<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 April 1, 2000
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 May 10, 2000 was 7,503,167.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of April 1,
2000, July 3, 1999 and March 27, 1999 1
Condensed Consolidated Statements of Operations for the
three and nine months ended April 1, 2000 and March 27, 1999 2
Condensed Consolidated Statements of Cash Flows for the
nine months ended April 1, 2000 and March 27, 1999 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
</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>
APRIL 1, 2000 JULY 3, 1999 MARCH 27, 1999
------------- ------------ --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash ............................................... $ 3,902 $ 3,300 $ 2,190
Trade accounts receivable, less allowances of
$9,852, $10,074 and $10,359 .................... 61,523 59,379 77,144
Inventory .......................................... 41,902 33,165 35,832
Deferred income taxes .............................. 6,223 2,749 2,797
Prepaid expenses and other current assets .......... 4,456 4,827 4,675
Interest receivable from a related party ........... 1,110 827 574
--------- --------- ---------
Total current assets .................................... 119,116 104,247 123,212
Property, plant and equipment, net ...................... 40,129 41,377 38,492
Notes receivable and advances to related parties ........ 13,174 12,954 12,706
Other assets ............................................ 3,142 3,801 3,478
--------- --------- ---------
Total assets ............................................ $ 175,561 $ 162,379 $ 177,888
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................... $ 18,264 $ 17,329 $ 15,850
Revolving credit advances .......................... 3,445 882 3,202
Income taxes payable ............................... - 2,252 2,055
Warranty and other accrued expenses ................ 5,434 7,284 7,021
Payroll and other employee-related benefits ........ 1,519 1,150 1,214
Current installments of long-term debt ............. 73,185 456 470
--------- --------- ---------
Total current liabilities ............................... 101,847 29,353 29,812
Long-term debt, less current installments ............... - 55,997 70,897
Deferred income taxes ................................... 1,492 1,619 1,320
Other noncurrent liabilities ............................ 432 400 406
--------- --------- ---------
Total liabilities ....................................... 103,771 87,369 102,435
--------- --------- ---------
Stockholders' equity:
Common stock, $.01 par value:
Authorized shares - 40,000,000
Issued shares - 8,796,067, 8,784,308 and
8,771,161 ................................... 88 88 88
Additional paid-in capital ......................... 57,868 57,815 57,708
Retained earnings .................................. 39,735 41,328 40,419
Less 1,292,900 shares in treasury at cost .......... (20,162) (20,162) (20,162)
Accumulated other comprehensive income ............. (5,739) (4,059) (2,600)
--------- --------- ---------
Total stockholders' equity .............................. 71,790 75,010 75,453
--------- --------- ---------
Total liabilities and stockholders' equity .............. $ 175,561 $ 162,379 $ 177,888
========= ========= =========
</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 THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
APRIL 1, MARCH 27, APRIL 1, MARCH 27,
2000 1999 2000 1999
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales................................... $ 39,866 $ 41,714 $ 117,025 $ 131,833
Cost of sales............................... 27,233 25,967 81,631 85,300
----------- ---------- ----------- -----------
Gross profit................................ 12,633 15,747 35,394 46,533
----------- ---------- ----------- -----------
Expenses:
Selling, general and administrative... 10,165 9,242 29,116 30,110
Research and development.............. 2,432 2,540 6,621 7,513
----------- ---------- ----------- -----------
12,597 11,782 35,737 37,623
----------- ---------- ----------- -----------
Operating income (loss) .................... 36 3,965 (343) 8,910
----------- ------- ---------- ---------
Other income (expense):
Interest expense...................... (1,901) (1,237) (4,305) (3,182)
Other income ......................... 531 639 1,265 1,030
----------- ---------- ----------- -----------
(1,370) (598) (3,040) (2,152)
----------- ---------- ----------- -----------
Income (loss) before income taxes........... (1,334) 3,367 (3,383) 6,758
Income tax benefit (expense)................ 572 (997) 1,790 (1,744)
