Document/Exhibit Description Pages Size
1: 10-K Annual Report 73 419K
2: EX-3.1 Amended and Restated Certificate of Incorporation 25 103K
3: EX-10.13 Amended and Restated Agreement 21 54K
4: EX-10.14 Revised Facility Agreement 231 790K
5: EX-10.15 Senior Subordinated Loan Agreement 63 141K
6: EX-10.16 Material Contract 6 30K
7: EX-10.17 Management Stock Purchase Agreement 11 46K
8: EX-10.18 Agreement 177 640K
9: EX-10.19 Form of Agreement Evidencing A Grant of Stock 7 31K
Option
10: EX-10.20 Amended & Restated Shareholders Agreement 34 130K
11: EX-10.21 Securities Purchase Agreement 5 15K
12: EX-21.1 Subsidiaries 2 11K
13: EX-27 Financial Data Schedule 2 7K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Year ended December 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES ACT OF 1934
For Transition Period from __________ to __________
Commission File Number 0001067447
THE DERBY CYCLE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 31-1038896
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Simon Goddard
The Derby Cycle Corporation
22710 72nd Avenue South
Kent, Washington 98032
(Address of principal executive offices, including zip code)
Telephone: (253) 395-1100
(Registrant's telephone number, including area code)
THE DERBY CYCLE CORPORATION
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. BUSINESS........................................................... 1
ITEM 2. PROPERTIES......................................................... 8
ITEM 3. LEGAL PROCEEDINGS.................................................. 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 9
PART II
ITEM 5. MARKET FOR THE REGISTRANTS UNITS AND RELATED UNITHOLDER
MATTERS ........................................................... 10
ITEM 6. SELECTED HISTORICAL FINANCIAL AND OPERATING DATA................... 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.......................................... 12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................ 25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................................ 25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................. 26
ITEM 11. EXECUTIVE COMPENSATION............................................. 29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..... 31
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................... 36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8 - K. 37
PART I
ITEM 1. BUSINESS
Nature of the Business
The accompanying combined financial statements have been prepared to reflect the
financial position and results of operations of the bicycle and bicycle
component businesses of Derby International Corporation SA ("DICSA"), a
Luxembourg holding company through May 14, 1998. Up to that date DICSA owned
shares, either directly or indirectly, in a number of bicycle and bicycle
component companies worldwide that predominantly operate as stand-alone
entities. Each of the companies manufactures, assembles and/or distributes
bicycles and bicycle components. These bicycle and bicycle component companies,
collectively referred to as The Derby Bicycle Group have significant operations
in the Netherlands ("Gazelle"), the United Kingdom ("Raleigh UK", and "Sturmey
Archer"), Canada ("Raleigh Canada"), Germany ("Derby Germany"), South Africa
("Probike") and the United States (" the Raleigh USA" division of the Company).
Effective May 14, 1998, DICSA reorganized its businesses in connection with a
recapitalization agreement so that each of its bicycle and bicycle component
companies are owned directly or indirectly by The Derby Cycle Corporation, a
Delaware corporation with operations in the United States. The accompanying
consolidated financial statements have been prepared to reflect the financial
position and results of operations of the Company and its subsidiaries from May
14, 1998 through December 31, 1998. Accordingly, the financial statements have
been prepared in conformity with accounting principles generally accepted in the
United States and are presented in United States dollars.
References to the "Company" throughout this document mean The Derby Bicycle
Group through May 14, 1998 and The Derby Cycle Corporation and its subsidiaries
from May 14, 1998 through December 31, 1998.
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, Nishiki and Univega,
and leading regional brands such as Gazelle in The Netherlands and Kalkhoff,
Musing, Winora and Staiger in Germany. The Company designs, manufactures and
markets a wide range of bicycles in all major product categories: (i)
all-terrain or mountain bicycles ("MTBs"), (ii) city bicycles, also called
touring or upright bicycles, (iii) hybrid bicycles, also called comfort or cross
bicycles, (iv) juvenile bicycles, including bicycle motocross ("BMX") bicycles,
and (v) race/road bicycles. The Company distributes branded bicycles through
extensive local market networks of independent bicycle dealers ("IBDs") as well
as through national retailers, and distributes private label bicycles through
mass merchandisers and specialty stores.
Through a series of acquisitions and plant expansions, the Company has created a
global bicycle business distinguished by its leading market positions, low cost
production, extensive distribution network and reputation for high quality.
Organized in 1986 for the purpose of acquiring the Raleigh, Gazelle and
Sturmey-Archer bicycle and bicycle component businesses from TI Group plc, the
Company expanded into the United States and Germany in 1988. Since then, the
Company has acquired additional well-known brands and leveraged its existing
manufacturing plants and component sourcing operations to
1
lower unit costs for its acquired businesses.
Since 1990, the Company has invested in labor-saving, flexible production
machinery and restructured the workforces at its manufacturing locations. From
1992 to 1993, taking advantage of substantial incentives from the German
government, the Company built a factory in Rostock, in the former German
Democratic Republic. The Company completed its internal reorganization and
investment program in 1996, having made major steps toward improving production
efficiency and increasing manufacturing flexibility.
The Company's operations are concentrated in the United Kingdom, the
Netherlands, Germany, the United States and Canada, with manufacturing
operations in these countries, each led by experienced local management.
The Company maintains marketing or purchasing operations in five additional
countries. (See Financial Statements page F-25 for details of segmental
information). Each local operation manages national distribution channels,
dealer service and working capital and benefits from shared product design and
manufacturing technologies as well as from economies of scale generated by the
Company's aggregate purchasing power. Consequently, each local operation has the
flexibility to respond to shifts in local market demand and product preference.
Business Strategy
The Company intends to enhance and leverage its competitive strengths through
the following business strategies:
Capitalize on Strength of The Company's Brand Names.
The Company owns or licenses many of the most recognized brand names in the
bicycle industry. The Company intends to continue to leverage its leading market
positions and strong brand equity to: (i) further penetrate attractive market
niches such as the hybrid and BMX segments, (ii) develop and enhance
relationships with existing and new IBDs, (iii) augment the Company's position
in the growing multi-sport retail channel, principally in the United Kingdom and
in the United States, and (iv) pursue attractive ancillary businesses, such as
cycling accessories and branded clothing.
Enhance and Leverage Dealer Relationships.
Due to the long-standing market presence of many of the Company's local
operations and brands (e.g., more than 100 years each for Raleigh UK and
Gazelle), management believes its relationships with local bicycle dealers are
strong as well as extensive. The Company intends to enhance loyalty among IBDs,
further penetrate its existing markets and expand into new markets by
maintaining multiple product categories and superior customer service.
Increase Market Share in Growing Hybrid Bicycle Sector.
In several markets, management expects the hybrid bicycle segment to grow at a
rate significantly higher than that of the overall bicycle industry Management
believes the Company is well-positioned to capitalize on this growth.
Pursue Strategic Acquisitions.
Management believes that the fragmented nature of the bicycle industry provides
opportunities for growth through strategic acquisitions. The Company intends to
pursue acquisitions that will allow it to leverage its existing distribution
network and its modern manufacturing facilities. The Company also intends to
focus its efforts on acquiring leading brands with particular emphasis on
consolidation opportunities in the United States and Germany and in markets
where the Company is not currently represented. In the ordinary course of
business, the Company routinely considers potential acquisition candidates.
2
Acquisition History and Investment Program
The Company was organized in 1986 to acquire the Raleigh, Gazelle and
Sturmey-Archer bicycle and bicycle component businesses from TI Group plc. In
1988, the Company acquired the assets of Neue Kalkhoff, the second largest
bicycle manufacturer in the former Federal Republic of Germany at the time, and
established Derby Germany. Also in 1988, the Company acquired the assets of
Raleigh Cycle Company of America from Raleigh's U.S. licensee, Huffy
Corporation, and the West Coast Cycle division of Medalist Industries Inc.
(owner of the Nishiki brand in the United States). These two businesses were
merged to form Raleigh USA. The Company formed the Probike South Africa
operating company with the acquisitions of Cycle and Hardware Factors in 1989,
J.H. Slotar in 1990 and Cycle Centre Wholesale in 1991. In 1992, the Company
acquired Musing, the German bicycle manufacturer.
In 1997, the Company acquired the assets and operations of the Winora and
Staiger businesses, long-established bicycle manufacturer and distributor
located in southwestern Germany. In 1997, Derby acquired the worldwide rights to
the Univega brand name and its associated trade names, trademarks and designs
and formed Univega to serve as a holding company for the acquisition of the MS
Sport Group in Germany from Robert Holzer.
On February 4, 1999, the Company acquired the assets (and assumed certain
liabilities) of the Diamond Back Group for approximately $42.75 million in cash.
The Diamond Back Group consists of Diamond Back International Company Limited, a
private British Virgin Islands company, Western States Import Company Inc., a
Delaware corporation and Bejka Trading A.B., a private Swedish company , each of
which is engaged in the bicycle, bicycle parts and accessories and fitness
equipment distribution business.
Weather Conditions And Seasonality
Demand for bicycles in the Company's principal markets is influenced by weather
conditions. For example, warm weather tends to increase sales of bicycles, and
cold, wet weather tends to reduce sales of bicycles. Moreover, demand for
bicycles in the Company's principal markets is seasonal, characterized in most
cases by a majority of consumer sales in the spring and summer months, with a
strong bias towards consumer sales in the last four months of the calendar year
in the United Kingdom, South Africa and Ireland. Seasonality in the United
Kingdom, South Africa and Ireland is influenced by increased sales of juvenile
bicycles in the months preceding Christmas. Accordingly, dealers' peak
purchasing months are October and November when they build inventory in
anticipation of Christmas sales of juvenile bicycles. The Company seeks to
mitigate the impact of the seasonality of the demand for bicycles by varying the
amount of labor employed throughout the year. Additional labor is employed in
the months before and during the periods of greater consumer sales through the
operation of longer shifts and the hiring of temporary workers. In addition,
certain of the Company's local operations, such as those in Canada, are closed
during periods of low production. There can be no assurance, however, that the
Company will be able to successfully respond to changes in demand for bicycles
due to variations in weather conditions or to manage its working capital needs.
Any failure to so respond may have a material adverse effect on the Company's
business, financial condition and results of operations.
Highly Competitive Industry
The market for bicycles, parts and accessories is highly competitive.
Competition in the bicycle industry is based upon price, quality, brand name and
service. In all its product categories, the Company competes with other
manufacturers and distributors, some of which have well-recognized brand names
and substantial financial, technological, distribution, advertising and
marketing resources. In addition, several bicycle manufacturers and component
suppliers that have substantial resources do not currently compete directly with
the Company, but could pose a significant competitive threat to the Company in
the future. Moreover, additional competitors could enter the Company's markets,
as management believes the barriers to entering the bicycle designing and
manufacturing businesses are low. Management also believes, however, that it
would be difficult for a new competitor to build a distribution network as
3
effective as the Company's distribution network.
Like other bicycle manufacturers, the Company also faces competition from
bicycles imported from the Far East. In recent years, the impact of this
competition has diminished due to the imposition of anti-dumping duties by the
E.U. The purpose of anti-dumping duties is to promote fair competition between
domestic and foreign suppliers of bicycles by increasing the cost of
foreign-supplied bicycles to domestic fair market value. Such anti-dumping
duties work by imposing a payment due to be made by the importer at the time of
clearing customs. The impact of such anti-dumping duties is to increase the
retail price of imported bicycles, thus enabling domestic manufacturers to
compete more fairly with imported bicycles. Specifically, imports from the Far
East have been constrained by E.U. initiatives such as the 30.6% anti-dumping
duty on Chinese bicycles introduced in 1993, which continued in effect until
September 1998. The E.U. has also imposed anti-dumping duties and tariffs,
ranging up to 39.4%, on bicycles imported from most manufacturers in Thailand,
Malaysia and Indonesia. In addition, in January 1997, the E.U. strengthened its
existing regulations to prevent circumvention through the importation of kits
and partially assembled bicycles. In November 1997, the E.U. opened an
anti-dumping inquiry into imports from Taiwan. Subsequently, anti-dumping duties
were imposed by the E.U. on Taiwan on August 24, 1998 at various rates for
different manufacturers. With respect to the imposition of anti-dumping duties
on Taiwanese bicycles completely assembled at the time of import, management
believes the level of the anti-dumping duties imposed on Taiwanese bicycle
manufacturers is not sufficient to offset the impact of the current currency
devaluation in Taiwan. While management cannot predict how long the value of the
New Taiwan dollar may remain depressed relative to the value of the U.S dollar,
management believes the Company is able to realize significant offsetting gains
in its purchases of Taiwanese components which allow the Company, to a certain
extent, to offer lower prices on bicycles produced by the Company which utilize
such Taiwanese components.
There can be no assurance that the Company will be able to compete successfully
in the future with other bicycle manufacturers located in its principal markets
or in the Far East or that the expiration or repeal of existing anti-dumping
duties or competition in the bicycle industry will not have a material adverse
effect on the Company's business, financial condition and results of operations.
Dependence On Certain Suppliers
The Company's operations are highly dependent upon products manufactured by
non-U.S. suppliers located primarily in Taiwan and Japan and, to a lesser
extent, in China. As is common in the bicycle industry, a substantial majority
of the Company's multi-speed bicycles contain components supplied by Shimano,
the world's largest bicycle component manufacturer and supplier, and a brand
with a strong reputation among bicycle consumers. Although Shimano has not
indicated any intention to limit or reduce sales of components to the Company,
if it were to do so, the Company's business, financial condition and results of
operations could be adversely affected. Although the Company has established
relationships with its principal suppliers, the Company's future success will
depend on its ability to maintain such relationships and to develop
relationships with new suppliers. In the event of a delay or disruption in the
supply of components, the Company believes that suitable alternative suppliers
could be located, although the transition to other suppliers could result in
significant production delays. Any significant delay or disruption in the supply
of components could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Recapitalization
On May 14, 1998, the Company consummated a recapitalization. Pursuant to a
Recapitalization Agreement dated March 11, 1998 (as amended, the
"Recapitalization Agreement"), (i) the Company was restructured (the
"Restructuring") such that the Company now owns all the capital stock of
approximately 70 existing subsidiaries, a controlling interest in Raleigh
Canada, Univega, Univega License, the MS Sport Group, Derby Holdings South
Africa and certain other subsidiaries, and a minority interest in certain other
entities; (ii) each of DFS (a wholly owned subsidiary of DICSA, the former
4
parent company of the Company), Thayer Equity Investors III, L.P. ("Thayer") and
Perseus Capital, L.L.C. ("Perseus") purchased (through their respective wholly
owned subsidiaries) equity interests in the Company in the amounts of $3.0
million, $50.0 million and $10.0 million, respectively, for cash (collectively,
the "Equity Contributions"); (iii) DICSA (directly and through DFS) retained an
equity interest in the Company and Raleigh Canada having a value of $45.0
million (the "Retained Equity"), based on the amounts invested in the Company's
equity by DFS, Thayer and Perseus.
The Retained Equity includes preferred stock of Raleigh Canada issued to DICSA
in connection with the Recapitalization (the "Raleigh Canada Preferred Stock"),
which may be exchanged for shares of Class A common stock (as defined) and Class
B common stock (as defined) of the Company having a value of $23.3 million,
based on the amounts invested in DCC's equity by DFS, Thayer and Perseus, or
redeemed subsequent to the vesting of the Company's right to exchange such stock
for shares of its common stock (as defined), at the option of DICSA under
certain circumstances, for a cash payment of $23.3 million, plus all accrued and
unpaid dividends thereon, pursuant to an exchange agreement among DICSA, the
Company and Raleigh Canada (the "Raleigh Canada Exchange Agreement"). In
addition, (i) the Company made a cash payment of approximately $146.2 million to
DFS (the "DFS Payment") (ii) equity held by the minority shareholders of Derby
Holdings South Africa was redeemed for a cash payment of approximately $1.9
million (the "Redemption Payment"); (iii) the Company repaid its net existing
indebtedness (the "Existing Indebtedness") (other than indebtedness of the
Company's South African subsidiaries incurred under a credit facility providing
for maximum borrowings in an amount approximately equivalent to $6 million (the
"South African Credit Facility")), in an amount of approximately $148.1 million;
(iv)the Company and certain of its subsidiaries borrowed approximately $84.9
million under a new senior secured revolving credit agreement (the "Revolving
Credit Agreement"); and (v) the Issuers issued the Old Notes (collectively with
borrowings under the Revolving Credit Agreement, the "Debt Financing"), as of
May 14, 1998. The Restructuring, the Equity Contributions, the DFS Payment, the
repayment of Existing Indebtedness (other than indebtedness incurred under the
South African Credit Facility) and the Debt Financing are collectively referred
to as the "Recapitalization".
Investor Group
Subsequent to the Recapitalization, and the issue of Class C common stock in
February 1999, the Company's shareholders are (i) a wholly-owned subsidiary of
Thayer, which controls approximately 65% of the total voting power of the
Company's capital stock, (ii) a wholly-owned subsidiary of Perseus, which
controls approximately 13% of the total voting power of the Company's capital
stock, and (iii) DFS, which controls approximately 20% of the total voting power
of the Company's capital stock. Prior to the Recapitalization, the Company was
wholly-owned by DICSA through its subsidiary, DFS.
Thayer is a private equity fund managed by TC Equity Partners ("Thayer
Capital"), a private equity investment firm based in Washington, D.C. Thayer
Capital's partners are Frederic V. Malek, Carl J. Rickertsen and Paul G. Stern.
Thayer Capital invests primarily in private equity investments in management
buyouts and recapitalizations. In June 1996, Thayer Capital closed Thayer, its
current corporate private equity fund, with $364 million in commitments.
Perseus is a merchant banking venture managed by Perseus Management L.L.C.
("Perseus Management") and based in Washington, D.C. Perseus invests primarily
in leveraged acquisitions of operating businesses. Frank H. Pearl is the
Chairman and President of Perseus and is one of the founding directors and
shareholders of DICSA.
DFS is a wholly-owned subsidiary of DICSA. A. Edward Gottesman, a director of
the Company, the chairman of DICSA, and a charitable trust of which he is the
settlor, control a majority of the capital stock of DICSA indirectly through an
industrial holding company, Centenary Corporation ("Centenary"). Alan J. Finden-
Crofts, the
5
a director of the Company and a director of DICSA and Mr. Pearl, a director of
the Company and a director of DICSA, own minority interests in DICSA.
Competitive Strengths
Global Industry Leader.
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, has the leading market share in the adult
bicycle market in Germany and is consistently among the five largest suppliers
to the IBD market in the United States. The Company's leading market shares in
multiple markets position it as a global bicycle industry leader and reduce its
vulnerability to local economic cycles and changing consumer preferences.
Portfolio of Well-Recognized Brand Names.
The Company owns or licenses many of the most widely-recognized brand names in
the bicycle industry. These brands include leading global brands such as
Raleigh, Nishiki and Univega, and leading regional brands such as Gazelle in The
Netherlands and Kalkhoff, Musing, Winora and Staiger in Germany. The Company has
maintained its leading brand names primarily by providing high quality, reliable
and innovative products supported by strong customer service to its dealers. The
Company promotes its brand names through mass-media advertising and focused
promotional efforts such as sponsoring professional and amateur cycling teams
and individuals, extending cooperative advertising programs to IBDs and
participating in major trade shows. Based on marketing surveys conducted by the
Company, the Raleigh brand has a 97% prompted recognition in the United Kingdom
and is the second most recognized bicycle brand in the United States with
respect to brands sold through IBDs. In addition, Raleigh and Gazelle are the
two most recognized bicycle brands in The Netherlands.
Significant Purchasing Power.
As one of the world's largest purchasers of bicycle components, management
believes that the Company's aggregate buying power and supplier relationships
provide the Company with an important competitive advantage. Typically, bicycle
components and raw materials account for approximately 75% of a bicycle's total
manufacturing cost. The Company's ability to obtain favorable pricing and trade
terms on a global basis results in lower per unit bicycle costs and higher gross
margins. The Company's purchasing subsidiary, Derby Trading, assists the
operating companies in negotiating with Taiwanese and Chinese bicycle component
manufacturers. Management believes that the Company is one of the largest
customers of Shimano, Inc. ("Shimano"), the world's largest bicycle component
manufacturer and supplier. The Company's long term relationships with key
suppliers help the Company to obtain high quality components in a timely,
cost-efficient manner.
Extensive Dealer Distribution Networks.
Management believes the Company has the most extensive dealer distribution
network of any bicycle company in its three largest markets, the United Kingdom,
The Netherlands and Germany, as well as in Canada and Ireland. For example,
Raleigh UK has approximately 225 exclusive retail outlets, while its nearest
competitor has none. In The Netherlands, Gazelle distributes through
approximately 1,500 dealers, representing more than 60% of the IBDs in the
country, and in Germany, Derby Germany is one of the largest suppliers to the
Zweirad-Einkaufs-Genossenschaft ("ZEG"), a major retail cooperative that
supplies approximately 50% of the German IBD market. The Company actively works
with its dealers to develop brand loyalty and to respond quickly to changes in
retailing formats and customer buying habits, in part by tailoring sales and
marketing programs to each market and distribution channel. The Company believes
its strong relationships with its dealers are a key to its success.
Flexible and Cost-Efficient Design and Manufacturing.
The Company operates modern manufacturing facilities in the United Kingdom, The
Netherlands, Germany, Canada and the United States, each of which has local
in-house design and engineering
6
staff who develop new models and styles. Local market manufacturing flexibility
and integrated product development allow the Company to respond quickly to
changes in customer demand, maintain consistent, high quality products, manage
working capital needs and reduce the risk of inventory obsolescence for both the
Company and its dealers. Furthermore, the development department at each
manufacturing operation participates in the Company's make-or-buy decision
process to help ensure that in-house manufacturing is the most cost-effective
method of production. Between 1991 and 1997, Derby invested approximately $25
million to build a modern manufacturing facility located in Rostock, in the
former German Democratic Republic, approximately $20 million to reorganize and
upgrade its Nottingham, England, manufacturing facility, and approximately $38
million to increase quality and capacity and reduce total product and
distribution costs in other existing facilities. The Company reduced its labor
hours per manufactured unit by approximately 19% over that period.
Diversified Revenues and Cash Flows.
The Company operates in ten countries around the world and offers a
comprehensive product line in each of its markets. Management believes the
Company's geographical diversification and broad product line: (i) reduce the
effects of cyclical downturns in individual markets and (ii) help to mitigate
the impact of sales volatility due to changing consumer preferences associated
with individual markets and products.
Experienced Management Team.
The Company has a strong and experienced management team at both the corporate
and operating levels. The Company's twelve executive managers average more than
ten years of experience in the bicycle industry. To capitalize on the strengths
of each of its local operations, management teams from the Company's local
operations meet periodically to share ideas regarding product innovation,
manufacturing processes and component purchasing. Since the Company's formation
in 1986, management has successfully integrated ten acquisitions and expanded
the range of the Company's brands and product lines. In mid-January 1999, the
Company hired Gary S. Matthews as the new chief executive officer to replace Mr.
Alan Finden-Crofts. Mr. Finden-Crofts will serve as a consultant to the Company
for four months thereafter in order to ensure a smooth transition. Mr.
Finden-Crofts will remain a shareholder of the Company (indirectly through DFS),
and a director of the Company.
Global Bicycle Industry Overview
The global bicycle industry, including bicycles, parts and accessories, is
estimated to have total retail sales in excess of $20 billion. The bicycle
manufacturing segment of the industry, with annual production of approximately
100 million units, is competitive, highly fragmented and locally driven.
