<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES ACT OF 1934
For Transition Period from __________ to __________
Commission File Number 0001067447
THE DERBY CYCLE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 31-1038896
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Daniel S. Lynch
The Derby Cycle Corporation
300 First Stamford Place (5th Floor)
Stamford, Connecticut 06902-6765
(Address of principal executive offices, including zip code)
Telephone: (203) 961 1666
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days, Yes (X) No.
The number of shares outstanding of each class of common stock, as of September
26, 1999 was:
Class A $0.01 par value 47,040
Class C $0.01 par value 23,460
<PAGE>
THE DERBY CYCLE CORPORATION
SEPTEMBER 1999 FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
PAGE
<TABLE>
<CAPTION>
PART I
<S> <C>
ITEM 1. FINANCIAL STATEMENTS............................................................................. 1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............ 15
PART II
ITEM 1. LEGAL PROCEEDINGS................................................................................ 26
ITEM 2. CHANGES IN SECURITIES............................................................................ 27
ITEM 3. EXHIBITS AND REPORTS ON FORM 8-K................................................................. 28
</TABLE>
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION> PAGE
----
<S> <C>
Consolidated Balance Sheets as of December 31, 1998 and September 26, 1999 (unaudited)............. 2
Unaudited Consolidated Statements of Income for the quarters and nine months ended September 27, 3
1998 and September 26, 1999........................................................................
Unaudited Consolidated Statement of Shareholders' (Deficit) for the nine months ended September 4
26, 1999...........................................................................................
Unaudited Consolidated Statements of Cash Flows for the nine months ended September 27, 1998 and 5
September 26, 1999.................................................................................
Notes to Consolidated Financial Statements......................................................... 7
</TABLE>
1
<PAGE>
THE DERBY CYCLE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
Dec 31, Sep 26,
Assets 1998 1999
unaudited
--------- ---------
Current assets:
<S> <C> <C>
Cash and cash equivalents............................................................. $ 17,453 $ 11,726
Receivables, net...................................................................... 66,801 70,390
Inventories........................................................................... 105,264 102,602
Other current assets.................................................................. 9,586 8,758
-------- --------
Total current assets............................................................... 199,104 193,476
-------- --------
Property, plant, and equipment, net..................................................... 49,514 44,362
Intangibles, net........................................................................ 20,600 38,211
Other assets............................................................................ - 3,025
Prepaid pension assets.................................................................. 56,072 56,457
-------- --------
Total assets....................................................................... $325,290 $335,531
======== ========
Liabilities and Shareholders' (Deficit)
Current liabilities:
<S> <C> <C>
Accounts payable...................................................................... $ 34,394 $ 35,328
Accrued liabilities................................................................... 20,161 23,496
Income taxes payable.................................................................. 8,452 3,089
Short-term borrowings................................................................. 60,831 38,017
Other current liabilities............................................................. 2,103 8,536
--------- ---------
Total current liabilities.......................................................... 125,941 108,466
--------- ---------
Other liabilities:
Long-term debt........................................................................ 165,870 180,109
Excess of assets acquired over cost of acquisitions................................... 11,120 10,507
Deferred income taxes................................................................. 18,896 15,199
Other liabilities..................................................................... 4,224 10,819
--------- ---------
Total liabilities.................................................................. 326,051 325,100
--------- ---------
Minority interest....................................................................... 627 640
Commitments and contingencies:
Preferred stock with redemption rights, $0.01 par value, 25,000 shares authorized,
issued, and outstanding of series a and 3,000 shares authorized, issued, and
outstanding of series B................................................................ 45,432 47,819
Stock rights............................................................................ 23,300 23,300
Shareholders' equity(deficit):
Class A common stock, $0.01 par value, 200,000 shares authorized, 44,200 & 47,040
shares issued & outstanding as of December 31, 1998 & September 26, 1999
respectively......................................................................... 1 1
Class B common stock, $0.01 par value, 15,000 shares authorized, no shares issued &
outstanding as of December 31, 1998 & September 26, 1999............................. - -
Class C common stock, $0.01 par value, 30,000 shares authorized, 23,460 issued &
outstanding as of September 26, 1999................................................. - -
Additional paid-in capital............................................................ 22,499 48,799
Accumulated deficit................................................................... (87,346) (102,738)
Accumulated other comprehensive income................................................ (5,274) (7,390)
--------- ---------
Total shareholders' (deficit)...................................................... (70,120) (61,328)
Total liabilities and shareholders' (deficit)...................................... $325,290 $ 335,531
========= =========
</TABLE>
2
<PAGE>
THE DERBY CYCLE CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per unit and unit data)
<TABLE>
<CAPTION>
Quarter ended Nine months ended
--------------------------- -------------------------
Sep 27, Sep 26, Sep 27, Sep 26,
1998 1999 1998 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues................................................ $ 86,369 $104,454 $ 358,653 $ 407,972
Cost of sales............................................... (67,707) (81,511) (269,996) (310,897)
--------- -------- --------- ---------
Gross profit........................................... 18,662 22,943 88,657 97,075
Selling, general, and administrative expenses............... (18,024) (24,404) (65,983) (79,766)
Recapitalization costs.................................... (1) - (5,672) -
Restructuring charge...................................... - (124) - (8,585)
--------- -------- --------- ---------
Operating income (loss)................................ 637 (1,585) 17,002 8,724
Other income (expense):
Interest expense.......................................... (5,595) (6,419) (11,501) (19,657)
Interest income........................................... 175 137 757 380
Other expense, net........................................ (283) - (1,334) -
--------- -------- --------- ---------
Income (loss) before income taxes, minority interest
and extraordinary item......................... (5,066) (7,867) 4,924 (10,553)
Provision for income taxes.................................. (20) 457 (4,192) 587
Minority interest........................................... (1) 6 (17) (18)
--------- -------- --------- ---------
Income (loss) before extraordinary item................ (5,087) (7,404) 715 (9,984)
Extraordinary item - loss on early extinguishment of debt
(net of tax).............................................. - - (348) -
-------- --------- --------- ---------
Net income (loss)...................................... (5,087) (7,404) 367 (9,984)
Dividends on preferred stock................................ (1,944) (1,323) (2,905) (2,387)
-------- --------- --------- ---------
Net (loss) applicable to common stockholders........... $ (7,031) $ (8,727) $ (2,538) $ (12,371)
Net (loss) applicable to common stockholders per share...... $(159.07) $(123.89) $ (65.91) $ (185.74)
======== ======== ========= =========
Extraordinary item applicable to commmon
stockholders per share..................................... $ - $ - $ (9.04) $ -
======== ======== ======== =========
Weighted average number of shares of common stock
outstanding.............................................. 44,200 70,442 38,508 66,604
</TABLE>
3
<PAGE>
THE DERBY CYCLE CORPORATION
UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT)
(Dollars in thousands)
<TABLE>
<CAPTION>
Common Capital Additional Accumulated Accumulated Total
Stock Investment Paid-In Deficit Other
capital Comprehensive
Income
----- ----------- ----------- ----------- -------------- -----
<S> <C> <C> <C> <C> <C> <C>
January 1, 1999.................. $ 1 $ - $22,499 $ (87,346) $(5,274) $(70,120)
Comprehensive income-
Net income..................... - - - (12,371) - (12,371)
Net gain (loss) on
derivative
instruments................ - - - - (493) (493)
Translation adjustments........ - - - - (1,623) (1,623)
----------- --------- ------ --------- ------- --------
Total comprehensive income....... - - - (12,371) (2,116) (14,487)
Issue of common stock.......... - - 26,300 - - 26,300
Dividend on common stock....... - - - (3,021) - (3,021)
----------- --------- ------ --------- ------- --------
September 26, 1999............... $ 1 $ - $48,799 $(102,738) $(7,390) $(61,328)
=========== ========= ======= ========= ======= ========
</TABLE>
4
<PAGE>
THE DERBY CYCLE CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended
-------------------------
Sep 27, Sep 26,
1998 1999
---------- -------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss)................................................................... $ 367 $ (9,984)
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation..................................................................... 7,308 7,128
Amortization of intangibles, goodwill and investment grants...................... (382) 48
Amortization of deferred financing costs......................................... 906 1,415
Extraordinary loss on early extinguishment of debt............................... 348 -
Minority interest................................................................ 17 18
Loss on swaps.................................................................... 1,334 -
Net periodic pension income...................................................... (3,714) (3,891)
Recapitalization costs........................................................... 5,672 -
Net changes in operating assets and liabilities, net of acquisitions-
