<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 January 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 February 10, 2000 was 7,501,617.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of January 1, 2000,
July 3, 1999 and December 26, 1998 1
Condensed Consolidated Statements of Operations for the three
and six months ended January 1, 2000 and December 26, 1998 2
Condensed Consolidated Statements of Cash Flows for the six
months ended January 1, 2000 and December 26, 1998 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 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
Signature 15
</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>
JANUARY 1, 2000 JULY 3, 1999 DECEMBER 26, 1998
--------------- ------------ -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash ................................................. $ 1,212 $ 3,300 $ 879
Trade accounts receivable, less allowances of
$9,573, $10,074 and $10,238 .................... 59,681 59,379 70,465
Inventory ............................................ 37,303 33,165 40,284
Deferred income taxes ................................ 5,256 2,749 3,310
Prepaid expenses and other current assets ............ 4,847 4,827 4,938
Interest receivable from a related party ............. 1,328 827 339
--------- --------- ---------
Total current assets ..................................... 109,627 104,247 120,215
Property, plant and equipment, net ....................... 40,576 41,377 38,522
Notes receivable and advances to related parties ......... 12,978 12,919 12,679
Other assets ............................................. 3,492 3,836 3,212
--------- --------- ---------
Total assets ............................................. $ 166,673 $ 162,379 $ 174,628
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................... $ 16,295 $ 17,329 $ 13,296
Revolving credit advances ............................ 1,632 882 4,997
Income taxes payable ................................. - 2,252 1,568
Warranty and other accrued expenses .................. 6,756 8,434 8,259
Current installments of long-term debt ............... 519 456 478
--------- --------- ---------
Total current liabilities ................................ 25,202 29,353 28,598
Long-term debt, less current installments ................ 65,552 55,997 69,288
Deferred income taxes .................................... 1,593 1,619 1,575
Other noncurrent liabilities ............................. 440 400 275
--------- --------- ---------
Total liabilities ........................................ 92,787 87,369 99,736
--------- --------- ---------
Stockholders' equity:
Common stock, $.01 par value:
Authorized shares - 40,000,000
Issued shares - 8,794,517, 8,784,308 and
8,741,579....................................... 88 88 87
Additional paid-in capital ........................... 57,866 57,815 57,460
Retained earnings .................................... 40,497 41,328 38,049
Less 1,292,900 shares in treasury at cost ............ (20,162) (20,162) (20,162)
Accumulated other comprehensive income ............... (4,403) (4,059) (542)
--------- --------- ---------
Total stockholders' equity ............................... 73,886 75,010 74,892
--------- --------- ---------
Total liabilities and stockholders' equity ............... $ 166,673 $ 162,379 $ 174,628
========= ========= =========
</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 SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JANUARY 1, DECEMBER 26, JANUARY 1, DECEMBER 26,
2000 1998 2000 1998
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales ................................. $ 41,150 $ 47,901 $ 77,159 $ 90,119
Cost of sales ............................. 28,662 31,719 54,398 59,333
-------- -------- -------- --------
Gross profit .............................. 12,488 16,182 22,761 30,786
-------- -------- -------- --------
Expenses:
Selling, general and administrative... 9,603 10,326 18,951 20,868
Research and development ............. 1,765 2,820 4,189 4,973
-------- -------- -------- --------
11,368 13,146 23,140 25,841
-------- -------- -------- --------
Operating income (loss) ................... 1,120 3,036 (379) 4,945
-------- -------- -------- --------
Other income (expense):
Interest expense ..................... (1,362) (1,106) (2,404) (1,945)
Other income ......................... 513 255 734 391
-------- -------- -------- --------
(849) (851) (1,670) (1,554)
-------- -------- -------- --------
Income (loss) before income taxes ......... 271 2,185 (2,049) 3,391
Income tax benefit (expense) .............. 383 (336) 1,218 (747)
-------- -------- -------- --------
Net income (loss) ......................... $ 654 $ 1,849 $ (831) $ 2,644
======== ======== ======== ========
Basic earnings (loss) per share ........... $ 0.09 $ 0.25 $ (0.11) $ 0.35
======== ======== ======== ========
Diluted earnings (loss) per share ......... $ 0.09 $ 0.24 $ (0.11) $ 0.34
======== ======== ======== ========
</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
JANUARY 1, 2000 DECEMBER 26, 1998
--------------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES.............................. $(10,960) $ (9,675)
-------- --------
INVESTING ACTIVITIES:
Loans provided to related parties ................................. (90) (10,017)
Proceeds from repayments of loans provided to related parties ..... 31 26
Capital expenditures .............................................. (2,927) (6,743)
Proceeds from sale of equipment and buildings ..................... 633 1,389
-------- --------
Net cash used in investing activities ............................. (2,353) (15,345)
-------- --------
FINANCING ACTIVITIES:
Net proceeds from issuance of common stock ........................ 51 52
Proceeds from issuance of long-term debt .......................... - 738
Payments for the purchase of treasury stock ....................... - (7,745)
Net proceeds from borrowings under short-term revolving credit
agreements .................................................... 639 2,585
Net proceeds from borrowings under long-term debt and capital
lease agreements .............................................. 9,542 28,016
-------- --------
Net cash provided by financing activities ......................... 10,232 23,646
-------- --------
Effect of exchange rate changes on cash ........................... 993 (778)
-------- --------
Net decrease in cash .............................................. (2,088) (2,152)
Cash at beginning of period ....................................... 3,300 3,031
-------- --------
