<PAGE>
THE DERBY CYCLE CORPORATION
LYON INVESTMENTS B.V.
JULY 2, 2000
FORM 10-Q QUARTERLY REPORT
<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 July 2, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Transition Period from __________ to __________
Commission File Number 0001067447
THE DERBY CYCLE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 31-1038896
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Daniel S. Lynch
The Derby Cycle Corporation
300 First Stamford Place (5th Floor)
Stamford, Connecticut 06902-6765
(Address of principal executive offices, including zip code)
Telephone: (203) 961 1666
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days, Yes (X) No.
The number of shares outstanding of each class of common stock, as of July 2,
2000 was:
Class A $0.01 par value 47,760
Class C $0.01 par value 23,640
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THE DERBY CYCLE CORPORATION
JULY 2, 2000 FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
PART I
------
<S> <C>
ITEM 1. FINANCIAL STATEMENTS............................................................................. 1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............ 16
PART II
-------
ITEM 1. LEGAL PROCEEDINGS................................................................................ 27
ITEM 2. CHANGES IN SECURITIES............................................................................ 28
ITEM 3. EXHIBITS AND REPORTS ON FORM 8-K................................................................. 29
</TABLE>
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PART I
------
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-------------
<S> <C>
Consolidated Balance Sheets as of December 31, 1999 and July 2, 2000 (unaudited)................... 2
Unaudited Consolidated Statements of Operations for the quarters and six months ended June 27, 3
1999 and July 2, 2000.............................................................................
Unaudited Consolidated Statement of Shareholders' Deficit for the six months ended July 2, 2000.... 4
Unaudited Consolidated Statements of Cash Flows for the six months ended June 27, 1999 and July 2, 5
2000..............................................................................................
Notes to Consolidated Financial Statements......................................................... 7
</TABLE>
1
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The Derby Cycle Corporation
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
Assets Dec 31, Jul 2,
1999 2000
unaudited
------------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................... $ 28,938 $ 6,221
Accounts receivable, net............................................................ 93,167 107,105
Inventories......................................................................... 121,499 116,904
Other current assets................................................................ 9,926 10,378
-------------- ----------
Total current assets............................................................. 253,530 240,608
-------------- ----------
Property, plant and equipment, net.................................................... 40,615 36,186
Intangibles, net...................................................................... 38,044 37,056
Other assets.......................................................................... 50 50
Prepaid pension assets................................................................ 57,345 56,583
-------------- ----------
Total assets..................................................................... $ 389,584 $ 370,483
-------------- ----------
Liabilities and Shareholders' Deficit
Current liabilities:
Accounts payable.................................................................... $ 60,985 $ 61,060
Accrued liabilities................................................................. 23,776 31,827
Income taxes payable................................................................ 3,344 5,392
Short-term borrowings............................................................... 69,207 55,103
Other current liabilities........................................................... 5,721 8,182
------------- ----------
Total current liabilities........................................................ 163,033 161,564
------------- ----------
Other liabilities:
Long-term debt...................................................................... 176,410 173,399
Excess of assets acquired over cost of acquisitions................................. 10,404 12,823
Deferred income taxes............................................................... 18,878 18,745
Other liabilities................................................................... 10,853 10,922
------------- ----------
Total liabilities................................................................ 379,578 377,453
------------- ----------
Minority interest..................................................................... 32 --
Commitments and contingencies
Preferred stock with redemption rights, $0.01 par value, 25,000 shares authorized, 49,141 51,809
issued, & outstanding of Series A and 3,000 shares authorized, issued, & outstanding
of Series B & 100 shares authorized of Series C......................................
Stock rights.......................................................................... 23,300 23,300
Shareholders' equity (deficit):
Class A common stock, $0.01 par value, 200,000 shares authorized, 47,160 & 47,760 1 1
shares issued & outstanding as of December 31, 1999 & July 2, 2000.................
Class B common stock, $0.01 par value, 15,000 shares authorized, nil shares issued - -
& outstanding as of December 31, 1999 & July 2, 2000...............................
Class C common stock, $0.01 par value, 30,000 shares authorized, 23,490 & 23,640 - -
issued & outstanding as of December 31, 1999 & July 2, 2000........................
Additional paid-in capital.......................................................... 48,949 49,699
Class C common stock warrants....................................................... - 2,900
Receivable from shareholders........................................................ (3,113) (3,750)
Accumulated deficit................................................................. (100,460) (118,887)
Accumulated other comprehensive income (loss)....................................... (7,844) (12,042)
------------- ----------
Total shareholders' deficit...................................................... (62,467) (82,079)
------------- ----------
Total liabilities and shareholders' deficit...................................... $ 389,584 $ 370,483
------------- ----------
</TABLE>
2
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The Derby Cycle Corporation
Unaudited Consolidated Statements of Operations
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
Quarter ended Six months ended
------------------------- -------------------------
Jun 27, Jul 2, Jun 27, Jul 2,
1999 2000 1999 2000
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues............................................... $ 161,504 $ 165,373 $ 295,240 $ 308,986
Cost of goods sold......................................... (121,026) (124,416) (222,493) (233,503)
--------- --------- --------- ---------
Gross profit.......................................... 40,478 40,957 72,747 75,483
Selling, general, and administrative expenses.............. (28,582) (29,998) (54,405) (59,337)
Restructuring charge....................................... (5,918) (112) (6,465) (112)
Non-recurring items........................................ (1,110) (61) (1,379) (61)
--------- --------- --------- ---------
Operating income...................................... 4,868 10,786 10,498 15,973
Other income (expense):
Interest expense......................................... (6,721) (7,247) (13,238) (17,582)
Interest income.......................................... 116 140 174 333
Other income (expense), net.............................. - 1,190 - 1,242
Loss on dispositions of property, plant and equipment.... - (11) - (569)
--------- --------- --------- ---------
Loss before income taxes and minority interest........
(1,737) 4,858 (2,566) (603)
Provision for income taxes................................. 497 (2,760) 59 (4,540)
Minority interest.......................................... (15) - (24) -
--------- --------- --------- ---------
Income from continuing operations........................ (1,255) 2,098 (2,531) (5,143)
Discontinued operations (note 9)
Income from discontinued operations...................... (104) 280 (49) 442
Loss on sale of discontinued operations.................. - (8,648) - (8,648)
--------- --------- --------- ---------
Loss on discontinued operations....................... (104) (8,368) (49) (8,206)
--------- --------- --------- ---------
Net loss.............................................. (1,359) (6,270) (2,580) (13,349)
Dividends accrued on preferred stock....................... (1,064) (1,319) (1,064) (2,668)
--------- --------- --------- ---------
Net loss applicable to common shareholders............ $ (2,423) $ (7,589) $ (3,644) $ (16,017)
========= ========= ========= =========
Basic and diluted net income (loss) applicable to common $ (34.65) $ (102.69) $ (56.37) $ (219.52)
shareholders per share....................................