(Increase) decrease in receivables............................................... 8,934 5,296
(Increase) decrease in inventories............................................... (7,024) 15,755
(Increase) decrease in other current assets...................................... 1,355 709
Increase (decrease) in accounts payable.......................................... (11,452) (4,159)
Increase (decrease) in accrued liabilities....................................... 140 3,357
Increase (decrease) in income taxes payable...................................... 1,298 (5,049)
Increase (decrease) in other current liabilities................................. 5,456 6,423
Increase (decrease) in deferred income taxes..................................... 931 (2,818)
Increase (decrease) in other liabilities......................................... (431) 4,997
-------- ----------
Net cash provided by operating activities..................................... 11,063 19,245
-------- ----------
Cash flows from investing activities:
Purchases of property, plant, and equipment......................................... (4,909) (4,499)
Proceeds of property, plant, & equipment dispositions............................... 530 102
Cash paid for acquisitions, net of cash acquired.................................... - (43,950)
Trade investment.................................................................... - (25)
Purchase of minority interest....................................................... (1,933) (246)
-------- ---------
Net cash used in investing activities......................................... $ (6,312) $(48,618)
======== ========
</TABLE>
5
<PAGE>
THE DERBY CYCLE CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------
SEP 27, SEP 26,
1998 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock issue........................................................... $ 63,000 $ 26,300
Redemption of shares in subsidiaries................................................ (146,159) -
Repayment of Series A, B and C Senior Notes, net.................................... (53,334) -
Proceeds from Senior Note issue..................................................... 161,867 -
Proceeds from Subordinated Note issue............................................... - 20,000
Short term borrowings, net, prior to Recapitalization............................... 45,894 -
Repayment of short term borrowings at Recapitalization.............................. (82,721) -
Proceeds from short term borrowings at Recapitalization............................. 84,914 -
Short term borrowings, net, post Recapitalization................................... (49,844) (22,821)
Repayment of term loan.............................................................. (9,057) -
Deferred financing costs............................................................ (14,578) (273)
Recapitalization costs.............................................................. (5,672) -
Contributions made to pension plans................................................. (1,247) (62)
Net contribution by DICSA........................................................... 1,600 -
Secured promissory notes issued..................................................... - (3,000)
--------- ---------
Net cash (used in) provided by financing activities.......................... (5,337) 20,144
EFFECT OF EXCHANGE RATE CHANGES....................................................... (1,728) 3,502
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS............................................. (2,314) (5,727)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........................................ 15,426 17,453
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.............................................. $ 13,112 $ 11,726
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid....................................................................... $ 4,831 $ 11,439
Income taxes paid................................................................... $ 1,963 $ 7,280
========= =========
</TABLE>
6
<PAGE>
THE DERBY CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF THE BUSINESS AND BASIS OF PRESENTATIONS
The consolidated financial statements for the quarter and nine months ended
September 27, 1998 and September 26, 1999 together with the balance sheet as of
September 26, 1999 included herein have not been audited by independent public
accountants, but in the opinion of The Derby Cycle Corporation (the "Company"),
all adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position at September 26, 1999 and the results of
operations and the cash flows for the periods presented herein have been made.
The results of operations for the quarter and nine months ended September 26,
1999 are not indicative of the operating results for the full fiscal year due to
the seasonal nature of the business.
The consolidated financial statements included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Although the Company believes that the disclosures made are adequate to make the
information not misleading, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
regulations. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-K for the year ended December 31, 1998.
The combined financial statements have been prepared to reflect the financial
position and results of operations of the bicycle and bicycle component
businesses of Derby International Corporation S.A. ("DICSA"), a Luxembourg
holding company through May 14, 1998. Up to that date DICSA owned shares, either
directly or indirectly, in a number of bicycle and bicycle component companies
worldwide that predominantly operate as stand-alone entities. Each of the
companies manufactures, assembles and/or distributes bicycles and bicycle
components. These bicycle and bicycle component companies, collectively referred
to as the "The Derby Bicycle Group", have significant operations in The
Netherlands ("Gazelle"), the United Kingdom ("Raleigh UK" and "Sturmey Archer"),
Canada ("Raleigh Canada"), Germany ("Derby Germany"), South Africa ("Probike")
and the United States (the "Derby USA" division of the Company). The Derby
Bicycle Group owns or licenses many of the most recognized brands in the bicycle
industry, including leading global brands such as Raleigh, Diamond Back, Nishiki
(for USA only) and Univega, and leading national brands such as Gazelle in The
Netherlands and Kalkhoff, Musing, Winora and Staiger in Germany.
Effective May 14, 1998, DICSA reorganized its businesses in connection with a
recapitalization agreement (the "Recapitalization") so that each of its bicycle
and bicycle component companies are owned directly or indirectly by The Derby
Cycle Corporation, a Delaware corporation with operations in the United States.
The accompanying consolidated financial statements have been prepared to reflect
the financial position and results of operations of the Company and its
subsidiaries from May 14, 1998 through September 26, 1999. Accordingly, the
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States and are
presented in United States dollars.
References to the "Company" throughout this document mean The Derby Bicycle
Group through May 14, 1998 and The Derby Cycle Corporation and its subsidiaries
from May 14, 1998 through September 26, 1999.
The accompanying consolidated financial statements, herein referred to as the
consolidated financial statements, have been prepared as if the Company had been
in existence for all periods presented. DICSA's historical basis in the assets
and liabilities of the Company has been carried over. All material inter-company
transactions and balances between entities included in these combined financial
7
<PAGE>
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. Management
believes this allocation is reasonable and represents the expenses as if the
Company had been a stand-alone operation.
For the purposes of calculating the net loss applicable to common shareholders,
the common shares outstanding used assumes that the conversion of pre-existing
stock at the time of the Recapitalization is applicable to earlier years.
2. DERIVATIVE FINANCIAL INSTRUMENTS
ADOPTION OF SFAS 133
The Company elected to adopt SFAS 133 as of October 1, 1998.
For the nine months ended September 27, 1998 income and expense related to the
marking-to-market of the Company's derivative instruments are included in the
statement of income: a profit of $160,000 on the marking-to-market of forward
foreign exchange contracts, taken out to hedge the purchased cost of foreign
materials and components, is shown within cost of sales; a loss of $1,334,000
on the marking-to-market of interest rate caps, currency basket options and
swaps entered into to hedge the payment of interest, is shown as other
(expense). For the nine months ended September 26, 1999 income and expense
related to the marking-to-market of derivative instruments subsequent to the
adoption of SFAS 133 are included in accumulated other comprehensive income: a
net loss of $714,000 on the marking-to-market of the forward foreign exchange
contracts, the expiration of one of the currency basket options and a gain of
$307,000 on the marking-to-market of the remaining currency options and interest
rate cap. The net gain of $584,000 in accumulated other comprehensive income at
September 26, 1999 will be released to income in the years 1999 to 2001 as the
related sales, purchases or interest expense occurs.
3. LONG TERM DEBT
On February 4, 1999 the Company issued $20 million principal amount in a
subordinated note (the "Subordinated Note") to Vencap Holding (1992) PTE Ltd.
which matures in 2010 and bears interest at 19% compounded daily. As of December
31, 1998, and September 26, 1999, long-term debt consists of the following (in
thousands):
<TABLE>
<CAPTION>
DEC 31, SEP 26,
1998 1999
UN-AUDITED
--------- -----------
<S> <C> <C>
10% $100,000,000 Senior Notes......................................................... $100,000 $100,000
9 3/8% DM110,000,000 Senior Notes..................................................... 65,870 60,109
19% $20,000,000 Subordinated Note..................................................... - 20,000
-------- ---------
Long-term debt...................................................................... $165,870 $180,109
</TABLE>
Management believes that there was no material difference between the fair value
and book value of the 10 percent $100,000,000 and the 9 3/8 percent
DM110,000,000 Senior Notes as of December 31, 1998 or the Subordinated Note as
of September 26, 1999. The mid-market price of each 10 percent $1,000 Senior
Note was $660 and each 9 3/8 percent DM1,000 Senior Note was DM675 as of
September 26, 1999.
4. CONTINGENCIES
INTERNATIONAL OPERATIONS; DEPENDENCE ON FOREIGN SUPPLIERS AND SALES
A significant portion of the Company's operations are conducted in foreign
countries and are subject to the risks that are inherent in operating abroad,
including, without limitation, the risks associated with
8
<PAGE>
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.
COMMON STOCK AND 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 nine months ended September 26, 1999 the Company issued 2,840 Class A
and 710 Class C common shares to executives of the Company for $1,000 per share
under the management stock plan.