----------- ---------- ----------- -----------
Net income (loss) .......................... $ (762) $ 2,370 $ (1,593) $ 5,014
=========== ========== =========== ===========
Basic earnings (loss) per share............. $ (0.10) $ 0.32 $ (0.21) $ 0.67
=========== ========== =========== ===========
Diluted earnings (loss) per share........... $ (0.10) $ 0.31 $ (0.21) $ 0.65
=========== ========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES
2
<PAGE> 5
CANNONDALE CORPORATION AND SUBIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
APRIL 1, 2000 MARCH 27, 1999
------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES ............................. $ (15,215) $ (7,716)
----------- -----------
INVESTING ACTIVITIES:
Loans and advances provided to related parties, net of repayments.. (220) (10,018)
Capital expenditures .............................................. (4,448) (10,969)
Proceeds from sale of equipment and buildings ..................... 633 4,133
----------- -----------
Net cash used in investing activities ............................. (4,035) (16,854)
----------- -----------
FINANCING ACTIVITIES:
Net proceeds from issuance of common stock ........................ 53 300
Proceeds from issuance of long-term debt .......................... - 20,738
Payments for the purchase of treasury stock ....................... - (7,745)
Net proceeds from borrowings under short-term credit and capital
lease agreements ............................................. 19,356 1,042
Net proceeds from borrowings under long-term debt and capital lease
agreements ................................................... - 9,780
----------- -----------
Net cash provided by financing activities ......................... 19,409 24,115
----------- -----------
Effect of exchange rate changes on cash ........................... 443 (386)
----------- -----------
Net increase (decrease) in cash ................................... 602 (841)
Cash at beginning of period ....................................... 3,300 3,031
----------- -----------
Cash at end of period ............................................. $ 3,902 $ 2,190
=========== ===========
</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 nine-month periods ended April 1, 2000 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 and Form 10-K/A.
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>
APRIL 1, 2000 JULY 3, 1999 MARCH 27, 1999
------------- ------------ --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Raw materials ..................... $ 24,806 $ 17,723 $ 18,025
Work-in-process ................... 2,891 2,110 2,320
Finished goods .................... 16,536 14,993 17,576
------------ ------------ ------------
44,233 34,826 37,921
Less reserve for obsolete inventory (2,331) (1,661) (2,089)
------------ ------------ ------------
$ 41,902 $ 33,165 $ 35,832
============ ============ ============
</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 NINE MONTHS NINE MONTHS
ENDED APRIL 1, ENDED MARCH 27, ENDED APRIL 1, ENDED MARCH 27,
2000 1999 2000 1999
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
NUMERATOR:
Numerator for basic and diluted earnings (loss) per
share - net income (loss) available to common
stockholders ....................................... $ (762) $2,370 $ (1,593) $5,014
========= ====== =========== ======
DENOMINATOR:
Denominator for basic earnings (loss) per share -
weighted-average shares............................. 7,503 7,467 7,495 7,532
Effect of dilutive securities:
Employee stock options ............................. - 195 - 161
--------- ------ ----------- ------
Denominator for diluted earnings (loss) per share -
adjusted weighted-average shares and assumed
conversions ........................................ 7,503 7,662 7,495 7,693
========= ====== =========== ======
Basic earnings (loss) per share ....................... $ (0.10) $ 0.32 $ (0.21) $ 0.67
========= ====== =========== ======
Diluted earnings (loss) per share ..................... $ (0.10) $ 0.31 $ (0.21) $ 0.65
========= ====== =========== ======
</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 three and nine months
ended April 1, 2000, inclusion of such options would result in an antidilutive
effect due to the net loss incurred by the Company. For the three and nine
months ended March 27, 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 APRIL 1, 2000................. 2,383,862 $ 0.34 - $15.00
THREE MONTHS ENDED MARCH 27, 1999................ 4,999 $10.56 - $15.00
NINE MONTHS ENDED APRIL 1, 2000 ................. 2,325,140 $ 0.34 - $15.00
