<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 26, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES 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 February 4, 1999 was 7,464,500.
<PAGE> 2
CANNONDALE CORPORATION
INDEX
Page
Part I Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 26, 1998,
June 27, 1998 and December 27, 1997 1
Condensed Consolidated Statements of Earnings for the three
and six months ended December 26, 1998 and December 27, 1997 2
Condensed Consolidated Statements of Cash Flows for the six
months ended December 26, 1998 and December 27, 1997 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Part II Other Information 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
Signature 12
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>
DECEMBER 26, 1998 JUNE 27, 1998 DECEMBER 27, 1997
--------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash ............................................... $ 879 $ 3,031 $ 1,469
Trade accounts receivable, less allowances of
$10,238, $8,479 and $8,227 ..................... 70,465 61,746 67,436
Inventory .......................................... 40,284 39,420 39,553
Deferred income taxes .............................. 3,310 2,172 2,639
Prepaid expenses and other current assets .......... 5,277 4,449 3,373
--------- --------- ---------
Total current assets .................................... 120,215 110,818 114,470
Property, plant and equipment, net ...................... 38,273 35,769 28,873
Notes receivable and advances to related parties ........ 12,679 2,688 658
Other assets ............................................ 3,212 3,002 2,577
--------- --------- ---------
Total assets ............................................ $ 174,379 $ 152,277 $ 146,578
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................... $ 13,296 $ 16,747 $ 15,212
Revolving credit advances .......................... 4,997 2,141 1,129
Income taxes payable ............................... 1,476 1,732 2,660
Warranty and other accrued expenses ................ 6,830 5,820 6,255
Payroll and other employee related benefits ........ 1,429 2,142 1,224
Payable to related party ........................... -- 2,800 --
Current installments of long-term debt ............. 478 461 477
--------- --------- ---------
Total current liabilities ............................... 28,506 31,843 26,957
Long-term debt, less current installments ............... 69,288 40,352 37,803
Deferred income taxes ................................... 1,575 1,569 327
Other noncurrent liabilities ............................ 275 275 275
--------- --------- ---------
Total liabilities ....................................... 99,644 74,039 65,362
--------- --------- ---------
Stockholders' equity:
Common stock, $.01 par value:
Authorized shares - 40,000,000
Issued shares - 8,741,579, 8,737,088 and
8,702,126 ................................... 87 87 87
Additional paid-in capital ......................... 57,460 57,303 57,057
Retained earnings .................................. 37,892 35,405 30,566
Less shares in treasury at cost - 1,292,900,
656,400 and 227,000 ............................ (20,162) (12,417) (4,774)
Accumulated other comprehensive income ............. (542) (2,140) (1,720)
--------- --------- ---------
Total stockholders' equity .............................. 74,735 78,238 81,216
--------- --------- ---------
Total liabilities and stockholders' equity .............. $ 174,379 $ 152,277 $ 146,578
========= ========= =========
</TABLE>
See accompanying notes
1
<PAGE> 4
CANNONDALE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 26, 1998 DECEMBER 27, 1997 DECEMBER 26, 1998 DECEMBER 27, 1997
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales ............................... $ 47,901 $ 47,701 $ 90,119 $ 82,010
Cost of sales ........................... 31,719 30,137 59,333 53,089
-------- -------- -------- --------
Gross profit ............................ 16,182 17,564 30,786 28,921
-------- -------- -------- --------
Expenses:
Selling, general and administrative 10,443 9,736 21,117 18,841
Research and development .......... 2,820 1,598 4,973 2,717
-------- -------- -------- --------
13,263 11,334 26,090 21,558
-------- -------- -------- --------
Operating income ........................ 2,919 6,230 4,696 7,363
-------- -------- -------- --------
Other income (expense):
Interest expense .................. (1,106) (382) (1,945) (561)
Other income ...................... 255 132 391 280
-------- -------- -------- --------
(851) (250) (1,554) (281)
-------- -------- -------- --------
Income before income taxes .............. 2,068 5,980 3,142 7,082
Income tax expense ...................... (293) (2,137) (655) (2,569)
-------- -------- -------- --------
Net income .............................. $ 1,775 $ 3,843 $ 2,487 $ 4,513
======== ======== ======== ========
Basic earnings per share ................ $ .24 $ .45 $ .33 $ .52
======== ======== ======== ========
Diluted earnings per share .............. $ .23 $ .43 $ .32 $ .51