The issue of shares to executives of the Company was partly financed by the
issue of secured promissory notes, shown within other assets in the balance
sheet. 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):
9
<PAGE>
<TABLE>
<CAPTION>
DERBY
INTERNAT-
THAYER IONAL
CAPITAL PERSEUS CORPOR
NUMBER OF PARTNERS CAPITAL -ATION MANAGE-
SHARES L.L.C. L.L.C. 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.................... 6,914 - - - 6,914
Series B..................... 3,000 - - 3,000 - 3,000
Accrued dividend 9.75% pa.... - - 405 - 405
-------- -------- --------- -------- ---------
$ 44,414 $ - $ 3,405 $ - $ 47,819
======== ======== ========= ======== =========
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............... 25,340 12,500 10,000 - 2,840 25,340
Class C common............... 23,460 18,950 3,800 - 710 23,460
-------- -------- --------- -------- ---------
$ 31,450 $ 13,800 $ - $ 3,550 $ 48,800
======== ======== ========= ======== =========
RETAINED EQUITY
-------- -------- --------- -------- ---------
Class A common............... 21,700 $ - $ - $ 21,700 $ - $ 21,700
======== ======== ========= ======== =========
</TABLE>
5. ACQUISITIONS
On February 4, 1999, the Company acquired the assets (and assumed certain
liabilities) of the Diamond Back Group for $43,950,000 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.
10
<PAGE>
The acquisition was accounted for under the purchase method with the purchase
price allocated as follows (in thousands):
<TABLE>
<S> <C>
Accounts receivable......................................... $12,173
Inventories................................................. 19,086
Other current assets........................................ 773
Property, plant, and equipment.............................. 613
Intangibles................................................. 4,750
Goodwill.................................................... 14,866
Liabilities assumed......................................... (8,311)
-------
Purchase price............................................ $43,950
=======
</TABLE>
The intangibles acquired comprise the intellectual property rights formerly
owned by the Diamond Back Group including the Diamond Back and Avenir
trademarks. In line with normal group policy intellectual property will be
amortized over a period of 15 years.
The goodwill arising on the acquisition of $14,866,000 will be amortized over 40
years.
The results of the Diamond Back Group are included in the consolidated financial
statements from February 4, 1999. A pro forma consolidated income statement
incorporating the results of the Diamond Back Group on the basis that the group
was acquired on January 1, 1998 is as follows.
THE DERBY CYCLE CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per unit and unit data)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
------------------------- ------------------------
SEP 27, SEP 26, SEP 27, SEP 26,
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET REVENUES................................................ $103,256 $104,454 $408,095 $412,233
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS......... (7,618) (8,727) 970 (13,362)
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS PER
SHARE...................................................... $(113.79) $(123.89) $ 15.83 $(192.08)
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK
OUTSTANDING................................................ 66,950 70,442 61,258 69,564
======== ======== ======== ========
</TABLE>
11
<PAGE>
6. SEGMENTAL INFORMATION: REPORTABLE BUSINESS SEGMENTS
The Company manages its business in seven reportable segments as shown in the
following tables. Consolidation adjustments, certain small operating companies,
non operating companies and the headquarters are included in "Other companies".
The reportable segments are managed separately because each business has
differing customer requirements, either as a result of the regional environment
of the country or differences in products and services offered. A summary of
revenues and operating income categorized by business segment is as follows (in
thousands):
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
--------------------------- ----------------------------
SEP 27, 1998 SEP 26, 1999 SEP 27, 1998 SEP 26, 1999
UNAUDITED UNAUDITED UNAUDITED UNAUDITED
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET REVENUES:
Raleigh UK............................................... $ 18,834 $ 21,137 $ 58,597 $ 55,723
Gazelle, The Netherlands................................. 15,809 20,055 82,259 94,518
Derby Germany............................................ 20,496 24,836 105,413 120,061
Derby USA................................................ 17,021 25,902 49,548 84,940
Raleigh Canada........................................... 1,931 1,417 26,540 19,503
Sturmey Archer, UK and The Netherlands................... 5,349 4,395 19,406 16,162
Probike, South Africa.................................... 3,657 3,479 11,211 10,413
Other companies.......................................... 3,272 3,233 5,679 6,652
-------- --------- --------- ---------
Total net revenues.................................... $ 86,369 $ 104,454 $ 358,653 $ 407,972
======== ========= ========= =========
OPERATING INCOME:
Raleigh UK............................................... $ 1,135 $ 1,676 $ 2,380 $ (183)
Gazelle, The Netherlands................................. 879 1,511 11,265 12,795
Derby Germany............................................ (3,687) (3,286) 2,740 3,385
Derby USA................................................ 807 (64) 689 660
Raleigh Canada........................................... (193) (140) 2,077 1,572
Sturmey Archer, UK and The Netherlands................... 103 (65) 830 362
Probike, South Africa.................................... 265 149 511 392
Other companies.......................................... 1,329 (1,242) 2,182 (1,674)
-------- --------- --------- ---------
Underlying operating income (loss).................... $ 638 $ (1,461) $ 22,674 $ 17,309
Recapitalization costs............................. (1) - (5,672) -
Restructuring charge............................... - (124) - (8,585)
-------- --------- --------- ---------
Total operating income (loss)......................... $ 637 $ (1,585) $ 17,002 $ 8,724
======== ========= ========= =========
</TABLE>
12
<PAGE>
7. LYON INVESTMENTS B.V. SUMMARIZED FINANCIAL INFORMATION
Lyon Investments B.V. ("Lyon"), a Dutch company, is a wholly owned subsidiary of
the Company which is a co-issuer of $20,250,000 of the $100,000,000 of 10
percent Senior Notes and all of the DM110,000,000 of 9 3/8 percent Senior
Notes. As co-issuers, Lyon and the Company are joint and severally liable with
respect to the Senior Notes. The following summarized financial information sets
forth the combined financial position and results of operations of Lyon,
together with its subsidiaries, Derby Nederland B.V. and Engelbert Wiener Bike
Parts GmbH. Derby Nederland B.V. is a holding company owning 100 percent of
Koniklijke Gazelle B.V., Sturmey Archer Europa B.V. and Raleigh B.V.
LYON INVESTMENTS B.V.
SUMMARIZED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
DEC 31, 1998 SEP 26, 1999
UNAUDITED
------------- ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS :
Cash and cash equivalents........................................................... $ 8,470 $ 6,861
Receivables, net.................................................................... 15,875 14,025
Inventories......................................................................... 26,433 20,875
Loans to internal group companies................................................... 137,768 118,011
Other current assets................................................................ 3,002 5,020
---------- ----------
Total current assets............................................................. 191,548 164,792
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, NET.................................................... 11,552 9,844
INTANGIBLES, NET...................................................................... 2,715 2,281
PREPAID PENSION ASSET................................................................. 16,920 17,112
---------- ----------
Total assets..................................................................... $ 222,735 $ 194,029
========== ==========
LIABILITIES AND SHAREHOLDER'S (DEFICIT)
CURRENT LIABILITIES :
Loans from internal group companies................................................. $ 105,273 $ 90,114
Short-term borrowings............................................................... 43,979 27,637
Other current liabilities........................................................... 24,015 24,631
---------- ----------
Total current liabilities........................................................ 173,267 142,382
---------- ----------
OTHER LIABILITIES :
10% $20,250,000 Senior Notes........................................................ 20,250 20,250
9 3/8% DM110,000,000 Senior Notes................................................... 65,870 60,109
Other liabilities................................................................... 5,971 5,989
---------- ----------
Total liabilities................................................................ 265,358 228,730
---------- ----------
SHAREHOLDER'S (DEFICIT)............................................................... (42,623) (34,701)
---------- ----------
Total liabilities and shareholder's (deficit).................................... $ 222,735 $ 194,029
========== ==========
</TABLE>
13
<PAGE>
LYON INVESTMENTS B.V.
UNAUDITED SUMMARIZED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
SEP 27, SEP 26, SEP 27, SEP 26,
1998 1999 1998 1999
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
NET REVENUES........................................... $ 22,567 $ 29,302 $104,570 $120,546
COST OF SALES.......................................... (18,137) (23,634) (79,328) (91,399)
-------- -------- -------- --------
Gross profit...................................... 4,430 5,668 25,242 29,147
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES.......... (2,844) (4,292) (12,863) (15,822)
RESTRUCTURING CHARGE................................... - - - (249)
-------- -------- -------- --------
Operating income.................................. 1,586 1,376 12,379 13,076
OTHER INCOME (EXPENSE)
Interest expense..................................... (2,484) (3,473) (5,526) (11,326)
Interest income...................................... 489 1,704 766 5,529
Other income net..................................... - - 898 -
-------- -------- -------- --------
Income (loss) before income taxes................. (409) (393) 8,517 7,279
PROVISION FOR INCOME TAXES............................. 427 116 (2,619) (2,517)
-------- -------- -------- --------
Net income (loss)................................. $ 18 $ (277) $ 5,898 $ 4,762
======== ======== ======== ========
</TABLE>
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is a world-leading designer, manufacturer and marketer of bicycles.