NINE MONTHS ENDED MARCH 27, 1999 ................ 860,716 $ 9.31 - $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 NINE MONTHS NINE MONTHS
ENDED APRIL 1, ENDED MARCH 27, ENDED APRIL 1, ENDED MARCH 27,
2000 1999 2000 1999
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net income (loss) ........................... $ (762) $ 2,370 $ (1,593) $ 5,014
Foreign currency translation loss, net of tax (1,336) (2,058) (1,680) (460)
---------- ---------- ---------- ----------
Total comprehensive income (loss) ........... $ (2,098) $ 312 $ (3,273) $ 4,554
========== ========== ========== ==========
</TABLE>
The component of accumulated other comprehensive income is as follows,
net of tax (in thousands):
<TABLE>
<CAPTION>
APRIL 1, 2000 JULY 3, 1999 MARCH 27, 1999
------------- ------------ --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Foreign currency translation adjustments, net of tax... $ (5,739) $ (4,059) $ (2,600)
----------- --------- ---------
Accumulated other comprehensive income................. $ (5,739) $ (4,059) $ (2,600)
=========== ========= =========
</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 motorized vehicles. 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 motorized vehicles, including offroad
motorcycles and an all-terrain vehicle, which are in the start-up stage of
operations, and for which no revenues have been generated as of April 1, 2000.
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 NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
APRIL 1, MARCH 27, APRIL 1, MARCH 27,
2000 1999 2000 1999
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales from external customers:
Bicycles ...................... $ 39,866 $ 41,714 $ 117,025 $ 131,833
Motorized Vehicles ............ - - - -
--------- --------- --------- ---------
$ 39,866 $ 41,714 $ 117,025 $ 131,833
========= ========= ========= =========
Operating income (loss):
Bicycles ...................... $ 2,601 $ 5,652 $ 5,131 $ 13,119
Motorized Vehicles ............ (2,565) (1,687) (5,474) (4,209)
--------- --------- --------- ---------
$ 36 $ 3,965 $ (343) $ 8,910
========= ========= ========= =========
</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 ENDED THREE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
APRIL 1, MARCH 27, APRIL 1, MARCH 27,
2000 1999 2000 1999
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Total operating income (loss) for reportable
segments ................................... $ 36 $ 3,965 $ (343) $ 8,910
Other income (expense):
Interest expense ........................ (1,901) (1,237) (4,305) (3,182)
Other income ............................ 531 639 1,265 1,030
------- ------- ------- -------
(1,370) (598) (3,040) (2,152)
------- ------- ------- -------
Income (loss) before income taxes .......... $(1,334) $ 3,367 $(3,383) $ 6,758
======= ======= ======= =======
</TABLE>
Summarized segment assets are as follows (in thousands):
<TABLE>
<CAPTION>
APRIL 1, 2000 JULY 3, 1999 MARCH 27, 1999
------------- ------------ --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Identifiable Assets:
Bicycles ................................... $ 161,351 $ 153,072 $ 171,484
Motorized Vehicles ......................... 14,210 9,307 6,404
--------- ----------- ----------
$ 175,561 $ 162,379 $ 177,888
========= =========== ==========
</TABLE>
7
<PAGE> 10
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 an operating lease and will result in rent
expense of approximately $141,000 annually.
7. DEBT
During the fourth quarter of fiscal 2000, the Company received a
covenant waiver from its lenders, pursuant to the provisions of the amended and
restated multi-currency credit facility dated January 22, 1999 (the "facility"),
pertaining to certain covenants under the provisions of the agreement as of
April 30, 2000. The waiver obligates the Company to refinance the facility or to
satisfy the covenants by June 15, 2000. The waiver provides for the payment of
(a) an initial fee equal to 0.25% of the sum of the aggregate amount of term
loans outstanding at April 30, 2000 plus the aggregate of all revolving credit
commitments as of April 30, 2000; (b) term loan reduction fees equal to 0.50% of
each payment or prepayment of outstanding term loans during the period May 1,
2000 through June 15, 2000; (c) revolver reduction fees equal to 0.50% of each
reduction or termination of revolving credit commitments during the period May
1, 2000 through June 15, 2000; and (d) an outstandings fee equal to 1.00% of the
sum of the term loans and revolving credit commitments outstanding as of June
15, 2000. Term loan reduction fees are waived with respect to certain paydowns
as listed in the consent and waiver agreement.
