SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[ X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 29, 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 (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
16 TROWBRIDGE DRIVE, 06801
BETHEL, CONNECTICUT (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 749-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
------------------- ON WHICH REGISTERED
None ---------------------
N/A
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01
COMMON STOCK PURCHASE RIGHTS
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
At September 20, 2002, the aggregate market value of the voting stock
held by non-affiliates of the registrant was $10,389,488 based on the per share
closing price on such date, and the registrant had 7,582,779 shares of common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement relating to the
2002 Annual Meeting of Stockholders are incorporated by reference into Part III,
as set forth herein.
PART I
ITEM 1. BUSINESS.
GENERAL.
Cannondale Corporation (together with its subsidiaries, collectively referred to
in this report as we, us or our) is a leading manufacturer of high-performance
bicycles, and an emerging player in the off-road motorsports industry. Our
bicycle line has grown from 21 models in our 1992 model year to 89 models in our
2003 model year, all of which are hand assembled and constructed with
hand-welded aluminum frames. We also sell other bicycle-related products
including clothing, shoes and bags, and a line of components, some of which are
manufactured for us by third parties. In addition, for our 2003 model year, we
are offering five ATV (All-Terrain Vehicle) models and six motorcycle models. We
were incorporated in Delaware in 1971.
The bicycle market has matured in recent years and its growth rate has
decreased. We believe that we can leverage our domestic flexible manufacturing
capabilities, which allow us to consistently provide high quality and innovative
products to the market faster than our competition and take strategic advantage
of the current market conditions. Additionally, we believe that a marketing
strategy consistent with our bicycle product line - one that focuses on
innovation, differentiation, performance and quality leadership - provides us
with the opportunity for a diversified growth strategy in the motorsports
market.
PRODUCTS - BICYCLES.
Our bicycles are marketed under the Cannondale brand name and "Handmade in USA"
logo. Our 2003 bicycle line offers 89 models, all of which feature a lightweight
Cannondale hand-welded and hand-assembled aluminum frame. Our use of aluminum
allows us to produce frames that are generally lighter in weight than other
frames. Our bicycles feature wide diameter tubing, which provides greater frame
rigidity as well as a distinctive look. Certain models also have full or front
suspension systems, offering greater comfort and control than non-suspended
bikes.
We manufacture and sell bicycle models for the adult market in seven major
categories: mountain, road racing, Sport road, multi-sport, Road Warrior,
recreational and specialty. Mountain bikes have wide knobby tires and straight
handlebars, and are designed for off-road riding. Road racing bikes are
lightweight with thin tires and drop (curved) handlebars, and are used for
competitions or fast-paced fitness riding on paved roads. Sport road bikes are
recreational road bikes that focus on comfort as much as performance.
Multi-sport bikes, designed for triathlons and other multi-sport races, are
crafted from aerodynamic tubes. Road Warrior models are targeted toward serious,
non-competitive road riders, and have somewhat more emphasis on comfort. The
recreational segment is comprised of Adventure and comfort bikes. Adventure
models stress performance and comfort while providing more potential ground
speed than comfort bikes, while comfort bikes are perfect for the occasional
cyclist who places maximum importance on comfort and ease of use. The specialty
bicycle market encompasses various niche products, including tandem, touring,
cyclocross, city and street models.
The 89 bicycle models in our 2003 model year are distributed in the seven major
bicycle categories as follows:
NUMBER OF
CATEGORY 2003 MODELS
-------- -----------
Mountain:
Full Suspension............. 18
Front Suspension............ 11
Road Racing:
Non-Suspended............... 18
Multi-Sport.................... 4
Sport Road..................... 5
Road Warrior:
Front-Suspended............. 1
1
NUMBER OF
CATEGORY 2003 MODELS
-------- -----------
Non-Suspended............... 2
Recreational:
Adventure................... 8 (three front suspension and one
full suspension)
Comfort..................... 7 (two front suspension and one
full suspension)
Specialty:
Tandem...................... 4
Touring..................... 2
Cyclocross.................. 3 (one front suspension)
Bad Boy (city).............. 3
Street...................... 3
We have 14 models in our 2003 line of proprietary HeadShok front suspension
forks. Each HeadShok model offers us an important point of differentiation from
other bicycle manufacturers, virtually all of whom use the same brand-name forks
produced by three independent suppliers. Our 2003 HeadShok line is highlighted
by four Lefty fork models. The HeadShok Lefty models feature a single
telescoping blade that dramatically reduces weight while delivering generous
travel. The flagship Lefty fork, the Lefty Carbon ELO, features a carbon fiber
telescoping blade and weighs 317 grams less than the original Lefty. The fork
also features ELO (Electronic Lock-Out), a handlebar-mounted push-button switch
that electronically deactivates the fork's suspension on demand to prevent
wasteful bobbing during sprints and climbs.
We also manufacture other proprietary components to further distinguish
ourselves from our competitors, and to pursue a strategy of "System
Integration." System Integration is the process by which our designers create
dedicated frames and components concurrently. This strategy allows our designers
to aggressively pursue new levels of light weight and performance, without the
restrictions of pre-set standards imposed by component suppliers. An example of
System Integration is our CAAD7 Si road frame, and its dedicated Hollowgram
front gear assembly. The CAAD7 Si frame is specially constructed to accommodate
the Hollowgram components, which are 15% lighter and 4% more energy-efficient
than the comparable leading parts available to other bicycle manufacturers.
We also offer a complete line of men's and women's cycling apparel. The line
features numerous garments, and ranges from traditional cycling shorts and
jerseys to water and windproof shells designed specifically for cold weather
cycling. The line includes two main collections: Chrono, a versatile line of
performance-oriented apparel for riders of all abilities, and Terra, more
loosely-cut garments for off-road riding.
In addition to our bicycle, suspension fork, component and clothing lines, we
manufacture and sell bicycle accessories, including bags, shoes and other items,
some of which are manufactured for us by third parties. These products are sold
primarily through the same distribution channels as our bicycles, forks,
components and apparel.
PRODUCTS - MOTORSPORTS.
In May 2000, we entered the motorsports industry with the commercial
introduction of the Cannondale MX400, a high-performance motocross (off-road
racing) motorcycle, and followed in February 2001 with shipments of our FX400
ATV. In fiscal 2002, we introduced six new motorcycle models and five new ATV
models. Our entry into the motorsports industry allows us to extend our brand
into a new market by capitalizing on several of our core competencies,
particularly our ability to design, test and manufacture welded and heat-treated
aluminum-framed vehicles for off-road use. Our motorsports products are powered
by a proprietary liquid-cooled, electric-start, 432 cc four-stroke engine with a
unique reversed cylinder head. The four-valve engine is fuel injected to deliver
the proper air/fuel mixture to the engine independent of changes in air
temperature or altitude.
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We are offering the following motorsports models for the 2003 model year:
Motorcycles
X440 - The only American-made motocross racer available.
E440 - Our highly-acclaimed enduro racer.
E440R - Our top-of-the-line enduro model, with the added performance of high-end
Ohlins front and rear suspension.
E440A - All the features and performance of our E440 enduro, with the simplified
shifting of an automatic Revloc clutch.
C440R - Aggressive motocross-level speed and performance in a cross-country
racing package.
S440 - The world's only super motard racer with high-performance fuel-injection
and a super-light, super-stiff, aluminum perimeter frame.
ATVs
Moto 440 - Our race-ready motocross ATV, designed to go straight from the crate
to the race track.
Blaze 440 - Our GNCC race machine, ready for competition right out of the box.
Speed 440 - A versatile all-around, high-performance ATV.
Glamis 440 - Based on our Speed model, and outfitted for high-performance riding
in sand dunes.
Cannibal 440 - Our base-model ATV, winner of the "Best Sport ATV" award from ATV
Magazine in March 2002.
We also sell a collection of motorcycle apparel which was introduced in fiscal
year 2000 concurrently with the MX400.
For additional information about revenues, profit and loss, and total assets for
the bicycle and motorsports segments, see Note 13 in the Notes to the
Consolidated Financial Statements included in this Form 10-K.
MARKETING.
The goal of our marketing program is to establish Cannondale as the leading
high-performance brand in the specialty bicycle and motorsports retail channels.
Our marketing effort is focused on innovation, differentiation, performance and
quality leadership with a strong emphasis on our "Handmade in USA" heritage.
Part of our bicycle marketing effort is the sponsorship of professional cycling
teams, which contribute to our bicycle product development effort, and serve as
a major focus of our bicycle marketing effort. We leverage the competitive
success of our racing teams by using photo images of the athletes on our web
site, in print media, on point-of-sale literature, banners, product packaging
and product catalogs.
Our sponsorship of the Saeco-Longoni Sport professional road cycling team
increases our visibility and credibility among high-end consumers dedicated to
road racing. A major force in top European professional road cycling events, the
Saeco team has competed aboard Cannondale bicycles and in our cycling apparel
since the spring of 1997. In domestic road racing, we are the official bicycle
sponsor of the T-Mobile women's team, and the 7 UP/Nutra Fig men's team.
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We also sponsor the SoBe/Cannondale team of pro-am mountain bike racers, which
currently includes 2002 U.S. National Champion Nancy Busching (24-hour women's
solo category).
In June 2002 we signed an exclusive licensing agreement with Ironman Properties
to become the official bicycle of Ironman triathlons, and have since introduced
a line of Ironman-branded bicycles. Ironman is the most prestigious name in the
sport of triathlon, with more than 50,000 athletes worldwide contending for one
of 1,500 available race slots for the Ironman Triathlon World Championships in
Hawaii. The Hawaii event has been covered on network television since 1980 and
has drawn international audiences of more than 50 million viewers.
We use the internet to vigorously promote our brand and image by offering
consumers a popular web site (www.cannondale.com), which averages about 29,000
visitors each day. The bicycle segment of the web site incorporates several
innovative features to link our products with potential customers. The site's
Select-A-Bike tool helps match customers to appropriate bike models based upon
their preferences and budget. The Test Ride function allows customers to locate
a particular bike model and size in their geographic area by searching a
database of dealer inventories, with a subsequent series of automated e-mails
between us, the customer and their local dealer coordinating the test ride
process. We have also expanded our on-line presence by offering foreign language
versions of key content areas.
Our web site is also home to the Cannondale Chain Gang, a loose confederation of
more than 50,000 global Cannondale owners and fans who receive regular e-mail
updates concerning new products, sales promotions, race results and other news.
The Chain Gang program has been expanded in recent years to include test ride
demos at races, cycling festivals and organized rides throughout the U.S.,
Europe, Japan and Australia. At these events, selected Chain Gang members
receive promotional Chain Gang team merchandise, free mechanical support, and
the use of a high-end Cannondale bicycle for the duration of the event.
We promote our motorsports products using print ads in specialty motorsports
magazines and trade journals. The motorsports segment of our web site promotes
our products with technical information and specifications, testimonials from
consumers, retailers and magazine editors, and regular race updates.
In 2002, we officially launched the Nac's/Cannondale ATV racing team, the ATV
industry's only factory-supported race squad. The team has garnered significant
exposure in ATV enthusiast magazines, and by the mid-point of its first race
season the team had achieved 46 top-ten finishes in 54 individual races,
including 15 wins and 25 podium finishes.
Due to the innovations and significant new technology that we incorporate in our
motorsports products, our products have also received significant amounts of
favorable exposure in enthusiast print media. Our 2002 products have appeared on
40 covers of motorsports specialty magazines.
All of our products are supported by an active program to generate product
publicity in a variety of print and broadcast media, both enthusiast and general
interest.
SALES AND DISTRIBUTION.
Our distribution strategy is to sell our bicycles through specialty bicycle
retailers who have the ability to provide knowledgeable sales assistance
regarding the technical and performance characteristics of our products and an
ongoing commitment to servicing our bicycles. In addition, in order to increase
the sales of our clothing and accessory lines, we expanded our distribution
network to include sport-specialty retailers. We do not sell bicycles through
mass merchandisers. A key aspect of our strategy is to use a network of
specialty bicycle retailers that can support our growth objectives. We take into
account a number of factors when adding new retailers; for example, we target
certain market areas based upon analysis of various demographic and competitive
characteristics.
In the United States and Canada, we currently sell bicycles and accessories
directly to approximately 1,000 specialty bicycle retailer locations and sell
accessories through approximately an additional 300 retailer locations.
Generally, our retailers do not have exclusive rights in any territory. In
addition to selling bicycles, our 30-member field-sales force is responsible for
selling our clothing and accessory lines. Our sales force contributes to all
aspects of
4
customer service, including marketing our products to retailers, providing
retailer assistance and assisting in our accounts receivable management. The
account managers also monitor sales at the retailer level, enabling us to better
respond to changes in market demand and to adjust production accordingly. In
addition, we employ a staff of inside sales representatives to handle retailer
orders between visits from the field-sales force, and maintain staff to handle
telemarketing and special dealer incentive programs.
Substantially all of our domestic and international bicycle retailers
participate in the Authorized Retailer Program, or ARP. Typically, retailers
that participate in the ARP place orders for the year and plan to take delivery
at predetermined points throughout the year. This program enables retailers to
plan their business around scheduled deliveries and provides freight and pricing
discounts, as well as payment terms that are conducive with the seasonality of
the business. Under the ARP, our sales force formulates a delivery plan with our
retailers, typically based upon historical delivery information, that conforms
with the retailers' growth objectives and inventory needs. We believe that the
ARP allows us to maximize the competitive advantage of our flexible domestic
manufacturing capabilities, which provide us with the ability to rapidly meet
changes in market trends and demand. Our payment terms generally vary from 30 to
210 days from the date of shipment, depending on the time of year and other
factors. Orders may be canceled by the retailers without penalty up to 30 days
before shipment.
Our 11-member motorsports sales force sells our motorsports products through a
network of independent motorsports dealerships. As with specialty bicycle
retailers, specialty motorsports retailers can most effectively communicate to
customers the technical and performance characteristics of our products.
Specialty motorsports retailers are also best able to provide proper initial set
up and adjustment of our products, as well as ongoing service and repair. For a
significant amount 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.
INTERNATIONAL OPERATIONS.
Our bicycle products are sold in approximately 60 foreign countries. Our
activities in Europe, Japan and Australia are conducted through three
wholly-owned subsidiaries: Cannondale Europe B.V., Cannondale Japan KK and
Cannondale Australia Pty Limited, respectively. Sales in other foreign countries
are made from the United States through the use of 45 foreign distributors who
sell our products to specialty bicycle retailers overseas. During fiscal 2002,
2001 and 2000, Cannondale Europe accounted for 37%, 39% and 41%, respectively,
of consolidated net sales, while Cannondale Japan accounted for 3%, 4% and 5%,
respectively. Cannondale Australia accounted for 2% of consolidated net sales in
fiscal 2002, 2001 and 2000.
During fiscal year 2002, we began shipping our motorsports products to the
international market. Cannondale U.S. uses 10 foreign distributors for
motorsports shipments to specialty retailers overseas, and Cannondale Europe is
in the process of developing its motorsports dealer network. We expect the
volume of our international motorsports shipments to increase during fiscal year
2003.
Cannondale Europe. Cannondale Europe, based in Oldenzaal, the Netherlands, was
formed in 1989. Cannondale Europe assembles bicycles at its Netherlands
facilities using our frames and components, as well as components manufactured
by third parties. Cannondale Europe sells bicycles and accessories directly to
approximately 1,000 specialty bicycle retailer locations in Austria, Belgium,
Denmark, Finland, France, Germany, Italy, Ireland, Luxembourg, the Netherlands,
Norway, Spain, Sweden, Switzerland and the United Kingdom using locally based
employee account managers supervised from the Oldenzaal headquarters.
Distributors are used in Greece, Hungary, Turkey, Greenland, India, Bulgaria,
Andorra, Malta, Estonia, Lithuania and the Czech Republic.
Cannondale Japan. We formed Cannondale Japan in fiscal 1992 to undertake direct
sales to Japanese specialty bicycle retailers. Cannondale Japan, based in Osaka,
imports fully-assembled bicycles and a full line of our accessories and various
components manufactured by third parties. Cannondale Japan sells bicycles and
accessories directly to approximately 300 specialty retailers and sells only
accessories to an additional 27 retailers.
Cannondale Australia. In July 1996, Cannondale Australia purchased substantially
all the assets of Beaushan Trading Pty Limited, an Australian bicycle
distribution company, to undertake direct sales to Australian and New
5
Zealand specialty bicycle retailers. Cannondale Australia, based in Sydney,
imports fully-assembled bicycles and a full line of our accessories and various
components manufactured by third parties. Cannondale Australia sells bicycles
and accessories directly to approximately 200 specialty retailers.
SUPPLIERS.
We source material and components on a global basis in order to keep pricing and
availability at stable levels. We have developed strong relationships with
vendors who have a proven track record in their markets. We have few long-term
agreements with our major suppliers. Aluminum tubing, the primary material
employed in our manufacturing operations for our bicycles and motorsports
products, is available from a number of domestic suppliers. We have a supply
agreement for aluminum tubing which expires in June 2003. We believe that the
termination of this agreement will not have a significant impact on the
availability of aluminum tubing, as the supply is currently strong and we also
utilize other aluminum suppliers. Purchases from Japanese component
manufacturers are made through Cannondale Japan. Our largest component supplier
is Shimano, which was the source of approximately 18% of our total bicycle raw
material inventory purchases in fiscal 2002.
PATENTS AND TRADEMARKS.
We hold 42 United States patents relating to various products, processes or
designs with expiration dates ranging from 2005 to 2017. We focus on obtaining
patent protection for our core technologies and seek broad coverage to protect
our position in the industry. We believe that our patented technology is a
reflection of our success in product innovation and that, collectively, our
patents enhance our ability to compete. However, in light of the nature of
innovation in the bicycle and motorsports industries, we do not believe that the
loss of any one of our patents, or the expiration of any of our current patents,
would have a material adverse effect on our business or results of operations.
We hold numerous United States trademarks, covering the CANNONDALE and HeadShok
names and the names of a variety of products and components. The CANNONDALE
trademark is also registered in our significant foreign markets. We believe a
significant competitive factor for us is the strong brand name recognition of
our CANNONDALE trademarks in the bicycle and accessory markets. We also believe
that our strong brand name will have a favorable effect on our presence within
the motorsports market.
SEASONALITY.
Our business is seasonal due to consumer spending patterns, which in turn affect
retailer delivery preferences. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Selected Quarterly Financial
Data; Seasonality" included in Part II, Item 7 of this Form 10-K.
COMPETITION.
Competition in the high-performance segment of the bicycle industry is based
primarily on perceived value, brand image, performance features, product
innovation and price. Competition in foreign markets may also be affected by
duties, tariffs, taxes and the effect of various trade agreements, import
restrictions and exchange rates. The worldwide market for bicycles and
accessories is extremely competitive, and we face competition from a number of
manufacturers in each of our product lines. A number of our competitors are
larger and have greater resources than us. We compete on the basis of the
breadth and quality of our product line, the development of an effective
specialty retailer network and our brand recognition.
The motorsports market is also highly competitive. Our principal competitors are
foreign manufacturers that have financial resources substantially greater than
ours. These competitors also have established manufacturing capabilities,
substantial diversification, and established brand recognition. As a result of
these factors, we can give no assurance that we will successfully penetrate the
motorsports market.
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RESEARCH AND DEVELOPMENT.
Our bicycle research and development efforts are directed toward the creation of
new and innovative products, and the improvement of existing designs. We
continuously strive to make our bicycles lighter, stronger, faster and more
comfortable. Our research and development group focuses on designing and
delivering innovative products in order to position Cannondale as an innovation
leader. Our research and development efforts are assisted by our sponsored race
teams which provide significant feedback on product design, performance and
durability.
Our research and development efforts have resulted in design and production
systems that allow us to compress the time between concept and production. We
believe that our research and development efforts have benefited from
efficiencies realized through the use of computer-aided design tools and
increased integration of the design and production processes. In addition, our
collaboration with our racing teams has led to the development of several
competitive new products, including new generations of CAAD (Cannondale Advanced
Aluminum Design) road and mountain bicycle frames, the HeadShok Lefty fork and
the Scalpel(TM), as well as the continuous refinement of our existing products.
During fiscal years 2002, 2001 and 2000, we invested approximately $3.3 million,
$2.9 million and $3.8 million, respectively, in bicycle research and development
activities. 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 by mid-2003.
Our research and development group has leveraged our core competencies as a
technology leader of frame and suspension products in the bicycle industry in
the development of an innovative frame and suspension system for our motorsports
products. We use our proprietary 432cc four-stroke engine, manufactured at our
motorsports production facility in Bedford, Pennsylvania, in both our
motorcycles and ATVs. We apply the design, testing and production techniques
used in our bicycle product line to the development of new and innovative
motorsports-related products. We invested approximately $2.5 million, $3.7
million and $4.7 million into research and development of our motorsports
products during fiscal years 2002, 2001 and 2000, respectively. 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.
The development of the motorsports and bicycle-related innovations exemplify our
commitment to continuously invest in developing design, product and process
technologies to differentiate Cannondale from our competition. We invested
approximately $5.8 million, $6.6 million and $8.5 million into research and
development of both bicycle and motorsports products during fiscal years 2002,
2001 and 2000, respectively. 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.
ENVIRONMENTAL MATTERS.
