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
September 29, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________
to ________
Commission File Number 0-24884
CANNONDALE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 06-0871823
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16 TROWBRIDGE DRIVE, BETHEL, CONNECTICUT 06801
(Address of principal executive offices) (Zip code)
(203) 749-7000
(Registrant's telephone number, including area code)
------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No__.
The number of shares outstanding of the issuer's Common Stock, $.01 par value
per share, as of November 7, 2001 was 7,543,364.
INDEX
Page
Part I Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 29, 2001,
June 30, 2001 and September 30, 2000...............................1
Condensed Consolidated Statements of Operations for the three
months ended September 29, 2001 and September 30, 2000.............2
Condensed Consolidated Statements of Cash Flows for the three
months ended September 29, 2001 and September 30, 2000.............3
Notes to Condensed Consolidated Financial Statements...............4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.................................................15
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K............................16
Signature....................................................................17
i
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CANNONDALE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 29, JUNE 30, 2001 SEPTEMBER 30,
2001 2000
(UNAUDITED) (UNAUDITED)
------------ ------------- -------------
ASSETS
Current assets:
Cash...................................... $ 929 $ 2,155 $ 2,748
Trade accounts receivable, less allowances
of $11,710, $11,270 and $10,537........ 38,604 43,762 42,249
Inventories............................... 41,836 37,759 41,092
Prepaid expenses and other current assets. 2,928 2,773 2,956
Deferred income taxes..................... - - 5,715
Interest receivable from a related party.. - - 196
---------- ---------- ----------
Total current assets...................... 84,297 86,449 94,956
Property, plant and equipment, net........ 35,042 35,628 38,824
Notes receivable and advances to related
parties................................ 1,391 1,441 13,231
Other assets.............................. 4,044 4,273 7,534
---------- ---------- ----------
Total assets.............................. $ 124,774 $ 127,791 $ 154,545
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................... $ 16,889 $ 15,351 $ 14,429
Revolving credit advances................. 2,614 866 1,384
Income taxes payable...................... 321 294 783
Deferred income taxes..................... 60 81 -
Warranty and other accrued expenses....... 7,689 8,279 6,713
Current installments of long-term debt.... 4,993 5,004 4,393
---------- ---------- ----------
Total current liabilities.................... 32,566 29,875 27,702
Long-term debt, less current installments.... 43,978 46,434 58,467
Subordinated debenture to a related party.... 2,000 2,000 -
Other noncurrent liabilities................. 417 427 415
---------- ---------- ----------
Total liabilities............................ 78,961 78,736 86,584
---------- ---------- ----------
Commitments and contingencies................ - - -
Stockholders' equity:
Common stock, $.01 par value:
Authorized shares - 40,000,000
Issued shares - 8,836,264, 8,836,264
and 8,808,125........................ 88 88 88
Additional paid-in capital................ 58,423 58,423 57,935
Retained earnings......................... 14,360 18,483 37,175
Less 1,292,900 shares in treasury at cost. (20,162) (20,162) (20,162)
Accumulated other comprehensive loss...... (6,896) (7,777) (7,075)
---------- ---------- ----------
Total stockholders' equity................... 45,813 49,055 67,961
---------- ---------- ----------
Total liabilities and stockholders' equity... $ 124,774 $ 127,791 $ 154,545
========== ========== ==========
SEE ACCOMPANYING NOTES.
1
CANNONDALE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 29, SEPTEMBER 30,
2001 2000
---- ----
(UNAUDITED) (UNAUDITED)
Net sales................................. $ 34,154 $ 36,687
Cost of sales............................. 27,001 26,725
---------- ----------
Gross profit.............................. 7,153 9,962
---------- ----------
Expenses:
Selling, general and administrative... 9,033 9,469
Research and development.............. 1,269 1,962
---------- ----------
10,302 11,431
---------- ----------
Operating loss............................ (3,149) (1,469)
---------- ----------
Other income (expense):
Interest expense...................... (1,148) (1,788)
Other income.......................... 94 274
---------- ----------
(1,054) (1,514)
---------- ----------
Pretax loss............................... (4,203) (2,983)
Income tax benefit........................ 80 1,356
---------- ----------
Net loss.................................. $ (4,123) $ (1,627)
========== ==========
Basic and diluted loss per share.......... $ (0.55) $ (0.22)
========== ==========
SEE ACCOMPANYING NOTES.
