company may exercise the Repurchase Option by delivery of
written notice (the "Repurchase Option Notice") to each member of the Employee
Group. The Repurchase Option Notice shall set forth the number of shares of
Common Stock to be acquired from each member of the Employee Group, the
aggregate consideration to be paid for such shares of Common Stock, and the time
and place for the closing of the transaction.
(d) The closing of the purchase of any shares of Common Stock
pursuant to the Repurchase or the Repurchase Option will take place on the date
designated by the Company in the Repurchase Notice or the Repurchase Option
Notice, as the case may be, which date will not be more than 45 days nor less
than 10 days after the delivery of such Repurchase Notice or the Repurchase
Option Notice, as the case may be. The Company will pay for the shares of Common
Stock to be purchased by delivering to each member of the Employee Group a check
in an amount equal to the aggregate purchase price for the shares of Common
Stock to be repurchased from such member of the Employee Group. Notwithstanding
the foregoing, in the event payment of the
-5-
<PAGE>
purchase price would cause a default under any material financing agreement of
the Company or any of its subsidiaries in effect from time to time (the
"Financing Agreements"), or is otherwise prohibited under applicable law, the
Company shall have the option of paying the purchase price with a subordinated
promissory note bearing interest at 6% per annum, due on the eighth anniversary
of the date of issuance, and payable upon the earlier to occur of the maturity
thereof or on the date of a Sale of the Company. In the event the issuance of
the subordinated promissory note is not permitted under the Financing Agreements
or applicable law, the Company may pay the purchase price for the shares of
Common Stock by the issuance of preferred stock bearing a dividend rate of 6%
per annum with redemption dates and payment restructuring similar to those set
forth in the subordinated promissory notes. If issuance of a subordinated
promissory note or the preferred stock is not permitted by the Financing
Agreements or applicable law, the Company may defer the repurchase until such
time as a form of payment described in this Section 3.5 is permitted under the
Financing Agreements and/or applicable law. If the Company determines that
withholding tax is required with respect to the Repurchase or the exercise of a
Repurchase Option, the Company shall withhold an amount equal to such
withholding tax from the purchase price. At the closing, each member of the
Employee Group will deliver the certificates representing the shares of Common
Stock to be sold, duly endorsed in form for transfer to the Company or its
designee, and the Company will be entitled to receive customary representations
and warranties from each member of the Employee Group regarding title to the
shares of Common Stock.
(e) In connection with any repurchase hereunder, the purchase price
payable by the Company shall be reduced, but not below zero, by any amounts
outstanding under any promissory notes issued by the Employee to acquire the
securities being purchased. The amounts due under such notes shall be deemed
paid to the extent of such reduction. In the event that (i) an Employee is
terminated for Cause or voluntarily terminates his employment (other than due to
Retirement), and (ii) the stock is not repurchased hereunder, the amounts due
under such promissory notes shall become immediately due and payable.
"Cause" shall have the meaning ascribed to it in the Employment Agreement
dated as of the date hereof, by and between the Company and Employee (the
"Employment Agreement").
"Fair Market Value" per share on any given date means the average of the
closing price of the sales of such shares on all securities exchanges on which
such shares may at the time be listed, or, if there have been no sales on any
such exchange on any day, the average of the highest bid and lowest asked prices
on all such exchanges at the end of such day, or, if on any day such stock is
not so listed, the average of the representative bid and asked prices quoted on
the NASDAQ Stock Market as of 4:00 P.M., New York time, or, if on any day such
shares are not quoted on the NASDAQ Stock Market, the average of the highest bid
and lowest asked prices on such day in the domestic over-the-counter market as
reported by the National Quotation Bureau, Incorporated, or any similar
organization. If at any time such shares are not listed or quoted, the Fair
Market Value per share shall be determined by the Board of Directors or the
compensation committee of the Board of Directors (i) based on such factors as
the members thereof, in the exercise of their business judgment, consider
relevant and (ii) consistent with fair market valuation principles previously
used by the Board of Directors to determine the cost of the Common Stock
acquired hereunder.
