<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 March 28, 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.)
Simon Goddard
The Derby Cycle Corporation
22710 72/nd/ Avenue South
Kent, Washington 98032
(Address of principal executive offices, including zip code)
Telephone: (253) 395-1100
(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 March 28,
1999, were:
Class A $0.01 par value 44,200
Class C $0.01 par value 22,750
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THE DERBY CYCLE CORPORATION
MARCH 1999 FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
<TABLE>
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PAGE
PART I
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ITEM 1. FINANCIAL STATEMENTS............................................................................... 1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............. 17
PART II
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ITEM 1. LEGAL PROCEEDINGS.................................................................................. 28
ITEM 2. CHANGES IN SECURITIES ............................................................................. 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................................... 28
</TABLE>
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PART I
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ITEM 1. FINANCIAL STATEMENTS
<TABLE>
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Page
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<S> <C>
Consolidated Balance Sheets as of December 31, 1998 and March 28, 1999 (unaudited) 2
Unaudited Consolidated Statements Statements of Income for the three months ended March 29, 1998
and March 28, 1999 3
Unaudited Consolidated Statement of Shareholders' (Deficit) for the three months
ended March 28, 1999 4
Unaudited Consolidated Statements of Cash Flows for the three months ended March 29, 1998
and March 28, 1999 5
Notes to the Consolidated Financial Statements 7
</TABLE>
1
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THE DERBY CYCLE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
DEC 31, MAR 28,
1998 1999
(UNAUDITED)
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................................................... $ 17,453 $ 6,873
Receivables, net.................................................................... 66,801 133,460
Inventories......................................................................... 105,264 124,571
Other current assets................................................................ 9,586 8,810
----------- -----------
Total current assets........................................................... 199,104 273,714
=========== ===========
PROPERTY, PLANT, AND EQUIPMENT, NET ..................................................... 49,514 46,285
OTHER ASSETS............................................................................. - 1,500
INTANGIBLES, NET......................................................................... 20,600 38,340
PREPAID PENSION ASSETS................................................................... 56,072 55,336
----------- -----------
Total assets................................................................... $ 325,290 $ 415,175
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.................................................................... $ 34,394 $ 48,469
Accrued liabilities................................................................. 20,161 28,627
Income taxes payable................................................................ 8,452 4,513
Short-term borrowings............................................................... 60,831 91,899
Other current liabilities........................................................... 2,103 6,693
----------- -----------
Total current liabilities...................................................... 125,941 180,201
----------- -----------
OTHER LIABILITIES:
Long-term debt ..................................................................... 165,870 181,454
Excess of assets acquired over cost of acquisitions................................. 11,120 10,760
Deferred income taxes............................................................... 18,896 17,348
Other liabilities................................................................... 4,224 3,834
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Total liabilities.............................................................. 326,051 393,597
----------- -----------
MINORITY INTEREST........................................................................ 627 632
COMMITMENTS AND CONTINGENCIES
PREFERRED STOCK WITH REDEMPTION RIGHTS, $0.01 PAR VALUE, 25,000 SHARES AUTHORIZED, 45,432 45,432
ISSUED, AND OUTSTANDING OF SERIES A AND 3,000 SHARES AUTHORIZED, ISSUED, AND
OUTSTANDING OF SERIES B.............................................................
STOCK RIGHTS............................................................................. 23,300 23,300
SHAREHOLDERS' EQUITY(DEFICIT):
Class A common stock, $0.01 par value, 200,000 shares authorized, 44,200 and 45,700
shares, issued and outstanding as of December 31, 1998 and
March 28, 1999, respectively................................................... 1 1
Class B common stock, $0.01 par value, 15,000 shares authorized, no shares issued
and outstanding as of December 31, 1998 and March 28, 1999..................... - -
Class C common stock, $0.01 par value, 22,750 share authorized, issued and
outstanding as of March 28, 1999............................................... - -
Additional paid-in capital.......................................................... 22,499 46,749
Accumulated deficit................................................................. (87,346) (88,567)
Accumulated other comprehensive income.............................................. (5,274) (5,969)
----------- -----------
Total shareholders' (deficit).................................................. (70,120) (47,786)
----------- -----------
Total liabilities and shareholders' (deficit).................................. $ 325,290 $ 415,175
=========== ===========
</TABLE>
2
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THE DERBY CYCLE CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per unit and unit data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------
MAR 29, MAR 28,
1998 1999
----------- -----------
<S> <C> <C>
NET REVENUES ............................................................................ $ 121,433 $ 138,387
COST OF SALES ........................................................................... (90,315) (105,420)
----------- -----------
Gross profit........................................................................ 31,118 32,967
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES............................................ (22,768) (27,316)
----------- -----------
Operating income.................................................................... 8,350 5,651
OTHER INCOME (EXPENSE):
Interest expense.................................................................... (1,814) (6,517)
Interest income..................................................................... 84 88
Other (expense), net................................................................ (138) -
----------- -----------
INCOME BEFORE INCOME TAXES MINORITY INTEREST AND EXTRAORDINARY ITEM...................... 6,482 (778)
PROVISION FOR INCOME TAXES............................................................... (1,874) (434)
MINORITY INTEREST........................................................................ - (9)
----------- -----------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS...................................... $ 4,608 $ (1,221)
=========== ===========
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS PER SHARE............................ $ 212.35 $ (20.66)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK
OUTSTANDING......................................................................... 21,700 59,108
=========== ===========
</TABLE>
3
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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................... $ $ $ 22,499 $ (87,346) $ (5,274) $ (70,120)
1 -
Comprehensive income-..............
