<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Year ended December 31, 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 No (X).
<PAGE>
THE DERBY CYCLE CORPORATION
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
PART I
------
ITEM 1. BUSINESS......................................................... 1
ITEM 2. PROPERTIES....................................................... 7
ITEM 3. LEGAL PROCEEDINGS................................................ 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 8
PART II
-------
ITEM 5. MARKET FOR THE REGISTRANTS' UNITS AND RELATED UNITHOLDER
MATTERS.......................................................... 9
ITEM 6. SELECTED HISTORICAL FINANCIAL AND OPERATING DATA................. 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................ 12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................... 25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.............................. 25
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............... 26
ITEM 11. EXECUTIVE COMPENSATION........................................... 29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT....................................................... 32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 37
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.. E1
<PAGE>
PART I
ITEM 1. BUSINESS
Nature of the Business
The accompanying 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 Derby Bicycle Group, have significant operations
in The Netherlands ("Gazelle"), the United Kingdom ("Raleigh U.K.", and "Sturmey
Archer"), Canada ("Raleigh Canada"), Germany ("Derby Germany"), South Africa
("Probike") and the United States ("the Derby U.S.A." division of the Company).
Effective May 14, 1998, DICSA reorganized its businesses in connection with a
recapitalization agreement 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 December 31, 1999. Accordingly, the financial statements have
been prepared in conformity with accounting principles generally accepted in the
United States and are presented in U.S. 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 December 31, 1999.
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 a leading bicycle supplier in the United
States. Competing primarily in the medium- to premium-priced market, the Company
owns or licenses many of the most widely 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 ("M.T.B.s"), (ii) city
bicycles, also called touring or upright bicycles, (iii) hybrid bicycles, also
called comfort or cross bicycles, (iv) juvenile bicycles, including bicycle
motocross ("B.M.X.") bicycles, and (v) race/road bicycles. The Company
distributes branded bicycles through extensive local market networks of
independent bicycle dealers ("I.B.D.s") 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 bicycle and bicycle component 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.
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.
1
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The Company's operations are concentrated in Germany, The Netherlands, the
United States, the United Kingdom 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. (See Financial Statements page F-28 for details of segmental
information). 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.
2
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Acquisition History and Investment Program
The Company was organized in 1986 to acquire the Raleigh, Gazelle and Sturmey
Archer bicycle and bicycle component businesses from TI Group plc. In 1988, the
Company acquired the assets of Neue Kalkhoff, the second largest bicycle
manufacturer in the former Federal Republic of Germany at the time, and
established Derby Germany. Also in 1988, the Company acquired the assets of
Raleigh Cycle Company of America from Raleigh's U.S. licensee, Huffy
Corporation, and the West Coast Cycle division of Medalist Industries Inc.
(owner of the Nishiki brand in the United States). These two businesses were
merged to form Raleigh U.S.A.. The Company formed the Probike South Africa
operating company with the acquisitions of Cycle and Hardware Factors in 1989,
J.H. Slotar in 1990 and Cycle Centre Wholesale in 1991. In 1992, the Company
acquired Musing, the German bicycle manufacturer. In 1997, Derby acquired the
assets and operations of the Winora and Staiger businesses. Winora-Staiger is a
long established bicycle manufacturer and distributor located in southwestern
Germany. Also in 1997, Derby acquired the worldwide rights to the Univega brand
name and its associated trade names, trademarks and designs and formed Univega
as a holding company for the acquisition of the Univega Group in Germany.
On February 4, 1999, the Company acquired the assets (and assumed certain
liabilities) of the Diamond Back Group for approximately $44.3 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 was engaged in the bicycle,
bicycle parts and accessories and fitness equipment distribution business.
Weather Conditions And Seasonality
Demand for bicycles in the Company's principal markets is influenced by weather
conditions. For example, warm weather tends to increase sales of bicycles, and
cold, wet weather tends to reduce sales of bicycles. Moreover, 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, with a
strong bias towards consumer sales in the last four months of the calendar year
in the United Kingdom, South Africa and Ireland. Seasonality in the United
Kingdom, South Africa and Ireland is influenced by increased sales of juvenile
bicycles in the months preceding Christmas. Accordingly, dealers' peak
purchasing months are October and November when they build inventory in
anticipation of Christmas sales of juvenile bicycles. The Company seeks to
mitigate the impact of the seasonality of the demand for bicycles by varying the
amount of labor employed throughout the year. Additional labor is employed in
the months before and during the periods of greater consumer sales through the
operation of longer shifts and the hiring of temporary workers. In addition,
certain of the Company's local operations, such as those in Canada, are closed
during periods of low production. There can be no assurance, however, that the
Company will be able to successfully respond to changes in demand for bicycles
due to variations in weather conditions or to manage its working capital needs.
Any failure to so respond may have a material adverse effect on the Company's
business, financial condition and results of operations.
3
<PAGE>
Highly Competitive Industry
The market for bicycles, parts and accessories is highly competitive.
Competition in the bicycle industry is based upon price, quality, brand name and
service. In all its product categories, the Company competes with other
manufacturers and distributors, some of which have well-recognized brand names
and substantial financial, technological, distribution, advertising and
marketing resources. In addition, several bicycle manufacturers and component
suppliers that have substantial resources do not currently compete directly with
the Company, but could pose a significant competitive threat to the Company in
the future. Moreover, additional competitors could enter the Company's markets,
as management believes the barriers to entering the bicycle designing and
manufacturing businesses are low. Management also believes, however, that it
would be difficult for a new competitor to build a distribution network as
effective as the Company's distribution network.
Like other bicycle manufacturers, the Company also faces competition from
bicycles imported from the Far East. In recent years, the impact of this
competition has diminished due to the imposition of anti-dumping duties by the
E.U. The purpose of anti-dumping duties is to promote fair competition between
domestic and foreign suppliers of bicycles by increasing the cost of foreign-
supplied bicycles to domestic fair market value. Such anti-dumping duties work
by imposing a payment due to be made by the importer at the time of clearing
customs. The impact of such anti-dumping duties is to increase the retail price
of imported bicycles, thus enabling domestic manufacturers to compete more
fairly with imported bicycles. Specifically, imports from the Far East have been
constrained by E.U. initiatives such as the 30.6% anti-dumping duty on Chinese
bicycles introduced in 1993, which continues in effect until 2004. The E.U. has
also imposed anti-dumping duties and tariffs, ranging up to 39.4%, on bicycles
imported from most manufacturers in Thailand, Malaysia and Indonesia. In
addition, in January 1997, the E.U. strengthened its existing regulations to
prevent circumvention through the importation of kits and partially assembled
bicycles. Anti-dumping duties were imposed by the E.U. on Taiwan on August 24,
1998 at various rates for different manufacturers for a period of five years.
There can be no assurance that the Company will be able to compete successfully
in the future with other bicycle manufacturers located in its principal markets
or in the Far East or that the expiration or repeal of existing anti-dumping
duties or competition in the bicycle industry will not have a material adverse
effect on the Company's business, financial condition and results of operations.
Dependence On Certain Suppliers
The Company's operations are highly dependent upon components manufactured by
non-U.S. suppliers located primarily in Taiwan, Japan and in China. As is common
in the bicycle industry, a substantial majority of the Company's multi-speed
bicycles contain components supplied by Shimano Inc. ("Shimano"), the world's
largest bicycle component manufacturer and supplier, and a brand with a strong
reputation among bicycle consumers. Although Shimano has not indicated any
intention to limit or reduce sales of components to the Company, if it were to
do so, the Company's business, financial condition and results of operations
could be adversely affected. Although the Company has established relationships
with its principal suppliers, the Company's future success will depend on its
ability to maintain such relationships and to develop relationships with new
suppliers. In the event of a delay or disruption in the supply of components,
the Company believes that suitable alternative suppliers could be located,
although the transition to other suppliers could result in significant
production delays. Any significant delay or disruption in the supply of
components could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Recapitalization
On May 14, 1998, the Company consummated a recapitalization. Pursuant to a
Recapitalization Agreement dated March 11, 1998 (as amended, the
"Recapitalization Agreement"), (i) the Company was restructured (the
"Restructuring") such that the Company now owns all the capital stock of
approximately 70 existing subsidiaries, a controlling interest in Raleigh
Canada, Univega, Univega License, the Univega Group, Derby Holdings South
Africa and certain other subsidiaries, and a minority interest in certain other
entities; (ii) each of Derby Finance S.a.r.l. ("DFS") (a wholly owned subsidiary
of
4
<PAGE>
DICSA, the former parent company of the Company), Thayer Equity Investors III,
L.P. ("Thayer") and Perseus Capital, L.L.C. ("Perseus") purchased (through their
respective wholly owned subsidiaries) equity interests in the Company in the
amounts of $3.0 million, $50.0 million and $10.0 million, respectively, for cash
(collectively, the "Equity Contributions"); (iii) DICSA (directly and through
DFS) retained an equity interest in the Company and Raleigh Canada having a
value of $45.0 million (the "Retained Equity"), based on the amounts invested in
the Company's equity by DFS, Thayer and Perseus.
The Retained Equity includes preferred stock of Raleigh Canada issued to DICSA
in connection with the Recapitalization (the "Raleigh Canada Preferred Stock"),
which may be exchanged for shares of Class A common stock (as defined) and Class
B common stock (as defined) of the Company having a value of $23.3 million,
based on the amounts invested in DCC's equity by DFS, Thayer and Perseus, or
redeemed subsequent to the vesting of the Company's right to exchange such stock
for shares of its common stock (as defined), at the option of DICSA under
certain circumstances, for a cash payment of $23.3 million, plus all accrued and
unpaid dividends thereon, pursuant to an exchange agreement among DICSA, the
Company and Raleigh Canada (the "Raleigh Canada Exchange Agreement"). In
addition, (i) the Company made a cash payment of $146.2 million to DFS (the "DFS
Payment"); (ii) equity held by the minority shareholders of Derby Holdings South
Africa was redeemed for a cash payment of $1.9 million (the "Redemption
Payment"); (iii) the Company repaid its net existing indebtedness (the "Existing
Indebtedness") (other than indebtedness of the Company's South African
subsidiaries incurred under a credit facility providing for maximum borrowings
in an amount approximately equivalent to $6 million (the "South African Credit
Facility")), in an amount of $148.1 million; (iv) the Company and certain of its
subsidiaries borrowed $84.9 million under a new secured senior revolving credit
agreement (the "Revolving Credit Agreement"); and (v) the Issuers issued the Old
Notes (collectively with borrowings under the Revolving Credit Agreement, the
"Debt Financing"), as of May 14, 1998. The Restructuring, the Equity
Contributions, the DFS Payment, the repayment of Existing Indebtedness (other
than indebtedness incurred under the South African Credit Facility) and the Debt
Financing are collectively referred to as the "Recapitalization".
Investor Group
Subsequent to the Recapitalization, the issue of Class C common stock in
February, 1999 and the issue, during 1999, of Class A and Class C common stock
under the management stock plan, the Company's shareholders are (i) DC Cycle
L.L.C. ("DC Cycle") a wholly-owned subsidiary of Thayer, which controls
approximately 64% of the total voting power of the Company's capital stock, (ii)
Perseus Cycle L.L.C. ("Perseus Cycle") a wholly-owned subsidiary of Perseus,
which controls approximately 13% of the total voting power of the Company's
capital stock, (iii) DFS, which controls approximately 20% of the total voting
power of the Company's capital stock and (iv) Management, which controls
approximately 3% of the total voting power of the Company's capital stock. Prior
to the Recapitalization, the Company was wholly-owned by DICSA through its
subsidiary, DFS.
Thayer is a private equity fund managed by TC Equity Partners ("Thayer
Capital"), a private equity investment firm based in Washington, D.C.. Thayer
Capital's partners are Frederic V. Malek, Carl J. Rickertsen and Paul G. Stern.
Thayer Capital invests primarily in private equity investments in management
buyouts and recapitalizations. In June 1996, Thayer Capital closed Thayer, a
private equity fund, with $364 million in commitments.
Perseus is a merchant banking venture managed by Perseus Management L.L.C.
("Perseus Management") and based in Washington, D.C.. Perseus invests primarily
in leveraged acquisitions of operating businesses. Frank H. Pearl is the
Chairman and President of Perseus and is one of the founding directors and
shareholders of DICSA.
DFS is a wholly-owned subsidiary of DICSA. A. Edward Gottesman, a director of
the Company, the chairman of DICSA and a charitable trust of which he is the
settlor, controls a majority of the capital stock of DICSA indirectly through an
industrial holding company, Centenary Corporation ("Centenary"). Alan J. Finden-
Crofts, a director of the Company and a director of DICSA, and Mr. Pearl, a
director of the Company and a director of DICSA, own minority interests in
DICSA.
5
<PAGE>
Global Bicycle Industry Overview.
The global bicycle industry, including bicycles, parts and accessories, is
estimated to have total retail sales in excess of $20 billion. The bicycle
manufacturing segment of the industry, with annual production of approximately
100 million units, is competitive, highly fragmented and locally driven.
Bicycles are produced throughout the world in approximately 65 countries with
product demand, design and distribution driven by varying local market dynamics
and consumer preferences. Across local markets, bicycle products can be
classified into five major categories: (i) all-terrain or mountain bicycles,
referred to as M.T.B.s, which feature wide tires, high strength frames,
components with multiple gears and powerful brakes, (ii) city bicycles, also
called touring or upright bicycles, which feature more comfortable seats, up to
seven gears within the wheel hub, chain and splash guards, luggage racks and
lights, (iii) hybrid bicycles, also called comfort or cross bicycles, which
combine the technology of M.T.B.s with the comfort and practicality of city
bicycles, (iv) juvenile bicycles with smaller wheels and frame size, including
B.M.X. bicycles, and (v) race/road bicycles, which feature narrow, high pressure
tires, lightweight frames and components with multiple gears. In general, these
bicycle products are marketed and sold through two primary distribution
channels: I.B.D.s and mass merchandisers. I.B.D.s typically carry a broad range
of relatively high priced, high quality bicycles, while mass merchandisers tend
to offer relatively lower priced bicycles focused primarily on the juvenile
market. The Company manufactures and markets bicycles across all five major
product categories and distributes through both the I.B.D. channel and the mass
merchandiser channel. Management believes that the Company is an industry leader
because it offers its customers high quality, comprehensive product lines in
each of its local markets.
6
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ITEM 2. PROPERTIES
The Company manufactures at sites in the U.K., the Netherlands, Germany, Canada
and the U.S.A.. The Company sold the factories and offices located in
Nottingham, England used by its Raleigh U.K. and Sturmey Archer operations in
December 1999. These properties have been leased back. The company has granted
an option to a property developer on the Raleigh U.K. warehouse site. Raleigh
U.K. has entered into a lease for a new warehouse for its parts and accessories
business unit with effect from May 2000. Except for the U.K. and U.S.A., these
manufacturing sites are owned by the Company. The U.K. and U.S.A. manufacturing
sites and certain warehouse and office facilities in Europe, South Africa and
Taiwan, are leased. The leases of the Diamond Back properties in U.S.A. and
Sweden were assigned to the Company in February 1999. See the following tables
on freehold and leasehold properties. The Company believes that it has
satisfactory title to or valid rights to the use of all of its material
properties.
<TABLE>
<S> <C> <C>
Operating entity Location Freehold property
Derby Germany Cloppenburg, Germany Factory and main offices
Derby Germany Rostock, Germany Factory
Derby Germany Sennfeld, Germany Factory and offices
Gazelle Dieren, The Netherlands Factory and offices
Raleigh Canada Oakville, Canada Offices and warehouse
Raleigh Canada Waterloo, Canada Factory
Raleigh U.K. Nottingham, England Warehouse
Sturmey Archer Birmingham, England Factory
Operating entity Location Leasehold property
Derby Cycle Corporation Stamford, Connecticut Offices
Derby Germany Isernhagen, Germany Offices and warehouse
Derby Germany Kirchheim, Germany Offices and warehouse
Derby Germany Nidwailden, Switzerland Offices and warehouse
Derby Sweden Gothenberg, Sweden Offices and warehouse
Derby Trading Co Shenzhen, China Offices and warehouse
Derby Trading Co Taipei, Taiwan Offices
Derby Trading Co Taichung, Taiwan Offices
Derby U.S.A. Bolingbrook, Illinois Warehouse
Derby U.S.A. Camarillo, California Warehouse and offices
Derby U.S.A. Dayton, New Jersey Warehouse
Derby U.S.A. Hanover Park, Illinois Warehouse
Derby U.S.A. Kent, Washington Factory, warehouse and offices
Derby U.S.A. Paulsboro, New Jersey Warehouse
Probike Bloemfontein, South Africa Offices and warehouse
Probike Durban, South Africa Offices and warehouse
Probike Ottery, Cape Town, South Africa Offices and warehouse
Probike Port Elizabeth, South Africa Offices and warehouse
Probike Sandton, South Africa Offices and warehouse
Raleigh Ireland Dublin, Republic of Ireland Offices
Raleigh U.K. Nottingham, England Factory and offices
Sturmey Archer Amsterdam, The Netherlands Offices
Sturmey Archer Nottingham, England Factory and offices
</TABLE>
All the freehold property is pledged as security for the Company's seven year
revolving credit facility of DM214,000,000.
7
<PAGE>
ITEM 3. 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
may 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
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PART II
ITEM 5. MARKET FOR THE REGISTRANTS' UNITS AND RELATED UNITHOLDER MATTERS
There is no established public trading market for any class of equity.
The Company had the following shares in issue:
<TABLE>
<CAPTION>
December
31, 1997
through May May 14, Dec 31, Dec 31, March
14, 1998 1998 1998 1999 30, 2000
---------- ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
Common stock held by DFS (1) 3,000 - - - -
Class A common stock held by DFS (1, 3) - 21,700 21,700 21,700 21,700
Class A common stock held by DC Cycle - 12,500 12,500 12,500 12,500
Class A common stock held by Perseus - 10,000 10,000 10,000 10,000
Class A common stock held by CEO (5) - - - 1,200 1,200
Class A common stock held by other directors (7) - - - - 40
Class A common stock held by management (6) - - - 1,760 2,320
Class A common stock held by DICSA (3) - 8,300 8,300 8,300 8,300
Class B common stock held by DICSA (3) - 15,000 15,000 15,000 15,000
Class C common stock held by DC Cycle (4) - - - 18,950 20,200
Class C common stock held by Perseus (4) - - - 3,800 5,050
Class C common stock held by CEO (5) - - - 300 300
Class C common stock held by other directors (7) - - - - 10
Class C common stock held by management (6) - - - 440 580
Class A preferred stock (2) 5,000 - - - -
Class B preferred stock (2) 5,000 - - - -
Class C preferred stock (2) 53,432 - - - -
Class D preferred stock (2) 45,000 - - - -
Series A preferred stock held by DC Cycle - 25,000 25,000 25,000 25,000
Series B preferred stock held by DFS - 3,000 3,000 3,000 3,000
</TABLE>
(1) At the time of the Recapitalization, the 3,000 common stock of $1 each held
by DFS were converted into 21,700 Class A common stock of $0.01 each.
(2) Classes A, B, C and D preferred stock in issue before the Recapitalization
were surrendered by the Company as part of the Recapitalization.
(3) DICSA has the right to acquire 15,000 shares of Class B common stock and
8,300 shares of Class A common stock under the Raleigh Canada Exchange
Agreement.
(4) Issued on acquisition of Diamond Back and includes warrants to purchase
1,250 shares of Class C common stock issued in connection with the $7
million bridge loan.
(5) Issued to CEO.
(6) Issued to management.
(7) Issued to non executive director.
9
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ITEM 6. SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
Selected Historical Financial Data
Set forth below are selected historical financial data of the Company in $
millions (except for share and per share data) as of the dates and for the
periods presented. The selected historical financial data as of December 31,
1996, 1997, 1998 and 1999 are derived from the audited combined and consolidated
financial statements of the Company. The selected unaudited historical financial
data of the Company as of December 31, 1995 was prepared by management in a
manner consistent with the audited consolidated financial statements. The
information contained in this table should be read in conjunction with "ITEM 7
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and accompanying notes
thereto on pages F1 to F33.
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------------------------
$ millions 1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenues................................... $ 473.8 $ 452.6 $ 465.7 $ 465.3 $ 540.4
Cost of goods sold............................. (366.2) (339.1) (345.9) (350.3) (409.5)
----------- ---------- --------- -------- -------
Gross profit................................... 107.6 113.5 119.8 115.0 130.9
Selling, general and administrative expenses... (81.3) (80.1) (90.1) (91.0) (107.1)
Recapitalization costs (1)..................... - - - (5.9) -
Restructuring charge (2)....................... (4.4) - - - (5.1)
Non-recurring items (3)........................ - - - - (4.5)
----------- ---------- --------- -------- -------
Operating income............................... 21.9 33.4 29.7 18.1 14.2
Interest expense............................... (9.4) (8.0) (7.5) (16.9) (26.3)
Interest income................................ 0.9 0.8 1.0 1.0 0.6
Other income (expense), net.................... 5.3 (2.7) 0.1 (1.3) 1.5
Gain on dispositions of property, plant and
equipment................................. 4.7 - - - 9.3
----------- ---------- --------- -------- -------
Income (loss) before income taxes, minority
interest and extraordinary item........... 23.4 23.5 23.3 0.9 (0.7)
Provision for income taxes..................... (10.1) (8.9) (10.6) (6.3) (4.5)
Minority interest.............................. (0.1) - (0.1) (0.1) -
----------- ---------- --------- -------- -------
Income (loss) before extraordinary item........ 13.2 14.6 12.6 (5.5) (5.2)
Extraordinary item (4)......................... - - - (0.4) -
----------- ---------- --------- -------- -------
Net income (loss).............................. 13.2 14.6 12.6 (5.9) (5.2)
Dividends accrued on preferred stock......... - - - (4.9) (3.7)
----------- ---------- --------- -------- -------
Net income (loss) applicable to common
shareholders............................ $ 13.2 $ 14.6 $ 12.6 $ (10.8) $ (8.9)
=========== ========== ========= ======== =======
$
Basic and diluted net income (loss) before
extraordinary item applicable to common
shareholders per share.................... $ 610.1 $ 671.2 $ 584.5 $ (289.1) $ (131.0)
Basic and diluted extraordinary item
applicable to common shareholders per
share..................................... - - - (12.0) -
Basic and diluted net income (loss) applicable
to common shareholders per share.......... 610.1 671.2 584.5 (301.1) (131.0)
Weighted average number of shares of common
stock outstanding......................... 21,700 21,700 21,700 35,940 67,666
=========== ========== ========= ======== =======
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------------------------
$ millions 1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Depreciation and amortization.................. $ 9.2 $ 8.8 $ 9.2 $ 10.2 $ 11.0
Amortization of pension transition asset....... (2.7) (2.7) (2.5) (2.5) (2.4)
Capital expenditures........................... 11.1 10.8 7.4 8.3 7.4
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
$ millions 1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents...................... $ 12.7 $ 8.8 $ 15.4 $ 17.5 $ 28.9
Working capital................................ 85.3 80.0 63.3 73.2 90.5
Total assets................................... 260.3 258.2 285.2 328.3 389.6
Total debt, including current portion.......... 92.0 78.6 102.2 226.7 245.6
Preferred stock with redemption rights......... - - - 45.4 49.1
Stock rights (5)............................... - - - 23.3 23.3
Shareholders' equity (deficit)................. $ 66.1 $ 83.1 $ 81.9 $ (70.1) $ (62.5)
</TABLE>
(1) Recapitalization costs of $5.9 million in 1998 included legal, accounting
and investment banking fees incurred in connection with implementing the
Recapitalization on May 14, 1998.
(2) The restructuring charge of $4.4 million in 1994 represented the cost of
relocating the Raleigh U.K. bicycle warehouse, offices and frame
manufacturing facility. The restructuring charge of $5.1 million in 1999
included the cost of exiting from bicycle frame manufacturing in the U.K.
and the closure of some Raleigh distribution facilities in Europe as
described in Note 2 of the financial statements.
(3) Non-recurring items of $4.5 million in 1999 included the cost of strategic
reviews of aspects of the business and start-up costs of establishing new
headquarters as described in Note 2 of the financial statements.
(4) Loss on early extinguishment of debt.
(5) Reflects Class A common stock having a value of $8.3 million and Class B
common stock having a value of $15.0 million issuable to DICSA upon exchange
of the Raleigh Canada Preferred Stock. The Raleigh Canada Preferred Stock
may be redeemed subsequent to the vesting of the Company's right to exchange
such stock for shares of its common stock, at the option of DICSA under
certain circumstances, for a cash payment of $23.3 million, plus all accrued
and unpaid dividends thereon.
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The following discussion should be read in conjunction with the attached
consolidated financial statements.
The Company is a world-leading designer, manufacturer and marketer of bicycles.
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. For the fiscal years ended
December 31, 1997, 1998 and 1999, the Company had net revenues of $465.7
million, $465.3 million and $540.4 million, respectively, and EBITDA of $35.8
million, $30.3 million and $30.5 million, respectively.
The Company operates in eleven countries around the world with a majority of its
operations conducted in countries other than the United States. In 1999, 54% of
the Company's net revenues were denominated in currencies linked to the Euro,
22% were denominated in U.S. Dollars, 15% were denominated in sterling and 9%
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 mitigated foreign exchange risk in 1999 by purchasing
currency options and entering into forward purchase contracts.
Results of Operations
Comparison of year ended December 31, 1999 to year ended December 31, 1998
All comparisons in the following discussion and analysis are against the
corresponding twelve month period ended December 31, 1998, unless otherwise
stated.
Units sold: Year ended
---------------------
Thousands of bicycles Dec 31, Dec 31,
1998 1999
------- -------
Raleigh U.K..................................... 472 502
Gazelle......................................... 303 338
Derby Germany................................... 520 584
Derby U.S.A..................................... 279 515
Raleigh Canada.................................. 306 248
Probike......................................... 155 177
Other companies and group transactions.......... - 11
----- -----
Total units sold........................... 2,035 2,375
===== =====
Units sold. Units sold increased by 340 thousand units for the year ended
December 1999, including Diamond Back sales of 252 thousand units. Excluding
Diamond Back, units sold increased by 4% in the year ended December 1999.
Particularly strong growth was seen at Gazelle and Derby Germany in the I.B.D.
sector following successful product ranges and more effective marketing efforts
such as the new television advertising in The Netherlands. This led to a
combined increase in sales volumes in those markets of 12% for the year. Sales
were regained at Raleigh U.K. and Probike behind better value product lines,
producing sales volume increases for the year 14% above year ago. Raleigh
Canada's sales fell by 19% in the year ended December 1999 as mass merchants
started the year over-stocked and experienced weak bicycle retail sales.
12
<PAGE>
Net revenues: Year ended
--------------------
$ millions Dec 31, Dec 31,
1998 1998
------ -------
Raleigh U.K................................................ $ 82.1 $ 82.0
Gazelle................................................... 111.5 124.5
Derby Germany............................................. 125.1 145.0
Derby U.S.A............................................... 69.1 117.4
Raleigh Canada............................................ 28.8 22.6
Sturmey Archer............................................ 23.8 20.6
Probike................................................... 17.0 16.8
Other companies and group transactions.................... 7.9 11.5
------ ------
Total net revenues................................... $465.3 $540.4
====== ======
Net Revenues. Net revenues increased $75.1 million to $540.4 million for the
year ended December 1999, including revenues from Diamond Back of $52.2 million.
Excluding Diamond Back, revenues grew by 5% in the year ended December 1999.
Revenues grew in line with the increase in units sold and included $11.2 million
in revenues from the sale of parts and accessories and $4.6 million from fitness
equipment in the year ended December 1999 at Diamond Back. Sturmey Archer's
revenues for the quarter were equal to year ago as renewed sales efforts have
stemmed the business erosion of the prior quarters. Sturmey Archer's revenues
from the sale of bicycle hubs dropped by $1.9 million (15%) in the year ended
December 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. Revenues at Probike for the year ended December 1999 in
South African Rand increased over year ago by 7% more than the rate of
inflation, but showed a decrease upon translation into U.S. Dollars. Overall the
hardening U.S. Dollar reduced consolidated revenues by 3.0% in the year ended
December 1999 compared with a year ago.
Gross Profit. Gross profit for the year ended December 1999 increased by $15.9
million. The margin erosion experienced in the first half of 1999 was reversed
during the second half, with a gross margin 0.7 percentage points above the
second half of 1998, putting gross margin for the year up to within half a
percentage point of 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $16.1 million to $107.1 million for the
year ended December 1999. Expenses at Diamond Back of $15.5 million for the
eleven months ended December 1999 accounted for nearly all the increase. If the
1998 expenses are adjusted to take out the currency gains of $2.0 million
realized in 1998, the $2.7 million adverse impact of a weaker U.S. Dollar in
1998 on the translation of figures into U.S. Dollars and to add in the $15.5
million Diamond Back expenses plus $1.7 million for the new headquarters, the
underlying operating expenses were actually $0.4 million lower in 1999, despite
the 4% increase in bicycle sales volume and inflationary pressures. This
decrease was achieved through the reorganization of the various Raleigh
operations described below which reduced expenses by $2.0 million.
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 restructured its businesses in the U.K. and the Raleigh
distribution operations in Germany, The Netherlands, Belgium and Ireland, at a
cost of $5.1 million as described in Note 2 of the financial statements.
Raleigh U.K. ceased manufacturing steel bicycle frames at the end of 1999 due to
increased consumer demand for aluminum frames. Steel frames manufactured by the
company accounted for approximately 50% of all frames sold by the company in
1999, with the balance being fabricated mostly from aluminum and imported from
Asia. The company has granted an option to a property developer for the sale of
the site used for employee car parking, storage and the parts and accessories
business that will be released. The company intends to use the $2.5 million net
proceeds from the sale of the site to pay down the Company's revolving credit
debt. A lease has been entered into for new purpose built premises close to
Nottingham for the parts and accessories business. This will allow for improved
efficiency in that business and provide space for continued growth. The parts
and accessories business has grown at a
13
<PAGE>
compound annual rate of 7% over the last 5 years. The initial annual rental will
be $0.3 million. Surplus plant with a net book value of $2.1 million was
disposed of, realizing $0.5 million. Other components of the restructuring at
Raleigh U.K. included streamlining the company's product development and
marketing functions. These restructuring steps are projected to reduce on-going
product costs and selling expenses by $3 million in 2000.
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 and distribution outsourced, leaving only a sales and
marketing organization in Ireland.
Non-Recurring Items. The Company completed strategic reviews of aspects of its
business, including the logistics of Raleigh and Diamond Back distribution in
the U.S.A., a pilot sourcing project to reduce the cost of certain components,
and a study of the strength of certain brands, as well as establishing its new
headquarters. The severance costs, recruitment costs and consulting expenses
incurred during 1999 in completing these steps aggregated $4.5 million and are
projected to produce annual cost savings of at least $3 million.
In July 1999 the Company restructured its corporate management and established
its headquarters in Stamford, CT to reorganize the finance, marketing and
sourcing functions of the Company on a global basis.
Operating income: Year ended
-------------------
$ millions Dec 31, Dec 31,
1998 1999
------- -------
Raleigh U.K............................................... $ 3.2 $ 2.4
Gazelle................................................... 14.8 17.1
Derby Germany............................................. (0.5) 2.8
Derby U.S.A............................................... 2.7 2.1
Raleigh Canada............................................ 2.6 2.4
Sturmey Archer............................................ 0.6 0.6
Probike................................................... 1.2 1.4
Other companies and group transactions.................... (0.6) (4.9)
------- ------
Underlying operating income ......................... 24.0 23.9
Recapitalization costs............................... (5.9) -
Restructuring charge................................. - (5.1)
Non-recurring items.................................. - (4.5)
------- ------
Total operating income .............................. $ 18.1 $ 14.3
======= ======
Operating Income. Underlying operating income of $23.9 million for the year
ended December 1999 decreased by $0.1 million due to the low gross margin in the
first half and higher selling, general and administrative expenses, which was
turned round in the last quarter by the strong recovery in sales volumes and
margins at Raleigh U.K. and Derby Germany.
14
<PAGE>
Interest expense: Year ended
----------------
$ millions Dec 31, Dec 31,
1998 1999
------- -------
Senior Notes................................................. $11.4 $15.6
Subordinated Note............................................ - 3.8
Revolving credit facility.................................... 3.3 4.3
Other interest............................................... 0.8 0.7
Amortization of deferred financing costs..................... 1.4 1.9
----- -----
Total interest expense.................................. $16.9 $26.3
===== =====
Interest Expense. Interest expense increased by $9.4 million to $26.3 million
for the year ended December 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.
Other Income. As of October 1, 1999, the Company has dedesignated all of its
hedges. From this date, all changes in fair value of derivatives are recorded as
"other income (expense)" in the 1999 Consolidated Statement of Operations.
Gain on Property Disposition. In December 1999 the Company contracted with the
University of Nottingham for the sale and leaseback of its two main
manufacturing sites in Nottingham, U.K. with an aggregate net book value of $0.7
million. The proceeds, net of selling expenses, of $13.5 million were received
before the year end and will be used to fund working capital during the 2000
Peak Season, and thereafter applied to a reduction in the Company's revolving
credit facility. The Sturmey Archer site will be vacated by December 2000 and
the Raleigh U.K. site by December 2003. The properties are being leased back at
an annual rental of $0.7 million in 2000 and the Raleigh U.K. site at $0.4
million in 2001-2003. Under sale and leaseback accounting provisions, a gain of
$11.4 million has been recognized, which represents the excess of the proceeds,
net of selling expenses, over the balance sheet value of the property and the
$1.4 million present value of the future lease premiums on the Raleigh site.
Provision for income taxes: Year ended
----------------
$ millions Dec 31, Dec 31,
1998 1999
------- -------
Current taxes................................................ $ 5.3 $ 3.3
Deferred taxes............................................... 1.0 1.2
----- -----
Total provision for income taxes........................ $ 6.3 $ 4.5
===== =====
Provision for Income Taxes. Most of the reduction in income before income taxes
arose in jurisdictions where the Company is in a tax loss position, principally
the U.K., 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
$2.0 million in the year ended December 1999. The provision for deferred taxes
was reviewed in the fourth quarter and a more prudent assumption made concerning
the future recovery of tax losses, resulting in an increase in the provision for
deferred taxes.
Net Income. Net loss decreased by $0.7 million to give a loss of $5.2 million in
the year ended December 1999. The decrease resulted, in the main, from the
increase in interest expense of $9.3 million, the restructuring charge and
non-recurring items of $9.6 million as discussed above, offset by the
recapitalization costs of $5.9 million in 1998, the $9.3 million gain on the
disposition of property, plant and equipment and the lower provision for income
taxes and other expense.
15
<PAGE>
EBITDA: Year ended
-------------------
$ millions Dec 31, Dec 31,
1998 1999
------- -------
Raleigh U.K.............................................. $ 4.7 $ 3.6
Gazelle.................................................. 15.3 17.5
Derby Germany............................................ 2.6 5.9
Derby U.S.A.............................................. 3.1 2.8
Raleigh Canada........................................... 2.9 2.7
Sturmey Archer........................................... 0.7 0.6
Probike.................................................. 1.4 1.5
Other companies and group transactions................... (0.4) (4.1)
------ ------
Total EBITDA........................................ $ 30.3 $ 30.5
====== ======
EBITDA. EBITDA of $30.5 million for the year ended December 1999 increased by
$0.2 million over 1998 due to changes in underlying operating income explained
above. EBITDA is calculated as follows:
EBITDA: Year ended
-------------------
$ millions Dec 31, Dec 31,
1998 1999
------- -------
Underlying operating income............................. $ 24.0 $ 23.9
Depreciation............................................ 9.4 9.0
Amortization
Intangibles......................................... 0.2 0.5
Investment grants................................... (0.5) (0.5)
Positive goodwill................................... 0.1 0.4
Negative goodwill................................... (0.4) (0.4)
Pension transition asset............................ (2.5) (2.4)
------ ------
Total EBITDA................................... $ 30.3 $ 30.5
====== ======
Comparison of year ended December 31, 1998 to year ended December 31, 1997
All comparisons in the following discussion and analysis are against the
corresponding twelve month period ended December 31, 1997, unless otherwise
stated.
Net Revenues: Year ended,
-------------------
$ millions Dec 31, Dec 31,
1997 1998
------- -------
Raleigh U.K.............................................. $107.3 $ 82.1
Gazelle.................................................. 107.8 111.5
Derby Germany............................................ 103.8 125.1
Raleigh U.S.A............................................ 57.9 69.1
Raleigh Canada........................................... 29.5 28.8
Sturmey Archer........................................... 29.6 23.8
Probike.................................................. 20.6 17.0
Other companies and group transactions................... 9.2 7.9
------ ------
Total net revenues.................................. $465.7 $465.3
====== ======
Net Revenues. Net revenues decreased by $0.4 million to $465.3 million for the
year ended December 1998. In local currencies, net revenues increased by 2.6%
over the same period. The decrease in U.S. Dollar terms for the year compared
with the increase in local currency figures was due primarily to the
16
<PAGE>
strengthening of the U.S. Dollar against the Deutsche Mark and the Dutch
guilder. Units sold decreased by 46,000 units in the year ended December 1998.
In continental Europe, Gazelle's business benefited from the buoyant Dutch
market, while strong consumer demand through the end of 1997 drove beginning
1998 inventory levels down for Dutch retailers. Net revenues in local currency
increased 6.7% in the year ended December 1998.
Derby Germany benefited from sales of Univega bicycles, a business which the
Company did not own in the first seven months of 1997. The private label and
trade businesses also contributed to year-over-year revenue increases. In local
currency, Derby Germany's revenues increased 25.1% in the year ended December
1998, of which 5.2% of the increase was represented by Univega.
Revenues at Raleigh U.S.A. increased 19.3% in the year ended December 1998. The
improvement was attributable to the improved product range as well as to sales
under the Univega brand. The Company purchased the previously loss-making
Univega brand in 1997 and successfully re-launched it in the U.S.A. in the fall
of that year, contributing 6.3% of the revenue increase in the year. In Canada,
local currency revenues grew by only 2.8% due to the postponement of an order by
a major private label account resulting from their poor retail sales.
The United Kingdom businesses (Raleigh U.K. and Sturmey Archer) were negatively
impacted by the strength of sterling, and by competitive pricing. As an exporter
of components, Sturmey Archer's Dutch guilder based revenues were reduced on
conversion into sterling by a 4.7% depreciation of the guilder, whereas Shimano,
the main competitor, gained from a 5.1% favorable movement in the Japanese Yen.
The other major competitor, Sachs, lowered prices aggressively to reduce high
inventory levels following a change in ownership. A slight increase in Sturmey
Archer's selling prices in guilder terms to recoup some of the margin loss led
to lower volume sales. Revenues were further reduced by the loss of a major
customer in the German automotive industry. These factors produced an overall
decline in local currency revenues of 20.2% for the year ended December 1998.
Raleigh U.K. specified its product range for the 1998 season to maintain selling
prices close to 1997 levels, giving enhanced margins through reduced component
costs due to the strength of sterling and price reductions gained from vendors.
However competitors, who gained a bigger cost advantage from the fall in Asian
currencies by having their own manufacturing based in Asia, passed their cost
savings on to consumers by giving more highly specified products at no increase
in price. This produced a 12.9% drop in revenues for the half year ended June
1998 as compared to the corresponding period in 1997. Management responded by
upgrading the specification of products to remain competitive. However the
market was further weakened by poor summer weather in the United Kingdom,
Ireland and the Netherlands and a supply chain temporarily over-stocked with
Taiwanese products imported to beat the introduction of E.U. anti-dumping duties
on Taiwan in August 1998 and weak U.K. Christmas retail market conditions. The
U.K. market was approximately 2.5 million units in 1998, a fall of approximately
10% compared with 1997, which was predominantly in the second half of the year.
As a result, revenues in the half year ended December 1998 dropped by 32.2%.
This resulted in revenues of $82.1 million for the year ended December 1998,
23.4% less than the corresponding period in 1997.
Gross Profit. Gross profit for the year ended December 1998 fell by $4.8 million
on the same revenue Dollars, representing a 1.0 percentage point margin
decrease. Margins were enriched at Raleigh U.S.A. by effective product
management and the effect of Japanese Yen weakness on component costs. However,
this was offset by the impact of the strength of sterling on the conversion of
export revenues at Sturmey Archer, lower production recoveries at Sturmey Archer
and Raleigh U.K. as production was cut back in line with sales demand, together
with the cost to Raleigh U.K. of enhanced product specifications. In addition,
the worldwide licensing operations of Raleigh International included in "Other
companies" saw a $0.8 million fall in licensing revenues following the
difficulties in Asian financial markets, which both inhibited licensees' ability
to pay royalties and reduced their U.S. Dollar value. Moreover the Raleigh
distribution operations in Ireland, Germany and The Netherlands (also included
in "Other companies") saw a $1.7 million fall in gross profit due to lower sales
volume and margin erosion.
17
<PAGE>
Selling, General and Administrative Expenses. For the year ended December, 1998,
expenses of $91.0 million increased by $0.9 million, or 1.0%, over the
comparable period in 1997 when translated into U.S. Dollars: aggregate expenses
in local currency increased by 3.0%. The inclusion of costs from the
acquisitions of Winora-Staiger and Univega for the whole period in 1998,
compared with their gradual phasing-in during 1997, plus cost inflation, and
one-time costs of $1.6 million in the quarter and year ended December 1998 were
counter-balanced by one-time cost items of $2.9 million which arose during the
year ended December 1997 and currency gains of $2.0 million which were realized
in September 1998.
