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Derby Cycle Corp – ‘10-Q’ for 6/27/99

On: Wednesday, 8/11/99 · For: 6/27/99 · Accession #: 928385-99-2528 · File #: 333-61191

  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 8/11/99  Derby Cycle Corp                  10-Q        6/27/99    5:230K                                   Donnelley R R & S… 09/FA

Quarterly Report — Form 10-Q
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Derby Cycle Corporation 10-Q                          35    192K 
 2: EX-1        Amended and Restated Cert. of Incorp.                 25    101K 
 3: EX-2        Employment Agreement                                   6     26K 
 4: EX-3        Management Stock Purchase Agreement                   11     44K 
 5: EX-27       Financial Data Schedule                                2      6K

10-Q — Derby Cycle Corporation 10-Q
Document Table of Contents

Page	(sequential)	\|	(alphabetic)	Top
			Alternative Formats (Word, et al.) Changes in Securities Exhibits and Reports on Form 8-K Financial Statements Gross profit Interest expense Legal Proceedings Management's Discussion and Analysis of Financial Condition and Results of Operations Net income Net revenues Operating income Restructuring charge Stock rights
1	1st Page - Filing Submission
3	Item 1. Financial Statements
13	Stock rights
16	Operating income
20	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
21	Net revenues
22	Gross profit
"	Restructuring charge
23	Interest expense
24	Net income
32	Item 1. Legal Proceedings
33	Item 2. Changes in Securities
34	Item 3. Exhibits and Reports on Form 8-K

10-Q 1st Page of 35 TOC ↑Top Previous Next ↓Bottom Just 1st
 
SECURITIES AND EXCHANGE COMMISSION  
Washington, D.C. 20549  
FORM 10-Q 
(X)  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE                   
SECURITIES EXCHANGE ACT OF 1934 
For the quarterly period ended June 27, 1999  
OR  
( )  TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE                   
SECURITIES ACT OF 1934  
For Transition Period from  __________ to __________  
Commission File Number 0001067447   
THE DERBY CYCLE CORPORATION 
(Exact name of registrant as specified in its charter)  

DELAWARE                                      31-1038896
(State or other jurisdiction of                        (I.R.S. Employer         
incorporation or organization)                       Identification No.)        
Daniel S. Lynch 
The Derby Cycle Corporation 
300 First Stamford Place (5th Floor)  
Stamford, Connecticut 06902-6765  
(Address of principal executive offices, including zip code)  
Telephone:(203) 961 1666  
(Registrant's telephone number, including area code)  

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was     
required to file such reports), and (2) has been subject to such filing         
requirements for the past 90 days, Yes (X)No .                                  

The number of shares outstanding of each class of common stock, as of June 27,  
1999 were:                                                                      

       Class A             $0.01 par value                      46,920

       Class C             $0.01 par value                      23,430

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THE DERBY CYCLE CORPORATION 

JUNE 1999 FORM 10-Q QUARTERLY REPORT  

TABLE OF CONTENTS 

                                                        [Enlarge/Download Table]

                                                                                    PAGE

                                   PART I                                               
                                   ------                                               
                                                                                        
ITEM 1. FINANCIAL STATEMENTS.......................................................   1 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION                     
        AND RESULTS OF OPERATIONS..................................................  18 

                                   PART II                                              
                                   -------                                              
ITEM 1. LEGAL PROCEEDINGS..........................................................  30 

ITEM 2. CHANGES IN SECURITIES......................................................  31 

ITEM 3. EXHIBITS AND REPORTS ON FORM 8-K...........................................  32 

10-Q 3rd Page of 35 TOC 1st Previous Next ↓Bottom Just 3rd
PART I  
------  

ITEM 1. FINANCIAL STATEMENTS                                                    

                                                        [Enlarge/Download Table]

                                                                                               Page
                                                                                               ----

                                                                                                   
Consolidated Balance Sheets as of December 31, 1998 and June 27, 1999 (unaudited).............   2 

Unaudited Consolidated Statements of Income for the quarter and six months ended June 28,          
1998 and June 27, 1999........................................................................   3 

Unaudited Consolidated Statement of Shareholders' (Deficit) for the six months ended June          
27, 1999......................................................................................   4 

Unaudited Consolidated Statements of Cash Flows for the six months ended June 28, 1998             
and June 27, 1999.............................................................................   5 

Notes to the Consolidated Financial Statements................................................   7 

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The Derby Cycle Corporation 
Consolidated Balance Sheets 
(Dollars in thousands)  

                                                        [Enlarge/Download Table]

                                          Assets                                          Dec 31,       Jun 27, 
                                                                                             1998         1999  
                                                                                                     unaudited  
                                                                                       ----------   ----------- 
                                                                                                                
Current assets:                                                                                                 
  Cash and cash equivalents........................................................... $   17,453   $     9,452 
  Receivables, net....................................................................     66,801       102,813 
  Inventories.........................................................................    105,264        94,053 
  Other current assets................................................................      9,586         9,152 
                                                                                       ----------   ----------- 
     Total current assets.............................................................    199,104       215,470 
                                                                                       ----------   ----------- 
Property, plant, and equipment, net...................................................     49,514        43,621 
Intangibles, net......................................................................     20,600        38,103 
Other assets..........................................................................          -         3,013 
Prepaid pension assets................................................................     56,072        54,483 
                                                                                       ----------   ----------- 
     Total assets..................................................................... $  325,290   $   354,690 
                                                                                       ----------   ----------- 

                        Liabilities and Shareholders' (Deficit)                                                 

Current liabilities:                                                                                            
  Accounts payable.................................................................... $   34,394   $    39,854 
  Accrued liabilities.................................................................     20,161        29,640 
  Income taxes payable................................................................      8,452         4,584 
  Short-term borrowings...............................................................     60,831        42,988 
  Other current liabilities...........................................................      2,103         3,590 
                                                                                       ----------   ----------- 
     Total current liabilities........................................................    125,941       120,656 
                                                                                       ----------   ----------- 
Other liabilities:                                                                                              
  Long-term debt......................................................................    165,870       178,512 
  Excess of assets acquired over cost of acquisitions.................................     11,120        10,536 
  Deferred income taxes...............................................................     18,896        14,912 
  Other liabilities...................................................................      4,224         8,993 
                                                                                       ----------   ----------- 
     Total liabilities................................................................    326,051       333,609 
                                                                                       ----------   ----------- 
Minority interest.....................................................................        627           644 
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        46,496 
Stock rights..........................................................................     23,300        23,300 
Shareholders' equity(deficit):                                                                                  
  Class A common stock, $0.01 par value, 200,000 shares authorized, 44,200 and 46,920                           
   shares issued and outstanding as of December 31, 1998 and June 27, 1999                                      
   respectively.......................................................................          1             1 
  Class B common stock, $0.01 par value, 15,000 shares authorized, no shares issued                             
   and outstanding as of December 31, 1998 and June 27, 1999..........................          -             - 
  Class C common stock, $0.01 par value, 30,000 shares authorized, 23,430 issued and                            
   outstanding as of June 27, 1999....................................................          -             - 
  Additional paid-in capital..........................................................     22,499        48,649 
  Accumulated deficit.................................................................    (87,346)      (90,990)
  Accumulated other comprehensive income..............................................     (5,274)       (7,019)
                                                                                       ----------   ----------- 
     Total shareholders' (deficit)....................................................    (70,120)      (49,359)
                                                                                       ----------   ----------- 
     Total liabilities and shareholders' (deficit).................................... $  325,290   $   354,690 
                                                                                       ==========   =========== 

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The Derby Cycle Corporation 
Unaudited Consolidated Statements of Income 
(Dollars in thousands, except per unit and unit data) 

                                                        [Enlarge/Download Table]

                                                                   Quarter ended            Six months ended     
                                                             ------------------------   ------------------------ 
                                                               Jun 28,        Jun 27,     Jun 28,        Jun 27, 
                                                                  1998           1999        1998           1999 
                                                             ---------      ---------   ---------      --------- 
                                                                                                                 
Net revenues................................................ $ 150,846      $ 165,131   $ 272,284      $ 303,518 
Cost of sales...............................................  (111,977)      (123,966)   (202,289)      (229,386)
                                                             ---------      ---------   ---------      --------- 
     Gross profit...........................................    38,869         41,165      69,995         74,132 
Selling, general, and administrative expenses...............   (25,175)       (29,042)    (47,959)       (55,363)
  Recapitalization costs....................................    (5,671)             -      (5,671)             - 
  Restructuring charge......................................         -         (7,468)          -         (8,461)
                                                             ---------      ---------   ---------      --------- 
     Operating income.......................................     8,023          4,655      16,365         10,308 
Other income (expense):                                                                                          
  Interest expense..........................................    (4,088)        (6,721)     (5,906)       (13,238)
  Interest income...........................................       498            158         582            244 
  Other expense, net........................................      (913)             -      (1,051)             - 
                                                             ---------      ---------   ---------      --------- 
     Income before income taxes, minority interest and                                                           
      extraordinary item....................................     3,520         (1,908)      9,990         (2,686)
Provision for income taxes..................................    (2,293)           564      (4,172)           130 
Minority interest...........................................       (16)           (15)        (16)           (24)
                                                             ---------      ---------   ---------      --------- 
     Income (loss) before extraordinary item................     1,211         (1,359)      5,802         (2,580)
Extraordinary item - loss on early extinguishment of debt                                                        
  (net of tax)..............................................      (348)             -        (348)             - 
                                                             ---------      ---------   ---------      --------- 
     Net income (loss)......................................       863         (1,359)      5,454         (2,580)
Dividends on preferred stock................................      (961)        (1,064)       (961)        (1,064)
                                                             ---------      ---------   ---------      --------- 
     Net income (loss) applicable to common stockholders.... $     (98)     $  (2,423)  $   4,493      $  (3,644)
                                                             =========      =========   =========      ========= 
Net income (loss) applicable to common stockholders                                                              
  per share................................................. $   (2.99)     $  (34.65)  $  164.24      $  (56.37)
                                                             =========      =========   =========      ========= 
Extraordinary item applicable to common stockholders                                                             
  per share................................................. $  (10.60)     $       -   $  (12.72)     $       - 
                                                             =========      =========   =========      ========= 
Weighted average number of shares of common stock                                                                
  outstanding...............................................    32,826         69,931      27,356         64,641 
                                                             =========      =========   =========      ========= 

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The Derby Cycle Corporation 
Unaudited Consolidated Statement of Shareholders' (Deficit) 
(Dollars in thousands)  

                                                        [Enlarge/Download Table]

                                                                                  Accumulated           
                                                      Additional                        Other           
                                  Common    Capital      Paid-In  Accumulated   Comprehensive           
                                   Stock  Investment     Capital      Deficit          Income     Total 
                                  ------  ----------  ----------  -----------   -------------  -------- 
                                                                                                        
January 1, 1999.................. $    1  $        -  $   22,499  $   (87,346)  $     (5,274)  $(70,120)
Comprehensive income-                                                                                   
  Net income.....................      -           -           -       (3,644)             -     (3,644)
  Net gain on derivative                                                                                
   instruments...................      -           -           -            -            307        307 
  Translation adjustments........      -           -           -            -         (2,052)    (2,052)
                                  ------  ----------  ----------  -----------   ------------   -------- 
Total comprehensive income.......      -           -           -       (3,644)        (1,745)    (5,389)
  Issue of common stock..........      -           -      26,150            -              -     26,150 
                                  ------  ----------  ----------  -----------   ------------   -------- 
June 27, 1999.................... $    1  $        -  $   48,649  $   (90,990)  $     (7,019)  $(49,359)
                                  ======  ==========  ==========  ===========   ============   ======== 