Net income ................... - - - (1,221) - (1,221)
Net gain on derivative
instruments.............. - - - - 698 698
Translation adjustments....... - - - - (1,393) (1,393)
----------- ----------- ----------- ----------- ------------- -----------
Total comprehensive income......... - - - (1,221) (695) (1,916)
Issue of common stock......... - - 24,250 - - 24,250
----------- ----------- ----------- ----------- ------------- -----------
MARCH 28, 1999 ................... $ 1 $ - $ 46,749 $ (88,567) $ (5,969) $ (47,786)
=========== =========== =========== =========== ============= ===========
</TABLE>
4
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THE DERBY CYCLE CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------
MAR 29, MAR 28,
1998 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................................... $ 4,608 $ (1,221)
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation................................................................... 2,565 2,525
Amortization................................................................... (126) (170)
Minority interest.............................................................. - 9
Loss on swaps.................................................................. 138 -
Net periodic pension income.................................................... (1,227) (1,332)
Net changes in operating assets and liabilities, net of acquisitions-
(Increase) decrease in receivables............................................. (47,621) (57,383)
(Increase) decrease in inventories............................................. (14,407) (5,034)
(Increase) decrease in other current assets.................................... 1,054 1,239
Increase (decrease) in accounts payable........................................ 1,142 8,896
Increase (decrease) in accrued liabilities..................................... 2,579 8,257
Increase (decrease) in income taxes payable.................................... 680 (3,719)
Increase (decrease) in other current liabilities............................... (601) 5,143
Increase (decrease) in deferred income taxes................................... 543 (852)
Increase (decrease) in other liabilities....................................... (116) (171)
----------- ----------
Net cash (used by) operating activities................................... (50,789) (43,813)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant, and equipment......................................... (1,416) (1,077)
Proceeds of property, plant, & equipment dispositions............................... 36 30
Cash paid for acquisitions, net of cash acquired.................................... - (42,774)
----------- ----------
Net cash used in investing activities..................................... $ (1,380) $ (43,821)
=========== ==========
</TABLE>
5
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THE DERBY CYCLE CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------
MAR 29, MAR 28,
1998 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from share issue........................................................... $ - $ 24,250
Proceeds from issuance of Subordinated Notes ....................................... - 20,000
Short term borrowings, net,......................................................... 45,465 31,071
Deferred financing costs............................................................ (8) (345)
Contributions made to pension plans................................................. (624) (20)
Net (distribution to) DICSA......................................................... (838) -
Issuance of secured promissory note................................................. - (1,500)
----------- ----------
Net cash provided by financing activities................................. 43,995 73,456
----------- ----------
EFFECT OF EXCHANGE RATE CHANGES.......................................................... 910 3,598
----------- ----------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS.............................................. (7,264) (10,580)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........................................... 15,426 17,453
----------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD................................................. $ 8,162 $ 6,873
=========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid....................................................................... $ 1,813 $ 1,286
Income taxes paid................................................................... $ 651 $ 5,005
</TABLE>
6
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THE DERBY CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF THE BUSINESS AND BASIS OF PRESENTATIONS
The consolidated financial statements for the three months ended March 29,
1998 and March 28, 1999 together with the balance sheet as of March 28, 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 March 28, 1999 and the results of operations and the
cash flows for the periods presented herein have been made. The results of
operations for the thirteen weeks ended March 28, 1999 are not necessarily
indicitave of the operating results for the full fiscal year.
The consolidated financial statements included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Although the Company believes that the disclosures made are adequate to make the
information not misleading, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
regulations. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10K 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 SA ("DICSA"), a Luxembourg holding
company through May 14, 1998. Up to that date DICSA owned shares, either
directly or indirectly, in a number of bicycle and bicycle component companies
worldwide that predominantly operate as standalone entities. Each of the
companies manufactures, assembles and/or distributes bicycles and bicycle
components. These bicycle and bicycle component companies, collectively referred
to as the "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 March 28, 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 March 28, 1999.
The accompanying consolidated financial statements, herein referred to as the
consolidated financial statements, have been prepared as if the Company had been
in existence for all periods presented. DICSA's historical basis in the assets
and liabilities of the Company has been carried over. All material inter-company
transactions and balances between entities included in these combined financial
statements have been eliminated. Certain expenses were originally recorded by
DICSA on behalf of the Company, such as headquarters' management costs and other
corporate expenses. These amounts have been allocated in their entirety in the
Company's financial statements, as such costs were incurred
7
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on behalf of the Company except for an immaterial amount that related to DICSA.
Management believes this allocation is reasonable and represents the expenses as
if the Company had been a stand-alone operation.
For the purposes of calculating the net income (loss) applicable to Common
Shareholders, the Common Shares outstanding used assumes that the conversion of
pre-existing stock at the time of the Recapitalization is applicable to earlier
years.
2. INVENTORIES
Inventories are stated at the lower of cost or net realizable value, with cost
determined on a first in, first out ("FIFO") basis. A provision is made for
obsolete, slow moving and defective items where appropriate.
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
MAR 28,
DEC 31, 1999
1998 (UNAUDITED)
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<S> <C> <C>
Finished products....................................................... $ 48,498 $ 74,383
Work in process......................................................... 9,686 9,268
Raw materials........................................................... 47,080 40,920
----------- ----------
Total inventories.................................................. $ 105,264 $ 124,571
=========== ==========
</TABLE>
The market for bicycles, parts and accessories is subject to the risk of
changing consumer trends. In the event that a particular bicycle model or
accessory does not achieve widespread consumer acceptance, and the Company holds
excess inventory of that bicycle model, part or accessory, the Company may be
required to take significant price markdowns, which could have a material
adverse effect on the Company's business, results of operations and financial
condition.
3. DERIVATIVE FINANCIAL INSTRUMENTS
ADOPTION OF SFAS 133
The Company elected to adopt SFAS 133 as of October 1, 1998.
For the three months ended March 29, 1998 income and expense related to the fair
value accounting of the Company's derivative instruments are included in the
statement of income: a profit of $846,000 on the fair value accounting of the
forward foreign exchange contracts is shown within cost of sales; a loss of
$138,000 on the fair value accounting of the swaps, is shown as other expense.
For the three months ended March 28, 1999 income and expense related to the fair
value accounting of derivative instruments subsequent to the adoption of
SFAS 133 are included in Accumulated Other Comprehensive Income: a gain of
$596,000 on the fair value accounting of the forward foreign exchange contracts
and a gain of $102,000 on the fair value accounting of the currency option and
interest rate cap. The net gain of $1,814,000 in other comprehensive income at
March 28, 1999 will be released to income in the years 1999 to 2001 as the
related sales, purchases or interest expense occurs.
4. SHORT-TERM BORROWINGS
The Company has indebtedness available under a seven year Revolving Credit
agreement (the "Revolving Credit Agreement") of DM214.0 million ($119.6
million).
8
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The Company was not in compliance with all of its borrowing covenants as at
December 31, 1998. The covenants include a maximum level of inventory days on
hand, and a minimum level of adjusted EBITDA. Effective February 4, 1999, the
revolving credit facility agreement was amended in connection with the
acquisition of Diamond Back. The changes made included an increase in inventory
days allowed, a change in the measurement of EBITDA and a reduction in the
EBITDA covenant, such that the Company is now in compliance with all its
borrowing covenants.
5. LONG TERM DEBT
On February 4, 1999 the Company issued $20 million principal amount in
subordinated notes to an affiliate of the Government of Singapore which mature
in 2010 and bear interest at 19% compounded daily. As of December 31, 1998, and
March 28, 1999, long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DEC 31, MAR 28,
1998 1999
(UNAUDITED)
----------- -----------
<S> <C> <C>
10% $100,000,000 Senior Notes................................................. $ 100,000 $ 100,000
93/8% DM110,000,000 Senior Notes.............................................. 65,870 61,454
19% $20,000,000 Subordinated Notes - 20,000
---------- -----------
Long-term debt........................................................... $ 165,870 $ 181,454
========== ===========
</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 93/8 percent DM110,000,000
Senior Notes as of December 31, 1998 or both the Senior and Subordinated Notes
as of March 28, 1999.