We are subject to all applicable foreign, federal, state and local laws and
regulations relating to the discharge of materials into the environment, or
otherwise relating to the protection of the environment. We do not believe that
compliance with these regulations has an adverse effect upon our business.
A portion of our Bedford, Pennsylvania property acquired in 1992 was the subject
of a groundwater monitoring program, stemming from the removal of certain
underground storage tanks prior to our acquisition of the property. We received
a waiver from the Department of Environmental Protection that provided for the
cessation of this program. During the program, the sampling results indicated no
groundwater contamination. In the unanticipated event that the situation
surrounding this matter changes, and conditions requiring remediation are
discovered, the costs of such remediation could have a material adverse effect
on our financial condition and results of operations.
7
EMPLOYEES.
As of June 29, 2002, Cannondale U.S. employed 717 full-time employees,
Cannondale Europe employed 125 full-time employees, Cannondale Japan employed 14
full-time employees, and Cannondale Australia employed 7 full-time employees.
FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES.
Please refer to Note 13 in the Notes to the Consolidated Financial Statements
included in this Form 10-K.
ITEM 2. PROPERTIES.
Our corporate headquarters and research and development facility is located in
Bethel, Connecticut. This facility contains 32,500 square feet on a five-acre
site. We partially financed the cost of the facility with a loan ($1.6 million)
from the Connecticut Development Authority. The loan extends to February 2008
and is secured by the facility.
We have a facility in Bedford, Pennsylvania for the production of our bicycles
and some of our bicycle-related products. This Bedford plant contains 289,000
square feet on 23 acres. In addition to production, we use this facility to
house our customer service department and provide additional space for
warehousing and future expanded production. In connection with the financing of
the facility, the site is held in the names of local development agencies and is
occupied by us pursuant to installment sales agreements. We make monthly
payments that will fully amortize the financing from the local agencies and
additional financing provided by the Pennsylvania Industrial Development
Authority ("PIDA"). Upon final amortization (the year 2013), title to the
property will be conveyed to us and PIDA's mortgages on the property will be
released.
We also have a second facility in Bedford, Pennsylvania to house production of
our motorsports products and to provide additional warehousing space. This
facility contains 100,000 square feet on 23.9 acres. The cost of this facility
was $6.3 million, which we partially financed with a loan ($1.0 million) from
PIDA. Upon final amortization (the year 2015), PIDA's mortgage on the property
will be released.
Cannondale Europe owns a 30,128 square foot facility in Oldenzaal, the
Netherlands, which houses administrative and sales offices, a bicycle assembly
plant and warehouse. This building is partially secured by a $1.9 million
mortgage, and contains additional space for further expansion. In addition,
Cannondale Europe leases a 25,286 square foot facility used for warehousing.
Cannondale Japan and Cannondale Australia lease a total of 5,940 and 2,500
square feet of office and warehouse space, respectively.
We believe that our present facilities are in good condition and are suitable
for our operations. We believe our facilities provide sufficient capacity to
meet our anticipated requirements for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We did not submit any matters to a vote of stockholders during the fourth
quarter of our 2002 fiscal year.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information concerning our executive officers follows:
NAME AGE POSITION
---- --- --------
Joseph S. Montgomery......... 62 Chairman, President, Chief Executive
Officer, Director
William A. Luca.............. 59 Vice President of Finance, Chief
Financial Officer, Chief Operating
Officer, Director
Daniel C. Alloway............ 43 Vice President of Sales, Director
Leonard J. Konecny........... 59 Vice President of Purchasing
James Scott Montgomery....... 41 Vice President of Marketing, Director
John P. Moriarty............. 58 Assistant Treasurer and Assistant
Secretary, Chief Accounting Officer
Michael T. Dower............. 50 Vice President of Information Technology
Larry E. Sarver.............. 37 Vice President of Manufacturing
Cynthia S. Hoboken........... 48 Treasurer
JOSEPH S. MONTGOMERY founded Cannondale in 1971 and has been our Chairman,
President and Chief Executive Officer and a director since inception. Mr.
Montgomery is the father of James Scott Montgomery, who is Cannondale's Vice
President of Marketing and a director.
WILLIAM A. LUCA joined us in January 1994 as Vice President of Finance,
Treasurer and Chief Financial Officer. During 2000, he was appointed as our
Chief Operating Officer. Prior to joining us, he served as a management
consultant from 1989 to 1993, including consulting for us between August and
December 1993. From 1980 to 1989, Mr. Luca was employed by Dual-Lite, Inc., a
manufacturer of emergency lighting systems, as Chief Financial Officer (1980 to
1983), President and Chief Operating Officer (1983 to 1986) and President and
Chief Executive Officer (1986 to 1989). Mr. Luca was appointed a director of
Cannondale in August 1994.
DANIEL C. ALLOWAY has held a number of positions since joining us in 1982,
including Vice President of Sales (November 1998 to the present), Vice President
of Sales and Vice President of European Operations (1994 to 1998), Managing
Director of Cannondale Europe (1992 to 1994), Director of Sales and Marketing
(1990 to 1992) and National Sales Manager (1987 to 1990). Mr. Alloway was
appointed a director of Cannondale in June 1998.
LEONARD J. KONECNY joined us in 1994 as Vice President of Purchasing. From 1988
to 1994, he was Director of Materials for General Signal Building Systems
(Dual-Lite and Edwards divisions), responsible for the materials and purchasing
functions.
JAMES SCOTT MONTGOMERY was appointed as our Vice President of Marketing in 2002.
From 1997 to 2002, Mr. Montgomery provided consulting services to Cannondale. He
served as our Vice President of Marketing from 1993 to 1997, our President of
the Sales and Trading Divisions of Cannondale Japan KK from 1991 to 1993, our
co-founder and Managing Director of Cannondale Europe B.V. from 1989 to 1991,
and our Director of Purchasing. Mr. Montgomery is the son of Joseph S.
Montgomery.
JOHN P. MORIARTY joined us in 1993 as Assistant Treasurer and Chief Accounting
Officer. From 1990 to 1993, he was Controller of Cuno, Inc., a manufacturer of
fluid filtration products. Between 1981 and 1989, he was employed by Dual-Lite,
Inc., as Vice President-Finance (1983 to 1989) and Controller (1981 to 1983).
MICHAEL T. DOWER joined us in 1992 as a Programmer/Analyst. He was appointed the
Director of Information Technology in 1994 and currently serves as the Vice
President of Information Technology. Prior to joining us, he worked as an
independent information technology consultant for 10 years. Mr. Dower was
appointed as our Vice President of Information Technology in September 1999.
9
LARRY E. SARVER joined Cannondale in 1983. Mr. Sarver served as our Bicycle
Plant Manager from 1997 to August 2002, at which time he was appointed our Vice
President of Manufacturing.
CYNTHIA S. HOBOKEN joined us in 1998 as our Senior Financial Analyst, and was
appointed Treasurer in November 2001. Before joining Cannondale, Ms. Hoboken was
the Controller for Amphenol CNP Division from 1997 to 1998, and she was the
Director of Finance for Dual-Lite, Inc from 1990 to 1997.
MARK A. CHARPENTIER resigned as our Vice President in September 2002, a position
he held since July 2000. He previously held several positions since joining us
in 1983, including National Sales Coordinator (1998 to 2000), National Sales
Manager (1995 to 1998), Director of Sales (1993 to 1995), and Midwest Region
Sales Manager (1987 to 1993).
Each of our officers is appointed by and serves at the pleasure of our Board of
Directors.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock began trading on the Nasdaq National Market on November 16,
1994, under the symbol BIKE. The following table sets forth, for the periods
indicated, the high and low bid prices per share for our common stock, as
reported by the Nasdaq National Market.
HIGH LOW
---- ---
FISCAL 2002
First Quarter (7/1/01 to 9/29/01)................ $ 3.98 $ 2.25
Second Quarter (9/30/01 to 12/29/01)............. 2.30 2.02
Third Quarter (12/30/01 to 3/30/02).............. 4.50 2.25
Fourth Quarter (3/31/02 to 6/29/02)............. 3.98 2.39
FISCAL 2001
First Quarter (7/2/00 to 9/30/00)................ 6.75 5.28
Second Quarter (10/1/00 to 12/30/00)............. 5.34 3.56
Third Quarter (12/31/00 to 3/31/01).............. 5.63 3.63
Fourth Quarter (4/1/01 to 6/30/01).............. 4.40 3.05
As of September 24, 2002, there were approximately 459 stockholders of record of
our common stock.
We have not paid any cash dividends on our common stock since our inception and
do not anticipate paying any cash dividends in the foreseeable future. We have
certain financing agreements which limit the payment of dividends.
In July 2002, we sold to Pegasus Partners II, L.P. $25.0 million of our senior
notes and warrants to purchase an aggregate of 2,944,552 shares of our common
stock. These warrants are exercisable through July 26, 2012 at an initial
exercise price of $2.05 per share. If we repay the senior notes in full by
January 26, 2004, warrants to purchase 1,972,849 shares will be cancelled. If we
do not repay the senior notes in full by that date, but repay the senior notes
in full by July 26, 2004, warrants to purchase 1,472,276 shares will be
cancelled. The warrants subject to cancellation are not exercisable.
The issuance of the senior notes and warrants was not registered under the
Securities Act of 1933 in reliance upon the exemption set forth in Section 4(2)
of that Act relating to transactions by an issuer not involving a public
offering.
11
ITEM 6. SELECTED FINANCIAL DATA.
We derived the following summary data from our Consolidated Financial
Statements. You should read the following information in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and related Notes, which
appear elsewhere in this Form 10-K.
TWELVE TWELVE TWELVE TWELVE TWELVE
MONTHS MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED
JUNE 29, JUNE 30, JULY 1, JULY 3, JUNE 27,
2002 2001 2000 1999 1998
-------- -------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales (1).................... $156,655 $146,791 $162,450 $ 178,765 $173,819
Cost of sales.................... 122,328 110,823 112,100 114,627 110,113
-------- -------- -------- --------- -------
Gross profit..................... 34,327 35,968 50,350 64,138 63,706
Expenses:
Selling, general and
administrative (1) (2)...... 40,731 36,825 42,771 42,545 41,684
Research and development....... 5,827 6,639 8,470 10,222 6,750
-------- -------- -------- --------- -------
Total operating expenses......... 46,558 43,464 51,241 52,767 48,434
-------- -------- -------- --------- -------
Operating income (loss).......... (12,231) (7,496) (891) 11,371 15,272
Other income (expense):
Interest expense (2)........... (5,119) (6,738) (5,888) (4,557) (1,995)
Other income (expense) (2)..... (238) 346 2,208 1,160 653
-------- -------- -------- --------- -------
(5,357) (6,392) (3,680) (3,397) (1,342)
-------- -------- -------- --------- -------
Income (loss) before income taxes (17,588) (13,888) (4,571) 7,974 13,930
Income tax (expense) benefit..... 2,148 (6,431) 2,045 (2,051) (4,578)
-------- -------- -------- --------- -------
Net income (loss)................ $(15,440) $(20,319) $ (2,526) $ 5,923 $ 9,352
======== ======== ======== ========= =======
BASIC EARNINGS (LOSS) PER
COMMON SHARE: (3)
Net income (loss)................ $ (2.04) $ (2.70) $ (0.34) $ 0.79 $ 1.11
Weighted-average common shares... 7,552 7,522 7,497 7,518 8,442
DILUTED EARNINGS (LOSS) PER
COMMON SHARE: (3)
Net income (loss)................ $ (2.04) $ (2.70) $ (0.34) $ 0.77 $ 1.08
Weighted-average common shares
and common equivalent shares
outstanding.................... 7,552 7,522 7,497 7,686 8,682
JUNE 29, JUNE 30, JULY 1, JULY 3, JUNE 27,
2002 2001 2000 1999 1998
---------- ----------- ----------- ---------- -----------
BALANCE SHEET DATA:
Working capital.................. $ 48,813 $ 56,574 $ 75,456 $ 74,894 $78,975
Total assets..................... 130,940 127,791 164,907 162,379 152,277
Total long-term debt, excluding 49,751 48,434 63,363 55,997 40,352
current portion................
Total stockholders' equity....... 34,628 49,055 70,686 75,010 78,238
- --------------
(1) Fiscal 1998 through 2000 amounts have been restated in accordance with
EITF 00-10, "Accounting for Shipping and Handling Fees and Costs."
(2) Fiscal 2001 and 2000 amounts have been restated in accordance with FASB
Statement No. 145, "Rescission of FASB Statements No. 4, 44 and 64,
Amendments of FASB Statement No. 13, and Technical Corrections."
(3) No cash dividends were declared or paid on the common stock during any
of these periods.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS.
The following table presents statement of operations data as a percentage of net
sales:
FISCAL
2002 2001 2000
---- ---- ----
Net sales................................ 100.0% 100.0% 100.0%
Cost of sales............................ 78.1 75.5 69.0
------ ------ -----
Gross profit............................. 21.9 24.5 31.0
Expenses:
Selling, general and administrative... 26.0 25.1 26.3
Research and development.............. 3.7 4.5 5.2
------ ------ -----
Total operating expenses................. 29.7 29.6 31.5
------ ------ -----
Operating loss........................... (7.8) (5.1) (0.5)
Other income (expense):
Interest expense...................... (3.3) (4.6) (3.6)
Other income (expense)................ (0.1) 0.2 1.3
------ ------ -----
(3.4) (4.4) (2.3)
------ ------ -----
Loss before income taxes................. (11.2) (9.5) (2.8)
Income tax (expense) benefit............. 1.4 (4.3) 1.2
------ ------ -----
Net loss................................. (9.8)% (13.8)% (1.6)%
====== ====== =====
Comparison of Fiscal 2002, 2001 and 2000.
Net Sales. Our net sales grew to $156.7 million in fiscal 2002, from $146.8
million in fiscal 2001, which in turn decreased from $162.5 million in fiscal
2000. The increase in net sales during fiscal 2002 reflects the significant
growth in motorsports sales, which totaled $22.0 million compared to $5.3
million for fiscal 2001. During fiscal 2002, we introduced eleven new
motorsports models, expanded our domestic motorsports dealer network and began
shipping our motorsports products to the international market. Sales of our
bicycles declined in fiscal 2002 to $134.6 million from $141.5 million in fiscal
2001 and $162.4 million in fiscal 2000. The fiscal 2002 decrease was primarily
attributable to the shift in the timing of inventory receipts by our bicycle
dealers closer to the time of their sales to end consumers. In addition, during
fiscal 2002 we had an increase in unfilled open orders at the end of June 2002
over the prior year as a result of orders not shippable due to late delivery of
componentry from suppliers for the new 2003 bicycle models. For fiscal 2001, our
net sales were negatively affected by approximately $8.1 million related to
foreign exchange fluctuations, primarily resulting from the weakened Euro
against the U.S. dollar. Additionally, the decrease in net sales for fiscal 2001
compared to fiscal 2000 reflected dealers' cautious buying patterns relating to
the weakened U.S. economy as well as adverse weather conditions. These
reductions were partially offset by the $5.3 million in motorsports shipments
during fiscal 2001. Overall, our bicycle sales have decreased in recent years
primarily as a result of the industry-wide decline in the bicycle market demand
and reduction in inventory by many of our domestic and international dealers.
Cannondale U.S. sales were $90.7 million in fiscal 2002, $80.8 million in fiscal
2001 and $85.0 million in fiscal 2000. The significant increase in Cannondale
U.S. shipments during fiscal 2002 relates to the growth in motorsports
shipments, offset by a decline in bicycle shipments as discussed above. Net
sales reported by Cannondale Europe increased to $58.2 million in fiscal 2002
from $57.5 million in fiscal 2001, which in turn decreased from $66.9 million in
fiscal 2000. Included in Cannondale Europe's net sales for fiscal year 2002 are
motorsports shipments of approximately $2.0 million. The significant decrease in
Cannondale Europe's net sales during fiscal 2001 compared to fiscal 2000
resulted from the unfavorable foreign exchange impacts of the weakened Euro
against the U.S. dollar, as mentioned above, coupled with the dealer inventory
adjustments. Net sales of Cannondale Japan decreased to $5.3 million in fiscal
2002 from $5.7 million in fiscal 2001 and $7.4 million in fiscal 2000. The 2002
decrease was attributable to an unfavorable foreign exchange impact, whereas the
2001 decrease was attributable to the downturn of the Japanese economy during
fiscal 2001 and an unfavorable foreign exchange impact. Net sales of Cannondale
13
Australia decreased slightly to $2.5 million in fiscal 2002 from $2.8 million in
fiscal 2001 and $3.2 million in fiscal 2000, primarily as a result of foreign
exchange fluctuations.
Gross Profit. Gross profit as a percentage of net sales decreased to 21.9% in
fiscal 2002 from 24.5% in fiscal 2001 and 31.0% in fiscal 2000. The reduction in
the gross profit rates in fiscal 2002 was attributable to a shift in the mix of
motorsports and bicycle sales; motorsports sales, which have significantly
higher product costs than bicycles, comprised 14% of total net sales in fiscal
2002 compared to 4% in fiscal 2001. However, there were significant reductions
in these motorsports costs per unit resulting from the increased volume and
certain part cost reductions compared to fiscal 2001. The bicycle margins for
fiscal 2002 strengthened to 33.8% from 31.8% for fiscal 2001 and 32.2% for
fiscal 2000. This increase was a result of bicycle production efficiencies and
more favorable product mix compared to 2001 and 2000. The decline in fiscal 2001
margins was primarily attributable to the motorsports production start-up costs,
coupled with approximately $2.4 million in unfavorable foreign exchange
fluctuations.
Operating Expenses. Selling, general and administrative expenses increased to
$40.7 million in fiscal 2002 from $36.8 million in fiscal 2001, which in turn
decreased from $42.8 million in fiscal 2000. The increase in selling, general
and administrative expenses for fiscal 2002 compared to fiscal 2001 primarily
related to higher bicycle-related bad debt expense, insurance costs,
amortization of deferred financing costs and motorsports warranty costs. The
decrease in selling, general and administrative costs in fiscal 2001 compared to
fiscal 2000 primarily related to reductions in such expenses as advertising,
product liability insurance and bad debt expense. Additionally, selling, general
and administrative expenses in fiscal 2001 were favorably impacted by
approximately $1.4 million relating to foreign currency fluctuations. As a
percentage of net sales, selling, general and administrative expenses were 26.0%
in fiscal 2002, 25.1% in fiscal 2001 and 26.3% in fiscal 2000.
Research and development expenses decreased to $5.8 million in fiscal 2002 from
$6.6 million in fiscal 2001 and $8.5 million in fiscal 2000. The decrease in
research and development expenses during fiscal 2002 and 2001 primarily reflects
the completion of the development stage of our ATVs, coupled with the timing of
bicycle research and development projects. We invested approximately $2.5
million, $3.7 million and $4.7 million in research and development for our
motorsports products during fiscal 2002, 2001 and 2000, respectively, and we
invested approximately $3.3 million, $2.9 million and $3.8 million in research
and development for our bicycle products during fiscal 2002, 2001 and 2000,
respectively. The integration of our sponsored race teams into our research and
development efforts continued to be a significant aspect of our investment
during fiscal 2002. We use our race teams for regular testing of both prototype
and finished production models.
Interest Expense. Interest expense decreased to $5.1 million in fiscal 2002 from
$6.7 million in fiscal 2001, which in turn increased from $5.9 million in fiscal
2000. The reduction in interest expense for fiscal 2002 compared to fiscal 2001
is mainly attributable to the significant drop in U.S. interest rates during the
year. Although average debt levels were higher in fiscal 2002 compared to fiscal
2001, the reduction in the interest rates resulted in lower interest payments on
our variable-rate domestic borrowings. The increase in interest expense during
fiscal 2001 compared to fiscal 2000 primarily resulted from the $400,000
beneficial conversion charge recorded in conjunction with the issuance of a
subordinated convertible debenture to a third party investor (see Note 5 in the
Notes to the Consolidated Financial Statements). Although average interest rates
were higher for the majority of fiscal 2001 compared to fiscal 2000, average
debt levels were lower because of the paydown of $12.0 million in long-term debt
using the proceeds from the repayment of the note from Joseph Montgomery.
Interest expense incurred in fiscal 2001 and 2000 as a result of the $12.0
million loan to Joseph Montgomery was offset by interest charged to him, which
is recorded in "Other income (expense)" in the Consolidated Statement of
Operations.
Other Income (Expense). Other income primarily consisted of finance charges
relating to accounts receivable, which totaled $360,000, $335,000 and $396,000
for fiscal 2002, 2001 and 2000, respectively; foreign currency gains (losses) of
($639,000), ($611,000) and $169,000 for fiscal 2002, 2001 and 2000,
respectively; and interest income of $541,000 and $1,105,000 in fiscal 2001 and
2000, respectively, from the loan to Joseph Montgomery.
Income Tax (Expense) Benefit. For fiscal 2002, we recorded an income tax benefit
of approximately $2.1 million which primarily resulted from the Job Creation and
Worker Assistance Act of 2002. This legislation allowed us to carry back certain
net operating losses over a five year period, and consequently reduce a portion
of the deferred tax asset valuation allowance established in fiscal 2001. We
recorded income tax expense of approximately $12.9 million during fiscal 2001 as
a result of a deferred tax asset valuation allowance (see Note 6 in the Notes to
the
14
Consolidated Financial Statements). Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes," requires that we establish a
valuation allowance when there is uncertainty as to the realizability of
deferred tax assets. Prior to the recognition of the deferred tax asset
valuation allowance, we recorded an income tax benefit of approximately $6.5
million resulting from our operating losses for the year. We recorded an income
tax benefit of $2.0 million in fiscal 2000 as a result of the net loss for the
fiscal year.
