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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 3, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-24884
CANNONDALE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 06-0871823
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
16 TROWBRIDGE DRIVE, 06801
BETHEL, CONNECTICUT (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 749-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH REGISTERED
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NONE N/A
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01
COMMON STOCK PURCHASE RIGHTS
Indicate by check mark whether 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
At September 21, 1999, the aggregate market value of the voting stock held
by non-affiliates of registrant was $51,408,124 based on the per share closing
price on such date, and registrant had 7,491,421 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's definitive Proxy Statement relating to the 1999
Annual Meeting of Stockholders are incorporated by reference into Part III, as
set forth herein.
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PART I
ITEM 1. BUSINESS.
GENERAL.
Cannondale Corporation ("Cannondale" or the "Company") is a leading
manufacturer of high-performance bicycles. The Company's bicycle line has grown
from 21 models in its 1992 model year to 71 models in its 2000 model year, the
significant majority of which are hand assembled and constructed with
hand-welded aluminum frames. Cannondale also sells other bicycle related
products, which include clothing, shoes and bags, and a line of components, some
of which are manufactured for the Company by third parties. In February 1998,
the Company announced plans to manufacture and sell a Cannondale
high-performance motocross (off-road) motorcycle (the "MX400"). The Company
anticipates initial shipments of the MX400 to begin in the second quarter of its
2000 fiscal year. The Company was incorporated in Delaware in 1971.
Despite the growth experienced by the Company, with net sales increasing
from $54.5 million in fiscal 1991 to $176.8 million in fiscal 1999, the bicycle
market has matured in recent years and its growth has subsided. The Company
believes that it can leverage its domestic flexible manufacturing capabilities
which allow it to consistently provide high quality and innovative products to
the market faster than its competition to take strategic advantage of the
current market conditions. Additionally, the Company believes that a marketing
strategy consistent with the bicycle product line, one that focuses on
innovation, differentiation, performance and quality leadership, used in the
motocross motorcycle market, provides the Company with a viable diversification
growth strategy.
PRODUCTS.
The Company's bicycles are marketed under the Cannondale brand name and
"Handmade in USA" logo. The Company's 2000 bicycle line offers 71 models, the
vast majority of which feature a lightweight Cannondale hand-welded and
hand-assembled aluminum frame. Cannondale's use of aluminum allows it to produce
frames that are generally lighter in weight than steel frames. Cannondale
bicycles employ wide diameter tubing, which provides greater frame rigidity as
well as a distinctive look. Certain Cannondale models also have full or front
suspension systems, offering greater comfort and control than non-suspended
bikes. The Company's 2000 bicycle line features the second generation Raven, a
high-performance, full-suspension mountain bike that is composed of lightweight
thermoplastic carbon fiber skins bonded to a magnesium spine, providing an even
lighter frame weight than its steel and aluminum counterparts. The second
generation Raven frame is 20% lighter than the original version of the Raven
frame.
There are five major categories of bicycles sold in the adult market:
mountain, road racing, multi-sport, recreational and specialty. Mountain bikes
have wide knobby tires and straight handlebars and are designed for off-road
riding. Road racing bikes are lightweight with thin tires and drop (curved)
handlebars, and are used for competitions or fast-paced fitness riding on paved
roads. Multi-sport bikes, designed for triathlons and other multi-sport races,
typically have smaller diameter wheels than traditional road racing bikes, and
are crafted from aerodynamic tubes. The recreational segment is composed of
hybrid and comfort bikes. Both categories offer the more upright riding position
of mountain bikes, making them popular with non-enthusiast riders. Hybrid models
use thinner, more smoothly treaded tires than those found on mountain bikes for
lower rolling resistance, while comfort bikes are equipped with generously
padded saddles and other features to maximize rider comfort. The specialty
bicycle market encompasses various niche products, including tandem, touring and
cyclocross bikes.
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The 71 bicycle models in Cannondale's 2000 model year are distributed in
the five major bicycle categories as follows:
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NUMBER OF
CATEGORY 2000 MODELS
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Mountain Bikes:
Full Suspension...................... 11
Front Suspension..................... 13
Non-Suspended........................ 3
Road Bikes:
Front Suspension..................... 3
Non-Suspended........................ 15
Multi-Sport............................ 2
Recreational:
Hybrid............................... 7 (three front suspension)
Comfort.............................. 7 (two front suspension and one full
suspension)
Specialty:
Tandem............................... 5 (three front suspension)
Touring.............................. 3 (one front suspension)
Cyclocross........................... 2 (one front suspension)
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The Company's 2000 line of proprietary HeadShok front suspension forks is
comprised of a total of fourteen models. Each HeadShok model offers the Company
an important point of differentiation from other bicycle manufacturers,
virtually all of whom use the same brand-name forks produced by one of two
independent suppliers. The Company's 2000 HeadShok line is highlighted by the
Lefty fork. The HeadShok Lefty features a single telescoping blade that
dramatically reduces weight while delivering 100 mm of shock-absorbing travel.
In the 2000 model year, there is one HeadShok fork model that can be mounted to
non-Cannondale frames; prior to 1996, all HeadShok forks functioned with the
bicycle's frame as part of an integrated system.
The Company currently offers cranksets (front gear assemblies), pedals,
hubs, wheels, disc brakes, handlebars, handlebar grips and stems, saddles and
certain other components under its CODA brand name. As with the use of its
proprietary HeadShok forks, the Company's use of its own CODA brand components
on its bicycles helps distinguish its models from those of its competitors. In
addition to providing value-added features exclusive to Cannondale's bicycles,
CODA components also provide revenues from aftermarket retail sales.
The Company also offers a complete line of men's and women's cycling
apparel. The line includes numerous garments, and ranges from traditional
cycling shorts and jerseys to specialized, water and windproof shells cut
specifically for cold-weather cycling. The line consists of four collections:
Vertex, a high-performance, competition-level line; HpX, a versatile line of
performance-oriented apparel for riders of all abilities; Terra, more
loosely-cut garments for off-road riding; and Sport, tailored, form-fitting
garments for women cyclists.
In addition to its bicycle, suspension fork, component and clothing lines,
the Company manufactures and sells bicycle accessories, including bags, shoes
and other items, some of which are manufactured for the Company by third
parties. These products are sold primarily through the same distribution
channels as the Company's bicycles, forks, components and apparel.
The MX400 is being marketed under the Cannondale brand name and "Handmade
in USA" logo. The Cannondale MX400 motocross motorcycle allows the Company to
extend its brand into a new market by capitalizing on several of its core
competencies, particularly the ability to design, test and manufacture two-
wheeled, welded and heat-treated aluminum-framed vehicles for off-road use. The
MX400 will be powered by a proprietary liquid-cooled, electric-start, 400cc
four-stroke engine with a unique reversed cylinder head. The
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four-valve engine is fuel-injected to deliver the proper air/fuel mixture to the
engine independent of changes in air temperature or altitude. Fuel injection
also eliminates the carburetor, lowering the motorcycle's gas tank, and thus its
center of gravity, for improved handling. The elimination of the carburetor also
allows optimal shock absorber placement for improved rear wheel suspension
performance. In addition to the MX400, the Company will sell replacement parts,
and a collection of motorcycle apparel, Full Throttle Racewear. These items will
be manufactured by Cannondale and introduced concurrently with the MX400. The
Company also plans to introduce additional motorcycle models based on the MX400
platform.
MARKETING.
The goal of the Company's bicycle marketing program is to establish
Cannondale as the leading high-performance bicycle brand in the specialty
bicycle retail channel. The marketing effort is focused on innovation,
differentiation, performance and quality leadership; publicity generated from
the Company-sponsored professional athletes; and a media campaign designed to
attract consumers to specialty bicycle retailers.
Since 1994, the Volvo/Cannondale mountain bike racing team has made
significant contributions to the product development effort of the Company, and
served as a major focus of the Company's marketing effort. The Company is
leveraging the competitive success of the racing team by using photo images of
the athletes in print media, on point-of-sale literature, banners, product
packaging and product catalogs.
Cannondale's sponsorship of the Saeco/Cannondale professional cycling team
is designed to increase the Company's visibility and credibility among the
high-end consumers dedicated to road racing. A major force in the Giro d'Italia,
Tour de France, U.S. Pro Championships and other top professional road cycling
events, the Saeco/Cannondale team has competed aboard Cannondale bicycles and in
the Company's cycling apparel since the spring of 1997.
A third team, SoBe/HeadShok, is a developmental "grass-roots" squad that
has also garnered significant exposure for the Company. A pair of SoBe/HeadShok
trucks, one based in the Western U.S. and the other based in the East, attend
major races around the country. Each truck is staffed by a trained mechanic who
provides technical assistance to team riders, and who delivers instructional
clinics to Cannondale retailers and their staffs while not attending races. The
Company also sponsors several professional triathletes.
The Company has historically maintained an active program to generate
publicity regarding its products in a variety of print and broadcast media, both
enthusiast and general interest. The public relations effort has been
supplemented by the Company's advertising program, which is primarily directed
to the enthusiast press, although the Company also occasionally advertises in
more general lifestyle publications targeting the upscale adult market with
interests in outdoor and leisure activities.
The Company also makes use of the internet to promote its brand and image,
offering consumers a popular web site (www.cannondale.com), which averages more
than 11,000 visitors each day. The bicycle segment of the web site incorporates
several innovative features to link the Company and its products with potential
customers. The site's Select-A-Bike tool helps match customers to appropriate
bike models based upon their preferences and budget. The Test Ride function
allows customers to locate a particular bike model and size in their geographic
area by searching a database of dealer inventories, with a subsequent series of
automated e-mails between Cannondale, the customer and their local dealer
coordinating the test ride process. The site is also home to the Company's CHAIN
Gang, a loose confederation of more than 40,000 Cannondale owners and fans of
the Company who receive regular e-mail updates concerning new products, sales
promotions, race results and other news. The Company is in the process of
expanding its on-line presence by offering foreign language versions of key
content areas. A password-protected dealer extranet, the Cannondale Insider, is
also in development, and will ultimately allow the Company's retailers the
ability to check backorders and product availability on-line, as well as place
orders and review their account status.
The MX400 is being promoted largely through a product-driven marketing
strategy. Due to the innovations and significant new technology that the Company
has incorporated in the MX400 design, the product has received significant
amounts of favorable exposure in motocross enthusiast print media. The
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MX400 is also supported by a dedicated area within the Company's web site, and
with a motorcycle-specific on-line mailing list similar to the CHAIN Gang.
SALES AND DISTRIBUTION.
Cannondale's distribution strategy is to sell its bicycles through
specialty bicycle retailers who it believes have the ability to provide
knowledgeable sales assistance regarding the technical and performance
characteristics of its products and to provide an ongoing commitment to service
its bicycles. In addition, in order to increase the sales of its clothing and
accessory lines, the Company expanded its distribution network to include
sport-specialty retailers. The Company does not sell bicycles through mass
merchandisers. A key aspect of the Company's strategy is to align itself with a
network of specialty bicycle retailers that can support the Company's growth
objectives. When adding new retailers, the Company takes into account a number
of factors, including the targeting of certain market areas determined by
analyzing various population, demographic and competitive characteristics.
In the United States and Canada, the Company currently sells bicycles and
accessories directly to approximately 1,150 specialty bicycle retailer locations
and sells accessories through approximately an additional 500 retailer
locations. Generally, the Company's retailers do not have exclusive rights in
any territory. In addition to selling bicycles, the Company's 37 member
field-sales force is responsible for selling the Company's clothing, accessory,
CODA and HeadShok lines offered by the Company. The Company's seven member sales
management team and 37 member field-sales force contribute to all aspects of
customer service, including marketing the Company's products to retailers,
providing retailer assistance and assisting in the Company's accounts receivable
management. The account managers also monitor retail sales at the retailer
level, enabling the Company to better respond to changes in market demand and to
adjust production accordingly. In addition, the Company employs a staff of
inside sales representatives to handle retailer orders between visits from the
field-sales force and maintains staff to handle telemarketing and special
incentive programs.
Substantially all of Cannondale's domestic and international bicycle
retailers participate in the Authorized Retailer Program ("ARP"). For fiscal
year 2000, in response to the inventory reduction that occurred among the
Company's domestic and international dealers, Cannondale expanded its ARP for
domestic and international bicycle retailers. Typically, retailers that
participate in the ARP place orders for the year and agree to take delivery at
predetermined points throughout the year. This program enables retailers to plan
their business around the scheduled deliveries and provides freight and pricing
discounts, as well as payment terms that are conducive with the seasonality of
the business. Generally, retailers can place additional orders during the year
and can adjust their original ARP order as their sales warrant. In order to
reduce some of the unpredictability inherent in the dealers' ability to adjust
their original ARP, under the expanded ARP, the Cannondale sales force
formulates a delivery plan with its retailers, typically based upon historical
delivery information, that conforms with the retailers' growth objectives and
their inventory needs. This program incorporates freight and pricing discounts
as incentives for the retailers to achieve their growth objectives formulated
together by the retailers and the Company's sales force. The Company believes
that the expanded ARP allows Cannondale to maximize the competitive advantage of
its flexible domestic manufacturing capabilities which provide the Company with
the ability to meet changes in market trends and demand rapidly. The payment
terms offered by the Company generally vary from 30 to 210 days from the date of
shipment, depending on the time of year and other factors. Orders may be
canceled by the retailers without penalty up to 30 days before shipment.
Cannondale's distribution strategy is to sell the MX400 through independent
motor-sport franchises (motor-sport dealers). The Company is currently in the
process of establishing its motor-sport dealer network. The Company's strategy
is to partner itself with motor-sport dealers operated by motocross enthusiasts
whose franchise is located to take advantage of demographics consistent with the
Company's growth objectives. The motor-sport dealers must employ a staff that
possesses the technical expertise to adequately service the Company's
motorcycle, and be committed to providing ongoing support and performance
assistance to its customers. In addition, the motor-sport dealers that the
Company partners with to launch its MX400 must have access to sufficient amounts
of capital. A significant majority of the Company's motor-sport dealers will
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participate in a floor-planning arrangement that the Company has entered into
with a major financial institution. The floor-planning arrangement offers the
Company various dating options that generally vary between 10 to 60 days from
the date of shipment.
INTERNATIONAL OPERATIONS.
The Company's products are sold in approximately 60 foreign countries. The
Company's activities in Europe, Japan and Australia are conducted through three
wholly-owned subsidiaries, Cannondale Europe B.V. ("Cannondale Europe"),
Cannondale Japan KK ("Cannondale Japan") and Cannondale Australia Pty Limited
("Cannondale Australia"), respectively. Sales in other foreign countries are
made by the Company from the United States, through the use of 39 foreign
distributors who sell the Company's products to specialty bicycle retailers
overseas. During fiscal 1999, 1998 and 1997, Cannondale Europe accounted for
48%, 45% and 41%, respectively, of consolidated net sales, while Cannondale
Japan accounted for 4%, 5% and 5%, respectively. Cannondale Australia, which was
formed in fiscal 1997, accounted for 1% of consolidated net sales in fiscal
1999, 1998 and 1997.
Cannondale Europe. Cannondale Europe based in Oldenzaal, the Netherlands,
was formed in 1989. Cannondale Europe assembles bicycles at its Netherlands
facilities, using frames and components manufactured by the Company, as well as
components manufactured by third parties. Cannondale Europe sells bicycles and
accessories directly to approximately 1,400 specialty bicycle retailer locations
in Austria, Belgium, Denmark, Finland, France, Germany, Italy, Ireland,
Luxembourg, the Netherlands, Norway, Spain, Sweden, Switzerland and the United
Kingdom using locally based employee account managers supervised from the
Oldenzaal headquarters. Distributors are used in Greece, Hungary, Turkey,
Greenland, India, Bulgaria, Andorra, Malta, Estonia, Lithuania and the
Czechoslovakian Republic.
Cannondale Japan. The Company formed Cannondale Japan in fiscal 1992 to
undertake direct sales to Japanese specialty bicycle retailers. Cannondale
Japan, based in Osaka, imports fully-assembled bicycles and a full line of
accessories from the Company and various components manufactured by third
parties. Cannondale Japan sells bicycles and accessories directly to
approximately 300 specialty retailers and sells only accessories to an
additional 27 retailers.
Cannondale Australia. In July 1996, Cannondale Australia purchased
substantially all the assets of Beaushan Trading Pty Limited, an Australian
bicycle distribution company, to undertake direct sales to Australian and New
Zealand specialty bicycle retailers. Cannondale Australia, based in Sydney,
imports fully-assembled bicycles and a full line of accessories from the Company
and various components manufactured by third parties. Cannondale Australia sells
bicycles and accessories directly to approximately 200 specialty retailers.
SUPPLIERS.
Aluminum tubing, the primary material employed in the Company's
manufacturing operations for its bicycles, is available from a number of
domestic suppliers. The Company currently has a supply agreement for aluminum
tubing expiring June 30, 2001, with an option to extend the agreement for an
additional six months with price protection throughout the term of the contract.
The Company believes that the termination of its current agreement would not
have a significant impact on the availability of aluminum tubing as the supply
is currently strong, and the Company utilizes other suppliers as required.
Cannondale purchases most of its componentry from Japanese, Taiwanese and United
States OEM suppliers. Purchases from Japanese component manufacturers are made
through Cannondale Japan. The Company's largest component supplier is Shimano,
which was the source of approximately 19% of the Company's total raw material
inventory purchases in fiscal 1999. The Company has few long-term agreements
with its major component manufacturers, and has no long-term agreement with
Shimano. Although the Company believes it has established close relationships
with the principal suppliers of these components, the Company believes that its
future success will depend upon its ability to maintain flexible relationships,
which may be terminated by such suppliers on short notice, or to substitute new
suppliers without interruption of supply.
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The Company has selected the majority of the suppliers that it will use to
purchase raw material parts and components for the manufacturing operations of
its MX400. In addition to quality and cost considerations of the materials that
it will purchase, an important standard used during its selection process is
either QS9000 or ISO9000 compliance by the vendor. QS9000 and ISO9000 refers to
compliance with manufacturing standards for evaluating documented quality
assurance systems. During the process of identifying these vendors, the Company
has established strong relationships with key third-party suppliers; however,
the Company has not yet entered into any long-term supply contracts. Generally,
the raw material parts and components needed to manufacture its MX400 are
available from a variety of sources; however, manufacturing operations may be
interrupted or otherwise adversely affected by delays in the supply of parts or
components from third-party suppliers. Even if parts and components are
available from alternative sources, the Company may be subject to increased
costs and production delays in connection with the replacement of an existing
third-party supplier with one or more alternative suppliers.
PATENTS AND TRADEMARKS.
The Company holds 35 United States patents relating to various products,
processes or designs with expiration dates ranging from 2001 to 2016. The
Company focuses its attention in this area on obtaining patent protection for
the Company's core technologies and seeks broad coverage to protect its position
in the industry. The Company believes that its patented technology is a
reflection of its success in product innovation and that, collectively, its
patents enhance its ability to compete. However, in light of the nature of
innovation in the bicycle industry, the Company does not believe that the loss
of any one of its patents, or the expiration of any of its current patents,
would have a material adverse effect on the Company's business or results of
operations.
The Company holds numerous United States trademarks, covering the
CANNONDALE, CODA and HeadShok names and the names of a variety of products and
components. The CANNONDALE and CODA trademarks are also registered in
Cannondale's significant foreign markets. The Company believes its CANNONDALE
trademarks have strong brand name recognition in the bicycle and accessory
markets, which the Company believes is a significant competitive factor. The
Company also believes that its strong brand name will have a favorable effect on
the Company's entry into the motorcycle market.
SEASONALITY.
The Company's business is highly seasonal due to consumer spending
patterns, which in turn affect retailer delivery preferences, and historically
resulted in significantly stronger operating results in the third and fourth
fiscal quarters (January through June). During fiscal 1999 and 1998, the
Company's operating results have deviated from this historical pattern. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Selected Quarterly Financial Data; Seasonality."
COMPETITION.
Competition in the high-performance segment of the bicycle industry is
based primarily on perceived value, brand image, performance features, product
innovation and price. Competition in foreign markets may also be affected by
duties, tariffs, taxes and the effect of various trade agreements, import
restrictions and fluctuations in exchange rates. The worldwide market for
bicycles and accessories is extremely competitive, and the Company faces
competition from a number of manufacturers in each of its product lines. A
number of the Company's competitors are larger and have greater resources than
the Company. The Company competes on the basis of the breadth and quality of its
product line, the development of an effective specialty retailer network and its
brand recognition.
The motorcycle market is highly competitive. The Company's principal
competitors will be foreign manufacturers that have financial resources
substantially greater than those of the Company, have established manufacturing
capabilities, market and sell a product with strong brand recognition in the
market and are more diversified than the Company. As a result of the foregoing,
there can be no assurance that the Company will successfully penetrate the
motorcycle market.
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RESEARCH AND DEVELOPMENT.
Cannondale's bicycle development is directed at making bicycles lighter,
stronger, faster and more comfortable, while creating new and innovative bicycle
related products. It is the objective of the research and development group,
with the assistance of the Company's race teams, and in particular the
Volvo/Cannondale mountain bike racing team, which provide significant feedback
from the field, to design and deliver innovative products to further the
Company's efforts to position itself as an innovation leader. The Company's
research and development efforts have resulted in design and production systems
that allow the Company to compress the time between concept and production. The
Company believes that its research and development efforts have benefited from
efficiencies realized through the use of computer-aided design tools and
increased integration of the design and production processes. In addition, the
Company's collaboration with its racing teams has led to the development of
several competitive new products, including the fifth generation of CAAD
(Cannondale Advanced Aluminum Design) road and mountain bicycle frames, the
HeadShok Lefty fork and the second-generation Raven, as well as the continuous
refinement of the Company's existing products.
The research and development group leveraged its core competencies as a
technology leader of frame and suspension products in the bicycle industry to
develop an innovative frame and suspension system for its motocross motorcycle.