======== ======== ======== ========
</TABLE>
See accompanying notes
2
<PAGE> 5
CANNONDALE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
DECEMBER 26, 1998 DECEMBER 27, 1997
-------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES: ............................ $ (9,951) $ (9,254)
-------- --------
INVESTING ACTIVITIES:
Loans provided to related parties ................................. (10,017) (431)
Proceeds from repayments of loans provided to related parties ..... 26 --
Capital expenditures .............................................. (6,467) (7,635)
Proceeds from sale of Philipsburg manufacturing facility .......... 1,389 --
-------- --------
Net cash used in investing activities ............................. (15,069) (8,066)
-------- --------
FINANCING ACTIVITIES:
Net proceeds from issuance of common stock ........................ 52 197
Proceeds from issuance of long-term debt .......................... 738 --
Payments for the purchase of treasury stock ....................... (7,745) (4,774)
Net proceeds from borrowings under short-term revolving credit
agreements ................................................... 2,585 214
Net proceeds from borrowings under long-term debt and capital lease
agreements ................................................... 28,016 17,437
-------- --------
Net cash provided by financing activities ......................... 23,646 13,074
-------- --------
Effect of exchange rate changes on cash ........................... (778) 194
-------- --------
Net decrease in cash .............................................. (2,152) (4,052)
Cash at beginning of period ....................................... 3,031 5,521
-------- --------
Cash at end of period ............................................. $ 879 $ 1,469
======== ========
</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- and six-month periods ended December 26, 1998
are not necessarily indicative of the results that may be expected for the year
ending July 3, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto for the year ended June 27, 1998
included in the Company's Annual Report on Form 10-K.
Reclassifications
Certain fiscal 1998 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>
DECEMBER 26, DECEMBER 27,
1998 JUNE 27, 1998 1997
-------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Raw materials ..................... $ 21,771 $ 20,439 $ 22,422
Work-in-process ................... 3,144 2,856 1,964
Finished goods .................... 16,717 16,931 15,771
-------- -------- --------
41,632 40,226 40,157
Less reserve for obsolete inventory (1,348) (806) (604)
-------- -------- --------
$ 40,284 $ 39,420 $ 39,553
======== ======== ========
</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 per share computations
and other related disclosures required by the Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share" (in thousands, except earnings
per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED
DECEMBER 26, DECEMBER 27, DECEMBER 26, DECEMBER 27,
1998 1997 1998 1997
------ ------ ------ ------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
NUMERATOR:
Numerator for basic and diluted
earnings per share - income available to
common stockholders ..................... $1,775 $3,843 $2,487 $4,513
====== ====== ====== ======
DENOMINATOR:
Denominator for basic earnings per share -
weighted-average shares ................. 7,449 8,621 7,565 8,653
Effect of dilutive securities:
Employee stock options .................. 126 297 144 277
------ ------ ------ ------
Denominator for diluted earnings per share -
adjusted weighted-average shares and
assumed conversions ..................... 7,575 8,918 7,709 8,930
====== ====== ====== ======
Basic earnings per share ................... $ .24 $ .45 $ .33 $ .52
====== ====== ====== ======
Diluted earnings per share ................. $ .23 $ .43 $ .32 $ .51
====== ====== ====== ======
</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 per share because the options' exercise prices
were greater than the average market price of the common shares, and therefore,
the effect would be antidilutive:
<TABLE>
<CAPTION>
OPTIONS RANGE OF EXERCISE PRICES
------- ------------------------
<S> <C> <C>
Three months ended December 26, 1998 .... 1,462,543 $ 9.31-16.50
Three months ended December 27, 1997 .... 51,850 $22.50-22.63
Six months ended December 26, 1998 ...... 1,288,574 $ 9.31-16.56
Six months ended December 27, 1997 ...... 86,561 $21.31-22.63
</TABLE>
5
<PAGE> 8
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. COMPREHENSIVE INCOME
As of June 28, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." Comprehensive income generally represents all changes in
stockholders' equity except those resulting from investments or contributions by
stockholders. The Company has reclassified information for the prior period to
conform with the standard. The adoption of this statement had no impact on the
Company's net income or shareholders' equity.