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The Derby Cycle Corporation 
Unaudited Consolidated Statements of Cash Flows 
(Dollars in thousands)

                                                        [Enlarge/Download Table]

                                                                                         Six months ended     
                                                                                       --------------------   
                                                                                        Jun 28,     Jun 27,   
                                                                                           1998        1999   
                                                                                       --------    --------   
                                                                                                              
Cash flows from operating activities:                                                                         
  Net income (loss)...................................................................  $  5,454     $ (2,580)
  Adjustments to reconcile net income to net cash provided by operating activities-                           
     Depreciation.....................................................................     4,992        4,921 
     Amortization.....................................................................      (247)         955 
     Extraordinary loss on early extinguishment of debt...............................       348            - 
     Minority interest................................................................        16           24 
     Loss on swaps....................................................................     1,051            - 
     Net periodic pension income......................................................    (2,467)      (2,616)
     Recapitalization costs...........................................................     5,671            - 
  Net changes in operating assets and liabilities, net of acquisitions-                                       
     (Increase) decrease in receivables...............................................   (29,301)     (28,087)
     (Increase) decrease in inventories...............................................      (298)      22,775 
     (Increase) decrease in other current assets......................................       762        1,176 
     Increase (decrease) in accounts payable..........................................    (8,471)       1,037 
     Increase (decrease) in accrued liabilities.......................................     5,617        9,816 
     Increase (decrease) in income taxes payable......................................     2,586       (3,513)
     Increase (decrease) in other current liabilities.................................       991        1,549 
     Increase  (decrease) in deferred income taxes....................................       681       (2,882)
     Increase (decrease) in other liabilities.........................................      (300)       6,170 
                                                                                         -------     -------- 
        Net cash (used in) provided by operating activities...........................   (12,915)       8,745 
                                                                                         -------     -------- 
Cash flows from investing activities:                                                                         
  Purchases of property, plant, and equipment.........................................    (3,514)      (2,297)
  Proceeds of property, plant, & equipment dispositions...............................       448           89 
  Cash paid for acquisitions, net of cash acquired....................................         -      (43,445)
  Purchase of minority interest.......................................................    (1,933)        (246)
                                                                                         -------     -------- 
        Net cash used in investing activities.........................................  $ (4,999)    $(45,899)
                                                                                         -------     -------- 

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The Derby Cycle Corporation 
Unaudited Consolidated Statements of Cash Flows 
(Dollars in thousands)

                                                        [Enlarge/Download Table]

                                                                                            Six months ended      
                                                                                       -------------------------- 
                                                                                       Jun 28,            Jun 27, 
                                                                                          1998               1999 
                                                                                       -------           -------- 
                                                                                                                  
Cash flows from financing activities:                                                                             
  Proceeds from stock issue...........................................................  $  63,000        $ 26,150 
  Redemption of shares in subsidiaries................................................   (146,159)              - 
  Repayment of Series A, B and C Senior Notes, net....................................    (53,334)              - 
  Proceeds from Senior Note issue.....................................................    161,867               - 
  Proceeds from Subordinated Note issue...............................................          -          20,000 
  Short term borrowings, net, prior to Recapitalization...............................     45,894               - 
  Repayment of short term borrowings at Recapitalization..............................    (82,721)              - 
  Proceeds from short term borrowings at Recapitalization.............................     84,914               - 
  Short term borrowings, net, post Recapitalization...................................    (17,759)        (17,840)
  Repayment of term loan..............................................................     (9,057)              - 
  Deferred financing costs............................................................    (11,359)           (273)
  Recapitalization costs..............................................................     (5,671)              - 
  Contributions made to pension plans.................................................     (1,238)            (41)
  Net contribution by DICSA...........................................................      1,600               - 
   Secured promissory note issue and amount due on issue of common stock..............          -          (3,013)
                                                                                        ---------        -------- 
         Net cash provided by financing activities....................................     29,977          24,983 
                                                                                        ---------        -------- 
Effect of exchange rate changes.......................................................       (964)          4,170 
                                                                                        ---------        -------- 
Net increase (decrease) in cash and cash equivalents..................................     11,099          (8,001)
Cash and cash equivalents, beginning of period........................................     15,426          17,453 
                                                                                        ---------        -------- 
Cash and cash equivalents, end of period..............................................  $  26,525        $  9,452 
                                                                                        =========        ======== 
Supplemental cash flow information:                                                                               
  Interest paid.......................................................................  $   3,876        $ 10,496 
  Income taxes paid...................................................................  $     905        $  6,265 
                                                                                        =========        ======== 

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The Derby Cycle Corporation 

Notes to Consolidated Financial Statements  

1.   Nature of the Business and Basis of Presentations                          

The consolidated financial statements for the quarter and six months ended June 
28, 1998 and June 27, 1999 together with the balance sheet as of June 27, 1999  
included herein have not been audited by independent public accountants, but in 
the opinion of The Derby Cycle Corporation (the "Company"), all adjustments     
(which include only normal recurring adjustments) necessary to present fairly   
the financial position at June 27, 1999 and the results of operations and the   
cash flows for the periods presented herein have been made. The results of      
operations for the quarter and six months ended June 27, 1999 are not           
necessarily indicative of the operating results for the full fiscal year.       

The consolidated financial statements included herein have been prepared        
pursuant to the rules and regulations of the Securities and Exchange Commission.
Although the Company believes that the disclosures made are adequate to make the
information not misleading, certain information and footnote disclosures        
normally included in financial statements prepared in accordance with generally 
accepted accounting principles have been condensed or omitted pursuant to such  
regulations. These consolidated financial statements should be read in          
conjunction with the consolidated financial statements and notes thereto        
included in the Company's Form 10-K for the year ended December 31, 1998.       

The combined financial statements have been prepared to reflect the financial   
position and results of operations of the bicycle and bicycle component         
businesses of Derby International Corporation S.A. ("DICSA"), a Luxembourg      
holding company through May 14, 1998. Up to that date DICSA owned shares, either
directly or indirectly, in a number of bicycle and bicycle component companies  
worldwide that predominantly operate as stand-alone entities. Each of the       
companies manufactures, assembles and/or distributes bicycles and bicycle       
components. These bicycle and bicycle component companies, collectively referred
to as the "The Derby Bicycle Group", have significant operations in The         
Netherlands ("Gazelle"), the United Kingdom ("Raleigh UK" and "Sturmey          
Archer"), Canada ("Raleigh Canada"), Germany ("Derby Germany"), South Africa    
("Probike") and the United States (the "Derby USA" division of the Company). The
Derby Bicycle Group owns or licenses many of the most recognized brands in the  
bicycle industry, including leading global brands such as Raleigh, Diamond Back,
Nishiki (for USA only) and Univega, and leading national brands such as Gazelle 
in The Netherlands and Kalkhoff, Musing, Winora and Staiger in Germany.         

Effective May 14, 1998, DICSA reorganized its businesses in connection with a   
recapitalization agreement  (the "Recapitalization") so that each of its bicycle
and bicycle component companies are owned directly or indirectly by The Derby   
Cycle Corporation, a Delaware corporation with operations in the United States. 
The accompanying consolidated financial statements have been prepared to reflect
the financial position and results of operations of the Company and its         
subsidiaries from May 14, 1998 through June 27, 1999. Accordingly, the          
accompanying consolidated financial statements have been prepared in conformity 
with accounting principles generally accepted in the United States and are      
presented in United States dollars.                                             

References to the "Company" throughout this document mean The Derby Bicycle     
Group through May 14, 1998 and The Derby Cycle Corporation and its subsidiaries 
from May 14, 1998 through June 27, 1999.                                        

The accompanying consolidated financial statements, herein referred to as the   
consolidated financial statements, have been prepared as if the Company had been
in existence for all periods presented. DICSA's historical basis in the assets  
and liabilities of the Company has been carried over. All material inter-company
transactions and balances between entities included in these combined financial 
statements have been eliminated. Certain expenses were originally recorded by   
DICSA on behalf of the Company, such as headquarters' management costs and other
corporate expenses. These amounts have                                          

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been allocated in their entirety in the Company's financial statements, as such 
costs were incurred on behalf of the Company except for an immaterial amount    
that related to DICSA. Management believes this allocation is reasonable and    
represents the expenses as if the Company had been a stand-alone operation.     

For the purposes of calculating the net income (loss) applicable to common      
shareholders, the common shares outstanding used assumes that the conversion of 
pre-existing stock at the time of the Recapitalization is applicable to earlier 
years.                                                                          

2.   Inventories                                                                

Inventories are stated at the lower of cost or net realizable value, with cost  
determined on a first in, first out ("FIFO") basis. A provision is made for     
obsolete, slow moving and defective items where appropriate.                    

Inventories consist of the following (in thousands):                            

                                                        [Enlarge/Download Table]

                                                                      Dec 31,    Jun 27,
                                                                         1998       1999
                                                                               unaudited
                                                                     --------  ---------
                                                                                        
Finished products................................................... $ 48,498  $  60,062
Work in process.....................................................    9,686      7,706
Raw materials.......................................................   47,080     26,285
                                                                     --------  ---------
  Total inventories................................................. $105,264  $  94,053
                                                                     ========  =========

The market for bicycles, parts and accessories is subject to the risk of        
changing consumer trends. In the event that a particular bicycle model or       
accessory does not achieve widespread consumer acceptance, and the Company holds
excess inventory of that bicycle model, part or accessory, the Company may be   
required to take significant price markdowns, which could have a material       
adverse effect on the Company's business, results of operations and financial   
condition.                                                                      

3.   Derivative Financial Instruments                                           

Adoption of SFAS 133                                                            
The Company elected to adopt SFAS 133 as of October 1, 1998.                    

For the six months ended June 28, 1998 income and expense related to the        
marking-to-market of the Company's derivative instruments are included in the   
statement of income: a profit of $558,000 on the marking-to-market of the       
forward foreign exchange contracts is shown within cost of sales; a loss of     
$1,051,000 on the marking-to-market of the swaps is shown as other (expense).   
For the six months ended June 27, 1999 income and expense related to the        
marking-to-market of derivative instruments subsequent to the adoption of SFAS  
133 are included in accumulated other comprehensive income: a net gain of       
$223,000 on the marking-to-market of the forward foreign exchange contracts, the
expiration of one of the currency options and a gain of $84,000 on the marking- 
to-market of the remaining currency options and interest rate cap. The net gain 
of $1,376,000 in accumulated other comprehensive income at June 27, 1999 will be
released to income in the years 1999 to 2001 as the related sales, purchases or 
interest expense occurs.                                                        

4.   Short-Term Borrowings                                                      

The Company has indebtedness available under a seven year revolving credit      
agreement (the "Revolving Credit Agreement") of DM214.0 million ($113.8         
million).                                                                       

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The Company was not in compliance with certain of its financial covenants as of 
June 27, 1999 under the Revolving Credit Agreement. These covenants include a   
minimum level of adjusted EBITDA, a minimum interest coverage and a maximum     
amount of loans out. The impact of the restructuring charge and the underlying  
results of the UK businesses reduced adjusted EBITDA, while the issue of secured
promissory notes to partially finance the issue of shares to executives of the  
Company increased loans out. The lenders under the Revolving Credit Agreement   
granted the Company a waiver on July 27, 1999 effective to August 27, 1999 with 
respect to the Company's non compliance of these covenants. The Company is      
currently in discussion with the members of the syndicated revolving credit     
facility in order to reset the levels of the financial covenants in the         
Revolving Credit Agreement on a going forward basis.                            