In addition, the Company developed a proprietary 400cc four-stroke engine that
will also be manufactured at the Company's new production facility in Bedford,
Pennsylvania. The research and development group will incorporate the design,
testing and production techniques used in the development of its bicycle product
line to continue to bring new and innovative motorcycle related products to the
market. The Company invested approximately $5.9 million and $2.0 million into
research and development of the motorcycle during fiscal years 1999 and 1998,
respectively.
The development of the MX400 and its bicycle related innovations exemplify
the commitment by the Company in fiscal 1999 to continue to invest in developing
design, product and process technologies to differentiate itself from its
competition. The Company invested $10.2 million, $6.8 million and $3.6 million
on research and development of its bicycle and motorcycle related products,
combined, during fiscal years 1999, 1998 and 1997, respectively.
ENVIRONMENTAL MATTERS.
The Company is subject to all applicable federal, state and local laws and
regulations relating to the discharge of materials into the environment, or
otherwise relating to the protection of the environment. The Company does not
believe that compliance with these regulations has an adverse effect upon its
business.
A portion of the Company's Bedford, Pennsylvania property acquired in 1992
was the subject of a groundwater monitoring program, stemming from the removal,
prior to Cannondale's acquisition of the property, of certain underground
storage tanks. The Company received a waiver from the Department of
Environmental Protection that provided for the cessation of this program. During
the program, no groundwater contamination was indicated in the sampling results.
In the unanticipated event that the situation surrounding this matter could
change, and conditions requiring remediation were discovered, the costs of such
remediation could have a material adverse effect on the Company's financial
condition.
EMPLOYEES.
As of July 3, 1999, the Company employed a total of 779 full-time employees
in the United States, Cannondale Europe employed 151 full-time employees,
Cannondale Japan employed 16 full-time employees, and Cannondale Australia
employed 6 full-time employees.
FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES.
Please refer to Note 13 of the Notes to Consolidated Financial Statements
appearing elsewhere in this Form 10-K.
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ITEM 2. PROPERTIES.
The Company's corporate headquarters and research and development facility
is located in Bethel, Connecticut. The corporate headquarters and research and
development facility contains 32,500 square feet on a five acre site. The cost
of the new facility was partially financed with a loan ($1.6 million) from the
Connecticut Development Authority ("CDA"). The loan extends to February 2008 and
is secured by the corporate headquarters and research and development facility.
Cannondale has a facility in Bedford, Pennsylvania for the production of
its bicycles and some of its bicycle related products. This Bedford plant
contains 289,000 square feet on 23 acres and not only is a production facility,
but also houses the Company's customer service department and provides
additional space for warehousing and future expanded production. In connection
with the financing of the facility, the site is held in the names of local
development agencies and is occupied by the Company pursuant to installment
sales agreements. The Company makes monthly payments which will fully amortize
the financing from the local agencies and additional financing provided by the
Pennsylvania Industrial Development Authority ("PIDA"). Upon final amortization
(the year 2013), title to the property will be conveyed to the Company and
PIDA's mortgages on the property will be released.
Cannondale had a manufacturing facility in Philipsburg, Pennsylvania. The
plant consisted of 40,000 square feet on 12 acres and housed the production of
accessories, some clothing and bike sub-assemblies. During June 1998, operations
from the Philipsburg facility were moved to the bicycle manufacturing facility
in Bedford, and in August 1998, the Philipsburg facility was sold to the
Moshannon Valley Economic Development Authority for $1.4 million.
During fiscal 1999, construction of a new facility in Bedford, Pennsylvania
to house production of the Company's motorcycle and to provide additional
warehousing space was completed. The facility contains 100,000 square feet on
23.9 acres. The project cost approximately $6.1 million, of which approximately
15% will be financed by the same agencies which have previously provided
financing for the bicycle production facility.
Cannondale Europe owns a 54,200 square foot facility in Oldenzaal, the
Netherlands, which houses administrative and sales offices, a bicycle assembly
plant and warehouse. Cannondale Europe's property provides additional space for
further expansion. Cannondale Japan and Cannondale Australia lease a total of
5,940 and 2,500 square feet of office and warehouse space, respectively.
The Company believes that its present facilities are in good condition and
will be suitable for the Company's operations and will provide sufficient
capacity to meet the Company's anticipated requirements for the foreseeable
future.
ITEM 3. LEGAL PROCEEDINGS.
The Company currently and from time to time is involved in product
liability lawsuits and other litigation incidental to the conduct of its
business. The Company is not a party to any lawsuit or proceeding that, in the
opinion of management, is likely to have a material adverse effect on the
results of operations, cash flow or financial condition of the Company; however,
due to the inherent uncertainty of litigation there can be no assurance that the
resolution of any particular claim or proceeding would not have a material
adverse effect on the Company's results of operations, cash flow or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of stockholders of the Company during
the fourth quarter of the Company's 1999 fiscal year.
8
<PAGE> 10
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning executive
officers and other key members of management of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Joseph S. Montgomery................... 59 Chairman, President, Chief Executive Officer,
Director
William A. Luca........................ 56 Vice President, Treasurer, Chief Financial Officer,
Director
Daniel C. Alloway...................... 40 Vice President of Sales
Leonard J. Konecny..................... 56 Vice President of Purchasing
John P. Moriarty....................... 55 Assistant Treasurer and Assistant Secretary,
Chief Accounting Officer
Mario Galasso.......................... 33 Vice President of Product Development
</TABLE>
JOSEPH S. MONTGOMERY founded Cannondale in 1971 and has been its Chairman,
President and Chief Executive Officer and a director since its formation. Mr.
Montgomery is the father of James Scott Montgomery, who is also a director of
the Company.
WILLIAM A. LUCA joined Cannondale in January 1994 as Vice President of
Finance, Treasurer and Chief Financial Officer. Prior to joining the Company he
served as a management consultant from 1989 to 1993, including consulting for
the Company between August and December 1993. Mr. Luca was appointed a director
of the Company in August 1994.
DANIEL C. ALLOWAY has held a number of positions since joining Cannondale
in 1982, including Vice President of Sales (November 1998 to present), Vice
President of Sales -- United States and Vice President of European Operations
(1994 to 1998), Managing Director of Cannondale Europe (1992 to 1994), Director
of Sales and Marketing (1990 to 1992) and National Sales Manager (1987 to 1990).
Mr. Alloway was appointed a director of the Company in June 1998.
LEONARD J. KONECNY joined Cannondale in 1994 as Vice President of
Purchasing. From 1988 to 1994 he was Director of Materials for General Signal
Building Systems (Dual-Lite and Edwards divisions), responsible for the
materials and purchasing functions.
JOHN P. MORIARTY joined Cannondale in 1993 as Assistant Treasurer and Chief
Accounting Officer. From 1990 to 1993 he was Controller of Cuno, Inc., a
manufacturer of fluid filtration products. Between 1981 and 1989 he was employed
by Dual-Lite, Inc., as Vice President -- Finance (1983 to 1989) and Controller
(1981 to 1983).
MARIO GALASSO joined Cannondale in 1991 as a Project Engineer. He served as
the Manager of Research and Development from 1994 to 1996. Mr. Galasso currently
serves as the Vice President of Product Development.
Each of the officers of the Company is appointed by and serves at the
pleasure of the Board of Directors.
9
<PAGE> 11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's common stock began trading on the Nasdaq National Market on
November 16, 1994, under the symbol BIKE. The following table sets forth for the
periods indicated the high and low sale prices per share for the common stock.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
FISCAL 1999
First Quarter (6/28/98 to 9/26/98)........................ 13.38 8.88
Second Quarter (9/27/98 to 12/26/98)...................... 12.38 7.00
Third Quarter (12/27/98 to 3/27/99)....................... 13.75 7.00
Fourth Quarter (3/28/99 to 7/3/99)........................ 11.75 8.25
FISCAL 1998
First Quarter (6/29/97 to 9/27/97)........................ 24.38 17.50
Second Quarter (9/28/97 to 12/27/97)...................... 24.63 19.50
Third Quarter (12/28/97 to 3/28/98)....................... 22.94 16.13
Fourth Quarter (3/29/98 to 6/27/98)....................... 16.69 12.38
</TABLE>
As of September 21, 1999, there were approximately 450 stockholders of
record of the common stock, excluding beneficial owners holding shares through
nominee names. Based on information available to it, the Company believes it had
more than 6,600 beneficial owners of its common stock as of such date.
The Company has not paid any cash dividends on its common stock since its
inception and does not anticipate paying any cash dividends in the foreseeable
future.
10
<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA.
The following selected historical statement of operations data and balance
sheet data have been derived from the Consolidated Financial Statements of the
Company, some of which are presented herein. The information set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and related Notes appearing elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS
ENDED JULY 3, ENDED JUNE 27, ENDED JUNE 28, ENDED JUNE 29, ENDED JULY 1,
1999 1998 1997 1996 1995
------------- -------------- -------------- -------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales......................... $176,819 $171,496 $162,496 $145,976 $122,081
Cost of sales..................... 114,627 110,113 101,334 92,804 79,816
-------- -------- -------- -------- --------
Gross profit...................... 62,192 61,383 61,162 53,172 42,265
-------- -------- -------- -------- --------
Expenses:
Selling, general and
administrative................ 40,599 39,361 35,707 32,577 27,023
Research and development........ 10,222 6,750 3,576 2,837 1,751
-------- -------- -------- -------- --------
Total operating expenses.......... 50,821 46,111 39,283 35,414 28,774
-------- -------- -------- -------- --------
Operating income.................. 11,371 15,272 21,879 17,758 13,491
-------- -------- -------- -------- --------
Other income (expense):
Interest expense................ (4,557) (1,995) (1,574) (2,224) (3,929)
Other income.................... 1,160 653 843 414 24
-------- -------- -------- -------- --------
Total other income (expense)...... (3,397) (1,342) (731) (1,810) (3,905)
-------- -------- -------- -------- --------
Income before income taxes and
extraordinary item.............. 7,974 13,930 21,148 15,948 9,586
Income tax expense................ (2,051) (4,578) (7,642) (5,802) (1,353)
-------- -------- -------- -------- --------
Income before extraordinary
item............................ 5,923 9,352 13,506 10,146 8,233
Extraordinary item, net of income
taxes(1)........................ -- -- -- -- (685)
-------- -------- -------- -------- --------
Net income........................ 5,923 9,352 13,506 10,146 7,548
Accumulated preferred stock
dividends(2).................... -- -- -- -- (400)
-------- -------- -------- -------- --------
Income applicable to common shares
and equivalents................. $ 5,923 $ 9,352 $ 13,506 $ 10,146 $ 7,148
======== ======== ======== ======== ========
BASIC INCOME PER COMMON SHARE:
Income before extraordinary
item(3)......................... $ 0.79 $ 1.11 $ 1.56 $ 1.23 $ 1.33
Net income........................ $ 0.79 $ 1.11 $ 1.56 $ 1.23 $ 1.21
Weighted average common
shares(4)....................... 7,518 8,442 8,638 8,216 5,888
DILUTED INCOME PER COMMON SHARE:
Income before extraordinary
item(3)......................... $ 0.77 $ 1.08 $ 1.51 $ 1.19 $ 1.20
Net income........................ $ 0.77 $ 1.08 $ 1.51 $ 1.19 $ 1.09
Weighted average common shares and
common equivalent shares
outstanding (4)................. 7,686 8,682 8,916 8,499 6,537
</TABLE>
<TABLE>
<CAPTION>
JULY 3, JUNE 27, JUNE 28, JUNE 29, JULY 1,
1999 1998 1997 1996 1995
------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................... $ 74,894 $ 78,975 $ 77,196 $ 62,032 $ 40,304
Total assets...................... 162,379 152,277 127,284 109,945 84,008
Total long-term debt, excluding
current portion................. 55,997 40,352 20,319 13,114 23,593
Total stockholders' equity........ 75,010 78,238 81,621 68,294 36,088
</TABLE>
- ---------------
(1) Extraordinary item consists of the costs relating to early extinguishment of
debt, net of applicable tax benefit.
(2) Reflects preferred stock dividends accumulated during the fiscal period. All
cumulative preferred stock dividends were paid in fiscal 1995 at the time of
the redemption of the preferred stock in connection with the Company's
initial public offering.
(3) No cash dividends were declared or paid on the common stock during any of
these periods.
(4) Weighted average number of shares outstanding in fiscal 1995 reflects the
issuance of 2,300,000 shares of common stock in connection with the
Company's initial public offering. Weighted average number of shares
outstanding in 1996 reflects the issuance of 1,366,666 shares of common
stock in connection with a public offering in fiscal 1996.
11
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS.
The following table sets forth selected statement of operations data
expressed as a percentage of net sales.
<TABLE>
<CAPTION>
FISCAL
-----------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 64.8 64.2 62.4
----- ----- -----
Gross profit................................................ 35.2 35.8 37.6
----- ----- -----
Expenses:
Selling, general and administrative....................... 23.0 23.0 22.0
Research and development.................................. 5.8 3.9 2.2
----- ----- -----
Total operating expenses.................................... 28.8 26.9 24.2
----- ----- -----
Operating income............................................ 6.4 8.9 13.4
----- ----- -----
Other income (expense):
Interest expense.......................................... (2.6) (1.2) (1.0)
Other income.............................................. 0.7 0.4 0.5
----- ----- -----
Total other income (expense)................................ (1.9) (0.8) (0.5)
----- ----- -----
Income before income taxes.................................. 4.5 8.1 12.9
Income tax expense.......................................... (1.2) (2.7) (4.7)
----- ----- -----
Net income.................................................. 3.3% 5.4% 8.2%
===== ===== =====
</TABLE>
COMPARISON OF FISCAL 1999, 1998 AND 1997.
Net Sales. Net sales increased to $176.8 million in fiscal 1999, from
$171.5 million in 1998 and $162.5 million in 1997. The increase in net sales
over these periods is primarily due to sales growth in the European bicycle
market as the awareness of the Cannondale brand has strengthened there. The
Company's rate of sales growth during the past three years has decreased
primarily as a result of the reduction in inventory by many of the Company's
domestic dealers and the cessation of growth in the bicycle market. During
fiscal 1999, the reduction of inventory also became prevalent among many of the
Company's international dealers. In addition, during fiscal 1999 the Company's
sales of high-end, higher-margin bicycles were negatively impacted by its
suppliers' ability to provide sufficient quantities of certain components in the
second quarter. Furthermore, sales volume was adversely affected by equipment
problems at the Company's bicycle manufacturing facility related to the
introduction of Year 2000 products, which hindered Cannondale's ability to
produce sufficient quantities to fill orders in the fourth quarter. The Company
has made an effort to partner itself with specialty bicycle retailers capable of
achieving growth objectives consistent with those of the Company. As a result,
over the last three years, the number of specialty retailer locations serviced
directly by the Company has remained relatively constant, increasing to
approximately 3,100 at the end of fiscal 1999 from approximately 3,000 at the
end of 1997. Net sales reported by Cannondale U.S. were $81.4 million in fiscal
1999, $83.3 million in 1998 and $85.5 million in 1997. Net sales reported by
Cannondale Europe increased to $85.6 million in fiscal 1999, from $78.0 million
in 1998 and $67.0 million in 1997. Net sales of Cannondale Japan decreased to
$7.1 million in fiscal 1999 from $8.0 million in fiscal 1998, which had
increased slightly from $7.9 million in fiscal 1997. The Company believes the
decrease in sales by Cannondale Japan during fiscal 1999 is primarily
attributable to the slumping Japanese economy. Net sales of Cannondale Australia
increased to $2.6 million in fiscal 1999 compared to $2.2 million in fiscal 1998
and $2.1 million in fiscal 1997. Based on the Company's relative market share
within the domestic and international markets, management anticipates that
international sales will continue to increase as a percentage of total sales in
the future.
12
<PAGE> 14
Gross Profits. Gross profit as a percentage of net sales decreased to
35.2% in fiscal 1999, from 35.8% in 1998 and 37.6% in 1997. The decrease in the
gross-profit rate in fiscal 1999 and 1998 compared to fiscal 1997 primarily
reflects price pressure on the Company and other bicycle suppliers in
conjunction with the maturation of the bicycle market and cessation of its
growth. In addition, the stronger U.S. dollar during fiscal 1999 and 1998
adversely affected the gross-profit rate of the Company's foreign subsidiaries
as the cost of materials purchased from the U.S. increased compared to fiscal
1997. In addition, during fiscal 1999, the Company's ability to ship high-end,
higher-margin bicycles during its second fiscal quarter was limited by its
suppliers' ability to provide sufficient quantities of certain components.
Operating Expenses. Selling, general and administrative expenses increased
to $40.6 million in fiscal 1999, from $39.4 million in 1998 and $35.7 million in
1997. Increased selling, general and administrative expenses in fiscal 1999
compared to fiscal 1998 primarily reflects higher warranty costs principally
associated with increased sales in Europe and the impact of higher depreciation
expense associated with the $15.3 million and $16.8 million of capital
expenditures in fiscal 1999 and 1998, respectively. For fiscal 1998 compared to
1997, increased selling, general and administrative expenses are directly
associated with additional personnel, primarily associated with the Company's
sales force, and advertising and marketing costs required to support the planned
growth. As a percentage of net sales, selling, general and administrative
expenses were 23.0%, 23.0% and 22.0% in fiscal 1999, 1998 and 1997,
respectively. The increased selling, general and administrative expenses as a
percentage of net sales in fiscal 1999 and 1998 reflects the Company's continued
investment to support planned growth.
Research and development expenses increased to $10.2 million in fiscal
1999, from $6.8 million in 1998 and $3.6 million in 1997, reflecting the
Company's commitment to improve its current products and processes, and to
generate new and innovative products. The increase in spending during fiscal
1999 was primarily attributable to the development of the MX400 motorcycle and
the manufacturing process associated with it. The Company invested approximately
$5.9 million in research and development for its motorcycle during fiscal 1999
compared to $2.0 million during fiscal 1998. In addition, the Company continued
to invest in the improvement and expansion of its existing bicycle and CODA
product lines. The Company's integration of its sponsored race teams, in
particular the Volvo/Cannondale mountain bike racing team and the Saeco/
Cannondale road racing team, into its research and development efforts,
continued to be a significant aspect of its investment during fiscal 1999. The
Company uses its race teams for regular testing of both prototype and finished
production models.
Interest Expense. Interest expense increased to $4.6 million in fiscal
1999, from $2.0 million in 1998 and $1.6 million in 1997. Increases in interest
expense are primarily attributable to debt incurred associated with the
Company's repurchase of $7.8 million and $12.4 million of its common stock
during fiscal 1999 and fiscal 1998, respectively, its investment of $15.3
million and $16.8 million in capital expenditures during fiscal 1999 and fiscal
1998, respectively, and the increase in working capital requirements associated
with seasonality of the business. Interest expense incurred by the Company in
fiscal 1999 as a result of the $12.0 million loan to Joseph Montgomery is offset
by interest charged to him and is recorded in other income (expense).
Other Income (Expense). Other income primarily consists of finance charges
relating to accounts receivable, which totaled $529,000, $885,000 and $810,000
for fiscal 1999, 1998 and 1997, respectively and foreign currency gains (losses)
of ($78,000), ($232,000) and $33,000 for fiscal 1999, 1998 and 1997,
respectively. In addition, for fiscal 1999 other income includes interest income
of $804,000 related to the loan to Mr. Montgomery. See Note 15 of the Notes to
the Consolidated Financial Statements.
Income Tax Expense. Income tax expense decreased to $2.1 million in fiscal
1999, from $4.6 million in 1998 and $7.6 million in 1997, which primarily
reflects the Company's reduction in profitability in fiscal 1999 and 1998. See
Note 6 of the Notes to the Consolidated Financial Statements.
13
<PAGE> 15
SELECTED QUARTERLY FINANCIAL DATA; SEASONALITY.
The following table presents selected unaudited quarterly data for the two
most recent fiscal years. This information has been prepared by the Company on a
basis consistent with the Company's audited consolidated financial statements
and includes all adjustments (consisting of normal recurring accruals) that
management considers necessary for a fair presentation of the results of such
quarters. The operating results for any quarter are not necessarily indicative
of the results for any future period.
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
--------------------------------------------------------------------------------------------------------
JULY 3, MARCH 27, DECEMBER 26, SEPTEMBER 26, JUNE 27, MARCH 28, DECEMBER 27, SEPTEMBER 27,
1999 1999 1998 1998 1998 1998 1997 1997
------- --------- ------------ ------------- -------- --------- ------------ -------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.............. $44,986 $41,714 $47,901 $42,218 $44,181 $45,305 $47,701 $34,309
Cost of sales.......... 29,327 25,967 31,719 27,614 28,923 28,101 30,137 22,952
------- ------- ------- ------- ------- ------- ------- -------
Gross profit........... 15,659 15,747 16,182 14,604 15,258 17,204 17,564 11,357
------- ------- ------- ------- ------- ------- ------- -------
Expenses:
Selling, general and
administrative(1)... 10,489 9,242 10,326 10,542 10,243 10,277 9,736 9,105
Research and
development........ 2,709 2,540 2,820 2,153 2,481 1,552 1,598 1,119
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............. 13,198 11,782 13,146 12,695 12,724 11,829 11,334 10,224
------- ------- ------- ------- ------- ------- ------- -------
Operating income....... 2,461 3,965 3,036 1,909 2,534 5,375 6,230 1,133
Other expense.......... (1,245) (598) (851) (703) (605) (456) (250) (31)
------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes................ 1,216 3,367 2,185 1,206 1,929 4,919 5,980 1,102
Income tax expense..... (307) (997) (336) (411) (276) (1,733) (2,137) (432)
------- ------- ------- ------- ------- ------- ------- -------
Net income............. $ 909 $ 2,370 $ 1,849 $ 795 $ 1,653 $ 3,186 $ 3,843 $ 670
======= ======= ======= ======= ======= ======= ======= =======
Basic income per
share(1)............. $ .12 $ .32 $ .25 $ .10 $ .20 $ .38 $ .45 $ .08
Diluted income per
share(1)............. $ .12 $ .31 $ .24 $ .10 $ .20 $ .37 $ .43 $ .07
</TABLE>
- ---------------
(1) Selling, general and administrative expenses have been restated, and as a
result the earnings per share amounts for the first three fiscal quarters of
1999 have been restated pursuant to the Company's adoption of Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" during the fourth fiscal quarter of
1999. For further discussion of the impact of the adoption of SOP 98-1, see
Note 14 of the Notes to the Consolidated Financial Statements.