2
CANNONDALE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 29, SEPTEMBER 30,
2001 2000
---- ----
(UNAUDITED) (UNAUDITED)
NET CASH PROVIDED BY OPERATING ACTIVITIES............... $ 1,298 $ 3,241
-------- --------
INVESTING ACTIVITIES:
Loans provided to related parties....................... (3) (47)
Repayments of loans provided to related parties......... 55 13
Capital expenditures.................................... (1,104) (807)
Proceeds from sale of equipment......................... 8 -
-------- --------
Net cash used in investing activities................... (1,044) (841)
-------- --------
FINANCING ACTIVITIES:
Net proceeds from (repayments of) borrowings under
short-term revolving credit agreements............... 1,676 (719)
Net repayments of borrowings under long-term debt and
capital lease agreements............................. (3,040) (4,140)
-------- --------
Net cash used in financing activities................... (1,364) (4,859)
-------- --------
Effect of exchange rate changes on cash................. (116) 143
-------- --------
Net decrease in cash.................................... (1,226) (2,316)
Cash at beginning of period............................. 2,155 5,064
-------- --------
Cash at end of period................................... $ 929 $ 2,748
======== ========
SEE ACCOMPANYING NOTES.
3
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 (together with its subsidiaries collectively referred to
as we, us and our) have been prepared in accordance with accounting principles
generally accepted in the United States 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
accounting principles generally accepted in the United States for complete
financial statements. In our opinion, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three-month period ended September 29, 2001
are not necessarily indicative of the results that may be expected for the year
ending June 29, 2002. For further information, refer to the consolidated
financial statements and footnotes thereto for the year ended June 30, 2001
included in our annual report on Form 10-K.
The Condensed Consolidated Balance Sheet at June 30, 2001 has been derived from
the audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
RECLASSIFICATIONS
Certain fiscal 2001 amounts have been reclassified to conform to the current
year's presentation.
ACCOUNTING DEVELOPMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." These Statements change
the accounting for business combinations, goodwill, and intangible assets. SFAS
No. 141 eliminates the pooling-of-interests method of accounting for business
combinations and changes the criteria to recognize intangible assets apart from
goodwill in a business combination. SFAS No. 142 requires that goodwill and
other indefinite lived intangible assets may no longer be amortized but must be
reviewed annually, or more frequently if impairment indicators arise, for
impairment. Goodwill and other indefinite lived intangible assets are required
to be tested for impairment between annual tests if an event occurs or
circumstances change indicating that the asset might be impaired. Separable
intangible assets that have finite lives will continue to be amortized over
their useful lives, for which SFAS No. 142 does not impose a limit. We adopted
SFAS No. 142 as of the beginning of fiscal 2002; such adoption did not have a
material effect on our operating results or financial position as no impairment
charges were recorded at that time. The net book value of goodwill as of
September 29, 2001 was $215,000.
The FASB recently issued SFAS No. 144, "Accounting for the Impairment or
Disposals of Long-Lived Assets," which broadens the presentation of discontinued
operations within financial statements to include more disposal transactions.
The Statement permits a component of an entity (rather than a segment) with
distinguishable operations and cash flows to be eligible for
4
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
discontinued
operation disclosure in the financial statements, and it requires that future
operating losses from discontinued operations be recognized in the periods in
which losses are incurred rather than as of the measurement date. In addition,
the Statement prescribes that goodwill is no longer allocated to long-lived
assets for purposes of impairment testing, and describes a probability-weighted
cash flow estimation approach to determine recovery of the carrying amounts of
long-lived assets. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001. At this time, we cannot estimate the impact on our operating
results or financial position as a result of adopting this Statement.
