SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 0-24884
CANNONDALE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 06-0871823
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16 TROWBRIDGE DRIVE, BETHEL, CONNECTICUT 06801
(Address of principal executive offices) (Zip code)
(203) 749-7000
(Registrant's telephone number, including area code)
------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
The number of shares outstanding of the issuer's Common Stock, $.01 par value
per share, as of November 8, 2002 was 7,582,779.
<page>
INDEX
<table>
<caption>
Page
<s>
Part I Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 28, 2002 and June 29, 2002 ..................1
Condensed Consolidated Statements of Operations for the three months ended September 28,
2002 and September 29, 2001........................................................................2
Condensed Consolidated Statements of Cash Flows for the three months ended September 28,
2002 and September 29, 2001........................................................................3
Notes to Condensed Consolidated Financial Statements...............................................4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......13
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................17
Item 4. Controls and Procedures.....................................................................17
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K............................................................19
Signature.......................................................................................................20
</table>
i
<page>
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CANNONDALE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except share data)
<table>
<caption>
SEPTEMBER 28, 2002 JUNE 29, 2002
------------------ -------------
(UNAUDITED)
<s> <c> <c>
ASSETS
Current assets:
Cash.......................................... $ 1,901 $ 2,498
Trade accounts receivable, less allowances of
$11,329 and $14,155 ....................... 45,131 50,703
Inventories, net.............................. 45,546 37,655
Prepaid expenses and other current assets..... 4,066 4,132
--------- ---------
Total current assets.......................... 96,644 94,988
Property, plant and equipment, net............ 30,749 32,078
Notes receivable and advances to related
parties.................................... 1,410 1,407
Other assets.................................. 5,017 2,467
--------- ---------
Total assets.................................. $ 133,820 $ 130,940
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................. $ 22,302 $ 17,652
Revolving credit advances..................... 27,556 32,183
Income taxes payable.......................... 478 497
Warranty and other accrued expenses........... 9,574 11,154
Deferred income taxes ....................... 24 24
Interest payable to a related party .......... 28 196
Subordinated debenture to a related party... 2,000 -
Current installments of long-term debt........ 43,559 12,817
--------- ---------
Total current liabilities......................... 105,521 74,523
Long-term debt, less current installments......... - 19,403
Subordinated debenture to a related party......... - 2,000
Other noncurrent liabilities...................... 377 386
--------- ---------
Total liabilities................................. 105,898 96,312
--------- ---------
Commitments and contingencies..................... - -
Stockholders' equity:
Common stock, $.01 par value:
Authorized shares - 40,000,000
Issued shares - 8,875,679 ................. 89 89
Additional paid-in capital.................... 59,725 58,498
(Accumulated deficit) retained earnings ...... (5,365) 3,043
Less 1,292,900 shares in treasury at cost..... (20,162) (20,162)
Accumulated other comprehensive loss.......... (6,365) (6,840)
--------- ---------
Total stockholders' equity........................ 27,922 34,628
--------- ---------
Total liabilities and stockholders' equity........ $ 133,820 $ 130,940
========= =========
</table>
SEE ACCOMPANYING NOTES.
1
<page>
CANNONDALE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<table>
<caption>
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 28, SEPTEMBER 29,
2002 2001
------ ------
(UNAUDITED) (UNAUDITED)
<s> <c> <c>
Net sales.......................................... $ 37,348 $ 34,154
Cost of sales...................................... 30,317 27,001
---------- ----------
Gross profit....................................... 7,031 7,153
Expenses:
Selling, general and administrative........... 10,822 9,033
Research and development...................... 1,248 1,269
Write-off of deferred financing costs due to
debt extinguishment ........................ 1,837 -
---------- ----------
13,907 10,302
---------- ----------
Operating loss..................................... (6,876) (3,149)
Other income (expense):
Interest expense.............................. (1,895) (1,148)
Other income ................................. 113 94
---------- ----------
(1,782) (1,054)
---------- ----------
Loss before income taxes .......................... (8,658) (4,203)
Income tax benefit ................................ 250 80
---------- ----------
Net loss........................................... $ (8,408) $ (4,123)
========== ==========
Basic and diluted loss per share................... $ (1.11) $ (0.55)
========== ==========
See accompanying notes.
