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 March 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 0-24884
CANNONDALE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 06-0871823
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16 TROWBRIDGE DRIVE, BETHEL, CONNECTICUT 06801
(Address of principal executive offices) (Zip code)
(203) 749-7000
(Registrant's telephone number, including area code)
------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
The number of shares outstanding of the issuer's Common Stock, $.01 par value
per share, as of May 8, 2002 was 7,560,902.
INDEX
PAGE
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Part I Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of March 30, 2002, June 30, 2001
and March 31, 2001..........................................................................1
Condensed Consolidated Statements of Operations for the three and nine
months ended March 30, 2002 and March 31, 2001..............................................2
Condensed Consolidated Statements of Cash Flows for the nine months ended
March 30, 2002 and March 31, 2001...........................................................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 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)
MARCH 30, 2002 JUNE 30, 2001 MARCH 31, 2001
-------------- ------------- --------------
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash.......................................... $ 1,816 $ 2,155 $ 1,920
Trade accounts receivable, less allowances of
$11,575, $11,270 and $11,146............... 53,080 43,762 47,833
Inventories................................... 38,044 37,759 42,861
Prepaid expenses and other current assets..... 5,543 2,773 3,719
---------- ---------- ----------
Total current assets.......................... 98,483 86,449 96,333
Property, plant and equipment, net............ 32,331 35,628 36,352
Notes receivable and advances to related
parties.................................... 1,408 1,441 1,349
Other assets.................................. 4,365 4,273 4,354
---------- ---------- ----------
Total assets.................................. $ 136,587 $ 127,791 $ 138,388
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................. $ 14,720 $ 15,351 $ 13,970
Revolving credit advances..................... 4,532 866 4,038
Income taxes payable.......................... 474 294 27
Warranty and other accrued expenses........... 9,303 8,360 8,743
Subordinated debenture to a related party..... 2,000 - -
Current installments of long-term debt........ 64,989 5,004 4,856
---------- ---------- ----------
Total current liabilities......................... 96,018 29,875 31,634
Long-term debt, less current installments......... - 46,434 54,760
Subordinated debenture to a related party......... - 2,000 -
Other noncurrent liabilities...................... 397 427 437
---------- ---------- ----------
Total liabilities................................. 96,415 78,736 86,831
---------- ---------- ----------
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.................... 58,455 58,423 57,978
Retained earnings............................. 8,709 18,483 21,252
Less 1,292,900 shares in treasury at cost..... (20,162) (20,162) (20,162)
Accumulated other comprehensive loss.......... (6,919) (7,777) (7,599)
---------- ---------- ----------
Total stockholders' equity........................ 40,172 49,055 51,557
---------- ---------- ----------
Total liabilities and stockholders' equity........ $ 136,587 $ 127,791 $ 138,388
========== ========== ==========
SEE ACCOMPANYING NOTES.
1
CANNONDALE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
MARCH 30, MARCH 31, MARCH 30, MARCH 31,
2002 2001 2002 2001
------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net sales.......................................... $ 39,167 $ 32,636 $ 111,104 $ 104,010
Cost of sales...................................... 30,682 25,895 86,479 77,089
----------- ----------- ---------- -----------
Gross profit....................................... 8,485 6,741 24,625 26,921
----------- ----------- ---------- -----------
Expenses:
Selling, general and administrative........... 9,689 9,005 28,550 27,275
Research and development...................... 1,616 1,500 4,261 5,417
----------- ----------- ---------- -----------
11,305 10,505 32,811 32,692
----------- ----------- ---------- -----------
Operating loss..................................... (2,820) (3,764) (8,186) (5,771)
----------- ----------- ---------- -----------
Other income (expense):
Interest expense.............................. (1,301) (1,486) (3,601) (5,036)
Other income (expense) ....................... (115) (199) (47) 192
----------- ----------- ---------- -----------
(1,416) (1,685) (3,648) (4,844)
----------- ----------- ---------- -----------
Loss before income taxes and extraordinary item.... (4,236) (5,449) (11,834) (10,615)
Income tax (expense) benefit ...................... 1,991 98 2,060 (6,382)
----------- ----------- ---------- -----------
Loss before extraordinary item..................... (2,245) (5,351) (9,774) (16,997)
Extraordinary loss from early extinguishment of
debt, net of $0 tax benefit..................... - - - (552)
------------ ----------- ---------- -----------
Net loss........................................... $ (2,245) $ (5,351) (9,774) $ (17,549)
============ =========== ========== ===========
Basic and diluted loss per share before
extraordinary item.............................. $ (0.30) $ (0.71) $ (1.29) $ (2.26)
Extraordinary loss per share....................... - - - (0.07)
------------ ----------- ---------- -----------
Basic and diluted loss per share................... $ (0.30) $ (0.71) (1.29) $ (2.33)
============ =========== ========== ===========
SEE ACCOMPANYING NOTES.
