<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 2, 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)
DELAWARE 06-0871823
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16 TROWBRIDGE DRIVE, BETHEL, CONNECTICUT 06801
(Address of principal executive offices) (zip code)
(203) 749-7000
(Registrant's telephone number, including area code)
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the issuer's Common Stock, $.01 par value
per share, as of November 10, 1999 was 7,491,421.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of October 2 1999, July
3, 1999 and September 26, 1998 1
Condensed Consolidated Statements of Operations for the three
months ended October 2, 1999 and September 26, 1998 2
Condensed Consolidated Statements of Cash Flows for the three
months ended October 2, 1999 and September 26, 1998 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K 13
Signature 14
</TABLE>
i
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CANNONDALE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 2, 1999 JULY 3, 1999 SEPTEMBER 26, 1998
--------------- ------------ ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash ............................................. $ 2,089 $ 3,300 $ 2,407
Trade accounts receivable, less allowances of
$9,368, $10,074 and $8,747 .................... 53,425 59,379 57,075
Inventory ........................................ 33,752 33,165 46,404
Deferred income taxes ............................ 4,116 2,749 3,312
Prepaid expenses and other current assets ........ 3,976 4,827 5,425
Interest receivable from a related party ......... 1,071 827 94
--------- --------- ---------
Total current assets ................................. 98,429 104,247 114,717
Property, plant and equipment, net ................... 40,460 41,377 37,000
Notes receivable and advances to related parties ..... 12,891 12,919 12,665
Other assets ......................................... 3,585 3,836 3,071
--------- --------- ---------
Total assets ......................................... $ 155,365 $ 162,379 $ 167,453
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................. $ 14,843 $ 17,329 $ 16,759
Revolving credit advances ........................ 2,271 882 2,022
Income taxes payable ............................. -- 2,252 2,431
Warranty and other accrued expenses .............. 8,174 8,434 7,613
Current installments of long-term debt ........... 485 456 560
--------- --------- ---------
Total current liabilities ............................ 25,773 29,353 29,385
Long-term debt, less current installments ............ 52,855 55,997 63,261
Deferred income taxes ................................ 1,614 1,619 1,561
Other noncurrent liabilities ......................... 449 400 275
--------- --------- ---------
Total liabilities .................................... 80,691 87,369 94,482
--------- --------- ---------
Stockholders' equity:
Common stock, $.01 par value:
Authorized shares - 40,000,000
Issued shares - 8,784,321, 8,784,308 and
8,741,579 ................................... 88 88 87
Additional paid-in capital ....................... 57,809 57,815 57,355
Retained earnings ................................ 39,843 41,328 36,200
Less 1,292,900 shares in treasury at cost ........ (20,162) (20,162) (20,162)
Accumulated other comprehensive income ........... (2,904) (4,059) (509)
--------- --------- ---------
Total stockholders' equity ........................... 74,674 75,010 72,971
--------- --------- ---------
Total liabilities and stockholders' equity ........... $ 155,365 $ 162,379 $ 167,453
========= ========= =========
</TABLE>
See accompanying notes
1
<PAGE> 4
CANNONDALE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
OCTOBER 2, SEPTEMBER 26,
1999 1998
---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net sales ........................................................ $ 36,009 $ 42,218
Cost of sales .................................................... 25,736 27,614
-------- --------
Gross profit ..................................................... 10,273 14,604
-------- --------
Expenses:
Selling, general and administrative ......................... 9,348 10,542
Research and development .................................... 2,424 2,153
-------- --------
11,772 12,695
-------- --------
Operating income (loss) .......................................... (1,499) 1,909
-------- --------
Other income (expense):
Interest expense ............................................ (1,042) (839)
Other income ................................................ 221 136
-------- --------
(821) (703)
-------- --------
Income (loss) before income taxes ................................ (2,320) 1,206