Bicycles are produced throughout the world in approximately 65 countries with
product demand, design and distribution driven by varying local market dynamics
and consumer preferences. Across local markets, bicycle products can be
classified into five major categories: (i) all-terrain or mountain bicycles,
referred to as MTBs, which feature wide tires, high strength frames, components
with multiple gears and powerful brakes, (ii) city bicycles, also called touring
or upright bicycles, which feature more comfortable seats, up to seven gears
within the wheel hub, chain and splash guards, luggage racks and lights, (iii)
hybrid bicycles, also called comfort or cross bicycles, which combine the
technology of MTBs with the comfort and practicality of city bicycles, (iv)
juvenile bicycles with smaller wheels and frame size, including BMX bicycles,
and (v) race/road bicycles, which feature narrow, high pressure tires,
lightweight frames and components with multiple gears. In general, these bicycle
products are marketed and sold through two primary distribution channels: IBDs
and mass merchandisers. IBDs typically carry a broad range of relatively high
priced, high quality bicycles, while mass merchandisers tend to offer relatively
lower-priced bicycles focused primarily on the juvenile market. The Company
manufactures and markets bicycles across all five major product categories and
distributes through both the IBD channel and the mass merchandiser channel.
Management believes that the Company is an industry leader because it offers its
customers high quality, comprehensive product lines in each of its local
markets.
7
ITEM. 2. PROPERTIES
The Company manufactures at sites in the UK, the Netherlands, Germany, Canada
and the USA. Except for the USA, these manufacturing sites are owned by the
Company. The USA manufacturing site and certain warehouse and office facilities
in Europe, South Africa and Taiwan, are leased. See the following tables on
freehold and leasehold properties. The Company believes that it has satisfactory
title to or valid rights to the use of all of its material properties.
Operating entity Location Freehold property
Raleigh UK Nottingham, England Factory and offices
Gazelle Dieren, The Netherlands Factory and offices
Derby Germany Cloppenburg, Germany Factory and main offices
Derby Germany Rostock, Germany Factory
Derby Germany Sennfeld, Germany Factory and offices
Raleigh Canada Oakville, Canada Offices and warehouse
Raleigh Canada Waterloo, Canada Factory
Sturmey-Archer Nottingham, England Factory and offices
Sturmey-Archer Birmingham, England Factory
Operating entity Location Leasehold property
Raleigh USA Kent, Washington Factory, warehouses
and offices
Raleigh USA Hanover Park, Illinois Warehouse
Raleigh USA Paulsboro, New Jersey Warehouse
Derby Germany Osnabruck, Germany Offices
Derby Germany Kircheim, Germany Offices and warehouse
Derby Germany Isernhagen, Germany Offices and warehouse
Derby Germany Nidwailden, Switzerland Offices and warehouse
Raleigh Europe Amsterdam, The Netherlands Offices
Raleigh Europe Antwerp, Belgium Offices
Sturmey-Archer Amsterdam, The Netherlands Offices
Probike Bloemfontein, South Africa Offices and warehouse
Probike Sandton, South Africa Offices and warehouse
Probike Port Elizabeth, South Africa Offices and warehouse
Probike Durban, South Africa Offices and warehouse
Probike Ottery, Cape, South Africa Offices and warehouse
Raleigh Ireland Dublin, Republic of Ireland Offices and warehouse
Derby Trading Co Taipei, Taiwan Offices
Derby Trading Co Taichung, Taiwan Offices
Derby Trading Co Shen-zen, China Offices and warehouse
The Company owns or licenses many of the most widely-recognized brand names in
the bicycle industry. These brands include leading global brands such as
Raleigh, Nishiki and Univega, and leading regional brands such as Gazelle in The
Netherlands and Kalkhoff, Musing, Winora and Staiger in Germany.
All the freehold property and intellectual property is pledged as security for
the Company's seven year revolving credit facility of DM214,000,000.
8
ITEM 3. LEGAL PROCEEDINGS
Product Liability
Due to the nature of the Company's business, the Company is a defendant in a
number of product liability lawsuits. The plaintiffs in these lawsuits generally
seek damages, in amounts that may be material, for personal injuries allegedly
sustained as a result of alleged defects in the Company's products. Although the
Company maintains product liability insurance, due to the uncertainty as to the
nature and extent of manufacturers' and distributors' liability for personal
injuries, there can be no assurance that the product liability insurance
maintained by the Company is or will be adequate to cover product liability
claims or that the applicable insurer will be solvent at the time of any covered
loss. In addition, due to deductibles, self-retention levels and aggregate
coverage amounts applicable under the Company's insurance policies, the Company
will bear responsibility for a significant portion, if not all, of the defense
costs (which include attorneys' fees and expenses incurred in the defense of any
claim) and the related payments to satisfy any judgments associated with any
claim asserted against the Company in excess of any applicable coverage. The
settlement of a significant number of insured claims, the settlement of a claim
exceeding the Company's insurance coverage or the successful assertion or
settlement of an uninsured claim could have a material adverse effect on the
Company's business, financial condition or results of operations. There can be
no assurance that insurance will remain available, or, if available, will not be
prohibitively expensive. The deductible under the Company's insurance policies
is currently $250,000 per claim; however, prior to 1993, the deductible was $1.0
million per claim. Not all claims arising during the period in which the
Company's deductible was $1.0 million have been resolved and it is possible that
additional claims may be filed. The aggregate amount of liability under existing
and potential claims could exceed the reserves established by the Company for
product liability claims.
Product Recalls
Although the Company has not recently experienced a significant product recall,
the Company has, in the past, recalled certain bicycle models. If the Company
were required to make a significant product recall, such a recall could have a
material adverse effect on the Company's business, financial condition or
results of operations. In common with the rest of the bicycle industry,
components fitted to its bicycles may be subject to a recall program of the
component supplier.
Liability For Environmental Matters
The Company is subject to a wide variety of governmental requirements related to
environmental protection including, among other things, the management of
hazardous substances and wastes. Although the Company has made and will continue
to make significant expenditures related to its environmental compliance
obligations, there can be no assurance that the Company will at all times be in
compliance with all such requirements. Moreover, the Company's existing and
historical operations, including the operations of its predecessors, expose the
Company to the risk of clean-up liabilities or environmental or personal injury
claims related to releases and emissions of hazardous substances and wastes.
Such liabilities and claims could require the Company to incur material costs
related to such releases or to the investigation or remediation of contaminated
property. Also, changes in existing environmental requirements or the imposition
of additional environmental liabilities related to existing or historical
operations could result in substantial cost to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
9
PART II
ITEM 5. MARKET FOR THE REGISTRANTS UNITS AND RELATED UNITHOLDER MATTERS
There is no established public trading market for any class of equity.
The Company had the following shares in issue:
[Enlarge/Download Table]
December 31,
1997 through May December March
May 14, 1998 14, 1998 31, 1998 28, 1999
------------ -------- -------- --------
Common stock held by DFS(1) 3,000 - - -
Class A common stock held by DFS(1, 3) - 21,700 21,700 21,700
Class A common stock held by DC Cycle - 12,500 12,500 12,500
Class A common stock held by Perseus - 10,000 10,000 10,000
Class A common stock held by CEO(5) - - - 1,500
Class A common stock held by DICSA(3) - 8,300 8,300 8,300
Class B common stock held by DICSA(3) - 15,000 15,000 15,000
Class C common stock held by DC Cycle(4) - - - 22,750
Class A preferred stock(2) 5,000 - - -
Class B preferred stock(2) 5,000 - - -
Class C preferred stock(2) 53,432 - - -
Class D preferred stock(2) 45,000 - - -
Series A preferred stock held by DC Cycle - 25,000 25,000 25,000
Series B preferred stock held by DFS - 3,000 3,000 3,000
(1) At the time of the Recapitalization, the 3,000 common stock of $1 each
held by DFS were converted into 21,700 Class A common stock of $0.01 each.
(2) Classes A, B, C and D preferred stock in issue before the
Recapitalization, were surrendered by the Company as part of the
Recapitalization.
(3) DICSA has the right to acquire 15,000 shares of Class B common stock and
8,300 shares of Class A common stock under the Raleigh Canada Exchange
Agreement.
(4) Issued on acquisition of Diamond Back after December 31, 1998.
(5) Issued to CEO after December 31, 1998.
10
ITEM 6. SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
Selected Historical Financial Data
Set forth below are selected historical financial data of the Company in $
millions as of the dates and for the periods presented. The selected historical
financial data as of December 31, 1996, 1997 and 1998 were derived from the
audited combined financial statements of the Company. The selected unaudited
historical financial data of the Company as of December 31, 1994, and 1995 were
prepared by management in a manner consistent with the audited consolidated
financial statements. The information contained in this table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations - ITEM 7" and the consolidated financial statements
and accompanying notes thereto in sections F1 to F30.
[Enlarge/Download Table]
For the years ended December 31,
---------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
Net revenues.................................... $ 432.6 $ 473.8 $ 452.6 $ 465.7 $ 465.3
Cost of sales................................... (332.5) (366.2) (339.1) (345.9) (350.3)
-------- -------- -------- -------- --------
Gross profit.................................... 100.1 107.6 113.5 119.8 115.0
Selling, general, and administrative expenses... (77.4) (81.3) (80.1) (90.1) (91.0)
Reorganization costs............................ - (4.4) - - -
Recapitalization costs.......................... - - - - (5.9)
-------- -------- -------- -------- --------
Operating income................................ 22.7 21.9 33.4 29.7 18.1
Interest expense................................ (10.5) (9.4) (8.0) (7.5) (16.9)
Interest income................................. 1.1 0.9 0.8 1.0 1.0
Other income (expense), net..................... (1.4) 10.0 (2.7) 0.1 (1.3)
-------- -------- -------- -------- --------
Income before income taxes, minority interest
and extraordinary item..................... 11.9 23.4 23.5 23.3 0.9
Provision for income taxes...................... (6.1) (10.1) (8.9) (10.6) (6.3)
Minority interest............................... (0.2) (0.1) - (0.1) (0.1)
Extraordinary item.............................. - - - - (0.4)
-------- -------- -------- -------- --------
Net income (loss)............................... 5.6 13.2 14.6 12.6 (5.9)
Dividends on preferred stock - - - - (4.9)
-------- -------- -------- -------- --------
Net income (loss) applicable to common
shareholders $ 5.6 $ 13.2 $ 14.6 $ 12.6 $ (10.8)
======== ======== ======== ======== ========
For the years ended December 31,
---------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
Depreciation and amortization................... $ 8.3 $ 9.2 $ 8.8 $ 9.2 $ 10.2
Amortization of pension transition asset........ (2.5) (2.7) (2.7) (2.5) (2.5)
Capital expenditures............................ $ 7.0 $ 11.1 $ 10.8 $ 7.4 $ 8.3
December 31,
---------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
Cash and cash equivalents....................... $ 21.8 $ 12.7 $ 8.8 $ 15.4 $ 17.5
Working capital................................. 96.9 85.3 80.0 63.3 73.2
Total assets.................................... 250.3 263.3 260.6 288.5 325.3
Total debt, including current portion........... 93.7 92.0 78.6 102.2 226.7
Preferred stock with redemption rights.......... - - - - 45.4
Stock rights (a)................................ - - - - 23.3
Shareholders' equity (deficit).................. $ 56.3 $ 66.1 $ 83.1 $ 81.9 $ (70.1)
11
(a) Reflects Class A common stock having a value of $8.3 million and Class B
common stock having a value of $15.0 million issuable to DICSA upon exchange of
the Raleigh Canada Preferred Stock. The Raleigh Canada Preferred Stock may be
redeemed subsequent to the vesting of the Company's right to exchange such stock
for shares of its common stock, at the option of DICSA under certain
circumstances, for a cash payment of $23.3 million, plus all accrued and unpaid
dividends thereon.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The following discussion should be read in conjunction with the attached audited
consolidated financial statements.
The Company is a world-leading designer, manufacturer and marketer of bicycles.
Competing primarily in the medium- to premium-priced market, the Company owns or
licenses many of the most recognized brand names in the bicycle industry,
including leading global brands such as Raleigh, Nishiki and Univega, and
leading regional brands such as Gazelle in The Netherlands and Kalkhoff, Musing,
Winora and Staiger in Germany. For the fiscal years ended December 31, 1996,
1997 and 1998, the Company had net revenues of $452.6 million, $465.7 million
and $465.3 million, respectively, and EBITDA of $39.0 million, $35.8 million and
$30.3 million, respectively.
The Company operates in ten countries around the world with a majority of its
operations conducted in countries other than the United States. In 1998, 55% of
the Company's net revenues were denominated in currencies within the European
Monetary System, 18% were denominated in pounds Sterling and 27% were
denominated in other currencies. The Company reduces its currency exposure by
maintaining operations in the major markets in which it sells its products. The
Company further mitigates foreign exchange risk by purchasing currency options
and entering into forward purchase contracts. See Note 8 of the "Notes to
Consolidated Financial Statements".
The Company is a net importer of products from Asian markets and was adversely
impacted by the Asian currency depreciation in late 1997, as noted at Raleigh UK
and Raleigh International under the Net Revenues and Gross Profit sections of
this discussion respectively.
Results of Operations
Comparison of year ended December 31, 1998 to year ended December 31, 1997
All comparisons in the following discussion and analysis are against the
corresponding twelve month period ended December 31, 1997, unless otherwise
stated.
12
Net Revenues: Year ended,
---------------------
$ millions Dec 31, Dec 31,
1997 1998
------- -------
Raleigh UK............................................. $ 107.3 $ 82.1
Gazelle................................................ 107.8 111.5
Derby Germany.......................................... 103.8 125.1
Raleigh USA............................................ 57.9 69.1
Raleigh Canada......................................... 29.5 28.8
Sturmey-Archer......................................... 29.6 23.8
Probike................................................ 20.6 17.0
Other companies and group transactions................. 9.2 7.9
------- -------
Total net revenues................................ $ 465.7 $ 465.3
======= =======
Net Revenues. Net revenues decreased by $0.4 million to $465.3 million for the
year ended December 1998. In local currencies, net revenues increased by 2.6%
over the same period. The decrease in U.S. dollar terms for the year compared
with the increase in local currency figures was due primarily to the
strengthening of the U.S. dollar against the Deutsche Mark and the Dutch
guilder.. Units sold decreased 46,000 units in the year ended December 1998.
In continental Europe, Gazelle's business benefited from the buoyant Dutch
market, while strong consumer demand through the end of 1997 drove beginning
1998 inventory levels down for Dutch retailers. Net revenues in local currency
increased 6.7% in the year ended December 1998.
Derby Germany benefited from sales of Univega bicycles, a business which the
Company did not own in the first seven months of 1997. The private label and
trade businesses also contributed to year-over-year revenue increases. In local
currency, Derby Germany's revenues increased 25.1% in the year ended December
1998, of which 5.2% of the increase was represented by Univega.
Revenues at Raleigh USA increased 21.7% in the year ended December 1998
respectively. The improvement is attributable to the improved product range as
well as to sales under the Univega brand. The Company purchased the previously
loss-making Univega brand in 1997 and successfully re-launched it in the USA in
the fall of that year, contributing 6.3% of the revenue increase in the year. In
Canada revenues grew by only 2.8% due to the postponement of an order by a major
private label account resulting from their poor retail sales.
The United Kingdom businesses (Raleigh UK and Sturmey-Archer) have been
negatively impacted by the strength of sterling, and by competitive pricing. As
an exporter of components, Sturmey-Archer's Dutch guilder based revenues have
been reduced on conversion into sterling by a 4.7% depreciation of the guilder,
whereas Shimano, the main competitor, gained from a 5.1% favorable movement in
the Japanese Yen. The other major competitor, Sachs, lowered prices aggressively
to reduce high inventory levels following a change in ownership. A slight
increase in Sturmey-Archer's selling prices in guilder terms to recoup some of
the margin loss, led to lower volume sales. Following resolution of an
intellectual property dispute, a redesigned 7-speed hub has been introduced for
the 1999 season, which should re-capture some of the business lost in 1998.
Revenues were further reduced by the loss of a major customer in the German
automotive industry, although new business has since been gained to replace
that. These factors produced an overall decline in revenues of 20.2% for the
year ended December 1998.
Raleigh UK specified its product range for the 1998 season to maintain selling
prices close to 1997 levels, giving enhanced margins through reduced component
costs due to the strength of sterling and price reductions gained from vendors.
However competitors, who gained a bigger cost advantage from the fall in Asian
currencies by having their own manufacturing based in Asia, passed their cost
savings on to consumers by giving more highly specified products at no increase
in price. This produced a
13
12.9% drop in revenues for the half year ended June 1998 as compared to the
corresponding period in 1997. Management responded by upgrading the
specification of products to remain competitive. However the market was further
weakened by poor summer weather in the United Kingdom, Ireland and the
Netherlands and a supply chain temporarily over-stocked with Taiwanese products
imported to beat the introduction of EU anti-dumping duties on Taiwan in August
1998 and weak UK Christmas retail market conditions. The UK market is estimated
at 2.5 million units in 1998, a fall of approximately 10% compared with 1997,
which was predominantly in the second half of the year. As a result, revenues in
the half year ended December 1998 dropped by 32.2%. This resulted in revenues of
$82.1 million for the year ended December 1998, 23.4% less than the
corresponding period in 1997. Action has been taken at Raleigh UK to improve the
competitiveness of the product line for 1999, to further incentivise retailers
to sell Raleigh product and to reduce selling, general and administrative
expense in 1999.
Gross Profit. Gross profit for the year ended December 1998 fell by $4.8 million
on the same revenue dollars, representing a 1.0 percentage point margin
decrease. Margins were enriched at Raleigh USA by effective product management
and the effect of Japanese Yen weakness on component costs. However, this was
offset by the impact of the strength of sterling on the conversion of export
revenues at Sturmey-Archer, lower production recoveries at Sturmey-Archer and
Raleigh UK as production was cut-back in line with sales demand, together with
the cost to Raleigh UK of enhanced product specifications. In addition, the
worldwide licensing operations of Raleigh International included in "Other
Companies" saw a $0.8 million fall in licensing revenues following the
difficulties in Asian financial markets, which both inhibited licensees' ability
to pay royalties and reduced their US dollar value. Moreover the Raleigh
distribution operations in Ireland, Germany and The Netherlands (also included
in "Other Companies") saw a $1.7 million fall in gross profit due to lower sales
volume and margin erosion. These companies have been reorganized since the year
end to reduce selling, general and administrative expense to give a position
close to break-even.
Selling, General and Administrative Expenses. For the year ended December, 1998,
expenses of $91.0 million increased by $2.5 million, or 1.0%, over the
comparable period in 1997 when translated into US dollars: aggregate expenses in
local currency increased by 3.0%. The inclusion of costs from the acquisitions
of Winora-Staiger and Univega for the whole period in 1998, compared with their
gradual phasing-in during 1997, plus cost inflation, and one-time costs of $1.6
million in the quarter and year ended December 1998 were counter-balanced by
one-time cost items of $2.9 million which arose during the year ended December
1997 and currency gains of $2.0 million which were realized in September 1998.
Operating Income: Year ended,
----------------------
$ millions Dec 31, Dec 31,
------- -------
1997 1998
Raleigh UK............................................ $ 13.1 $ 3.2
Gazelle............................................... 13.4 14.8
Derby Germany......................................... (2.2) (0.5)
Raleigh USA........................................... (2.0) 2.7
Raleigh Canada........................................ 2.8 2.6
Sturmey-Archer........................................ 3.4 0.6
Probike............................................... 2.1 1.2
Other companies and group transactions................ (0.9) (0.6)
------- -------
Underlying operating income........................... 29.7 24.0
Recapitalization costs................................ - (5.9)
------- -------
Total operating income........................... $ 29.7 $ 18.1
======= =======
Operating Income. Underlying operating income of $24.0 million for the year
ended December 1998 decreased by $5.7 million, over the comparable period in
1997 due to the lower gross margin and higher
14
selling general and administrative expense.
Recapitalization costs of $5.9 million include legal, accounting and investment
banking fees incurred in connection with implementing the Recapitalization on
May 14, 1998. These costs resulted in lower total operating income for the year
ended December 1998.
Interest expense. Interest expense increased by $9.5 million for the year ended
December 1998 to $16.9 million due to the increased debt and higher interest
rate margin following the Recapitalization.
Other Income (Expense), Net. The other expense of $1.0 million for the half year
ended June 1998, represented the reduction in market value of the outstanding
interest rate swap contracts upon their amortization over the remaining term and
the loss upon their early termination due to the Recapitalization. The expense
of $0.3 million for the quarter ended September 1998 represented the reduction
in mark-to-market value of currency options and interest caps. These were
purchased to safeguard the Company's ability to service its debt from any
weakening of the foreign currencies in which it earns its income and increases
in interest rates over the following three years.
Provision for Income Taxes. The effective tax rate on income before income taxes
and extraordinary item increased from 45% in 1997 to over 100% in 1998,
primarily due to Recapitalization expenses of $5.9 million and $6.5 million of
interest on the Senior Notes for which the related tax benefit has been fully
reserved, together with unrelieved current year losses in Germany of $6.4
million, which will be carried forward to future years.
Extraordinary Item. The extraordinary item of $0.4 million in the year ended
December 1998, represents a $0.6 million charge for the loss on the early
retirement of debt on May 14, 1998, in connection with the Recapitalization,
less the related tax benefit of $0.2 million.
Net Income. Net income decreased by $18.5 million in the year ended December
1998. The decreases were primarily the result of the $9.5 million increase in
interest expense, $6.0 million fall in underlying operating income that occurred
in the last quarter of the year, $5.9 million in Recapitalization costs May 1998
and the $0.6 million losses on the early retirement of debt and the early
termination of the swaps, less the $0.2 million related tax benefit.
EBITDA: Year ended,
---------------------
$ millions Dec 31, Dec 31,
1997 1998
Raleigh UK............................................. $ 14.9 $ 4.7
Gazelle................................................ 13.9 15.3
Derby Germany.......................................... 0.6 2.6
Raleigh USA............................................ (1.4) 3.1
Raleigh Canada......................................... 3.1 2.9
Sturmey-Archer......................................... 3.3 0.7
Probike................................................ 2.3 1.4
Other companies and group transactions................. (0.9) (0.4)
------- -------
Total EBITDA...................................... $ 35.8 $ 30.3
======= =======
EBITDA. EBITDA of $30.3 million for the year ended December 1998 decreased by
over $5 million due to changes in underlying operating income explained above.
Comparison of year ended December 31, 1997 to year ended December 31, 1996
15
Net Revenues: Year ended
---------------------
$ millions Dec 31, Dec 31,
1996 1997
------- -------
Raleigh UK........................................ $ 107.4 $ 107.3
Gazelle........................................... 120.8 107.8
Derby Germany..................................... 82.4 103.8
Raleigh USA....................................... 53.5 57.9
Raleigh Canada.................................... 29.5 29.5
Sturmey-Archer.................................... 30.1 29.6
Probike........................................... 20.5 20.6
Other companies and group transactions............ 8.4 9.2
------- -------
Total net revenues........................... $ 452.6 $ 465.7
======= =======
Net Revenues. Net revenues increased $13.1 million, or 2.9%, to $465.7
million for 1997 from $452.6 million for 1996. This increase was primarily due
to increases in selling prices as the Company's product mix strengthened.
Average unit selling prices decreased by 1.5%. Net revenues from sales of parts
and accessories, which accounted for 14.7% of total 1997 net revenues, increased
by 25.5% in 1997, due in part to the acquisition of Winora-Staiger. Bicycle
sales volume increased 22.9 thousand units, or 0.8%, to 2.1 million units. The
benefits of increased volume were partially offset by the continued strength of
the U.S. dollar against the major continental European currencies, tempered by
the U.S. dollar's weaker position relative to the pound Sterling.
Raleigh UK's net revenues decreased $0.1 million, or 0.1%, from 1996. In local
currency, Raleigh UK's net revenues declined 4.5%. Raleigh UK's sales to dealers
declined by 34 thousand units, or 11%, from 1996, while mail order sales
declined by 8 thousand units.
Gazelle's net revenues decreased $13.0 million, or 10.8%, from 1996. In local
currency, Gazelle's net revenues increased 2.4%.