Cash at end of period ............................................. $ 1,212 $ 879
======== ========
</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 January 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>
JANUARY 1, 2000 JULY 3, 1999 DECEMBER 26, 1998
--------------- ------------ -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Raw materials............................ $ 21,971 $ 17,723 $ 21,771
Work-in-process.......................... 2,567 2,110 3,144
Finished goods........................... 14,679 14,993 16,717
--------- --------- ---------
39,217 34,826 41,632
Less reserve for obsolete inventory...... (1,914) (1,661) (1,348)
---------- ---------- ----------
$ 37,303 $ 33,165 $ 40,284
========= ========= =========
</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 SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JANUARY 1, DECEMBER 26, JANUARY 1, DECEMBER 26,
2000 1998 2000 1998
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
NUMERATOR:
Numerator for basic and diluted earnings (loss) per
share - income (loss) available to common
stockholders ...................................... $ 654 $ 1,849 $ (831) $ 2,644
======== ======= =========== =======
DENOMINATOR:
Denominator for basic earnings (loss) per share -
weighted-average shares ........................... 7,492 7,449 7,492 7,565
Effect of dilutive securities:
Employee stock options ............................ 134 126 - 144
-------- ------- ----------- -------
Denominator for diluted earnings (loss) per share -
adjusted weighted-average shares and assumed
conversions ....................................... 7,626 7,575 7,492 7,709
======== ======= =========== =======
Basic earnings (loss) per share ...................... $ 0.09 $ 0.25 $ (0.11) $ 0.35
======== ======= =========== =======
Diluted earnings (loss) per share .................... $ 0.09 $ 0.24 $ (0.11) $ 0.34
======== ======= =========== =======
</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 months ended
January 1, 2000 and December 26, 1998, and for the six months ended December 26,
1998, the options' exercise prices were greater than the average market price of
the common shares, and therefore, the effect was antidilutive. For the six
months ended January 1, 2000, inclusion of such options would result in an
antidilutive effect due to the net loss incurred by the Company.
<TABLE>
<CAPTION>
OPTIONS RANGE OF EXERCISE PRICES
------- ------------------------
<S> <C> <C>
THREE MONTHS ENDED JANUARY 1, 2000 ............................................ 2,247,110 $ 7.41 - $15.00
THREE MONTHS ENDED DECEMBER 26, 1998 .......................................... 1,462,543 $ 9.31 - $16.50
SIX MONTHS ENDED JANUARY 1, 2000 .............................................. 2,399,985 $ 0.34 - $15.00
SIX MONTHS ENDED DECEMBER 26, 1998 ............................................ 1,288,574 $ 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 SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JANUARY 1, DECEMBER 26, JANUARY 1, DECEMBER 26,
2000 1998 2000 1998
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net income (loss) .......................................... $ 654 $ 1,849 $ (831) $ 2,644
Foreign currency translation gain (loss), net of tax........ (1,499) (33) (344) 1,598
------------ --------- ----------- --------
Total comprehensive income (loss)........................... $ (845) $ 1,816 $ (1,175) $ 4,242
============ ========= =========== ========
</TABLE>
The component of accumulated other comprehensive income is as
follows, net of tax (in thousands):
<TABLE>
<CAPTION>
JANUARY 1, JULY 3, DECEMBER 26,
2000 1999 1998
---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Foreign currency translation adjustments, net of tax..... $ (4,403) $ (4,059) $ (542)
------------ ---------- --------
Accumulated other comprehensive income................... $ (4,403) $ (4,059) $ (542)
============ ========== ========
</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 January
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 SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JANUARY 1, DECEMBER 26, JANUARY 1, DECEMBER 26,
2000 1998 2000 1998
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales from external customers:
Bicycles .................... $ 41,150 $ 47,901 $ 77,159 $ 90,119
Motorcycles ................. - - - -
-------- -------- -------- --------
$ 41,150 $ 47,901 $ 77,159 $ 90,119
======== ======== ======== ========
Operating income (loss):
Bicycles .................... $ 2,320 $ 4,589 $ 2,124 $ 7,467
Motorcycles ................. (1,200) (1,553) (2,503) (2,522)
-------- -------- -------- --------
$ 1,120 $ 3,036 $ (379) $ 4,945
======== ======== ======== ========
</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 SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JANUARY 1, DECEMBER 26, JANUARY 1, DECEMBER 26,
2000 1998 2000 1998
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Total operating income (loss) for reportable
segments....................................... $ 1,120 $ 3,036 $ (379) $ 4,945
Other income (expense)
Interest expense............................ (1,362) (1,106) (2,404) (1,945)
Other income................................ 513 255 734 391
-------- -------- ---------- ---------
(849) (851) (1,670) (1,554)
--------- --------- ---------- ---------
Income (loss) before income taxes.............. $ 271 $ 2,185 $ (2,049) $ 3,391
========= ========= ========== =========
</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 third quarter of fiscal 2000, the Company received a
covenant waiver from its lenders, pursuant to the provisions of the amended and
restated multicurrency credit facility dated January 22, 1999 (the "facility"),
pertaining to certain covenants under the provisions of the agreement as of its
fiscal quarter ended January 1, 2000. The waiver is effective until April 30,
2000. The Company currently expects that it will be in compliance with the
covenants under the provisions of the facility.
During the second quarter of fiscal 2000, the Company received a
covenant waiver from its lenders in the form of an amendment to 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 was 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.
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 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. As of
February 14, 2000, Mr. Montgomery plans to sell the 75,000 shares as required
by his agreement with the Company in accordance with the terms of the deferral
during the authorized selling period for the Company's insiders and executive
officers.