Income tax benefit (expense) ..................................... 835 (411)
-------- --------
Net income (loss) ................................................ $ (1,485) $ 795
======== ========
Basic earnings (loss) per share .................................. $ (0.20) $ 0.10
======== ========
Diluted earnings (loss) per share ................................ $ (0.20) $ 0.10
======== ========
</TABLE>
See accompanying notes
2
<PAGE> 5
CANNONDALE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
OCTOBER 2, 1999 SEPTEMBER 26, 1998
--------------- ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ............. $ 1,349 $ (2,417)
-------- --------
INVESTING ACTIVITIES:
Loans provided to related parties ............................... -- (10,000)
Proceeds from repayments of loans provided to related parties ... 28 23
Capital expenditures ............................................ (1,464) (3,833)
Proceeds from sale of equipment and buildings ................... 633 1,389
-------- --------
Net cash used in investing activities ........................... (803) (12,421)
-------- --------
FINANCING ACTIVITIES:
Net proceeds from (used in) issuance of common stock ............ (6) 52
Proceeds from issuance of long-term debt ........................ -- 400
Payments for the purchase of treasury stock ..................... -- (7,745)
Net proceeds from (repayments of) borrowings under short-term
revolving credit agreements ........................ 1,242 (266)
Net proceeds from (repayments of) borrowings under long-term
debt and capital lease agreements .................. (3,156) 22,458
-------- --------
Net cash provided by (used in) financing activities ............. (1,920) 14,899
-------- --------
Effect of exchange rate changes on cash ......................... 163 (685)
-------- --------
Net decrease in cash ............................................ (1,211) (624)
Cash at beginning of period ..................................... 3,300 3,031
-------- --------
Cash at end of period ........................................... $ 2,089 $ 2,407
======== ========
</TABLE>
See accompanying notes
3
<PAGE> 6
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Cannondale Corporation (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three-month period ended October 2, 1999 are not
necessarily indicative of the results that may be expected for the year ending
July 1, 2000. For further information, refer to the consolidated financial
statements and footnotes thereto for the year ended July 3, 1999 included in the
Company's Annual Report on Form 10-K.
Reclassifications
Certain fiscal 1999 amounts have been reclassified to conform to the
current year's presentation.
2. INVENTORY
The components of inventory are as follows (in thousands):
<TABLE>
<CAPTION>
OCTOBER 2, SEPTEMBER 26,
1999 JULY 3, 1999 1998
----------- ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Raw materials ..................... $ 19,408 $ 17,723 $ 27,393
Work-in-process ................... 2,404 2,110 3,181
Finished goods .................... 14,041 14,993 17,178
-------- -------- --------
35,853 34,826 47,752
Less reserve for obsolete
inventory......................... (2,101) (1,661) (1,348)
-------- -------- --------
$ 33,752 $ 33,165 $ 46,404
======== ======== ========
</TABLE>
4
<PAGE> 7
' CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. EARNINGS PER SHARE AMOUNTS
The following table is an illustration of the reconciliation of the
numerator and denominator of basic and diluted earnings (loss) per share
computations and other related disclosures required by Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share" (in thousands,
except earnings per share data):
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
OCTOBER 2, SEPTEMBER 26,
1999 1998
---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
NUMERATOR:
Numerator for basic and diluted earnings (loss) per share - income
(loss) available to common stockholders .......................................... $ (1,485) $ 795
========== ======
DENOMINATOR:
Denominator for basic earnings (loss) per share - weighted-average shares............ 7,492 7,682
Effect of dilutive securities:
Employee stock options ........................................................... -- 162
---------- ------
Denominator for diluted earnings (loss) per share - adjusted
weighted-average shares and assumed conversions .................................. 7,492 7,844
========== ======
Basic earnings (loss) per share ..................................................... $ (0.20) $ 0.10
========== ======
Diluted earnings (loss) per share ................................................... $ (0.20) $ 0.10
========== ======
</TABLE>