Derby Germany's net revenues increased $21.4 million, or 26%, from 1996. In
local currency, Derby Germany's net revenues increased 43.9%. Derby Germany's
acquisitions in 1997 of Winora-Staiger and the MS Sport Group, which distributes
the Univega brand, contributed substantially to volume increases. In addition,
the introduction of high specification Winora bicycles strengthened the product
mix. These factors offset a decline of 27 thousand units, or 7.5%, in Derby
Germany sales other than in the Winora and Univega product lines, reflecting
difficult overall market conditions in Germany. Without the 1997 acquisitions,
net revenues would have decreased by $1.7 million, or 2.1%. Plans are in
development to increase production and sales of private label bicycles at
prevailing market prices to achieve higher margins.
Raleigh USA's net revenues increased $4.4 million, or 8.2%, from 1996 as it
benefited from organizational changes and a well-received mid-priced product
offering for the 1996/97 season. Unit volume increased by 22 thousand units, or
10.3%, over 1996.
Raleigh Canada's net revenues were relatively flat between 1996 and 1997. In
local currency, Raleigh Canada's net revenues increased C$0.2 million.
Gross Profit. Gross profit increased $6.3 million, or 5.6%, to $119.8 million
for 1997 from $113.5 million for 1996, and gross margin increased from 25.1% to
25.7%. This increase was primarily due to a relative emphasis on increasing
profit margins rather than sales. Continued weakening of the Yen led to a fall
in material costs as a percentage of sales to 54.7% from 55.1% in 1996, which
offset an increase in labor costs.
Raleigh UK's gross profit increased by $4.9 million, or 19.2%, from 1996, and
gross margin increased
16
from 23.6% to 28.2%. In local currency, gross profit increased (pound)2.3
million, or 14.2%. Favorable exchange rate movements and lower component costs
benefited Raleigh UK The benefits of factory reorganizations at Raleigh UK also
contributed to the increase in gross profit.
Gazelle's gross profit decreased by $3.6 million, or 12.0%, from 1996, and gross
margin declined from 24.9% to 24.5%. Gross profit in local currency increased
f0.4 million, or 0.8%.
Derby Germany's gross profit increased by $5.6 million, or 38.5%, and gross
margin increased from 17.6% to 19.3%. Without giving effect to the 1997
acquisitions, gross profit would have decreased by $2.6 million, or 17.7%.
Following the acquisition of Winora-Staiger by Derby Germany, insufficient
forward hedging against U.S. dollar purchases of materials resulted in an
exchange loss as the Deutsche Mark significantly depreciated. In local currency,
gross profit increased DM12.6 million, or 58.3%. The acquisition of
Winora-Staiger, which occurred immediately prior to the peak selling season,
required short and inefficient production runs to meet demand, which caused
significant factory disruption at Derby Germany and contributed to increased
labor costs. A favorable shift in product mix to high specification models at
Derby Germany required a greater amount of labor input than required for
traditional Derby Germany models, further adding to the increase in direct labor
costs.
Raleigh USA's gross profit increased by $2.0 million, or 15.9%, from 1996, and
gross margin increased from 23.6% to 25.2% primarily due to lower
Yen-denominated component prices.
Raleigh Canada's gross profit increased by $0.5 million, or 7.5%, from 1996, and
gross margin increased from to 20.8% to 22.3%. Gross profit in local currency
increased C$0.7 million.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $10.0 million, or 12.5%, to $90.1 million in
1997 from $80.1 million in 1996. As a percentage of net revenues, selling,
general and administrative expenses increased to 19.3% from 17.7% in 1996. This
increase was principally the result of the acquisitions of Winora-Staiger and
the MS Sport Group. Included in selling, general and administrative expenses is
net negative amortization of $(0.7) million, which includes amortization of net
negative goodwill related to acquisitions as well as amortization into income of
capital grants from the German government for facility construction in Germany.
Operating Income: Year ended
---------------------
$ millions Dec 31, Dec 31,
1996 1997
------- -------
Raleigh UK............................................ $ 7.5 $ 13.1
Gazelle............................................... 16.2 13.4
Derby Germany......................................... 1.1 (2.2)
Raleigh USA........................................... (0.7) (2.0)
Raleigh Canada........................................ 2.8 2.8
Sturmey-Archer........................................ 5.5 3.4
Probike............................................... 2.0 2.1
Other companies and group transactions................ (1.0) (0.9)
------- -------
Total operating income........................... $ 33.4 $ 29.7
======= =======
Operating Income. Operating income decreased $3.7 million, or 11.1%, to $29.7
million for 1997 from $33.4 million in 1996. The operating margin declined to
6.4% in 1997 from 7.4% in 1996.
Interest Expense. Interest expense decreased $0.5 million, or 6.3%, to $7.5
million in 1997 from $8.0 million in 1996. The decrease was due primarily to an
increased proportion of Deutsche Mark denominated debt which carried a
relatively low interest rate of 5.25%. These benefits were partially offset by
an increase in borrowings associated with acquisitions made during the year.
17
Other Income (Expense), Net. Other income (expense) increased $2.8 million to
$0.1 million from $(2.7) million in 1996. Other income (expense) in 1997 was
comprised entirely of a gain on outstanding swap contracts.
Provision for Income Taxes. Income taxes increased $1.7 million, or 19.1%, to
$10.6 million for 1997 from $8.9 million in 1996. The effective tax rate
increased to 45% in 1997 from 38% in 1996 due to higher losses in Germany and
the United States for which no income tax benefit was available.
Net Income. Net income decreased $1.9 million, or 13.0%, to $12.7 million for
1997 from $14.6 million for 1996 due to the factors discussed above.
Liquidity and capital resources
Demand for bicycles in the Company's principal markets is seasonal,
characterized in most cases by a majority of consumer sales in the spring and
summer months. In the United Kingdom, South Africa and Ireland, consumer
revenues are typically higher in the last four months of the calendar year due
to increased sales of juvenile bicycles in the months preceding Christmas.
Accordingly, dealers' peak purchasing months in those countries are October and
November when they build inventory in anticipation of Christmas sales of
juvenile bicycles. Excluding this holiday seasonality, the Company's working
capital requirements are greatest during February, March and April at the start
of the Company's Peak Season as receivable levels increase. The Company offers
extended credit terms during the months prior to the Peak Season, although the
Company encourages early payments through trade discounts.
Finished goods inventory remains relatively constant throughout the fiscal year
and the level of raw materials increases and decreases normally only to
accommodate production needs. Work in progress represents, on average, eight
days' production. Inventory levels reach a minimum at the end of the Peak
Season.
Net cash flows from operating activities decreased $14.2 million to a $3.3
million outflow for 1998 from $11.0 million provided in 1997. This decrease was
due to a $12.7 million reduction in net income, excluding the Recapitalization
costs, and a $2.9 million greater inventory increase. Inventories increased by
$13.0 million in 1998, compared with $10.1 million in 1997 due to Gazelle's
higher in-transit inventories resulting from the greater use of imported
derailleurs and hub gears in the Dutch product range for the 1999 model. Net
cash flows from operating activities decreased $0.9 million to $11.0 million for
1997 from $11.9 million for 1996.
Net cash flows from financing activities increased in 1998 to $18.8 million
compared with $8.5 million provided by financing activities in 1997,
representing bank borrowings to fund the cash outflow from operating and
investing activities. Net cash flows from financing activities increased to $8.5
million in 1997 from a net use of $15.7 million in 1996. This increase of $24.2
million was due primarily to an increase in short term borrowings of $28.9
million in 1997.
The Company's contributions to its defined benefit pension plans were $2.2
million, $2.3 million and $1.6 million in 1996, 1997 and 1998 respectively. The
actuarial valuation of the UK pension schemes carried out as at April 1998
showed that the schemes were in surplus based on UK funding criteria and
employer's contributions ceased from mid-year. The Company adopted Statement of
Financial Accounting Standards No. 87, "Employers' Accounting for Pensions" on
January 1, 1993. The impact of adopting SFAS No. 87 was the recognition of a
transition asset of $37.8 million. The transition asset is being amortized into
income over 15 years. Net periodic pension income was $6.3 million, $5.8
million, and $5.4 million in 1996, 1997 and 1998 respectively. Net periodic
pension income includes amortization of the transition asset into income of $2.7
million, $2.5 million and $2.5 million in 1996, 1997 and 1998.
18
The Company's capital expenditures were $10.8 million, $7.4 million and $8.3
million in 1996, 1997 and 1998 respectively. The Company had unconditional
purchase obligations for raw materials and bicycle components of $54,017,000 as
of December 31, 1998.
The Company is primarily financed by the equity purchased by Thayer, Perseus and
DFS as part of the Recapitalization and the Retained Equity of, in aggregate,
$108 million and debt in the form of Senior Notes and bank facilities. The
Company incurred significant indebtedness in connection with the
Recapitalization. As of December 31, 1998, the Company had approximately $226.7
million of combined indebtedness, including $165.9 million of indebtedness
pursuant to the Senior Notes, $56.7 million of borrowings under the Revolving
Credit Agreement, $2.6 million of borrowings under the South African credit
facility, and $1.5 million of bank overdraft borrowings by the Company's other
subsidiaries. The Senior Notes are issued under Indentures which contain certain
covenants that, among other things, restrict the ability of the Company and its
Restricted Subsidiaries to incur additional indebtedness, pay dividends, redeem
capital stock, redeem subordinated obligations, make investments, undertake
sales of assets and subsidiary stock, engage in transactions with affiliates,
issue capital stock, permit liens to exist, operate in other lines of business,
engage in certain sale and leaseback transactions and engage in mergers,
consolidations or sales of all or substantially all the assets of the Company.
Accordingly, certain activities or transactions that the Company may want to
pursue or enter into may be restricted or prohibited, and such restrictions and
prohibitions could, from time to time, impact available cash on hand and the
liquidity of the Company.
The Company uses derivative financial instruments including currency swaps,
interest rate swaps, interest rate caps, forward foreign exchange contracts, and
currency options. The Company enters into currency and interest rate swaps such
that the notional principal amount is equal to the principal amount of the
underlying debt. The swaps achieve the effect of synthetically converting the
original United States dollar denominated debt into several other foreign
currencies and converting the interest rate on the debt from United States
dollar rates to those applicable for that currency. The Company enters into
forward foreign exchange contracts and options to minimize the impact of
currency movements, principally on purchases of inventory and sales of goods
denominated in currencies other than the subsidiaries' functional currencies.
Interest rate caps have been purchased to limit the blended interest rate paid
on the revolving credit facility to under 8% over the next 2 1/2 years. Currency
basket options have been purchased to substantially maintain the value of
foreign operating profits upon conversion into US dollars, in order to protect
the ability to service the US senior notes from the effect of changes in foreign
exchange rates.
The Revolving Credit Agreement provides for a seven-year DM214 million senior
secured revolving credit facility to be made available to the Company's
operating companies. Borrowings under the Revolving Credit Agreement are
available subject to a borrowing base determined as a percentage of eligible
assets. The Company's borrowings peak in March/April each year. The Company
believes that it has adequate headroom on its funding requirements for the next
year.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in foreign currency exchange
rates and interest rates. In order to manage the risk arising from these
exposures, the Company enters into a variety of foreign currency and interest
rate contracts and options.
The Company's accounting policies for derivative instruments are included in
Note 1 to the consolidated financial statements, with further disclosure in Note
8.
Foreign Currency Exchange Rate Risk
The Company has foreign currency exposures related to buying and selling in
currencies other than the functional currencies in which it operates. The
Company's net trading position is long in the Euro, Canadian Dollar and South
African Rand, arising from its revenues in those currencies, and short of
19
the New Taiwan Dollar, Japanese Yen and U.S. Dollar as a result of components
purchased in those currencies. The Company has a natural currency hedge against
Pounds Sterling arising from its position as both an importer and exporter in
UK. Sturmey-Archer also has a competitive exposure to the currencies of Japan
and Germany in which its two main competitors manufacture.
The Company generally introduces its new bicycle model ranges annually in the
fall of each year, at a similar time to most of its competitors. Product
specifications, component costs and selling prices are kept as stable as
possible during the model year to satisfy the requirements of mass-merchandisers
and facilitate orderly marketing of branded products amongst IBDs. The Company
takes out foreign currency forward exchange contracts or options in the fall to
hedge most of its foreign currency trading transaction exposure for the upcoming
season. These foreign currency forward exchange contracts and options have been
designated as hedges as defined in SFAS133 and the mark-to-market value of $1.1
million has therefore been included in accumulated other comprehensive income in
the December 31, 1998 balance sheet. The potential loss in fair value for such
financial instruments from a hypothetical 10% adverse change in quoted foreign
currency exchange rates would be approximately $4.1 million for 1998. Each year
the Company changes the specification of its products to endeavor to optimize
its competitive position and margins. Since most of the Company's competitors
purchase comparable components from similar sources to the Company and are
believed not to hedge beyond the current season, the Company does not generally
hedge its transaction exposure beyond the end of the season to stay competitive.
Management believes the likelihood of obtaining a competitive advantage would
not justify the cost of hedging beyond the end of the season. Sales and
purchases in currencies other than the functional currencies in which the
Company operates were $31.6 million and $106.9 million respectively in 1998,
treating the currencies within the European Exchange Rate Mechanism as one.
The foreign currency element of the Company's debt under the Senior Notes and
revolving credit facility has, since September 1998, generally been arranged to
align with the denomination of the book value of net assets. By doing this, the
Company reduces the translation exposure of net worth to changes in foreign
currency exchange rates. The three principal exceptions are: (1) $38 million of
net assets denominated in Pounds Sterling arising from the Company's relatively
large presence in UK, (2) $38 million of foreign pension assets in UK and The
Netherlands, and, (3) $5 million denominated in South African Rand due to limits
placed by the South African Reserve Bank on the maximum indebtedness allowed by
foreign owned corporations. In 1997, and up to the Recapitalization on May 14,
1998, the Company was organized under DICSA who prepared consolidated financial
statements in Pounds Sterling. Accordingly the translation exposure in 1997 was
managed by reference to Pounds Sterling, accounting for the large translation
differences up to September 1998 shown in the consolidated financial statements
prepared in U.S. Dollars.
The Company generates most of its trading income in foreign currencies. In order
to ensure that such trading income can be converted to yield sufficient U.S.
Dollars to service 67% of the interest on the $100 million 10% Senior Notes
through May 2001, currency options were purchased in 1998. These currency
options are for $6.7 million per year, selling f6 million, (pound)2 million and
C$1.2 million. At December 31, 1998 the mark-to-market value of these currency
options was $0.1 million. As the purchaser of options has no obligations to
exercise them, any weakening of the value of the U.S. Dollar can do no more than
reduce the fair value of these currency options to zero.
In 1997 interest and currency swaps were held which achieved the effect of
synthetically converting the original U.S. Dollar denominated Series A and
Series C Senior Notes into foreign currency debt of those countries where the
Company had operations. This converted the interest on the debt from U.S.
Dollars to those foreign currencies in which trading income was generated.
Raleigh USA generated sufficient trading income to service the 7.66% Series B
Senior Note, withstanding certain one time items, in 1997.
Interest Rate Risk
The Company's debt instruments are listed in Notes 9 and 10 to the consolidated
financial statements. Interest expense relating to the Senior Notes was $4.9
million and $12.2 million in 1997 and 1998
20
respectively, which were at fixed interest rates. The weighted average interest
rates on the Senior Notes were 6.6% in 1997, 6.9% in 1998 through May 13, 1998
and 10.3% effective May 14, 1998, after taking into account the effect of any
swaps and including $0.5 million and $0.8 million in amortization of deferred
financing costs for 1997 and 1998, respectively. The other major element of the
Company's interest expense was $1.9 million and $4.0 million on the revolving
credit facilities in 1997 and 1998 respectively. These were at floating rates of
1% above the London Interbank Offered Rate through May 13, 1998 and 2%
thereafter. This produced weighted average interest rates on the revolving
credit facilities of 5.1% and 6.6% in 1997 and 1998, respectively, after taking
into account the effect of any swaps and including $0.1 million and $0.5 million
in amortization of deferred financing costs for 1997 and 1998 respectively. A
hypothetical one percentage point shift in floating interest rates would have a
$0.7 million approximate impact on annual interest expense. As interest rates on
the revolving credit facilities have been capped at 7.9% effective August 1998
through July 2001, increases in floating interest rates above that level would
only have limited impact on expense.
Commodity Price Risk
The business of the Company does not carry a significant direct exposure to the
prices of commodities.
Unsecured status of Senior Notes and asset encumbrance
The Indentures permit the Company to incur certain secured indebtedness,
including indebtedness under the Revolving Credit Agreement, which is secured
and guaranteed by the obligors thereunder through a first priority fully
protected security interest in all the assets, properties and undertakings of
the Company and each other obligor thereunder where available and cost effective
to do so, and to the extent permissible by local laws. The Company has
indebtedness available under the Revolving Credit Agreement of DM214.0 million
($127.9 million). As of December 31, 1998, the Company had indebtedness
outstanding under the Revolving Credit Agreement of approximately $56.7 million.
Borrowings under the South African Credit Facility are secured by a security
interest in certain of the assets of the Company's South African subsidiaries.
The Notes are unsecured and therefore do not have the benefit of any such
collateral. Accordingly, if an event of default were to occur under the
Revolving Credit Agreement or the South African Credit Facility, the lenders
thereunder would have the right to foreclose upon the collateral securing such
indebtedness to the exclusion of the holders of the Notes, notwithstanding the
existence of an event of default with respect to the Notes. In such event, the
assets constituting such collateral would first be used to repay in full all
amounts outstanding under the Revolving Credit Agreement or the South African
Credit Facility, as applicable, resulting in all or a portion of the assets of
the Issuers being unavailable to satisfy the claims of holders of the Notes and
other unsecured indebtedness of the Issuers. The Company may also incur other
types of secured indebtedness under the Indentures, including up to $20 million
in indebtedness of any type, indebtedness of an acquired company where the
Company would have been able to incur $1.00 of additional indebtedness under its
Consolidated Coverage Ratio, indebtedness in respect of performance bonds,
bankers' acceptances, letters of credit, and the like, purchase money
indebtedness and capitalized lease obligations in an aggregate amount not
exceeding $10 million, indebtedness incurred by foreign subsidiaries not
exceeding $5 million, and indebtedness incurred by a securitization entity.
Restrictive Loan Covenants
The Revolving Credit Agreement contains a number of covenants that, among other
things, restrict the ability of the Company and its subsidiaries to dispose of
shares in any subsidiary, dispose of assets, incur additional indebtedness,
engage in mergers and acquisitions, exercise certain options, make investments,
incur guaranty obligations, make loans, make capital distributions, enter into
joint ventures, repay the Notes, make loans or pay any dividend or distribution
to the Issuers for any reason other than (among other things) to pay interest
(but not principal or Additional Amounts) owing in respect of the Notes, incur
liens and encumbrances and permit the amount of receivables and inventory to
exceed specified thresholds.
21
The Company was not in compliance with all of its borrowing covenants as at
December 31, 1998. The covenants under the Revolving Credit Agreement include a
maximum level of inventory days on hand, a minimum level of adjusted EBITDA, a
minimum interest coverage and leverage ratios and minimum net worth among other
restrictions. The inventory days covenant of 100-days is calculated as average
inventory net of provisions divided by cost of goods sold before depreciation
and amortization on a trailing 12-month basis. As of December 31, 1998 inventory
days were 103-days. Effective February 4, 1999, the revolving credit facility
agreement was amended in connection with the acquisition of Diamond Back. The
changes made included an increase in inventory days allowed to 110-days through
the first half of 1999 and 105-days in the third quarter of 1999, reverting to
100-days thereafter. Adjusted EBITDA is measured after the elimination of all
net periodic pension income of $5.4 million, whereas conventionally only the
amortization of the transition asset of $2.5 million is eliminated as used in
management's discussion and analysis. Adjusted EBITDA was covenanted at a level
of $35 million, rising to $38 million by December 31, 1999. The changes made to
the Revolving Credit Agreement effective February 4, 1999 included a reduction
in the adjusted EBITDA covenant to $25 million as at December 31, 1998 and $36
million at December 31, 1999, equivalent to conventional EBITDA figures of $27.9
million and $38.9 million. Corresponding changes were made to the interest
coverage and leverage covenants. Net worth, defined as subscribed equity
(comprising $63.0 million subscribed during the Recapitalization), together with
$45.0 million retained equity, plus the net income (excluding PIK dividends)
since January 1, 1998 less goodwill purchased since May 14, 1998, and
intellectual property was covenanted to stay above $100.0 million through
December 31, 1998, rising to $110.0 million at December 31, 1999. Net worth was
$98.7 million as at December 31, 1998, but has since been cured by the issue of
$22.75 million of Class C common stock in connection with the Diamond Back
acquisition, less approximately $16.0 million goodwill.
The ability of the Company to comply with the covenants and other provisions of
the Revolving Credit Agreement may be affected by changes in general economic
and competitive conditions and by financial, business and other factors that are
beyond the Company's control. The failure to comply with the provisions of the
Revolving Credit Agreement could result in an event of default thereunder, and,
depending upon the actions of the lenders thereunder, all amounts borrowed under
the Revolving Credit Agreement, together with accrued interest, could be
declared due and payable. If the Company were not able to repay all amounts
borrowed under the Revolving Credit Agreement, together with accrued interest,
the lenders thereunder would have the right to proceed against the collateral
granted to them to secure such indebtedness. If the indebtedness outstanding
under the Revolving Credit Agreement were to be accelerated, there can be no
assurance that the assets of the Company would be sufficient to repay in full
such indebtedness, and there can be no assurance that there would be sufficient
assets remaining after such repayments to pay amounts due in respect of any or
all of the Notes.
In addition, the Indentures contain certain covenants that, among other things,
restrict the ability of the Company and its Restricted Subsidiaries to incur
additional indebtedness, pay dividends on and redeem capital stock, redeem
certain subordinated obligations, make investments, undertake sales of assets
and subsidiary stock, engage in certain transactions with affiliates, sell or
issue capital stock, permit liens to exist, operate in other lines of business,
engage in certain sale and leaseback transactions and engage in mergers,
consolidations or sales of all or substantially all the assets of the Company. A
failure to comply with the restrictions contained in either of the Indentures
could result in an event of default under such Indenture.
Information Technology--Year 2000
The Company is in the process of implementing a plan designed to ensure that all
application software used in connection with the Company's management
information systems, including internally developed systems, software purchased
from outside vendors and embedded chips at the Company's manufacturing
facilities, will manage and manipulate data involving the transition of dates
from 1999 to 2000 without functional or data abnormality and without inaccurate
results related to such dates. Due to the fact that existing software often
defines each year with two digits rather than four digits, the
22
Company's computers that have date-sensitive software may recognize a date using
"00" as occurring in the year 1900 rather than the year 2000, which would result
in such abnormalities and inaccuracies and lead to disruptions of the Company's
operations, including a temporary inability to process customer orders, send
invoices or engage in other normal business activities. Many of the Company's
existing computer systems will need to be retired, replaced or remediated prior
to the year 2000. Retirement, replacement and remediation may require that, over
the next few years, a substantial portion of the Company's management
information systems spending be allocated to such activities. The Company is
currently in the process of replacing and upgrading the computer systems of its
United States and Canadian operations. The Company spent a total of
approximately $2.3 million in 1998 and expects to spend $1.1 million in 1999 to
achieve "Year 2000 compliance" for all of its operations. The Company plans to
complete all Year 2000 compliance efforts by the first half of 1999. The costs
and timing of such efforts, however, are based upon management's best estimates,
which are derived using assumptions relating to, among other things, the
availability of certain resources, the timing of actions taken by third parties
and other factors. Additional expenditures beyond the Company's projections may
be necessary. In the event that the Company materially underestimates the amount
of funds or the time necessary to resolve identified problems or that any
information systems relied upon by the Company for critical functions are not
substantially Year 2000 compliant in a timely manner, there could be a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company's plan for the Year 2000 calls for communication with significant
suppliers and customers to determine the readiness of third parties' remediation
of their own Year 2000 issues. As part of its assessment, the Company is
evaluating the level of validation it will require of third parties to ensure
their Year 2000 readiness. The Company believes that the purchasing patterns of
customers and potential customers may be affected by Year 2000 issues as
companies expend significant resources to correct or patch their current
software systems for Year 2000 compliance. These expenditures may result in
reduced funds available to purchase the Company's products, which could result
in a material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that any Year 2000 compliance
problems of the Company's customers or suppliers will not have a material
adverse effect on the Company's business, financial condition and results of
operations.