The Company's results fluctuate from quarter to quarter principally as a
result of a number of factors, including product mix, the timing and number of
new retailer openings, the timing of shipments and new product introductions and
the effect of adverse weather conditions on consumer purchases. In addition, the
Company's business is seasonal due to consumer spending patterns, which in turn
affect dealer delivery preferences, and historically has resulted in more
shipments and significantly stronger results in the third and fourth fiscal
quarters (January through June). Through its ARP program, the Company attempts
to reduce the seasonality of its shipments and to smooth the production process
by providing incentives for retailers to take delivery of a higher percentage of
their annual bicycle order in the first and second fiscal quarters. During
fiscal 1999, a trend that began in fiscal 1998, inventory reductions by domestic
dealers, occurred among the Company's international dealers. For fiscal 1999,
the inventory reduction by the Company's dealers was a significant cause of the
variation in the historical pattern of stronger sales in the Company's third and
fourth fiscal quarters. The third and fourth fiscal quarters together accounted
for 49% and 52% of the Company's total net sales in fiscal 1999 and 1998,
respectively. As a result of the change in dealer delivery preferences, the
Company expanded its ARP at the end of fiscal 1999. Under the expanded ARP, the
Cannondale sales force formulates a delivery plan with its retailers, typically
based upon historical delivery information, that conforms with the retailers'
growth objectives and their inventory needs. This program incorporates freight
and pricing discounts as incentives for the retailers to achieve their growth
objectives formulated together by the retailers and the Company's sales force.
The Company believes that the expanded ARP allows Cannondale to maximize the
competitive advantage of its flexible domestic manufacturing capabilities which
provides the Company with the ability to meet changes in market trends and
demand rapidly.
14
<PAGE> 16
The Company's gross margins fluctuate primarily according to product mix,
the cost of materials, fluctuations in foreign exchange rates and the timing of
product price adjustments and markdowns. Although some operating expenses are
variable with sales, most expenses are incurred evenly throughout the year. The
third and fourth fiscal quarters accounted for 57% and 52% of the operating
income for fiscal 1999 and 1998, respectively. In addition to lower net sales
attributable to the inventory reduction by the Company's bicycle dealers,
operating income during the fourth quarter of fiscal 1999 was adversely affected
by equipment problems at the Company's bicycle manufacturing facility related to
the introduction of Year 2000 products that hindered its ability to produce
sufficient quantities to fill orders and by the increased investment in research
and development primarily related to the development of its motorcycle.
It is unlikely that the seasonal nature of the business will change
significantly in the future. While the Company was successful in reducing the
impact of the seasonality during fiscal 1999 and 1998, and in achieving
profitable performances each quarter, the Company in the past has incurred, and
may in the future incur, operating losses in a fiscal quarter, as the business
remains highly seasonal.
LIQUIDITY AND CAPITAL RESOURCES.
The Company's primary sources of working capital used over the past three
years have been borrowings under its credit facilities.
On January 22, 1999, the Company entered into an $85.0 million amended and
restated multicurrency credit facility (the "facility") secured by all of the
Company's tangible and intangible domestic assets. The facility, as amended May
1, 1999, extends through January 2002. It allows for Cannondale U.S., Cannondale
Europe and Cannondale Japan to borrow up to $65.0 million under a multicurrency
revolving line of credit and provides for a $20.0 million term loan that
amortizes by $10.0 million 30 months from the inception date of the facility.
The facility includes a provision that permits the Company to borrow up to $10.0
million of the $65.0 million revolving line of credit on a short-term basis
(less than 30 days). Under the revolving line of credit, the Company has the
option to borrow at the following rates: (1) a variable rate that is defined as
the higher of the bank's prime rate or the Federal Funds Rate plus 50.0 basis
points, (2) a short-term market rate that is an offered rate per annum quoted by
the bank or (3) the LIBOR (London Interbank Offered Rate) applicable to the
currency borrowed plus an interest rate margin ("LIBOR margin"). The LIBOR
margin (ranging from 75.0 to 170.0 basis points) is determined quarterly based
upon predetermined performance criteria. The Company is obligated to pay a
facility fee (ranging from 25.0 to 30.0 basis points) on the balance of the
facility based on the same performance criteria as the LIBOR margin. The
interest rate on the term loan is the LIBOR plus a margin that was 225.0 basis
points at July 3, 1999, and increases to 250.0 basis points January 1, 2000,
275.0 basis points April 1, 2000 and 300 basis points July 1, 2000. The facility
contains restrictive and financial covenants relating to, among other things,
the payment of dividends, the repurchase of shares of the Company's common stock
and the maintenance of minimum levels of cash flow, capitalization, interest
coverage and tangible net worth. The Company is currently in compliance with all
restrictive and financial covenants. At July 3, 1999, the borrowings outstanding
under the facility were $50.6 million.
Cannondale Europe and Cannondale Japan each maintain a separate credit
facility for short-term borrowings. In February 1998, Cannondale Europe entered
into a multicurrency credit arrangement, which allows Cannondale Europe to
borrow up to 12,500,000 Dutch guilders (approximately $5.8 million at July 3,
1999) on a short-term basis. The interest rate on outstanding borrowings is a
market rate, applicable to the currencies borrowed, plus 1.50% with a minimum
rate of 3.00%. Cannondale Japan has an unsecured revolving credit facility for
up to 155,000,000 Japanese yen (approximately $1.3 million at July 3, 1999).
Approximately $300,000 and $600,000 of principal amount was outstanding under
the Dutch and Japanese facilities, respectively, at July 3, 1999. The credit
arrangements contain no specific expiration date, and may be terminated by
either Cannondale Europe, Cannondale Japan or the lenders, at any time. The
Dutch and Japanese facilities are guaranteed by Cannondale U.S.
Net cash provided by operating activities was $14.7 million, $7.2 million
and $4.6 million in fiscal 1999, 1998 and 1997, respectively. The principal uses
of cash in operating activities over the three-year period were primarily to
support the increased investment in accounts receivable and inventories
associated with the
15
<PAGE> 17
Company's growth in sales and market conditions. The increase in cash provided
by operating activities in fiscal 1999 was primarily due to a reduction of
inventory compared to the end of fiscal 1998 which reflects the effort by the
Company to maintain inventory levels consistent with its sales levels. Cash
provided by operating activities in fiscal 1998 was primarily due to the
Company's continued profitability and its management of receivable growth,
offset by an increase in raw-material inventory levels caused by the lower sales
growth levels in the last two quarters of the 1998 fiscal year.
Capital expenditures were $15.3 million, $16.8 million and $9.8 million in
fiscal 1999, 1998 and 1997, respectively. In fiscal 1999, a significant portion
of the expenditures related to the construction of the motorcycle manufacturing
facility and equipment to develop and manufacture the motorcycle ($9.1 million).
In fiscal 1998, the majority of the expenditures related to the completion of
the corporate headquarters and research and development facility in Bethel,
Connecticut and the expansion of the Company's bicycle production facility in
Bedford, Pennsylvania ($4.8 million), and the commitment entered into by the
Company to purchase a Cessna Citation jet ($2.8 million). For both fiscal 1999
and 1998, the balance of capital expenditures principally represents investments
in computer equipment and manufacturing equipment to support increases in
production volume to support the Company's planned growth. In fiscal 1997, the
majority of the capital expenditures ($5.6 million) related to the construction
of the headquarters and research and development facility in Bethel, Connecticut
and the expansion of the Company's bicycle production facility in Bedford,
Pennsylvania. The cost of the corporate headquarters and research and
development facility was partially funded with the proceeds from the sale of the
Company's previous headquarters facility ($1.7 million) in fiscal 1997, and from
the CDA financing of $1.6 million which was funded in fiscal 1998. The Company
also received funding in fiscal 1999 ($337,500) from the Department of Economic
and Community Development for research and development equipment acquired in
conjunction with the new facilities. The Company obtained $2.0 million of
financing from PIDA to fund approximately 40% of the cost for the expansion of
the Company's bicycle production facility in Bedford, Pennsylvania, of which
$1.6 million was received during fiscal 1998, and the balance was received
during the first quarter of fiscal 1999.
During the first quarter of fiscal 1999, the Company completed the sale of
its Philipsburg facility to the Moshannon Valley Development Authority for
approximately $1.4 million, an amount which approximated the net book value of
the facility. The operations from the Philipsburg facility were moved to the
Bedford facility in June 1998.
During the third quarter of fiscal 1999, the Company entered into a $2.9
million sale-leaseback transaction for its Cessna Citation Jet aircraft. The
sale resulted in a $131,000 gain for the Company which was deferred and is being
amortized over the five-year term of the lease. The lease provides the Company
with the option to terminate the lease before the end of the lease term for
predetermined amounts without penalty. At the end of the lease term, the Company
can purchase the equipment for 90% of its original cost, renew the lease for the
then fair market value rental or sell the aircraft to a third party. If the
proceeds from the sale of the aircraft are less than 90% of the purchase price,
the Company shall make a final payment in the amount of the deficiency not to
exceed 72% of the original cost. The related lease is being accounted for as an
operating lease and will result in rent expense of approximately $273,000
annually.
In September 1997, the Company's Board of Directors authorized the
repurchase by the Company of up to 1,000,000 shares of its common stock at an
aggregate price not to exceed $20.0 million. In July 1998, the Company's Board
of Directors authorized a second stock repurchase program by the Company to
repurchase up to 1,000,000 shares of its common stock. Under both plans,
purchases by the Company can be made from time to time in the open market or in
private transactions. The repurchase programs can be suspended or discontinued
at any time. Shares repurchased by the Company will be available for general
corporate purposes, including the issuance upon exercise of stock options. As of
September 21, 1999, the Company repurchased an aggregate of 1,292,000 shares of
its common stock under the programs at a cost of $20.2 million.
In April 1998, the Company provided Joseph Montgomery, the President and
Chief Executive Officer of the Company, with a loan in the principal amount of
$2.0 million to enable him to meet certain tax
16
<PAGE> 18
obligations. In June 1998, the Company agreed to provide Mr. Montgomery with an
additional loan in the principal amount of $10.0 million for the purchase of
certain real property, which loan has been combined with the previous $2.0
million loan made in April 1998. The loan matures on August 1, 2003, at which
time the entire principal balance is due. The interest rate on the loan is set
at the prime rate as published in the Wall Street Journal from time to time, and
the loan is secured by a pledge to the Company of all of the shares of the
Company's common stock held by Mr. Montgomery and by a mortgage on such real
property. As of September 21, 1998, a principal amount of $12.0 million was
outstanding under the loan. The Company has agreed to defer the interest payment
of approximately $900,000 payable by Mr. Montgomery to the Company due August 1,
1999 pursuant to the terms of the loan. Under the terms of the deferral, Mr.
Montgomery is obligated to sell 75,000 shares of his stock in the Company per
quarter commencing in the Company's third quarter of fiscal 2000. The net
proceeds of such sales will be remitted to the Company to pay the deferred
interest. The stock selling program by Mr. Montgomery is subject to applicable
securities laws and other restrictions which may preclude Mr. Montgomery from
selling a total of 75,000 shares per quarter. This selling program will continue
until the balance of the deferred interest is paid by Mr. Montgomery in its
entirety.
Inflation is not a material factor affecting the Company's results of
operations and financial condition. General operating expenses such as salaries,
employee benefits and occupancy costs are, however, subject to normal
inflationary pressures.
The Company expects that cash flow generated by its operations and
borrowings under the revolving credit facilities will be sufficient to meet its
planned operating and capital requirements for the foreseeable future.
ACCOUNTING DEVELOPMENTS.
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 defines the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and hedging activities. In June 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133 -- an
Amendment of FASB Statement No. 133," which extends the effective date of SFAS
No. 133 to fiscal quarters beginning after June 15, 2000. In fiscal 2000, the
Company will assess how the provisions of this statement will affect its hedging
operations and future earnings. At this time, the effect of the adoption of SFAS
No. 133 on future earnings cannot be estimated.
YEAR 2000 COMPLIANCE.
The Company has assessed its exposure to the Year 2000 problem and has
completed a comprehensive response to that exposure. Generally, the Company has
potential Year 2000 exposures in three areas: (i) financial and management
operating computer systems used to manage the Company's business, (ii)
manufacturing equipment used by the Company ("embedded chips") and (iii)
computer systems used by third parties, in particular customers and suppliers of
the Company.
The Company performed an examination of its hardware and software
applications to determine whether the systems it uses to operate its business
are prepared to accommodate the Year 2000. Upon identifying the applications
that required modification to accommodate Year 2000 dating, the Company
initiated a program to modify the software using internal and third-party
service providers. The Company completed the programming changes to its software
applications to accommodate Year 2000 dating and the testing thereon, and
completed the implementation of its Year 2000 system modifications during the
fourth quarter of fiscal 1999. In concert with the Company's assessment and
modification of its hardware and software applications, the Company's
examination of its Year 2000 exposure also included the following: (1) the
Company contacted its hardware and software vendors to determine their Year 2000
readiness; (2) the Company completed a survey of its major third-party suppliers
to determine their status with Year 2000 compliance; and (3) the Company
completed its examination of factory equipment with microprocessors to determine
if Year 2000 dating affects the equipment operationally. The Company spent
approximately $62,000 in this effort. The
17
<PAGE> 19
Company increased its overall information technologies budget to accommodate
Year 2000 issues and has not delayed other information technology projects
critical to the Company's business as a result of the increase. Based on the
Company's examination of the Year 2000 problem, its implementation of
modifications to its internal systems, the representations made by its suppliers
through its survey and the completion of its examination of factory equipment,
the Company does not anticipate that the Year 2000 problem will have a material
adverse impact on its operations.
However, if the Company's changes are not successful in the remediation of
non-compliant operating systems or the correction of embedded chips or if
customers or suppliers did not in fact rectify Year 2000 issues applicable to
them, the Company is likely to incur substantial additional costs to develop
alternative methods of managing its business and replacing non-compliant
equipment. The Company may also experience delays in payments by customers or to
suppliers and delays in providing its products to customers. The Year 2000
problem is pervasive and complex and there can be no assurance that the Company
has been or will be able to identify all of the Year 2000 issues that may affect
the Company or that any remedial efforts it takes will adequately address any
potential Year 2000 problems.
THE EURO.
On January 1, 1999, certain member countries of the European Union adopted
the Euro as their common legal currency. Between January 1, 1999 and January 1,
2002, transactions may be conducted in either the Euro or the participating
countries' national currency. However, by July 1, 2002, the participating
countries will withdraw their national currency as legal tender and complete the
conversion to the Euro. The Company conducts business in Europe and does not
expect the conversion to the Euro to have a material adverse effect on its
competitive position or consolidated financial position. The Company has
completed the necessary system modifications that allow the Company to conduct
business in both the Euro as well as the participating countries' national
currency.
RECENT DEVELOPMENTS
In September 1999, a major earthquake struck the country of Taiwan. Several
of Cannondale's suppliers of bicycle components are located there. Due to the
magnitude of the disaster, and the anticipated lack of certain components coming
from these suppliers in Taiwan, Cannondale believes that there could be delays
in the bicycle manufacturing process. At this time, however, the extent of the
adverse effect of this event on Cannondale's business as a whole cannot be
determined.
CERTAIN FACTORS WHICH MAY AFFECT THE COMPANY'S FUTURE PERFORMANCE.
This Annual Report on Form 10-K contains certain forward looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which represent
the Company's expectations or beliefs concerning future events, including, but
not limited to, the following: statements regarding the state of the bicycle
industry and the growth opportunity pursued by the Company with its motorcycle;
statements regarding the sufficiency of the Company's capital and current
operational investments to finance its future growth; statements regarding the
Company's expected cash needs and sources of cash to fund its planned operating
and capital requirements; statements regarding the impact of the Company's brand
image, distribution, reputation and innovative products on the successful
introduction of new products; statements regarding expected remediation and
other costs relating to an environmental condition; statements regarding the
effect of pending lawsuits on the Company; statements regarding the impact of
the Year 2000 issue and the Euro conversion on computerized information systems;
statements regarding the condition of the Company's present facilities and the
ability of its present facilities to support its current and future production
capacity. Such statements are based upon the facts presently known to the
Company and assumptions as to important future events, many of which are beyond
the control of the Company. Among the more important factors which could
adversely affect actual results of operations are the following:
18
<PAGE> 20
Seasonality. The Company's results fluctuate from quarter to quarter as a
result of a number of factors, including product mix, the timing and number of
new retailer openings, the timing of shipments and new product introductions,
and the effect of adverse weather conditions on consumer purchases. In addition,
the Company's business is highly seasonal due to consumer spending patterns,
which in turn affect dealer delivery preferences, and historically has resulted
in more shipments and significantly stronger results in the third and fourth
fiscal quarters (January through June). The Company's gross margins fluctuate
primarily according to product mix, the cost of materials, fluctuations in
foreign exchange rates and the timing of product price adjustments and
markdowns. Although some operating expenses are variable with sales, most
expenses are incurred evenly throughout the year. It is unlikely that the
seasonal nature of the business will change significantly in the future. While
the Company was successful in reducing the impact of the seasonality during
fiscal 1999 and 1998, and in achieving profitable performances each quarter, the
Company in the past has incurred, and may in the future incur, operating losses
in a fiscal quarter, as the business remains highly seasonal.
Introduction of New Products. The Company's ability to return to the
growth pattern that characterized its operations in recent years is dependent,
to a significant degree, on its ability to successfully anticipate and respond
to changing consumer demands and trends in a timely manner, including the
introduction of new or updated products at prices acceptable to customers. While
currently a substantial part of the Company's sales are attributable to mountain
bikes, the introduction of new product lines, particularly its motorcycle, will
provide diversification of the Company's products. The Company's ability to
recover its new product investments and earn a satisfactory profit thereon will
depend on its ability to successfully produce the new products at acceptable
cost levels and the satisfactory resolution of numerous design and manufacturing
issues. In addition, market acceptance of new products is difficult to predict
and may require substantial marketing efforts.
Competition. Competition in the high-performance segment of the bicycle
industry is based primarily on perceived value, brand image, performance
features, product innovation and price. Competition in foreign markets may also
be affected by duties, tariffs, taxes and the effect of various trade
agreements, import restrictions and fluctuations in exchange rates. The
worldwide market for bicycles and accessories is extremely competitive, and the
Company faces competition from a number of manufacturers in each of its product
lines. A number of the Company's competitors are larger and have greater
resources than the Company. The Company competes on the basis of the breadth and
quality of its product line, the development of an effective specialty retailer
network and its brand recognition.
The motorcycle market is highly competitive. The Company's principal
competitors will be foreign manufacturers with financial resources substantially
greater than those of the Company, that have established manufacturing
capabilities, market and sell a product with strong brand recognition in the
market and are more diversified than the Company. As a result of the foregoing,
there can be no assurance that the Company will successfully penetrate the
motorcycle market.
Foreign Exchange Rates. A substantial portion of the Company's sales are
generated by the Company's foreign subsidiaries. Results of operations by these
subsidiaries may be adversely affected by changes in the exchange ratio between
the local currencies and the U.S. dollar. A substantial portion of the Company's
raw materials are purchased from overseas suppliers. The gross margin of the
Company may be adversely affected by changes in the exchange ratio between the
U.S. dollar and the local currency of the supplier.
Customer Base. Sales of the Company's products are made to specialty
bicycle retailers, many of which are small businesses with limited capital. The
Company's credit policies are designed to minimize the risks associated with
business failures among such customers. Nevertheless, such unpredictable matters
as poor weather could have a serious impact on important segments of the
Company's customer base.
The Company is currently in the process of establishing its motor-sport
dealer network. There can be no assurance that the Company will successfully
establish a motor-sport dealer network through which it would be able to recover
its new product investments and earn a satisfactory profit thereon.
19
<PAGE> 21
Adverse Weather. The Company's products are primarily used outdoors and
therefore adverse weather conditions can have a negative impact on consumer
demand.
Reliance on Key Vendor and Supplier Relationships. The Company's ability
to distribute its products on schedule is highly dependent on timely receipt of
an adequate supply of components and materials. The bicycles incorporate
numerous components manufactured by other companies. Aluminum tubing, the
primary material employed in the Company's manufacturing operations, is
available from a number of domestic suppliers. The Company has few long-term
agreements with its component manufacturers, and has no long-term agreement with
Shimano, its largest single supplier, or with suppliers of many of the materials
used in the manufacture of its products. Thus, the Company's supply of materials
and components from most of its current suppliers is not assured. Although the
Company believes it has established close relationships with the principal
suppliers of these components, the Company's future success will depend upon its
ability to maintain flexible relationships, which may be terminated by such
suppliers on short notice, or to substitute new suppliers without interruption
of supply. The loss of Shimano or certain other key suppliers, or delays or
disruptions in the delivery of components or materials, could adversely affect
the Company's operations.
The Company has identified the majority of the suppliers that it will use
to purchase the raw material parts and components for the manufacturing
operations of its motorcycle. During the process of identifying these vendors,
the Company has established strong relationships with key third-party suppliers;
however, the Company has not yet entered into any long-term supply contracts.
Generally, the raw material parts and components needed to manufacture its
motorcycle are available from a variety of sources; however, manufacturing
operations may be interrupted or otherwise adversely affected by delays in the
supply of parts or components from third-party suppliers. Even if parts and
components are available from alternative sources, the Company may be subject to
increased costs and production delays in connection with the replacement of an
existing third-party supplier with one or more alternative suppliers.
Discretionary Consumer Spending. Purchases of bicycles and motorcycles,
particularly high-performance models including those manufactured by the
Company, and the Company's other products are discretionary for consumers. The
success of the Company is influenced by a number of economic factors affecting
disposable consumer income, such as employment levels, business conditions,
interest rates and taxation rates. Adverse changes in these economic factors may
restrict consumer spending, thereby negatively affecting the Company's growth
and profitability.