</table>
2
<page>
CANNONDALE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<table>
<caption>
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 28, 2002 SEPTEMBER 29, 2001
------------------ ------------------
(UNAUDITED) (UNAUDITED)
<s> <c> <c>
Net cash provided by (used in) operating activities................. $ (8,204) $ 1,298
---------- ----------
INVESTING ACTIVITIES:
Loans provided to related parties, net of repayments................ (5) 52
Capital expenditures................................................ (523) (1,104)
Proceeds from sale of equipment..................................... 5 8
--------- ----------
Net cash used in investing activities............................... (523) (1,044)
---------- -----------
FINANCING ACTIVITIES:
Payments for early extinguishment of debt .......................... (10,320) -
Proceeds from issuance of long-term debt ........................... 25,000 -
Net repayments of borrowings under short-term credit agreements..... (6,652) (1,942)
Net proceeds from borrowings under long-term debt and capital lease
agreements...................................................... - 578
--------- ----------
Net cash provided by (used in) financing activities................. 8,028 (1,364)
--------- ----------
Effect of exchange rate changes on cash............................. 102 (116)
--------- -----------
Net decrease in cash................................................ (597) (1,226)
Cash at beginning of period......................................... 2,498 2,155
--------- ----------
Cash at end of period............................................... $ 1,901 $ 929
========= ==========
</table>
SEE ACCOMPANYING NOTES.
3
<page>
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Cannondale Corporation (together with its subsidiaries, collectively referred to
as "we," "us" or "our") have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all the information and footnotes required
by accounting principles generally accepted in the United States for complete
financial statements. In our opinion, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three-month period ended September 28, 2002
are not necessarily indicative of the results that may be expected for the year
ending June 28, 2003. For further information, refer to the consolidated
financial statements and footnotes thereto for the year ended June 29, 2002
included in our annual report on Form 10-K/A.
The Condensed Consolidated Balance Sheet at June 29, 2002 has been derived from
the audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
s
The accompanying condensed 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 the first quarter of fiscal 2004 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
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.
Reclassifications
Certain fiscal 2002 amounts have been reclassified to conform to the current
year's presentation.
4
<page>
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Accounting Developments
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("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. We adopted SFAS No. 144 as of June 30,
2002; such adoption had no impact on our operating results or financial position
as no asset disposals or impairment charges were recorded during the quarter
ended September 28, 2002.
2. INVENTORIES, NET
The components of inventories are as follows (in thousands):
<table>
<caption>
SEPTEMBER 28,
2002 JUNE 29, 2002
---- -------------
(UNAUDITED)
<s> <c> <c>
Raw materials........................................ $ 26,376 $ 21,893
Work-in-process...................................... 5,621 3,604
Finished goods....................................... 16,191 14,785
--------- ---------
48,188 40,282
Less reserve for obsolete inventories................ (2,642) (2,627)
--------- ---------
$ 45,546 $ 37,655
========= =========
</table>
5
<page>
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. LOSS PER SHARE AMOUNTS
The following tables present the numerator and denominator of the basic and
diluted loss per share computations and other related disclosures required by
SFAS No. 128, "Earnings Per Share" (in thousands, except loss per share data):
<table>
<caption>
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 28, SEPTEMBER 29,
2002 2001
---- ----
(UNAUDITED) (UNAUDITED)
Numerator:
<s> <c> <c>
Net loss ............................................. $ (8,408) $ (4,123)
Denominator:
Denominator for basic and diluted loss per share -
weighted-average shares............................ 7,583 7,543
---------- -----------
Basic and diluted loss per share...................... $ (1.11) $ (0.55)
========== ===========
</table>
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 diluted loss per share. For the
periods indicated, inclusion of such options would result in an antidilutive
effect due to the net losses incurred.