As of the date of this report, the Company does not expect to be in
compliance with the financial covenants of the facility on June 15, 2000.
Accordingly, long-term debt has been reclassified to a current liability on the
balance sheet as of April 1, 2000. The Company is currently considering
proposals to refinance the facility.
During the third quarter of fiscal 2000, the Company received a covenant
waiver from its lenders, pursuant to the provisions of the facility, pertaining
to certain covenants under the provisions of the agreement as of its fiscal
quarter ended January 1, 2000. The covenant waiver was effective until April 30,
2000.
8. RELATED PARTY TRANSACTIONS
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 certain 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, and 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
8
<PAGE> 11
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
shares per quarter. During the third quarter of fiscal 2000, Mr. Montgomery sold
75,000 shares of his stock in the Company pursuant to the terms of the deferral.
This selling program will continue until the balance of the deferred interest is
paid by Mr. Montgomery in its entirety.
In the second quarter of fiscal 2000, the Company decided not to
purchase a Learjet aircraft, for which the Company had paid a $500,000 deposit
in fiscal 1998 to JSM Aviation LLC, a Connecticut limited liability company of
which Mr. Montgomery is the sole shareholder. Accordingly, the deposit was
returned to the Company with accrued interest thereon.
9. SUBSEQUENT EVENT
During the fourth quarter of fiscal 2000, the Company received a
$1,000,000 loan from the Pennsylvania Industrial Development Authority. The loan
is secured by the Company's motorcycle facility in Bedford, Pennsylvania, and
extends through 2015, payable in equal monthly installments. The interest rate
on the loan is fixed at 3.75%.
9
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net Sales. Net sales decreased to $39.9 million in the third quarter of
fiscal 2000 from $41.7 million in the third quarter of fiscal 1999, a reduction
of $1.8 million or 4.4%. This decrease in net sales is primarily attributable to
the impact of dealer inventory adjustments in the European market and the
resulting changes in the seasonality of shipments to European retailers. In
addition, net sales were also negatively affected by the strengthening of the
U.S. dollar compared to the Euro.
For the first nine months of fiscal 2000, net sales were $117.0 million,
a decrease of $14.8 million or 11.2% from the $131.8 million in net sales
recorded for the same period last year. The decreased sales for the first nine
months of fiscal 2000 were primarily a result of dealer inventory adjustments in
the European market and the resulting changes in the seasonality of shipments to
European retailers, and component shortages in the first quarter caused by the
September earthquake in Taiwan.
Gross Profit. Gross profit was $12.6 million in the third quarter of
fiscal 2000, a decrease of $3.1 million or 19.8% from the gross profit in the
third quarter of fiscal 1999 of $15.7 million. Gross profit as a percentage of
net sales in the third quarter of fiscal 2000 decreased to 31.7% compared to
37.7% for the third quarter of fiscal 1999. The reduction in gross profit
dollars and the gross profit rate is attributable to a less favorable sales mix
between the domestic market and the international market, where the Company
typically achieves a higher gross profit rate. In addition, higher costs for
purchased components resulting from a stronger Japanese yen relative to the U.S.
dollar compared to the same period last year contributed to a lower gross profit
percentage in the third quarter of fiscal 2000.
For the nine months ended April 1, 2000, gross profit was $35.4 million,
a decrease of $11.1 million or 23.9% from the $46.5 million in gross profit for
the same period last year. For the first nine months of fiscal 2000, gross
profit as a percentage of net sales was 30.2% compared to 35.3% for the first
nine months of fiscal 1999. In addition to the changes in the seasonality of
shipments in Europe and higher costs for purchased components resulting from the
stronger Japanese yen, the gross margin for the first nine months of fiscal 2000
was adversely affected by component shortages caused by the earthquake in Taiwan
which precluded the Company from shipping its high-end products in the first
quarter of fiscal 2000.