6. CONTINGENCIES
INTERNATIONAL OPERATIONS; DEPENDENCE ON FOREIGN SUPPLIERS AND SALES
A significant portion of the Company's operations are conducted in foreign
countries and are subject to the risks that are inherent in operating abroad,
including, without limitation, the risks associated with foreign governmental
regulation, foreign taxes, import duties and trade restrictions. The Company's
business is highly dependent upon products manufactured by foreign suppliers
located primarily in Taiwan and 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
9
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incurred in the defense of any claim), and the related payments to satisfy any
judgments associated with any claim asserted against the Company in excess of
any applicable coverage. The successful assertion or settlement of an uninsured
claim, the settlement of a significant number of insured claims, or a claim
exceeding the Company's insurance coverage could have a material adverse effect
on the Company's business, results of operations and financial condition. In
addition, there can be no assurance that insurance will remain available or, if
available, will not be prohibitively expensive.
COMMON STOCK AND PREFERRED STOCK
On October 20, 1998, the Company entered into an employment contract with Gary
Matthews as Chief Executive Officer with effect from mid January 1999. The
contract is for a four year term with a three year extension. The Company issued
the stock options to purchase 1,625 shares of the Company's Class A common
stock for $1,000 per share which vest over three years, and performance-based
stock options to purchase 3,250 shares of Class A common stock for $1,000 per
share to Gary Matthews. Pursuant to a Management Stock Purchase Agreement dated
October 20, 1998, Gary Matthews purchased 1,500 shares of the Company's Class A
common stock for $1,000 per share. Gary Matthews paid for such shares with a
secured promissory note, shown within other assets in the balance sheet, that is
non-recourse except for 20 percent of the principal amount and all of the
accrued interest. Upon the termination of Gary Matthews' employment with the
Company, the Company has the right or is required to repurchase, depending on
the reason for such termination, such Class A common stock.
Following the issue of 22,750 shares of Class C common stock for the acquisition
of Diamond Back on February 4, 1999, under the terms of the Company's Amended
and Restated Certificate of Incorporation and the Shareholders' Agreement (as
defined), (i) DC Cycle L.L.C., a wholly owned subsidiary of Thayer Equity
Investors III, L.P. ("Thayer") currently controls approximately 65% of the total
voting power of the Company's capital stock; (ii) DICSA, through its wholly
owned subsidiary Derby Finance Sarl ("DFS"), controls approximately 20% of the
total voting power of the Company's capital stock, and (iii) Perseus Cycle,
L.L.C., a wholly owned subsidiary of Perseus Capital, L.L.C. ("Perseus")
controls approximately 13% of the total voting power of the Company's capital
stock.
In addition, following the Recapitalisation and pursuant to a recapitalization
of Raleigh Canada, DICSA received all of the outstanding shares of the Raleigh
Canada Preferred Stock, a new class of nonvoting senior preferred stock of
Raleigh Canada, in exchange for its shares of common stock of Raleigh Canada
pursuant to the Raleigh Canada Exchange Agreement. The shares of Raleigh Canada
Preferred Stock, which have a liquidation value of $23.3 million, are
exchangeable (at the option of DICSA at any time and by the Company at any time
after January 2, 2001) into 8,300 shares of Class A common stock and 15,000
shares of Class B common stock, par value $.01 per share (or the right to
receive securities or such other property into which such classes of stock are
converted).
7. ACQUISITIONS:
On February 4, 1999, the Company acquired the assets (and assumed certain
liabilities) of the Diamond Back Group for $42,774,000 in cash. The Diamond Back
Group consists of Diamond Back International Company Limited, a private British
Virgin Islands company ("Diamond Back"), Western States Import Company Inc., a
Delaware corporation ("Western States") and Bejka Trading A.B., a private
Swedish company ("Bejka"), each of which is engaged in the bicycle, bicycle
parts and accessories and fitness equipment distribution business. Western
States and Bejka had worldwide revenues of approximately $62.9 million and $3.1
million, respectively, in 1998. Diamond Back was essentially a holding company
for the Company's intellectual property and did not generate material revenues.
The Company financed the acquisition of the Diamond Back Group by issuing $20
million principal amount in subordinated notes (the "Subordinated Notes") to an
affiliate of the Government of Singapore and $22.75 million in newly issued
Class C common stock to DC Cycle, L.L.C. and Perseus Cycle L.L.C. The
Subordinated Notes mature in 2010 and bear interest at an annual rate of 19%
compounded daily.
10
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The acquisition was accounted for under the purchase method with the purchase
price allocated as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Accounts receivable................................................... $12,173
Inventories........................................................... 19,086
Other current assets.................................................. 773
Property, plant, and equipment........................................ 645
Intangibles........................................................... 4,750
Goodwill.............................................................. 13,658
Liabilities assumed................................................... (8,311)
-------
Purchase price................................................... 42,774
=======
</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 $13,658,000 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.
11
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THE DERBY CYCLE CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per unit and unit data)
<TABLE>
<CAPTION>
Three months ended
------------------------
MAR 29, MAR 28,
1998 1999
----------- -----------
<S> <C> <C>
NET REVENUES ........................................................ $ 135,377 $ 142,648
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS.................. 2,678 (2,212)
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS PER SHARE........ $ 40.00 $ (32.41)
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK
OUTSTANDING..................................................... 66,950 68,260
========== ===========
</TABLE>
8. STOCK OPTION PLAN
The Company has established one stock option plan: The Derby Cycle Corporation
1998 Stock Option Plan.
On October 21, 1998, the Board of Directors of the Company adopted The Derby
Cycle Corporation 1998 Stock Option Plan (the "Stock Plan"), which authorizes
grants of stock options (including options intended to qualify as "incentive
stock options" within the meaning of Section 422 of the Internal Revenue Code).
The Stock Plan authorizes the Company's Board of Directors to grant options at
any time in such quantity, at such price, on such terms and subject to such
conditions as established by the board. To date, the Company has granted an
aggregate of 4,875 stock options to its management, none of which have vested
yet.
In October 1995, FASB Statement 123 "Accounting for Stock-Based Compensation"
was issued. The Company has adopted the disclosure provisions of FASB Statement
123 in 1999, but opted to remain under the expense recognition provisions of
Accounting Principles Board (APB) Opinion No 25, "Accounting for Stock Issued to
Employees" in accounting for options granted under the Stock Option Plans. Had
compensation expense for share options granted under these schemes been
determined based on fair value at the grant dates in accordance with FASB
Statement 123, the Company's net income and earnings per share for the three
months ended March 28, 1999 would have been reduced to the diluted amounts
shown below:
<TABLE>
<CAPTION>
MAR 28, 1999
(UN-AUDITED)
------------
APPROXIMATE NET INCOME
<S> <C>
As reported (1,221)
Diluted by share options (1,269)
EARNINGS PER SHARE
As reported (21.13)
Diluted by share options (20.03)
</TABLE>
12
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The movement in options outstanding during the three months ended March 28, 1999
is summarized in the following table:
<TABLE>
<CAPTION>
NUMBER OF SHARES WEIGHTED AVERAGE
SUBJECT TO OPTION EXERCISE PRICE
---------------------- ---------------------
<S> <C> <C>
Outstanding at January 1, 1999 0 $0
Granted during 1999 4,875 $1,000
Outstanding at March 28, 1999 4,875 $1,000
Exercisable at March 28, 1999 0 $ 0
</TABLE>
The weighted average fair value of options granted in the three months ended
March 28, 1999 was estimated at $118.39 as at the date of grant using the
Black-Scholes stock option pricing model. The following weighted average
assumptions were used: dividend yield of 0% per annum, annual standard deviation
(volatility) of 0%, risk free interest rate of 4.20% and expected term of 3.0
years.