<table>
<caption>
OPTIONS RANGE OF EXERCISE PRICES
------- ------------------------
<s> <c> <c> <c>
Three months ended September 28, 2002..................... 3,547,518 $ 0.34 - $10.38
Three months ended September 29, 2001..................... 3,184,254 $ 0.34 - $10.38
</table>
We did not include the 1,012,414 potentially convertible shares related to the
8.0% subordinated debentures, and the 971,703 warrants issued to Pegasus in the
computation of diluted loss per share for the three months ended September 28,
2002 as the effect would be antidilutive due to the net loss incurred. In
addition, we did not include the 977,777 potentially convertible shares (at that
time) related to the 8.0% subordinated debentures in the computation of diluted
loss per share for the three months ended September 29, 2001 as the effect would
be antidilutive due to the net loss incurred.
6
<page>
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. COMPREHENSIVE INCOME (LOSS)
Pursuant to the provisions of SFAS No. 130, "Reporting Comprehensive Income,"
our comprehensive loss is as follows (in thousands):
<table>
<caption>
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 28, SEPTEMBER 29,
2002 2001
---- ----
(UNAUDITED) (UNAUDITED)
<s> <c> <c>
Net loss........................................ $ (8,408) $ (4,123)
Net accumulated derivative gains (losses)....... 673 (134)
Foreign currency translation gains (losses).....
(198) 1,015
----------- -----------
Total comprehensive loss........................ $ (7,933) $ (3,242)
========== ===========
</table>
The accumulated derivative gain and loss activity relating to cash flow hedges
for the three months ended September 28, 2002 and September 29, 2001 is as
follows (in thousands):
<table>
<caption>
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 28, SEPTEMBER 29,
2002 2001
---- ----
(UNAUDITED) (UNAUDITED)
<s> <c> <c>
Beginning net accumulated derivative gains
(losses)................................. $ (1,108) $ 16
Revaluations of cash flow hedge derivatives.
274 (126)
Net reclassifications to earnings........... 399 (8)
---------- -----------
Ending net accumulated derivative losses....
$ (435) $ (118)
=========== ===========
</table>
The components of the accumulated other comprehensive loss are as follows (in
thousands):
<table>
<caption>
SEPTEMBER 28, JUNE 29,
2002 2002
---- ----
(UNAUDITED)
<s> <c> <c>
Net accumulated derivative losses.................... $ (435) $ (1,108)
Foreign currency translation adjustments............. (5,930) (5,732)
------- --------
Accumulated other comprehensive loss................. $ (6,365) $ (6,840)
========== ==========
</table>
7
<page>
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. OPERATIONS BY INDUSTRY SEGMENTS
In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," our reportable segments are Bicycles and Motorsports.
We operate predominantly in the bicycle industry as a manufacturer and
distributor of high-performance bicycles and bicycle-related products, which
include clothing, shoes and bags, and a line of components. Due to the
similarities in the nature of the products, production processes, customers and
methods of distribution, bicycles and bicycle-related products are aggregated in
the Bicycle segment. We are also an emerging player in the motorsports industry
with our line of ATVs, our motocross motorcycles, and related accessories and
clothing. There are no sales between the segments.