========= ========= ========= =========
Weighted average number of shares of common stock
outstanding............................................... 69,931 73,900 64,641 72,964
========= ========= ========= =========
</TABLE>
3
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The Derby Cycle Corporation
Unaudited Consolidated Statement of Shareholders' Deficit
(Dollars in thousands)
<TABLE>
<CAPTION>
Common Additional Stock Receivable
Stock Paid-In Warrants From
Capital Share-holders
---------- ------------- ---------- --------------
<S> <C> <C> <C> <C>
January 1, 2000............................................ $ 1 $ 48,949 $ - $ (3,113)
Comprehensive loss-
Net loss................................................. - - - -
Translation adjustments.................................. - - - -
----------- ------------- ---------- ------------
Total comprehensive income................................. - - - -
----------- ------------- ---------- ------------
Issuance of common stock................................. - 750 - -
Issuance of common stock warrants........................ - - 2,900 -
Receivable from shareholders............................. - - - (637)
Accrued dividend on preferred stock...................... - - - -
Accrued dividend on common stock......................... - - - -
----------- ------------- ---------- ------------
July 2, 2000............................................... $ 1 $ 49,699 $ 2,900 $ (3,750)
=========== ============= ========== ============
</TABLE>
<TABLE>
<CAPTION>
Accumulated Accumulated Total
Deficit Other
Comprehensive
Income
------------ -------------- -------------
<S> <C> <C> <C>
January 1, 2000......................................................... $ (100,460) $ (7,844) $ (62,467)
Comprehensive loss-
Net loss.............................................................. (13,349) - (13,349)
Translation adjustments............................................... - (4,198) (4,198)
------------ ------------- ------------
Total comprehensive income.............................................. (13,349) (4,198) (17,547)
------------ ------------- ------------
Issuance of common stock.............................................. - - 750
Issuance of common stock warrants..................................... - - 2,900
Receivable from shareholders.......................................... - - (637)
Accrued dividend on preferred stock................................... (2,668) - (2,668)
Accrued dividend on common stock...................................... (2,410) - (2,410)
------------ ------------- ------------
July 2, 2000............................................................ $ (118,887) $ (12,042) $ (82,079)
============ ============= ============
</TABLE>
4
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The Derby Cycle Corporation
Unaudited Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Six months ended
-----------------------------
Jun 27, Jul 2,
1999 2000
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss from operations............................................................ $ (2,580) $ (13,349)
Adjustments to reconcile net income (loss) to net cash provided by (used by)
operating activities-
Loss on sale of discontinued operations.......................................... - 8,648
Depreciation..................................................................... 4,921 4,042
Amortization of intangibles, goodwill and investment grants...................... 5 126
Issue of Class C warrants classified as an interest cost......................... -- 2,900
Amortization of deferred financing costs......................................... 950 948
Minority interest................................................................ 24 -
Change in fair value of currency options and interest rate cap................... - (143)
Net periodic pension income...................................................... (2,616) (2,655)
Loss on dispositions of property, plant and equipment............................ - 580
Net changes in operating assets and liabilities, net of acquisitions-
(Increase) decrease in receivables............................................... (28,087) (20,830)
(Increase) decrease in inventories............................................... 22,775 (2,887)
(Increase) decrease in other current assets...................................... 1,176 (1,242)
Increase (decrease) in accounts payable.......................................... 1,037 4,763
Increase (decrease) in accrued liabilities....................................... 9,816 9,899
Increase (decrease) in income taxes payable...................................... (3,513) 2,232
Increase (decrease) in other current liabilities................................. 1,549 2,341
Increase (decrease) in deferred income taxes..................................... (2,882) 997
Increase (decrease) in other liabilities......................................... 6,170 (1,874)
------------- -------------
Net cash used by operating activities......................................... $ 8,745 $ (5,504)
------------- -------------
Comprising
Net cash used by continuing operations..................................... (3,595)
Net cash used by discontinued operatiions.................................. (1,909)
-------------
Cash flows from investing activities:
Purchases of property, plant and equipment.......................................... (2,297) (4,001)
Proceeds of property, plant & equipment dispositions................................ 89 -
Cash paid for acquisitions, net of cash acquired.................................... (43,445) -
Cash paid for acquisition of minority interest...................................... (246) (1,043)
Proceeds from sale of discontinued operations....................................... - -
------------- -------------
Net cash used in investing activities......................................... $ (45,899) $ (5,044)
------------- -------------
</TABLE>
5
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The Derby Cycle Corporation
Unaudited Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Six months ended
---------------------------
Jun 27, Jul 2,
1999 2000
---------- ----------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from stock issue........................................................... $ 26,150 $ 750
Secured promissory notes receivable from shareholders............................... (3,013) (637)
Proceeds from Subordinated Note issue............................................... 20,000 -
Short term borrowings, net.......................................................... (17,840) (14,107)
Deferred financing costs............................................................ (273) -
Contributions made to pension plans................................................. (41) (43)
Consideration payable to minority interest.......................................... - 1,043
--------- ---------
Net cash provided by financing activities................................... 24,983 (12,994)
--------- ---------
Effect of exchange rate changes....................................................... 4,170 825
--------- ---------
Net decrease in cash and cash equivalents............................................. (8,001) (22,717)
Cash and cash equivalents, beginning of period........................................ 17,453 28,938
--------- ---------
Cash and cash equivalents, end of period.............................................. $ 9,452 $ 6,221
========= =========
Supplemental cash flow information:
Interest paid....................................................................... $ 10,496 $ 13,811
Income taxes paid................................................................... $ 6,265 $ 3,209
Income taxes refunded............................................................... $ - $ 1,719
========= =========
</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 quarter and six months ended June
27, 1999 and July 2, 2000 together with the balance sheet as of July 2, 2000
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 July 2, 2000 and the results of operations and the
cash flows for the periods presented herein have been made. The results of
operations for the quarter and six months ended July 2, 2000 are not indicative
of the operating results for the full fiscal year due to the seasonal nature of
the business.
The consolidated financial statements included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Although the Company believes that the disclosures made are adequate to make the
information not misleading, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
regulations. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-K for the year ended December 31, 1999.
The Company operates via a number of operating companies worldwide that
predominantly operate as stand-alone entities. Each of the companies
manufactures, assembles and/or distributes bicycles and parts and accessories.
These operating companies, have significant operations in The Netherlands
("Gazelle"), the United Kingdom ("Raleigh U.K."), Canada ("Raleigh Canada"),
Germany ("Derby Germany"), South Africa ("Probike") and the United States (the
"Derby U.S.A." division of the Company). The Company owns or licenses many of
the most recognized brands in the bicycle industry, including leading global
brands such as Raleigh, Diamond Back, Nishiki (for U.S.A. only) and Univega, and
leading national brands such as Gazelle in The Netherlands and Kalkhoff, Musing,
Winora and Staiger in Germany. The bicycle component and other engineering
component manufacturing business, trading as Sturmey Archer, was disposed of on
June 30, 2000 (see note 9). The operating results of Sturmey Archer for 1999 and
2000 have been excluded from operating income and included as income from
discontinued operations.
The Company expects that the existing revolving credit facility will not be
sufficient to cover its liquidity requirements after January 2001. Based on the
Company's business plan, the Company estimates that approximately an additional
$30 million will be required to fund the Company's operations through 2001. The
Company is negotiating with the lenders under its Credit Agreement to increase
its line of credit and to amend certain financial covenants in the Credit
Agreement. In addition, the Company is exploring other financing options
including raising new equity and/or debt capital. No assurance can be given that
the Company will be successful in meeting these objectives. The revolving credit
facility continues to be available subject to compliance with its terms and
conditions and the Company will be seeking to review this in September 2000.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern.
The Company was in compliance with all of its borrowing covenants as at July 2,
2000. The Company covenanted to reduce its Aggregate Financial Indebtedness, as
defined in the Revolving Credit Agreement, to $55 million on July 4, 2000.
Aggregate Financial Indebtedness, which includes undrawn letters of credit, at
that date was $59.3 million. The banks waived the default, which was corrected
by the conversion, on July 30, 2000, of the $7.0 million bridge loan to a Junior
Subordinated Loan which is excluded from the definition of Aggregate Financial
Indebtedness under the Revolving Credit Agreement as amended.
2. Restructuring Charge
In 1999 the Company completed the plans to restructure its businesses in the
U.K. and the Raleigh distribution operations in Germany, The Netherlands,
Belgium and Ireland. Raleigh U.K. ceased manufacturing steel bicycle frames at
the end of 1999 due to increased consumer demand for aluminum frames. Steel
frames manufactured by the company accounted for approximately 50% of all frames
sold by the company in 1999, with the balance being fabricated mostly from
aluminum and imported from Asia.
7
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Other components of the restructuring at Raleigh U.K. included streamlining the
company's product development and marketing functions. The company has granted
an option to a property developer for the sale of the site used for employee car
parking, storage and the parts and accessories business that will be released.
Management of the Raleigh distribution operations in Germany, The Netherlands
and Belgium, previously run on a stand-alone basis, has been combined with the
Gazelle and Derby Germany operations. The Raleigh Ireland warehouse was closed
and distribution outsourced, leaving only a sales and marketing organization in
Ireland. These restructuring steps are projected to reduce on-going product
costs and selling expenses by approximately $3 million in 2000. In aggregate,
182 employees were engaged in these activities which have ceased and their
employment has been terminated. $7,082,000 was included in respect of
involuntary termination benefits and closure expenses in the six months ended
June 27, 1999.
20 employees volunteered to leave, all of whom left and were paid their
termination benefits in 1999. 162 employees were terminated involuntarily of
whom 153 left during 1999 and were paid $3,123,000 in termination benefits. A
further 9 employees were compulsorily terminated in the second quarter of 2000
and were paid $125,000. The closure expenses were mainly in respect of the
closure of operations and costs incurred on the re-configuration of assembly
tracks, all of which were written-off or paid during 1999.
Restructuring costs for the six months ended July 2, 2000 comprise $112,000
incurred to relocate the Raleigh U.K. Parts & Accessories operation to a green
field site.
3. Non-Recurring Items
In 1999 the Company restructured its corporate management and established its
headquarters in Stamford, CT to organize the finance, marketing and purchasing
functions on a global basis. The Company also reviewed the logistics of Raleigh
and Diamond Back distribution in the U.S.A. and undertook strategic reviews to
leverage global scale and strengthen the brands. Of the total non-recurring
items of $4,495,000 in 1999, $546,000 was incurred on the recruitment of
headquarters staff during the first six months while $833,000 was spent on
logistical and strategic reviews.
Non recurring costs for the six months ended July 2, 2000 comprise $61,000
incurred in a review of ERP systems at Derby Germany.
4. Derivative Financial Instruments
Adoption of SFAS 133
For the six months ended June 27, 1999, changes in the fair value of derivative
instruments designated as hedges subsequent to the adoption of SFAS 133 are
included in accumulated other comprehensive income (loss). During that period
the Company recorded in accumulated other comprehensive income (loss) (i) an
unrealized gain of $223,000 on the fair value accounting of the forward foreign
currency exchange contracts and, (ii) an unrealized gain of $84,000 on the fair
value accounting of the currency option and interest rate cap. The unrealized
amounts held in other comprehensive income (loss) as at June 27, 1999 have been
subsequently realized and therefore recognized in the 1999 consolidated
statement of operations with the related hedged transactions.
For the six months ended July 2, 2000 the Company had no derivatives designated
as hedges. Income and expense related to the fair value accounting of the
Company's derivative instruments are included in the statement of operations.
During this period the Company recorded in other income (expense) (i) a $813,000
increase in the fair value of the unexpired forward foreign exchange contracts,
(ii) a $143,000 increase in the fair value of the unexpired currency option and
unexpired interest rate cap and (iii) $211,000 realized upon maturity of part
of the currency option.