The following table sets forth the options to purchase shares of common
stock at the respective ranges of exercise prices that were not included in the
computation of diluted earnings (loss) per share. For the first quarter of
fiscal 2000, inclusion of such options would result in an antidilutive effect
due to the net loss incurred by the Company; for the first quarter of fiscal
1999, the options' exercise prices were greater than the average market price of
the common shares, and therefore, the effect was antidilutive:
<TABLE>
<CAPTION>
OPTIONS RANGE OF EXERCISE PRICES
------- ------------------------
<S> <C> <C>
THREE MONTHS ENDED OCTOBER 2, 1999 ................................. 2,344,447 $ 0.34 - $15.00
THREE MONTHS ENDED SEPTEMBER 26, 1998 .............................. 1,188,888 $12.50 - $16.56
</TABLE>
5
<PAGE> 8
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. COMPREHENSIVE INCOME
Pursuant to the provisions of SFAS No. 130, "Reporting Comprehensive
Income," the Company's comprehensive income (loss) is as follows, net of tax (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
OCTOBER 2, SEPTEMBER 26,
1999 1998
---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net income (loss) ......................................................... $(1,485) $ 795
Foreign currency translation gain, net of tax ............................. 1,155 1,631
------- -------
Total comprehensive income (loss) ......................................... $ (330) $ 2,426
======= =======
</TABLE>
The component of accumulated other comprehensive income is as follows,
net of tax (in thousands):
<TABLE>
<CAPTION>
OCTOBER 2, JULY 3, SEPTEMBER 26,
1999 1999 1998
---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Foreign currency translation adjustments, net of tax ............. $(2,904) $(4,059) $ (509)
------- ------- -------
Accumulated other comprehensive income ........................... $(2,904) $(4,059) $ (509)
======= ======= =======
</TABLE>
5. OPERATIONS BY INDUSTRY SEGMENTS
In fiscal year 1999, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." 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 motocross motorcycle, which is in the start-up
stage of operations, and for which no revenues have been generated as of
October 2, 1999.
6
<PAGE> 9
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Summarized segment data is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
OCTOBER 2, SEPTEMBER 26,
1999 1998
---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net sales from external customers:
Bicycles ........................................................ $ 36,009 $ 42,218
Motorcycles ..................................................... -- --
-------- --------
$ 36,009 $ 42,218
======== ========
Operating income (loss):
Bicycles ........................................................ $ (196) $ 2,878
Motorcycles ..................................................... (1,303) (969)
-------- --------
$ (1,499) $ 1,909
======== ========
</TABLE>
The Company evaluates performance of its segments based on profit or
loss from operations. The amounts below are not allocated between the segments
(in thousands):
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
OCTOBER 2, SEPTEMBER 26,
1999 1998
---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Total operating income (loss) for reportable segments ........................ $(1,499) $ 1,909
Other income (expense):
Interest expense .......................................................... (1,042) (839)
Other income .............................................................. 221 136
------- -------
(821) (703)
------- -------
Income (loss) before income taxes ............................................ $(2,320) $ 1,206
------- -------
</TABLE>
6. SALE-LEASEBACK TRANSACTION
During the first quarter of fiscal 2000, the Company entered into a
$960,000 sale-leaseback transaction for manufacturing and research and
development equipment from which the Company received proceeds of $633,000 and
the lender paid the balance of the equipment cost. The sale resulted in a
$48,000 gain, which was deferred and is being amortized over the seven-year term
of the lease. The lease provides the Company with the option to purchase the
equipment for 25.46% of the equipment cost on the 85th basic rent date. This
lease is being accounted for as on operating lease and will result in rent
expense of approximately $141,000 annually.
7
<PAGE> 10
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. DEBT
During the second quarter of fiscal 2000, the Company received a
covenant waiver from its lenders in the form of an amendment to the amended and
restated multicurrency credit facility dated January 22, 1999 (the "facility").