The exercise price for options outstanding at March 28, 1999 is $1,000 and a
remaining contractual life of 9.56 years.
9. SEGMENTAL INFORMATION: REPORTABLE BUSINESS SEGMENTS
The Company manages its business in seven reportable segments as shown in the
following tables. Consolidation adjustments and certain small operating
companies and non operating companies are included in "Other companies" The
reportable segments are managed separately because each business has differing
customer requirements, either as a result of the regional environment of the
country or differences in products and services offered. A summary of revenues,
operating income, and identifiable assets categorized by the business segment is
as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------
MAR 29, MAR 28,
1998 1999
(UNAUDITED) (UNAUDITED)
----------- -----------
NET REVENUES:
<S> <C> <C>
Raleigh UK.......................................................................... $ 15,638 $ 13,308
Gazelle, Holland.................................................................... 30,551 34,738
Derby Germany....................................................................... 40,335 45,246
Derby USA........................................................................... 11,172 21,302
Raleigh Canada...................................................................... 11,631 11,550
Sturmey Archer, UK and Holland...................................................... 6,924 6,215
Probike, South Africa............................................................... 4,017 3,801
Other companies..................................................................... 1,165 2,227
----------- -----------
Total net revenues............................................................. $ 121,433 $ 138,387
=========== ===========
OPERATING INCOME:
Raleigh UK.......................................................................... $ (1,467) $ (2,304)
Gazelle, Holland.................................................................... 4,846 5,202
Derby Germany....................................................................... 3,480 2,978
Derby USA........................................................................... (415) (718)
Raleigh Canada...................................................................... 891 1035
Sturmey Archer, UK and Holland...................................................... 439 23
Probike, South Africa............................................................... 183 228
Other companies..................................................................... 393 (793)
----------- -----------
Total operating income......................................................... $ 8,350 $ 5,651
=========== ===========
</TABLE>
13
<PAGE>
<TABLE>
DEC 31, MAR 28,
1998 1999
[UNAUDITED]
IDENTIFIABLE ASSETS
<S> <C> <C>
Raleigh UK.................................. 67,719 69,100
Gazelle, Holland............................ 55,784 62,690
Derby Germany............................... 91,789 111,221
Derby USA................................... 36,356 86,021
Raleigh Canada.............................. 13,997 20,613
Sturmey Archer, UK and Holland.............. 25,060 25,167
Probike, South Africa....................... 11,993 8,898
Other companies............................. 22,592 31,465
---------- ----------
Total identifiable assets.............. 325,290 415,175
========== ==========
</TABLE>
10. RECENT DEVELOPMENTS
On May 7, 1999 the Company announced to its employees that Raleigh UK intends
to cease manufacturing steel bicycle frames altogether by the end of 1999 due
to increased consumer demand for aluminium frames. Steel frames manufactured
by Raleigh UK currently account for approximately 50% of all frames sold by
Raleigh UK, with the balance being fabricated from aluminium and imported
from Asia.
The Company is currently negotiating the sale of that part of the factory site
that will be released, subject to the consent of the members of the Company's
syndicated revolving credit facility. 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 senior credit facility, or a
combination thereof.
Other components of the restructuring include the streamlining of Raleigh UK's
product development and marketing functions.
The consolidation of Raleigh UK's bicycle operations together with the other
restructuring activities will produce greater efficiancies and help re-build the
profitability. The nature of these changes requires them to be phased over the
balance of 1999, and the precise number and timing of associated lay-offs will
not be defined until more detailed work has been completed.
11. LYON INVESTMENTS B.V. SUMMARIZED FINANCIAL INFORMATION
Lyon Investments B.V. ("Lyon"), a Dutch Company, is a wholly owned subsidiary of
the Company which is is a co-issuer of $20,250,000 of the $100,000,000 of 10
percent Senior Notes and all of the DM110,000,000 of 93/8 percent Senior Notes.
As co-issuers, Lyon and the Company are joint and severally liable with respect
to the Senior Notes. The following summarized financial information sets forth
the combined financial position and results of operations of Lyon, together with
its subsidiaries, Derby Nederland B.V. and Engelbert Wiener Bike Parts GmbH.
Derby Nederland is a holding company owning 100 percent of Gazelle, Sturmey
Archer B.V., and Raleigh B.V.
14
<PAGE>
LYON INVESTMENTS B.V.
SUMMARIZED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
DEC 31, MAR 28,
1998 1999
(UNAUDITED)
----------- -----------
<S> <C> <C>
CASH AND CASH EQUIVALENTS................................................................ $ 8,470 $ 6,620
ACCOUNTS RECEIVABLE, net................................................................. 15,875 30,561
INVENTORIES.............................................................................. 26,433 24,268
LOANS TO INTERNAL GROUP COMPANIES........................................................ 137,768 133,165
OTHER CURRENT ASSETS..................................................................... 3,002 3,760
----------- -----------
Total current assets................................................................ 191,548 198,374
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, net....................................................... 11,552 10,482
INTANGIBLES.............................................................................. 2,715 2,466
PREPAID PENSION ASSET.................................................................... 16,920 16,355
----------- -----------
Total assets........................................................................ $ 222,735 $ 227,677
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
SHORT-TERM BORROWINGS.................................................................... $ 149,252 $ 149,257
OTHER CURRENT LIABILITIES................................................................ 24,015 28,871
----------- -----------
Total current liabilities........................................................... 173,267 178,128
10% $100,000,000 SENIOR NOTES............................................................ 20,250 20,250
93/8% DM110,000,000 SENIOR NOTES......................................................... 65,870 61,454
OTHER LIABILITIES........................................................................ 5,971 5,736
----------- -----------
Total liabilities................................................................... 265,358 265,568
SHAREHOLDERS' DEFICIT.................................................................... (42,623) (37,891)
----------- -----------
Total liabilities and shareholders' deficit......................................... $ 222,735 $ 227,677
=========== ===========
</TABLE>
15
<PAGE>
LYON INVESTMENTS B.V.