5.   Long term debt                                                             

On February 4, 1999 the Company issued $20 million principal amount in a        
subordinated note (the "Subordinated Note") to Vencap Holding (1992) PTE Ltd.   
which matures in 2010 and bears interest at 19% compounded daily. As of December
31, 1998, and June 27, 1999, long-term debt consists of the following (in       
thousands):                                                                     

                                                        [Enlarge/Download Table]

                                                                     Dec 31,    Jun 27,
                                                                       1998        1999
                                                                              unaudited
                                                                    --------  ---------
                                                                                       
10% $100,000,000 Senior Notes...................................... $100,000  $ 100,000
9 3/8% DM110,000,000 Senior Notes..................................   65,870     58,512
19% $20,000,000 Subordinated Note..................................        -     20,000
                                                                    --------  ---------
  Long-term debt................................................... $165,870  $ 178,512
                                                                    ========  =========

Management believes that there was no material difference between the fair value
and book value of the 10 percent $100,000,000 and the 9 3/8 percent             
DM110,000,000 Senior Notes as of December 31, 1998 or both the Senior and       
Subordinated Notes as of June 27, 1999.                                         

6.   Contingencies                                                              

International Operations; Dependence on Foreign Suppliers and Sales             

A significant portion of the Company's operations are conducted in foreign      
countries and are subject to the risks that are inherent in operating abroad,   
including, without limitation, the risks associated with foreign governmental   
regulation, foreign taxes, import duties and trade restrictions. The Company's  
business is highly dependent upon products manufactured by foreign suppliers    
located primarily in Taiwan, Japan and the People's Republic of China. A        
substantial majority of the Company's multi-speed bicycles contain components   
supplied on a purchase order basis by one Japanese manufacturer. The Company's  
business is also subject to the risks generally associated with doing business  
abroad, such as delays in shipment and foreign governmental regulations which   
could have a material adverse effect on the results of operations and financial 
condition of the Company. In addition, several of the Company's manufacturing   
operations are unionized.                                                       

Product Liability                                                               

Because of the nature of the Company's business, the Company at any particular  
time is a defendant in a number of product liability lawsuits and expects that  
this will continue to be the case in the future. These lawsuits generally seek  
damages, sometimes in substantial amounts, for personal injuries allegedly      
sustained as a result of defects in the Company's products. Although the Company
maintains product liability insurance, due to the uncertainty as to the nature  
and extent of manufacturers' and distributors' liability for personal injuries, 
there is no assurance that the product liability insurance maintained by the    
Company is or will be adequate to cover product liability claims or that the    
applicable insurer will be solvent at the time of any covered loss. In addition,
due to deductibles, self-retention levels and aggregate coverage amounts        
applicable under the Company's insurance policies, the Company may bear         

9 

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responsibility for a significant portion of the defense costs (which include    
attorneys' fees and expenses incurred in the defense of any claim), and the     
related payments to satisfy any judgments associated with any claim asserted    
against the Company in excess of any applicable coverage. The successful        
assertion or settlement of an uninsured claim, the settlement of a significant  
number of insured claims, or a claim exceeding the Company's insurance coverage 
could have a material adverse effect on the Company's business, results of      
operations and financial condition. In addition, there can be no assurance that 
insurance will remain available or, if available, will not be prohibitively     
expensive.                                                                      

Common stock and Preferred stock                                                

On 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.                   

Pursuant to a Management Stock Purchase Agreement dated October 20, 1998, Gary  
Matthews purchased 1,500 shares of the Company's common stock for $1,000 per    
share. Gary Matthews paid for such shares with a secured promissory note, shown 
within other assets in the balance sheet, that is non-recourse except for 20    
percent of the principal amount and all of the accrued interest. Upon the       
termination of Gary Matthews' employment with the Company, the Company has the  
right or is required to repurchase, depending on the reason for such            
termination, such common stock.                                                 

On February 4, 1999 the Company issued 18,950 shares of Class C common stock to 
DC Cycle L.L.C., a wholly owned subsidiary of Thayer Equity Investors III, L.P. 
("Thayer") and 3,800 shares of Class C common stock to Perseus Cycle L.L.C., a  
wholly owned subsidiary of Perseus Capital, L.L.C. ("Perseus") for the          
acquisition of Diamond Back                                                     

On April 1, 1999 and June 1, 1999 the Company issued Class A and Class C common 
shares to executives of the Company for $1,000 per share as follows :           

                                                                [Download Table]

                                                         Number of Shares   
                                                         ----------------   
                                                      Class A        Class C
                                                      -------        -------
                                                                            
April 1, 1999.......................................    1,120            280
June 1, 1999........................................      400            100
                                                      -------        -------
                                                        1,520            380
                                                      =======        =======

The issue of shares to executives of the Company was partly financed by the     
issue of secured promissory notes, shown within other assets in the balance     
sheet. $125,000 was due on issue at June 27, 1999 and has since been received.  

Following the issue of stock in connection with the Diamond Back acquisition,   
the employment of Gary Matthews and the management stock plan, the stock in the 
Company (at issue price plus accrued dividends) is held by the following        
shareholders and their affiliates (in thousands except number data) :           

10

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                                                        [Enlarge/Download Table]

                                                               Derby                  
                                          Thayer           Internat-                  
                                Number   Capital  Perseus      ional                  
                                   of   Partners  Capital    Corpor-  Manage-         
                               Shares     L.L.C.   L.L.C.  ation S.A     ment   Total 
                               ------   --------  -------  ---------  -------  -------
                                                                                      
Preferred stock                                                                       
 Series A..................... 25,000   $ 37,500  $     -  $       -  $     -  $37,500
 Accrued dividend $200 per                                                            
  share pa....................             5,665        -          -        -    5,665
 Series B.....................  3,000          -        -      3,000        -    3,000
 Accrued dividend 9.75% pa....      -          -        -        331        -      331
                                        --------  -------  ---------  -------  -------
                                        $ 43,165  $     -  $   3,331  $     -  $46,496
                                        ========  =======  =========  =======  =======

Stock rights                                                                          
 Class A common...............  8,300          -        -      8,300        -    8,300
 Class B common............... 15,000          -        -     15,000        -   15,000
                                        --------  -------  ---------  -------  -------
                                        $      -  $     -  $  23,300  $     -  $23,300
                                        ========  =======  =========  =======  =======

Paid in capital                                                                       
 Class A common............... 25,220     12,500   10,000          -    2,720   25,220
 Class C common............... 23,430     18,950    3,800          -      680   23,430
                                        --------  -------  ---------  -------  -------
                                        $ 31,450  $13,800  $       -  $ 3,400  $48,650
                                        ========  =======  =========  =======  =======

Retained equity                                                                       
                                        --------  -------  ---------  -------  -------
 Class A common............... 21,700   $      -  $     -  $  21,700  $     -  $21,700
                                        ========  =======  =========  =======  =======

7.   Acquisitions                                                               

On February 4, 1999, the Company acquired the assets (and assumed certain       
liabilities) of the Diamond Back Group for $43,445,000 in cash. The Diamond Back
Group consists of Diamond Back International Company Limited, a private British 
Virgin Islands company ("Diamond Back"), Western States Import Company Inc., a  
Delaware corporation ("Western States") and Bejka Trading A.B., a private       
Swedish company ("Bejka"), each of which is engaged in the bicycle, bicycle     
parts and accessories and fitness equipment distribution business. Western      
States and Bejka had worldwide revenues of approximately $62.9 million and $3.1 
million, respectively, in 1998. Diamond Back was essentially a holding company  
for the company's intellectual property and did not generate material revenues. 
The Company financed the acquisition of the Diamond Back Group by issuing a     
$20,000,000  Subordinated Note and $22,750,000 in  Class C common stock.        

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The acquisition was accounted for under the purchase method with the purchase   
price allocated as follows (in thousands):                                      

                                                                [Download Table]
                                                                                
Accounts receivable...............................................  $    12,173 
Inventories.......................................................       19,086 
Other current assets..............................................          773 
Property, plant, and equipment....................................          613 
Intangibles.......................................................        4,750 
Goodwill..........................................................       14,361 
Liabilities assumed...............................................       (8,311)
     Purchase price...............................................  ----------- 
                                                                    $    43,445 
                                                                    =========== 

The intangibles acquired comprise the intellectual property rights formerly     
owned by the Diamond Back Group including the Diamond Back and Avenir           
trademarks. In line with normal group policy intellectual property will be      
amortized over a period of 15 years.                                            

The goodwill arising on the acquisition of $14,361,000 will be amortized over 40
years.                                                                          

The results of the Diamond Back Group are included in the consolidated financial
statements from February 4, 1999. A pro forma consolidated income statement     
incorporating the results of the Diamondback Group on the basis that the group  
was acquired on January 1, 1998 is as follows.                                  

The Derby Cycle Corporation 
Unaudited Pro Forma Consolidated Statements of Income 
(Dollars in thousands, except per unit and unit data) 

                                                        [Enlarge/Download Table]

                                                                            Quarter ended           Six months ended     
                                                                      ------------------------   ----------------------- 
                                                                         Jun 28,       Jun 27,     Jun 28,       Jun 27, 
                                                                            1998          1999        1998          1999 
                                                                      ----------    ----------   ---------    ---------- 
                                                                                                                         
Net revenues ........................................................ $  169,459    $  165,131   $ 304,836    $  307,779 
Net income (loss) applicable to common stockholders..................       (745)       (2,423)      1,921        (4,635)

Net income (loss) applicable to common stockholders per share........ $   (13.54)   $   (34.65)  $   38.34    $   (67.06)
                                                                      ==========    ==========   =========    ========== 
Weighted average number of shares of common stock outstanding........     55,036        69,931      50,106        69,115 
                                                                      ==========    ==========   =========    ========== 

8.    Stock option plan                                                         

The Company has established one stock option plan: The Derby Cycle Corporation  
1998 Stock Option Plan.                                                         

On October 21, 1998, the Board of Directors of the Company adopted The Derby    
Cycle Corporation 1998 Stock Option Plan (the "Stock Plan"), which authorizes   
grants of stock options (including options intended to qualify as "incentive    
stock options" within the meaning of Section 422 of the Internal Revenue Code). 
The Stock Plan authorizes the Company's Board of Directors to grant options at  
any time in such quantity, at such price, on such terms and subject to such     
conditions as established by the board. The Company issued 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.     

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On April 1, 1999 and June 1, 1999 the Company issued stock options to purchase a
total of 4,240 shares of Class A common stock and 1,060 shares of Class B common
stock to executives of the Company. 3,800 of these options vest over four years 
while the remaining 1,500 options are performance based.                        