Operating Income: Year ended,
--------------------
$ millions Dec 31, Dec 31,
1997 1998
------- -------
Raleigh U.K............................................... $13.1 $ 3.2
Gazelle................................................... 13.4 14.8
Derby Germany............................................. (2.2) (0.5)
Raleigh U.S.A............................................. (2.0) 2.7
Raleigh Canada............................................ 2.8 2.6
Sturmey Archer............................................ 3.4 0.6
Probike................................................... 2.1 1.2
Other companies and group transactions.................... (0.9) (0.6)
----- -----
Underlying operating income............................... 29.7 24.0
Recapitalization costs.................................... - (5.9)
----- -----
Total operating income............................... $29.7 $18.1
===== =====
Operating Income. Underlying operating income of $24.0 million for the year
ended December 1998 decreased by $5.7 million over the comparable period in 1997
fdue to the lower gross margin and higher selling, general and administrative
expense.
Recapitalization costs of $5.9 million included legal, accounting and investment
banking fees incurred in connection with implementing the Recapitalization on
May 14, 1998. These costs resulted in lower total operating income for the year
ended December 1998.
Interest expense. Interest expense increased by $9.5 million for the year ended
December 1998 to $16.9 million due to the increased debt and higher interest
rate margin following the Recapitalization.
Other Income (Expense), Net. The other expense of $1.0 million for the half year
ended June 1998, represented the reduction in market value of the outstanding
interest rate swap contracts upon their amortization over the remaining term and
the loss upon their early termination due to the Recapitalization. The expense
of $0.3 million for the quarter ended September 1998 represented the reduction
in mark-to-market value of currency options and interest caps. These were
purchased to safeguard the Company's ability to service its debt from any
weakening of the foreign currencies in which it earns its income and increases
in interest rates over the following three years.
Provision for Income Taxes. The effective tax rate on income before income taxes
and extraordinary item increased from 45% in 1997 to over 100% in 1998,
primarily due to Recapitalization expenses of $5.9 million and $6.5 million of
interest on the Senior Notes for which the related tax benefit has been fully
reserved, together with unrelieved current year losses in Germany of $6.4
million, which will be carried forward to future years.
Extraordinary Item. The extraordinary item of $0.4 million in the year ended
December 1998, represents a $0.6 million charge for the loss on the early
retirement of debt on May 14, 1998, in connection with the Recapitalization,
less the related tax benefit of $0.2 million.
Net Income. Net income decreased by $18.5 million in the year ended December
1998. The decreases were primarily the result of the $9.5 million increase in
interest expense, $6.0 million fall in underlying operating income that occurred
in the last quarter of the year, $5.9 million in Recapitalization costs
18
<PAGE>
incurred in May 1998 and the $0.6 million losses on the early retirement of debt
and the early termination of the swaps, less the $0.2 million related tax
benefit.
EBITDA: Year ended,
--------------------
$ millions Dec 31, Dec 31,
1997 1998
------ -------
Raleigh U.K............................................... $ 14.9 $ 4.7
Gazelle................................................... 13.9 15.3
Derby Germany............................................. 0.6 2.6
Raleigh U.S.A............................................. (1.4) 3.1
Raleigh Canada............................................ 3.1 2.9
Sturmey Archer............................................ 3.3 0.7
Probike................................................... 2.3 1.4
Other companies and group transactions.................... (0.9) (0.4)
------ ------
Total EBITDA......................................... $ 35.8 $ 30.3
====== ======
EBITDA. EBITDA of $30.3 million for the year ended December 1998 decreased by
over $5 million due to changes in underlying operating income explained above.
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 of bicycles increase 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 and replenish their inventories with the next
season's model range in the case of U.S.A.. Excluding this holiday seasonality,
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 provided by operating activities decreased $4.1 million to a $7.4
million outflow for the year from a $3.3 million outflow in 1998. This decline
was principally due to the $9.6 million of restructuring charge and
non-recurring items, whereas 1998 benefited from $5.6 million in taxes repaid
and $6.8 million lower interest payments. This was offset by a $15.9 million
increase in working capital in 1998 compared with a $1.2 million reduction in
the current year.
Interest of $20.3 million was paid in 1999 compared with $13.5 million a year
ago due to the increased principal amount of Senior Notes issued in May 1998 and
higher coupon. The net cash flow used by operating activities of $7.4 million in
1999 was funded by an $8.4 million increase in drawings under the revolving
credit facility. Cash balances increased as the $13.5 million net proceeds of
the property disposition were held on deposit until they were released when the
sixth amendment to the Revolving Credit Agreement was executed on February 3,
2000.
On February 4, 1999, the Company acquired the assets (and assumed certain
liabilities) of the Diamond Back Group for approximately $44.3 million. The
Company financed the acquisition of the Diamond Back Group primarily by issuing
a $20.0 million Subordinated Note and $22.75 million in Class C common stock.
19
<PAGE>
The actuarial valuation of the U.K. pension schemes carried out as at April 1998
showed that the schemes were in surplus 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 $0.2 million in 1999,
compared with $1.6 million in 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 the 15 years from January 1, 1989, the
effective date of SFAS 87. Net periodic pension income was $5.4 million in 1998
and 1999. Net periodic pension income includes amortization of the transition
asset into income of $2.5 million and $2.4 million in 1998 and 1999.
The Company's capital expenditures were $8.3 million and $7.4 million in 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, DICSA
and management as part of the Recapitalization and subsequently, plus the
Retained Equity of, in aggregate, $131.3 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 December 31, 1999,
the Company had $251.4 million of combined indebtedness, comprising $156.4
million of Senior Notes, a $20.0 million Subordinated Note, $69.2 million of
borrowings and $5.8 million of guarantees under the revolving credit facility.
The Senior Notes are issued under indentures (the "Senior Note 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, 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 U.S. Dollar denominated debt into several other foreign currencies and
converting the interest rate on the debt from U.S. Dollar rates to those
applicable for that currency. During 1999 the Company entered 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 were purchased to limit the blended interest rate paid on the revolving
credit facility to under 8% until July 2001. Currency options were purchased to
substantially maintain the value of most of the foreign operating income upon
conversion into U.S. Dollars, in order to protect the ability to service the
U.S. Dollar Senior Notes from the effect of changes in foreign exchange rates
until May 2001.
The 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 and April each year. The facility will be
reduced during 2000 by the $13.5 million proceeds of the property sale. Since
the year end the Company has received an interest free bridge loan of $7 million
provided by Thayer and Perseus. The bridge loan is repayable in July 2000
subject to (1) the Company's reduction of the Revolving Credit Facility by $13.5
million, (2) the non-existence of a payment default under the Revolving Credit
Facility and, (3) the Company having availability under the Revolving Credit
Facility of at least $7 million prior to the repayment of the bridge loan. In
the event of non-repayment by August 1, 2000, the bridge loan converts into
warrants for the purchase of 7,000 shares of Class C common stock at an exercise
price of $0.01 per
20
<PAGE>
share ("Class C Warrants"). The Company has issued 2,500 Class C Warrants in
consideration for the use of the bridge loan.
The Company expects that the existing revolving credit facility will not be
sufficient to cover its liquidity requirements after January 2001. Based on the
Company's business plan, the Company estimates that approximately an additional
$30 million will be required to fund the Company's operations through 2001. The
revolving credit facility continues to be available subject to compliance with
its terms and conditions and the Company will be seeking to review this in
September 2000. The directors have also obtained a commitment from Thayer and
Perseus to provide a bridge loan of up to $7 million in 2001 should it be
required.
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.
The Company's accounting policies for derivative instruments are included in
Note 2 to the consolidated financial statements, with further disclosure in
Note 8.
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 U.S. 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
U.K.. 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 I.B.D.s. The
Company initiates foreign currency forward exchange contracts or options in the
fall to cover a portion of its foreign currency trading transaction exposure for
the upcoming season. The fair value of such contracts at December 31, 1999 was
$0.9 million. 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 $2.0 million for 1999. Each year the Company changes the
specification of its products to endeavor to optimize its competitive position
and margins. Since 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, the Company does not generally hedge its transaction
exposure beyond the end of the season, to stay competitive. Management believes
the likelihood of obtaining a competitive advantage would not justify the cost
of hedging beyond the end of the season. Sales and purchases in currencies other
than the functional currencies in which the Company operates were $30.4 million
and $127.4 million respectively in 1999, treating the currencies within the
Euro currency area as one.
The foreign currency element of the Company's debt under the Senior Notes and
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) $34 million of
net assets denominated in Pounds Sterling arising from the Company's former
large presence in U.K., (2) $40
21
<PAGE>
million of foreign pension assets in U.K. and The Netherlands, and, (3) $6
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. In 1997, and up to the Recapitalization on May 14, 1998, the
Company was organized under DICSA which prepared consolidated financial
statements in Pounds Sterling. Accordingly the translation exposure in 1997 was
managed by reference to Pounds Sterling, accounting for the large translation
differences up to September 1998 shown in the consolidated financial statements
prepared in U.S. Dollars.
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 U.S.
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 guilder 6 million, pound 2
million and C$1.2 million. At December 31, 1999 the fair value of these currency
options was $0.2 million. As the purchaser of options has no obligations to
exercise them, any weakening of the value of the U.S. Dollar can do no more than
reduce the fair value of these currency options to zero.
In 1997 interest and currency swaps were held which achieved the effect of
synthetically converting the original U.S. 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 U.S.
Dollars to those foreign currencies in which trading income was generated.
Raleigh U.S.A. generated sufficient trading income to service the 7.66% Series B
Senior Note, withstanding certain one time items, in 1997.
Interest Rate Risk
Interest expense relating to the Senior Notes was $11.4 million and $15.6
million in 1998 and 1999 respectively, which were at fixed interest rates.
Interest expense on the Subordinated Note of $3.8 million in 1999 is
paid-in-kind through the issue of additional Subordinated Notes. The other major
element of the Company's interest expense was $3.3 million and $4.3 million on
the revolving credit facilities in 1998 and 1999 respectively. These were at
floating rates of 1.0% above the London Interbank Offer Rate through May 13,
1998, 2.0% through August 31, 1999 and 2.5% thereafter. 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 facilities have been capped at 8.4% 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 Senior Note 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
($109.7 million). As of December 31, 1999, the Company had indebtedness
outstanding under the Revolving Credit Agreement of $67.6 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 Senior
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 Senior Notes,
notwithstanding the existence of an event of default with respect to the Senior
Notes. In such event, the assets 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 Senior Notes and other unsecured indebtedness of the
Issuers. The Company may also incur other types of secured indebtedness under
the Senior Note Indentures, including up to $20 million in indebtedness of any
type, indebtedness
22
<PAGE>
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) owing in respect of the Notes, incur liens and encumbrances
and permit the amount of receivables and inventory to exceed specified
thresholds.
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 Senior Note 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 Senior Note Indentures could result in an event of default under
such indenture.
All the Company's freehold property and intellectual property is pledged as
security for the Company's seven year revolving credit facility of
DM214,000,000.
The Company was in compliance with all of its borrowing covenants as at December
31, 1999. During the year the terms of the Revolving Credit Agreement were
amended to avoid breaching certain of the covenants and to safeguard compliance
with the covenants in 2000.
The Company was not in compliance with all of its borrowing covenants as at
December 31, 1998. The covenants under the revolving credit facility include a
maximum level of inventory days on hand, and a minimum level of adjusted EBITDA.
Effective February 4, 1999, the revolving credit facility agreement was amended
in connection with the acquisition of Diamond Back. The changes made included an
increase in inventory days allowed, a change in the measurement of EBITDA and a
reduction in the EBITDA covenant.
Information Technology--Year 2000
During 1998 and 1999 the Company implemented its plan to ensure, through a
combination of retirement, replacement and remediation, that all application
software used in connection with the Company's management information systems
were "Year 2000 compliant".
23
<PAGE>
The Company spent a total of approximately $2.3 million and $1.2 million in 1998
and 1999 respectively to achieve "Year 2000 compliance" for all its operations
by the end of 1999.
The Company has not encountered, to date, any material Year 2000 issues
concerning its computer systems.
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 U.S. Dollars at the applicable currency exchange rate for inclusion in the
Company's financial statements. The appreciation of the U.S. 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
U.S. Dollar against such currencies will have a positive impact. Fluctuations in
the exchange rate between the U.S. 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.
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 may enter into foreign currency forward exchange
contracts primarily relating to the Pound Sterling, the U.S. Dollar, the Dutch
Guilder, the Deutsche Mark, the New Taiwan Dollar and the Yen. 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 "E.U."), 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 E.U.
(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.
24
<PAGE>
Substantial Leverage and Debt Service Obligations.
The Company incurred substantial indebtedness in connection with the
Recapitalization and has a highly leveraged capital structure. As of December
31, 1999, the Company had combined total indebtedness of $251.4 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), and shareholders'
deficit was $62.5 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. For the years ended December 31, 1997 and 1998, on
a pro forma basis after giving effect to the Recapitalization, the Company's
combined total interest expense would have been $19.6 million and $21.9 million,
respectively, and the Company's combined total ratio of earnings to fixed
charges would have been 1.5 to 1.0 and 1.1 to 1.0, respectively.
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 such actions could be effected or
would be effective to allow the Company to service such obligations.
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 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 componentry 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements set forth on pages F1 to F33 of this Report are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
25
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Management
Directors and Executive Officers of the Company
The following table sets forth certain information regarding the directors and
executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Position
- --------------------------------- --------- ---------------------------------------------------------
<S> <C> <C>
Frederic V. Malek 63 Chairman and Director of the Company
Gary S. Matthews 42 Chief Executive Officer and Director of the Company
Daniel S. Lynch 41 Chief Financial Officer of the Company
Warren L. Batts 67 Director of the Company
Alan J. Finden-Crofts 58 Director of the Company
A. Edward Gottesman 62 Director of the Company
Frank H. Pearl 56 Director of the Company
Dr-Ing. Thomas H. Thomsen 65 Director of the Company
William W. Austin, Jr. 63 President, Derby U.S.A.
Colin Bateman 46 Managing Director, Sturmey Archer
Klaas Dantuma 56 Managing Director, Gazelle
Phillip L. Darnton 57 Managing Director, Raleigh U.K.
Reginald Fils-Aime 39 Chief Marketing Officer
Simon J. Goddard 48 Corporate Controller
Peter Miller 52 Joint Managing Director, Probike
Kim Roether 36 Managing Director, Derby Germany
Irwin R. Slotar 52 Joint Managing Director, Probike
John V. Spon-Smith 46 Managing Director, Raleigh Parts & Accessories Europe
Carlos Tribino 37 General Manager, Bikeshop.com
Nancy E. Uridil 48 Vice President, Global Sourcing
Farid Vaiya 56 President, Raleigh Canada
</TABLE>
Frederic V. Malek, Chairman of the Board of Directors of the Company
Mr. Malek, age 63, has been chairman of Thayer Capital, the general partner of
Thayer, since 1993. Prior to that, Mr. Malek was president of Marriott Hotels
and Resorts from 1980 to 1988, and president and then vice chairman of Northwest
Airlines from 1989 to 1991. Mr. Malek currently serves on the board of directors
of Automatic Data Processing Corporation, American Management Systems, Inc., FPL
Group, Inc., HCR Manor Care, Inc., CB Richard Ellis, Inc., Northwest Airlines,
Colorado Prime, Inc., Paine Webber Mutual Funds, Global Vacation Group, Inc,
Saga Systems, Inc. and Aegis Communications Group, Inc.
Gary S. Matthews, Chief Executive Officer and Director of the Company
Mr. Matthews, age 42, became the Chief Executive Officer of the Company on
January 11, 1999. Mr. Matthews was the Managing Director of Guinness Great
Britain Limited from January 1998 until his appointment to the Company. Prior to
that, Mr. Matthews was President of Guinness Import Company from 1996 to 1998.
From 1990 to 1995, Mr. Matthews held a variety of marketing and corporate
positions at PepsiCo, Inc. Mr. Matthews serves on the board of directors of
Department 56, Inc.
Daniel S. Lynch, Chief Financial Officer of the Company
Mr. Lynch, age 41, was appointed Chief Financial Officer of the Company on June
1, 1999. Mr. Lynch was the Chief Financial Officer of Bristol-Myers Squibb's
U.S. Medicine Group until his appointment to the Company. Mr. Lynch had fifteen
years of financial experience with Bristol-Myers Squibb.
26
<PAGE>
Warren L. Batts, Director of the Company
Mr. Batts, age 67, was appointed to the board of directors of the Company on
September 10, 1999. Mr. Batts was Chief Operating Officer of Dart and Kraft from
1980 to 1986 and became Chief Executive Officer of Premark Information from 1986
to 1996 when it was spun off from Dart and Kraft. Mr. Batts serves on the board
of directors of Allstate Insurance, Cooper Industries, Sears Roebuck and Sprint.
Alan J. Finden-Crofts, Director of the Company
Mr. Finden-Crofts, age 58, was the Chief Executive Officer of the Company from
1987 until January 1999. Mr. Finden-Crofts was previously the chief executive
officer of Dunlop Slazenger International from 1985 to 1987 and director,
consumer group, of Dunlop from 1982 to 1984. Mr. Finden-Crofts is chief
executive of Exeter International Corporation S.A. which, through its
subsidiaries, manufactures and distributes Royal Worcester and Spode fine bone
china and porcelain.
A. Edward Gottesman, Director of the Company
Mr. Gottesman, age 62, is the chairman of DICSA. Mr. Gottesman has been chairman
of Centenary since its formation in 1989. Mr. Gottesman was a partner of Coudert
Brothers from 1963 to 1970 and has been a partner of Gottesman Jones & Partners
since 1970. Mr. Gottesman is chairman of Exeter International Corporation S.A.
Frank H. Pearl, Director of the Company
Mr. Pearl, age 56, is chairman and president of Perseus and Perseus Management,
the managing member of Perseus. Prior to founding Perseus in 1996, Mr. Pearl
founded, and is also chairman of, Rappahannock Investment Company
("Rappahannock"), a private investment fund which owns approximately 57% of
Perseus Management. From 1984 to 1988, Mr. Pearl was a principal and managing
director of Wesray Capital Corporation. Mr. Pearl is also a founding shareholder
and director of DICSA.
Dr-Ing. Thomas H. Thomsen, Director of the Company
Dr-Ing. Thomsen, age 65, is a director of DICSA. Dr-Ing. Thomsen was director of
corporate engineering of The Gillette Company from 1969 to 1981. From 1982 to
1991, Dr-Ing. Thomsen was a member of the management board of Braun AG. Dr-Ing.
Thomsen currently serves on the board of directors of Travelplans and A. Paukner
S.A., as well as the German Institute for New Technical Form and the Design
Council, State of Hesse.
William W. Austin, Jr., President of Derby U.S.A.
Mr. Austin, age 63, has been President of Derby U.S.A. since 1994. Mr. Austin
was previously Group Vice President of Schwinn Cycling and Fitness, Inc. from
1981 to 1986. From 1988 to 1993, Mr. Austin was President of Giant Bicycle
Company.
Colin Bateman, Managing Director of Sturmey Archer
Mr. Bateman, age 46, has spent most of his career in the pharmaceutical industry
in sales, marketing and general management with Glaxo Laboratories and Wyeth. He
joined Sturmey Archer on March 1, 1999.
Klaas Dantuma, Managing Director of Gazelle
Mr. Dantuma, age 56, has been Managing Director of Gazelle since 1990. Mr.
Dantuma has held a variety of positions with the Company since 1973, including
Deputy Commercial Director for four years, before becoming Commercial Director
in 1985.
Phillip L. Darnton, Managing Director, Raleigh U.K.
Mr. Darnton, age 57, became the Managing Director of Raleigh U.K. on January 4,
2000. Prior to joining the Company, Mr. Darnton was Chief Marketing Officer of
Reckitt & Coleman, having previously spent 26 years at Unilever including
President, Lever Brothers Canada and Managing Director, Unilever Brazil.
Reginald Fils-Aime, Chief Marketing Officer
Mr. Fils-Aime, age 39, was appointed Chief Marketing Officer of the Company on
April 19, 1999. Previously Mr. Fils-Aime followed a marketing career with
Procter and Gamble, Pepsi Co and Guinness. Mr. Fils-Aime served as interim Chief
Operating Officer of Raleigh U.K. from August to December 1999.
27
<PAGE>
Simon J. Goddard, Corporate Controller
Mr. Goddard, age 48, held the senior financial post in the Company from 1990 to
June 1999. Mr. Goddard began working at Raleigh U.K. in 1985 as the management
accountant for international operations. Prior to that, Mr. Goddard was with
Coopers & Lybrand.
Peter Miller, Joint Managing Director of Probike
Mr. Miller, age 52, has been Joint Managing Director of Probike since the
Company acquired Cycle Center Wholesalers in 1991, a company that Mr. Miller
founded.
Kim Roether, Managing Director of Derby Germany
Mr. Roether, age 36, has been Managing Director of Derby Germany since 1997. Mr.
Roether started with Derby Germany as its Controller in 1994. In 1995, he became
Derby Germany's Financial Director. From 1991 to 1994, Mr. Roether was a
consultant to Grant Thornton International.
Irwin R. Slotar, Joint Managing Director of Probike
Mr. Slotar, age 52, has been Joint Managing Director of Probike since the
Company acquired Probike in 1990. Prior to the acquisition Mr. Slotar was
Managing Director of Probike which had been owned by Mr. Slotar's family for
several generations.
John V. Spon-Smith, Managing Director of Raleigh Parts & Accessories Europe
Mr. Spon-Smith, age 46, became Managing Director of Raleigh Parts & Accessories
Europe in July 1999. He has been a Director of Raleigh U.K. and General Manager
of Raleigh Parts & Accessories-U.K. since 1996. From 1991 to 1996, Mr. Spon-
Smith was Sales and Marketing Director of Stanley Tools for the United Kingdom,
South Africa and Ireland.
Carlos Tribino, General Manager, Bikeshop.com
Mr. Tribino, age 37, joined the Company on September 1, 1999 to start up the
internet Bikeshop.com division. Mr. Tribino was co-founder of the internet start
up Talkway.com and previously worked in advertising with DDB Needham.
Nancy Uridil, Vice President, Global Sourcing
Ms. Uridil, age 48, became Vice President, Global Sourcing, effective January
2000. Ms. Uridil has 20 years of purchasing and manufacturing experience with
Procter and Gamble. Prior to joining the Company, Ms. Uridil was Operations Vice
President with Mary Kay Cosmetics.
Farid Vaiya, President of Raleigh Canada
Mr. Vaiya, age 56, has been President of Raleigh Canada since 1989. Mr. Vaiya
has been with the Company since 1972, as Vice President of Sales and Marketing
of Raleigh Canada from 1987 to 1988 and National Account Sales Manager and
Product Manager of Raleigh Canada from 1981 to 1987.
28
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Compensation of Directors
The Company compensates non-executive directors for services provided as a
director by paying such directors a retainer of $5,000 per annum plus reasonable
out-of-pocket expenses incurred by them, and each year granting stock options to
purchase 25 shares of common stock. The Company does not compensate salaried
executive directors. In July 1998, the Company's Board of Directors appointed a
compensation committee.
Compensation of Executive Officers
The following table sets forth information concerning the compensation paid or
accrued by the Company for services in all capacities to the Company for each of
the years ended December 31, 1999, 1998 and 1997, of those persons who served as
(i) the Chief Executive Officer of the Company during fiscal year 1999 and (ii)
the other four most highly compensated executive officers of the Company for
fiscal year 1999 (each, a "Named Executive Officer"):
<TABLE>
Annual Long Other
Compensation Term Annual
------------------------ Compen- Compen-
sation sation
Name Year Salary Bonus Awards
- ------------------------------------------------- -------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Gary S. Matthews (1) 1999 $ 416,795 $ 300,000 $ - $ 57,500
Chief Executive Officer of the Company
Alan J. Finden-Crofts (2) 1999 120,029 - - -
Former Chief Executive Officer of 1998 326,211 - - -
the Company 1997 267,493 355,163 - 140,760
William W. Austin, Jr.(3) 1999 276,494 - - 10,000
President, Derby U.S.A. 1998 262,500 126,000 561,034 7,500
1997 248,827 70,910 - 4,567
Klaas Dantuma (4) 1999 187,584 130,267 - -
Managing Director, Gazelle 1998 165,419 69,468 - -
1997 153,255 55,172 - -
Reginald Fils-Aime (5) 1999 160,096 50,000 - -
Chief Marketing Officer of the Company
Daniel S. Lynch (6) 1999 151,923 110,000 - -
Chief Financial Officer of the Company
</TABLE>
(1) Mr. Matthews joined as Chief Executive Officer in January 1999.
(2) Mr. Finden-Crofts ceased to draw a salary in May 1999 and was compensated
in Pounds Sterling. The amounts reported in the table have been converted
at the rate of (pound)0.6131 per $1.00.
(3) Mr. Austin, Jr.'s long term compensation in 1998 was in respect of change
of control obligations at the time of the Recapitalization.
(4) Mr. Dantuma is compensated in Dutch Guilders. The amounts reported in
the table have been converted at the rate of f2.0554 per $1.00.
(5) Mr. Fils-Aime joined the Company in April 1999. Mr. Fils-Aime's annual
salary is $225,000.
(6) Mr. Lynch joined the Company in June 1999.
29
<PAGE>
Employment Agreements
On October 20, 1998, the Company entered into an employment contract with Mr.
Gary S. Matthews to become the new Chief Executive Officer and President of the
Company effective mid-January 1999. Mr. Matthews' compensation package includes
a base annual salary of $450,000 and a bonus of up to 120% of his base salary.
The contract is for a four year term with a three year extension. The Company
issued Mr. Matthews stock options to purchase 1,300 shares of the Company's
Class A common stock and 325 shares of Class C common stock which vest over
three years, and performance based stock options for 2,600 shares of Class A
common stock and 650 shares of Class C common stock.
Pursuant to a Management Stock Purchase Agreement dated October 20, 1998, Mr.
Matthews purchased 1,200 shares of the Company's Class A common stock and 300
shares of Class C common stock for $1,000 per share. Mr. Matthews paid for such
shares with a secured promissory note that is non-recourse except for 20% of the
principal amount and all accrued interest. Upon the termination of Mr. Matthews'
employment with the Company, the Company has the right or is required to
repurchase, depending on the reason for such termination, such Class A and Class
C common stock, provided no event of default exists under material financing
agreements, including the Senior Note Indentures.
On June 1, 1999, the Company entered into an employment contract with Mr. Daniel
S. Lynch to become the new Chief Financial Officer of the Company effective
immediately. Mr. Lynch's compensation package includes a base annual salary of
$250,000 and a bonus of up to 100% of his base salary. The Company issued Mr.
Lynch stock options to purchase 800 shares of the Company's Class A common stock
and 200 of the Company's Class C common stock which vest over four years, and
performance based stock options for 1,200 shares of Class A common stock and 300
shares of Class C common stock.
Pursuant to a Management Stock Purchase Agreement dated June 1, 1999, Mr. Lynch
purchased 400 shares of the Company's Class A common stock and 100 shares of the
Company's Class C common stock for $1,000 per share. Mr. Lynch paid for such
shares with a secured promissory note for $375,000 plus $125,000 in cash. Upon
the termination of Mr. Lynch's employment with the Company, the Company has the
right or is required to repurchase, depending on the reason for such
termination, such Class A and Class C common stock, provided no event of default
exists under material financing agreements, including the Senior Note
Indentures.
On April 19, 1999, the Company entered into an employment contract with Mr.
Reginald Fils-Aime to become the new Chief Marketing Officer of the Company
effective immediately. Mr. Fils-Aime's compensation package includes a base
annual salary of $225,000 and a bonus of up to 100% of his base salary. The
Company issued Mr. Fils-Aime stock options to purchase 480 shares of the
Company's Class A common stock and 120 of the Company's Class C common stock
which vest over four years.
Pursuant to a Management Stock Purchase Agreement dated June 1, 1999, Mr.
Fils-Aime purchased 240 shares of the Company's Class A common stock and 60
shares of the Company's Class C common stock for $1,000 per share. Mr. Fils-Aime
paid for such shares with a secured promissory note for $225,000 plus $75,000 in
cash. Upon the termination of Mr. Fils-Aime's employment with the Company, the
Company has the right or is required to repurchase, depending on the reason for
such termination, such Class A and Class C common stock, provided no event of
default exists under material financing agreements, including the Senior Note
Indentures.
The terms of Mr. Austin's employment agreement as President of Derby U.S.A.
provide for a base salary of $280,000 and a bonus up to 150% of base salary tied
to Derby U.S.A.'s and the Company's income before interest payments and taxes.
DICSA paid Mr. Austin $561,034 upon the closing of the Recapitalization pursuant
to a change of control provision in his former employment agreement.
The Company has entered into employment contracts with other senior managers of
the Company which generally contain remuneration packages including base salary,
bonus, insurance, pension benefits and non-compete provisions.
30
<PAGE>
Management Stock Options
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. As at December 31, 1999, the Company had
granted an aggregate of 11,425 stock options to its management and directors, 75
of which had been cancelled and 1,241 of which had vested.
32
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Description of Shareholders' Agreement and Registration Agreement
The Company, DFS, DC Cycle and Perseus Cycle (DFS, DC Cycle and Perseus Cycle
being referred to as the "Shareholders") entered into a Shareholders' Agreement
in connection with the consummation of the Recapitalization (the "Shareholders'
Agreement"). The Shareholders' Agreement provides, among other things, for the
following: (i) the Board of Directors of the Company initially consists of seven
individuals, four of whom will be appointed by DC Cycle, two by DFS and one by
Perseus Cycle, (ii) certain restrictions on the transfer of shares of the
Company, including, but not limited to, provisions providing that (a) the
Shareholders have limited rights of first offer in any proposed third party sale
of Class A common stock and Series A preferred stock by any Shareholder and (b)
the Shareholders have limited participation rights in any proposed third party
sale of Class A common stock and Series A preferred stock by any Shareholder,
(iii) an agreement among the Shareholders that, upon approval of a sale of all
or substantially all of the Company's outstanding capital stock or a sale of all
or substantially all of the Company's assets by the Company's Board of
Directors, each Shareholder will consent to, and raise no objections against,
such sale and sell its shares and rights to acquire shares, if so required, and
(iv) certain limited preemptive rights of the Shareholders with respect to an
issuance or sale of common stock by the Company. Certain material transactions
require the approval of a supermajority of the Board of Directors which can be
achieved with the votes of the DC Cycle nominees and any one other director. The
Shareholders' Agreement also provides that DFS shall be deemed to own all shares
of the Company's capital stock which DICSA can acquire pursuant to the Raleigh
Canada Exchange Agreement for purposes of determining the voting power of the
stock held by DFS and for all other purposes.
The Shareholders are parties to a Registration Agreement (the "Registration
Agreement"), pursuant to which all holders of Registrable Securities (as defined
in the Registration Agreement) are entitled to piggyback registration rights,
whenever the Company proposes to register any of its securities under the
Securities Act. Each such holder is subject to certain pro rata limitations,
including priorities and preferences for certain holders, on its ability to
participate in such a piggyback registration. The Company will pay all expenses
related to these registrations (other than underwriting discounts and
commissions) and, subject to certain conditions and limitations, is required to
use its best efforts to effect such registrations. The Company has agreed to
indemnify all holders of Registrable Securities for certain liabilities arising
out of such registrations, including certain liabilities under the Securities
Act.
Security Ownership of Certain Beneficial Owners and Management
The authorized capitalization of the Company as of March 30, 2000 is: 200,000
shares of Class A common stock; 15,000 shares of Class B common stock; 30,000
shares of Class C common stock; 25,000 shares of Series A preferred stock; 3,000
shares of Series B preferred stock and 100 shares of Series C preferred stock.
The issued and outstanding capital stock of the Company as of March 30, 2000
consists of: 47,760 shares of Class A common stock, 23,640 shares of Class C
common stock, 25,000 shares of Series A preferred stock and 3,000 shares of
Series B preferred stock. Holders of Class B common stock and Series B preferred
stock have no voting rights except as required by applicable law. In addition,
DICSA has the right to acquire 15,000 shares of Class B common stock and 8,300
shares of Class A common stock under the Raleigh Canada Exchange Agreement and
Thayer and Perseus hold warrants for the purchase of 2,500 shares of Class C
common stock. The Holders of Class A and Class C common stock are entitled to
one vote per share on all matters to be voted upon by the shareholders of the
Company, including the election of directors. Holders of Series A preferred
stock are entitled to 1.5 votes per share, voting together with the Class A and
Class C common stock as a single class.
32
<PAGE>
The following table sets forth certain information as of March 30, 2000 with
respect to the beneficial ownership of the Company's Class A and Class C common
stock and Series A preferred stock by (i) each shareholder known by the Company
to own beneficially 5% or more of each class of the Company's voting securities,
(ii) each current director of the Company, (iii) each Named Executive Officer of
the Company and (iv) all directors of the Company and executive officers of the
Company as a group. Unless indicated otherwise below, to the knowledge of the
Company, each shareholder has sole voting and investment power with respect to
the shares indicated as beneficially owned.
<TABLE>
<CAPTION>
Percent of the
Company's total
outstanding
voting
Name and Address of Beneficial Number of Percent of securities
Owner (1) Class shares class Note (2)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DC Cycle, L.L.C .......................... Class A common 12,500 26.17
Suite 350, Class C common 20,200 81.16
1455 Pennsylvania Avenue, Series A preferred 25,000 100.00
Washington, DC 20004 63.73
Note (3)
- -----------------------------------------------------------------------------------------------------------------
Derby Finance S.a.r.l.................... Class A common 21,700 45.44
15 Rue de la Chapelle, 19.73
L-1325 Luxembourg,
Grand Duchy of Luxembourg
Note (4)
- -----------------------------------------------------------------------------------------------------------------
Derby International Corporation S.A. Class A common 8,300 14.81
5 Boulevard de la Foire, 7.08
L-1528 Luxembourg,
Grand Duchy of Luxembourg
Note (5)
- -----------------------------------------------------------------------------------------------------------------
Perseus Cycle L.L.C...................... Class A common 10,000 20.94
1627 "I" Street NW, Suite 610, Class C common 5,050 20.29 13.66
Washington, DC 20006
Note (6)
- -----------------------------------------------------------------------------------------------------------------
Frederic V. Malek ....................... Class A common 12,500 26.17
Suite 350, Class C common 20,200 81.16
1455 Pennsylvania Avenue, Series A preferred 25,000 100.00
Washington, DC 20004 63.32
Note (7)
- -----------------------------------------------------------------------------------------------------------------
Frank H. Pearl........................... Class A common 40,000 71.35
1627 "I" Street NW, Suite 610, Class C common 5,050 20.29 37.64
Washington, DC 20006
Note (10)
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Percent of the
Company's total
outstanding
voting
Name and Address of Beneficial Number of Percent of securities
Owner (1) Class shares class Note (2)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A. Edward Gottesman ..................... Class A common 30,000 53.51
1120 Avenue of the Americas 25.60
(18th Floor)
New York, NY 10036
Note (8)
- -----------------------------------------------------------------------------------------------------------------
Alan J. Finden-Crofts.................... Class A common 30,000 53.51
Becquet Road, St. Peter Port, Guernsey,
GY1 2TH, Channel Islands
Note (9)
25.60
- -----------------------------------------------------------------------------------------------------------------
Gary S. Matthews......................... Class A common 1,200 2.51
C/o The Derby Cycle Corporation Class C common 300 1.27
300 First Stamford Place (5th Floor)
Stamford, CT 06902 1.38
- -----------------------------------------------------------------------------------------------------------------
William W. Austin, Jr.................... Class A common 240 0.50
C/o Derby U.S.A. Bicycle Co., Class C common 60 0.25
22710 72nd Avenue South, 0.28
Kent, WA 98032-1926
- -----------------------------------------------------------------------------------------------------------------
Daniel S. Lynch.......................... Class A common 400 0.84
C/o The Derby Cycle Corporation Class C common 100 0.42
300 First Stamford Place (5th Floor) 0.46
Stamford, CT 06902
- -----------------------------------------------------------------------------------------------------------------
Klaas Dantuma............................ Class A common 240 0.50
C/o Koninklijke Gazelle B.V., Class C common 60 0.25
Wilhelminaweg 8, 0.28
6951 BP Dieren,
The Netherlands
- -----------------------------------------------------------------------------------------------------------------
Dr-Ing. Thomas H. Thomsen................
Falkensteinerstra(beta)e 36,
Konigstein im Taunus, - - - -
Frankfurt, Germany
- -----------------------------------------------------------------------------------------------------------------
Reginald Fils-Aime....................... Class A common 240 0.50
C/o The Derby Cycle Corporation Class C common 60 0.25
300 First Stamford Place (5th Floor) 0.28
Stamford, CT 06902
- -----------------------------------------------------------------------------------------------------------------
Warren L. Batts.......................... Class A common 40 0.08
143 Abingdon Class C common 10 0.04
Kenilworth, IL 60043 0.05
- -----------------------------------------------------------------------------------------------------------------
All Directors and Executive Class A common 56,060 100.00
Officers as a group (15 persons) Class C common 26,140 100.00
Note (11) Series A preferred 25,000 100.00
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
(1) The percentages of the Company's voting securities held by DC Cycle,
Perseus Cycle and DFS set forth in this table differ from the percentages
of total voting power indirectly held by their respective parent companies
under "PART 1 ITEM 1 Investor Group" and "The Recapitalization" for two
reasons: first, rights to acquire shares of Class A common stock and
warrants for the purchase of shares of Class C common stock which are
exercisable within 60 days of the date hereof are considered outstanding
for the purpose of determining the percent of the class held by the holder
of such rights, but not for the purpose of computing the percentage held
by others (in accordance with Rule 13d-3(d)(1)(ii)), and second, under the
terms of the Shareholders' Agreement, all shares of the Company
beneficially owned by DICSA are deemed to be beneficially owned by DFS for
voting purposes and all other purposes thereunder.
(2) Pursuant to the rules of the Commission, shares are deemed to be
"beneficially owned" by a person if such person directly or indirectly has
or shares (i) the power to vote or dispose of such shares, whether or not
such person has any pecuniary interest in such shares, or (ii) the right
to acquire the power to vote or dispose of such shares within 60 days,
including any right to acquire through the exercise of any option, warrant
or right, or the conversion or exchange of a security.
(3) DC Cycle is 100% owned by Thayer, a Delaware limited partnership. TC
Capital Partners, a Delaware general partnership, is the general partner
of Thayer. Mr. Frederic V. Malek, a director of the Company, is a general
partner of TC Capital Partners. As such, Mr. Malek has shared voting and
investment power (as well as an indirect pecuniary interest within the
meaning of Rule 16a-1 under the Exchange Act), with respect to the shares
held by DC Cycle. As a result, Mr. Malek may be deemed to be the
beneficial owner of the 12,500 shares of Class A common stock, the 18,950
shares of Class C common stock, warrants for the purchase of 1,250 shares
of Class C common stock and the 25,000 shares of Series A preferred stock
held by DC Cycle.
(4) DFS is a wholly owned subsidiary of DICSA. See note 5 below.
(5) Includes 8,300 shares of Class A common stock issuable to DICSA upon
conversion of its Raleigh Canada preferred stock under the Raleigh Canada
Exchange Agreement. Mr. Gottesman, a director of the Company, is the
chairman of DICSA, and a charitable trust of which he is the settlor
controls a majority of the capital stock of DICSA indirectly through an
industrial holding company, Centenary. Mr. Finden-Crofts, a director of
the Company and a director of DICSA, and Mr. Pearl, a director of the
Company and a director of DICSA, own minority interests in DICSA. As a
result of their shared voting and investing power with respect to shares
beneficially owned by DFS and DICSA, Messrs. Gottesman, Finden-Crofts and
Pearl may each be deemed to be the beneficial owner of the shares owned by
DFS and DICSA.
(6) Perseus Cycle is 100% owned by Perseus Capital, L.L.C., a Delaware limited
liability company. Perseus Management, a Delaware limited liability
company, is the managing member of Perseus and owns approximately 17% of
Perseus. Mr. Frank H. Pearl is the Chairman and President of Perseus
Management. Rappahannock Investment Company, a Delaware corporation, owns
approximately 57% of Perseus Management. Rappahannock is 100% owned by Mr.
Pearl. Mr. Pearl, by virtue of his indirect ownership interest in Perseus,
may be deemed the beneficial owner of the 10,000 shares of Class A common
stock, the 3,800 shares of Class C common stock held by Perseus and
warrants for the purchase of 1,250 shares of Class C common stock.
(7) Includes the 12,500 shares of Class A common stock, the 18,950 shares of
Class C common stock and 25,000 shares of Series A preferred stock
beneficially owned by DC Cycle. See note 3 above.
(8) Includes the 21,700 shares of Class A common stock beneficially owned by
DFS and the 8,300 shares of Class A common stock beneficially owned by
DICSA. See note 5 above.
(9) Includes the 21,700 shares of Class A common stock beneficially owned by
DFS and the 8,300 shares of Class A common stock beneficially owned by
DICSA. See note 5 above.
35
<PAGE>
(10) Includes the 10,000 shares of Class A common stock, 3,800 shares of Class
C common stock and warrants for the purchase of 1,250 shares of Class C
common stock beneficially owned by Perseus, the 21,700 shares of Class A
common stock beneficially owned by DFS and the 8,300 shares of Class A
common stock beneficially owned by DICSA. See notes 5 and 6 above.
(11) Includes (1) 12,500 shares of Class A common stock, 18,950 shares of Class
C common stock, warrants for the purchase of 1,250 shares of Class C
common stock and 25,000 shares of Series A preferred stock beneficially
owned by DC Cycle which may be deemed to be beneficially owned by Mr.
Malek (see note 3 above); (2) 21,700 shares of Class A common stock
beneficially owned by DFS and 8,300 shares of Class A common stock
beneficially owned by DICSA which may be deemed to be beneficially owned
by Messrs. Gottesman, Finden-Crofts and Pearl (see note 5 above); (3)
10,000 shares of Class A common stock, 3,800 shares of Class C common
stock and warrants for the purchase of 1,250 shares of Class C common
stock beneficially owned by Perseus which may be deemed to be beneficially
owned by Mr. Pearl (see note 5 above); (4) 40 shares of Class A common
stock and 10 shares of Class C common stock owned by Mr. Batts; and (5)
3,520 shares of Class A common stock and 880 shares of Class C common
stock issued to management.
