Derby needs to dig deep to please the banks

As a paying subscriber to EdgarOnline.com, we get notification of the latest corporate filings to the US Securities and Exchange Commission (SEC). Derby has just filed its statement for the third quarter, ended 1st October 2000

This shows that Derbys global sales were down two percent to $99.2 million compared to the third quarter last year. 18 000 fewer Derby bikes were sold worldwide during the third quarter.

Much of the drop in sales during the first nine months of the year are due to Raleigh in the UK and Derby USA in America.

To September 26 1999 Raleigh sold 323 000 bikes. In roughly the same period in 2000 (Oct 1st 2000), Raleigh sold 264 000 bikes. Derby USAs sales fell from 367 000 to 339 000.

Derbys report to SEC, a document that corporations are legally obliged to file and which is used by investors to evaluate a corporations strengths and weaknesses, said: The change in sales volume at Raleigh U.K. arose because a major customer ended 1999 with excess inventory and cut back its purchase from 12 thousand units in the first quarter of 1999 to less than 1 thousand units in the first quarter of 2000 while sales have since suffered from the introduction of competing brands, leading to a reduction of 29 thousand units in sales for the nine months ended October 1, 2000.

[The major customer, of course, is Halfords.]

The SEC filing also mentions the supply problems caused by Ralegh importing all its frames instead of making them in the UK:

Sales also suffered from less availability from stock due to the longer lead-time on out-

sourced frames compared with in-house manufacture which ceased in December 1999:

this is estimated to have caused the loss of sales of 15 thousand units as

demand was concentrated more towards the lower price-points than had been

anticipated.

For the quarter ended October 1, 2000, UK sales were adversely affected by wet

weather and low availability of those models in demand…

Derby, as a whole, is heavily in debt ($245m at the last count) and a downturn in the market could put it at risk of not being able to meet its financial obligations under the Revolving Credit Agreement brokered by Chase Manhattan bank in 1998.

The Company incurred significant indebtedness in connection with the

Recapitalization. As of October 1, 2000, the Company had $233.4 million of

combined indebtedness, comprising $149.3 million of Senior Notes, a $20.0

million Subordinated Note, $7.0 million of Junior Subordinated Notes from Thayer

and Perseus, as well as $37.1 million of draw downs, $0.3 million of overdraft

and $4.9 million of guarantees under the revolving credit facility and $1.0

million of borrowings under the South African Credit Facility.

In order to reduce its debt and keep within the financial shackles imposed by the banks, Derby sold land and a company in 1999 and 2000. The land was the factory sites of Sturmey Archer and Raleigh, and the company, of course, was Sturmey Archer.

Derbys SEC filing puts it like this:

The Revolving Credit Agreement provided for a seven-year DM214 million secured

senior revolving credit facility to be made available to the Company’s operating

companies. The facility was reduced to DM183 million on June 30, 2000, the DM31 million reduction being equivalent to the proceeds of a property sale completed in December 1999 and the working capital of the Sturmey Archer business that was sold.

31 million Deutchmarks is about £9.4m.

Derbys SEC filing says the corporation needs to increase its mortgage:

The Company expects that the existing revolving credit facility will not be

sufficient to cover its liquidity requirements. The Company is currently

negotiating with the lenders under its Credit Agreement to increase its line of

credit and to amend certain financial covenants in the Credit Agreement. In

addition, the Company is exploring other financing options including raising new

equity and/or debt capital.

However, No assurance can be given that the Company will be

successful in meeting these objectives.

If Derby is unsuccesful in securing more loans it could be in serious trouble, says the SEC filing.

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.

The banks would own Derby and might have to sell off Derbys companies to recoup their cash.

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.

Derby has so far breached three of its loan covenants.

It went $4.3m over its Aggregate Financial Indebtedness on July 4th 2000. On August 6th Derby breached the Inventory Days covenant. And on October 1st, Derby breached the Consolidated Adjusted EBITDA to Consolidated Net Interest Payable.

According to Derby the banks granted waivers of these breaches through October 30, 2000. The Company has currently drawn down DM118.1 million

and has ancillary facilities available to it of DM24.0 million, out of the total

facility of DM182.9 million ($82 million), but cannot make further draw downs

under the Revolving Credit Agreement until and unless the current negotiations

with the lenders are complete. No assurance can be given that the Company will

be successful in its negotiations with its lenders.

The Company incurred substantial indebtedness in connection with the

recapitalization in 1998 and acquisition of Diamond Back in 1999 and has a

highly leveraged capital structure. As of October 1, 2000, the Company had

combined total indebtedness of $245.7 million.

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.

Naturally, a lot of these caveats are bog standard in financial reports of this kind, and its not always necessary to take them at face value, but nevertheless Derby has a fair few liquidity problems on its hands.