Summarized segment data is as follows (in thousands):
<table>
<caption>
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 28, SEPTEMBER 29,
2002 2001
---- ----
(UNAUDITED) (UNAUDITED)
<s> <c> <c>
Net sales to external customers:
Bicycles......................... $ 31,611 $ 33,039
Motorsports...................... 5,737 1,115
---------- ---------
$ 37,348 $ 34,154
========== =========
Operating income (loss):
Bicycles......................... $ 221 $ 2,768
Motorsports...................... (7,097) (5,917)
---------- ---------
$ (6,876) $ (3,149)
========== =========
</table>
We evaluate performance of our segments based on operating income or loss. The
amounts below are not allocated between the segments (in thousands):
<table>
<caption>
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 28, SEPTEMBER 29,
2002 2001
---- ----
(UNAUDITED) (UNAUDITED)
<s> <c> <c>
Total operating loss for reportable
segments............................... $ (6,876) $ (3,149)
Other income (expense):
Interest expense..................... (1,895) (1,148)
Other income ........................ 113 94
---------- ---------
(1,782) (1,054)
Loss before income taxes.................. (8,658) (4,203)
Income tax benefit........................ 250 80
-------- ---------
Net loss.................................. $ (8,408) $ (4,123)
========== =========
</table>
8
<page>
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Summarized segment assets are as follows (in thousands):
<table>
<caption>
SEPTEMBER 28, 2002 JUNE 29, 2002
------------------ -------------
(UNAUDITED)
<s> <c> <c>
Identifiable assets:
Bicycles................................. $ 101,930 $ 100,135
Motorsports.............................. 31,890 30,805
----------- ----------
$ 133,820 $ 130,940
=========== ==========
</table>
6. NET DEFERRED TAX ASSETS
The significant components of our deferred tax assets and liabilities at
September 28, 2002 and June 29, 2002 are as follows (in thousands):
<table>
<caption>
SEPTEMBER 28, 2002 JUNE 29, 2002
------------------ -------------
(UNAUDITED)
<s> <c> <c>
Deferred tax assets:
Accounts receivable and inventory
reserves............................ $ 2,723 $ 2,988
Accrued liabilities.................... 1,037 1,124
Tax credits and NOL carryforwards...... 17,649 14,490
Other.................................. 871 858
----------- ----------
Total deferred tax assets................... 22,280 19,460
----------- ----------
Deferred tax liabilities:
Tax over book depreciation............. (1,162) (1,208)
Other.................................. (153) (413)
----------- ----------
Total deferred tax liabilities......... (1,315) (1,621)
----------- ----------
Net deferred tax asset before valuation
allowance................................ 20,965 17,839
Valuation allowance......................... (20,989) (17,863)
----------- ----------
Net deferred tax liability.................. $ (24) $ (24)
=========== ==========
</table>
We established a valuation allowance for the excess of Cannondale U.S. and
Cannondale Japan's deferred tax assets over deferred tax liabilities, and have
adjusted the valuation allowance on a quarterly basis since that time. 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.
9
<page>
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. DERIVATIVES AND HEDGING ACTIVITIES
We enter into forward foreign currency contracts to purchase and sell U.S.,
European, Australian, Canadian and Japanese currencies to reduce exposures to
foreign currency risks. The forward exchange contracts generally have maturities
that do not exceed 12 months and require us to exchange at maturity various
currencies for U.S. dollars and Euros at rates agreed to at the inception of the
contracts.
At September 28, 2002 and September 29, 2001 we had approximately $37.2 million
and $29.0 million, respectively, of forward exchange contracts outstanding. Of
these contracts outstanding, approximately $34.5 million and $23.3 million were
designated as effective cash flow hedges as of September 28, 2002 and September
29, 2001, respectively. We use forward foreign currency contracts as cash flow
hedges to mitigate foreign currency risks related to the settlements of
forecasted sales and purchase transactions. For these foreign currency forward
contracts designated as cash flow hedges, we report the changes in fair value as
a component of other comprehensive income and reclassify such amounts into
earnings in the same period or periods in which the underlying hedged
transactions affect earnings. The total net accumulated derivative losses of
$435,000 included in the accumulated other comprehensive loss at September 28,
2002 are expected to be reclassified into earnings within the next 12 months
upon settlement of the related hedged item (accounts receivable or sale of
inventory to a third party). There was no hedge ineffectiveness between the
forward contract derivatives and the underlying hedged items relating to these
cash flow hedges during the first quarter of fiscal 2003 as both were equally
affected by exchange rate fluctuations. The net expense relating to amortization
of premiums and discounts of cash flow hedges was not material to either our
operating results or financial position for the quarter ended September 28, 2002
and is included in "Other income (expense)" on the Condensed Consolidated
Statement of Operations. As of September 28, 2002, the maximum period of time we
were hedging our exposure to the variability in future cash flows for forecasted
transactions was nine months.
