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 December 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 February 8, 2002 was 7,560,321.
INDEX
PAGE
Part I Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of December 29,
2001, June 30, 2001 and December 30, 2000..........................1
Condensed Consolidated Statements of Operations for the three
and six months ended December 29, 2001 and December 30, 2000.......2
Condensed Consolidated Statements of Cash Flows for the six
months ended December 29, 2001 and December 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.................................................16
Part II Other Information
Item 4. Submission of Matters to a Vote of Security Holders.........17
Item 6. Exhibits and Reports on Form 8-K............................17
Signature....................................................................18
i
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CANNONDALE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 29, JUNE 30, DECEMBER 30,
2001 2001 2000
------------ -------- ------------
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash.................................. $ 1,940 $ 2,155 $ 2,602
Trade accounts receivable, less allowances
of $11,569, $11,270 and $11,444.... 43,000 43,762 46,546
Inventories........................... 44,133 37,759 45,379
Prepaid expenses and other current
assets................................ 3,671 2,773 3,114
---------- ---------- ---------
Total current assets.................. 92,744 86,449 97,641
Property, plant and equipment, net.... 33,603 35,628 38,214
Notes receivable and advances to related
parties............................ 1,385 1,441 1,293
Other assets.......................... 4,151 4,273 4,630
---------- ---------- ---------
Total assets.......................... $ 131,883 $ 127,791 $ 141,778
========== ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................... $ 16,300 $ 15,351 $ 14,949
Revolving credit advances............. 4,751 866 1,802
Income taxes payable.................. 368 294 105
Deferred income taxes................. 21 81 23
Warranty and other accrued expenses... 8,814 8,279 8,650
Subordinated debenture to a
related party...................... 2,000 - -
Current installments of long-term
debt............................... 56,747 5,004 58,022
---------- ---------- ----------
Total current liabilities................ 89,001 29,875 83,551
Long-term debt, less current
installments....................... - 46,434 -
Subordinated debenture to a
related party...................... - 2,000 -
Other noncurrent liabilities............. 408 427 406
---------- ---------- ----------
Total liabilities........................ 89,409 78,736 83,957
---------- ---------- ----------
Commitments and contingencies............ - - -
Stockholders' equity:
Common stock, $.01 par value:
Authorized shares - 40,000,000
Issued shares - 8,853,221,
8,836,264 and 8,821,871............ 89 88 88
Additional paid-in capital............ 58,454 58,423 57,978
Retained earnings..................... 10,954 18,483 26,604
Less 1,292,900 shares in treasury at
cost............................... (20,162) (20,162) (20,162)
Accumulated other comprehensive loss.. (6,861) (7,777) (6,687)
---------- ---------- ----------
Total stockholders' equity............... 42,474 49,055 57,821
---------- ---------- ----------
Total liabilities and stockholders'
equity............................. $ 131,883 $ 127,791 $ 141,778
========== ========== ==========
SEE ACCOMPANYING NOTES.
1
CANNONDALE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 29, DECEMBER 30, DECEMBER 29, DECEMBER 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net sales................................. $ 37,783 $ 34,687 $ 71,937 $ 71,374
Cost of sales............................. 28,796 24,469 55,797 51,194
---------- ---------- --------- ----------
Gross profit.............................. 8,987 10,218 16,140 20,180
---------- ---------- --------- ----------
Expenses:
Selling, general and administrative... 9,828 8,801 18,861 18,270
Research and development.............. 1,376 1,955 2,645 3,917
---------- ---------- --------- ----------
11,204 10,756 21,506 22,187
---------- ---------- --------- ----------
Operating loss............................ (2,217) (538) (5,366) (2,007)
---------- ---------- --------- ----------
Other income (expense):
Interest expense...................... (1,152) (1,762) (2,300) (3,550)
Other income (expense) ............... (26) 117 68 391
---------- ---------- --------- ----------
(1,178) (1,645) (2,232) (3,159)
---------- ---------- --------- ----------
Loss before income taxes and extraordinary
item.................................... (3,395) (2,183) (7,598) (5,166)
Income tax (expense) benefit ............. (11) (7,836) 69 (6,480)
---------- ---------- --------- ----------
Loss before extraordinary item............ (3,406) (10,019) (7,529) (11,646)
Extraordinary loss from early
extinguishment of debt, net of $0 tax
benefit................................ - (552) - (552)
---------- ---------- --------- ----------
Net loss.................................. $ (3,406) $ (10,571) $ (7,529) $ (12,198)
========== ========== ========= ==========
Basic and diluted loss per share before
extraordinary item..................... $ (0.45) $ (1.34) $ (1.00) $ (1.55)
Extraordinary loss per share.............. - (0.07) - (0.07)
---------- ---------- --------- ----------
Basic and diluted loss per share.......... $ (0.45) $ (1.41) $ (1.00) $ (1.62)
========== ========== ========= ==========
SEE ACCOMPANYING NOTES.