Selected Quarterly Financial Data; Seasonality.
The following table presents selected unaudited quarterly data for the two most
recent fiscal years. We prepared this information on a basis consistent with our
audited consolidated financial statements. We included all adjustments
(consisting of normal recurring accruals) that we considered necessary for a
fair presentation of our quarterly results. Our operating results for any
quarter are not necessarily indicative of the results for any future period.
FOR THE QUARTER ENDED
--------------------------------------------------------------------------
JUNE MARCH DECEMBER SEPTEMBER JUNE MARCH DECEMBER SEPTEMBER
29, 2002 30, 2002 29, 2001 29, 2001 30, 2001 31, 2001 30, 2000 30, 2000
-------- -------- -------- -------- -------- -------- -------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales.............. $45,551 $39,167 $37,783 $34,154 $42,781 $32,636 $34,687 $36,687
Cost of sales.......... 35,849 30,682 28,796 27,001 33,734 25,895 24,469 26,725
------ ------ ------ ------ ------ ------ ------ ------
Gross profit........... 9,702 8,485 8,987 7,153 9,047 6,741 10,218 9,962
Expenses:
Selling, general and
administrative(1).... 12,181 9,689 9,828 9,033 8,998 9,005 9,353 9,469
Research and
development.......... 1,566 1,616 1,376 1,269 1,222 1,500 1,955 1,962
------ ------ ------ ------ ------ ------ ------ -----
Total operating
expenses............. 13,747 11,305 11,204 10,302 10,220 10,505 11,308 11,431
------ ------ ------ ------ ------ ------ ------ ------
Operating loss......... (4,045) (2,820) (2,217) (3,149) (1,173) (3,764) (1,090) (1,469)
Other expense.......... (1,709) (1,416) (1,178) (1,054) (1,548) (1,685) (1,645) (1,514)
------ ------ ------ ------ ------ ------ ------ ------
Loss before income
taxes ............... (5,754) (4,236) (3,395) (4,203) (2,721) (5,449) (2,735) (2,983)
Income tax (expense)
benefit.............. 88 1,991 (11) 80 (48) 98 (7,836) 1,356
------ ------ ------ ------ ------ ------ ------ ------
Net loss............... $(5,666) $(2,245) $(3,406) $(4,123) $(2,769) $(5,351) $(10,571) $(1,627)
======= ======= ======= ======= ======= ======= ======== ======
Basic and diluted loss
per share............ $ (0.75) $ (0.30) $ (0.45) $ (0.55) $ (0.37) $ (0.71) $ (1.41) $ (0.22)
- --------------
(1) Fiscal 2001 amounts have been restated in accordance with FASB Statement
No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendments of
FASB Statement No. 13, and Technical Corrections."
Our results fluctuate from quarter to quarter principally as a result of a
number of factors, including product mix, the timing and number of new retailer
openings, the timing of shipments and new product introductions and the effect
of adverse weather conditions on consumer purchases. In addition, our business
is seasonal due to consumer spending patterns, which in turn affect dealer
delivery preferences. These patterns have historically resulted in more
shipments during our third and fourth fiscal quarters (January through June).
During fiscal 2001, our operating results deviated from this historical pattern.
For fiscal 2001, the downturn of both the domestic and international economies,
as well as the adverse weather conditions during the majority of the second and
third fiscal quarters, caused the deviation from this historical pattern. The
third and fourth fiscal quarters together accounted for 51% of our total net
sales in fiscal 2001. However, during fiscal 2002, our third and fourth fiscal
quarters accounted for 54% of our total net sales for the year. This shift was
primarily attributable to the growth in motorsports shipments, as illustrated
below:
FOR THE QUARTER ENDED
--------------------------------------------------------------------------
JUNE MARCH DECEMBER SEPTEMBER JUNE MARCH DECEMBER SEPTEMBER
29, 2002 30, 2002 29, 2001 29, 2001 30, 2001 31, 2001 30, 2000 30, 2000
-------- -------- -------- -------- -------- -------- -------- ---------
(UNAUDITED)
(IN THOUSANDS)
Bicycle net sales..... $38,032 $30,984 $32,578 $33,039 $40,645 $30,899 $34,783 $35,148
Motorsports net sales. 7,519 8,183 5,205 1,115 2,136 1,737 (96) 1,539
------- ------- ------- ------- ------- ------- ------- -------
Total net sales....... $45,551 $39,167 $37,783 $34,154 $42,781 $32,636 $34,687 $36,687
======= ======= ======= ======= ======= ======= ======= =======
To aid in developing our production and delivery schedules, we use our
Authorized Retailer Program, or ARP. Using this program, our sales force
formulates a delivery plan with our retailers, typically based upon historical
15
delivery information, that conforms with the retailers' growth objectives and
their inventory needs. This program incorporates freight and pricing discounts
as incentives for the retailers to achieve their growth objectives formulated
together by the retailers and our sales force. We believe that our ARP allows us
to maximize the competitive advantage of our flexible domestic manufacturing
capabilities, which in turn provides us with the ability to meet changes in
market trends and demand rapidly.
LIQUIDITY AND CAPITAL RESOURCES.
Our primary sources of working capital over the past three years have been cash
from operations, borrowings under our revolving credit facilities, term loans,
and subordinated debentures.
In July 2002, we entered into a new financing facility with Pegasus Partners II,
L.P., and amended our existing credit facility with the CIT Group/Business
Credit, Inc. The new financing facilities cured any defaults under our prior
financing agreements, and permitted us to classify our debt as long-term on our
Consolidated Balance Sheet at June 29, 2002.
We sold to Pegasus $25.0 million of senior notes and warrants to purchase an
aggregate of 2,944,552 shares of our common stock. The senior notes are due July
25, 2007. We may prepay the senior notes without penalty at any time. Interest
payments at the rate of 7.5% per annum are payable in cash, and interest
payments at the rate of 12.5% are payable in additional senior notes, or at our
option, in cash. The senior note agreement requires minimum fixed charge
coverage, net worth, daily availability, consolidated EBITDA and motorsports
EBITDA levels, as defined, and restricts the payment of cash dividends. The
senior notes are secured by a first lien on our domestic machinery and
equipment, a junior lien on our Connecticut and Pennsylvania real property,
subject only to first liens held by state government agencies, and by a junior
lien on all other domestic assets. The warrants issued to Pegasus are
exercisable through July 26, 2012 at an initial exercise price of $2.05 per
share. If we repay the senior notes in full by January 26, 2004, warrants to
purchase 1,972,849 shares will be cancelled. If we do not repay the senior notes
in full by that date, but repay the senior notes in full by July 26, 2004,
warrants to purchase 1,472,276 shares will be cancelled. The warrants subject to
cancellation are not exercisable.
Our amended facility with CIT provides us with a five year revolving line of
credit. The amount of the revolving line of credit is the lesser of $35.0
million or a percentage of eligible receivables and inventories. Interest on the
revolving line of credit is payable monthly, and is computed as a Base Rate
(JPMorgan Chase Bank prime rate) plus an applicable increment, or a LIBOR
(London Interbank Offered Rate) plus an applicable increment. The applicable
increments are based on daily availability, as defined, and range from 1.25% to
1.75% on the prime rate, and 3.25% to 3.50% on the LIBOR. The amended facility
requires minimum fixed charge coverage, net worth, daily availability,
consolidated EBITDA and motorsports EBITDA levels, as defined, and restricts the
payment of cash dividends. The facility is secured by a first lien on all of our
domestic assets, with the exception of our Connecticut and Pennsylvania real
property and machinery and equipment, to which CIT holds a junior lien.
We used approximately $10.3 million of the net proceeds from the sale of our
senior notes to retire our prior term loans with CIT and Ableco Finance LLC. The
remaining net proceeds of approximately $11.7 million have been used for working
capital needs. In conjunction with this refinancing, in July 2002 we expensed
approximately $1.8 million in unamortized deferred financing costs associated
with the retired debt. Additionally, we allocated the $25.0 million proceeds
from the Pegasus financing between the senior notes and the warrants. The
resulting debt discount will be amortized over the five year life of the senior
notes to interest expense.
In June 2000, we entered into a five year secured credit facility in the amount
of $60.0 million with CIT as the administrative and collateral agent. The
secured facility consisted of a revolving line of credit and a term loan. The
outstanding amount of the revolving line of credit was limited to the lesser of
$45.0 million or a percentage of eligible receivables and inventories. At June
29, 2002 and June 30, 2001, approximately $2.3 million and $7.9 million,
respectively, was available under the revolving line of credit. The term loan,
initially in the amount of $15.0 million, was scheduled to amortize in 19
consecutive quarterly principal payments of $622,250 each, followed by a final
payment of the remaining unamortized principal at maturity. In accordance with
the provisions of the secured facility, we paid down the term loan by
approximately $2.1 million during fiscal 2001 in conjunction with the full
repayment of the note from Joseph Montgomery (see Note 15 in the Notes to the
Consolidated Financial Statements). The interest rate on the revolving line of
credit was 8.25% at June 29, 2002 and June 30, 2001, and the
16
interest rate on the term loan was 8.75% at June 29, 2002 and June 30, 2001.
Interest on the revolving line of credit and term loan was payable monthly, and
was computed as the Chase Bank Rate (prime rate) plus an applicable revolver or
term loan prime rate margin per annum, or LIBOR plus the applicable revolver or
term loan LIBOR margin per annum. The revolver and term loan margins were based
on certain fixed charge coverage ratios, as defined, and ranged from 0.25% to
1.50% on the prime rate, or 1.75% to 3.00% on the LIBOR. The secured facility
was collateralized by substantially all of Cannondale U.S. assets and the issued
and outstanding stock of our subsidiaries. The secured facility required
minimum fixed charge coverage, net worth, senior leverage and EBITDA levels, as
defined, and restricted the payment of cash dividends.
In conjunction with the secured facility, we also entered into a three year
financing agreement with Ableco Finance LLC during fiscal 2000, which provided
for a $15.0 million term loan. Such loan was scheduled to amortize in four
quarterly principal payments of $337,750 each, followed by seven quarterly
payments of $500,000 each, and a final payment of the remaining unamortized
principal at maturity. In accordance with the provisions of the Ableco
agreement, we paid down the term loan by approximately $9.9 million during
fiscal 2001 in conjunction with the full repayment of the note from Joseph
Montgomery. The interest rate on the term loan at June 29, 2002 and June 30,
2001 was 20.5% and 18.0%, respectively. Such interest, determined on a monthly
basis, consisted of a reference rate (prime rate), as defined, plus a margin.
Interest of 15.0% was payable in cash on a monthly basis, and the remaining 5.5%
was capitalized as additional principal of the loan. In June 2000, we issued to
Ableco warrants to purchase an aggregate of 393,916 shares of our common stock
at a purchase price of $0.01 per share. These warrants could be exercised at any
time after June 30, 2001, but prior to June 30, 2005, provided we had not paid
or prepaid at least $7.5 million of principal under the term loan by June 30,
2001. The warrants were terminated during fiscal 2001 in conjunction with the
early paydown of the term loan of approximately $9.9 million. The term loan was
collateralized by a second security interest in substantially all of Cannondale
U.S. assets. The Ableco agreement required minimum fixed charge coverage, net
worth, senior leverage and EBITDA levels, as defined, and restricted the payment
of cash dividends.
In April 2001, we amended our respective prior financing agreements with CIT and
Ableco, effective as of December 31, 2000, in order to modify certain financial
covenants. As a result of these amendments, we were in compliance with all
financial covenants of our borrowing facilities. As a condition to entering into
these amendments, we were required to receive a cash infusion of at least $7.0
million, of which no more than $3.0 million was to be paid by our foreign
subsidiaries. In satisfaction of this condition, Cannondale Europe repaid to
Cannondale U.S. $3.0 million of intercompany indebtedness, and we sold an
aggregate of $4.0 million of convertible subordinated debentures to two
individual investors, including $2.0 million to our Chairman, President and
Chief Executive Officer, Joseph Montgomery. Both debentures bear interest at an
annual rate of 8.0%.
The $2.0 million debenture issued to Mr. Montgomery is due June 28, 2005 and is
convertible into shares of our common stock at an initial conversion price of
$4.50 per share. Mr. Montgomery may convert this debenture once the $2.0 million
subordinated debenture issued to the third party investor is no longer
outstanding (whether by conversion, redemption, payment in full of the principal
sum, or otherwise). The $2.0 million debenture issued to the third party
investor is due April 28, 2004 and is immediately convertible into shares of our
common stock at an initial conversion price of $3.75 per share. This debenture
contains a beneficial conversion feature equal to the difference of the market
price of Cannondale stock at the date of issue ($4.50 per share) and the
conversion price ($3.75 per share). During fiscal 2001, we recorded interest
expense related to the beneficial conversion feature of $400,000, with the
offset to additional paid-in capital. As a result of the issuance of the senior
notes and warrants to Pegasus in connection with our refinancing in July 2002,
the conversion prices of the convertible debentures have been adjusted. In
accordance with the antidilution provisions of the debentures, the conversion
price of the debenture issued to Mr. Montgomery was reduced to $4.32 per share,
which will entitle Mr. Montgomery to receive an additional 18,519 shares upon
conversion. The conversion price of the debenture issued to the third party
investor was reduced to $3.64 per share, which will entitle the holder to
receive an additional 16,118 shares upon conversion.
In February 2000, Cannondale Europe entered into a financing agreement with IFN
Finance, B.V., secured by receivables from European customers for a period of
three years. The available financing is 80% of pledged receivables, subject to a
maximum of EUR 18,151,000 (approximately $17,995,000 at June 29, 2002). The
financing may be in the form of either a current account overdraft or short-term
loans (up to a maximum of EUR 6,807,000, or $6,748,000 at June 29, 2002). At
June 29, 2002, the remaining availability under the IFN agreement
17
was approximately $2.5 million. The interest rate is determined as the sum of
the European central bank rate, subject to a minimum of 3.00% per annum, plus a
margin of 1.50%. At June 29, 2002, $6,741,000 was outstanding in short-term
loans with interest at 4.85%, and $5,530,000 was outstanding in account
overdrafts with interest at 5.50%. At June 30, 2001, $5,788,000 was outstanding
in short-term loans with interest at 5.86%, and $22,000 was outstanding in
account overdrafts with interest at 6.75%. The pledged receivables are subject
to certain conditions, including concentrations from single customers and time
outstanding. In addition, the agreement provides for the payment of customary
fees on a quarterly basis.
In February 2000, Cannondale Europe entered into an agreement with ABN AMRO
Onroerend Goed Lease en Financieringen B.V. ("ABN Financing") to mortgage its
office building and land. The mortgage was in the amount of EUR 1,293,000
(approximately $1,282,000 at June 29, 2002), with a five year fixed interest
rate of 6.70%, and a variable rate thereafter. Such mortgage is in addition to
the previous ABN Financing mortgage of EUR 697,000 (approximately $691,000 at
June 29, 2002), and both mortgages will expire on September 12, 2016. The
interest on the previous ABN Financing mortgage is adjusted every three months,
subject to a maximum of 7.55%, based upon the European central bank rate. The
rate on this mortgage was 6.05% and 7.15% at June 29, 2002 and June 30, 2001,
respectively.
During fiscal 2001, we paid down $12.0 million in long-term debt using the
proceeds from the full repayment of the note from Joseph Montgomery.
Accordingly, we expensed $552,000 of related unamortized deferred financing
costs. In accordance with SFAS No. 145, "Rescission of FASB Statements No. 4,
44 and 64, Amendments of FASB Statement No. 13, and Technical Corrections,"
this write-off is reflected as a component of selling, general and
administrative expenses on the Consolidated Statement of Operations for the
fiscal year ended June 30, 2001.
During fiscal 2000, we used the proceeds of the CIT, Ableco, and IFN financing
arrangements to retire our prior $75.0 million amended and restated
multi-currency credit facility. We recorded a net loss of $234,000 which was
comprised of the write-off of net deferred financing costs (approximately $1.1
million) offset by realized gains on the settlement of the foreign-denominated
debt (approximately $325,000) and the interest rate swap agreements
(approximately $420,000). Such amounts have been included in our loss before
income taxes on the Consolidated Statement of Operations for the fiscal year
ended July 1, 2000.
Cannondale Europe and Cannondale Japan each maintain a separate credit facility
for short-term borrowings. In March 2002, Cannondale Europe renegotiated certain
terms of its multi-currency credit arrangement with ABN AMRO Bank N.V. ("ABN"),
which allows Cannondale Europe to borrow up to EUR 5,000,000 (approximately
$4,957,000 at June 29, 2002) on a short-term basis. The current interest rate on
the overdraft facility is 5.50%, which is comprised of an ABN Euro base rate of
4.00% plus a margin of 1.50%. The minimum interest rate on the overdraft
facility is an ABN Euro base rate of 3.00% plus the margin of 1.50%. Borrowings
are limited to 50% of the lower of cost or market of on-hand inventory.
Cannondale Japan has an unsecured revolving credit facility for up to JPY
155,000,000 (approximately $1.3 million at June 29, 2002) with an interest rate
of 3.00%. Approximately $2,777,000 and $1,058,000 of principal amount was
outstanding under the European and Japanese facilities, respectively, at June
29, 2002, and approximately $346,000 and $238,000, respectively, was available
under these facilities at such time. Cannondale Europe's credit arrangement
contains no specific expiration date, and may be terminated either by Cannondale
Europe or the lenders at any time. Cannondale Japan has agreed to pay monthly
installments of JPY 1,500,000 (approximately $12,500 as of June 29, 2002) until
October 2002 to reduce the outstanding balance. The European and Japanese
facilities are guaranteed by Cannondale U.S.
Net cash provided by (used in) operating activities was $(7.4) million, $1.9
million and ($5.9) million in fiscal 2002, 2001 and 2000, respectively. The
significant increase in net cash used in operating activities during fiscal 2002
compared to fiscal 2001 is primarily attributable to the higher motorsports
receivable levels. The net cash provided by operating activities during fiscal
2001 was primarily attributable to the receipt of all interest on the note
receivable from Joseph Montgomery. The net cash used in operating activities
during fiscal 2000 was primarily attributable to the increase in inventories
resulting from the lower sales volume and the motorsports start-up.
Capital expenditures were $2.6 million, $4.3 million and $6.0 million in fiscal
2002, 2001 and 2000, respectively. During fiscal 2002 and 2001, the majority of
capital expenditures were for motorsports equipment and tooling. For fiscal
2000, the majority of the expenditures related to motorsports equipment and
tooling ($3.5 million) and computer equipment ($1.3 million). In fiscal 2000, we
obtained $1.0 million of financing from PIDA for our
18
motorsports production facility in Bedford, Pennsylvania. In connection with
our new secured facility with CIT (see Note 5 in the Notes to the Consolidated
Financial Statements), future capital expenditures by Cannondale U.S. are
limited to $4.5 million per year.
During fiscal 2001, we entered into two sale-leaseback transactions for
manufacturing equipment. We recognized no gain or loss on a $421,000 transaction
that has resulted in approximately $152,000 of additional rent expense annually
for a three year period. Additionally, we realized a $39,000 gain on a $310,000
transaction in which we received $160,000 and the lender paid the balance of the
equipment cost. We deferred this gain, and will amortize it to earnings over the
six year term of the lease. This lease has resulted in approximately $63,000 of
additional rent expense annually. Both leases are being accounted for as
operating leases.
During fiscal 2000, we entered into a $960,000 sale-leaseback transaction for
manufacturing and research and development equipment from which we received
proceeds of $633,000 and the lender paid the balance of the equipment cost. The
sale resulted in a $48,000 gain, which was deferred and is being amortized over
the seven year term of the lease. The lease provides us with the option to
purchase the equipment for 25.46% of the equipment cost on the 85th basic rent
date. This lease is being accounted for as an operating lease and has resulted
in rent expense of approximately $141,000 annually.
During fiscal 2002, 2001 and 2000, Cannondale Europe remitted dividends totaling
approximately $1.6 million, $2.3 million and $11.5 million, respectively, to
Cannondale U.S. Such funds were used to retire outstanding long-term debt
balances.
Inflation is not a material factor affecting our results of operations and
financial condition. General operating expenses such as salaries, employee
benefits and occupancy costs are, however, subject to normal inflationary
pressures.
We expect to fund our planned operating and capital requirements through fiscal
2003 with cash generated by operations and borrowings under our revolving credit
facilities. As of September 20, 2002, we had approximately $1.1 million
available for working capital needs after giving effect to a $3.5 million
minimum availability reserve requirement set forth in our credit facility with
CIT. The amount of availability under our revolving credit facility with CIT is
subject to adjustment in the event of increases or decreases in our accounts
receivable and/or inventory levels. We will depend on cash generated by our
operations to fund a substantial portion of our working capital needs in fiscal
2003. In turn, our cash flows from operations will depend upon, among other
things, the timing of product shipments and the payment of receivables owed to
us. If our sources of liquidity from our credit facilities are unavailable or
insufficient and if we cannot generate sufficient positive cash flows from
operations to fund our working capital needs, we may be required to obtain
additional sources of funds through operational changes, asset sales, additional
third-party financing or a combination thereof. We can give no assurance that
additional sources of funds will be available to us on commercially reasonable
terms or at all.