The Company holds the leading market share in the United Kingdom, The
Netherlands, Canada and Ireland, holds the leading market share in the adult
bicycle market in Germany and is also the third largest supplier to independent
bicycle dealers ("IBDs") in the United States. Competing primarily in the
medium-to premium-priced market, the Company owns or licenses many of the most
recognized brand names in the bicycle industry, including leading global brands
such as Raleigh, Diamond Back, Nishiki and Univega, and leading regional brands
such as Gazelle in The Netherlands and Kalkhoff, Musing, Winora and Staiger in
Germany. The Company designs, manufactures and markets a wide range of bicycles
in all major product categories: (i) all-terrain or mountain bicycles ("MTBs"),
(ii) city bicycles, also called touring or upright bicycles, (iii) hybrid
bicycles, also called comfort or cross bicycles, (iv) juvenile bicycles,
including bicycle motocross ("BMX") bicycles, and (v) race/road bicycles. The
Company distributes branded bicycles through extensive local market networks of
IBDs as well as through national retailers, and distributes private label
bicycles through mass merchandisers and specialty stores.
Through a series of acquisitions and plant expansions, the Company has created a
global bicycle business distinguished by its leading market positions, low cost
production, extensive distribution network and reputation for high quality.
Organized in 1986 for the purpose of acquiring the Raleigh, Gazelle and Sturmey
Archer businesses from TI Group plc, the Company expanded into the United States
and Germany in 1988. Since then, the Company has acquired additional well-known
brands and leveraged its existing manufacturing plants and component sourcing
operations to lower unit costs for its acquired businesses.
On February 4, 1999, the Company acquired the assets (and assumed certain
liabilities) of the Diamond Back Group for approximately $43.95 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.
Western States and Bejka had worldwide revenues of approximately $62.9 million
and $3.1 million, respectively, in 1998. Diamond Back was essentially a holding
company for the company's intellectual property and did not generate material
revenues. The Company financed the acquisition of the Diamond Back Group by
issuing $20 million principal amount in a Subordinated Note to Vencap Holding
(1992) PTE Ltd. and $22.75 million in Class C common stock to DC Cycle, L.L.C.
and Perseus Cycle L.L.C. The Subordinated Note matures in 2010 and bears
interest at an annual rate of 19% compounded daily.
Since 1990, the Company has invested in labor-saving flexible production
machinery and restructured the workforces at its manufacturing locations. From
1992 to 1993, taking advantage of substantial incentives from the German
government, the Company built a factory in Rostock, in the former German
Democratic Republic.
The Company's operations are concentrated in the United Kingdom, The
Netherlands, Germany, the United States and Canada, with manufacturing
operations in these countries, each led by experienced local management.
The Company maintains marketing or purchasing operations in five additional
countries. Each local operation manages national distribution channels, dealer
service and working capital and benefits from shared product design and
manufacturing technologies as well as from economies of scale generated by the
Company's aggregate purchasing power. Consequently, each local operation has the
flexibility to respond to shifts in local market demand and product preference.
15
<PAGE>
In 1998, 55% of the Company's net revenues were denominated in currencies within
the European Monetary System, 18% were denominated in pounds sterling, 15% were
denominated in US dollars and 12% were denominated in other currencies. The
Company reduces its currency exposure by maintaining operations in the major
markets in which it sells its products. The Company further mitigates foreign
exchange risk by purchasing currency options and entering into forward purchase
contracts. The acquisition of the Diamond Back Group increases the proportion
of the Company's net revenues denominated in US dollars to approximately 25%.
RESULTS OF OPERATIONS
All comparisons in the following discussion and analysis are against the
corresponding quarter and nine month period ended September 27, 1998, unless
otherwise stated.
<TABLE>
<CAPTION>
UNITS SOLD: QUARTER ENDED NINE MONTHS ENDED
----------------------- ------------------------
THOUSANDS OF BICYCLES SEP 27, SEP 26, SEP 27, SEP 26,
1998 1999 1998 1999
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Raleigh UK............................................... 104 128 317 323
Gazelle.................................................. 43 57 229 257
Derby Germany............................................ 88 102 442 480
Derby USA................................................ 73 121 200 367
Raleigh Canada........................................... 19 15 286 220
Probike.................................................. 36 34 92 93
Other companies and group transactions................... 1 5 2 10
---- ---- ------ ------
Total units sold....................................... 364 462 1,568 1,750
==== ==== ====== ======
</TABLE>
UNITS SOLD. Units sold increased by 98 thousand units and 182 thousand units for
the quarter and nine months ended September 1999 including Diamond Back sales of
58 thousand units and 184 thousand units in those periods. Raleigh Canada's
private label sales fell by 70 thousand units in the nine months ended September
1999 as mass merchants started the year over-stocked and have experienced weak
bicycle retail sales. Particularly strong growth was seen at Gazelle and Derby
Germany in the IBD sector following successful product range launches and
glorious summer weather, leading to a combined increase in sales volumes in
those markets of 21% and 10% for the quarter and nine months ended September
1999. Sales were regained at Raleigh UK as the lessons were learned from last
year, producing a 23% volume increase for the quarter, bringing sales for the
nine months ended September 1999 2% above year ago.
<TABLE>
<CAPTION>
NET REVENUES: QUARTER ENDED NINE MONTHS ENDED
------------------------ -------------------------
$ MILLIONS SEP 27, SEP 26, SEP 27, SEP 26,
1998 1999 1998 1999
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Raleigh UK............................................... $18.8 $ 21.1 $ 58.6 $ 55.7
Gazelle.................................................. 15.8 20.1 82.3 94.5
Derby Germany............................................ 20.5 24.8 105.4 120.1
Derby USA................................................ 17.0 25.9 49.5 84.9
Raleigh Canada........................................... 1.9 1.4 26.5 19.5
Sturmey Archer........................................... 5.3 4.4 19.4 16.2
Probike.................................................. 3.7 3.5 11.2 10.4
Other companies and group transactions................... 3.4 3.3 5.8 6.7
----- ------ ------ ------
Total net revenues..................................... $86.4 $104.5 $358.7 $408.0
===== ====== ====== ======
</TABLE>
NET REVENUES. Net revenues increased by $18.1 million and $49.3 million to
$104.5 million and $408.0 million for the quarter and nine months ended
September 1999 in line with the increase in units sold and increases of $10.3
million in revenues from the sale of parts and accessories and $2.7 million
16
<PAGE>
from fitness equipment in the nine months ended September 1999 at Diamond Back.
Sturmey Archer's revenues for the nine months ended September 1999 dropped by
$1.7 million (27%) in the engineering components business following the loss of
one major customer during the first quarter of 1998 and other business since.
Sturmey Archer's revenues from the sale of bicycle hubs dropped by $0.9 million
(11%) in the nine months ended September 1999 as competition increased in the
European hub market and the re-designed seven-speed hub was not introduced in
time for the introduction of 1999 bicycle models at the autumn 1998 trade shows.
Revenues at Probike for the nine months ended September 1999 in South African
Rand increased over year ago at a faster rate than inflation, but showed a
decrease upon translation into US dollars. Overall the hardening US dollar
reduced consolidated revenues by 1.5% in the nine months ended September 1999
compared with a year ago.
GROSS PROFIT. Gross profit for the quarter and nine months ended September 1999
increased by $4.3 million, and $8.4 million. The margin erosion experienced in
the first half of 1999 was reversed during the quarter, with a gross margin 0.4
percentage points above the same quarter in 1998, and putting gross margin for
the nine months up to within one percentage point of the same period in 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $6.4 million and $13.8 million to $24.4
million and $79.8 million for the quarter and nine months ended September 1999.
Expenses at Diamond Back of $4.2 million and $11.5 million for the quarter and
eight months ended September 1999 accounted for most of the increase. The
currency gains of $2.0 million which were realized in September 1998 reduced
selling, general and administrative expenses and account for most of the
balance.
RESTRUCTURING CHARGE. In order to reduce product costs and selling, general and
administrative expenses and maximize the synergy benefits from the Diamond Back
acquisition, the Company has started restructuring its businesses in UK and the
Raleigh distribution operations in Germany, The Netherlands, Belgium and
Ireland, as well as reviewing the logistics of Raleigh and Diamond Back
distribution in the USA and establishing its new headquarters, estimated to cost
$9.6 million in aggregate.