36
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Investor Group
Subsequent to the Recapitalization, the issue of Class C common stock in
February, 1999 and the issue during 1999 of Class A and Class C common stock
under the management stock plan, the Company's shareholders are (i) DC Cycle, a
wholly-owned subsidiary of Thayer, which controls approximately 64% of the total
voting power of the Company's capital stock, (ii) Perseus Cycle, a wholly-owned
subsidiary of Perseus, which controls approximately 13% of the total voting
power of the Company's capital stock, (iii) DFS, which controls approximately
20% of the total voting power of the Company's capital stock and (iv)
Management, which controls approximately 3% of the total voting power of the
Company's capital stock. Prior to the Recapitalization, the Company was
wholly-owned by DICSA through its subsidiary, DFS.
Thayer is a private equity fund managed by Thayer Capital, a private equity
investment firm based in Washington, D.C.. Thayer Capital's partners are
Frederic V. Malek, Carl J. Rickertsen and Paul G. Stern. Thayer Capital invests
primarily in private equity investments in management buyouts and
recapitalizations. In June 1996, Thayer Capital closed Thayer, a corporate
private equity fund, with $364 million in commitments.
Perseus is a merchant banking venture managed by Perseus Management and based in
Washington, D.C.. Perseus invests primarily in leveraged acquisitions of
operating businesses. Frank H. Pearl is the Chairman and President of Perseus
and is one of the founding directors and shareholders of DICSA.
DFS is a wholly-owned subsidiary of DICSA. A. Edward Gottesman, a director of
the Company, the chairman of DICSA and a charitable trust of which he is the
settlor, controls a majority of the capital stock of DICSA indirectly through an
industrial holding company, Centenary. Alan J. Finden-Crofts a director of the
Company and a director of DICSA, and Mr. Pearl, a director of the Company and a
director of DICSA, own minority interests in DICSA.
Payment of Certain Fees and Expenses
In connection with the acquisition of Diamond Back in 1999, the Company paid a
$45,000 fee to T.C. Management Partners L.L.C., an affiliate of Thayer, for the
Hart Scott Rodino filing.
In connection with the Recapitalization in 1998, the Company paid closing fees
(i) to Thayer in the amount of $1.2 million, (ii) to Perseus in the amount of
$1.0 million and (iii) to Centenary (which is controlled in part by Mr. A.
Edward Gottesman) in the amount of $0.7 million. In addition, the Company paid
all the out-of-pocket expenses of Thayer and Perseus, certain expenses incurred
in order to effect the Recapitalization, and $150,000 of the out-of-pocket
expenses of DICSA and DFS.
In the future, affiliates of Thayer may receive customary fees for advisory and
other services rendered to the Company. If such services are rendered in the
future, the fees will be negotiated from time to time and will be based on the
services performed and the prevailing fees then charged by third parties for
comparable services.
37
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements.
See "Index to Consolidated Financial Statements" set forth on page
F-1.
2. Financial Data Schedules.
3. Exhibits.
See " Index to Exhibits" set forth on page E-4.
(b) Report on Form 8-K.
Report on Form 8-K filed February 22, 1999.
Report on Form 8-K filed May 7, 1999.
Report on Form 8-K filed September 7, 1999.
Report on Form 8-K filed January 11, 2000.
E-1
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Annual Report on Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Stamford,
Connecticut.
The Derby Cycle Corporation
/s/ Daniel S. Lynch
By: ______________________________
Name: Daniel S. Lynch
Title: Chief Financial Officer
/s/ Simon J. Goddard
By: ______________________________
Name: Simon J. Goddard
Title: Vice President and Corporate Controller
E-2
<PAGE>
INDEX TO EXHIBITS
Exhibit Description
No. -----------
---
<TABLE>
<CAPTION>
<S> <C> <C>
(1) 3.1 Amended and Restated Certificate of Incorporation of The Derby Cycle Corporation.
(1) 10.1 Employment Agreement made as of June 1, 1999 between The Derby Cycle Corporation and Daniel S.
Lynch.
(1) 10.2 Management Stock Purchase Agreement dated as of June 1, 1999 between The Derby Cycle Corporation
and Daniel S. Lynch.
* 10.3 Amendment Agreement dated April 30, 1999 relating to the Multi-Currency Credit Facility of up to
DM214,000,000 dated May 12, 1998 between The Derby Cycle Corporation and others as borrowers
and/or Guarantors, Chase Manhattan plc as arranger, the financial institutions named therein as
Banks, Chase Manhattan International Limited as security agent, and Chase Manhattan International
Limited as facility agent.
* 10.4 Amendment Agreement dated August 31, 1999 relating to the Multi-Currency Credit Facility of up to
DM214,000,000 dated May 12, 1998 between The Derby Cycle Corporation and others as borrowers
and/or Guarantors, Chase Manhattan plc as arranger, the financial institutions named therein as
Banks, Chase Manhattan International Limited as security agent, and Chase Manhattan International
Limited as facility agent.
* 10.5 Amendment Agreement dated November 25, 1999 relating to the Multi-Currency Credit Facility of up
to DM214,000,000 dated May 12, 1998 between The Derby Cycle Corporation and others as borrowers
and/or Guarantors, Chase Manhattan plc as arranger, the financial institutions named therein as
Banks, Chase Manhattan International Limited as security agent, and Chase Manhattan International
Limited as facility agent.
* 10.6 Amendment Agreement dated December 17, 1999 relating to the Multi-Currency Credit Facility of up
to DM214,000,000 dated May 12, 1998 between The Derby Cycle Corporation and others as borrowers
and/or Guarantors, Chase Manhattan plc as arranger, the financial institutions named therein as
Banks, Chase Manhattan International Limited as security agent, and Chase Manhattan International
Limited as facility agent.
* 10.7 Amendment Agreement dated February 3, 2000 relating to the Multi-Currency Credit Facility of up to
DM214,000,000 dated May 12, 1998 between The Derby Cycle Corporation and others as borrowers
and/or Guarantors, Chase Manhattan plc as arranger, the financial institutions named therein as
Banks, Chase Manhattan International Limited as security agent, and Chase Manhattan International
Limited as facility agent.
* 10.8 Amendment Agreement dated March 2, 2000 relating to the Multi-Currency Credit Facility of up to
DM214,000,000 dated May 12, 1998 between The Derby Cycle Corporation and others as borrowers
and/or Guarantors, Chase Manhattan plc as arranger, the financial institutions named therein as
Banks, Chase Manhattan International Limited as security agent, and Chase Manhattan International
Limited as facility agent.
* 10.9 Warrant Agreement dated as of February 15, 2000 among The Derby Cycle Corporation, Thayer Equity
Partners, III, L.P. and Perseus Capital, L.L.C.
* 10.10 Promissory Note of The Derby Cycle Corporation dated February 15, 2000 in favor of Thayer Equity
Investors III, L.P.
* 10.11 Promissory Note of The Derby Cycle Corporation dated February 15, 2000 in favor of Perseus
Capital, L.L.C.
* 10.12 Employment Agreement dated as of January 20, 2000 between The Derby Cycle Corporation and Carlos
Tribino.
* 27 Financial Data Schedule
(1) - Filed previously
* - Filed herein
</TABLE>
E-4
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Consolidated Financial Statements :
Report of Independent Auditors........................................... F2
Consolidated Balance Sheets as of December 31, 1998 and 1999............. F3
Consolidated Statements of Operations for the years ended December 31,
1997, 1998 and 1999................................................. F4
Consolidated Statements of Shareholders' Equity (Deficit) for the years
ended December 31, 1997, 1998 and 1999.............................. F5
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1998 and 1999................................................. F7
Notes to Consolidated Financial Statements............................... F9
F-1
<PAGE>
Report of Independent Auditors
To the Shareholders of The Derby Cycle Corporation:
We have audited the accompanying consolidated balance sheets of The Derby Cycle
Corporation and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, comprehensive income, shareholders'
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Derby Cycle Corporation and
subsidiaries as of December 31, 1999 and 1998 and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
Arthur Andersen
Nottingham, England.
March 30, 2000
F-2
<PAGE>
The Derby Cycle Corporation
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1999
------------ ------------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................ $ 17,453 $ 28,938
Receivables, net..................................................................... 69,836 93,167
Inventories.......................................................................... 105,264 121,499
Other current assets................................................................. 9,586 9,926
------------ ------------
Total current assets............................................................ 202,139 253,530
------------ ------------
Property, plant and equipment, net ...................................................... 49,514 40,615
Intangibles, net.......................................................................... 20,600 38,044
Other assets.............................................................................. - 50
Prepaid pension assets.................................................................... 56,072 57,345
------------ ------------
Total assets.................................................................... $ 328,325 $ 389,584
------------ ------------
Liabilities and Shareholders' Deficit
Current liabilities:
Accounts payable..................................................................... $ 34,394 $ 60,985
Accrued liabilities.................................................................. 23,196 23,776
Income taxes payable................................................................. 8,452 3,344
Short term borrowings................................................................ 60,831 69,207
Other current liabilities............................................................ 2,103 5,721
------------ ------------
Total current liabilities....................................................... 128,976 163,033
------------ ------------
Other liabilities:
Long-term debt....................................................................... 165,870 176,410
Excess of assets acquired over cost of acquisitions.................................. 11,120 10,404
Deferred income taxes................................................................ 18,896 18,878
Other liabilities.................................................................... 4,224 10,853
------------ ------------
Total liabilities............................................................... 329,086 379,578
------------ ------------
Minority interest......................................................................... 627 32
------------ ------------
Commitments and contingencies: ...........................................................
Preferred stock with redemption rights, $0.01 par value, 25,000 shares authorized, issued
& outstanding of Series A, 3,000 shares authorized, issued & outstanding of Series
B & 100 shares authorized of Series C.............................................. 45,432 49,141
Stock rights.............................................................................. 23,300 23,300
Shareholders' equity (deficit):
Class A common stock, $0.01 par value, 200,000 shares authorized, 44,200/47,160
shares issued & outstanding as of December 31, 1998/1999........................ 1 1
Class B common stock, $0.01 par value, 15,000 shares authorized, nil shares issued &
outstanding as of December 31, 1998/1999........................................ - -
Class C common stock, $0.01 par value, 30,000 shares authorized, nil/23,490 issued &
outstanding as of December 31, 1998/1999........................................ - -
Additional paid-in capital........................................................... 22,499 48,949
Receivable from shareholders......................................................... - (3,113)
Accumulated deficit.................................................................. (87,346) (100,460)
Accumulated other comprehensive income (loss)........................................ (5,274) (7,844)
------------ ------------
Total shareholders' deficit..................................................... (70,120) (62,467)
------------ ------------
Total liabilities and shareholders' deficit..................................... $ 328,325 $ 389,584
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
The Derby Cycle Corporation
Consolidated Statements of Operations
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Net revenues ................................................................ $ 465,687 $ 465,305 $ 540,427
Cost of goods sold.......................................................... (345,885) (350,346) (409,490)
---------- ---------- ----------
Gross profit........................................................ 119,802 114,959 130,937
---------- ---------- ----------
Selling, general and administrative expenses................................. (90,101) (90,968) (107,091)
Recapitalization costs................................................. - (5,853) -
Restructuring charge................................................... - - (5,093)
Non-recurring items.................................................... - - (4,495)
---------- ---------- ----------
Operating income.................................................... 29,701 18,138 14,258
---------- ---------- ----------
Other income (expense):
Interest expense....................................................... (7,490) (16,948) (26,281)
Interest income........................................................ 1,038 1,048 577
Other income (expense), net............................................ 107 (1,334) 1,481
Gain on dispositions of property, plant and equipment.................. - - 9,314
---------- ---------- ----------
Income (loss) before income taxes, minority interest and
extraordinary item............................................. 23,356 904 (651)
Provision for income taxes................................................... (10,621) (6,294) (4,474)
Minority interest............................................................ (51) (67) (32)
---------- ---------- ----------
Income (loss) before extraordinary item............................. 12,684 (5,457) (5,157)
Extraordinary item - loss on early extinguishment of debt
(net of tax of $233)................................................... - (431) -
---------- ---------- ----------
Net income (loss)................................................... 12,684 (5,888) (5,157)
Dividends accrued on preferred stock......................................... - (4,932) (3,709)
---------- ---------- ----------
Net income (loss) applicable to common shareholders................. $ 12,684 $ (10,820) $ (8,866)
---------- ---------- ----------
Basic and diluted net income (loss) before extraordinary item applicable to
common shareholders per share........................................... $ 584.52 $ (289.07) $ (131.03)
---------- ---------- ----------
Basic and diluted extraordinary item applicable to common shareholders per
share................................................................... $ - $ (11.99) $ -
---------- ---------- ----------
Basic and diluted net income (loss) applicable to common shareholders per
share................................................................... $ 584.52 $ (301.06) $ (131.03)
---------- ---------- ----------
Weighted average number of shares of common stock
outstanding............................................................. 21,700 35,940 67,666
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
The Derby Cycle Corporation
Consolidated Statements of Shareholders' Equity (Deficit)
(Dollars in thousands)
<TABLE>
<CAPTION>
Accumul-
ated Other
Addit- Compre-
Capital Receivable ional Accumul- hensive
Common Invest- from Paid-In ated Income
Stock ment Shareholders Capital Deficit (Loss) Total
----------- ----------- ----------- ----------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
January 1, 1997................... $ - $ 94,498 $ - $ - $ (12,738) $ 1,321 $ 83,081
Comprehensive income-
Net income.................... - - - - 12,684 - 12,684
Translation adjustments....... - - - - - (4,741) (4,741)
----------- ----------- ---------- ----------- --------- ------------ -----------
Total comprehensive income (loss).. - - - - 12,684 (4,741) 7,943
Decrease in capital........... - (3,043) - - - - (3,043)
Dividends..................... - - - - (6,108) - (6,108)
----------- ----------- ---------- ----------- --------- ------------ -----------
December 31, 1997................. - 91,455 - - (6,162) (3,420) 81,873
Comprehensive loss.................
Net loss ..................... - - - - (5,888) - (5,888)
Unrecognized changes in fair
value of hedge
instruments.............. - - - - - 1,116 1,116
Translation adjustments....... - - - - - (2,970) (2,970)
----------- ----------- ---------- ----------- --------- ------------ -----------
Total comprehensive loss........... - - - - (5,888) (1,854) (7,742)
Capital contribution prior to
Recapitalization ........ - 1,600 - - 6,040 - 7,640
Issuance of common stock ..... 1 - - 22,499 - - 22,500
Issuance of stock rights ..... - - - - (23,300) - (23,300)
Accrued dividend on preferred
stock ................... - - - - (4,932) - (4,932)
Distribution to shareholders
in connection with
Recapitalization ........ - (93,055) - - (53,104) - (146,159)
----------- ----------- ---------- ----------- --------- ------------ -----------
December 31, 1998................. $ 1 $ - $ - $ 22,499 $ (87,346) $ (5,274) $ (70,120)
----------- ----------- ---------- ----------- --------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
The Derby Cycle Corporation
Consolidated Statements of Shareholders' Equity (Deficit) (continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Accumul-
ated Other
Addit- Compre-
Capital Receivable ional Accumul- hensive
Common Invest- from Paid-In ated Income
Stock ment Shareholders Capital Deficit (Loss) Total
----------- ----------- ----------- ----------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
January 1, 1999.................... $ 1 $ - $ - $ 22,499 $ (87,346) $ (5,274) $ (70,120)
Comprehensive loss.................
Net loss...................... - - - - (5,157) - (5,157)
Unrecognized changes in fair
value of hedge
instruments.............. - - - - - (1,116) (1,116)
Translation adjustments....... - - - - - (1,454) (1,454)
----------- -------- ----------- ----------- --------- ------------ -----------
Total comprehensive loss........... - - - - (5,157) (2,570) (7,727)
Issuance of common stock ..... - - - 26,450 - - 26,450
Receivable from shareholders . - - (3,113) - - - (3,113)
Accrued dividend on preferred
stock ................... - - - - (3,709) - (3,709)
Accrued dividend on common
stock.................... - - - - (4,248) - (4,248)
----------- -------- ----------- ----------- --------- ------------ -----------
December 31, 1999................. $ 1 $ - $ (3,113) $ 48,949 $(100,460) $ (7,844) $ (62,467)
----------- -------- ----------- ----------- --------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
The Derby Cycle Corporation
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
For the years ended December 31,
---------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................................... $ 12,684 $ (5,888) $ (5,157)
Adjustments to reconcile net income (loss) to net cash provided by
(used by) operating activities-
Depreciation........................................................ 9,362 9,407 8,956
Amortization of intangibles, goodwill and investment grants......... (722) (616) 164
Amortization of deferred financing costs............................ 590 1,422 1,875
Extraordinary loss on early extinguishment of debt.................. - 431 -
Minority interest................................................... 51 67 32
Unrealized (gain) loss on swaps recognized in earnings.............. (107) 1,334 -
Change in fair value of other currency instruments.................. - - (1,481)
Net periodic pension income......................................... (5,828) (5,403) (5,368)
Recapitalization costs.............................................. - 5,853 -
Gain on disposition of property, plant and equipment................ - - (9,314)
Net changes in operating assets and liabilities, net of acquisitions-
(Increase) decrease in receivables.................................. (2,071) 886 (15,949)
(Increase) decrease in inventories.................................. (10,104) (12,980) (6,802)
(Increase) decrease in other current assets......................... (1,745) 795 354
Increase (decrease) in accounts payable............................. 4,405 (587) 22,143
Increase (decrease) in accrued liabilities.......................... 2,589 (3,991) 1,418
Increase (decrease) in income taxes payable......................... 209 4,491 (4,706)
Increase (decrease) in other current liabilities.................... (310) 953 3,515
Increase (decrease) in deferred income taxes........................ 2,371 1,009 1,207
Increase (decrease) in other liabilities............................ (416) (457) 1,701
----------- ------------ ------------
Net cash provided by (used by) operating activities........... 10,958 (3,274) (7,412)
----------- ------------ ------------
Cash flows from investing activities:
Purchases of property, plant and equipment.......................... (7,413) (8,322) (7,357)
Proceeds from property, plant and equipment dispositions............ 882 1,135 13,983
Cash paid for acquisitions, net of cash acquired.................... (6,650) - (44,288)
Purchase of trade investment........................................ - - (50)
Purchase of trademarks.............................................. (2,663) (1,108) -
Purchase of minority interest....................................... - (1,933) (246)
Proceeds from disposition of minority interest...................... - 261 -
----------- ------------ ------------
Net cash used in investing activities......................... $ (15,844) $ (9,967) $ (37,958)
----------- ----------- ------------
</TABLE>
F-7
<PAGE>
The Derby Cycle Corporation
Consolidated Statements of Cash Flows (continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
For the years ended December 31,
---------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from stock issue........................................... $ - $ 63,000 $ 26,450
Secured promissory notes receivable from shareholders............... - - (3,113)
Redemption of shares in subsidiaries................................ - (146,159) -
Repayment of Series A, B and C Senior Notes, net.................... (13,331) (53,334) -
Proceeds from Senior Note issue .................................... - 161,867 -
Proceeds from Subordinated Note issue............................... - - 20,000
Short term borrowings, net, prior to Recapitalization .............. 28,910 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................... - (25,873) 8,363
Repayment of term loan.............................................. - (9,057) -
Deferred financing costs............................................ (596) (13,924) (403)
Recapitalization costs.............................................. - (5,853) -
Dividends paid...................................................... (1,139) - (51)
Contributions to pension plans...................................... (2,335) (1,577) (161)
Net (distribution to) contribution by DICSA......................... (3,043) 1,600 -
----------- ------------ ------------
Net cash provided by financing activities..................... 8,466 18,777 51,085
----------- ------------ ------------
Effect of exchange rate changes.............................................. 3,016 (3,509) 5,770
----------- ------------ ------------
Net increase in cash and cash equivalents.................................... 6,596 2,027 11,485
Cash and cash equivalents, beginning of year................................. 8,830 15,426 17,453
----------- ------------ ------------
Cash and cash equivalents, end of year....................................... $ 15,426 $ 17,453 $ 28,938
----------- ------------ ------------
Supplemental cash flow information:
Interest paid....................................................... $ 7,202 $ 13,525 $ 20,313
Income taxes paid................................................... 8,041 6,372 7,973
Income taxes received............................................... - 5,624 -
----------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
The Derby Cycle Corporation
Notes to Consolidated Financial Statements
1. Nature of the Business and Basis of Presentation:
The accompanying 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 standalone 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 "Company", have significant operations in The Netherlands,
the United Kingdom, Canada, Germany, South Africa and the United States. The
Company owns or licenses many of the most recognized brands in the bicycle
industry, including leading global brands such as Raleigh, Nishiki (for U.S.A.
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 Agreement," see Note 19) so
that each of its bicycle and bicycle component companies are owned directly or
indirectly by the Company, 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 December 31, 1999. Accordingly, the
accompanying combined and consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the United States
and are presented in U.S. Dollars.
The accompanying combined and 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 intercompany 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 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. The headquarters' management costs and other corporate expenses were
$1,198,000, $1,262,000 and $4,652,000 for the years ended December 31, 1997,
1998 and 1999, respectively. Management believes the allocation in 1997 and 1998
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 Stock outstanding used assumes that the conversion of
pre-existing stock at the time of the Recapitalization is applicable to earlier
years.
The Company has earned net income (losses) of $12.7 million, ($5.9 million) and
($5.2 million) in 1997, 1998 and 1999, respectively. To date, the Company has
been able to secure financing to support its operations through a $7 million
bridge loan and DM214 revolving credit facility, which are currently fully
drawn. Furthermore, the Company raised $14.0 million in cash from the sale of
property, plant and equipment, realizing a gain of $9.3 million.
The Company expects that the existing revolving credit facility will not be
sufficient to cover its liquidity requirements after January 2001. Based on the
Company's business plan, the Company estimates that approximately an additional
$30 million will be required to fund the Company's operations through 2001. The
revolving credit facility continues to be available subject to compliance with
its terms and conditions and the Company will be seeking to review this in
September 2000. In addition the directors have obtained a commitment from Thayer
and Perseus to provide a bridge loan of up to $7 million in 2001 should it be
required.
F-9
<PAGE>
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern.
During the year the terms of the Revolving Credit Agreement were amended to
avoid breaching certain of the covenants and to safeguard compliance with the
covenants in 2000.
2. Accounting Policies:
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenue and expenses. Actual results could differ from those
estimates.
Foreign Currency Translation
The financial statements of the Company's subsidiaries have been translated in
accordance with Statement of Financial Accounting Standards ("SFAS") 52 "Foreign
Currency Translation". Current rates of exchange are used to translate the
balance sheets of the Company's subsidiaries, while the average exchange rate
for each year is used to translate the statements of operations and cash flows.
The resulting translation adjustments are recorded as a component of
shareholders' equity (deficit). Gains or losses resulting from transactions in
other than a functional currency are reflected in selling, general, and
administrative expenses in the accompanying Consolidated Statements of
Operations. Total foreign currency gains (losses) were $(19,000), $2,042,000 and
$(118,000) for the years ended December 31, 1997, 1998 and 1999, respectively.
Revenue Recognition
Revenue is generally recognized net of sales taxes, returns, discounts and
allowances, when products are shipped to customers or services are rendered.
Advertising Costs
Advertising costs are expensed as incurred. Total advertising costs were
$10,245,000, $10,858,000 and $9,879,000 for the years ended December 31, 1997,
1998 and 1999, respectively.
Restructuring Charge
In 1999 the Company completed the plans to restructure its business in the U.K.
and the Raleigh distribution operations in Germany, The Netherlands, Belgium and
Ireland. Raleigh U.K. ceased manufacturing steel bicycle frames at the end of
1999 due to increased consumer demand for aluminum frames. Steel frames
manufactured by the company accounted for approximately 50% of all frames sold
by the company in 1999, with the balance being fabricated mostly from aluminum
and imported from Asia. Other components of the restructuring at Raleigh U.K.
included streamlining the company's product development and marketing functions.
The company has granted an option to a property developer for the sale of the
site used for employee car parking, storage and the parts and accessories
business that will be released. 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. The Raleigh Ireland warehouse has been closed and distribution
outsourced, leaving only a sales and marketing organization in Ireland. These
restructuring steps are projected to reduce on-going product costs and selling
expenses by approximately $3 million in 2000. In aggregate, 182 employees were
engaged in these activities which have ceased and their employment has been
terminated. The total restructuring charge of $5,093,000 in 1999 comprised the
following items (in thousands):
<TABLE>
<CAPTION>
For the years ended December 31,
---------------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Voluntary termination benefits......... $ - $ - $ 621
Involuntary termination benefits....... - - 3,271
Closure expenses....................... - - 1,201
------- ------- --------
$ - $ - $ 5,093
======= ======= ========
</TABLE>
20 employees volunteered to leave, all of whom left and were paid their
termination benefits in 1999. 162 employees were terminated involuntarily of
whom 153 left during 1999 and were paid $3,123,000 in termination benefits. 9
compulsorily terminated employees remained on the payroll as at December 31,
1999 and $148,000 of accrued termination benefits in respect of these employees
is included in other liabilities. The closure expenses were mainly in respect of
inventory written-off on the closure of operations and productivity lost on the
re-configuration of assembly tracks.
Non-Recurring Items
In 1999 the Company restructured its corporate management and established its
headquarters in Stamford, CT to organize the finance, marketing and purchasing
functions on a global basis. The Company also reviewed the logistics of Raleigh
and Diamond Back distribution in the U.S.A. and undertook strategic reviews to
leverage global scale and strengthen the brands. The total non-recurring items
of $4,495,000 in 1999 comprised the following (in thousands):
<TABLE>
<CAPTION>
For the years ended December 31,
----------------------------------
1997 1998 1999
------ ------ -------
<S> <C> <C> <C>
Global components sourcing project.............. $ - $ - $ 1,750
Manufacturing and logistics strategic review.... - - 739
Brand and distribution assessment............... - - 1,457
Recruitment of headquarters staff............... - - 549
------- ------- --------
$ - $ - $ 4,495
======= ======= ========
</TABLE>
Income Taxes
The Company accounts for income taxes under the liability method in accordance
with SFAS 109 "Accounting for Income Taxes." Deferred taxes are recognized for
the tax consequences of temporary differences by applying enacted statutory tax
rates applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. The
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date. Future tax benefits are recognized to
the extent that realization of such benefits is more likely than not.
Earnings Per Share
The effect of stock options granted to employees has been excluded from the
computation of diluted earnings per share in 1999 because they were
anti-dilutive.
F-10
<PAGE>
Basis of Consolidation
The financial statements combine the financial position and results of
operations of the bicycle and bicycle component businesses of DICSA, through May
14, 1998, and consolidate the financial position and results of operations of
the Company and its subsidiaries from May 14, 1998 through December 31, 1999.
The results of subsidiaries are consolidated in the statements of operations
from the date of acquisition. Goodwill arising on combination and consolidation
is being amortized over 40 years.
Cash and Cash Equivalents
The Company considers liquid investments with an original maturity at the date
of purchase of three months or less to be cash equivalents. Due to the short
maturity of these investments, their carrying amount approximates fair value.
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):
December 31,
---------------------
1998 1999
--------- ---------
Finished products.................................... $ 48,498 $ 54,205
Work in process...................................... 9,686 9,594
Raw materials........................................ 47,080 57,700
--------- ---------
Total inventories................................ $ 105,264 $ 121,499
========= =========
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.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and depreciated using the
straight-line method over the useful life of the asset (buildings-50 years;
plant and equipment-3 to 13 years) or the lease term if shorter for leasehold
improvements. The cost and accumulated depreciation for property, plant and
equipment sold, retired, or otherwise disposed of are removed from the
Consolidated Balance Sheets, and the resulting gains and losses are reflected
within the Consolidated Statements of Operations.
Capital Grants
Capital grants received from government authorities to construct facilities are
amortized over the estimated useful life of the respective assets. The amounts
amortized were $567,000, $547,000 and $445,000 for the years ended December 31,
1997, 1998, and 1999, respectively. The unamortized balance of capital grants
was $3,341,000 and $2,447,000 as of December 31, 1998 and 1999, respectively,
and is included in the accompanying balance sheets as other long-term
liabilities.
These grants relate to the factory completed in Rostock, Germany in 1993. The
total grants received for the Rostock factory were $10.3 million, and have
certain claw-back provisions relating to maintaining both the assets and a
minimum number of employees. These claw-back provisions expire at certain times
from December 31, 1999 to December 31, 2000.
Sale and Leaseback
In December 1999 the Company contracted with the University of Nottingham for
the sale and lease back of its two main manufacturing sites in Nottingham, U.K..
The Sturmey Archer site will be vacated by December 2000 and the Raleigh U.K.
site by December 2003. The properties are being leased back at an annual rental
of $0.7 million in 2000 and the Raleigh U.K. site at $0.4 million in 2001-2003.
Under sale and
F-11
<PAGE>
leaseback accounting provisions, a gain of $11,419,000 has been recognized,
which represents the excess of the proceeds, net of selling expenses, over the
balance sheet value of the property and the $1,433,000 present value of the
future lease premiums on the Raleigh site.
Intangibles
Intangibles are stated net of accumulated amortization of $1,581,000 and
$4,233,000 as of December 31, 1998 and 1999, respectively. The Company has
positive goodwill of $4,643,000 and $19,730,000 included in intangibles as of
December 31, 1998, and 1999, respectively, and negative goodwill of $11,120,000
and $10,404,000 as of December 31, 1998, and 1999, respectively, in excess of
assets acquired over cost of acquisitions in the accompanying balance sheets.
Both positive and negative goodwill are amortized using the straight-line method
over 40 years. Total amortization expense on positive goodwill was $92,000,
$113,000 and $447,000 for the years ended December 31, 1997, 1998 and 1999,
respectively, and total amortization income related to negative goodwill was
$408,000, $392,000 and $383,000 for the years ended December 31, 1997, 1998, and
1999, respectively. Trademarks are amortized over 15 years. Deferred financing
costs are amortized over the life of the related debt using the effective
interest rate method.
Impairment of Long-lived Assets
The Company periodically evaluates whether events or circumstances have occurred
indicating that the carrying amount of long-lived assets may not be recoverable.
If the sum of undiscounted expected future cash flows is less than the carrying
amount of an asset, the Company recognizes an impairment loss based on the
amount by which the carrying amount of the asset exceeds the fair value of the
asset, determined using the discounted cash flow method.
Reclassifications
Certain reclassifications have been made to prior years to conform to the
current year presentation.
Derivative Financial Instruments
The Company uses derivative financial instruments for purposes other than
trading and does so to reduce its exposure to fluctuations in interest and
foreign currency exchange rates.
Forwards - Forward foreign currency exchange contracts, as well as currency
options, are used to reduce the impact of currency exchange rate movements on
purchases of inventory and sales of goods. Forward contracts are recorded as
assets or liabilities at fair value in the balance sheet. Since the adoption of
SFAS 133 on October 1, 1998, changes in fair value on forward contracts
designated as hedges are recorded in accumulated other comprehensive income
(loss), and are recognized in the statements of operations with the related
transaction. Changes in fair value on undesignated forward contracts are
recorded as gains or losses through other income (expense) in the statements of
operations as the changes in fair value occur. Prior to the adoption of SFAS
133, changes in the fair value of forward contracts were recorded as gains or
losses through cost of goods sold for purchases and through revenues for sales.
Cash flows resulting from forward contracts are included in cash flows from
operating activities in the accompanying statements of cash flows.
Swaps - Currency and interest rate swaps have the effect of synthetically
changing the currency and interest rates of certain liabilities of the Company.
The net receivable or payable related to currency swaps was recorded as other
current assets or other current liabilities, respectively, in the balance sheet
as at December 31, 1997. Changes in the market value of the currency and
interest rate swaps were recorded as gains or losses through other income
(expense) in the accompanying statements of operations for the years ended
December 31, 1997 and 1998. Cash flows resulting from currency and interest rate
swaps were classified in repayment of long-term debt in the accompanying
statements of cash flows for the years ended December 31, 1997 and 1998. The
Company has not used currency and interest rate swaps since the Recapitalization
on May 14, 1998.
Options - Currency options as well as forward contracts are used to reduce the
impact of currency exchange rate movements on purchases of inventory and sales
of goods. Currency options are recorded as assets or liabilities at fair value
in the balance sheet. Since the adoption of SFAS 133 on October 1, 1998, changes
in fair value on currency options designated as hedges are recorded in
accumulated other comprehensive income (loss), and are recognized in the
statements of operations with the related transaction. Changes in fair value on
undesignated currency options are recorded as gains or losses through other
income (expense) in the statements of operations as the changes in fair value
occur. Prior to
F-12
<PAGE>
the adoption of SFAS 133, changes in the fair value of currency options were
recorded as gains or losses through cost of goods sold for purchases, through
revenues for sales and through other income (expense) for options purchased to
hedge operating cash flows being generated in different currencies than that
required to service the interest on the Senior Notes. Cash flows resulting from
currency options are included in cash flows from operating activities in the
accompanying statements of cash flows. The options are expensed at maturity if
they are not exercised.
Fair Value of Financial Instruments
The following methods were used to estimate the fair value of each class of
financial instruments:
Cash and cash equivalents - The carrying amount approximates the fair value due
to the short term nature of the instruments.
Short term and long-term debt - The fair value is estimated based upon quoted
market prices at year-end or current interest rates for debt of the same
maturity (see Notes 9 and 10).
Forwards and Options - The fair value is estimated based on quoted market prices
at year-end (see Note 8).
Swaps and Caps - The fair value of currency and interest rate swap agreements
was estimated based on quoted market prices at year-end (see Note 8).
3. Receivables:
Receivables consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1999
------------ ------------
<S> <C> <C>
Trade receivables......................................................................... $ 74,591 $ 98,084
Royalty receivables....................................................................... 284 119
------------ ------------
Total receivables.................................................................... 74,875 98,203
Allowance for doubtful trade accounts..................................................... (3,956) (4,027)
Allowance for discounts................................................................... (1,083) (1,009)
------------ ------------
Total receivables, net............................................................... $ 69,836 $ 93,167
============ ============
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Allowance for doubtful trade accounts:
Balance January 1,........................................................... $ 4,501 $ 4,419 $ 3,956
Acquired with Diamond Back................................................... - - 1,070
Additions charged to costs and expenses...................................... 1,016 1,467 571
Deductions................................................................... (993) (2,045) (1,172)
Effect of exchange rate changes.............................................. (105) 115 (398)
----------- ------------ ------------
Balance December 31,.................................................... $ 4,419 $ 3,956 $ 4,027
=========== ============ ============
</TABLE>
F-13
<PAGE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Allowance for discounts:
Balance January 1,........................................................... $ 714 $ 564 $ 1,083
Acquired with Diamond Back................................................... - - 183
Additions charged to costs and expenses...................................... (145) 566 (232)
Effect of exchange rate changes ............................................. (5) (47) (25)
----------- ------------ ------------
Balance December 31,.................................................... $ 564 $ 1,083 $ 1,009
=========== ============ ============
</TABLE>
4. Other Current Assets:
Other current assets consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1999
------------ ------------
<S> <C> <C>
Prepaid expenses.......................................................................... $ 5,011 $ 5,496
Receivable on derivatives................................................................. 125 228
Sales taxes recoverable................................................................... 908 614
Other receivables......................................................................... 3,542 3,588
------------ ------------
Total other current assets........................................................... $ 9,586 $ 9,926
============ ============
</TABLE>
5. Property, Plant and Equipment:
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1999
------------ ------------
<S> <C> <C>
Land...................................................................................... $ 4,200 $ 4,208
Buildings................................................................................. 24,274 20,466
Equipment................................................................................. 90,503 80,844
------------ ------------
118,977 105,518
Accumulated depreciation.................................................................. (69,463) (64,903)
------------ ------------
Net property, plant and equipment.................................................... $ 49,514 $ 40,615
============ ============
</TABLE>
Depreciation expense was $9,362,000, $9,407,000 and $8,956,000 for the years
ended December 31, 1997, 1998 and 1999, respectively.
F-14
<PAGE>
6. Intangibles:
Intangible assets consist of the following (in thousands):
December 31,
-------------------
1998 1999
-------- --------
Trademarks purchased..................................... $ 3,773 $ 8,523
Goodwill purchased....................................... 4,811 20,462
Deferred financing costs................................. 13,375 13,778
Effect of exchange rates................................. 222 (486)
-------- --------
22,181 42,277
Accumulated amortization................................. (1,581) (4,233)
-------- --------
Total intangibles, net.............................. $ 20,600 $ 38,044
======== ========
7. Accrued Liabilities:
The following is a breakdown of accrued liabilities (in thousands):
December 31,
--------------------
1998 1999
-------- --------
Sales taxes payable..................................... $ 2,389 $ 2,159
Payroll taxes payable................................... 3,858 3,190
Accrued vacation........................................ 1,485 1,735
Accrued unvouchered payables............................ 12,429 12,558
Warranty and rebates reserves........................... 3,035 4,134
-------- --------
Total accrued liabilities.......................... $ 23,196 $ 23,776
======== ========
8. Derivative Financial Instruments:
Forwards
A forward foreign currency exchange contract calls for delivery of a specified
amount of one currency for a specified amount of another currency at a fixed
exchange rate and a specified future date. The exchange rate is established at
the time the contract is entered into, but payment and delivery are not required
until maturity. Forward contracts are entered into with bank counterparties. The
Company enters into forward contracts to reduce the impact of currency movements
for the following year, principally on purchases of inventory and sales of goods
denominated in currencies other than the subsidiaries' functional currencies.
F-15
<PAGE>
The Company held forward contracts for the purchases of inventory and sales of
goods denominated in the following currencies (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1998 1999
------------------------ ---------------------
Buy Sell Buy Sell
--------- --------- --------- -----
<S> <C> <C> <C> <C>
From: Pounds Sterling....................................... $ 9,768 $ - $ 9,935 $ -
Deutsche Marks........................................ 10,445 - 2,163 -
Dutch Guilders........................................ 3,082 - 4,015 -
Canadian Dollars...................................... 8,532 - 8,060 -
South African Rand.................................... 288 - 300 -
New Taiwanese Dollar.................................. - 8,682 - -
--------- --------- --------- -----
To: U.S. Dollars.......................................... 32,115 8,682 24,473 -
--------- --------- --------- -----
From: Pounds Sterling....................................... 1,378 - 1,522 -
U.S. Dollars.......................................... - - 603 -
Dutch Guilders........................................ 4,858 - 4,752 -
--------- --------- --------- -----
To: Japanese Yen.......................................... 6,236 - 6,877 -
--------- --------- --------- -----
From: Pounds Sterling to Dutch Guilders..................... 119 9,276 - 535
From: Pounds Sterling to Deutsche Marks..................... - 1,482 - -
From: Irish Punts to Pounds Sterling........................ 283 - - -
From: Pounds Sterling to Belgium Francs..................... 59 - - -
--------- --------- --------- -----
Total notional amounts.................................... $ 38,812 $ 19,440 $ 31,350 $ 535
========= ========= ========= =====
Fair value................................................ $ 39,739 $ 19,274 $ 32,190 $ 455
========= ========= ========= =====
</TABLE>
Currency Options and Interest Rate Cap
With the issuance of the $100,000,000 of 10% Senior Notes and DM110,000,000 of
9.38 percent Senior Notes (see Note 10), and a seven year revolving credit
facility of DM214,000,000 on May 14, 1998 (see Note 9) in connection with the
Recapitalization, the Company purchased currency options and interest rate caps.
The currency options hedge 67% of the Company's exposure from July, 1998 through
May, 2001, arising from operating cash flows being generated in different
currencies than that required to service the interest on the Senior Notes. The
interest rate caps limit the Company's exposure to floating interest rate
increases on the primary portion of the drawdowns on the revolving credit
facility.
The following is a summary of the Company's currency option and interest rate
cap net receivables as of December 31, 1998, and 1999 (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1998 1999
------------------------ -----------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- -----
<S> <C> <C> <C> <C>
Currency options............................................... $ 251 $ 114 $ 89 $171
Interest rate cap.............................................. 137 11 84 57
---------- -------- -------- ----
Total currency options and interest rate cap.............. $ 388 $ 125 $ 173 $228
========== ======== ======== ====
</TABLE>
Adoption of SFAS 133
The Company elected to adopt SFAS 133 as of October 1, 1998.
Income and expense related to the fair value accounting of the Company's
derivative instruments prior to 1998 are included in the consolidated statement
of operations. The Company recognized a gain on the fair value accounting of
swaps of $107,000 in other income (expense) for the year ended December 31,
1997.
F-16
<PAGE>
In 1998, (i) a gain of $805,000 on the fair value accounting of the forward
foreign currency exchange contracts is shown within gross profit, and (ii) a
loss of $286,000 on the fair value accounting of the currency option and
interest rate cap and a loss of $1,048,000 on the fair value accounting of the
swaps (due to the early termination of the swaps before the Recapitalization on
May 14, 1998) are shown as other income (expense), in the consolidated statement
of operations to September 30, 1998, prior to adoption of SFAS 133.
Changes in the fair value of derivative instruments designated as hedges
subsequent to the adoption of SFAS 133 are included in accumulated other
comprehensive income (loss). In the period from October 1, 1998 to December 31,
1998 the Company recorded in accumulated other comprehensive income (loss) (i)
an unrealized gain of $1,093,000 on the fair value accounting of the forward
foreign currency exchange contracts and, (ii) an unrealized gain of $23,000 on
the fair value accounting of the currency option and interest rate cap.