2
CANNONDALE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED NINE MONTHS ENDED
MARCH 30, 2002 MARCH 31, 2001
----------------- -----------------
(UNAUDITED) (UNAUDITED)
NET CASH USED IN OPERATING ACTIVITIES............................... $ (15,767) $ (8,220)
---------- ----------
INVESTING ACTIVITIES:
Loans provided to related parties................................... (31) (184)
Repayments of loans provided to related parties..................... 64 12,032
Capital expenditures................................................ (2,084) (2,996)
Proceeds from sale of equipment..................................... 8 743
---------- ----------
Net cash provided by (used in) investing activities................. (2,043) 9,595
---------- ----------
FINANCING ACTIVITIES:
Net proceeds from issuance of common stock.......................... 32 43
Payments for early extinguishment of debt........................... - (12,000)
Net proceeds from borrowings under short-term revolving credit
agreements...................................................... 17,273 4,774
Net proceeds from borrowings under long-term debt and
capital lease agreements........................................ - 2,100
---------- ----------
Net cash provided by (used in) financing activities................. 17,305 (5,083)
---------- ----------
Effect of exchange rate changes on cash............................. 166 564
---------- ----------
Net decrease in cash................................................ (339) (3,144)
Cash at beginning of period......................................... 2,155 5,064
---------- ----------
Cash at end of period............................................... $ 1,816 $ 1,920
=========== ===========
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 nine month periods ended March
30, 2002 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 March
30, 2002 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
4
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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):
MARCH 30, MARCH 31,
2002 JUNE 30, 2001 2001
---- ------------- ----
(UNAUDITED) (UNAUDITED)
Raw materials........................................ $ 17,970 $ 21,682 $ 22,486
Work-in-process...................................... 2,929 2,928 3,243
Finished goods....................................... 20,521 15,703 19,548
--------- --------- ---------
41,420 40,313 45,277
Less reserve for obsolete inventories................ (3,376) (2,554) (2,416)
--------- --------- ---------
$ 38,044 $ 37,759 $ 42,861
========= ========= =========
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 NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
MARCH 30, MARCH 31, MARCH 30, MARCH 31,
2002 2001 2002 2001
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
NUMERATOR:
Numerator for basic and diluted loss per
share - loss before extraordinary item............ $ (2,245) $ (5,351) $ (9,774) $ (16,997)
Extraordinary loss from early extinguishment
of debt, net of $0 tax benefit................. - - - (552)
--------- ---------- --------- -----------
Net loss....................................... $ (2,245) $ (5,351) $ (9,774) $ (17,549)
========= ========== ========= ===========
DENOMINATOR:
Denominator for basic and diluted loss per
share - weighted-average shares............. 7,560 7,529 7,549 7,520
--------- ---------- --------- -----------
Basic and diluted loss per share before
extraordinary item.......................... (0.30) (0.71) (1.29) (2.26)
Extraordinary loss per share................... - - - (0.07)
---------- ---------- --------- -----------
Basic and diluted loss per share............... $ (0.30) $ (0.71) $ (1.29) $ (2.33)
========== ========== ========= ===========
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 March 30, 2002......................... 3,244,876 $ 0.34 - $10.38
Three months ended March 31, 2001......................... 2,890,257 $ 0.34 - $10.56
Nine months ended March 30, 2002.......................... 3,189,758 $ 0.34 - $10.38
Nine months ended March 31, 2001.......................... 2,617,697 $ 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 nine months ended March 30, 2002 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 NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
MARCH 30, MARCH 31, MARCH 30, MARCH 31,
2002 2001 2002 2001
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net loss........................................ $ (2,245) $ (5,351) $ (9,774) $ (17,549)
Net accumulated derivative gains (losses)....... 54 273 322 (118)
Foreign currency translation gains (losses).....