Raleigh UK intends to cease manufacturing steel bicycle frames altogether by the
end of 1999 due to increased consumer demand for aluminum frames. Steel frames
manufactured by the company currently account for approximately 50% of all
frames sold by the company, with the balance being fabricated mostly from
aluminum and imported from Asia. The company has granted an option to a property
developer for the sale of the factory site that will be released. The company
intends to use the proceeds from the sale of the site either to pay expenses
associated with the restructuring or to pay down the Company's revolving credit
facility, or a combination thereof. Other components of the restructuring at
Raleigh UK include streamlining the company's product development and marketing
functions.
Management of the Raleigh distribution operations in Germany, The Netherlands
and Belgium, previously run on a stand-alone basis, has been combined with the
Gazelle and Derby Germany operations, although the results are still included in
Other companies in this discussion for ease of comparison. The Raleigh Ireland
warehouse has been closed and distribution outsourced, leaving only a sales and
marketing organization in Ireland.
In July 1999 the Company restructured its corporate management and established
its headquarters in Stamford, CT to organize the finance and marketing functions
of the Company on a global basis.
These restructuring steps are projected to reduce on-going product costs and
selling expenses by $2 million in the current year and by $5 million in 2000.
Further restructuring costs of some $1.0 million are planned for the final
quarter of 1999.
17
<PAGE>
<TABLE>
<CAPTION>
OPERATING INCOME: QUARTER ENDED NINE MONTHS ENDED
------------------------ -------------------------
$ MILLIONS SEP 27, SEP 26, SEP 27, SEP 26,
1998 1999 1998 1999
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Raleigh UK............................................... $ 1.1 $ 1.7 $ 2.4 $(0.2)
Gazelle.................................................. 0.9 1.5 11.3 12.8
Derby Germany............................................ (3.7) (3.3) 2.7 3.4
Derby USA................................................ 0.8 (0.1) 0.7 0.6
Raleigh Canada........................................... (0.2) (0.1) 2.1 1.6
Sturmey Archer........................................... 0.1 (0.1) 0.8 0.4
Probike.................................................. 0.3 0.1 0.5 0.4
Other companies and group transactions................... 1.3 (1.2) 2.2 (1.7)
----- ----- ----- -----
Underlying operating income (loss)..................... $ 0.6 $(1.5) $22.7 $17.3
Recapitalization costs.............................. - - (5.7) -
Restructuring charge................................ - (0.1) - (8.6)
----- ----- ----- -----
Total operating income (loss).......................... $ 0.6 $(1.6) $17.0 $ 8.7
===== ===== ===== =====
</TABLE>
OPERATING INCOME. Underlying operating income, of $1.5 million loss and $17.3
million profit for the quarter and nine months ended September 1999, decreased
by $2.1 million and $5.4 million due to the lower gross margin in the first half
and higher selling, general and administrative expenses. The $2.0 million
currency gain in 1998 accounted for the decrease in operating income for the
quarter.
<TABLE>
<CAPTION>
INTEREST EXPENSE: QUARTER ENDED NINE MONTHS ENDED
------------------------ -----------------------
$ MILLIONS SEP 27, SEP 26, SEP 27, SEP 26,
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Senior Notes............................................. $4.0 $3.8 $ 7.4 $11.6
Subordinated Note........................................ - 1.0 - 2.8
Revolving Credit Facility................................ 0.9 1.0 2.1 3.3
Other interest........................................... 0.2 0.1 1.1 0.6
Amortization of deferred financing costs................. 0.5 0.5 0.9 1.4
---- ---- ----- -----
$5.6 $6.4 $11.5 $19.7
==== ==== ===== =====
</TABLE>
INTEREST EXPENSE. Interest expense increased by $0.8 million and $8.2 million to
$6.4 million and $19.7 million for the quarter and nine months ended September
1999 due to the increased debt and higher interest rate margin following the
Recapitalization and the acquisition of Diamond Back. Interest on the
Subordinated Note is paid-in-kind by way of the issue of further subordinated
notes.
<TABLE>
<CAPTION>
PROVISION FOR INCOME TAXES: QUARTER ENDED NINE MONTHS ENDED
----------------------- ------------------------
$ MILLIONS SEP 27, SEP 26, SEP 27, SEP 26,
1998 1999 1998 1999
-------- --------- ------- --------
<S> <C> <C> <C> <C>
Current taxes............................................ $(0.2) $(0.6) $3.3 $ 2.2
Deferred taxes........................................... 0.2 0.1 0.9 (2.8)
----- ----- ---- -----
$ - $(0.5) $4.2 $(0.6)
===== ===== ==== =====
</TABLE>
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 UK, and so reduced the liability to deferred taxes. Only a portion of the
reduction in income arose in The Netherlands, where most of the Company's tax
liability arises, which created savings in the provision for current taxes of
$0.4 million and $1.1 million in the quarter and nine months ended September
1999.
18
<PAGE>
NET INCOME. Net income decreased by $2.3 million and $10.4 million to give
losses of $7.4 million and $10.0 million in the quarter and nine months ended
September 1999. The decrease was primarily the result of the $2.0 million
currency gain in 1998, the increase in interest expense, and the restructuring
charge of $8.6 million in the nine months ended September 1999 as discussed
above, offset by the recapitalization costs of $5.7 million in the second
quarter of 1998 and the lower tax charge.
<TABLE>
<CAPTION>
EBITDA: QUARTER ENDED NINE MONTHS ENDED
-------------------------- -------------------------
$ MILLIONS SEP 27, SEP 26, SEP 27, SEP 26,
1998 1999 1998 1999
---------- -------- --------- ---------
<S> <C> <C> <C> <C>
Raleigh UK............................................... $ 1.4 $ 2.0 $ 3.5 $ 0.8
Gazelle.................................................. 1.1 1.6 11.4 13.5
Derby Germany............................................ (2.9) (2.4) 5.7 6.3
Derby USA................................................ 0.9 0.2 1.5 1.4
Raleigh Canada........................................... (0.2) (0.1) 2.9 2.3
Sturmey Archer........................................... 0.1 (0.1) 0.8 0.4
Probike.................................................. 0.4 0.2 0.7 0.5
Other companies and group transactions................... 1.4 (1.3) 1.2 (2.6)
----- ----- ----- -----
Total EBITDA........................................... $ 2.2 $ 0.1 $27.7 $22.6
===== ===== ===== =====
</TABLE>
EBITDA. EBITDA of $0.1 million and $22.6 million for the quarter and nine months
ended September 1999 decreased by $2.1 million and $5.1 million due to changes
in underlying operating income explained above.
EBITDA is calculated as follows:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
------------------------- --------------------------
EBITDA: SEP 27, SEP 26, SEP 27, SEP 26,
$ MILLIONS 1998 1999 1998 1999
------- ------- -------- --------
<S> <C> <C> <C> <C>
Underlying operating income.............................. $ 0.6 $(1.5) $22.7 $17.3
Depreciation............................................. 2.3 2.2 7.3 7.1
AMORTIZATION
Intangibles............................................ - 0.1 0.1 0.4
Investment grants...................................... (0.1) (0.1) (0.3) (0.4)
Positive goodwill...................................... 0.1 0.1 0.1 0.3
Negative goodwill...................................... (0.1) (0.1) (0.3) (0.3)
Pension transition asset............................... (0.6) (0.6) (1.9) (1.8)
----- ----- ----- -----
$ 2.2 $ 0.1 $27.7 $22.6
===== ===== ===== =====
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Demand for bicycles in the Company's principal markets is seasonal,
characterized in most cases by a majority of consumer sales in the spring and
summer months. The exceptions to this are in the United Kingdom, South Africa
and Ireland, where consumer sales 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. 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.
19
<PAGE>
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 increased $8.1 million to a
$19.2 million inflow for the first nine months of 1999 from $11.1 million in
1998. This improvement was principally due to a $15.8 million reduction in
inventories compared with a $7.0 million increase in the first nine months of
1998 and a $7.3 million lower reduction in accounts payable. This was offset by
$11.9 million higher interest and tax payments, $5.1 million lower EBITDA and
$3.6 million smaller decrease in receivables.
Following a change in the fiscal year end in The Netherlands in 1997, payment of
tax due for 1997 and 1998 of $3.8 million was deferred until 1999. This,
together with estimated tax payments relating to 1999 of $2.1 million, was paid
in the first nine months of 1999, resulting in an increase in taxes paid to $7.3
million in the first nine months of this year compared with $2.0 million a year
ago. Interest of $11.4 million was paid in the first nine months of 1999
compared with $4.8 million a year ago due to the increased principal amount of
senior notes and higher coupon. The net cash flow provided by operating
activities of $19.2 million in the first nine months of 1999 was used to repay
drawings under the revolving credit facility which decreased by $22.8 million as
a result of this and the application of most of the reduction in cash balances
of $5.7 million.