Dependence on Key Personnel. The Company depends substantially on key
personnel involved in the research and development, marketing, sales, finance
and administration. The loss of the services of one or more of these key
persons, particularly the loss of the services of Joseph S. Montgomery, the
Company's Chairman, President and Chief Executive Officer could have a material
adverse effect on the Company's operations. Executive officers of the Company
and other management personnel frequently travel between the Company's executive
offices and its manufacturing facility on an aircraft leased by the Company. An
accident involving the corporate aircraft and resulting injury or loss of life
could have a material adverse effect on the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risks relating to the Company's operations result primarily from
changes in interest rates and foreign exchange rates, as well as credit risk
concentrations. To address these risks, the Company enters into various hedging
transactions as described below. The Company does not use financial instruments
for trading purposes.
CREDIT RISKS.
The Company's customer base is composed of specialty bicycle retailers
which are located principally throughout the United States and Europe. The
Company's net sales are concentrated in the United States and Germany. No other
single country accounted for more than 10% of the Company's net sales during
fiscal 1999, 1998 and 1997. No single customer accounted for more than 5% of the
Company's sales during fiscal 1999,
20
<PAGE> 22
1998 and 1997. As a result of the seasonality of the Company's business, the
payment terms offered to its bicycle dealers generally range from 30 to 210 days
depending on the time of year and other factors.
FOREIGN CURRENCY AND INTEREST RATE RISKS.
The Company enters into forward contracts to purchase and sell U.S.,
European, Australian, Canadian and Japanese currencies to reduce exposures to
foreign currency risk. The Company enters into forward foreign currency
contracts for a significant portion of its current and net balance sheet
exposures, principally relating to trade receivables and payables denominated in
foreign currencies, and firm sale and purchase commitments. The forward exchange
contracts generally have maturities that do not exceed 12 months and require the
Company to exchange, at maturity, various currencies for U.S. dollars and Dutch
guilders at rates agreed to at inception of the contracts. The Company does not
hold foreign currency forward contracts for trading purposes. Deferred gains and
losses resulting from effective hedges of existing assets, liabilities or firm
commitments are included in prepaid expenses and other current assets and are
recognized when the offsetting gains and losses are recognized on the related
transaction. The net gains (losses) explicitly deferred at July 3, 1999 and June
27, 1998 were not significant. Gains and losses on foreign currency transactions
that do not satisfy the accounting requirements of an effective hedge are
reported currently as other income or expense.
The Company uses borrowings of Japanese yen and Dutch guilders to hedge its
net investments in its foreign subsidiaries. Gains and losses on hedges of net
investments are recognized as a component of accumulated other comprehensive
income.
The Company also hedges exposure to changes in interest rates on its
revolving credit facility. On April 28, 1998, the Company entered into two five
year interest rate hedge agreements with a total notional principal amount of
$20.0 million to manage interest costs associated with changing interest rates.
These agreements convert underlying variable-rate debt based on LIBOR under the
Company's revolving credit facility to fixed-rate debt with an interest rate of
6.05%.
The following table provides information about the Company's derivative
financial instruments that are sensitive to changes in interest rates. The table
presents for the Company's debt obligations, principal cash flows and related
weighted-average interest rates by expected maturity dates. For interest rate
swaps, the table presents the notional amount and strike rate by maturity date.
The notional amount of the interest rate swaps is used to calculate the
contractual cash flows to be exchanged under the contract.
INTEREST RATE SENSITIVITY
PRINCIPAL (NOTIONAL) AMOUNT BY EXPECTED MATURITY
INTEREST (SWAP) RATE
(IN THOUSANDS)
<TABLE>
<CAPTION>
FAIR VALUE
AT JULY 3,
2000 2001 2002 2003 2004 THEREAFTER TOTAL 1999
----- ----- ------- ------- ----- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES:
Long-term debt, including current portion
Fixed rate................................... $ 354 $ 347 $ 298 $ 265 $ 264 $1,930 $ 3,458 $ 3,296
Average interest rate........................ 4.22% 3.98% 3.83% 3.78% 3.78% 3.77% 3.85%
Variable rate................................ $ 104 $ 157 $50,801 $ 157 $ 656 $1,120 $52,995 $52,995
Average interest rate........................ 4.97% 4.86% 6.57% 4.86% 5.19% 4.65% 6.50%
INTEREST RATE DERIVATIVE FINANCIAL INSTRUMENTS
RELATED TO DEBT:
Interest Rate Swaps
Pay fixed/receive variable................... -- -- -- $20,000 -- -- $20,000 $ 47
Average pay rate............................. 6.05% 6.05% 6.05% 6.05% -- -- 6.05%
Average receive rate -- USD 1 Month LIBOR.... -- -- -- -- -- -- --
</TABLE>
21
<PAGE> 23
The following table summarizes information on instruments and transactions
with the United States dollar functional currency that are sensitive to foreign
currency exchange rates, including foreign currency forward exchange agreements.
For foreign currency forward exchange agreements, the table presents the
notional amounts and weighted average exchange rates by expected (contractual)
maturity dates. These notional amounts are used to calculate the contractual
payments to be exchanged under the contract.
EXPOSURES RELATED TO DERIVATIVE CONTRACTS AND LONG-TERM DEBT
WITH UNITED STATES DOLLAR FUNCTIONAL CURRENCY
PRINCIPAL (NOTIONAL) AMOUNT BY EXPECTED MATURITY
FORWARD FOREIGN CURRENCY EXCHANGE RATE (USD/FOREIGN CURRENCY)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FAIR VALUE
AT JULY 3,
2000 2001 2002 2003 2004 THEREAFTER TOTAL 1999
------- ---- ------- ---- ---- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FORWARD CONTRACTS TO SELL FOREIGN
CURRENCY FOR U.S. DOLLARS:
Australian Dollar
Notional amount........................ $ 857 -- -- -- -- -- $ 857 $(13)
Contract Rate........................ 0.6590 0.6590
Canadian Dollar
Notional amount........................ $ 1,151 -- -- -- -- -- $ 1,151 $ (3)
Contract Rate........................ 0.6772 0.6772
LONG-TERM DEBT DENOMINATED IN FOREIGN
CURRENCIES:
Dutch guilder
Notional amount........................ -- -- $ 3,624 -- -- -- $ 3,624 $372
Rate at Inception.................... -- -- 0.5177 0.5177
Japanese Yen
Notional amount........................ -- -- $ 2,250 -- -- -- $ 2,250 $179
Rate at Inception.................... -- -- 0.0090 0.0090
</TABLE>
The following table summarizes information on instruments and transactions
denominated in currencies other than the functional currency that are sensitive
to foreign currency exchange rates, including foreign currency forward exchange
agreements. For foreign currency forward exchange agreements, the table presents
the notional amounts and weighted average exchange rates by expected
(contractual) maturity dates. These notional amounts are used to calculate the
contractual payments to be exchanged under the contract.
EXPOSURES RELATED TO DERIVATIVE CONTRACTS
WITH DUTCH GUILDER FUNCTIONAL CURRENCY
PRINCIPAL (NOTIONAL) AMOUNT BY EXPECTED MATURITY
FORWARD FOREIGN CURRENCY EXCHANGE RATE (NLG/FOREIGN CURRENCY)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FAIR VALUE
AT JULY 3,
2000 2001 2002 2003 2004 THEREAFTER TOTAL 1999
------- ---- ---- ---- ---- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FORWARD CONTRACTS TO SELL FOREIGN CURRENCY
FOR DUTCH GUILDERS:
Norwegian Krona
Notional amount........................... $ 963 -- -- -- -- -- $ 963 $ 4
Contract Rate........................... 0.2727 0.2727
British Sterling
Notional amount........................... $ 2,284 -- -- -- -- -- $ 2,284 $ 8
Contract Rate........................... 3.3903 3.3903
FORWARD CONTRACTS TO BUY FOREIGN CURRENCY
FOR DUTCH GUILDERS:
United States Dollars
Notional amount........................... $ 5,000 -- -- -- -- -- $ 5,000 $(12)
Contract Rate........................... 2.1521 2.1521
Japanese Yen
Notional amount........................... $ 165 -- -- -- -- -- $ 165 $ 1
Contract Rate........................... 0.0178 0.0178
</TABLE>
22
<PAGE> 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by Part II, Item
8, are included in Part IV, as indexed at Item 14(a)(1).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
23
<PAGE> 25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 is incorporated by reference to the
information appearing under the captions "Item 1 -- Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's
definitive Proxy Statement relating to its 1999 Annual Meeting of Stockholders
to be filed with the Securities and Exchange Commission within 120 days after
the close of its fiscal year. The information required by Item 10 regarding
executive officers appears under the caption "Executive Officers of the
Registrant" in Part I.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is incorporated by reference to the
information appearing under the caption "Executive Compensation" in the
Company's definitive Proxy Statement relating to its 1999 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within 120
days after the close of its fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is incorporated by reference to the
information appearing under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive Proxy Statement
relating to its 1999 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission within 120 days after the close of its fiscal
year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is incorporated by reference to the
information appearing under the caption "Certain Relationships and Related
Transactions" in the Company's definitive Proxy Statement relating to its 1999
Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission within 120 days after the close of its fiscal year.
24
<PAGE> 26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) FINANCIAL STATEMENTS.
Index to Consolidated Financial Statements.
Report of Independent Auditors.
Consolidated Balance Sheets as of July 3, 1999 and June 27, 1998.
Consolidated Statements of Earnings for the years ended July 3, 1999, June
27, 1998 and June 28, 1997.
Consolidated Statements of Stockholders' Equity for the years ended July 3,
1999, June 27, 1998 and June 28, 1997.
Consolidated Statements of Cash Flows for the years ended July 3, 1999,
June 27, 1998 and June 28, 1997.
Notes to Consolidated Financial Statements.
(a)(2) FINANCIAL STATEMENT SCHEDULE.
Report of Independent Auditors on Financial Statement Schedule.
Schedule II -- Valuation and Qualifying Accounts.
All other financial statement schedules are omitted because they are not
applicable, or not required, or because the required information is included in
the Consolidated Financial Statements or Notes thereto.
(a)(3) EXHIBITS.
The following is a list of all exhibits filed as part of this report.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
3.1(i) Form of Amended and Restated Certificate of Incorporation of
the Company. (Filed as Exhibit 3.2 to the Registrant's
Registration Statement on Form S-1, Registration No.
33-84566).+
3.1.1(i) Certificate of Amendment to Restated Certificate of
Incorporation, effective as of November 17, 1997. (Filed as
Exhibit 4.2 to the Registrant's Registration Statement on
Form S-8, Registration No. 333-40879).+
3.1(ii) Amended and Restated Bylaws of the Company. (Filed as
Exhibit 3.1(ii) to the Registrant's Form 10-Q for the
quarterly period ended March 27, 1999).+
4.1 Rights Agreement, dated December 22, 1997, between the
Company and BankBoston, N.A., as Rights Agent. (Filed with
the Registrants's Form 8-K filed on December 23, 1997).+
4.2 1994 Stock Option Plan, as amended as of February 5, 1998.
(Filed as Exhibit 4.2 to the Registrant's Form 10-K for the
fiscal year ended June 27, 1998).+
4.3 1994 Management Stock Option Plan, as amended as of February
5, 1998. (Filed as Exhibit 4.3 to the Registrant's Form 10-K
for the fiscal year ended June 27, 1998).+
4.4 1995 Stock Option Plan, as amended as of February 5, 1998.
(Filed as Exhibit 4.4 to the Registrant's Form 10-K for the
fiscal year ended June 27, 1998).+
4.5 1996 Stock Option Plan, as amended as of February 5, 1998.
(Filed as Exhibit 4.5 to the Registrant's Form 10-K for the
fiscal year ended June 27, 1998).+
4.6 1998 Stock Option Plan. (Filed as Exhibit 4.10 to the
Registrant's Registration Statement on Form S-8,
Registration No. 333-72121).+
</TABLE>
25
<PAGE> 27
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.1 First Amendment to Amended and Restated Credit Agreement,
dated as of May 1, 1999, among the Company and NationsBank
N.A., as Administrative Agent, Fronting Bank, Documentation
Agent and Swingline Bank and Fleet National Bank, The Chase
Manhattan Bank, State Street Bank and Trust Company and
BankBoston, N.A.*
10.2 Amended and Restated Credit Agreement, dated as of January
22, 1999, among the Company and NationsBank N.A., as
Administrative Agent, Fronting Bank, Documentation Agent and
Swingline Bank and Fleet National Bank, The Chase Manhattan
Bank, State Street Bank and Trust Company and BankBoston,
N.A. (Filed as Exhibit 10.1 to the Registrant's Form 10-Q
for the quarterly period ended March 27, 1999).+
10.3 Installment Sales Agreement, dated August 28, 1981, between
the Company and Bedford Development Council. Amendments to
Installment Sales Agreement, dated May 29, 1987, September
1, 1988 and October 26, 1993. Assignment of Fifth
Supplemental Installment Sale Agreement, dated October 26,
1993, from Bedford Development Council to The Pennsylvania
Industrial Development Authority. (Filed as Exhibit 10.7 to
the Registrant's Registration Statement on Form S-1,
Registration No. 33-84566).+
10.4 Consent, Subordination and Assumption Agreements, between
the Company and Bedford Development Council, in favor of The
Pennsylvania Industrial Development Authority, dated August
28, 1981, May 7, 1982, May 11, 1983, May 29, 1987, September
1, 1988, and October 26, 1993. (Filed as Exhibit 10.8 to the
Registrant's Registration Statement on Form S-1,
Registration No. 33-84566).+
10.5 Installment Sale Agreement, dated April 27, 1994, between
the Company and Bedford Development Council. Assignment,
dated April 27. 1994, from Bedford Development Council to
Pennsylvania Industrial Development Authority. (Filed as
Exhibit 10.9 to the Registrant's Registration Statement on
Form S-1, Registration No. 33-84566).+
10.6 Consent, Subordination and Assumption Agreement, dated April
27, 1994, between the Company and Bedford Development
Council, in favor of The Pennsylvania Industrial Development
Authority. (Filed as Exhibit 10.10 to the Registrant's
Registration Statement on Form S-1, Registration No.
33-84566).+
10.7 Loan Agreement, dated November 10, 1989, between the Company
and Rush Township, Commonwealth of Pennsylvania. (Filed as
Exhibit 10.11 to the Registrant's Registration Statement on
Form S-1, Registration No. 33-84566).+
10.8 Promissory Note, dated November 10, 1989, from the Company
to Rush Township, Commonwealth of Pennsylvania. (Filed as
exhibit 10.12 to the Registrant's Registration Statement on
Form S-1, Registration No. 33-84566).+
10.9 Mortgage, dated November 10, 1989, from the Company to Rush
Township, Commonwealth of Pennsylvania. Assignment of Note
and Mortgage, dated June 30, 1989, from Rush Township,
Commonwealth of Pennsylvania to Pennsylvania Department of
Commerce. (Filed as Exhibit 10.13 to the Registrant's
Registration Statement on Form S-1, Registration No.
33-84566).+
10.10 Loan Agreement, dated July 24, 1990, between the Company and
Rush Township, Commonwealth of Pennsylvania. (Filed as
Exhibit 10.14 to the Registrant's Registration Statement on
Form S-1, Registration No. 33-84566).+
10.11 Promissory Note, dated July 24, 1990, from the Company to
Rush Township, Commonwealth of Pennsylvania. (Filed as
Exhibit 10.15 to the Registrant's Registration Statement on
Form S-1, Registration No. 33-84566).+
10.12 Mortgage, dated July 24, 1990, from the Company to Rush
Township Commonwealth of Pennsylvania. (Filed as Exhibit
10.16 to the Registrant's Registration Statement on Form
S-1, Registration No. 33-84566).+
</TABLE>
26
<PAGE> 28
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.13 Installment Sales Agreement, dated December 4, 1990, between
the Company and Moshannon Valley Economic Development
Partnership. Assignment, dated December 4, 1990, from
Moshannon Valley Economic Development Partnership to The
Pennsylvania Industrial Development Authority. (Filed as
Exhibit 10.17 to the Registrant's Registration Statement on
Form S-1, Registration No. 33-84566).+
10.14 Mortgage Subordination Agreement, dated December 4, 1990,
among the Company, Moshannon Valley Economic Development
Partnership, Rush Township, Commonwealth of Pennsylvania,
and The Pennsylvania Industrial Development Authority.
(Filed as Exhibit 10.18 to the Registrant's Registration
Statement on Form S-1, Registration No. 33-84566).+
10.15 Consent, Subordination and assumption Agreement, dated
December 4, 1990, between the Company and Moshannnon Valley
Economic Development Partnership, in favor of The
Pennsylvania Industrial Development Authority. (Filed as
Exhibit 10.19 to the Registrant's Registration Statement on
Form S-1, Registration No. 33-84566).+
10.16 Loan Agreement, dated February 1, 1992, between the Company
and Moshannon Valley Economic Development Partnership.
(Filed as Exhibit 10.20 to the Registrant's Registration
Statement on Form S-1, Registration No. 33-84566).+
10.17 Installment Judgment Note, dated February 1, 1992, from the
Company to Moshannon Valley Economic Development
Partnership. (Filed as Exhibit 10.21 to the Registrant's
Registration Statement on Form S-1, Registration No.
33-84566).+
10.18 Chattel Mortgage Security Agreement, dated February 1, 1992,
between the Company and Moshannon Valley Economic
Development Partnership. (Filed as Exhibit 10.22 to the
Registrant's Registration Statement on Form S-1,
Registration No. 33-84566).+
10.19 Business Infrastructure Development Loan Agreement, dated
June 30, 1989, among the Company, Pennsylvania Department of
Commerce and Rush Township, Commonwealth of Pennsylvania.
(Filed as Exhibit 10.23 to the Registrant's Registration
Statement on Form S-1, Registration No. 33-84566).+
10.20 Promissory Note, dated June 30, 1989, from the Company to
Pennsylvania Department of Commerce. Amendment to Promissory
Note, dated February 1, 1992, from the company to
Pennsylvania Department of Commerce. (Filed as Exhibit 10.24
to the Registrant's Registration Statement on Form S-1,
Registration No. 33-84566).+
10.21 Escrow Agreement, dated June 30, 1989, among the Company,
Rush Township, Commonwealth of Pennsylvania, Pennsylvania
Department of Commerce and MidState Bank and Trust Company.
(Filed as Exhibit 10.25 to the Registrant's Registration
Statement on Form S-1, Registration No. 33-84566).+
10.22 Mortgage, dated July 23, 1991, from Cannondale Europe, B.V.
to Algemene-Bank Netherlands B.V. (In Dutch, with English
summary). (Filed as Exhibit 10.26 to the Registrant's
Registration Statement on Form S-1, Registration No.
33-84566).+
10.23 Financing Lease, dated May 31, 1991, between ABN Onroerend
Goed Lease B.V., as lessor, and Cannondale Europe B.V., as
lessee. (In Dutch, with English translation). (Filed as
Exhibit 10.27 to the Registrant's Registration Statement on
Form S-1, Registration No. 33-84566).+
10.24 Credit Agreement, dated February 5, 1998, between Cannondale
Europe B.V. and ABN AMRO Bank N.V. (Filed as Exhibit 10.1.11
to the Registrant's Form 10-Q for the quarterly period ended
March 28, 1998).+
10.25 Loan Agreement, dated September 1, 1992, between Cannondale
Japan KK and The Dai-Ichi Kangyo Bank, Ltd. (In Japanese,
with English translation). (Filed as Exhibit 10.30 to the
Registrant's Registration Statement on Form S-1,
Registration No. 33-84566).+
10.26 Guarantee Agreement, dated August 7, 1992, from the Company
to The Dai-Ichi Kangyo Bank, Ltd. (Filed as Exhibit 10.30.1
to the Registrant's Registration Statement on Form S-1,
Registration No. 33-84566).+
</TABLE>
27
<PAGE> 29
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.27 Master Lease Agreement, dated April 11, 1994, between United
States Leasing Corporation and the Company. (Filed as
Exhibit 10.32 to the Registrant's Registration Statement on
Form S-1, Registration No. 33-84566).+
10.28 Employment Agreement, dated January 3, 1994, between the
Company and William A. Luca. (Filed as Exhibit 10.48 to the
Registrant's Registration Statement on Form S-1,
Registration No. 33-84566).+
10.29 Employee Patent and Confidential Information Agreement,
dated August 20, 1982, between the Company and Daniel C.
Alloway. (Filed as Exhibit 10.49 to the Registrant's
Registration Statement on Form S-1, Registration No.
33-84566).+
10.30 Employment Agreement, dated June 6, 1994, between the
Company and Leonard Konecny. (Filed as Exhibit 10.53 to the
Registrant's Registration Statement on Form S-1,
Registration No. 33-84566).+
10.31 Cannondale Corporation 401(k) Profit Sharing Plan. (Filed as
Exhibit 10.54 to the Registrant's Registration Statement on
Form S-1, Registration No. 33-84566).+
10.32 Cannondale Corporation Employee Stock Purchase Plan. (Filed
as Exhibit 4.4 to the Registrant's Registration Statement on
Form S-8, Registration No. 333-40879).+
10.33 Form of Indemnification Agreement between the Company and
each of its directors and officers. (Filed as Exhibit 10.60
to the Registrant's Registration Statement on Form S-1,
Registration No. 33-84566).+
10.34 Change of Control Employment Agreement, dated February 5,
1998, between Cannondale Corporation and William A. Luca.
(Filed as Exhibit 10.68 to the Registrant's Form 10-Q for
the quarterly period ended March 28, 1998).+
10.35 Change of Control Employment Agreement, dated February 5,
1998, between Cannondale Corporation and Joseph S.
Montgomery. (Filed as Exhibit 10.68.1 to the Registrant's
Form 10-Q for the quarterly period ended March 28, 1998).+
10.36 Change of Control Employment Agreement, dated February 5,
1998, between Cannondale Corporation and John Moriarty.
(Filed as Exhibit 10.68.2 to the Registrant's Form 10-Q for
the quarterly period ended March 28, 1998).+
10.37 Change of Control Employment Agreement, dated February 5,
1998, between Cannondale Corporation and Daniel C. Alloway.