In the following table, we summarize our consolidated long-term debt and
operating lease obligations as of June 29, 2002, in thousands. See Notes 5 and
10 in the Notes to the Consolidated Financial Statements for further detail:
DUE IN DUE IN DUE IN DUE AFTER
LESS THAN 1-3 4-5 5
CONTRACTUAL OBLIGATIONS TOTAL DUE 1 YEAR YEARS YEARS YEARS
- ----------------------- --------- --------- ------- ------- ---------
Long-term debt............ $ 62,470 $ 12,774 $ 4,978 $ 15,682 $ 29,036
Capital lease obligations. 98 43 55 - -
Operating lease obligations 5,207 2,074 1,797 724 612
-------- -------- -------- -------- --------
Total contractual
obligations............... $ 67,775 $ 14,891 $ 6,830 $ 16,406 $ 29,648
======== ======== ======== ======== ========
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.
19
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.
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.
ACCOUNTING DEVELOPMENTS.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendments of FASB Statement No. 13, and Technical Corrections."
This Statement prescribes that certain gains and losses arising from the
extinguishment of debt are included in operating results, rather than as
extraordinary items as previously required under FASB Statement No. 4. The
provisions of this Statement related to the rescission of Statement No. 4 shall
be applied in fiscal years beginning after May 15, 2002. We have early adopted
this Statement and, accordingly, the extraordinary losses incurred in fiscal
years 2001 and 2000 of $552,000 and $234,000, respectively, relating to debt
extinguishments have been reclassified to our results from operations.
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 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.
CERTAIN FACTORS WHICH MAY AFFECT OUR FUTURE PERFORMANCE.
This Annual Report on Form 10-K 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, those risks and uncertainties discussed below.
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.
WE HAVE SUFFERED DECREASED SALES AND SUBSTANTIAL NET LOSSES IN RECENT PERIODS
AND WE CANNOT PREDICT WHETHER OUR FUTURE OPERATIONS WILL BE PROFITABLE. Our net
sales have fluctuated from $162.5 million in fiscal 2000 to $146.8 million in
fiscal 2001 to $156.7 million in fiscal 2002. In addition, our net losses
totaled $2.5 million in fiscal 2000, $20.3 million in fiscal 2001 (including the
effect of a deferred tax asset valuation provision of $12.9 million), and $15.4
million in fiscal 2002. Our future level of sales and potential profitability
depend on many factors, including our ability to enhance existing products and
achieve market acceptance of new products, especially our motorsports products,
the effectiveness of our dealer networks and sales teams and various economic
20
conditions and changes affecting discretionary consumer spending. Furthermore,
due to the significant production and fixed costs associated with our
motorsports division, we currently realize negative margins on the sale of most
of our motorsports products. We will need to substantially increase sales of our
motorsports products in order to achieve positive margins on the sale of these
products. As a result, we can give no assurance that we will experience any
significant growth in net sales or that our future operations will return to
profitability.
OUR REVENUES AND EARNINGS COULD CONTINUE TO BE NEGATIVELY AFFECTED IF WE CANNOT
ANTICIPATE MARKET TRENDS, ENHANCE EXISTING PRODUCTS AND ACHIEVE MARKET
ACCEPTANCE OF NEW PRODUCTS, ESPECIALLY OUR MOTORSPORTS PRODUCTS. Our ability to
return to the growth pattern that characterized our operations in prior years is
dependent to a large part on our ability to successfully anticipate and respond
to changing consumer demands and trends in a timely manner, including the
introduction of new or updated products at prices acceptable to customers. While
the substantial part of our sales historically has been attributable to mountain
and road bikes, we believe that our introduction of our motorsports product
lines will provide diversification of our products. Our ability to achieve
market acceptance for these products will depend upon our ability to:
o establish a strong and favorable brand image;
o establish a reputation for high quality; and
o continue to develop our network of independent motorsports dealers to
sell these products.
The demand for and market acceptance of our motorsports products are subject to
substantial uncertainty. Because the market for our motorsports products is new
for us and evolving, we cannot predict the size and future growth rate, if any,
of this market. We also can give no assurance that the market for our
motorsports products will develop or that large demand for these products will
emerge or be sustainable. In addition, we may incur significant costs in our
attempt to establish market acceptance for our motorsports products.
WE FACE SUBSTANTIAL COMPETITION FROM A NUMBER OF MANUFACTURERS IN EACH OF OUR
PRODUCT LINES, INCLUDING IN THE MOTORSPORTS MARKET, WHICH WE MAY NOT BE ABLE TO
PENETRATE BECAUSE OF THE ESTABLISHED MANUFACTURING CAPABILITIES, MARKET POSITION
AND BRAND RECOGNITION OF MANY OF OUR COMPETITORS. The worldwide market for
bicycles and accessories is extremely competitive and we face strong competition
from a number of manufacturers in each of our product lines. A number of our
competitors are larger and have greater resources than we have. Competition in
the high-performance segment of the bicycle industry is based primarily on
perceived value, brand image, performance features, product innovation and
price. Competition in foreign markets may also be affected by duties, tariffs,
taxes and the effect of various trade agreements, import restrictions and
fluctuations in exchange rates. We may not be successful in the bicycle market
if we cannot compete on:
o the breadth and quality of our bicycle product lines;
o the continued development and maintenance of an effective specialty
bicycle retailer network;
o brand recognition; and
o price.
The motorsports market is also highly competitive. Our principal competitors in
this market are foreign manufacturers that have financial resources
substantially greater than ours, have established manufacturing capabilities,
have established market positions and have strong brand recognition. As a
result, we may not be able to penetrate the motorsports market. We may not be
successful in the motorsports market if we cannot compete on:
o the design and production of quality motorcycles and ATVs;
o the development and maintenance of an effective motorsports retailer
network;
o brand recognition;
21
o market presence;
o timely delivery of motorcycles and ATVs; and
o price.
OUR SALES ARE HIGHLY DEPENDENT ON THE EFFECTIVENESS OF OUR DEALER NETWORKS AND
SALES TEAMS AND OUR DEALERS MAY NOT GIVE PRIORITY TO OUR PRODUCTS AS COMPARED TO
OUR COMPETITORS' PRODUCTS. Sales of our products are made to specialty bicycle
and motorsports retailers. Our level of sales depends upon the effectiveness of
these dealer networks and our internal sales teams. Most of our dealers offer
competitive products manufactured by third parties. Our dealers may not give
priority to our products as compared to our competitors' products. In addition,
because we have recently entered the motorsports business, we do not yet know
how successful our dealers and sales team will be in selling our motorcycles,
ATVs and related products over the long term.
WE RELY ON A SINGLE SUPPLIER FOR MANY OF THE SIGNIFICANT COMPONENTS IN OUR
BICYCLE PRODUCTS AND WE CAN GIVE NO ASSURANCE THAT WE WILL BE ABLE TO OBTAIN
COMPONENTS FROM OUR CURRENT BICYCLE AND MOTORSPORTS SUPPLIERS AT REASONABLE
PRICES OR ON A TIMELY BASIS. Our ability to distribute our products on schedule
is highly dependent on our timely receipt of an adequate supply of components
and materials. Our bicycles, motorcycles and ATVs incorporate numerous
components manufactured by other companies. Although there are many suppliers
for each of our component parts, we rely on a sole source of supply for many of
the significant components in our bicycle products. This reliance involves a
number of significant risks, including:
o temporary unavailability of materials and interruptions in
delivery of components and materials from our suppliers;
o manufacturing delays caused by unavailability or interruptions
of components and materials to us; and
o fluctuations in the quality and the price of components and
materials.
We have few long-term agreements with our component manufacturers, and have no
long-term agreement with Shimano, our largest single supplier, or with the
suppliers of many of the materials used in the manufacture of our products. As a
result, we can provide no guarantee that we will be able to purchase the
components and materials we need from our current suppliers at reasonable prices
or on a timely basis. Although we believe we have established close
relationships with our principal suppliers, our future success will depend upon
our ability to maintain flexible relationships with our suppliers or to
substitute new suppliers without interruption of supply. The loss of Shimano or
certain other key suppliers or delays or disruptions in the delivery of
components or materials could have a material adverse effect on our
manufacturing operations and our operating results. For example, we have
suffered recent delays in the delivery of certain components used in our
bicycles. As a result, we have been unable to produce a sufficient number of
bicycles to fulfill our outstanding orders during the first quarter of fiscal
2003, which in turn will have a negative impact on our operating results for the
first quarter of fiscal 2003.
WE HAVE LIMITED EXPERIENCE WITH MOTORSPORTS PRODUCT MANUFACTURING OPERATIONS.
While we believe that we can capitalize on many of our core competencies in
producing our motorsports products, we have limited experience in designing and
manufacturing motorsports products. This may lead to unforeseen expenses and
delays in manufacturing and selling our motorsports products. For example,
although we conduct significant testing of our motorsports products, these
products could contain unforeseen defects. These defects could result in costly
product recalls, product liability claims and damage to our brand name. In
addition, we may encounter significant difficulties and incur unforeseen
expenses in manufacturing our motorsports products in commercial quantities and
on a timely basis.
OUR PRODUCTS COULD CONTAIN DEFECTS CREATING PRODUCT RECALLS AND WARRANTY CLAIMS
THAT COULD MATERIALLY ADVERSELY AFFECT OUR FUTURE SALES AND PROFITABILITY. Our
products could contain unforeseen defects. These defects could give rise to
product recalls and warranty claims. A product recall could delay or halt
production of the affected product until we are able to address the reasons for
any defects. Recalls may also have a materially
22
negative effect on our brand image and public perception of the affected
product. This could materially adversely affect our future sales. Recalls or
other defects would be costly and could require substantial expenditures.
Unanticipated defects could also result in product liability litigation against
us. Given the nature of our products, we have in the past and expect in the
future to be subject to potential product liability claims that, in the absence
of sufficient insurance coverage, could have a material adverse effect on us.
Although we currently maintain liability insurance coverage, this coverage may
not be adequate to cover all product liability claims. Any large product
liability claim could materially adversely affect our ability to market our
products.
DISCRETIONARY CONSUMER SPENDING MAY AFFECT PURCHASES OF OUR PRODUCTS AND IS
AFFECTED BY VARIOUS ECONOMIC CONDITIONS AND CHANGES. Purchases of bicycles and
motorsports products, particularly the high-performance models manufactured by
us, and our other products are considered discretionary for consumers. Our
success will be influenced by a number of economic factors affecting
discretionary consumer spending, including:
o employment levels;
o business conditions;
o interest rates;
o general level of inflation; and
o taxation rates.
Adverse economic changes affecting these factors may restrict consumer spending
and thereby adversely affect our growth and profitability. For example, we
believe that the weakening of the U.S. economy and the related decline in
consumer confidence has contributed to the decline in our bicycle sales during
fiscal 2002 and 2001.
OUR ABILITY TO MEET OUR FINANCIAL OBLIGATIONS AND OPERATIONAL COMMITMENTS
DEPENDS ON CERTAIN FACTORS BEYOND OUR CONTROL. Our ability to satisfy various
financial covenants contained in our credit facilities with Pegasus and CIT and
to maintain our planned levels of production depends on our future financial and
operating performance. This performance is subject to various factors, including
certain factors beyond our control such as, among other things, various economic
conditions and changes adversely affecting discretionary consumer spending. The
breach of any of the financial covenants in our credit facilities, unless waived
or amended by the lenders, would constitute an event of default under our
financing agreements, which would permit our lenders to accelerate the maturity
of our debt. We can give no assurance that we would be able to obtain any such
waiver or amendment on acceptable terms or at all. In addition, we will depend
on cash generated by our operations to fund a substantial portion of our working
capital needs in fiscal 2003. If we cannot generate sufficient positive cash
flows from operations to continue compliance with the financial covenants
contained in our financing facilities or to fund our working capital needs, we
could be forced to:
o reduce or delay capital expenditures;
o limit or discontinue, temporarily or permanently, business plans,
activities or operations;
o sell assets or businesses;
o obtain additional debt or equity financing; or
o restructure or refinance our debt.
23
WE ARE SUBJECT TO OPERATIONAL, FINANCIAL, POLITICAL AND EXCHANGE RATE RISKS DUE
TO OUR SIGNIFICANT LEVEL OF INTERNATIONAL OPERATIONS AND SALES. A substantial
portion of our sales is generated by our foreign subsidiaries. As a result, our
operations are subject to risks inherent in international business activities,
including:
o fluctuations in currency exchange rates;
o shipment delays;
o difficulties in accounts receivable collections;
o changes in tariffs and other barriers;
o unexpected changes in legal and regulatory requirements;
o political and economic instability;
o difficulties in staffing and managing international operations; and
o potentially adverse tax consequences.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE AND OUR STOCK PRICE MAY BE
VOLATILE AS A RESULT. Our quarterly operating results may fluctuate in the
future as a result of a number of factors, including:
o the amount and timing of orders from retailers;
o the timing and number of new retailer openings;
o the timing of shipments and new product introductions;
o the amount and timing of expenditures for key components and
materials;
o the availability of key components and materials;
o manufacturing delays;
o seasonal variations in the sale of our products;
o product mix;
o pricing changes in our products;
o the effect of adverse weather conditions on consumer purchases; and
o general economic conditions.
As a result, our operating results in any quarter are not necessarily indicative
of our results for any future period. In the future, we will likely experience
quarterly or annual fluctuations. In one or more future quarters, our operating
results may fall below the expectations of public market analysts or investors,
and the price of our common stock could decline significantly.
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE CANNOT PROTECT OUR PROPRIETARY
TECHNOLOGY OR IF WE INFRINGE ON THE PROPRIETARY TECHNOLOGY OF OTHERS. Our
proprietary technology aids our ability to compete with other companies in the
bicycle and motorsports markets. Although we rely on a combination of patents,
trade secrets, know-how, trademarks and non-disclosure agreements to protect our
proprietary technology, we may not be
24
able to fully protect our technology or competitive position. Our inability to
maintain the proprietary nature of our technologies could negatively affect our
revenues and earnings. Further, our competitors may apply for and obtain patents
that may restrict our ability to make and sell our products.
Although we believe our proprietary technology does not infringe on the rights
of third parties, we can provide no guarantee that third parties will not assert
infringement claims against us in the future. The defense and prosecution
of patent suits are both costly and time consuming, even if the outcome is
favorable to us. An adverse outcome in the defense of a patent suit could
subject us to significant liabilities to third parties or require us to cease
selling our products.
WE DEPEND ON OUR KEY PERSONNEL. Our success depends on the efforts of key
personnel involved in research and development, marketing, sales, finance and
administration. The loss of the services of one or more of these key persons,
particularly the loss of the services of Joseph S. Montgomery, our Chairman,
President and Chief Executive Officer, could have a material adverse effect on
our operations. Our success also depends upon our ability to hire and retain
additional qualified research and development, marketing and sales personnel. We
may not be able to hire or retain necessary personnel.
THE DILUTION WHICH MAY RESULT FROM THE CONVERSION AND EXERCISE OF OUR
OUTSTANDING CONVERTIBLE DEBENTURES AND WARRANTS COULD BE SIGNIFICANT. In April
2001, we issued two convertible debentures, each with a principal amount of $2.0
million, to two individual investors. The two debentures are convertible, in
whole or in part, at the option of the holders into shares of our common stock
at an initial conversion price of $3.75 and $4.50, respectively, or an aggregate
of 977,777 shares. We have registered the resale of all 977,777 shares, which
means that when a debenture is converted, in whole or in part, the holder may
resell the shares received on the conversion in the public market. Furthermore,
in July 2002, in connection with the sale of $25.0 million of our senior notes,
we issued to Pegasus Partners II, L.P. warrants to purchase an aggregate of
2,944,552 shares of our common stock. These warrants are exercisable through
July 26, 2012 at an initial exercise price of $2.05 per share. If we repay the
senior notes in full by January 26, 2004, warrants to purchase 1,972,849 will be
cancelled. If we do not repay the senior notes in full by that date, but repay
the senior notes in full by July 26, 2004, warrants to purchase 1,472,276 shares
will be cancelled. The warrants subject to cancellation are not exercisable. In
connection with the issuance of these warrants, the conversion prices of the
convertible debentures were reduced, which will entitle the holders of the
debentures to collectively receive additional shares upon conversion. The
conversion of a material portion of these debentures and/or the exercise of a
material portion of these warrants will have a substantial dilutive effect on
our existing stockholders.
THE PROVISIONS OF THE CONVERTIBLE DEBENTURES AND THE PEGASUS WARRANTS WOULD
SUBJECT OUR STOCKHOLDERS TO FURTHER DILUTION IF WE WERE TO ISSUE COMMON STOCK AT
PRICES BELOW THE CONVERSION PRICES OF THE DEBENTURES OR THE EXERCISE PRICE OF
THE WARRANTS. In addition to provisions providing for proportionate adjustments
in the event of stock splits, stock dividends and similar events, the debentures
provide for an adjustment of the applicable conversion prices if we issue shares
of our common stock at prices lower than these conversion prices. Similarly, the
warrants issued to Pegasus provide for an adjustment of both the exercise price
and the number of shares issuable upon exercise of the warrants if we issue
shares of our common stock at prices lower than the exercise price of the
warrants. This means that if we raise equity financing at the then current
market price at a time when the market price for our common stock is lower than
the applicable conversion and exercise prices, then the conversion price of the
debentures will be reduced, the number of shares issuable upon conversion of the
debentures will be increased, the exercise price of the warrants will be
reduced, the number of shares issuable upon exercise of the warrants will be
increased and, as a result, the potential dilution to stockholders will be
increased.
IF THE HOLDERS OF THE CONVERTIBLE DEBENTURES OR THE PEGASUS WARRANTS ELECT TO
SELL A MATERIAL AMOUNT OF THEIR SHARES OF OUR COMMON STOCK, THE MARKET PRICE OF
OUR SHARES MAY DECREASE. It is possible that the holders of the debentures and
warrants issued to Pegasus will offer for sale all or a material portion of the
shares issuable upon conversion of the debentures or the exercise of the
warrants, respectively. Further, because it is possible that a significant
number of these shares could be sold at one time, those sales could reduce the
market price of our common stock.
25
ITEM 7A. 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.
CREDIT RISKS.
Our customer base is composed of specialty bicycle and motorsports retailers
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 fiscal 2002, 2001 or 2000. No single
customer accounted for more than 5% of our net sales during fiscal 2002, 2001 or
2000. 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. The majority of our domestic motorsports 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 AND INTEREST RATE 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 June 29, 2002 and June 30, 2001, we had approximately $23.8 million and $14.8
million, respectively, of forward exchange contracts outstanding. Of the total
contracts outstanding at June 29, 2002 and June 30, 2001, approximately $19.3
million and $7.9 million, respectively, 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. As of June 29, 2002, 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 June 29, 2002 and June 30, 2001 were not designated as hedging
instruments. For these derivatives, gains and losses were recognized immediately
in earnings during the period of change.
At June 29, 2002, the fair value of forward foreign contracts in gain (i.e.
asset) positions was $82,000, and the fair value of forward foreign contracts in
loss (i.e. liability) positions was ($1.4) million. These fair values were
determined based upon current forward rates applicable to the remaining terms of
the forward contracts as of June 29, 2002. The fair value of contracts in asset
positions is included as a component of "Prepaid expenses and other current
assets," and the fair value of contracts in liability positions is included as a
component of "Accrued expenses" on our Consolidated Balance Sheet. At June 30,
2001, the fair value of forward foreign contracts in gain (i.e. asset) positions
was $121,000, and the fair value of forward foreign contracts in loss (i.e.
liability) positions was ($74,000). These fair values were determined based upon
current forward rates applicable to the remaining terms of the forward contracts
as of June 30, 2001.
26
The following table provides information about our derivative financial
instruments that are sensitive to changes in interest rates. The table presents
principal cash flows and related weighted-average interest rates by expected
maturity dates for our long-term debt obligations at June 29, 2002.
INTEREST RATE SENSITIVITY
PRINCIPAL (NOTIONAL) AMOUNT BY EXPECTED MATURITY
------------------------------------------------
(IN THOUSANDS)
FAIR
VALUE
AT JUNE
29,
2003 2004 2005 2006 2007 THEREAFTER TOTAL 2002
---- ---- ---- ---- ---- ---------- ----- ---------
LIABILITIES:
Long-term debt, including
current portion
Fixed rate............... $ 363 $2,353 $2,352 $ 339 $ 333 $ 1,693 $ 7,433 $ 7,530
Average interest rate.... 3.80% 7.37% 7.39% 3.53% 3.53% 3.49% 5.97%
Variable rate........... $12,454 $ 178 $ 150 $ 159 $14,851 $27,343 $55,135 $55,110
Average interest rate.... 5.15% 5.82% 5.65% 5.65% 6.24% 18.79% 12.22%
The following tables summarize information on foreign currency forward exchange
contracts which were denominated in currencies other than the functional
currency and were sensitive to foreign currency exchange rate changes. For these
foreign currency forward exchange contracts, the tables present the notional
amounts and weighted-average exchange rates by expected (contractual) maturity
dates. These notional amounts were used to calculate the contractual payments to
be exchanged under the contract.