8
<PAGE> 11
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
<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 $41.2 million in the second quarter
of fiscal 2000 from $47.9 million in the second quarter of fiscal 1999, a
reduction of $6.7 million or 14.0%. The majority of this decrease in net sales
is attributable to the impact of 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 six months of fiscal 2000, net sales were $77.2 million,
a decrease of $12.9 million or 14.3% from the $90.1 million in net sales
recorded for the same period last year. The decreased sales for the first six
months of fiscal 2000 were primarily a result of the continued adverse effect of
the retail inventory realignment in the European market and by component
shortages in the first quarter caused by the September earthquake in Taiwan.
Gross Profit. Gross profit was $12.5 million in the second quarter of
fiscal 2000, a decrease of $3.7 million or 22.8% below the gross profit in the
second quarter of fiscal 1999 of $16.2 million. Gross profit as a percentage of
net sales in the second quarter of fiscal 2000 decreased to 30.3% compared to
33.8% for the second quarter of fiscal 1999. The reduction in gross profit
dollars and the gross profit rate is attributable to changes in the seasonality
of shipments within the European market which resulted in a less favorable sales
mix to the international markets where the Company typically achieves a higher
gross profit rate. In addition, higher costs 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 second quarter of fiscal
2000.
For the six months ended January 1, 2000, gross profit was $22.8
million, a decrease of $8.0 million or 26.0% from the $30.8 million in gross
profit for the same period last year. For the first six months of fiscal 2000,
gross profit as a percentage of net sales was 29.5% compared to 34.2% for the
first six months of fiscal 1999. In addition to the changes in the seasonality
of shipments in Europe and a stronger Japanese yen, the gross margin for the
first six 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 $11.4 million for the
second quarter of fiscal 2000, a decrease of approximately $1.7 million or 13.0%
from the $13.1 million recorded for the second quarter of fiscal 1999. For the
first six months of fiscal 2000, operating expenses were $23.1 million, a
decrease of $2.7 million or 10.5% from the $25.8 million recorded for the first
six months of fiscal 1999.
Selling, general and administrative expenses decreased to $9.6 million
in the second quarter of fiscal 2000, from $10.3 million recorded during the
prior-year period. For the six months ended January 1, 2000, selling, general
and administrative expenses were $19.0 million, a decrease of $1.9 million or
9.1% from the $20.9 million recorded for the same period last year. Decreased
selling, general and administrative expenses for the second quarter and first
six months of fiscal 2000 were primarily associated with reductions in expenses
directly related to sales volume. As a percentage of net sales, selling, general
and administrative expenses increased to 24.6% for the first six months of
fiscal 2000 compared to 23.2% for the first six months of fiscal 1999 primarily
due to the reduction in net sales levels.
Research and development expenses decreased to $1.8 million in the
second quarter of fiscal 2000, from $2.8 million recorded during the prior-year
period. For the first six months of fiscal 2000, research and development
expenses decreased to $4.2 million from $5.0 million recorded for the first six
months of fiscal 1999. The decrease in expenses during fiscal 2000 was primarily
attributable to reduced expenses associated with the MX400 motorcycle
development. Production of sub-assemblies for the MX400 motorcycle has begun in
the new motorcycle facility in Bedford, Pennsylvania, and shipments are
scheduled to commence
10
<PAGE> 13
during the third quarter of fiscal 2000. For the first six months of fiscal
2000, research and development expenses represented 5.4% of net sales compared
to 5.5% of net sales for the same period last year.
Other income (expense). Interest expense increased to $1.4 million in
the second quarter of fiscal 2000 from $1.1 million recorded during the
prior-year period. For the six months ended January 1, 2000, interest expense
was $2.4 million compared to $1.9 million recorded for the same period last
year. The increase in interest expense was primarily attributable to the
increase in 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 Inc. which was refunded to the Company in January 2000,
and finance charges relating to accounts receivable. For the three- and
six-month periods ended January 1, 2000, interest income from the loan to
Mr. Montgomery was $257,000 and $500,000, respectively (See Liquidity and
Capital Resources).
Income Taxes. The income tax benefit recorded for the second quarter of
fiscal 2000 was $383,000, a change of $719,000 compared to the income tax
expense recorded for the same period last year of $336,000. For the six months
ended January 1, 2000, the income tax benefit was $1.2 million, a change of
approximately $2.0 million compared to the income tax expense of $747,000
recorded for the first six 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. In addition, the tax rate
for both periods was favorably impacted by the retroactive reinstatement by the
U.S. government of the Research Tax Credit in November 1999.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $11.0 million for the first
six months of fiscal 2000, an increase of $1.3 million compared to the $9.7
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 six months of fiscal 2000, offset by lower working
capital levels due to the lower sales volume compared to the same period last
year.
Capital expenditures were $2.9 million for the first six months of
fiscal 2000 compared to $6.7 million for the first six months of fiscal 1999.
Capital expenditures during the first six months of fiscal 2000 principally
consisted of computer equipment and manufacturing equipment associated with the
production of both the Company's bicycle and motorcycle product lines. Capital
expenditures during the first six months 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.
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
11
<PAGE> 14
$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 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. As of
February 14, 2000, Mr. Montgomery plans to sell the 75,000 shares as required
by his agreement with the Company in accordance with the terms of the deferral
during the authorized selling period for the Company's insiders and executive
officers. 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 six months of
fiscal 1999 at a cost of $7.7 million.