(Filed as Exhibit 10.68.3 to the Registrant's Form 10-Q for
the quarterly period ended March 28, 1998).+
10.38 Cannondale Corporation Change of Control Separation Plan A.
(Filed as Exhibit 10.68.4 to the Registrant's Form 10-Q for
the quarterly period ended March 28, 1998).+
10.39 Cannondale Corporation Change of Control Separation Plan B.
(Filed as Exhibit 10.68.5 to the Registrant's Form 10-Q for
the quarterly period ended March 28, 1998).+
21 Subsidiaries of the Registrant.*
23 Consent of Independent Auditors.*
24 Power of Attorney (appears on signature page ).*
27.1 Financial Data Schedule For Fiscal Year Ended July 3, 1999.*
27.2 Restated Financial Data Schedules for the Nine-Month,
Six-Month and Three-Month Periods Ended March 27, 1999,
December 26, 1998 and September 26, 1998, respectively.*
</TABLE>
- ---------------
+ Incorporated by reference.
* Filed herewith.
(b) REPORTS ON FORM 8-K.
None
28
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CANNONDALE CORPORATION
October 1, 1999 /s/ WILLIAM A. LUCA
--------------------------------------
William A. Luca
Vice President,
Treasurer and Chief Financial Officer
KNOWN BY ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints William A. Luca his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments to this Annual Report on Form 10-K, 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 as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent or their or his substitutes or substitute, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOSEPH S. MONTGOMERY Chairman, President, Chief October 1, 1999
- --------------------------------------------------- Executive Officer and Director
Joseph S. Montgomery (Principal Executive Officer)
/s/ WILLIAM A. LUCA Vice President, Treasurer, Chief October 1, 1999
- --------------------------------------------------- Financial Officer, and Director
William A. Luca (Principal Financial Officer)
/s/ DANIEL C. ALLOWAY Vice President of Sales and October 1, 1999
- --------------------------------------------------- Director
Daniel C. Alloway
/s/ JOHN P. MORIARTY Assistant Treasurer and Assistant October 1, 1999
- --------------------------------------------------- Secretary, Chief Accounting
John P. Moriarty Officer (Principal Accounting
Officer)
/s/ JAMES S. MONTGOMERY Director October 1, 1999
- ---------------------------------------------------
James S. Montgomery
/s/ GREGORY GRIFFIN Director October 1, 1999
- ---------------------------------------------------
Gregory Griffin
/s/ JOHN SANDERS Director October 1, 1999
- ---------------------------------------------------
John Sanders
/s/ MICHAEL J. STIMOLA Director October 1, 1999
- ---------------------------------------------------
Michael J. Stimola
/s/ SALLY G. PALMER Director October 1, 1999
- ---------------------------------------------------
Sally G. Palmer
</TABLE>
29
<PAGE> 31
CANNONDALE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of July 3, 1999 and June 27,
1998...................................................... F-3
Consolidated Statements of Earnings for the years ended July
3, 1999, June 27, 1998 and June 28, 1997.................. F-4
Consolidated Statements of Stockholders' Equity for the
years ended July 3, 1999, June 27, 1998 and June 28,
1997...................................................... F-5
Consolidated Statements of Cash Flows for the years ended
July 3, 1999, June 27, 1998 and June 28, 1997............. F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 32
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Cannondale Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Cannondale
Corporation and subsidiaries as of July 3, 1999 and June 27, 1998, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for the years ended July 3, 1999, June 27, 1998 and June 28, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cannondale
Corporation and subsidiaries at July 3, 1999 and June 27, 1998, and the
consolidated results of their operations and their cash flows for the years
ended July 3, 1999, June 27, 1998 and June 28, 1997, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
August 10, 1999,
except for the first paragraph
of Note 15, as to
which the date is
September 30, 1999.
F-2
<PAGE> 33
CANNONDALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JULY 3, 1999 JUNE 27, 1998
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 3,300 $ 3,031
Trade accounts receivable, less allowances of $10,074 and
$8,479................................................. 59,379 61,746
Inventory................................................. 33,165 39,420
Deferred income taxes..................................... 2,749 2,172
Prepaid expenses and other current assets................. 4,827 4,426
Interest receivable from a related party.................. 827 23
-------- --------
Total current assets........................................ 104,247 110,818
Property, plant and equipment............................... 41,377 35,769
Notes receivable and advances to related parties............ 12,919 2,688
Other assets................................................ 3,836 3,002
-------- --------
Total assets................................................ $162,379 $152,277
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 17,329 $ 16,747
Revolving line of credit.................................. 882 2,141
Income taxes payable...................................... 2,252 1,732
Other accrued expenses.................................... 4,476 3,838
Accrued warranty expense.................................. 2,808 1,982
Payroll and other employee related benefits............... 1,150 2,142
Payable to related party.................................. -- 2,800
Current installments of long-term debt.................... 456 461
-------- --------
Total current liabilities................................... 29,353 31,843
Long-term debt, less current installments................... 55,997 40,352
Deferred income taxes....................................... 1,619 1,569
Other noncurrent liabilities................................ 400 275
-------- --------
Total liabilities........................................... 87,369 74,039
-------- --------
Stockholders' equity:
Common Stock, $.01 par value:
Authorized shares -- 40,000,000
Issued 8,784,308 and 8,737,088 shares.................. 88 87
Additional paid-in capital................................ 57,815 57,303
Retained earnings......................................... 41,328 35,405
Less 1,292,900 and 656,400 shares in treasury at cost..... (20,162) (12,417)
Accumulated other comprehensive income.................... (4,059) (2,140)
-------- --------
Total stockholders' equity.................................. 75,010 78,238
-------- --------
Total liabilities and stockholders' equity.................. $162,379 $152,277
======== ========
</TABLE>
See accompanying notes
F-3
<PAGE> 34
CANNONDALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 3, 1999 JUNE 27, 1998 JUNE 28, 1997
------------ ------------- -------------
<S> <C> <C> <C>
Net sales............................................. $176,819 $171,496 $162,496
Cost of sales......................................... 114,627 110,113 101,334
-------- -------- --------
Gross profit.......................................... 62,192 61,383 61,162
-------- -------- --------
Expenses:
Selling, general and administrative................. 40,599 39,361 35,707
Research and development............................ 10,222 6,750 3,576
-------- -------- --------
50,821 46,111 39,283
-------- -------- --------
Operating income...................................... 11,371 15,272 21,879
-------- -------- --------
Other income (expense):
Interest expense.................................... (4,557) (1,995) (1,574)
Other income........................................ 1,160 653 843
-------- -------- --------
(3,397) (1,342) (731)
-------- -------- --------
Income before income taxes............................ 7,974 13,930 21,148
Income tax expense.................................... (2,051) (4,578) (7,642)
-------- -------- --------
Net income............................................ $ 5,923 $ 9,352 $ 13,506
======== ======== ========
Basic income per share................................ $ .79 $ 1.11 $ 1.56
Diluted income per share.............................. $ .77 $ 1.08 $ 1.51
</TABLE>
See accompanying notes
F-4
<PAGE> 35
CANNONDALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL TREASURY STOCK OTHER
----------------- PAID-IN RETAINED --------------------- COMPREHENSIVE
SHARES VALUE CAPITAL EARNINGS SHARES VALUE INCOME TOTAL
--------- ----- ---------- -------- ---------- -------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JUNE 29, 1996.... 8,611,715 $86 $55,965 $12,547 -- $ -- $ (304) $68,294
-------
Net income.................. -- -- -- 13,506 -- -- -- 13,506
Foreign currency
translation, (net of tax
expense of $510).......... -- -- -- -- -- -- (1,075) (1,075)
-------
Comprehensive income........ 12,431
Exercise of options......... 75,900 1 895 -- -- -- -- 896
--------- --- ------- ------- ---------- -------- ------- -------
BALANCE AT JUNE 28, 1997.... 8,687,615 87 56,860 26,053 -- -- (1,379) 81,621
-------
Net income.................. -- -- -- 9,352 -- -- -- 9,352
Foreign currency
translation, (net of tax
expense of $247).......... -- -- -- -- -- -- (761) (761)
-------
Comprehensive income........ 8,591
Exercise of options......... 49,473 -- 443 -- -- -- -- 443
Purchase of treasury
stock..................... -- -- -- -- (656,400) (12,417) -- (12,417)
--------- --- ------- ------- ---------- -------- ------- -------
BALANCE AT JUNE 27, 1998.... 8,737,088 87 57,303 35,405 (656,400) (12,417) (2,140) 78,238
-------
Net income.................. -- -- -- 5,923 -- -- -- 5,923
Foreign currency
translation, (net of tax
benefit of $25)........... -- -- -- -- -- -- (1,919) (1,919)
-------
Comprehensive income........ 4,004
Exercise of options......... 17,875 -- 169 -- -- -- -- 169
Shares issued under employee
stock purchase plan....... 29,345 1 238 -- -- -- -- 239
Stock option compensation... -- -- 105 -- -- -- -- 105
Purchase of treasury
stock..................... -- -- -- -- (636,500) (7,745) -- (7,745)
--------- --- ------- ------- ---------- -------- ------- -------
BALANCE AT JULY 3, 1999..... 8,784,308 $88 $57,815 $41,328 (1,292,900) $(20,162) $(4,059) $75,010
========= === ======= ======= ========== ======== ======= =======
</TABLE>
See accompanying notes
F-5
<PAGE> 36
CANNONDALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 3, 1999 JUNE 27, 1998 JUNE 28, 1997
------------ ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................ $ 5,923 $ 9,352 $ 13,506
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization.................... 5,782 4,054 3,211
Provision for bad debt, discount, credit and
return and late charge reserves................ 9,498 7,141 5,762
Provision for obsolete inventory................. 2,309 1,425 1,484
Unrealized (gain) loss on foreign currency
transactions................................... (865) 642 107
Deferred income taxes............................ (129) 425 (442)
Stock option compensation........................ 105 -- --
Other............................................ 122 16 (1)
Changes in assets and liabilities:
Trade accounts receivable...................... (8,151) (8,894) (17,399)
Inventory...................................... 4,040 (11,589) (1,975)
Prepaid expenses and other assets.............. (2,723) (3,319) (2,089)
Accounts payable............................... 505 4,711 138
Warranty and other accrued expenses............ (2,480) 3,174 805
Income taxes payable and other liabilities..... 743 36 1,470
-------- -------- --------
Net cash provided by operating activities............. 14,679 7,174 4,577
-------- -------- --------
INVESTING ACTIVITIES
Capital expenditures.................................. (15,257) (16,762) (9,766)
Proceeds from sale of airplane and buildings.......... 4,264 -- 1,676
Loans provided to related parties..................... (10,269) (2,461) (227)
Proceeds from repayments of loans to related
parties............................................. 38 -- --
-------- -------- --------
Net cash used in investing activities................. (21,224) (19,223) (8,317)
-------- -------- --------
FINANCING ACTIVITIES
Net proceeds from the issuance of common stock........ 408 443 896
Payments for the purchase of treasury stock........... (7,745) (12,417) --
Proceeds from issuance of long-term debt.............. 20,738 3,203 21,383
Net proceeds from (repayments of) borrowings under
short-term revolving credit agreements.............. (1,383) 1,291 (3,555)
Net proceeds from (repayments of) borrowings under
long-term debt and capital lease agreements......... (5,267) 16,833 (15,133)
-------- -------- --------
Net cash provided by financing activities............. 6,751 9,353 3,591
-------- -------- --------
Effect of exchange rate changes on cash............... 63 206 1,365
-------- -------- --------
Net increase (decrease) in cash....................... 269 (2,490) 1,216
Cash at beginning of period........................... 3,031 5,521 4,305
-------- -------- --------
Cash at end of period................................. $ 3,300 $ 3,031 $ 5,521
======== ======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest............................................ $ 3,889 $ 2,071 $ 1,781
======== ======== ========
Income taxes, net of refunds........................ $ 2,385 $ 7,341 $ 6,788
======== ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE> 37
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
Description of Business
Cannondale Corporation (the "Company") manufactures and distributes
bicycles and bicycling accessories and equipment. International operations are
conducted through the Company's wholly-owned subsidiaries: Cannondale Europe
B.V. ("Cannondale Europe"), Cannondale Japan KK ("Cannondale Japan") and
Cannondale Australia Pty Limited ("Cannondale Australia").
In February 1998, the Company announced plans to introduce a line of
motocross motorcycles. The Company's motocross motorcycle business is in the
start-up stage of operations and no revenues have been generated as of July 3,
1999.
Business and Credit Concentrations
The Company's customer base is composed of specialty bicycle retailers who
are located principally throughout the United States and Europe. The Company's
net sales are concentrated in the United States and Germany. No other single
country accounted for more than 10% of the Company's net sales during fiscal
1999, 1998 and 1997. No single customer accounted for more than 5% of the
Company's sales during the years ended July 3, 1999, June 27, 1998 or June 28,
1997. As a result of the seasonality of the Company's business, the payment
terms offered to its bicycle dealers generally range from 30 to 210 days
depending on the time of year and other factors.
The Company's raw materials are readily available and the Company is not
completely dependent upon a single supplier. The Company has, however,
preferences with respect to continuing its relationships with certain selected
vendors, and a material portion of the Company's inventory purchases is from a
single supplier. That single supplier was the source of approximately 19% of the
Company's total raw material inventory purchases in fiscal 1999.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Revenue Recognition
Sales, net of estimated returns and allowances, are recognized when
products are shipped. Provisions for returns and allowances are determined
principally on the basis of past experience.
Product Warranties
The Company provides original owners of its bicycles with a lifetime
warranty for the bicycle frame and a one-year warranty for suspensions and
components. During the warranty period, the Company will repair or replace a
defective part or assembly at no cost to the owner. Provisions for estimated
warranty expense are recognized at the time of sale, determined principally on
the basis of past experience.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or
market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Plant and equipment under
capitalized lease obligations are recorded at the present value of minimum lease
payments.
F-7
<PAGE> 38
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation of plant and equipment is calculated on the straight-line
method over 20 to 40 years for buildings and improvements and 3 to 10 years for
equipment. Amortization of assets recorded under capitalized lease obligations
is recognized over the lesser of the useful lives or lease terms and such amount
is included in depreciation and amortization expense.
Interest costs for the construction of certain long-lived assets are
capitalized and amortized over the related asset's useful life. The Company
capitalized interest costs of $101,000, $88,000 and $133,000 for the years ended
July 3, 1999, June 27, 1998 and June 28, 1997, respectively, related to the
construction of the Company's new motorcycle facility, headquarters facility and
the expansion of its bicycle manufacturing facility. Total interest incurred
before the recognition of the capitalized amount was $4,658,000, $2,083,000 and
$1,707,000 for fiscal 1999, 1998 and 1997, respectively.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes."
It requires an asset and liability approach for financial accounting and
reporting for deferred income taxes. Taxes are recognized for all temporary
differences between the tax and financial reporting bases of the Company's
assets and liabilities based on the enacted tax laws and statutory tax rates
applicable to the periods in which differences are expected to affect taxable
income.
Foreign Currency Translation
The assets and liabilities of the Company's foreign subsidiaries are
translated into U.S. dollars at current exchange rates. Revenues, costs and
expenses are translated at the average exchange rates applicable for the period.
Translation adjustments resulting from changes in exchange rates are reported as
a component of accumulated other comprehensive income pursuant to SFAS No. 130,
"Reporting Comprehensive Income."
Financial Instruments
The Company enters into foreign currency forward contracts to purchase and
sell U.S., European, Japanese, Australian and Canadian currencies to reduce
exposures to foreign currency risk. The Company does not hold foreign currency
forward contracts for trading purposes. Gains and losses resulting from
effective hedges of existing assets, liabilities or firm commitments are
deferred and recognized when the offsetting gains and losses are recognized on
the related transaction. Gains and losses on foreign currency transactions that
do not satisfy the accounting requirements of an effective hedge are reported
currently as a component of other income or expense.
During fiscal 1998, the Company entered into two interest rate swap
agreements to manage exposure to fluctuations in interest rates. The
differential between the interest paid or received on a specified notional
amount is recognized as an adjustment to interest expense. The fair value of the
swap agreements and changes in the fair value as a result of changes in market
interest rates are not recognized in the financial statements.
Stock-Based Compensation
The Company grants stock options to officers, directors, employees,
consultants and advisors with an exercise price determined by the Board of
Directors at the time of grant. The Company accounts for stock option grants,
except for those granted to consultants and advisors of the Company, in
accordance with Accounting Principles Board Standard ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," which requires that compensation
expense be recognized for the difference between the quoted market price of the
stock at the grant date and the amount that the employee is required to pay. The
Company accounts for stock option grants to consultants and advisors in
accordance with SFAS No. 123, "Accounting
F-8
<PAGE> 39
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for Stock-Based Compensation." During fiscal 1999, the Company incurred $105,000
of stock option compensation related to options granted to consultants of the
Company. As prescribed under SFAS No. 123, the Company has disclosed in Note 7
the pro-forma effects on net income and earnings per share of recording
compensation expense for the fair value of all stock options granted subsequent
to July 1, 1995. It is the opinion of management that the existing model to
estimate the fair value of employee options according to SFAS No. 123, and the
assumptions used to calculate the impact, may not be representative of the
effects on future years and does not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassifications
Certain 1998 and 1997 amounts have been reclassified to conform to the
current year's presentation.
Computer Software Developed for Internal Use
During the fourth fiscal quarter of 1999, the Company adopted Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." In accordance with SOP 98-1, the Company
capitalizes certain costs incurred in connection with developing or obtaining
internal use software.
Intangible Assets
Included in other assets are intangible assets, which represent the cost of
patents, goodwill and deferred financing charges. Intangible assets were
$2,378,000 and $1,453,000 at July 3, 1999 and June 27, 1998, respectively.
Accumulated amortization on intangible assets amounted to $624,000 and $372,000
at July 3, 1999 and June 27, 1998, respectively. Amortization of goodwill and
patents is provided using the straight-line method over the estimated useful
lives of the assets, not exceeding 17 years. Amortization of deferred financing
charges is provided over the term of the related debt instrument.
Advertising Expenses
Advertising expenses are charged to income during the year that they are
incurred. Selling, general and administrative expenses of the Company include
advertising and promotion costs of $3,441,000, $3,906,000 and $3,867,000 for the
years ended July 3, 1999, June 27, 1998, and June 28, 1997, respectively.
Accounting Developments
During fiscal 1999, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which was effective for the Company's first fiscal
quarter of 1999. SFAS No. 130 defines the concept of "comprehensive income" and
establishes the standards for reporting "comprehensive income." Comprehensive
income is defined to include net income, as currently reported, as well as
unrealized gains and losses on available-for-sale securities, foreign currency
translation adjustments and certain other items not included in the income
statement. SFAS No. 130 also sets forth requirements on how comprehensive income
should be presented as part of the issuer's financial statements. The Company's
comprehensive income comprises net income and foreign translation adjustments.
The adoption of SFAS No. 130 had no impact on the Company's net income or
shareholders' equity.
F-9
<PAGE> 40
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On July 3, 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which is effective for
companies with fiscal years beginning after December 15, 1997. SFAS No. 131
defines the criteria by which an issuer is to determine the number and nature of
its "operating segments" and sets forth the financial information that is
required to be disclosed about such segments. SFAS No. 131 also establishes
standards for disclosures related to geographic areas, products and services and
major customers. The adoption of SFAS No. 131 did not affect results of
operations or financial position, but did affect the disclosure of segment
information.
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 defines the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and hedging
activities. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133 -- an Amendment of FASB Statement No. 133," which
extends the effective date of SFAS No. 133 to fiscal quarters beginning after
June 15, 2000. In fiscal 2000, the Company will assess how the provisions of
this statement will affect its hedging operations and future earnings. At this
time, the effect of the adoption of SFAS No. 133 on future earnings cannot be
estimated.
2. INVENTORY
The components of inventory are as follows (in thousands):
<TABLE>
<CAPTION>
JULY 3, 1999 JUNE 27, 1998
------------ -------------
<S> <C> <C>
Raw materials....................................... $17,723 $20,439
Work-in process..................................... 2,110 2,856
Finished goods...................................... 14,993 16,931
------- -------
34,826 40,226
Less reserve for obsolete inventory................. (1,661) (806)
------- -------
$33,165 $39,420
======= =======
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are as follows (in
thousands):
<TABLE>
<CAPTION>
JULY 3, 1999 JUNE 27, 1998
------------ -------------
<S> <C> <C>
Land................................................ $ 1,841 $ 1,270
Buildings and improvements.......................... 22,868 18,328
Factory and office equipment........................ 39,633 33,366
Cessna Citation jet................................. -- 2,800
Construction and projects in progress............... 3,369 1,577
-------- --------
67,711 57,341
Less accumulated depreciation and amortization...... (26,334) (21,572)
-------- --------
$ 41,377 $ 35,769
======== ========
</TABLE>
Purchases of equipment through capitalized lease obligations and notes were
$146,000 and $28,000 in fiscal 1999 and 1997, respectively. The Company did not
enter into any capital leases during fiscal 1998.
F-10
<PAGE> 41
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. EARNINGS PER SHARE
The following table is an illustration of the reconciliation of the
numerator and denominator of basic and diluted earnings per share computations
and other related disclosures required by SFAS No. 128 "Earnings Per Share" (in
thousands, except earnings per share data):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 3, 1999 JUNE 27, 1998 JUNE 28, 1997
------------ ------------- -------------
<S> <C> <C> <C>
NUMERATOR:
Numerator for basic and diluted earnings per
share -- income available to common
stockholders................................ $5,923 $9,352 $13,506
====== ====== =======
DENOMINATOR:
Denominator for basic earnings per share --
weighted-average shares..................... 7,518 8,442 8,638
Effect of dilutive securities:
Employee stock options...................... 168 240 278
------ ------ -------
Denominator for diluted earnings per share --
adjusted weighted-average shares and assumed
conversions................................. 7,686 8,682 8,916
====== ====== =======
Basic earnings per share...................... $ .79 $ 1.11 $ 1.56
====== ====== =======
Diluted earnings per share.................... $ .77 $ 1.08 $ 1.51
====== ====== =======
</TABLE>
The average number of options to purchase shares of common stock excluded
from the computation of diluted earnings per share because the options' exercise
prices were greater than the average market price of the common shares,
therefore, having an antidilutive effect, were 1,021,843, 377,528, and 118,844
for fiscal 1999, 1998, and 1997, respectively.