EXPOSURES RELATED TO DERIVATIVE CONTRACTS
WITH EURO FUNCTIONAL CURRENCY
PRINCIPAL (NOTIONAL) AMOUNT BY EXPECTED MATURITY
FORWARD FOREIGN CURRENCY EXCHANGE RATE (EURO/FOREIGN CURRENCY)
--------------------------------------------------------------
(IN THOUSANDS)
FAIR
VALUE
AT JUNE
29,
2003 2004 2005 2006 2007 THEREAFTER TOTAL 2002
---- ---- ---- ---- ---- ---------- ----- --------
FORWARD CONTRACTS TO SELL
FOREIGN CURRENCY FOR
EUROS:
Norwegian Krona
Notional amount.... $ 187 -- -- -- -- -- $ 187 $ (8)
Contract rate...... 0.1277 0.1277
British Sterling
Notional amount.... $ 1,302 -- -- -- -- -- $ 1,302 $ 72
Contract rate...... 1.6249 1.6249
Swiss Franc
Notional amount.... $ 1,215 -- -- -- -- -- $ 1,215 $ (1)
Contract rate...... 0.6800 0.6800
FORWARD CONTRACTS TO BUY
FOREIGN CURRENCY FOR
EUROS:
United States Dollar
Notional amount.... $15,000 -- -- -- -- -- $15,000 $(1,199)
Contract rate...... 1.0900 1.0900
Japanese Yen
Notional amount.... $ 1,589 -- -- -- -- -- $ 1,589 $ (3)
Contract rate...... 0.0085 0.0085
27
EXPOSURES RELATED TO DERIVATIVE CONTRACTS
WITH UNITED STATES DOLLAR FUNCTIONAL CURRENCY
PRINCIPAL (NOTIONAL) AMOUNT BY EXPECTED MATURITY
FORWARD FOREIGN CURRENCY EXCHANGE RATE (UNITED STATES DOLLAR/FOREIGN CURRENCY)
------------------------------------------------------------------------------
(IN THOUSANDS)
FAIR
VALUE
AT JUNE
29,
2003 2004 2005 2006 2007 THEREAFTER TOTAL 2002
---- ---- ---- ---- ---- ---------- ----- --------
FORWARD CONTRACTS TO SELL
FOREIGN CURRENCY FOR UNITED
STATES DOLLARS:
Australian Dollar
Notional amount.................. $ 555 -- -- -- -- -- $ 555 $ (26)
Contract rate.................... 0.5365 0.5365
Canadian Dollar
Notional amount.................. $ 1,878 -- -- -- -- -- $ 1,878 $ (60)
Contract rate.................... 0.6367 0.6367
Japanese Yen
Notional amount.................. $ 343 -- -- -- -- -- $ 343 $ (17)
Contract rate.................... 0.0080 0.0080
Euro
Notional amount.................. $ 1,667 -- -- -- -- -- $ 1,667 $ (86)
Contract rate.................... 0.9394 0.9394
FORWARD CONTRACTS TO BUY
FOREIGN CURRENCY FOR UNITED
STATES DOLLARS:
Swedish Krona
Notional amount.................. $ 112 -- -- -- -- -- $ 112 $ 10
Contract rate.................... 0.1003 0.1003
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by this Item are
included herein, commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 is incorporated by reference to the
information appearing under the captions "Item 1 - Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in our definitive
Proxy Statement relating to our 2002 Annual Meeting of Stockholders to be filed
with the Securities and Exchange Commission within 120 days after the close of
our fiscal year. The information required by Item 10 regarding executive
officers appears under the caption "Executive Officers of the Registrant" in
Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is incorporated by reference to the
information appearing under the caption "Executive Compensation" in our
definitive Proxy Statement relating to our 2002 Annual Meeting of Stockholders
to be filed with the Securities and Exchange Commission within 120 days after
the close of our fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is incorporated by reference to the
information appearing under the captions "Security Ownership of Certain
Beneficial Owners and Management" and "Equity Compensation Plan Information" in
our definitive Proxy Statement relating to our 2002 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within 120
days after the close of our fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is incorporated by reference to the
information appearing under the caption "Certain Relationships and Related
Transactions" in our definitive Proxy Statement relating to our 2002 Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission
within 120 days after the close of our fiscal year.
29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
The following financial statements and financial statement schedule are filed as
part of this report commencing on page F-1 hereof.
(A)(1) FINANCIAL STATEMENTS.
Index to Consolidated Financial Statements.
Report of Independent Auditors.
Consolidated Balance Sheets as of June 29, 2002 and June 30, 2001.
Consolidated Statements of Operations for the years ended June 29, 2002, June
30, 2001 and July 1, 2000.
Consolidated Statements of Stockholders' Equity for the years ended June 29,
2002, June 30, 2001 and July 1, 2000.
Consolidated Statements of Cash Flows for the years ended June 29, 2002, June
30, 2001 and July 1, 2000.
Notes to Consolidated Financial Statements.
(A)(2) FINANCIAL STATEMENT SCHEDULE.
Schedule II--Valuation and Qualifying Accounts.
All other financial statement schedules are omitted because they are not
applicable, or not required, or because the required information is included in
the Consolidated Financial Statements or Notes thereto.
(A)(3) EXHIBITS.
The following is a list of all exhibits filed as part of this report.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1(a) Amended and Restated Certificate of Incorporation of the
Registrant. (Filed as Exhibit 3.2 to the Registrant's
Registration Statement on Form S-1, Registration No.
33-84566).+
3.1(b) Certificate of Amendment to Restated Certificate of
Incorporation, effective as of November 17, 1997. (Filed as
Exhibit 4.2 to the Registrant's Registration Statement on
Form S-8, Registration No. 333-40879).+
3.2 Amended and Restated Bylaws of the Registrant. (Filed as
Exhibit 3.1(ii) to the Registrant's Form 10-Q for the
quarterly period ended March 27, 1999).+
4.1(a) Rights Agreement, dated December 22, 1997, between the
Registrant and BankBoston, N.A., as Rights Agent. (Filed as
Exhibit 4.1 to the Registrant's Form 8-K filed on December
23, 1997).+
4.1(b) Agreement of Substitution and Amendment of Rights Agreement,
dated as of May 21, 2001, between the Registrant and American
Stock Transfer and Trust Company. (Filed as Exhibit 4.1(b) to
the Registrant's Form 10-K for the fiscal year ended June 30,
2001).+
30
EXHIBIT NO. DESCRIPTION
- ----------- -----------
4.1(c) Amendment of Rights Agreement, dated as of July 24, 2002,
between the Registrant and American Stock Transfer and Trust
Company. *
4.2 1994 Stock Option Plan, as amended as of February 5, 1998.
(Filed as Exhibit 4.2 to the Registrant's Form 10-K for the
fiscal year ended June 27, 1998).+
4.3 1994 Management Stock Option Plan, as amended as of February
5, 1998. (Filed as Exhibit 4.3 to the Registrant's Form 10-K
for the fiscal year ended June 27, 1998).+
4.4 1995 Stock Option Plan, as amended as of February 5, 1998.
(Filed as Exhibit 4.4 to the Registrant's Form 10-K for the
fiscal year ended June 27, 1998).+
4.5 1996 Stock Option Plan, as amended as of February 5, 1998.
(Filed as Exhibit 4.5 to the Registrant's Form 10-K for the
fiscal year ended June 27, 1998).+
4.6 1998 Stock Option Plan. (Filed as Exhibit 4.10 to the
Registrant's Registration Statement on Form S-8, Registration
No. 333-72121).+
4.7 2000 Stock Option Plan. (Filed as Exhibit 4.11 to the
Registrant's Registration Statement on Form S-8, Registration
No. 333-55600).+
4.8(a) Convertible Debenture Purchase Agreement, dated as of April
27, 2001 between the Registrant and Joseph S. Montgomery.
(Filed as Exhibit 4.8 to the Registrant's Form 10-K for the
fiscal year ended June 30, 2001).+
4.9(a) 8% Convertible Subordinated Debenture due June 28, 2005
issued to Joseph S. Montgomery. (Filed as Exhibit 4.9 to the
Registrant's Form 10-K for the fiscal year ended June 30,
2001).+
4.9(b) Amendment and Waiver with respect to 8% Convertible
Subordinated Debenture due June 28, 2005 issued to Joseph S.
Montgomery. *
4.10 Convertible Debenture Purchase Agreement, dated as of April
27, 2001, between the Registrant and James R. Pyne. (Filed as
Exhibit 4.10 to the Registrant's Form 10-K for the fiscal
year ended June 30, 2001).+
4.11(a) 8% Convertible Subordinated Debenture due April 28, 2004
issued to James R. Pyne. (Filed as Exhibit 4.11 to the
Registrant's Form 10-K for the fiscal year ended June 30,
2001).+
4.11(b) Amendment and Waiver with respect to 8% Convertible
Subordinated Debenture due April 28, 2004 issued to James R.
Pyne. *
10.1 Severance Agreement, dated as of February 16, 2000, by and
between the Registrant and William A. Luca. (Filed as Exhibit
10.1 to the Registrant's Form 10-K for the fiscal year ended
July 1, 2000).+
10.2 Employee Patent and Confidential Information Agreement, dated
August 20, 1982, between the Registrant and Daniel C.
Alloway. (Filed as Exhibit 10.49 to the Registrant's
Registration Statement on Form S-1, Registration No.
33-84566).+
31
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.3 Employment Agreement, dated June 6, 1994, between the
Registrant and Leonard Konecny. (Filed as Exhibit 10.53 to
the Registrant's Registration Statement on Form S-1,
Registration No. 33-84566).+
10.4 Cannondale Corporation 401(k) Profit Sharing Plan. (Filed as
Exhibit 10.54 to the Registrant's Registration Statement on
Form S-1, Registration No. 33-84566).+
10.5 Cannondale Corporation 1994 Employee Stock Purchase Plan.
(Filed as Exhibit 10.57 to the Registrant's Registration
Statement on Form S-1, Registration No. 33-84566). +
10.6 Form of Indemnification Agreement between the Registrant and
each of its directors and officers. (Filed as Exhibit 10.60
to the Registrant's Registration Statement on Form S-1,
Registration No. 33-84566). +
10.7 Change of Control Employment Agreement, dated February 5,
1998, between the Registrant and William A. Luca. (Filed as
Exhibit 10.68 to the Registrant's Form 10-Q for the quarterly
period ended March 28, 1998). +
10.8 Change of Control Employment Agreement, dated February 5,
1998, between the Registrant and Joseph S. Montgomery. (Filed
as Exhibit 10.68.1 to the Registrant's Form 10-Q for the
quarterly period ended March 28, 1998).+
10.9 Change of Control Employment Agreement, dated February 5,
1998, between the Registrant and John Moriarty. (Filed as
Exhibit 10.68.2 to the Registrant's Form 10-Q for the
quarterly period ended March 28, 1998). +
10.10 Change of Control Employment Agreement, dated February 5,
1998, between the Registrant and Daniel C. Alloway. (Filed as
Exhibit 10.68.3 to the Registrant's Form 10-Q for the
quarterly period ended March 28, 1998). +
10.11 Change of Control Employment Agreement, dated February 27,
2002, between the Registrant and James Scott Montgomery. *
10.12 Change of Control Employment Agreement, dated February 27,
2002, between the Registrant and Cynthia Hoboken. *
10.13 Change of Control Employment Agreement, dated August 13,
2002, between the Registrant and Larry Sarver. *
10.14 Cannondale Corporation Change of Control Separation Plan A.
(Filed as Exhibit 10.68.4 to the Registrant's Form 10-Q for
the quarterly period ended March 28, 1998). +
10.15 Cannondale Corporation Change of Control Separation Plan B.
(Filed as Exhibit 10.68.5 to the Registrant's Form 10-Q for
the quarterly period ended March 28, 1998). +
10.16 Form of Non-Competition Agreement between the Registrant and
each of Joseph S. Montgomery, William A. Luca, Daniel C.
Alloway, James Scott Montgomery and Cynthia Hoboken. *
10.17 Amended and Restated Financing Agreement, dated as of July
26, 2002, by and among the Registrant, the lenders party
thereto and The CIT Group/Business Credit, Inc., as Agent. *
32
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.18 Note Purchase Agreement, dated July 26, 2002, by and between
the Registrant and Pegasus Partners II, L.P. *
21 Subsidiaries of the Registrant. (Filed as Exhibit 21 to the
Registrant's Form 10-K for the fiscal year ended July 3,
1999). +
23 Consent of Independent Auditors. *
24 Power of Attorney (appears on signature page of this
report). *
- ----------------
+ Incorporated by reference.
* Filed herewith.
(B) REPORTS ON FORM 8-K.
We did not file any reports on Form 8-K during the quarter ended June 29, 2002.
33
CANNONDALE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors......................................... F-2
Consolidated Balance Sheets as of June 29, 2002 and
June 30, 2001.......................................................... F-3
Consolidated Statements of Operations for the years ended June 29,
2002, June 30, 2001 and July 1, 2000.................................. F-4
Consolidated Statements of Stockholders' Equity for the years ended
June 29, 2002, June 30, 2001 and July 1, 2000......................... F-5
Consolidated Statements of Cash Flows for the years ended June 29,
2002, June 30, 2001 and July 1, 2000.................................. F-6
Notes to Consolidated Financial Statements............................. F-7
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Cannondale Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Cannondale
Corporation and subsidiaries as of June 29, 2002 and June 30, 2001, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended June 29, 2002. Our audits
also included the financial statement schedule listed in the Index at Item
14(a)(2). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cannondale
Corporation and subsidiaries at June 29, 2002 and June 30, 2001, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 29, 2002, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ Ernst & Young LLP
Stamford, Connecticut
August 12, 2002
F-2
CANNONDALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 29, 2002 JUNE 30, 2001
------------- -------------
ASSETS
Current assets:
Cash................................................................... $ 2,498 $ 2,155
Trade accounts receivable, less allowances of $14,155 and $11,270...... 50,703 43,762
Inventories, net ...................................................... 37,655 37,759
Prepaid expenses and other current assets.............................. 4,132 2,773
------------ ------------
Total current assets........................................................ 94,988 86,449
Property, plant and equipment, net ......................................... 32,078 35,628
Notes receivable and advances to related parties............................ 1,407 1,441
Other assets................................................................ 2,467 4,273
------------ ------------
Total assets................................................................ $ 130,940 $ 127,791
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................... $ 17,652 $ 15,351
Revolving credit advances.............................................. 3,835 866
Income taxes payable................................................... 497 294
Deferred income taxes.................................................. 24 81
Interest payable to a related party.................................... 196 28
Accrued expenses....................................................... 11,154 8,251
Current installments of long-term debt................................. 12,817 5,004
------------ ------------
Total current liabilities................................................... 46,175 29,875
Long-term debt, less current installments................................... 47,751 46,434
Subordinated debenture to a related party................................... 2,000 2,000
Other noncurrent liabilities................................................ 386 427
------------ ------------
Total liabilities........................................................... 96,312 78,736
------------ ------------
Commitments and contingencies .............................................. - -
Stockholders' equity:
Common Stock, $.01 par value:
Authorized shares - 40,000,000
Issued 8,875,679 and 8,836,264 shares .............................. 89 88
Additional paid-in capital............................................. 58,498 58,423
Retained earnings...................................................... 3,043 18,483
Less 1,292,900 shares in treasury at cost.............................. (20,162) (20,162)
Accumulated other comprehensive loss................................... (6,840) (7,777)
------------ ------------
Total stockholders' equity.................................................. 34,628 49,055
------------ ------------
Total liabilities and stockholders' equity.................................. $ 130,940 $ 127,791
============ ============
SEE ACCOMPANYING NOTES
F-3
CANNONDALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 29, 2002 JUNE 30, 2001 JULY 1, 2000
------------- ------------- ------------
Net sales............................................... $ 156,655 $ 146,791 $ 162,450
Cost of sales........................................... 122,328 110,823 112,100
------------- ------------- -------------
Gross profit............................................ 34,327 35,968 50,350
Expenses:
Selling, general and administrative................ 40,731 36,825 42,771
Research and development........................... 5,827 6,639 8,470
------------- ------------- -------------
46,558 43,464 51,241
------------- ------------- -------------
Operating loss.......................................... (12,231) (7,496) (891)
Other income (expense):
Interest expense................................... (5,119) (6,738) (5,888)
Other income (expense)............................. (238) 346 2,208
-------------- ------------- -------------
(5,357) (6,392) (3,680)
-------------- -------------- --------------
Loss before income taxes................................ (17,588) (13,888) (4,571)
Income tax (expense) benefit............................ 2,148 (6,431) 2,045
------------- -------------- -------------
Net loss................................................ $ (15,440) $ (20,319) $ (2,526)
============== ============== ==============
Basic and diluted loss per share........................ $ (2.04) $ (2.70) $ (0.34)
============== ============== ==============
SEE ACCOMPANYING NOTES
F-4
CANNONDALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED
COMMON STOCK ADDITIONAL TREASURY STOCK OTHER
------------- PAID-IN RETAINED --------------- COMPREHENSIVE
SHARES VALUE CAPITAL EARNINGS SHARES VALUE LOSS TOTAL
------ ----- ---------- -------- ------ ----- ------------- ---------
BALANCE AT JULY 3, 1999....... 8,784,308 $ 88 $ 57,815 $ 41,328 (1,292,900) $(20,162) $ (4,059) $ 75,010
Net loss.................... - - - (2,526) - - - (2,526)
Foreign currency translation
loss (net of tax benefit
of $174)................. - - - - - - (1,918) (1,918)
---------
Comprehensive loss......... (4,444)
Exercise of options......... 2,895 - 16 - - - - 16
Return of shares............ (1,332) - (19) - - - - (19)
Shares issued under employee
stock purchase plan...... 22,254 - 123 - - - - 123
--------- -------- -------- -------- ---------- -------- -------- ----------
BALANCE AT JULY 1, 2000....... 8,808,125 88 57,935 38,802 (1,292,900) (20,162) (5,977) 70,686
Net loss.................... - - - (20,319) - - - (20,319)
Foreign currency translation
loss..................... - - - - - - (1,816) (1,816)
Net accumulated derivative
gains...................... 16 16
---------
Comprehensive loss......... - - - - - - - (22,119)
Beneficial conversion on
subordinated convertible
debenture................ - - 400 - - - - 400
Shares issued under employee
stock purchase plan...... 28,139 - 88 - - - - 88
--------- -------- -------- -------- ---------- -------- -------- ---------
BALANCE AT JUNE 30, 2001...... 8,836,264 88 58,423 18,483 (1,292,900) (20,162) (7,777) 49,055
Net loss.................... - - - (15,440) - - - (15,440)
Foreign currency translation
gain..................... - - - - - - 2,061 2,061
Net accumulated derivative
losses................... - - - - - - (1,124) (1,124)
---------
Comprehensive loss......... - - - - - - - (14,503)
Exercise of options......... 581 1 - - - - - 1
Shares issued under employee
stock purchase plan...... 38,834 - 75 - - - - 75
--------- -------- -------- -------- -------- -------- -------- ---------
BALANCE AT JUNE 29, 2002...... 8,875,679 $ 89 $ 58,498 $ 3,043 (1,292,900) $(20,162) $ (6,840) $ 34,628
========== ======== ======== ======== =========== ========= ======== =========
SEE ACCOMPANYING NOTES
F-5
CANNONDALE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 29, 2002 JUNE 30, 2001 JULY 1, 2000
------------- ------------- ------------
OPERATING ACTIVITIES
Net loss.............................................. $ (15,440) $ (20,319) $ (2,526)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization..................... 7,674 9,187 8,023
Provisions for bad debts, discounts, credits and
returns and late charges ....................... 12,736 11,360 11,027
Provision for obsolete inventories and lower of 8,264 4,437 2,157
cost or market adjustments........................
Unrealized gain on foreign currency transactions (1,225) (711) (554)
Deferred income taxes............................. (12) 6,197 (1)
Beneficial conversion on subordinated convertible - 400 -
debt............................................