To date, the Company has not encountered any material Year 2000 issues
concerning its computer systems. Accordingly, the Company has not at this time
developed a contingency plan if it fails to achieve Year 2000 compliance and
does not plan to develop such a plan until it learns of material impediments in
timely implementation of its plans for the Year 2000.
Risk of Foreign Exchange Rate Fluctuations; Introduction of The Euro
The Company's business is conducted by operating subsidiaries in many countries,
and, accordingly, the Company's results of operations are subject to currency
translation risk and currency transaction risk. With respect to currency
translation risk, the results of operations of each of these operating
subsidiaries are reported in the relevant local currency and then translated
into U.S. dollars at the applicable currency exchange rate for inclusion in the
Company's financial statements. The appreciation of the U.S. dollar against the
local currencies of the operating subsidiaries will have a negative impact on
the Company's sales and operating margin. Conversely, the depreciation of the
U.S. dollar against such currencies will have a positive impact. Fluctuations in
the exchange rate between the U.S. dollar and the other currencies in which the
Company conducts its operations may also affect the book value of the Company's
assets and the amount of the Company's shareholders' equity. In addition, to the
extent indebtedness of the Company is denominated in different currencies,
changes in the values of such currencies relative to other currencies in which
the Company conducts its operations may have a negative impact on the Company's
ability to meet principal and interest obligations in respect of such
indebtedness.
In addition to currency translation risk, the Company incurs currency
transaction risk to the extent that the Company's operations involve
transactions in differing currencies. Fluctuations in currency exchange rates
will impact the Company's results of operations to the extent that the costs
incurred by
23
the operating subsidiaries are denominated in currencies that differ from the
currencies in which the related sale proceeds are denominated. To mitigate such
risk, the Company enters into forward purchase contracts primarily relating to
the Pound Sterling, the U.S. Dollar, the Dutch Guilder, the Deutsche Mark, the
New Taiwan Dollar and the Yen. The Company does not enter into forward purchase
agreements for speculative purposes. Given the volatility of currency exchange
rates, there can be no assurance that the Company will be able effectively to
manage its currency transaction risks or that any volatility in currency
exchange rates will not have a material adverse effect on the Company's
business, financial condition or results of operations.
Under the treaty on the European Economic and Monetary Union (the "Treaty"), to
which the Federal Republic of Germany and the Netherlands are signatories, on
January 1, 1999, a European single currency (the "Euro") replaced some of the
currencies of the member states of the European Union (the "E.U."), including
the Deutsche Mark and Dutch Guilder.
Following introduction of the Euro, the existing sovereign currencies (the
"legacy currencies") of the eleven participating member countries of the EU (the
"participating countries") who adopted the Euro as their common legal currency
are scheduled to remain legal tender in the participating countries as
denominations of the Euro until January 1, 2002 (the "transition period"). The
Euro conversion may impact the Company's competitive position as the Company may
incur increased costs to conduct business in an additional currency during the
transition period. Additionally, the participating countries' pursuit of a
single monetary policy through the European Central Bank may affect the
economies of significant markets of the Company. The Company will also need to
maintain and in certain circumstances develop information systems software to
(1) convert legacy currency amounts to Euro; (2) convert one legacy currency to
another; (3) perform prescribed rounding calculations to effect currency
conversions; and (4) permit transactions to take place in both legacy currencies
and the Euro during the transition period. Since the Company conducts extensive
business operations in, and exports its products to, several of the
participating countries, there can be no assurance that the conversion to the
Euro will not have a material adverse effect on the Company's business,
financial condition or results of operations. Similarly, in the event that the
Company materially underestimates the costs, timeliness and adequacy of
modifications to its information systems software, there could be a material
adverse effect on the Company's business, financial condition and results of
operations.
Substantial Leverage and Debt Service Obligations
The Company incurred substantial indebtedness in connection with the
Recapitalization and has a highly leveraged capital structure. As of December
31, 1998, the Company had combined total indebtedness of approximately $226.7
million (including all indebtedness and guarantees of indebtedness under the
Revolving Credit Agreement and indebtedness under the South African Credit
Facility, but excluding, in each case, unused commitments thereunder), and
shareholder's deficit was approximately $(70.1) 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. For the years ended December 31, 1997
and 1998, on a pro forma basis after giving effect to the Recapitalization, the
Company's combined total interest expense would have been $19.6 million and
$21.9 million, respectively, and the Company's combined total ratio of earnings
to fixed charges would have been 1.5 to 1.0 and 1.1 to 1.0, respectively.
Although the Company believes that, based on current operations, it will have
sufficient cash flow from operations to service its obligations with respect to
its indebtedness, there can be no assurance that the Company will be able to
meet such obligations. In the event that the Company is unable to generate cash
flow from operations that is sufficient to service its obligations in respect of
its indebtedness, the Company may be required to take certain actions, including
delaying or reducing capital expenditures, attempting to restructure or
refinance its indebtedness, selling material assets or operations or seeking
additional equity. There can be no assurance that the Company will be able to
generate cash flow from operations that is sufficient to service its obligations
in respect of its indebtedness or that any of such actions could be effected or
would be
24
effective to allow the Company to service such obligations.
Forward looking statements
This discussion contains certain forward-looking statements that involve risks
and uncertainties. In addition, the Company may from time to time make oral
forward-looking statements. As discussed in the Company's prospectus on Form
S-4A filed with the SEC on December 4, 1998, actual results are uncertain and
may be impacted by the various factors. In particular, certain risks and
uncertainties that may impact the accuracy of the forward-looking statements
with respect to revenues, expenses and operating results include, without
limitation, cycles of customer orders, general economic and competitive
conditions and changing consumer trends, foreign exchange rates, technological
advances and the number and timing of new product introductions, shipments of
products and componentry from foreign suppliers, the timing of operating and
advertising expenditures and changes in the mix of products ordered by
independent bicycle dealers and mass merchants. As a result, the actual results
may differ materially from those projected in the forward-looking statements.
Because of these and other factors that may affect the Company's operating
results, past financial performance should not be considered an indicator of
future performance, and investors should not use historical trends to anticipate
results or trends in future periods.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements set forth on pages F1 to F30 of this Report are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Management
Directors and Executive Officers of the Company
The following table sets forth certain information regarding the directors and
executive officers of the Company:
Name Age Position
---------------------- --- ---------------------------------------------
Gary S. Matthews 41 Chief Executive Officer and Executive Director
of the Company
William W. Austin, Jr. 61 President, Raleigh USA
Colin Bateman 45 Managing Director, Sturmey-Archer
Klaas Dantuma 55 Managing Director, Gazelle
Simon J. Goddard 46 Chief Financial Officer of the Company
Robert Holzer 33 Managing Director, MS Sport Group
Peter Miller 51 Joint Managing Director, Probike
Kim Roether 35 Managing Director, Derby Germany
Irwin R. Slotar 50 Joint Managing Director, Probike
John V. Spon-Smith 45 Director, Raleigh UK
Mark J. Todd 39 Managing Director, Raleigh U.K
Farid Vaiya 55 President, Raleigh Canada
Alan J. Finden-Crofts 57 Director of the Company, Former Chief
Executive Officer
A. Edward Gottesman 61 Director of the Company
Frederic V. Malek 62 Chairman and Director of the Company
Frank H. Pearl 55 Director of the Company
Carl J. Rickertsen 38 Director of the Company
Dr. Thomas H. Thomsen 64 Director of the Company
Gary S. Matthews, Chief Executive Officer and Executive Director of the Company
Mr. Matthews, age 41, became the Chief Executive Officer of the Company
effective mid-January 1999. Mr. Matthews was the Managing Director of UK
Operations of Guinness Great Britain Limited from April 1998 until his
appointment to the Company. Prior to that, Mr. Matthews was President of
Guinness Import Company from 1996 to 1998. From 1990 to 1995, Mr. Matthews held
a variety of marketing and corporate strategy positions at PepsiCo, Inc.
William W. Austin, Jr., President of Raleigh USA
Mr. Austin, age 61, has been President of Raleigh USA since 1994. Mr. Austin was
previously group vice president of Schwinn Cycling and Fitness, Inc. from 1981
to 1986. From 1988 to 1993, Mr. Austin was president of Giant Bicycle Company.
Colin Bateman, Managing Director of Sturmey-Archer
Mr. Bateman, age 45, has spent most of his career in the pharmaceutical industry
in sales, marketing and general management with Glaxo Laboratories and Wyeth.
He joined Sturmey-Archer on March 1 1999.
Klaas Dantuma, Managing Director of Gazelle
Mr. Dantuma, age 55, has been Managing Director of Gazelle since 1990. Mr.
Dantuma has held a variety of positions with the Company since 1973, including
Deputy Commercial Director for four
26
years, before becoming Commercial Director in 1985.
Simon J. Goddard, Chief Financial Officer of the Company
Mr. Goddard, age 46, has held the senior financial post in the Company since
1990 and was appointed Chief Financial Officer of the Company in May 1998 with
the Recapitalization. Mr. Goddard began working at Raleigh UK in 1985 as the
management accountant for international operations. Prior to that, Mr. Goddard
was with Coopers & Lybrand.
Robert Holzer, Managing Director of the MS Sport Group
Mr. Holzer, age 33, has been Managing Director of the MS Sport Group since the
Company acquired an interest in the MS Sport Group in 1997. Prior to this
acquisition, Mr. Holzer owned the MS Sport Group since 1988. Mr. Holzer was also
an executive officer of Univega, in which the Company acquired a controlling
interest in 1997. From 1994 to 1995, Mr. Holzer was the general manager and
owner of Winners Bike & Fun Sport Center GmbH. Since 1992, Mr. Holzer has been a
general manager and director of Nobel Haus Industrie und Wohnbau GmbH.
Peter Miller, Joint Managing Director of Probike
Mr. Miller, age 51, has been Joint Managing Director of Probike since the
Company acquired Cycle Center Wholesalers in 1991, a company that Mr. Miller
founded.
Kim Roether, Managing Director of Derby Germany
Mr. Roether, age 35, has been Managing Director of Derby Germany since 1997. Mr.
Roether started with Derby Germany as its Controller in 1994. In 1995, he became
Derby Germany's Financial Director. From 1991 to 1994, Mr. Roether was a
consultant to Grant Thornton International.
Irwin R. Slotar, Joint Managing Director of Probike
Mr. Slotar, age 50, has been Joint Managing Director of Probike since the
Company acquired Probike in 1990. Prior to the acquisition Mr. Slotar was
Managing Director of Probike which had been owned by Mr. Slotar's family for
several generations.
John V. Spon-Smith, Director of Raleigh UK
Mr. Spon-Smith, age 45, has been Director of Raleigh UK and General Manager of
Raleigh Parts & Accessories-UK since 1996. From 1991 to 1996, Mr. Spon-Smith was
sales and marketing director of Stanley Tools for the United Kingdom, South
Africa and Ireland.
Mark J. Todd, Managing Director of Raleigh UK
Mr. Todd, age 39, has been Managing Director of Raleigh UK since July 1997.
Prior to joining Raleigh UK, Mr. Todd was business unit director of Courage
Limited, the UK's largest brewing company, from 1994 to 1997. From 1993 to 1994,
Mr. Todd was managing director of Moulinex Limited, which manufactures food
processing appliances. Prior to joining Moulinex, Mr. Todd was sales and
marketing director for Toshiba UK, Limited from 1989 to 1993.
Farid Vaiya, President of Raleigh Canada
Mr. Farid Vaiya, age 55, has been President of Raleigh Canada since 1989. Mr.
Vaiya has been with the Company since 1972, as Vice President of Sales and
Marketing of Raleigh Canada from 1987 to 1988 and National Account Sales Manager
and Product Manager of Raleigh Canada from 1981 to 1987.
Alan J. Finden-Crofts, Director of the Company
Mr. Finden-Crofts, age 57, was the Chief Executive Officer of the Company until
January 1999. Mr. Finden-Crofts was previously the chief executive officer of
Dunlop Slazenger International from 1985 to 1987 and director, consumer group,
of Dunlop from 1982 to 1984. Prior to joining the Company, Mr. Finden-Crofts
served on the operational board of BTR plc from 1982 to 1986. From 1968 to 1982,
Mr. Finden-Crofts was managing director of various subsidiaries of Norcros plc,
an industrial conglomerate
27
in the United Kingdom.
A. Edward Gottesman, Director of the Company
Mr. Gottesman, age 61, is the chairman of DICSA. Mr. Gottesman has been chairman
of Centenary since its formation in 1989. Mr. Gottesman was a partner of Coudert
Brothers from 1963 to 1970 and has been a partner of Gottesman Jones & Partners
since 1970. Mr. Gottesman is chairman of Exeter International Corporation S.A.
which, through its subsidiaries, manufactures and distributes Royal Worcester
and Spode fine bone china and porcelain, and Piedmont International S.A., a
company formed in 1996 to acquire the personal computer business of Olivetti
SpA.
Frederic V. Malek, Chairman of the Board of Directors of the Company
Mr. Malek, age 62, has been chairman of Thayer Capital, the general partner of
Thayer, since 1993. Prior to that, Mr. Malek was president of Marriott Hotels
and Resorts from 1980 to 1988, and president and then vice chairman of Northwest
Airlines from 1989 to 1991. Mr. Malek currently serves on the board of directors
of Automatic Data Processing Corporation, American Management Systems, Inc., FPL
Group, Inc., Choice Hotels, Inc., Manor Care, Inc., CB Commercial Real Estate
Group, Inc., Northwest Airlines, Colorado Prime, Inc., Paine Webber Mutual Funds
and Global Vacation Group, Inc.
Frank H. Pearl, Director of the Company
Mr. Pearl, age 55, is chairman and president of Perseus and Perseus Management,
the managing member of Perseus. Prior to founding Perseus in 1996, Mr. Pearl
founded, and is also chairman of, Rappahannock Investment Company
("Rappahannock"), a private investment fund which owns approximately 57% of
Perseus Management. From 1984 to 1988, Mr. Pearl was a principal and managing
director of Wesray Capital Corporation. Mr. Pearl is also a founding shareholder
and director of DICSA.
Carl J. Rickertsen, Director of the Company
Mr. Rickertsen, age 38, is a partner of Thayer Capital, the general partner of
Thayer. Prior to joining Thayer Capital in 1995, Mr. Rickertsen acted as a
private financial consultant from 1993 through August 1994, and was a partner at
Hancock Park Associates, a private equity investment firm based in Los Angeles,
from 1989 to 1993. Before joining Hancock Park Associates, Mr. Rickertsen was an
associate at Brentwood Associates from 1987 to 1989, and worked in the high
technology group at Morgan Stanley & Co., Inc. from 1983 to 1985. Mr. Rickertsen
currently serves as a director of MLC Holdings, Inc. and Global Vacation Group,
Inc. and as the chairman of the board of Software AG Systems, Inc.
Dr. Thomas H. Thomsen, Director of the Company
Dr. Thomsen, age 64, is a director of DICSA. Dr. Thomsen was director of
corporate engineering of The Gillette Company from 1969 to 1981. From 1982 to
1991, Dr. Thomsen was a member of the management board of Braun AG. Dr. Thomsen
currently serves on the board of directors of Travelplans and A. Paukner S.A.,
as well as the German Institute for New Technical Form and the Design Council,
State of Hesse.
28
ITEM 11. EXECUTIVE COMPENSATION
Compensation of Directors
The Company compensates non-executive directors for services provided as a
director by paying such directors a retainer of $10,000 per annum, plus $1,500
for each board meeting plus reasonable out-of-pocket expenses incurred by them.
The Company does not compensate salaried executive directors. In July 1998, the
Company's Board of Directors appointed a compensation committee.
Compensation of Executive Officers
The following table sets forth information concerning the compensation paid or
accrued by the Company for services in all capacities to the Company for each of
the years ended December 31, 1998, 1997, and 1996, of those persons who served
as (i) the Chief Executive Officer of the Company during fiscal year 1998 and
(ii) the other four most highly compensated executive officers of the Company
for fiscal 1998 (each, a "Named Executive Officer"):
[Download Table]
Long
Annual Term Other
Compensation Compen- Annual
------------------- sation Compen-
Name Year Salary Bonus Awards sation
------------------------------- ---- ---------- -------- -------- ---------
Alan J. Finden-Crofts (1) 1998 $ 332,005 $ - $ - $ -
Chief Executive Officer 1997 272,244 361,471 - 143,260
The Company 1996 272,244 683,783 - 142,679
William W. Austin, Jr.(2) 1998 262,500 126,000 561,034 -
President, Raleigh USA 1997 248,827 70,910 - -
1996 228,067 25,681 - -
Klaas Dantuma (3) 1998 180,688 75,881 - -
Managing Director, Gazelle 1997 167,402 60,265 - -
1996 164,213 82,107 - -
Mark J. Todd (4) 1998 167,663 - - -
Managing Director, Raleigh UK 1997 73,041 32,371 - 10,615
1996 - - - -
Farid Vaiya (5) 1998 124,635 62,318 - -
President, Raleigh Canada 1997 120,130 57,662 - -
1996 $ 110,390 $ 39,740 $ - $ -
(1) Mr. Finden-Crofts is compensated in Pounds Sterling. The amounts reported in
the table have been converted at the rate of(pound)0.6024 per $1.00.
(2) Mr. Austin, Jr's long term compensation was in respect of change of control
obligations at the time of the Recapitalization.
(3) Mr. Dantuma is compensated in Dutch Guilders. The amounts reported in the
table have been converted at the rate of f1.8817 per $1.00.
(4) Mr. Todd joined Raleigh UK as Managing Director in July 1997. Mr. Todd is
compensated in Pounds Sterling. The amounts reported in the table have been
converted at the rate of (pounds)0.6024 per $1.00.
(5) Mr. Vaiya is compensated in Canadian dollars. The amounts reported in the
table have been converted at the rate of C$1.54 per $1.00.
29
Employment Agreements
On October 20, 1998, the Company entered into an employment contract with Mr.
Gary S. Matthews to become the new Chief Executive Officer and President of the
Company effective mid-January 1999. Mr. Matthews' compensation package includes
a base annual salary of $450,000 and a bonus of up to 120% of his base salary.
The contract is for a four year term with a three year extension. The Company
issued Mr. Matthews stock options to purchase 1,625 shares of the Company's
Class A common stock which vest over three years, and performance stock options
for 3,250 shares of Class A common stock.
Pursuant to a Management Stock Purchase Agreement dated October 20, 1998, Mr.
Matthews purchased 1,500 shares of the Company's Class A common stock for $1,000
per share. Mr. Matthews paid for such shares with a secured promissory note that
is non-recourse except for 20% of the amount and all accrued interest. Upon the
termination of Mr. Matthews' employment with the Company, the Company has the
right or is required to repurchase, depending on the reason for such
termination, such Class A common stock, provided no event of default exists
under material financing agreements, including the Indentures.
Mr. Finden-Crofts' employment contract expires on May 14, 1999. It provides for
an annual base salary of $333,005 plus a targeted bonus of $415,007 for 1998
subject to adjustment based on the Company's performance.
The terms of Mr. Austin's employment agreement as President of Raleigh USA
provide for a base salary of $270,000 and a bonus ranging from 20% to 50% of
base salary tied to Raleigh USA's profit before interest payments and taxes,
inventory turns and account receivables turnover. DICSA paid Mr. Austin
approximately $561,034 upon the closing of the Recapitalization pursuant to a
change of control provision in his former employment agreement.
Under the terms of Mr. Holzer's employment agreement with the MS Sport Group,
the MS Sport Group will pay Mr. Holzer for each of the five calendar years from
1997 to 2001 as follows: (i) if the profit before tax ("PBT") of the MS Sport
Group is less than DM 2.3 million, 10% of the amount by which PBT exceeds DM
1.35 million and, in addition, (ii) if PBT exceeds DM 2.3 million, 25% of the
amount by which PBT exceeds DM 2.3 million.
The Company has entered into employment contracts with other senior managers of
the Company which generally contain remuneration packages including base salary,
bonus, insurance, pension benefits and non-compete provisions.
Management Stock Option
On October 21, 1998, the Board of Directors of the Company adopted The Derby
Cycle Corporation 1998 Stock Option Plan (the "Stock Plan"), which authorizes
grants of stock options (including options intended to qualify as "incentive
stock options" within the meaning of Section 422 of the Internal Revenue Code).
The Stock Plan authorizes the Company's Board of Directors to grant options at
any time in such quantity, at such price, on such terms and subject to such
conditions as established by the board. To date, the Company has granted an
aggregate of 4,875 stock options to its management, none of which have vested
yet.
30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Description of Shareholders' Agreement and Registration Agreement
The Company, DFS, DC Cycle and Perseus Cycle (DFS, DC Cycle and Perseus Cycle
being referred to as the "Shareholders") entered into a Shareholders' Agreement
in connection with the consummation of the Recapitalization (the "Shareholders'
Agreement"). The Shareholders' Agreement provides, among other things, for the
following: (i) the Board of Directors of the Company initially consists of seven
individuals, four of whom will be appointed by DC Cycle, two by DFS and one by
Perseus Cycle, (ii) certain restrictions on the transfer of shares of the
Company, including, but not limited to, provisions providing that (a) the
Shareholders have limited rights of first offer in any proposed third party sale
of Class A common stock and Series A preferred stock by any Shareholder and (b)
the Shareholders have limited participation rights in any proposed third party
sale of Class A common stock and Series A preferred stock by any Shareholder,
(iii) an agreement among the Shareholders that, upon approval of a sale of all
or substantially all of the Company's outstanding capital stock or a sale of all
or substantially all of the Company's assets by the Company's Board of
Directors, each Shareholder will consent to, and raise no objections against,
such sale and sell its shares and rights to acquire shares, if so required, and
(iv) certain limited preemptive rights of the Shareholders with respect to an
issuance or sale of common stock by the Company. Certain material transactions
require the approval of a supermajority of the Board of Directors which can be
achieved with the votes of the DC Cycle nominees and any one other director. The
Shareholders' Agreement also provides that DFS shall be deemed to own all shares
of the Company's capital stock which DICSA can acquire pursuant to the Raleigh
Canada Exchange Agreement for purposes of determining the voting power of the
stock held by DFS and for all other purposes.
The Shareholders are parties to a Registration Agreement (the "Registration
Agreement"), pursuant to which all holders of Registrable Securities (as defined
in the Registration Agreement) are entitled to piggyback registration rights,
whenever the Company proposes to register any of its securities under the
Securities Act. Each such holder is subject to certain pro rata limitations,
including priorities and preferences for certain holders, on its ability to
participate in such a piggyback registration. The Company will pay all expenses
related to these registrations (other than underwriting discounts and
commissions) and, subject to certain conditions and limitations, is required to
use its best efforts to effect such registrations. The Company has agreed to
indemnify all holders of Registrable Securities for certain liabilities arising
out of such registrations, including certain liabilities under the Securities
Act.
Security ownership of certain beneficial owners and management
The authorized capitalization of the Company, as of March 28, 1999, is: 200,000
shares of Class A common stock; 15,000 shares of Class B common stock; 22,750
shares of Class C common stock; 25,000 shares of Series A preferred stock; 3,000
shares of Series B preferred stock and 100 shares of Series C prefered stock.
The issued and outstanding capital stock of the Company, as of March 28, 1999,
consists of: 45,700 shares Class A common stock; 22,750 shares of Class C common
stock; 25,000 shares of Series A preferred stock and 3,000 shares of Series B
preferred stock. Holders of Class B common stock and Series B preferred stock
have no voting rights except as required by applicable law. In addition, DICSA
has the right to acquire 15,000 shares of Class B common stock and 8,300 shares
of Class A common stock under the Raleigh Canada Exchange Agreement. The Holders
of Class A and Class C common stock are entitled to one vote per share on all
matters to be voted upon by the shareholders of the Company, including the
election of directors. Holders of Series A preferred stock are entitled to 1.5
votes per share, voting together with the Class A and Class C common stock as a
single class.