(112) (1,185) 536 (1,504)
--------- ---------- -------- -----------
Total comprehensive loss........................ $ (2,303) $ (6,263) $ (8,916) $ (19,171)
========= ========== ======== ===========
The accumulated derivative gain and loss activity relating to cash flow hedges
for the three and nine months ended March 30, 2002 and March 31, 2001 is as
follows (in thousands):
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
MARCH 30 MARCH 31, MARCH 30, MARCH 31,
2002 2001 2002 2001
---- ---- ---- ----
(UAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Beginning net accumulated derivative gains
(losses)................................. $ 284 $ (391) $ 16 $ -
Revaluations of cash flow hedge
derivatives.............................. 75 303 233 237
Net reclassifications to earnings........... (21) (30) 89 (355)
--------- ------- -------- ---------
Ending net accumulated derivative gains
(losses)................................. $ 338 $ (118) $ 338 $ (118)
========= ======= ======== =========
The components of the accumulated other comprehensive loss are as follows (in
thousands):
MARCH 30, JUNE 30, MARCH 31,
2002 2001 2001
---- ---- ----
(UNAUDITED) (UNAUDITED)
Net accumulated derivative gains (losses)............ $ 338 $ 16 $ ( 118)
Foreign currency translation adjustments............. (7,257) (7,793) (7,481)
--------- -------- ----------
Accumulated other comprehensive loss................. $ (6,919) $ (7,777) $ (7,599)
========= ======== ==========
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
7
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 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 NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
MARCH 30, MARCH 31, MARCH 30, MARCH 31,
2002 2001 2002 2001
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net sales to external customers:
Bicycles......................... $ 30,984 $ 30,899 $ 96,601 $ 100,830
Motorsports...................... 8,183 1,737 14,503 3,180
--------- --------- --------- ----------
$ 39,167 $ 32,636 $ 111,104 $ 104,010
========= ========= ========= ==========
Operating income (loss):
Bicycles......................... $ 1,662 $ 1,030 $ 7,390 $ 5,888
Motorsports...................... (4,482) (4,794) (15,576) (11,659)
--------- --------- --------- ----------
$ (2,820) $ (3,764) $ (8,186) $ (5,771)
========= ========= ========= ==========
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 NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
MARCH 30, MARCH 31, MARCH 30, MARCH 31,
2002 2001 2002 2001
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Total operating loss for reportable
segments............................... $ (2,820) $ (3,764) $ (8,186) $ (5,771)
Other income (expense):
Interest expense..................... (1,301) (1,486) (3,601) (5,036)
Other income (expense) .............. (115) (199) (47) 192
--------- ---------- --------- ----------
(1,416) (1,685) (3,648) (4,844)
--------- ---------- --------- ----------
Loss before income taxes and
extraordinary item..................... (4,236) (5,449) (11,834) (10,615)
Income tax (expense) benefit.............. 1,991 98 2,060 (6,382)
--------- ---------- --------- ----------
Loss before extraordinary item............ (2,245) (5,351) (9,774) (16,997)
Extraordinary loss from early
extinguishment of debt, net of $0 tax
benefit............................... - - - (552)
--------- ---------- --------- ----------
Net loss.................................. $ (2,245) $ (5,351) $ (9,774) $ (17,549)
========= ========== ========= ==========
8
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Summarized segment assets are as follows (in thousands):
MARCH 30, 2002 JUNE 30, 2001 MARCH 31, 2001
-------------- ------------- --------------
(UNAUDITED) (UNAUDITED)
Identifiable assets:
Bicycles................................. $ 107,725 $ 103,024 $ 116,215
Motorsports.............................. 28,862 24,767 22,173
---------- ---------- -----------
$ 136,587 $ 127,791 $ 138,388
========== ========== ===========
6. NET DEFERRED TAX ASSETS
The significant components of our deferred tax assets and liabilities at March
30, 2002, June 30, 2001 and March 31, 2001 are as follows (in thousands):
MARCH 30, 2002 JUNE 30, 2001 MARCH 31, 2001
-------------- ------------- --------------
(UNAUDITED) (UNAUDITED)
Deferred tax assets:
Accounts receivable and inventory
reserves............................ $ 3,082 $ 2,524 $ 2,597
Accrued liabilities.................... 981 1,187 1,155
Tax credits and NOL carryforwards...... 14,562 12,017 9,986