Other............................................. 1 (40) (499)
Changes in assets and liabilities:
Trade accounts receivable....................... (16,562) (7,477) (3,064)
Inventories..................................... (6,814) (3,043) (9,893)
Prepaid expenses and other assets............... (342) (1,301) (5,391)
Interest receivable from a related party........ - 1,318 -
Accounts payable................................ 1,804 (246) (1,026)
Accrued expenses................................ 1,861 1,085 (1,274)
Income taxes payable and other liabilities...... 644 1,022 (2,908)
------------ ------------ ------------
Net cash provided by (used in) operating (7,411) 1,869 (5,929)
activities ------------ ------------ ------------
INVESTING ACTIVITIES
Capital expenditures.................................. (2,595) (4,318) (5,982)
Proceeds from sale of equipment....................... 14 808 633
Loans provided to related parties..................... (33) (283) (294)
Repayments of loans provided to related parties....... 67 12,034 51
------------ ------------ ------------
Net cash provided by (used in) investing activities... (2,547) 8,241 (5,592)
------------ ------------ ------------
FINANCING ACTIVITIES
Net proceeds from the issuance of common stock........ 76 88 120
Proceeds from issuance of subordinated debenture to a
related party..................................... - 2,000 -
Proceeds from issuance of long-term debt.............. - 2,000 43,632
Payments for early extinguishment of debt............. - (12,000) (64,596)
Net proceeds from (repayments of) borrowings under
short-term revolving credit agreements............ 2,641 (1,148) 1,352
Net proceeds from (repayments of) borrowings under
long-term debt and capital lease agreements....... 7,321 (5,253) 32,673
------------ ------------ ------------
Net cash provided by (used in) financing activities... 10,038 (14,313) 13,181
------------ ------------ ------------
Effect of exchange rate changes on cash............... 263 1,294 104
------------ ------------ ------------
Net increase (decrease) in cash....................... 343 (2,909) 1,764
Cash at beginning of period........................... 2,155 5,064 3,300
------------ ------------ ------------
Cash at end of period................................. $ 2,498 $ 2,155 $ 5,064
============ ============ ============
Cash paid during the period for:
Interest.......................................... $ 4,792 $ 6,609 $ 5,496
============ ============ ============
Income taxes (refunds), net....................... $ (1,994) $ (953) $ 2,906
============ ============ ============
SEE ACCOMPANYING NOTES
F-6
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING
POLICIES
Description of Business
Cannondale Corporation (together with its subsidiaries, collectively referred to
as we, us or our) manufactures and distributes bicycles, ATVs (All-Terrain
Vehicles), motorcycles and bicycling and motorsports accessories and equipment.
International operations are conducted through our wholly-owned subsidiaries:
Cannondale Europe B.V., Cannondale Japan KK, and Cannondale Australia Pty
Limited.
Basis of Presentation
The accompanying consolidated financial statements have been prepared assuming
we will have adequate working capital to fund operations. We have experienced
significant losses for the past three years, primarily generated by our
motorsports operating segment. We expect to fund our planned operating and
capital requirements through fiscal 2003 primarily with cash generated by
operations. Our ability to generate sufficient working capital from operations
is dependent on our ability to achieve our planned production and revenue goals.
We plan to supplement our working capital needs with borrowings under our
revolving credit facility with the CIT Group/Business Credit, Inc. Our credit
facilities with Pegasus Partners II, L.P. and CIT (see Note 5) require that we
satisfy certain periodic financial covenants. Our ability to satisfy these
covenants is dependent on our ability to generate sufficient cash flows from
operations. The breach of any of these covenants, unless amended or waived by
the lenders, would constitute an event of default, which would permit our
lenders to accelerate the maturity of our debt. Although we have been
successful in obtaining waivers or amendments in the past, we can give no
assurance that we will be able to obtain any such waiver or amendment on
acceptable terms or at all. If we cannot generate sufficient positive cash flows
from operations to continue compliance with the financial covenants contained in
our financing facilities or to fund our working capital needs, we may be
required to seek additional sources of funds through changes in our operations,
asset sales, additional third-party debt and/or equity financing or a
combination thereof. We can give no assurance that additional sources of funds
will be available to us on commercially reasonable terms or at all.
Business and Credit Concentrations
Our bicycle customer base is comprised of specialty bicycle retailers who 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 fiscal 2002, 2001 or 2000. No single
customer accounted for more than 5% of our net sales during the years ended June
29, 2002, June 30, 2001 or July 1, 2000. 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.
Our motorsports customer base is comprised of specialty motorsports retailers
who are located within the United States and Europe. The majority of our
domestic motorsports 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 time period (not
exceeding 120 days), less an interest factor. All other products are sold with
payment terms from 30 to 180 days.
Raw materials for our bicycle and motorsports products are readily available.
We do have, however, preferences with respect to continuing our relationships
with certain selected vendors, and a material portion of our bicycle inventory
purchases is from a single supplier. That single supplier was the source of
approximately 18% of our total bicycle raw material inventory purchases in
fiscal 2002.
F-7
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Cannondale U.S., Cannondale Europe, Cannondale Japan, and Cannondale Australia.
We have eliminated all significant intercompany balances and transactions in
consolidation.
Revenue Recognition
In December 1999, the Securities and Exchange Commission Staff issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB 101, as amended by SAB 101B, provides guidance on the
recognition, presentation, and disclosure of revenue in financial statements. We
adopted SAB 101 as of the beginning of the fourth quarter of fiscal 2001.
We recognize revenue upon passage of title, which is generally upon shipment of
goods, with the exception of certain motorsports sales (discussed below). For
all bicycle and bicycle-related shipments, there is a clear and irrevocable
passage of title to the customer at the shipping point. Bicycles and
bicycle-related items are not sold under any special sales arrangements, such as
consignment sales, bill and hold transactions, customer acceptance provisions,
or layaway agreements. Due to the established history of our bicycle business,
we are able to adequately reserve for estimated customer returns at the time of
shipment. As customary in the bicycle industry, we grant extended payment terms
which vary based on the time of year and geographic location of the customer,
and range from 30 to 210 days. There are no material collectibility issues with
these extended-term receivables.
With the exception of our trial basis program, we recognize revenue for our
motorsports sales upon shipment. During fiscal 2002 and 2001, we permitted
certain select customers to take delivery of an ATV or motorcycle for a 30 day
trial period. After the customer notified us of his acceptance of the product,
title passed to the customer and revenue was recognized. This program comprised
a nominal amount of total motorsports sales for both fiscal 2002 and 2001, and
the program was discontinued in the latter portion of fiscal 2002. Motorsports
products are sold with payment terms from 30 to 180 days.
Shipping and Handling Fees and Costs
We adopted EITF Issue 00-10, "Accounting for Shipping and Handling Fees and
Costs," effective July 2, 2000. Accordingly, we have included all shipping and
handling billings to customers in net sales, and freight costs incurred for
product shipments have been included in selling, general and administrative
expenses. For fiscal 2002, 2001 and 2000, freight costs were $3,381,000,
$3,009,000 and $3,518,000, respectively.
Product Warranties
We provide original owners of our bicycles with a lifetime warranty for the
bicycle frame and a one year warranty for suspensions and components. In
addition, we provide a lifetime warranty against defects in material and/or
workmanship on our cycling clothing. During the warranty period, we will repair
or replace a defective part or assembly at no cost to the owner. We recognize
provisions for estimated warranty expense at the time of sale, determined
principally on the basis of past experience.
We offer a six month warranty on our Blaze and Cannibal model ATVs, and do not
offer a warranty on our motocross motorcycles, which is customary in the
industry. We recognize provisions for warranty expense at the time of sale,
based upon the estimated costs to repair each unit and the estimated number of
units requiring repair.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Plant and equipment under
capitalized lease obligations are recorded at the present value of minimum lease
payments.
F-8
We calculate depreciation of plant and equipment using the straight-line method
over 20 to 40 years for buildings and improvements and 3 to 10 years for
equipment. We recognize depreciation of assets recorded under capitalized lease
obligations over the lesser of the useful lives or lease terms, and we include
such amount in depreciation and amortization expense.
Impairment of Long-Lived Assets
Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flow estimates to be generated by those assets are less than the assets'
carrying amount. SFAS No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. We periodically evaluate the
carrying value of long-lived assets in relation to the estimated cash flows of
the underlying business. An impairment loss is recognized if the undiscounted
expected cash flow is less than the carrying amount.
Income Taxes
We account for income taxes under the provisions of SFAS No. 109, "Accounting
for Income Taxes." The Statement requires an asset and liability approach for
the financial accounting and reporting of deferred income taxes. Taxes are
recognized for all temporary differences between the tax and financial reporting
bases of our assets and liabilities based on the enacted tax laws and statutory
tax rates applicable to the periods in which differences are expected to affect
taxable income. We evaluate the realizability of our deferred tax assets on a
quarterly basis. If we determine a portion or all of the valuation allowance to
be unnecessary, the related tax benefits will reduce the future income tax
provision anticipated at that time.
Foreign Currency Translation
We translate the assets and liabilities of our foreign subsidiaries into U.S.
dollars at the exchange rates in effect at the balance sheet date. We translate
revenues, costs and expenses at the average exchange rates applicable for the
period. We report translation adjustments resulting from changes in exchange
rates as a component of accumulated other comprehensive income pursuant to SFAS
No. 130, "Reporting Comprehensive Income."
Derivative Financial Instruments
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," and its
amendments, SFAS No. 137 and SFAS No. 138, in June 1999 and June 2000,
respectively. The Statement requires us to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through earnings. If a derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of derivatives are either offset against
the change in fair value of assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings in other income (expense) on
the Consolidated Statement of Operations. We adopted SFAS No. 133, as amended,
effective July 2, 2000; the effect of such adoption was not material to either
our operating results or financial position for the year ended June 30, 2001.
Stock-Based Compensation
We grant stock options to officers, directors, employees, consultants and
advisors with an exercise price determined by our Board of Directors at the time
of grant. We account for stock option grants, except for those granted to
consultants and our advisors, in accordance with Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," which
requires that we recognize compensation expense for the difference between the
quoted market price of the stock at the grant date and the amount that the
employee is required to pay. We account for stock option grants to consultants
and advisors in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation." As prescribed under SFAS No. 123, we have disclosed in Note 7 the
pro-forma effects on net loss and loss per share of recording compensation
expense for the fair value of all stock options granted subsequent to July 1,
1995. It is our opinion that the existing model to estimate the fair value of
F-9
employee options according to SFAS No. 123, and the assumptions we used to
calculate the impact, may not be representative of the effects on future years
and it does not necessarily provide a reliable single measure of the fair value
of our employee stock options.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States require us to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Intangible Assets
Included in other assets are intangible assets, which represent the cost of
patents, goodwill and deferred financing costs. We amortize patents using the
straight-line method over the estimated useful lives of the assets, not
exceeding 17 years. We amortize deferred financing costs over the term of the
related debt instruments. Net deferred financing costs of approximately
$1,836,000 are included in "Prepaid expenses and other current assets" on the
Consolidated Balance Sheet at June 29, 2002 as such costs were fully expensed in
July 2002 in connection with our debt refinancing; see Note 5 for additional
discussion of this refinancing. In connection with the early extinguishment of
debt during fiscal 2001 and 2000 (see Note 5), we expensed approximately
$552,000 and $1,122,000, respectively, of unamortized deferred financing costs
relating to the retired debt; such amounts are included in selling, general and
administrative expenses in the Consolidated Statements of Operations in
accordance with SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64,
Amendments of FASB Statement No. 13, and Technical Corrections."
Following is a summary of the activity related to our intangible assets, in
thousands:
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 29, 2002 JUNE 30, 2001 JULY 1, 2000
------------- ------------- ------------
DEFERRED FINANCING COSTS:
Gross amount....................... $ 4,422 $ 2,949 $ 2,027
Accumulated amortization........... (1,985) (1,094) (80)
------------ ------------ ------------
Net book value..................... $ 2,437 $ 1,855 $ 1,947
============ ============ ============
PATENTS:
Gross amount....................... $ 1,218 $ 1,224 $ 1,214
Accumulated amortization........... (420) (363) (298)
------------ ------------ ------------
Net book value..................... $ 798 $ 861 $ 916
============ ============ ============
GOODWILL:
Gross amount....................... $ 403 $ 403 $ 403
Accumulated amortization........... (188) (188) (161)
------------ ------------ ------------
Net book value..................... $ 215 $ 215 $ 242
============ ============ ============
TOTAL GROSS INTANGIBLE ASSETS...... $ 6,043 $ 4,576 $ 3,644
TOTAL ACCUMULATED AMORTIZATION
OF INTANGIBLE ASSETS............. $ (2,593) $ (1,645) $ (539)
AMORTIZATION EXPENSE............... $ 1,027 $ 868 $ 772
Based upon our current intangible asset balances, we estimate amortization
expense will be approximately $2,640,000 for fiscal year 2003, and approximately
$748,000 for each of the following four fiscal years.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." These statements drastically 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
F-10
longer be amortized but must be reviewed annually, or more frequently if
impairment indicators arise, for impairment. Goodwill is required to be tested
for impairment between annual tests if an event occurs or circumstances change
that more-likely-than-not reduce the fair value of a reporting unit below its
carrying value. An indefinite lived intangible asset is required to be tested
for impairment between the 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 had no material effect on our
operating results or financial position as no impairment charge was deemed
necessary.
Advertising Expenses
We expense advertising costs during the year incurred. Our selling, general and
administrative expenses include advertising and promotion costs of $1,526,000,
$1,397,000 and $2,650,000 for the years ended June 29, 2002, June 30, 2001 and
July 1, 2000, respectively.
Accounting Developments
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendments of FASB Statement No. 13, and Technical Corrections."
This Statement prescribes that certain gains and losses arising from the
extinguishment of debt are included in operating results, rather than as
extraordinary items as previously required under FASB Statement No. 4. The
provisions of this Statement related to the rescission of Statement No. 4
shall be applied in fiscal years beginning after May 15, 2002. We have early
adopted this Statement and, accordingly, the extraordinary losses incurred in
fiscal years 2001 and 2000 of $552,000 and $234,000, respectively, relating to
debt extinguishments have been reclassified to our results from operations.
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 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.
Reclassifications
We have reclassified certain fiscal 2001 and 2000 amounts to conform to the
current year's presentation.
2. INVENTORIES, NET
The components of inventories are as follows (in thousands):
JUNE 29, 2002 JUNE 30, 2001
------------- -------------
Raw materials........................................ $ 21,893 $ 22,981
Work-in-process...................................... 3,604 2,879
Finished goods....................................... 14,785 14,453
--------------- --------------
40,282 40,313
Less reserve for obsolete inventories and lower of cost
or market adjustments................................ (2,627) (2,554)
--------------- --------------
$ 37,655 $ 37,759
=============== ==============
F-11
3. PROPERTY, PLANT AND EQUIPMENT, NET
The components of property, plant and equipment, net, are as follows (in
thousands):
JUNE 29, 2002 JUNE 30, 2001
------------- -------------
Land................................................ $ 1,819 $ 1,725
Buildings and improvements.......................... 24,035 23,591
Factory and office equipment........................ 51,698 48,527
Construction and projects-in-progress............... 550 790
--------------- --------------
78,102 74,633
Less accumulated depreciation....................... (46,024) (39,005)
--------------- --------------
$ 32,078 $ 35,628
=============== ==============
Purchases of equipment through capitalized lease obligations and notes were
$49,000 and $87,000 in fiscal 2002 and 2000, respectively. We did not enter into
any capital leases during fiscal 2001.
In accordance with SOP 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," we capitalize certain costs incurred in
connection with developing or obtaining internal use software. We capitalized
approximately $55,000, $74,000 and $141,000 related to internally developed
software costs during fiscal 2002, 2001 and 2000, respectively.
4. LOSS PER SHARE
In the following table, we reconcile the numerator and denominator for the basic
and diluted loss per share computations and other related disclosures required
by SFAS No. 128, "Earnings Per Share" (in thousands, except per share data):
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 29, JUNE 30, JULY 1,
2002 2001 2000
------------- ------------ --------
NUMERATOR:
Net loss............................................ $ (15,440) $ (20,319) $ (2,526)
DENOMINATOR:
Denominator for basic and diluted loss per share -
weighted-average shares.......................... 7,552 7,522 7,497
Basic and diluted loss per share.................... $ (2.04) $ (2.70) $ (0.34)
In the following table, we summarize the weighted-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 loss per share. For the periods
below, inclusion of such options would result in an antidilutive effect due to
the net losses incurred:
OPTIONS RANGE OF EXERCISE PRICES
------- ------------------------
Fiscal 2002............................. 3,284,316 $0.34 - $10.38
Fiscal 2001............................. 2,774,197 $0.34 - $15.00
Fiscal 2000............................. 2,364,704 $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
fiscal 2002 and 2001 as the effect would be antidilutive due to the net losses
incurred.
F-12
5. DEBT
Short-term revolving credit advances (in thousands):
JUNE 29, 2002 JUNE 30, 2001
------------- -------------
Cannondale Europe..................................... $ 2,777 $ 385
Cannondale Japan...................................... 1,058 481
------------ ------------
$ 3,835 $ 866
============ ============
In March 2002, Cannondale Europe renegotiated certain terms of its
multi-currency credit arrangement with ABN AMRO Bank N.V. ("ABN"), which allows
Cannondale Europe to borrow up to EUR 5,000,000 (approximately $4,957,000 at
June 29, 2002) on a short-term basis. At June 29, 2002, the remaining
availability under the ABN revolver was approximately $346,000. The current
interest rate on the overdraft facility is 5.50%, which is comprised of an ABN
Euro base rate of 4.00% plus a margin of 1.50%. The minimum interest rate on the
overdraft facility is an ABN Euro base rate of 3.00% plus the margin of 1.50%.
Cannondale Europe must maintain a level of tangible net worth which represents
at least 25% of total assets, excluding intercompany amounts. Borrowings are
limited to 50% of the lower of cost or market of on-hand inventory, and the
financing arrangement is secured by receivables, inventories and machinery and
equipment. The credit arrangement contains no specific expiration date,
and may be terminated by either the borrower or the lender at any time.
Cannondale Europe's multi-currency credit arrangement is guaranteed by
Cannondale U.S.
Cannondale Japan has an unsecured revolving credit facility for up to JPY
155,000,000 (approximately $1,296,000 at June 29, 2002). The availability under
the revolving facility at June 29, 2002 was approximately $238,000. The interest
rate on the outstanding borrowings was 3.00% at June 29, 2002 and June 30, 2001.
Cannondale Japan has agreed to pay monthly installments of JPY 1,500,000
(approximately $12,500 as of June 29, 2002) until October 2002 to reduce the
outstanding balance. Cannondale Japan's unsecured revolving credit facility is
guaranteed by Cannondale U.S., and contains no specific expiration date.
The weighted-average interest rate on our short-term revolving credit advances
was 4.70% and 3.54% at June 29, 2002 and June 30, 2001, respectively.
Long-term debt (in thousands):
JUNE 29, 2002 JUNE 30, 2001
------------- -------------
Revolving debt................................................. $ 28,348 $ 21,672
Term loans..................................................... 11,334 15,128
IFN Finance, B.V. loan......................................... 12,272 5,810
ABN AMRO Onroerend Goed Lease en Financieringen 1,769 1,601
B.V. loan...................................................
Subordinated Convertible Debentures, interest at 8.0%.......... 4,000 4,000
Pennsylvania Industrial Development Authority bonds, interest 3,103 3,405
rates ranging from 2.0% to 3.75%............................
Connecticut Development Authority loan......................... 1,412 1,490
Department of Economic and Community Development loan, 232 263
interest at 4.0%............................................
Notes secured by equipment and capitalized leases.............. 98 69
----------- -----------
62,568 53,438
Less current portion........................................... (12,817) (5,004)
----------- -----------
$ 49,751 $ 48,434
=========== ===========
In July 2002, we entered into a new financing facility with Pegasus Partners II,
L.P., and amended our existing credit facility with the CIT Group/Business
Credit, Inc. The new financing facilities cured any defaults under our prior
financing agreements, and permitted us to classify our debt as long-term on our
Consolidated Balance Sheet at June 29, 2002.
F-13
We sold to Pegasus $25.0 million of senior notes and warrants to purchase an
aggregate of 2,944,552 shares of our common stock. The senior notes are due July
25, 2007. We may prepay the senior notes without penalty at any time. Interest
payments at the rate of 7.5% per annum are payable in cash, and interest
payments at the rate of 12.5% are payable in additional senior notes, or at our
option, in cash. The senior note agreement requires minimum fixed charge
coverage, net worth, daily availability, consolidated EBITDA and motorsports
EBITDA levels, as defined, and restricts the payment of cash dividends. The
senior notes are secured by a first lien on our domestic machinery and
equipment, a junior lien on our Connecticut and Pennsylvania real property,
subject only to first liens held by state government agencies and by a junior
lien on all other domestic assets. The warrants issued to Pegasus are
exercisable through July 26, 2012 at an initial exercise price of $2.05 per
share. If we repay the senior notes in full by January 26, 2004, warrants to
purchase 1,972,849 shares will be cancelled. If we do not repay the senior notes
in full by that date, but repay the senior notes in full by July 26, 2004,
warrants to purchase 1,472,276 shares will be cancelled. The warrants subject to
cancellation are not exercisable.
Our amended facility with CIT provides us with a five year revolving line of
credit. The amount of the revolving line of credit is the lesser of $35.0
million or a percentage of eligible receivables and inventories. Interest on the
revolving line of credit is payable monthly, and is computed as a Base Rate
(JPMorgan Chase Bank prime rate) plus an applicable increment, or a LIBOR
(London Interbank Offered Rate) plus an applicable increment. The applicable
increments are based on daily availability, as defined, and range from 1.25% to
1.75% on the prime rate, and 3.25% to 3.50% on the LIBOR. The amended facility
requires minimum fixed charge coverage, net worth, daily availability,
consolidated EBITDA and motorsports EBITDA levels, as defined, and restricts the
payment of cash dividends. The facility is secured by a first lien on all of our
domestic assets, with the exception of our Connecticut and Pennsylvania real
property and machinery and equipment, to which CIT holds a junior lien.