2
CANNONDALE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED SIX MONTHS ENDED
DECEMBER 29, 2001 DECEMBER 30, 2000
----------------- -----------------
(UNAUDITED) (UNAUDITED)
NET CASH USED IN OPERATING ACTIVITIES................... $ (7,848) $ (3,012)
--------- ---------
INVESTING ACTIVITIES:
Loans provided to related parties....................... (3) (118)
Repayments of loans provided to related parties......... 60 12,022
Capital expenditures.................................... (1,516) (2,005)
Proceeds from sale of equipment......................... 8 12
--------- ---------
Net cash provided by (used in) investing activities..... (1,451) 9,911
--------- ---------
FINANCING ACTIVITIES:
Net proceeds from issuance of common stock.............. 32 43
Payments for early extinguishment of debt............... - (12,000)
Net proceeds from (repayments of) borrowings under
short-term revolving credit agreements............... 9,047 (277)
Net proceeds from borrowings under long-term debt and
capital lease agreements............................. - 2,291
--------- ---------
Net cash provided by (used in) financing activities..... 9,079 (9,943)
--------- ---------
Effect of exchange rate changes on cash................. 5 582
--------- ---------
Net decrease in cash.................................... (215) (2,462)
Cash at beginning of period............................. 2,155 5,064
--------- ---------
Cash at end of period................................... $ 1,940 $ 2,602
========= =========
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" or "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- and six month periods ended December
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
December 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 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
4
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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):
DECEMBER 29, DECEMBER 30,
2001 JUNE 30, 2001 2000
------------ ------------- ------------
(UNAUDITED) (UNAUDITED)
Raw materials................... $ 22,796 $ 21,682 $ 25,010
Work-in-process................. 4,023 2,514 2,802
Finished goods.................. 20,085 16,117 19,928
--------- --------- ---------
46,904 40,313 47,740
Less reserve for obsolete
inventories................... (2,771) (2,554) (2,361)
--------- --------- ---------
$ 44,133 $ 37,759 $ 45,379
========= ========= =========
5
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 29, DECEMBER 30, DECEMBER 29, DECEMBER 30,
2001 2000 2001 2000
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
NUMERATOR:
Numerator for basic and diluted loss
per share - loss before
extraordinary item................... $ (3,406) $ (10,019) $ (7,529) $ (11,646)
Extraordinary loss from early
extinguishment of debt, net of $0
tax benefit.......................... - (552) - (552)
--------- ----------- --------- ------------
Net loss............................... $ (3,406) $ (10,571) $ (7,529) $ (12,198)
========= =========== ========= ============
DENOMINATOR:
Denominator for basic and diluted loss
per share - weighted-average shares.. 7,543 7,515 7,543 7,515
--------- ----------- --------- -----------
Basic and diluted loss per share
before extraordinary item............ (0.45) (1.34) (1.00) (1.55)
Extraordinary loss per share........... - (0.07) - (0.07)
--------- ----------- --------- -----------
Basic and diluted loss per share....... $ (0.45) $ (1.41) $ (1.00) $ (1.62)
========= =========== ========= ===========
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 losses incurred.