UNAUDITED SUMMARIZED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MAR 29, MAR 28,
1998 1999
--------- ---------
<S> <C> <C>
NET REVENUES............................................................................. $ 39,098 $ 42,823
COST OF SALES............................................................................ (29,974) (32,020)
--------- ---------
Gross profit........................................................................ 9,124 10,803
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES............................................ (4,473) (5,562)
--------- ---------
Operating income.................................................................... 4,651 5,241
INTEREST EXPENSE......................................................................... (431) (4,089)
INTEREST INCOME.......................................................................... 7 2,046
OTHER INCOME (EXPENSE) NET............................................................... 2 (8)
--------- ---------
Income before income taxes.......................................................... 4,229 3,190
PROVISION FOR INCOME TAXES............................................................... (1,456) (1,114)
--------- ---------
Net income.......................................................................... $ 2,773 $ 2,076
========= =========
</TABLE>
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The Company is a world-leading designer, manufacturer and marketer of bicycles.
The Company holds the leading market share in the United Kingdom, The
Netherlands, Canada and Ireland, holds the leading market share in the adult
bicycle market in Germany and is also the second largest supplier to independent
bicycle dealers ("IBDs") in the United States. Competing primarily in the
medium-to premium-priced market, the Company owns or licenses many of the most
recognized brand names in the bicycle industry, including leading global brands
such as Raleigh, Diamond Back, Nishiki and Univega, and leading regional brands
such as Gazelle in The Netherlands and Kalkhoff, Musing, Winora and Staiger in
Germany. The Company designs, manufactures and markets a wide range of bicycles
in all major product categories: (i) all-terrain or mountain bicycles ("MTBs"),
(ii) city bicycles, also called touring or upright bicycles, (iii) hybrid
bicycles, also called comfort or cross bicycles, (iv) juvenile bicycles,
including bicycle motocross ("BMX") bicycles, and (v) race/road bicycles. The
Company distributes branded bicycles through extensive local market networks
of IBDs as well as through national retailers, and distributes private label
bicycles through mass merchandisers and specialty stores.
Through a series of acquisitions and plant expansions, the Company has created a
global bicycle business distinguished by its leading market positions, low cost
production, extensive distribution network and reputation for high quality.
Organized in 1986 for the purpose of acquiring the Raleigh, Gazelle and Sturmey
Archer businesses from TI Group plc, the Company expanded into the United States
and Germany in 1988. Since then, the Company has acquired additional well-known
brands and leveraged its existing manufacturing plants and component sourcing
operations to lower unit costs for its acquired businesses.
On February 4, 1999, the Company acquired the assets (and assumed certain
liabilities) of the Diamond Back Group for $42.8 million in cash.
The Diamond Back Group consisted of Diamond Back International Company Limited,
a private British Virgin Islands company ("Diamond Back"), Western States Import
Company Inc., a Delaware corporation ("Western States") and Bejka Trading A.B.,
a private Swedish company ("Bejka"), each of which is engaged in the bicycle,
bicycle parts and accessories and fitness equipment distribution business.
Western States and Bejka had worldwide revenues of approximately $62.9 million
and $3.1 million, respectively, in 1998. Diamond Back was essentially a holding
company for the Company's intellectual property and did not generate material
revenues. The Company financed the acquisition of the Diamond Back Group by
issuing $20 million principal amount in subordinated notes (the "Subordinated
Notes") to an affiliate of the Government of Singapore and $22.75 million in
newly issued Class C common stock to DC Cycle, L.L.C. and Perseus Cycle L.L.C.
The Subordinated Notes mature in 2010 and bear 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 completed its internal reorganization and
investment program in 1996, having made major steps toward improving production
efficiency and increasing manufacturing flexibility.
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.
In 1998, 55% of the Company's net revenues were denominated in currencies within
the European Monetary System, 18% were denominated in pounds Sterling and 27%
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.
17
<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 28, 1999 TO THREE MONTHS ENDED
MARCH 29, 1998
All comparisons in the following discussion and analysis are against the
corresponding three month period ended March 29, 1998, unless otherwise stated.
<TABLE>
<CAPTION>
UNITS SOLD: THREE MONTHS ENDED,
-----------------------
THOUSANDS OF BICYCLES MAR 29, MAR 28,
1998 1999
--------- -----------
<S> <C> <C>
Raleigh UK........................................ 81 71
Gazelle........................................... 87 92
Derby Germany..................................... 166 177
Derby USA......................................... 41 85
Raleigh Canada.................................... 123 131
Probike........................................... 31 32
Other companies and group transactions............ (3) 2
--------- -----------
Total units sold............................. 526 590
========= ===========
</TABLE>
UNITS SOLD. Units sold increased in all markets, apart from UK, by 74 thousand
units, of which Diamond Back accounted for 45 thousand units, and the balance of
29 thousand units represented 6.5% organic growth. Particularly strong growth
was seen at Gazelle and Derby Germany in the IBD sector following successful
product range launches in the fall. Action has been taken at Raleigh UK to
improve the competitiveness of the product line for 1999 and to further
incentivise retailers to sell Raleigh. However as the UK market is at a seasonal
low point in the first quarter and is generally weak, it is not until the second
quarter that the effect of the action taken will be felt. Production at Raleigh
Canada was adversely affected by an ice storm in 1998, which led to unusually
low sales in the first quarter of 1998 in Canada.
<TABLE>
<CAPTION>
NET REVENUES: THREE MONTHS ENDED,
-------------------------
$ MILLIONS MAR 29, MAR 28,
1998 1999
----------- -----------
<S> <C> <C>
Raleigh UK....................................... $ 15.6 $ 13.3
Gazelle.......................................... 30.6 34.7
Derby Germany.................................... 40.3 45.2
Derby USA........................................ 11.2 21.3
Raleigh Canada................................... 11.6 11.6
Sturmey-Archer................................... 6.9 6.2
Probike.......................................... 4.0 3.8
Other companies and group transactions........... 1.2 2.3
----------- -----------
Total net revenues.......................... $ 121.4 $ 138.4
=========== ===========
</TABLE>
18
<PAGE>
NET REVENUES. Net revenues increased by $17.0 million to $138.4 million for the
first quarter of 1999 in-line with the increase in units sold. $7.1 million of
the increase in bicycle sales, a $2.2 million increase in the sales of parts
and accessories and $0.9 million sales of fitness equipment were generated by
Diamond Back. Sturmey-Archer's revenues dropped by $0.5 million in the
engineering components business following the loss of one major customer during
the first quarter of 1998 and other business since New business is being
actively sought to come on stream in the third quarter.
GROSS PROFIT. Gross profit for the first quarter increased by $1.8 million, but
on increased revenue dollars, this represented a 1.8 percentage point margin
decrease. Gross margins at Raleigh UK dropped from 17.9% to 9.8%, accounting for
a 0.8 percentage point decrease in gross margin of the Company. The thin margins
at Raleigh UK arose due to a combination of weak product mix and weak
distribution channel mix, lower cost recovery on the low production volumes and
discounting on the sale of obsolete models.
