This afternoon the Derby Cycle Corporation filed its full annual return to the US Securities and Exchange Commission (SEC). Derby’s loss of $51m was revealed on on April 2nd when the Corporation applied for a 14-day extension of the deadline but today’s filing reveals the details behind the massive loss. The 223-page document contains plenty of blood-curdling material, appropriate since today is Friday the 13th…

Derby’s $51m loss: it’s a bit of a horror story

Today’s SEC filing fills in the gory details behind the headline loss of $51m. It also reveals the healthy compensation package paid to Gary Matthews, the person who sold Sturmey Archer to a flaky investment house and who was at the helm of Derby when it was incurring such huge losses.

Alan Finden-Crofts, the new man at the helm of the group he co-founded and built to being the biggest bike group in the world (and a profitable one), revealed on that, thanks to Derby’s losses the group would be “deleveraged”, with the VC sponsors likely to lose out big-time but with tthe creditors and banks all to be paid in full before the group metamorphoses into a leaner, less debt-ridden entity.

Derby employed 2745 people at December 31, 2000. Two days later that total shrunk somewhat with the departure of Gary Matthews and some of his underlings. Industry veterans were brought back on board; Matthews’ US HQ was closed down and, his cash-sucking e-commerce venture, was shelved.

The cost-cutting moves may be just in the nick of time to save the group from bankruptcy and the planned “deleveraging” should mean Derby can move forward almost whole.

However, its main profit centre – Gazelle of the Netherlands – is currently the subject of due diligence researches to see whether an MBO can go ahead. Whilst selling Gazelle – something Finden-Crofts is said not be keen on – will bring in heaps of cash, removing the main profit centre may mean a more radical restructuring of the group than originally planned.

Far Eastern suppliers are keeping a keen eye on developments. This is alluded to in the annual accounts:

“Although Shimano has not indicated any intention to limit or reduce sales of components to [Derby], if it were to do so [Derby’s] business, financial condition and results of operations could be adversely affected.”

According to the accounts, Derby made a net loss of $51.3m as against a loss of $5.2m in 1999, $5.9m in 1998 but a profit of $12.6m in 1997.

For the fiscal years ended December 31, 1998, 1999 and 2000 Derby had net revenues of $450m, $529m, and $526.7 million respectively, and EBITDA of $29.6m, $29.9m and an EBITDA loss of $0.7m, respectively.

Derby’s annual accounts are brutally frank. Sales fell in the US and UK “due to the disruption arising from the reorganization of manufacturing, selling and distribution operations and some lackluster products.”

Matthews lavished $15.2 million on consultants and his corporate HQ in 2000, whereas before Finden-Crofts ran the corporation from a home office and with no consultants.

The sale of Sturmey Archer to Lenark Ltd (see passim) resulted in an aggregate loss of $8.3 million from the initial sale and subsequent claims from Sturmey Archer suppliers.

The report reveals that Raleigh sold 407 000 bikes in 2000 compared to 502 000 in 1999.

As was said in the quarterly SEC filings (already reported on the drop in sales volume at Raleigh arose because Halfords ended 1999 with excess inventory and cut back its purchase from 12 000 units in the first quarter of 1999 to less than one thousand units in the first quarter of 2000.

However, in a newly inserted paragraph Raleigh is shown to be expecting to benefit from the collapse of Schwinn/GT’s European distribution company:

“Sales to [Halfords] suffered from the introduction of competing brands in the U.K., especially Schwinn and GT, leading to a reduction of 24 thousand units in sales for the balance of the year. Schwinn and GT have withdrawn from the U.K. market in 2001.”

However, sales at Raleigh also suffered from “less availability from stock due to the longer lead-time on out-sourced frames compared with the 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. The supply of play-bikes (those with wheels of 14 inches diameter or less) was out- sourced in January 2000. The initial shipments were of poor quality and required substantial rectification work, leading to lost sales, which were 27 thousand units below 1999. Finally, sales of the main product line were adversely impacted by a greater swing in customer preference to models with suspension, where the Raleigh product range was weak.”

Raleigh had net revenue of $67.1m in 2000 compared to $76.6m in 1999. The P&A side consistently outperforms the bike side:

“Sales of parts and accessories saw double digit percentage growth, with all markets apart from the U.S.A. growing.”

As has been reported previously on, Derby was in breach of the financial covenants under its Revolving Credit Agreement (er, big bank loans) as at December 31, 2000 and continues to be in default.

“The Company believes that it will not be in compliance with the Consolidated Adjusted EBITDA covenant for the first quarter of 2001 due to the expense of closing both its Stamford, Connecticut headquarters and the manufacturing operations at its Kent, Washington facility.”

The “deleveraging” of Derby is being handled by merchant bank Lazard Freres & Co. of London.

Derby’s accounts say: “Lazard are exploring all alternatives available to the Company in order to repay the Revolving Credit Facility, including refinancing the Revolving Credit Facility with asset based lenders, the sale of certain assets and operations and the restructuring of other indebtedness. While management presently has no firm plans to dispose of significant assets or operations, it is possible that the sale of certain assets and operations may involve the disposal of a significant part of the Company’s operations. No assessment can be made at this time of the likelihood that any refinancing, sale, or restructure of indebtedness is feasible or can be effectively implemented.”

Bit of a bummer for Thayer and Perseus, the VC ‘sponsors’ who refinanced Derby in 1998, they look likely to lose their shirts:

“The Company believes that any repayment of the Revolving Credit Facility would be made in conjunction with a restructuring of the Senior Notes.

“In order both to address its long-term capital and debt service requirements, and in connection with the potential repayment of the Revolving Credit Facility, the Company began working with an informal committee comprised of holders of more than 50% of the principal amount of its Senior Notes, on March 21, 2001, for the purposes of negotiating a consensual restructuring of its outstanding securities. The Company has advised the informal committee of noteholders that any restructuring proposal made by the Company will (a) provide for payment in full of all obligations to the Company’s trade creditors that continue to support the Company with customary trade credit and (b) not have any impact on the day-to-day operations with regard to employees, customers, suppliers, distributors and general business.”

The sponsors look likely to lose out because Derby has “suffered recurring net losses, has a net capital deficiency and is currently in default of its Revolving Credit Agreement. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.”

And who was in charge when the losses were racking up but the first class flights were still been enjoyed by group execs? Step forward Gary S. Matthews. He’s lost out financially then? Hardly.

His employment contract still had nearly two years left on the clock so, on December 20th 2000, his lawyers were able to negotiate a separation settlement of $500 000. Derby’s lawyers were able prevent the group from buying back Matthews’ stock at $1.5m. Instead he was paid “an amount equal to the fair market value as at January 2, 2001 of the 1,500 shares of Class A and Class C common stock.”

It is a requirement of the separation settlement that Derby “shall not disparage” Matthews. Derby even has to provide positive references for the CEO who presided over the sale of Sturmey Archer and which subsequently went into liquidation through no real fault of its own.

Finden-Crofts told last month that the way this sale was handled was a “debacle.” Indeed, and it certainly shone light on the management failings at the top of Derby throughout 2000.

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