Operating Expenses. Operating expenses were $12.6 million for the third
quarter of fiscal 2000, an increase of approximately $800,000 or 6.9% from the
$11.8 million recorded for the third quarter of fiscal 1999. For the first nine
months of fiscal 2000, operating expenses were $35.7 million, a decrease of $1.9
million or 5.0% from the $37.6 million recorded for the first nine months of
fiscal 1999.
Selling, general and administrative expenses increased to $10.2 million
in the third quarter of fiscal 2000, from $9.2 million recorded during the
prior-year period. For the nine months ended April 1, 2000, selling, general and
administrative expenses were $29.1 million, a decrease of $1.0 million or 3.3%
from the $30.1 million recorded for the same period last year. Increased
selling, general and administrative expenses for the third quarter of fiscal
2000 were primarily associated with motorcycle expenses, including depreciation
and insurance. For the first nine months of fiscal 2000, decreased selling,
general and administrative expenses were a result of lower expenses directly
related to sales volume, including advertising and bad debts, slightly offset by
motorcycle expenses. As a percentage of net sales, selling, general and
administrative expenses increased to 24.9% for the first nine months of fiscal
2000 compared to 22.8% for the first nine months of fiscal 1999 due to the
reduction in net sales levels.
10
<PAGE> 13
Research and development expenses decreased to $2.4 million in the third
quarter of fiscal 2000, from $2.5 million recorded during the prior-year period.
For the first nine months of fiscal 2000, research and development expenses
decreased to $6.6 million from $7.5 million recorded for the first nine months
of fiscal 1999. The decrease in expenses during fiscal 2000 was primarily
attributable to the near completion of the MX400 motorcycle development.
Production of sub-assemblies for the MX400 motorcycle continued in the new
motorcycle facility in Bedford, Pennsylvania, and shipments are scheduled to
commence during the fourth quarter of fiscal 2000. For the first nine months of
fiscal 2000 and 1999, research and development expenses represented 5.7% of net
sales.
Other income (expense). Interest expense increased to $1.9 million in
the third quarter of fiscal 2000 from $1.2 million recorded during the
prior-year period. For the nine months ended April 1, 2000, interest expense was
$4.3 million compared to $3.2 million recorded for the same period last year.
The increase in interest expense was primarily attributable to the increase in
borrowings and interest rates compared to the same periods last year. For fiscal
2000, other income primarily consisted of interest income from the loan to
Joseph Montgomery, interest earned on the Company's deposit to purchase an
aircraft from Learjet which was refunded to the Company in January 2000, and
finance charges relating to accounts receivable. For the three- and nine-month
periods ended April 1, 2000, interest income from the loan to Mr. Montgomery was
$264,000 and $764,000, respectively.
Income Taxes. The income tax benefit recorded for the third quarter of
fiscal 2000 was $572,000, a change of $1.6 million compared to the income tax
expense recorded for the same period last year of $997,000. For the nine months
ended April 1, 2000, the income tax benefit was $1.8 million, a change of
approximately $3.5 million compared to the income tax expense of $1.7 million
recorded for the first nine months of fiscal 1999. For both periods, the
reduction in income tax expense is primarily attributable to decreased
profitability from the Company's European operations.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $15.2 million for the first
nine months of fiscal 2000, an increase of $7.4 million compared to the $7.8
million used in operating activities for the same period of fiscal 1999. The
increase in cash used in operating activities was primarily attributable to the
net loss for the first nine months of fiscal 2000.
Capital expenditures were $4.4 million for the first nine months of
fiscal 2000 compared to $11.0 million for the first nine months of fiscal 1999.
Capital expenditures during the first nine months of fiscal 2000 principally
consisted of computer equipment and manufacturing equipment associated with the
production of the bicycle and motorized vehicle product lines. Capital
expenditures during the first nine months of fiscal 1999 principally consisted
of the Company's investment in the production facility for its motorcycles 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.