In October 1995, SFAS 123 "Accounting for Stock-Based Compensation" was issued. 
The Company has adopted the disclosure provisions of SFAS 123 in 1999, but opted
to remain under the expense recognition provisions of Accounting Principles     
Board (APB) Opinion No 25, "Accounting for Stock Issued to Employees" in        
accounting for options granted under the Stock Option Plans. Had compensation   
expense for share options granted under these schemes been determined based on  
fair value at the grant dates in accordance with SFAS 123, the Company's net    
income and earnings per share for the quarter and six months ended June 27, 1999
would have been reduced to the pro-forma amounts shown below:                   

                                                        [Enlarge/Download Table]

                                                                                             Quarter    Six months 
                                                                                               ended         ended 
                                                                                        Jun 27, 1999  Jun 27, 1999 
                                                                                          un-audited    un-audited 
                                                                                        ------------  ------------ 
                                                                                                                   
Approximate net income  ($ thousands)                                                                              
    As reported........................................................................       (2,423)       (3,644)
    Diluted by share options...........................................................       (2,558)       (3,827)
Earnings per share  ($)                                                                                            
    As reported........................................................................       (34.65)       (56.37)
    Diluted by share options...........................................................       (32.71)       (53.94)

The movement in options outstanding during the six months ended June 27, 1999 is
summarized in the following table:                                              

                                                        [Enlarge/Download Table]

                                                                                     Number of   Weighted
                                                                                        shares    average
                                                                                    subject to   exercise
                                                                                        option      price
                                                                                    ----------  ---------
                                                                                                         
Outstanding at January 1, 1999.....................................................          0   $      0
Granted during 1999................................................................     10,175   $  1,000
Outstanding at June 27, 1999.......................................................     10,175   $  1,000
Exercisable at June 27, 1999.......................................................          0   $      0

The weighted average fair value of options granted in the quarter ended June 27,
1999 and the quarter ended March 28, 1999 was estimated at $198.01 and $118.39  
as at the date of grant using the Black-Scholes stock option pricing model. The 
following weighted average assumptions were used: dividend yield of 0% per      
annum, annual standard deviation (volatility) of 0% per annum, risk free        
interest rate of 5.52% and expected term of 4.0 and 3.0 years respectively.     

The exercise price for options outstanding at June 27, 1999 is $1,000 and a     
remaining contractual life of 9.59 years.                                       

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9.   Segmental Information: Reportable business segments                        

The Company manages its business in seven reportable segments as shown in the   
following tables. Consolidation adjustments, certain small operating companies, 
non operating companies and the headquarters are included in "Other companies". 
The reportable segments are managed separately because each business has        
differing customer requirements, either as a result of the regional environment 
of the country or differences in products and services offered. A summary of    
revenues, operating income, and identifiable assets categorized by the business 
segment is as follows (in thousands):                                           

                                                        [Enlarge/Download Table]

                                                                    Quarter ended           Six months ended    
                                                              ------------------------   ---------------------- 
                                                                 Jun 28,       Jun 27,     Jun 28,      Jun 27, 
                                                                    1998          1999        1998         1999 
                                                                     un-           un-         un-          un- 
                                                                 audited       audited     audited      audited 
                                                               ---------     ---------   ---------    --------- 
                                                                                                                
Net revenues:                                                                                                   
     Raleigh UK..............................................  $  24,125     $  21,278   $  39,763    $  34,586 
     Gazelle, The Netherlands................................     35,897        39,725      66,448       74,463 
     Derby Germany...........................................     44,582        49,979      84,917       95,225 
     Derby USA...............................................     21,355        37,736      32,527       59,038 
     Raleigh Canada..........................................     12,978         6,536      24,609       18,086 
     Sturmey Archer, UK and The Netherlands..................      7,131         5,552      14,055       11,767 
     Probike, South Africa...................................      3,537         3,133       7,554        6,934 
     Other companies.........................................      1,241         1,192       2,411        3,419 
                                                               ---------     ---------   ---------    --------- 
          Total net revenues.................................  $ 150,846     $ 165,131   $ 272,284    $ 303,518 
                                                               =========     =========   =========    ========= 

Operating income:                                                                                               
     Raleigh UK..............................................  $   2,713     $     365   $   1,246    $  (1,939)
     Gazelle, The Netherlands................................      5,544         6,082      10,390       11,284 
     Derby Germany...........................................      2,947         3,692       6,427        6,670 
     Derby USA...............................................        297         1,442        (118)         724 
     Raleigh Canada..........................................      1,379           677       2,270        1,712 
     Sturmey Archer, UK and The Netherlands..................        289           302         728          502 
     Probike, South Africa...................................         63            15         246          243 
     Other companies.........................................        462            (4)        847         (427)
                                                               ---------     ---------   ---------    --------- 
          Underlying  operating income.......................  $  13,694     $  12,571   $  22,036    $  18,769 
               Recapitalization costs........................     (5,671)            -      (5,671)           - 
               Restructuring charge..........................          -        (7,914)          -       (8,461)
                                                               ---------     ---------   ---------    --------- 
          Total operating income.............................  $   8,023     $   4,657   $  16,365    $  10,308 
                                                               =========     =========   =========    ========= 

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                                                        [Enlarge/Download Table]

                                                                                             Dec 31,    Jun 27,
                                                                                                1998       1999
                                                                                                      unaudited
                                                                                          ----------  ---------
                                                                                                               
Identifiable assets                                                                                            
     Raleigh UK.......................................................................... $   67,719  $  67,771
     Gazelle, The Netherlands............................................................     55,784     47,728
     Derby Germany.......................................................................     91,789     86,903
     Derby USA...........................................................................     36,356     79,137
     Raleigh Canada......................................................................     13,997     13,913
     Sturmey Archer, UK and The Netherlands..............................................     25,060     24,936
     Probike, South Africa...............................................................     11,993      6,993
     Other companies.....................................................................     22,592     27,309
                                                                                          ----------  ---------
          Total identifiable assets...................................................... $  325,290  $ 354,690
                                                                                          ==========  =========

10.  Recent developments                                                        

Raleigh UK intends to cease manufacturing steel bicycle frames altogether by the
end of 1999 due to increased consumer demand for aluminum frames. Steel frames  
manufactured by Raleigh UK currently account for approximately 50% of all frames
sold by Raleigh UK, with the balance being fabricated from aluminum and imported
from Asia.                                                                      

The Company is currently negotiating the sale of that part of the factory site  
that will be released. The Company intends to use the proceeds from the sale of 
the site either to pay expenses associated with the restructuring or to pay down
the Company's revolving credit facility, or a combination thereof.              

Other components of the restructuring include the streamlining of Raleigh UK's  
product development and marketing functions.                                    

The consolidation of Raleigh UK's bicycle operations together with the other    
restructuring activities will produce greater efficiencies and help re-build the
profitability. The nature of these changes requires them to be phased over the  
balance of 1999, and the precise number and timing of associated lay-offs will  
not be defined until more detailed work has been completed.                     

In July 1999 the Company restructured its corporate management and established  
its headquarters in Stamford, CT to organize the finance and marketing functions
of the Company. This is the first step to running the Company on a global basis 
which will enable the Company to obtain the scale benefits of being the largest 
player in the international bicycle business.                                   

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11.   Lyon Investments B.V. Summarized Financial Information                    

Lyon Investments B.V. ("Lyon"), a Dutch company, is a wholly owned subsidiary of
the Company which is a co-issuer of $20,250,000 of the $100,000,000 of 10       
percent Senior Notes and all of the DM110,000,000 of 93/8 percent Senior Notes. 
As co-issuers, Lyon and the Company are joint and severally liable with respect 
to the Senior Notes. The following summarized financial information sets forth  
the combined financial position and results of operations of Lyon, together with
its subsidiaries, Derby Nederland B.V. and Engelbert Wiener Bike Parts GmbH.    
Derby Nederland B.V. is a holding company owning 100 percent of Koniklijke      
Gazelle B.V., Sturmey-Archer Europa B.V. and Raleigh B.V.                       

   Lyon Investments B.V.
    Summarized Consolidated Balance Sheets
  (Dollars in thousands)

                                                        [Enlarge/Download Table]

                                                                                             Dec 31,         Jun 27, 
                                                                                                1998            1999 
                                                   Assets                                                 un-audited 
                                                                                          ------------  ------------ 
                                                                                                                     
Current assets:                                                                                                      
     Cash and cash equivalents........................................................... $      8,470  $      6,526 
     Receivables, net....................................................................       15,875        19,639 
     Inventories.........................................................................       26,433        16,864 
     Loans to internal group companies...................................................      137,768       121,623 
     Other current assets................................................................        3,002         3,861 
          Total current assets........................................................... ------------  ------------ 
                                                                                               191,548       168,513 
Property, plant and equipment, net....................................................... ------------  ------------ 
                                                                                                11,552         9,697 
Intangibles, net.........................................................................        2,715         2,284 
Prepaid pension asset....................................................................       16,920        16,115 
                                                                                          ------------  ------------ 
          Total assets................................................................... $    222,735  $    196,609 
                                                                                          ============  ============ 

                           Liabilities and Shareholder's (Deficit)                                                   

Current liabilities:                                                                                                 
     Loans from internal group companies................................................. $    105,273  $     88,410 
     Short-term borrowings...............................................................       43,979        33,076 
     Other current liabilities...........................................................       24,015        24,078 
          Total current liabilities...................................................... ------------  ------------ 
                                                                                               173,267       145,564 
                                                                                          ------------  ------------ 
Other liabilities:                                                                                                   
     10% $100,000,000 Senior Notes.......................................................       20,250        20,250 
     93/8% DM110,000,000 Senior Notes....................................................       65,870        58,512 
     Other liabilities...................................................................        5,971         5,640 
                                                                                          ------------  ------------ 
          Total liabilities..............................................................      265,358       229,966 
                                                                                          ------------  ------------ 
Shareholder's (deficit)..................................................................      (42,623)      (33,357)
                                                                                          ------------  ------------ 
          Total liabilities and shareholder's (deficit).................................. $    222,735  $    196,609 
                                                                                          ============  ============ 

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Lyon Investments B.V. 
Unaudited Summarized Consolidated Statements of Income  
(Dollars in thousands)  

                                                        [Enlarge/Download Table]

                                                                Quarter  ended             Six months ended     
                                                           ------------------------   ------------------------- 
                                                               Jun 28,      Jun 27,        Jun 28,      Jun 27, 
                                                                  1999         1998          1999          1998 
                                                           -----------  -----------   -----------   ----------- 
                                                                                                                
Net revenues.............................................. $    42,905  $    48,421   $    82,003   $    91,244 
Cost of sales.............................................     (31,217)     (35,745)      (61,191)      (67,765)
                                                           -----------  -----------   -----------   ----------- 
          Gross profit....................................      11,688       12,676        20,812        23,479 

Selling, general, and administrative expenses.............      (4,650)      (6,080)       (9,121)      (11,530)
Restructuring charge......................................           -         (129)            -          (249)
                                                           -----------  -----------   -----------   ----------- 
          Operating income................................       7,038        6,467        11,691        11,700 

Other income (expense)                                                                                          
     Interest expense.....................................      (2,611)      (3,764)       (3,042)       (7,853)
     Interest income......................................         270        1,779           277         3,825 
     Other income (expense) net..........................            -            -             -             - 
                                                           -----------  -----------   -----------   ----------- 
          Income before income taxes......................       4,697        4,482         8,926         7,672 

Provision for income taxes................................      (1,590)      (1,519)       (3,046)       (2,633)
                                                           -----------  -----------   -----------   ----------- 
          Net income...................................... $     3,107  $     2,963   $     5,880   $     5,039 
                                                           ===========  ===========   ===========   =========== 

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ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND      
RESULTS OF OPERATIONS                                     

Overview                                                                        

The Company is a world-leading designer, manufacturer and marketer of bicycles. 
The Company holds the leading market share in the United Kingdom, The           
Netherlands, Canada and Ireland, holds the leading market share in the adult    
bicycle market in Germany and is also the second largest supplier to independent
bicycle dealers ("IBDs") in the United States. Competing primarily in the       
medium-to premium-priced market, the Company owns or licenses many of the most  
recognized brand names in the bicycle industry, including leading global brands 
such as Raleigh, Diamond Back, Nishiki and Univega, and leading regional brands 
such as Gazelle in The Netherlands and Kalkhoff, Musing, Winora and Staiger in  
Germany. The Company designs, manufactures and markets a wide range of bicycles 
in all major product categories: (i) all-terrain or mountain bicycles ("MTBs"), 
(ii) city bicycles, also called touring or upright bicycles, (iii) hybrid       
bicycles, also called comfort or cross bicycles, (iv) juvenile bicycles,        
including bicycle motocross ("BMX") bicycles, and (v) race/road bicycles. The   
Company distributes branded bicycles through extensive local market networks of 
IBDs as well as through national retailers, and distributes private label       
bicycles through mass merchandisers and specialty stores.                       