Following the adoption of FAS 133, the Company reports changes in the mark-to-
market value of its foreign currency forward cover contracts and currency
options in Other Comprehensive Income in 1999. This differs from the first
quarter of 1998 when a $0.8 million favorable change in the mark-to-market value
of foreign currency forward cover contracts was included in Cost of Sales, which
improved year ago margins by 0.7 percentage points.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the first quarter, expenses of
$27.3 million increased by $2.5 million following the acquisition of Diamond
Back, $0.8 million in termination costs arising from the rationalization of the
Raleigh Germany, Holland, Belgium and Ireland operations, together with $1.2
million increased costs of continuing businesses, most of which arose in Germany
following the increase in activity there. Management of the Raleigh distribution
operations in Germany, Holland and Belgium, previously run on a stand-alone
basis, has been combined with the Gazelle and Derby Germany operations, although
the results are still included in Other Companies in this discussion for ease of
comparison. The Raleigh Ireland warehouse has been closed, leaving only a sales
force in Ireland. These rationalization steps are projected to reduce on-going
expenses by $1.8 million in the current year.
<TABLE>
<CAPTION>
OPERATING INCOME: THREE MONTHS ENDED,
-------------------------
$ MILLIONS MAR 29, MAR 28,
1998 1999
----------- -----------
<S> <C> <C>
Raleigh UK............................................................................... $ (1.5) $ (2.3)
Gazelle.................................................................................. 4.8 5.2
Derby Germany............................................................................ 3.5 3.0
Derby USA................................................................................ (0.4) (0.7)
Raleigh Canada........................................................................... 0.9 1.0
Sturmey-Archer........................................................................... 0.4 0.0
Probike.................................................................................. 0.2 0.2
Other companies and group transactions................................................... 0.5 (0.7)
----------- -----------
Total operating income.............................................................. $ 8.4 $ 5.7
=========== ===========
</TABLE>
OPERATING INCOME. Operating income of $5.7 million for the first quarter
decreased by $2.7 million due to the lower gross margin and higher selling
general and administrative expenses. Diamond Back broke even in the quarter,
which diluted the operating margin.
INTEREST EXPENSE. Interest expense increased by $4.7 million for the quarter to
$6.5 million due to the increased debt and higher interest rate margin following
the Recapitalization and the acquisition of Diamond Back.
PROVISION FOR INCOME TAXES. Although the company made a loss before income
taxes, there is still a tax charge of $0.4 million in the quarter as some of the
losses cannot be relieved against the income earned in different countries.
19
<PAGE>
NET INCOME. Net income decreased by $5.8 million in the quarter. The decrease
was primarily the result of the $4.7 million increase in interest expense, and
higher selling, general and administrative expenses, as discussed above.
<TABLE>
<CAPTION>
EBITDA: THREE MONTHS ENDED,
-------------------------
$ MILLIONS MAR 29, MAR 28,
1998 1999
----------- -----------
<S> <C> <C>
Raleigh UK................................................................................ $ (1.0) $ (1.9)
Gazelle................................................................................... 4.8 5.5
Derby Germany............................................................................. 4.7 4.0
Derby USA................................................................................. (0.3) (0.5)
Raleigh Canada............................................................................ 1.3 1.4
Sturmey-Archer............................................................................ 0.4 0.0
Probike................................................................................... 0.2 0.3
Other companies and group transactions.................................................... 0.1 (1.3)
----------- -----------
Total EBITDA......................................................................... $ 10.2 $ 7.5
=========== ===========
</TABLE>
EBITDA. EBITDA of $7.5 million for the quarter decreased by $2.7 million due to
changes in operating income explained above.
LIQUIDITY AND CAPITAL RESOURCES
Demand for bicycles in the Company's principal markets is seasonal,
characterized in most cases by a majority of consumer sales in the spring and
summer months. In the United Kingdom, South Africa and Ireland, consumer
revenues are typically higher in the last four months of the calendar year due
to increased sales of juvenile bicycles in the months preceding Christmas.
Accordingly, dealers' peak purchasing months in those countries are October and
November when they build inventory in anticipation of Christmas sales of
juvenile bicycles. Excluding this holiday seasonality, the Company's working
capital requirements are greatest during February, March and April at the start
of the Company's Peak Season as receivable levels increase. The Company offers
extended credit terms during the months prior to the Peak Season, although the
Company encourages early payments through trade discounts.
Finished goods inventory remains relatively constant throughout the fiscal year
and the level of raw materials increases and decreases normally only to
accommodate production needs. Work in progress represents, on average, eight
days' production. Inventory levels reach a minimum at the end of the Peak
Season.
Net cash flows used in operating activities decreased $7.0 million to a $43.8
million outflow for the first quarter of 1999 from $50.8 million used in 1998.
This improvement was due to a $9.4 million smaller increase in inventories,
offset by a $2.7 million decrease in operating income, while increased activity
levels led to larger increases in receivables and accounts payable of $9.8
million and $7.8 million respectively. The smaller increase in inventories arose
due to the higher inventory levels at the beginning of the quarter: closing
inventories were higher than a year ago by $2.9 million at Derby Germany due to
the growth of that operation, while the Diamond Back acquisition added $19.3
million. The change in interest payment date on the Company's Senior notes from
January 30/July 30, to May 15/November 15, resulted in an increase in other
current liabilities as at March 28, 1999 compared with a year ago.
The net cash flows used in operating activities of $50.8 million and $43.8
million in the first quarter of 1998 and 1999 respectively were financed, in the
main, by drawings under revolving credit facilities of
20
<PAGE>
$45.5 million and $31.1 million, and decrease in cash balances of $7.3 million
and $10.6 million respectively.
On February 4, 1999, the Company acquired the assets (and assumed certain
liabilities) of the Diamond Back Group for $42.8 million. The Company financed
the acquisition of the Diamond Back Group by issuing $20.0 million in
Subordinated Notes and $22.75 million in Class C common stock.
The actuarial valuation of the UK pension schemes carried out as at April 1998
showed that the schemes were in surplus based on UK funding criteria and
employer's contributions ceased from mid-year 1998. The Dutch pension scheme has
been in surplus and no employer's contributions have been made for a number of
years. As a result, the Company's contributions to its defined benefit pension
plans were less than $0.1 million in the quarter, compared with $0.6 million in
the first quarter of 1998. The Company adopted Statement of Financial Accounting
Standards No. 87, "Employers' Accounting for Pensions" on January 1, 1993. The
impact of adopting SFAS No. 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 $1.2 million and $1.3 million in the
first quarters of 1998 and 1999 respectively. Net periodic pension income
includes amortization of the transition asset into income of $0.6 million in the
first quarters of both 1998 and 1999.