OPTIONS RANGE OF EXERCISE PRICES
------- ------------------------
Three months ended December 29, 2001... 3,140,143 $ 0.34 - $10.38
Three months ended December 30, 2000... 2,455,722 $ 0.34 - $10.56
Six months ended December 29, 2001..... 3,162,199 $ 0.34 - $10.38
Six months ended December 30, 2000..... 2,481,417 $ 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 and six months ended December 29, 2001 as the effect would be
antidilutive due to the net losses incurred.
6
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 29, DECEMBER 30, DECEMBER 29, DECEMBER 30,
2001 2000 2001 2000
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net loss............................... $ (3,406) $ (10,571) $ (7,529) $ (12,198)
Net accumulated derivative gains
(losses)............................. 402 (506) 268 (391)
Foreign currency translation gains
(losses)............................. (367) 894 648 (319)
--------- ----------- --------- -----------
Total comprehensive loss............... $ (3,371) $ (10,183) $ (6,613) $ (12,908)
========= =========== ========= ===========
The accumulated derivative gain and loss activity relating to cash flow hedges
for the three and six months ended December 29, 2001 and December 30, 2000 is as
follows (in thousands):
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 29, DECEMBER 30, DECEMBER 29, DECEMBER 30,
2001 2000 2001 2000
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Beginning net accumulated
derivative gains (losses)......... $ (118) $ 115 $ 16 $ -
Revaluations of cash flow hedge
derivatives....................... 284 (310) 158 (66)
Net reclassifications to earnings... 118 (196) 110 (325)
--------- ------- -------- ---------
Ending net accumulated derivative
gains (losses).................... $ 284 $ (391) $ 284 $ (391)
========= ======= ======== =========
The components of the accumulated other comprehensive loss are as follows (in
thousands):
DECEMBER 29, JUNE 30, DECEMBER 30,
2001 2001 2000
---- ---- ----
(UNAUDITED) (UNAUDITED)
Net accumulated derivative gains (losses)... $ 284 $ 16 $ ( 391)
Foreign currency translation adjustments.... (7,145) (7,793) (6,296)
--------- --------- ----------
Accumulated other comprehensive loss........ $ ( 6,861) $ (7,777) $ (6,687)
========= ========= ==========
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
7
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 a participant in the
motorsports industry with our line of ATVs, our motocross motorcycles, and
related accessories and clothing. There are no sales between the segments.
Summarized segment data is as follows (in thousands):
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 29, DECEMBER 30, DECEMBER 29, DECEMBER 30,
2001 2000 2001 2000
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net sales to external customers:
Bicycles.................... $ 32,578 $ 34,783 $ 65,617 $ 69,931
Motorsports................. 5,205 (96) 6,320 1,443
--------- --------- --------- ---------
$ 37,783 $ 34,687 $ 71,937 $ 71,374
========= ========= ========= =========
Operating income (loss):
Bicycles.................... $ 2,960 $ 3,049 $ 5,728 $ 4,859
Motorsports................. (5,177) (3,587) (11,094) (6,866)
--------- --------- --------- ---------
$ (2,217) $ (538) $ (5,366) $ (2,007)
========= ========= ========= =========
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 THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 29, DECEMBER 30, DECEMBER 29, DECEMBER 30,
2001 2000 2001 2001
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Total operating loss for
reportable segments.............. $ (2,217) $ (538) $ (5,366) $ (2,007)
Other income (expense):
Interest expense............... (1,152) (1,762) (2,300) (3,550)
Other income (expense) ........ (26) 117 68 391
--------- ---------- --------- ----------
(1,178) (1,645) (2,232) (3,159)
--------- ---------- --------- ----------
Loss before income taxes and
extraordinary item............... (3,395) (2,183) (7,598) (5,166)
Income tax (expense) benefit....... (11) (7,836) 69 (6,480)
--------- ---------- --------- ----------
Loss before extraordinary item..... (3,406) (10,019) (7,529) (11,646)
Extraordinary loss from early
extinguishment of debt, net of
$0 tax benefit.................. - (552) - (552)
--------- ---------- --------- ----------
Net loss........................... $ (3,406) $ (10,571) $ (7,529) $ (12,198)
========== ========== ========= ==========
8
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Summarized segment assets are as follows (in thousands):
DECEMBER 29, 2001 JUNE 30, 2001 DECEMBER 30, 2000
----------------- ------------- -----------------
(UNAUDITED) (UNAUDITED)
Identifiable assets:
Bicycles.............. $ 106,140 $ 103,024 $ 121,892
Motorsports........... 25,743 24,767 19,886
---------- ---------- -----------
$ 131,883 $ 127,791 $ 141,778
========== ========== ===========
6. NET DEFERRED TAX ASSETS
The significant components of our deferred tax assets and liabilities at
December 29, 2001, June 30, 2001 and December 30, 2000 are as follows (in
thousands):
DECEMBER 29, 2001 JUNE 30, 2001 DECEMBER 30, 2000
----------------- ------------- -----------------
(UNAUDITED) (UNAUDITED)
Deferred tax assets:
Accounts receivable and
inventory reserves........... $ 2,832 $ 2,524 $ 2,329
Accrued liabilities............. 1,188 1,187 1,179
Tax credits and NOL
carryforwards................ 14,972 12,017 7,748
Other........................... 919 805 914
--------- ----------- -----------
Total deferred assets............... 19,911 16,533 12,170
--------- ----------- -----------
Deferred tax liabilities:
Tax over book depreciation...... (1,140) (1,415) (1,644)
Accounts receivable fair value
adjustment................... (143) (286) (429)
Other........................... (2,621) (1,830) (1,318)
--------- ----------- -----------
Total deferred liabilities...... (3,904) (3,531) (3,391)
--------- ----------- -----------
Net deferred tax asset before
valuation allowance............... 16,007 13,002 8,779
Valuation allowance................. (16,028) (13,083) (8,802)
--------- ----------- -----------
Net deferred tax liability.......... $ (21) $ (81) $ (23)
========= =========== ===========
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.
9
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
During the first quarter of fiscal 2002, Cannondale U.S. received dividends from
Cannondale Europe totaling 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 December 29, 2001, we had approximately $23.5 million of forward exchange
contracts outstanding. Of these contracts outstanding, approximately $18.9
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. The total net accumulated
derivative gains of $284,000 included in the accumulated other comprehensive
loss at December 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 second quarter or
first six months 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 and six months ended December 29, 2001 and is
included in other income (expense) on the Condensed Consolidated Statement of
Operations. As of December 29, 2001, the maximum period of time we were hedging
our exposure to the variability in future cash flows for forecasted transactions
was six months.
The remaining foreign exchange contracts outstanding at December 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 December 29, 2001, the fair value of forward foreign contracts in gain (i.e.
asset) positions was approximately $596,000, and is included in "Prepaid
expenses and other current assets" on the Condensed Consolidated Balance Sheet.
The fair value of forward foreign contracts in loss (i.e. liability) positions
was approximately ($233,000), and is included in "Warranty and other accrued
expenses" on the Condensed Consolidated Balance Sheet at December 29, 2001.
These fair values were determined based upon current forward rates applicable to
the remaining terms of the forward contracts as of December 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 December 29, 2001
and December 30, 2000, shipping and handling billings of approximately $501,000
10
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
and $321,000, respectively, have been included in net sales, and freight costs
of approximately $833,000 and $584,000, respectively, have been included in
selling, general and administrative expenses. For the six months ended December
29, 2001 and December 30, 2000, shipping and handling billings of approximately
$1,036,000 and $813,000, respectively, have been included in net sales, and
freight costs of approximately $1,426,000 and $1,330,000, respectively, have
been included in selling, general and administrative expenses.
9. LONG-TERM DEBT
We are not able to provide adequate assurances in accordance with generally
accepted accounting principles that we will be able to maintain compliance with
certain financial covenants contained in our financing agreements with Tyco
Capital Corporation (formerly The CIT Group/Business Credit, Inc.) and Ableco
Finance LLC which are to be determined as of the end of February 2002. We are
currently holding discussions with these lenders to amend these covenants;
however, we can give no assurance that we will be able to amend these covenants.
Accordingly, all long-term debt has been reclassified to a current liability on
the Condensed Consolidated Balance Sheet at December 29, 2001.