5. DEBT
Short-term revolving credit advances (in thousands):
<TABLE>
<CAPTION>
JULY 3, 1999 JUNE 27, 1998
------------ -------------
<S> <C> <C>
Cannondale Europe................................... $262 $1,578
Cannondale Japan.................................... 620 563
---- ------
$882 $2,141
==== ======
</TABLE>
In February 1998, Cannondale Europe entered into a multi-currency credit
arrangement, which allows Cannondale Europe to borrow up to 12,500,000 Dutch
guilders (approximately $5,807,000 at July 3, 1999) on a short-term basis. The
interest rate on outstanding borrowings is a market rate, applicable to the
currencies borrowed, plus 1.50% with a minimum rate of 3.00%. The credit
arrangement contains no specific expiration date, and may be terminated by
either the borrower or the lender at any time. Cannondale Europe's multicurrency
credit arrangement is guaranteed by Cannondale U.S.
Cannondale Japan has an unsecured revolving credit facility for up to
155,000,000 Japanese yen (approximately $1,281,000 at July 3, 1999). The
interest rate on the outstanding borrowings was 2.875% at July 3, 1999 and June
27, 1998. The credit facility contains no specific expiration date, and may be
terminated by either the borrower or the lender at any time. Cannondale Japan's
unsecured revolving credit facility is guaranteed by Cannondale U.S.
F-11
<PAGE> 42
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average interest rate on the Company's revolving lines of
credit was 3.32% and 5.05% at July 3, 1999 and June 27, 1998, respectively.
Long-Term Debt (in thousands):
<TABLE>
<CAPTION>
JULY 3, 1999 JUNE 27, 1998
------------ -------------
<S> <C> <C>
Revolving credit facility................................... $30,643 $34,661
Term loan, interest at 7.25%................................ 20,000 --
Pennsylvania Industrial Development Authority bonds,
interest rates ranging from 2.0% to 4.5%.................. 2,951 3,049
Connecticut Development Authority Loan...................... 1,602 1,602
Algemene Bank Nederland N.V. Loan........................... 751 846
Department of Economic Community Development, interest at
4.0%...................................................... 321 --
Rush Township Construction Loan, interest at 3.0%........... -- 378
Daiichi Kangyo Bank term loan, interest at 3.25%............ -- 115
Notes secured by equipment and capitalized leases........... 185 162
------- -------
56,453 40,813
Less current portion........................................ (456) (461)
------- -------
$55,997 $40,352
======= =======
</TABLE>
On January 22, 1999, the Company entered into an $85.0 million amended and
restated multicurrency credit facility (the "facility") secured by all of the
Company's tangible and intangible domestic assets. The facility, as amended May
1, 1999, extends through January 2002. It allows for Cannondale U.S., Cannondale
Europe and Cannondale Japan to borrow up to $65.0 million under a multicurrency
revolving line of credit and provides for a $20.0 million term loan that
amortizes by $10.0 million 30 months from the inception date of the facility.
The facility includes a provision that permits the Company to borrow up to $10.0
million of the $65.0 million revolving line of credit on a short-term basis
(less than 30 days). The outstanding borrowings consisted of U.S. dollars
($45,320,000), Dutch guilders (7,000,000) and Japanese yen (250,705,000) at July
3, 1999. The facility contains restrictive and financial covenants relating to,
among other things, the payment of dividends and the repurchase of shares of the
Company's common stock, and the maintenance of minimum levels of cash flow,
capitalization, interest coverage and tangible net worth.
Under the facility, the Company has the option to borrow at the following
rates: (1) a variable rate that is defined as the higher of the bank prime rate
or the Federal Funds Rate plus 50.0 basis points, (2) a short-term market rate
that is an offered rate per annum quoted by the bank or (3) the LIBOR (London
Interbank Offered Rate) applicable to the currency borrowed plus an interest
rate margin (the "LIBOR margin"). At July 3, 1999, the rate(s) of outstanding
borrowings under the LIBOR option were 6.70% and 6.76% for U.S. dollar
borrowings, 4.31% for Dutch guilder borrowings and 1.84% for Japanese yen
borrowings. The LIBOR margin (ranging from 75.0 to 170.0 basis points) is
determined quarterly based upon predetermined performance criteria. The Company
is obligated to pay a facility fee (ranging from 25.0 to 30.0 basis points) on
the balance of the facility based on the same performance criteria as the LIBOR
margin. The LIBOR margin was 170.0 basis points at July 3, 1999. The facility
fee was 30.0 basis points at July 3, 1999. The interest rate on the term loan is
the LIBOR plus a margin that was 225.0 basis points at July 3, 1999, and
increases to 250.0 basis points January 1, 2000, 275.0 basis points April 1,
2000 and 300 basis points July 1, 2000. The weighted average interest rate for
borrowings under this facility was 6.58% at July 3, 1999.
In June 1997, the Company entered into an unsecured, multicurrency
revolving credit facility (the "credit facility"). The agreement, as amended in
October 1997, extended to June 2000 and allowed the Company and its subsidiaries
to borrow up to $70.0 million until September 1998, when the commitment of the
lenders was to decrease by $1.25 million each quarter thereafter. The credit
facility included a provision
F-12
<PAGE> 43
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
that permitted the Company to borrow up to $10.0 million of the $70.0 million
facility on a short-term basis (less than 30 days). The outstanding borrowings
consisted of U.S. dollars ($27,500,000), Dutch guilders (11,000,000) and
Japanese yen (250,705,000) at June 27, 1998. The credit facility required the
maintenance of minimum levels of cash flow, capitalization, interest coverage
and tangible net worth. Under the credit facility, the Company had the option to
borrow at the following rates: (1) a variable rate that was defined as the
higher of the bank's prime rate or the Federal Funds Rate plus 50.0 basis
points, (2) a short-term market rate (6.225% at June 27, 1998) that was an
offered rate per annum quoted by the bank or (3) the LIBOR applicable to the
currency borrowed plus a LIBOR margin. At June 27, 1998, the rate(s) of
outstanding borrowings under the LIBOR option ranged from 6.175% to 6.44% for
U.S. dollar borrowings, were 4.24% and 4.25% for Dutch guilder borrowings and
was 1.29% for Japanese yen borrowings. The LIBOR margin (ranged from 30.0 to
75.0 basis points) was determined quarterly based upon predetermined performance
criteria. The Company was obligated to pay a facility fee (ranged from 15.0 to
25.0 basis points) on the balance of the facility based on the same performance
criteria as the LIBOR margin. The LIBOR margin was 75.0 basis points at June 27,
1998. The facility fee was 25.0 basis points at June 27, 1998. The weighted
average interest rate for borrowings under this facility was 5.74% at June 27,
1998. This credit facility was refinanced pursuant to the amended and restated
multicurrency credit facility dated January 22, 1999.
The Pennsylvania Industrial Development Authority bonds are secured by the
Company's Bedford, Pennsylvania facility. The loans extend through 2013, and are
payable in equal monthly payments.
The Connecticut Development Authority loan is secured by the Company's
Bethel, Connecticut headquarters and research and development facility. The
interest rate is fixed at 4.65% until January 2000; thereafter, the interest
rate will be adjusted annually to yield the U.S. Government Securities Ten Year
Treasury. The loan is payable in monthly installments with no obligation to
amortize the principal portion of the loan until February 2000. Thereafter, the
loan is payable in amounts sufficient to amortize the principal balance over a
fifteen-year term plus interest, with the balance due on February 1, 2008.
The Algemene Bank of Nederland N.V. loan is secured by Cannondale Europe's
factory in Oldenzaal, Netherlands. The interest rate is a variable market rate
determined quarterly with a maximum of 7.55%. The interest rate was 5.30% and
6.20% at July 3, 1999 and June 27, 1998, respectively. The loan extends to May
2004 and is payable quarterly in Dutch guilders with equal principal payments
plus interest, with the balance of 1,100,000 Dutch guilders (approximately
$511,000 at July 3, 1999) due at the expiration of the agreement.
The Department of Economic and Community Development loan is secured by
certain pieces of machinery and equipment used for research and development by
the Company. The loan extends through 2009 and is payable in equal monthly
installments.
The Rush Township Construction loan was secured by the Company's
Philipsburg, Pennsylvania facility which was sold during fiscal 1999.
The Daiichi Kangyo Bank term loan was unsecured. The loan extended through
1999, and was paid in quarterly installments.
Capitalized lease obligations extend through 2002, and represent the
present value of future minimum lease payments, discounted at rates ranging from
4.70% to 10.20%, payable in monthly installments.
F-13
<PAGE> 44
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Maturities of long-term debt, including payments under capitalized lease
obligations, are as follows (in thousands):
<TABLE>
<S> <C>
2000....................................................... $ 471
2001....................................................... 511
2002....................................................... 51,099
2003....................................................... 422
2004....................................................... 920
Thereafter................................................. 3,050
-------
56,473
Amounts representing interest on capital lease
obligations.............................................. (20)
-------
$56,453
=======
</TABLE>
6. INCOME TAXES
Income (loss) before income taxes by geographic location is as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 3, 1999 JUNE 27, 1998 JUNE 28, 1997
------------ ------------- -------------
<S> <C> <C> <C>
United States................................. $ (22) $ (872) $ 7,770
Foreign....................................... 7,996 14,802 13,378
------ ------- -------
$7,974 $13,930 $21,148
====== ======= =======
</TABLE>
The income tax provision consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 3, 1999 JUNE 27, 1998 JUNE 28, 1997
------------ ------------- -------------
<S> <C> <C> <C>
Current:
Federal..................................... $ (309) $ (786) $2,884
Foreign..................................... 2,733 5,067 4,698
State....................................... (244) (128) 502
------ ------ ------
Total current............................ 2,180 4,153 8,084
------ ------ ------
Deferred:
Federal..................................... (52) 412 (408)
Foreign..................................... (71) (59) 36
State....................................... (6) 72 (70)
------ ------ ------
Total deferred........................... (129) 425 (442)
------ ------ ------
Total......................................... $2,051 $4,578 $7,642
====== ====== ======
</TABLE>
F-14
<PAGE> 45
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes on income before income taxes differs from
the amount computed by applying the U.S. federal income tax rate (34.0%) because
of the effects of the following items:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 3, 1999 JUNE 27, 1998 JUNE 28, 1997
------------ ------------- -------------
<S> <C> <C> <C>
Tax at U.S. statutory rate.................... 34.0% 34.0% 34.0%
State income taxes, net of federal benefit.... (3.2) (0.6) 1.6
Higher (lower) effective income taxes of other
countries................................... (0.7) (0.2) 0.9
Tax effect of research and development
credit...................................... (5.0) (1.8) (0.5)
Other......................................... 0.6 1.5 0.1
---- ---- ----
25.7% 32.9% 36.1%
==== ==== ====
</TABLE>
The significant components of the Company's deferred tax assets and
liabilities at July 3, 1999 and June 27, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
JULY 3, 1999 JUNE 27, 1998
------------ -------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable and inventory reserves................ $ 1,988 $ 1,586
Stock option compensation................................. 304 307
Accrued liabilities....................................... 1,119 843
Other..................................................... 523 489
------- -------
Total deferred assets..................................... 3,934 3,225
------- -------
Deferred tax liabilities:
Tax over book depreciation................................ (1,078) (955)
Accounts receivable fair value adjustment................. (858) (1,145)
Other..................................................... (868) (522)
------- -------
Total deferred liabilities................................ (2,804) (2,622)
------- -------
Net deferred tax assets..................................... $ 1,130 $ 603
======= =======
</TABLE>
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $31,686,000 at July 3, 1999. Those earnings are considered to be
indefinitely reinvested and, accordingly, no provision for U.S. federal and
state income taxes has been provided thereon. Upon distribution of those
earnings in the form of dividends or otherwise, the Company would be subject to
both U.S. income taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to the various foreign countries. Determination of the
amount of the unrecognized deferred U.S. income tax liability is not practicable
because of the complexities associated with its hypothetical calculation;
however, unrecognized foreign tax credit carryforwards would be available to
reduce some of the portion of the U.S. liability. Withholding taxes of
approximately $1,716,000 would be payable upon remittance of all previously
unremitted earnings at July 3, 1999.
F-15
<PAGE> 46
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. STOCK OPTIONS
At July 3, 1999, the Company had five fixed option plans, which are
described below. The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its employee stock option grants. Under APB
Opinion No. 25, the Company does not recognize compensation expense since the
exercise price of the options granted is equal to the market value of the
Company's common stock on the date of grant.
SFAS No. 123 requires that the Company disclose the pro-forma impact on net
income and earnings per share as if compensation expense associated with
employee stock options had been calculated under the fair value method for
employee stock options granted subsequent to July 1, 1995. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for the years
ended July 3, 1999, June 27, 1998 and June 28, 1997, respectively: an expected
volatility of .43, .50 and .45, an expected term of 4.29, 4.18 and 4.66,
risk-free interest rates of 4.85%, 5.50% and 6.05%, and no expected dividend
yield.
For purposes of pro-forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro-forma information is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 3, 1999 JUNE 27,1998 JUNE 28,1997
------------ ------------ ------------
<S> <C> <C> <C>
Pro Forma Net Income........................... $3,107 $7,000 $11,986
Pro Forma Basic Earnings Per Share............. $ .41 $ .83 $ 1.39
Pro Forma Diluted Earnings Per Share........... $ .41 $ .80 $ 1.38
</TABLE>
The pro-forma effect of SFAS No. 123 will be not be fully reflected until
2001 due to the inclusion of options granted only subsequent to July 1, 1995.
The Company has five fixed option plans: the 1994 Stock Option Plan (the
"1994 Plan"), the 1994 Management Stock Option Plan (the "Management Plan"), the
1995 Stock Option Plan (the "1995 Plan"), the 1996 Stock Option Plan (the "1996
Plan") and the 1998 Stock Option Plan (the "1998 Plan"). Under the terms of the
plans, the committee administering the plans may grant options to purchase
shares of the Company's common stock to officers, directors, employees,
consultants and advisors for up to 2,957,500 shares. The vesting of options
granted under the plans is at the discretion of the Board of Directors. Other
than options granted under the 1994 Plan to purchase 373,743 shares of common
stock at an exercise price of $0.34, substantially all of which vested on July
2, 1994, and options granted to new non-employee directors (1,000 on the date of
election or appointment) which vest immediately, options vest over a three- to
five-year period. The 1994 Plan, the Management Plan, the 1995 Plan, the 1996
Plan and the 1998 Plan terminate on December 31, 2003, December 31, 2004,
December 31, 2005, December 31, 2006 and December 31, 2008, respectively.
In February 1998, the Company amended its stock option plans to include a
provision whereby upon a change of control, as defined by the plans, any option
granted and outstanding shall immediately become vested. On June 15, 1998, an
aggregate of 1,430,652 options to purchase common stock with exercise prices in
excess of $12.50 were canceled and new options were issued with the same
exercise prices and terms as the old options; provided, however, that in the
event of a change of control, the exercise price of the new options will be
$12.50 (the fair value of the Company's common stock at the time of the grant).
On March 27, 1998, an aggregate of 509,426 options to purchase common stock
with exercise prices in excess of $16.50 were canceled and new options were
issued in replacement thereof with exercise prices of $16.50 and terms identical
to those canceled.
On September 3, 1998, an aggregate of 1,462,252 options to purchase common
stock with exercise prices in excess of $9.31 were canceled and new options were
issued in replacement thereof with exercise prices of $9.31 and terms identical
to those canceled.
F-16
<PAGE> 47
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's stock option plans as of July 3,
1999, June 27, 1998 and June 28, 1997, and changes during the years ending on
those dates is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- ---------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- -------- ----------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year................. 1,651,447 $14.30 1,353,204 $14.25 1,035,495 $11.71
Granted.......................................... 2,208,552 $ 8.90 2,379,758 $16.30 454,196 $19.21
Exercised........................................ (17,875) $ 8.53 (49,473) $ 5.47 (75,900) $ 7.44
Terminated or canceled........................... (1,567,858) $15.48 (2,032,042) $16.83 (60,587) $16.45
----------- ----------- ----------
Outstanding at end of year....................... 2,274,266 $ 8.30 1,651,447 $14.30 1,353,204 $14.25
=========== =========== ==========
Options exercisable at end of year............... 874,017 $ 7.72 742,898 $11.73 509,756 $ 9.20
Weighted average fair value of options granted
during the year................................ $ 3.47 $ 5.92 $ 8.51
</TABLE>
The following table summarizes information about fixed stock options
outstanding at July 3, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -------------------------------
NUMBER OF WEIGHTED- NUMBER OF
RANGE OF OPTIONS AVERAGE WEIGHTED- OPTIONS WEIGHTED-
EXERCISE OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
PRICES JULY 3, 1999 CONTRACTUAL LIFE EXERCISE PRICE JULY 3, 1999 EXERCISE PRICE
- ---------------- -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.34 152,875 4.98 $ 0.34 152,875 $ 0.34
$ 7.41 to $ 9.69 2,108,392 8.01 $ 8.87 716,143 $ 9.27
$10.00 to $15.00 12,999 9.40 $10.56 4,999 $11.45
--------- -------
$ 0.34 to $15.00 2,274,266 7.81 $ 8.30 874,017 $ 7.72
========= =======
</TABLE>
8. PROFIT SHARING PLAN
The Company has a qualified, defined contribution savings plan covering all
full-time U.S. employees who have attained the age of 18 with more than three
months of service. Contributions to the plan, which are discretionary, are
determined annually by the Board of Directors. There were no contributions in
fiscal 1999, 1998 or 1997.
9. STOCKHOLDERS' EQUITY
In September 1997, the Company's Board of Directors authorized the
repurchase by the Company of up to 1,000,000 shares of its common stock at an
aggregate price not to exceed $20.0 million. In July 1998, the Company's Board
of Directors authorized a new stock repurchase program by the Company to
repurchase up to 1,000,000 shares of its common stock. Shares repurchased under
the new program are to be additional to the shares repurchased pursuant to the
repurchase program announced in September 1997. Purchases by the Company may be
made from time to time in the open market or in private transactions. The
repurchase program may be suspended or discontinued at any time. Shares
repurchased by the Company will be available for general corporate purposes,
including issuance upon the exercise of employee stock options. At July 3, 1999,
the Company had repurchased an aggregate of 1,292,900 shares of its common stock
under the programs at a cost of $20.2 million.
In November 1997, the stockholders of the Company approved an increase in
its authorized shares of common stock to 40,000,000 from 18,000,000.
In December 1997, the Company's Board of Directors adopted a Stockholders'
Rights Plan pursuant to which rights to purchase shares of common stock of the
Company were distributed as a dividend, one right per
F-17
<PAGE> 48
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
share, to record owners of common stock as of the close of business on December
22, 1997, and for each share of common stock issued subsequent to that date.
Each right entitles the registered holder to purchase that number of shares of
common stock of the Company having a market value of two times the then
applicable exercise price of the right. Subject to certain exceptions, the
rights become exercisable on the earlier of ten business days following a public
announcement that a person or group acquired or obtained the right to acquire
beneficial ownership of 20% or more of the outstanding common stock of the
Company, or ten business days following the commencement or announcement by a
person or group of a tender offer or exchange offer which would result in
beneficial ownership of 20% or more of the common stock of the Company. In the
event that the Company is acquired in a merger or other business combination or
50% or more of the Company's consolidated assets or earnings power are sold,
proper provisions will be made so that each holder of a right will be entitled
to receive, upon the exercise of the right, at the then applicable exercise
price, that number of shares of common stock of the acquiring company that at
the time of such transaction will have a market value of two times the
applicable exercise price of the right. Until a right is exercised, the holder
of the right will have no rights as a stockholder of the Company, including,
without limitation, the right to vote, or to receive dividends. The rights
expire December 22, 2007 unless extended or unless rights are redeemed by the
Company.
In September 1994, the Company adopted an Employee Stock Purchase Plan (the
"Purchase Plan"), which is intended to allow qualified employees to purchase
common stock of the Company at a discount to the market value of such common
stock. A total of 348,750 shares of common stock have been reserved for issuance
under the Purchase Plan. Under the terms of the Purchase Plan, the purchase
price of a share of common stock is the lower of 85% of the closing price of the
Company's common stock on the date the offering period begins or 85% of the
closing price of the Company's common stock on the termination date of the
offering period. During fiscal year 1999, employees purchased 29,345 shares of
common stock pursuant to the Purchase Plan at prices ranging from $7.23 to
$11.37 per share.
At July 3, 1999 there were 2,994,327 shares of common stock reserved for
the exercise of options and employee stock purchases.
10. OPERATING LEASES
The Company and its subsidiaries lease a Cessna Citation Jet, computer
software and hardware and other office and factory equipment under long-term
operating leases with varying terms. The aggregate future minimum lease payments
under noncancellable operating leases with initial or remaining lease terms of
greater than one year are as follows (in thousands):
<TABLE>
<S> <C>
2000........................................................ $1,161
2001........................................................ 767
2002........................................................ 428
2003........................................................ 425
2004 and after.............................................. 726
------
$3,507
======
</TABLE>
Rent expense amounted to $1,582,000, $2,052,000 and $2,273,000 in fiscal
1999, 1998 and 1997, respectively.
During the third quarter of fiscal 1999, the Company entered into a $2.9
million sale-leaseback transaction for its Cessna Citation Jet aircraft. The
sale resulted in a gain of $131,000 which was deferred and is being amortized
over the five-year term of the lease. The lease provides the Company with the
option to terminate the lease before the end of the lease term for predetermined
amounts without penalty. At the end of the lease term, the Company can purchase
the equipment for 90% of its original cost, renew the lease for the
F-18
<PAGE> 49
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
then fair market value rental or sell the aircraft to a third party. If the
proceeds from the sale of the aircraft are less than 90% of the purchase price,
the Company shall make a final payment in the amount of the deficiency not to
exceed 72% of the original cost. The related lease is being accounted for as an
operating lease and will result in rent expense of approximately $273,000
annually.