The Company's capital expenditures were $1.4 million and $1.0 million in the
first quarters of 1998 and 1999 respectively, 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 and
DFS as part of the Recapitalization and the Retained Equity of, in aggregate,
$108 million and debt in the form of Senior Notes and bank facilities. The
Company incurred significant indebtedness in connection with the
Recapitalization. As of March 28, 1999, the Company had $273.4 million of
combined indebtedness, including $161.5 of Senior Notes, $20.0 million of
Subordinated Notes, $90.0 million of borrowings under the Revolving Credit
Agreement and $1.9 million of borrowings under the South African credit
facility. The Senior Notes are issued under Indentures which contain certain
covenants that, among other things, restrict the ability of the Company and its
Restricted Subsidiaries to incur additional indebtedness, pay dividends, redeem
capital stock, redeem subordinated obligations, make investments, undertake
sales of assets and subsidiary stock, engage in transactions with affiliates,
issue capital stock, permit liens to exist, operate in other lines of business,
engage in certain sale and leaseback transactions and engage in mergers,
consolidations or sales of all or substantially all the assets of the Company.
Accordingly, certain activities or transactions that the Company may want to
pursue or enter into may be restricted or prohibited, and such restrictions and
prohibitions could, from time to time, impact available cash on hand and the
liquidity of the Company.
The Company uses derivative financial instruments including currency swaps,
interest rate swaps, interest rate caps, forward foreign exchange contracts, and
currency options. The Company enters into currency and interest rate swaps such
that the notional principal amount is equal to the principal amount of the
underlying debt. The swaps achieve the effect of synthetically converting the
original United States dollar denominated debt into several other foreign
currencies and converting the interest rate on the debt from United States
dollar rates to those applicable for that currency. The Company enters into
forward foreign exchange contracts and options to minimize the impact of
currency movements, principally on purchases of inventory and sales of goods
denominated in currencies other than the subsidiaries' functional currencies.
Interest rate caps have been purchased to limit the blended interest rate paid
on the revolving credit facility to under 8% over the next 2 1/4 years. Currency
basket options have been purchased to substantially maintain the value of
foreign operating profits upon conversion into US dollars, in order to protect
the ability to service the US senior notes from the effect of changes in foreign
exchange rates.
The Revolving Credit Agreement provides for a seven-year DM214 million senior
secured revolving credit facility to be made available to the Company's
operating companies. Borrowings under the
21
<PAGE>
Revolving Credit Agreement are available subject to a borrowing base determined
as a percentage of eligible assets. The Company's borrowings peak in March/April
each year. The Company believes that it has adequate headroom on its funding
requirements for the next year.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in foreign currency exchange
rates and interest rates. In order to manage the risk arising from these
exposures, the Company enters into a variety of foreign currency and interest
rate contracts and options.
FOREIGN CURRENCY EXCHANGE RATE RISK
The Company has foreign currency exposures related to buying and selling in
currencies other than the functional currencies in which it operates. The
Company's net trading position is long in the Euro, Canadian Dollar and South
African Rand, arising from its revenues in those currencies, and short of the
New Taiwan Dollar, Japanese Yen and U.S. Dollar as a result of components
purchased in those currencies. The Company has a natural currency hedge against
Pounds Sterling arising from its position as both an importer and exporter in
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 SFAS133 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.
The foreign currency element of the Company's debt under the Senior Notes and
revolving credit facility has, since September 1998, generally been arranged to
align with the denomination of the book value of net assets. By doing this, the
Company reduces the translation exposure of net worth to changes in foreign
currency exchange rates. The three principal exceptions are: (1) $37 million of
net assets denominated in Pounds Sterling arising from the Company's relatively
large presence in UK, (2) $37 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. Up to the Recapitalization on May 14, 1998, the
Company was organized under DICSA who prepared consolidated financial statements
in Pounds Sterling.
The Company generates most of its trading income in foreign currencies. In order
to ensure that such trading income can be converted to yield sufficient U.S.
Dollars to service 67% of the interest on the $100 million 10% Senior Notes
through May 2001, currency options were purchased in 1998. These currency
22
<PAGE>
options are for $6.7 million per year, selling Df6 million, (GB pound)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 U.S. 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 U.S. Dollar denominated Series
A and Series C Senior Notes into foreign currency debt of those countries
where the Company had operations. This converted the interest on the debt from
U.S. Dollars to those foreign currencies in which trading income was generated.
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 rates 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 a weighted average interest rate 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 facilities
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
($119.6 million). As of March 28, 1999, the Company had indebtedness outstanding
under the Revolving Credit Agreement of approximately $90.1 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 $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.
23
<PAGE>
RESTRICTIVE LOAN COVENANTS
The Revolving Credit Agreement contains a number of covenants that, among other
things, restrict the ability of the Company and its subsidiaries to dispose of
shares in any subsidiary, dispose of assets, incur additional indebtedness,
engage in mergers and acquisitions, exercise certain options, make investments,
incur guaranty obligations, make loans, make capital distributions, enter into
joint ventures, repay the Notes, make loans or pay any dividend or distribution
to the Issuers for any reason other than (among other things) to pay interest
(but not principal or Additional Amounts) owing in respect of the Notes, incur
liens and encumbrances and permit the amount of receivables and inventory to
exceed specified thresholds. The Company was in compliance with the covenants
under the Revolving Credit Agreement as at March 28, 1999 and continues to
remain in compliance.
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.
24
<PAGE>
INFORMATION TECHNOLOGY--YEAR 2000
The Company is in the process of implementing a plan designed to ensure that all
application software used in connection with the Company's management
information systems, including internally developed systems, software purchased
from outside vendors and embedded chips at the Company's manufacturing
facilities, will manage and manipulate data involving the transition of dates
from 1999 to 2000 without functional or data abnormality and without inaccurate
results related to such dates. Due to the fact that existing software often
defines each year with two digits rather than four digits, the Company's
computers that have date-sensitive software may recognize a date using "00" as
occurring in the year 1900 rather than the year 2000, which would result in such
abnormalities and inaccuracies and lead to disruptions of the Company's
operations, including a temporary inability to process customer orders, send
invoices or engage in other normal business activities. Many of the Company's
existing computer systems will need to be retired, replaced or remediated prior
to the year 2000. Retirement, replacement and remediation may require that, over
the next few years, a substantial portion of the Company's management
information systems spending be allocated to such activities. The Company is
currently in the process of replacing and upgrading the computer systems of its
United States and Canadian operations. The Company spent a total of
approximately $2.3 million in 1998 and expects to spend $1.1 million in 1999 to
achieve "Year 2000 compliance" for all of its operations. At March, 1999 all the
compliance plans of the Company's operations were more than 75% completed. The
Company plans to complete all Year 2000 compliance efforts by the third quarter
of 1999. The costs and timing of such efforts, however, are based upon
management's best estimates, which are derived using assumptions relating to,
among other things, the availability of certain resources, the timing of actions
taken by third parties and other factors. Additional expenditures beyond the
Company's projections may be necessary. In the event that the Company materially
underestimates the amount of funds or the time necessary to resolve identified
problems or that any information systems relied upon by the Company for critical
functions are not substantially Year 2000 compliant in a timely manner, there
could be a material adverse effect on the Company's business, financial
condition and results of operations.