Through a series of acquisitions and plant expansions, the Company has created a
global bicycle business distinguished by its leading market positions, low cost 
production, extensive distribution network and reputation for high quality.     
Organized in 1986 for the purpose of acquiring the Raleigh, Gazelle and Sturmey 
Archer businesses from TI Group plc, the Company expanded into the United States
and Germany in 1988. Since then, the Company has acquired additional well-known 
brands and leveraged its existing manufacturing plants and component sourcing   
operations to lower unit costs for its acquired businesses.                     

On February 4, 1999, the Company acquired the assets (and assumed certain       
liabilities) of the Diamond Back Group for approximately $43.4 million in cash. 
The Diamond Back Group consisted of Diamond Back International Company Limited, 
a private British Virgin Islands company ("Diamond Back"), Western States Import
Company Inc., a Delaware corporation ("Western States") and Bejka Trading A.B., 
a private Swedish company ("Bejka"), each of which is engaged in the bicycle,   
bicycle parts and accessories and fitness equipment distribution business.      
Western States and Bejka had worldwide revenues of approximately $62.9 million  
and $3.1 million, respectively, in 1998. Diamond Back was essentially a holding 
company for the company's intellectual property and did not generate material   
revenues. The Company financed the acquisition of the Diamond Back Group by     
issuing $20 million principal amount in a Subordinated Note to Vencap Holding   
(1992) PTE Ltd. and $22.75 million in Class C common stock to DC Cycle, L.L.C.  
and Perseus Cycle L.L.C. The Subordinated Note matures in 2010 and bears        
interest at an annual rate of 19% compounded daily.                             

Since 1990, the Company has invested in labor-saving flexible production        
machinery and restructured the workforces at its manufacturing locations. From  
1992 to 1993, taking advantage of substantial incentives from the German        
government, the Company built a factory in Rostock, in the former German        
Democratic Republic.                                                            

The Company's operations are concentrated in the United Kingdom, The            
Netherlands, Germany, the United States and Canada, with manufacturing          
operations in these countries, each led by experienced local management.        

The Company  maintains  marketing or purchasing  operations  in five  additional
countries. Each local operation manages national distribution channels, dealer  
service and working capital and benefits from shared product design and         
manufacturing technologies as well as from economies of scale generated by the  
Company's aggregate purchasing power. Consequently, each local operation has the
flexibility to respond to shifts in local market demand and product preference. 

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In 1998, 55% of the Company's net revenues were denominated in currencies within
the European Monetary System, 18% were denominated in pounds sterling, 15% were 
denominated in US dollars and 12% were denominated in other currencies. The     
Company reduces its currency exposure by maintaining operations in the major    
markets in which it sells its products. The Company further mitigates foreign   
exchange risk by purchasing currency options and entering into forward purchase 
contracts. The acquisition of the Diamond Back Group increases the proportion of
the Company's net revenues denominated in US dollars to approximately 25%.      

Results of Operations                                                           

All comparisons in the following discussion and analysis are against the        
corresponding quarter and six month periods ended June 28, 1998, unless         
otherwise stated.                                                               

                                                        [Enlarge/Download Table]

Units sold:                                                       Quarter ended            Six months ended   
                                                            ------------------------  ------------------------
Thousands of bicycles                                          Jun 28,       Jun 27,     Jun 28,       Jun 27,
                                                                  1998          1999        1998          1999
                                                            ----------    ----------  ----------    ----------
                                                                                                              
Raleigh UK.................................................        132           125         213           195
Gazelle....................................................         99           108         186           200
Derby Germany..............................................        187           200         353           378
Derby USA..................................................         86           161         127           246
Raleigh Canada.............................................        144            74         267           205
Probike....................................................         25            26          56            59
Other companies and group transactions.....................          6             4           3             5
                                                            ----------    ----------  ----------    ----------
     Total units sold......................................        679           698       1,205         1,288
                                                            ==========    ==========  ==========    ==========

Units sold. Units sold increased by 19 thousand units and 83 thousand units for 
the quarter and six months ended June 1999. Diamond Back sales were 81 thousand 
units and 126 thousand units in the quarter and six months ended June 1999.     
Raleigh Canada's private label sales fell by 63 thousand units and 54 thousand  
units in the quarter and six months ended June 1999 as mass merchants started   
the year over-stocked and have experienced weak bicycle retail sales.           
Particularly strong growth was seen at Gazelle and Derby Germany in the IBD     
sector following successful product range launches in the fall leading to an    
increase in sales volumes of approximately 7%. Sales at Raleigh UK fell by      
approximately 5% and action has been taken to improve the competitiveness of the
product line for 1999 and to further incentivize retailers to sell Raleigh,     
which has arrested the decline.                                                 

                                                        [Enlarge/Download Table]

Net revenues:                                                   Quarter ended            Six months ended     
                                                            ------------------------  ------------------------
$ millions                                                     Jun 28,       Jun 27,     Jun 28,       Jun 27,
                                                                  1998          1999        1998          1998
                                                            ----------    ----------  ----------    ----------
                                                                                                              
Raleigh UK................................................. $     24.1    $     21.3  $     39.8    $     34.6
Gazelle....................................................       35.9          39.7        66.4          74.5
Derby Germany..............................................       44.6          50.0        84.9          95.2
Derby USA..................................................       21.4          37.7        32.5          59.0
Raleigh Canada.............................................       13.0           6.5        24.6          18.1
Sturmey Archer.............................................        7.1           5.6        14.1          11.8
Probike....................................................        3.5           3.1         7.6           6.9
Other companies and group transactions.....................        1.2           1.2         2.4           3.4
                                                            ----------    ----------  ----------    ----------
     Total net revenues.................................... $    150.8    $    165.1  $    272.3    $    303.5
                                                            ==========    ==========  ==========    ==========

Net Revenues. Net revenues increased by $14.3 million and $31.2 million to      
$165.1 million and $303.5 million for the quarter and six months ended June 1999
in line with the increase in units sold and a 4-5% increase in average price    
achieved through growth in the high value Dutch and German markets accompanied  
by a reduction in the low value Canadian market. $20.4 million of the increase  
in bicycle                                                                      

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sales, a $6.5 million increase in the sales of parts and accessories and $1.8   
million sales of fitness equipment in the six months ended June 1999 were       
generated by Diamond Back. Sturmey Archer's revenues for the six months ended   
June 1999 dropped by $1.2 million in the engineering components business        
following the loss of one major customer during the first quarter of 1998 and   
other business since. New business is being negotiated to come on stream in the 
fourth quarter. Sturmey Archer's sales of bicycle hubs dropped by $0.7 million  
in the six months ended June 1999 as competition increased in the European hub  
market and the re-designed seven-speed hub was not introduced in time for the   
introduction of 1999 bicycle models at the autumn 1998 trade shows.             

Gross Profit.  Gross profit for the quarter and six months ended June 1999      
increased by $2.3 million, and $4.1 million but on increased revenue dollars,   
this represented a margin decrease of 0.9 and 1.3 percentage points to 24.9% and
24.4% for those periods. Gross margins at Raleigh UK dropped in the first       
quarter from 17.9% to 9.8%, and in the second quarter from 29.0% to 18.4%       
compared with a year ago, accounting for a 1.1 percentage point decrease in     
gross margin of the Company for the six months ended June 1999. The thin margins
at Raleigh UK arose due to a combination of weak product mix, weak distribution 
channel mix, and lower cost recovery on the low production volumes, together    
with aggressive discounting on the sale of obsolete models in the first quarter.

Following the adoption of SFAS 133, the Company reports changes in the mark-to- 
market value of its foreign currency forward cover contracts and currency       
options in other comprehensive income in 1999. This differs from 1998 when $0.3 
million adverse and $0.6 million favorable changes in the mark-to-market value  
of foreign currency forward cover contracts for the quarter and six months ended
June 1998 were included in cost of sales, which impacted year ago margins by 0.2
percentage points adversely in the quarter, and 0.2 percentage points favorably 
in the six months ended June 1998.                                              

Selling, General and Administrative Expenses. Selling, general and              
administrative expenses increased by $3.9 million and $7.4 million to $29.0     
million and $55.4 million for the quarter and six months ended June 1999.       
Expenses at Diamond Back of $4.5 million and $7.0 million for the quarter and   
six months ended June 1999 accounted for nearly all of the increase.            

Restructuring Charge. In order to reduce product costs and selling, general and 
administrative expenses and maximize the synergy benefits from the Diamond Back 
acquisition, the Company has started restructuring its businesses in UK and the 
Raleigh distribution operations in Germany, The Netherlands, Belgium and        
Ireland, as well as reviewing the logistics of Raleigh and Diamond Back         
distribution in USA and establishing its new headquarters, estimated to cost $10
million in aggregate.                                                           

Raleigh UK intends to cease manufacturing steel bicycle frames altogether by the
end of 1999 due to increased consumer demand for aluminum frames. Steel frames  
manufactured by the company currently account for approximately 50% of all      
frames sold by the company, with the balance being fabricated from aluminum and 
imported from Asia. The company has granted an option to a property developer   
for the sale of the factory site that will be released. The company intends to  
use the proceeds from the sale of the site either to pay expenses associated    
with the restructuring or to pay down the Company's revolving credit facility,  
or a combination thereof. Other components of the restructuring at Raleigh UK   
include streamlining the company's product development and marketing functions. 

Management of the Raleigh distribution operations in Germany, The Netherlands   
and Belgium, previously run on a stand-alone basis, has been combined with the  
Gazelle and Derby Germany operations, although the results are still included in
Other Companies in this discussion for ease of comparison. The Raleigh Ireland  
warehouse has been closed, leaving only a sales force in Ireland.               

In July 1999 the Company restructured its corporate management and established  
its headquarters in Stamford, CT to organize the finance and marketing          
functions of the Company on a global basis.                                     

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These restructuring steps are projected to reduce on-going product costs and    
selling expenses by $2 million in the current year and by $5 million in 2000.   
Further restructuring costs of some $1.5 million are planned for the second half
of 1999, but had not been committed as at June 27, 1999 and consequently have   
not been provided for in these financial statements.                            