5. Short-term Borrowings
On February 15, 2000 the Company received a bridge loan of $7 million provided
by Thayer and Perseus. Subsequent to July 2, 2000 the Company converted the
bridge loan into a Junior Subordinated Loan due May 15, 2008. The Company issued
2,500 Class C Warrants in consideration for the use of the bridge loan, with an
estimated fair value of $2.9 million, which has been included in interest
expense in the first
8
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quarter. Interest accrues on the Junior Subordinated Loan at 18% and is paid-in-
kind by issue of further junior subordinated notes.
As of December 31, 1999 and July 2, 2000 short-term borrowings consist of the
following (in thousands):
<TABLE>
<CAPTION>
Dec 31, Jul 2,
1999 2000
unaudited
------- ---------
<S> <C> <C>
Short-term bank borrowings............................................................ $67,602 $47,716
Bank overdraft........................................................................ 1,605 387
Shareholder bridge loan............................................................... - 7,000
------- -------
Total short-term borrowings......................................................... $69,207 $55,103
======= =======
</TABLE>
The Company was in compliance with all of its borrowing covenants as at July 2,
2000. The Company covenanted to reduce its Aggregate Financial Indebtedness, as
defined in the Revolving Credit Agreement, to $55 million on July 4, 2000.
Aggregate Financial Indebtedness, which includes undrawn letters of credit, at
that date was $59.3 million. The banks waived the default, which was corrected
by the conversion, on July 30, 2000, of the $7.0 million bridge loan to a Junior
Subordinated Loan which is excluded from the definition of Aggregate Financial
Indebtedness under the Revolving Credit Agreement as amended.
6. Long-term Debt
On February 4, 1999 the Company issued $20 million principal amount in a
subordinated note (the "Subordinated Note") to Vencap Holding (1992) PTE Ltd.
which matures in 2010 and bears interest at 19% compounded daily and paid-in-
kind by issue of further subordinated notes. As of December 31, 1999, and July
2, 2000, long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
Dec 31, Jul 2,
1999 2000
unaudited
-------- ---------
<S> <C> <C>
10% $100,000,000 Senior Notes........................................................ $100,000 $100,000
9 3/8% DM110,000,000 Senior Notes.................................................... 56,410 53,399
19% $20,000,000 Subordinated Note.................................................... 20,000 20,000
-------- ---------
Total long-term debt............................................................... $176,410 $173,399
======== ========
</TABLE>
7. Contingencies
International operations; dependence on foreign suppliers and sales
A significant portion of the Company's operations are conducted in foreign
countries and are subject to the risks that are inherent in operating abroad,
including, without limitation, the risks associated with foreign governmental
regulation, foreign taxes, import duties and trade restrictions. The Company's
business is highly dependent upon products manufactured by foreign suppliers
located primarily in Taiwan, Japan and the People's Republic of China. A
substantial majority of the Company's multi-speed bicycles contain components
supplied on a purchase order basis by one Japanese manufacturer. The Company's
business is also subject to the risks generally associated with doing business
abroad, such as delays in shipment and foreign governmental regulations which
could have a material adverse effect on the results of operations and financial
condition of the Company. In addition, several of the Company's manufacturing
operations are unionized.
Product liability
Because of the nature of the Company's business, the Company at any particular
time is a defendant in a number of product liability lawsuits and expects that
this will continue to be the case in the future. These lawsuits generally seek
damages, sometimes in substantial amounts, for personal injuries allegedly
sustained as a result of defects in the Company's products. Although the Company
maintains product liability insurance, due to the uncertainty as to the nature
and extent of manufacturers' and distributors' liability for personal injuries,
there is no assurance that the product liability insurance maintained by the
Company is or will be adequate to cover product liability claims or that the
applicable insurer will be solvent at the time of any covered loss. In addition,
due to deductibles, self-retention levels and aggregate coverage amounts
applicable under the Company's insurance policies, the Company may bear
9
<PAGE>
responsibility for a significant portion of the defense costs (which include
attorneys' fees and expenses incurred in the defense of any claim), and the
related payments to satisfy any judgments associated with any claim asserted
against the Company in excess of any applicable coverage. The successful
assertion or settlement of an uninsured claim, the settlement of a significant
number of insured claims, or a claim exceeding the Company's insurance coverage
could have a material adverse effect on the Company's business, results of
operations and financial condition. In addition, there can be no assurance that
insurance will remain available or, if available, will not be prohibitively
expensive.
Common stock and preferred stock
During the six months ended July 2, 2000 the Company issued 600 Class A and 150
Class C common shares to executives of the Company for $1,000 per share under
the management stock plan. In addition the Company issued 1,250 Class C Warrants
to Thayer and 1,250 Class C Warrants to Perseus, in consideration for the use of
the bridge loan, for a fair value of $2.9 million.
The issue of shares to executives of the Company was partly financed by the
issue of secured promissory notes, shown within shareholders' deficit in the
balance sheet. All such executive promissory notes bear interest at a fixed rate
of 6% p.a. Following the issue of stock as listed above, the stock in the
Company (at issue price plus accrued preference dividends) is held by the
following shareholders and their affiliates (in thousands):
<TABLE>
<CAPTION>
Number Thayer Perseus Derby Manage- Total
of Shares Capital Capital Internat- ment
Partners L.L.C. ional
L.L.C. Corpor-
ation
S.A.
---------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Preferred stock
Series A..................... 25,000 $ 37,500 $ - $ - $ - $ 37,500
Accrued dividend $200 per
share pa.................... 10,684 - - - 10,684
Series B..................... 3,000 - - 3,000 - 3,000
Accrued dividend 9.75%
pa.......................... - - 625 - 625
---------- --------- --------- --------- ---------
$ 48,184 $ - $ 3,625 $ - 51,809
========== ========= ========= ========= =========
Stock rights
Class A common............... 8,300 - - 8,300 - 8,300
Class B common............... 15,000 - - 15,000 - 15,000
---------- --------- --------- --------- ---------
$ - $ - $ 23,300 $ - $ 23,300
========== ========= ========= ========= =========
Paid in capital
Class A common............... 26,060 12,500 10,000 - 3,560 26,060
Class C common............... 23,640 18,950 3,800 - 890 23,640
---------- --------- --------- --------- ---------
$ 31,450 $ 13,800 $ - $ 4,450 $ 49,700
========== ========= ========= ========= =========
Stock warrants
Class C common............... 2,500 $ 1,450 $ 1,450 $ - $ - $ 2,900
========== ========= ========= ========= =========
Retained equity
Class A common............... 21,700 $ - $ - $ 21,700 $ - $ 21,700
========== ========= ========= ========= =========
</TABLE>
8. Acquisitions
On February 4, 1999, the Company acquired the assets (and assumed certain
liabilities) of the Diamond Back Group which consisted of Diamond Back
International Company Limited, a private British Virgin Islands company
("Diamond Back"), Western States Import Company Inc., a Delaware corporation
("Western States") and Bejka Trading A.B., a private Swedish company ("Bejka"),
each of which was engaged in the bicycle, bicycle parts and accessories and
fitness equipment distribution business.
10
<PAGE>
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, 1999 is as follows.
The Derby Cycle Corporation
Unaudited Pro Forma Consolidated Statements of Income
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
Quarter ended Six months ended
--------------------------- ---------------------------
Jun 27, Jul 2, Jun 27, Jul 2,
1999 2000 1999 2000
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues............................................... $161,504 $165,373 $299,501 $308,986
Net loss applicable to common shareholders................. (2,319) (7,589) (4,586) (16,017)
=========== =========== ========== ==========
Net loss applicable to common shareholders per share....... $ (33.16) $(102.69) $ (66.35) $(219.52)
=========== =========== ========== ==========
Weighted average number of shares of common stock
outstanding............................................... 69,931 73,900 69,115 72,964
=========== =========== ========== ==========
</TABLE>
On April 30, 2000 the Company completed the purchase of the remaining 24%
minority holdings in the "Univega Group" including distribution companies in
Germany ("Univega Bikes & Sports Europe GmbH") and Switzerland ("Univega Bike &
Sport Switzerland AG") together with an intermediate holding company "(Univega
Beteiligungen GmbH") for $1,043,000.
As the Univega Group had a deficit on shareholders' equity at the time of
acquisition, the entire purchase price has been treated as goodwill. The amount
payable has been included as accrued liabilities in the balance sheet as at July
2, 2000 and was paid on July 26, 2000.
9. Discontinued Operations
On June 6, 2000 the Company determined to dispose of the bicycle component and
other engineering component manufacturing segment of the business trading as
Sturmey Archer.