The Company's comprehensive income is as follows, net of tax (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED
DECEMBER 26, DECEMBER 27, DECEMBER 26, DECEMBER 27,
1998 1997 1998 1997
------- ------- ------- -------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net Income ......................................... $ 1,775 $ 3,843 $ 2,487 $ 4,513
Foreign currency translation gain (loss), net of tax (33) (197) 1,598 (341)
------- ------- ------- -------
Total comprehensive income ......................... $ 1,742 $ 3,646 $ 4,085 $ 4,172
======= ======= ======= =======
</TABLE>
The component of accumulated other comprehensive income is as follows, net of
tax (in thousands):
<TABLE>
<CAPTION>
DECEMBER 26, JUNE 27, DECEMBER 27,
1998 1998 1997
------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Foreign currency translation adjustments, net of tax $ (542) $(2,140) $(1,720)
------- ------- -------
Accumulated other comprehensive income ............. $ (542) $(2,140) $(1,720)
======= ======= =======
</TABLE>
5. 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 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 principal balance of
the outstanding loan to Mr. Montgomery was $12.0 million at December 26, 1998.
During fiscal 1999, the Company began the construction of its
production facility for the motocross motorcycle and its clothing line.
The Company contracted an entity controlled by a director of the Company to act
as the general contractor for the construction of the project. The Company paid
the entity approximately $2.7 million for the construction of the project
during the first six months of fiscal 1999.
6. SUBSEQUENT EVENT
On January 22, 1999, the Company entered into an $85.0 million amended
and restated multicurrency credit facility (the "facility") to serve as the
Company's principal source of working capital and capital funding. The facility
is secured by all of the Company's tangible and intangible domestic assets. The
facility, which extends through January 2002, allows for Cannondale U.S.A.,
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 million in 30 months. The facility includes a
provision that permits the Company to borrow up to $10.0 Million 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 42.5 to 120.0 basis points) is determined quarterly based
upon predetermined performance criteria. The interest rate on the term loan is
the LIBOR plus a margin (175.0 to 250.0 basis points) that increases
incrementally every six months during the life of the loan. The Company is
obligated to pay a facility fee (ranging from 20.0 to 30.0 basis points) on the
balance of the facility based on the same performance criteria as the LIBOR
margin. The facility contains restrictive and financial covenants relating to,
among other things, the repurchase of shares of the Company's common stock and
the maintenance of minimum levels of cash flow, of capitalization, interest
coverage and tangible net worth. The Company is currently in compliance with all
restrictive and financial covenants.
6
<PAGE> 9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Sales. Net sales were $47.9 million in the second quarter of fiscal
1999 compared to $47.7 million in the second quarter of fiscal 1998. For the
first six months, net sales increased 9.9% from $82.0 million in fiscal 1998 to
$90.1 million in fiscal 1999, an increase of $8.1 million. The increased sales
for the first six months of fiscal 1999 were primarily a result of strong
international demand for Cannondale products during the first quarter and, in
addition, a weaker U.S. Dollar against the Dutch Guilder.
Gross Profit. Gross profit as a percentage of net sales decreased to
33.8% for the second quarter of fiscal 1999 compared to 36.8% for the second
quarter of fiscal 1998. Gross profit was $16.2 million in the second quarter of
fiscal 1999, a decrease of $1.4 million, or 7.9% below the gross profit in the
second quarter of fiscal 1998 of $17.6 million. For the first six months of
fiscal 1999, gross profit as a percentage of sales decreased to 34.2% compared
to 35.3% for the same period last year. Gross profit was $30.8 million for the
first six months of fiscal 1999, an increase of $1.9 million, or 6.4% compared
to the gross profit for the same period last year of $28.9 million. The
decrease in the gross profit rate for both periods primarily relates to product
mix, as the Company's ability to ship high-end, higher margin bicycles during
the second quarter was limited by its suppliers' ability to provide sufficient
quantities of certain components which resulted in lower shipments and factory
production levels. The less favorable product mix and lower factory production
levels in the second quarter of fiscal 1999 offset the benefit of a sales mix
that favored international markets, cost-reduction programs, the Company's
continued integration of proprietary technologies and a weaker U.S. Dollar
against the Dutch Guilder during the first six months of the fiscal year.