11. FINANCIAL INSTRUMENTS
Balance Sheet Financial Instruments
At July 3, 1999, the carrying value of financial instruments such as cash,
trade receivables and payables approximated their fair values, based on the
short-term maturities of these instruments. The carrying amounts of the
Company's borrowings under its variable rate short- and long-term credit
agreements approximate their fair value. The carrying value of the Company's
other long-term debt, which approximates its fair value, is estimated based on
expected future cash flows, discounted at current rates for the same or similar
issues.
Forward Foreign Exchange Contracts
At July 3, 1999 and June 27, 1998, the Company had approximately $10.4 and
$10.3 million, respectively, of forward exchange contracts outstanding to
exchange European, Japanese, Australian, Canadian and U.S. currencies to reduce
exposures to foreign currency risk. The Company enters into forward foreign
currency contracts for a significant portion of its current and net balance
sheet exposures, principally relating to trade receivables and payables
denominated in foreign currencies, and firm sale and purchase commitments. The
forward exchange contracts generally have maturities that do not exceed 12
months and require the Company to exchange, at maturity, various currencies for
U.S. dollars and Dutch guilders at rates agreed to at the inception of the
contracts. At July 3, 1999, the net gain deferred from hedging firm sale and
purchase commitments was not significant and will be recognized in earnings
during fiscal 2000. Deferred gains and losses are included in prepaid expenses
and other current assets, and are recognized in earnings when the future sales
and purchases occur. At July 3, 1999, the carrying value of the Company's
foreign currency forward contracts, which approximates their fair value, is the
amount at which the contracts could be settled based on quotes provided by major
financial institutions.
The Company's credit risk in these transactions is the cost of replacing
these contracts at current market rates in the event of default by a
counterparty, which is typically a major international financial institution.
Additionally, market risk exists during the period between the date of the
contract and its designation as an effective hedge for financial reporting
purposes. The Company believes that its exposure to credit risk and market risk
in these transactions is not significant in relation to earnings.
The Company uses borrowings of Japanese yen and Dutch guilders to hedge its
net investments in its foreign subsidiaries. The Company had outstanding
borrowings of 251.0 million Japanese yen (approximately $2,072,000 and
$1,766,000 at July 3, 1999 and June 27, 1998, respectively) and 7.0 million
Dutch guilders (approximately $3,252,000 and $3,433,000 at July 3, 1999 and June
27, 1998, respectively). Gains and losses on hedges of net investments are
recognized as a component of accumulated other comprehensive income in
stockholders' equity.
Interest Rate Swaps
In April 1998, the Company entered into two five year interest rate swap
agreements with a total notional principal amount of $20.0 million to manage
interest costs associated with changing interest rates. These agreements convert
underlying variable-rate debt based on the LIBOR under the Company's
multicurrency revolving line of credit to fixed-rate debt with an interest rate
of 6.05%. The fair value of the Company's interest rate swap agreements, based
on estimates received from financial institutions, would have required the
financial institutions to pay the Company approximately $47,000 to settle these
agreements on July 2, 1999.
F-19
<PAGE> 50
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. OTHER INCOME
Other income primarily consists of finance charges relating to accounts
receivable, which totaled $529,000, $885,000 and $810,000 for fiscal 1999, 1998
and 1997, respectively, foreign currency gains (losses) of ($78,000), ($232,000)
and $33,000 for fiscal 1999, 1998 and 1997, respectively and for fiscal 1999
interest income of $804,000 related to a related party loan.
13. OPERATIONS BY INDUSTRY SEGMENTS AND GEOGRAPHIC AREAS
In fiscal year 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which changed the method the
Company uses in reporting information about its operating segments. As a result
of the adoption, segment information for 1998 and 1997 has been restated to
conform to the 1999 presentation.
The Company's reportable segments are Bicycles and Motorcycles. The Company
operates predominantly in the bicycle industry as a manufacturer and distributor
of high-performance bicycles and bicycle-related products, which include
clothing, shoes and bags, and a line of components. Due to the similarities in
the nature of the products, production processes, customers and methods of
distribution, bicycles and bicycle related products are aggregated in the
bicycle segment. The Company has also developed a line of motocross motorcycles,
which is in the start-up stage of operations, and for which no revenues have
been generated as of July 3, 1999.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies.
Summarized segment data is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 3, 1999 JUNE 27, 1998 JUNE 28, 1997
------------ ------------- -------------
<S> <C> <C> <C>
Net Sales From External Customers:
Bicycles........................................... $176,819 $171,496 $162,496
Motorcycles........................................ -- -- --
-------- -------- --------
$176,819 $171,496 $162,496
======== ======== ========
Operating Income (Loss):
Bicycles........................................... $ 17,278 $ 17,306 $ 21,879
Motorcycles........................................ (5,907) (2,034) --
-------- -------- --------
$ 11,371 $ 15,272 $ 21,879
======== ======== ========
Identifiable Assets:
Bicycles........................................... $153,072 $152,018 $127,284
Motorcycles........................................ 9,307 259 --
-------- -------- --------
$162,379 $152,277 $127,284
======== ======== ========
Capital Expenditures:
Bicycles........................................... $ 6,190 $ 16,503 $ 9,766
Motorcycles........................................ 9,067 259 --
-------- -------- --------
$ 15,257 $ 16,762 $ 9,766
======== ======== ========
Depreciation and Amortization Expense:
Bicycles........................................... $ 5,721 $ 4,054 $ 3,211
Motorcycles........................................ 61 -- --
-------- -------- --------
$ 5,782 $ 4,054 $ 3,211
======== ======== ========
</TABLE>
F-20
<PAGE> 51
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company evaluates performance of its segments based on profit or loss
from operations. The amounts below are not allocated between the segments.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 3, 1999 JUNE 27, 1998 JUNE 28, 1997
------------ ------------- -------------
<S> <C> <C> <C>
Total operating income for reportable
segments.................................... $11,371 $15,272 $21,879
Other income (expense):
Interest expense............................ (4,557) (1,995) (1,574)
Other income................................ 1,160 653 843
------- ------- -------
(3,397) (1,342) (731)
------- ------- -------
Income before income taxes.................... $ 7,974 $13,930 $21,148
======= ======= =======
</TABLE>
Summarized data by geographic area is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 3, 1999 JUNE 27, 1998 JUNE 28, 1997
------------ ------------- -------------
<S> <C> <C> <C>
Net Sales From External Customers(a):
United States............................... $ 72,413 $ 75,193 $ 80,542
Other European countries.................... 59,008 52,603 43,478
Germany..................................... 26,639 25,382 23,569
All other countries......................... 18,759 18,318 14,907
-------- -------- --------
$176,819 $171,496 $162,496
======== ======== ========
Long-Lived Assets(b):
United States............................... $ 54,798 $ 37,937 $ 21,905
Netherlands................................. 2,886 3,141 2,949
All other countries......................... 449 380 522
-------- -------- --------
$ 58,133 $ 41,458 $ 25,376
======== ======== ========
</TABLE>
- ---------------
(a) Net Sales are attributed to countries based on location of customer.
(b) Long-lived assets are located in the respective geographic regions.
At July 3, 1999, the net assets of Cannondale Europe, Cannondale Japan and
Cannondale Australia were $25,350,000, $1,442,000 and $1,022,000, respectively.
14. CAPITALIZATION OF COSTS OF COMPUTER SOFTWARE DEVELOPED FOR INTERNAL USE
In March 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, "Accounting For the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1, which was adopted by the Company as of the
beginning of its fourth fiscal quarter of 1999, requires capitalization of
certain costs incurred in connection with developing or obtaining internal use
software. In the prior year, the Company expensed such costs as incurred. SOP
98-1 requires companies to adopt its provisions as of the beginning of the
fiscal year and restate previously reported interim results. The effect of this
accounting change was to increase net income for the fiscal year ended July 3,
1999 by $322,000 ($0.04 per share). In addition, the
F-21
<PAGE> 52
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company restated previously reported 1999 quarterly earnings as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED ENDED
SEPTEMBER 27, DECEMBER 27, DECEMBER 27, MARCH 27, MARCH 27,
1998 1998 1998 1999 1999
-------------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Previously reported earnings.......... $ 712 $1,775 $2,487 $2,317 $4,804
Change in accounting for internal use
software............................ 83 74 157 53 210
----- ------ ------ ------ ------
Adjusted earnings..................... $ 795 $1,849 $2,644 $2,370 $5,014
===== ====== ====== ====== ======
Previously reported basic earnings per
share............................... $0.09 $ 0.24 $ 0.33 $ 0.31 $ 0.64
Adjusted basic earnings per share..... $0.10 $ 0.25 $ 0.35 $ 0.32 $ 0.67
Previously reported diluted earnings
per share........................... $0.09 $ 0.23 $ 0.32 $ 0.30 $ 0.62
Adjusted diluted earnings per share... $0.10 $ 0.24 $ 0.34 $ 0.31 $ 0.65
</TABLE>
15. RELATED PARTY TRANSACTIONS
In April 1998, the Company provided Joseph Montgomery, the President and
Chief Executive Officer of the Company, with a loan in the principal amount of
$2.0 million to enable him to meet certain tax obligations. In June 1998, the
Company agreed to provide Mr. Montgomery with an additional loan in the
principal amount of $10.0 million for the purchase of certain real property,
which loan has been combined with the previous $2.0 million loan made in April
1998. The loan matures on August 1, 2003, at which time the entire principal
balance is due. The interest rate on the loan is set at the prime rate as
published in the Wall Street Journal from time to time, and the loan is secured
by a pledge to the Company of all of the shares of the Company's common stock
held by Mr. Montgomery and a mortgage on such real property. The principal
balance of the outstanding loan to Mr. Montgomery was $12.0 million at July 3,
1999. The Company has agreed to defer the interest payment of approximately
$900,000 payable by Mr. Montgomery to the Company due August 1, 1999 pursuant to
the terms of the loan. Under the terms of the deferral, Mr. Montgomery is
obligated to sell 75,000 shares of his stock in the Company per quarter
commencing in the Company's third quarter of fiscal 2000. The net proceeds of
such sales will be remitted to the Company to pay the deferred interest. The
stock selling program by Mr. Montgomery is subject to applicable securities laws
and other restrictions which may preclude Mr. Montgomery from selling a total of
75,000 shares per quarter. This selling program will continue until the balance
of the deferred interest is paid by Mr. Montgomery in its entirety.
On June 30, 1998, the Company purchased a Cessna Citation Jet aircraft from
JSM, Inc. ("JSM"), a corporation of which Mr. Montgomery is the sole
stockholder, for $2.8 million and terminated its lease with JSM for the rental
of the same aircraft. The purchase price of the Cessna Citation Jet aircraft was
determined by the Company based on independent valuations of the market value of
the aircraft. The Company also assumed the obligations of JSM Aviation, LLC
("JSM LLC"), a Connecticut limited liability company in which Mr. Montgomery and
a director of the Company are each members, as sublessee under a hangar lease
which houses the Cessna Citation jet aircraft. As part of the assumption of the
hangar lease obligations, the Company reimbursed JSM LLC $160,922 for the cost
of certain leasehold improvements made to the hangar by JSM LLC. The Company
uses the Cessna Citation Jet aircraft largely for transporting personnel between
its Connecticut headquarters and its Pennsylvania manufacturing facilities, and
anticipates that it will have an increased need for an aircraft in connection
with the growth of the business. In connection with the purchase of the Cessna
Citation Jet aircraft, the Company also purchased, for $500,000, JSM's right to
acquire a Learjet aircraft. JSM had entered into a contract with Learjet, Inc.
("Learjet") to purchase an aircraft, and had paid Learjet $500,000 as a deposit
with respect to such purchase. The Company has assumed JSM's rights and
obligations under this contract. In connection with these transactions, JSM
obtained a right of first
F-22
<PAGE> 53
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
refusal with respect to the Cessna Citation Jet aircraft and the Learjet
aircraft under certain circumstances. It is not the intention of the Company to
operate both the Cessna Citation Jet aircraft and the Learjet aircraft
simultaneously.
During the third quarter of fiscal 1999, the Company entered into a $2.9
million sale-leaseback transaction for the Cessna Citation Jet (See Note 10).
The lease provides JSM with the right of first refusal should the Company
purchase the aircraft pursuant to the terms of the lease agreement.
The Company has provided two officers of the Company with interest-free
loans to enable them to purchase homes in the vicinity of the Company's
headquarters. As of July 3, 1999, $650,000 and $125,000 had been loaned to the
two officers. The loans mature on December 29, 2006 and September 1, 2007, at
which dates the entire principal balance of each of the respective loans is due.
The loans are secured by mortgages on the officer's residences. In addition,
during fiscal 1999, another officer received an advance of $80,000 against his
future salary. This advance was still outstanding at July 3, 1999.
During fiscal 1998, construction of the Company's headquarters and research
and development facility and the expansion of its manufacturing facility was
completed. During fiscal 1999, the construction of the Company's new motorcycle
manufacturing facility was completed. The Company contracted an entity
controlled by a director of the Company to act as the general contractor for the
construction of these projects. The Company paid the entity approximately $6.3
million and $5.6 million for the construction of these facilities during the
fiscal years ended July 3, 1999 and June 27, 1998, respectively. At July 3,
1999, the Company owed the entity a final payment of approximately $131,000 for
the construction of the motorcycle manufacturing facility.
F-23
<PAGE> 54
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders
Cannondale Corporation and Subsidiaries
We have audited the consolidated financial statements of Cannondale Corporation
as of July 3, 1999 and June 27, 1998, and for the years ended July 3, 1999, June
27, 1998 and June 28, 1997, and have issued our report thereon dated August 10,
1999, except for the first paragraph of Note 15, as to which the date is
September 30, 1999 (included elsewhere in this Annual Report). Our audits also
included the financial statement schedule listed in Item 14(a)(2) of this Annual
Report. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
August 10, 1999
<PAGE> 55
SCHEDULE II
CANNONDALE CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
-------------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- ------------ ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS,
RETURNS, DISCOUNTS AND LATE
CHARGES
Year ended June 28, 1997......... $5,238 $5,545 $(34) $(4,317)(1) $ 6,432
====== =======
Year ended June 27, 1998......... $6,432 $7,586 $ (5) $(5,534)(1) $ 8,479
====== =======
Year ended July 3, 1999.......... $8,479 $9,297 $ 4 $(7,706)(1) $10,074
====== =======
RESERVE FOR OBSOLETE INVENTORY
Year ended June 28, 1997......... $1,415 $1,484 $(43) $(1,787)(2) $ 1,069
====== =======
Year ended June 27, 1998......... $1,069 $1,425 $(39) $(1,649)(2) $ 806
====== =======
Year ended July 3, 1999.......... $ 806 $2,309 $ 5 $(1,459)(2) $ 1,661
====== =======
</TABLE>
- ---------------
(1) Discounts, late charges and uncollectible accounts written off, net of
recoveries.
(2) Inventory disposed.
<PAGE> 56
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGES
- ----------- ----------- ------------
<S> <C> <C>
3.1(i) Form of Amended and Restated Certificate of Incorporation of
the Company. (Filed as Exhibit 3.2 to the Registrant's
Registration Statement on Form S-1, Registration No.
33-84566).+
3.1.1(i) Certificate of Amendment to Restated Certificate of
Incorporation, effective as of November 17, 1997. (Filed as
Exhibit 4.2 to the Registrant's Registration Statement on
Form S-8, Registration No. 333-40879).+
3.1(ii) Amended and Restated Bylaws of the Company. (Filed as
Exhibit 3.1(ii) to the Registrant's Form 10-Q for the
quarterly period ended March 27, 1999).+
4.1 Rights Agreement, dated December 22, 1997, between the
Company and BankBoston, N.A., as Rights Agent. (Filed with
the Registrants's Form 8-K filed on December 23, 1997).+
4.2 1994 Stock Option Plan, as amended as of February 5, 1998.
(Filed as Exhibit 4.2 to the Registrant's Form 10-K for the
fiscal year ended June 27, 1998).+
4.3 1994 Management Stock Option Plan, as amended as of February
5, 1998. (Filed as Exhibit 4.3 to the Registrant's Form 10-K
for the fiscal year ended June 27, 1998).+
4.4 1995 Stock Option Plan, as amended as of February 5, 1998.
(Filed as Exhibit 4.4 to the Registrant's Form 10-K for the
fiscal year ended June 27, 1998).+
4.5 1996 Stock Option Plan, as amended as of February 5, 1998.
(Filed as Exhibit 4.5 to the Registrant's Form 10-K for the
fiscal year ended June 27, 1998).+
4.6 1998 Stock Option Plan. (Filed as Exhibit 4.10 to the
Registrant's Registration Statement on Form S-8,
Registration No. 333-72121).+
10.1 First Amendment to Amended and Restated Credit Agreement,
dated as of May 1, 1999, among the Company and NationsBank
N.A., as Administrative Agent, Fronting Bank, Documentation
Agent and Swingline Bank and Fleet National Bank, The Chase
Manhattan Bank, State Street Bank and Trust Company and
BankBoston, N.A.*
10.2 Amended and Restated Credit Agreement, dated as of January
22, 1999, among the Company and NationsBank N.A., as
Administrative Agent, Fronting Bank, Documentation Agent and
Swingline Bank and Fleet National Bank, The Chase Manhattan
Bank, State Street Bank and Trust Company and BankBoston,
N.A. (Filed as Exhibit 10.1 to the Registrant's Form 10-Q
for the quarterly period ended March 27, 1999).+
10.3 Installment Sales Agreement, dated August 28, 1981, between
the Company and Bedford Development Council. Amendments to
Installment Sales Agreement, dated May 29, 1987, September
1, 1988 and October 26, 1993. Assignment of Fifth
Supplemental Installment Sale Agreement, dated October 26,
1993, from Bedford Development Council to The Pennsylvania
Industrial Development Authority. (Filed as Exhibit 10.7 to
the Registrant's Registration Statement on Form S-1,
Registration No. 33-84566).+
</TABLE>
<PAGE> 57
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGES
- ----------- ----------- ------------
<S> <C> <C>
10.4 Consent, Subordination and Assumption Agreements, between
the Company and Bedford Development Council, in favor of The
Pennsylvania Industrial Development Authority, dated August
28, 1981, May 7, 1982, May 11, 1983, May 29, 1987, September
1, 1988, and October 26, 1993. (Filed as Exhibit 10.8 to the
Registrant's Registration Statement on Form S-1,
Registration No. 33-84566).+
10.5 Installment Sale Agreement, dated April 27, 1994, between
the Company and Bedford Development Council. Assignment,
dated April 27. 1994, from Bedford Development Council to
Pennsylvania Industrial Development Authority. (Filed as
Exhibit 10.9 to the Registrant's Registration Statement on
Form S-1, Registration No. 33-84566).+
10.6 Consent, Subordination and Assumption Agreement, dated April
27, 1994, between the Company and Bedford Development
Council, in favor of The Pennsylvania Industrial Development
Authority. (Filed as Exhibit 10.10 to the Registrant's
Registration Statement on Form S-1, Registration No.
33-84566).+
10.7 Loan Agreement, dated November 10, 1989, between the Company
and Rush Township, Commonwealth of Pennsylvania. (Filed as
Exhibit 10.11 to the Registrant's Registration Statement on
Form S-1, Registration No. 33-84566).+
10.8 Promissory Note, dated November 10, 1989, from the Company
to Rush Township, Commonwealth of Pennsylvania. (Filed as
exhibit 10.12 to the Registrant's Registration Statement on
Form S-1, Registration No. 33-84566).+
10.9 Mortgage, dated November 10, 1989, from the Company to Rush
Township, Commonwealth of Pennsylvania. Assignment of Note
and Mortgage, dated June 30, 1989, from Rush Township,
Commonwealth of Pennsylvania to Pennsylvania Department of
Commerce. (Filed as Exhibit 10.13 to the Registrant's
Registration Statement on Form S-1, Registration No.
33-84566).+
10.10 Loan Agreement, dated July 24, 1990, between the Company and
Rush Township, Commonwealth of Pennsylvania. (Filed as
Exhibit 10.14 to the Registrant's Registration Statement on
Form S-1, Registration No. 33-84566).+
10.11 Promissory Note, dated July 24, 1990, from the Company to
Rush Township, Commonwealth of Pennsylvania. (Filed as
Exhibit 10.15 to the Registrant's Registration Statement on
Form S-1, Registration No. 33-84566).+
10.12 Mortgage, dated July 24, 1990, from the Company to Rush
Township Commonwealth of Pennsylvania. (Filed as Exhibit
10.16 to the Registrant's Registration Statement on Form
S-1, Registration No. 33-84566).+
10.13 Installment Sales Agreement, dated December 4, 1990, between
the Company and Moshannon Valley Economic Development
Partnership. Assignment, dated December 4, 1990, from
Moshannon Valley Economic Development Partnership to The
Pennsylvania Industrial Development Authority. (Filed as
Exhibit 10.17 to the Registrant's Registration Statement on
Form S-1, Registration No. 33-84566).+
</TABLE>
<PAGE> 58
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGES
- ----------- ----------- ------------
<S> <C> <C>
10.14 Mortgage Subordination Agreement, dated December 4, 1990,
among the Company, Moshannon Valley Economic Development
Partnership, Rush Township, Commonwealth of Pennsylvania,
and The Pennsylvania Industrial Development Authority.
(Filed as Exhibit 10.18 to the Registrant's Form S-1,
Registration No. 33-84566).+
10.15 Consent, Subordination and assumption Agreement, dated
December 4, 1990, between the Company and Moshannnon Valley
Economic Development Partnership, in favor of The
Pennsylvania Industrial Development Authority. (Filed as
Exhibit 10.19 to the Registrant's Registration Statement on
Form S-1, Registration No. 33-84566).+
10.16 Loan Agreement, dated February 1, 1992, between the Company
and Moshannon Valley Economic Development Partnership.