Pursuant to the provisions of the facility, the Company did not satisfy certain
covenants under the provisions of the agreement as of its fiscal quarter ended
October 2, 1999. The covenant waiver is effective for the period ending October
2, 1999 exclusively. The amendment to the facility provides for a $75.0 million
multicurrency credit facility secured by all of the Company's tangible and
intangible domestic assets that extends through January 22, 2002. It allows for
Cannondale U.S., Cannondale Europe and Cannondale Japan to borrow up to $55.0
million under a multicurrency revolving line of credit and provides for a $20.0
million term loan that amortizes by $10.0 million on July 22, 2001. Borrowings
under the multicurrency revolving line of credit cannot exceed the lesser of
$55.0 million or 110% of the Company's eligible accounts receivable. The
interest rate on the revolving line of credit and the term loan is 200.0 basis
points plus 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. The amendment to the
facility contains additional restrictive covenants relating to, among other
things, the payment of dividends and the repurchase of shares of the Company's
common stock. Pursuant to the amendment, the Company currently expects that it
will be in compliance with the covenants under the provisions of the facility.
8. RELATED-PARTY TRANSACTION
During the first quarter of fiscal 1999, the Company provided Joseph
Montgomery, the President and Chief Executive Officer of the Company, with a
loan in the principal amount of $10.0 million for the purchase of certain real
property. This loan was combined with a previous loan in the principal amount of
$2.0 million which enabled him to meet certain tax obligations in April 1998.
The combined 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. The Company
deferred the first 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 him 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.
8
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Sales. Net sales decreased to $36.0 million in the first quarter of
fiscal 2000 from $42.2 million in the first quarter of fiscal 1999, a reduction
of $6.2 million or 14.7%. Approximately one third of the decreased sales were
primarily a result of the adverse effect of the continued retail inventory
realignment in the European market. The balance of the sales shortfall compared
to the same period last year was attributable to component shortages caused by
the September earthquake in Taiwan.
Gross Profit. Gross profit was $10.3 million in the first quarter of
fiscal 2000, a decrease of $4.3 million, or 29.7%, below the gross profit in the
first quarter of fiscal 1999 of $14.6 million. Gross profit as a percentage of
net sales in the first quarter of fiscal 2000 decreased to 28.5% compared to
34.6% for the first quarter of fiscal 1999. The decrease in gross profit dollars
and gross profit as a percentage of net sales was primarily attributable to
product mix as the component shortages caused by the Taiwan earthquake precluded
the Company from shipping its high-end products. In addition, the retail
inventory realignment in the European market resulted in a less favorable sales
mix to the international markets where the Company typically achieves a higher
gross-profit rate.
Operating Expenses. Operating expenses were $11.8 million for the first
quarter of fiscal 2000, a decrease of approximately $900,000, or 7.3%, from the
$12.7 million recorded for the first quarter of fiscal 1999.
Selling, general and administrative expenses decreased to $9.3 million
in the first quarter of fiscal 2000 from $10.5 million recorded during the
prior-year period. Decreased selling, general and administrative expenses were
primarily associated with lower freight, warranty, bad debt and insurance
expenses directly related to the decrease in sales volume compared to the same
period last year. As a percentage of sales, selling, general and administrative
expenses increased to 26.0% for the first three months of fiscal 2000 from 25.0%
in the prior-year period due to the reduction in sales compared to the same
period last year.
Research and development expenses increased to $2.4 million in the
first quarter of fiscal 2000 from $2.2 million recorded during the prior-year
period. The increase in spending during the first quarter of fiscal 2000 was
primarily attributable to the development of the MX400 motorcycle and the
manufacturing process associated with it. The Company invested approximately
$1.3 million in research and development for its motorcycle during the first
quarter of fiscal 2000 compared to approximately $1.0 million during the same
period last year. The Company plans to begin manufacturing its MX400 motorcycle
in the second quarter of fiscal 2000 with shipments in the third quarter. As a
percentage of sales, research and development expense increased to 6.7% for the
first three months of fiscal 2000 compared to 5.1% for the first three months of
fiscal 1999; this increase reflects the Company's commitment to invest in the
improvement of its current products and the generation of new products and
manufacturing processes, as well as the reduction in sales compared to the same
period last year.