On February 4, 1999, the Company acquired the assets (and assumed certain
liabilities) of the Diamond Back Group for $43.95 million. The Company financed
the acquisition of the Diamond Back Group by issuing a $20.0 million
Subordinated Note and $22.75 million in Class C common stock.
The actuarial valuation of the UK pension schemes carried out as at April 1998
showed that the schemes were in surplus 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 $0.1 million in the nine
months ended September 1999, compared with $1.2 million in the nine months ended
September 1998. The Company adopted SFAS 87, "Employers' Accounting for
Pensions" on January 1, 1993. The impact of adopting SFAS 87 was the recognition
of a transition asset of $37.8 million. The transition asset is being amortized
into income over 15 years. Net periodic pension income was $3.7 million and $3.9
million in the first nine months of 1998 and 1999 respectively. Net periodic
pension income includes amortization of the transition asset into income of $1.9
million and $1.8 million in the first nine months of both 1998 and 1999.
The Company's capital expenditures were $4.9 million and $4.5 million in the
first nine months of 1998 and 1999, being (i) on-going cost reduction projects,
(ii) replacements and (iii) items required to satisfy statutory environmental
and health and safety legislation.
The Company is primarily financed by equity purchased by Thayer, Perseus, DICSA
and management as part of the Recapitalization and subsequently, plus the
Retained Equity of, in aggregate, $134.3 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 September 26, 1999,
the Company had $223.1 million of combined indebtedness, comprising $160.1 of
Senior Notes, a $20.0 million Subordinated Note, as well as $38.0 million of
borrowings and $5.0 million of guarantees under the revolving credit facility.
The Senior Notes are issued under Indentures which contain certain covenants
that, among other things, restrict the ability of the Company and its Restricted
Subsidiaries to incur additional indebtedness, pay dividends, redeem capital
stock, redeem subordinated obligations, make investments, undertake sales of
assets and subsidiary stock, engage in transactions with affiliates, 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.
20
<PAGE>
The Company uses derivative financial instruments including currency swaps,
interest rate swaps, interest rate caps, forward foreign exchange contracts, and
currency options. The Company enters into currency and interest rate swaps such
that the notional principal amount is equal to the principal amount of the
underlying debt. The swaps achieve the effect of synthetically converting the
original United States dollar denominated debt into several other foreign
currencies and converting the interest rate on the debt from United States
dollar rates to those applicable for that currency. The Company enters into
forward foreign exchange contracts and options to minimize the impact of
currency movements, principally on purchases of inventory and sales of goods
denominated in currencies other than the subsidiaries' functional currencies.
Interest rate caps have been purchased to limit the blended interest rate paid
on the revolving credit facility to under 8% over the next 1 3/4 years. Currency
basket options have been purchased to substantially maintain the value of part
of the foreign operating profits upon conversion into US dollars, in order to
protect the ability to service the US Senior Notes from the effect of changes in
foreign exchange rates.
A Revolving Credit Agreement provides for a seven-year DM214 million secured
senior revolving credit facility to be made available to the Company's operating
companies. Borrowings under this revolving credit facility are available subject
to a borrowing base determined as a percentage of eligible assets. The Company's
borrowings peak in February/March/April each year. The Company believes that it
has adequate funding for its financial requirements for the next year.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in foreign currency exchange
rates and interest rates. In order to manage the risk arising from these
exposures, the Company enters into a variety of foreign currency and interest
rate contracts and options.
FOREIGN CURRENCY EXCHANGE RATE RISK
The Company has foreign currency exposures related to buying and selling in
currencies other than the functional currencies in which it operates. The
Company's net trading position is long in the Euro, Canadian Dollar and South
African Rand, arising from its revenues in those currencies, and short of the
New Taiwan Dollar, Japanese Yen and US Dollar as a result of components
purchased in those currencies. The Company has a natural currency hedge against
Pounds Sterling arising from its position as both an importer and exporter in
UK. Sturmey Archer also has a competitive exposure to the currencies of Japan
and Germany in which its two main competitors manufacture.
The Company generally introduces its new bicycle model ranges annually in the
fall of each year, at a similar time to most of its competitors. Product
specifications, component costs and selling prices are kept as stable as
possible during the model year to satisfy the requirements of mass-merchandisers
and facilitate orderly marketing of branded products amongst IBDs. The Company
takes out foreign currency forward exchange contracts or options in the fall to
hedge most of its foreign currency trading transaction exposure for the upcoming
season. These foreign currency forward exchange contracts and options have been
designated as hedges as defined in SFAS 133 and the mark-to-market value of $1.1
million at December 31, 1998 was therefore included in accumulated other
comprehensive income. The potential loss in fair value for such financial
instruments from a hypothetical 10% adverse change in quoted foreign currency
exchange rates would be approximately $4.1 million for 1998. Each year the
Company changes the specification of its products to endeavor to optimize its
competitive position and margins. Most of the Company's competitors purchase
comparable components from similar sources to the Company and are believed not
to hedge beyond the current season. To stay competitive the Company does not
generally hedge its transaction exposure beyond the end of the season.
Management believes the likelihood of obtaining a competitive advantage would
not justify the cost of hedging beyond the end of the season. Sales and
purchases in currencies other than the functional currencies in which the
Company operates were $31.6 million and $106.9 million respectively in 1998,
treating the currencies within the European Exchange Rate Mechanism as one.
21
<PAGE>
The foreign currency element of the Company's debt under the Senior Notes and
the revolving credit facility has, since September 1998, generally been arranged
to align with the denomination of the book value of net assets. By doing this,
the Company reduces the translation exposure of net worth to changes in foreign
currency exchange rates. The three principal exceptions are: (1) $38 million of
net assets denominated in Pounds Sterling arising from the Company's relatively
large presence in UK, (2) $38 million of foreign pension assets in UK and The
Netherlands, and, (3) $5 million denominated in South African Rand due to limits
placed by the South African Reserve Bank on the maximum indebtedness allowed by
foreign owned corporations, based on the balance sheet as at December 31, 1998.
The Company generates most of its trading income in foreign currencies. In order
to ensure that such trading income can be converted to yield sufficient US
Dollars to service 67% of the interest on the $100 million 10% Senior Notes
through May 2001, currency options were purchased in 1998. These currency
options are for $6.7 million per year, selling DF6 million, (Pounds)2 million
and C$1.2 million. At December 31, 1998 the mark-to-market value of these
currency options was $0.1 million. As the purchaser of options has no
obligations to exercise them, any weakening of the value of the US Dollar can do
no more than reduce the fair value of these currency options to zero.
Up to May 14, 1998, interest and currency swaps were held which achieved the
effect of synthetically converting the original US Dollar denominated Series A
and Series C Senior Notes into foreign currency debt of those countries where
the Company had operations. This converted the interest on the debt from US
Dollars to those foreign currencies in which trading income was generated. Derby
USA generated sufficient trading income to service the 7.66% Series B Senior
Note, withstanding certain one time items.
INTEREST RATE RISK
The weighted average interest rate on the Senior Notes was 6.9% in 1998 through
May 13, 1998 and 10.3% effective May 14, 1998, after taking into account the
effect of any swaps and including amortization of deferred financing costs. The
other major element of the Company's interest expense was on the revolving
credit facilities. These were at floating rates of 1% above the London Interbank
Offered Rate through May 13, 1998 and 2% thereafter. This produced weighted
average interest rates on the revolving credit facilities of 6.6% in 1998, after
taking into account the effect of any swaps and including amortization of
deferred financing costs. A hypothetical one percentage point shift in floating
interest rates would have a $0.7 million approximate impact on annual interest
expense. As interest rates on the revolving credit facility have been capped at
7.9% effective August 1998 through July 2001, increases in floating interest
rates above that level would only have limited impact on expense.
COMMODITY PRICE RISK
The business of the Company does not carry a significant direct exposure to the
prices of commodities.
UNSECURED STATUS OF SENIOR NOTES AND ASSET ENCUMBRANCE
The Indentures permit the Company to incur certain secured indebtedness,
including indebtedness under the Revolving Credit Agreement, which is secured
and guaranteed by the obligors thereunder through a first priority fully
protected security interest in all the assets, properties and undertakings of
the Company and each other obligor thereunder where available and cost effective
to do so, and to the extent permissible by local laws. The Company has
indebtedness available under the Revolving Credit Agreement of DM214.0 million
($116.9 million). As of September 26, 1999, the Company had indebtedness
outstanding under the Revolving Credit Agreement of $43.0 million. Borrowings
under the South African Credit Facility are secured by a security interest in
certain of the assets of the Company's South African subsidiaries. The Notes are
unsecured and therefore do not have the benefit of any such collateral.