Net cash provided by financing activities for the first six months of
fiscal 2000 was $10.2 million, a decrease of approximately $13.4 million
compared to the $23.6 million provided by financing activities for the first six
months of fiscal 1999. The net cash provided by financing activities during the
first six months of fiscal 2000 primarily reflects the increase in the Company's
multicurrency 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 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 Mr. Montgomery.
During the third quarter of fiscal 2000, the Company received a
covenant waiver from its lenders, pursuant to the provisions of the amended and
restated multicurrency credit facility dated January 22, 1999 (the "facility"),
pertaining to certain covenants under the provisions of the agreement as of its
fiscal quarter ended January 1, 2000. The waiver is effective until April 30,
2000. The Company currently expects that it will be in compliance with the
covenants under the provisions of the facility.
During the second quarter of fiscal 2000, the Company received a
covenant waiver from its lenders in the form of an amendment to the facility.
Pursuant to the provisions of the facility, the Company did not satisfy certain
covenants under the provisions of the faciltiy as of its fiscal quarter ended
October 2, 1999. The covenant waiver was 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.
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.
12
<PAGE> 15
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: (i) financial and management operating
computer systems used to manage the Company's business, (ii) manufacturing
equipment used by the Company and (iii) 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;
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 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.
13
<PAGE> 16
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An Annual Meeting of Stockholders was held on November 17, 1999. The following
matters were acted upon:
a. The election of three Class II Directors to serve for the ensuing three
years. Mr. John Sanders was elected as a Class II Director with 6,992,354
votes for, 56,988 votes withheld and zero votes abstaining. Mr. James S.
Montgomery was elected as a Class II Director with 6,985,829 votes for,
63,513 votes withheld and zero votes abstaining. Ms. Sally G. Palmer was
elected as a Class II Director with 6,993,554 votes for, 55,788 votes
withheld and zero votes abstaining. Class III Directors, whose term of
office continued after the Annual Meeting and expires in 2000, were William
A. Luca, Daniel C. Alloway and Gregory Griffin. Class I Directors, whose
term of office continued after the Annual Meeting and expires in 2001, were
Joseph S. Montgomery and Michael J. Stimola.
b. 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 1, 2000. Of the votes cast, there were 7,019,225 for the
ratification, 21,447 against and 8,670 abstained.
<TABLE>
<CAPTION>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Page
----
<S> <C>
(a) Index to Exhibits 16
(b) Reports on Form 8-K None
</TABLE>
14
<PAGE> 17
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 15, 2000 /s/ WILLIAM A. LUCA
----------------------------------
William A. Luca
Vice President, Treasurer
and Chief Financial Officer
(Principal Financial Officer
and authorized signatory)
15
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10.1 Second Amendment to Amended and Restated Credit Agreement, dated as of
November 16, 1999, among the Company, Bank of America, N.A., as
Administrative Agent, Fleet National Bank, The Chase Manhattan Bank,
Citizens Bank of Massachusetts, and BankBoston, N.A.
27 Financial Data Schedule for the Six Months Ended January 1, 2000
</TABLE>
16
<PAGE> 1
EXHIBIT 10.1
SECOND AMENDMENT
TO
AMENDED AND RESTATED CREDIT AGREEMENT
SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT, dated as of
November 16, 1999 (this "Amendment"), by and among Cannondale Corporation, a
corporation organized under the laws of the State of Delaware ("Cannondale");
each of the Subsidiaries of Cannondale that is a signatory to the Credit
Agreement (as defined below) (such Subsidiaries of Cannondale, together with
Cannondale, the "Borrowers"); BANK OF AMERICA, N.A., a national banking
association organized under the laws of the United States of America ("Bank of
America"), as successor-in-interest to NATIONSBANK, N.A.; FLEET NATIONAL BANK, a
national banking association organized under the laws of the United States of
America ("Fleet"); THE CHASE MANHATTAN BANK, a bank organized under the laws of
New York ("Chase"); and CITIZENS BANK OF MASSACHUSETTS ("Citizens"), as
successor-in-interest to STATE STREET BANK AND TRUST COMPANY; and BANKBOSTON,
N.A., a national banking association organized under the laws of the United
States of America ("BankBoston") (each of Bank of America, Fleet, Chase, and
Citizens, and BankBoston shall be referred to herein individually as a "Bank"
and collectively as the "Banks"); and Bank of America, in its capacity as
administrative agent for the Banks (in such capacity, together with its
successors in such capacity, the "Administrative Agent").
Background
A. Reference is made to that certain Amended and Restated Credit
Agreement dated as of January 22, 1999 (the "Original Credit Agreement") among
the Borrowers, the Banks, the Administrative Agent and the other parties
signatory thereto.
B. The Original Credit Agreement was amended by that certain First
Amendment to Amended and Restated Credit Agreement dated as of May 1, 1999 (the
"First Amendment"), among the Borrowers, the Banks, the Administrative Agent and
the other parties signatory thereto. The Original Credit Agreement, as amended
by the First Amendment, shall be referred to herein as the "Credit Agreement."
C. The parties hereto wish to further amend the Credit Agreement as
herein provided.
D. Capitalized terms not otherwise defined shall have the meanings
ascribed to them in the Credit Agreement, as amended hereby.
<PAGE> 2
2
Agreement
In consideration of the Background, which is incorporated by reference,
the parties hereto, intending to be legally bound, hereby agree as follows:
1. Modification. All the terms and provisions of the Credit Agreement
and the other Facility Documents, as amended to date, shall remain in full force
and effect except as follows:
(a) The terms "Administrative Agent" and "Documentation Agent,"
shall mean Bank of America, N.A., a national banking association organized under
the laws of the United States of America, and its successors in such capacities.