The above unrealized amounts held in other comprehensive income (loss) as at
December 31, 1998 have been subsequently realized and therefore recognized in
the 1999 consolidated statement of operations with the related hedged
transactions. As of September 27, 1999, the Company dedesignated all of its
remaining hedges. The increase of $1,140,000 in the fair value of forward
foreign currency exchange contracts and the increase of $318,000 in the fair
value of the currency options and interest rate cap which occurred between
September 27, 1999 and December 31, 1999 are included in other income (expense)
in the 1999 consolidated statement of operations.
As of December 31, 1999 there was no balance relating to hedges designated prior
to September 27, 1999 remaining in accumulated other comprehensive income
(loss), since all of the amounts were reclassified to earnings when the related
hedged transactions occurred. The net decrease in the balance of accumulated
other comprehensive income (loss) relating to hedges of $1,116,000 was
recognized throughout 1999 as a net increase in gross profit of $1,093,000 and a
net increase in other income (expense) of $23,000.
Credit Risk
The Company enters into derivative transactions with several counterparties
including HSBC Bank Plc, Bank of Nova Scotia, ABN Amro Bank N.V. and The Chase
Manhattan Bank. The Company is exposed to credit loss in the event of
non-performance by these counterparties. However, the Company does not
anticipate non-performance by these counterparties. In the event of
non-performance, the Company would be subject to the following counterparty
risk (in thousands):
December 31,
------------------
1998 1999
------- -------
Currency options........................................... $ 114 $ 171
Interest rate cap.......................................... 11 57
Forwards................................................... 1,099 921
------- -------
Total credit risk..................................... $ 1,224 $ 1,149
======= =======
F-17
<PAGE>
9. Short Term Borrowings:
Short term borrowings consist of the following (in thousands):
December 31,
-------------------
1998 1999
-------- --------
Short term bank borrowings................................ $ 56,693 $ 67,602
Bank overdraft............................................ 4,138 1,605
-------- --------
Total short term borrowings.......................... $ 60,831 $ 69,207
======== ========
At December 31, 1996, the Company maintained 364-day aggregate unsecured
revolving credit facilities of (pound)26,500,000, and on which interest was
charged at 1.25% above the London Interbank Offer Rate. On March 6, 1997, these
facilities were replaced by a three year unsecured revolving credit facility of
(pound)60,000,000, and on which interest was charged at 1.00% above the London
Interbank Offer Rate. In addition the Company's subsidiaries had available
overdraft facilities of up to $24,000,000 during the periods ended December 31,
1996, 1997, and up to May 14, 1998.
On May 14, 1998, all the revolving credit and overdraft facilities outstanding,
except for the Rand 31,000,000 of facilities in South Africa, were repaid and
replaced by a seven year secured senior revolving credit facility of
DM214,000,000 (see Notes 10 and 19). Interest on the facility is currently
charged at 2.5% above the London Interbank Offer Rate. Management believes that
there is no material difference between the book values and fair values of
borrowings on revolving credit facilities and bank overdrafts as of December 31,
1998 and 1999.
The Company's interest expense was $3,304,000 and $4,259,000 on the revolving
credit facilities for the years ended December 31, 1998 and 1999 respectively.
These were at floating rates of 1.00% above the London Interbank Offer Rate
through May 14, 1998, 2.00% through August 31, 1999 and 2.50% thereafter. At
December 31, 1999, the Company had $67,602,000 of bank borrowings under the
revolving credit facilities.
DM214,000,000 of secured senior revolving credit facilities are available to the
Company's operating companies under the terms of a seven year revolving credit
agreement, (the "Revolving Credit Agreement"). 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. All the
Company's freehold property and intellectual property is pledged as security
under the Revolving Credit Agreement.
The Company was in compliance with all of its borrowing covenants as at December
31, 1999. During the year the terms of the Revolving Credit Agreement were
amended to avoid breaching certain of the covenants and to safeguard compliance
with the covenants in 2000.
The Company was not in compliance with all of its borrowing covenants as at
December 31, 1998. The covenants under the revolving credit facility include a
maximum level of inventory days on hand, and a minimum level of adjusted EBITDA.
Effective February 4, 1999, the Revolving Credit Agreement was amended in
connection with the acquisition of Diamond Back. The changes made included an
increase in maximum inventory days allowed, a change in the measurement of
EBITDA and a reduction in the minimum EBITDA covenant.
F-18
<PAGE>
10. Long Term Debt
In 1993, Derby Holding B.V., which was a subsidiary of DICSA and is a subsidiary
of the Company, issued unsecured U.S. Dollar denominated Series A, B and C
Senior Notes, in the aggregate principal of $85,000,000. Derby Holding B.V.
repaid $14,333,000 of the Senior Notes in September 1996 and $14,333,000 in
September 1997, leaving $56,334,000 outstanding at December 31, 1997 and May 14,
1998. On May 14, 1998, these Senior Notes were repaid in full. The long-term
bank loan at December 31, 1997, represents a loan of DM16,250,000 equivalent to
$9,059,000 as of December 31, 1997, assumed on the acquisition of the Winora and
Staiger businesses (see Note 13). The long-term bank loan was repaid on May 14,
1998.
On May 14, 1998, the Company issued $79,750,000 of 10% Senior Notes, and Lyon
Investments BV, a subsidiary of the Company, issued $20,250,000 of 10% Senior
Notes and DM110,000,000 of 9.38% Senior Notes (see Note 19). The Senior Notes
mature in full in 2008. The Senior Notes are issued under indentures (the
"Senior Note 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 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 of the assets of the
Company.
On February 4, 1999, the Company issued a $20,000,000 19% Subordinated Note to
Vencap Holdings (1992) Pte Ltd, a Singapore corporation affiliated to GIC
Special Investments Pte Ltd. The Subordinated Note is subordinated and junior in
right of payment and enforcement to the prior payment of the amounts due under
the Company's revolving credit facility and the Senior Notes. Interest on the
Subordinated Note is compounded daily, with an annual effective yield of 20.9%.
The Subordinated Note matures in full on February 3, 2009. The Subordinated Note
is issued under an agreement which cross-defaults upon an event of default under
the Revolving Credit Agreement or the Senior Note Indentures.
As of December 31, 1998, and 1999, long-term debt consists of the following (in
thousands):
December 31,
-------------------
1998 1999
-------- --------
10% $100,000,000 Senior Notes............................. $100,000 $100,000
9.38% DM110,000,000 Senior Notes......................... 65,870 56,410
19% $20,000,000 Subordinated Note......................... - 20,000
-------- --------
Total long-term debt...................................... 165,870 176,410
======== ========
Management believes that there was no material difference between the fair value
and book value of the 10.00% $100,000,000 and the 9.38% DM110,000,000 Senior
Notes as of December 31, 1998, or the Subordinated Note as of December 31, 1999.
The mid-market price of each 10.00% $1,000 Senior Note was $520 and each 9.38%
DM1,000 Senior Note was DM520 as of December 31, 1999.
The Company's interest expense was $11,403,000 and $15,648,000 on the Senior
Notes for the years ended December 31, 1998 and 1999 respectively, and
$3,754,000 on the Subordinated Note for the year ended December 31, 1999.
11. Commitments and Contingencies:
Operating Leases
Total rent expense for operating leases, primarily in respect of land and
buildings and automobiles, was $5,409,000, $5,768,000 and $7,668,000 for the
years ended December 31, 1997, 1998, and 1999 respectively, which is included in
selling, general and administrative expenses in the accompanying Consolidated
Statements of Operations.
F-19
<PAGE>
The future minimum lease payments for operating leases subsequent to December
31, 1999, are as follows (in thousands):
For the years ended December 31,
2000.................................................................. $ 6,552
2001.................................................................. 5,002
2002.................................................................. 4,600
2003.................................................................. 4,289
2004.................................................................. 3,785
Thereafter............................................................ 9,064
--------
Total............................................................ $ 33,292
========
Leases of land and buildings are typically subject to rent reviews at specified
intervals and provide for the lessee to pay all insurance, maintenance and
repair costs. The Company's facilities are subject to the requirements of
environmental regulations in their respective jurisdictions. There can be no
assurance that the Company is at all times in compliance with all such
requirements.
Sale and Leaseback
In December 1999 the Company contracted with the University of Nottingham for
the sale and lease back of its two main manufacturing sites in Nottingham, U.K..
The Sturmey Archer site will be vacated by December 2000 and the Raleigh U.K.
site by December 2003. The properties are being leased back at an annual rental
of $0.7 million in 2000 and the Raleigh U.K. site at $0.4 million in 2001-2003.
Under sale and leaseback accounting provisions, a gain of $11,419,000 has been
recognized, which represents the excess of the proceeds, net of selling
expenses, over the balance sheet value of the property and $1,433,000 present
value of the future lease premiums on the Raleigh site.
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
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.
F-20
<PAGE>
Unconditional Purchase Obligations
The Company had unconditional purchase obligations for raw materials and bicycle
components of $54,017,000 and $91,016,000 as of December 31, 1998, and 1999,
respectively, which are not recorded in the consolidated financial statements.
Common stock and Preferred stock
Following the Recapitalization, DC Cycle L.L.C., a wholly owned subsidiary of
Thayer, owned approximately 27% of the Class A common stock, par value $.01 per
share (the "Class A common stock"), and all of the outstanding shares of the
Series A preferred stock, par value $.01 per share (the "Series A preferred
stock"). Holders of Series A preferred stock are entitled to 1.5 votes per
share, voting together with the Class A common stock. Perseus Cycle, L.L.C., a
wholly owned subsidiary of Perseus, owned approximately 22% of the Class A
common stock. DFS owned approximately 47% of the Class A common stock and all
the Series B preferred stock, par value $.01 per share (the "Series B preferred
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.
During the year ended December 31, 1999 the Company issued 2,960 Class A and 740
Class C common shares to executives of the Company for $1,000 per share under
the management stock plan. $1,000 is the fair value at the date of purchase. The
issue of shares to executives of the Company was partly financed by the issue of
secured promissory notes, shown within shareholders' deficit in the balance
sheet.
Following the issue of stock as listed above, the stock in the Company (at issue
price plus accrued preference dividends) is held by the following shareholders
and their affiliates (in thousands):
<TABLE>
<CAPTION>
Derby
Thayer Internat-
Capital Perseus ional
Number 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.................... 8,164 - - - 8,164
Series B....................... 3,000 - - 3,000 - 3,000
Accrued dividend 9.75% pa...... - - 477 - 477
----------- ----------- ------------- ---------- -----------
$ 45,664 $ - $ 3,477 $ - $ 49,141
=========== =========== ============= ========== ===========
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................. 25,460 12,500 10,000 - 2,960 25,460
Class C common................. 23,490 18,950 3,800 - 740 23,490
----------- ----------- ------------- ---------- -----------
$ 31,450 $ 13,800 $ - $ 3,700 $ 48,950
=========== =========== ============= ========== ===========
Retained equity
Class A common................. 21,700 $ - $ - $ 21,700 $ - $ 21,700
=========== =========== ============= ========== ===========
</TABLE>
F-21
<PAGE>
In addition, following the Recapitalization and pursuant to a recapitalization
of Raleigh Canada, DICSA received all of the outstanding shares of the Raleigh
Canada Preferred Stock, a new class of nonvoting senior preferred stock of
Raleigh Canada, in exchange for its shares of common stock of Raleigh Canada
pursuant to the Raleigh Canada Exchange Agreement. The shares of Raleigh Canada
Preferred Stock, which have a liquidation value of $23.3 million, are
exchangeable (at the option of DICSA at any time and by the Company at any time
after January 2, 2001) into 8,300 shares of Class A common stock and 15,000
shares of Class B common stock, par value $.01 per share (the "Class B common
stock", and, together with the Class A common stock, the "common stock") (or the
right to receive securities or such other property into which such classes of
stock are converted). The exchange ratio will be adjusted, if required, as
provided in the Articles of Raleigh Canada and the Raleigh Canada Exchange
Agreement. The exchange ratio will be such that the value of the Raleigh Canada
Preferred Stock on the date of the consummation of the Recapitalization will
equal the value of the shares of Raleigh Canada common stock that are exchanged
for the Raleigh Canada Preferred Stock. If the value of the Raleigh Canada
Preferred Stock is later determined to be greater than, or less than, the value
of the shares of Raleigh Canada common stock exchanged for the Raleigh Canada
Preferred Stock, the exchange ratio will be adjusted through increasing or
decreasing the number of shares of Class A common stock to be received upon
exercise of the exchange rights. Any adjustment in the exchange ratio will
result in an offsetting adjustment against the number of shares of Class A
common stock retained by DFS in the Recapitalization. DICSA also has the right
to redeem its shares of Raleigh Canada Preferred Stock for a cash payment of
$23.3 million, plus all accrued and unpaid dividends thereon, at any time after
April 1, 2001, upon 60 days' prior notice, provided that such redemption does
not result in a breach or default under any financing document of Raleigh Canada
or its affiliates, including, without limitation, the Revolving Credit Agreement
and the Senior Note Indentures. Upon liquidation of Raleigh Canada, each holder
of Raleigh Canada Preferred Stock will be entitled to receive an amount based
upon the value that such holder would have received if such holder had exchanged
the Raleigh Canada Preferred Stock pursuant to the Raleigh Canada Exchange
Agreement.
Holders of shares of Class A and Class C common stock are entitled to one vote
per share, and holders of shares of Series A preferred stock are entitled to 1.5
votes per share. Holders of Class A and Class C common stock and Series A
preferred stock will vote together as a single class on all matters submitted to
the shareholders of the Company for a vote. Upon the occurrence of certain
events, each share of Series A preferred stock will be convertible, at the
option of the holder thereof, into one-half share of Class A common stock, plus
a number of shares of Class A common stock equal to the liquidation value, which
will initially be $1,000 (plus accrued and unpaid dividends thereon, if any), of
such share divided by $1,000. At any time after the tenth anniversary of the
consummation of the Recapitalization or upon the occurrence of certain events,
holders of shares of Series A preferred stock will have the right to require the
Company to repurchase all or any portion of such shares for cash at a price per
share equal to the sum of the liquidation value (plus accrued and unpaid
dividends thereon, if any) of such share and one-half share of Class A common
stock; provided that if (other than in connection with a proposed sale of the
Company that constitutes a Change of Control) the Company is prohibited by law
from repurchasing such shares or if any such repurchase would result in a
default under the Revolving Credit Agreement or the Senior Note Indentures, the
Company may defer such repurchase until such prohibition no longer exists or
such default would no longer occur. the Company must use commercially reasonable
efforts to obtain any consent necessary to permit such payment.
Holders of shares of Class B common stock and Series B preferred stock are not
entitled to voting rights, except as otherwise required by applicable law. Upon
the occurrence of certain events, each share of Series B preferred stock will be
convertible, at the option of the holder thereof, into the number of shares of
Class A common stock having a fair market value equal to the liquidation value,
which will initially be $1,000 (plus accrued and unpaid dividends thereon, if
any), of such share. At any time after the fourth anniversary of the
consummation of the Recapitalization or upon the occurrence of certain events,
holders of shares of Series B preferred stock will have the right to require the
Company to repurchase all or any portion of such shares for cash at a price per
share equal to the liquidation value (plus accrued and unpaid dividends thereon,
if any) of such share; provided that if (other than in connection with a
proposed sale of the Company that constitutes a Change of Control) the Company
is prohibited by law from repurchasing such shares or if any such repurchase
would result in a default under the Revolving
F-22
<PAGE>
Credit Agreement or the Senior Note Indentures, the Company may defer such
repurchase until such prohibition no longer exists or such default would no
longer occur. the Company must use commercially reasonable efforts to obtain any
consent necessary to permit such payment.
Dividends on each share of Class C common stock shall accrue on a daily basis at
the rate of 20% per annum of the sum of the liquidation amount thereof plus all
accumulated and unpaid dividends thereon. Such dividends shall accrue whether or
not they have been declared and whether or not there is income, surplus or other
funds of the Company legally available for the payment of dividends. Dividends
on each share of Series A preferred stock will accrue on a daily basis at the
rate of 20% per annum on the sum of the liquidation value thereof, which will
initially be $1,000, plus all accumulated and unpaid dividends thereon.
Dividends on each share of Series B preferred stock will accrue on a daily basis
at the rate of 9.75% per annum on the sum of the liquidation amount thereof,
which will initially be $1,000, plus all accumulated and unpaid dividends
thereon. The dividends and capital distributions on the Series A preferred
stock, Series B preferred stock and Class C common stock rank pari passu.
Although a single security, each share of Series A preferred stock consists of
two economic elements: (i) the right to receive a liquidation value of $1,000
plus the 20% per annum return described above, in respect of which Thayer
(through DC Cycle) invested $1,000 per share; and (ii) the economic rights
equivalent to one-half share of Class A common stock, in respect of which Thayer
(through DC Cycle) invested $500 per share (the "Deemed Common Stock"). After
all such amounts required to be paid to holders of Series A preferred stock,
Series B preferred stock and Class C common stock have been paid, any
distribution made by the Company will be paid (i) first, to holders of Class A
common stock and Series A preferred stock until such holders have received
$1,000 for each share of Class A common stock and $500 for each share of Series
A preferred stock (in respect of the Deemed Common Stock) (subject to adjustment
in certain circumstances), (ii) second, to holders of Class B common stock until
such holders have received $1,000 for each share of Class B common stock
(subject to adjustment in certain circumstances), (iii) third, to holders of
Class A common stock and Series A preferred stock until such holders have
received a 25% internal rate of return, (iv) fourth, to holders of Class B
common stock until such holders have received a 20% internal rate of return and
(v) fifth, to holders of Class A common stock and Series A preferred stock.
At any time, each holder of Class C common stock may convert all or any portion
of the Class C common shares as follows: each Class C common stock 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 but unpaid
dividends on such Class C common stock through the date of conversion by $1,000.
At any time after August 3, 2000, the Company may redeem all or any portion of
the Class C common shares then outstanding. On any such redemption, the Company
shall pay a purchase price per Class C common share equal to the product of (i)
the Class C Common Redemption Premium (as defined) and (ii) the liquidation
amount (plus all accrued and accumulated but unpaid dividends thereon).
12. Income taxes:
The Company does not have a formal tax sharing agreement with its subsidiaries.
The Company calculates its income taxes on a stand-alone basis, with
subsidiaries filing separate returns in their own jurisdictions. The combined
related amounts are included in income taxes payable and deferred income taxes
payable in the accompanying balance sheets.
F-23
<PAGE>
Income (loss) before income taxes, minority interest and extraordinary item
consists of the following (in thousands):
<TABLE>
<CAPTION>
For the years ended December 31,
---------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
United Kingdom............................................................... $ 19,533 $ 208 $ 1,377
The Netherlands.............................................................. 8,541 5,971 8,774
Germany...................................................................... (9,753) (5,348) (597)
United States................................................................ (2,807) (5,858) (12,289)
Canada....................................................................... 1,591 1,705 1,591
South Africa................................................................. 1,369 683 730
Others....................................................................... 4,882 3,543 (237)
----------- ------------ ------------
Total income (loss) before income taxes, minority interest and
extraordinary item................................................. $ 23,356 $ 904 $ (651)
=========== =========== ===========
</TABLE>
The provision (benefit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
For the years ended December 31,
---------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Current tax provision (benefit):
United Kingdom.......................................................... $ 3,547 $ (144) $ (80)
The Netherlands......................................................... 3,271 3,988 2,076
Germany................................................................. (196) 97 98
United States........................................................... - 77 155
Canada.................................................................. 525 735 548
South Africa............................................................ 759 302 231
Others.................................................................. 344 230 239
----------- ------------ ------------
Total current provision............................................ 8,250 5,285 $ 3,267
----------- ------------ ------------
Deferred tax provision (benefit):
United Kingdom.......................................................... 1,844 537 306
The Netherlands......................................................... 498 410 775
Germany................................................................. - - -
United States........................................................... - (92) -
Canada.................................................................. 93 122 39
South Africa............................................................ 45 (33) (2)
Others.................................................................. (109) 65 89
----------- ------------ ------------
Total deferred tax provision....................................... 2,371 1,009 1,207
----------- ------------ ------------
Provision for income taxes................................................... $ 10,621 $ 6,294 $ 4,474
=========== ============ ============
</TABLE>
F-24
<PAGE>
The following table summarizes the significant differences between the United
States statutory tax rate and the Company's effective tax rate for financial
statement purposes:
<TABLE>
<CAPTION>
For the years ended December 31,
---------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Statutory tax rate - U.S. Federal............................................ 35% 35% 35%
Effect of foreign tax rates.................................................. (2) (89) 29
Utilization of losses brought forward........................................ - (37) -
Net operating losses for which no benefit is currently available............. 14 207 (123)
Permanent differences - interest not deductible for tax...................... - 337 (816)
Permanent differences - other................................................ (2) 16 36
Recapitalization costs....................................................... - 227 -
Property disposal............................................................ - - 152
----------- ------------ ------------
Effective tax rate...................................................... 45% 696% (687)%
=========== ============ ============
</TABLE>
The permanent differences - other, in 1998, relate to non-deductible items of
only $144,000, but which calculates to 16% of net income.
Deferred income tax (assets) liabilities consist of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1999
----------- ------------
<S> <C> <C>
Deferred income tax assets:
Operating losses..................................................................... $ 38,542 $ 37,648
Provisions and accruals.............................................................. 376 322
----------- ------------
Total deferred income tax assets................................................ 38,918 37,970
Valuation allowance.................................................................. (35,281) (34,425)
----------- ------------
Net deferred income tax assets.................................................. 3,637 3,545
----------- ------------
Deferred income tax liabilities:
Pension ............................................................................. (18,086) (18,760)
Depreciation......................................................................... (4,504) (3,663)
Other................................................................................ 57 -
----------- ------------
Total deferred income tax liabilities........................................... (22,533) (22,423)
----------- ------------
Net deferred income tax liabilities........................................ $ (18,896) $ (18,878)
=========== ============
</TABLE>
The operating losses, which arise in Germany and the United States, begin to
expire in 2000. The ability of the Company to utilize these losses may be
limited by a change in ownership of the Company.
13. Acquisitions:
In January 1997, the Company completed the acquisition of the assets and
operations of a bicycle and bicycle component business in Germany which
distributes bicycles under the names Winora and Staiger for consideration of
$2,650,000, net of assumed debt equivalent to $9,059,000 as of December 31, 1997
(see Note 10). The results of this business are included in the consolidated
financial statements from February 1, 1997.
In March 1997, the Company acquired the Univega brand name, trademarks and
related intellectual property for consideration of $2,550,000. Univega is a
range of all-terrain and mountain bikes. In addition, further licenses were
acquired during 1997 for $115,000.
F-25
<PAGE>
In August 1997, the Company acquired a controlling interest in the Univega Group
for consideration of $4,000,000. Univega Group is the main distributor of
Univega brand cycles in Europe. The results of Univega are included in the
consolidated financial statements from September 1, 1997.
These acquisitions were accounted for under the purchase method with the
purchase price allocated as follows (in thousands):
Accounts receivable.................................................. $ 2,351
Inventories.......................................................... 5,742
Property, plant and equipment........................................ 6,025
Goodwill............................................................. 3,386
Liabilities assumed and direct acquisitions.......................... (10,854)
--------
Purchase price.................................................. $ 6,650
========
Proforma net revenues and net income reflecting the acquisitions as if they had
occurred at the beginning of the respective years, have been omitted because the
differences between those amounts and the historical results are not material.
In May 1998, the Company purchased the minority interest in its operations in
South Africa for $1,933,000, including $1,139,000 for goodwill that is being
amortized over 40 years. The acquisition of the minority interest was accounted
for under the purchase method.
On February 4, 1999, the Company acquired the assets (and assumed certain
liabilities) of the Diamond Back Group for approximately $44,288,000 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 was 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.
The acquisition was accounted for under the purchase method with the purchase
price preliminarily allocated as follows (in thousands):
Accounts receivable................................................. $ 12,310
Inventories......................................................... 18,736
Other current assets................................................ 543
Property, plant and equipment....................................... 579
Intangibles......................................................... 4,750
Preliminary goodwill................................................ 15,651
Liabilities assumed................................................. (8,281)
--------
Purchase price................................................. $ 44,288
========
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 $15,651,000 is being amortized over
40 years.
The results of the Diamond Back Group are included in the consolidated financial
statements from February 4, 1999. An unaudited pro forma consolidated income
statement incorporating the results of the Diamond Back Group on the basis that
the group was acquired at the beginning of the respective years is as follows:
F-26
<PAGE>
The Derby Cycle Corporation
Unaudited Pro Forma Consolidated Statements of Operations
(Dollars in thousands, except per unit and unit data)
<TABLE>
<CAPTION>
Year ended
------------------------
December 31
------------------------
1998 1999
----------- ----------
<S> <C> <C>
Net revenues ........................................................................... $ 528,237 $ 544,688
Net loss applicable to common shareholders.............................................. (16,108) (9,857)
Net loss applicable to common shareholders per share.................................... $ (274.46) $ (141.12)
========== ==========
Weighted average number of shares of common stock outstanding........................... 58,690 69,847
========== ==========
</TABLE>
14. Pension Plans:
The Company operates defined benefit pension plans in its subsidiaries in
Canada, Netherlands, Ireland and the United Kingdom, which are funded in
accordance with local actuarial advice and cover all eligible current and
retired employees. In the United States, the Company operates a 401(k) pension
contribution plan for certain of its employees, for which the Company paid
$127,000, $180,000 and $446,000 in the years ended December 31, 1997, 1998 and
1999 respectively. The plans are operated under trusts and their assets are
invested independently of the Company. The largest plans are in the United
Kingdom and Netherlands, where valuations are carried out by qualified actuaries
every three years and every year respectively.
The Company adopted SFAS 87 "Employers' Accounting for Pensions and Other
Postretirement Benefits" on January 1, 1993. The impact of adopting SFAS 87 was
a transition asset of $37,795,000. The transition asset is being amortized into
income over 15 years. A cumulative change in accounting principle was recorded
as of January 1, 1993, which represented the amortization of the transition
asset between January 1, 1989, the effective date of SFAS 87, and January 1,
1993, the Company's adoption of SFAS 87.
The Company's defined benefit plan assets of $220,787,000 (1998 $217,501,000)
are approximately invested in U.K. quoted equities 40%, other equities 30%,
treasury instruments 21% and 9% invested in cash and other.
The Company adopted SFAS 132 "Employers' Disclosure about Pensions and Other
Postretirement Benefits" during 1998 and the following disclosures are made in
accordance with the new standard (in thousands):
<TABLE>
<CAPTION>
Total Pension Schemes
---------- ---------- ----------
1997 1998 1999
---------- ---------- ----------
Change in Benefit Obligation
<S> <C> <C> <C>
Projected benefit obligation at January 1............................... $ 113,338 $ 130,143 $ 155,550
Recognition of Irish pension scheme, not previously reported............ - - 1,242
Employer service cost................................................... 2,792 4,338 4,273
Interest cost........................................................... 8,386 8,821 8,035
Actual employee contributions........................................... 1,074 1,072 975
Curtailment under SFAS 88............................................... - - 540
Actuarial gain(loss).................................................... 16,783 13,886 (15,009)
Actual distributions.................................................... (5,588) (5,564) (8,488)
Exchange adjustment..................................................... (6,642) 2,854 (8,177)
---------- ---------- ----------
Projected benefit obligation at December 31........................ $ 130,143 $ 155,550 $ 138,941
========== ========== ==========
</TABLE>
F-27
<PAGE>
<TABLE>
<CAPTION>
Total Pension Schemes
---------- ---------- ----------
1997 1998 1999
---------- ---------- ----------
Change in Plan Assets
<S> <C> <C> <C>
Plan assets at January 1.............................................., $ 172,830 $ 180,664 $ 217,501
Recognition of Irish pension scheme, not previously reported............ - - 1,493
Actual return on assets during.......................................... 21,059 34,497 23,902
Actual employer contributions........................................... 2,335 1,577 161
Actual employee contributions........................................... 1,074 1,072 975
Actual distributions.................................................... (5,588) (5,564) (9,070)
Exchange adjustment..................................................... (11,046) 5,255 (14,175)
---------- ---------- ----------
Plan assets at December 31......................................... $ 180,664 $ 217,501 $ 220,787
========== ========== ==========
Net Amount Recognized
Funded status........................................................... $ 49,834 $ 61,951 $ 81,846
Unrecognized transition asset........................................... (14,981) (12,472) (9,509)
Unrecognized loss....................................................... 9,660 3,710 (18,456)
Unrecognized prior service cost......................................... 3,264 2,883 3,464
---------- ---------- ----------
Net amount recognized as prepaid expense........................... $ 47,777 $ 56,072 $ 57,345
========== ========== ==========
Weighted Average Assumptions as of December 31
Discount rate........................................................... 6.90% 5.42% 6.27%
Expected return on assets............................................... 9.35% 8.57% 8.34%
Rate of compensation increase........................................... 5.68% 3.92% 3.80%
Components of Net Periodic Pension Cost for the years ended December 31
Service cost............................................................ $ 2,792 $ 4,338 $ 4,273
Interest cost........................................................... 8,386 8,821 8,035
Expected return on plan assets.......................................... (14,852) (16,430) (16,223)
Amortization of transition asset........................................ (2,536) (2,514) (2,447)
Amortization of prior service cost...................................... 382 382 473
Gain .................................................................. - - 521
---------- ---------- ----------
Net periodic pension income........................................ $ (5,828) $ (5,403) $ (5,368)
Curtailment under SFAS 88............................................... - - 540
---------- ---------- ----------
Total pension income............................................... $ (5,828) $ (5,403) $ (4,828)
========== ========== ==========
</TABLE>
15. Segmental Information:
Reportable business segments
The Company manages its business in seven reportable segments as shown in the
following tables. Consolidation adjustments and certain small operating
companies and non operating companies 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. The accounting policies
of the business segments are the same as those described in the summary of
significant accounting policies (Note 2).
A summary of net revenues, operating income, depreciation, capital additions and
identifiable assets categorized by business segment is as follows (in
thousands):
F-28
<PAGE>
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Net revenues:
Raleigh U.K............................................................. $ 107,254 $ 82,116 $ 81,984
Gazelle, The Netherlands................................................ 107,793 111,512 124,488
Derby Germany........................................................... 103,813 125,089 144,984
Derby U.S.A............................................................. 57,917 69,083 117,396
Raleigh Canada.......................................................... 29,468 28,750 22,580
Sturmey Archer, U.K. and The Netherlands................................ 29,588 23,834 20,606
Probike, South Africa................................................... 20,626 17,047 16,815
Other companies......................................................... 9,228 7,874 11,574
---------- ---------- ----------
Total net revenues................................................. $ 465,687 $ 465,305 $ 540,427
========== ========== ==========
Operating income:
Raleigh U.K............................................................. $ 13,086 $ 3,195 $ (1,942)
Gazelle, The Netherlands................................................ 13,367 14,776 16,708
Derby Germany........................................................... (2,202) (517) 2,862
Derby U.S.A............................................................. (1,980) 2,686 1,676
Raleigh Canada.......................................................... 2,752 2,563 2,718
Sturmey Archer, U.K. and The Netherlands................................ 3,385 613 (253)
Probike, South Africa................................................... 2,133 1,224 1,350
Other companies......................................................... (840) (6,402) (8,861)
---------- ---------- ----------
Total operating income............................................. $ 29,701 $ 18,138 $ 14,258
========== ========== ==========
Depreciation:
Raleigh U.K............................................................. $ 2,578 $ 2,758 $ 2,440
Gazelle, The Netherlands................................................ 1,681 1,677 1,554
Derby Germany........................................................... 3,375 3,431 3,137
Derby U.S.A............................................................. 612 476 785
Raleigh Canada.......................................................... 327 307 324
Sturmey Archer, U.K. and The Netherlands................................ 439 529 486
Probike, South Africa................................................... 164 123 81
Other companies......................................................... 186 106 149
---------- ---------- ----------
Total depreciation................................................. $ 9,362 $ 9,407 $ 8,956
========== ========== ==========
Capital additions:
Raleigh U.K............................................................. $ 1,434 $ 2,296 $ 563
Gazelle, The Netherlands................................................ 1,658 1,852 1,679
Derby Germany........................................................... 2,430 2,003 2,468
Derby U.S.A............................................................. 472 1,132 1,197
Raleigh Canada.......................................................... 153 526 353
Sturmey Archer, U.K. and The Netherlands................................ 991 332 364
Probike, South Africa................................................... 38 85 129
Other companies......................................................... 237 96 604
---------- ---------- ----------
Total capital additions............................................ $ 7,413 $ 8,322 $ 7,357
========== ========== ==========
</TABLE>
F-29
<PAGE>
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Identifiable assets:
Raleigh U.K............................................................. $ 64,950 $ 68,110 $ 73,830
Gazelle, The Netherlands................................................ 44,448 56,369 49,193
Derby Germany........................................................... 80,539 93,004 89,761
Derby U.S.A............................................................. 36,402 36,768 73,323
Raleigh Canada.......................................................... 13,031 13,997 16,278
Sturmey Archer, U.K. and The Netherlands................................ 23,447 25,185 23,843
Probike, South Africa................................................... 10,015 12,135 8,252
Other companies......................................................... 18,940 22,757 55,104
---------- ---------- ----------
Total identifiable assets.......................................... $ 291,772 $ 328,325 $ 389,584
========== ========== ==========
</TABLE>
Long lived assets by geographic region
The Company's long lived assets categorized by geographic location are as
follows (in thousands):
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Long lived assets:
United Kingdom.......................................................... $ 14,897 $ 14,303 $ 9,039
The Netherlands......................................................... 4,467 4,943 4,395
Germany................................................................. 25,552 24,946 20,637
United States........................................................... 1,675 2,249 3,346
Canada.................................................................. 2,372 2,428 2,606
South Africa............................................................ 420 267 286
Rest of the World....................................................... 324 378 306
---------- ---------- ----------
Total long lived assets............................................ $ 49,707 $ 49,514 $ 40,615
========== ========== ==========
</TABLE>
Net revenues by geographic region
The Company sells its products in several geographic regions. Net revenues
relating to each region (categorized by the customer's geographic location) are
as follows (in thousands):
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Net revenues:
United Kingdom.......................................................... $ 100,892 $ 78,559 $ 78,239
The Netherlands......................................................... 101,216 104,772 117,939
Germany................................................................. 117,990 130,747 145,009
United States........................................................... 58,316 67,859 118,200
Canada.................................................................. 29,528 28,864 22,256
South Africa............................................................ 20,631 17,047 16,835
Rest of the World....................................................... 37,114 37,457 41,949
---------- ---------- ----------
Total net revenues................................................. $ 465,687 $ 465,305 $ 540,427
========== ========== ==========
</TABLE>
F-30
<PAGE>
16. Related Party Transactions:
The Company rents land and buildings under operating leases from personnel of
the Company in Germany and South Africa. Rents charged under such leases were
$495,000, $447,000 and $457,000 for the years ended December 31, 1997, 1998, and
1999 respectively. Management consider these rents to be at fair value.
17. Chief Executive Officer's stock options and service contract:
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. The Company issued
stock options to purchase 1,300 shares of the Company's Class A common stock and
325 shares of Class C common stock for $1,000 per share which vest over three
years, and performance-based stock options to purchase 2,600 shares of Class A
common stock and 650 shares of Class C common stock for $1,000 per share to Gary
Matthews. Pursuant to a Management Stock Purchase Agreement dated October 20,
1998, Gary Matthews purchased 1,200 shares of the Company's Class A common stock
and 300 shares of Class C common stock for $1,000 per share. Gary Matthews paid
for such shares with a secured promissory note that is non-recourse except for
20% 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 Class A and Class C common stock, provided no event of default
exists under material financing agreements, including the Senior Note
Indentures.
18. Stock Option Plan
The Company has established a stock option plan called 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. At December 31, 1999, the Company had
granted an aggregate of 11,425 stock options to its management, 75 of which have
been forfeited and 1,241 of which have vested. All the options issued are split
as to 80% over Class A common stock and 20% over Class C common stock. 6,675
vest over a period between three and four years. 4,750 are performance based.
All options have a life of 10 years.
In October 1995, FASB Statement 123 "Accounting for Stock-Based Compensation"
was issued. The Company has adopted the disclosure provisions of FASB Statement
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 FASB
Statement 123, the Company's compensation cost for share options for the
financial years 1998 and 1999 would have been $12,825 and $215,922 respectively
and the net income and earnings per share for the year ended December 31, 1999
and would have been reduced to the pro forma amounts shown below:
F-31
<PAGE>
<TABLE>
<CAPTION>
Year
ended
------------
Dec 31,
1999
------------
<S> <C>
Net income (loss) ($ thousands)
As reported....................................................................................... (8,866)
Pro forma......................................................................................... (9,082)
Earnings per share ( $ )
As reported....................................................................................... (131.03)
Pro forma......................................................................................... (134.22)
</TABLE>
The movement in options outstanding during the years ended December 31, 1998 and
December 31, 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, 1998...................................................... - -
Granted during 1998 ................................................................ 4,875 $ 1,000
Outstanding at December 31, 1998.................................................... 4,875 $ 1,000
Outstanding options which will only become exercisable subject to performance
conditions......................................................................... 3,250 $ 1,000
Outstanding at January 1, 1999...................................................... 4,875 $ 1,000
Granted during 1999................................................................. 6,550 $ 1,000
Forfeited during 1999............................................................... 75 $ 1,000
Outstanding at December 31, 1999.................................................... 11,350 $ 1,000
Exercisable at December 31, 1999.................................................... 1,241 $ 1,000
Outstanding options which will only become exercisable subject to performance
conditions......................................................................... 4,750 $ 1,000
</TABLE>
The weighted average fair value of options granted in the year ended December
31, 1999 (December 31, 1998) was estimated at $159.73 ($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 nil, risk free interest rate of 5.57%
(4.20%), and expected term of 4.0 years (3.0 years).
All options granted had an exercise price of $1,000 which was equal to the value
of the underlying stock as at the date of grant. The weighted average remaining
contractual life of the options outstanding at December 31, 1999 is 9.1 years.
19. Recapitalization Agreement:
On May 14, 1998, DICSA and two investment groups, Thayer Equity Investors III,
L.P. and Perseus Capital, L.L.C., completed the Recapitalization of the Company,
pursuant to a Recapitalization Agreement signed on March 11, 1998. As part of
the Recapitalization, DICSA transferred the shares of all of its bicycle and
bicycle component manufacturing and sales subsidiaries, other than Raleigh
Industries of Canada Limited ("RIC"), to a wholly-owned company incorporated in
Luxembourg, Derby Finance S.a.r.l. (DFS). The Company issued new equity to the
two investment groups, which diluted the interest of DFS and DICSA in the
Company to approximately 33% of the voting rights. The Recapitalization
Agreement also provided for the purchase by the Company of the minority
interests in the South African subsidiaries of the Company.
F-32
<PAGE>
As a result of the Recapitalization of the bicycle business, the Company and its
subsidiaries paid $146.2 million to DICSA and DFS to redeem certain equity
rights in the Company and its affiliates. In addition, existing long term debt
of $62.4 million net of $3.0 million of cash received on related swaps was
retired, for which the Company recorded an extraordinary charge of $0.4 million
net of taxes upon this early extinguishment of debt. The Company financed this
from the issue of new stock, as detailed below, and $163.9 million in Senior
Notes (see Note 10). The existing $98.4 million ((pound)60 million) of revolving
credit facilities, together with local banking facilities except for those in
South Africa, were replaced with a seven year secured senior revolving credit
facility of $127.9 million (DM214 million). In connection with the retirement of
debt, the Company terminated certain interest rate swaps related to the debt and
recorded a loss of $1.1 million in other income (expense) in the accompanying
statements of income for the year ended December 31, 1998.
Following the Recapitalization, DFS retained voting Class A common stock in the
Company with a value of $21.7 million. DFS's parent, DICSA, retained preferred
shares in its former subsidiary, RIC, which are exchangeable for an additional
$8.3 million of voting common stock and $15.0 million of non-voting Class B
common stock in the Company. In addition, DFS purchased 3,000 shares of
non-voting Series B preferred stock in the Company for $3.0 million. DC Cycle
L.L.C. (a subsidiary of Thayer Equity Investors III L.P.) and Perseus Cycle
L.L.C. (a subsidiary of Perseus Capital L.L.C.) purchased 22,500 shares of
voting Class A common stock of the Company for $22.5 million. The Company also
issued 25,000 shares of voting Series A preferred stock to DC Cycle L.L.C for
$37.5 million.
The Company incurred estimated fees and professional expenses of $5.9 million
related to the Recapitalization. Fees and professional expenses paid to finance
the Recapitalization of $13.9 million have been deferred and will be amortized
over the term of the Senior Notes and the bank facility. These include
investment banking fees of $1.0 million payable to the management company of one
of the investment groups, $1.2 million to a company which is wholly owned by the
chairman and president of the other investment group, and $0.7 million to
Centenary Corporation, a company in which a director of the Company is a
shareholder.
20. Subsequent Events:
Since the year end the Company has issued 40 shares of Class A common stock and
10 shares of Class C common stock to Warren L. Batts, a director of the Company,
for $1,000 per share and has issued 560 shares of Class A common stock and 140
shares of Class C common stock to executives of the Company for $1,000 per share
under the management stock plan.
Since the year end the Company has received an interest free bridge loan of $7
million provided by Thayer and Perseus. The bridge loan is repayable in July
2000 subject to (1) the Company's reduction of the Revolving Credit Facility by
$13.5 million, (2) the non-existence of a payment default under the Revolving
Credit Facility and, (3) the Company having availability under the Revolving
Credit Facility of at least $7 million prior to the repayment of the bridge
loan. In the event of non-repayment by August 1, 2000, the bridge loan converts
into warrants for the purchase of 7,000 shares of Class C common stock at an
exercise price of $0.01 per share ("Class C Warrants"). The Company has issued
2,500 Class C Warrants in consideration for the use of the bridge loan.