Operating Expenses. Operating expenses were $13.3 million for the
second quarter of fiscal 1999, an increase of approximately $2.0 million, or
17.0% over the $11.3 million recorded for the second quarter of fiscal 1998.
Operating expenses were $26.1 million for the first six months of fiscal 1999,
an increase of approximately $4.5 million, or 21.0% over the $21.6 million
recorded for the first six months of fiscal 1998.
Selling, general and administrative expenses increased 7.3% to $10.4
million in the second quarter of fiscal 1999 from $9.7 million recorded during
the prior-year period. For the first six months of fiscal 1999, selling, general
and administrative expenses increased 12.1% to $21.1 million from $18.8 million
recorded during the prior-year period. For both periods, increased selling,
general and administrative expenses were directly associated with increased
sales and additional personnel primarily relating to the Company's sales force,
product management team and marketing personnel to support the Company's current
and planned future growth. In addition, increased selling, general and
administrative expenses reflect the effect of higher depreciation expense
primarily associated with $16.8 million of capital expenditures in fiscal 1998
and a weaker U.S. Dollar against the Dutch Guilder. As a percentage of sales,
selling, general and administrative expenses increased slightly to 23.4% for the
first six months of fiscal 1999 from 23.0% in the prior-year period.
Research and development expenses increased 76.5% to $2.8 million in
the second quarter of fiscal 1999 from $1.6 million recorded during the
prior-year period. For the first six months of fiscal 1999, research and
development expenses increased 83.0% to $5.0 million from $2.7 million recorded
during the prior-year period. The increase in research and development expenses
reflects the Company's commitment to the improvement of its current products and
the generation of new products and manufacturing processes. For both periods,
the increase in spending was primarily attributable to the product and process
development of the motocross motorcycle and, in addition, the Company's effort
to improve and expand its existing bicycle and CODA product lines. The Company
plans to introduce the motocross motorcycle to the market during the first
quarter of fiscal year 2000 (July 1999 to September 1999). As a percentage of
sales, the Company increased its investment in research and development
7
<PAGE> 10
expense to 5.5% for the first six months of fiscal 1999 compared to 3.3% for the
first six months of fiscal 1998.
Other income (expense). Interest expense increased to $1.1 million in
the second quarter of fiscal 1999 from $399,000 recorded during the prior-year
period adjusted for capitalized interest costs related to the construction of
the Company's new corporate headquarters and research and development facility
and the expansion of the manufacturing facility. For the first six months of
fiscal 1999, interest expense increased to $1.9 million from $649,000, adjusted
for the capitalized interest costs in fiscal 1998. The increase in interest
expense is primarily attributable to higher average borrowings pursuant to the
Company's share repurchase programs, capital expenditures during fiscal 1998
and the first six months of fiscal 1999 and increased working capital levels
related to the growth of the business. Other income primarily consists of
finance charges relating to accounts receivable, and in fiscal 1999, interest
income related to the loan to Joseph Montgomery (see -- Liquidity and Capital
Resources).
Income tax expense. Income tax expense decreased 86.3% to $293,000 in
the second quarter of fiscal 1999, from $2.1 million recorded during the
prior-year period. For the first six months of fiscal 1999, income tax expense
decreased 74.5% to $655,000 from $2.6 million recorded during the prior-year
period. For both periods, the reduction in the income tax rate is primarily
attributable to the twelve month retroactive extension by the U.S. government of
the Research tax credit in November 1998.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $10.0 million for the first
six months of fiscal 1999 compared to the $9.3 million used in operating
activities for the first six months of fiscal 1998. The Company's use of cash
during the first six months of fiscal 1999 compared to the same period last year
reflects lower net income, and a decrease in accounts payable and accrued
expense levels that is offset by a significant reduction in inventory growth.