"Good Reason" shall have the meaning ascribed to it in the Employment
Agreement.
-6-
<PAGE>
"Retirement" means the retirement after age 65 pursuant to the normal
retirement policy of the Company.
ARTICLE 4. GENERAL PROVISIONS.
4.1 Severability. Whenever possible, each provision of this Agreement will
be interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
4.2 Entire Agreement. This Agreement and those documents expressly
referred to herein embody the complete agreement and understanding among the
parties and supersede and preempt any prior understandings, agreements or
representations by or among the parties hereto with respect to the subject
matter hereof written or oral, which may have related to the subject matter
hereof in any way.
4.3 Amendments and Waivers. Any provision of this Agreement may be amended
or waived only with the prior written consent of Employee and the Company.
4.4 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT
TO ANY CHOICE OF LAW OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE STATE
OF NEW YORK OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE
LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK.
4.5 Counterparts. This Agreement may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute one and the same
instrument.
4.6 Headings. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement or of any term or provision hereof.
4.7 Arbitration.
(a) Employee and the Company agree that the arbitration procedure set
forth below shall be the sole and exclusive method for resolving and remedying
claims for money damages arising out of this Agreement (the "Disputes"). Nothing
in this Section 4.7 shall prohibit a party hereto from instituting litigation to
enforce any Final Determination (as defined below) or availing itself of the
other remedies set forth in Section 4.8 below. The parties hereby agree and
acknowledge that, except as otherwise provided in this Section 4.7 or in the
Commercial Arbitration Rules of the American Arbitration Association as in
effect from time to time, the arbitration
-7-
<PAGE>
procedures and any Final Determination hereunder shall be governed by, and shall
be enforced pursuant to the Uniform Arbitration Act and applicable provisions of
New York law.
(b) In the event that any party asserts that there exists a Dispute,
such party shall deliver a written notice to each other party involved therein
specifying the nature of the asserted Dispute and requesting a meeting to
attempt to resolve the same. If no such resolution is reached within ten
business days after such delivery of such notice, the party delivering such
notice of Dispute (the "Disputing Person") may, within 45 business days after
delivery of such notice, commence arbitration hereunder by delivering to each
other party involved therein a notice of arbitration (a "Notice of Arbitration")
and by filing a copy of such Notice of Arbitration with the appropriate office
of the American Arbitration Association. Such Notice of Arbitration shall
specify the matters as to which arbitration is sought, the nature of any
Dispute, the claims of each party to the arbitration and shall specify the
amount and nature of any damages, if any, sought to be recovered as a result of
any alleged claim, and any other matters required by the Commercial Arbitration
Rules of the American Arbitration Association as in effect from time to time to
be included therein, if any.
(c) The Company and Employee shall attempt to agree within 10
business days on an arbitrator. If they are unable to agree, the Company and the
Employee each shall select one independent arbitrator expert in the subject
matter of the Dispute (the arbitrators so selected shall be referred to herein
as "Company's Arbitrator" and "Employee's Arbitrator," respectively). In the
event that either party fails to select an independent arbitrator as set forth
herein within 20 days from delivery of a Notice of Arbitration, then the matter
shall be resolved by the arbitrator selected by the other party. Company's
Arbitrator and Employee's Arbitrator shall select a third independent arbitrator
expert in the subject matter of the dispute, and the arbitrator so selected
shall resolve the matter according to the procedures set forth in this Section
4.7. If Company's Arbitrator and Employee's Arbitrator are unable to agree on a
third arbitrator within 20 days after their selection, Company's Arbitrator and
Employee's Arbitrator shall each prepare a list of three independent
arbitrators. Company's Arbitrator and Employee's Arbitrator shall each have the
opportunity to designate as objectionable and eliminate one arbitrator from the
other arbitrator's list within 7 days after submission thereof, and the third
arbitrator shall then be selected by lot from the arbitrators remaining on the
lists submitted by Company's Arbitrator and Employee's Arbitrator.