F-33
<PAGE>
Lyon Investments B.V. Summarized Financial Information:
Lyon Investments B.V. ("Lyon"), a Dutch Company, is a wholly owned subsidiary of
the Company. Prior to the Recapitalization, Lyon was a dormant subsidiary. As a
result of the Recapitalization, Lyon became a holding company and is a co-issuer
of $20,250,000 of the $100,000,000 of 10.00% Senior Notes and all of the
DM110,000,000 of 9.38% Senior Notes (collectively, the "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% of Koninklijke Gazelle B.V.,
Sturmey Archer Europa B.V., and Raleigh B.V..
Lyon Investments B.V.
Summarized Consolidated Balance Sheets
(Dollars in thousands)
Assets
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1999
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................................................ $ 8,470 $ 7,817
Accounts receivable, net............................................................. 15,875 11,642
Inventories.......................................................................... 26,433 20,986
Loans to internal group companies.................................................... 137,768 103,906
Other current assets................................................................. 3,002 6,799
------------ ------------
Total current assets............................................................ 191,548 151,150
------------ ------------
Property, plant and equipment, net........................................................ 11,552 9,805
Intangibles, net.......................................................................... 2,715 2,080
Prepaid pension asset..................................................................... 16,920 16,807
------------ ------------
Total assets.................................................................... $ 222,735 $ 179,842
============ ============
</TABLE>
Liabilities and Shareholders' Deficit
<TABLE>
<CAPTION>
<S> <C> <C>
Current liabilities:
Loans from internal group companies.................................................. $ 105,273 $ 78,189
Short term borrowings................................................................ 43,979 26,567
Other current liabilities............................................................ 24,015 22,876
------------ ------------
Total current liabilities........................................................ 173,267 127,632
Other liabilities:
10% $100,000,000 Senior Notes........................................................ 20,250 20,250
9 3/8% DM110,000,000 Senior Notes.................................................... 65,870 56,410
Other liabilities.................................................................... 5,971 5,791
------------ ------------
Total liabilities................................................................ 265,358 210,083
Shareholders' deficit..................................................................... (42,623) (30,241)
------------ ------------
Total liabilities and shareholders' deficit...................................... $ 222,735 $ 179,842
============ ============
</TABLE>
F-34
<PAGE>
Lyon Investments B.V.
Reconciliation of Shareholders' Deficit
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1999
------------- ------------
<S> <C> <C>
Shareholders' deficit, beginning balance.................................................. $ (25,593) $ (42,623)
Capital contributions................................................................ 5,800 -
Net income........................................................................... 4,843 6,453
Translation adjustments.............................................................. (2,043) 5,929
Distribution to shareholders in connection with the Recapitalization................. (25,630) -
------------- ------------
Shareholders' deficit, ending balance..................................................... $ (42,623) $ (30,241)
============= ============
</TABLE>
Lyon Investments B.V.
Summarized Combined Statements of Operations
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1997 1998 1999
---------- ----------- -----------
<S> <C> <C> <C>
Net revenues................................................................. $ 137,025 $ 138,297 $ 154,835
Cost of goods sold........................................................... (103,721) (104,760) (116,624)
---------- ----------- -----------
Gross profit............................................................ 33,304 33,537 38,211
Selling, general, and administrative expenses(1)............................. (25,481) (18,579) (21,845)
---------- ----------- -----------
Operating income........................................................ 7,823 14,958 16,366
Interest expense............................................................. (4,395) (9,812) (14,587)
Interest income.............................................................. 197 3,158 6,870
Other income expense net (2)................................................. - 900 570
---------- ----------- -----------
Income before income taxes.............................................. 3,625 9,204 9,219
Provision for income taxes................................................... (3,027) (4,361) (2,766)
---------- ----------- -----------
Net income.............................................................. $ 598 $ 4,843 $ 6,453
========== ========== ===========
</TABLE>
(1) Selling, general, and administrative expenses include a foreign
exchange loss on a loan from the Company to Derby Nederland B.V. of
$(5,697,000), in the year ended December 31, 1997. The impact of the
foreign exchange loss on this loan eliminates in the consolidation of the
Company's financial statements. In addition, there was also a foreign
exchange gain on inter-company loans of $872,000 for the year ended
December 31, 1998.
(2) Other income (expense), net comprised the gain on the sale of Curragh
Finance Company to Derby Holding B.V. in the year ended December 31, 1998,
and the gain in mark-to-market value on forward exchange contracts in the
year ended December 31, 1999. The impact of the sale eliminates in the
consolidation of the Company's financial statements.
F-35
<PAGE>
Exhibit 10.3
CONFORMED COPY
THE DERBY CYCLE CORPORATION AND OTHERS
as Borrowers and/or Guarantors
CHASE MANHATTAN plc
as Arranger
THE FINANCIAL INSTITUTIONS NAMED HEREIN
as Banks
CHASE MANHATTAN INTERNATIONAL LIMITED
as Facility Agent
CHASE MANHATTAN INTERNATIONAL LIMITED
as Security Agent
---------------------------------------------
AMENDMENT AGREEMENT
relating to
a facility agreement dated 12 May 1998
---------------------------------------------
<PAGE>
THIS AMENDMENT AGREEMENT is made on the 30 day of April 1999
BETWEEN:
(1) THE DERBY CYCLE CORPORATION on behalf of itself and each of THE COMPANIES
NAMED IN SCHEDULE 1 (the "Borrowers");
(2) THE DERBY CYCLE CORPORATION on behalf of itself and each of THE COMPANIES
NAMED IN SCHEDULE 2 (the "Guarantors");
(3) CHASE MANHATTAN plc (the "Arranger");
(4) CHASE MANHATTAN INTERNATIONAL LIMITED (the "Facility Agent");
(5) CHASE MANHATTAN INTERNATIONAL LIMITED (the "Security Agent"); and
(6) THE FINANCIAL INSTITUTIONS NAMED IN SCHEDULE 3 (the "Banks").
WHEREAS:
(A) By a facility agreement dated 12 May 1998 as amended and restated pursuant
to an amendment and restatement agreement dated 3 February 1999 (the
"Facility Agreement") entered into between the parties hereto, the Banks
have agreed to make certain credit facilities available to the Borrowers.
(B) The Parties hereto, with effect from the date hereof, have agreed to amend
the Facility Agreement in the manner set out in Schedule 4.
NOW IT IS HEREBY AGREED as follows:
1. Interpretation
Unless the context otherwise requires, words and expressions defined in the
Facility Agreement shall have the same meaning herein.
2. Amendments
Each of the parties agrees that, as from the date of this Agreement, the
amendments referred to at Schedule 4 shall become effective.
3. General
3.1 The Facility Agreement and this Agreement shall be read and construed
as a single document.
3.2 References in the Facility Agreement to the Facility Agreement
howsoever characterised shall with effect from the date hereof be
references to the Facility Agreement as amended by this Agreement.
3.3 On the date hereof, the Obligors represent and warrant that no Event
of Default or Potential Event of Default has occurred which has not
been remedied or otherwise waived by the Banks and no Event of Default
or Potential Event of Default would occur as a result of the Obligors
entering into this Agreement.
1
<PAGE>
3.4 The Company shall reimburse the Agents and the Banks for reasonable
costs and expenses (including reasonable legal fees) incurred by them
and their professional advisers in connection with the negotiation,
preparation and execution of this Agreement and any related
documentation.
3.5 This Agreement may be executed in any number of counterparts and by
the different parties hereto on separate counterparts, each of which
when executed and delivered together shall constitute one and the same
instrument.
3.6 The Facility Agreement shall continue in full force and effect as
amended by this Agreement.
3.7 This Agreement shall be governed by and construed in accordance with
English law.
3.8 Clause 38 (Jurisdiction) of the Facility Agreement shall be deemed to
------------
apply as if it had been set out in full in this Agreement.
2
<PAGE>
SCHEDULE 1
The Borrowers
Raleigh Industries Limited
Sturmey-Archer Limited
Derby Holding (Deutschland) GmbH
Koninklijke Gazelle BV
The Derby Cycle Corporation
Raleigh Industries of Canada Limited
Raleigh Europe B.V.
Raleigh B.V.
Englebert Wiener Bike Parts GmbH
Winora-Staiger GmbH
Derby Holding Limited
Raleigh Fahrrader GmbH
Derby Cycle Werke GmbH
Raleigh International Limited
Curragh Finance Company
Raleigh Ireland Limited
3
<PAGE>
SCHEDULE 2
The Guarantors
Derby Holding Limited
Raleigh Industries Limited
Raleigh International Limited
Sturmey-Archer Limited
Raleigh Industries of Canada Limited
The Derby Cycle Corporation
Raleigh BV
Raleigh Europe BV
Koninklijke Gazelle BV
Derby Nederland BV
Derby Holding BV
Sturmey-Archer Europa BV
Lyon Investments BV
Derby Holding (Deutschland) GmbH
Raleigh Fahrrader GmbH
NW Sportgerate GmbH
Derby Cycle Werke GmbH
Englebert Wiener Bike Parts GmbH
Univega Worldwide Licence GmbH
Univega Beteiligungen GmbH
Univega Bikes & Sports Europe GmbH
Derby Fahrrader GmbH
Derby WS Vermogenswerwaltungs GmbH
Winora-Staiger GmbH
Curragh Finance Company
Raleigh Ireland Limited
4
<PAGE>
InterDerby Group Finance N.V.
The British Cycle Corporation Limited
BSA Cycles Limited
Triumph Cycle Co. Limited
Raleigh (Services) Limited
Derby Sweden AB
5
<PAGE>
SCHEDULE 3
The Banks
Name
The Chase Manhattan Bank
ABN Amro Bank N.V.
Bank of Scotland
BHF - Bank AG
Dresdner Bank AG, Grand Cayman branch
Lloyds Bank Plc
Midland Bank plc
Scotia Bank Europe plc
The Bank of Nova Scotia
The Sumitomo Bank, Limited
Banque Nationale de Paris
San Paolo IMI SPA
Kredietbank (Nederland) N.V.
Oldenburgische Landesbank AG
The Governor and Company of the Bank of Ireland
The Industrial Bank of Japan, Limited
6
<PAGE>
SCHEDULE 4
Further Amendments to the Facility Agreement
1. The definition of "Consolidated Net Worth" at Clause 1.2 of the Facility
Agreement shall be deleted and replaced with the following:-
"Consolidated Net Worth" means the amount (including any additional paid in
capital) for the time being paid up or credited as paid up in cash on the
issued share capital of the Company (other than any Excluded Share
Capital):
plus an amount (of up to $45,000,000) in respect of the value attributable
to equity retained by on or behalf of DFS;
plus any amount standing to the credit of, or (as the case may be) minus
any amount standing to the debit of the consolidated income statement of
the Group before any adjustment made in respect of dividends on any class
of shares of the Company to the extent that the holder of such share(s) is
only entitled to receive, in respect thereof, payment in kind, and not cash
or other assets;
minus any amount which is attributable to (a) the aggregate of all goodwill
(to the extent created or purchased after Closing and excluding goodwill,
the aggregate value of which does not exceed $15,000,000, created or
purchased pursuant to the Diamond Back Acquisition), titles, trademarks,
copyrights, patents, capitalised research and development expenditure
(other than research and development expenditure which is capitalised in
accordance with the accounting polices of the Company in force at the date
of this Agreement) and other intangible assets, and (b) any upwards
revaluation of assets by any Group Member after Closing; and
minus (to the extent otherwise included) the amount attributable to the
interests (if any) of outside holders of issued share capital, in any Group
Member other than the Company other than RIC Preference Shares for so long
as the same are exchangeable solely for A Common Stock or B Common Stock
and carry no rights greater than as at the date of this Agreement and RIC
is prohibited from redeeming such RIC Preference Shares pursuant to the
provisions of this Agreement.
For the purposes of the foregoing, no items shall be effectively taken into
account more than once in this calculation and all items shall be
calculated on a consolidated basis and (subject only as may be required in
order to reflect the express inclusion or exclusion of items as specified
in this definition) in accordance with the Applicable Accounting Principles
and, where the calculation is being made as at the end of any Accounting
Period for which a consolidated balance sheet of the Group has been or is
required to be delivered to the Facility Agent hereunder, shall be
determined from that balance sheet.
2. Clause 21.1(aa)of the Facility Agreement shall be deleted and replaced with
the following definition:
"(aa) Adjusted Borrowing Base: If at any time, the aggregate Borrowing
Base of the Borrowers is less than the aggregate Deutschmark Amount
of the Ancillary Facilities, (other than that portion of Ancillary
Facilities which are solely available for foreign exchange
transactions), Advances and Outstanding Standby L/C's at such
7
<PAGE>
time, and such breach is not remedied within ten Business Days of
the delivery to the Facility Agent, in accordance with this
Agreement, of the Borrowing Base Summary which identified such
breach."
3. The sub-limit of $250,000 referred to at Clause 19.5(c)(iii) of the
Facility Agreement shall be increased to $2,750,000 so that the entire sub-
clause shall read:
"(iii) (in addition to paragraphs (i) and (ii)) Financial
Indebtedness in an aggregate principal amount (for the Group
as a whole) not exceeding $2,750,000 (or the equivalent in
other currencies) at any time where the aggregate of all
Financial Indebtedness in excess of $250,000 are loans by
the Company for the purchase by management of shares in the
Company and provided that such sub-limit shall be reduced by
the amount by which loans made by the Company to management
to enable the purchase of shares in the Company are repaid
in cash. For the avoidance of doubt the aggregate of all
loans in cash to any person may not exceed $250,000".
8
<PAGE>
THE DERBY CYCLE CORPORATION )
for itself and on behalf of each of the )
Borrowers and Guarantors )
By: SIMON GODDARD
CHASE MANHATTAN INTERNATIONAL )
LIMITED for itself and as the Facility )
Agent and Security Agent for and on behalf )
of the Arranger and each of the Banks )
By: STEPHEN CLARKE
STEPHEN HURFORD
9
<PAGE>
Exhibit 10.4
CONFORMED COPY
THE DERBY CYCLE CORPORATION AND OTHERS
as Borrowers and/or Guarantors
CHASE MANHATTAN plc
as Arranger
THE FINANCIAL INSTITUTIONS NAMED HEREIN
as Banks
CHASE MANHATTAN INTERNATIONAL LIMITED
as Facility Agent
CHASE MANHATTAN INTERNATIONAL LIMITED
as Security Agent
______________________________________
THIRD AMENDMENT AGREEMENT
relating to
a facility agreement dated 12 May 1998
______________________________________
<PAGE>
CONTENTS
<TABLE>
<S> <C>
1. Interpretation......................................................... 1
2. Amendments............................................................. 1
3. General................................................................ 1
SCHEDULE 1................................................................ 3
The Borrowers........................................................... 3
SCHEDULE 2................................................................ 4
The Guarantors.......................................................... 4
SCHEDULE 3................................................................ 6
The Banks............................................................... 6
SCHEDULE 4................................................................ 7
Further Amendments to the Facility Agreement............................ 7
</TABLE>
<PAGE>
THIS AMENDMENT AGREEMENT is made on the 31 day of August 1999
BETWEEN:
(1) THE DERBY CYCLE CORPORATION on behalf of itself and each of THE COMPANIES
NAMED IN SCHEDULE 1 (the "Borrowers");
(2) THE DERBY CYCLE CORPORATION on behalf of itself and each of THE COMPANIES
NAMED IN SCHEDULE 2 (the "Guarantors");
(3) CHASE MANHATTAN plc (the "Arranger");
(4) CHASE MANHATTAN INTERNATIONAL LIMITED (the "Facility Agent");
(5) CHASE MANHATTAN INTERNATIONAL LIMITED (the "Security Agent"); and
(6) THE FINANCIAL INSTITUTIONS NAMED IN SCHEDULE 3 (the "Banks").
WHEREAS:
(A) By a facility agreement dated 12 May 1998 as amended and restated pursuant
to an amendment and restatement agreement dated 3 February 1999 and as
further amended pursuant to an amendment agreement dated 30 April 1999 and
as further amended by the terms of this Amendment Agreement (collectively
the "Facility Agreement") entered into between the parties hereto, the
Banks have agreed to make certain credit facilities available to the
Borrowers.
(B) The Parties hereto, with effect from the date hereof, have agreed to amend
the Facility Agreement in the manner set out in Schedule 4.
NOW IT IS HEREBY AGREED as follows:
1. Interpretation
Unless the context otherwise requires, words and expressions defined in the
Facility Agreement shall have the same meaning herein.
2. Amendments
Each of the parties agrees that, as from the date of this Agreement, the
amendments referred to at Schedule 4 shall become effective (subject to the
provisions of Clause 3.9).
3. General
3.1 The Facility Agreement and this Agreement shall be read and construed
as a single document.
3.2 References in the Facility Agreement to the Facility Agreement
howsoever characterised shall with effect from the date hereof be
references to the Facility Agreement as amended by this Agreement.
3.3 On the date hereof, the Obligors represent and warrant that no Event
of Default or Potential Event of Default (save in respect of the
Potential Event of Default resulting from the potential breach of some
of the financial covenants for the period ending 31
1
<PAGE>
March 2000 as more particularly set out in the Information Memorandum
dated 4 August 1999 but subject always to the provisions of Clause 310
hereof) has occurred which has not been remedied or otherwise waived
by the Banks and no Event of Default or Potential Event of Default
would occur as a result of the Obligors entering into this Agreement.
3.4 The Company shall reimburse the Agents and the Banks for reasonable
costs and expenses (including reasonable legal fees) incurred by them
and their professional advisers in connection with the negotiation,
preparation and execution of this Agreement and any related
documentation.
3.5 Upon execution of this Agreement the Company shall pay an amendment
fee of US$10,000 (the "Amendment Fee") to each of the Banks in
consideration of the Banks entering into this Agreement.
3.6 This Agreement may be executed in any number of counterparts and by
the different parties hereto on separate counterparts, each of which
when executed and delivered together shall constitute one and the same
instrument.
3.7 The Facility Agreement shall continue in full force and effect as
amended by this Agreement and, for the avoidance of doubt, each of the
Guarantors reaffirms the Guarantee contained in Clause 23 of the
Facility Agreement and agrees that such Guarantee continues in full
force and effect notwithstanding this Agreement.
3.8 Nothing contained herein, including the matters set out in Clause 33
hereof, shall constitute a waiver of any Event of Default or Potential
Event of Default and the Banks expressly reserve all or any rights and
remedies they may have in relation to the same.
3.9 The Company shall procure within 30 days of the date of this Agreement
that it delivers to the Facility Agent a copy of the resolutions of
the members of each Obligor certified by an Authorised Signatory (or
appropriately authorised person of such Obligor) ratifying, approving,
and confirming the execution and delivery of this Agreement by the
Company as Obligors' Agent and any other communication or documents
delivered by or on behalf of each Obligor in connection herewith.
3.10 This Agreement shall be governed by and construed in accordance with
English law.
3.11 Clause 38 (Jurisdiction) of the Facility Agreement shall be deemed to
apply as if it had been set out in full in this Agreement.
2
<PAGE>
SCHEDULE 1
The Borrowers
Raleigh Industries Limited
Sturmey-Archer Limited
Derby Holding (Deutschland) GmbH
Koninklijke Gazelle BV
The Derby Cycle Corporation
Raleigh Industries of Canada Limited
Raleigh Europe B.V.
Raleigh B.V.
Englebert Wiener Bike Parts GmbH
Winora-Staiger GmbH
Derby Holding Limited
Raleigh Fahrrader GmbH
Derby Cycle Werke GmbH
Raleigh International Limited
Curragh Finance Company
Raleigh Ireland Limited
3
<PAGE>
SCHEDULE 2
The Guarantors
Derby Holding Limited
Raleigh Industries Limited
Raleigh International Limited
Sturmey-Archer Limited
Raleigh Industries of Canada Limited
The Derby Cycle Corporation
Raleigh BV
Raleigh Europe BV
Koninklijke Gazelle BV
Derby Nederland BV
Derby Holding BV
Sturmey-Archer Europa BV
Lyon Investments BV
Derby Holding (Deutschland) GmbH
Raleigh Fahrrader GmbH
NW Sportgerate GmbH
Derby Cycle Werke GmbH
Englebert Wiener Bike Parts GmbH
Univega Worldwide Licence GmbH
Univega Beteiligungen GmbH
Univega Bikes & Sports Europe GmbH
Derby Fahrrader GmbH
Derby WS Vermogenswerwaltungs GmbH
Winora-Staiger GmbH
Curragh Finance Company
Raleigh Ireland Limited
4
<PAGE>
InterDerby Group Finance N.V.
The British Cycle Corporation Limited
BSA Cycles Limited
Triumph Cycle Co. Limited
Raleigh (Services) Limited
Derby Sweden AB
5
<PAGE>
SCHEDULE 3
The Banks
Name
The Chase Manhattan Bank
ABN Amro Bank N.V.
Bank of Scotland
BHF - Bank AG
Dresdner Bank AG, New York and Grand Cayman
Branches
Lloyds TSB Bank Plc
Midland Bank plc
Scotia Bank Europe plc
The Bank of Nova Scotia
The Sumitomo Bank, Limited
Banque Nationale de Paris
San Paolo IMI SPA
Kredietbank (Nederland) N.V.
Oldenburgische Landesbank AG
The Governor and Company of the Bank of Ireland
The Industrial Bank of Japan, Limited
6
<PAGE>
SCHEDULE 4
Further Amendments to the Facility Agreement
1. The definition of "Consolidated Adjusted EBITDA" at Clause 1.2 of the
Facility Agreement shall be deleted and replaced with the following:
"Consolidated Adjusted EBITDA" means for any period comprising an annual
Accounting Period of the Company or four consecutive quarterly Accounting
Periods of the Company (taken together as one period) means the operating
income of the Group for such period:
before taking into account all Extraordinary Items (whether positive or
negative) and one-off expenses not exceeding, in aggregate, $2,900,000
insured in the Annual Accounting Period ending 31 December 1997 and in
aggregate $9,600,000 incurred in the annual Accounting Period ending 31
December 1999 as detailed in the Information Memorandum dated 4 August
1999;
before taking into account any Transaction Costs required to be expensed
through the income statement up to a maximum aggregate amount of $6,200,000
in the annual Accounting Period ending 31 December 1998 whether an
Extraordinary Item or otherwise and any one-off payments of premia or
otherwise made by any Group Member in connection with Hedging Protection
Agreements entered into in accordance with the Approved Hedging Programme
within 30 days of the date of this Agreement;
before taking into account to the extent deducted from operating income any
amounts expended that relate solely to Year 2000 Expenditure to the extent
that such expenditure, when aggregated with any other Year 2000 Expenditure
incurred since the date of this Agreement and prior to 31 December 1999
does not exceed $2,700,000 (or the equivalent in other currencies);
before deducting income tax expense;
before deducting charges to depreciation and amortisation excluding
amortisation attributable to a prepaid cash item arising in the ordinary
course of business, the amortisation of any goodwill and amortisation of
Transaction Costs in an amount not exceeding $8,800,000 in aggregate in all
Accounting Periods post Closing;
before deducting Interest (whether accrued, paid, deferred or capitalised)
as an obligation of any Group Member or Interest accrued in favour of, or
paid to, any Group Member;
after deducting (to the extent otherwise included in operating income) any
gain over book value arising in favour of the Group on the sale, lease or
other disposal of any fixed or intangible asset during such period and any
gain arising on any revaluation of any fixed or tangible asset during such
period;
after adding back (to the extent otherwise deducted in operating income)
any loss against book value incurred by the Group on the sale, lease or
other disposal of any fixed or intangible asset during such period and any
loss arising on any revaluation of any fixed or intangible assets during
such period;
after deducting (to the extent otherwise included) the amount of retained
profit (or adding back the retained loss) of any Group Member (other than
the Company) which is attributable to the interest of any shareholder of
or, as the case may be, partner in such Group Member which is not a Group
Member other than the amount of retained profit or the amount of the
retained loss of RIC which is attributable to such non-Group Member's
interest in RIC Preference Shares for
7
<PAGE>
so long as such shares may be exchanged solely for B Common Stock of the
Company and carry no rights greater than as at the date of this Agreement
and RIC is prohibited from redeeming such RIC Preference Shares pursuant to
the provisions of this Agreement;
after deducting items which have not, or are not due to be paid in cash,
including any amortisation, credit, income or provision release (where such
provision was not originally increased by reducing operating income) or
other credit where cash was received in an earlier period. For the
avoidance of doubt, any income related to the defined benefit pensions
plans of the Group recognised in accordance with FAS 87 and FAS 132 shall
be deducted when calculating Consolidated Adjusted EBITDA and any
unrealised income or loss in respect of the change in the mark to market
value of foreign exchange contracts recognised in accordance with FAS 52
and FAS 133 where such contracts are in accordance with the Approved
Hedging Programme, shall not be included when calculating Consolidated
Adjusted EBITDA;
and for the purposes of the foregoing no item shall be effectively taken
into account more than once in this calculation and all items shall be
determined on a consolidated basis and subject only as may be required in
order to reflect the express inclusion or exclusion of items as specified
in this definition) in accordance with the Applicable Accounting Principles
and as determined from the consolidated Financial Accounts of the Group for
such annual Accounting Period or for the quarterly Accounting Periods
falling within such period or, to the extent that such period, or part
thereof, relates to the period prior to Closing, from the Pre-Closing
Accounts relating to such period;
2. The financial undertakings listed in Clause 20 (Financial Undertakings)
shall be amended as follows:-
2.1 The ratios specified in Column 2 of the table in Clause 20.2(a)
(Interest Cover) for the following Accounting Periods ending on the
Accounting Dates specified below only shall be deleted and replaced
with the following:
Accounting Date Ratio
26 September 1999 1.10 : 1
31 December 1999 1.40 : 1
2.2 The amounts specified in Column 2 of the table in Clause 20.2(b)
(Consolidated Net Worth) for the following Accounting Periods only
shall be deleted and replaced with the following:
Period Consolidated Net Worth ($)
28 June 1999 - 26 September 1999 103,000,000
27 September 1999 - 31 December 1999 103,000,000
1 January 2000 - 31 January 2000 101,000,000
1 February 2000 - 2 April 2000 110,000,000
8
<PAGE>
2.3 The amounts specified in Column 2 of the table in Clause 20.2(d)
(Consolidated Adjusted EBITDA) for the following periods ending on
the Accounting Dates set out below only shall be deleted and
replaced with the following:
Accounting Date Amount ($)
27 September 1999 21,000,000
31 December 1999 27,500,000
2.4 The Accounting Periods set out in Column 1 of the table in Clause
20.2(g) (Aggregate Group Financial Indebtedness) for the following
periods only shall be deleted and replaced with the following:
Column 1 Column 2 ($)
28 June 1999 to (and including)
26 September 1999 50,000,000
27 September 1999 to (and including)
31 December 1999 75,000,000
3. The parties agree that the sub-limit of $2,750,000 referred to at Clause
19.5(c)(iii) (as amended) of the Facility Agreement shall be increased to
$3,750,000 so that the revised sub-clause shall read:
"(iii) (in addition to paragraphs (i) and (ii) Financial Indebtedness in an
aggregate principal amount) for the Group as a whole not exceeding
$3,750,000 (or the equivalent in other currencies) at any time where
the aggregate of all Financial Indebtedness in excess of $250,000
are loans by the Company for the purchase by management of shares in
the Company and provided that such sub-limit shall be reduced by the
amount by which loans made by the Company to management to enable
the purchase of shares in the Company are repaid in cash. For the
avoidance of doubt the aggregate of all loans in cash to any person
may not exceed $250,000."
5. With effect from the first Drawdown Date following the date of this
Amendment Agreement, the definition of "Margin" at Clause 1.1 of the
Facility Agreement shall be amended as follows:
"Margin" means two and one half per cent (2.50%) per annum at all times
prior to the first anniversary of this Agreement and at all times
thereafter save that, in relation to any time after the first anniversary
of this Agreement, if any consolidated Financial Accounts of the Group
delivered to the Facility Agent pursuant to Clause 19.1(a)(i) for an annual
Accounting Period or Clause 19.1(a)(ii) for a quarterly Accounting Period,
disclose that:
(a) Consolidated Adjusted EBITDA calculated on a Rolling 4 Quarterly
basis is more than $40,000,000 and the ratio of Consolidated
Adjusted EBITDA to Consolidated Net Interest Payable calculated on a
Rolling 4 Quarterly basis is greater than 2:00:1, the Margin shall
be two per cent (2.00%) per annum.
Sub-clauses (a), (b) and (c) shall be renumbered as (b), (c) and (d)
respectively.
9
<PAGE>
6. Clause 26.2 (Utilisation Fee) shall be deleted and replaced by the
following:-
"Save at any time where the applicable Margin is 2.50% per annum in which
case no such utilisation fee will be payable, the Company will pay (or will
procure that there is paid) to the Facility Agent for distribution among
the Banks pro rata to the aggregate of their respective Revolving
Commitments in respect of each Utilisation Period (as defined below) a
utilisation fee calculated at the rate per annum determined pursuant to
Clause 26.3 on an amount equal to the sum of the average daily Deutschmark
Amount of the Ancillary Facilities during such Utilisation Period and the
average daily utilisation of the Revolving Facility and the Standby L/C
Facility during such Utilisation Period (without double counting)."
10
<PAGE>
THE DERBY CYCLE CORPORATION )
For itself and on behalf of each of the )
Borrowers and Guarantors as Obligors' Agent )
By: FRANK AGAR - Vice-President
CHASE MANHATTAN INTERNATIONAL )
LIMITED for itself and as the Facility )
Agent and Security Agent and for and on behalf )
of the Arranger and each of the Banks (other )
than Lloyds TSB Bank Plc, Scotia Bank Europe )
plc and The Bank of Nova Scotia) )
By: C ASKHAM
LLOYDS TSB BANK PLC
By: D J MILWARD
SCOTIA BANK EUROPE PLC
By: DAVID SPARKES
THE BANK OF NOVA SCOTIA
By: ROGER KEAN
11
<PAGE>
Exhibit 10.5
THE DERBY CYCLE CORPORATION AND OTHERS
as Borrowers and/or Guarantors
CHASE MANHATTAN plc
as Arranger
THE FINANCIAL INSTITUTIONS NAMED HEREIN
as Banks
CHASE MANHATTAN INTERNATIONAL LIMITED
as Facility Agent
CHASE MANHATTAN INTERNATIONAL LIMITED
as Security Agent
_______________________________________
FOURTH AMENDMENT AGREEMENT
relating to
a facility agreement dated 12 May 1998
_______________________________________
<PAGE>
CONTENTS
<TABLE>
<S> <C>
1. Interpretation............................................................ 1
2. Amendments................................................................ 1
3. General................................................................... 1
SCHEDULE 1................................................................... 3
The Borrowers............................................................ 3
SCHEDULE 2................................................................... 4
The Guarantors........................................................... 4
SCHEDULE 3................................................................... 6
The Banks................................................................ 6
SCHEDULE 4................................................................... 7
Further Amendments to Facility Agreement................................. 7
1. The financial undertakings listed in Clause 20 (Financial Undertakings)
shall be amended as follows:-............................................ 7
</TABLE>
<PAGE>
Exhibit 10.5
THIS AMENDMENT AGREEMENT is made on the 25 November 1999
BETWEEN:
(1) THE DERBY CYCLE CORPORATION on behalf of itself and each of THE COMPANIES
NAMED IN SCHEDULE 1 (the "Borrowers");
(2) THE DERBY CYCLE CORPORATION on behalf of itself and each of THE COMPANIES
NAMED IN SCHEDULE 2 (the "Guarantors");
(3) CHASE MANHATTAN plc (the "Arranger");
(4) CHASE MANHATTAN INTERNATIONAL LIMITED (the "Facility Agent");
(5) CHASE MANHATTAN INTERNATIONAL LIMITED (the "Security Agent"); and
(6) THE FINANCIAL INSTITUTIONS NAMED IN SCHEDULE 3 (the "Banks").
WHEREAS:
(A) By a facility agreement dated 12 May 1998 as amended and restated pursuant
to an amendment and restatement agreement dated 3 February 1999 and as
further amended pursuant to an amendment agreement dated 30 April 1999 and
as further amended pursuant to an Amendment Agreement dated 31 August 1999
and as further amended by the terms of this Amendment Agreement
(collectively the "Facility Agreement") entered into between the parties
hereto, the Banks have agreed to make certain credit facilities available
to the Borrowers.
(B) The Parties hereto, with effect from the date hereof, have agreed to amend
the Facility Agreement in the manner set out in Schedule 4.
NOW IT IS HEREBY AGREED as follows:
1. Interpretation
Unless the context otherwise requires, words and expressions defined in the
Facility Agreement shall have the same meaning herein.
2. Amendments
Each of the parties agrees that, as from the date of this Agreement, the
amendment referred to at Schedule 4 shall become effective (subject to the
provisions of Clause 3.8).
3. General
3.1 The Facility Agreement and this Agreement shall be read and construed
as a single document.
3.2 References in the Facility Agreement to the Facility Agreement
howsoever characterised shall with effect from the date hereof be
references to the Facility Agreement as amended by this Agreement.
3.3 On the date hereof, the Obligors represent and warrant that no Event
of Default or Potential Event of Default has occurred which has not
been remedied or otherwise
1
<PAGE>
waived by the Banks and no Event of Default or Potential Event of
Default would occur as a result of the Obligors entering into this
Agreement.
3.4 The Company shall reimburse the Agents and the Banks for reasonable
costs and expenses (including reasonable legal fees) incurred by them
and their professional advisers in connection with the negotiation,
preparation and execution of this Agreement and any related
documentation.
3.5 This Agreement may be executed in any number of counterparts and by
the different parties hereto on separate counterparts, each of which
when executed and delivered together shall constitute one and the same
instrument.
3.6 The Facility Agreement shall continue in full force and effect as
amended by this Agreement and, for the avoidance of doubt, each of the
Guarantors reaffirms the Guarantee contained in Clause 23 of the
Facility Agreement and agrees that such Guarantee continues in full
force and effect notwithstanding this Agreement.
3.7 Nothing contained herein, shall constitute a waiver of any Event of
Default or Potential Event of Default and the Banks expressly reserve
all or any rights and remedies they may have in relation to the same.
3.8 The Company shall procure within 10 days of the date of this Agreement
that it delivers to the Facility Agent a copy of the resolutions of
the members of each Obligor certified by an Authorised Signatory (or
appropriately authorised person of such Obligor) ratifying, approving,
and confirming the execution and delivery of this Agreement by the
Company as Obligors' Agent and any other communication or documents
delivered by or on behalf of each Obligor in connection herewith.
3.9 This Agreement shall be governed by and construed in accordance with
English law.
3.10 Clause 38 (Jurisdiction) of the Facility Agreement shall be deemed to
apply as if it had been set out in full in this Agreement.
2
<PAGE>
SCHEDULE 1
The Borrowers
Raleigh Industries Limited
Sturmey-Archer Limited
Derby Holding (Deutschland) GmbH
Koninklijke Gazelle BV
The Derby Cycle Corporation
Raleigh Industries of Canada Limited
Raleigh Europe B.V.
Raleigh B.V.
Englebert Wiener Bike Parts GmbH
Winora-Staiger GmbH
Derby Holding Limited
Raleigh Fahrrader GmbH
Derby Cycle Werke GmbH
Raleigh International Limited
Curragh Finance Company
Raleigh Ireland Limited
3
<PAGE>
SCHEDULE 2
The Guarantors
Derby Holding Limited
Raleigh Industries Limited
Raleigh International Limited
Sturmey-Archer Limited
Raleigh Industries of Canada Limited
The Derby Cycle Corporation
Raleigh BV
Raleigh Europe BV
Koninklijke Gazelle BV
Derby Nederland BV
Derby Holding BV
Sturmey-Archer Europa BV
Lyon Investments BV
Derby Holding (Deutschland) GmbH
Raleigh Fahrrader GmbH
NW Sportgerate GmbH
Derby Cycle Werke GmbH
Englebert Wiener Bike Parts GmbH
Univega Worldwide Licence GmbH
Univega Beteiligungen GmbH
Univega Bikes & Sports Europe GmbH
Derby Fahrrader GmbH
Derby WS Vermogenswerwaltungs GmbH
Winora-Staiger GmbH
Curragh Finance Company
Raleigh Ireland Limited
4
<PAGE>
InterDerby Group Finance N.V.
The British Cycle Corporation Limited
BSA Cycles Limited
Triumph Cycle Co. Limited
Raleigh (Services) Limited
Derby Sweden AB
5
<PAGE>
SCHEDULE 3
The Banks
Name
The Chase Manhattan Bank
ABN Amro Bank N.V.
Bank of Scotland
BHF - Bank AG
Dresdner Bank AG, New York and Grand Cayman
Branches
Lloyds TSB Bank Plc
HSBC Bank Plc
Scotia Bank Europe plc
The Bank of Nova Scotia
The Sumitomo Bank, Limited
Banque Nationale de Paris
San Paolo IMI SPA
Kredietbank (Nederland) N.V.
Oldenburgische Landesbank AG
The Governor and Company of the Bank of Ireland
The Industrial Bank of Japan, Limited
6
<PAGE>
SCHEDULE 4
Further Amendments to Facility Agreement
1. The financial undertakings listed in Clause 20 (Financial Undertakings)
shall be amended as follows:-
1.1 The number of Inventory Days specified in Column 2 of the table in
Clause 20.2(f) (Inventory Days) for the following Accounting Periods
ending on the Accounting Dates specified below only shall be deleted
and replaced with the following:
Accounting Period Column 2
From 31 October 1999 until (and including 31 105
December 1999)
1 January 2000 and at all times thereafter 100
7
<PAGE>
THE DERBY CYCLE CORPORATION )
for itself and on behalf of each of the )
Borrowers and Guarantors as Obligors' Agent )
By: FRANK AGAR - Vice-President
CHASE MANHATTAN INTERNATIONAL )
LIMITED for itself and as the Facility )
Agent and Security Agent and for and on behalf )
of the Arranger and each of the Banks (other )
than Lloyds TSB Bank Plc, Scotia Bank Europe )
plc and The Bank of Nova Scotia) )
By: C ASKHAM
LLOYDS TSB BANK PLC
By: D J MILWARD
SCOTIA BANK EUROPE PLC
By: DAVID SPARKES
THE BANK OF NOVA SCOTIA
By: ROGER KEAN
8
<PAGE>
Exhibit 10.6
THE DERBY CYCLE CORPORATION AND OTHERS
as Borrowers and/or Guarantors
CHASE MANHATTAN plc
as Arranger
THE FINANCIAL INSTITUTIONS NAMED HEREIN
as Banks
CHASE MANHATTAN INTERNATIONAL LIMITED
as Facility Agent
CHASE MANHATTAN INTERNATIONAL LIMITED
as Security Agent
______________________________________
FIFTH AMENDMENT AGREEMENT
relating to
a facility agreement dated 12 May 1998
______________________________________
<PAGE>
CONTENTS
<TABLE>
<S> <C>
1. Interpretation.................................................... 1
2. Amendments........................................................ 1
3. General........................................................... 1
SCHEDULE 1........................................................... 3
The Borrowers.................................................... 3
SCHEDULE 2........................................................... 4
The Guarantors................................................... 4
SCHEDULE 3........................................................... 6
The Banks........................................................ 6
SCHEDULE 4........................................................... 7
Further Amendments to Facility Agreement......................... 7
</TABLE>
<PAGE>
Exhibit 10.6
THIS AMENDMENT AGREEMENT is made on the 17 December 1999
BETWEEN:
(1) THE DERBY CYCLE CORPORATION on behalf of itself and each of THE COMPANIES
NAMED IN SCHEDULE 1 (the "Borrowers");
(2) THE DERBY CYCLE CORPORATION on behalf of itself and each of THE COMPANIES
NAMED IN SCHEDULE 2 (the "Guarantors");
(3) CHASE MANHATTAN plc (the "Arranger");
(4) CHASE MANHATTAN INTERNATIONAL LIMITED (the "Facility Agent");
(5) CHASE MANHATTAN INTERNATIONAL LIMITED (the "Security Agent"); and
(6) THE FINANCIAL INSTITUTIONS NAMED IN SCHEDULE 3 (the "Banks").
WHEREAS:
(A) By a facility agreement dated 12 May 1998 as amended and restated pursuant
to an amendment and restatement agreement dated 3 February 1999 and as
further amended pursuant to an amendment agreement dated 30 April 1999 and
as further amended pursuant to an Amendment Agreement dated 31 August 1999
and as further amended by the terms of an Amendment Agreement dated 25
November 1999 and as further amendment pursuant to this Amendment Agreement
(collectively the "Facility Agreement") entered into between the parties
hereto, the Banks have agreed to make certain credit facilities available
to the Borrowers.
(B) The Parties hereto, with effect from the date hereof, have agreed to amend
the Facility Agreement in the manner set out in Schedule 4.
NOW IT IS HEREBY AGREED as follows:
1. Interpretation
Unless the context otherwise requires, words and expressions defined in the
Facility Agreement shall have the same meaning herein.
"Effective Date" means the date on which the Facility Agent has confirmed
to the Company and the Banks that it has received evidence satisfactory to
it that upon completion of the Nottingham Property the Net Proceeds will be
remitted to the Land Sale Account (as such terms are defined in Schedule 4
hereof).
2. Amendments
Each of the parties agrees that, as from the Effective Date, the amendment
referred to at Schedule 4 shall become effective (subject to the provisions
of Clause 3.8).
3. General
3.1 The Facility Agreement and this Agreement shall be read and construed
as a single document.
1
<PAGE>
3.2 References in the Facility Agreement to the Facility Agreement
howsoever characterised shall with effect from the date hereof be
references to the Facility Agreement as amended by this Agreement.
3.3 On the date hereof, the Obligors represent and warrant that no Event
of Default or Potential Event of Default has occurred which has not
been remedied or otherwise waived by the Banks and no Event of Default
or Potential Event of Default would occur as a result of the Obligors
entering into this Agreement.