The remaining foreign exchange contracts outstanding at September 28, 2002 and
September 29, 2001 were not designated as hedging instruments. For these
derivatives, gains and losses were recognized immediately in earnings during the
period of change.
At September 28, 2002 and September 29, 2001, the fair values of forward foreign
contracts in gain (i.e. asset) positions were approximately $214,000 and
$227,000, respectively, which are included in "Prepaid expenses and other
current assets" on the Condensed Consolidated Balance Sheets. The fair values of
forward foreign contracts in loss (i.e. liability) positions were approximately
$(548,000) and $(332,000), which are included in "Warranty and other accrued
expenses" on the Condensed Consolidated Balance Sheet at September 28, 2002 and
September 29, 2001, respectively. These fair values were determined based upon
current forward rates applicable to the remaining terms of the forward contracts
as of September 28, 2002 and September 29, 2001, respectively.
8. SHIPPING AND HANDLING FEES AND COSTS
In accordance with EITF Issue 00-10, "Accounting for Shipping and Handling Fees
and Costs," we have included all shipping and handling billings within net
sales, and freight costs incurred for product shipments within selling, general
and administrative expenses. For the quarterly periods ended September 28, 2002
and September 29, 2001, freight costs of approximately $1,008,000 and $593,000,
respectively, have been included in selling, general and administrative
expenses.
10
<page>
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. LONG-TERM DEBT
In July 2002, we entered into a new financing facility with Pegasus and amended
our existing credit facility with CIT. The new financing facilities cured any
defaults under our prior financing agreements.
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 were 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. Using a
Black-Scholes valuation model, we determined the fair value of the immediately
exercisable warrants (and the resulting debt discount) to be approximately $1.2
million. The debt discount will be amortized over the five year life of the
senior notes to interest expense. In the event that the remaining 1,972,849
warrants become exercisable by Pegasus, we will record the corresponding fair
value adjustments to equity and the debt discount at such time.
On September 27, 2002, the minimum daily availability requirement contained in
our financing agreements with Pegasus and CIT was amended. For a 60-day period,
our minimum daily availability requirement was reduced to $2.0 million from $3.5
million.
We are not able to provide adequate assurances in accordance with generally
accepted accounting principles that we will be able to maintain compliance
during the next 12 months with certain
11
<page>
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
covenants contained in our financing agreements with CIT and Pegasus.
Accordingly, all long-term debt has been classified as a current liability on
the Condensed Consolidated Balance Sheet at September 28, 2002.
10. LITIGATION
We currently and from time to time are involved in product liability lawsuits
and other litigation incidental to the conduct of our business. We are not a
party to any lawsuit or proceeding that, in the opinion of management, is likely
to have a material adverse effect on our results of operations, cash flows or
financial condition; however, due to the inherent uncertainty of litigation we
can give no assurance that the resolution of any particular claim or proceeding
would not have a material adverse effect on our results of operations, cash
flows or financial condition.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Sales. Our net sales increased to $37.3 million in the first quarter of
fiscal 2003 from $34.2 million in the first quarter of fiscal 2002, an increase
of approximately 9%. This growth in net sales occurred in our motorsports
segment, with net sales of approximately $5.7 million for the first quarter of
fiscal 2003 compared to net sales of approximately $1.1 million for the first
quarter of fiscal 2002. This net sales increase was partially offset by a
decrease in our bicycle net sales to $31.6 million in the first quarter of
fiscal 2003 from $33.0 million in the first quarter of fiscal 2002. This bicycle
sales shortfall for the first quarter of fiscal 2003 compared to the same period
last year primarily occurred in our overseas markets as certain suppliers were
unable to deliver key component parts to us as scheduled. This bicycle sales
shortfall was partially mitigated by favorable foreign exchange fluctuations of
approximately $1.1 million, the majority of which resulted from the
strengthening of the Euro against the U.S. dollar.