(d) The arbitrator jointly selected by the Company and the Employee
pursuant (or the third arbitrator selected pursuant) to paragraph (c) will
determine the allocation of the costs and expenses of arbitration.
(e) The arbitration shall take place in New York City and shall be
conducted under the American Arbitration Association rules as in effect from
time to time in the State of New York, except as otherwise set forth herein or
as modified by the agreement of all of the parties to this Agreement. The
arbitrator shall conduct the arbitration so that a final result, determination,
finding, judgment and/or award (a "Final Determination") is made or rendered as
soon as practicable, but in no event later than 90 business days after the
delivery of the Notice of Arbitration nor later than 10 days following
completion of the arbitration. The Final Determination must be agreed upon and
signed by the arbitrator. The Final Determination shall be final and binding on
all parties and there shall be no appeal from or reexamination of the Final
Determination, except for fraud, perjury,
-8-
<PAGE>
evident partiality or misconduct by an arbitrator prejudicing the rights of any
party and to correct manifest clerical errors.
(f) Employee and the Company may enforce any Final Determination in
any state or federal court having jurisdiction over the dispute. For the purpose
of any action or proceeding instituted with respect to any Final Determination,
each party hereto hereby irrevocably submits to the jurisdiction of such courts,
irrevocably consents to the service of process by registered mail or personal
service and hereby irrevocably waives, to the fullest extent permitted by law,
any objection which it may have or hereafter have as to personal jurisdiction,
the laying of the venue of any such action or proceeding brought in any such
court and any claim that any such action or proceeding brought in such court has
been brought in an inconvenient forum. The foregoing shall in no way prevent or
prejudice the prevailing party's right to enforce a Final Determination in any
other jurisdiction (whether domestic or foreign).
(g) If any party shall fail to pay the amount of any damages, if any,
assessed against it within 10 days of the delivery to such party of such Final
Determination, the unpaid amount shall bear interest from the date of such
delivery at the maximum rate permitted by applicable usury laws. Interest on any
such unpaid amount shall be compounded semi-annually, computed on the basis of a
360-day year consisting of twelve 30-day months and shall be payable on demand.
In addition, such party shall promptly reimburse the other party for any and all
costs or expenses of any nature or kind whatsoever (including, but not limited
to, all attorneys' fees) incurred in seeking to collect such damages or to
enforce any Final Determination.
4.8 Remedies. Except as provided in Section 4.7 hereof regarding the
requirements of using the arbitration procedure set forth therein for resolving
and remedying claims for money damages arising out of this Agreement, Employee
and the Company each have and retain all other rights and remedies existing in
their favor at law or equity, including, without limitation, any actions for
specific performance and/or injunctive or other equitable relief (including,
without limitation, the remedy of rescission) to enforce or prevent any
violations of the provisions of this Agreement.
4.9 Rights of Participants. This Agreement does not create any
employment rights in Employee and the Company shall have no liability under this
Agreement for terminating Employee's employment or materially reducing
Employee's responsibilities other than the remedies herein provided in such
events.
* * * * *
-9-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Management Stock
Purchase Agreement as of the date set forth above.
DERBY CYCLE CORPORATION
By:___________________________________
Name:
Title:
______________________________________
DAN S. LYNCH
<PAGE>
EXHIBIT A
PROMISSORY NOTE
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-27-1999
<CASH> 9,452
<SECURITIES> 0
<RECEIVABLES> 102,813
<ALLOWANCES> 0
<INVENTORY> 94,053
<CURRENT-ASSETS> 215,470
<PP&E> 43,621
<DEPRECIATION> 0
<TOTAL-ASSETS> 354,690
<CURRENT-LIABILITIES> 120,656
<BONDS> 178,512
46,496
0
<COMMON> 1
<OTHER-SE> (49,360)
<TOTAL-LIABILITY-AND-EQUITY> 354,690
<SALES> 303,518
<TOTAL-REVENUES> 303,518
<CGS> 229,386
<TOTAL-COSTS> 229,386
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,238
<INCOME-PRETAX> (2,686)
<INCOME-TAX> (130)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,644)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