Accordingly, if an event of default were to occur under the Revolving Credit
Agreement or the South African Credit Facility, the lenders thereunder would
have the right to foreclose upon the collateral securing such indebtedness to
the exclusion of the holders of the Notes, notwithstanding the existence of an
event of default with respect to the Notes. In such event, the assets
constituting such collateral would first be used to repay in full all amounts
outstanding under the Revolving Credit Agreement or the South African Credit
Facility, as applicable, resulting in all or a portion of the assets of the
Issuers being unavailable to satisfy the claims of holders of the Notes and
other unsecured indebtedness of the Issuers. The Company may also incur other
types of secured indebtedness under the Indentures, including up to
22
<PAGE>
$20 million in indebtedness of any type, indebtedness of an acquired company
where the Company would have been able to incur $1.00 of additional indebtedness
under its Consolidated Coverage Ratio, indebtedness in respect of performance
bonds, bankers' acceptances, letters of credit, and the like, purchase money
indebtedness and capitalized lease obligations in an aggregate amount not
exceeding $10 million, indebtedness incurred by foreign subsidiaries not
exceeding $5 million, and indebtedness incurred by a securitization entity.
RESTRICTIVE LOAN COVENANTS
The Revolving Credit Agreement contains a number of covenants that, among other
things, restrict the ability of the Company and its subsidiaries to dispose of
shares in any subsidiary, dispose of assets, incur additional indebtedness,
engage in mergers and acquisitions, exercise certain options, make investments,
incur guaranty obligations, make loans, make capital distributions, enter into
joint ventures, repay the Notes, make loans or pay any dividend or distribution
to the Issuers for any reason other than (among other things) to pay interest
(but not principal or Additional Amounts) owing in respect of the Notes, incur
liens and encumbrances and permit the amount of receivables and inventory to
exceed specified thresholds.
The ability of the Company to comply with the covenants and other provisions of
the Revolving Credit Agreement may be affected by changes in general economic
and competitive conditions and by financial, business and other factors that are
beyond the Company's control. The failure to comply with the provisions of the
Revolving Credit Agreement could result in an event of default thereunder, and,
depending upon the actions of the lenders thereunder, all amounts borrowed under
the Revolving Credit Agreement, together with accrued interest, could be
declared due and payable. If the Company were not able to repay all amounts
borrowed under the Revolving Credit Agreement, together with accrued interest,
the lenders thereunder would have the right to proceed against the collateral
granted to them to secure such indebtedness. If the indebtedness outstanding
under the Revolving Credit Agreement were to be accelerated, there can be no
assurance that the assets of the Company would be sufficient to repay in full
such indebtedness, and there can be no assurance that there would be sufficient
assets remaining after such repayments to pay amounts due in respect of any or
all of the Notes.
In addition, the Indentures contain certain covenants that, among other things,
restrict the ability of the Company and its Restricted Subsidiaries to incur
additional indebtedness, pay dividends on and redeem capital stock, redeem
certain subordinated obligations, make investments, undertake sales of assets
and subsidiary stock, engage in certain transactions with affiliates, sell or
issue capital stock, permit liens to exist, operate in other lines of business,
engage in certain sale and leaseback transactions and engage in mergers,
consolidations or sales of all or substantially all the assets of the Company. A
failure to comply with the restrictions contained in either of the Indentures
could result in an event of default under such Indenture.
INFORMATION TECHNOLOGY-YEAR 2000
The Company has implemented a plan designed to ensure that all application
software used in connection with the Company's management information systems,
including internally developed systems, software purchased from outside vendors
and embedded chips at the Company's manufacturing facilities, will manage and
manipulate data involving the transition of dates from 1999 to 2000 without
functional or data abnormality and without inaccurate results related to such
dates. Due to the fact that existing software often defines each year with two
digits rather than four digits, the Company's computers that have date-sensitive
software may recognize a date using "00" as occurring in the year 1900 rather
than the year 2000, which would result in such abnormalities and inaccuracies
and lead to disruptions of the Company's operations, including a temporary
inability to process customer orders, send invoices or engage in other normal
business activities. The Company spent a total of approximately $2.3 million in
1998 and will spend $1.1 million in 1999 to achieve "Year 2000 compliance" for
all of its operations. At September, 1999 the compliance plans of the Company's
operations were more than 95%completed. The Company plans to complete all Year
2000 compliance efforts by the end of November 1999. The costs and timing of
such efforts, however, are based upon management's best estimates, which are
derived using assumptions relating to, among other things, the availability of
certain
23
<PAGE>
resources, the timing of actions taken by third parties and other
factors. Additional expenditures beyond the Company's projections may be
necessary. In the event that the Company materially underestimates the amount of
funds or the time necessary to resolve identified problems or that any
information systems relied upon by the Company for critical functions are not
substantially Year 2000 compliant in a timely manner, there could be a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company's plan for the Year 2000 entailed communication with significant
suppliers and customers in determining the readiness of third parties'
remediation of their own Year 2000 issues. The Company believes that the
purchasing patterns of customers and potential customers may be affected by Year
2000 issues as companies expend significant resources to correct or patch their
current software systems for Year 2000 compliance. These expenditures may result
in reduced funds available to purchase the Company's products, which could
result in a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that any Year
2000 compliance problems of the Company's customers or suppliers will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
RISK OF FOREIGN EXCHANGE RATE FLUCTUATIONS; INTRODUCTION OF THE EURO
The Company's business is conducted by operating subsidiaries in many countries,
and, accordingly, the Company's results of operations are subject to currency
translation risk and currency transaction risk. With respect to currency
translation risk, the results of operations of each of these operating
subsidiaries are reported in the relevant local currency and then translated
into US dollars at the applicable currency exchange rate for inclusion in the
Company's financial statements. The appreciation of the US dollar against the
local currencies of the operating subsidiaries will have a negative impact on
the Company's sales and operating margin. Conversely, the depreciation of the US
dollar against such currencies will have a positive impact. Fluctuations in the
exchange rate between the US dollar and the other currencies in which the
Company conducts its operations may also affect the book value of the Company's
assets and the amount of the Company's shareholders' equity. In addition, to the
extent indebtedness of the Company is denominated in different currencies,
changes in the values of such currencies relative to other currencies in which
the Company conducts its operations may have a negative impact on the Company's
ability to meet principal and interest obligations in respect of such
indebtedness.
In addition to currency translation risk, the Company incurs currency
transaction risk to the extent that the Company's operations involve
transactions in differing currencies. Fluctuations in currency exchange rates
will impact the Company's results of operations to the extent that the costs
incurred by the operating subsidiaries are denominated in currencies that differ
from the currencies in which the related sale proceeds are denominated. To
mitigate such risk, the Company enters into forward purchase contracts primarily
relating to the Pound Sterling, the US Dollar, the Dutch Guilder, the Deutsche
Mark, the New Taiwan Dollar and the Yen. The Company does not enter into forward
purchase agreements for speculative purposes. Given the volatility of currency
exchange rates, there can be no assurance that the Company will be able
effectively to manage its currency transaction risks or that any volatility in
currency exchange rates will not have a material adverse effect on the Company's
business, financial condition or results of operations.
Under the treaty on the European Economic and Monetary Union (the "Treaty"), to
which the Federal Republic of Germany and The Netherlands are signatories, on
January 1, 1999, a European single currency (the "Euro") replaced some of the
currencies of the member states of the European Union (the "EU"), including the
Deutsche Mark and Dutch Guilder.