Other income (expense). Interest expense increased to $1.0 million in
the first quarter of fiscal 2000 from $839,000 recorded during the prior-year
period. The increase in interest expense was primarily attributable to the
increase in interest rates compared to the same period last year. For fiscal
2000, other income primarily consists of finance charges relating to accounts
receivable and interest income from the loan to Joseph Montgomery ($244,000) net
of foreign exchange losses incurred during the period.
9
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $1.3 million for the
first three months of fiscal 2000, an increase of $3.7 million compared to the
$2.4 million used in operating activities for the first three months of fiscal
1999. The increase in cash provided by operating activities during the first
quarter of fiscal 2000 was primarily attributable to a larger decrease in
accounts receivable levels compared to the same period last year due to the
reduction in sales. In addition, inventory levels at the end of the first
quarter of fiscal 2000 were consistent with the balance at the end fiscal 1999
compared to an increase in inventory levels experienced during the same period
last year.
Capital expenditures were $1.5 million for the first three months of
fiscal 2000, compared to $3.8 million in the first three months of fiscal 1999.
Capital expenditures during the first quarter of fiscal 2000 principally
consisted of computer equipment and manufacturing equipment associated with the
production of both the bicycle and motorcycle product lines. Capital
expenditures during the first quarter of fiscal 1999 principally consisted of
the Company's investment in the production facility for its motorcycle in
Bedford, Pennsylvania, and computer and manufacturing equipment.
During the first quarter of fiscal 2000, the Company entered into a
$960,000 sale-leaseback transaction for manufacturing and research and
development equipment from which the Company received proceeds of $633,000 and
the lender paid the balance of the equipment cost. The sale resulted in a
$48,000 gain, which was deferred and is being amortized over the seven-year term
of the lease. The lease provides the Company with the option to purchase the
equipment for 25.46% of the equipment cost on the 85th basic rent date. This
lease is being accounted for as an operating lease and will result in rent
expense of approximately $141,000 annually.
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.
Under its stock repurchase programs, the Company repurchased an
aggregate of 636,500 shares of its common stock during the first quarter of
fiscal 1999 at a cost of $7.7 million.
During the first quarter of fiscal 1999, the Company provided Joseph
Montgomery, the President and Chief Executive Officer of the Company, with a
loan in the principal amount of $10.0 million for the purchase of certain real
property. This loan was combined with a previous loan in the principal amount of
$2.0 million which enabled him to meet certain tax obligations in April 1998.
The combined 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. The Company
deferred the first 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 him 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.
Net cash used by financing activities for the first three months of
fiscal 2000 was $1.9 million, a decrease of approximately $16.8 million compared
to the $14.9 million provided by financing activities for the first three months
of fiscal 1999. The net cash used in financing activities during the first
quarter of fiscal 2000 primarily reflects the decrease in the Company's working
capital levels during the quarter and the corresponding reduction in its debt.
The net cash provided by financing activities in fiscal 1999
10
<PAGE> 13
primarily reflects the net proceeds from borrowings under the Company's
multicurrency revolving credit facility to meet its operating and capital
requirements, to finance the Company's programs to repurchase shares of its
common stock and to finance the loan to Joseph Montgomery.
During the second quarter of fiscal 2000, the Company received a
covenant waiver from its lenders in the form of an amendment to the amended and
restated multicurrency credit facility dated January 22, 1999 (the "facility").