10. EMPLOYEE STOCK PURCHASE PLAN
For the first offering period of fiscal 2002, our employees purchased 16,957
shares of our common stock at $1.90 per share.
11. 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.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NET SALES. For the second quarter of fiscal 2002, our net sales increased to
$37.8 million compared to $34.7 million in the second quarter of fiscal 2001, an
increase of approximately $3.1 million or 9%. Included in the above sales
amounts are motorsports sales of approximately $5.2 million for the second
quarter of fiscal 2002. For the first six months of fiscal 2002, our net sales
were $71.9 million compared to $71.4 million for the prior year period, with
motorsports sales of $6.3 million and $1.4 million, respectively. The sales
growth for the second quarter and first six months of fiscal 2002 compared to
the same periods last year was attributable to the increase in motorsports
shipments during the current year. During the second quarter of fiscal 2002, we
began shipping two new 2002 ATV models and two new 2002 motorcycle models.
Additionally, we began shipping our motorsports products to European dealers
during the second quarter of fiscal 2002. For the fiscal 2002 quarterly and
year-to-date periods, the growth in motorsports shipments was offset by lower
bicycle shipments, as bicycle retailers continued to shift their inventory
receipts closer to the time of expected sale in spring. As a result of this
shift, we expect that bicycle sales will recover in the spring and early summer
of 2002.
GROSS PROFIT. Gross profit was $9.0 million in the second quarter of fiscal
2002, a decrease of approximately $1.2 million from the gross profit in the
second quarter of fiscal 2001 of $10.2 million. Gross profit as a percentage of
net sales in the second quarter of fiscal 2002 decreased to 23.8% compared to
29.5% for the second quarter of fiscal 2001. For the first six months of fiscal
2002, gross profit was $16.1 million compared to $ 20.2 million for the prior
year period. Gross profit as a percentage of net sales for the first six months
of fiscal 2002 was 22.4% compared to 28.3% for the prior year period. The
decrease in gross profit dollars and gross profit as a percentage of net sales
for the fiscal 2002 quarterly and year-to-date periods 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 second quarter of fiscal 2002 strengthened to 35.1% from 33.7% in the prior
year; similarly, our bicycle margins for the first six months of fiscal 2002
increased to 34.3% from 33.3% in the comparable prior year period. This growth
in bicycle margins during the current year periods is a result of production
efficiencies coupled with more favorable product mix as compared to the prior
year periods.
OPERATING EXPENSES. Operating expenses were $11.2 million for the second quarter
of fiscal 2002, an increase of approximately $400,000, or 4%, from the $10.8
million recorded for the second quarter of fiscal 2001. For the first six months
of fiscal 2002, operating expenses were $21.5 million, a decrease of
approximately $700,000, or 3%, from the $22.2 million recorded for the prior
year period.
Selling, general and administrative expenses increased to $9.8 million for the
second quarter of fiscal 2002, from $8.8 million recorded during the prior year
period. For the first six months of fiscal 2002, selling, general and
administrative expenses increased to $18.9 million from $18.3 million in the
prior year period. The increase in selling, general and administrative expenses
during the second quarter and first six months of fiscal 2002 resulted from our
growth in motorsports sales activities. For the second quarter and first six
months of fiscal 2002, motorsports selling general and administrative expenses
were $2.1 million and $3.4 million respectively, compared to $763,000 and $1.4
million, respectively, for the prior year periods. During the current year
periods, motorsports expenses tied directly to sales volume increased compared
to the prior year periods, including such expenses as warranty and insurance
costs. Conversely, bicycle selling, general and administrative expenses
decreased during the current year periods due to our continued cost-reduction
efforts and a reduction in bicycle segment expenses tied directly to sales
volume, such as advertising and travel. As a percentage of net sales, selling,
general and
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administrative expenses represented 26.2% for the first six months of fiscal
2002 compared to 25.6% for the prior year period.
Research and development expenses decreased to $1.4 million in the second
quarter of fiscal 2002, from $2.0 million recorded during the prior year period.