The Company's plan for the Year 2000 calls for communication with significant
suppliers and customers to determine the readiness of third parties' remediation
of their own Year 2000 issues. As part of its assessment, the Company is
evaluating the level of validation it will require of third parties to ensure
their Year 2000 readiness. The Company believes that the purchasing patterns of
customers and potential customers may be affected by Year 2000 issues as
companies expend significant resources to correct or patch their current
software systems for Year 2000 compliance. These expenditures may result in
reduced funds available to purchase the Company's products, which could result
in a material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that any Year 2000 compliance
problems of the Company's customers or suppliers will not have a material
adverse effect on the Company's business, financial condition and results of
operations.
To date, the Company has not encountered any material Year 2000 issues
concerning its computer systems. Accordingly, the Company has not at this time
developed a contingency plan if it fails to achieve Year 2000 compliance and
does not plan to develop such a plan until it learns of material impediments in
timely implementation of its plans for the Year 2000.
RISK OF FOREIGN EXCHANGE RATE FLUCTUATIONS; INTRODUCTION OF THE EURO
The Company's business is conducted by operating subsidiaries in many countries,
and, accordingly, the Company's results of operations are subject to currency
translation risk and currency transaction risk. With respect to currency
translation risk, the results of operations of each of these operating
subsidiaries are reported in the relevant local currency and then translated
into U.S. dollars at the applicable currency exchange rate for inclusion in the
Company's financial statements. The appreciation of the U.S. dollar against the
local currencies of the operating subsidiaries will have a negative impact on
the Company's sales and operating margin. Conversely, the depreciation of the
U.S. dollar against such currencies will have a positive impact. Fluctuations in
the exchange rate between the U.S. dollar and the other currencies in which the
Company conducts its operations may also affect the book value of the Company's
assets and the amount of the Company's shareholders' equity. In addition, to the
extent indebtedness of the Company is denominated in different currencies,
changes in the values of such currencies relative to
25
<PAGE>
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 U.S. 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 "E.U."), including
the Deutsche Mark and Dutch Guilder.
Following introduction of the Euro, the existing sovereign currencies (the
"legacy currencies") of the eleven participating member countries of the EU (the
"participating countries") who adopted the Euro as their common legal currency
are scheduled to remain legal tender in the participating countries as
denominations of the Euro until January 1, 2002 (the "transition period"). The
Euro conversion may impact the Company's competitive position as the Company may
incur increased costs to conduct business in an additional currency during the
transition period. Additionally, the participating countries' pursuit of a
single monetary policy through the European Central Bank may affect the
economies of significant markets of the Company. The Company will also need to
maintain and in certain circumstances develop information systems software to
(1) convert legacy currency amounts to Euro; (2) convert one legacy currency to
another; (3) perform prescribed rounding calculations to effect currency
conversions; and (4) permit transactions to take place in both legacy currencies
and the Euro during the transition period. Since the Company conducts extensive
business operations in, and exports its products to, several of the
participating countries, there can be no assurance that the conversion to the
Euro will not have a material adverse effect on the Company's business,
financial condition or results of operations. Similarly, in the event that the
Company materially underestimates the costs, timeliness and adequacy of
modifications to its information systems software, there could be a material
adverse effect on the Company's business, financial condition and results of
operations.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS
The Company incurred substantial indebtedness in connection with the
Recapitalization and acquisition of Diamond Back and has a highly leveraged
capital structure. As of March 28, 1999, the Company had combined total
indebtedness of $273.4 million (including all indebtedness and guarantees of
indebtedness under the Revolving Credit Agreement and indebtedness under the
South African Credit Facility, but excluding, in each case, unused commitments
thereunder), preferred stock of $45.4 million, stock rights of $23.3 million and
the shareholders' deficit was $47.8 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
26
<PAGE>
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 componentry from foreign suppliers, the timing of operating and
advertising expenditures and changes in the mix of products ordered by
independent bicycle dealers and mass merchants. As a result, the actual results
may differ materially from those projected in the forward-looking statements.
Because of these and other factors that may affect the Company's operating
results, past financial performance should not be considered an indicator of
future performance, and investors should not use historical trends to anticipate
results or trends in future periods.
27
<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.
ITEM 2. CHANGES IN SECURITIES
Upon the appointment, on January 11, 1999 of Gary Matthews as Chief Executive
Officer the company issued 1,500 shares of Class A common stock for a total of
$1,500,000.
On February 4, 1999, in connection with the acquisition of the Diamond Back
Group, the Company issued 22,750 shares of Class C common stock for a total
amount of $22,750,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
a) Exhibits: None
b) Reports on Form 8-K filed for three months ended March 28, 1999: None
28
<PAGE>
SIGNATURES
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
Washington, USA on May , 1999.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
<S> <C> <C>
President, Chief
Executive Officer
/s/ Gary Matthews and Director
_________________________________ (principal May 11, 1999
GARY S MATTHEWS executive officer)
Chief Financial
Officer (principal
/s/ Simon J. Goddard financial and
_________________________________ accounting officer) May 11, 1999
SIMON J. GODDARD
/s/ Frederic V. Malek Chairman of the
_________________________________ Board and Director May 11, 1999
FREDERIC V. MALEK
/s/ Alan Finden-Crofts
_________________________________ Director May 11, 1999
ALAN FINDEN-CROFTS
/s/ A. Edward Gottesman
_________________________________ Director May 11, 1999
A. EDWARD GOTTESMAN
Frank H. Pearl
_________________________________ Director May 11, 1999
FRANK H. PEARL
Carl J. Rickersten
_________________________________ Director May 11, 1999
CARL J. RICKERTSEN
/s/ Thomas H. Thomsen
_________________________________ Director May 11, 1999
THOMAS H. THOMSEN
</TABLE>
29
<PAGE>
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 Lyon Investments B.V.), 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:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
<S> <C> <C>
/s/ K. Dantuma
_________________________________ Managing Director May 11, 1999
K. DANTUMA
/s/ S. J. Goddard
_________________________________ Managing Director May 11, 1999
S. J. GODDARD
/s/ F. E. Agar
_________________________________ Managing Director May 11, 1999
F. E. AGAR
</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
Washington, USA on May 11, 1999.
Lyon Investments B.V.
/s/ Simon J. Goddard
By: ______________________________
Name: Simon J. Goddard
Title: Managing Director
30
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-28-1999
<CASH> 6,873
<SECURITIES> 0
<RECEIVABLES> 133,460
<ALLOWANCES> 0
<INVENTORY> 124,571
<CURRENT-ASSETS> 273,714
<PP&E> 46,285
<DEPRECIATION> 0
<TOTAL-ASSETS> 415,175
<CURRENT-LIABILITIES> 180,201
<BONDS> 181,454
45,432
0
<COMMON> 1
<OTHER-SE> (47,785)
<TOTAL-LIABILITY-AND-EQUITY> 415,175
<SALES> 138,387
<TOTAL-REVENUES> 138,387
<CGS> 105,420
<TOTAL-COSTS> 105,420
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,517
<INCOME-PRETAX> (778)
<INCOME-TAX> 434
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,221)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