The sale of the U.K. trading assets and certain overseas subsidiaries to
Lenark Ltd, on a going concern basis, was completed on June 30, 2000. The
transaction, which is included as a loss on the sale of discontinued operations
in the operating statement, may be summarized as follows (in thousands):
Trading assets...................................................... $ 8,665
Intangibles......................................................... 47
Goodwill............................................................ 3,237
Disposal costs...................................................... 680
Liabilities assumed................................................. (3,981)
--------
Loss on sale of discontinued operations.......................... $ 8,648
========
The consolidated Statement of Operations for the discontinued segment for the
quarter and six months ended July 2, 2000 was as follows:
11
<PAGE>
<TABLE>
<CAPTION>
Quarter ended Six months ended
----------------------------- -----------------------------
Jun 27, Jul 2, Jun 27, Jul 2,
1999 2000 1999 2000
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues............................................... $ 3,627 $ 4,066 $ 8,278 $ 8,616
Cost of goods sold......................................... (2,940) (3,338) (6,893) (7,153)
------------- ------------- ------------- -------------
Gross profit.......................................... 687 728 1,385 1,463
Selling, general, and administrative expenses.............. (460) (440) (958) (905)
Restructuring charge....................................... (440) - (617) -
------------- ------------- ------------- -------------
Operating (loss) income............................... (213) 288 (190) 558
Interest income.......................................... 42 105 70 149
Other income (expense) net............................... - - - (75)
Loss on dispositions of property, plant and equipment.... - (11) - (11)
------------- ------------- ------------- -------------
(Loss) profit before income taxes...................... (171) 382 (120) 621
Provision for income taxes................................. 67 (102) 71 (179)
------------- ------------- ------------- -------------
Net (loss) profit applicable to common shareholders... $ (104) $ 280 $ (49) $ 442
============= ============= ============= =============
</TABLE>
10. Segmental Information: Reportable Business Segments
The Company manages its business in six reportable segments as shown in the
following tables. Consolidation adjustments, certain small operating companies,
non-operating companies and the headquarters are included in "Other companies".
The reportable segments are managed separately because each business has
differing customer requirements, either as a result of the regional environment
of the country or differences in products and services offered. A summary of net
revenues and operating income categorized by business segment, excluding the
Sturmey Archer business segment disposed of on June 30, 2000, is as follows (in
thousands):
<TABLE>
<CAPTION>
Quarter ended Six months ended
----------------------------- -----------------------------
Jun 27, Jul 2, Jun 27, Jul 2,
1999 2000 1999 2000
unaudited unaudited unaudited unaudited
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues:
Raleigh U.K.............................................. $ 21,278 $ 16,515 $ 34,586 $ 28,768
Gazelle, The Netherlands................................. 39,725 41,711 74,463 79,842
Derby Germany............................................ 49,979 60,695 95,225 109,056
Derby U.S.A.............................................. 37,736 30,795 59,038 55,710
Raleigh Canada........................................... 6,536 8,087 18,086 20,627
Probike, South Africa.................................... 3,133 3,638 6,934 7,554
Other companies.......................................... 3,117 3,932 6,908 7,429
------------- ------------- ------------- -------------
Total net revenues.................................... $ 161,504 $ 165,373 $ 295,240 $ 308,986
============= ============= ============= =============
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Quarter ended Six months ended
----------------------------- -----------------------------
Jun 27, Jul 2, Jun 27, Jul 2,
1999 2000 1999 2000
unaudited unaudited unaudited unaudited
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Operating income:
Raleigh U.K.............................................. $ 463 $ 574 $ (1,816) $ (224)
Gazelle, The Netherlands................................. 6,250 7,325 11,606 12,753
Derby Germany............................................ 3,844 4,894 6,951 8,027
Derby U.S.A.............................................. 1,534 (808) 887 (2,514)
Raleigh Canada........................................... 815 924 2,093 2,201
Probike, South Africa.................................... 29 127 274 459
Other companies.......................................... (1,039) (2,077) (1,653) (4,556)
------------- ------------- ------------- -------------
Underlying operating income........................... 11,896 10,959 18,342 16,146
Restructuring charge............................... (5,918) (112) (6,465) (112)
Non-recurring items................................ (1,110) (61) (1,379) (61)
------------- ------------- ------------- -------------
Total operating income................................ $ 4,868 $ 10,786 $ 10,498 $ 15,973
============= ============= ============= =============
</TABLE>
13
<PAGE>
11. Lyon Investments B.V. Summarized Financial Information
Lyon Investments B.V. ("Lyon"), a Dutch company, is a wholly owned subsidiary of
the Company which is a co-issuer of $20,250,000 of the $100,000,000 of 10
percent Senior Notes and all of the DM110,000,000 of 9 3/8 percent Senior Notes
(collectively, the "Senior Notes"). As co-issuers, Lyon and the Company are
joint and severally liable with respect to the Senior Notes. Sturmey Archer
Europa B.V., a subsidiary of Derby Nederland B.V. was sold to Lenark Ltd on June
30, 2000 as part of the disposal of the Sturmey Archer business segment. The
following summarized financial information sets forth the combined financial
position and results of operations of Lyon, together with its subsidiaries,
Derby Nederland B.V. and Engelbert Wiener Bike Parts GmbH. Derby Nederland B.V.
is a holding company owning 100 percent of Koninklijke Gazelle B.V., Sturmey
Archer Europa B.V. and Raleigh B.V..
Lyon Investments B.V.
Summarized Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
Dec 31, Jul 2, 2000
Assets 1999 unaudited
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................... $ 7,817 $ 5,619
Accounts receivable, net............................................................ 11,642 19,222
Inventories......................................................................... 20,986 17,427
Loans to internal group companies................................................... 103,906 111,808
Other current assets................................................................ 6,799 7,636
------------- ------------
Total current assets............................................................. 151,150 161,712
------------- ------------
Property, plant and equipment, net.................................................... 9,805 8,849
Intangibles, net...................................................................... 2,080 1,852
Prepaid pension asset................................................................. 16,807 16,814
------------- ------------
Total assets..................................................................... $ 179,842 $ $189,227
============= ============
Liabilities and Shareholders' Deficit
Current liabilities:
Loans from internal group companies................................................. $ 78,189 $ 75,578
Short-term borrowings............................................................... 26,567 22,958
Other current liabilities........................................................... 22,876 33,402
------------- ------------
Total current liabilities........................................................ 127,632 131,938
Other liabilities:
10% $100,000,000 Senior Notes....................................................... 20,250 20,250
9 3/8% DM110,000,000 Senior Notes.................................................... 56,410 53,399
Other liabilities................................................................... 5,791 5,792
------------- ------------
Total liabilities................................................................ 210,083 211,379
Shareholders' deficit................................................................. (30,241) (22,152)
------------- ------------
Total liabilities and shareholders' deficit...................................... $ 179,842 $ 189,227
============= ============
</TABLE>
14
<PAGE>
Lyon Investments B.V.
Unaudited Summarized Consolidated Statements of Operations
(Dollars in thousands)
<TABLE>
<CAPTION>
Quarter ended 6 months ended
------------------------- -------------------------
Jun 27, Jul 2, Jun 27, Jul 2,
1999 2000 1999 2000
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues............................................... $ 48,372 $ 52,131 $ 88,966 $ 95,148
Cost of goods sold......................................... (35,983) (38,692) (66,087) (70,929)
--------- --------- --------- ---------
Gross profit.......................................... 12,389 13,439 22,879 24,219
Selling, general, and administrative expenses.............. (5,958) (5,337) (11,253) (11,527)
--------- --------- --------- ---------
Operating income...................................... 6,431 8,102 11,626 12,692
Other income (expense):
Interest expense......................................... (3,764) (3,636) (7,853) (7,505)
Interest income.......................................... 1,779 2,059 3,825 4,216
Other income net......................................... - (98) - 207
--------- --------- --------- ---------
Income before income taxes............................ 4,446 6,427 7,598 9,610
Provision for income taxes................................. (1,506) (2,444) (2,607) (3,431)
--------- --------- --------- ---------
Income from continuing operations..................... 2,940 3,983 4,991 6,179
Discontinued operations
Income from discontinued operations................... 23 35 48 80
Gain on sale of discontinued operations............... - 160 - 160
--------- --------- --------- ---------
Income from discontinued operations................... 23 195 48 240
--------- --------- --------- ---------
Net income............................................ $ 2,963 $ 4,178 $ 5,039 $ 6,419
========= ========= ========= =========
</TABLE>
15
<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 a leading bicycle supplier in the United
States. Competing primarily in the medium-to premium-priced market, the Company
owns or licenses many of the most recognized brand names in the bicycle
industry, including leading global brands such as Raleigh, Diamond Back, Nishiki
and Univega, and leading regional brands such as Gazelle in The Netherlands and
Kalkhoff, Musing, Winora and Staiger in Germany. The Company designs,
manufactures and markets a wide range of bicycles in all major product
categories: (i) all-terrain or mountain bicycles ("M.T.B.s"), (ii) city
bicycles, also called touring or upright bicycles, (iii) hybrid bicycles, also
called comfort or cross bicycles, (iv) juvenile bicycles, including bicycle
motocross ("B.M.X.") bicycles, and (v) race/road bicycles. The Company
distributes branded bicycles through extensive local market networks of
independent bicycle dealers ("I.B.D.s") as well as through national retailers,
and distributes private label bicycles through mass merchandisers and specialty
stores.
Through a series of acquisitions and plant expansions, the Group has created a
global bicycle business distinguished by its leading market positions, low cost
production, extensive distribution network and reputation for high quality.
Organized in 1986 for the purpose of acquiring the Raleigh, Gazelle and Sturmey
Archer bicycle and bicycle component businesses from TI Group plc, the Group
expanded into the United States and Germany in 1988. From 1992 to 1993, taking
advantage of substantial incentives from the German government the Group built a
factory in Rostock, in the former German Democratic Republic. Since then, the
Group has acquired additional well-known brands and leveraged its existing
manufacturing plants and component sourcing operations to lower unit costs for
its acquired businesses.