3.4 The Company shall reimburse the Agents and the Banks for reasonable
costs and expenses (including reasonable legal fees) incurred by them
and their professional advisers in connection with the negotiation,
preparation and execution of this Agreement and any related
documentation.
3.5 This Agreement may be executed in any number of counterparts and by
the different parties hereto on separate counterparts, each of which
when executed and delivered together shall constitute one and the same
instrument.
3.6 The Facility Agreement shall continue in full force and effect as
amended by this Agreement and, for the avoidance of doubt, each of the
Guarantors reaffirms the Guarantee contained in Clause 23 of the
Facility Agreement and agrees that such Guarantee continues in full
force and effect notwithstanding this Agreement.
3.7 Nothing contained herein, shall constitute a waiver of any Event of
Default or Potential Event of Default and the Banks expressly reserve
all or any rights and remedies they may have in relation to the same.
3.8 The Company shall procure by no later than 15 January 2000 that it
delivers to the Facility Agent a copy of the resolutions of the
members of each Obligor certified by an Authorised Signatory (or
appropriately authorised person of such Obligor) ratifying,
approving, and confirming the execution and delivery of this Agreement
by the Company as Obligors' Agent and any other communication or
documents delivered by or on behalf of each Obligor in connection
herewith.
3.9 This Agreement shall be governed by and construed in accordance with
English law.
3.10 Clause 38 (Jurisdiction) of the Facility Agreement shall be deemed to
apply as if it had been set out in full in this Agreement.
2
<PAGE>
SCHEDULE 1
The Borrowers
Raleigh Industries Limited
Sturmey-Archer Limited
Derby Holding (Deutschland) GmbH
Koninklijke Gazelle BV
The Derby Cycle Corporation
Raleigh Industries of Canada Limited
Raleigh Europe B.V.
Raleigh B.V.
Englebert Wiener Bike Parts GmbH
Winora-Staiger GmbH
Derby Holding Limited
Raleigh Fahrrader GmbH
Derby Cycle Werke GmbH
Raleigh International Limited
Curragh Finance Company
Raleigh Ireland Limited
3
<PAGE>
SCHEDULE 2
The Guarantors
Derby Holding Limited
Raleigh Industries Limited
Raleigh International Limited
Sturmey-Archer Limited
Raleigh Industries of Canada Limited
The Derby Cycle Corporation
Raleigh BV
Raleigh Europe BV
Koninklijke Gazelle BV
Derby Nederland BV
Derby Holding BV
Sturmey-Archer Europa BV
Lyon Investments BV
Derby Holding (Deutschland) GmbH
Raleigh Fahrrader GmbH
NW Sportgerate GmbH
Derby Cycle Werke GmbH
Englebert Wiener Bike Parts GmbH
Univega Worldwide Licence GmbH
Univega Beteiligungen GmbH
Univega Bikes & Sports Europe GmbH
Derby Fahrrader GmbH
Derby WS Vermogenswerwaltungs GmbH
Winora-Staiger GmbH
Curragh Finance Company
Raleigh Ireland Limited
4
<PAGE>
InterDerby Group Finance N.V.
The British Cycle Corporation Limited
BSA Cycles Limited
Triumph Cycle Co. Limited
Raleigh (Services) Limited
Derby Sweden AB
5
<PAGE>
SCHEDULE 3
The Banks
Name
The Chase Manhattan Bank
ABN Amro Bank N.V.
Bank of Scotland
BHF - Bank AG
Dresdner Bank AG, New York and Grand Cayman
Branches
Lloyds TSB Bank Plc
HSBC Bank Plc
Scotia Bank Europe plc
The Bank of Nova Scotia
The Sumitomo Bank, Limited
Banque Nationale de Paris
San Paolo IMI SPA
Kredietbank (Nederland) N.V.
Oldenburgische Landesbank AG
The Governor and Company of the Bank of Ireland
The Industrial Bank of Japan, Limited
6
<PAGE>
SCHEDULE 4
Further Amendments to Facility Agreement
1. Clause 1.1 (Definitions) shall be amended by the insertion of a definition
of Net Proceeds as follows:-
"Net Proceeds" means in respect of the sale of the property described at
Clause 19.5(xiii), the full amount of cash proceeds realised on such sale
less the reasonable costs of such sale for which purpose (a) such proceeds
shall be taken to include, in addition to consideration directly
attributable to the sale of such property, any amount owing to and set-off
by the relevant purchaser and (b) "reasonable costs of disposal" includes
legal fees, agents' commissions, auditors' fees, registration fees but
excluding restructuring costs provided that Net Proceeds are not less than
(Pounds)8,400,000.
2. The definition of "Cash Collateral Amount" in clause 6.10 shall be
deleted and replaced with the following definition:-
"Cash Collateral Amount" in relation an Obligor, means an amount from time to
time standing to the credit of such account of such Obligor from time to
time subject to the terms of a Debenture or an Irish Debenture relating to
such Obligor but excluding for the avoidance of doubt any amount standing
to the credit of the Land Sale Account."
3. Clause 19.5 (Negative Undertakings) shall be amended by the insertion of a
new sub-clause 19.5 (xiii) as follows:-
"(xiii) (a) the whole of the land and buildings comprised in title number
NT337369 owned by Sturmey-Archer Limited;
(b) the whole of the land and buildings comprised in title number
P173612 owned by Derby Holding Limited;
(c) that part of land and building comprised in title number
NT329065 owned by Raleigh Industries Limited shown hatched on
the plan annexed (but not any other land in that title); and
(d) that part of the land and buildings comprised in title number
NT127908 owned by Derby Holding Limited shown hatched on the
plan annexed (but not any other land in that title).
together (the "Nottingham Property") provided that immediately upon such
sale the Net Proceeds of such sale are placed in account number 23659101,
sort code 60-90-42 held at The Chase Manhattan Bank in the names of the
relevant Obligors (and over which security has been granted to the Security
Trustee for and on behalf of the Secured Beneficiaries) and upon such terms
as the Security Agent may require (the "Land Sale Account")."
4. Clause 19.5(e)(i) shall be deleted and replaced with the following:
"(i) sell or otherwise dispose of any of their respective assets on
terms whereby such asset or assets are or may be leased to, or
re-acquired or acquired by, any Group Member other than a
lease back of the Nottingham Property on terms acceptable to
the Facility Agent."
7
<PAGE>
THE DERBY CYCLE CORPORATION )
for itself and on behalf of each of the )
Borrowers and Guarantors as Obligors' Agent )
By:
CHASE MANHATTAN INTERNATIONAL )
LIMITED for itself and as the Facility )
Agent and Security Agent and for and on behalf )
of the Arranger and each of the Banks (other )
than Lloyds TSB Bank Plc, Scotia Bank Europe )
plc and The Bank of Nova Scotia) )
By:
LLOYDS TSB BANK PLC
By:
SCOTIA BANK EUROPE PLC
By:
THE BANK OF NOVA SCOTIA
By:
8
<PAGE>
Exhibit 10.7
THE DERBY CYCLE CORPORATION AND OTHERS
as Borrowers and/or Guarantors
CHASE MANHATTAN plc
as Arranger
THE FINANCIAL INSTITUTIONS NAMED HEREIN
as Banks
CHASE MANHATTAN INTERNATIONAL LIMITED
as Facility Agent
CHASE MANHATTAN INTERNATIONAL LIMITED
as Security Agent
---------------------------------------------
SIXTH AMENDMENT AGREEMENT
relating to
a facility agreement dated 12 May 1998
---------------------------------------------
<PAGE>
CONTENTS
<TABLE>
<S> <C>
1. Interpretation............................................................ 1
2. Amendments................................................................ 1
3. General................................................................... 1
SCHEDULE 1................................................................... 3
The Borrowers.............................................................. 3
SCHEDULE 2................................................................... 4
The Guarantors............................................................. 4
SCHEDULE 3................................................................... 6
The Banks.................................................................. 6
SCHEDULE 4................................................................... 7
Further Amendments to Facility Agreement................................... 7
SCHEDULE 5................................................................... 11
Conditions Precedent....................................................... 11
</TABLE>
<PAGE>
Exhibit 10.7
THIS AMENDMENT AGREEMENT is made on the 3 February 2000
BETWEEN:
(1) THE DERBY CYCLE CORPORATION on behalf of itself and each of THE COMPANIES
NAMED IN SCHEDULE 1 (the "Borrowers");
(2) THE DERBY CYCLE CORPORATION on behalf of itself and each of THE COMPANIES
NAMED IN SCHEDULE 2 (the "Guarantors");
(3) CHASE MANHATTAN plc (the "Arranger");
(4) CHASE MANHATTAN INTERNATIONAL LIMITED (the "Facility Agent");
(5) CHASE MANHATTAN INTERNATIONAL LIMITED (the "Security Agent"); and
(6) THE FINANCIAL INSTITUTIONS NAMED IN SCHEDULE 3 (the "Banks").
WHEREAS:
(A) By a facility agreement dated 12 May 1998 as amended and restated pursuant
to an amendment and restatement agreement dated 3 February 1999 and as
further amended pursuant to an amendment agreement dated 30 April 1999 and
as further amended pursuant to an Amendment Agreement dated 31 August 1999
and as further amended by an Amendment Agreement dated 25 November 1999 and
as further amended by an Amendment Agreement dated 17 December 1999
(collectively the "Facility Agreement") entered into between the parties
hereto, the Banks have agreed to make certain credit facilities available
to the Borrowers.
(B) The Parties hereto, with effect from the date hereof, have agreed to amend
the Facility Agreement in the manner set out in Schedule 4.
NOW IT IS HEREBY AGREED as follows:
1. Interpretation
Unless the context otherwise requires, words and expressions defined in the
Facility Agreement shall have the same meaning herein.
"Effective Date" means the date on which the Facility Agent has confirmed
in writing to the Company and the Banks that it has received all the
conditions precedent set out in Schedule 5 in each case in form and
substance satisfactory to the Facility Agent.
2. Amendments
Each of the parties agrees that, as from the Effective Date, the amendment
referred to at Schedule 4 shall become effective (subject to the provisions
of Clause 3.8 and 3.9).
3. General
3.1 The Facility Agreement and this Agreement shall be read and construed
as a single document.
1
<PAGE>
3.2 References in the Facility Agreement to the Facility Agreement
howsoever characterised shall with effect from the date hereof be
references to the Facility Agreement as amended by this Agreement.
3.3 On the date hereof, the Obligors represent and warrant that no Event
of Default or Potential Event of Default has occurred which has not
been remedied or otherwise waived by the Banks other than the
Potential Events of Default which have been notified to the Banks by
the Facility Agent pursuant to a letter of request dated 25 January
2000, and no Event of Default or Potential Event of Default would
occur as a result of the Obligors entering into this Agreement.
3.4 The Company shall reimburse the Agents and the Banks for reasonable
costs and expenses (including reasonable legal fees) incurred by them
and their professional advisers in connection with the negotiation,
preparation and execution of this Agreement and any related
documentation.
3.5 This Agreement may be executed in any number of counterparts and by
the different parties hereto on separate counterparts, each of which
when executed and delivered together shall constitute one and the same
instrument.
3.6 The Facility Agreement shall continue in full force and effect as
amended by this Agreement and, for the avoidance of doubt, each of the
Guarantors reaffirms the Guarantee contained in Clause 23 of the
Facility Agreement and agrees that such Guarantee continues in full
force and effect notwithstanding this Agreement.
3.7 Nothing contained herein shall constitute a waiver of any Event of
Default or Potential Event of Default and the Banks expressly reserve
all or any rights and remedies they may have in relation to the same.
3.8 The Company shall procure by no later than 30 days after the date of
this Agreement that it delivers to the Facility Agent a copy of the
resolutions of the members of each Obligor certified by an Authorised
Signatory (or appropriately authorised person of such Obligor)
ratifying, approving, and confirming the execution and delivery of
this Agreement by the Company as Obligors' Agent and any other
communication or documents delivered by or on behalf of each Obligor
in connection herewith.
3.9 The Company shall procure that by no later than 7 days after 15
February 2000 that it will deliver to the Facility Agent an opinion,
in a form and substance satisfactory to the Facility Agent, addressed
to the Facility Agent, the Security Agent and the Banks, from Kirkland
& Ellis, United States of America legal advisors to the Company
confirming that the amendments contemplated hereunder and the
agreements and transactions contemplated in connection with the
Sponsor Facility (including, but not limited to execution and delivery
of the Sponsor Facility, and the issuance of the warrants referred to
in the Term Sheet and the performance by the Company of its obligation
thereunder) will not violate or result in a breach of the terms of the
Note Indentures, the Senior Notes and the GSIC Note Documents.
3.10 This Agreement shall be governed by and construed in accordance with
English law.
3.11 Clause 38 (Jurisdiction) of the Facility Agreement shall be deemed to
apply as if it had been set out in full in this Agreement.
2
<PAGE>
SCHEDULE 1
The Borrowers
Raleigh Industries Limited
Sturmey-Archer Limited
Derby Holding (Deutschland) GmbH
Koninklijke Gazelle BV
The Derby Cycle Corporation
Raleigh Industries of Canada Limited
Raleigh Europe B.V.
Raleigh B.V.
Englebert Wiener Bike Parts GmbH
Winora-Staiger GmbH
Derby Holding Limited
Raleigh Fahrrader GmbH
Derby Cycle Werke GmbH
Raleigh International Limited
Curragh Finance Company
Raleigh Ireland Limited
3
<PAGE>
SCHEDULE 2
The Guarantors
Derby Holding Limited
Raleigh Industries Limited
Raleigh International Limited
Sturmey-Archer Limited
Raleigh Industries of Canada Limited
The Derby Cycle Corporation
Raleigh BV
Raleigh Europe BV
Koninklijke Gazelle BV
Derby Nederland BV
Derby Holding BV
Sturmey-Archer Europa BV
Lyon Investments BV
Derby Holding (Deutschland) GmbH
Raleigh Fahrrader GmbH
NW Sportgerate GmbH
Derby Cycle Werke GmbH
Englebert Wiener Bike Parts GmbH
Univega Worldwide Licence GmbH
Univega Beteiligungen GmbH
Univega Bikes & Sports Europe GmbH
Derby Fahrrader GmbH
Derby WS Vermogenswerwaltungs GmbH
Winora-Staiger GmbH
Curragh Finance Company
Raleigh Ireland Limited
4
<PAGE>
InterDerby Group Finance N.V.
The British Cycle Corporation Limited
BSA Cycles Limited
Triumph Cycle Co. Limited
Raleigh (Services) Limited
Derby Sweden AB
5
<PAGE>
SCHEDULE 3
The Banks
Name
The Chase Manhattan Bank
ABN Amro Bank N.V.
Bank of Scotland
BHF - Bank AG
Dresdner Bank AG, New York and Grand Cayman
Branches
Lloyds TSB Bank Plc
HSBC Bank Plc
Scotia Bank Europe plc
The Bank of Nova Scotia
The Sumitomo Bank, Limited
Banque Nationale de Paris
San Paolo IMI SPA
Kredietbank (Nederland) N.V.
Oldenburgische Landesbank AG
The Governor and Company of the Bank of Ireland
The Industrial Bank of Japan, Limited
6
<PAGE>
SCHEDULE 4
Further Amendments to Facility Agreement
1. Clause 1.1 (Definitions) shall be amended by the insertion of the following
amendment:-
"Sponsor Facility" shall mean the unsecured facility of $7,000,000
contemplated by the Term Sheet and to be granted by Thayer and Perseus to
the Company pursuant to the Sponsor Facility Documents (each to be in a
form and substance satisfactory to the Facility Agent) to be entered into
by those parties and under which such facility has been or will be made
available by Thayer and Perseus to the Company by no later than 15 February
2000;
"Sponsor Facility Documents" means each of the documents to be entered into
by, inter alios, Thayer, Perseus and the Company in respect of the Sponsor
Facility, including for the avoidance of doubt, but not limited to any
facility letter and any warrant agreement;
"Sponsor Facility Letter" means the letter dated on or about the date of
this Agreement in an agreed form and made between Thayer, Perseus and the
Facility Agent and Security Agent; and
"Term Sheet" means the term sheet in the agreed form pursuant to which
Thayer and Perseus have agreed to make available to the Company by no later
than 15 February 2000 the Sponsor Facility.
2. The definitions of "Net Proceeds" in Clause 1.1 shall be deleted and
replaced with the following definition:
""Net Proceeds" means in respect of the sale of the property described in
Clause 19.5(b)(xiv) (Pounds)8,400,000".
3. The definition of "Permitted Financial Indebtedness" in Clause 1.1 shall be
amended by deleting part (a) of that definition and replacing it with the
following:-
"(a) in respect of the Company, any indebtedness:-
(i) incurred under the Finance Documents;
(ii) as permitted under Clause 19.5(c) of this Agreement;
(iii) as contemplated in the definition of Permitted Amount; or
(iv) any indebtedness incurred under the Sponsor Facility provided
that such indebtedness is repaid by 1 August 2000 or converted
into equity in accordance with the Term Sheet."
4. Clause 11.1 (Reduction of Facility) shall be deleted and replaced with the
following:
"11.1 Reduction of the Facility
On each date specified in Column 1 below (each such date being a
"Reduction Date") the Total Commitments shall be reduced such that
they are equal to the amount set opposite such Reduction Date in
Column 2 below less the aggregate
7
<PAGE>
amount of the Commitments that have been previously cancelled under
this Agreement prior to that Reduction Date otherwise than solely as a
result of the operation of this Clause 11.1 or Clause 7, whereupon the
Revolving Commitment of each Bank (including, for the avoidance of
doubt, the Revolving Commitment of each Ancillary Bank and without
double counting a Bank's Ancillary Commitment) shall be reduced by a
proportionate amount and pro rata to their respective Revolving
Commitments at such time and the Standby L/C Commitments of the Banks
shall be reduced by a proportionate amount pro rata and the Company
shall procure that the aggregate Deutschmark Amount of all outstanding
Advances, Standby L/Cs, Ancillary Facilities and amounts owing under
Clause 11.3 (if any) shall on such date (and at all times thereafter)
not exceed the Total Commitments on such date.
Column 1 Column 2
Reduction Date Total Commitments
on or before 30 June 2000 DM214,000,000 minus the
Deutschmark Equivalent of
(Pounds)8,400,000
computed as at the date
falling 4 Business Days
before the Reduction Date
Fifth Anniversary of the date of this Agreement DM194,000,000
Sixth Anniversary of the date of this Agreement DM169,000,000
Final Repayment Date Zero"
5.
(i) A new Clause 11.8 shall be inserted as follows:
"11.8 Mandatory Prepayment of Net Proceeds.
(a) On or before 30 June 2000 the Company shall prepay in cash an
amount equal to the Net Proceeds and all other amounts payable to
the Facility Agent and each Bank hereunder (including any amounts
payable under Clause 25.1(b))
(b) No amount prepaid under this Clause may be reborrowed. Any amount
so prepaid shall be applied in reducing pro rata the Revolving
Commitment of each Bank (including for the avoidance of doubt,
the Revolving Commitment of each Ancillary Bank disregarding for
this purpose its Ancillary Commitment and the Standby L/C
Commitments of the Banks."
(ii) Clauses 11.8 - Clause 11.13 inclusive shall be correspondingly
renumbered Clauses 11.9 to 11.14 inclusive and any references to such
clauses in the Facility Agreement shall be deemed to be references to
the clause numbers so renumbered.
6. Clause 19.5(b) (xii) (Negative Undertakings - disposals) commencing
"disposal of assets which were acquired after the date of this
Agreement..." shall be renumbered Clause 19.5(b) (xiii) and Clause 19.5(b)
(xiii) shall be renumbered Clause 19.5 (xiv) and any reference to such
clauses shall be deemed to be a reference to such clauses as renumbered.
7. Clause 19.5(b) (xiv) (Negative Undertakings) shall be amended as follows:-
8
<PAGE>
"(xiv) (a) the whole of the land and buildings comprised in title number
NT337369 owned by Sturmey-Archer Limited;
(b) the whole of the land and buildings comprised in title number P173612
owned by Derby Holding Limited;
(c) the part of the land and building comprised in title number NT329065
owned by Raleigh Industries Limited shown hatched on the plan annexed
(but not any other land in that title); and
(d) that part of the land and buildings comprised in title number
NT127908 owned by Derby Holding Limited shown hatched on the plan
annexed (but not any other land in that title).
Together (the "Nottingham Property") and subject to the provisions of Clause
11.1, the proceeds of the Nottingham Property may, to the extent it does
not have sufficient alternative permitted funding (other than existing
Ancillary Facilities and for the avoidance of doubt, provided that the
Company may utilise the Revolving Facility to establish or maintain
Ancillary Facilities), be utilised by the Group for working capital
purposes only.
8. Clause 19.5(w) (Share Capital) shall be amended by deleting Clause
19.5(w)(iii) and replacing it with the following:-
"save as contemplated by the Recapitalisation Documents (as at the date of this
Agreement) and the Term Sheet issue any new share capital or grant any
option to any Person to subscribe for any shares in its capital other
than another Group Member (provided that if the Security Agent already
has security over the shares of the issuer of any such new shares then
the Company will procure that the Group Member to whom such new shares
are issued promptly provides security over such shares to the Security
Agent to the reasonable satisfaction of the Security Agent)."
9. Clause 19.5 (Negative Undertakings) shall be amended by inserting a new
sub-clause 19.5(ac) as follows:-
"19.5(ac) Sponsor Facility
The Company shall not and shall procure that no Group Company shall repay,
redeem, cancel or repurchase all or any part of the Sponsor Facility or
make any other payment or distribution whether in cash or kind or in any
manner whatsoever in respect of the Sponsor Facility save that such
prohibition shall not apply provided each of the following conditions
are, in the opinion of the Facility Agent, satisfied :-
(i) the Total Commitments are reduced by the Deutschmark Equivalent of
(Pounds)8,400,000 on or before 30 June 2000 in accordance with the
provisions of Clause 11.1; and
(ii) that no Default pursuant to Clause 21.1(a) has occurred which is
continuing, or unwaived in writing by the Facility Agent; and
(iii) the Revolving Facility Available Amount is greater than the amount of
the Sponsor Facility immediately prior to the repayment of the Sponsor
Facility."
9
<PAGE>
SCHEDULE 5
Conditions Precedent
1. The Term Sheet in respect of the Sponsor Facility duly signed by each of
the parties to the Sponsor Facility.
2. The Sponsor Facility Letter duly signed by each party.
3. Deed of Release in respect of the first fixed security over the Land Sale
Account duly executed, but held in escrow.
10
<PAGE>
THE DERBY CYCLE CORPORATION )
for itself and on behalf of each of the )
Borrowers and Guarantors as Obligors' Agent )
By:
CHASE MANHATTAN INTERNATIONAL )
LIMITED for itself and as the Facility )
Agent and Security Agent and for and on behalf )
of the Arranger and each of the Banks (other )
than Lloyds TSB Bank Plc, Scotia Bank Europe )
plc and The Bank of Nova Scotia) )
By:
LLOYDS TSB BANK PLC
By:
SCOTIA BANK EUROPE PLC
By:
THE BANK OF NOVA SCOTIA
By:
11
<PAGE>
Exhibit 10.8
THE DERBY CYCLE CORPORATION AND OTHERS
as Borrowers and/or Guarantors
CHASE MANHATTAN plc
as Arranger
THE FINANCIAL INSTITUTIONS NAMED HEREIN
as Banks
CHASE MANHATTAN INTERNATIONAL LIMITED
as Facility Agent
CHASE MANHATTAN INTERNATIONAL LIMITED
as Security Agent
---------------------------------------------
SEVENTH AMENDMENT AGREEMENT
relating to
a facility agreement dated 12 May 1998
---------------------------------------------
<PAGE>
CONTENTS
<TABLE>
<S> <C>
1. Interpretation..................................................................................... 1
2. Amendments......................................................................................... 2
3. General............................................................................................ 2
SCHEDULE 1............................................................................................ 4
The Borrowers......................................................................................... 4
SCHEDULE 2............................................................................................ 5
The Guarantors........................................................................................ 5
SCHEDULE 3............................................................................................ 7
The Banks............................................................................................. 7
SCHEDULE 4............................................................................................ 8
Immediate Amendments.................................................................................. 8
1. The definition of "Consolidated Net Worth" at Clause 1.2 (Definitions) shall be deleted and
replaced with the following:-..................................................................... 8
SCHEDULE 5............................................................................................ 11
Residual Amendments................................................................................... 11
SCHEDULE 6............................................................................................ 15
Conditions Precedent.................................................................................. 15
</TABLE>
<PAGE>
Exhibit 10.8
THIS AMENDMENT AGREEMENT is made on the 2 March 2000
BETWEEN:
(1) THE DERBY CYCLE CORPORATION on behalf of itself and each of THE COMPANIES
NAMED IN SCHEDULE 1 (the "Borrowers");
(2) THE DERBY CYCLE CORPORATION on behalf of itself and each of THE COMPANIES
NAMED IN SCHEDULE 2 (the "Guarantors");
(3) CHASE MANHATTAN plc (the "Arranger");
(4) CHASE MANHATTAN INTERNATIONAL LIMITED (the "Facility Agent");
(5) CHASE MANHATTAN INTERNATIONAL LIMITED (the "Security Agent"); and
(6) THE FINANCIAL INSTITUTIONS NAMED IN SCHEDULE 3 (the "Banks").
WHEREAS:
(A) By a facility agreement dated 12 May 1998 as amended and restated pursuant
to an amendment and restatement agreement dated 3 February 1999 and as
further amended pursuant to an amendment agreement dated 30 April 1999 and
as further amended pursuant to an Amendment Agreement dated 31 August 1999
and as further amended by an Amendment Agreement dated 25 November 1999 and
as further amended by an Amendment Agreement dated 17 December 1999 and as
further amended pursuant to an Amendment Agreement dated 3 February 2000
(collectively the "Facility Agreement") entered into between the parties
hereto, the Banks have agreed to make certain credit facilities available
to the Borrowers.
(B) The Parties hereto, with effect from the date hereof, have agreed to amend
the Facility Agreement in the manner set out in Schedule 4.
NOW IT IS HEREBY AGREED as follows:
1. Interpretation
Unless the context otherwise requires, words and expressions defined in the
Facility Agreement shall have the same meaning herein.
"Effective Date" means the date on which the Facility Agent has confirmed
in writing to the Company and the Banks that it has received all the
conditions precedent set out in Schedule 6 in each case, in a form and
substance satisfactory to the Facility Agent.
"Immediate Amendments" means the proposed changes to the Facility Agreement
(as more particularly detailed in Schedule 4 hereof).
"Remaining Amendments" means the proposed changes to the Facility Agreement
(other than the Financial Covenant Amendments) as more particularly
detailed in Schedule 5 hereof.
<PAGE>
2. Amendments
Each of the parties agrees that the Immediate Amendments only shall become
effective as from the date hereof, (subject to Clause 3.9) and, the
Remaining Amendments shall become effective from the Effective Date
(subject to clause 3.9).
3. General
3.1 The Facility Agreement and this Agreement shall be read and construed
as a single document.
3.2 References in the Facility Agreement to the Facility Agreement
howsoever characterised shall with effect from the date hereof be
references to the Facility Agreement as amended by this Agreement.
3.3 On the date hereof, the Obligors represent and warrant that no Event
of Default or Potential Event of Default has occurred which has not
been remedied or otherwise waived in writing by the Banks and no Event
of Default or Potential Event of Default would occur as a result of
the Obligors entering into this Agreement.
3.4 The representations and warranties contained at Clause 18.1 of the
Facility Agreement (to the extent that such representations are
capable of being repeated in accordance with Clause 18.2 of the
Facility Agreement) shall be deemed to be incorporated herein and made
by the Company on the date of this Agreement, with reference to the
facts and circumstances existing at that time, and will be deemed
repeated by the Company on each date that a condition precedent listed
at Schedule 6 of this Agreement is delivered in accordance with this
Agreement with reference to the facts and circumstances existing at
each such time.
3.5 The Company shall reimburse the Agents and the Banks for reasonable
costs and expenses (including legal fees) incurred by them and their
professional advisers in connection with the negotiation, preparation
and execution of this Agreement and any related documentation.
3.6 This Agreement may be executed in any number of counterparts and by
the different parties hereto on separate counterparts, each of which
when executed and delivered together shall constitute one and the same
instrument.
3.7 The Facility Agreement shall continue in full force and effect as
amended by this Agreement and, for the avoidance of doubt, each of the
Guarantors reaffirms the Guarantee contained in Clause 23 of the
Facility Agreement and agrees that such Guarantee continues in full
force and effect notwithstanding this Agreement.
3.8 Nothing contained herein shall constitute a waiver of any Event of
Default or Potential Event of Default and the Banks expressly reserve
all or any rights and remedies they may have in relation to the same.
3.9 The Company shall procure by no later than 30 days after the date of
this Agreement that it delivers to the Facility Agent a copy of the
resolutions of the members of each Obligor certified by an Authorised
Signatory (or appropriately authorised person of such Obligor)
ratifying, approving, and confirming the execution and delivery of
this Agreement by the Company as Obligors' Agent and any other
communication or documents delivered by or on behalf of each Obligor
in connection herewith.
<PAGE>
3.10 This Agreement shall be governed by and construed in accordance with
English law.
3.11 Clause 38 (Jurisdiction) of the Facility Agreement shall be deemed to
apply as if it had been set out in full in this Agreement.
<PAGE>
SCHEDULE 1
The Borrowers
Raleigh Industries Limited
Sturmey-Archer Limited
Derby Holding (Deutschland) GmbH
Koninklijke Gazelle BV
The Derby Cycle Corporation
Raleigh Industries of Canada Limited
Raleigh Europe B.V.
Raleigh B.V.
Englebert Wiener Bike Parts GmbH
Winora-Staiger GmbH
Derby Holding Limited
Raleigh Fahrrader GmbH
Derby Cycle Werke GmbH
Raleigh International Limited
Curragh Finance Company
Raleigh Ireland Limited
<PAGE>
SCHEDULE 2
The Guarantors
Derby Holding Limited
Raleigh Industries Limited
Raleigh International Limited
Sturmey-Archer Limited
Raleigh Industries of Canada Limited
The Derby Cycle Corporation
Raleigh BV
Raleigh Europe BV
Koninklijke Gazelle BV
Derby Nederland BV
Derby Holding BV
Sturmey-Archer Europa BV
Lyon Investments BV
Derby Holding (Deutschland) GmbH
Raleigh Fahrrader GmbH
NW Sportgerate GmbH
Derby Cycle Werke GmbH
Englebert Wiener Bike Parts GmbH
Univega Worldwide Licence GmbH
Univega Beteiligungen GmbH
Univega Bikes & Sports Europe GmbH
Derby Fahrrader GmbH
Derby WS Vermogenswerwaltungs GmbH
Winora-Staiger GmbH
Curragh Finance Company
<PAGE>
Raleigh Ireland Limited
InterDerby Group Finance N.V.
The British Cycle Corporation Limited
BSA Cycles Limited
Triumph Cycle Co. Limited
Raleigh (Services) Limited
Derby Sweden AB
<PAGE>
SCHEDULE 3
The Banks
Name
The Chase Manhattan Bank
ABN Amro Bank N.V.
Bank of Scotland
BHF - Bank AG
Dresdner Bank AG, New York and Grand Cayman
Branches
Lloyds TSB Bank Plc
HSBC Bank Plc
Scotia Bank Europe plc
The Bank of Nova Scotia
The Sumitomo Bank, Limited
Banque Nationale de Paris
San Paolo IMI SPA
KBC Bank (Nederland) N.V.
Oldenburgische Landesbank AG
The Governor and Company of the Bank of Ireland
The Industrial Bank of Japan, Limited
<PAGE>
SCHEDULE 4
Immediate Amendments
1. The definition of "Consolidated Net Worth" at Clause 1.2 (Definitions)
shall be deleted and replaced with the following:-
"Consolidated Net Worth" means the amount (including any additional paid in
capital) for the time being paid up or credited as paid up on the issued
share capital of the Company (other than any Excluded Share Capital):
plus an amount (of up to $45,000,000) in respect of the value attributable
to equity retained by on or behalf of DFS;
plus any amount standing to the credit of, or (as the case may be) minus
any amount standing to the debit of the consolidated income statement of
the Group before any adjustment made in respect of dividends on any class
of shares of the Company to the extent that the holder of such share(s) is
only entitled to receive, in respect thereof, payment in kind, and not cash
or other assets. For the avoidance of doubt, the net income of $5,588,000
loss reported in the audited consolidated Financial Accounts of the Group
for the Accounting Period ended 31 December 1998 is the only amount
credited or debited to the audited consolidated Financial Accounts for the
Accounting Period ended 31 December 1998 which shall be included in the
definition of Consolidated Net Worth;
plus for the period from 6 March 2000 to 31 December 2000 only, the
aggregate amount of principal outstanding under the GSIC Notes (but
excluding for the avoidance of doubt any interest (whether in cash or in
kind) or any other amount accruing thereon);
minus any amount included in the above which is attributable to (a) the
aggregate of all goodwill (to the extent created or purchased after
Closing), titles, trademarks, copyrights, patents, capitalised research and
development expenditure (other than research and development expenditure
which is capitalised in accordance with the accounting policies of the
Company in force at the date of this Agreement) and other intangible
assets, and (b) any upwards revaluation of assets by any Group Member after
Closing; and
minus (to the extent otherwise included) the amount attributable to the
interests (if any) of outside holders of issued share capital in any Group
Member other than the Company other than RIC Preference Shares for so long
as the same are exchangeable solely for B Common Stock and carry no rights
greater than as at the date of this Agreement and RIC is prohibited from
redeeming such RIC Preference Shares pursuant to the provisions of this
Agreement.
For the purposes of the foregoing, no items shall be effectively taken into
account more than once in this calculation and all items shall be
calculated on a consolidated basis and (subject only as may be required in
order to reflect the express inclusion or exclusion of items as specified
in this definition) in accordance with the Applicable Accounting Principles
and, where the calculation is being made as at the end of any Accounting
Period for which a consolidated balance sheet of the Group has been or is
required to be delivered to the Facility Agent hereunder, shall be as
determined from that balance sheet.
3. The financial undertakings listed in Clause 20 (Financial Undertakings)
shall be amended as follows:-
<PAGE>
3.1 The ratios specified in Column 2 of the table in Clause 20.2(a)
(Interest Cover) for the following Accounting Periods ending on the
Accounting Dates specified below only shall be deleted and replaced
with the following:
Accounting Date Ratio
2 April 2000 1.20 : 1
2 July 2000 1.25 : 1
1 October 2000 1.35 : 1
31 December 2000 1.45 : 1
3.2 The amounts specified in Column 2 of the table in Clause 20.2(b)
(Consolidated Net Worth) for the following Accounting Periods only
shall be deleted and replaced with the following:
Period Consolidated Net Worth ($)
1 January 2000 - 5 March 2000 101,000,000
6 March 2000 - 4 June 2000 115,000,000
5 June 2000 - 2 July 2000 120,000,000
3.3 Clause 20.2(c) (the ratio of Net Average Financial Indebtedness to
Consolidated Adjusted EBITDA) shall be amended by deleting the
following Accounting Dates (and corresponding ratios) only from the
table contained in such clause:
Accounting Date Ratio
7 April 2000 5.45 : 1
2 July 2000 5.30 : 1
1 October 2000 5.15 : 1
3.4 The amounts specified in Column 2 of the table in Clause 20.2(d)
(Consolidated Adjusted EBITDA) for the following periods ending on the
Accounting Dates set out below only shall be deleted and replaced with
the following:
Accounting Date Amount ($)
2 April 2000 25,000,000
2 July 2000 25,000,000
1 October 2000 26,300,000
31 December 2000 28,500,000
<PAGE>
3.5 The Accounting Periods set out in Column 1 of the table in Clause
20.2(g) (Aggregate Group Financial Indebtedness) shall be amended by
adding the following to the table in clause 20.2(g):
Accounting Date Amount ($)
1 January 2000 to (and including) 6 February 2000 95,000,000
7 February 2000 to (and including) 5 March 2000 110,000,000
6 March 2000 to (and including) 2 April 2000 110,000,000
3 April 2000 to (and including) 7 May 2000 110,000,000
8 May 2000 to (and including) 4 June 2000 93,000,000
5 June 2000 to (and including) 2 July 2000 77,000,000
3 July 2000 to (and including) 6 August 2000 55,000,000
7 August 2000 to (and including) 3 September 2000 45,000,000
4 September 2000 to (and including) 1 October 2000 45,000,000
2 October 2000 to (and including) 5 November 2000 60,000,000
6 November 2000 to (and including) 3 December 2000 75,000,000
4 December 2000 to (and including) 31 December 2000 75,000,000
3.6 The number of Inventory Days specified in Column 2 of the table in
Clause 20.2(f) (Inventory Days) for the following Accounting Periods
ending on the Accounting Dates specified below only shall be deleted
and replaced with the following:
Column 1 Column 2
1 January 2000 until (and including) 1 October 2000 105
2 October 2000 until (and including) 31 December 2000 102
1 January 2001 and all times thereafter 100
<PAGE>
SCHEDULE 5
Residual Amendments
1. Clause 1.1 (Definitions) shall be amended by the insertion of the following
amendments:
"Bikeshop.com" means Bikeshop.com, Inc;
"Bikeshop.com Licence" means the licence in an agreed form to be granted by
the Company to Bikeshop.com to enable Bikeshop to utilise certain
Intellectual Property Rights as will be more particularly set out therein;
"Bikeshop.com Intellectual Property Rights" means all Intellectual Property
Rights in which Bikeshop.com has legal and beneficial title or otherwise is
entitled to use in relation to its business;
"Bikeshop.com Security Documents" means such security documents as the
Security Agent in its absolute discretion may require from Bikeshop.com,
the Company or any other Person to grant in respect of, and over the assets
of Bikeshop.com and all other documents ancillary or incidental thereto,
each in an agreed form;
"Bikeshop.com Share Pledge" means the amendment to the US Pledge Agreement
in an agreed form to be granted by the Company to the Security Agent over
its shares in Bikeshop.com;
"Bikeshop.com Stock Option Plan" means a stock option plan in an agreed
form to be prepared by the Kirkland & Ellis, US legal advisors to the
Company;
"Bikeshop.com Information Memorandum" means the memorandum in an agreed
form to be prepared by Kirkland & Ellis detailing the business of
Bikeshop.com and its operations.
Clause 18.1 (cc) (US Security Documents) shall be deleted and replaced with
the following:
"(cc) U.S. Security Documents:
(i) each of the U.S. Pledge Agreement and the Bikeshop.com Share
Pledge is, or when executed will be, effective to create in
favour of the Security Agent for the rateable benefit of the
Secured Beneficiaries (as defined in each such document) a
legal, valid and enforceable security interest in Collateral
(as defined in each such document) and, when such Collateral is
pledged and delivered to the Security Agent, the U.S. Pledge
Agreement and the Bikeshop.com Share Pledge shall constitute a
fully perfected first priority lien on, and security interest
in all right, title and interest of the pledgors thereunder in
such Collateral, in each case prior and superior in right to
any other person, subject to Permitted Encumbrances that have a
priority as a matter of law;
(ii) each of the U.S. Security Agreement and each of the
Bikeshop.com Security Documents (other than which relate to the
Bikeshop.com Intellectual Property Rights) is, or when executed
will be, effective to create in favour of the Security Agent
for the rateable benefit of the Secured Beneficiaries (as
defined in each such document) and, when financing statements
in appropriate form are filed in the offices specified in
Schedule 5 to the Perfection Certificate (as defined in the US
Security Agreement) or in such
<PAGE>
other offices as are required, each of the U.S. Security
Agreement and each of the Bikeshop.com Security Documents
(other than which relate to the Bikeshop.com Intellectual
Property Rights) shall create a fully perfected lien on, and
security interest in, all right, title and interest of the
grantors thereunder in Collateral (as defined in each such
document) in which a security interest may be perfected by
the filing of financing statements, in each case prior and
superior in right to any other person, other than with
respect to Permitted Encumbrances that have a priority as a
matter of law;
(iii) to the extent that the laws of the United States are
applicable thereto, when the U.S. Patent and Trademark
Security Agreement, the U.S. Patent Assignment for Security
Purposes and each of the Bikeshop.com Security Documents
which relate to the Bikeshop.com Intellectual Property
Rights (the "US IP Security Documents") are recorded in the
United States Patent and Trademark Office and all relevant
offices, the U.S. IP Security Documents shall create a fully
perfected lien on, and security interest in, all right,
title and interest of the grantors thereunder in the
federally registered and applied for Patents and Trademark
Collateral (as defined in the U.S. IP Security Documents),
in each case prior and superior in right to any other Person
(it being understood that subsequent recordings in the
United States Patent and Trademark Office and the United
States Copyright Office or such other relevant office may be
necessary to perfect a lien on U.S. registered, trademarks,
trademark applications, U.S. patents and patent applications
copyrights and all other intellectual property rights
acquired by the grantors after the date hereof and the
registration of any copyright may be required to perfect a
lien in such copyright), subject to Permitted Encumbrances
that have a priority as a matter of law;
2. Clause 19.5(b) shall be amended by inserting a new subclause (xiii) as
follows:
"(xiii) disposals of assets by the Company to Bikeshop.com to enable the
capitalisation of Bikeshop.com in accordance with the
Bikeshop.com. Information Memorandum provided that the aggregate
value of such assets does not exceed $1,000,000."
3. Clause 19.5 (c) (iii) (Loans out) shall be deleted and replaced with the
following:
"(iii) (in addition to paragraphs (i) and (ii)) Financial Indebtedness in
an aggregate principal amount (for the Group as a whole) not
exceeding $3,750,000 (or the equivalent in other currencies) at
any time where the aggregate of all Financial Indebtedness in
excess of $250,000 are loans by the Company for the purchase by
management of shares in the Company and loans by Bikeshop.com for
the purchase by management of shares in Bikeshop.com and provided
that such sub-limit shall be reduced by the amount by which loans
made by the Company or, as the case may be Bikeshop.com, to their
respective management to enable the purchase of shares in the
Company, or as the case may be, Bikeshop.com, are repaid in cash.