We used approximately $10.3 million of the net proceeds from the sale of our
senior notes to retire our prior term loans with CIT and Ableco Finance LLC. The
remaining net proceeds of approximately $11.7 million have been used for working
capital needs. In conjunction with this refinancing, in July 2002 we expensed
approximately $1.8 million in unamortized deferred financing costs associated
with the retired debt. Additionally, we allocated the $25.0 million proceeds
from the Pegasus financing between the senior notes and the warrants. The
resulting debt discount will be amortized over the five year life of the senior
notes to interest expense.
In June 2000, we entered into a five year secured credit facility in the amount
of $60.0 million with CIT as the administrative and collateral agent. The
secured facility consisted of a revolving line of credit and a term loan. The
outstanding amount of the revolving line of credit was limited to the lesser of
$45.0 million or a percentage of eligible receivables and inventories. At June
29, 2002 and June 30, 2001, approximately $2.3 million and $7.9 million,
respectively, was available under the revolving line of credit. The term loan,
initially in the amount of $15.0 million, was scheduled to amortize in 19
consecutive quarterly principal payments of $622,250 each, followed by a final
payment of the remaining unamortized principal at maturity. In accordance with
the provisions of the secured facility, we paid down the term loan by
approximately $2.1 million during fiscal 2001 in conjunction with the full
repayment of the note from Joseph Montgomery (see Note 15). The interest rate on
the revolving line of credit was 8.25% at June 29, 2002 and June 30, 2001, and
the interest rate on the term loan was 8.75% at June 29, 2002 and June 30, 2001.
Interest on the revolving line of credit and term loan was payable monthly, and
was computed as the Chase Bank Rate (prime rate) plus an applicable revolver or
term loan prime rate margin per annum, or LIBOR plus the applicable revolver or
term loan LIBOR margin per annum. The revolver and term loan margins were based
on certain fixed charge coverage ratios, as defined, and ranged from 0.25% to
1.50% on the prime rate, or 1.75% to 3.00% on the LIBOR. The secured facility
was collateralized by substantially all of Cannondale U.S. assets and the issued
and outstanding stock of our subsidiaries. The secured facility required
minimum fixed charge coverage, net worth, senior leverage and EBITDA levels, as
defined, and restricted the payment of cash dividends.
In conjunction with the secured facility, we also entered into a three year
financing agreement with Ableco Finance LLC during fiscal 2000, which provided
for a $15.0 million term loan. Such loan was scheduled to amortize in four
quarterly principal payments of $337,750 each, followed by seven quarterly
payments of $500,000 each, and a final payment of the remaining unamortized
principal at maturity. In accordance with the provisions of the Ableco
agreement, we paid down the term loan by approximately $9.9 million during
fiscal 2001 in conjunction with the full repayment of the note from Joseph
Montgomery. The interest rate on the term loan at June 29, 2002 and June 30,
2001 was 20.5% and 18.0%, respectively. Such interest, determined on a monthly
basis, consisted of a reference rate (prime rate), as defined, plus a margin.
Interest of 15.0% was payable in cash on a monthly basis, and the
F-14
remaining 5.5% was capitalized as additional principal of the loan. In June
2000, we issued to Ableco warrants to purchase an aggregate of 393,916 shares of
our common stock at a purchase price of $0.01 per share. These warrants could be
exercised at any time after June 30, 2001, but prior to June 30, 2005, provided
we had not paid or prepaid at least $7.5 million of principal under the term
loan by June 30, 2001. The warrants were terminated during fiscal 2001 in
conjunction with the early paydown of the term loan of approximately $9.9
million. The term loan was collateralized by a second security interest in
substantially all of Cannondale U.S. assets. The Ableco agreement required
minimum fixed charge coverage, net worth, senior leverage and EBITDA levels,
as defined, and restricted the payment of cash dividends.
In April 2001, we amended our respective prior financing agreements with CIT and
Ableco, effective as of December 31, 2000, in order to modify certain financial
covenants. As a result of these amendments, we were in compliance with all
financial covenants of our borrowing facilities. As a condition to entering into
these amendments, we were required to receive a cash infusion of at least $7.0
million, of which no more than $3.0 million was to be paid by our foreign
subsidiaries. In satisfaction of this condition, Cannondale Europe repaid to
Cannondale U.S. $3.0 million of intercompany indebtedness, and we sold an
aggregate of $4.0 million of convertible subordinated debentures to two
individual investors, including $2.0 million to our Chairman, President and
Chief Executive Officer, Joseph Montgomery. Both debentures bear interest at an
annual rate of 8.0%.
The $2.0 million debenture issued to Mr. Montgomery is due June 28, 2005 and is
convertible into shares of our common stock at an initial conversion price of
$4.50 per share. Mr. Montgomery may convert this debenture once the $2.0 million
subordinated debenture issued to the third party investor is no longer
outstanding (whether by conversion, redemption, payment in full of the principal
sum, or otherwise). The $2.0 million debenture issued to the third party
investor is due April 28, 2004 and is immediately convertible into shares of our
common stock at an initial conversion price of $3.75 per share. This debenture
contains a beneficial conversion feature equal to the difference of the market
price of Cannondale stock at the date of issue ($4.50 per share) and the
conversion price ($3.75 per share). During fiscal 2001, we recorded interest
expense related to the beneficial conversion feature of $400,000, with the
offset to additional paid-in capital. As a result of the issuance of the senior
notes and warrants to Pegasus in connection with our refinancing in July 2002,
the conversion prices of the convertible debentures have been adjusted. In
accordance with the antidilution provisions of the debentures, the conversion
price of the debenture issued to Mr. Montgomery was reduced to $4.32 per share,
which will entitle Mr. Montgomery to receive an additional 18,519 shares upon
conversion. The conversion price of the debenture issued to the third party
investor was reduced to $3.64 per share, which will entitle the holder to
receive an additional 16,118 shares upon conversion.
In February 2000, Cannondale Europe entered into a financing agreement with IFN
Finance, B.V., secured by receivables from European customers for a period of
three years. The available financing is 80% of pledged receivables, subject to a
maximum of EUR 18,151,000 (approximately $17,995,000 at June 29, 2002). The
financing may be in the form of either a current account overdraft or short-term
loans (up to a maximum of EUR 6,807,000, or $6,748,000 at June 29, 2002). At
June 29, 2002, the remaining availability under the IFN agreement was
approximately $2.5 million. The interest rate is determined as the sum of the
European central bank rate, subject to a minimum of 3.00% per annum, plus a
margin of 1.50%. At June 29, 2002, $6,741,000 was outstanding in short-term
loans with interest at 4.85%, and $5,530,000 was outstanding in account
overdrafts with interest at 5.50%. At June 30, 2001, $5,788,000 was outstanding
in short-term loans with interest at 5.86%, and $22,000 was outstanding in
account overdrafts with interest at 6.75%. The pledged receivables are subject
to certain conditions, including concentrations from single customers and time
outstanding. In addition, the agreement provides for the payment of customary
fees on a quarterly basis.
In February 2000, Cannondale Europe entered into an agreement with ABN AMRO
Onroerend Goed Lease en Financieringen B.V. ("ABN Financing") to mortgage its
office building and land. The mortgage was in the amount of EUR 1,293,000
(approximately $1,282,000 at June 29, 2002), with a five year fixed interest
rate of 6.70%, and a variable rate thereafter. Such mortgage is in addition to
the previous ABN Financing mortgage of EUR 697,000 (approximately $691,000 at
June 29, 2002), and both mortgages will expire on September 12, 2016. The
interest on the previous ABN Financing mortgage is adjusted every three months,
subject to a maximum of 7.55%, based upon the European central bank rate. The
rate on this mortgage was 6.05% and 7.15% at June 29, 2002 and June 30, 2001,
respectively.
F-15
During fiscal 2001, we paid down $12.0 million in long-term debt using the
proceeds from the full repayment of the note from Joseph Montgomery.
Accordingly, we expensed $552,000 of related unamortized deferred financing
costs. In accordance with SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendments of FASB Statement No. 13, and Technical
Corrections," this write-off has been reclassified as a component of selling,
general and administrative expenses on the Consolidated Statement of Operations
for the fiscal year ended June 30, 2001.
During fiscal 2000, we used the proceeds of the CIT, Ableco, and IFN financing
arrangements to retire our prior $75.0 million amended and restated
multi-currency credit facility. We recorded a net loss of $234,000 which was
comprised of the write-off of net deferred financing costs (approximately $1.1
million) offset by realized gains on the settlement of the foreign-denominated
debt (approximately $325,000) and the interest rate swap agreements
(approximately $420,000). Such amounts have been included in our loss before
income taxes on the Consolidated Statement of Operations for the fiscal year
ended July 1, 2000.
We have received funding from the Pennsylvania Industrial Development Authority
("PIDA") to partially finance the cost of both our Bedford, Pennsylvania bicycle
and motorsports facilities. The PIDA bonds are secured by these manufacturing
facilities, and are payable in equal monthly payments. The loans expire at
various times between 2003 and 2015.
We partially financed the cost of our Bethel, Connecticut headquarters and
research and development facility with a loan from the Connecticut Development
Authority ("CDA"). The loan, initially in the amount of $1.6 million, is secured
by the facility. The interest rate was fixed at 4.65% until January 2000;
beginning at such time, the CDA adjusts the interest rate annually to yield the
U.S. Government Securities Ten Year Treasury. At June 29, 2002 and June 30,
2001, the interest rate on the CDA loan was 5.10% and 5.25%, respectively.
Principal payments on the loan commenced in February 2000 in amounts sufficient
to amortize the principal balance over a fifteen year term plus interest, with
the balance due on February 1, 2008.
We borrowed $337,500 from the Connecticut Department of Economic and Community
Development to purchase certain machinery and equipment used for research and
development. The loan, which extends through 2009, is secured by the machinery
and equipment and is payable in equal monthly installments.
Our capitalized lease obligations extend through 2004, and represent the present
value of future minimum lease payments, discounted at rates ranging from 4.5% to
9.5%, payable in monthly installments.
Maturities of our long-term debt, including payments under capitalized lease
obligations, are as follows (in thousands):
2003........................................................... $ 12,817
2004........................................................... 2,531
2005........................................................... 2,502
2006........................................................... 498
2007........................................................... 15,184
Thereafter..................................................... 29,036
----------
$ 62,568
==========
At June 29, 2002 and June 30, 2001, we had outstanding trade letters of credit
for approximately $555,000 and $636,000, respectively.
6. INCOME TAXES
Income (loss) before income taxes by geographic location is as follows (in
thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 29, 2002 JUNE 30, 2001 JULY 1, 2000
------------- ------------- ------------
United States....................... $ (17,936) $ (15,427) $ (8,650)
Foreign............................. 348 1,539 4,079
------------- ------------- -------------
$ (17,588) $ (13,888) $ (4,571)
============= ============= =============
F-16
The income tax expense (benefit) attributable to income (loss) before income
taxes consists of the following (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 29, 2002 JUNE 30, 2001 JULY 1, 2000
------------- ------------- ------------
Current:
Federal........................ $ (2,010) $ - $ (3,106)
Foreign........................ (126) 234 1,574
State.......................... - - (512)
--------- ---------- ---------
Total current............... (2,136) 234 (2,044)
--------- ---------- ---------
Deferred:
Federal........................ 45 5,205 230
Foreign........................ (57) 447 (279)
State.......................... - 545 48
--------- ---------- ---------
Total deferred.............. (12) 6,197 (1)
--------- ---------- ---------
Total............................... $ (2,148) $ 6,431 $ (2,045)
========= ========== =========
The provision (benefit) for income taxes on our loss before income taxes differs
from the amount computed by applying the U.S. federal income tax rate (34.0%) as
a result of the following items:
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 29, 2002 JUNE 30, 2001 JULY 1, 2000
------------- ------------- ------------
Tax at U.S. statutory rate........................... (34.0)% (34.0)% (34.0)%
State income benefit, net of federal effect.......... (3.3) (3.7) (6.6)
Lower effective income taxes of other countries...... (1.0) (2.6) (2.0)
Tax effect of research and development credit........ (1.0) (2.0) (8.7)
Tax effect of dividend from foreign subsidiary....... (0.1) (5.4) 5.4
Valuation allowance.................................. 27.0 94.6 -
Other................................................ 0.2 (0.6) 1.2
---------- ---------- ----------
(12.2)% 46.3% (44.7)%
========== ========== ==========
The significant components of our deferred tax assets and liabilities at June
29, 2002 and June 30, 2001 were as follows (in thousands):
JUNE 29, 2002 JUNE 30, 2001
------------- -------------
Deferred tax assets:
Accounts receivable and inventory reserves.. $ 2,988 $ 2,524
Accrued liabilities......................... 1,124 1,187
Tax credits and NOL carryforwards........... 14,490 10,932
Other....................................... 858 805
----------- -----------
Total deferred assets....................... 19,460 15,448
----------- -----------
Deferred tax liabilities:
Tax over book depreciation.................. (1,208) (1,415)
Accounts receivable fair value adjustment... - (286)
Other....................................... (413) (745)
----------- -----------
Total deferred liabilities.................. (1,621) (2,446)
------------ -----------
Net deferred tax asset before valuation allowance 17,839 13,002
Less valuation allowance......................... (17,863) (13,083)
----------- -----------
Net deferred tax liability....................... $ (24) $ (81)
=========== ===========
Included in the deferred tax asset balance at June 29, 2002, we have available
for U.S. federal income tax purposes research and development credit, foreign
tax credit and alternative minimum tax credit carryforwards of approximately
$2,586,000, $5,706,000 and $277,000, respectively. We also have federal and
state net operating loss carryforwards of approximately $3,620,000 and
$2,062,000, respectively. The research and development credit carryforwards have
expiration dates ranging from fiscal 2019 through fiscal 2022. The foreign tax
credit carryforwards will expire in fiscal 2005 through 2007. The alternative
minimum tax credit carryforwards have no expiration, and will be carried forward
indefinitely until utilized. The federal net operating loss carryforward will
F-17
expire in fiscal 2022. The state net operating loss carryforwards are related to
a number of state jurisdictions and will expire at various times between fiscal
2003 and 2017.
Also included in our deferred tax asset balance as of June 29, 2002 are net
operating loss carryforwards of approximately $239,000 from our subsidiary in
Japan, which expire in fiscal 2005 and 2006.
We have established a valuation allowance, which represents Cannondale U.S. and
Cannondale Japan's excess deferred tax assets over deferred tax liabilities as
of June 29, 2002 and June 30, 2001. 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. We evaluate the realizability of our deferred tax assets on a
quarterly basis. If we determine a portion or all of the valuation allowance to
be unnecessary, the related tax benefit will be recorded at such time.
During fiscal 2002, we reduced the valuation allowance previously recorded and
recognized a tax benefit of 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 received a
refund of taxes in the amount of $2.0 million in the fourth quarter of fiscal
2002 due to this net operating loss carryback claim.
The remaining deferred tax liability of $24,000 and $81,000 as of June 29, 2002
and June 30, 2001, respectively, pertains to Cannondale Europe.
During fiscal 2002 and 2001, we received dividends from Cannondale Europe of
approximately $1,595,000 and $2,336,000, respectively. Withholding taxes of
approximately $80,000 and $117,000, respectively, were paid as a result of these
dividends. No incremental taxes attributable to the fiscal 2002 or 2001 dividend
were provided.
Undistributed earnings of our foreign subsidiaries as of June 29, 2002 amounted
to approximately $20,490,000. Of this amount, we intend to indefinitely reinvest
approximately $17,085,000, and, accordingly, we have not provided for any
related U.S. income and foreign withholding taxes. We have provided for
withholding taxes potentially payable on approximately $3,405,000 of
undistributed earnings to the extent we anticipate such earnings will be
remitted. In the event that undistributed earnings are repatriated in the form
of dividends or otherwise, we would be subject to both U.S. income taxes
(subject to an adjustment for foreign tax credits) and withholding taxes payable
to the various foreign countries. Determination of the amount of the
unrecognized deferred U.S. income tax liability is not practicable due to the
complexities associated with its hypothetical calculation; however, upon
repatriation, foreign tax credits would be available to reduce substantially all
of the resulting U.S. tax liability. Based on the current U. S. income tax rates
and the tax rates applicable to our foreign subsidiaries as of June 29, 2002, we
anticipate that we will not incur any additional U.S. income tax if such foreign
subsidiary earnings were distributed. Withholding taxes of approximately
$1,163,000 would be payable upon remittance of all previously unremitted
earnings at June 29, 2002.
7. STOCK OPTIONS
SFAS No. 123 requires that we disclose the pro-forma impact on our net loss and
loss per share as if compensation expense associated with employee stock options
had been calculated under the fair value method for employee stock options
granted subsequent to July 1, 1995. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for the years ended June 29, 2002,
June 30, 2001 and July 1, 2000, respectively: an expected volatility of .62, .53
and .43, an expected term of 4.00, 4.00 and 4.34, risk-free interest rates of
3.76%, 5.01% and 6.23%, and no expected dividend yield.
F-18
For purposes of pro-forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Our pro-forma
information is as follows (in thousands, except per share data):
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 29, 2002 JUNE 30, 2001 JULY 1, 2000
------------- ------------- ------------
Pro-forma net loss......................................... $ (17,687) $ (22,092) $ (4,147)
Pro-forma basic and diluted loss per share................. $ (2.34) $ (2.94) $ (0.55)
We have six fixed option plans: the 1994 Stock Option Plan (the "1994 Plan"),
the 1994 Management Stock Option Plan (the "Management Plan"), the 1995 Stock
Option Plan (the "1995 Plan"), the 1996 Stock Option Plan (the "1996 Plan"), the
1998 Stock Option Plan (the "1998 Plan"), and the 2000 Stock Option Plan (the
"2000 Plan"). Under the terms of the plans, the committee administering the
plans may grant options to purchase shares of our common stock to officers,
directors, employees, consultants and advisors for up to 3,957,500 shares. The
vesting of options granted under the plans is at the discretion of our Board of
Directors. Other than options granted under the 1994 Plan to purchase 373,743
shares of common stock at an exercise price of $0.34, substantially all of which
vested on July 2, 1994, and options granted to new non-employee directors (1,000
on the date of election or appointment) which vest immediately, options vest
over a three to five year period. The 1994 Plan, the Management Plan, the 1995
Plan, the 1996 Plan, the 1998 Plan, and the 2000 Plan terminate on December 31,
2003, December 31, 2004, December 31, 2005, December 31, 2006, December 31,
2008, and December 11, 2010, respectively.
In February 1998, we amended our stock option plans to include a provision
whereby upon a change of control, as defined by the plans, any option granted
and outstanding shall immediately become vested. On June 15, 1998, we canceled
an aggregate of 1,430,652 options to purchase common stock with exercise prices
in excess of $12.50 and issued new options with the same exercise prices and
terms as the old options. However, in the event of a change of control, the
exercise price of the new options will be $12.50 (the fair value of our common
stock at the time of the grant).
A summary of the status of our stock option plans as of June 29, 2002, June 30,
2001 and July 1, 2000, and changes during the years ending on those dates is
presented below:
2002 2001 2000
----------------------- ---------------------- ------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- ---------- ----------- --------- ---------- ----------
Outstanding at beginning of year 3,206,869 $ 7.08 2,492,026 $ 8.18 2,274,266 $ 8.30
Granted....................... 550,148 $ 4.33 1,148,600 $ 5.07 442,286 $ 7.79
Exercised..................... (581) $ 0.34 - - (2,895) $ 4.51
Terminated or canceled........ (195,916) $ 6.85 (433,757) $ 8.07 (221,631) $ 8.74
--------- --------- ---------
Outstanding at end of year.... 3,560,520 $ 6.67 3,206,869 $ 7.08 2,492,026 $ 8.18
========= ========= =========
Options exercisable at end of
year........................ 1,816,258 $ 7.47 1,130,973 $ 7.92 922,639 $ 7.82
Weighted-average fair value of
options granted during the
year........................ $ 2.16 $ 2.44 $ 3.24
F-19
The following table summarizes information about our fixed stock options
outstanding at June 29, 2002:
OUTSTANDING OPTIONS OPTIONS EXERCISABLE
--------------------------------------------- -----------------------------
WEIGHTED-
NUMBER OF AVERAGE WEIGHTED- NUMBER OF WEIGHTED-
OPTIONS REMAINING AVERAGE OPTIONS AVERAGE
RANGE OF EXERCISE OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE AT EXERCISE
PRICES JUNE 29, 2002 LIFE PRICE JUNE 29, 2002 PRICE
------ ------------- ----------------- ------------ ------------- ----------
$ 0.34............ 150,356 1.99 $ 0.34 150,356 $ 0.34
$ 2.68 to $4.00... 23,500 9.81 $ 3.73 - $ -
$ 4.36 to $6.56... 1,572,633 8.89 $ 4.87 377,211 $ 5.20
$ 7.06 to $10.38.. 1,814,031 5.30 $ 8.79 1,288,691 $ 8.96
------------ ------------
$ 0.34 to $10.38.. 3,560,520 6.78 $ 6.67 1,816,258 $ 7.47
============ ============
8. PROFIT SHARING PLAN
We have a qualified, defined contribution savings plan covering all full-time
U.S. employees who have attained the age of 18 with more than three months of
service. Contributions to the plan, which are discretionary, are determined
annually by our Board of Directors. We did not make any contributions in fiscal
years 2002, 2001 or 2000.