31
The following table sets forth certain information, as of March 28,1999, with
respect to the beneficial ownership of the Company's Class A and Class C common
stock and Series A preferred stock by (i) each shareholder known by the Company
to own beneficially five percent or more of each class of the Company's voting
securities, (ii) each current director of the Company, (iii) each Named
Executive Officer of the Company and (iv) all directors of the Company and
executive officers of the Company as a group. Unless indicated otherwise below,
to the knowledge of the Company, each shareholder has sole voting and investment
power with respect to the shares indicated as beneficially owned.
32
[Enlarge/Download Table]
Percent of the
Company's total
outstanding
Voting
Number of Percent of securities
Name and Address of Beneficial Owner (1) Class shares class Note (2)
-------------------------------------------------------------------------------------------------------------------
DC Cycle, L.L.C.......................... Class A common 12,500 27.35
Suite 350, Class C common 18,950 83.30
1455 Pennsylvania Avenue, Series A preferred 25,000 100.00
Washington, DC 20004 65.08
Note (3)
-------------------------------------------------------------------------------------------------------------------
Derby Finance S.a.r.l.................... Class A common 21,700 47.48
5 Boulevard de la Foire' 20.48
L-1528 Luxembourg,
Grand Duchy of Luxembourg
Note (4)
-------------------------------------------------------------------------------------------------------------------
Derby International Corporation S.A. Class A common 8,300 15.37
5 Boulevard de la Foire, 7.26
L-1528 Luxembourg,
Grand Duchy of Luxembourg
Note (5)
-------------------------------------------------------------------------------------------------------------------
Perseus Cycle L.L.C...................... Class A common 10,000 21.88
1627 "I" Street NW, Suite 610, Class C common 3,800 16.70 13.03
Washington, D.C. 20006
Note (6)
-------------------------------------------------------------------------------------------------------------------
Frederic V. Malek ....................... Class A common 12,500 27.35
Suite 350, Class C common 18,950 83.30
1455 Pennsylvania Avenue, Series A preferred 25,000 100.00
Washington, DC 20004 65.08
Note (7)
-------------------------------------------------------------------------------------------------------------------
Carl J. Rickertsen ...................... Class A common 12,500 27.35
Suite 350, Class C common 18,950 83.30
1455 Pennsylvania Avenue, Series A preferred 25,000 100.00
Washington, DC 20004 65.08
Note (8)
-------------------------------------------------------------------------------------------------------------------
A Edward Gottesman ...................... Class A common 30,000 55.55
38 Chester Terrace, London, 26.26
NW1 4ND, England
Note (9)
-------------------------------------------------------------------------------------------------------------------
Alan J. Finden-Crofts.................... Class A common 30,000 55.55
Bequet Road, 26.26
St. Peter Port, Guernsey
GY1 2TH, Channel Islands
Note (10)
-------------------------------------------------------------------------------------------------------------------
33
[Enlarge/Download Table]
Percent of the
Company's total
outstanding
Voting
Number of Percent of securities
Name and Address of Beneficial Owner (1) Class shares class Note (2)
-------------------------------------------------------------------------------------------------------------------
Frank H. Pearl........................... Class A common 40,000 74.07
1627 "I" Street NW, Suite 610', Class C common 3,800 16.70 38.34
Washington, D.C. 20006
Note (11)
-------------------------------------------------------------------------------------------------------------------
Gary S. Matthews......................... Class A common 1,500 3.28
C/o Raleigh Industries Ltd., 1.42
Triumph Rd, Nottingham,
NG7 2DD, England
-------------------------------------------------------------------------------------------------------------------
Dr. Thomas H. Thomsen....................
Falkensteinerstrasse 36,
Konigstein im Taunus,
Frankfurt, Germany - - - -
-------------------------------------------------------------------------------------------------------------------
William W. Austin, Jr....................
C/o Raleigh USA Bicycle Co.,
22710 72nd Avenue South,
Kent, WA 98032-1926 - - - -
-------------------------------------------------------------------------------------------------------------------
Mark J. Todd.............................
C/0 Raleigh Industries Ltd.,
Triumph Road, Nottingham,
England, NG7 2DD - - - -
-------------------------------------------------------------------------------------------------------------------
Farid Vaiya..............................
C/o Raleigh Industries of
Canada Limited, 2124 London
Lane, Oakville, Ontario, L6H
5V8, Canada - - - -
-------------------------------------------------------------------------------------------------------------------
Klaas Dantuma............................
C/o Koninklijke Gazelle B.V.,
Wilhelminaweg VII,
6951 BP Dieren,
The Netherlands - - - -
-------------------------------------------------------------------------------------------------------------------
All Directors and Executive Class A common 54,000 100
Officers as a group (6 persons) Class C common 22,750 100
Note (12) Series A preferred 25,000 100 100
-------------------------------------------------------------------------------------------------------------------
(1) The percentages of the Company's voting securities held by DC Cycle,
Perseus Cycle and DFS set forth in this table differ from the percentages
of total voting power indirectly held by their respective parent companies
under "PART 1 ITEM 1 Investor Group" and "The Recapitalization" for two
reasons: first, rights to acquire shares of Class A common stock which are
exercisable within 60 days of the date hereof are considered outstanding
for the purpose of determining the percent of the class held by the holder
of such rights, but not for the purpose of computing the percentage held
by others (in accordance with Rule 13d-3(d)(1)(ii)), and second, under the
terms of the Shareholders' Agreement, all shares of the Company
beneficially owned by DICSA are deemed to be beneficially owned by DFS for
voting purposes and all other purposes thereunder
(2) Pursuant to the rules of the Commission, shares are deemed to be
"beneficially owned" by a person if such person directly or indirectly has
or shares (i) the power to vote or dispose of such shares, whether or not
such person has any pecuniary interest in such shares, or (ii) the right
to acquire the
34
power to vote or dispose of such shares within 60 days, including any
right to acquire through the exercise of any option, warrant or right, or
the conversion or exchange of a security.
(3) DC Cycle is 100% owned by Thayer Equity Investors III, L.P. ("Thayer"), a
Delaware limited partnership. TC Capital Partners, a Delaware general
partnership, is the general partner of Thayer. Messrs. Frederic V. Malek
and Carl J. Rickertsen, directors of the Company, are general partners of
TC Capital Partners. As such, Messrs. Malek and Rickertsen have shared
voting and investment power (as well as an indirect pecuniary interest
within the meaning of Rule 16a-1 under the Exchange Act), with respect to
the shares held by DC Cycle. As a result, each of Messrs. Malek and
Rickertsen may be deemed to be the beneficial owners of the 12,500 shares
of Class A common stock, the 18,950 shares of Class C common stock and the
25,000 shares of Series A preferred stock held by DC Cycle.
(4) DFS is a wholly owned subsidiary of DICSA. See note 5 below.
(5) Includes 8,300 shares of Class A common stock issuable to DICSA upon
conversion of its Raleigh Canada preferred stock under the Raleigh Canada
Exchange Agreement. Mr. Gottesman, a director of the Company, is the
chairman of DICSA. Mr. Gottesman and a charitable trust of which he is the
settlor, control a majority of the capital stock of DICSA indirectly
through an industrial holding company, Centenary. Mr. Finden-Crofts, a
director of the Company and a director of DICSA, and Mr. Pearl, a director
of the Company and a director of DICSA, own minority interests in DICSA.
As a result of their shared voting and investing power with respect to
shares beneficially owned by DFS and DICSA, Messrs. Gottesman, Finden-
Crofts and Pearl may each be deemed to be the beneficial owner of the
shares owned by DFS and DICSA.
(6) Perseus Cycle is 100% owned by Perseus Capital, L.L.C., a Delaware limited
liability company ("Perseus"). Perseus Management, a Delaware limited
liability company, is the managing member of Perseus and owns
approximately 17% of Perseus. Mr. Frank H. Pearl is the Chairman and
President of Perseus Management. Rappahannock Investment Company, a
Delaware corporation, owns approximately 57% of Perseus Management.
Rappahannock is 100% owned by Mr. Pearl. Mr. Pearl, by virtue of his
indirect ownership interest in Perseus, may be deemed the beneficial owner
of the 10,000 shares of Class A common stock held by Perseus.
(7) Includes the 12,500 shares of Class A common stock, the 18,950 shares of
Class C common stock and 25,000 shares of Series A preferred stock
beneficially owned by DC Cycle. See note 3 above.
(8) Includes the 12,500 shares of Class A common stock, the 18,950 shares of
Class C common stock and 25,000 shares of Series A preferred stock
beneficially owned by DC Cycle. See note 3 above.
(9) Includes the 21,700 shares of Class A common stock beneficially owned by
DFS and the 8,300 shares of Class A common stock beneficially owned by
DICSA. See note 5 above.
(10) Includes the 21,700 shares of Class A common stock beneficially owned by
DFS and the 8,300 shares of Class A common stock beneficially owned by
DICSA. See note 5 above.
(11) Includes the 10,000 shares of Class A common stock and 3,800 shares of
Class C common stock beneficially owned by Perseus, the 21,700 shares of
Class A common stock beneficially owned by DFS and the 8,300 shares of
Class A common stock beneficially owned by DICSA. See notes 5 and 6 above.
(12) Includes (1) 12,500 shares of Class A common stock, the 18,950 shares of
Class C common stock and 25,000 shares of Series A preferred stock
beneficially owned by DC Cycle which may be deemed to be beneficially
owned by Messrs. Malek and Rickertsen (see note 3 above); (2) 21,700
shares of Class A common stock beneficially owned by DFS and 8,300 shares
of Class A common stock beneficially owned by DICSA which may be deemed to
be beneficially owned by Messrs. Gottesman, Finden-Crofts and Pearl (see
note 5 above); (3) 10,000 shares of Class A common stock beneficially
owned by Perseus and 10,000 shares of Class A common stock and 3,800
shares of Class C common stock beneficially owned by Perseus which may be
deemed to be beneficially owned by Mr. Pearl (see note 5 above); and 1,500
shares of Class A common stock issued to Gary S. Matthews.
35
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Investor group
Subsequent to the Recapitalization and issue of Class C common stock in
February, 1999, the Company's shareholders are (i) a wholly-owned subsidiary of
Thayer, which controls approximately 65% of the total voting power of the
Company's capital stock, (ii) a wholly-owned subsidiary of Perseus, which
controls approximately 13% of the total voting power of the Company's capital
stock, and (iii) DFS, which controls approximately 20% of the total voting power
of the Company's capital stock. Prior to the Recapitalization, the Company was
wholly-owned by DICSA through its subsidiary, DFS.
Thayer is a private equity fund managed by TC Equity Partners ("Thayer
Capital"), a private equity investment firm based in Washington, D.C. Thayer
Capital's partners are Frederic V. Malek, Carl J. Rickertsen and Paul G. Stern.
Thayer Capital invests primarily in private equity investments in management
buyouts and recapitalizations. In June 1996, Thayer Capital closed Thayer, its
current corporate private equity fund, with $364 million in commitments.
Perseus is a merchant banking venture managed by Perseus Management L.L.C.
("Perseus Management") and based in Washington, D.C. Perseus invests primarily
in leveraged acquisitions of operating businesses. Frank H. Pearl is the
Chairman and President of Perseus and is one of the founding directors and
shareholders of DICSA.
DFS is a wholly-owned subsidiary of DICSA. A. Edward Gottesman, a director of
the Company, the chairman of DICSA, and a charitable trust of which he is the
settlor, control a majority of the capital stock of DICSA indirectly through an
industrial holding company, Centenary Corporation ("Centenary"). Alan J. Finden-
Crofts, a director of the Company and a director of DICSA, and Mr. Pearl, a
director of the Company and a director of DICSA, own minority interests in
DICSA.
Payment of Certain Fees and Expenses
In connection with the Recapitalization, the Company paid closing fees (i) to
Thayer in the amount of $1.2 million, (ii) to Perseus in the amount of $1.0
million and (iii) to Centenary (which is controlled in part by Mr. A. Edward
Gottesman) in the amount of $0.7 million. In addition, the Company paid all the
out-of-pocket expenses of Thayer and Perseus, certain expenses incurred in order
to effect the Recapitalization, and $150,000 of the out-of-pocket expenses of
DICSA and DFS. In the future, affiliates of Thayer may receive customary fees
for advisory and other services rendered to the Company. If such services are
rendered in the future, the fees will be negotiated from time to time and will
be based on the services performed and the prevailing fees then charged by third
parties for comparable services.
36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial statements.
See "Index to Consolidated Financial Statements" set forth on page F-1
2. Financial Data Schedules.
Period Type YEAR
Fiscal Year End Dec 31 1998
Period End Dec 31 1998
Cash 17,453
Securities 0
Receivables 74,875
Allowances 8,074
Inventory 105,264
Current Assets 199,104
PP & E 118,977
Depreciation 69,463
Total Assets 325,290
Current Liabilities 125,941
Bonds 165,870
Preferred Mandatory 45,432
Preferred 0
Common 1
Other SE (70,121)
Total Liability and Equity 325,290
Sales 465,305
Total Revenues 465,305
CGS 350,346
Total Costs 350,346
Other Expenses 0
Loss Provision 1,467
Interest Expense 16,948
Income Pre Tax 904
Income Tax 6,294
Income Continuing 0
Discontinued 0
Extraordinary 431
Changes 0
Net Income (5,888)
EPS Primary 0
EPS Diluted 0
3. Exhibits.
See " Index to Exhibits" set forth on page E-1
(b) Reports of Form 8-K.
Report on Form 8-K filed February 22, 1999.
37
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Simon J. Goddard, his true and lawful attorney-in-fact
and agent, with full power of substitution and re-substitution, for him and in
his name, place and stead, in any and all capacities (including his capacity as
a director and/or officer of The Derby Cycle Corporation), to sign the Annual
Report on Form 10-K filed pursuant to the Securities Exchange Act of 1934, and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Registration Statement and power of attorney have been signed by the following
persons in the capacities and on the dates indicated:
[Download Table]
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ Gary S Matthews
_________________________________ President, Chief April 1, 1999
GARY S MATTHEWS Executive Officer
and Director
(principal
executive officer)
/s/ Simon J. Goddard
_________________________________ Chief Financial April 1, 1999
SIMON J. GODDARD Officer (principal
financial and
accounting officer)
/s/ Frederic V. Malek Chairman of the
_________________________________ Board and Director April 1, 1999
FREDERIC V. MALEK
/s/ Alan Finden-Crofts
_________________________________ Director April 1, 1999
ALAN FINDEN-CROFTS
/s/ A. Edward Gottesman
_________________________________ Director April 1, 1999
A. EDWARD GOTTESMAN
/s/ Frank H. Pearl
_________________________________ Director April 1, 1999
FRANK H. PEARL
/s/ Carl J. Rickertsen
_________________________________ Director April 1, 1999
CARL J. RICKERTSEN
/s/ Thomas H. Thomsen
_________________________________ Director April 1, 1999
THOMAS H. THOMSEN
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Annual Report on Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Nottingham,
England on April 1, 1999.
The Derby Cycle Corporation
/s/ Simon J. Goddard
By: ______________________________
Name: Simon J. Goddard
Title: Chief Financial Officer
38
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Simon J. Goddard, his true and lawful attorney-in-fact
and agent, with full power of substitution and re-substitution, for him and in
his name, place and stead, in any and all capacities (including his capacity as
a director and/or officer of Lyon Investments B.V.), the Annual Report on form
10-K filed pursuant to the Securities Exchange Act of 1934, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Registration Statement and power of attorney have been signed by the following
persons in the capacities and on the dates indicated:
[Download Table]
SIGNATURE CAPACITY DATE
/s/ K. Dantuma
_________________________________ Managing Director April 1, 1999
K. DANTUMA
/s/ S. J. Goddard
_________________________________ Managing Director April 1, 1999
S. J. GODDARD
/s/ F. E. Agar
_________________________________ Managing Director April 1, 1999
F. E. AGAR
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Annual Report on Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Nottingham,
England on April 1, 1999.
Lyon Investments B.V.
/s/ Simon J. Goddard
By: ______________________________
Name: Simon J. Goddard
Title: Managing Director
39
INDEX TO EXHIBITS
Exhibit
No. Description
------- -----------
(1) 1.1 Purchase Agreement dated as of May 7, 1998, among The Derby Cycle
Corporation, Lyon Investments B.V., Chase Securities Inc., Chase
Manhattan Bank AG, and Chase Manhattan International Limited
(1) 2.1 Recapitalization Agreement dated as of March 11, 1998, among The
Derby Cycle Corporation, Derby International Corporation S.A., Derby
Finance S.a.r.l., DC Cycle, L.L.C., and Perseus Cycle, L.L.C.
(1) 2.2 First Amendment to the Recapitalization Agreement dated March 17,
1998, among The Derby Cycle Corporation, Derby International
Corporation S.A., Derby Finance S.a.r.l., DC Cycle, L.L.C., Perseus
Cycle, L.L.C., Frank H. Pearl and Alan J. Finden-Crofts
(1) 2.3 Second Amendment to the Recapitalization Agreement dated as of May
14, 1998, among The Derby Cycle Corporation, Derby International
Corporation S.A., Derby Finance S.a.r.l., DC Cycle, L.L.C., Perseus
Cycle, L.L.C., Alan J. Finden-Crofts, A. Edward Gottesman, Frank H.
Pearl and Thayer Equity Partners, III
* 3.1 Amended and Restated Certificate of Incorporation of The Derby Cycle
Corporation.
(1) 3.2 Bylaws of The Derby Cycle Corporation.
(1) 3.3 Articles of Association of Lyon Investments B.V.
(1) 4.1 Dollar Indenture dated May 14, 1998, by and among The Derby Cycle
Corporation, Lyon Investments, B.V. and IBJ Schroder Bank & Trust
Company, as trustee.
(1) 4.2 DM Indenture dated May 14, 1998, by and among The Derby Cycle
Corporation, Lyon Investments B.V. and IBJ Schroder Bank & Trust
Company, as trustee.
(1) 4.3 Forms of 10% Senior Note and 9 3/8% Senior Note (contained in Exhibit
4.1 as Exhibit A thereto).
(1) 4.4 Exchange and Registration Rights Agreement dated as of May 14, 1998,
among The Derby Cycle Corporation, Lyon Investments B.V. and Chase
Securities Inc., Chase Manhattan Bank AG, and Chase Manhattan
International Limited.
(1) 10.1 Multicurrency Credit Facility Agreement dated May 12, 1998, by and
among The Derby Cycle Corporation, Chase Manhattan plc as arranger,
the Financial Institutions named therein as Banks, and Chase
Manhattan International Limited as Facility Agent and Security Agent.
(1) 10.2 Shareholders Agreement of The Derby Cycle Corporation dated as of May
14, 1998, by and among The Derby Cycle Corporation, Derby Finance
S.a.r.l., DC Cycle, L.L.C. and Perseus Cycle, L.L.C.
(1) 10.3 Registration Agreement dated as of May 14, 1998, by and among The
Derby Cycle Corporation, Derby Finance S.a.r.l., DC Cycle, L.L.C. and
Perseus Cycle, L.L.C.
(1) 10.4 Trademark License Agreement dated as of May 14, 1998 between The
Derby Cycle Corporation and Derby International Corporation S.A.
(1) 10.5 Support Agreement dated as of May 12, 1998 among The Derby Cycle
Corporation, Derby International Corporation S.A., Derby Finance
S.a.r.l., DC Cycle, L.L.C., Perseus Cycle, L.L.C. and Raleigh
Industries of Canada Limited.
(1) 10.6 Put and Call Option Agreement dated May 13, 1998 among The Derby
Cycle Corporation, Derby International Corporation S.A., Derby
Finance S.a.r.l., DC Cycle, L.L.C., Perseus Cycle, L.L.C. and Raleigh
Industries of Canada Limited.
(1) 10.7 Derby Cycle Corporation Share Option Agreement dated May 13, 1998
among The Derby Cycle Corporation, Derby International Corporation,
S.A., Derby Finance S.a.r.l., DC Cycle, L.L.C. Perseus Cycle, L.L.C.
and Raleigh Industries of Canada Limited.
(1) 10.8 Employment Agreement dated as of May 14, 1998 between The Derby Cycle
Corporation and Alan J. Finden--Crofts.
E 1
(1) 10.9 Employment Agreement dated as of May 14, 1998 between The Derby Cycle
Corporation and William W. Austin, Jr.
(1) 10.10 The Derby Cycle Corporation 1998 Stock Option Plan.
(1) 10.11 Employment Agreement dated as of October 20, 1998 between The Derby
Cycle Corporation and Gary S. Matthews.
(1) 10.12 Management Stock Purchase Agreement dated as of October 20, 1998
between The Derby Cycle Corporation and Gary S. Matthews.
* 10.13 Amendment and Restatement Agreement dated 4 February 1999 relating to
the Multi-Currency Credit Facility of up to DM214,000,000 dated 12
May 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.
* 10.14 Revised Facility Agreement dated 12 May 1998 for Multi-Currency
Credit Facility of up to DM 214,000,000 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 facility agent,
Chase Manhattan International Limited as security agent (the
"Revolving Credit Agreement").
* 10.15 Senior Subordinated Loan Agreement dated as of February 4, 1999
between The Derby Cycle Corporation and the Government of Singapore
Investment Corporation, Pte Ltd
* 10.16 1998 stock option plan.
* 10.17 Form of Management stock purchase agreement.
* 10.18 Agreement between Diamond Back International Company Ltd, Western
States Import Company Inc., Bejka Trading AB as vendors and The Derby
Cycle Corporation and Derby Sweden AB as purchasers relating to the
sale and purchase of certain business assets and rights, and the
assumption of certain liabilities, involved in the bicycle, parts and
accessories and fitness equipment distribution business carried on
under the principal trade name "Diamondback".
* 10.19 Form of agreement evidencing a grant of a stock option under 1998
stock option plan.
* 10.20 Amended and Restated Shareholders Agreement of The Derby Cycle
Corporation dated as of February 3, 1999 by and among The Derby Cycle
Corporation, Derby Finance S.a.r.l., DC Cycle L.L.C. and Perseus
Cycle, L.L.C.
* 10.21 Securities Purchase Agreement dated as of February 3, 1999 between
The Derby Cycle Corporation, DC Cycle, L.L.C. and Perseus Cycle,
L.L.C.
* 21.1 Subsidiaries of The Derby Cycle Corporation.
* 27 Financial Data Schedule
(1) - Filed previously;
* - Filed herein
E 2
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Company Consolidated Financial Statements :
Report of the Auditors.......................................................F2
Consolidated Balance Sheets as of December 31, 1997 and 1998.................F3
Consolidated Statements of Income for the years ended December 31,
1996, 1997 and 1998.....................................................F4
Consolidated Statements of Shareholders' Equity (Deficit) for the years
ended December 31, 1996, 1997 and 1998 .................................F5
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998.....................................................F6
Notes to Consolidated Financial Statements...................................F8
F 1
Report of the Auditors
To The Derby Cycle Corporation:
We have audited the accompanying consolidated balance sheets of The Derby Cycle
Corporation as of December 31, 1997 and 1998, and the related consolidated
statements of income, shareholders' equity (deficit) and cash flows for each of
the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
1997 and 1998 and the consolidated results of its operations and cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles in the United States of America.
Arthur Andersen, April 1, 1999
Chartered Accountants and Registered Auditors
Nottingham, England.