Gross Profit. Gross profit was $7.0 million in the first quarter of fiscal 2003
compared to $7.2 million for the comparable prior-year period. Gross profit as a
percentage of net sales in the first quarter of fiscal 2003 decreased to 18.8%
compared to 20.9% for the first quarter of fiscal 2002. The decrease in gross
profit dollars and gross profit as a percentage of net sales was primarily
attributable to shifts in both the product and geographic mix of our sales.
Foreign sales, which provide a higher margin contribution than domestic sales,
decreased for the first quarter of fiscal 2003 compared to the prior-year
period. Furthermore, motorsports sales, which carry significantly higher product
costs than bicycle sales, comprised 15% of net sales for the first quarter of
fiscal 2003 compared to 3% for the first quarter of fiscal 2002.
Bicycle margins for the first quarter of fiscal 2003 were 30.9% compared to
33.5% in the prior year period. This margin decrease primarily resulted from a
decrease in our foreign sales, which was caused by our major suppliers'
inability to deliver high-end product components to us as scheduled. Our
motorsports margins continued to be negative for the first quarter of fiscal
2003 as a result of manufacturing costs which were not fully absorbed by
production volume.
Operating Expenses. Operating expenses were $13.9 million for the first quarter
of fiscal 2003 compared to $10.3 million recorded for the first quarter of
fiscal 2002.
Selling, general and administrative expenses increased to $10.8 million for the
first quarter of fiscal 2003 from $9.0 million recorded during the prior-year
period. The increase in selling, general and administrative expenses during the
first quarter of fiscal 2003 resulted from higher volume-related motorsports
expenses, legal expenses, and an unfavorable foreign exchange impact. Selling,
general and administrative expenses represented 29.0% of net sales for the first
quarter of fiscal 2003 compared to 26.4% for the prior-year period.
Research and development expenses decreased slightly to $1.2 million in the
first quarter of fiscal 2003 from $1.3 million recorded during the prior-year
period. The decrease in research and development expenses during the first
quarter of fiscal 2003 primarily reflects the timing of our various motorsports
and bicycle research and development projects. We invested approximately
$587,000 in research and development for our motorsports
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products during the first quarter of fiscal 2003 compared to approximately
$680,000 during the same period last year. As a percentage of net sales,
research and development expenses were 3.3% for the first quarter of fiscal 2003
compared to 3.7% for the first quarter of fiscal 2002.
Currently, our bicycle-related research and development 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 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.
In the first quarter of fiscal 2003, we recorded a one-time $1.8 million
write-off of certain deferred financing costs related to debt retired in July
2002 (see Note 9 in the Notes to the Condensed Consolidated Financial Statements
for further detail).
Other Income (Expense). Interest expense increased to $1.9 million in the first
quarter of fiscal 2003 from $1.1 million recorded during the prior-year period.
This increase in interest expense during the first quarter of fiscal 2003 is a
result of increased borrowings, coupled with higher interest rates, compared to
the first quarter of fiscal 2002. For the first quarter of fiscal 2003, other
income primarily consisted of finance charge income from accounts receivable and
foreign currency exchange gains.
Income Taxes. For the three months ended September 28, 2002, the income tax
benefit was $250,000 compared to the income tax benefit of $80,000 recorded for
the three months ended September 29, 2001. Our net deferred tax assets at
Cannondale U.S. and Cannondale Japan have been fully reserved with a valuation
allowance. Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes," requires the establishment of a valuation allowance when there is
uncertainty as to the realizability of deferred tax assets. See Note 6 in the
Notes to the Condensed Consolidated Financial Statements for further discussion.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $8.2 million for the first quarter of
fiscal 2003 compared to $1.3 million of net cash provided by operating
activities for the first quarter of fiscal 2002. The decrease in net cash
provided by operating activities primarily reflects the net loss recorded for
the current period, coupled with a larger increase in bicycle inventory levels
during the first quarter of fiscal 2003 compared to the first quarter of fiscal
2002. These uses of cash were partially offset by an increase in our accounts
payable levels for the first quarter of fiscal 2003 compared to fiscal 2002.