On February 4, 1999, the Company acquired the assets (and assumed certain
liabilities) of the Diamond Back Group for approximately $44.3 million in cash.
The Diamond Back Group consisted of Diamond Back International Company Limited,
a private British Virgin Islands company ("Diamond Back"), Western States Import
Company Inc., a Delaware corporation ("Western States") and Bejka Trading A.B.,
a private Swedish company ("Bejka"), each of which was engaged in the bicycle,
bicycle parts and accessories and fitness equipment distribution business.
Western States and Bejka had worldwide revenues of approximately $62.9 million
and $3.1 million, respectively, in 1998. Diamond Back was essentially a holding
company for the company's intellectual property and did not generate material
revenues. The Company financed the acquisition of the Diamond Back Group by
issuing $20 million principal amount in a Subordinated Note to Vencap Holding
(1992) PTE Ltd. and $22.75 million in Class C common stock to DC Cycle, L.L.C.
and Perseus Cycle L.L.C. The Subordinated Note matures in 2010 and bears
interest at an annual rate of 19% compounded daily.
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.
On June 30, 2000 the Company sold the business and assets of Sturmey
Archer which was engaged in the manufacturing of bicycle components and other
engineering components. The purchaser assumed $4.0 million of liabilities in
consideration of the sale. Sturmey Archer had revenues of $20.6 million and
EBITDA of $0.6 million in 1999.
The Company maintains marketing or purchasing operations in six 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 1999, 54% of the Company's net revenues, excluding Sturmey Archer, were
denominated in currencies, linked to the Euro, 22% were denominated in U.S.
dollars, 14% were denominated in pounds sterling and 10% were denominated in
other currencies. The Company reduces its currency exposure by maintaining
operations in the major markets in which it sells its products.
16
<PAGE>
Results of Operations
The Company manages its business in six major operating units as shown in the
following table. Consolidation adjustments, certain small operating companies,
non-operating companies and the headquarters are included in "Other companies".
All comparisons in the following discussion and analysis are against the
corresponding quarter and six months ended June 27, 1999, unless otherwise
stated. Operating unit figures for 1999 have been re-translated using 2000
foreign exchange rates to facilitate comparison. The results of Sturmey Archer
for 1999 and 2000 have been excluded.
<TABLE>
<CAPTION>
Units sold: Quarter ended Six months ended
----------------------- -----------------------
Jun 27, Jul 2, Jun 27, Jul 2,
Thousands of bicycles 1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Raleigh U.K................................................ 125 97 195 161
Gazelle.................................................... 108 121 200 232
Derby Germany.............................................. 200 256 378 461
Derby U.S.A................................................ 161 129 246 225
Raleigh Canada............................................. 74 93 205 237
Probike.................................................... 26 41 59 85
Other companies and group transactions..................... 4 5 5 7
-------- -------- -------- --------
Total units sold......................................... 698 742 1,288 1,408
======== ======== ======== ========
</TABLE>
Units sold. Units sold increased by 44 thousand units and 120 thousand units for
the quarter and six months ended July 2, 2000. Organic growth achieved was 42
thousand units and 73 thousand units in each period compared with year ago,
representing an annual volume growth rate of approximately 6%. 16 thousand units
of the increase represented Diamond Back sales in January 1999 not included in
the 1999 results as that business was acquired on February 4, 1999 and 33
thousand units of the increase related to the 5 days through July 2, 1999
included in the third quarter's results in 1999. Particularly strong growth was
seen at Gazelle and Derby Germany following successful product range launches,
advertising and lower retail inventories. The change in sales volume at Raleigh
U.K. arose because a major customer ended 1999 with excess inventory and cut
back its purchase from 12 thousand units in the first quarter of 1999 to less
than 1 thousand units in the first quarter of 2000, while sales also suffered
from less availability from stock due to the longer lead-time on out-sourced
frames compared with in-house manufacture which ceased in December 1999: this is
estimated to have caused the loss of sales of 15,000 units.
<TABLE>
<CAPTION>
Net revenues: Quarter ended Six months ended
----------------------- -----------------------
Jun 27, Jul 2, Jun 27, Jul 2,
$ millions 1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Raleigh U.K................................................ $ 20.2 $ 16.5 $ 33.3 $ 28.8
Gazelle.................................................... 35.0 41.7 65.5 79.8
Derby Germany.............................................. 44.0 60.7 83.7 109.1
Derby U.S.A................................................ 37.7 30.8 59.0 55.7
Raleigh Canada............................................. 6.5 8.1 18.6 20.6
Probike.................................................... 2.8 3.6 6.5 7.6
Other companies and group transactions..................... 2.8 4.0 6.1 7.4
-------- -------- -------- --------
Total at comparable foreign exchange rates............... 149.0 165.4 272.7 309.0
Re-translation to actual foreign exchange rates.......... 12.5 - 22.5 -
-------- -------- -------- --------
Total net revenues as reported........................... $ 161.5 $ 165.4 $ 295.2 $ 309.0
======== ======== ======== ========
</TABLE>
Net revenues. Net revenues at comparable foreign exchange rates for the quarter
and six months ended July 2, 2000 grew by $16.4 million (11.0%) and $36.2
million (13.3%). This was driven by the increase in bicycle units sold of 6.4%
and 9.3% for those periods and an increase in average unit selling price of 7.7%
and 4.0% for the same periods. The weakness of the Euro in 2000 reduced the
reported growth in consolidated net revenues by more than 8 percentage points
upon translation of net revenues into U.S. Dollars at the actual rates
applicable to each year. Sales of parts and accessories saw double digit
17
<PAGE>
percentage growth in all markets apart from the U.K. and the U.S.A.. Parts and
accessories revenues fell in the quarter in the U.K. as the distribution center
was relocated in May 2000 to purpose built premises to accommodate the planned
expansion of the business, but were still over 5% ahead of year ago for the
first half. Parts and accessories revenues fell at Derby U.S.A. as the sales
force was reorganized and due to the disruption while the Diamond Back and
Raleigh parts and accessories warehousing was consolidated. The recovery seen in
the Diamond Back fitness business in the last quarter of 1999 with the launch of
the new range of products continued, with revenues in the quarter 35% up on year
ago.
Gross profit. Gross profit increased in-line with the growth in revenues. Gross
margin was within 0.3 percentage points of year ago for both the quarter and the
first half.
<TABLE>
<CAPTION>
Selling, general and administrative expenses: Quarter ended Six months ended
----------------------- -----------------------
Jun 27, Jul 2, Jun 27, Jul 2,
$ millions 1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Translated at comparable foreign exchange rates............ $26.7 $30.0 $50.9 $59.3
Re-translation to actual foreign exchange rates............ 1.9 - 3.5 -
-------- -------- -------- --------
Total selling general and administrative expenses as
reported................................................ $28.6 $30.0 $54.4 $59.3
======== ======== ======== ========
</TABLE>
Selling, general and administrative expenses. Selling, general and
administrative expenses at comparable foreign exchange rates increased by $3.3
million and $8.4 million for the quarter and six months ended July 2, 2000. This
included $1.6 million of expenses at Diamond Back in January 1999 not included
in the 1999 results as that business was acquired on February 4, 1999 and costs
of the corporate headquarters and Bikeshop.com of $1.7 million and $3.5 million
for the quarter and six months ended July 2, 2000: neither of these had been
established in the first half of 1999. Distribution expenses increased by $1.3
million and $2.9 million for the quarter and six months ended July 2, 2000 due
to the higher sales volume and higher freight rates. The above increases were
reduced upon translation into U.S. dollars at the actual rates applicable for
each year due to the weakness of the Euro.
<TABLE>
<CAPTION>
Operating income: Quarter ended Six months ended
----------------------- -----------------------
Jun 27, Jul 2, Jun 27, Jul 2,
$ millions 1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Raleigh U.K................................................ $ 0.5 $ 0.6 $ (1.7) $ (0.2)
Gazelle.................................................... 5.5 7.3 10.2 12.8
Derby Germany.............................................. 3.4 4.9 6.1 8.0
Derby U.S.A................................................ 1.5 (0.8) 0.9 (2.5)
Raleigh Canada............................................. 0.8 0.9 2.1 2.2
Probike.................................................... - 0.1 0.2 0.5
Other companies and group transactions..................... (1.0) (2.0) (1.6) (4.6)
-------- -------- -------- --------
Underlying operating income at comparable foreign
exchange rates.......................................... 10.7 11.0 16.2 16.2
Re-translation to actual foreign exchange rates....... 1.2 - 2.1 -
Restructuring charge.................................. (5.9) (0.1) (6.4) (0.1)
Non-recurring items................................... (1.1) (0.1) (1.4) (0.1)
-------- -------- -------- --------
Total operating income as reported....................... $ 4.9 $ 10.8 $ 10.5 $ 16.0
======== ======== ======== ========
</TABLE>
Operating income. Underlying operating income at comparable foreign exchange
rates, of $11.0 million and $16.2 million for the quarter and six months ended
July 2, 2000, increased by $0.3 million in the quarter, reversing the shortfall
in the first quarter, and bringing the first half figures up to the same level
as 1999. For the first half, the growth in revenues was offset by a slightly
lower margin and higher selling, general and administrative expenses. The 2000
figures were reduced, relative to 1999, upon translation into U.S. Dollars at
the actual foreign exchange rates applicable for each year, due to the weakness
of the Euro.