F 2
The Derby Cycle Corporation
Consolidated Balance Sheets
(Dollars in thousands)
[Enlarge/Download Table]
Assets
December 31,
-------------------------
1997 1998
----------- -----------
Current assets:
Cash and cash equivalents........................................................... $ 15,426 $ 17,453
Receivables, net.................................................................... 65,264 66,801
Inventories......................................................................... 89,792 105,264
Other current assets................................................................ 13,881 9,586
----------- -----------
Total current assets........................................................... 184,363 199,104
----------- -----------
Property, plant, and equipment, net...................................................... 49,707 49,514
Intangibles, net......................................................................... 6,651 20,600
Prepaid pension assets................................................................... 47,777 56,072
----------- -----------
Total assets................................................................... $ 288,498 $ 325,290
=========== ===========
Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Accounts payable.................................................................... $ 35,526 $ 34,394
Accrued liabilities................................................................. 22,738 20,161
Income taxes payable................................................................ 4,027 8,452
Short-term borrowings and current portion of long-term borrowings................... 51,160 60,831
Other current liabilities........................................................... 7,603 2,103
----------- -----------
Total current liabilities...................................................... 121,054 125,941
----------- -----------
Other liabilities:
Long-term debt, net of current portion ............................................. 51,059 165,870
Excess of assets acquired over cost of acquisitions................................. 11,235 11,120
Deferred income taxes............................................................... 17,451 18,896
Other liabilities................................................................... 4,950 4,224
----------- -----------
Total liabilities.............................................................. 205,749 326,051
----------- -----------
Minority interest........................................................................ 876 627
Commitments and contingencies
Preferred stock with redemption rights, $0.01 par value, 25,000 shares authorized,
issued, and outstanding of Series A and 3,000 shares authorized, issued, and
outstanding of Series B ........................................................... - 45,432
Stock rights............................................................................. - 23,300
Shareholders' equity(deficit):
Class A common stock, $0.01 par value, 200,000 shares authorized, 44,200 shares
issued and outstanding as of December 31, 1998................................. - 1
Class B common stock, $0.01 par value, 15,000 shares authorized, no shares issued
and outstanding as of December 31, 1998........................................ - -
Additional paid-in capital.......................................................... - 22,499
Capital investment.................................................................. 91,455 -
Accumulated deficit................................................................. (6,162) (87,346)
Accumulated other comprehensive income.............................................. (3,420) (5,274)
----------- -----------
Total shareholders' equity (deficit)........................................... 81,873 (70,120)
----------- -----------
Total liabilities and shareholders' equity (deficit)........................... $ 288,498 $ 325,290
========== ==========
The accompanying notes are an integral part of these financial statements
F 3
The Derby Cycle Corporation
Consolidated Statements of Income
(Dollars in thousands, except per unit and unit data)
[Enlarge/Download Table]
For the years ended December 31,
--------------------------------------------
1996 1997 1998
----------- ----------- ----------
Net revenues.......................................... $ 452,584 $ 465,687 $ 465,305
Cost of sales......................................... (339,119) (345,885) (350,346)
----------- ----------- ----------
Gross profit..................................... 113,465 119,802 114,959
----------- ----------- ----------
Selling, general, and administrative expenses......... (80,083) (90,101) (90,968)
Recapitalization costs................................ - - (5,853)
----------- ----------- ----------
Operating income................................. 33,382 29,701 18,138
----------- ----------- ----------
Other income (expense):
Interest expense................................. (8,023) (7,490) (16,948)
Interest income.................................. 815 1,038 1,048
Other income (expense), net...................... (2,675) 107 (1,334)
----------- ----------- ----------
Income before income taxes minority interest
and extraordinary item........................... 23,499 23,356 904
Provision for income taxes............................ (8,924) (10,621) (6,294)
Minority interest..................................... (10) (51) (67)
----------- ----------- ----------
Income (loss) before extraordinary item............... 14,565 12,684 (5,457)
Extraordinary item - loss on early
extinguishment of debt (net of related tax
benefit of $233)................................. - - (431)
----------- ----------- ----------
Net income (loss)..................................... 14,565 12,684 (5,888)
Dividends on preferred stock.......................... - - (4,932)
----------- ----------- ----------
Net income (loss) applicable to common
stockholders..................................... $ 14,565 $ 12,684 $ (10,820)
=========== =========== ==========
Net income (loss) applicable to common
stockholders per share........................... $ 671.20 $ 584.52 $ (301.06)
=========== =========== ==========
Weighted average number of shares of common
stock outstanding................................ 21,700 21,700 35,940
=========== =========== ==========
The accompanying notes are an integral part of these financial statements.
F 4
The Derby Cycle Corporation
Consolidated Statements of Shareholders' Equity (Deficit)
(Dollars in thousands)
[Enlarge/Download Table]
Accumul-
ated
Addit- Other
Capital ional Accumul- Compre-
Common Invest- Paid-In ated hensive
Stock ment Capital Deficit Income Total
--------- --------- --------- ---------- ---------- ---------
January 1, 1996.................. $ - $ 88,853 $ - $ (20,954) $ (1,809) $ 66,090
Comprehensive income-
Net income.................. - - - 14,565 - 14,565
Translation adjustments..... - - - - 3,130 3,130
--------- --------- --------- ---------- ---------- ---------
Total comprehensive income....... - - - 14,565 3,130 17,695
Increase in capital......... - 5,645 - - - 5,645
Dividends................... - - - (6,349) - (6,349)
--------- --------- --------- ---------- ---------- ---------
December 31, 1996................ - 94,498 - (12,738) 1,321 83,081
Comprehensive income-
Net income.................. - - - 12,684 - 12,684
Translation adjustments..... - - - - (4,741) (4,741)
--------- --------- --------- ---------- ---------- ---------
Total comprehensive income....... - - - 12,684 (4,741) 7,943
Decrease in capital......... - (3,043) - - - (3,043)
Dividends................... - - - (6,108) - (6,108)
--------- --------- --------- ---------- ---------- ---------
December 31, 1997................ - 91,455 - (6,162) (3,420) 81,873
Comprehensive income-............
Net income ................. - - - (5,888) - (5,888)
Net gain on derivative
instruments............ - - - - 1,116 1,116
Translation adjustments..... - - - - (2,970) (2,970)
--------- --------- --------- ---------- ---------- ---------
Total comprehensive income....... - - - (5,888) (1,854) (7,742)
Capital contribution prior
to Recapitalization ... - 1,600 - 6,040 7,640
Issuance of common stock ... 1 - 22,499 - - 22,500
Issuance of stock rights ... - - - (23,300) - (23,300)
Accrued dividend on
preferred stock ....... - - - (4,932) - (4,932)
Distribution to
shareholders in
connection with
Recapitalization ...... - (93,055) - (53,104) - (146,159)
--------- --------- --------- ---------- ---------- ---------
December 31, 1998 ............... $ 1 $ - $ 22,499 $ (87,346) $ (5,274) $ (70,120)
========= ========= ========= ========== ========== =========
The accompanying notes are an integral part of these financial statements.
F 5
The Derby Cycle Corporation
Consolidated Statements of Cash Flows
(Dollars in thousands)
[Enlarge/Download Table]
For the years ended December 31,
-------------------------------------
1996 1997 1998
--------- --------- ---------
Cash flows from operating activities:
Net income (loss)..................................................... $ 14,565 $ 12,684 $ (5,888)
Adjustments to reconcile net income to net cash provided by operating
activities-
Depreciation..................................................... 9,400 9,362 9,407
Amortization..................................................... (642) (132) 806
Extraordinary loss on early extinguishment of debt............... - - 431
Minority interest................................................ 10 51 67
(Gain) loss on swaps............................................. 2,675 (107) 1,334
Net periodic pension income...................................... (6,261) (5,828) (5,403)
Recapitalization costs........................................... - - 5,853
Net changes in operating assets and liabilities, net of acquisitions-
(Increase) decrease in receivables............................... (5,490) (1,155) 647
(Increase) decrease in inventories............................... 2,753 (10,104) (12,980)
(Increase) decrease in other current assets...................... (14) (1,745) 795
Increase (decrease) in accounts payable.......................... (5,385) 4,405 (587)
Increase (decrease) in accrued liabilities....................... (146) 1,673 (3,752)
Increase (decrease) in income taxes payable...................... 882 209 4,491
Increase (decrease) in other current liabilities................. (138) (310) 953
Increase (decrease) in deferred income taxes..................... 1,954 2,371 1,009
Increase (decrease) in other liabilities......................... (2,249) (416) (457)
--------- --------- ---------
Net cash (used by) provided by operating activities......... 11,914 10,958 (3,274)
--------- --------- ---------
Cash flows from investing activities:
Purchases of property, plant, and equipment........................... (10,765) (7,413) (8,322)
Proceeds of property, plant, & equipment dispositions................. 3,933 882 1,135
Cash paid for acquisitions, net of cash acquired...................... - (6,650) -
Purchases of trademarks............................................... - (2,663) (1,108)
Purchase of minority interest......................................... - - (1,933)
Proceeds of sale of minority interest................................. - - 261
--------- --------- ---------
Net cash used in investing activities....................... $ (6,832) $ (15,844) $ (9,967)
========= ========= =========
F 6
The Derby Cycle Corporation
Consolidated Statements of Cash Flows
(Dollars in thousands)
[Enlarge/Download Table]
For the years ended December 31,
-------------------------------------
1996 1997 1998
--------- --------- ---------
Cash flows from financing activities:
Proceeds from share issue............................................. $ - $ - $ 63,000
Redemption of shares in subsidiaries.................................. - - (146,159)
Repayment of Series A, B and C Senior Notes, net...................... (14,570) (13,331) (53,334)
Proceeds from issuance of Senior Notes ............................... - - 161,867
Short term borrowings, net, prior to Recapitalization ................ 950 28,910 45,894
Repayment of short term borrowings at Recapitalization................ - - (82,721)
Proceeds from short term borrowings at Recapitalization............... - - 84,914
Short term borrowings, net, post Recapitalization..................... - - (25,873)
Repayment of term loan................................................ - - (9,057)
Deferred financing costs.............................................. - (596) (13,924)
Recapitalization costs................................................ - - (5,853)
Dividends paid........................................................ (5,607) (1,139) -
Contributions made to pension plans................................... (2,154) (2,335) (1,577)
Net contribution by (distribution to) DICSA........................... 5,645 (3,043) 1,600
--------- --------- ---------
Net cash (used in) provided by financing activities......... (15,736) 8,466 18,777
--------- --------- ---------
Effect of exchange rate changes............................................ 6,799 3,016 (3,509)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents....................... (3,855) 6,596 2,027
Cash and cash equivalents, beginning of year............................... 12,685 8,830 15,426
--------- --------- ---------
Cash and cash equivalents, end of year..................................... $ 8,830 $ 15,426 $ 17,453
========= ========= =========
Supplemental cash flow information:
Interest paid......................................................... $ 8,015 $ 7,202 $ 13,525
Income taxes paid..................................................... $ 6,088 $ 8,041 $ 6,372
Income taxes received................................................. $ - $ - $ 5,624
========= ========= =========
The accompanying notes are an integral part of these financial statements
F 7
The Derby Cycle Corporation
Notes to Consolidated Financial Statements
1. Nature of the Business and Basis of Presentation:
The accompanying combined financial statements have been prepared to reflect the
financial position and results of operations of the bicycle and bicycle
component businesses of Derby International Corporation SA ("DICSA"), a
Luxembourg holding company through May 14, 1998. Up to that date DICSA owned
shares, either directly or indirectly, in a number of bicycle and bicycle
component companies worldwide that predominantly operate as standalone entities.
Each of the companies manufactures, assembles and/or distributes bicycles and
bicycle components. These bicycle and bicycle component companies, collectively
referred to as the "Company", have significant operations in The Netherlands
("Gazelle"), the United Kingdom ("Raleigh UK" and "Sturmey - Archer"), Canada
("Raleigh Canada"), Germany ("Derby Germany"), South Africa ("Probike") and the
United States (the "Raleigh USA" 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, Nishiki (for USA only) and Univega, and
leading national brands such as Gazelle in The Netherlands and Kalkhoff, Musing,
Winora and Staiger in Germany.
Effective May 14, 1998, DICSA reorganized its businesses in connection with a
recapitalization agreement (the "Recapitalization Agreement," see Note 18) so
that each of its bicycle and bicycle component companies are owned directly or
indirectly by the Company, a Delaware corporation with operations in the United
States. The accompanying consolidated financial statements have been prepared to
reflect the financial position and results of operations of the Company and its
subsidiaries from May 14, 1998 through December 31, 1998. Accordingly, the
accompanying combined and consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the United States
and are presented in United States dollars.
The accompanying combined and consolidated financial statements, herein referred
to as the consolidated financial statements, have been prepared as if the
Company had been in existence for all periods presented. DICSA's historical
basis in the assets and liabilities of the Company has been carried over. All
material inter-company transactions and balances between entities included in
these consolidated financial statements have been eliminated. Certain expenses
were originally recorded by DICSA on behalf of the Company, such as
headquarters' management costs and other corporate expenses. These amounts have
been allocated in their entirety in the Company's financial statements, as such
costs were incurred on behalf of the Company except for an immaterial amount
that related to DICSA. The headquarters' management costs and other corporate
expenses were $2,069,000, $1,198,000 and $1,262,000 for the years ended December
31, 1996, 1997 and 1998, respectively. Management believes this allocation is
reasonable and represents the expenses as if the Company had been a stand-alone
operation.
For the purposes of calculating the net income (loss) applicable to Common
Shareholders, the Common Shares outstanding used assumes that the conversion of
pre-existing stock at the time of the Recapitalization is applicable to earlier
years.
2. Accounting Policies:
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenue and expenses. Actual results could differ from those
estimates.
Foreign Currency Translation
The financial statements of the Company's subsidiaries have been translated in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 52
"Foreign Currency Translation". Current rates of
F 8
exchange are used to translate the balance sheets of the Company's subsidiaries,
while the average exchange rate for each year is used to translate the
statements of income and cash flows. The resulting translation adjustments are
recorded as a component of shareholder's equity. Gains or losses resulting from
transactions in other than a functional currency are reflected in selling,
general, and administrative expenses in the accompanying statements of income.
Total foreign currency gains (losses) were $(4,000), $(19,000) and $2,042,000
for the years ended December 31, 1996, 1997 and 1998, respectively.
Revenue Recognition
Revenue is generally recognized net of sales taxes, returns, discounts and
allowances, when products are shipped to customers or services are rendered.
Advertising Costs
Advertising costs are expensed as incurred. Total advertising costs were
$11,329,000, $10,245,000 and $10,858,000 for the years ended December 31, 1996,
1997 and 1998, respectively.
Income Taxes
The Company accounts for income taxes under the liability method in accordance
with SFAS No. 109 "Accounting for Income Taxes." Deferred taxes are recognized
for the tax consequences of temporary differences by applying enacted statutory
tax rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and liabilities.
The effect on deferred taxes of a change in tax rates is recognized in income in
the period that includes the enactment date. Future tax benefits are recognized
to the extent that realization of such benefits is more likely than not.
Basis of Consolidation
The financial statements combine the financial position and results of
operations of the bicycle and bicycle component businesses of DICSA, through May
14, 1998, and consolidate the financial position and results of operations of
the Company and its subsidiaries from May 14, 1998 through December 31, 1998.
The results of subsidiaries are consolidated in the Statements of Income from
the date of acquisition. Goodwill arising on combination and consolidation is
being written off over 40 years.
Comprehensive Income
The Company adopted SFAS No. 130 "Reporting Comprehensive Income" during 1998.
The adoption of this standard did not have a material effect on the Company's
financial statements as the Company's comprehensive income does not differ
materially from net income except for foreign currency translation adjustments
included in comprehensive income, the effect of which could be material
depending on future changes in foreign exchange rates. The presentation of
comprehensive income for all years presented is included within the Statement of
Shareholders' Equity.
Cash and Cash Equivalents
The Company considers liquid investments with an original maturity at the date
of purchase of three months or less to be cash equivalents. Due to the short
maturity of these investments, their carrying amount approximates fair value.
Inventories
Inventories are stated at the lower of cost or net realizable value, with cost
determined on a first in, first out ("FIFO") basis. A provision is made for
obsolete, slow moving and defective items where appropriate.
F 9
Inventories consist of the following (in thousands):
December 31,
------------------------
1997 1998
----------- ----------
Finished products..................................... $ 43,211 $ 48,498
Work in process....................................... 8,841 9,686
Raw materials......................................... 37,740 47,080
----------- ----------
Total inventories................................ $ 89,792 $ 105,264
=========== ==========
The market for bicycles, parts and accessories is subject to the risk of
changing consumer trends. In the event that a particular bicycle model or
accessory does not achieve widespread consumer acceptance, and the Company holds
excess inventory of that bicycle model, part or accessory, the Company may be
required to take significant price markdowns, which could have a material
adverse effect on the Company's business, results of operations and financial
condition.
Property, Plant, and Equipment
Property, plant, and equipment are recorded at cost and depreciated using the
straight-line method over the useful life of the asset (buildings-50 years;
plant and equipment-3 to 13 years) or the lease term if shorter for leasehold
improvements. The cost and accumulated depreciation for property, plant and
equipment sold, retired, or otherwise disposed of are removed from the financial
statements, and the resulting gains and losses are reflected within other income
or expense.
Capital Grants
Capital grants received from government authorities to construct facilities are
amortized over the estimated useful life of the respective assets. The amounts
amortized were $771,000, $567,000 and $547,000 for the years ended December 31,
1996, 1997, and 1998, respectively. The unamortized balance of capital grants
was $3,633,000 and $3,341,000 as of December 31, 1997 and 1998, respectively,
and is included in the accompanying balance sheets as other long-term
liabilities.
These grants relate to the factory completed in Rostock, Germany in 1993. The
total grants received for the Rostock factory were $10.3 million, and have
certain claw-back provisions relating to maintaining both the assets and a
minimum number of employees. These claw-back provisions expire at certain times
from December 31, 1998 to December 31, 2000.
Intangibles
Intangibles are stated net of accumulated amortization of $818,000 and
$1,581,000 as of December 31, 1997 and 1998, respectively. The Company has
goodwill related to 1997 and 1998 acquisitions of $3,462,000 and $5,033,000
included in intangibles as of December 31, 1997, and 1998, respectively, and
negative goodwill of $11,235,000 and $11,120,000 as of December 31, 1997, and
1998, respectively, in excess of assets acquired over cost of acquisitions in
the accompanying balance sheets. Both positive and negative goodwill are
amortized using the straight-line method over 40 years. Total amortization
expense on positive goodwill was $92,000 and $113,000 for the years ended
December 31, 1997 and 1998, respectively, and total amortization income related
to negative goodwill was $364,000, $408,000, and $392,000 for the years ended
December 31, 1996, 1997, and 1998, respectively. Trademarks are amortized over
15 years. Deferred financing costs are amortized over the life of the related
debt using the effective interest rate method.
Impairment of Long-lived Assets
The Company periodically evaluates whether events or circumstances have occurred
indicating that the carrying amount of long-lived assets may not be recoverable.
If the sum of undiscounted expected future cash flows is less than the carrying
amount of an asset, the Company recognizes an impairment loss
F 10
based on the amount by which the carrying amount of the asset exceeds the fair
value of the asset.
Derivative Financial Instruments
The Company uses derivative financial instruments for purposes other than
trading and does so to reduce its exposure to fluctuations in interest and
foreign currency exchange rates.
Forwards - Forward foreign currency exchange contracts are used to minimize the
impact of currency exchange rate movements on purchases of inventory and sales
of goods. Changes in the market value of the forward contracts are recorded as
gains or losses through cost of sales in the accompanying statements of income.
Cash flows resulting from forwards are included in cash flows from operating
activities in the accompanying statements of cash flows.
Swaps - Currency and interest rate swaps have the effect of synthetically
changing the currency and interest rates of certain liabilities of the Company.
The net receivable or payable related to currency swaps is recorded as other
current assets or other current liabilities, respectively, in the accompanying
balance sheets. Changes in the market value of the currency and interest rate
swaps are recorded as gains or losses through other income (expense) in the
accompanying statements of income. Cash flows resulting from currency and
interest rate swaps are classified in repayment of long-term debt in the
accompanying statements of cash flows.
Options - Options are used to hedge foreign currency exchange rate movements on
inventory purchases and sales of goods and certain liabilities of the Company.
Changes in the market value of the options are recorded as gains or losses
through cost of sales for purchases and sales of goods or other income (expense)
for certain liabilities in the accompanying statements of income. The options
are expensed at maturity if they are not exercised.
Fair Value of Financial Instruments
The following methods were used to estimate the fair value of each class of
financial instruments:
Cash and cash equivalents - The carrying amount approximates the fair value due
to the short-term nature of the instruments.
Short-term and long-term debt - The fair value is estimated based upon quoted
market prices at year-end or current interest rates for debt of the same
maturity (see Notes 9 and 10).
Forwards and Options - The fair value is estimated based on quoted market prices
at year-end (see Note 8).
Swaps and Caps - The fair value of currency and interest rate swap agreements
were estimated based on quoted market prices at year-end (see Note 8).
New Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information," which requires financial and descriptive
information about reportable operating segments and related products, services,
geographic areas and major customers. This statement is effective for fiscal
years beginning after December 31, 1997. The Company adopted FASB Statement No.
131 on December 31, 1998. The adoption of SFAS 131 did not have any effect on
the Company's primary financial statements, but did affect the disclosure of
segment information contained in note 15.
In February 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132, Employers' Disclosures about Pensions
and Other Post-retirement Benefits. The Company adopted Statement 132 during
1998 and the disclosures in note 14 are made in accordance with the new
standard.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting
F 11
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities.
The Statement establishes accounting and reporting standards in the United
States requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. The Statement requires
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
Statement 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement the Statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). Statement 133 cannot be applied retroactively. Statement 133 must
be applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997.
The Company elected to adopt Statement 133 as of October 1, 1998. The impact of
this adoption on the Company is that certain activities qualify for hedge
accounting under SFAS 133 that did not qualify for hedge accounting under the
Company's prior policy. Gains and losses related to derivative instruments prior
to October 1, 1998 are included in the results of operations as cost of sales or
other income (expenses) as the market changes occur. Gains and losses related to
derivative instruments subsequent to the adoption of Statement 133 are included
in other comprehensive income as the market changes occur, and are recorded in
cost of sales or other income (expense) when the hedged forecasted transaction
impacts earnings.
3. Receivables:
Receivables consist of the following (in thousands):
[Enlarge/Download Table]
December 31,
-----------------------
1997 1998
--------- ----------
Trade receivables........................................................................ $ 72,785 $ 74,591
Royalty receivables...................................................................... 738 284
--------- ----------
Total receivables................................................................... 73,523 74,875
Allowance for doubtful trade accounts.................................................... (4,419) (3,956)
Allowance for discounts and rebates...................................................... (2,862) (2,635)
Allowance for other items................................................................ (978) (1,483)
--------- ----------
Total receivables, net.............................................................. $ 65,264 $ 66,801
========= ==========
[Enlarge/Download Table]
December 31,
-------------------------------------
1996 1997 1998
--------- --------- ---------
Allowance for doubtful trade accounts:
Balance January 1,......................................................... $ 3,859 $ 4,501 $ 4,419
Additions charged to costs and expenses.................................... 1,826 1,016 1,467
Deductions................................................................. (1,084) (993) (2,045)
Effect of exchange rate changes............................................ (100) (105) 115
--------- --------- ---------
Balance December 31,.................................................. $ 4,501 $ 4,419 $ 3,956
========= ========= =========
December 31,
-------------------------------------
1996 1997 1998
--------- --------- ---------
Allowance for discounts and rebates:
Balance January 1,......................................................... $ 2,769 $ 2,314 $ 2,862
Additions charged to costs and expenses.................................... (272) 734 (233)
Effect of exchange rate changes ........................................... (183) (186) 6
--------- --------- ---------
Balance December 31,.................................................. $ 2,314 $ 2,862 $ 2,635
========= ========= =========
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exi
4. Other Current Assets:
Other current assets consist of the following (in thousands):
[Enlarge/Download Table]
December 31,
-----------------------
1997 1998
--------- ---------
Prepaid expenses......................................................................... $ 4,757 $ 5,011
Receivable on derivatives................................................................ 4,335 125
Sales taxes recoverable.................................................................. 827 908
Other receivables........................................................................ 3,962 3,542
--------- ---------
Total other current assets.......................................................... $ 13,881 $ 9,586
========= =========
5. Property, Plant, and Equipment:
Property, plant, and equipment consist of the following (in thousands):
[Enlarge/Download Table]
December 31,
-----------------------
1997 1998
--------- ---------
Land .................................................................................... $ 3,910 $ 4,200
Buildings................................................................................ 22,422 24,274
Equipment................................................................................ 82,838 90,503
--------- ---------
109,170 118,977
Accumulated depreciation................................................................. (59,463) (69,463)
--------- ---------
Net property, plant, and equipment.................................................. $ 49,707 $ 49,514
========= =========
Depreciation expense was $9,400,000, $9,362,000 and $9,407,000 for the years
ended December 31, 1996, 1997 and 1998, respectively.