Capital expenditures were $523,000 for the first quarter of fiscal 2003,
compared to $1.1 million for the first quarter of fiscal 2002. Our capital
expenditures during the first quarters of fiscal 2003 and 2002 principally
related to tooling used in the production of motorsports products.
Net cash provided by financing activities for the first quarter of fiscal 2003
was $8.0 million, compared to the $1.4 million of net cash used in financing
activities for the first quarter of fiscal 2002. The net cash provided by
financing activities is a result of our debt refinancing during the first
quarter of fiscal 2003, whereby 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. 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 were used for working capital needs.
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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.
On September 27, 2002, the minimum daily availability requirement contained in
our financing agreements with Pegasus and CIT was amended. For a 60-day period,
our minimum daily availability requirement was reduced to $2.0 million from $3.5
million.
We are not able to provide adequate assurances in accordance with generally
accepted accounting principles that we will be able to maintain compliance
during the next 12 months with certain covenants contained in our financing
agreements with CIT and Pegasus. Accordingly, all long-term debt has been
classified as a current liability on the Condensed Consolidated Balance Sheet at
September 28, 2002.
We expect to fund our planned operating and capital requirements through the
first quarter of fiscal 2004 with cash generated by operations and borrowings
under our revolving credit facilities. As of September 28, 2002, we had
approximately $2.3 million available for working capital needs after giving
effect to a $2.0 million minimum availability reserve requirement set forth in
our amended 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.
Availability under our borrowing facility with IFN Finance, B.V. was
approximately $777,000 at September 28, 2002. We will depend on cash generated
by our operations to fund a substantial portion of our working capital needs
through the first quarter of fiscal 2004. 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.
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CRITICAL ACCOUNTING POLICIES
During the preparation of financial statements, we use estimates and make
judgments based upon the information known to us at that time in establishing
our credits and returns, inventory and warranty reserves. For our bicycle
reserves, historical information and trends serve as the primary basis for
determining required reserve levels. However, due to the start-up nature of our
motorsports business and the resulting lack of historical trend information, we
use estimates and judgments to determine the adequate motorsports reserve
levels. Actual results could differ from our estimates.
We have provided for future credits to be issued to dealers related to current
sales using estimates based upon information available at this time. We
estimated the number of future product returns, as well as the amount of
potential credit adjustments, based upon detailed information from our field
sales force and customer service department. We have also established a lower of
cost or market valuation reserve for our motorsports inventory based on the
differences between our actual costs and average selling prices. In addition,
our warranty reserves provide for the anticipated number of units we expect to
repair multiplied by the anticipated cost to repair each unit. We have estimated
the actual number of units to be returned and the actual cost to repair each
unit. Although we use reasonable estimates based on the information available at
this time, actual activity could vary from our estimates.
CERTAIN FACTORS WHICH MAY AFFECT THE COMPANY'S FUTURE PERFORMANCE
This Quarterly Report on Form 10-Q contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These include
statements about anticipated financial performance, future revenues or earnings,
business prospects, new products, anticipated market performance, planned
production and shipping of motorsports products, expected cash needs,
availability of additional financing, future compliance with the terms and
conditions of financing facilities and similar matters. In addition, the words
"anticipate," "project," "plan," "intend," "estimate," "expect," "may,"
"believe" and similar words are intended to identify the statements that are
forward-looking statements. All forward-looking statements involve risks and
uncertainties. Actual results may differ materially from those discussed in, or
implied by, the forward-looking statements as a result of certain factors,
including, but not limited to: seasonality, the timing of the introduction and
the market acceptance of new products, competition, changes in foreign exchange
rates, general economic conditions, credit risks related to our customer base,
adverse weather, our reliance on key vendor and supplier relationships, the
effectiveness of our dealer networks and our internal sales teams, our limited
motorsports products experience, our ability to obtain additional equity or debt
financing when needed, changes in discretionary consumer spending, our
dependence on key personnel and potential dilution of shareholder ownership.