18
<PAGE>
Restructuring charge and non-recurring items. The Company reorganized parts of
its business in 1999, as described in Notes 2 and 3 of the attached financial
statements, at a total cost of $8.7 million, of which $7.8 million arose in the
first half of 1999.
<TABLE>
<CAPTION>
Interest expense: Quarter ended Six months ended
------------------------- -------------------------
Jun 27, Jul 2, Jun 27, Jul 2,
$ millions 1999 2000 1999 2000
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Senior Notes............................................... $ 3.9 $ 3.8 $ 7.8 $ 7.6
Subordinated Note.......................................... 1.0 1.2 1.7 2.5
Revolving credit facility.................................. 1.1 1.5 2.4 3.1
Bridge loan................................................ - - - 2.9
Other interest............................................. 0.2 0.3 0.5 0.6
Amortization of deferred financing costs................... 0.5 0.5 0.9 0.9
---------- ---------- ---------- ---------
Total interest expense................................... $ 6.7 $ 7.3 $ 13.3 $ 17.6
========== ========== ========== =========
</TABLE>
Interest expense. Interest expense increased by $0.6 million and $4.4 million
for the quarter and six months ended July 2, 2000, of which $2.9 million
represents the fair value of Class C common stock warrants issued in the first
quarter in consideration for the use of the bridge loan. The remaining increase
was caused by three factors: a longer accounting period, higher revolver
borrowings and interest on the Subordinated Note for January 2000: the
Subordinated Note was issued on February 4, 1999 and therefore the 1999 half
year figures only include 5 months interest on the Subordinated Note. Interest
on the Subordinated Note is paid-in-kind by way of the issue of further
subordinated notes.
Interest income. Interest income was earned in the first quarter of 2000 on the
cash proceeds of a property disposition in December 1999, which were placed
temporarily on deposit during the first quarter of 2000.
Loss on dispositions of property, plant and equipment. Additional costs
associated with the property disposition in December 1999 were identified in the
first quarter of 2000 and therefore expensed.
<TABLE>
<CAPTION>
Provision for income taxes: Quarter ended Six months ended
------------------------- -------------------------
Jun 27, Jul 2, Jun 27, Jul 2,
$ millions 1999 2000 1999 2000
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Current taxes.............................................. $ 1.5 $ 2.3 $ 2.8 $ 3.5
Deferred taxes............................................. (2.0) 0.5 (2.9) 1.0
---------- ---------- ---------- ---------
Total provision for income taxes......................... $ (0.5) $ 2.8 $ (0.1) $ 4.5
========== ========== ========== =========
</TABLE>
Provision for income taxes. Deferred tax has been calculated in 2000 using the
same more prudent assumptions first adopted in the 1999 year end financials,
resulting in a reduction in the deferred tax recovery. Taxable losses continue
to be made in certain jurisdictions which cannot be offset against the taxable
income in other jurisdictions.
Net income. Net income decreased by $4.9 million and $10.8 million in the
quarter and six months ended July 2, 2000. The decrease was the result of the
weak Euro, which reduced the results upon translation into U.S. Dollars, higher
interest expense, a book loss of $8.6 million on the sale of Sturmey Archer in
the second quarter and provision for income taxes, offset by a restructuring
charge in 1999.
Dividends accrued on preferred stock. Dividends were not accrued on the
preferred stock in the first quarter of 1999 to correct an over-accrual in the
prior period.
19
<PAGE>
<TABLE>
<CAPTION>
EBITDA: Quarter ended Six months ended
-------------------------- --------------------------
Jun 27, Jul 2, Jun 27, Jul 2,
$ millions 1999 2000 1999 2000
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Raleigh U.K................................................ $ 0.7 $ 0.6 $ (1.1) $ (0.2)
Gazelle.................................................... 5.7 7.7 10.5 13.2
Derby Germany.............................................. 4.1 5.7 7.7 9.9
Derby U.S.A................................................ 1.7 (0.6) 1.2 (2.1)
Raleigh Canada............................................. 1.0 1.0 2.4 2.5
Probike.................................................... - 0.2 0.3 0.5
Other companies and group transactions..................... (0.9) (1.9) (1.2) (4.1)
---------- ----------- ---------- ----------
Total EBITDA at comparable exchange rates................ 12.3 12.7 19.8 19.7
Retranslation to actual foreign exchange rates........... 1.5 - 2.2 -
---------- ----------- ---------- ----------
Total EBITDA as reported................................. $ 13.8 $ 12.7 $ 22.0 $ 19.7
========== =========== ========== ==========
</TABLE>
EBITDA. EBITDA at comparable exchange rates increased by $0.4 million in the
quarter in line with the increase in underlying operating income explained
above. This recouped most of the shortfall in the first quarter and produced
EBITDA for the first half very close to year ago.
EBITDA is calculated as follows:
<TABLE>
<CAPTION>
EBITDA: Quarter ended Six months ended
-------------------------- --------------------------
Jun 27, Jul 2, Jun 27, Jul 2,
$ millions 1999 2000 1999 2000
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Underlying operating income at actual foreign exchange $ 11.9 $ 11.0 $ 18.3 $ 16.2
rates.....................................................
Foreign currency contracts allocated to other income....... - 0.3 - 0.5
Depreciation............................................... 2.4 1.9 4.9 4.0
Amortization
Intangibles.............................................. 0.2 0.1 0.3 0.3
Investment grants........................................ (0.1) (0.1) (0.3) (0.2)
Positive goodwill........................................ (0.1) (0.1) (0.2) (0.2)
Negative goodwill........................................ 0.1 0.1 0.2 0.2
Pension transition asset................................. (0.6) (0.5) (1.2) (1.1)
---------- ----------- ---------- ----------
$ 13.8 $ 12.7 $ 22.0 $ 19.7
========== =========== ========== ==========
</TABLE>
From September 27, 1999 the Company did not designate its forward foreign
currency exchange contracts as hedges, recording any realized gain or loss
through other income in the income statement in accordance with SFAS 133. As all
of these contracts were initiated to mitigate the Company's foreign currency
trading transaction exposure, the realized gain of $0.3 million and $0.5 million
in the quarter and six months ended July 2, 2000 arising from them has been
included in EBITDA to match these contracts with the transactions they relate
to, albeit that they do not meet all the hedge designation requirements of SFAS
133. The resulting EBITDA is consistent with the calculation used for the
quarter ended June 27, 1999, when the realized gain or loss resulting from all
such hedge contracts was included in operating income.
Depreciation reduced in 2000 following the disposal of the U.K. frame
manufacturing equipment in December 1999.
Liquidity and Capital Resources
Demand for bicycles in the Company's principal markets is seasonal,
characterized in most cases by a majority of consumer sales in the spring and
summer months. The exceptions to this are in the United Kingdom, South Africa
and Ireland, where consumer sales of bicycles increase in the months preceding
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<PAGE>
Christmas: accordingly, dealers' peak purchasing months in those countries are
October and November when they build inventory in anticipation of Christmas
sales of juvenile bicycles. Excluding this holiday seasonality, the Company's
working capital requirements are greatest during February, March and April (the
Company's "Peak Season") as receivable levels increase. The Company offers
extended credit terms on sales during the months prior to the Peak Season,
although the Company encourages early payments through trade discounts.
Finished goods inventory remains relatively constant throughout the fiscal year
and the level of raw materials increases and decreases normally only to
accommodate production needs. Work in process represents, on average, nine days'
production. Inventory levels reach a minimum at the end of the season.
Net cash flows used by operating activities increased by $14.2 million to a
$5.5 million outflow for the first half from an inflow of $8.7 million in 1999.
Three of the constituent elements of cash flow changed significantly year-on-
year. Firstly, although receivables were above year ago due to higher revenues,
the increase was actually $7.3 million lower due to an $11.0 million higher
starting position (including the Diamond Back acquisition balance sheet in the
1999 starting position) caused by strong sales in the final quarter of 1999.
Secondly, higher planned production, together with unforeseen production
arrears, principally in Germany, lead to a $25.7 million lower decrease in
inventories. Lastly, income taxes paid were $1.5 million net this period,
compared with $6.3 million in the first half of the previous year when tax
postponed from 1997 and 1998 was paid. In addition, the credit period taken from
vendors has increased by 11 days, generating $3.7 million of cash, while
operating income was $2.2 million lower.
Cash-on-hand at the beginning of the year was applied to finance operating and
investing activities of $5.5 million and $5.0 million respectively. Drawings of
$19.9 million under the revolving credit facility were repaid during the period
from the proceeds of the $7.0 million bridge loan and the application of the
$12.7 million cash proceeds of the property disposition made in December 1999.
At the end of the period $28.2 million of the revolving credit facility was
unutilized and cash of $6.2 million was held.
The Company adopted SFAS 87, "Employers' Accounting for Pensions and other Post
Retirement Benefits" on January 1, 1993. The impact of adopting SFAS 87 was the
recognition of a transition asset of $37.8 million. The transition asset is
being amortized into income over 15 years from January 1, 1989, the effective
date of SFAS 87. Net periodic pension income was $2.6 million and $2.7 million
in the first half of 1999 and 2000 respectively. Net periodic pension income
includes amortization of the transition asset into income of $1.2 million and
$1.1 million in the first half of 1999 and 2000.