9. STOCKHOLDERS' EQUITY
In September 1997, our Board of Directors authorized our repurchase of up to
1,000,000 shares of our common stock at an aggregate price not to exceed $20.0
million. In July 1998, our Board of Directors authorized a new stock repurchase
program to repurchase up to 1,000,000 shares of our common stock. Shares
repurchased under the 1998 program are to be additional to the shares
repurchased pursuant to the repurchase program announced in September 1997. We
may make purchases from time to time in the open market or in private
transactions. The repurchase program may be suspended or discontinued at any
time. Any shares that we repurchase will be available for general corporate
purposes, including issuance upon the exercise of employee stock options. As of
July 3, 1999, we had repurchased an aggregate of 1,292,900 shares of our common
stock under the programs at a cost of $20.2 million. We have not repurchased any
shares of our common stock since that time.
In December 1997, our Board of Directors adopted a Stockholders' Rights Plan
pursuant to which rights to purchase shares of our common stock were distributed
as a dividend, one right per share, to record owners of common stock as of the
close of business on December 22, 1997, and for each share of common stock
issued subsequent to that date. Each right entitles the registered holder to
purchase that number of shares of our common stock having a market value of two
times the then applicable exercise price of the right. Subject to certain
exceptions, the rights become exercisable on the earlier of ten business days
following a public announcement that a person or group acquired or obtained the
right to acquire beneficial ownership of 20% or more of our outstanding common
stock, or ten business days following the commencement or announcement by a
person or group of a tender offer or exchange offer which would result in
beneficial ownership of 20% or more of our common stock. In the event that we
are acquired in a merger or other business combination or 50% or more of our
consolidated assets or earnings power are sold, proper provisions will be made
so that each holder of a right will be entitled to receive, upon the exercise of
the right, at the then applicable exercise price, that number of shares of
common stock of the acquiring company that at the time of such transaction will
have a market value of two times the applicable exercise price of the right.
Until a right is exercised, the holder of the right will have no rights as a
stockholder, including, without limitation, the right to vote, or to receive
dividends. The rights expire December 22, 2007 unless we extended or redeem the
rights.
In September 1994, we adopted an Employee Stock Purchase Plan (the "Purchase
Plan") which is intended to allow qualified employees to purchase our common
stock at a discount to the market value. We have reserved a total of 348,750
shares of common stock for issuance under the Purchase Plan. Under the terms of
the Purchase Plan, the purchase price of a share of common stock is the lower of
85% of the closing price of our common stock on the date the offering period
begins or 85% of the closing price of our common stock on the termination date
of the offering period. During fiscal 2002, employees purchased 38,834 shares of
common stock pursuant to the Purchase Plan at prices ranging from $1.90 to $2.02
per share. During fiscal 2001, employees purchased 28,139 shares of common
F-20
stock pursuant to the Purchase Plan at $3.14 per share. During fiscal year 2000,
employees purchased 22,254 shares of common stock pursuant to the Purchase Plan
at prices ranging from $5.53 to $5.55 per share.
The following table summarizes shares of common stock we currently have reserved
for future issuance:
SHARES RESERVED
---------------
Employee stock purchase plan and stock option plans...... 3,902,956
Conversion of subordinated debentures.................... 1,012,412
Exercise of Pegasus warrants............................. 2,944,552
---------
Total common stock reserved.............................. 7,859,920
=========
10. OPERATING LEASES
We lease a Cessna Citation Jet, computer software and hardware and other office
and factory equipment under long-term operating leases with varying terms. The
aggregate future minimum lease payments under noncancellable operating leases
with initial or remaining lease terms of greater than one year are as follows
(in thousands):
2003............................................... $ 2,074
2004............................................... 1,289
2005............................................... 508
2006............................................... 424
2007 and thereafter ............................... 912
-----------
$ 5,207
===========
Rent expense amounted to $2,488,000, $1,773,000 and $1,729,000 in fiscal 2002,
2001 and 2000, respectively.
During fiscal 2001, we entered into two sale-leaseback transactions for
manufacturing equipment. No gain or loss was recognized on a $421,000
transaction which has resulted in approximately $152,000 of additional rent
expense annually for a three year period. We realized a $39,000 gain on a
$310,000 transaction in which we received $160,000 and the lender paid the
balance of the equipment cost. We deferred this gain and will amortize it to
earnings over the six year term of the lease. This lease has resulted in
approximately $63,000 of additional rent expense annually. Both leases are being
accounted for as operating leases.
During fiscal 2000, we entered into a $960,000 sale-leaseback transaction for
manufacturing and research and development equipment from which we received
proceeds of $633,000 and the lender paid the balance of the equipment cost. The
sale resulted in a $48,000 gain, which was deferred and is being amortized over
the seven year term of the lease. The lease provides us with the option to
purchase the equipment for 25.46% of the equipment cost on the 85th basic rent
date. This lease is being accounted for as an operating lease and has resulted
in rent expense of approximately $141,000 annually.
11. FINANCIAL INSTRUMENTS
Balance Sheet Financial Instruments
At June 29, 2002, the carrying value of our financial instruments such as cash,
receivables and payables approximated their fair values, based on the short-term
maturities of these instruments. The carrying amounts of our notes receivable
and borrowings under our variable rate short- and long-term credit agreements
approximated their fair value. The carrying value of our other long-term debt
was estimated based on expected future cash flows, discounted at current rates
for the same or similar issues. The carrying value of our other long-term debt
approximated the fair value as of June 29, 2002.
Forward Foreign Exchange Contracts
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
F-21
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 June 29, 2002 and June 30, 2001, we had approximately $23.8 million and $14.8
million, respectively, of forward exchange contracts outstanding. Of the total
contracts outstanding at June 29, 2002 and June 30, 2001, approximately $19.3
million and $7.9 million, respectively, 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 same period or periods which the underlying hedged transactions
affect earnings. The total net accumulated derivative losses of $1.1 million
included in the accumulated other comprehensive loss at June 29, 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 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 year ended June 29, 2002 and is included in "Other
income (expense)" on the Consolidated Statement of Operations. As of June 29,
2002, the maximum period of time we were hedging our exposure to the variability
in future cash flows for forecasted transactions was six months.
The accumulated derivative gain and loss activity relating to cash flow hedges
for the years ended June 29, 2002 and June 30, 2001 is as follows (in
thousands):
YEAR ENDED YEAR ENDED
JUNE 29, 2002 JUNE 30, 2001
------------- -------------
Beginning accumulated derivative gains....... $ 16 $ -
Revaluations of cash flow hedge derivatives.. (1,175) 185
Net reclassifications to earnings............ 51 (169)
-------- --------
Ending net accumulated derivative gains
(losses)..................................... $ (1,108) $ 16
======== ========
The remaining foreign exchange contracts outstanding at June 29, 2002 were not
designated as hedging instruments. For these derivatives, gains and losses were
recognized immediately in earnings during the period of change.
At June 29, 2002, the fair value of forward foreign contracts in gain (i.e.
asset) positions was $82,000, and the fair value of forward foreign contracts in
loss (i.e. liability) positions was ($1.4) million. These fair values were
determined based upon current forward rates applicable to the remaining terms of
the forward contracts as of June 29, 2002. The fair value of contracts in asset
positions is included as a component of "Prepaid expenses and other current
assets," and the fair value of contracts in liability positions is included as a
component of "Accrued expenses" on our Consolidated Balance Sheet. At June 30,
2001, the fair value of forward foreign contracts in gain (i.e. asset) positions
was $121,000, and the fair value of forward foreign contracts in loss (i.e.
liability) positions was ($74,000). These fair values were determined based upon
current forward rates applicable to the remaining terms of the forward contracts
as of June 30, 2001.
The components of the accumulated other comprehensive loss are as follows (in
thousands):
JUNE 29, 2002 JUNE 30, 2001
------------- -------------
Net accumulated derivative gains (losses)... $ (1,108) $ 16
Foreign currency translation adjustments.... (5,732) (7,793)
--------- ---------
Accumulated other comprehensive loss........ $ ( 6,840) $ (7,777)
========= =========
Our credit risk in these transactions is the cost of replacing these contracts
at current market rates in the event of default by a counterparty, which is
typically a major international financial institution; however, we believe that
our exposure to credit risk in these transactions is not significant in relation
to earnings.
F-22
Prior to the retirement of our multi-currency revolving credit facility, we used
borrowings of Japanese yen, Euros, and Dutch guilders to hedge our net
investments in our foreign subsidiaries. Gains and losses on hedges of net
investments were recognized as a component of accumulated other comprehensive
income in stockholders' equity. The gain recognized upon the early
extinguishment of these borrowings (see Note 5) is included as a component of
"Other income (expense)" in our Consolidated Statement of Operations for fiscal
2000.
Interest Rate Swaps
In April 1998, we entered into two five year interest rate swap agreements with
a total notional principal amount of $20.0 million to manage interest costs
associated with changing interest rates. These agreements converted underlying
variable-rate debt based on the LIBOR under our multi-currency revolving line of
credit to fixed-rate debt with an interest rate of 6.05%. In June 2000, the
interest rate swap agreements were terminated in conjunction with the early
extinguishment of long-term debt (see Note 5). We included the gain recognized
upon such termination of $420,000 as a component of interest expense in our
Consolidated Statement of Operations for fiscal 2000.
12. OTHER INCOME
Other income primarily consisted of finance charges relating to accounts
receivable, which totaled $360,000, $335,000 and $396,000 for fiscal 2002, 2001,
and 2000, respectively; foreign currency gains (losses) of ($639,000),
($611,000) and $169,000 for fiscal 2002, 2001 and 2000, respectively; and
interest income of $541,000 and $1,105,000 from a related party loan in fiscal
2001 and 2000, respectively.
13. OPERATIONS BY INDUSTRY SEGMENTS AND GEOGRAPHIC AREAS
In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," our reportable segments are Bicycles and Motorsports.
We operate predominantly in the bicycle industry as a manufacturer and
distributor of high-performance bicycles and bicycle-related products, which
include clothing, shoes and bags, and a line of components. Due to the
similarities in the nature of the products, production processes, customers and
methods of distribution, bicycles and bicycle-related products are aggregated in
the Bicycle segment. We are also an emerging player in the motorsports industry
with our line of ATVs and motocross motorcycles, and related accessories and
clothing.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. In addition, there are no sales
between the segments.
F-23
Summarized segment data is as follows (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 29, 2002 JUNE 30, 2001 JULY 1, 2000
------------- ------------- ------------
Net sales to external customers:
Bicycles........................... $134,633 $141,475 $162,393
Motorsports........................ 22,022 5,316 57
-------- -------- --------
$156,655 $146,791 $162,450
======== ======== ========
Operating loss:
Bicycles........................... $ 9,181 $ 9,288 $ 7,645
Motorsports........................ (21,412) (16,784) (8,536)
-------- ------- -------
$(12,231) $ (7,496) $ (891)
======== ======== ========
Identifiable assets:
Bicycles........................... $100,135 $103,024 $146,875
Motorsports........................ 30,805 24,767 18,032
-------- -------- --------
$130,940 $127,791 $164,907
======== ======== ========
Capital expenditures:
Bicycles........................... $ 547 $ 873 $ 2,395
Motorsports........................ 2,048 3,445 3,587
-------- -------- --------
$ 2,595 $ 4,318 $ 5,982
======== ======== ========
Depreciation and amortization expense:
Bicycles........................... $ 5,282 $ 6,910 $ 7,666
Motorsports........................ 2,392 2,277 357
-------- -------- --------
$ 7,674 $ 9,187 $ 8,023
======== ======== ========
Interest expense:
Bicycles........................... $ 902 $ 2,013 $ 3,412
Motorsports........................ 4,217 4,725 2,476
-------- -------- --------
$ 5,119 $ 6,738 $ 5,888
======== ======== ========
We evaluate performance of our segments based on profit or loss from operations.
The amounts below are not allocated between the segments (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 29, 2002 JUNE 30, 2001 JULY 1, 2000
------------- ------------- ------------
Total operating loss for reportable segments. $(12,231) $ (7,496) $ (891)
Other income (expense):
Interest expense......................... (5,119) (6,738) (5,888)
Other income (expense)................... (238) 346 2,208
-------- --------- ---------
(5,357) (6,392) (3,680)
-------- -------- --------
Loss before income taxes..................... (17,588) (13,888) (4,571)
Income tax (expense) benefit................. 2,148 (6,431) 2,045
--------- -------- ---------
Net loss..................................... $(15,440) $(20,319) $ (2,526)
======== ======== ========
F-24
Summarized data by geographic area is as follows (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 29, 2002 JUNE 30, 2001 JULY 1, 2000
------------- ------------- ------------
Net sales to external customers (1):
United States................... $ 85,442 $ 71,706 $ 74,904
Other European countries........ 42,590 40,280 46,770
Germany......................... 15,589 17,234 20,081
All other countries............. 13,034 17,571 20,695
---------- ---------- ----------
$ 156,655 $ 146,791 $ 162,450
========== ========== ==========
Long-lived assets (2):
United States................... $ 33,719 $ 39,195 $ 55,059
Netherlands..................... 1,917 1,778 2,265
All other countries............. 316 369 1,012
---------- ---------- ----------
$ 35,952 $ 41,342 $ 58,336
========== ========== ==========
- -------------
(1) Net sales are attributed to countries based on location of customer.
(2) Long-lived assets are located in the respective geographic regions.
At June 29, 2002, the net assets of Cannondale Europe, Cannondale Japan and
Cannondale Australia were $12,015,000, $642,000 and $1,382,000, respectively.
14. RELATED PARTY TRANSACTIONS
During fiscal 1999, we provided Joseph Montgomery, our Chairman, President and
Chief Executive Officer, with a loan in the principal amount of $10.0 million
for the purchase of certain real property. This loan was combined with a
previous loan in the principal amount of $2.0 million which enabled him to meet
certain tax obligations in April 1998. The interest rate on the loan was set at
the prime rate as published in the Wall Street Journal from time to time, and
the loan was secured by a pledge to us of all of the shares of our common stock
held by Mr. Montgomery and by a third mortgage on certain real property. We
deferred the first interest payment of approximately $900,000 payable by Mr.
Montgomery due August 1, 1999 pursuant to the terms of the loan. Under the terms
of the deferral, Mr. Montgomery was obligated to sell 75,000 shares of his
Cannondale stock per quarter beginning in the third quarter of fiscal 2000, and
the net proceeds of such sales were to be remitted to us to pay the deferred
interest. The stock selling program by Mr. Montgomery was subject to applicable
securities laws and other restrictions which precluded him from selling a total
of 75,000 shares per quarter. During the third and fourth quarters of fiscal
2000, Mr. Montgomery sold 98,100 shares of his stock pursuant to the terms of
the agreement, thus reducing his deferred interest balance by approximately
$614,000. We also deferred the interest payment due August 1, 2000 of
approximately $1.1 million until August 28, 2000. At such time, Mr. Montgomery
paid $1.4 million to us as full payment of all deferred interest and accrued
interest thereon. In December 2000, Mr. Montgomery repaid his entire $12.0
million obligation to us, plus accrued interest of approximately $431,000.
During fiscal 2001, we issued a $2.0 million debenture to Mr. Montgomery which
is due June 28, 2005 and is convertible into shares of our common stock at an
initial conversion price of $4.50 per share. The debenture bears interest at
8.0%. We owed interest payments of $196,000 and $28,000 to Mr. Montgomery as of
June 29, 2002 and June 30, 2001 related to this debenture.
During fiscal 1998, we purchased a Cessna Citation Jet aircraft from JSM, Inc.
("JSM"), a corporation of which Mr. Montgomery is the sole stockholder, for $2.8
million and terminated our lease with JSM for the rental of this aircraft. The
purchase price of the Cessna Citation Jet aircraft was determined based on
independent valuations of the market value of the aircraft. We also assumed the
obligations of JSM Aviation, LLC ("JSM LLC"), a Connecticut limited liability
company in which Mr. Montgomery and a Cannondale director are each members, as
sublessee under a hangar lease which houses the Cessna Citation jet aircraft. As
part of the assumption of the hangar lease obligations, we reimbursed JSM LLC
$160,922 for the cost of certain leasehold improvements made to the hangar by
JSM LLC. We use the Cessna Citation Jet aircraft largely for transporting
personnel between our Connecticut headquarters and our Pennsylvania
manufacturing facilities, and we anticipate that we will have an increased need
for an aircraft in connection with the growth of the business. In connection
with the purchase of the
F-25
Cessna Citation Jet aircraft, we also purchased, for $500,000, JSM's right to
acquire a Learjet aircraft. JSM had entered into a contract with Learjet, Inc.
to purchase an aircraft, and had paid Learjet $500,000 as a deposit with respect
to such purchase. We had assumed JSM's rights and obligations under this
contract. In the second quarter of fiscal 2000, we decided not to purchase the
Learjet aircraft and, accordingly, the deposit was returned to us with accrued
interest thereon.
During fiscal 1999, we entered into a $2.9 million sale-leaseback transaction
for the Cessna Citation Jet. The lease provides JSM with the right of first
refusal should we purchase the aircraft pursuant to the terms of the lease
agreement.
We have provided three of our officers with interest-free loans to enable them
to purchase homes in the vicinity of our headquarters. As of June 29, 2002 and
June 30, 2001, we had loans outstanding of $1,282,000 to these officers. Two of
the loans mature on December 29, 2006 and September 1, 2007, respectively, at
which dates the entire principal balance of each of the respective loans is due.
The remaining note receivable, originally a salary advance, was converted into a
demand note during fiscal 2000 and is included in the total loan amount stated
above.
We have entered into various employment, non-competition and severance
agreements with our executive officers which provide these executives with
certain benefits if their employment with us is terminated for any reason (other
than death or disability) after a change of control. These benefits vary among
the executives but may include lump sum payments based on the executives' prior
salary and bonus, the forgiveness of certain indebtedness to us, the payment of
certain benefits, such as medical insurance and tax and financial planning
services, and payments to reimburse the executives for certain tax obligations.
Assuming a change of control occurred as of June 29, 2002 and the subsequent
termination of employment of each of the executive officers party to one or more
of the various agreements discussed above, the aggregate amount payable by us to
these executive officers would have been approximately $6.5 million.
15. 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.
F-26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
September 27, 2002 /s/ William A. Luca
-------------------
William A. Luca
Vice President of Finance,
Chief Financial Officer and
Chief Operating Officer
KNOWN BY ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints William A. Luca his or her true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him or her and in his or her name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report on Form 10-K,
and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully as he or she might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent or his substitutes or
substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Joseph S. Montgomery Chairman, President, Chief September 27, 2002
- ------------------------ Executive Officer and Director
Joseph S. Montgomery (Principal Executive Officer)
/s/ William A. Luca Vice President of Finance, September 27, 2002
- ------------------- Chief Financial Officer,
William A. Luca Chief Operating Officer and
Director (Principal Financial
Officer)
/s/ Daniel C. Alloway Vice President of Sales and September 27, 2002
- --------------------- Director
Daniel C. Alloway
/s/ John P. Moriarty Assistant Treasurer and September 27, 2002
- -------------------- Assistant Secretary, Chief
John P. Moriarty Accounting Officer
(Principal Accounting Officer)
/s/ James S. Montgomery Vice President of Marketing and September 27, 2002
- ----------------------- Director
James S. Montgomery
/s/ Gregory Griffin Director September 27, 2002
- -------------------
Gregory Griffin
/s/ John Sanders Director September 27, 2002
- ----------------
John Sanders
/s/ Michael J. Stimola Director September 27, 2002
- ----------------------
Michael J. Stimola
/s/ Sally G. Palmer Director September 27, 2002
- -------------------
Sally G. Palmer
I, Joseph S. Montgomery, certify that:
1. I have reviewed this annual report on Form 10-K of Cannondale Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
Date: September 27, 2002
By: /s/ Joseph S. Montgomery
-----------------------------------------------
Joseph S. Montgomery
Chairman, President and Chief Executive Officer
I, William A. Luca, certify that:
1. I have reviewed this annual report on Form 10-K of Cannondale Corporation.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
Date: September 27, 2002
By: /s/ William A. Luca
----------------------------------------
Vice President of Finance, Chief
Financial Officer and Chief Operating
Officer
SCHEDULE II
CANNONDALE CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
----------- ------ -------- -------- ---------- ---------
ALLOWANCE FOR BAD DEBTS,
DISCOUNTS, CREDITS AND
RETURNS AND LATE CHARGES
Year ended June 29, 2002.................... $11,270 $12,736 $ 1,024 (a) $ (10,875) (b) $14,155
Year ended June 30, 2001.................... $10,076 $11,360 $ (596) (a) $ (9,570) (b) $11,270
Year ended July 1, 2000..................... $10,074 $11,027 $ (346) (a) $ (10,679) (b) $10,076
RESERVE FOR OBSOLETE INVENTORIES
AND LOWER OF COST OR MARKET
ADJUSTMENTS
Year ended June 29, 2002.................... $ 2,554 $ 8,264 $ 31 (a) $ (8,222) (c) $ 2,627
Year ended June 30, 2001.................... $ 1,879 $ 4,437 $ (71) (a) $ (3,691) (c) $ 2,554
Year ended July 1, 2000..................... $ 1,661 $ 2,157 $ 9 (a) $ (1,948) (c) $ 1,879
- ---------------
(a) Amounts charged to foreign currency translation account.
(b) Discounts, late charges and uncollectible accounts written off, net of
recoveries.
(c) Inventory disposed.