(b) The following definitions are inserted into Section 1.1 of
the Credit Agreement immediately following the definition of "Borrowing":
"Borrowing Base" means, as of the date of determination thereof,
for each Bank, an amount equal to the lesser of: (a) 110% of the
Eligible Receivables or (b) the Revolving Credit Commitment for
such Bank. Unless the Administrative Agent shall otherwise
determine, the Borrowing Base as of any date shall be the
Borrowing Base set forth on the most current Borrowing Base
Certificate certified and delivered by the applicable Borrower
pursuant to Section 7.8.
"Borrowing Base Certificate" means a certificate substantially in
the form of Exhibit P hereto.
(c) The following definition is inserted into Section 1.1 of
the Credit immediately following the definition of "Eligible Assignee":
"Eligible Receivable" means, as of any date of determination
thereof, all Receivables owing to a Borrower and its Subsidiaries
net of the Borrowers' and its Subsidiaries' customary reserves,
unearned customer deposits, taxes, trade or other documents,
discounts, claims, credits, returns, rebates, allowances or
set-offs.
(d) The definition of "Fronting Bank" contained in Section 1.1
of the Credit Agreement is deleted and the following is substituted therefor:
"Fronting Bank" means, as the case may be, either the Standby
Letter of Credit Fronting Bank which will be
<PAGE> 3
3
responsible solely for the issuance of standby Letters of Credit
or the Trade Letter of Credit Fronting Bank which will be
responsible solely for the issuance of documentary trade Letters
of Credit."
(e) The definition of "Letter(s) of Credit contained in Section
1.1 of the Credit Agreement is deleted and the following is substituted
therefor:
"Letter(s) of Credit" means any standby or documentary trade
Letter of Credit issued by a Fronting Bank (either the Standby
Letter of Credit Fronting Bank or the Trade Letter of Credit
Fronting Bank, as the case may be) for the account of a Borrower
pursuant to Section 3.1 for the purpose of supporting performance,
payment deposit, or surety obligations of such Borrower, in any
case if required by law or governmental rule or regulation or if
in the ordinary course of business of such Borrower.
(f) The definition of "Margin" contained in Section 1.1 of the
Credit Agreement is deleted and the following is substituted therefor: "Margin"
means (a) for each type of Revolving Loan, 200 basis points; (b) for each type
of Term Loan, 200 basis points; and (c) for each Swingline Loan, 200 basis
points.
(g) The following definition is inserted into Section 1.1 of
the Credit Agreement immediately following the definition of "Principal Office":
"Receivable" and "Receivables" means all amounts owing to a
Borrower arising out of or in connection with the bona fide sale
or lease of goods or services in the ordinary course of business.
(h) The definition of "Reference Bank" contained in Section 1.1
of the Credit Agreement is deleted and the following is substituted therefor:
"Reference Bank" means Bank of America, N.A. (or its applicable
Lending Office, as the case may be).
<PAGE> 4
4
(i) The definition of "Restricted Payment Allowance" contained
in Section 1.1 of the Credit Agreement is deleted in its entirety.
(j) The definition of "Revolving Credit Commitment" contained
in Section 1.1 of the Credit Agreement is deleted and the following is
substituted therefor:
"Revolving Credit Commitment" means, with respect to each Bank,
the obligation of such Bank to make Revolving Loans and
participate in Letters of Credit under this Agreement, subject to
Borrowing Base limitations, in the following aggregate principal
amount, as such amount may be reduced or otherwise modified from
time to time:
Bank of America, N.A.: $12,941,177;
Fleet National Bank: $12,941,177;
The Chase Manhattan Bank: $9,705,882;
Citizens Bank of Massachusetts: $9,705,882;
BankBoston, N.A. $9,705,882;
Total: $55,000,000.
(k) The definition of "Shareholder Pledge Agreement" contained
in Section 1.1 of the Credit Agreement is deleted and the following is
substituted therefor:
"Shareholder Pledge Agreement" means the Amended and Restated
Pledge Agreement dated as of September 15, 1998, entered into by
Joseph Montgomery in favor of Cannondale, securing the Shareholder
Note, as the same may be amended, modified, supplemented, or
restated from time to time.
(l) The following definition is inserted into Section 1.1 of
the Credit Agreement immediately following the definition of "Spot Exchange
Rate":
"Standby Letter of Credit Fronting Bank" means Bank of America,
N.A., a national banking association organized under the laws of
the United States of America, acting in its capacity as the issuer
of the standby Letters of Credit hereunder.
<PAGE> 5
5
(m) The definition of "Swingline Bank" contained in Section 1.1
of the Credit Agreement is deleted and the following is substituted therefor:
"Swingline Bank" means Bank of America, N.A., a national banking
association organized under the laws of the United States of
America, acting in its capacity as the lender of the Swingline
Loans hereunder.
(n) The definition of "Term Loan Commitment" contained in
Section 1.1 of the Credit Agreement is deleted and the following is substituted
therefor:
"Term Loan Commitment" means, with respect to each Bank, the
obligation of such Bank to make Term Loans under this Agreement in
the following aggregate principal amount:
Bank of America, N.A.: $4,705,882;
Fleet National Bank: $4,705,882;
The Chase Manhattan Bank: $3,529,412;
Citizens Bank of Massachusetts: $3,529,412;
BankBoston, N.A. $3,529,412;
Total: $20,000,000.
(o) The following definition is inserted into Section 1.1 of
the Credit Agreement immediately following the definition of "Total Outstandings
Amount":
"Trade Letter of Credit Fronting Bank" means The Chase Manhattan
Bank, a bank organized under the laws of New York, acting in its
capacity as the issuer of the documentary trade Letters of Credit.