F 13
6. Intangibles:
Intangible assets consist of the following (in thousands):
[Enlarge/Download Table]
December 31,
-----------------------
1997 1998
--------- ---------
Trademarks purchased..................................................................... $ 2,665 $ 3,773
Goodwill purchased....................................................................... 3,462 5,033
Deferred financing costs................................................................. 1,342 13,375
--------- ---------
7,469 22,181
Accumulated amortization................................................................. (818) (1,581)
--------- ---------
Total intangibles, net.............................................................. $ 6,651 $ 20,600
========= =========
7. Accrued Liabilities:
The following is a breakdown of accrued liabilities (in thousands):
[Enlarge/Download Table]
December 31,
-----------------------
1997 1998
--------- ---------
Sales taxes payable...................................................................... $ 3,329 $ 2,389
Payroll taxes payable.................................................................... 3,089 3,858
Accrued vacation......................................................................... 1,269 1,485
Accrued unvouchered trade payables....................................................... 15,051 12,429
--------- ---------
Total accrued liabilities........................................................... $ 22,738 $ 20,161
========= =========
8. Derivative Financial Instruments:
Forwards
A forward foreign exchange contract calls for delivery of a specified amount of
one currency for a specified amount of another currency at a fixed exchange rate
and a specified future date. The exchange rate is established at the time the
contract is agreed on, but payment and delivery are not required until maturity.
Forward contracts are entered into with bank counterparties. The Company enters
into forward foreign exchange contracts to minimize the impact of currency
movements for the following year, principally on purchases of inventory and
sales of goods denominated in currencies other than the subsidiaries' functional
currencies.
F 14
The Company held forward foreign exchange contracts in the following gross
amounts (in thousands):
[Enlarge/Download Table]
December 31,
---------------------------------------------------
1997 1998
----------------------- -----------------------
Buy Sell Buy Sell
--------- --------- --------- ---------
US Dollars................................................... $ 53,673 $ 6,835 $ 32,115 $ 8,682
Japanese Yen................................................. 15,139 - 6,236 -
Dutch Guilders............................................... 1,153 9,643 119 9,276
Deutsche Marks............................................... - 1,900 - 1,482
Pounds Sterling.............................................. 1,579 - 283 -
Other........................................................ 2,984 - 59 -
--------- --------- --------- ---------
Total notional amounts.................................. $ 74,528 $ 18,378 $ 38,812 $ 19,440
========= ========= ========= =========
Fair value.............................................. $ 73,845 $ 18,502 $ 39,739 $ 19,274
========= ========= ========= =========
Currency Options and Swaps and Interest Rate Caps and Swaps
A currency swap is an agreement to exchange principal and interest of one
currency for those of another currency. Interest rate swaps constitute a
contractual agreement between two parties to exchange interest-type cash flows
at periodic intervals based on a hypothetical principal or notional amount. The
Company enters into currency swap and interest rate swap contracts such that the
notional principal amount is equal to the principal amount of the underlying
debt. The swaps achieved the effect of synthetically converting the original
United States dollar denominated Series A, B and C Senior Notes into several
other foreign currencies to match related operating cash flows and converting
the fixed interest rate on the Series A and C Senior Notes to a floating
interest rate. The Series A and C Senior Notes and associated swaps were repaid
on May 14, 1998 (see Notes 10 and 17).
With the issuance of the $100,000,000 of 10 percent Senior Notes and
DM110,000,000 of 9 3/8 percent Senior Notes, and a seven-year revolving credit
facility of DM214,000,000 on May 14, 1998 (see Note 10) in connection with the
Recapitalization, the Company purchased currency options and interest rate caps.
The currency options hedge 67% of the Company's exposure from July, 1998 through
May, 2001 arising from operating cash flows being generated in different
currencies than that required to service the Company's debt. The interest rate
caps limit the Company's exposure to floating interest rate increases on the
primary portion of the drawdowns on the revolving credit facility.
The following is a summary of the Company's currency and interest rate swap,
currency option and interest rate cap net receivables as of December 31, 1997,
and 1998 (in thousands):
[Enlarge/Download Table]
December 31,
---------------------------------------------------
1997 1998
----------------------- -----------------------
Carrying Fair Carrying Fair
Value Value Value Value
--------- --------- --------- ---------
Currency options............................................. $ - $ - $ 251 $ 114
Interest rate cap............................................ - - 137 11
--------- --------- --------- ---------
Total currency options and interest rate cap............ - - 388 125
Swaps........................................................ 3,279 4,335 - -
--------- --------- --------- ---------
Total derivatives....................................... $ 3,279 $ 4,335 $ 388 $ 125
========= ========= ========= =========
F 15
Adoption of SFAS 133
The Company elected to adopt SFAS 133 as of October 1, 1998.
Income and expense related to the fair value accounting of the Company's
derivative instruments prior to October 1, 1998 are included in the statement of
income for the year ended December 31, 1998: a profit of $807,000 on the fair
value accounting of the forward foreign exchange contracts is shown within cost
of sales; a loss of $286,000 on the fair value accounting of the currency option
and interest rate cap and a loss of $1,048,000 on the fair value accounting of
the swaps, due to the amortisation of the swaps before the Recapitalization on
May 14, 1998, are shown as other income (expense). The Company recognized in
other income (expense) a gain (loss) on swaps of $(2,675,000), and $107,000 for
the years ended December 31, 1996, and 1997.
Income and expense related to the fair value accounting of derivative
instruments subsequent to the adoption of SFAS 133 are included in Accumulated
Other Comprehensive Income for the year ended December 31, 1998: a gain of
$1,093,000 on the fair value accounting of the forward foreign exchange
contracts and a gain of $23,000 on the fair value accounting of the currency
option and interest rate cap. The net gain of $1,116,000 in other comprehensive
income at December 31, 1998 will be released to income in 1999 as the related
sales, purchases or interest expense occurs.
Of the $263,000 loss due to fair value accounting of the currency option and
interest rate cap during the year ended December 31, 1998, the Company
recognized a loss of $286,000 in the income statement to September 30, 1998
prior to adoption of SFAS 133, and recognized a gain of $23,000 in Accumulated
Other Comprehensive Income from October 1, 1998 to December 31, 1998.
Credit Risk
The Company enters into derivative transactions with several counterparties
including Midland Bank and Banque National de Paris. The Company is exposed to
credit loss in the event of non-performance by these counterparties. However,
the Company does not anticipate non-performance by these counterparties. In the
event of non-performance, the Company would be subject to the following
counterparty risk (in thousands):
[Enlarge/Download Table]
December 31,
------------------------
1997 1998
---------- ----------
Currency options......................................................................... - 114
Interest rate cap........................................................................ - 11
Forwards................................................................................. 748 1,099
Swaps.................................................................................... 4,335 -
---------- ----------
Total credit risk................................................................. $ 5,083 $ 1,224
========== ==========
9. Short-Term Borrowings:
Short-term borrowings consist of the following (in thousands):
[Enlarge/Download Table]
December 31,
------------------------
1997 1998
---------- ----------
Short-term bank borrowings............................................................... $ 34,049 $ 56,693
Bank overdraft........................................................................... 2,778 4,138
Current portion of long-term debt (see Note 10).......................................... 14,333 -
---------- ----------
Total short-term borrowings......................................................... $ 51,160 $ 60,831
========== ==========
F 16
At December 31, 1996, the Company maintained 364-day aggregate unsecured
revolving credit facilities of (pound)26,500,000, and on which interest was
charged at 1 1/4 percent above the London Interbank Borrowing Rate. On March 6,
1997, these facilities were replaced by a syndicated unsecured three year
aggregated revolving credit facility of (pound)60,000,000, and on which interest
was charged at one percent above the London Interbank Offer Rate. In addition
the Company's subsidiaries had available overdraft facilities of up to
$24,000,000 during the periods ended December 31, 1996, 1997, and up to May 14,
1998.
On May 14, 1998, all the revolving credit and overdraft facilities outstanding,
except for the Rand 31.0 million of facilities in South Africa, were repaid and
replaced by a seven year revolving credit facility of DM214,000,000 (see
Notes 10 and 18). Interest on the facility is charged at two percent above the
London Interbank Borrowing Rate. The weighted-average balance outstanding on
these facilities was $33,500,000 and $48,324,000 during the years ended
December 31, 1997 and 1998, respectively. The highest amount outstanding on
these facilities was $44,800,000, $60,300,000 and $86,032,000 during the years
ended December 31, 1996, 1997 and 1998, respectively. Management believes that
there is no material difference between the book values and fair values of
borrowings on revolving credit facilities and bank overdrafts as of December 31,
1997 and 1998.
The Company's interest expense was $1,927,000 and $3,953,000 on the revolving
credit facilities for the years ended December 31, 1997 and 1998 respectively.
These were at floating rates of 1% above the London Interbank Offered Rate
through May 14, 1998 and 2% thereafter. This produced weighted average interest
rates on the revolving credit facilities of 5.1% and 6.6% in 1997 and 1998,
respectively, after taking into account the effect of any swaps and including
$139,000 and $511,000 in amortization of deferred financing costs for 1997 and
1998 respectively. At December 31, 1998, the Company had $56,693,000 of bank
borrowings under the revolving credit facilities, on which the average interest
rate was 5.87%.
The Company was not in compliance with all of its borrowing covenants as at
December 31, 1998. The covenants under the seven year revolving credit facility
include a maximum level of inventory days on hand and a minimum level of
adjusted EBITDA. Effective February 4, 1999, the revolving credit facility
agreement was amended in connection with the acquisition of Diamond Back. The
changes made included an increase in inventory days allowed, a change in the
measurement of EBITDA and a reduction in the EBITDA covenant, such that the
Company is now in compliance with all its borrowing covenants.
10. Long Term Debt
In 1993, Derby Holding BV, which was a subsidiary of DICSA and is a subsidiary
of the Company, issued unsecured United States dollar denominated Series A, B
and C Senior Notes, in the aggregate principal of $85,000,000. Derby Holding BV
repaid $14,333,000 of the Senior Notes in September 1996 and $14,333,000 in
September 1997, leaving $56,333,000 outstanding at December 31, 1997, and
May 14, 1998. On May 14, 1998, these Senior Notes were repaid in full. The long-
term bank loan at December 31, 1997, represents a loan of DM16,250,000
equivalent to $9,059,000 as of December 31, 1997, assumed on the acquisition of
the Winora and Staiger businesses (see Note 13). The long-term bank loan was
repaid on May 14, 1998.
On May 14, 1998, the Company issued $79,750,000 of 10 percent Senior Notes,
and Lyon Investments BV, a subsidiary of the Company, issued $20,250,000 of
10 percent Senior Notes and DM110,000,000 of 9 3/8 percent Senior Notes (see
Note 18). The Senior Notes mature in full in 2008. 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 on and redeem capital stock, redeem
certain subordinated obligations, make investments, undertake sales of assets
and subsidiary stock, engage in certain transactions with affiliates, sell or
issue capital stock, permit liens to exist, operate in other lines of business,
engage in certain sale and leaseback transactions and engage in mergers,
consolidations or sales of all or substantially all of the assets of the
Company.
The weighted average interest rates on the Senior Notes were 6.6% in 1997, 6.9%
in 1998 through May
F 17
13, 1998 and 10.3% effective May 14, 1998, after taking into account the effect
of any swaps and including $0.5 million and $0.8 million in amortization of
deferred financing costs for 1997 and 1998, respectively.
As of December 31, 1997, and 1998, long-term debt consists of the following (in
thousands):
[Enlarge/Download Table]
December 31,
------------------------
1997 1998
---------- ----------
10% $100,000,000 Senior Notes............................................................ $ - $ 100,000
9 3/8% DM110,000,000 Senior Notes........................................................ - 65,870
Series A Senior Notes.................................................................... 33,000 -
Series B Senior Notes.................................................................... 20,000 -
Series C Senior Notes.................................................................... 3,333 -
Long-term bank loan...................................................................... 9,059 -
---------- ----------
Total long-term debt..................................................................... 65,392 165,870
Less current portion of long-term debt................................................... (14,333) -
---------- ----------
Non-current portion of long-term debt............................................... $ 51,059 $ 165,870
========== ==========
The fair value of the Series A, B and C Senior Notes as of December 31, 1997 was
approximately $56,149,000. Management believes that there was no material
difference between the fair value and book value of the long-term bank loan as
of December 31, 1997, or the 10 percent $100,000,000 and the 9 3/8 percent
DM110,000,000 Senior Notes as of December 31, 1998.
11. Commitments and Contingencies:
Operating Leases
Total rent expense for operating leases, primarily in respect of land and
buildings and automobiles, was $5,153,000, $5,409,000 and $5,768,000 for the
years ended December 31, 1996, 1997, and 1998 respectively, which is included in
selling, general and administrative expenses in the accompanying statements of
income.
The future minimum lease payments for operating leases as of December 31, 1998,
are as follows (in thousands):
[Enlarge/Download Table]
For the years ended December 31,
--------------------------------
1999 ................................................................................................. $ 4,919
2000 ................................................................................................. 3,694
2001 ................................................................................................. 2,283
2002 ................................................................................................. 1,732
2003 ................................................................................................. 1,327
Thereafter............................................................................................ 10,261
----------
Total............................................................................................ $ 24,216
==========
Leases of land and buildings are typically subject to rent reviews at specified
intervals and provide for the lessee to pay all insurance, maintenance and
repair costs. The Company's facilities are subject to the requirements of
environmental regulations in their respective jurisdictions. There can be no
assurance that the Company is at all times in compliance with all such
requirements.
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
F 18
business is highly dependent upon products manufactured by foreign suppliers
located primarily in Taiwan and Japan and the People's Republic of China. A
substantial majority of the Company's multi-speed bicycles contain components
supplied on a purchase order basis by one Japanese manufacturer. The Company's
business is also subject to the risks generally associated with doing business
abroad, such as delays in shipment and foreign governmental regulations which
could have a material adverse effect on the results of operations and financial
condition of the Company. In addition, several of the Company's manufacturing
operations are unionized.
Product Liability
Because of the nature of the Company's business, the Company at any particular
time is a defendant in a number of product liability lawsuits and expects that
this will continue to be the case in the future. These lawsuits generally seek
damages, sometimes in substantial amounts, for personal injuries allegedly
sustained as a result of defects in the Company's products. Although the Company
maintains product liability insurance, due to the uncertainty as to the nature
and extent of manufacturers' and distributors' liability for personal injuries,
there is no assurance that the product liability insurance maintained by the
Company is or will be adequate to cover product liability claims or that the
applicable insurer will be solvent at the time of any covered loss. In addition,
due to deductibles, self-retention levels and aggregate coverage amounts
applicable under the Company's insurance policies, the Company may bear
responsibility for a significant portion of the defense costs (which include
attorneys' fees and expenses 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.
Unconditional Purchase Obligations
The Company had unconditional purchase obligations for raw materials and bicycle
components of $49,188,000 and $54,017,000 as of December 31, 1997, and 1998,
respectively, which are not recorded in the consolidated financial statements.
Common Stock and Preferred Stock
Following the Recapitalization, DC Cycle L.L.C. ("DC Cycle"), a wholly owned
subsidiary of Thayer, owns approximately 27% of the Class A common stock, par
value $.01 per share (the "Class A common stock"), and all of the outstanding
shares of the Series A preferred stock, par value $.01 per share (the "Series A
preferred stock"). Holders of Series A preferred stock are entitled to 1.5 votes
per share, voting together with the Class A common stock. Perseus Cycle, L.L.C.
("Perseus Cycle"), a wholly owned subsidiary of Perseus, owns approximately 22%
of the Class A common stock. DFS owns approximately 47% of the Class A common
stock and all the Series B preferred stock, par value $.01 per share (the
"Series B preferred stock").
Following the issue of 22,750 shares of Class C common stock for the acquisition
of Diamond Back on February 4, 1999, under the terms of the Company's Amended
and Restated Certificate of Incorporation and the Shareholders' Agreement (as
defined), (i) Thayer currently controls approximately 65% of the total voting
power of the Company's capital stock; (ii) DFS controls approximately 20% of the
total voting power of the Company's capital stock; and (iii) Perseus controls
approximately 13% of the total voting power of the Company's capital stock.
In addition, following the Recapitalization, pursuant to a recapitalization of
Raleigh Canada, DICSA received all of the outstanding shares of the Raleigh
Canada Preferred Stock, a new class of nonvoting senior preferred stock of
Raleigh Canada, in exchange for its shares of common stock of Raleigh Canada
pursuant to the Raleigh Canada Exchange Agreement. The shares of Raleigh Canada
Preferred Stock, which have a liquidation value of $23.3 million, are
exchangeable (at the option of DICSA at any time and by the Company at any
time after January 2, 2001) into 8,300 shares of Class A common stock and
15,000 shares of Class B common stock, par value $.01 per share (the "Class B
common stock", and, together with the Class A common stock, the "common stock")
(or the right to receive securities or such other property into which such
classes of stock are converted). The exchange ratio will be adjusted, if
required, as provided in the Articles of Raleigh Canada and the Raleigh Canada
Exchange Agreement. The exchange ratio will be such that the value of the
Raleigh Canada Preferred Stock on the
F 19
date of the consummation of the Recapitalization will equal the value of the
shares of Raleigh Canada common stock that are exchanged for the Raleigh Canada
Preferred Stock. If the value of the Raleigh Canada Preferred Stock is later
determined to be greater than, or less than, the value of the shares of Raleigh
Canada common stock exchanged for the Raleigh Canada Preferred Stock, the
exchange ratio will be adjusted through increasing or decreasing the number of
shares of Class A common stock to be received upon exercise of the exchange
rights. Any adjustment in the exchange ratio will result in an offsetting
adjustment against the number of shares of Class A common stock retained by DFS
in the Recapitalization. DICSA also has the right to redeem its shares of
Raleigh Canada Preferred Stock for a cash payment of $23.3 million, plus all
accrued and unpaid dividends thereon, at any time after April 1, 2001, upon 60
days' prior notice, provided that such redemption does not result in a breach or
default under any financing document of Raleigh Canada or its affiliates,
including, without limitation, the Revolving Credit Agreement and the
Indentures. Upon liquidation of Raleigh Canada, each holder of Raleigh Canada
Preferred Stock will be entitled to receive an amount based upon the value that
such holder would have received if such holder had exchanged the Raleigh Canada
Preferred Stock pursuant to the Raleigh Canada Exchange Agreement.
Holders of shares of Class A and Class C common stock are entitled to one vote
per share, and holders of shares of Series A preferred stock are entitled to 1.5
votes per share. Holders of Class A and Class C common stock and Series A
preferred stock will vote together as a single class on all matters submitted to
the shareholders of the Company for a vote. During the first year following the
consummation of the Recapitalization or upon the occurrence of certain events,
each share of Series A preferred stock will be convertible, at the option of the
holder thereof, into one-half share of Class A common stock, plus a number of
shares of Class A common stock equal to the liquidation value, which will
initially be $1,000 (plus accrued and unpaid dividends thereon, if any), of such
share divided by $1,000. At any time after the tenth anniversary of the
consummation of the Recapitalization or upon the occurrence of certain events,
holders of shares of Series A preferred stock will have the right to require the
Company to repurchase all or any portion of such shares for cash at a price per
share equal to the sum of the liquidation value (plus accrued and unpaid
dividends thereon, if any) of such share and one-half share of Class A common
stock; provided that if (other than in connection with a proposed sale of the
Company that constitutes a Change of Control) the Company is prohibited by law
from repurchasing such shares or if any such repurchase would result in a
default under the Revolving Credit Agreement or the Indentures, the Company may
defer such repurchase until such prohibition no longer exists or such default
would no longer occur. the Company must use commercially reasonable efforts to
obtain any consent necessary to permit such payment.
Holders of shares of Class B common stock and Series B preferred stock are not
entitled to voting rights, except as otherwise required by applicable law. Upon
the occurrence of certain events, each share of Series B preferred stock will be
convertible, at the option of the holder thereof, into the number of shares of
Class A common stock having a fair market value equal to the liquidation value,
which will initially be $1,000 (plus accrued and unpaid dividends thereon, if
any), of such share. At any time after the fourth anniversary of the
consummation of the Recapitalization or upon the occurrence of certain events,
holders of shares of Series B preferred stock will have the right to require the
Company to repurchase all or any portion of such shares for cash at a price per
share equal to the liquidation value (plus accrued and unpaid dividends thereon,
if any) of such share; provided that if (other than in connection with a
proposed sale of the Company that constitutes a Change of Control) the Company
is prohibited by law from repurchasing such shares or if any such repurchase
would result in a default under the Revolving Credit Agreement or the
Indentures, the Company may defer such repurchase until such prohibition no
longer exists or such default would no longer occur. the Company must use
commercially reasonable efforts to obtain any consent necessary to permit such
payment.
Dividends on each share of Class C common stock shall accrue on a daily basis at
the rate of 20% per annum of the sum of the liquidation amount thereof plus all
accumulated and unpaid dividends thereon. Such dividends shall accrue whether
or not they have been declared and whether or not there are profits, surplus or
other funds of the Company legally available for the payment of dividends.
Dividends on each share of Series A preferred stock will accrue on a daily basis
at the rate of 20% per annum on the sum of the liquidation value thereof, which
will initially be $1,000, plus all accumulated and unpaid dividends thereon.
Dividends on each share of Series B preferred stock will accrue on a daily basis
at the rate of 9.75% per annum on the sum of the liquidation amount thereof,
which will initially be $1,000, plus all accumulated and unpaid dividends
thereon. The dividends and capital distributions on
F 20
the Series A preferred stock and Series B preferred stock rank pari passu.
Although a single security, each share of Series A preferred stock consists of
two economic elements: (i) the right to receive a liquidation value of $1,000
plus the 20% per annum return described above, in respect of which Thayer
(through DC Cycle) invested $1,000 per share; and (ii) the economic rights
equivalent to one-half share of Class A common stock, in respect of which Thayer
(through DC Cycle) invested $500 per share (the "Deemed common stock"). After
all such amounts required to be paid to holders of Series A preferred stock and
Series B preferred stock have been paid, any distribution made by the Company
will be paid (i) first, to holders of Class A common stock and Series A
preferred stock until such holders have received $1,000 for each share of Class
A common stock and $500 for each share of Series A preferred stock (in respect
of the Deemed common stock) (subject to adjustment in certain circumstances),
(ii) second, to holders of Class B common stock until such holders have received
$1,000 for each share of Class B common stock (subject to adjustment in certain
circumstances), (iii) third, to holders of Class A common stock and Series A
preferred stock until such holders have received a 25% internal rate of return,
(iv) fourth, to holders of Class B common stock until such holders have received
a 20% internal rate of return and (v) fifth, to holders of Class A common stock
and Series A preferred stock.
At any time, each holder of Class C common stock may convert all or any portion
of the Class C common shares as follows: each Class C common stock shall be
convertible into (i) one share of Class A common stock and (ii) the number of
shares of Class A common stock determined by dividing the accrued but unpaid
dividends on such Class C common stock through the date of conversion by
$1,000. At any time after August 3, 2000, the Company may redeem all or any
portion of the Class C common shares then outstanding. On any such redemption,
the Company shall pay a purchase price per Class C common share equal to the
product of (i) the Class C Common Redemption Premium (as defined) and (ii) the
liquidation amount (plus all accrued and accumulated but unpaid dividends
thereon).
12. Income taxes:
The Company does not have a formal tax sharing agreement with its subsidiaries.