Please refer to the "Management's Discussion and Analysis of Financial Condition
and Results of Operations" contained in our annual report on Form 10-K/A for the
fiscal year ended June 29, 2002 for a description of these risk factors which
may affect our future results. Readers should not place undue reliance on the
forward-looking statements contained in this report. Except as required by law,
we do not intend to update information contained in any of our forward-looking
statements.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to our operations result primarily from changes in
interest rates and foreign exchange rates, as well as credit risk
concentrations. To address these risks, we enter into various hedging
transactions as described below. We do not use financial instruments for trading
purposes. For further discussion of the quantitative and qualitative aspects of
market risk, see Part II Item 7A of our annual report on Form 10-K for the
fiscal year ended June 29, 2002.
CREDIT RISKS.
Our customer base is comprised of specialty bicycle and motorsports retailers
which are located principally throughout the United States and Europe. Our net
sales are concentrated in the United States and Germany. No other single country
accounted for more than 10% of our net sales during the first quarter of fiscal
2003. No single customer accounted for more than 5% of our net sales during the
first quarter of fiscal 2003. As a result of the seasonality of our business,
the payment terms offered to our bicycle dealers generally range from 30 to 210
days depending on the time of year and other factors. For the majority of our
motorsports sales, our dealers use a third-party financial services organization
to finance their inventory purchases whereby we receive payment from such
organization for all motorsports shipments within a specified period of time
(not exceeding 120 days), less an interest factor. All other products are sold
with payment terms from 30 to 180 days.
FOREIGN CURRENCY RISKS.
We enter into forward foreign currency contracts to purchase and sell U.S.,
European, Australian, Canadian and Japanese currencies to reduce exposures to
foreign currency risks. The forward exchange contracts generally have maturities
that do not exceed 12 months and require us to exchange at maturity various
currencies for U.S. dollars and Euros at rates agreed to at the inception of the
contracts.
At September 28, 2002, we had approximately $37.2 million of forward exchange
contracts outstanding. Of these contracts outstanding, approximately $34.5
million were designated as effective cash flow hedges. We use forward foreign
currency contracts as cash flow hedges to mitigate foreign currency risks
related to the settlements of forecasted sales and purchase transactions. For
these foreign currency forward contracts designated as cash flow hedges, we
report the changes in fair value as a component of other comprehensive income
and reclassify such amounts into earnings in the same period or periods which
the underlying hedged transactions affect earnings. As of September 28, 2002,
the maximum period of time we were hedging our exposure to the variability in
future cash flows for forecasted transactions was nine months.
The remaining $2.7 million of foreign exchange contracts outstanding at
September 28, 2002 were not designated as hedging instruments. For these
derivatives, gains and losses were recognized immediately in earnings during the
period of change.
Item 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures within 90 days of the filing date of this report, and, based on this
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that these controls and procedures are effective. There were no
significant changes in our internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
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Disclosure controls and procedures are our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission's rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by us in the reports that we
file under the Exchange Act is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
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PART II OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
We filed a Current Report on Form 8-K on September 27, 2002
furnishing under Item 9 thereof certain information
regarding the certifications of our Chief Executive Officer
and our Chief Financial Officer accompanying our Form 10-K
for the fiscal year ended June 29, 2002.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CANNONDALE CORPORATION
Date: November 12, 2002 /s/ William A. Luca
---------------------------------
William A. Luca
Vice President of Finance,
Chief Financial Officer and Chief
Operating Officer
(Principal Financial Officer
and authorized signatory)
I, Joseph S. Montgomery, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cannondale Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
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5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there was significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 12, 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-Q of Cannondale Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
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5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there was significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
By: /s/ William A. Luca
--------------------
William A. Luca
Vice President of Finance,
Chief Financial Officer and Chief
Operating Officer
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