11
<PAGE> 14
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 related lease is being
accounted for as an operating lease and resulted in additional rent expense of
approximately $273,000 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.
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 certain 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, and 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. During the third quarter of fiscal 2000, Mr. Montgomery sold 75,000
shares of his stock in the Company pursuant to the terms of the deferral. This
selling program will continue until the balance of the deferred interest is paid
by Mr. Montgomery in its entirety.
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 has not repurchased any
shares of its common stock since that time.
Net cash provided by financing activities for the first nine months of
fiscal 2000 was $19.4 million, a decrease of approximately $4.7 million compared
to the $24.1 million provided by financing activities for the first nine months
of fiscal 1999. The net cash provided by financing activities during the first
nine months of fiscal 2000 primarily reflects the increase in the Company's
multi-currency revolving credit facility in order to finance working capital
needs and capital expenditures. The net cash provided by financing activities in
fiscal 1999 primarily reflects the net proceeds from borrowings under the
Company's multi-currency 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 Mr. Montgomery.
During the fourth quarter of fiscal 2000, the Company received a
covenant waiver from its lenders, pursuant to the provisions of the amended and
restated multi-currency credit facility dated January 22, 1999 (the "facility"),
pertaining to certain covenants under the provisions of the agreement as of
April 30, 2000. The waiver obligates the Company to refinance the facility or to
satisfy the covenants by June 15, 2000. The waiver provides for the payment of
(a) an initial fee equal to 0.25% of the sum of the aggregate amount of term
loans outstanding at April 30, 2000 plus the aggregate of all revolving credit
commitments as of April 30, 2000; (b) term loan reduction fees equal to 0.50% of
each payment or prepayment of outstanding term loans during the period May 1,
2000 through June 15, 2000; (c) revolver reduction fees equal to 0.50% of each
reduction or termination of revolving credit commitments during the period May
1, 2000 through June 15, 2000; and (d) an outstandings fee equal to 1.00% of the
sum of
12
<PAGE> 15
the term loans and revolving credit commitments outstanding as of June 15, 2000.
Term loan reduction fees are waived with respect to certain paydowns as listed
in the consent and waiver agreement. During May 2000, the Company paid $187,500
as an initial fee per the terms of the waiver.
As of the date of this report, the Company does not expect to be in
compliance with the financial covenants of the facility on June 15, 2000.
Accordingly, long-term debt has been reclassified to a current liability on the
balance sheet as of April 1, 2000. The Company is currently considering
proposals to refinance the facility.
During the third quarter of fiscal 2000, the Company received a covenant
waiver from its lenders, pursuant to the provisions of the facility, pertaining
to certain covenants under the provisions of the agreement as of its fiscal
quarter ended January 1, 2000. The covenant waiver was effective until April 30,
2000.
YEAR 2000 COMPLIANCE
The Company assessed its exposure to the Year 2000 problem and completed
a comprehensive response to that exposure. The Company had potential Year 2000
exposures in three areas: (a) financial and management operating computer
systems used to manage the Company's business, (b) manufacturing equipment used
by the Company and (c) computer systems used by third parties, in particular
customers and suppliers of the Company. To date, the Company has not encountered
any adverse effects with respect to the Year 2000 problem. The Company spent
approximately $73,000 in its Year 2000 readiness efforts. The Company had
increased its overall fiscal 2000 information technologies budget to accommodate
Year 2000 issues and has not delayed other information technology projects
critical to the Company's business. The Company will continue to monitor its own
systems and those of its customers and suppliers to identify and address any
computer system problems related to the Year 2000 dating issue.
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
and related new products; 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
13
<PAGE> 16
Condition and Results of Operations" contained in the Company's annual report on
Form 10-K and Form 10-K/A for the fiscal year ended July 3, 1999 for a
description of certain additional risk factors which may affect the Company's
future results.