The Company's capital expenditures were $2.3 million and $4.0 million in the
first half of 1999 and 2000. Apart from $0.6 million invested in Bikeshop.com
systems, this comprised (i) on-going cost reduction projects, (ii) replacements
and (iii) items required to satisfy statutory environmental and health and
safety legislation.
The Company is primarily financed by equity purchased by Thayer, Perseus, DICSA
and management as part of a recapitalization in May 1998 and subsequently, plus
retained equity that was not recapitalized of, in aggregate, $135.2 million and
debt in the form of Senior Notes and the revolving credit facility. The Company
incurred significant indebtedness in connection with the Recapitalization. As of
July 2, 2000, the Company had $233.4 million of combined indebtedness,
comprising $153.4 of Senior Notes, a $20.0 million Subordinated Note, a bridge
loan of $7.0 million from Thayer and Perseus, as well as $47.7 million of
borrowings and $4.9 million of guarantees under the revolving credit facility
and $0.4 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 interest rate caps,
forward foreign exchange contracts, and currency options. The Company enters
into forward foreign exchange contracts and options
21
<PAGE>
to reduce the impact of currency movements, principally on purchases of
inventory and sales of goods denominated in currencies other than the
subsidiaries' functional currencies. Interest rate caps were purchased to limit
the blended interest rate paid on the revolving credit facility to under 8.4%
until July 2001. Currency options were purchased to substantially maintain the
value of part of the foreign operating income upon conversion into U.S. Dollars,
in order to protect the ability to service the U.S. Dollar Senior Notes from the
effect of changes in foreign exchange rates until May 2001.
The Revolving Credit Agreement provides for a seven-year DM214 million secured
senior revolving credit facility to be made available to the Company's operating
companies. Borrowings under this revolving credit facility are available subject
to a borrowing base determined as a percentage of eligible assets. The Company's
borrowings peak in February, March and April each year.
The facility was reduced on June 30, 2000 by the DM31 million, equivalent to the
proceeds of a property sale completed in December 1999 and the working capital
of the Sturmey Archer business that was sold. On July 31, 2000 the Company
converted its interest free bridge loan of $7.0 million provided by Thayer and
Perseus into a Junior Subordinated Loan due May 15, 2008. The Company issued
2,500 Class C Warrants in consideration for the use of the bridge loan. Interest
accrues on the Junior Subordinated Loan at 18% pa and is paid-in-kind by way of
issue of further Junior Subordinated Loans.
The Company expects that the existing revolving credit facility will not be
sufficient to cover its liquidity requirements after January 2001. Based on the
Company's business plan, the Company estimates that approximately an additional
$30 million will be required to fund the Company's operations through 2001. The
Company is negotiating with the lenders under its Credit Agreement to increase
its line of credit and to amend certain financial covenants in the Credit
Agreement. In addition, the Company is exploring other financing options
including raising new equity and/or debt capital. No assurance can be given that
the Company will be successful in meeting these objectives. The revolving credit
facility continues to be available subject to compliance with its terms and
conditions and the Company will be seeking to review this in September 2000.
Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk from changes in foreign currency exchange
rates and interest rates. In order to manage the risk arising from these
exposures, the Company enters into a variety of foreign currency and interest
rate contracts and options. The Company's accounting policies for derivative
instruments are included in Note 2 to the consolidated financial statements
included in the Company's form 10-K for the year ended December 31, 1999.
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, Pounds Sterling, 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 had a natural currency
hedge against fluctuations in Pounds Sterling arising from its position as both
an importer and exporter in U.K. until it sold Sturmey Archer.
The Company generally introduces its new bicycle model ranges annually in the
fall of each year, at a similar time to most of its competitors. Product
specifications, component costs and selling prices are kept as stable as
possible during the model year to satisfy the requirements of mass-merchandisers
and facilitate orderly marketing of branded products amongst I.B.D.s. The
Company initiates foreign currency forward exchange contracts or options in the
fall to hedge some of its foreign currency trading transaction exposure for the
upcoming season. The fair value of such contracts at December 31, 1999 was $0.9
million. The potential loss in fair value for such financial instruments from a
hypothetical 10% adverse change in quoted foreign currency exchange rates would
be approximately $2.0 million for 1999. Each year the Company changes the
specification of its products to endeavor to optimize its competitive position
and margins. Since most of the Company's competitors purchase comparable
components from similar sources to the Company and are believed not to hedge
beyond the current season, the Company does not generally hedge its transaction
exposure beyond the end of the season, to stay competitive. Management believes
the likelihood of obtaining a competitive advantage would not justify the cost
of hedging beyond the end of the season. Sales and purchases in currencies other
than the functional
22
<PAGE>
currencies in which the Company operates were $30.4 million and $127.4 million
respectively in 1999, treating the currencies within the Euro currency area as
one.
The foreign currency element of the Company's debt under the Senior Notes and
revolving credit facility is generally arranged to align with the denomination
of the book value of net assets. By doing this, the Company reduces the
translation exposure of net worth to changes in foreign currency exchange rates.
The three principal exceptions are: (1) $38 million of net assets denominated in
Pounds Sterling arising from the Company's former large presence in U.K., (2)
$40 million of foreign pension assets in U.K. and The Netherlands, and, (3) $6
million denominated in South African Rand due to limits placed by the South
African Reserve Bank on the maximum indebtedness allowed by foreign owned
corporations, based on the balance sheet as at December 31, 1999.
The Company generates most of its trading income in foreign currencies. In order
to ensure that such trading income can be converted to yield sufficient U.S.
Dollars to service 67% of the interest on the $100 million 10% Senior Notes
through May 2001, currency options were purchased in 1998. These currency
options are for $6.7 million per year, selling NLG6 million, GBP2 million and
C$1.2 million. At December 31, 1999 the fair 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.
Interest rate risk
Interest expense relating to the Senior Notes was $15.6 million in 1999, which
was at fixed interest rates. Interest expense on the Subordinated Note of $3.8
million in 1999 is paid-in-kind through the issue of additional Subordinated
Notes. The other major element of the Company's interest expense was $4.3
million on the revolving credit facilities in 1999. These were at floating rates
of 2.0% above the London Interbank Offer Rate through August 31, 1999 and 2.5%
thereafter. A hypothetical one percentage point shift in floating interest rates
would have a $0.7 million approximate impact on annual interest expense. As
interest rates on the revolving credit facilities have been capped at 8.4%
effective August 1998 through July 2001, increases in floating interest rates
above that level would only have limited impact on expense.
Commodity price risk
The business of the Company does not carry a significant direct exposure to the
prices of commodities.
Unsecured status of senior notes and asset encumbrance
The Senior Note Indentures permit the Company to incur certain secured
indebtedness, including indebtedness under the Revolving Credit Agreement, which
is secured and guaranteed by the obligors thereunder through a first priority
fully protected security interest in all the assets, properties and undertakings
of the Company and each other obligor thereunder where available and cost
effective to do so, and to the extent permissible by local laws. The Company has
facilities available under the Revolving Credit Agreement of DM214.0 million
($103.9 million). As of July 2, 2000, the Company had indebtedness outstanding
under the Revolving Credit Agreement of $52.6 million. Borrowings of $0.4
million under the South African Credit Facility are secured by a security
interest in certain of the assets of the Company's South African subsidiaries.
The Senior Notes are unsecured and therefore do not have the benefit of any such
collateral. Accordingly, if an event of default were to occur under the
Revolving Credit Agreement or the South African Credit Facility, the lenders
thereunder would have the right to foreclose upon the collateral securing such
indebtedness to the exclusion of the holders of the Senior Notes,
notwithstanding the existence of an event of default with respect to the Senior
Notes. In such event, the assets constituting such collateral would first be
used to repay in full all amounts outstanding under the Revolving Credit
Agreement or the South African Credit Facility, as applicable, resulting in all
or a portion of the assets of the Issuers being unavailable to satisfy the
claims of holders of the Senior Notes and other unsecured indebtedness of the
Issuers. The Company may also incur other types of secured indebtedness under
the Senior Note Indentures, including up to $20 million in indebtedness of any
type, indebtedness 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) owing in respect of the Notes, incur liens and encumbrances
and permit the amount of receivables and inventory to exceed specified
thresholds.
The ability of the Company to comply with the covenants and other provisions of
the Revolving Credit Agreement may be affected by changes in general economic
and competitive conditions and by financial, business and other factors that are
beyond the Company's control. The failure to comply with the provisions of the
Revolving Credit Agreement could result in an event of default thereunder, and,
depending upon the actions of the lenders thereunder, all amounts borrowed under
the Revolving Credit Agreement, together with accrued interest, could be
declared due and payable. If the Company were not able to repay all amounts
borrowed under the Revolving Credit Agreement, together with accrued interest,
the lenders thereunder would have the right to proceed against the collateral
granted to them to secure such indebtedness. If the indebtedness outstanding
under the Revolving Credit Agreement were to be accelerated, there can be no
assurance that the assets of the Company would be sufficient to repay in full
such indebtedness, and there can be no assurance that there would be sufficient
assets remaining after such repayments to pay amounts due in respect of any or
all of the Notes.
In addition, the Senior Note Indentures contain certain covenants that, among
other things, restrict the ability of the Company and its Restricted
Subsidiaries to incur additional indebtedness, pay dividends on and redeem
capital stock, redeem certain subordinated obligations, make investments,
undertake sales of assets and subsidiary stock, engage in certain transactions
with affiliates, sell or issue capital stock, permit liens to exist, operate in
other lines of business, engage in certain sale and leaseback transactions and
engage in mergers, consolidations or sales of all or substantially all the
assets of the Company. A failure to comply with the restrictions contained in
either of the Senior Note Indentures could result in an event of default under
such indenture.