                                                        [Enlarge/Download Table]

Operating income:                                                 Quarter ended                Six months ended      
                                                            ---------------------------   ---------------------------
$ millions                                                      Jun 28,        Jun 27,         Jun 28,      Jun 27,  
                                                                 1998           1999            1998         1999    
                                                            ------------     ----------   -------------    ----------
                                                                                                                     
Raleigh UK................................................. $       2.7      $      0.4    $      1.2      $   (1.9) 
Gazelle....................................................         5.5             6.1          10.4          11.3  
Derby Germany..............................................         2.9             3.7           6.4           6.7  
Derby USA..................................................         0.3             1.4          (0.1)          0.7  
Raleigh Canada.............................................         1.4             0.7           2.3           1.7  
Sturmey Archer.............................................         0.3             0.3           0.7           0.5  
Probike....................................................         0.1               -           0.3           0.2  
Other companies and group transactions.....................         0.5               -           0.9          (0.4) 
                                                            ------------     ----------   -------------    ----------
     Underlying  operating income.......................... $      13.7      $     12.6    $     22.1      $   18.8  
          Recapitalization costs...........................        (5.7)              -          (5.7)            -  
          Restructuring charge.............................           -            (7.9)            -          (8.5) 
                                                            ------------     ----------   -------------    ----------
     Total operating income................................ $       8.0      $      4.7   $      16.4      $   10.3  
                                                            ============     ==========   =============    ==========

Operating Income. Underlying operating income of $12.6 million and $18.8 million
for the first quarter and six months ended June 1999 decreased by $1.1 million  
and $3.3 million due to the lower gross margin and higher selling, general and  
administrative expenses. Diamond Back made a loss of $0.2 million in the        
quarter, which diluted the operating margin.                                    

                                                        [Enlarge/Download Table]

Interest expense:                                                  Quarter ended               Six months ended     
                                                            ---------------------------  ---------------------------
$ millions                                                      Jun 28,        Jun 27,        Jun 28,      Jun 27,  
                                                                 1998           1999           1998         1999    
                                                            ------------     ----------  -------------    ----------
                                                                                                                    
Senior Notes............................................... $     2.5        $    3.9     $     3.4        $    7.8 
Subordinated Note..........................................         -             1.0             -             1.7 
Revolving Credit Facility..................................       0.7             1.1           1.2             2.3 
Other interest.............................................       0.7             0.2           0.9             0.5 
Amortization of deferred financing costs...................       0.2             0.5           0.4             0.9 
                                                            ------------     ----------  -------------    ----------
                                                            $     4.1         $   6.7      $    5.9         $  13.2 
                                                            ============     ==========  =============    ==========

Interest expense. Interest expense increased by $2.6 million and $7.3 million to
$6.7 million and $13.2 million for the quarter and six months ended June 1999   
due to the increased debt and higher interest rate margin following the         
Recapitalization and the acquisition of Diamond Back. Interest on the           
Subordinated Note is paid-in-kind by way of the issue of further subordinated   
notes.                                                                          

                                                        [Enlarge/Download Table]

Provision for income taxes:                                        Quarter ended               Six months ended     
                                                            ---------------------------  ---------------------------
$ millions                                                      Jun 28,        Jun 27,        Jun 28,      Jun 27,  
                                                                 1998           1999           1998         1999    
                                                            ------------     ----------  -------------    ----------
                                                                                                                    
Current taxes.............................................. $      2.2        $    1.4    $    3.5        $    2.8  
Deferred taxes.............................................        0.1            (2.0)        0.7            (2.9) 
                                                            ------------     ----------  -------------    ----------
                                                            $      2.3        $   (0.6)   $    4.2        $   (0.1) 
                                                            ============     ==========  =============    ==========

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Provision for Income Taxes. Most of the reduction in income arose in            
jurisdictions where the Company is in a tax loss position, principally the UK,  
and so reduced the liability to deferred taxes. Only a portion of the reduction 
in income arose in The Netherlands, where most of the Company's tax liability   
arises, which created savings in the provision for current taxes of $0.8 million
and $0.7 million in the quarter and six months ended June 1999.                 

Net Income. Net income decreased by $2.2 million and $8.0 million to give losses
of $1.4 million and S2.6 million in the quarter and six months ended June 1999. 
The decrease was primarily the result of the increase in interest expense, and  
the restructuring charge as discussed above, offset by the recapitalization     
costs of $5.7 million in 1998.                                                  

                                                        [Enlarge/Download Table]

EBITDA:                                                            Quarter ended             Six months ended   
                                                            ----------------------------   ---------------------
$ millions                                                     Jun 28,         Jun 27,      Jun 28,     Jun 27, 
                                                                 1998            1999         1998        1999  
                                                            -----------      -----------   ---------   ---------
                                                                                                                
Raleigh UK................................................. $      3.1       $      0.7    $    2.1    $   (1.2)
Gazelle....................................................        5.5              6.4        10.3        11.9 
Derby Germany..............................................        3.9              4.7         8.6         8.7 
Derby USA..................................................        0.9              1.7         0.6         1.2 
Raleigh Canada.............................................        1.8              1.0         3.1         2.4 
Sturmey Archer.............................................        0.3              0.3         0.7         0.5 
Probike....................................................        0.1                -         0.3         0.3 
Other companies and group transactions.....................       (0.3)            (0.3)       (0.2)       (1.3)
                                                            -----------       -----------  ---------   ---------
     Total EBITDA.......................................... $      15.3       $    14.5    $   25.5    $   22.5 
                                                            ===========       ===========  =========   =========

EBITDA. EBITDA of $14.5 million and $22.5 million for the quarter and six months
ended June 1999 decreased by $0.8 million and $3.0 million due to changes in    
underlying operating income explained above.                                    

EBITDA is calculated as follows:                                                

                                                        [Enlarge/Download Table]

                                                                  Quarter ended          Six months ended   
                                                            -----------------------  -----------------------
EBITDA                                                          Jun 28,    Jun 27,     Jun 28,      Jun 27, 
$ millions                                                        1998      1999         1998         1999  
                                                            -----------   ---------  ---------     ---------
                                                                                                            
Underlying operating income................................ $    13.7     $   12.6   $   22.1      $   18.8 
Depreciation...............................................       2.4          2.4        5.0           4.9 
Amortization                                                                                                
    Intangibles............................................         -          0.2        0.1           0.3 
    Investment grants......................................      (0.1)        (0.1)      (0.2)         (0.3)
    Pension transition asset...............................      (0.6)        (0.6)      (1.3)         (1.2)
    Positive goodwill......................................         -          0.1          -           0.2 
    Negative goodwill......................................      (0.1)        (0.1)      (0.2)         (0.2)
                                                            -----------   ---------  ---------     ---------
                                                            $    15.3     $   14.5   $   25.5      $   22.5 
                                                            ===========   =========  =========     =========

Liquidity and capital resources                                                 

Demand for bicycles in the Company's principal markets is seasonal,             
characterized in most cases by a majority of consumer sales in the spring and   
summer months. The exceptions to this are in the United Kingdom, South Africa   
and Ireland, where consumer sales 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,       

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the Company's working capital requirements are greatest during February, March  
and April (the Company's "Peak Season") as receivable levels increase. The      
Company offers extended credit terms on sales during the months prior to the    
Peak Season, although the Company encourages early payments through trade       
discounts.                                                                      

Finished goods inventory remains relatively constant throughout the fiscal year 
and the level of raw materials increases and decreases normally only to         
accommodate production needs. Work in process represents, on average, eight     
days' production. Inventory levels reach a minimum at the end of the Peak       
Season.                                                                         

Net cash flows used in operating activities increased $21.6 million to a $8.7   
million inflow for the first half of 1999 from $12.9 million used in 1998. This 
improvement was principally due to a $22.8 million reduction in inventories and 
$13.7 million higher increase in accounts payable and accrued liabilities,      
offset by $12.0 million higher interest and tax payments. The payment period for
accounts payable has extended by 11 days compared with year ago leading to an   
increase in accounts payable of $1.0 million in the first half compared with a  
decrease of $8.5 million in the first half of 1998. Following a change in the   
fiscal year end in The Netherlands in 1997, payment of tax due for 1997 and 1998
of $3.8 million was deferred until 1999. This, together with estimated tax      
payments relating to 1999 of $1.5 million, was paid in the first half of 1999,  
resulting in an increase in taxes paid to $6.3 million in the first half of this
year compared with $0.9 million year ago. Interest of $10.5 million was paid in 
the first half of 1999 compared with $3.9 million year ago due to the increased 
principal amount of Senior Notes and higher coupon. The net cash flow provided  
by operating activities of $8.7 million in the first half of 1999 was used to   
repay drawings under the revolving credit facility which decreased by $17.8     
million as a result of this and the application of cash balances of $8.0        
million.                                                                        

On February 4, 1999, the Company acquired the assets (and assumed certain       
liabilities) of the Diamond Back Group for $43.4 million. The Company financed  
the acquisition of the Diamond Back Group by issuing a $20.0 million            
Subordinated Note and $22.75 million in Class C common stock.                   

The actuarial valuation of the UK pension schemes carried out as at April 1998  
showed that the schemes were in surplus based on UK funding criteria and        
employer's contributions ceased from mid-year 1998. The Dutch pension scheme has
been in surplus and no employer's contributions have been made for a number of  
years. As a result, the Company's contributions to its defined benefit pension  
plans were less than $0.1 million in the six months ended June 1999, compared   
with $1.2 million in the six months ended June 1998. The Company adopted SFAS   
87, "Employers' Accounting for Pensions" on January 1, 1993. The impact of      
adopting SFAS 87 was the recognition of a transition asset of $37.8 million. The
transition asset is being amortized into income over 15 years. Net periodic     
pension income was $2.5 million and $2.6 million in the first half of 1998 and  
1999 respectively. Net periodic pension income includes amortization of the     
transition asset into income of $1.3 million and $1.2 million in the first half 
of both 1998 and 1999.                                                          

The Company's capital expenditures were $3.5 million and $2.3 million in the    
first half of 1998 and 1999, being (i) on-going cost reduction projects, (ii)   
replacements and (iii) items required to satisfy statutory environmental and    
health and safety legislation.                                                  

The Company is primarily financed by equity purchased by Thayer, Perseus DFS and
management as part of the Recapitalization and subsequently, plus the Retained  
Equity of, in aggregate, $134.2 million and debt in the form of Senior Notes and
the revolving credit facility. The Company incurred significant indebtedness in 
connection with the Recapitalization. As of June 27, 1999, the Company had      
$221.5 million of combined indebtedness, comprising $158.5 of Senior Notes, a   
$20.0 million Subordinated Note, $42.7 million of borrowings under the revolving
credit facility and $0.3 million of borrowings under the South African credit   
facility. The Senior Notes are issued under Indentures which contain certain    
covenants that, among other things, restrict the ability of the Company and its 
Restricted Subsidiaries to incur additional indebtedness, pay dividends, redeem 
capital stock, redeem subordinated obligations, make investments, undertake     
sales of assets and subsidiary stock, engage in transactions with affiliates,   

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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 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.                                                                 

A Revolving Credit Agreement provides for a seven-year DM214 million secured    
senior revolving credit facility to be made available to the Company's operating
companies. Borrowings under this revolving credit facility are available subject
to a borrowing base determined as a percentage of eligible assets. The Company's
borrowings peak in February/March/April each year. The Company believes that it 
has adequate headroom on its funding requirements for the next year.            