2. INVENTORIES
The components of inventories are as follows (in thousands):
SEPTEMBER 29, SEPTEMBER 30,
2001 JUNE 30, 2001 2000
(UNAUDITED) (UNAUDITED)
----------- ------------- -------------
Raw materials............................... $ 23,171 $ 21,682 $ 24,561
Work-in-process............................. 3,620 2,514 2,084
Finished goods.............................. 18,189 16,117 16,536
---------- ---------- ----------
44,980 40,313 43,181
Less reserve for obsolete inventories....... (3,144) (2,554) (2,089)
------------ ------------ ------------
$ 41,836 $ 37,759 $ 41,092
========= ========= =========
3. LOSS PER SHARE AMOUNTS
The following tables present the numerator and denominator of the basic and
diluted loss per share computations and other related disclosures required by
SFAS No. 128, "Earnings Per Share" (in thousands, except loss per share data):
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 29, SEPTEMBER 30,
2001 2000
---- ----
(UNAUDITED) (UNAUDITED)
NUMERATOR:
Numerator for basic and diluted loss per
share-net loss............................ $ (4,123) $ (1,627)
DENOMINATOR:
Denominator for basic and diluted loss per
share-weighted-average shares............. 7,543 7,515
---------- ----------
Basic and diluted loss per share............ $ (0.55) $ (0.22)
=========== ==========
5
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In the following table, we summarize the average number of options to purchase
shares of our common stock at the respective ranges of exercise prices which we
did not include in the computation of diluted loss per share. For the periods
indicated, inclusion of such options would result in an antidilutive effect due
to the net loss incurred.
OPTIONS RANGE OF EXERCISE PRICES
------- ------------------------
THREE MONTHS ENDED SEPTEMBER 29, 2001... 3,184,254 $ 0.34 - $10.38
THREE MONTHS ENDED SEPTEMBER 30, 2000... 2,507,112 $ 0.34 - $15.00
We did not include the 977,777 potentially convertible shares related to the
8.0% subordinated debentures in the computation of diluted loss per share for
the three months ended September 29, 2001 as the effect would be antidilutive
due to the net loss incurred.
4. COMPREHENSIVE INCOME (LOSS)
Pursuant to the provisions of SFAS No. 130, "Reporting Comprehensive Income,"
our comprehensive loss is as follows, (in thousands):
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 29, SEPTEMBER 30,
2001 2000
---- ----
(UNAUDITED) (UNAUDITED)
Net loss.................................... $ (4,123) $ (1,627)
Net accumulated derivative gains (losses)... (134) 115
Foreign currency translation gains (losses). 1,015 (1,213)
---------- ---------
Total comprehensive loss.................... $ (3,242) $ (2,725)
========== =========
The accumulated derivative gain and loss activity relating to cash flow hedges
for the three months ended September 29, 2001 and September 30, 2000 is as
follows (in thousands):
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 29, SEPTEMBER 30,
2001 2000
---- ----
(UNAUDITED) (UNAUDITED)
Beginning accumulated derivative gains...... $ 16 $ -
Revaluations of cash flow hedge derivatives. (126) 244
Net reclassifications to earnings........... (8) (129)
------- --------
Ending net accumulated derivative gains
(losses).................................. $ (118) $ 115
======= ========
6
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The components of the accumulated other comprehensive loss are as follows (in
thousands):
SEPTEMBER 29, JUNE 30, SEPTEMBER 30,
2001 2001 2000
---- ---- ----
(UNAUDITED) (UNAUDITED)
Net accumulated derivative gains (losses)... $ ( 118) $ 16 $ 115
Foreign currency translation adjustments.... (6,778) (7,793) (7,190)
--------- --------- ---------
Accumulated other comprehensive loss........ $ (6,896) $ (7,777) $ (7,075)
========= ========= =========
5. OPERATIONS BY INDUSTRY SEGMENTS
In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," our reportable segments are Bicycles and Motorsports.
We operate 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. We are also an emerging player in the motorsports industry
with our line of ATVs and our motocross motorcycles, related accessories and
clothing. There are no sales between the segments.
Summarized segment data is as follows (in thousands):
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 29, SEPTEMBER 30,
2001 2000
---- ----
(UNAUDITED) (UNAUDITED)
Net sales to external customers:
Bicycles............................... $ 33,039 $ 35,148
Motorsports............................ 1,115 1,539
---------- ---------
$ 34,154 $ 36,687
========== =========
Operating income (loss):
Bicycles............................... $ 2,768 $ 1,810
Motorsports............................ (5,917) (3,279)
---------- ---------
$ (3,149) $ (1,469)
========== =========
7
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
We evaluate performance of our segments based on profit or loss from operations.