The reduction of inventory growth is a reflection of the Company's efforts to
maintain inventory levels more consistent with its sales growth subsequent to
the third quarter of fiscal 1998 when the Company's domestic dealers reduced
their inventories. The net use of cash is typical for the first six months of
the fiscal year due to seasonal activity, which includes seasonal terms offered
to dealers through the Company's Authorized Retailer Program and adequate
inventory levels in anticipation of third quarter shipments, historically the
Company's busiest sales period.
Capital expenditures were $6.5 million for the first six months of
fiscal 1999, compared to $7.6 million for the first six months of fiscal 1998.
Capital expenditures during the first six months of fiscal 1999 principally
consist of the Company's investments in a production facility for the motocross
motorcycle and the Company's clothing line in Bedford, Pennsylvania, as well as
computer and manufacturing equipment to support the Company's planned increases
in production volume and future growth. Capital expenditures in fiscal 1998
primarily reflected the Company's investment in its new administrative
headquarters and research and development facility and the expansion of its
production facility.
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.
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 $2,000,000 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 $10,000,000 for the purchase of certain real property, which
loan has been combined with the previous $2,000,000 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. The principal balance of the
outstanding loan to Mr. Montgomery was $12.0 million at February 9,1999.
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. The Company did not repurchase any
shares of its common stock during the second quarter of fiscal 1999.
Net cash provided by financing activities for the first six months of
fiscal 1999 was $23.6 million, an increase of approximately $10.5 million
compared to the $13.1 million for the first six months
8
<PAGE> 11
of fiscal 1998. The net cash provided by financing activities in fiscal 1999
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.
On January 22, 1999, the Company entered into an $85.0 million amended
and restated multicurrency credit facility (the "facility") to serve as the
Company's principal source of working capital and capital funding. The facility
is secured by all of the Company's tangible and intangible domestic assets. The
facility, which extends through January 2002, allows for Cannondale U.S.A.,
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 in 30 months. The facility includes a
provision that permits the Company to borrow up to $10.0 million 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 42.5 to 120.0 basis points) is
determined quarterly based upon predetermined performance criteria. The
interest rate on the term loan is the LIBOR plus a margin (175.0 to 250.0 basis
points) that increases incrementally every six months during the life of the
loan. The Company is obligated to pay a facility fee (ranging from 20.0 to 30.0
basis points) on the balance of the facility based on the same performance
criteria as the LIBOR margin. The facility contains restrictive and financial
covenants relating to, among other things, 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. The
Company expects that cash flow generated by its operations and borrowings under
the facility will be sufficient to meet its planned operating and capital
requirements, and to accommodate the Company's share repurchase program for the
foreseeable future.
Year 2000 Compliance
The Company has assessed its exposure to the Year 2000 problem and has
established 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 has 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 require modification to accommodate Year 2000 dating, the Company
initiated a program to modify the software using internal and third-party
service providers. The Company is currently in the testing stage of its Year
2000 remediation program, and anticipates that it will be in the final
implementation stages during the third fiscal quarter of 1999. In order to
mitigate the possibility that it may not be successful in adequately modifying
its current software applications, the Company has identified vendors that
specialize in Year 2000 software conversions at an estimated cost to the
Company of $500,000. The Company's previous contingency plan of replacing its
current software applications with a new Enterprise Resource Planning system is
no longer a viable option given the time constraints to implement a new system.