For the first six months of fiscal 2002, research and development expenses were
$2.6 million compared to $3.9 million in the prior year period. The decrease in
research and development expenses during the second quarter and first six months
of fiscal 2002 primarily reflects the transition of our new ATV and motorcycle
models from the development stage to production, as well as the timing of
bicycle research and development projects. We invested approximately $641,000 in
research and development for our motorsports products during the second quarter
of fiscal 2002 compared to approximately $1.3 million during the same period
last year. For the first six months of fiscal 2002, we invested approximately
$1.3 million in research and development activities for our motorsports products
compared to $2.3 million in the prior year period. As a percentage of net sales,
research and development expenses were 3.7% for the first six months of fiscal
2002 compared to 5.5% for the first six months of fiscal 2001.
The extent and timing of any future profitability of Cannondale Corporation is
dependent in part upon our ability to continually provide innovative products to
both the bicycle and motorsports markets faster than our competitors. Currently,
our bicycle-related projects focus upon developing new frame materials for
lighter weight frames, as well as several new frame designs and suspension
technologies. In addition, we have projects focusing on our patented HeadShok
and Lefty front suspension technologies, as well as specific teams investigating
cost-saving opportunities. The projects are expected to be completed between
mid-2002 and mid-2003. Our motorsports research and development projects are
currently focused upon the development of two new ATV models, one new motorcycle
model, and modifications to existing models to comply with European
specifications. These projects are expected to be completed by mid-2003. Due to
the inherent uncertainties in developing new products and improving upon
existing products, we cannot determine the additional costs necessary to
complete these projects, nor can we assure that the projects will be completed
by the dates estimated at this time.
OTHER INCOME (EXPENSE). Interest expense decreased to $1.2 million in the second
quarter of fiscal 2002 from $1.8 million recorded during the prior year period.
For the first six months of fiscal 2002, interest expense was $2.3 million
compared to $3.6 million for the prior year period. The decreases in interest
expense for the fiscal 2002 quarterly and year-to-date periods is a result of
lower interest rates, primarily resulting from the decreases in the U.S. prime
rate during fiscal 2002. During the prior year, Mr. Montgomery repaid his entire
notes payable obligation to us totaling $12.0 million; we used the proceeds from
the repayment to retire a portion of our long-term debt, which in turn lowered
our fiscal 2001 interest expense. For the second quarters and first six months
of fiscal 2002 and 2001, other income (expense) primarily consisted of finance
charge income from accounts receivable, offset by foreign exchange losses.
INCOME TAXES. For the quarter ended December 29, 2001, income tax expense
amounted to $11,000 compared to $7.8 million recorded for the prior year period.
For the first six months of fiscal 2002, we recorded an income tax benefit of
$69,000 compared to income tax expense of $6.5 million for the first six months
of fiscal 2001. The significant change in the income tax amounts relates to the
initial deferred tax asset valuation allowance which was 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.
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LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $7.8 million for the first six months
of fiscal 2002, an increase of approximately $4.8 million compared to $3.0
million of net cash used in operating activities for the first six months of
fiscal 2001. The increase in net cash used in operating activities during the
first six months of fiscal 2002 compared to the same period last year reflects
the larger increase in bicycle inventories, coupled with no interest collections
relating to the note from Joseph Montgomery due to its repayment in full last
year.
Capital expenditures were $1.5 million for the first six months of fiscal 2002,
compared to $2.0 million for the first six months of fiscal 2001. Our capital
expenditures during the fiscal 2002 and 2001 year-to-date periods principally
related to tooling used in the production of motorsports products.
Net cash provided by financing activities for the first six months of fiscal
2002 was $9.1 million, compared to the $9.9 million of net cash used in
financing activities for the corresponding period of fiscal 2001. The net cash
provided by financing activities during the first six months of fiscal 2002
primarily reflects the borrowings under our revolving credit facilities for the
purpose of funding working capital requirements. During the first six months of
fiscal 2001, we used the proceeds from the repayment of the note from Joseph
Montgomery to paydown $12.0 million of long-term debt. At December 29, 2001, the
remaining availability under our revolving line of credit with Tyco Capital
Corporation (formerly the CIT Group/Business Credit Inc.) was approximately $1.7
million, and availability under the borrowing facility with IFN Finance, B.V.
was approximately $2.3 million.