Other.................................. 853 805 888
--------- --------- ----------
Total deferred assets....................... 19,478 16,533 14,626
--------- --------- ----------
Deferred tax liabilities:
Tax over book depreciation............. (961) (1,415) (1,841)
Accounts receivable fair value
adjustment.......................... (72) (286) (358)
Other.................................. (2,694) (1,830) (1,411)
--------- --------- ----------
Total deferred liabilities............. (3,727) (3,531) (3,610)
--------- --------- ----------
Net deferred tax asset before valuation
allowance................................ 15,751 13,002 11,016
Valuation allowance......................... (15,751) (13,083) (11,037)
--------- --------- ----------
Net deferred tax liability.................. $ - $ (81) $ (21)
========= ========= ==========
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. In the third quarter of fiscal 2002, we reduced this valuation
allowance and recognized a tax benefit of
9
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
approximately $2.0 million as a result of a tax law change to the carryback
period allowed for net operating losses. In accordance with the Job Creation and
Worker Assistance Act of 2002, net operating losses from a tax year ending in
2001 may be carried back for five years. As a result of this recent tax law
change, the net operating loss generated in fiscal 2001 has been carried back
five years and utilized against taxable income in prior years. We expect to
receive a refund of taxes of approximately $2.0 million due to this net
operating loss carryback claim, and therefore have recorded a tax benefit for
this amount in the third quarter of fiscal 2002.
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 March 30, 2002, we had approximately $20.4 million of forward exchange
contracts outstanding. Of these contracts outstanding, approximately $15.7
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 $338,000 included in the accumulated other comprehensive
loss at March 30, 2002 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 third quarter or first nine 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 nine months ended March 30, 2002 and is included in "Other
income (expense)" on the Condensed Consolidated Statement of Operations. As of
March 30, 2002, the maximum period of time we were hedging our exposure to the
variability in future cash flows for forecasted transactions was five months.
The remaining $4.7 million of foreign exchange contracts outstanding at March
30, 2002 were not designated as hedging instruments. For these derivatives,
gains and losses were recognized immediately in earnings during the period of
change.
At March 30, 2002, the fair value of forward foreign contracts in gain (i.e.
asset) positions was approximately $327,000, 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 ($103,000), and is included in "Warranty and other accrued
expenses" on the Condensed Consolidated Balance Sheet at March 30, 2002. These
fair values were determined based
10
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
upon current forward rates applicable to the remaining terms of the forward
contracts as of March 30, 2002.
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 March 30, 2002 and
March 31, 2001, shipping and handling billings of approximately $547,000 and
$373,000, respectively, have been included in net sales, and freight costs of
approximately $1,074,000 and $692,000, respectively, have been included in
selling, general and administrative expenses. For the nine months ended March
30, 2002 and March 31, 2001, shipping and handling billings of approximately
$1,582,000 and $1,186,000, respectively, have been included in net sales, and
freight costs of approximately $2,499,000 and $2,022,000, respectively, have
been included in selling, general and administrative expenses.
9. LONG-TERM DEBT
As of February 2002, we were not in 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. We are currently
holding discussions with these lenders to amend these covenants, and we are
considering refinancing proposals from other lenders. However, we can give no
assurance that we will be able to amend these covenants with our current
lenders, or that we will secure refinancing with other lenders on acceptable
terms or at all. 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.
Accordingly, all long-term debt has been reclassified to a current liability on
the Condensed Consolidated Balance Sheet at March 30, 2002.