14
<PAGE> 17
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Page
----
(a) Index to Exhibits 17
(b) Reports on Form 8-K None
15
<PAGE> 18
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: May 16, 2000 /s/ William A. Luca
--------------------------------
William A. Luca
Vice President, Treasurer, Chief
Operating Officer, and Chief
Financial Officer
(Principal Financial Officer
and authorized signatory)
16
<PAGE> 19
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.1 Consent and Waiver, dated as of February 15, 2000, among the
Company, Bank of America, N.A., as Administrative Agent, Fleet
National Bank, The Chase Manhattan Bank, and Citizens Bank of
Massachusetts.
27 Financial Data Schedule for the Nine Months Ended April 1, 2000
17
<PAGE> 1
EXHIBIT 10.1
CONSENT AND WAIVER
February 15, 2000
Bank of America, N.A.,
as Administrative Agent
101 North Tryon Street
Charlotte, North Carolina 28255
The Banks parties to the Credit
Agreement referred to below
Ladies and Gentlemen:
Reference is hereby made to that certain Amended and Restated Credit
Agreement, dated as of January 22, 1999, as amended by that certain First
Amendment to Amended and Restated Credit Agreement, dated as of May 1, 1999, and
as further amended by that certain Second Amendment to Amended and Restated
Credit Agreement, dated as of November 16, 1999 (collectively, the "Credit
Agreement"), 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 thereto (together with Cannondale, the
"Borrowers"); each of the Banks that is a signatory thereto; Bank of America,
N.A., a national banking association organized under the laws of the United
States of America (as successor-in-interest to NationsBank, N.A), as
Administrative Agent, Documentation Agent, Fronting Bank, and Swingline Bank;
and Fleet National Bank, a national banking association organized under the laws
of the United States of America, as Syndication Agent. Unless otherwise defined
herein, the terms defined in the Credit Agreement shall be used herein as
therein defined.
Pursuant to Section 10.1(d) of the Credit Agreement, the failure of the
Borrowers to perform or observe any covenant contained in Article 9 of the
Credit Agreement shall constitute an "Event of Default" under the Credit
Agreement. Accordingly, Cannondale hereby requests that you waive any Event of
Default that has occurred or that may occur as the result of the Borrowers'
failure to comply with the covenants contained in Article 9 of the Credit
Agreement (the "Financial Covenants") through April 29, 2000.
In the event that the waiver requested herein is granted, Cannondale agrees
that it shall be in full compliance with all covenants contained in Article 9 of
the Credit Agreement on and as of April 30, 2000, and that it shall deliver on
May 1, 2000, a certificate of its chief financial officer (the "Certificate of
Compliance") setting forth computations demonstrating such compliance on and as
of April 30, 2000. Notwithstanding anything contained in the Credit Agreement to
the contrary, solely for purposes of determining compliance with the covenants
contained in Article 9 of the Credit Agreement on and as of April 30, 2000, (i)
all such covenants
<PAGE> 2
2
shall be measured on and as of April 30, 2000, (ii) the most recently-ended
Fiscal Quarter of Cannondale shall be deemed to be the three-month period ended
April 30, 2000, and (iii) the immediately preceding four full Fiscal Quarters of
Cannondale shall be deemed to be the three month periods ended July 31, 1999,
October 30, 1999, January 31, 2000, and April 30, 2000, respectively. The
Certificate of Compliance shall be in form and substance reasonably satisfactory
to the Administrative Agent in all respects. In the event that (x) Cannondale
shall fail to be in full compliance with the covenants contained in Article 9 of
the Credit Agreement (as modified herein) on and as of April 30, 2000, or (y)
Cannondale shall fail to deliver the Certificate of Compliance on May 1, 2000,
setting forth computations demonstrating full compliance with all covenants
contained in Article 9 of the Credit Agreement (as modified herein) on and as of
April 30, 2000, then any such failure shall be deemed to be an immediate Event
of Default under the Credit Agreement.
In addition to the foregoing, Cannondale hereby requests that the
Administrative Agent and the Banks consent to the amendment of the Shareholder
Pledge Agreement, the Collateral Assignment of Shareholder Note, and that
certain Loan and Security Agreement dated as of September 15, 1998, between
Joseph S. Montgomery and Cannondale, copies of which are attached hereto as
Exhibits A, B, and C, respectively.