We are not able to provide adequate assurances in accordance with generally
accepted accounting principles that we will be able to maintain compliance with
certain financial covenants contained in our financing agreements with Tyco
Capital Corporation (formerly The CIT Group/Business Credit, Inc.) and Ableco
Finance LLC which are to be determined as of the end of February 2002. We are
currently holding discussions with these lenders to amend these covenants;
however, we can give no assurance that we will be able to amend these covenants.
Accordingly, all long-term debt has been reclassified to a current liability on
the Condensed Consolidated Balance Sheet at December 29, 2001.
As a result of foregoing, we can give no assurance that future borrowings under
our current financing facilities will be available or that we will be able to
replace such facilities, and therefore we can give no assurance that we will be
able to meet our planned operating and capital requirements in the foreseeable
future or to repay the outstanding indebtedness under our current financing
facilities.
CRITICAL ACCOUNTING POLICIES
During the preparation of financial statements, we use estimates and make
judgments based upon the information known to us at that time in establishing
our credits and returns, inventory and warranty reserves. For our bicycle
reserves, historical information and trends serve as the primary basis for
determining required reserve levels. However, due to the start-up nature of our
motorsports business and the resulting lack of historical trend information, we
use estimates and judgments to determine the adequate motosports reserve levels.
Actual results could differ from our estimates.
We have provided for future credits to be issued to dealers related to current
sales using estimates based upon information available at this time. We
estimated the number of future product returns, as well as the amount of
potential credit adjustments, based upon detailed information from our field
sales force
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and customer service department. We have also established a lower of
cost or market valuation reserve for our motorsports inventory based on the
differences between our actual costs and average selling prices. In addition,
our warranty reserves provide for the anticipated number of units we expect to
repair multiplied by the anticipated cost to repair each unit. We have estimated
the actual number of units to be returned and the actual cost to repair each
unit. Although we use reasonable estimates based on the information available at
this time, actual activity could vary from our estimates.
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. Readers should not place undue reliance on the
forward-looking statements contained in this report. Except as required by law,
we do not intend to update information contained in any of our forward-looking
statements.
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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 six months of
fiscal 2002. No single customer accounted for more than 5% of our net sales
during the first six months 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 120 days), less an interest factor. All other
products are sold with payment terms from 30 to 180 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 December 29, 2001, we had approximately $23.5 million of forward exchange
contracts outstanding. Of these contracts outstanding, approximately $18.9
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 December 29, 2001, the
maximum period of time we were hedging our exposure to the variability in future
cash flows for forecasted transactions was six months.
The remaining foreign exchange contracts outstanding at December 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our 2001 Annual Meeting of Stockholders was held on November 14, 2001. At the
2001 Annual Meeting, our stockholders:
(a) Elected two Class I Directors to serve for the ensuing three
years. Mr. Joseph Montgomery was elected as a Class I Director
with 7,093,571 votes for and 134,743 votes withheld. Mr. Michael
J. Stimola was elected as a Class I Director with 7,096,071 votes
for and 132,243 votes withheld. Class II Directors, whose term of
office continued after the 2001 Annual Meeting and expires in
2002, are John Sanders, James Scott Montgomery and Sally G.
Palmer. Class III Directors, whose term of office continued after
the 2001 Annual Meeting and expires in 2003, are William A. Luca,
Daniel C. Alloway and Gregory Griffin.
(b) Ratified the selection by our Board of Directors of Ernst & Young
LLP to serve as our independent auditors for the fiscal year
ending June 29, 2002. Of the votes cast, there were 7,143,078 for
ratification, 72,054 votes against and 13,182 abstentions.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Second Amendment and Waiver, dated as of December
7, 2001, to the Financing Agreement by and among
Cannondale Corporation, the Lenders party thereto,
and The CIT Group/Business Credit Inc., as Agent.
10.2 Second Amendment and Waiver, dated as of December
7, 2001, to the Financing Agreement by and among
Cannondale Corporation, the Lenders party thereto,
and Ableco Finance LLC, as Agent.
(b) Reports on Form 8-K
We did not file any reports on Form 8-K during the quarter ended
December 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: February 12, 2002 /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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