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 third quarter of fiscal 2002, our net sales increased to
$39.2 million compared to $32.6 million in the third quarter of fiscal 2001, an
increase of approximately $6.6 million or 20%. This growth in sales primarily
occurred in our motorsports line with shipments of approximately $8.2 million in
the third quarter of fiscal 2002 compared to $1.7 million in the third quarter
of fiscal 2001. The remainder of our sales increase for the third quarter of
fiscal 2002 of $861,000 primarily related to a volume increase in domestic
bicycle shipments, which was substantially offset by an unfavorable foreign
exchange impact of approximately $776,000 on international bicycle sales. For
the first nine months of fiscal 2002, our net sales were $111.1 million compared
to $104.0 million for the prior year period, an increase of approximately $7.1
million, or 7%. For the year-to-date period, motorsports sales grew 356% to
$14.5 million from $3.2 million in the prior year. During 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 year-to-date
period, this growth in motorsports shipments was partially offset by lower
bicycle shipments, which occurred in the first two quarters of fiscal 2002 as a
result of dealers waiting until warmer weather before taking delivery of
inventory.
GROSS PROFIT. Gross profit was $8.5 million in the third quarter of fiscal 2002,
an increase of approximately $1.8 million, or 26%, from the gross profit in the
third quarter of fiscal 2001 of $6.7 million. Gross profit as a percentage of
net sales in the third quarter of fiscal 2002 increased to 21.7% compared to
20.7% for the third quarter of fiscal 2001. This increase in gross profit for
the current year quarterly period was attributable to the significant increase
in bicycle margins to 35.0% from 30.4% in the prior year period, primarily
resulting from favorable product mix and production efficiencies. For the first
nine months of fiscal 2002, gross profit was $24.6 million compared to $26.9
million for the prior year period, a decrease of approximately $2.3 million, or
9%. Gross profit as a percentage of net sales for the first nine months of
fiscal 2002 was 22.2% compared to 25.9% for the prior year period. The decrease
in gross profit dollars and gross profit as a percentage of net sales for the
fiscal 2002 year-to-date period 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 fiscal 2002
year-to-date period strengthened to 34.5% from 32.4% in the prior year. This
growth in bicycle margins during the current year-to-date period was also a
result of more favorable product mix coupled with production efficiencies,
however the contribution was not sufficient to offset the motorsports production
costs.
OPERATING EXPENSES. Operating expenses were $11.3 million for the third quarter
of fiscal 2002, an increase of approximately $800,000, or 8%, from the $10.5
million recorded for the third quarter of fiscal 2001. For the first nine months
of fiscal 2002, operating expenses were $32.8 million compared to $32.7 million
recorded for the prior year period.
Selling, general and administrative expenses increased to $9.7 million for the
third quarter of fiscal 2002, from $9.0 million recorded during the prior year
period. For the first nine months of fiscal 2002, selling, general and
administrative expenses increased to $28.6 million from $27.3 million in the
prior year period. The increase in selling, general and administrative expenses
during the third quarter of fiscal 2002 resulted primarily from increases in
freight expenses, salaries and fringe costs, and insurance costs. These
increases were attributable to a $570,000 increase within the bicycle segment,
whereas the motorsports selling general and administrative expenses were $1.5
million for the third quarter of fiscal 2002 compared to $1.4 million for the
third quarter of fiscal 2001. For the year-to-date period, the
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increase in selling, general and administrative expense related to such expenses
as freight, salaries and fringe costs, warranty costs, insurance costs, and
equipment rental expenses. The majority of the year-to-date increase occurred in
the motorsports segment, as the motorsports selling, general and administrative
expenses for the first nine months of fiscal 2002 were $4.9 million compared to
$2.8 million for the prior year period as a result of the higher volume of sales
activity. As a percentage of net sales, selling, general and administrative
expenses represented 25.7% for the first nine months of fiscal 2002 compared to
26.2% for the prior year period.