The amounts below are not allocated between the segments (in thousands):
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 29, SEPTEMBER 30,
2001 2000
---- ----
(UNAUDITED) (UNAUDITED)
Total operating loss for reportable
segments........................... $ (3,149) $ (1,469)
Other income (expense):
Interest expense................. (1,148) (1,788)
Other income..................... 94 274
--------- ---------
(1,054) (1,514)
--------- ---------
Pretax loss.......................... (4,203) (2,983)
Income tax benefit.................. 80 1,356
--------- ---------
Net loss............................. $ (4,123) $ (1,627)
========= =========
Summarized segment assets are as follows (in thousands):
SEPTEMBER 29, 2001 JUNE 30, 2001 SEPTEMBER 30, 2000
------------------ ------------- ------------------
(UNAUDITED) (UNAUDITED)
Indentifiable assets:
Bicycles........................... $ 99,210 $ 103,024 $ 135,024
Motorsports........................ 25,564 24,767 19,521
---------- ---------- -----------
$ 124,774 $ 127,791 $ 154,545
========== ========== ===========
6. NET DEFERRED TAX ASSETS
The significant components of our deferred tax assets and liabilities at
September 29, 2001, June 30, 2001 and September 30, 2000 are as follows (in
thousands):
SEPTEMBER 29, JUNE 30, SEPTEMBER 30,
2001 2001 2000
---- ---- ----
(UNAUDITED) (UNAUDITED)
Deferred tax assets:
Accounts receivable and inventory
reserves........................... $ 3,002 $ 2,524 $ 2,299
Accrued liabilities................... 1,077 1,187 1,140
Tax credits and NOL carryforwards..... 18,744 12,017 6,392
Other................................. 870 805 1,003
---------- ----------- -----------
Total deferred assets................. 23,693 16,533 10,834
---------- ----------- -----------
8
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 29, JUNE 30, SEPTEMBER 30,
2001 2001 2000
---- ---- ----
(UNAUDITED) (UNAUDITED)
Deferred tax liabilities:
Tax over book depreciation............ (1,273) (1,415) (1,541)
Accounts receivable fair value (215) (286) (501)
adjustment.........................
Other................................. (2,390) (1,830) (983)
---------- ----------- -----------
Total deferred liabilities............ (3,878) (3,531) (3,025)
---------- ----------- -----------
Net deferred tax asset before valuation
allowance.............................. 19,815 13,002 7,809
Valuation allowance....................... (19,875) (13,083) -
---------- ----------- -----------
Net deferred tax asset (liability)........ $ (60) $ (81) $ 7,809
========== =========== ===========
We established a valuation allowance as of December 30, 2000 for the excess of
Cannondale U.S. and Cannondale Japan's deferred tax assets over deferred tax
liabilities, and have adjusted the valuation allowance on a quarterly basis
since that time. Although we ultimately expect to realize these tax benefits in
future years, SFAS No. 109, "Accounting for Income Taxes," requires the
establishment of a valuation allowance when there is uncertainty as to the
realizability of deferred tax assets. The deferred tax assets will be recognized
in future periods to the extent that we reasonably expect such assets to be
realized. If we determine a portion or all of the valuation allowance to be
unnecessary, the related tax benefits will be recorded at such time.
During the first quarter of fiscal 2002, Cannondale U.S. received dividends from
Cannondale Europe totalling approximately $1.6 million. Cannondale U.S. has
provided for additional U.S. federal income taxes representing the net tax
impact of the dividends after the effect of foreign tax credit adjustments,
which offset the majority of the U.S. federal income taxes generated by these
dividends.
7. DERIVATIVES AND HEDGING ACTIVITIES
We enter into forward foreign currency contracts to purchase and sell U.S.,
European, Australian, Canadian and Japanese currencies to reduce exposures to
foreign currency risks. The forward exchange contracts generally have maturities
that do not exceed 12 months and require us to exchange at maturity various
currencies for U.S. dollars and Euros at rates agreed to at the inception of the
contracts.