Quantitative and Qualitative Disclosures about Market Risk                      

The Company is exposed to market risk from changes in foreign currency exchange 
rates and interest rates. In order to manage the risk arising from these        
exposures, the Company enters into a variety of foreign currency and interest   
rate contracts and options.                                                     

Foreign Currency Exchange Rate Risk                                             
The Company has foreign currency exposures related to buying and selling in     
currencies other than the functional currencies in which it operates. The       
Company's net trading position is long in the Euro, Canadian Dollar and South   
African Rand, arising from its revenues in those currencies, and short of the   
New Taiwan Dollar, Japanese Yen and US Dollar as a result of components         
purchased in those currencies. The Company has a natural currency hedge against 
Pounds Sterling arising from its position as both an importer and exporter in   
UK. Sturmey Archer also has a competitive exposure to the currencies of Japan   
and Germany in which its two main competitors manufacture.                      

The Company generally introduces its new bicycle model ranges annually in the   
fall of each year, at a similar time to most of its competitors. Product        
specifications, component costs and selling prices are kept as stable as        
possible during the model year to satisfy the requirements of mass-merchandisers
and facilitate orderly marketing of branded products amongst IBDs. The Company  
takes out foreign currency forward exchange contracts or options in the fall to 
hedge most of its foreign currency trading transaction exposure for the upcoming
season. These foreign currency forward exchange contracts and options have been 
designated as hedges as defined in SFAS 133 and the mark-to-market value of $1.1
million at December 31, 1998 was therefore included in accumulated other        
comprehensive income. The potential loss in fair value for such financial       
instruments from a hypothetical 10% adverse change in quoted foreign currency   
exchange rates would be approximately $4.1 million for 1998. Each year the      
Company changes the specification of its products to endeavor to optimize its   
competitive position and margins. Most of the Company's competitors purchase    
comparable components from similar sources to the Company and are believed not  
to hedge beyond the current season. To stay competitive the Company does not    
generally hedge its transaction exposure beyond the end of the season.          
Management believes the likelihood of obtaining a competitive advantage would   
not justify the cost of hedging beyond the end of the season.                   

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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   
the revolving credit facility has, since September 1998, generally been arranged
to align with the denomination of the book value of net assets. By doing this,  
the Company reduces the translation exposure of net worth to changes in foreign 
currency exchange rates. The three principal exceptions are: (1) $38 million of 
net assets denominated in Pounds Sterling arising from the Company's relatively 
large presence in UK, (2) $38 million of foreign pension assets in UK and The   
Netherlands, and, (3) $5 million denominated in South African Rand due to limits
placed by the South African Reserve Bank on the maximum indebtedness allowed by 
foreign owned corporations, based on the balance sheet as at December 31, 1998. 
The Company generates most of its trading income in foreign currencies. In order
to ensure that such trading income can be converted to yield sufficient US      
Dollars to service 67% of the interest on the $100 million 10% Senior Notes     
through May 2001, currency options were purchased in 1998. These currency       
options are for $6.7 million per year, selling Df6 million, GBP2 million        
and C$1.2 million. At December 31, 1998 the mark-to-market value of these       
currency options was $0.1 million. As the purchaser of options has no           
obligations to exercise them, any weakening of the value of the US Dollar can do
no more than reduce the fair value of these currency options to zero.           

Up to May 14, 1998, interest and currency swaps were held which achieved the    
effect of synthetically converting the original US Dollar denominated Series A  
and Series C Senior Notes into foreign currency debt of those countries where   
the Company had operations. This converted the interest on the debt from US     
Dollars to those foreign currencies in which trading income was generated. Derby
USA generated sufficient trading income to service the 7.66% Series B Senior    
Note, withstanding certain one time items.                                      

Interest Rate Risk                                                              
The weighted average interest rate on the Senior Notes was 6.9% in 1998 through 
May 13, 1998 and 10.3% effective May 14, 1998, after taking into account the    
effect of any swaps and including amortization of deferred financing costs. The 
other major element of the Company's interest expense was on the revolving      
credit facilities. These were at floating rates of 1% above the London Interbank
Offered Rate through May 13, 1998 and 2% thereafter. This produced weighted     
average interest rates on the revolving credit facilities of 6.6% in 1998, after
taking into account the effect of any swaps and including amortization of       
deferred financing costs. A hypothetical one percentage point shift in floating 
interest rates would have a $0.7 million approximate impact on annual interest  
expense. As interest rates on the revolving credit facility have been capped at 
7.9% effective August 1998 through July 2001, increases in floating interest    
rates above that level would only have limited impact on expense.               

Commodity Price Risk                                                            
The business of the Company does not carry a significant direct exposure to the 
prices of commodities.                                                          

Unsecured status of Senior Notes and asset encumbrance                          
The Indentures permit the Company to incur certain secured indebtedness,        
including indebtedness under the Revolving Credit Agreement, which is secured   
and guaranteed by the obligors thereunder through a first priority fully        
protected security interest in all the assets, properties and undertakings of   
the Company and each other obligor thereunder where available and cost effective
to do so, and to the extent permissible by local laws. The Company has          
indebtedness available under the Revolving Credit Agreement of DM214.0 million  
($113.8 million). As of June 27, 1999, the Company had indebtedness outstanding 
under the Revolving Credit Agreement of approximately $42.7 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           

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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.                                                    

The Company was not in compliance with certain of its financial covenants as of 
June 27, 1999 under the Revolving Credit Agreement. These covenants include a   
minimum level of adjusted EBITDA, a minimum interest coverage and a maximum     
amount of loans out. The impact of the restructuring charge and the underlying  
results of the UK businesses reduced adjusted EBITDA, while the issue of secured
promissory notes to partially finance the issue of shares to executives of the  
Company increased loans out. The lenders under the Revolving Credit Agreement   
granted the Company a waiver on July 27, 1999 effective to August 27, 1999 with 
respect to the Company's non compliance of these covenants. The Company is      
currently in discussion with the members of the Company's syndicated revolving  
credit facility in order to reset the levels of the financial covenants in the  
Revolving Credit Agreement on a going forward basis.                            

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                                       

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developed systems, software purchased from outside vendors and embedded chips at
the Company's manufacturing facilities, will manage and manipulate data         
involving the transition of dates from 1999 to 2000 without functional or data  
abnormality and without inaccurate results related to such dates. Due to the    
fact that existing software often defines each year with two digits rather than 
four digits, the Company's computers that have date-sensitive software may      
recognize a date using "00" as occurring in the year 1900 rather than the year  
2000, which would result in such abnormalities and inaccuracies and lead to     
disruptions of the Company's operations, including a temporary inability to     
process customer orders, send invoices or engage in other normal business       
activities. Many of the Company's existing computer systems will need to be     
retired, replaced or remediated prior to the year 2000. Retirement, replacement 
and remediation may require that, over the next few years, a substantial portion
of the Company's management information systems spending be allocated to such   
activities. The Company is currently in the process of replacing and upgrading  
the computer systems of its United States and Canadian operations. The Company  
spent a total of approximately $2.3 million in 1998 and expects to spend $1.1   
million in 1999 to achieve "Year 2000 compliance" for all of its operations. At 
June, 1999 all the compliance plans of the Company's operations were more than  
75% completed. The Company plans to complete all Year 2000 compliance efforts by
the third quarter of 1999. The costs and timing of such efforts, however, are   
based upon management's best estimates, which are derived using assumptions     
relating to, among other things, the availability of certain resources, the     
timing of actions taken by third parties and other factors. Additional          
expenditures beyond the Company's projections may be necessary. In the event    
that the Company materially underestimates the amount of funds or the time      
necessary to resolve identified problems or that any information systems relied 
upon by the Company for critical functions are not substantially Year 2000      
compliant in a timely manner, there could be a material adverse effect on the   
Company's business, financial condition and results of operations.              

The Company's plan for the Year 2000 calls for communication with significant   
suppliers and customers to determine the readiness of third parties' remediation
of their own Year 2000 issues. As part of its assessment, the Company is        
evaluating the level of validation it will require of third parties to ensure   
their Year 2000 readiness. The Company believes that the purchasing patterns of 
customers and potential customers may be affected by Year 2000 issues as        
companies expend significant resources to correct or patch their current        
software systems for Year 2000 compliance. These expenditures may result in     
reduced funds available to purchase the Company's products, which could result  
in a material adverse effect on the Company's business, financial condition and 
results of operations. There can be no assurance that any Year 2000 compliance  
problems of the Company's customers or suppliers will not have a material       
adverse effect on the Company's business, financial condition and results of    
operations.                                                                     

To date, the Company has not encountered any material Year 2000 issues          
concerning its computer systems. Accordingly, the Company has not at this time  
developed a contingency plan if it fails to achieve Year 2000 compliance and    
does not plan to develop such a plan until it learns of material impediments in 
timely implementation of its plans for the Year 2000.                           

Risk of Foreign Exchange Rate Fluctuations; Introduction of The Euro            
The Company's business is conducted by operating subsidiaries in many countries,
and, accordingly, the Company's results of operations are subject to currency   
translation risk and currency transaction risk. With respect to currency        
translation risk, the results of operations of each of these operating          
subsidiaries are reported in the relevant local currency and then translated    
into US dollars at the applicable currency exchange rate for inclusion in the   
Company's financial statements. The appreciation of the US dollar against the   
local currencies of the operating subsidiaries will have a negative impact on   
the Company's sales and operating margin. Conversely, the depreciation of the US
dollar against such currencies will have a positive impact. Fluctuations in the 
exchange rate between the US dollar and the other currencies in which the       
Company conducts its operations may also affect the book value of the Company's 
assets and the amount of the Company's shareholders' equity. In addition, to the
extent indebtedness of the Company is denominated in different currencies,      
changes in the values of such currencies relative to other currencies in which  
the Company conducts its operations may have a negative impact on the Company's 
ability to meet principal and interest obligations in respect of such           
indebtedness.                                                                   

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In addition to currency translation risk, the Company incurs currency           
transaction risk to the extent that the Company's operations involve            
transactions in differing currencies. Fluctuations in currency exchange rates   
will impact the Company's results of operations to the extent that the costs    
incurred by the operating subsidiaries are denominated in currencies that differ
from the currencies in which the related sale proceeds are denominated. To      
mitigate such risk, the Company enters into forward purchase contracts primarily
relating to the Pound Sterling, the US Dollar, the Dutch Guilder, the Deutsche  
Mark, the New Taiwan Dollar and the Yen. The Company does not enter into forward
purchase agreements for speculative purposes. Given the volatility of currency  
exchange rates, there can be no assurance that the Company will be able         
effectively to manage its currency transaction risks or that any volatility in  
currency exchange rates will not have a material adverse effect on the Company's
business, financial condition or results of operations.                         