Following introduction of the Euro, the existing sovereign currencies (the
"legacy currencies") of the eleven participating member countries of the EU (the
"participating countries") who adopted the Euro as their common legal currency
are scheduled to remain legal tender in the participating countries as
denominations of the Euro until January 1, 2002 (the "transition period"). The
Euro conversion may impact the Company's competitive position as the Company may
incur increased costs to conduct business in an additional currency during the
transition period. Additionally, the participating countries'
24
<PAGE>
pursuit of a single monetary policy through the European Central Bank may affect
the economies of significant markets of the Company. The Company will also need
to maintain and in certain circumstances develop information systems software to
(1) convert legacy currency amounts to Euro; (2) convert one legacy currency to
another; (3) perform prescribed rounding calculations to effect currency
conversions; and (4) permit transactions to take place in both legacy currencies
and the Euro during the transition period. Since the Company conducts extensive
business operations in, and exports its products to, several of the
participating countries, there can be no assurance that the conversion to the
Euro will not have a material adverse effect on the Company's business,
financial condition or results of operations. Similarly, in the event that the
Company materially underestimates the costs, timeliness and adequacy of
modifications to its information systems software, there could be a material
adverse effect on the Company's business, financial condition and results of
operations.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS
The Company incurred substantial indebtedness in connection with the
Recapitalization and acquisition of Diamond Back and has a highly leveraged
capital structure. As of September 26, 1999, the Company had combined total
indebtedness of $223.1 million (including all indebtedness and guarantees of
indebtedness under the Revolving Credit Agreement and indebtedness under the
South African Credit Facility, but excluding, in each case, unused commitments
thereunder), preferred stock of $47.8 million, stock rights of $23.3 million and
the shareholders' deficit was $61.3 million. The Company's ability to make
scheduled interest payments and repayment of principal is dependent upon its
future operating performance, which, in turn, is subject to general economic and
competitive conditions and to financial, business and other factors, many of
which are beyond the Company's control. Although the Company believes that,
based on current operations, it will have sufficient cash flow from operations
to service its obligations with respect to its indebtedness, there can be no
assurance that the Company will be able to meet such obligations. In the event
that the Company is unable to generate cash flow from operations that is
sufficient to service its obligations in respect of its indebtedness, the
Company may be required to take certain actions, including delaying or reducing
capital expenditures, attempting to restructure or refinance its indebtedness,
selling material assets or operations or seeking additional equity. There can be
no assurance that the Company will be able to generate cash flow from operations
that is sufficient to service its obligations in respect of its indebtedness or
that any of such actions could be effected or would be effective to allow the
Company to service such obligations.
FORWARD LOOKING STATEMENTS
This discussion contains certain forward-looking statements that involve risks
and uncertainties. In addition, the Company may from time to time make oral
forward-looking statements. As discussed in the Company's prospectus on Form S-
4A filed with the SEC on December 4, 1998, actual results are uncertain and may
be impacted by the various factors. In particular, certain risks and
uncertainties that may impact the accuracy of the forward-looking statements
with respect to revenues, expenses and operating results include, without
limitation, cycles of customer orders, general economic and competitive
conditions and changing consumer trends, foreign exchange rates, technological
advances and the number and timing of new product introductions, shipments of
products and components from foreign suppliers, the timing of operating and
advertising expenditures and changes in the mix of products ordered by
independent bicycle dealers and mass merchants. As a result, the actual results
may differ materially from those projected in the forward-looking statements.
Because of these and other factors that may affect the Company's operating
results, past financial performance should not be considered an indicator of
future performance, and investors should not use historical trends to anticipate
results or trends in future periods.
25
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
PRODUCT LIABILITY
Due to the nature of the Company's business, the Company is a defendant in a
number of product liability lawsuits. The plaintiffs in these lawsuits generally
seek damages, in amounts that may be material, for personal injuries allegedly
sustained as a result of alleged defects in the Company's products. Although the
Company maintains product liability insurance, due to the uncertainty as to the
nature and extent of manufacturers' and distributors' liability for personal
injuries, there can be no assurance that the product liability insurance
maintained by the Company is or will be adequate to cover product liability
claims or that the applicable insurer will be solvent at the time of any covered
loss. In addition, due to deductibles, self-retention levels and aggregate
coverage amounts applicable under the Company's insurance policies, the Company
will bear responsibility for a significant portion, if not all, of the defense
costs (which include attorneys' fees and expenses incurred in the defense of any
claim) and the related payments to satisfy any judgments associated with any
claim asserted against the Company in excess of any applicable coverage. The
settlement of a significant number of insured claims, the settlement of a claim
exceeding the Company's insurance coverage or the successful assertion or
settlement of an uninsured claim could have a material adverse effect on the
Company's business, financial condition or results of operations. There can be
no assurance that insurance will remain available, or, if available, will not be
prohibitively expensive. The deductible under the Company's insurance policies
is currently $250,000 per claim; however, prior to 1993, the deductible was $1.0
million per claim. Not all claims arising during the period in which the
Company's deductible was $1.0 million have been resolved and it is possible that
additional claims may be filed. The aggregate amount of liability under existing
and potential claims could exceed the reserves established by the Company for
product liability claims.
PRODUCT RECALLS
Although the Company has not recently experienced a significant product recall,
the Company has, in the past, recalled certain bicycle models. If the Company
were required to make a significant product recall, such a recall could have a
material adverse effect on the Company's business, financial condition or
results of operations. In common with the rest of the bicycle industry,
components fitted to its bicycles may be subject to a recall program of the
component supplier.
LIABILITY FOR ENVIRONMENTAL MATTERS
The Company is subject to a wide variety of governmental requirements related to
environmental protection including, among other things, the management of
hazardous substances and wastes. Although the Company has made and will continue
to make significant expenditures related to its environmental compliance
obligations, there can be no assurance that the Company will at all times be in
compliance with all such requirements. Moreover, the Company's existing and
historical operations, including the operations of its predecessors, expose the
Company to the risk of clean-up liabilities or environmental or personal injury
claims related to releases and emissions of hazardous substances and wastes.
Such liabilities and claims could require the Company to incur material costs
related to such releases or to the investigation or remediation of contaminated
property. Also, changes in existing environmental requirements or the imposition
of additional environmental liabilities related to existing or historical
operations could result in substantial cost to the Company.
26
<PAGE>
ITEM 2. CHANGES IN SECURITIES
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.
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. for the acquisition of Diamond Back.
During the nine months ended September 26, 1999 the Company issued 2,840 Class A
and 710 Class C common shares to executives of the Company for $1,000 per share
under the management stock plan.
Since September 26, 1999 the Company has issued 120 Class A and 30 Class C
common shares to an executive of the Company for $1,000 per share under the
management stock plan.
27
<PAGE>
ITEM 3. EXHIBITS AND REPORTS ON FORM 8-K
REPORTS ON FORM 8-K
Report on Form 8-K filed September 7, 1999.
SIGNATURES
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT, that each person whose signature appears below
constitutes and appoints Simon J. Goddard, his true and lawful attorney-in-fact
and agent, with full power of substitution and re-substitution, for him and in
his name, place and stead, in any and all capacities (including his capacity as
a director and/or officer of The Derby Cycle Corporation), the Quarterly Report
on Form 10-Q filed pursuant to the Securities Exchange Act of 1934, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Registration Statement and power of attorney have been signed by the following
persons in the capacities and on the dates indicated:
28
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
<S> <C> <C>
President, Chief
Executive Officer and
/s/ Gary S. Matthews Director (principal
- --------------------------------- executive officer) November 10, 1999
GARY S. MATTHEWS
Chief Financial
Officer (principal
/s/ Daniel S. Lynch financial and
- --------------------------------- accounting officer) November 10, 1999
DANIEL S. LYNCH
/s/ Frederic V. Malek Chairman of the
- --------------------------------- Board and Director November 10, 1999
FREDERIC V. MALEK
/s/ Alan J. Finden-Crofts
- --------------------------------- Director November 10, 1999
ALAN J. FINDEN-CROFTS
/s/ A. Edward Gottesman
- --------------------------------- Director November 10, 1999
A. EDWARD GOTTESMAN
/s/ Frank H. Pearl
- --------------------------------- Director November 10, 1999
FRANK H. PEARL
/s/ Warren L. Batts
- --------------------------------- Director November 10, 1999
WARREN L. BATTS
/s/ Thomas H. Thomsen
- --------------------------------- Director November 10, 1999
THOMAS H. THOMSEN
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on
its behalf by the undersigned, thereunto duly authorized, in the city of
Nottingham, England on November 10, 1999.
The Derby Cycle Corporation
By: /s/ Simon J. Goddard
- ---------------------------------
Name: SIMON J. GODDARD
Title: Company secretary
29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-26-1999
<CASH> 11,726
<SECURITIES> 0
<RECEIVABLES> 70,390
<ALLOWANCES> 0
<INVENTORY> 102,602
<CURRENT-ASSETS> 193,476
<PP&E> 44,362
<DEPRECIATION> 0
<TOTAL-ASSETS> 335,531
<CURRENT-LIABILITIES> 108,466
<BONDS> 180,109
47,819
0
<COMMON> 1
<OTHER-SE> (61,329)
<TOTAL-LIABILITY-AND-EQUITY> 335,531
<SALES> 407,972
<TOTAL-REVENUES> 407,972
<CGS> 310,897
<TOTAL-COSTS> 310,897
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,657
<INCOME-PRETAX> (10,553)
<INCOME-TAX> 587
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,392)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