In concert with the Company's assessment of its hardware and software
applications, the Company's examination of its Year 2000 exposure also includes
the following: (1) the Company has contacted its hardware and software vendors
to determine their Year 2000 readiness, (2) the Company has completed a survey
of its major third-party suppliers to determine their status with Year 2000
compliance, and (3) the Company is in the process of examining factory
equipment with microprocessors to determine if Year 2000 dating affects the
equipment operationally. The Company estimates the cost of its remediation
effort to be approximately $100,000. At December 26, 1998, the Company had
already spent approximately $62,000 in this effort. 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
9
<PAGE> 12
the increase. Based on the Company's examination of the Year 2000 problem, its
progress with modifications to its internal systems, the representations made by
its suppliers through its survey and its progress with its examination of
factory equipment, the Company does not anticipate that the Year 2000 problem
will have a material adverse impact on its operations.
If the Company is unsuccessful in completing its remediation of
non-compliant operating systems, correcting 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 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 is
in the process of making the necessary system modifications and, in addition, is
evaluating Enterprise Resource Planning systems on the market to replace its
current systems that will allow the Company to conduct business in both the Euro
as well as the participating countries' national currency. The Company has
determined that failure to implement systems that are able to process both Euro
and participating countries' national currency may cause disruptions to
operations including, among other things, a temporary inability to process
transactions, send invoices or engage in normal business activities.
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 Company's
capital and current operational investments to finance the future growth of the
Company; statements regarding the Company's expected cash needs and sources of
cash to fund its planned operating and capital requirements; 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 June 27, 1998, for a description of certain additional risk factors
which may affect the Company's future results.
10
<PAGE> 13
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
An Annual Meeting of Stockholders was held on November 4, 1998. The following
matters were acted upon:
a. The election of two Class I Directors to serve for the ensuing three years.
Mr. Joseph S. Montgomery was elected as a Class I Director with 6,386,433
votes for, 40,679 votes withheld and zero votes abstaining. Mr. Michael J.
Stimola was elected as a Class I Director with 6,378,108 votes for, 49,004
votes withheld and zero votes abstaining. Class II Directors, whose term of
office continued after the annual meeting and expires in 1999, were John
Sanders, James S. Montgomery and John H.T. Wilson. Class III Directors, whose
term of office continued after the annual meeting and expires in 2000, were
William A. Luca and Daniel C. Alloway.
b. The approval of the Company's 1998 Stock Option Plan. Of the votes cast,
there were 2,619,443 for approval, 1,406,536 against, 17,316 abstained and
2,383,817 broker nonvotes.
c. The ratification of the selection by the Board of Directors of Ernst & Young
LLP to serve as the Company's independent auditors for the fiscal year ending
July 3, 1999. Of the votes cast, there were 6,405,936 for the ratification,
10,787 against and 10,389 abstained.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule for the six months end December 26, 1998.
(b) Reports on Form 8-K
None.
11
<PAGE> 14
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: February 9, 1999 /s/ William A. Luca
-------------------------------------
William A. Luca
Vice President, Treasurer
and Chief Financial Officer
(Principal Financial Officer
and authorized signatory)
12
<PAGE> 15
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
27 Financial Data Schedule for the Six Months Ended December 26, 1998
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-03-1999
<PERIOD-START> JUN-28-1998
<PERIOD-END> DEC-26-1998
<CASH> 879
<SECURITIES> 0
<RECEIVABLES> 80,703
<ALLOWANCES> 10,238
<INVENTORY> 40,284
<CURRENT-ASSETS> 120,215
<PP&E> 62,443
<DEPRECIATION> 24,170
<TOTAL-ASSETS> 174,379
<CURRENT-LIABILITIES> 28,506
<BONDS> 69,288
0
0
<COMMON> 87
<OTHER-SE> 74,648
<TOTAL-LIABILITY-AND-EQUITY> 174,379
<SALES> 90,119
<TOTAL-REVENUES> 90,119
<CGS> 59,333
<TOTAL-COSTS> 59,333
<OTHER-EXPENSES> 26,090
<LOSS-PROVISION> 4,714
<INTEREST-EXPENSE> 1,945
<INCOME-PRETAX> 3,142
<INCOME-TAX> 655
<INCOME-CONTINUING> 2,487
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,487
<EPS-PRIMARY> .33<F1>
<EPS-DILUTED> .32
<FN>
<F1>REPRESENTS BASIC EARNINGS PER COMMON SHARE
</FN>
</TABLE>