(p) Article II of the Credit Agreement shall be modified in all
respects to reflect that the Borrowers shall not have the right, on or after the
date hereof, to request either a borrowing or a renewal of, or a conversion
into, any Eurocurrency Loans, and neither the Banks nor the Administrative Agent
shall be obligated to make, renew, or convert any other type of Loan into a
Eurocurrency Loan on or after the date hereof. All Loans (including Swingline
Loans) made to the Borrowers under the Credit Agreement, on or after the date
hereof, shall be Variable Rate Loans. Specifically, the Swingline Loans shall no
longer accrue interest at the Swingline Rate, but, instead, shall accrue
interest at the Variable Rate plus the applicable Margin. In addition, from and
after the date hereof, Variable Rate Loans may be denominated in one or more
Alternative Currencies, provided however, that any prepayment of such Variable
Rate Loans denominated in one or more Alternative Currencies must be accompanied
by a prepayment penalty determined by the
<PAGE> 6
6
Banks in their sole discretion. Without limiting any of the foregoing, to the
extent that any Loans are currently outstanding as Eurocurrency Loans and are
accruing interest prior to the date hereof at a Fixed Rate plus the applicable
Margin, all such Loans shall begin to accrue interest on the outstanding and
unpaid principal amount of each such Loan from and including the date hereof to
but excluding the date such Loan is due at a variable rate per annum equal to
the Variable Rate plus the Margin.
(q) The first sentence of Section 2.3(a) of the Credit
Agreement shall be deleted in its entirety and the following shall be
substituted in lieu thereof:
Subject to the terms and conditions of this Agreement, each of the
Banks, severally and not jointly, agrees to make revolving credit
loans (the "Revolving Loans") to each Borrower (as specified in
the notice of each Borrowing pursuant to Section 2.11) from time
to time from and including the date hereof to and including the
Banking Day next preceding the Termination Date, in an aggregate
principal amount at any one time outstanding up to but not
exceeding the amount of the Borrowing Base of such Bank to the
Borrowers; provided the Revolving Loans of such Bank outstanding
plus the Letters of Credit Usage outstanding of such Bank shall
not at any time exceed its Borrowing Base and provided further
that the Outstandings Amount (which includes the aggregate amount
of Revolving Loans outstanding, the aggregate amount of Swingline
Loans outstanding plus the Letters of Credit Usage) shall not at
any time exceed the aggregate amount of the Borrowing Base of the
Banks.
(r) The following shall be added as a new Section 2.3(c) to the
Credit Agreement:
(c) Each of the parties hereto agrees that, to the extent that
Joseph Montgomery sells Securities (as such term is defined in the
Shareholder Pledge Agreement) pursuant to Section 15 of the
Shareholder Pledge Agreement, the proceeds of which are required
to be applied in accordance with Section 2(e) of the Loan
Agreement dated as of September 15, 1998 between Cannondale and
Joseph Montgomery (the "Loan Agreement"), the Revolving Credit
Commitment shall be reduced by one dollar for every dollar
resulting from such proceeds that are so applied toward the
payment of interest owed by Joseph Montgomery to Cannondale under
the Loan
<PAGE> 7
7
Agreement and the related note(s). Once reduced, the Revolving
Credit Commitment cannot be reinstated.
(s) The first sentence of Section 2.8(b) of the Credit
Agreement shall be deleted in its entirety and the following shall be
substituted in lieu thereof:
If any time prior to the Termination Date, as a result of a
partial reduction or termination of Revolving Credit Commitments,
as a result of fluctuations in currencies or otherwise, the
aggregate amount of all Revolving Loans and Swingline Loans
outstanding at such time shall exceed the aggregate amount of the
Borrowing Base, the Borrowers shall repay the Banks forthwith such
amounts as may be necessary to eliminate such excess (and if the
repayment in full of the Revolving Loans and Swingline Loans does
not eliminate such excess due to the amount of outstanding Letters
of Credit Usage, at such time, Cannondale shall also deposit with
the Administrative Agent sufficient cash collateral to cover such
remaining excess), and the failure of the Borrowers to make and
the Banks to receive such payment shall constitute an Event of
Default hereunder.
(t) The words "Revolving Credit Commitments" in the first
sentence of Section 2.12 of the Credit Agreement shall be deleted, and the words
"applicable Borrowing Base" shall be substituted in lieu thereof.
(u) The following sentence shall be added to the end of Section
3.1(a) of the Credit Agreement:
Without limiting the foregoing, all requests made by the Borrower
with respect to the issuance of standby Letters of Credit shall be
made to the Standby Letter of Credit Fronting Bank, and all
requests made by the Borrower with respect to the issuance of
documentary trade Letters of Credit shall be made to the Trade
Letter of Credit Fronting Bank. Furthermore, any documentary trade
Letters of Credit issued pursuant to the terms of this Agreement
shall be Letters of Credit requested by the Borrower to be issued
for its account on or after the date hereof, it being the
intention of the Banks not to participate with the Trade Letter of
Credit Fronting Bank in any Letter of Credit previously issued by
Chase prior to the date hereof.
<PAGE> 8
8
(v) The following condition precedent shall be added as an
additional condition precedent as Section 5.2(g) of the Credit Agreement: "the
Administrative Agent shall have received a Borrowing Base Certificate required
to be delivered pursuant to this Agreement, which Borrowing Base Certificate
shall be dated not earlier than five business days prior to the date on which
the Borrower gives a Notice of Borrowing to the Bank of the subject Borrowing to
be made pursuant to Section 2.7 of the Agreement.