At September 29, 2001, we had approximately $29.0 million of forward exchange
contracts outstanding. Of these contracts outstanding, approximately $23.3
million were designated as effective cash flow hedges. We use forward foreign
currency contracts as cash flow hedges to
9
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
mitigate foreign currency risks related to the settlements of forecasted
sales and purchase transactions. For these foreign currency forward contracts
designated as cash flow hedges, we report the changes in fair value as a
component of other comprehensive income and reclassify such amounts into
earnings in the same period or periods which the underlying hedged
transactions affect earnings. The total net accumulated derivative
losses of $118,000 included in the accumulated other comprehensive loss at
September 29, 2001 are expected to be reclassified into earnings within the
next 12 months upon settlement of the related hedged item (accounts
receivable or sale of inventory to a third party). There was no hedge
ineffectiveness between the forward contract derivatives and the underlying
hedged items relating to these cash flow hedges during the first quarter of
fiscal 2002 as both were equally affected by exchange rate fluctuations. The
net expense relating to amortization of premiums and discounts of cash flow
hedges was not material to either our operating results or financial position
for the quarter ended September 29, 2001 and is included in other income
(expense) on the Condensed Consolidated Statement of Operations. As of
September 29, 2001, the maximum period of time we were hedging our exposure to
the variability in future cash flows for forecasted transactions was nine
months.
The remaining foreign exchange contracts outstanding at September 29, 2001 were
not designated as hedging instruments. For these derivatives, gains and losses
were recognized immediately in earnings during the period of change.
At September 29, 2001, the fair value of forward foreign contracts in gain (i.e.
asset) positions was approximately $227,000, and the fair value of forward
foreign contracts in loss (i.e. liability) positions was approximately
($332,000). These fair values were determined based upon current forward rates
applicable to the remaining terms of the forward contracts as of September 29,
2001.
8. SHIPPING AND HANDLING FEES AND COSTS
In accordance with EITF Issue 00-10, "Accounting for Shipping and Handling Fees
and Costs", we have included all shipping and handling billings within net
sales, and freight costs incurred for product shipments within selling, general
and administrative expenses. For the quarterly periods ended September 29, 2001
and September 30, 2000, shipping and handling billings of approximately $534,000
and $449,000, respectively, have been included in net sales, and freight costs
of approximately $593,000 and $764,000, respectively, have been included in
selling, general and administrative expenses.
9. LONG-TERM DEBT
As of September 29, 2001, we were not in compliance with one of the financial
covenants of our borrowing facilities with The CIT Group/Business Credit Inc.
and Ableco Finance LLC. The lenders have waived the covenant non-compliance and
the financing agreements with these lenders will be amended effective as of
Septmeber 29, 2001.
10
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. LITIGATION
We currently and from time to time are involved in product liability lawsuits
and other litigation incidental to the conduct of our business. We are not a
party to any lawsuit or proceeding that, in the opinion of management, is likely
to have a material adverse effect on our results of operations, cash flows or
financial condition; however, due to the inherent uncertainty of litigation we
can give no assurance that the resolution of any particular claim or proceeding
would not have a material adverse effect on our results of operations, cash
flows or financial condition.
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NET SALES. Our net sales decreased to $34.2 million in the first quarter of
fiscal 2002 from $36.7 million in the first quarter of fiscal 2001, a decrease
of approximately $2.5 million or 7%. Included in the above sales amounts are
motorsports sales of approximately $1.1 million for the first quarter of fiscal
2002 and approximately $1.5 million for the first quarter of fiscal 2001. The
sales shortfall for the first quarter of fiscal 2002 compared to the same period
last year is primarily attributable to the delay in receipt of parts from our
suppliers coupled with a slowdown in consumer demand. In addition, motorsports
shipments were interrupted due to the unavailability of parts.
GROSS PROFIT. Gross profit was $7.2 million in the first quarter of fiscal 2002,
a decrease of approximately $2.8 million from the gross profit in the first
quarter of fiscal 2001 of $10.0 million. Gross profit as a percentage of net
sales in the first quarter of fiscal 2002 decreased to 20.9% compared to 27.2%
for the first quarter of fiscal 2001. The decrease in gross profit dollars and
gross profit as a percentage of net sales was primarily attributable to the
continuing production start-up costs of the motorsports products which were not
proportionately offset by revenues. Bicycle margins for the first quarter of
fiscal 2002 were 33.5% compared to 32.9% in the prior year primarily as a result
of a more favorable product mix coupled with cost reductions.