Under the treaty on the European Economic and Monetary Union (the "Treaty"), to 
which the Federal Republic of Germany and The Netherlands are signatories, on   
January 1, 1999, a European single currency (the "Euro") replaced some of the   
currencies of the member states of the European Union (the "EU"), including the 
Deutsche Mark and Dutch Guilder.                                                

Following introduction of the Euro, the existing sovereign currencies (the      
"legacy currencies") of the eleven participating member countries of the EU (the
"participating countries") who adopted the Euro as their common legal currency  
are scheduled to remain legal tender in the participating countries as          
denominations of the Euro until January 1, 2002 (the "transition period"). The  
Euro conversion may impact the Company's competitive position as the Company may
incur increased costs to conduct business in an additional currency during the  
transition period. Additionally, the participating countries' pursuit of a      
single monetary policy through the European Central Bank may affect the         
economies of significant markets of the Company. The Company will also need to  
maintain and in certain circumstances develop information systems software to   
(1) convert legacy currency amounts to Euro; (2) convert one legacy currency to 
another; (3) perform prescribed rounding calculations to effect currency        
conversions; and (4) permit transactions to take place in both legacy currencies
and the Euro during the transition period. Since the Company conducts extensive 
business operations in, and exports its products to, several of the             
participating countries, there can be no assurance that the conversion to the   
Euro will not have a material adverse effect on the Company's business,         
financial condition or results of operations. Similarly, in the event that the  
Company materially underestimates the costs, timeliness and adequacy of         
modifications to its information systems software, there could be a material    
adverse effect on the Company's business, financial condition and results of    
operations.                                                                     

Substantial Leverage and Debt Service Obligations                               
The Company incurred substantial indebtedness in connection with the            
Recapitalization and acquisition of Diamond Back and has a highly leveraged     
capital structure. As of June 27, 1999, the Company had combined total          
indebtedness of $221.5 million (including all indebtedness and guarantees of    
indebtedness under the Revolving Credit Agreement and indebtedness under the    
South African Credit Facility, but excluding, in each case, unused commitments  
thereunder), preferred stock of $46.5 million, stock rights of $23.3 million and
the shareholders' deficit was $49.4 million. The Company's ability to make      
scheduled interest payments and repayment of principal is dependent upon its    
future operating performance, which, in turn, is subject to general economic and
competitive conditions and to financial, business and other factors, many of    
which are beyond the Company's control. Although the Company believes that,     
based on current operations, it will have sufficient cash flow from operations  
to service its obligations with respect to its indebtedness, there can be no    
assurance that the Company will be able to meet such obligations. In the event  
that the Company is unable to generate cash flow from operations that is        
sufficient to service its obligations in respect of its indebtedness, the       
Company may be required to take certain actions, including delaying or reducing 
capital expenditures, attempting to restructure or refinance its indebtedness,  
selling material assets or operations or seeking additional equity. There can be
no assurance that the Company will be able to generate cash flow from operations
that is sufficient to service its obligations in respect of its indebtedness or 
that any of such actions could be effected or would be effective to allow the   
Company to service such obligations.                                            

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Forward looking statements                                                      
This discussion contains certain forward-looking statements that involve risks  
and uncertainties. In addition, the Company may from time to time make oral     
forward-looking statements. As discussed in the Company's prospectus on Form S- 
4A filed with the SEC on December 4, 1998, actual results are uncertain and may 
be impacted by the various factors. In particular, certain risks and            
uncertainties that may impact the accuracy of the forward-looking statements    
with respect to revenues, expenses and operating results include, without       
limitation, cycles of customer orders, general economic and competitive         
conditions and changing consumer trends, foreign exchange rates, technological  
advances and the number and timing of new product introductions, shipments of   
products and components from foreign suppliers, the timing of operating and     
advertising expenditures and changes in the mix of products ordered by          
independent bicycle dealers and mass merchants. As a result, the actual results 
may differ materially from those projected in the forward-looking statements.   
Because of these and other factors that may affect the Company's operating      
results, past financial performance should not be considered an indicator of    
future performance, and investors should not use historical trends to anticipate
results or trends in future periods.                                            

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PART II 
------- 

ITEM 1.  LEGAL PROCEEDINGS                                                      

Product Liability                                                               

Due to the nature of the Company's business, the Company is a defendant in a    
number of product liability lawsuits. The plaintiffs in these lawsuits generally
seek damages, in amounts that may be material, for personal injuries allegedly  
sustained as a result of alleged defects in the Company's products. Although the
Company maintains product liability insurance, due to the uncertainty as to the 
nature and extent of manufacturers' and distributors' liability for personal    
injuries, there can be no assurance that the product liability insurance        
maintained by the Company is or will be adequate to cover product liability     
claims or that the applicable insurer will be solvent at the time of any covered
loss. In addition, due to deductibles, self-retention levels and aggregate      
coverage amounts applicable under the Company's insurance policies, the Company 
will bear responsibility for a significant portion, if not all, of the defense  
costs (which include attorneys' fees and expenses incurred in the defense of any
claim) and the related payments to satisfy any judgments associated with any    
claim asserted against the Company in excess of any applicable coverage. The    
settlement of a significant number of insured claims, the settlement of a claim 
exceeding the Company's insurance coverage or the successful assertion or       
settlement of an uninsured claim could have a material adverse effect on the    
Company's business, financial condition or results of operations. There can be  
no assurance that insurance will remain available, or, if available, will not be
prohibitively expensive. The deductible under the Company's insurance policies  
is currently $250,000 per claim; however, prior to 1993, the deductible was $1.0
million per claim. Not all claims arising during the period in which the        
Company's deductible was $1.0 million have been resolved and it is possible that
additional claims may be filed. The aggregate amount of liability under existing
and potential claims could exceed the reserves established by the Company for   
product liability claims.                                                       

Product Recalls                                                                 

Although the Company has not recently experienced a significant product recall, 
the Company has, in the past, recalled certain bicycle models. If the Company   
were required to make a significant product recall, such a recall could have a  
material adverse effect on the Company's business, financial condition or       
results of operations. In common with the rest of the bicycle industry,         
components fitted to its bicycles may be subject to a recall program of the     
component supplier.                                                             

Liability For Environmental Matters                                             

The Company is subject to a wide variety of governmental requirements related to
environmental protection including, among other things, the management of       
hazardous substances and wastes. Although the Company has made and will continue
to make significant expenditures related to its environmental compliance        
obligations, there can be no assurance that the Company will at all times be in 
compliance with all such requirements. Moreover, the Company's existing and     
historical operations, including the operations of its predecessors, expose the 
Company to the risk of clean-up liabilities or environmental or personal injury 
claims related to releases and emissions of hazardous substances and wastes.    
Such liabilities and claims could require the Company to incur material costs   
related to such releases or to the investigation or remediation of contaminated 
property. Also, changes in existing environmental requirements or the imposition
of additional environmental liabilities related to existing or historical       
operations could result in substantial cost to the Company.                     

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ITEM 2.  CHANGES IN SECURITIES                                                  

On April 1, 1999 and June 1, 1999 the Company issued a total of 1,520 shares of 
Class A and 380 shares of Class C common stock to executives of the Company for 
a total of $1,900,000. 300 shares of Class A common stock issued to Gary        
Matthews were, effective from the date of issue, converted to Class C common    
stock.                                                                          

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ITEM 3.    EXHIBITS AND REPORTS ON FORM 8-K                                     

a)   Index to Exhibits:                                                         

1)   Amended and Restated Certificate of Incorporation of The Derby Cycle       
Corporation.                                                          

2)   Employment Agreement made as of June 1, 1999 between The Derby Cycle       
Corporation and Daniel S. Lynch.                                      

3)   Management Stock Purchase Agreement dated as of June 1, 1999 between The   
Derby Cycle Corporation and Daniel S. Lynch.                          

Reports on Form 8-K                                                             

Report on Form 8-K filed May 7, 1999.                                           

SIGNATURES                                                                      

POWER OF ATTORNEY                                                               

KNOW ALL MEN BY THESE PRESENT, that each person whose signature appears below   
constitutes and appoints Simon J. Goddard, his true and lawful attorney-in-fact 
and agent, with full power of substitution and re-substitution, for him and in  
his name, place and stead, in any and all capacities (including his capacity as 
a director and/or officer of The Derby Cycle Corporation), the Quarterly Report 
on Form 10-Q filed pursuant to the Securities Exchange Act of 1934, and to file 
the same, with all exhibits thereto, and other documents in connection          
therewith, with the Securities and Exchange Commission, granting unto said      
attorney-in-fact and agent full power and authority to do and perform each and  
every act and thing requisite and necessary to be done in and about the         
premises, as fully to all intents and purposes as he might or could do in       
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or his substitute or substitutes, may lawfully do or cause to be done by virtue 
hereof.                                                                         

Pursuant to the requirements of the Securities Exchange Act of 1934, this       
Registration Statement and power of attorney have been signed by the following  
persons in the capacities and on the dates indicated:                           

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                                                                [Download Table]

SIGNATURE                          CAPACITY               DATE           
                                                                         
                                   President, Chief                      
                                   Executive Officer and                 
                                   Director (principal                   
/s/ Gary S. Matthews               executive officer)     August 11, 1999
---------------------------------                                        
GARY S. MATTHEWS                                                         

                                   Chief Financial                       
                                   Officer (principal                    
                                   financial and                         
/s/ Daniel S. Lynch                accounting officer)    August 11, 1999
---------------------------------                                        
DANIEL S. LYNCH                                                          

                                   Chairman of the                       
/s/ Frederic V. Malek              Board and Director     August 11, 1999
---------------------------------                                        
FREDERIC V. MALEK                                                        

/s/ Alan J. Finden-Crofts          Director               August 11, 1999
---------------------------------                                        
ALAN J. FINDEN-CROFTS                                                    

/s/ A. Edward Gottesman            Director               August 11, 1999
---------------------------------                                        
A. EDWARD GOTTESMAN                                                      

/s/ Frank H. Pearl                 Director               August 11, 1999
---------------------------------                                        
FRANK H. PEARL                                                           

/s/ Carl J. Rickertsen             Director               August 11, 1999
---------------------------------                                        
CARL J. RICKERTSEN                                                       

/s/ Thomas H. Thomsen              Director               August 11, 1999
---------------------------------                                        
THOMAS H. THOMSEN                                                        

Pursuant to the requirements of the Securities Exchange Act of 1934, the        
Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on   
its behalf by the undersigned, thereunto duly authorized, in the city of        
Nottingham, England on August 11, 1999.                                         

The Derby Cycle Corporation                                                     

By: /s/ Simon J. Goddard                                                        
---------------------------------                                               
Name: SIMON J. GODDARD                                                          
Title: Company secretary                                                        

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Dates Referenced Herein and Documents Incorporated by Reference

		Referenced-On Page
This ‘10-Q’ Filing	Date	First	Last	Other Filings

	1/1/02	30
	8/27/99	11	28
Filed on:	8/11/99	35
	7/27/99	11	28
For Period End:	6/27/99	1	30
	6/1/99	12	34
	5/7/99	34		8-K
	4/1/99	12	33	10-K
	3/28/99	15		10-Q
	2/4/99	11	25	8-K
	1/1/99	6	30
	12/31/98	3	27	10-K
	12/4/98	31		S-4/A
	10/21/98	14
	10/20/98	12
	10/1/98	10
	6/28/98	3	21
	5/14/98	9	27
	5/13/98	27
	1/1/98	14
	1/1/93	25
				List all Filings

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Filing Submission 0000928385-99-002528 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

Derby Cycle Corp – ‘10-Q’ for 6/27/99

On: Wednesday, 8/11/99 · For: 6/27/99 · Accession #: 928385-99-2528 · File #: 333-61191

Previous ‘10-Q’: ‘10-Q’ on 5/12/99 for 3/28/99 · Next: ‘10-Q’ on 11/10/99 for 9/26/99 · Latest: ‘10-Q’ on 10/17/01 for 7/1/01

Quarterly Report — Form 10-QFiling Table of Contents

10-Q — Derby Cycle Corporation 10-QDocument Table of Contents

Dates Referenced Herein and Documents Incorporated by Reference

Quarterly Report — Form 10-Q
Filing Table of Contents

10-Q — Derby Cycle Corporation 10-Q
Document Table of Contents