(w) The following covenant shall be added as an additional
covenant as Section 7.8(p) of the Credit Agreement: "as soon as available, and
in any event within 10 days of the end of each calendar month, a Borrowing Base
Certificate."
(x) Section 8.5 of the Credit Agreement is deleted and the
following is substituted therefor:
Make, or permit any of its Subsidiaries to make, any loan or
advance to any Person or purchase or otherwise acquire, or permit
any such Subsidiary to purchase or otherwise acquire, any capital
stock, assets, obligations or other securities of, make any
capital contribution to, or otherwise invest in, or acquire any
interest in, any Person, except for: (a) Cash and Cash Equivalents
held or acquired by such Borrower or any such Subsidiary; (b)
stock, obligations or securities received in settlement of debts
(created in the ordinary course of business) owing to such
Borrower or any such Subsidiary; (c) any Acceptable Acquisition or
any Interest Rate Protection Agreement; (d) joint ventures with
third-parties (including dealer loans) that, together with all
other joint ventures (including dealer loans) entered into by all
Borrowers and their Subsidiaries on or after June 9, 1997, do not
exceed an aggregate amount of $5,000,000 during the term hereof
(other than joint ventures (including dealer loans) existing at
the Closing Date); and (e) intercompany loans made by Cannondale
to any Subsidiary or Affiliate, including any Subsidiary Borrower,
that do not exceed an aggregate principal amount of $5,000,000
outstanding at any one time (exclusive of such intercompany loans
set forth in Schedule 8.5 hereto). Neither the Borrower nor any of
its Subsidiaries shall make any loans or advances to their
respective employees, except for (i) such loans or advances
previously made to employees of the Borrower or any of its
Subsidiaries prior to the date hereof, which loans or advances do
not currently exceed an aggregate principal amount of
$13,000,144.00; and (ii) such
<PAGE> 9
9
loans or advances made to employees in the ordinary course of
Borrower's business (e.g., advances for travel and relocation),
which loans or advances shall not exceed at any one time the
aggregate principal amount of $500,000.
(y) Section 8.6 of the Credit Agreement is deleted and the
following is substituted therefor:
Declare or pay any dividends, purchase, redeem, retire, or
otherwise acquire for value any of its capital stock now or
hereafter outstanding, or make any distribution of assets to its
stockholders as such whether in cash, assets, or in obligations of
such Borrower, or allocate or otherwise set apart any sum for the
payment of any dividend or distribution on, or for the purchase,
redemption, or retirement of any shares of its capital stock, or
make any other distribution by reduction of capital or otherwise
in respect of any shares of its capital stock or permit any of its
Subsidiaries to purchase or otherwise acquire for value any stock
of such Borrower or another such Subsidiary, provided, however,
that each Borrower may declare and deliver dividends and make
distributions to its stockholders payable solely in common stock
of such Borrower; and provided further, however, that no such
dividends shall be declared or paid and no such distributions
shall be made if any Default or Event of Default shall have
occurred and be continuing or shall result therefrom.
2. Waiver. The Banks and the Administrative Agent hereby waive any
Event of Default that has occurred or may occur as the result of the Borrowers'
failure to comply with the covenants contained in Sections 9.1 ("Interest
Coverage Ratio") and 9.4 ("Debt Service Coverage Ratio") of the Credit Agreement
for the first fiscal quarter of the 2000 Fiscal Year of the Borrowers,
commencing on July 4, 1999 and ended on October 2, 1999 and for the period
commencing on October 3, 1999 (the first day of the second fiscal quarter of the
2000 Fiscal Year of the Borrowers) through, but not including, the last day of
said second fiscal quarter of the Borrowers; provided, however, that such waiver
shall only operate for the specific instance for which it is given, it being the
intention of the parties hereto that the Borrowers shall be in compliance in all
respects with all financial covenants set forth in Article IX of the Credit
Agreement, including the covenants contained in Sections 9.1 and 9.4 therein, on
the last day of the second fiscal quarter of the 2000 Fiscal Year of the
Borrowers and thereafter. The execution and delivery of this Amendment shall
not, except as expressly provided herein, operate as a waiver of any right,
power, or remedy that the Banks or the Administrative Agent may have under any
of the Facility Documents.
<PAGE> 10
10
3. Amendment Fee. The Borrowers hereby agree to pay to the
Administrative Agent, on or prior to the effective date of this Amendment, for
the account of each Bank executing this Amendment, an amendment fee in the
amount of .20% of such Bank's Commitment (used and unused, without giving effect
to Borrowing Base limitations), which Commitment has been reduced by this
Amendment.
4. Amendment of Shareholder Pledge Agreement. The Borrowers hereby
agree to enter into an amendment of the Shareholder Pledge Agreement with the
Administrative Agent and Joseph Montgomery ("Montgomery") in form and substance
satisfactory to the Administrative Agent (the "Shareholder Pledge Amendment"),
in order that the parties to the Shareholder Pledge Amendment expressly
acknowledge, among other things, the dollar-for-dollar reduction in the
Revolving Credit Commitment that will occur upon the sale of Securities (as
defined in the Shareholder Pledge Agreement) and the application of the proceeds
from such sale(s) toward interest in accordance with the terms of Section 2(e)
of the Loan Agreement dated as of September 15, 1998 between Cannondale and
Joseph Montgomery.