For the avoidance of doubt the aggregate of all loans in cash to
any person may not exceed $250,000".
4. Clause 19.5 (m) (ii) (Subsidiaries) shall be deleted and replaced with the
following:
"Save to the extent permitted by Clause 19.5(d) the Company shall not
acquire any Subsidiaries which are not Subsidiaries immediately following
the Closing or acquire any business after the Closing or enter into any
agreement which it may be or become bound to acquire any Subsidiary or
business other than Bikeshop.com in accordance with the Bikeshop.com
Information Memorandum, or unless such Subsidiary is incorporated in the
<PAGE>
United Kingdom and each of the provisions of this Agreement and the Finance
Documents are complied with;"
5. A new Clause 19.5(ac) (Bikeshop.com) shall be added as follows:
"Notwithstanding any other provision of this Agreement the Company shall
not and shall procure that:
(i) it will not dispose of any of its shares in Bikeshop.com without the
prior written consent of the Facility Agent (acting in accordance
with the instructions of the Super Majority Banks) and on such terms
and conditions as the Facility Agent shall require;
(ii) Bikeshop.com shall not issue shares other than in accordance with
the Bikeshop.com Stock Option Plan and provided further that the
provisions of such Bikeshop.com Stock Option shall be (A)
substantially in the form of the management stock option purchase
agreement made between the Company and its employees pursuant to
which the Company has issued shares to employees as permitted
pursuant to Clause 19.5(w)(b) (the "DCC Stock Option"); and (B)
shall not permit the issue of more than in aggregate 25 per cent of
the issued shares of Bikeshop.com both in terms of voting rights and
in value; and (C) permit any employee any greater rights than under
the DCC Stock Option;
(iii) Bikeshop.com shall not redeem, repurchase, retire, return or repay
any of its share capital or resolve to do so provided that,
Bikeshop.com may, provided that no Event of Default has occurred and
is outstanding or would result as a consequence, issue shares to
employees in accordance with Bikeshop.com Stock Option Plan; and
(iv) Bikeshop.com shall not dispose of any Intellectual Property Rights
in which it has legal and beneficial title or otherwise uses or
requires in relation to its business without the prior written
consent of the Facility Agent ( acting in accordance with the
instructions of the Super Majority Banks) and on such terms and
conditions as the Facility Agent shall require. Any other assets of
Bikeshop.com may be disposed of in accordance with Clause 19.5(b)."
6. Clause 3 of Schedule 14 shall be deleted and replaced with the following:
"3. UNITED STATES OF AMERICA
(a) Security Agreement The Derby Cycle Corporation
(b) US Law Share Pledge over shares in the
following:
(i) Derby Trading Co. Inc.
(ii) Lyon Investments BV (66 /2/3/%) The Derby Cycle Corporation
(iii) Sturmey-Archer Limited (66 /2/3/%)
<PAGE>
(iv) Derby Holding BV (66 /2/3/%)
(v) Raleigh Industries of Canada Limited (66 /2/3/%)
(vi) Derby Holding (Deutschland) GmbH (5%)
<TABLE>
<S> <C>
(c) US Patent Assignment for Security Purposes The Derby Cycle Corporation
(d) US Patent and Trademark Security Agreement The Derby Cycle Corporation
(e) US Amendment to Security Agreement The Derby Cycle Corporation
(f) US Amendment to Patent and Trademark Security The Derby Cycle Corporation
Agreement
(g) US Patent Assignment for Security Purposes The Derby Cycle Corporation
(h) Leasehold Deed of Trust The Derby Cycle Corporation
(i) The Bikeshop Share Pledge The Derby Cycle Corporation
(j) The Bikeshop.com Security Documents
</TABLE>
<PAGE>
SCHEDULE 6
Conditions Precedent
1. A Borrower Accession Agreement and a Guarantor Accession Agreement duly
executed by Derby Holding BV and Bikeshop.com respectively together with
each of the documents listed in Schedule 5 of the Facility Agreement
(Documents to Accompany Additional Borrower/Guarantor Accession Agreement).
2. The Bikeshop.com Information Memorandum.
3. The Bikeshop.com Stock Option Plan.
4. The Bikeshop.com Security Documents.
5. The Bikeshop.com Share Pledge.
6. The Bikeshop.com Licence.
7. In respect of the Company:
(a) a Certified Copy of the resolutions of the board of directors of the
Company:
(i) authorising the execution, delivery and performance on behalf of
the Company of the Bikeshop.com Share Pledge; and
(ii) authorising a Person or Persons (by name, or to the extent that
the same is permitted so as to bind the Company by applicable
laws, by title) (each an "Authorised Signatory") specified
therein to execute on behalf of the Company, the Bikeshop.com
Share Pledge and to give any notices or certificates required in
connection with therewith;
(b) a certificate of an Authorised Signatory of the Company in the agreed
terms to the effect that the execution of the Bikeshop.Com Share
Pledge by the Company is lawful and complies with its constitution.
(c) a certificate signed by the Company certifying that the Certificate of
Incorporation and other constitutional documents delivered to the
Facility Agent on or about 3 February 1999 remain unaltered and in
full force and effect.
8. At least three copies of the Bikeshop.com Share Pledge duly executed by all
the parties thereto other than the Facility Agent and/or the Security Agent
together with:
(i) share certificates in respect of any and all shares the subject matter
of the security created by the Bikeshop.com Share Pledge and (if
applicable) stock powers, executed in blank or other instruments of
transfer satisfactory to the Security Agent, in respect thereof and
undated letters of resignation from each of the relevant directors
together with irrevocable authority for the Facility Agent to date the
same, and all title documents relating to any land or buildings
mortgaged or otherwise charged by the Security Documents or
confirmation that such documents are held to the order of the Security
Agent or are in course of being lodged with the appropriate
registration authority and will thereafter be delivered to the order
of the Security Agent;
<PAGE>
(ii) copies of all notice required to be despatched pursuant to the
Bikeshop.com Share Pledge duly completed by an Authorised Signatory.
9. Bikeshop.com Security Documents
10. Such other evidence or documents as the Facility Agent may in its absolute
discretion require in relation to or in connection with Bikeshop.com
including for the avoidance of doubt, any opinions to be provided by
appropriate legal advisors to Bikeshop.com.
<PAGE>
THE DERBY CYCLE CORPORATION )
for itself and on behalf of each of the )
Borrowers and Guarantors as Obligors' Agent )
By:
CHASE MANHATTAN INTERNATIONAL )
LIMITED for itself and as the Facility )
Agent and Security Agent and for and on behalf )
of the Arranger and each of the Banks (other )
than Lloyds TSB Bank Plc, Scotia Bank Europe )
plc and The Bank of Nova Scotia) )
By:
LLOYDS TSB BANK PLC
By:
SCOTIA BANK EUROPE PLC
By:
THE BANK OF NOVA SCOTIA
By:
<PAGE>
Exhibit 10.9
================================================================================
The Derby Cycle Corporation
Warrant to Purchase
2,500 Shares of Class C Common Stock
Warrant Agreement
Dated as of February 15, 2000
================================================================================
<PAGE>
This WARRANT AGREEMENT (the "Agreement"), dated as of February 15, 2000
among The Derby Cycle Corporation, a Delaware corporation (the "Company"), and
Thayer Equity Partners, III, L.P. ("Thayer") and Perseus Capital, L.L.C.
("Perseus"; and together with Thayer,the "Holders" and each a "Holder").
WHEREAS, pursuant to a Promissory Note dated as of the date hereof issued
by the Company by which Thayer has loaned the Company $3,500,000;
WHEREAS, pursuant to a Promissory Note dated as of the date hereof issued
by the Company by which Perseus has loaned the Company $3,500,000;
WHEREAS, the Company will issue Class C warrants (the "Warrants") to
initially purchase an aggregate of 1,250 shares of Common Stock, par value $0.01
per share (the "Common Stock"), of the Company (the Common Stock issuable on
exercise of the Warrants being referred to herein as the "Warrant Shares"), to
Thayer in connection with, and in consideration for, the Holders' loan of money
to the Company pursuant to the Promissory Notes between the Company and Thayer
and the Company and Perseus (the "Bridge Loans"); and
WHEREAS, the Company will issue Class C warrants (the "Warrants") to
initially purchase an aggregate of 1,250 shares of Common Stock of the Company
to Perseus in connection with, and in consideration for, the Holders' loan of
money to the Company pursuant to the Bridge Loans.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, the parties hereto agree as follows:
SECTION 1. CERTAIN DEFINITIONS.
As used in this Agreement, the following terms shall have the following
respective meanings:
"Affiliate" of any Person means any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such Person. For purposes of this definition, "control" (including, with
correlative meanings, the terms "controlling," "controlled by" and "under common
control with"), as used with respect to any Person shall mean the possession,
directly or indirectly, of the power to direct or cause the direction of the
management or policies of such specified Person, whether through the ownership
of voting securities, by agreement or otherwise; provided that beneficial
ownership of 10% or more of the voting securities of a Person shall be deemed to
be control.
"Business Day" means any day other than a Legal Holiday.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Holder" is defined in the recitals hereto.
"Nonpublic Warrant Shares" shall mean Warrant Shares that have not been
sold to the public (or pursuant to Rule 144, Rule 144A or Regulation S under the
Securities Act) and bear the legend set forth in Section 6 of the Stockholders
Agreement.
<PAGE>
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof, including any
subdivision or ongoing business of any such entity or substantially all of the
assets of any such entity, subdivision or business.
"Private Placement and Transfer Restriction Legend" means the legend
set forth in Section 2.2(b) to be placed on all Warrants issued under this
--------------
Warrant Agreement except where otherwise permitted by the provisions of this
Warrant Agreement.
"Rule 144" means Rule 144 promulgated under the Securities Act.
"Rule 144A" means Rule 144A promulgated under the Securities Act.
"Securities Act" means the Securities Act of 1933, as amended.
SECTION 2. ISSUANCE OF WARRANTS; WARRANT CERTIFICATES.
2.1. Form and Dating.
The Warrant shall be substantially in the form of Exhibits A-1 and A-2
hereto (the "Warrant Certificates"). The Warrant may have notations, legends or
endorsements required by law, stock exchange rule or usage. The Warrant shall be
dated the date hereof.
The terms and provisions contained in the Warrants shall constitute,
and are hereby expressly made, a part of this Warrant Agreement. The Company and
the Holders, by their execution and delivery of this Warrant Agreement,
expressly agree to such terms and provisions and to be bound thereby. However,
to the extent any provision of the Warrant conflicts with the express provisions
of this Warrant Agreement, the provisions of this Warrant Agreement shall govern
and be controlling.
2.2. Transfer and Exchange.
(a) Subject to the transfer conditions referred to in the legends
endorsed on the Warrant, the Warrant and all rights thereunder are transferable
in whole or in part, without charge to the registered holder, upon surrender of
the Warrant with a properly executed Assignment (in the form of Exhibit B
---------
hereto) at the principal office of the Company.
(b) Legend.
The following legend shall appear on the face of all the Warrants
issued under this Warrant Agreement unless specifically stated otherwise in the
applicable provisions of this Warrant Agreement.
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 (THE "SECURITIES ACT"), AND THIS SECURITY MAY NOT BE OFFERED, SOLD, PLEDGED
OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
OR IN ACCORDANCE WITH AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS
OF THE SECURITIES ACT (SUBJECT TO THE DELIVERY OF SUCH EVIDENCE, IF ANY,
REQUIRED UNDER THE WARRANT AGREEMENT PURSUANT TO WHICH THIS SECURITY IS ISSUED)
AND IN ACCORDANCE WITH ANY
-2-
<PAGE>
APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER
JURISDICTION. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED
THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5
OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER OR ANOTHER EXEMPTION
UNDER THE SECURITIES ACT. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES FOR
THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR
OTHERWISE TRANSFERRED, ONLY (1)(a) TO A PERSON WHO THE SELLER REASONABLY
BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c)
OUTSIDE THE UNITED STATES TO A FOREIGN PURCHASER IN A TRANSACTION MEETING THE
REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT OR (d) IN ACCORDANCE WITH
ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND
BASED UPON AN OPINION OF COUNSEL IF THE COMPANY SO REQUESTS), (2) TO THE COMPANY
OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN
ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES
OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH
SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY
EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE.
2.3. Replacement Warrants.
If a mutilated Warrant is surrendered to the Company and the Company
receives evidence to its satisfaction of the destruction, loss or theft of the
Warrant, the Company shall issue a replacement Warrant. If required by the
Company, an indemnity bond must be supplied by the Holder that is sufficient in
the reasonable judgment of the Company to protect the Company from any loss that
it may suffer if a Warrant is replaced. The Company may charge for its expenses
in replacing a Warrant.
Every replacement Warrant is an additional warrant of the Company and
shall be entitled to all of the benefits of this Warrant Agreement equally and
proportionately with all other Warrants duly issued hereunder.
SECTION 3. TERMS OF THE WARRANT; EXERCISE OF THE WARRANT.
3.1. Subject to the terms of this Agreement, each Warrant holder shall
have the right, which may be exercised during the period commencing the date
hereof and until 5:00 p.m., New York City time on February 15, 2010 (the
"Exercise Period"), to receive from the Company the number of fully paid and
nonassessable Warrant Shares which the holder may at the time be entitled to
receive on exercise of such Warrants and payment of the exercise price (the
"Exercise Price") either by (i) a bank or certified check payable to the Company
in an amount equal to the product of the Exercise Price multiplied by the number
of shares of Warrant Shares being purchased upon such exercise (the "Aggregate
Exercise Price"), (ii) the surrender to the Company of securities of the Company
or its subsidiaries having a Market Value equal to the Aggregate Exercise Price
of the Warrant Shares being purchased upon such exercise (provided that for
purposes of this subparagraph, and notwithstanding the definition of Market
Value set forth below, the Market Value of any note or other debt security or
any preferred stock shall be deemed to be equal to the aggregate outstanding
principal amount or liquidation value thereof plus all accrued and unpaid
interest thereon or accrued and unpaid dividends thereon) or
-3-
<PAGE>
(iii) a written notice to the Company that the Holder is exercising the Warrant
(or a portion thereof) and authorizing the Company to withhold from issuance a
number of Warrant Shares issuable upon such exercise of the Warrant which when
multiplied by the Market Value of the Warrant Shares is equal to the Aggregate
Exercise Price (and such withheld shares shall no longer be issuable under this
Warrant). Each Warrant not exercised prior to 5:00 p.m., New York City time, on
February 10, 2010 (the "Expiration Date") shall become void and all rights
thereunder and all rights in respect thereof under this Agreement shall cease as
of such time. No adjustments as to dividends will be made upon exercise of the
Warrants.
The "Market Value" per share of Common Stock as of any date shall
equal (i) if Common Stock is primarily traded on a securities exchange, the last
sale price on such securities exchange on the trading day immediately prior to
the date of determination, or if no sale occurred on such day, the mean between
the closing "bid" and "asked" prices on such day, (ii) if the principal market
for Common Stock is in the over-the-counter market, the closing sale price on
the trading day immediately prior to the date of the determination, as published
by the National Association of Securities Dealers Automated Quotation System or
similar organization, or if such price is not so published on such day, the mean
between the closing "bid" and "asked" prices, if available, on such day, which
prices may be obtained from any reputable pricing service, broker or dealer, and
(iii) if neither clause (i) nor clause (ii) is applicable, the fair market value
on the date of determination of Common Stock as determined in good faith by the
Board of Directors of the Company.
3.2. In order to exercise all or any of the Warrants represented by
the Warrant Certificate, the Holder must surrender for exercise the Warrant
Certificate to the Company together with the form of election to purchase on the
reverse thereof duly filled in and signed, and upon payment to the Company of
the Exercise Price, which is set forth in the form of Warrant Certificate
attached hereto as Exhibit A, as adjusted as herein provided, for the number of
Warrant Shares in respect of which such Warrants are then exercised.
3.3. Subject to the provisions of Section 4 hereof, upon compliance
with clause (b) above, the Company shall deliver or cause to be delivered with
all reasonable dispatch, to or upon the written order of the Holder and in such
name or names as the Holder may designate, a certificate or certificates for the
number of whole Warrant Shares issuable upon the exercise of such Warrants or
other securities or property to which such holder is entitled hereunder,
together with cash as provided in Section 8 hereof; provided that if any
consolidation, merger or lease or sale of assets is proposed to be effected by
the Company as described in Section 7(l) hereof, or a tender offer or an
exchange offer for shares of Common Stock shall be made, upon such surrender of
Warrants and payment of the Exercise Price as aforesaid, the Company shall, as
soon as possible, but in any event not later than two business days thereafter,
deliver or cause to be delivered the full number of Warrant Shares issuable upon
the exercise of such Warrants in the manner described in this sentence or other
securities or property to which such holder is entitled hereunder, together with
cash as provided in Section 8 hereof. Such certificate or certificates shall be
deemed to have been issued and any Person so designated to be named therein
shall be deemed to have become a holder of record of such Warrant Shares as of
the date of the surrender of such Warrants and payment of the Exercise Price.
3.4. The Warrants shall be exercisable, at the election of the Holder,
either in full or from time to time in part. If less than all the Warrants
represented by the Warrant Certificate are exercised, the Warrant Certificate
shall be surrendered and a new Warrant Certificate of the same tenor and for the
number of Warrants which were not exercised shall be executed by the Company,
registered
-4-
<PAGE>
in such name or names as may be directed in writing by the Holder, and the
Company shall deliver the new Warrant Certificate to the Person or Persons
entitled to receive the same.
3.5. All Warrant Certificates surrendered upon exercise of Warrants
shall be canceled by the Company.
3.6. The Company shall keep copies of this Agreement and any notices
given or received hereunder available for inspection by the Holder during normal
business hours at its office.
SECTION 4. PAYMENT OF TAXES.
The Company will pay all documentary stamp taxes attributable to the
initial issuance of Warrant Shares upon the exercise of the Warrant; provided
that the Company shall not be required to pay any tax or taxes which may be
payable in respect of any transfer involved in the issue of any Warrant
Certificates or any certificates for Warrant Shares in a name other than that of
the registered holder of a Warrant Certificate surrendered upon the exercise of
a Warrant, and the Company shall not be required to issue or deliver such
Warrant Certificates unless or until the Person or Persons requesting the
issuance thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
SECTION 5. RESERVATION OF WARRANT SHARES.
5.1. The Company will at all times reserve and keep available, free
from preemptive rights, out of the aggregate of its authorized but unissued
Class C Common Stock or its authorized and issued Class C Common Stock held in
its treasury, for the purpose of enabling it to satisfy any obligation to issue
Warrant Shares upon exercise of the Warrant, the maximum number of shares of
Class C Common Stock which may then be deliverable upon the exercise of all
outstanding Warrants.
5.2. The Company or, if appointed, the transfer agent for the Class C
Common Stock (the "Transfer Agent") and every subsequent transfer agent for any
shares of the Company's capital stock issuable upon the exercise of any of the
rights of purchase aforesaid will be irrevocably authorized and directed at all
times to reserve such number of authorized shares as shall be required for such
purpose. The Company will keep a copy of this Agreement on file with the
Transfer Agent and with every subsequent transfer agent for any shares of the
Company's capital stock issuable upon the exercise of the rights of purchase
represented by the Warrants. The Company will supply such Transfer Agent with
duly executed certificates for such purposes and will provide or otherwise make
available any cash which may be payable as provided in Section 8 hereof. The
Company will furnish such Transfer Agent a copy of all notices of adjustments,
and certificates related thereto, transmitted to each holder pursuant to Section
9 hereof.
5.3. Before taking any action which would cause an adjustment pursuant
to Section 8 hereof to reduce the Exercise Price below the then par value (if
any) of the Warrant Shares, the Company will take any corporate action which
may, in the opinion of its counsel (which may be counsel employed by the
Company), be necessary in order that the Company may validly and legally issue
fully paid and nonassessable Warrant Shares at the Exercise Price as so
adjusted.
5.4. The Company covenants that all Warrant Shares which may be issued
upon exercise of Warrants will, upon issue, be fully paid, nonassessable, free
of preemptive rights and free from all taxes, liens, charges and security
interests with respect to the issuance thereof.
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<PAGE>
SECTION 6. OBTAINING STOCK EXCHANGE LISTINGS.
The Company will from time to time take all action which may be
necessary so that the Warrant Shares, immediately upon their issuance upon the
exercise of the Warrant, will be listed on the principal securities exchanges,
automated quotation systems or other markets within the United States of
America, if any, on which other shares of Class C Common Stock are then listed,
if any.
SECTION 7. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES
ISSUABLE.
The Exercise Price and the number of Warrant Shares issuable upon the
exercise of the Warrants are subject to adjustment from time to time upon the
occurrence of the events enumerated in this Section 7. For purposes of this
Section 7, "Class C Common Stock" means shares now or hereafter authorized of
any class of Class C Common Stock of the Company and any other stock of the
Company, however designated, that has the right (subject to any prior rights of
any class or series of preferred stock) to participate in any distribution of
the assets or earnings of the Company without limit as to per share amount.
7.1. Adjustment for Change in Capital Stock.
If the Company (i) pays a dividend or makes a distribution on its
Class C Common Stock in shares of its Class C Common Stock, (ii) subdivides its
outstanding shares of Class C Common Stock into a greater number of shares,
(iii) combines its outstanding shares of Class C Common Stock into a smaller
number of shares, (iv) makes a distribution on its Class C Common Stock in
shares of its capital stock other than Class C Common Stock or (v) issues by
reclassification of its Class C Common Stock any shares of its capital stock,
then the Exercise Price in effect immediately prior to such action shall be
proportionately adjusted so that the holder of any Warrant thereafter exercised
may receive the aggregate number and kind of shares of capital stock of the
Company which he would have owned immediately following such action if such
Warrant had been exercised immediately prior to such action.
The adjustment shall become effective immediately after the record
date in the case of a dividend or distribution and immediately after the
effective date in the case of a subdivision, combination or reclassification.
If, after an adjustment, a holder of a Warrant upon exercise of it may receive
shares of two or more classes of capital stock of the Company, the Company shall
determine, in good faith, the allocation of the adjusted Exercise Price between
the classes of capital stock. After such allocation, the exercise privilege and
the Exercise Price of each class of capital stock shall thereafter be subject to
adjustment on terms comparable to those applicable to Class C Common Stock in
this Section 7. Such adjustment shall be made successively whenever any event
listed above shall occur.
7.2. Adjustment for Rights Issue.
If the Company distributes any rights, options or warrants to all
holders of its Class C Common Stock entitling them for a period expiring within
45 days after the record date mentioned below to purchase shares of Class C
Common Stock at a price per share less than the Fair Value (as defined herein)
per share on that record date, the Exercise Price shall be adjusted in
accordance with the formula:
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<PAGE>
O + N x P
-------
E' = E x M
---------------
O + N
where:
E' = the adjusted Exercise Price.
E = the current Exercise Price.
O = the number of shares of Class C Common Stock outstanding on
the record date.
N = the number of additional shares of Class C Common Stock issued
pursuant to such rights, options or warrants.
P = the aggregate price per share of the additional shares.
M = the Fair Value per share of Class C Common Stock on the record
date.
The adjustment shall be made successively whenever any such rights,
options or warrants are issued and shall become effective immediately after the
record date for the determination of stockholders entitled to receive the
rights, options or warrants. If at the end of the period during which such
rights, options or warrants are exercisable, not all rights, options or warrants
shall have been exercised, the Exercise Price shall be immediately readjusted to
what it would have been if "N" in the above formula had been the number of
shares actually issued.
7.3. Adjustment for Other Distributions.
If the Company distributes to all holders of its Class C Common Stock
any of its assets (including cash), debt securities, preferred stock or any
rights or warrants to purchase debt securities, preferred stock, assets
(including cash) or other securities of the Company, the Exercise Price shall be
adjusted in accordance with the formula:
M - F
E' = E x ------------
M
where:
E' = the adjusted Exercise Price.
E = the current Exercise Price.
M = the Fair Value per share of Class C Common Stock on the record
date mentioned below.
F = the fair market value on the record date of the debt
securities, preferred stock, assets, securities, rights or
warrants to be distributed in respect of
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<PAGE>
one share of Class C Common Stock as determined in good
faith by the Board of Directors of the Company (the "Board
of Directors").
The adjustment shall be made successively whenever any such
distribution is made and shall become effective immediately after the record
date for the determination of stockholders entitled to receive the distribution.
This subsection 7.3 does not apply to cash dividends or cash
distributions paid out of consolidated current or retained earnings as shown on
the books of the Company prepared in accordance with generally accepted
accounting principles. Also, this subsection 7.3 does not apply to rights,
options or warrants referred to in subsection 7.2 hereof
7.4. Adjustment for Class C Common Stock Issue.
If the Company issues shares of Class C Common Stock for a
consideration per share less than the Fair Value per share on the date the
Company fixes the offering price of such additional shares, the Exercise Price
shall be adjusted in accordance with the formula:
P
----
E' = E x O + M
--------------
A
where:
E' = the adjusted Exercise Price.
E = the then current Exercise Price.
O = the number of shares outstanding immediately prior to the
issuance of such additional shares.
P = the aggregate consideration received for the issuance of such
additional shares.
M = the Fair Value per share on the date of issuance of such
additional shares.
A = the number of shares outstanding immediately after the
issuance of such additional shares.
The adjustment shall be made successively whenever any such issuance
is made, and shall become effective immediately after such issuance.
This subsection 7.4 does not apply to:
(1) any of the transactions described in subsections 7.1, 7.2 and
7.3 of this Section 7,
-8-
<PAGE>
(2) the exercise of Warrants, or the conversion or exchange of
other securities convertible or exchangeable for Class C Common Stock the
issuance of which caused an adjustment to be made under subsection 7.5,
(3) Class C Common Stock issued to the Company's employees,
directors or consultants (or any of the foregoing of its subsidiaries)
under bona fide employee benefit plans adopted by the Board of Directors
and approved by the holders of Class C Common Stock when required by law,
if such Class C Common Stock would otherwise be covered by this subsection
7.4 (but only to the extent that the aggregate number of shares excluded
hereby and issued after the date of this Warrant Agreement shall not,
together with the shares of Class C Common Stock underlying the options
described in the last paragraph of subsection 7.2 hereof, exceed 10% of the
Class C Common Stock outstanding at the time of the adoption of each such
plan, exclusive of anti-dilution adjustments thereunder), or
(4) Class C Common Stock issued to shareholders of any Person
which merges into the Company, or with a subsidiary of the Company, in
proportion to their stock holdings of such Person immediately prior to such
merger, upon such merger, provided that if such Person is an Affiliate of
the Company, the Board of Directors shall have obtained a fairness opinion
from a nationally recognized investment banking, appraisal or valuation
firm, which is not an Affiliate of the Company, stating that the
consideration received in such merger is fair to the Company from a
financial point of view.
7.5. Adjustment for Convertible Securities Issue.
If the Company issues any securities convertible into or exchangeable
for Class C Common Stock (other than securities issued in transactions described
in subsections 7.1, 7.2 and 7.3 of this Section 7) for a consideration per share
of Class C Common Stock initially deliverable upon conversion or exchange of
such securities less than the Fair Value per share on the date of issuance of
such securities, the Exercise Price shall be adjusted in accordance with this
formula:
P
-----
O + M
E' = E x --------
O + D
where:
E' = the adjusted Exercise Price.
E = the then current Exercise Price.
O = the number of shares outstanding immediately prior to the
issuance of such securities.
P = the aggregate consideration received for the issuance of such
securities.
M = the Fair Value per share on the date of issuance of such
securities.
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<PAGE>
D = the maximum number of shares deliverable upon conversion or in
exchange for such securities at the initial conversion or
exchange rate.
The adjustment shall be made successively whenever any such issuance
is made, and shall become effective immediately after such issuance.
If all of the Class C Common Stock deliverable upon conversion or
exchange of such securities have not been issued when such securities are no
longer outstanding, then the Exercise Price shall promptly be readjusted to the
Exercise Price which would then be in effect had the adjustment upon the
issuance of such securities been made on the basis of the actual number of
shares of Class C Common Stock issued upon conversion or exchange of such
securities.
This subsection 7.5 does not apply to convertible securities issued to
shareholders of any person which merges into the Company, or with a subsidiary
of the Company, in proportion to their stock holdings of such person immediately
prior to such merger, upon such merger, provided that if such person is an
Affiliate of the Company, the Board of Directors shall have obtained a fairness
opinion from a nationally recognized investment banking, appraisal or valuation
firm, which is not an Affiliate of the Company, stating that the consideration
received in such merger is fair to the Company from a financial point of view.
7.6. Consideration Received.
For purposes of any computation respecting consideration received
pursuant to subsections 7.4, and 7.5 of this Section 7, the following shall
apply:
(1) in the case of the issuance of shares of Class C Common Stock
for cash, the consideration shall be the amount of such cash, provided that
in no case shall any deduction be made for any commissions, discounts or
other expenses incurred by the Company for any underwriting of the issue or
otherwise in connection therewith;
(2) in the case of the issuance of shares of Class C Common Stock
for a consideration in whole or in part other than cash, the consideration
other than cash shall be deemed to be the fair market value thereof as
determined in good faith by the Board of Directors (irrespective of the
accounting treatment thereof), whose determination shall be conclusive, and
described in a Board resolution which shall be delivered to the Holder;
(3) in the case of the issuance of securities convertible into or
exchangeable for shares, the aggregate consideration received therefor
shall be deemed to be the consideration received by the Company for the
issuance of such securities plus the additional minimum consideration, if
any, to be received by the Company upon the conversion or exchange thereof
(the consideration in each case to be determined in the same manner as
provided in clauses (1) and (2) of this subsection); and
(4) in the case of the issuance of shares of Class C Common Stock
pursuant to rights, options or warrants which rights, options or warrants
were originally issued together with one or more other securities as part
of a unit at a price per unit, the consideration shall be deemed to be the
fair value of such rights, options or warrants at the time of issuance
thereof as determined in good faith by the Board of Directors whose
determination shall be conclusive and described in a Board resolution which
shall be delivered to the Holder plus the additional
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<PAGE>
minimum consideration, if any, to be received by the Company upon the
exercise, conversion or exchange thereof (as determined in the same manner
as provided in clauses (1) and (2) of this subsection).
7.7. Fair Value.
In subsections 7.2, 7.3, 7.4 and 7.5 and Section 7 hereof, the "Fair
Value" per security at any date of determination shall be (1) in connection with
a sale by the Company to a party that is not an Affiliate of the Company in an
arm's-length transaction (a "Non-Affiliate Sale"), the price per security at
which such security is sold and (2) in connection with any sale by the Company
to an Affiliate of the Company, (a) the last price per security at which such
security was sold in a Non-Affiliate Sale within the three-month period
preceding such date of determination or (b) if clause (a) is not applicable, the
fair market value of such security determined in good faith by (i) a majority of
the Board of Directors, including a majority of the Disinterested Directors, and
approved in a Board resolution delivered to the Holder or (ii) a nationally
recognized investment banking, appraisal or valuation firm, which is not an
Affiliate of the Company, in each case, taking into account, among all other
factors deemed relevant by the Board of Directors or such investment banking,
appraisal or valuation firm, the trading price and volume of such security on
any national securities exchange or automated quotation system on which such
security is traded.
For purposes of this subsection 7.7, "Disinterested Director" means,
in connection with any issuance of securities that gives rise to a determination
of the Fair Value thereof, each member of the Board of Directors who is not an
officer, employee, director or other Affiliate of the party to whom the Company
is proposing to issue the securities giving rise to such determination.
For purposes of this subsection 7.7, "Affiliate" of any specified
Person means (A) any other Person directly or indirectly controlling or
controlled by or under direct or indirect common control with such specified
Person and (B) any director, officer or employee of such specified person. For
purposes of this definition "control" (including, with correlative meanings, the
terms "controlling," "controlled by" and "under common control with") as used
with respect to any Person, shall mean the possession, directly or indirectly,
of the power to direct or cause the direction of the management or policies of
such Person, whether through the ownership of voting securities, by agreement or
otherwise.
7.8. When De Minimis Adjustment May Be Deferred.
No adjustment in the Exercise Price need be made unless the adjustment
would require an increase or decrease of at least 1% in the Exercise Price. Any
adjustments that are not made shall be carried forward and taken into account in
any subsequent adjustment. All calculations under this Section 8 shall be made
to the nearest one-one thousandth of a cent or to the nearest one-one thousandth
of a share, as the case may be, it being understood that no such rounding shall
be made under subsection (p).
7.9. When No Adjustment Required.
No adjustment need be made for a transaction referred to subsections
7.1, 7.2, 7.3, 7.4, 7.5 or 7.6 hereof, if the Holder is to participate (without
being required to exercise its Warrants) in the transaction on a basis and with
notice that the Board of Directors determines to be fair and appropriate in
light of the basis and notice on which holders of Class C Common Stock
participate in the transaction. No adjustment need be made for (i) rights to
purchase Class C Common Stock pursuant to a Company
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<PAGE>
plan for reinvestment of dividends or interest or (ii) a change in the par value
or no par value of the Class C Common Stock. To the extent the Warrants become
convertible into cash, no adjustment need be made thereafter as to the cash.
Interest will not accrue on the cash.
7.10. Notice of Adjustment.
Whenever the Exercise Price is adjusted, the Company shall provide the
notices required by Section 10 hereof.
7.11. Notice of Certain Transactions.
If (i) the Company takes any action that would require an adjustment
in the Exercise Price pursuant to subsection 7.1, 7.2, 7.3, 7.4, 7.5 or 7.6
hereof and if the Company does not arrange for the Holder to participate
pursuant to subsection 7.9 hereof, (ii) the Company takes any action that would
require a supplemental Warrant Agreement pursuant to subsection 7.12 hereof or
(iii) there is a liquidation or dissolution of the Company, then the Company
shall mail to the Holder a notice stating the proposed record date for a
dividend or distribution or the proposed effective date of a subdivision,
combination, reclassification, consolidation, merger, transfer, lease,
liquidation or dissolution. The Company shall mail the notice at least 15 days
before such date. Failure to mail the notice or any defect in it shall not
affect the validity of the transaction.
7.12. Reorganization of Company.
Immediately after the date hereof, if the Company consolidates or
merges with or into, or transfers or leases all or substantially all its assets
to, any person, upon consummation of such transaction the Warrants shall
automatically become exercisable for the kind and amount of securities, cash or
other assets which the holder of a Warrant would have owned immediately after
the consolidation, merger, transfer or lease if the holder had exercised the
Warrant immediately before the effective date of the transaction. Concurrently
with the consummation of such transaction, the corporation formed by or
surviving any such consolidation or merger if other than the Company, or the
person to which such sale or conveyance shall have been made, shall enter into
(i) a supplemental Warrant Agreement so providing and further providing for
adjustments which shall be as nearly equivalent as may be practical to the
adjustments provided for in this subsection 7.12 and (ii) a supplement to the
Registration Rights Agreement providing for the assumption of the Company's
obligations thereunder. The successor Company shall mail to Warrant holders a
notice describing the supplemental Warrant Agreement and Registration Rights
Agreement. If the issuer of securities deliverable upon exercise of Warrants
under the supplemental Warrant Agreement is an Affiliate of the formed,
surviving, transferee or lessee corporation, that issuer shall join in the
supplemental Warrant Agreement and Registration Rights Agreement. If this
subsection 7.12 applies, subsections 7.1, 7.2, 7.3, 7.4, 7.5 and 7.6 hereof do
not apply.
7.13. Company Determination Final.
Any determination that the Company or the Board of Directors must make
pursuant to subsections 7.1, 7.3, 7.4, 7.5, 7.6, 7.7, 7.8 or 7.9 hereof is
conclusive.
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<PAGE>
7.14. When Issuance or Payment May Be Deferred.
In any case in which this Section 7 shall require that an adjustment
in the Exercise Price be made effective as of a record date for a specified
event, the Company may elect to defer until the occurrence of such event (i)
issuing to the Holder exercised after such record date the Warrant Shares and
other capital stock of the Company, if any, issuable upon such exercise over and
above the Warrant Shares and other capital stock of the Company, if any,
issuable upon such exercise on the basis of the Exercise Price and (ii) paying
to Holder any amount in cash in lieu of a fractional share pursuant to Section
10 hereof; provided that the Company shall deliver to Holder a due bill or other
appropriate instrument evidencing Holder's right to receive such additional
Warrant Shares, other capital stock and cash upon the occurrence of the event
requiring such adjustment.
7.15. Adjustment in Number of Shares.
Upon each adjustment of the Exercise Price pursuant to this Section 7
each Warrant outstanding prior to the making of the adjustment in the Exercise
Price shall thereafter evidence the right to receive upon payment of the
adjusted Exercise Price that number of shares of Class C Common Stock
(calculated to the nearest hundredth) obtained from the following formula:
N' = N x E
---
E'
where:
N' = the adjusted number of Warrant Shares issuable upon exercise
of a Warrant by payment of the adjusted Exercise Price.
N = the number or Warrant Shares previously issuable upon exercise
of a Warrant by payment of the Exercise Price prior to
adjustment.
E' = the adjusted Exercise Price.
E = the Exercise Price prior to adjustment.
7.16. Form of Warrants.
Irrespective of any adjustments in the Exercise Price or the number or
kind of shares purchasable upon the exercise of the Warrants, Warrants
theretofore or thereafter issued may continue to express the same price and
number and kind of shares as are stated in the Warrants initially issuable
pursuant to this Agreement.
SECTION 8. FRACTIONAL INTERESTS.
The Company shall not be required to issue fractional Warrant Shares
on the exercise of Warrants. If more than one Warrant shall be presented for
exercise in full at the same time by the same holder, the number of full Warrant
Shares which shall be issuable upon the exercise thereof shall be computed on
the basis of the aggregate number of Warrant Shares purchasable on exercise of
the Warrants so presented. If any fraction of a Warrant Share would, except for
the provisions of this
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<PAGE>
Section 8, be issuable on the exercise of any Warrant (or specified portion
thereof), the Company shall pay an amount in cash equal to the Fair Value per
Warrant Share, as determined on the day immediately preceding the date the
Warrant is presented for exercise, multiplied by such fraction, computed to the
nearest whole U.S. cent.
SECTION 9. NOTICES TO WARRANT HOLDERS.
9.1 Upon any adjustment of the Exercise Price pursuant to Section 9
hereof, the Company shall promptly thereafter (i) cause to be prepared a
certificate of a firm of independent public accountants of recognized standing
selected by the Board of Directors of the Company (who may be the regular
auditors of the Company) setting forth the Exercise Price after such adjustment
and setting forth in reasonable detail the method of calculation and the facts
upon which such calculations are based and setting forth the number of Warrant
Shares (or portion thereof) issuable after such adjustment in the Exercise
Price, upon exercise of a Warrant and payment of the adjusted Exercise Price,
which certificate shall be conclusive evidence of the correctness of the matters
set forth therein, and (ii) cause to be given to each of the holders of Warrants
at such holder's address as it appears in the records of the Company (unless
otherwise indicated by any such holder) written notice of such adjustments by
first-class mail, postage prepaid. Where appropriate, such notice may be given
in advance and included as a part of the notice required to be mailed under the
other provisions of this Section 9.
9.2 In case:
(i) the Company shall authorize the issuance to all holders of
shares of Class C Common Stock of rights, options or warrants to subscribe
for or purchase shares of Class C Common Stock or of any other subscription
rights or warrants;
(ii) the Company shall authorize the distribution to all holders of
shares of Class C Common Stock of evidences of its indebtedness or assets
(other than dividends or cash distributions paid out of consolidated
current or retained earnings as shown on the books of the Company prepared
in accordance with generally accepted accounting principles or dividends
payable in shares of Class C Common Stock or distributions referred to in
subsection 9.1 hereof);
(iii) of any consolidation or merger to which the Company is a party
and for which approval of any stockholders of the Company is required, or
of the conveyance or transfer of the properties and assets of the Company
substantially as an entirety, or of any reclassification or change of Class
C Common Stock issuable upon exercise of the Warrants (other than a change
in par value, or from par value to no par value, or from no par value to
par value, or as a result of a subdivision or combination), or a tender
offer or exchange offer for shares of Class C Common Stock;
(iv) of the voluntary or involuntary dissolution, liquidation or
winding up of the Company; or
(v) the Company proposes to take any action (other than actions of
the character described in subsection 7.1 hereof) which would require an
adjustment of the Exercise Price pursuant to Section 7 hereof;
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<PAGE>
then the Company shall cause to be given to each of the registered holders of
Warrants at such holder's address as it appears in the records of the Company
(unless otherwise indicated by any such holder), at least 20 days (or 10 days in
any case specified in clauses (i) or (ii) above) prior to the applicable record
date hereinafter specified, or promptly in the case of events for which there is
no record date, by first-class mail, postage prepaid, a written notice stating
(x) the date as of which the holders of record of shares of Class C Common Stock
to be entitled to receive any such rights, options, warrants or distribution are
to be determined, (y) the initial expiration date set forth in any tender offer
or exchange offer for shares of Class C Common Stock, or (z) the date on which
any such consolidation, merger, conveyance, transfer, dissolution, liquidation
or winding up is expected to become effective or consummated, and the date as of
which it is expected that holders of record of shares of Class C Common Stock
shall be entitled to exchange such shares for securities or other property, if
any, deliverable upon such reclassification, consolidation, merger, conveyance,
transfer, dissolution, liquidation or winding up. The failure to give the notice
required by this Section 9 or any defect therein shall not affect the legality
or validity of any distribution, right, option, warrant, consolidation, merger,
conveyance, transfer, dissolution, liquidation or winding up, or the vote upon
any action.