In order to induce the Administrative Agent and the Required Banks to
execute and deliver this Consent and Waiver, Cannondale hereby agrees to pay to
the Administrative Agent (for the account of each Bank) a waiver fee equal to
one percent (1%) of the Committed Amount. For the purposes hereof, the term
"Committed Amount" shall refer to the sum of (i) the aggregate amount of Term
Loans outstanding on April 30, 2000, plus (ii) the aggregate of the Revolving
Credit Commitments of all of the Banks on April 30, 2000. In consideration of
the execution and delivery of this Waiver and Consent by the Administrative
Agent and the Required Banks, Cannondale hereby agrees that said waiver fee
shall be due and payable on May 1, 2000, unless the Total Outstandings Amount
and the Revolving Credit Commitments have been reduced to zero on or prior to
April 30, 2000.
Cannondale agrees that this Consent and Waiver shall become effective when,
and only when, the Administrative Agent and the Required Banks shall have
executed and delivered this Consent and Waiver. This Consent and Waiver is
subject to the following limitations, terms, and conditions:
a) this Consent and Waiver is granted without prejudice to any right
the Agents or any Bank may have, on any future date, to declare the Borrowers to
be out of compliance with any term or provision of the Credit Agreement or the
other Facility Documents under any Sections of the Credit Agreement or the other
Facility Documents other than those to which this Consent and Waiver
specifically applies;
b) this Consent and Waiver shall have no effect on any other portions
of the Credit Agreement or the other Facility Documents, all of which shall
remain in full force and effect, including all of the Agents' and the Banks'
rights thereunder; and
<PAGE> 3
3
c) the Agents and the Banks are under no obligation to grant this
Consent and Waiver. The Agents' and the Banks' granting of this Consent and
Waiver shall only operate for the specific instance for which given and shall
not be deemed to limit or hinder any rights of the Agents or any Bank under the
Credit Agreement or the other Facility Documents, nor shall it be deemed to
create or infer a course of dealing between the Agents or any Bank and any of
the Borrowers with regard to any provision of the Credit Agreement or any other
Facility Document.
If you agree and consent to the foregoing, please evidence such agreement
and consent by executing and returning two counterparts of this Consent and
Waiver to Cannondale Corporation, 16 Trowbridge Drive, Bethel, Connecticut
06801, Attention: William A. Luca.
This Consent and Waiver is subject to the provisions of Section 13.1 of the
Credit Agreement, and this Consent and Waiver shall constitute a Facility
Document under the Credit Agreement.
[The next page is the signature page.]
<PAGE> 4
4
This Consent and Waiver may be executed in any number of counterparts and
by any combination of the parties hereto in separate counterparts, each of which
counterpart shall be an original, and all of which taken together shall
constitute one and the same document.
Very truly yours,
CANNONDALE CORPORATION
By /s/ John Moriarty
-----------------------------
Name: John Moriarty
Title: Assistant Treasurer
CANNONDALE EUROPE B.V.
By /s/ Beppo Hilfiker
-----------------------------
Name: Beppo Hilfiker
Title: Managing Director
CANNONDALE JAPAN K.K.
By /s/ Jeffrey McGwane
-----------------------------
Name: Jeffrey McGwane
Title: President
<PAGE> 5
5
Acknowledged as of the date first written above:
BANK OF AMERICA, N.A.,
as Administrative Agent
By /s/ John W. Pocalyko
----------------------------
Name: John W. Pocalyko
Title: Managing Director
BANKS:
BANK OF AMERICA, N.A. FLEET NATIONAL BANK
By /s/ John W. Pocalyko By /s/ Edward J. Walsh
---------------------------- -------------------------
Name: John W. Pocalyko Name: Edward J. Walsh
Title: Managing Director Title: Senior Vice President
THE CHASE MANHATTAN BANK CITIZENS BANK OF MASSACHUSETTS
By /s/ Alan J. Aria By
---------------------------- -------------------------
Name: Alan J. Aria Name:
Title: Vice President Title:
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