The Company calculates its income taxes on a stand-alone basis, with
subsidiaries filing separate returns in their own jurisdictions. The combined
related amounts are included in income taxes payable and deferred income taxes
payable in the accompanying balance sheets.
Income (loss) before income taxes, minority interest and extraordinary item
consists of the following (in thousands):
[Enlarge/Download Table]
For the years ended December 31,
--------------------------------------
1996 1997 1998
---------- ---------- ----------
United Kingdom............................................................. $ 14,544 $ 19,533 $ 208
Holland.................................................................... 8,136 8,541 5,971
Germany.................................................................... (6,031) (9,753) (5,348)
United States.............................................................. (1,293) (2,807) (5,858)
Canada..................................................................... 1,474 1,591 1,705
South Africa............................................................... 1,109 1,369 683
Others..................................................................... 5,560 4,882 3,543
---------- ---------- ----------
Total income before income taxes, minority interest and
extraordinary item............................................... $ 23,499 $ 23,356 $ 904
========== ========== ==========
F 21
The provision (benefit) for income taxes consists of the following (in
thousands):
[Enlarge/Download Table]
For the years ended December 31,
--------------------------------------
1996 1997 1998
---------- ---------- ----------
Current tax provision (benefit):
United Kingdom........................................................ $ 1,411 $ 3,547 $ (144)
Holland............................................................... 4,185 3,271 3,988
Germany............................................................... 499 (196) 97
United States......................................................... - - 77
Canada................................................................ 400 525 735
South Africa.......................................................... 244 759 302
Others................................................................ 231 344 230
---------- ---------- ----------
Total current provision.......................................... 6,970 8,250 5,285
---------- ---------- ----------
Deferred tax provision (benefit):
United Kingdom........................................................ 2,102 1,844 537
Holland............................................................... (326) 498 410
Germany............................................................... - - -
United States......................................................... - - (92)
Canada................................................................ 129 93 122
South Africa.......................................................... (27) 45 (33)
Others................................................................ 76 (109) 65
---------- ---------- ----------
Total deferred tax provision..................................... 1,954 2,371 1,009
---------- ---------- ----------
Provision for income taxes ................................................ $ 8,924 $ 10,621 $ 6,294
========== ========== ==========
The following table summarizes the significant differences between the United
States statutory tax rate and the Company's effective tax rate for financial
statement purposes:
[Enlarge/Download Table]
For the years ended December 31,
--------------------------------------
1996 1997 1998
---------- ---------- ----------
Statutory tax rate - US Federal............................................ 35% 35% 35%
Effect of foreign tax rates................................................ 3 (2) (89)
Utilization of losses brought forward...................................... - - (37)
Net operating losses for which no benefit is currently available........... 2 14 207
Permanent differences - interest not deductible for tax.................... - - 337
Permanent differences - other.............................................. (2) (2) 16
Recapitalization costs..................................................... - - 227
---------- ---------- ----------
Effective tax rate.................................................... 38% 45% 696%
========== ========== ==========
The permanent differences - other, in 1998, relates to non-deductible items of
only $144,000, but which calculates to 16% of net income.
F 22
Deferred income tax (assets) liabilities consist of the following (in
thousands):
[Enlarge/Download Table]
December 31,
------------------------
1997 1998
---------- ----------
Deferred income tax assets:
Operating losses.................................................................... $ 66,830 $ 38,542
Provisions and accruals............................................................. 427 376
---------- ----------
Total deferred income tax assets............................................... 67,257 38,918
---------- ----------
Valuation allowance................................................................. (63,523) (35,281)
---------- ----------
Net deferred income tax assets................................................. 3,734 3,637
Deferred income tax liabilities:
Pension ............................................................................ (15,543) (18,086)
Depreciation........................................................................ (5,272) (4,504)
Other............................................................................... (370) 57
---------- ----------
Total deferred income tax liabilities.......................................... (21,185) (22,533)
---------- ----------
Net deferred income tax liabilities....................................... $ (17,451) $ (18,896)
========== ==========
The operating losses, which arise in Germany and the United States, begin to
expire in 1999. The ability of the Company to utilize these losses may be
limited by a change in ownership of the Company.
13. Acquisitions:
In January 1997, the Company completed the acquisition of the assets and
operations of a bicycle and bicycle component business in Germany which
distributes bicycles under the names Winora and Staiger for consideration of
$2,650,000, net of assumed debt equivalent to $9,059,000 as of December 31, 1997
(see Note 10). The results of this business are included in the consolidated
financial statements from February 1, 1997.
In August 1997, the Company acquired a controlling interest in the MS Sport
Group for consideration of $4,000,000. MS Sport Group is the main distributor of
Univega brand cycles in Europe. The results of MS Sport are included in the
consolidated financial statements from September 1, 1997.
These acquisitions were accounted for under the purchase method with the
purchase price allocated as follows (in thousands):
[Enlarge/Download Table]
Accounts receivable.................................................................................... $ 2,351
Inventories............................................................................................ 5,742
Property, plant, and equipment......................................................................... 6,025
Goodwill............................................................................................... 3,386
Liabilities assumed and direct acquisitions............................................................ (10,854)
----------
Purchase Price.................................................................................... $ 6,650
==========
Pro forma net revenues and net income reflecting the acquisitions as if they had
occurred on January 1, 1996, and January 1, 1997, respectively, have been
omitted because the differences between those amounts and the historical results
are not material.
In March 1997, the Company acquired the Univega brand name, trademarks and
related intellectual property for consideration of $2,550,000 (see Note 6).
Univega is a range of all-terrain and mountain
F 23
bikes. In addition, further licenses were acquired during 1997 for $115,000.
In May 1998, the Company purchased the minority interest in its operations in
South Africa for $1,933,000, including $1,139,000 for goodwill that is being
written off over 40 years. The acquisition of the minority interest was
accounted for under the purchase method.
14. Pension Plans:
The Company operates defined benefit pension plans in its subsidiaries in
Canada, Netherlands, Ireland and the United Kingdom, which are funded in
accordance with local actuarial advice and cover all eligible current and
retired employees. In the United States, the Company operates a 401(k) pension
contribution plan for certain of its employees, for which the Company paid
$120,000, $127,000 and $180,000 in the years ended December 31, 1996, 1997 and
1998 respectively. The plans are operated under trusts and their assets are
invested independently of the Company. The largest plans are in the United
Kingdom and Netherlands, where valuations are carried out by qualified actuaries
every three years and every year respectively.
The Company adopted SFAS No. 87 "Employers' Accounting for Pensions" on January
1, 1993. The impact of adopting SFAS No. 87 was a transition asset of
$37,795,000. The transition asset is being amortized into income over 15 years.
A cumulative change in accounting principle was recorded as of January 1, 1993,
which represented the amortization of the transition asset between January 1,
1989, the effective date of SFAS No. 87, and January 1, 1993, the Company's
adoption of SFAS No. 87.
The Company's defined benefit plan assets of $217,501,000 (1997 $180,664,000)
are approximately invested in UK quoted equities 36%, other equities 24%,
treasury instruments 25% and 15% invested in cash and other.
The Company adopted SFAS 132 during 1998 and the following disclosures are made
in accordance with the new standard (in thousands):
[Enlarge/Download Table]
1996 1997 1998
--------- ---------- ----------
Total Pension Schemes
Change in Benefit Obligation
Projected benefit obligation at January 1, ........................... $ 99,042 $ 113,338 $ 130,143
Employer service cost................................................. 2,098 2,792 4,338
Interest cost......................................................... 7,599 8,386 8,821
Actual employee contributions......................................... 1,067 1,074 1,072
Actuarial Gain........................................................ 4,358 16,783 13,886
Actual distributions.................................................. (5,407) (5,588) (5,564)
Exchange adjustment................................................... 4,581 (6,642) 2,854
--------- ---------- ----------
Projected benefit obligation at December 31...................... $ 113,338 $ 130,143 $ 155,550
========= ========== ==========
Change in Plan Assets
Plan assets at January 1............................................, $ 52,293 $ 172,830 $ 180,664
Actual return on assets during........................................ 16,243 21,059 34,497
Actual employer contributions......................................... 2,154 2,335 1,577
Actual employee contributions......................................... 1,067 1,074 1,072
Actual distributions.................................................. (5,407) (5,588) (5,564)
Exchange adjustment................................................... 6,480 (11,046) 5,255
--------- ---------- ----------
Plan assets at December 31....................................... $ 172,830 $ 180,664 $ 217,501
========= ========== ==========
F 24
[Enlarge/Download Table]
1996 1997 1998
--------- ---------- ----------
Net Amount Recognized
Funded status......................................................... $ 59,492 $ 49,834 $ 61,951
Unrecognized transition asset......................................... (19,048) (14,981) (12,472)
Unrecognized loss..................................................... 121 9,660 3,710
Unrecognized prior service cost....................................... 1,846 3,264 2,883
--------- ---------- ----------
Net amount recognized as prepaid expense......................... $ 42,411 $ 47,777 $ 56,072
========= ========== ==========
Weighted average Assumptions as of December 31
Discount rate......................................................... 8.00% 6.90% 5.42%
Expected return on assets............................................. 9.25% 9.35% 8.57%
Rate of compensation increase......................................... 5.62% 5.68% 3.92%
Components of Net Periodic Pension Cost for the years ended December 31
Service cost.......................................................... $ 2,098 $ 2,792 $ 4,338
Interest cost......................................................... 7,599 8,386 8,821
Expected return on plan assets........................................ (13,530) (14,852) (16,430)
Amortization of transition asset...................................... (2,652) (2,536) (2,514)
Amortization of prior service cost.................................... 224 382 382
--------- ---------- ----------
Net periodic pension income as total pension income.............. $ (6,261) $ (5,828) $ (5,403)
========= ========== ==========
15. Segmental Information:
Reportable business segments
The Company manages its business in seven reportable segments as shown in the
following tables. Consolidation adjustments and certain small operating
companies and non operating companies are included in "other companies" The
reportable segments are managed separately because each business has differing
customer requirements, either as a result of the regional environment of the
country or differences in products and services offered. The accounting policies
of the business segments are the same as those described in the summary of
significant accounting policies (Note 2).
A summary of revenues, operating income, depreciation, identifiable assets and
capital additions categorized by the business segment is as follows (in
thousands):
[Enlarge/Download Table]
For the years ended December 31,
--------------------------------------
1996 1997 1998
---------- ---------- ----------
Net revenues:
Raleigh UK............................................................ $ 107,374 $ 107,254 $ 82,116
Gazelle, Holland...................................................... 120,788 107,793 111,512
Derby Germany......................................................... 82,390 103,813 125,089
Raleigh USA........................................................... 53,516 57,917 69,083
Raleigh Canada........................................................ 29,459 29,468 28,750
Sturmey - Archer, UK and Holland...................................... 30,130 29,588 23,834
Probike, South Africa................................................. 20,477 20,626 17,047
Other companies....................................................... 8,450 9,228 7,874
---------- ---------- ----------
Total net revenues............................................... $ 452,584 $ 465,687 $ 465,305
========== ========== ==========
F 25
[Enlarge/Download Table]
For the years ended December 31,
--------------------------------------
1996 1997 1998
---------- ---------- ----------
Operating income:
Raleigh UK............................................................ $ 7,532 $ 13,086 $ 3,195
Gazelle, Holland...................................................... 16,217 13,367 14,776
Derby Germany......................................................... 1,050 (2,202) (517)
Raleigh USA........................................................... (718) (1,980) 2,686
Raleigh Canada........................................................ 2,784 2,752 2,563
Sturmey - Archer, UK and Holland...................................... 5,544 3,385 613
Probike, South Africa................................................. 2,032 2,133 1,224
Other companies....................................................... (1,059) (840) (6,402)
---------- ---------- ----------
Total operating income........................................... $ 33,382 $ 29,701 $ 18,138
========== ========== ==========
Depreciation:
Raleigh UK............................................................ $ 1,990 $ 2,578 $ 2,758
Gazelle, Holland...................................................... 1,938 1,681 1,677
Derby Germany......................................................... 3,721 3,375 3,431
Raleigh USA........................................................... 598 612 476
Raleigh Canada........................................................ 366 327 307
Sturmey - Archer, UK and Holland...................................... 483 439 529
Probike, South Africa................................................. 203 164 123
Other companies....................................................... 101 186 106
---------- ---------- ----------
Total depreciation............................................... $ 9,400 $ 9,362 $ 9,407
========== ========== ==========
Capital additions:
Raleigh UK............................................................ $ 3,288 $ 1,434 $ 2,296
Gazelle, Holland...................................................... 1,836 1,658 1,852
Derby Germany......................................................... 2,149 2,430 2,003
Raleigh USA........................................................... 479 472 1,132
Raleigh Canada........................................................ 147 153 526
Sturmey - Archer, UK and Holland...................................... 643 991 332
Probike, South Africa................................................. 200 38 85
Other companies....................................................... 354 237 96
---------- ---------- ----------
Total capital additions.......................................... $ 9,096 $ 7,413 $ 8,322
========== ========== ==========
Identifiable assets:
Raleigh UK............................................................ $ 60,200 $ 63,605 $ 67,719
Gazelle, Holland...................................................... 48,719 44,448 55,784
Derby Germany......................................................... 56,089 79,604 91,789
Raleigh USA........................................................... 33,901 35,905 36,356
Raleigh Canada........................................................ 14,766 13,031 13,997
Sturmey - Archer, UK and Holland...................................... 19,376 23,327 25,060
Probike, South Africa................................................. 11,612 9,864 11,993
Other companies....................................................... 15,898 18,714 22,592
---------- ---------- ----------
Total identifiable assets........................................ $ 260,561 $ 288,498 $ 325,290
========== ========== ==========
F 26
Net Revenues by Geographic Region
The Company sells its products in several geographic regions. Net revenues
relating to each region (categorized by the customer's geographic location) are
as follows (in thousands):
[Enlarge/Download Table]
For the years ended December 31,
--------------------------------------
1996 1997 1998
---------- ---------- ----------
Net revenues:
United Kingdom........................................................ $ 101,260 $ 100,892 $ 78,559
Netherlands........................................................... 113,508 101,216 104,772
Germany............................................................... 97,347 117,990 130,747
United States......................................................... 52,903 58,316 67,859
Canada................................................................ 29,477 29,528 28,864
South Africa.......................................................... 20,010 20,631 17,047
Rest of the World..................................................... 38,079 37,114 37,457
---------- ---------- ----------
Total net revenues............................................... $ 452,584 $ 465,687 $ 465,305
========== ========== ==========
16. Related-Party Transactions:
The Company rents land and buildings under operating leases from management in
Germany and South Africa. Rents charged under such leases were $326,000,
$495,000 and $447,000 for the years ended December 31, 1996, 1997, and 1998
respectively. Management consider these rents to be at fair value.
17. Chief Executive Officer's stock options and service contract:
On October 20, 1998, the Company entered into an employment contract with Gary
Matthews as Chief Executive Officer with effect from mid January 1999. The
contract is for a four year term with a three year extension. The Company issued
the stock options to purchase 1,625 shares of the Company's Class A common stock
for $1,000 per share which vest over three years, and performance-based stock
options to purchase 3,250 shares of Class A common stock for $1,000 per share to
Gary Matthews. Pursuant to a Management Stock Purchase Agreement dated October
20, 1998, Gary Matthews purchased 1,500 shares of the Company's Class A common
stock for $1,000 per share. Gary Matthews paid for such shares with a secured
promissory note that is non-recourse except for 20 percent of the principal
amount and all of the accrued interest. Upon the termination of Gary Matthews'
employment with the Company, the Company has the right or is required to
repurchase, depending on the reason for such termination, such Class A common
stock.
18. Recapitalization Agreement and Subsequent Events:
On May 14, 1998, Derby International Corporation SA ("DICSA") and two investment
groups, Thayer Equity Investors III L.P. and Perseus Capital L.L.C., completed
the Recapitalization of the Company, pursuant to a Recapitalization Agreement
signed on March 11, 1998. As part of the Recapitalization, DICSA transferred the
shares of all of its bicycle and bicycle component manufacturing and sales
subsidiaries, other than Raleigh Industries of Canada Limited ("RIC"), to a
wholly-owned company incorporated in Luxembourg, Derby Finance Sarl ("DFS"). The
Company issued new equity to the two investment groups, which diluted the
interest of DFS and DICSA in the Company to approximately 33 percent of the
voting rights. The Recapitalization Agreement also provided for the purchase by
the Company of the minority interests in the South African subsidiaries of the
Company.
As a result of the Recapitalization of the bicycle business, the Company and its
subsidiaries paid $146.2 million to DICSA and DFS to redeem certain equity
rights in the Company and its affiliates. In addition, existing long term debt
of $62.4 million net of $3.0 million of cash received on related swaps was
retired for which the Company recorded an extraordinary charge of $0.4 million
net of taxes upon this early extinguishment of debt. The Company financed this
from the issue of new stock, as detailed below, and $163.9 million in Senior
Notes (see Note 10). The existing $98.4 million ((pound)60 million) of revolving
bank facilities, together with local banking facilities except for those in
South Africa,
F 27
were replaced with a seven-year secured syndicated bank facility of $127.9
million (DM214 million). In connection with the retirement of debt, the Company
terminated certain interest rate swaps related to the debt and recorded a loss
of $1.1 million in other income (expense) in the accompanying statements of
income for the year ended December 31, 1998.
Following the Recapitalization, DFS retained voting Class A common stock in the
Company with a value of $21.7 million. DFS's parent, DICSA, retained preferred
shares in its former subsidiary, RIC, which are exchangeable for an additional
$8.3 million of voting common stock and $15.0 million of non-voting Class B
common stock in the Company. In addition, DFS purchased 3,000 shares of
non-voting Series B preferred stock for the Company for $3.0 million. DC Cycle
L.L.C. (a subsidiary of Thayer Equity Investors III L.P.) and Perseus Cycle
L.L.C. (a subsidiary of Perseus Capital L.L.C.) purchased 22,500 shares of
voting Class A common stock of the Company for $22.5 million. The Company also
issued 25,000 shares of voting Series A preferred stock to DC Cycle L.L.C for
$37.5 million.
The Company incurred estimated fees and professional expenses of $5.9 million
related to the recapitalization. Fees and professional expenses paid to finance
the Recapitalization of $13.9 million have been deferred and will be amortized
over the term of the Senior Notes and the bank facility. These include
investment banking fees of $1.0 million payable to the management company of one
of the investment groups, $1.2 million to a company which is wholly owned by the
chairman and president of the other investment group, and $0.7 million to
Centenary Corporation, a company in which a director of the Company is a
shareholder.
On February 4, 1999, the Company acquired the assets (and assumed certain
liabilities) of the Diamond Back Group for approximately $42.75 million in cash.
The Diamond Back Group consists of Diamond Back International Company Limited, a
private British Virgin Islands company ("Diamond Back"), Western States Import
Company Inc., a Delaware corporation ("Western States") and Bejka Trading A.B.,
a private Swedish company ("Bejka"), each of which is engaged in the bicycle,
bicycle parts and accessories and fitness equipment distribution business.
Western States and Bejka had worldwide revenues of approximately $69.9 million
and $4.1 million, respectively, for their 1997 fiscal years. Diamond Back was
essentially a holding company for the Company's intellectual property and did
not generate material revenues. The Company financed the acquisition of the
Diamond Back Group by issuing $20 million principal amount in subordinated notes
(the "Subordinated Notes") to an affiliate of the Government of Singapore and
$22.75 million in newly issued Class C common stock to DC Cycle, L.L.C. and
Perseus Cycle L.L.C. The Subordinated Notes mature in 2010 and bear interest at
an annual rate of 19% compounded daily.
F 28
18. Lyon Investments B.V. Summarized Financial Information:
Lyon Investments B.V. ("Lyon"), a Dutch Company, is a wholly owned subsidiary of
the Company. Prior to the Recapitalization, Lyon was a dormant subsidiary. As a
result of the Recapitalization, Lyon became a holding company and is a co-issuer
of $20,250,000 of the $100,000,000 of 10 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. The following summarized financial information sets forth
the combined financial position and results of operations of Lyon, together with
its subsidiaries, Derby Nederland and E. Wiener Bike Parts GmbH. Derby Nederland
is a holding company owning 100 percent of Gazelle, Sturmey-Archer B.V., and
Raleigh B.V.
Lyon Investments B.V.
Summarized Consolidated Balance Sheets
[Enlarge/Download Table]
Assets
December 31,
-------------------------
1997 1998
----------- -----------
Cash and cash equivalents................................................................ $ 6,285 $ 8,470
Accounts receivable, net................................................................. 16,411 15,875
Inventories.............................................................................. 20,477 26,433
Loans to internal group companies........................................................ - 137,768
Other current assets..................................................................... 2,820 3,002
----------- -----------
Total current assets................................................................ 45,993 191,548
----------- -----------
Property, plant, and equipment, net...................................................... 11,118 11,552
Intangibles.............................................................................. - 2,715
Prepaid pension asset.................................................................... 13,492 16,920
----------- -----------
Total assets........................................................................ $ 70,603 $ 222,735
=========== ===========
Liabilities and Shareholders' Deficit
December 31,
-------------------------
1997 1998
----------- -----------
Short-term borrowings - internal and current portion of long-term borrowings $ 28,343 $ 149,252
Bank overdraft........................................................................... 200 -
Other current liabilities................................................................ 17,794 24,015
----------- -----------
Total current liabilities........................................................... 46,337 173,267
Long-term borrowings - internal.......................................................... 44,188 -
10% $100,000,000 Senior Notes............................................................ - 20,250
9 3/8% DM110,000,000 Senior Notes........................................................ - 65,870
Other liabilities........................................................................ 5,671 5,971
----------- -----------
Total liabilities................................................................... 96,196 265,358
Shareholders' deficit.................................................................... (25,593) (42,623)
----------- -----------
Total liabilities and shareholders' deficit......................................... $ 70,603 $ 222,735
=========== ===========
F 29
Lyon Investments B.V.
Reconciliation of Shareholders' Deficit
[Enlarge/Download Table]
December 31,
-------------------------
1997 1998
----------- -----------
Shareholders' deficit, beginning balance................................................. $ (31,091) $ (25,593)
Capital contributions............................................................... 549 5,800
Net income.......................................................................... 598 4,843
Translation adjustments............................................................. 4,351 (2,043)
Distribution to shareholders in connection with the Recapitalization................ - (25,630)
----------- -----------
Shareholders' deficit, ending balance.................................................... $ (25,593) $ (42,623)
=========== ===========
Lyon Investments B.V.
Summarized Combined Statements of Operations
[Enlarge/Download Table]
December 31,
---------------------------------------
1996 1997 1998
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Net revenues............................................................... $ 137,370 $ 137,025 $ 138,297
Cost of sales.............................................................. (103,362) (103,721) (104,760)
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Gross profit.......................................................... 34,008 33,304 33,537
Selling, general, and administrative expenses(1)........................... (20,898) (25,481) (18,579)
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Operating income...................................................... 13,110 7,823 14,958
Interest expense........................................................... (4,358) (4,395) (9,812)
Interest income............................................................ 181 197 3,158
Other income (expense), net(2)............................................. - - 900
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Income before income taxes............................................ 8,933 3,625 9,204
Provision for income taxes................................................. (4,309) (3,027) (4,361)
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Net income............................................................ $ 4,624 $ 598 $ 4,843
=========== =========== ===========
(1) Selling, general, and administrative expenses include a foreign exchange
loss on a loan from the Company to Derby Nederland BV of $(3,489,000) and
$(5,697,000), for the years ended December 31, 1996, and 1997. The impact
of the foreign exchange loss on this loan eliminates in the consolidation
of the Company's financial statements. In addition, there was also a
foreign exchange gain on inter-company loans of $872,000 for the year
ended December 31, 1998.
(2) Other income (expense), net is comprised of the profit on the sale of
Curragh Finance Company to Derby Holding B.V. for the year ended December
31, 1998. The impact of the sale eliminates in the consolidation of the
Company's financial statements.
F 30
Dates Referenced Herein and Documents Incorporated by Reference
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