All of the Company's freehold property and intellectual property located in
Canada, Germany, Ireland, The Netherlands, Sweden, U.K. and U.S.A. is pledged as
security for the Company's seven year revolving credit facility of
DM214,000,000.
The Company was in compliance with all of its borrowing covenants as at July 2,
2000. The Company covenanted to reduce its Aggregate Financial Indebtedness, as
defined in the Revolving Credit Agreement, to $55 million on July 4, 2000.
Aggregate Financial Indebtedness, which includes undrawn letters of credit, at
that date was $59.3 million. The banks waived the default, which was corrected
by the conversion, on July 30, 2000, of the $7.0 million bridge loan to a Junior
Subordinated Loan which is excluded from the definition of Aggregate Financial
Indebtedness under the Revolving Credit Agreement as amended.
Risk of foreign exchange rate fluctuations; introduction of the Euro
The Company's business is conducted by operating subsidiaries in many countries,
and, accordingly, the Company's results of operations are subject to currency
translation risk and currency transaction risk. With respect to currency
translation risk, the results of operations of each of these operating
subsidiaries are reported in the relevant local currency and then translated
into U.S. Dollars at the applicable currency exchange rate for inclusion in the
Company's financial statements. The appreciation of the U.S. Dollar against the
local currencies of the operating subsidiaries will have a negative impact on
the Company's sales and operating margin. Conversely, the depreciation of the
U.S. Dollar against such currencies will have a positive impact. Fluctuations in
the exchange rate between the U.S. Dollar and the other currencies in which the
Company conducts its operations may also affect the book value of the Company's
assets and the amount of the Company's shareholders' equity. In addition, to the
extent indebtedness of the Company is denominated in different currencies,
changes in the values of such currencies relative to other currencies in which
the Company conducts its operations may have a negative impact on the Company's
ability to meet principal and interest obligations in respect of such
indebtedness.
In addition to currency translation risk, the Company incurs currency
transaction risk to the extent that the Company's operations involve
transactions in differing currencies. Fluctuations in currency exchange rates
24
<PAGE>
will impact the Company's results of operations to the extent that the costs
incurred by the operating subsidiaries are denominated in currencies that differ
from the currencies in which the related sale proceeds are denominated. To
mitigate such risk, the Company may enter into foreign currency forward exchange
contracts primarily relating to the Pound Sterling, the U.S. Dollar, the Dutch
Guilder, the Deutsche Mark, the New Taiwan Dollar and the Yen. Given the
volatility of currency exchange rates, there can be no assurance that the
Company will be able effectively to manage its currency transaction risks or
that any volatility in currency exchange rates will not have a material adverse
effect on the Company's business, financial condition or results of operations.
Under the treaty on the European Economic and Monetary Union (the "Treaty"), to
which the Federal Republic of Germany and the Netherlands are signatories, on
January 1, 1999, a European single currency (the "Euro") replaced some of the
currencies of the member states of the European Union (the "E.U."), including
the Deutsche Mark and Dutch Guilder.
Following introduction of the Euro, the existing sovereign currencies (the
"legacy currencies") of the eleven participating member countries of the E.U.
(the "participating countries") who adopted the Euro as their common legal
currency are scheduled to remain legal tender in the participating countries as
denominations of the Euro until January 1, 2002 (the "transition period"). The
Euro conversion may impact the Company's competitive position as the Company may
incur increased costs to conduct business in an additional currency during the
transition period. Additionally, the participating countries' pursuit of a
single monetary policy through the European Central Bank may affect the exchange
rate of the Euro, and therefore of the legacy currencies, as well as 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 in 1998 and acquisition of Diamond Back in 1999 and has a
highly leveraged capital structure. As of July 2, 2000, the Company had combined
total indebtedness of $233.4 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 $51.8 million, stock rights of $23.3 million and
shareholders' deficit was $82.1 million. The Company's ability to make scheduled
interest payments and repayment of principal is dependent upon its future
operating performance, which, in turn, is subject to general economic and
competitive conditions and to financial, business and other factors, many of
which are beyond the Company's control.
Although the Company believes that, based on current operations, it will have
sufficient cash flow from operations to service its obligations with respect to
its indebtedness, there can be no assurance that the Company will be able to
meet such obligations. In the event that the Company is unable to generate cash
flow from operations that is sufficient to service its obligations in respect of
its indebtedness, the Company may be required to take certain actions, including
delaying or reducing capital expenditures, attempting to restructure or
refinance its indebtedness, selling material assets or operations or seeking
additional equity. There can be no assurance that the Company will be able to
generate cash flow from operations that is sufficient to service its obligations
in respect of its indebtedness or that any such actions could be effected or
would be effective to allow the Company to service such obligations.
Forward Looking Statements
This discussion contains certain forward-looking statements that involve risks
and uncertainties. In addition, the Company may from time to time make oral
forward-looking statements. As discussed in the Company's prospectus on Form S-
4A filed with the SEC on December 4, 1998, actual results are uncertain and may
be impacted by various factors. In particular, certain risks and uncertainties
that may
25
<PAGE>
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.
26
<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
may bear responsibility for a significant portion, if not all, of the defense
costs (which include attorneys' fees and expenses incurred in the defense of any
claim) and the related payments to satisfy any judgments associated with any
claim asserted against the Company in excess of any applicable coverage. The
settlement of a significant number of insured claims, the settlement of a claim
exceeding the Company's insurance coverage or the successful assertion or
settlement of an uninsured claim could have a material adverse effect on the
Company's business, financial condition or results of operations. There can be
no assurance that insurance will remain available, or, if available, will not be
prohibitively expensive. The deductible under the Company's insurance policies
is currently $250,000 per claim; however, prior to 1993, the deductible was $1.0
million per claim. Not all claims arising during the period in which the
Company's deductible was $1.0 million have been resolved and it is possible that
additional claims may be filed. The aggregate amount of liability under existing
and potential claims could exceed the reserves established by the Company for
product liability claims.
Product Recalls
Although the Company has not recently experienced a significant product recall,
the Company has, in the past, recalled certain bicycle models. If the Company
were required to make a significant product recall, such a recall could have a
material adverse effect on the Company's business, financial condition or
results of operations. In common with the rest of the bicycle industry,
components fitted to its bicycles may be subject to a recall program of the
component supplier.
Liability For Environmental Matters
The Company is subject to a wide variety of governmental requirements related to
environmental protection including, among other things, the management of
hazardous substances and wastes. Although the Company has made and will continue
to make significant expenditures related to its environmental compliance
obligations, there can be no assurance that the Company will at all times be in
compliance with all such requirements. Moreover, the Company's existing and
historical operations, including the operations of its predecessors, expose the
Company to the risk of clean-up liabilities or environmental or personal injury
claims related to releases and emissions of hazardous substances and wastes.
Such liabilities and claims could require the Company to incur material costs
related to such releases or to the investigation or remediation of contaminated
property. Also, changes in existing environmental requirements or the imposition
of additional environmental liabilities related to existing or historical
operations could result in substantial cost to the Company.
27
<PAGE>
ITEM 2. CHANGES IN SECURITIES
None.
28
<PAGE>
ITEM 3. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
10.2 Offer to sell the business and assets of Sturmey Archer to The Wright
Saddle Company Limited dated June 24, 2000.
10.3 Agreement for the sale and purchase of the entire issued share capital of
The Wright Saddle Company Limited dated June 24, 2000 between The Derby
Cycle Corporation and Sturmey Archer Limited as vendors and Lenark Limited
as purchaser.
10.4 Amendment Agreement dated June 30, 2000 relating to the Multi-Currency
Credit Facility of up to DM214,000,000 dated May 12, 1998 between The
Derby Cycle Corporation and others as borrowers and/or guarantors, Chase
Manhattan plc as arranger, the financial institutions named therein as
banks, Chase Manhattan International Limited as security agent, and Chase
Manhattan International Limited as facility agent.
10.5 Amendment Agreement dated July 31, 2000 relating to the Multi-Currency
Credit Facility of up to DM214,000,000 dated May 12, 1998 between The
Derby Cycle Corporation and others as borrowers and/or guarantors, Chase
Manhattan plc as arranger, the financial institutions named therein as
banks, Chase Manhattan International Limited as security agent, and Chase
Manhattan International Limited as facility agent.
10.6 Junior Subordinated Promissory Note issued to Thayer Equity Investors III,
L.P. and Perseus Capital, L.L.C. dated July 31, 2000.
10.7 Employment Agreement dated as of August 11, 2000 between Raleigh
Industries Limited and Phillip L. Darnton
27 Financial Data Schedule.
Reports on Form 8-K
Report on form 8-K filed August 16, 2000.
29
<PAGE>
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
Stamford, Connecticut on August 16, 2000.
The Derby Cycle Corporation Date
----
\s\ Daniel S. Lynch
By: ______________________________ August 16, 2000
Name: Daniel S. Lynch
Title: Chief Financial Officer
\s\ Simon J. Goddard
By: ______________________________ August 16, 2000
Name: Simon J. Goddard
Title: Vice President and Corporate Controller
30