Pursuant to the provisions of the facility, the Company did not satisfy certain
covenants under the provisions of the agreement as of its fiscal quarter ended
October 2, 1999. The covenant waiver is effective for the period ending October
2, 1999 exclusively. The amendment to the facility provides for a $75.0 million
multicurrency credit facility secured by all of the Company's tangible and
intangible domestic assets that extends through January 22, 2002. It allows for
Cannondale U.S., Cannondale Europe and Cannondale Japan to borrow up to $55.0
million under a multicurrency revolving line of credit and provides for a $20.0
million term loan that amortizes by $10.0 million on July 22, 2001. Borrowings
under the multicurrency revolving line of credit cannot exceed the lesser of
$55.0 million or 110% of the Company's eligible accounts receivable. The
interest rate on the revolving line of credit and the term loan is 200.0 basis
points plus 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. The amendment to the
facility contains additional restrictive covenants relating to, among other
things, the payment of dividends and the repurchase of shares of the Company's
common stock. Pursuant to the amendment to the facility, the Company currently
expects that it will be in compliance with the covenants under the provisions of
the facility.
The Company expects that cash flow generated by its operations and
borrowings under its revolving credit facilities will be sufficient to meet its
planned operating and capital requirements for the foreseeable future.
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 stage of its Year 2000 system modifications during
the fourth quarter of fiscal 1999. In concert with the Company's assessment and
modifications 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 has spent
approximately $73,000 in this effort through the first quarter of fiscal 2000.
The Company has 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 and
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 cannot rectify Year 2000 issues applicable to them, the
Company is likely to incur substantial additional costs to develop alternative
11
<PAGE> 14
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.
CERTAIN FACTORS WHICH MAY AFFECT THE COMPANY'S FUTURE PERFORMANCE
This Quarterly Report on Form 10-Q 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 timing of
the Company's planned production and shipping of its MX400 motocross motorcycle;
statements regarding the Company's capital and current operational investments
to finance the planned growth of the Company; statements regarding the Company's
expected cash needs, sources of cash to fund its planned operating and capital
requirements and its future ability to comply with the terms and conditions of
the facility; and statements regarding the impact of the Year 2000 issue and the
Euro conversion on computerized information systems. 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. Reference is
made to the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained in the Company's annual report on Form 10-K for
the fiscal year ended July 3, 1999 for a description of certain additional risk
factors which may affect the Company's future results.
12
<PAGE> 15
' PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule for the three months ended
October 2, 1999
(b) Reports on Form 8-K
None
13
<PAGE> 16
SIGNATURE
Pursuant to the requirements 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
Date: November 16, 1999 /s/ WILLIAM A. LUCA
----------------------------
William A. Luca
Vice President, Treasurer
and Chief Financial Officer
(Principal Financial Officer
and authorized signatory)
14
<PAGE> 17
INDEX TO EXHIBITS
EXHIBIT
NUMBER Description
- ------ -----------
27 Financial Data Schedule for the three months ended
October 2, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-01-2000
<PERIOD-START> JUL-04-1999
<PERIOD-END> OCT-02-1999
<CASH> 2,089
<SECURITIES> 0
<RECEIVABLES> 62,793
<ALLOWANCES> 9,368
<INVENTORY> 33,752
<CURRENT-ASSETS> 98,429
<PP&E> 68,607
<DEPRECIATION> 28,147
<TOTAL-ASSETS> 155,365
<CURRENT-LIABILITIES> 25,773
<BONDS> 52,855
0
0
<COMMON> 88
<OTHER-SE> 74,586
<TOTAL-LIABILITY-AND-EQUITY> 155,365
<SALES> 36,009
<TOTAL-REVENUES> 36,009
<CGS> 25,736
<TOTAL-COSTS> 25,736
<OTHER-EXPENSES> 11,772
<LOSS-PROVISION> 3,197
<INTEREST-EXPENSE> 1,042
<INCOME-PRETAX> (2,320)
<INCOME-TAX> (835)
<INCOME-CONTINUING> (1,485)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,485)
<EPS-BASIC> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