9.3. Nothing contained in this Agreement or in any of the Warrant
Certificates shall be construed as conferring upon the holders of Warrants the
right to vote or to consent or to receive notice as stockholders in respect of
the meetings of stockholders or the election of directors of the Company or any
other matter, or any rights whatsoever as stockholders of the Company.
SECTION 10. REPORTS
10.1. The Company agrees with Holder, for so long as any Warrants or
Warrant Shares remain outstanding and during any period in which the Company (i)
is not subject to Section 13 or 15(d) of the Exchange Act, to make available,
upon request of Holder, to such Holder or beneficial owner of Warrants or
Warrant Shares in connection with any sale thereof and any prospective purchaser
of such Warrants or Warrant Shares designated by such Holder or beneficial
owner, the information required by Rule 144(A)(d)(4) under the Securities Act in
order to permit resales of such Warrants or Warrant Shares pursuant to Rule
144A, and (ii) is subject to Section 13 or 15(d) of the Exchange Act, to make
all filings required thereby in a timely manner in order to permit resales of
such Warrants or Warrant Shares pursuant to Rule 144A.
SECTION 11. NOTICES TO COMPANY.
Any notice or demand authorized by this Agreement to be given or made
by the registered holder of any Warrant to or on the Company shall be
sufficiently given or made when received if deposited in the mail, first class
or registered, postage prepaid, addressed (until another address is filed in
writing by the Company) as follows:
The Derby Cycle Corporation
300 First Stamford Place
Stamford, CT 06902
Telecopier No.:
Attention: Dan Lynch
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<PAGE>
With a copy to:
Kirkland & Ellis
International Financial Centre
Old Broad Street
London EC2N 1HQ UK
Telecopier No.: 44 171 816-8800
Attention: M. Gilbey Strub, Esq.
SECTION 12. FURTHER AGREEMENTS.
12.1. Public Equity Offering.
The Company agrees that it shall not undertake any initial Public
Equity Offering of Class C Common Stock of any class other than the class of
Class C Common Stock into which the Warrants are exercisable, unless the Company
provides Holders of the Warrants and Non Public Warrant Shares the ability to
convert their Warrant Shares or to exercise their Warrants for Class C Common
Stock of the same class as is the subject of the initial Public Equity Offering.
12.2. Investment Company.
The Company agrees that it shall not, and shall not permit any of its
subsidiaries, to take any action that would subject it to the requirements of
the Investment Company Act of 1940.
SECTION 13. SUPPLEMENTS AND AMENDMENTS.
The Company may from time to time supplement or amend this Agreement
without the approval of any holders of Warrants in order to cure any ambiguity
or to correct or supplement any provision contained herein which may be
defective or inconsistent with any other provision herein, or to make any other
provisions in regard to matters or questions arising hereunder which the Company
may deem necessary or desirable and which shall not in any way adversely affect
the interests of the holders of Warrants. Any amendment or supplement to this
Agreement that has an adverse effect on the interests of the holders of Warrants
shall require the written consent of the holders of Warrants exercisable into a
majority of the Warrant Shares. The consent of each holder of Warrants affected
shall be required for any amendment pursuant to which the Exercise Price would
be increased or the number of Warrant Shares purchasable upon exercise of
Warrants would be decreased (other than pursuant to adjustments provided in this
Agreement) or which would affect any holder of Warrants in a manner different
from any other holder of Warrants.
SECTION 14. SUCCESSORS.
All the covenants and provisions of this Agreement by or for the
benefit of the Company or Holder shall bind and inure to the benefit of their
respective successors and assigns hereunder.
-16-
<PAGE>
SECTION 15. TERMINATION.
This Agreement shall terminate at 5:00 p.m., New York City time on
February 15, 2010. Notwithstanding the foregoing, this Agreement will terminate
on any earlier date if all Warrants have been exercised.
SECTION 16. GOVERNING LAW.
This Agreement and the Warrant Certificate issued hereunder shall be
deemed to be a contract made under the laws of the State of New York and for all
purposes shall be construed in accordance with the internal laws of said State.
SECTION 17. BENEFITS OF THIS AGREEMENT.
Nothing in this Agreement shall be construed to give to any Person
other than the Company and the registered holders of Warrants any legal or
equitable right, remedy or claim under this Agreement; but this Agreement shall
be for the sole and exclusive benefit of the Company and the registered holders
of Warrants.
SECTION 18. COUNTERPARTS.
This Agreement may be executed in any number of counterparts and each
of such counterparts shall for all purposes be deemed to be an original, and all
such counterparts shall together constitute but one and the same instrument.
[Signature Page Follows]
-17-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Warrant
Agreement to be duly executed, as of the day and year first above written.
The Derby Cycle Corporation
By: ________________________________
Name:
Title:
Thayer Capital Partners, III, L.P.
By: _________________________________
Name:
Title:
Perseus Capital L.L.C.
By: _________________________________
Name:
Title:
-18-
<PAGE>
EXHIBIT A-1
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE
"SECURITIES ACT"), AND THIS SECURITY MAY NOT BE OFFERED, SOLD, PLEDGED OR
OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR
IN ACCORDANCE WITH AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF
THE SECURITIES ACT (SUBJECT TO THE DELIVERY OF SUCH EVIDENCE, IF ANY, REQUIRED
UNDER THE WARRANT AGREEMENT PURSUANT TO WHICH THIS SECURITY IS ISSUED) AND IN
ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES
OR ANY OTHER JURISDICTION. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS
HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE
PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER
OR ANOTHER EXEMPTION UNDER THE SECURITIES ACT. THE HOLDER OF THE SECURITY
EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY
MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1)(a) TO A PERSON WHO THE
SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN
RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF
RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE
SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN PURCHASER IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT OR (d)
IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL IF THE COMPANY SO
REQUESTS), (2) TO THE COMPANY OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS
OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B)
THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER
FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN
(A) ABOVE.
No. ___________ Exercisable for 1250 shares
Class C Common Stock Warrant Certificate
THE DERBY CYCLE CORPORATION
This Class C Warrant Certificate certifies that Thayer Capital Partners,
III is the registered holder of Warrants expiring February 15, 2010 (the
"Warrants") to purchase Class C Common Stock, par value $0.01 (the "Class C
Common Stock"), of The Derby Cycle Corporation, a Delaware corporation (the
"Company"). Each Class C Warrant entitles the registered holder upon exercise at
any time from 9:00 a.m. February 15, 2000 (the "Exercise Date") until 5:00 p.m.
New York City Time on February 15, 2010 to receive from the Company 1,250 fully
paid and nonassessable shares of Class C Common Stock (the "Warrant Shares") at
the initial exercise price (the "Exercise Price") of $0.01 per share payable
upon surrender of this Warrant Certificate and payment of the Exercise Price at
the offices of the Company, but only subject to the conditions set forth herein
and in the Warrant Agreement referred to on the reverse hereof. The Exercise
Price and number of Warrant Shares issuable
A-1
<PAGE>
upon exercise of the Class C Warrant are subject to adjustment upon the
occurrence of certain events set forth in the Warrant Agreement.
No Class C Warrant may be exercised after 5:00 p.m., New York City
Time on February 15, 2010, and to the extent not exercised by such time such
Warrants shall become void.
Reference is hereby made to the further provisions of this Class C
Warrant Certificate set forth on the reverse hereof and such further provisions
shall for all purposes have the same effect as though fully set forth at this
place.
This Warrant Certificate shall be governed by and construed in
accordance with the internal laws of the State of New York.
A-2
<PAGE>
IN WITNESS WHEREOF, The Derby Cycle Corporation has caused this Class
C Warrant Certificate to be signed below.
Dated: February 15, 2000
The Derby Cycle Corporation
By: __________________________
Name:
Title:
A-3
<PAGE>
[Reverse of Class C Warrant Certificate]
The Class C Warrants evidenced by this Class C Warrant Certificate are
issued pursuant to an Class C Warrant Agreement dated as of February 15, 2000
(the "Class C Warrant Agreement"), duly executed and delivered by the Company to
Thayer Capital Partners, III, L.P. which Class C Warrant Agreement is hereby
incorporated by reference in and made a part of this instrument and is hereby
referred to for a description of the rights, limitation of rights, obligations,
duties and immunities thereunder of the Company and the holders (the words
"holders" or "holder" meaning the registered holders or registered holder) of
the Class C Warrant. A copy of the Class C Warrant Agreement may be obtained by
the holder hereof upon written request to the Company.
Class C Warrants may be exercised at any time on or after February 15,
2000 and on or before 5:00 p.m. New York City time on February 15, 2000;
provided that holders shall be able to exercise their Class C Warrants only if a
registration statement relating to the Warrant Shares is then in effect, or the
exercise of such Class C Warrants is exempt from the registration requirements
of the Securities Act of 1933, as amended (the "Securities Act"), and such
securities are qualified for sale or exempt from qualification under the
applicable securities laws of the states in which the various holders of the
Class C Warrants or other persons to whom it is proposed that the Warrant Shares
be issued on exercise of the Class C Warrants reside. In order to exercise all
or any of the Class C Warrants represented by this Warrant Certificate, the
holder must deliver to the Company at its address set forth in Section 12 of the
----------
Class C Warrant Agreement this Class C Warrant Certificate and the form of
election to purchase on the reverse hereof duly filled in and signed, and upon
payment to the Company of the Exercise Price, as adjusted as provided in the
Class C Warrant Agreement, for the number of Warrant Shares in respect of which
such Class C Warrants are then exercised. No adjustment shall be made for any
dividends on any Class C Common Stock issuable upon exercise of this Class C
Warrant.
The Class C Warrant Agreement provides that upon the occurrence of
certain events the Exercise Price set forth on the face hereof may, subject to
certain conditions, be adjusted. If the Exercise Price is adjusted, the Class C
Warrant Agreement provides that the number of shares of Class C Common Stock
issuable upon the exercise of each Class C Warrant shall be adjusted. No
fractions of a share of Class C Common Stock will be issued upon the exercise of
any Class C Warrant, but the Company will pay the cash value thereof determined
as provided in the Class C Warrant Agreement.
The Class C Warrants and the shares of Class C Common Stock underlying
the Warrants are subject to certain restrictions or transfer and other
restrictions set forth in an Amended and Restated Shareholders' Agreement, dated
February 3, 1999. Copies of the Amended and Restated Shareholders' Agreement may
be obtained by the holder hereof, upon written request to the Company.
Class C Warrant Certificates, when surrendered at the office of the
Company by the registered holder thereof in person or by legal representative or
attorney duly authorized in writing, may be exchanged, in the manner and subject
to the limitations provided in the Class C Warrant Agreement, but without
payment of any service charge, for another Class C Warrant Certificate or Class
C Warrant Certificates of like tenor evidencing in the aggregate a like number
of Class C Warrants.
Upon due presentation for registration of transfer of this Class C
Warrant Certificate at the office of the Company a new Class C Warrant
Certificate or Class C Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Class C Warrants shall be issued to the transferee(s)
in exchange for this Class C Warrant Certificate, subject to the limitations
provided in the
A-4
<PAGE>
Class C Warrant Agreement, without charge except for any tax or other
governmental charge imposed in connection therewith.
The Company may deem and treat the registered holder(s) thereof as the
absolute owner(s) of this Class C Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise hereof, of any distribution to the holder(s) hereof, and for all
other purposes, the Company shall not be affected by any notice to the contrary.
Neither the Class C Warrants nor this Class C Warrant Certificate entitles any
holder hereof to any rights of a stockholder of the Company.
A-5
<PAGE>
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE
"SECURITIES ACT"), AND THIS SECURITY MAY NOT BE OFFERED, SOLD, PLEDGED OR
OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR
IN ACCORDANCE WITH AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF
THE SECURITIES ACT (SUBJECT TO THE DELIVERY OF SUCH EVIDENCE, IF ANY, REQUIRED
UNDER THE WARRANT AGREEMENT PURSUANT TO WHICH THIS SECURITY IS ISSUED) AND IN
ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES
OR ANY OTHER JURISDICTION. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS
HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE
PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER
OR ANOTHER EXEMPTION UNDER THE SECURITIES ACT. THE HOLDER OF THE SECURITY
EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY
MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1)(a) TO A PERSON WHO THE
SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN
RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF
RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE
SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN PURCHASER IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT OR (d)
IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL IF THE COMPANY SO
REQUESTS), (2) TO THE COMPANY OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS
OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B)
THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER
FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN
(A) ABOVE.
No. ___________ Exercisable for 1250 shares
Class C Common Stock Warrant Certificate
THE DERBY CYCLE CORPORATION
This Class C Warrant Certificate certifies that Perseus Capital,
L.L.C. is the registered holder of Warrants expiring February 15, 2010 (the
"Warrants") to purchase Class C Common Stock, par value $0.01 (the "Class C
Common Stock"), of The Derby Cycle Corporation, a Delaware corporation (the
"Company"). Each Class C Warrant entitles the registered holder upon exercise at
any time from 9:00 a.m. February 15, 2000 (the "Exercise Date") until 5:00 p.m.
New York City Time on February 15, 2010 to receive from the Company 1250 fully
paid and nonassessable shares of Class C Common Stock (the "Warrant Shares") at
the initial exercise price (the "Exercise Price") of $0.01 per share payable
upon surrender of this Warrant Certificate and payment of the Exercise Price at
the offices of the Company, but only subject to the conditions set forth herein
and in the Warrant Agreement referred to on the reverse hereof. The Exercise
Price and number of Warrant Shares issuable upon exercise of the Class C Warrant
are subject to adjustment upon the occurrence of certain events set forth in the
Warrant Agreement.
A-6
<PAGE>
No Class C Warrant may be exercised after 5:00 p.m., New York City
Time on February 15, 2010, and to the extent not exercised by such time such
Warrants shall become void.
Reference is hereby made to the further provisions of this Class C
Warrant Certificate set forth on the reverse hereof and such further provisions
shall for all purposes have the same effect as though fully set forth at this
place.
This Warrant Certificate shall be governed by and construed in
accordance with the internal laws of the State of New York.
A-7
<PAGE>
IN WITNESS WHEREOF, The Derby Cycle Corporation has caused this Class
C Warrant Certificate to be signed below.
Dated: February 15, 2000
The Derby Cycle Corporation
By: ______________________________
Name:
Title:
A-8
<PAGE>
[Reverse of Class C Warrant Certificate]
The Class C Warrants evidenced by this Class C Warrant Certificate are
issued pursuant to a Class C Warrant Agreement dated as of February 15, 2000
(the "Class C Warrant Agreement"), duly executed and delivered by the Company to
Perseus Capital, L.L.C. which Class C Warrant Agreement is hereby incorporated
by reference in and made a part of this instrument and is hereby referred to for
a description of the rights, limitation of rights, obligations, duties and
immunities thereunder of the Company and the holders (the words "holders" or
"holder" meaning the registered holders or registered holder) of the Class C
Warrant. A copy of the Class C Warrant Agreement may be obtained by the holder
hereof upon written request to the Company.
Class C Warrants may be exercised at any time on or after February 15,
2000 and on or before 5:00 p.m. New York City time on February 15, 2010;
provided that holders shall be able to exercise their Class C Warrants only if a
registration statement relating to the Warrant Shares is then in effect, or the
exercise of such Class C Warrants is exempt from the registration requirements
of the Securities Act of 1933, as amended (the "Securities Act"), and such
securities are qualified for sale or exempt from qualification under the
applicable securities laws of the states in which the various holders of the
Class C Warrants or other persons to whom it is proposed that the Warrant Shares
be issued on exercise of the Class C Warrants reside. In order to exercise all
or any of the Class C Warrants represented by this Warrant Certificate, the
holder must deliver to the Company at its address set forth in Section 12 of the
----------
Class C Warrant Agreement this Class C Warrant Certificate and the form of
election to purchase on the reverse hereof duly filled in and signed, and upon
payment to the Company of the Exercise Price, as adjusted as provided in the
Class C Warrant Agreement, for the number of Warrant Shares in respect of which
such Class C Warrants are then exercised. No adjustment shall be made for any
dividends on any Class C Common Stock issuable upon exercise of this Class C
Warrant.
The Class C Warrant Agreement provides that upon the occurrence of
certain events the Exercise Price set forth on the face hereof may, subject to
certain conditions, be adjusted. If the Exercise Price is adjusted, the Class C
Warrant Agreement provides that the number of shares of Class C Common Stock
issuable upon the exercise of each Class C Warrant shall be adjusted. No
fractions of a share of Class C Common Stock will be issued upon the exercise of
any Class C Warrant, but the Company will pay the cash value thereof determined
as provided in the Class C Warrant Agreement.
The Class C Warrants and the shares of Class C Common Stock underlying
the Warrants are subject to certain restrictions or transfer and other
restrictions set forth in the Amended and Restated Shareholders' Agreement,
dated February 3, 1999. Copies of the Amended and Restated Shareholders'
Agreement may be obtained by the holder hereof, upon written request to the
Company.
Class C Warrant Certificates, when surrendered at the office of the
Company by the registered holder thereof in person or by legal representative or
attorney duly authorized in writing, may be exchanged, in the manner and subject
to the limitations provided in the Class C Warrant Agreement, but without
payment of any service charge, for another Class C Warrant Certificate or Class
C Warrant Certificates of like tenor evidencing in the aggregate a like number
of Class C Warrants.
Upon due presentation for registration of transfer of this Class C
Warrant Certificate at the office of the Company a new Class C Warrant
Certificate or Class C Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Class C Warrants shall be issued to the transferee(s)
in exchange for this Class C Warrant Certificate, subject to the limitations
provided in the
A-9
<PAGE>
Class C Warrant Agreement, without charge except for any tax or other
governmental charge imposed in connection therewith.
The Company may deem and treat the registered holder(s) thereof as the
absolute owner(s) of this Class C Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise hereof, of any distribution to the holder(s) hereof, and for all
other purposes, the Company shall not be affected by any notice to the contrary.
Neither the Class C Warrants nor this Class C Warrant Certificate entitles any
holder hereof to any rights of a stockholder of the Company.
A-10
<PAGE>
[Form of Election to Purchase]
(To Be Executed Upon Exercise Of Class C Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Class C Warrant Certificate, to receive _____________ shares
of Class C Common Stock and herewith tenders payment for such shares to the
order of The Derby Cycle Corporation, in the amount of the Aggregate Exercise
Price in accordance with the terms hereof. The undersigned requests that a
certificate for such shares be registered in the name of _______________, whose
address is __________________ and that such shares be delivered to ___________,
whose address is ____________________________. If said number of shares is less
than all of the shares of Class C Common Stock purchasable hereunder, the
undersigned requests that a new Warrant Certificate representing the remaining
balance of such shares be registered in the name of ______________________,
whose address is ____________________, and that such Warrant Certificate be
delivered to whose address is ____________________.
________________________________________
Signature
Date:
B-1
<PAGE>
EXHIBIT B
ASSIGNMENT
FOR VALUE RECEIVED, _________________________ hereby sells, assigns
and transfers all of the rights of the undersigned under the attached Class C
Warrant (Certificate No. W______) with respect to the number of shares of the
Class C Common Stock covered thereby set forth below, unto:
Names of Assignee Address No. of Shares
------------------- ------- -------------
Dated: Signature _____________________
_____________________
Witness _____________________
B-2
<PAGE>
Exhibit 10.10
THIS NOTE WAS ORIGINALLY ISSUED ON FEBRUARY 15, 2000,
AND HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY COMPARABLE STATE SECURITIES
LAW.
THE DERBY CYCLE CORPORATION
PROMISSORY NOTE
February 15, 2000 $3,500,000
The Derby Cycle Corporation, a Delaware corporation (the "Company"),
-------
hereby promises to pay to the order of Thayer Equity Investors III, L.P. (the
"Lender") the principal amount of $3,500,000 in accordance with the provisions
of this Note.
1. Interest. This Note is interest-free.
--------
2. Payment of Principal on Note.
----------------------------
(a) Scheduled Principal Payment. The Company shall pay the principal
---------------------------
amount of $3,500,000 (or such lesser principal amount then outstanding) to the
holder of this Note on the earlier of August 1, 2000 or on the soonest date on
which the Company shall have $7 million in availability under its revolving
credit facility with Chase Manhattan plc as Arranger (the "Revolving Credit
Facility") (the "Maturity Date").
-------------
3. Conversion.
----------
(a) Conversion Procedure.
--------------------
(i) Upon the Event of Default, then all or any portion of the
outstanding principal amount of this Note shall, without the need for any
action on the part of the Company, automatically convert into warrants (the
"Default Warrants") to purchase such number of shares of the Company's
----------------
Class C Common Stock (the "Class C Common Stock") as shall be equal to the
--------------------
amount of unpaid principal then due to the Lender, divided by 1,000 (the
"Conversion Price").
------------------
(ii) Except as otherwise expressly provided herein, the
conversion of this Note shall be deemed to have been effected as of the
close of business on the date of the Event of Default. At such time as such
conversion has been effected, the rights of the holder of this Note as such
holder to the extent of the conversion shall cease, and the debt
represented by this Note shall be extinguished.
(iii) As soon as possible after a conversion has been effected
(but in any event within five business days in the case of clause (A)
below), the Company shall deliver to the converting holder a certificate
representing the number of shares of Class C Common
<PAGE>
Stock issuable by reason of such conversion in such name or names and such
denomination or denominations as the converting holder has specified. Upon
conversion of this Note, the Company shall take all such actions as are
necessary in order to insure that the Class C Common Stock issuable with
respect to such Default Warrants shall be validly issued, fully paid and
nonassessable.
(iv) The Company shall not close its books against the transfer
of Class C Common Stock issued or issuable upon exercise of the Default
Warrants in any manner which interferes with the timely conversion of this
Note. The Company shall assist and cooperate with any holder of this Note
required to make any governmental filings or obtain any governmental
approval prior to or in connection with the conversion of this Note
(including, without limitation, making any filings required to be made by
the Company).
(v) The Company shall at all times reserve and keep available
out of its authorized but unissued shares of Class C Common Stock, solely
for the purpose of issuance upon the exercise of the Default Warrants, such
number of shares of Class C Common Stock issuable upon the exercise of the
Default Warrants. All shares of Class C 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 Company shall
take all such actions as may be necessary to assure that all such shares of
Class C 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 C Common Stock may be listed
(except for official notice of issuance which shall be immediately
delivered by the Company upon each such issuance).
(b) Subdivision or Combination of Common Stock. If the Company at any
------------------------------------------
time subdivides (by any stock split, stock dividend or otherwise) one or more
classes of its outstanding shares of Class C Common Stock into a greater number
of shares, the Conversion Price in effect immediately prior to such subdivision
shall be proportionately reduced, and if the Company at any time combines (by
reverse stock split or otherwise) one or more classes of its outstanding shares
of Class C Common Stock into a smaller number of shares, the Conversion Price in
effect immediately prior to such combination shall be proportionately increased.
(c) Reorganization, Reclassification, Consolidation, Merger or Sale.
---------------------------------------------------------------
Any recapitalization, reorganization, reclassification, consolidation, merger,
sale of all or substantially all of the Company's assets or other transaction,
which in each case is effected in such a manner that holders of Class C Common
Stock are entitled to receive (either directly or upon subsequent liquidation)
stock, securities or assets with respect to or in exchange for Class C Common
Stock is referred to herein as an "Organic Change." Prior to the consummation
--------------
of any Organic Change, the Company shall make lawful and adequate provision to
insure that the holder of this Note shall thereafter have the right to acquire
and receive, in lieu of or addition to (as the case may be) shares of Class C
Common Stock immediately theretofore acquirable and receivable upon the exercise
of the Default Warrants, such shares of stock, securities or assets as may be
issued or payable with respect to or in exchange for the number of shares of
Class C Common Stock immediately theretofore acquirable and receivable upon
exercise of the Default Warrants had such Organic Change not taken place.
-2-
<PAGE>
4. Events of Default.
-----------------
(a) Definition. For purposes of this Note, an Event of Default shall
----------
be deemed to have occurred if
(i) the Company fails to pay when due and payable on the
Maturity Date the full amount of principal on this Note, and such failure
to pay is not cured within thirty business days after the occurrence
thereof; or
(ii) the Company makes an assignment for the benefit of
creditors or admits in writing its inability to pay its debts generally as
they become due; or an order, judgment or decree is entered adjudicating
the Company bankrupt or insolvent; or any order for relief with respect to
the Company is entered under the Federal Bankruptcy Code; or the Company
petitions or applies to any tribunal for the appointment of a custodian,
trustee, receiver or liquidator of the Company, or of any substantial part
of the assets of the Company, or commences any proceeding relating to the
Company under any bankruptcy reorganization, arrangement, insolvency,
readjustment of debt, dissolution or liquidation law of any jurisdiction;
or any such petition or application is filed, or any such proceeding is
commenced, against the Company and either (A) the Company by any act
indicates its approval thereof, consent thereto or acquiescence therein or
(B) such petition, application or proceeding is not dismissed within 60
days.
The foregoing shall constitute Events of Default whatever the reason or cause
for any such Event of Default and whether it is voluntary or involuntary or is
effected by operation of law or pursuant to any judgment, decree or order of any
court or any order, rule or regulation of any administrative or governmental
body.
(b) Consequences of Events of Default.
---------------------------------
(i) If any Event of Default of the type described in paragraphs
4(a)(i) and 4(a)(ii) above has occurred and is continuing, the outstanding
principal amount of this Note shall automatically convert into Default
Warrants at the Conversion Price.
5. Amendment and Waiver. Except as otherwise expressly provided
--------------------
herein, the provisions of this Note may be amended and the Company may take any
action herein prohibited, or omit to perform any act herein required to be
performed by it, only if the Company has obtained the written consent of the
holder of this Note.
6. Cancellation. After all principal at any time owed on this Note
------------
has been paid in full or converted into Default Warrants, this Note shall be
surrendered to the Company for cancellation and shall not be reissued.
7. Payments. All payments to be made to the holder of this Note
--------
shall be made in the lawful money of the United States of America in immediately
available funds.
8. Place of Payment. Payments of principal shall be delivered to
----------------
the holder of this Note at such address as is specified by prior written notice
by the holder to the Company.
-3-
<PAGE>
9. Governing Law. All questions concerning the construction,
-------------
validity and interpretation of this Note will 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.
10. Waiver of Presentment, Demand and Dishonor. The Company hereby
------------------------------------------
waives presentment for payment, protest, demand, notice of protest, notice of
nonpayment and diligence with respect to this Note, and to the full extent
permitted by applicable law waives and renounces all rights to the benefits of
any statute of limitations or any moratorium, appraisement, exemption, or
homestead now provided or that hereafter may be provided by any federal or
applicable state statute, including but not limited to exemptions provided by or
allowed under the Federal Bankruptcy Code, both as to itself and as to all of
its property, whether real or personal, against the enforcement and collection
of the obligations evidenced by this Note and any and all extensions, renewals,
and modifications hereof.
11. Business Days. If any payment is due, or any time period for
-------------
giving notice or taking action expires, on a day which is a Saturday, Sunday or
legal holiday in the State of New York, the payment shall be due and payable on,
and the time period shall automatically be extended to, the next business day
immediately following such Saturday, Sunday or legal holiday.
* * * * *
-4-
<PAGE>
IN WITNESS WHEREOF, the Company has executed and delivered this
Promissory Note on the date first above written.
THE DERBY CYCLE CORPORATION
By: ______________________________
Its: ______________________________
<PAGE>
Exhibit 10.11
THIS NOTE WAS ORIGINALLY ISSUED ON FEBRUARY 15, 2000,
AND HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY COMPARABLE STATE SECURITIES
LAW.
THE DERBY CYCLE CORPORATION
PROMISSORY NOTE
February 15, 2000 $3,500,000
The Derby Cycle Corporation, a Delaware corporation (the "Company"),
-------
hereby promises to pay to the order of Perseus Capital, L.L.C. (the "Lender")
the principal amount of $3,500,000 in accordance with the provisions of this
Note.
1. Interest. This Note is interest-free.
--------
2. Payment of Principal on Note.
----------------------------
(a) Scheduled Principal Payment. The Company shall pay the principal
---------------------------
amount of $3,500,000 (or such lesser principal amount then outstanding) to the
holder of this Note on the earlier of August 1, 2000 or on the soonest date on
which the Company shall have $7 million in availability under its revolving
credit facility with Chase Manhattan plc as Arranger (the "Revolving Credit
Facility") (the "Maturity Date").
-------------
3. Conversion.
----------
(a) Conversion Procedure.
--------------------
(i) Upon the Event of Default, then all or any portion of the
outstanding principal amount of this Note shall, without the need for any
action on the part of the Company, automatically convert into warrants (the
"Default Warrants") to purchase such number of shares of the Company's
----------------
Class C Common Stock (the "Class C Common Stock") as shall be equal to the
--------------------
amount of unpaid principal then due to the Lender, divided by 1,000 (the
"Conversion Price").
------------------
(ii) Except as otherwise expressly provided herein, the
conversion of this Note shall be deemed to have been effected as of the
close of business on the date of the Event of Default. At such time as
such conversion has been effected, the rights of the holder of this Note as
such holder to the extent of the conversion shall cease, and the debt
represented by this Note shall be extinguished.
(iii) As soon as possible after a conversion has been effected,
the Company shall deliver to the converting holder a certificate
representing the number of shares of Class C Common Stock issuable by
reason of such conversion in such name or names and such
<PAGE>
denomination or denominations as the converting holder has specified. Upon
conversion of this Note, the Company shall take all such actions as are
necessary in order to insure that the Class C Common Stock issuable with
respect to such Default Warrants shall be validly issued, fully paid and
nonassessable.
(iv) The Company shall not close its books against the transfer
of Class C Common Stock issued or issuable upon exercise of the Default
Warrants in any manner which interferes with the timely conversion of this
Note. The Company shall assist and cooperate with any holder of this Note
required to make any governmental filings or obtain any governmental
approval prior to or in connection with the conversion of this Note
(including, without limitation, making any filings required to be made by
the Company).
(v) The Company shall at all times reserve and keep available
out of its authorized but unissued shares of Class C Common Stock, solely
for the purpose of issuance upon the exercise of the Default Warrants, such
number of shares of Class C Common Stock issuable upon the exercise of the
Default Warrants. All shares of Class C 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 Company shall
take all such actions as may be necessary to assure that all such shares of
Class C 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 C Common Stock may be listed
(except for official notice of issuance which shall be immediately
delivered by the Company upon each such issuance).
(b) Subdivision or Combination of Common Stock. If the Company at any
------------------------------------------
time subdivides (by any stock split, stock dividend or otherwise) one or more
classes of its outstanding shares of Class C Common Stock into a greater number
of shares, the Conversion Price in effect immediately prior to such subdivision
shall be proportionately reduced, and if the Company at any time combines (by
reverse stock split or otherwise) one or more classes of its outstanding shares
of Class C Common Stock into a smaller number of shares, the Conversion Price in
effect immediately prior to such combination shall be proportionately increased.
(c) Reorganization, Reclassification, Consolidation, Merger or Sale.
---------------------------------------------------------------
Any recapitalization, reorganization, reclassification, consolidation, merger,
sale of all or substantially all of the Company's assets or other transaction,
which in each case is effected in such a manner that holders of Class C Common
Stock are entitled to receive (either directly or upon subsequent liquidation)
stock, securities or assets with respect to or in exchange for Class C Common
Stock is referred to herein as an "Organic Change." Prior to the consummation
--------------
of any Organic Change, the Company shall make lawful and adequate provision to
insure that the holder of this Note shall thereafter have the right to acquire
and receive, in lieu of or addition to (as the case may be) shares of Class C
Common Stock immediately theretofore acquirable and receivable upon the exercise
of the Default Warrants, such shares of stock, securities or assets as may be
issued or payable with respect to or in exchange for the number of shares of
Class C Common Stock immediately theretofore acquirable and receivable upon
exercise of the Default Warrants had such Organic Change not taken place.
-2-
<PAGE>
4. Events of Default.
-----------------
(a) Definition. For purposes of this Note, an Event of Default shall
----------
be deemed to have occurred if
(i) the Company fails to pay when due and payable on the
Maturity Date the full amount of principal on this Note, and such failure
to pay is not cured within thirty business days after the occurrence
thereof; or
(ii) the Company makes an assignment for the benefit of
creditors or admits in writing its inability to pay its debts generally as
they become due; or an order, judgment or decree is entered adjudicating
the Company bankrupt or insolvent; or any order for relief with respect to
the Company is entered under the Federal Bankruptcy Code; or the Company
petitions or applies to any tribunal for the appointment of a custodian,
trustee, receiver or liquidator of the Company, or of any substantial part
of the assets of the Company, or commences any proceeding relating to the
Company under any bankruptcy reorganization, arrangement, insolvency,
readjustment of debt, dissolution or liquidation law of any jurisdiction;
or any such petition or application is filed, or any such proceeding is
commenced, against the Company and either (A) the Company by any act
indicates its approval thereof, consent thereto or acquiescence therein or
(B) such petition, application or proceeding is not dismissed within 60
days.
The foregoing shall constitute Events of Default whatever the reason or cause
for any such Event of Default and whether it is voluntary or involuntary or is
effected by operation of law or pursuant to any judgment, decree or order of any
court or any order, rule or regulation of any administrative or governmental
body.
(b) Consequences of Events of Default.
---------------------------------
(i) If any Event of Default of the type described in paragraphs
4(a)(i) and 4(a)(ii) above has occurred and is continuing, the outstanding
principal amount of this Note shall automatically convert into Default
Warrants at the Conversion Price.
5. Amendment and Waiver. Except as otherwise expressly provided
--------------------
herein, the provisions of this Note may be amended and the Company may take any
action herein prohibited, or omit to perform any act herein required to be
performed by it, only if the Company has obtained the written consent of the
holder of this Note.
6. Cancellation. After all principal at any time owed on this Note
------------
has been paid in full or converted into Default Warrants, this Note shall be
surrendered to the Company for cancellation and shall not be reissued.
7. Payments. All payments to be made to the holder of this Note
--------
shall be made in the lawful money of the United States of America in immediately
available funds.
8. Place of Payment. Payments of principal shall be delivered to
----------------
the holder of this Note at such address as is specified by prior written notice
by the holder to the Company.
-3-
<PAGE>
9. Governing Law. All questions concerning the construction,
-------------
validity and interpretation of this Note will 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.
10. Waiver of Presentment, Demand and Dishonor. The Company hereby
------------------------------------------
waives presentment for payment, protest, demand, notice of protest, notice of
nonpayment and diligence with respect to this Note, and to the full extent
permitted by applicable law waives and renounces all rights to the benefits of
any statute of limitations or any moratorium, appraisement, exemption, or
homestead now provided or that hereafter may be provided by any federal or
applicable state statute, including but not limited to exemptions provided by or
allowed under the Federal Bankruptcy Code, both as to itself and as to all of
its property, whether real or personal, against the enforcement and collection
of the obligations evidenced by this Note and any and all extensions, renewals,
and modifications hereof.
11. Business Days. If any payment is due, or any time period for
-------------
giving notice or taking action expires, on a day which is a Saturday, Sunday or
legal holiday in the State of New York, the payment shall be due and payable on,
and the time period shall automatically be extended to, the next business day
immediately following such Saturday, Sunday or legal holiday.
* * * * *
-4-
<PAGE>
IN WITNESS WHEREOF, the Company has executed and delivered this
Promissory Note on the date first above written.
THE DERBY CYCLE CORPORATION
By: ______________________________
Its: ______________________________
<PAGE>
Exhibit 10.12
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of January 20, 2000, between The Derby Cycle
Corporation, a Delaware corporation (the "Company"), and Carlos Tribino
("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, (or Newco, if applicable) shall employ
Executive, and Executive hereby accepts employment with the Company (or Newco,
if applicable), 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
General Manager of the Company's Internet business division (the "Division") and
shall have the normal duties, responsibilities and authority of the Division's
General Manager, 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. If the Division is spun-off into a wholly owned subsidiary ("Newco") of
the Company, Executive shall become the General Manager of Newco and the Company
and Executive agree that this Agreement (and the rights and obligations hereto)
shall be assigned to Newco.
(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 Division (or
Newco, if applicable). Executive shall perform his duties and responsibilities
to the Division (or Newco, if applicable) hereunder to the best of his abilities
in a diligent, trustworthy, businesslike and efficient 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
$150,000 per annum or such higher rate as the Company's President and 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 three 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.
-1-
<PAGE>
(b) For each calendar year during the Employment Period, beginning
with calendar year 1999, the Company (or Newco, if applicable) shall pay to the
Executive a bonus of thirty-five percent (35%) of the Base Salary which the
Executive earned during such calendar year if the Executive achieves his
personal targets and business goals, with such targets and goals to be
determined mutually by the Company's President and Executive at the outset of
each fiscal year. Executive's 1999 fiscal year bonus shall be pro-rated to
reflect the start of Executive's employment on August 23, 1999. If such personal
targets and goals are not met or are exceeded, then the Executive shall be
eligible for such lower bonus (if targets and goals are not met) or higher bonus
(if targets and goals are exceeded) as determined by the Company's President.
(c) The Company shall be entitled to offset any bonus received by
Executive against amounts due under the Promissory Note executed by the
Executive in the amount of $75,000, dated January 20, 2000.
(d) During the Employment Period, the Company (or Newco, if
applicable) 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 other incapacity (as determined by the Board
in its good faith judgment) or until the Company's President determines in its
good faith judgment that termination of Executive's employment is in the best
interests of the Company(or Newco, if applicable); provided that, Executive
hereby agrees not to resign from the Company (or Newco, if applicable) until and
unless the Executive provides three months prior written notice. The Company (or
Newco, if applicable) agrees not to terminate Executive's employment without
Cause until and unless it (or Newco, if applicable) provides three months prior
written notice to Executive.
(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
(or Newco, if applicable) may offset any amounts Executive owes the Company 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 a crime involving moral turpitude or the commission of
any other act or omission involving disloyalty, fraud or material dishonesty
with respect to the Division, the Company or any of its Subsidiaries or any of
their customers or suppliers, (ii) conduct tending to bring the Division, the
Company or any of its Subsidiaries into substantial public disgrace or
disrepute, (iii) repeated failure to perform material duties as reasonably
directed by the Company's President, (iv) gross negligence or willful misconduct
with respect to the Division, the Company or any of its
-2-
<PAGE>
Subsidiaries, (v) chronic drug or alcohol abuse (include, without limitation,
DWI charges or similar), or (vi) any other material breach of this Agreement by
the Executive if such breach is not cured within 30 days of Executive receiving
written notice of such breach; provided that Cause shall not be deemed to exist
unless (A) the Company provides to the Executive a written notice specifying in
detail the reasons for (and/or breaches leading to) the existence of Cause
within 30 days of becoming aware of the existence of such Cause and (B) to the
extent curable, the Executive has had 30 days after receipt of the Company's
written notice to cure the existence of any such Cause.
5. Confidential Information. Executive acknowledges that the
information, observations and data (including trade secrets) obtained by him
while employed by the Division (or Newco, if applicable) and the Company and its
subsidiaries concerning the business or affairs of the Division (or Newco, if
applicable), and the Company and its subsidiaries ("Confidential Information")
are the property of the Division (or Newco, if applicable) and the Company and
its 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 Company's President.
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 Division (or Newco, if applicable) and the Company and its
subsidiaries, he shall become familiar with the Division's (or Newco's, if
applicable) and the Company's and its subsidiaries' trade secrets and with other
Confidential Information concerning the Division (or Newco, if applicable) and
the Company and its subsidiaries and that his services shall be of special,
unique and extraordinary value to the Division (or Newco, if applicable) and 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, manage, control,
participate in, consult with, render services for, or in any manner engage in
any bicycle, bicycle accessory or Internet business competing with the Division
(or Newco, if applicable) or the Company or its subsidiaries, as such businesses
exist, within any geographical area in which the Division (or Newco, if
applicable) or the Company and 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 Division (or Newco, if applicable) or the Company and its subsidiary to
leave the employ of the Division (or Newco, if applicable) or the Company and
its subsidiaries, or in any way interfere with the relationship between the
Division (or Newco, if applicable) and the Company and its subsidiaries and any
employee thereof, (ii) hire any person who was an employee of the Division (or
Newco, if applicable) and the Company or its subsidiaries, 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
Division (or Newco, if applicable) or the Company and its subsidiaries to cease
doing business with the Division (or Newco, if applicable) and the Company and
its subsidiaries, or in any way interfere with the relationship between any such
customer, supplier, licensee or business relation and the Division (or Newco, if
applicable) or the Company and its subsidiaries (including, without
-3-
<PAGE>
limitation, making any negative or disparaging statements or communications
regarding the Division (or Newco, if applicable) or the Company and 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 and its subsidiaries 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) 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
(including, without limitation, all terms and conditions of the confirmation of
an offer between the parties hereto, dated on or about July 23, 1999 except for
the grant of an equity interest in Bikeshop.com referred to in the third to last
paragraph thereof), but excluding any breaches thereof by either party prior to
the date hereof.
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.
-4-
<PAGE>
10. 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.
* * * * *
-5-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 28,938
<SECURITIES> 0
<RECEIVABLES> 98,203
<ALLOWANCES> 5,036
<INVENTORY> 121,499
<CURRENT-ASSETS> 253,530
<PP&E> 105,518
<DEPRECIATION> 64,903
<TOTAL-ASSETS> 389,584
<CURRENT-LIABILITIES> 163,033
<BONDS> 176,410
49,141
0
<COMMON> 1
<OTHER-SE> (62,468)
<TOTAL-LIABILITY-AND-EQUITY> 389,584
<SALES> 540,427
<TOTAL-REVENUES> 540,427
<CGS> 409,490
<TOTAL-COSTS> 409,490
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 571
<INTEREST-EXPENSE> 26,281
<INCOME-PRETAX> (651)
<INCOME-TAX> 4,474
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<CHANGES> 0
<NET-INCOME> (5,157)
<EPS-BASIC> (131.03)
<EPS-DILUTED> (131.03)
</TABLE>