5. Conditions to Effectiveness. This Amendment shall not be effective
until such date as the Administrative Agent shall have received the following,
all in form, scope, and content acceptable to the Administrative Agent and the
Banks in their sole discretion, and then shall be effective as of the date first
above written:
(a) this Amendment, executed by the Borrowers and the Required
Banks;
(b) the Shareholder Pledge Amendment, executed by Cannondale
and Montgomery;
(c) the fully executed Pennsylvania Mortgage and related UCC-1
financing statements to be delivered in connection therewith;
(d) a Borrowing Base Certificate setting forth the Borrowing
Base within 5 business days prior to the date hereof;
(e) payment of all reasonable fees, including those due under
Section 3 of this Amendment and all reasonable legal fees due Cummings &
Lockwood as counsel to the Administrative Agent;
(f) such other agreements and instruments as the Administrative
Agent shall reasonably require.
6. Reaffirmation by the Borrowers. Each of the Borrowers
acknowledges, agrees, and reaffirms, both prior to and after taking into account
this Amendment, that each is legally, validly, and enforceably indebted to the
Banks under the Notes without defense, counterclaim, or offset, and that each is
legally, validly, and enforceably liable to the Banks
<PAGE> 11
11
for all costs and expenses of collection and reasonable attorneys' fees as and
to the extent provided in this Amendment, the Credit Agreement, the Notes, and
the other Facility Documents. Each of the Borrowers hereby restates and agrees
to be bound by all covenants contained in the Credit Agreement and the other
Facility Documents and hereby reaffirms that all of the representations and
warranties contained in the Credit Agreement and the other Facility Documents
remain true and correct in all material respects with the exception that the
representations and warranties regarding the financial statements described
therein are deemed true as of the date made. Each of the Borrowers represents
that, except as set forth in the Credit Agreement and the other Facility
Documents, there are neither pending, nor to each Borrower's knowledge,
threatened, legal proceedings to which any of the Borrowers is a party that
materially or adversely affect the transactions contemplated by this Amendment
or the ability of any of the Borrowers to conduct its business on a consolidated
basis. Cannondale and Cannondale Europe B.V. each acknowledge and represent that
the resolutions of each dated January 6, 1999, in the case of Cannondale, and
January 19, 1999, and January 21, 1999, in the case of Cannondale Europe B.V.,
remain in full force and effect and have not been amended, modified, rescinded,
or otherwise abrogated.
7. Reaffirmation re: Collateral. Cannondale reaffirms the mortgages,
liens, security interests, and pledges granted to Bank of America, N.A.
(successor-in-interest to NationsBank, N.A.), as Administrative Agent, for the
benefit of the Banks pursuant to the Credit Agreement and the other Facility
Documents to secure the obligations of each Borrower thereunder.
8. Other representations by the Borrowers. Each of the Borrowers
represents and confirms that: (a) no Default or Event of Default has occurred
and is continuing, and that neither the Agents nor the Banks has given its
consent to or waived any Default or Event of Default other than as expressly set
forth herein, and (b) the Credit Agreement and the other Facility Documents are
in full force and effect and enforceable against the Borrowers in accordance
with the terms thereof. Each of the Borrowers represents and confirms that as of
the date hereof, each has no claim or defense (and each of the Borrowers hereby
waives every claim and defense as of the date hereof) against the Agents or the
Banks arising out of or relating to the Credit Agreement or the other Facility
Documents or arising out of or relating to the making, administration, or
enforcement of the Loans or the remedies provided for under the Facility
Documents.
9. Miscellaneous.
(a) This Amendment may be executed by one or more of the
parties to this Amendment on any number of separate counterparts (including by
facsimile transmission), and all of said counterparts taken together shall be
deemed to constitute one and the same instrument.
<PAGE> 12
12
(b) This Amendment and the rights and obligations of the
parties hereunder shall be governed by, and construed in accordance with, the
laws of the State of New York.
(c) This Amendment shall be deemed a, and included in the
definition of, Facility Document under the Credit Agreement for all purposes.
(d) The Credit Agreement, as amended hereby, and the other
Facility Documents remain in full force and effect in accordance with their
terms.
[The balance of this page left intentionally blank. The next page is the
signature page.]
<PAGE> 13
13
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first written above.
BORROWERS
CANNONDALE CORPORATION
By /S/ WILLIAM A. LUCA
------------------------------
Name: William A. Luca
Title: Vice President, Treasurer,
Chief Financial Officer
CANNONDALE EUROPE B.V.
By /S/ BEPPO HILFIKER
--------------------
Name: Beppo Hilfiker
Title: Managing Director
CANNONDALE JAPAN K.K.
By /S/ BILL CONRADT
------------------
Name: Bill Conradt
Title: President, Cannondale Japan
ADMINISTRATIVE AGENT
BANK OF AMERICA, N.A.
By /S/ JOHN W. POCALYKO
----------------------
Name: John W. Pocalyko
Title: Managing Director
<PAGE> 14
14
BANKS
BANK OF AMERICA, N.A.
By /S/ JOHN W. POCALYCO
----------------------
Name: John W. Pocalyko
Title: Managing Director
FLEET NATIONAL BANK
By
----------------------------------
Name:
Title:
THE CHASE MANHATTAN BANK
By /S/ THOMAS D. MCCORMICK
-------------------------
Name: Thomas D. McCormick
Title: Vice President
CITIZENS BANK OF MASSACHUSETTS
By /S/ ARLENE M. DOHERTY
-----------------------
Name: Arlene M. Doherty
Title: Vice President
BANKBOSTON, N.A.
By
----------------------------------
Name:
Title:
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-01-2000
<PERIOD-START> JUL-04-1999
<PERIOD-END> JAN-01-2000
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0
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<COMMON> 88
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