Research and development expenses increased to $1.6 million in the third quarter
of fiscal 2002, from $1.5 million recorded during the prior year period. For the
first nine months of fiscal 2002, research and development expenses were $4.3
million compared to $5.4 million in the prior year period. The increase in
research and development expenses during the third quarter of fiscal 2002
relates to an increase in the bicycle segment by approximately $300,000 as a
result of the timing of research and development projects. Conversely, our
motorsports research and development expenses decreased as we invested
approximately $577,000 in research and development for our motorsports products
during the third quarter of fiscal 2002 compared to approximately $763,000
during the same period last year. For the first nine months of fiscal 2002, the
decrease in research and development expenses reflects the transition of the
motorsports products to the full production stage, as we invested approximately
$1.9 million in research and development activities during the year-to-date
period of fiscal 2002 for our motorsports products compared to $3.1 million in
the prior year period. As a percentage of net sales, research and development
expenses were 3.8% for the first nine months of fiscal 2002 compared to 5.2% for
the first nine 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 one new ATV model, two new motorcycle
models, 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 $1.3 million in the third
quarter of fiscal 2002 from $1.5 million recorded during the prior year period.
For the first nine months of fiscal 2002, interest expense was $3.6 million
compared to $5.0 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, partially offset by higher average borrowings. For the
third quarters and first nine 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 March 30, 2002, the income tax benefit
amounted to approximately $2.0 million compared to $98,000 recorded for the
prior year period. The income tax benefit for the current year period was a
result of the recently enacted Job Creation and Worker Assistance Act of 2002,
which allowed us to carry back certain net operating losses over a five year
period. Consequently, a portion of the deferred tax asset valuation allowance
which was established in prior periods was reduced,
13
allowing us to record the related tax benefit in the current period. For the
first nine months of fiscal 2002, we recorded an income tax benefit of $2.1
million compared to income tax expense of $6.4 million for the first nine 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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $15.8 million for the first nine
months of fiscal 2002, an increase of approximately $7.6 million compared to
$8.2 million of net cash used in operating activities for the first nine months
of fiscal 2001. The increase in net cash used in operating activities during the
first nine months of fiscal 2002 compared to the same period last year reflects
the larger increase in motorsports receivable balances, coupled with no interest
collections relating to the note from Joseph Montgomery due to its repayment in
full last year.
Capital expenditures were $2.1 million for the first nine months of fiscal 2002,
compared to $3.0 million for the first nine 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 nine months of fiscal
2002 was $17.3 million, compared to the $5.1 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 nine months of fiscal 2002
primarily reflects the borrowings under our revolving credit facilities for the
purpose of funding working capital requirements. During the first nine 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 March 30, 2002, the
remaining availability under our revolving line of credit with Tyco Capital
Corporation (formerly the CIT Group/Business Credit Inc.) was approximately $4.5
million, and availability under the borrowing facility with IFN Finance, B.V.
was approximately $1.4 million.
As of February 2002, we were not in compliance with certain financial covenants
contained in our financing agreements with Tyco Capital Corporation and Ableco
Finance LLC. We are currently holding discussions with these lenders to amend
these covenants, and we are considering refinancing proposals from other
lenders. However, we can give no assurance that we will be able to amend these
covenants with our current lenders, or that we will secure refinancing with
other lenders on acceptable terms or at all. 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. Accordingly, all long-term debt has been
reclassified to a current liability on the Condensed Consolidated Balance Sheet
at March 30, 2002.
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 motorsports reserve
levels. Actual results could differ from our estimates.
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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 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 nine months of
fiscal 2002. No single customer accounted for more than 5% of our net sales
during the first nine 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 March 30, 2002, we had approximately $20.4 million of forward exchange
contracts outstanding. Of these contracts outstanding, approximately $15.7
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 March 30, 2002, the
maximum period of time we were hedging our exposure to the variability in future
cash flows for forecasted transactions was five months.
The remaining $4.7 million of foreign exchange contracts outstanding at March
30, 2002 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
March 30, 2002.
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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: May 14, 2002 /S/ WILLIAM A. LUCA
-----------------------------------
William A. Luca
Vice President of Finance,
Chief Financial Officer and Chief
Operating Officer
(Principal Financial Officer
and authorized signatory)
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