(Filed as Exhibit 10.20 to the Registrant's Registration
Statement on Form S-1, Registration No. 33-84566).+
10.17 Installment Judgment Note, dated February 1, 1992, from the
Company to Moshannon Valley Economic Development
Partnership. (Filed as Exhibit 10.21 to the Registrant's
Registration Statement on Form S-1, Registration No.
33-84566).+
10.18 Chattel Mortgage Security Agreement, dated February 1, 1992,
between the Company and Moshannon Valley Economic
Development Partnership. (Filed as Exhibit 10.22 to the
Registrant's Form S-1, Registration No. 33-84566).+
10.19 Business Infrastructure Development Loan Agreement, dated
June 30, 1989, among the Company, Pennsylvania Department of
Commerce and Rush Township, Commonwealth of Pennsylvania.
(Filed as Exhibit 10.23 to the Registrant's Registration
Statement on Form S-1, Registration No. 33-84566).+
10.20 Promissory Note, dated June 30, 1989, from the Company to
Pennsylvania Department of Commerce. Amendment to Promissory
Note, dated February 1, 1992, from the company to
Pennsylvania Department of Commerce. (Filed as Exhibit 10.24
to the Registrant's Registration Statement on Form S-1,
Registration No. 33-84566).+
10.21 Escrow Agreement, dated June 30, 1989, among the Company,
Rush Township, Commonwealth of Pennsylvania, Pennsylvania
Department of Commerce and MidState Bank and Trust Company.
(Filed as Exhibit 10.25 to the Registrant's Registration
Statement on Form S-1, Registration No. 33-84566).+
10.22 Mortgage, dated July 23, 1991, from Cannondale Europe, B.V.
to Algemene-Bank Netherlands B.V. (In Dutch, with English
summary). (Filed as Exhibit 10.26 to the Registrant's
Registration Statement on Form S-1, Registration No.
33-84566).+
10.23 Financing Lease, dated May 31, 1991, between ABN Onroerend
Goed Lease B.V., as lessor, and Cannondale Europe B.V., as
lessee. (In Dutch, with English translation). (Filed as
Exhibit 10.27 to the Registrant's Registration Statement on
Form S-1, Registration No. 33-84566).+
10.24 Credit Agreement, dated February 5, 1998, between Cannondale
Europe B.V. and ABN AMRO Bank N.V. (Filed as Exhibit 10.1.11
to the Registrant's Form 10-Q for the quarterly period ended
March 28, 1998).+
</TABLE>
<PAGE> 59
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGES
- ----------- ----------- ------------
<S> <C> <C>
10.25 Loan Agreement, dated September 1, 1992, between Cannondale
Japan KK and The Dai-Ichi Kangyo Bank, Ltd. (In Japanese,
with English translation). (Filed as Exhibit 10.30 to the
Registrant's Registration Statement on Form S-1,
Registration No. 33-84566).+
10.26 Guarantee Agreement, dated August 7, 1992, from the Company
to The Dai-Ichi Kangyo Bank, Ltd. (Filed as Exhibit 10.30.1
to the Registrant's Registration Statement on Form S-1,
Registration No. 33-84566).+
10.27 Master Lease Agreement, dated April 11, 1994, between United
States Leasing Corporation and the Company. (Filed as
Exhibit 10.32 to the Registrant's Registration Statement on
Form S-1, Registration No. 33-84566).+
10.28 Employment Agreement, dated January 3, 1994, between the
Company and William A. Luca. (Filed as Exhibit 10.48 to the
Registrant's Registration Statement on Form S-1,
Registration No. 33-84566).+
10.29 Employee Patent and Confidential Information Agreement,
dated August 20, 1982, between the Company and Daniel C.
Alloway. (Filed as Exhibit 10.49 to the Registrant's
Registration Statement on Form S-1, Registration No.
33-84566).+
10.30 Employment Agreement, dated June 6, 1994, between the
Company and Leonard Konecny. (Filed as Exhibit 10.53 to the
Registrant's Registration Statement on Form S-1,
Registration No. 33-84566).+
10.31 Cannondale Corporation 401(k) Profit Sharing Plan. (Filed as
Exhibit 10.54 to the Registrant's Registration Statement on
Form S-1, Registration No. 33-84566).+
10.32 Cannondale Corporation Employee Stock Purchase Plan. (Filed
as Exhibit 4.4 to the Registrant's Registration Statement on
Form S-8, Registration No. 333-40879).+
10.33 Form of Indemnification Agreement between the Company and
each of its directors and officers. (Filed as Exhibit 10.60
to the Registrant's Registration Statement on Form S-1,
Registration No. 33-84566).+
10.34 Change of Control Employment Agreement, dated February 5,
1998, between Cannondale Corporation and William A. Luca.
(Filed as Exhibit 10.68 to the Registrant's Form 10-Q for
the quarterly period ended March 28, 1998).+
10.35 Change of Control Employment Agreement, dated February 5,
1998, between Cannondale Corporation and Joseph S.
Montgomery. (Filed as Exhibit 10.68.1 to the Registrant's
Form 10-Q for the quarterly period ended March 28, 1998).+
10.36 Change of Control Employment Agreement, dated February 5,
1998, between Cannondale Corporation and John Moriarty.
(Filed as Exhibit 10.68.2 to the Registrant's Form 10-Q for
the quarterly period ended March 28, 1998).+
10.37 Change of Control Employment Agreement, dated February 5,
1998, between Cannondale Corporation and Daniel C. Alloway.
(Filed as Exhibit 10.68.3 to the Registrant's Form 10-Q for
the quarterly period ended March 28, 1998).+
10.38 Cannondale Corporation Change of Control Separation Plan A.
(Filed as Exhibit 10.68.4 to the Registrant's Form 10-Q for
the quarterly period ended March 28, 1998).+
</TABLE>
<PAGE> 60
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGES
- ----------- ----------- ------------
<S> <C> <C>
10.39 Cannondale Corporation Change of Control Separation Plan B.
(Filed as Exhibit 10.68.5 to the Registrant's Form 10-Q for
the quarterly period ended March 28, 1998).+
21 Subsidiaries of the Registrant.*
23 Consent of Independent Auditors.*
24 Power of Attorney (appears on signature page).*
27.1 Financial Data Schedule For Fiscal Year Ended July 3, 1999.*
27.2 Restated Financial Data Schedules for the Nine-Month,
Six-Month and Three-Month Periods Ended March 27, 1999,
December 26, 1998 and September 26, 1998, respectively.*
</TABLE>
- ---------------
+ Incorporated by reference.
* Filed herewith.
<PAGE> 1
FIRST AMENDMENT
TO
AMENDED AND RESTATED CREDIT AGREEMENT
FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT, dated as of May
1, 1999 (this "Amendment"), by and among CANNONDALE CORPORATION, a corporation
organized under the laws of the State of Delaware ("Cannondale"); each of the
Subsidiaries of Cannondale that is a signatory to the Credit Agreement (as
defined below) (such Subsidiaries of Cannondale, together with Cannondale, the
"Borrowers"); NATIONSBANK, N.A., a national banking association organized under
the laws of the United States of America ("NationsBank"); FLEET NATIONAL BANK, a
national banking association organized under the laws of the United States of
America ("Fleet"); THE CHASE MANHATTAN BANK, a bank organized under the laws of
New York ("Chase"); STATE STREET BANK AND TRUST COMPANY, a trust company
organized under the laws of Massachusetts ("State Street"); and BANKBOSTON,
N.A., a national banking association organized under the laws of the United
States of America ("BankBoston") (each of NationsBank, Fleet, Chase, State
Street and BankBoston may be referred to individually as a "Bank" and
collectively as the "Banks"); and NATIONSBANK, as administrative agent for the
Banks (in such capacity, together with its successors in such capacity, the
"Administrative Agent").
BACKGROUND
A. Reference is made to that certain Amended and Restated Credit Agreement
dated as of January 22, 1999 (the "Credit Agreement"), among the Borrowers, the
Administrative Agent, the Banks and the other parties signatory thereto.
B. The parties hereto wish to amend the Credit Agreement as herein
provided.
C. Capitalized terms not otherwise defined shall have the meanings ascribed
to them in the Credit Agreement, as amended hereby.
AGREEMENT
In consideration of the Background, which is incorporated by reference, the
parties hereto, intending to be legally bound, hereby agree as follows:
1. Modification. All the terms and provisions of the Credit Agreement
and the other Facility Documents, as amended to date, shall remain in full
force and effect except as follows:
(a) The definition of "Margin" contained in Section 1.1 of the
Credit Agreement is deleted and the following is substituted therefor:
"Margin" means (a) for each type of Revolving Loan, the number
of basis points for such type of Revolving Loan set forth below
opposite the range of the Consolidated Average Funded Debt to EBITDA
Ratio of Cannondale in the schedule below as determined as of the
last day of the immediately preceding Fiscal Quarter, with
adjustments to become effective on the date of receipt by the
Administrative Agent of the most recent financial statements of the
Borrowers required to be furnished to the Banks under Section 7.8;
provided, however, that in the event that the Borrowers fail to
furnish such financial statements to the Banks on a timely basis
under Section 7.8, "Margin" means, for each type of Revolving Loan
during the continuance of such
<PAGE> 2
failure until such financial statements are delivered, the highest
number of basis points for such type of Revolving Loan set forth
below:
<TABLE>
<CAPTION>
MARGIN
CONSOLIDATED AVERAGE FUNDED ----------------------------------------
DEBT TO EBITDA RATIO VARIABLE RATE LOANS EUROCURRENCY LOANS
--------------------------- ------------------- ------------------
<S> <C> <C>
Less than 2.50 0 basis points 75.0 basis points
Greater than or equal to 2.50, but 0 basis points 97.5 basis points
less than 3.00
Greater than or equal to 3.00, but 0 basis points 120.0 basis points
less than 3.30
Greater than or equal to 3.30, but 0 basis points 145.0 basis points
less than 3.60
Greater than or equal to 3.60 0 basis points 170.0 basis points
</TABLE>
and (b) for each type of Term Loan, the number of basis points
for such type of Term Loan set forth below opposite the stated time
period in the schedule below, with adjustments to become effective
automatically without further action on the part of the Borrowers,
the Administrative Agent or the Banks:
<TABLE>
<CAPTION>
MARGIN
----------------------------------------
TIME PERIOD VARIABLE RATE LOANS EUROCURRENCY LOANS
----------- ------------------- ------------------
<S> <C> <C>
January 22, 1999 to 0 basis points 175 basis points
April 30, 1999
May 1, 1999 to 0 basis points 225 basis points
December 31, 1999
January 1, 2000 to 0 basis points 250 basis points
March 31, 2000
April 1, 2000 to 0 basis points 275 basis points
June 30, 2000
from and after July 1, 2000 0 basis points 300 basis points
</TABLE>
(b) The facility fee schedule contained in Section 2.14(a) of the
Credit Agreement is deleted and the following is substituted therefor:
<TABLE>
<CAPTION>
CONSOLIDATED AVERAGE FUNDED
DEBT TO EBITDA RATIO FACILITY FEE
--------------------------- ------------
<S> <C>
Less than 2.50 25 basis points
Greater than or equal to 2.50, 27.5 basis points
but less than 3.00
Greater than or equal to 3.00 30.0 basis points
</TABLE>
(c) Section 9.4 to the Credit Agreement is deleted and the
following is substituted therefor:
Section 9.4. Debt Service Coverage Ratio. Cannondale shall
maintain at all times, as certified at the end of each Fiscal Quarter
of Cannondale, a Consolidated Average Funded Debt to EBITDA Ratio
(for the four Fiscal Quarters then ended) of not greater than (a) 3.9
to 1.0 during the fourth Fiscal Quarter of Cannondale's 1999 Fiscal
Year, (b) 3.8 to 1.0 and 3.6 to 1.0 during the first and second
Fiscal Quarters, respectively, of Cannondale's 2000 Fiscal Year, and
(c) 3.3 to 1.0 thereafter.
2. Amendment Fee. The Borrowers hereby agree to pay to the
Administrative Agent, on the effective date of this Amendment, for the
account of each Bank executing this Amendment prior to May 14, 1999, an
amendment fee in the amount of .125% of such Bank's Commitment (used and
unused) on such date.
3. Conditions to effectiveness. This Amendment shall not be effective
until such date as the Administrative Agent shall have received the
following, all in form, scope, and content acceptable to the
2
<PAGE> 3
Administrative Agent and Required Banks in their sole discretion, and then
shall be effective as of the date first above written:
(a) This Amendment, executed by the Borrowers and the Required
Banks; and
(b) Such other agreements and instruments as the Administrative
Agent shall reasonably require.
4. Reaffirmation by the Borrowers. Each of the Borrowers
acknowledges, agrees, and reaffirms, both prior to and after taking into
account this Amendment, that each is legally, validly, and enforceably
indebted to the Banks under the Notes without defense, counterclaim, or
offset, and that each is legally, validly, and enforceably liable to the
Banks for all costs and expenses of collection and reasonable attorneys'
fees as and to the extent provided in this Amendment, the Credit Agreement,
the Notes, and the other Facility Documents. Each of the Borrowers hereby
restates and agrees to be bound by all covenants contained in the Credit
Agreement and the other Facility Documents and hereby reaffirms that all of
the representations and warranties contained in the Credit Agreement and
the other Facility Documents remain true and correct in all material
respects with the exception that the representations and warranties
regarding the financial statements described therein are deemed true as of
the date made. Each of the Borrowers represents that, except as set forth
in the Credit Agreement and the other Facility Documents, there are neither
pending, nor to each Borrower's knowledge, threatened, legal proceedings to
which any of the Borrowers is a party that materially or adversely affect
the transactions contemplated by this Amendment or the ability of any of
the Borrowers to conduct its business on a consolidated basis. Cannondale
and Cannondale Europe B.V. each acknowledge and represent that the
resolutions of each dated January 6, 1999, in the case of Cannondale, and
January 19, 1999, and January 21, 1999, in the case of Cannondale Europe
B.V., remain in full force and effect and have not been amended, modified,
rescinded, or otherwise abrogated.
5. Reaffirmation re: Collateral. Cannondale reaffirms the mortgages,
liens, security interests, and pledges granted to NationsBank, N.A., as
Administrative Agent, for the benefit of the Banks pursuant to the Credit
Agreement and the other Facility Documents to secure the obligations of
each Borrower thereunder.
6. Other representations by the Borrowers. Each of the Borrowers
represents and confirms that: (a) no Default or Event of Default has
occurred and is continuing, and that neither the Agents nor the Banks has
given its consent to or waived any Default or Event of Default, and (b) the
Credit Agreement and the other Facility Documents are in full force and
effect and enforceable against the Borrowers in accordance with the terms
thereof. Each of the Borrowers represents and confirms that as of the date
hereof, each has no claim or defense (and each of the Borrowers hereby
waives every claim and defense as of the date hereof) against the Agents or
the Banks arising out of or relating to the Credit Agreement or the other
Facility Documents or arising out of or relating to the making,
administration or enforcement of the Loans or the remedies provided for
under the Facility Documents.
7. No waiver by the Banks. Each of the Borrowers acknowledges that:
(a) neither the Banks nor the Administrative Agent, by execution of this
Amendment, are waiving any Default or Event of Default, whether now
existing or hereafter occurring, disclosed or undisclosed, by the Borrowers
under the Facility Documents, and (b) the Banks and the Administrative
Agent reserve all rights and remedies available to them under the Facility
Documents and otherwise.
8. Miscellaneous.
(a) This Amendment may be executed by one or more of the parties to
this Amendment on any number of separate counterparts (including by
facsimile transmission), and all of said counterparts taken together
shall be deemed to constitute one and the same instrument.
(b) This Amendment and the rights and obligations of the parties
hereunder shall be governed by, and construed in accordance with, the
laws of the State of New York.
3
<PAGE> 4
(c) This Amendment shall be deemed a, and included in the
definition of, Facility Document under the Credit Agreement for all
purposes.
(d) The Credit Agreement, as amended hereby, and the other Facility
Documents remain in full force and effect in accordance with their
terms.
[The balance of this page left intentionally blank. The next page is the
signature page.]
4
<PAGE> 5
IN WITNESS WHEREOF, the parties have executed this Amendment on the date
first written above.
BORROWERS
CANNONDALE CORPORATION
By /s/ WILLIAM A. LUCA
------------------------------------
Name: William A. Luca
Title: Vice President, CFO,
Treasurer
CANNONDALE EUROPE B.V.
By /s/ JORG HILFIKER
------------------------------------
Name: Jorg Hilfiker
Title: President
CANNONDALE JAPAN K.K.
By /s/ WILLIAM CONRADT
------------------------------------
Name: William Conradt
Title: President
ADMINISTRATIVE AGENT
NATIONSBANK, N.A.
By /s/ W.L. HESS
------------------------------------
Name: W.L. Hess
Title: Managing Director
BANKS
NATIONSBANK, N.A.
By /s/ W.L. HESS
------------------------------------
Name: W.L. Hess
Title: Managing Director
5
<PAGE> 6
FLEET NATIONAL BANK
By
------------------------------------
Name:
Title:
THE CHASE MANHATTAN BANK
By
------------------------------------
Name:
Title:
STATE STREET BANK AND TRUST COMPANY
By /s/ ARLENE M. DOHERTY
------------------------------------
Name: Arlene M. Doherty
Title: Vice President
BANKBOSTON, N.A.
By /s/ DIANE B. VACCARO
------------------------------------
Name: Diane B. Vaccaro
Title: Vice President
6
<PAGE> 1
EXHIBIT 21
LIST OF OPERATING SUBSIDIARIES
<TABLE>
<CAPTION>
NAME OF COMPANY JURISDICTION OF ORGANIZATION
- --------------- ----------------------------
<S> <C>
Cannondale Europe B.V....................................... Netherlands
Cannondale Japan KK......................................... Japan
Cannondale Australia Pty Limited............................ Australia
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-40879) pertaining to the 1994 Employee Stock Purchase Plan and
Registration Statement (Form S-8 No. 33-16807) pertaining to the 1996 Stock
Option Plan and Registration Statement (Form S-8 No. 33-80073) pertaining to the
1995 Stock Option Plan and Registration Statement (Form S-8 No. 33-87328)
pertaining to the 1994 Stock Option Plan and the 1994 Management Stock Option
Plan and Registration Statement (Form S-8 No. 333-72121) pertaining to the 1998
Stock Option Plan of Cannondale Corporation of our reports dated August 10,
1999, except for the first paragraph of Note 15, as to which the date is
September 30 1999, with respect to the consolidated financial statements and
schedule of Cannondale Corporation included in this Annual Report (Form 10-K)
for the year ended July 3, 1999.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
September 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND
THE CONSOLIDATED STATEMENTS OF EARNINGS OF CANNONDALE
CORPORATION FOR THE FISCAL YEAR ENDED JULY 3, 1999,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-03-1999
<PERIOD-START> JUN-28-1998
<PERIOD-END> JUL-03-1999
<CASH> 3,300
<SECURITIES> 0
<RECEIVABLES> 69,453
<ALLOWANCES> 10,074
<INVENTORY> 33,165
<CURRENT-ASSETS> 104,247
<PP&E> 67,711
<DEPRECIATION> 26,334
<TOTAL-ASSETS> 162,379
<CURRENT-LIABILITIES> 29,353
<BONDS> 55,997
0
0
<COMMON> 88
<OTHER-SE> 74,922
<TOTAL-LIABILITY-AND-EQUITY> 162,379
<SALES> 176,819
<TOTAL-REVENUES> 176,819
<CGS> 114,627
<TOTAL-COSTS> 114,627
<OTHER-EXPENSES> 50,821
<LOSS-PROVISION> 9,498
<INTEREST-EXPENSE> 4,557
<INCOME-PRETAX> 7,974
<INCOME-TAX> 2,051
<INCOME-CONTINUING> 5,923
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,923
<EPS-BASIC> 0.79<F1>
<EPS-DILUTED> 0.77
<FN>
<F1>REPRESENTS BASIC INCOME PER COMMON SHARES
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND THE
RESTATED CONSOLIDATED STATEMENTS OF EARNINGS OF CANNONDALE
CORPORATION FOR THE FISCAL NINE, SIX, AND THREE MONTH
PERIODS ENDED MARCH 27, 1999, DECEMBER 26, 1998 AND
SEPTEMBER 26, 1998, RESPECTIVELY, AND ARE QUALIFIED IN
THEIR ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> JUL-03-1999 JUL-03-1999 JUL-03-1999
<PERIOD-START> JUN-28-1998 JUN-28-1998 JUN-28-1998
<PERIOD-END> MAR-27-1999 DEC-26-1998 SEP-26-1998
<CASH> 2,190 879 2,407
<SECURITIES> 0 0 0
<RECEIVABLES> 87,503 80,703 65,822
<ALLOWANCES> 10,359 10,238 8,747
<INVENTORY> 35,832 40,284 46,404
<CURRENT-ASSETS> 123,212 120,215 114,717
<PP&E> 63,293 62,443 59,703
<DEPRECIATION> 25,133 24,170 22,835
<TOTAL-ASSETS> 177,556 174,379 167,321
<CURRENT-LIABILITIES> 29,690 28,506 29,336
<BONDS> 70,897 69,288 63,261
0 0 0
0 0 0
<COMMON> 88 87 87
<OTHER-SE> 75,155 74,648 72,801
<TOTAL-LIABILITY-AND-EQUITY> 177,556 174,379 167,321
<SALES> 131,833 90,119 42,218
<TOTAL-REVENUES> 131,833 90,119 42,218
<CGS> 85,300 59,333 27,614
<TOTAL-COSTS> 85,300 59,333 27,614
<OTHER-EXPENSES> 37,623 25,841 12,695
<LOSS-PROVISION> 7,323 4,714 2,264
<INTEREST-EXPENSE> 3,182 1,945 839
<INCOME-PRETAX> 6,758 3,391 1,206
<INCOME-TAX> 1,744 747 411
<INCOME-CONTINUING> 5,014 2,644 795
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 5,014 2,644 795
<EPS-BASIC> 0.67<F1> 0.35<F1> 0.10<F1>
<EPS-DILUTED> 0.65 0.34 0.10
<FN>
<F1>REPRESENTS BASIC INCOME PER COMMON SHARES
</FN>
</TABLE>
