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Iron Horse Creditors Allege Misconduct

Published April 1, 2009

BY NICOLE FORMOSA

HOLBROOK, NY—Three Asian suppliers, owed more than $5 million by bankrupt Iron Horse Bicycle Co., claim Iron Horse executives and its lender tried to sell the company to Dorel Industries below its market value without notifying them, court documents say.

The creditors also allege financial misconduct by Iron Horse principals Cliff Weidberg and Stew Barnett.

Those claims include writing off receivables owed Iron Horse by Randall Scott Cycles, a company owned by Weidberg’s son; putting their spouses on the company payroll in exchange for little or no work; and that Weidberg paid himself handsomely despite limited involvement in day-to-day operations.

The 18-page document, filed March 6 in the Eastern New York district of U.S. Bankruptcy Court, supports a request for the bankruptcy judge to examine accounting records and other Iron Horse documents from its executives and various third parties.

Attempts to reach Weidberg, Barnett and attorneys for Iron Horse and its lender, the CIT Group, for comment were unsuccessful.

Iron Horse had until March 25 to object to the allegations, and had yet to file a response with the court as the magazine went to press. (Any response will be posted online at www.bicycleretailer.com.)

Dorel Industries spokesman Rick Leckner confirmed that Dorel at one time had been in negotiations with Iron Horse’s secured creditors.

“There was considerable back and forth on terms and conditions, however no deal was ever reached,” Leckner said.

The motion came four days after the creditors— Fairly Bike Manufacturing Co., Ltd, of Tuchen City, Taiwan, Shenzhen Bo-An Bike Co., Ltd., of Shenzhen, China, and Acetrikes Bicycle Co., of Taicang City, Taiwan—filed an involuntary petition against Iron Horse for Chapter 7 bankruptcy protection to recoup their losses.

Iron Horse owes Fairly $1.44 million; Shenzhen Bo-An $2.76 million; and Acetrikes $942,500, according to the filing.

Attorneys for the creditors say that the CIT Group initiated a private sale of the company to Dorel Industries for $2 million on Feb. 23, 2008, in an attempt to dispose of its assets. Dorel, a publicly traded company, purchased Cannondale and Sugoi the same month. Dorel also owns Pacific Cycle, Mongoose, GT and Schwinn.

At the time CIT didn’t provide notice of the proposed sale to Iron Horse’s creditors, the filing said.When creditors discovered the pending sale, they asked CIT for a delay so they could determine whether another liquidation or sales model would provide a greater return on Iron Horse’s assets. CIT allegedly indicated it would proceed with the sale. That same day, March 2, the creditors filed their petition.

Under terms of the proposed sale, Dorel was to pay $1.2 million for Iron Horse’s inventory of complete bikes held in various U.S. warehouses—most of which had been manufactured by Fairly, Bo-An and Acetrikes—plus $800,000 for intellectual property, documents say.

“The inventory has a book value of more than $3 million and . . . could be sold . . . through third-party distributors for full book value or more in a matter of months of less,” according to the motion. Creditors claimed the inventory was to be transferred to and sold by Randall Scott Cycle, owned by Weidberg’s son, with a one-year, interest-free term.

As part of the proposed sale, Weidberg sought a side deal for a four- to five-year consulting job with Dorel worth as much as $1 million.

Dorel’s Leckner declined to discuss allegations in the motion. “Dorel walked away from the deal because we didn’t agree to various terms and conditions,” he said.

Iron Horse generated $20 million in revenue in 2008, about half of World Wide Cycle’s overall business. The other half came from bikes sold under licensing agreements with K2, Columbia and Jeep. On Feb. 1, nine terminated World Wide employees started East Coast Cycle Supply and were attempting to take over that side of the business, said Jill Janouskovec, marketing manager for East Coast Cycle Supply.

Weidberg has no connection to the new company, Janouskovec said.

Besides asking for an investigation into the attempted sale to Dorel, creditors also want to know about potential conflicts of interest, unchecked financial activity by past or current management, and whether there had been a diversion of cash and other assets.

Creditors allege that Iron Horse had previously hired outside accountants to investigate potential asset diversions by Barnett, Iron Horse’s former president and one-time co-owner. He left the company in September after 29 years.

Iron Horse’s troubles seemed to start around July 2007 when suspension guru Dave Weagle decided not to renew the license for his DW Link, a favorite among gravity riders. Last summer, Iron Horse pulled out of the specialty channel opting to sell its high-end bikes exclusively through Weidberg’s son’s online store.

The company then announced that it had acquired the license for Tony Ellsworth’s Instant Center Tracking (ICT) to replace the DW Link on 2010 models.

Ellsworth said the license isn’t currently in effect because of Iron Horse’s status. He doesn’t know what will happen with designs that were to become Iron Horse ICT bikes.

“Since they are ICT bikes, there will need to be ICT licenses in place to make and market those bikes anywhere in the world,” Ellsworth said.

Janouskovec said East Coast is in talks with Ellsworth to use ICT on its new bike line.

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