OPERATING EXPENSES. Operating expenses were $10.3 million for the first quarter
of fiscal 2002, a decrease of $1.1 million, or 10%, from the $11.4 million
recorded for the first quarter of fiscal 2001.
Selling, general and administrative expenses decreased to $9.0 million for the
first quarter of fiscal 2002, from $9.5 million recorded during the prior-year
period. Decreased selling, general and administrative expenses during the first
quarter of fiscal 2002 resulted from our continued cost-reduction efforts and a
reduction in those Bicycle segment expenses tied directly to sales volume, such
as warranty and freight. Motorsports selling, general and administrative
expenses for the first quarter of fiscal 2002 were slightly higher than in the
comparable prior-year period, primarily as a result of increased warranty and
insurance costs. As a percentage of net sales, selling, general and
administrative expenses represented 26.4% for the first quarter of fiscal 2002
compared to 25.8% for the prior-year period.
Research and development expenses decreased to $1.3 million in the first quarter
of fiscal 2002, from $2.0 million recorded during the prior-year period. The
decrease in research and development expenses during the first quarter of fiscal
2002 primarily reflects the transition of our new ATV models from the
development stage to production, as well as the timing of bicycle research and
development projects. We invested approximately $680,000 in research and
development for our motorsports products during the first quarter of fiscal 2002
compared to approximately $992,000 during the same period last year. As a
percentage of net sales, research and development expenses were 3.7% for the
first quarter of fiscal 2002 compared to 5.3% for the first quarter of fiscal
2001.
12
OTHER INCOME (EXPENSE). Interest expense decreased to $1.1 million in the first
quarter of fiscal 2002 from $1.8 million recorded during the prior-year period.
Such decrease is a result of our lower average debt balances, due to the $12.0
million paydown of debt at the end of the second quarter of fiscal 2001, and
lower interest rates, due to the decreases in the prime rate, for the first
quarter of fiscal 2002 compared to the first quarter of fiscal 2001. For the
first quarters of fiscal 2002 and 2001, other income primarily consisted of
finance charge income from accounts receivable, offset by foreign exchange
losses; additionally, for the first quarter of fiscal 2001, interest income from
the loan to Joseph Montgomery, totaling approximately $303,000, was included in
other income.
INCOME TAXES. For the three months ended September 29, 2001, the income tax
benefit was $80,000 compared to the income tax benefit of $1.4 million recorded
for the three months ended September 30, 2000. The significant change in the
income tax benefit relates to a deferred tax asset valuation allowance which we
originally established in the second quarter of fiscal 2001. Although we
ultimately expect to realize our net deferred tax assets in future years,
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," requires the establishment of a valuation allowance when there is
uncertainty as to the realizability of deferred tax assets. See Note 6 in the
Notes to the Condensed Consolidated Financial Statements for further discussion.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $1.3 million for the first quarter
of fiscal 2002, a decrease of approximately $1.9 million compared to $3.2
million of net cash provided by operating activities for the first quarter of
fiscal 2001. The decrease in net cash provided by operating activities during
the first quarter of fiscal 2002 compared to the same period last year reflects
the larger increase in bicycle inventories and no interest collections relating
to the note from Joseph Montgomery, partially offset by a decrease in receivable
levels and an increase in payable levels.
Capital expenditures were $1.1 million for the first quarter of fiscal 2002,
compared to $800,000 for the first quarter of fiscal 2001. Our capital
expenditures during the first quarters of fiscal 2002 and 2001 principally
related to tooling used in the production of motorsports products.
Net cash used by financing activities for the first quarter of fiscal 2002 was
$1.4 million, compared to the $4.9 million of net cash used in financing
activities for the first quarter of fiscal 2001. The net cash used in financing
activities during the first quarters of fiscal 2002 and 2001 primarily reflects
the decreases in our working capital levels during the respective quarters and
the corresponding reductions in our revolving debt. At September 29, 2001, the
remaining availability under our revolving line of credit with the CIT
Group/Business Credit Inc. was approximately $5.6 million, and availability
under the borrowing facility with IFN Finance, B.V. was approximately $4.6
million.
As of September 29, 2001, we were not in compliance with one of the financial
covenants of our borrowing facilities with The CIT Group/Business Credit Inc.
and Ableco Finance LLC. The lenders have waived the covenant non-compliance and
the financing agreements with these lenders will be amended as of September 29,
2001.
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We expect that cash flow generated by our operations and borrowings under our
financing facilities will be sufficient to meet our planned operating and
capital requirements for at least the next 12 months in light of currently known
and estimable trends.
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. These include
statements about anticipated financial performance, future revenues or earnings,
business prospects, new products, anticipated market performance, planned
production and shipping of motorsports products, expected cash needs,
availability of additional financing, future compliance with the terms and
conditions of financing facilities and similar matters. In addition, the words
"anticipate," "project," "plan," "intend," "estimate," "expect," "may,"
"believe" and similar words are intended to identify the statements that are
forward-looking statements. All forward-looking statements involve risks and
uncertainties. Actual results may differ materially from those discussed in, or
implied by, the forward-looking statements as a result of certain factors,
including, but not limited to: seasonality, the timing of the introduction and
the market acceptance of new products, competition, changes in foreign exchange
rates, general economic conditions, credit risks related to our customer base,
adverse weather, our reliance on key vendor and supplier relationships, the
effectiveness of our dealer networks and our internal sales teams, our limited
motorsports products experience, our ability to obtain additional equity or debt
financing when needed, changes in discretionary consumer spending, our
dependence on key personnel and potential dilution of shareholder ownership.
Please refer to the "Management's Discussion and Analysis of Financial Condition
and Results of Operations" contained in our annual report on Form 10-K for the
fiscal year ended June 30, 2001 for a description of these risk factors which
may affect our future results.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to our operations result primarily from changes in
interest rates and foreign exchange rates, as well as credit risk
concentrations. To address these risks, we enter into various hedging
transactions as described below. We do not use financial instruments for trading
purposes. For further discussion of the quantitative and qualitative aspects of
market risk, see Part II Item 7A of our annual report on Form 10-K for the
fiscal year ended June 30, 2001.
CREDIT RISKS.
Our customer base is comprised of specialty bicycle and motorsports retailers
which are located principally throughout the United States and Europe. Our net
sales are concentrated in the United States and Germany. No other single country
accounted for more than 10% of our net sales during the first quarter of fiscal
2002. No single customer accounted for more than 5% of our net sales during the
first quarter of fiscal 2002. As a result of the seasonality of our business,
the payment terms offered to our bicycle dealers generally range from 30 to 210
days depending on the time of year and other factors. For the majority of our
motorsports sales, our dealers use a third-party financial services organization
to finance their inventory purchases whereby we receive payment from such
organization for all motorsports shipments within a specified period of time
(not exceeding 60 days), less an interest factor. All other products are sold
with payment terms from 30 to 60 days.
FOREIGN CURRENCY RISKS.
We enter into forward foreign currency contracts to purchase and sell U.S.,
European, Australian, Canadian and Japanese currencies to reduce exposures to
foreign currency risks. The forward exchange contracts generally have maturities
that do not exceed 12 months and require us to exchange at maturity various
currencies for U.S. dollars and Euros at rates agreed to at the inception of the
contracts.
At September 29, 2001, we had approximately $29.0 million of forward exchange
contracts outstanding. Of these contracts outstanding, approximately $23.3
million were designated as effective cash flow hedges. We use forward foreign
currency contracts as cash flow hedges to mitigate foreign currency risks
related to the settlements of forecasted sales and purchase transactions. For
these foreign currency forward contracts designated as cash flow hedges, we
report the changes in fair value as a component of other comprehensive income
and reclassify such amounts into earnings in the same period or periods which
the underlying hedged transactions affect earnings. As of September 29, 2001,
the maximum period of time we were hedging our exposure to the variability in
future cash flows for forecasted transactions was nine months.
The remaining foreign exchange contracts outstanding at September 29, 2001 were
not designated as hedging instruments. For these derivatives, gains and losses
were recognized immediately in earnings during the period of change.
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PART II OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
We did not file any reports on Form 8-K during the quarter ended
September 29, 2001.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CANNONDALE CORPORATION
Date: November 13, 2001 /S/ WILLIAM A. LUCA
-----------------------------
William A. Luca
Vice President of Finance, Treasurer,
Chief Financial Officer and Chief
Operating Officer
(Principal Financial Officer
and authorized signatory)
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