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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 1, 2000
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 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 18, 2000, the aggregate market value of the voting stock held
by non-affiliates of registrant was $21,647,725 based on the per share closing
price on such date, and registrant had 7,515,225 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's definitive Proxy Statement relating to the 2000
Annual Meeting of Stockholders are incorporated by reference into Part III, as
set forth herein.
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PART I
ITEM 1. BUSINESS.
GENERAL.
Cannondale Corporation ("Cannondale" or the "Company") is a leading
manufacturer of high-performance bicycles. The Company's bicycle line has grown
from 21 models in its 1992 model year to 85 models in its 2001 model year, the
significant majority of which are hand assembled and constructed with
hand-welded aluminum frames. Cannondale also sells other bicycle-related
products, which include clothing, shoes and bags, and a line of components, some
of which are manufactured for the Company by third parties. The Company was
incorporated in Delaware in 1971.
During fiscal 2000, the Company entered the motorsports market with the
production and shipment of its first MX400 motocross motorcycle. The Company
also has announced plans to manufacture and sell three additional motorized
recreational vehicles: two new motorcycle models and a four-wheeled all-terrain
vehicle ("ATV").
The bicycle market has matured in recent years and its growth has subsided.
The Company believes that it can leverage its domestic flexible manufacturing
capabilities which allow it to consistently provide high quality and innovative
products to the market faster than its competition to take strategic advantage
of the current market conditions. Additionally, the Company believes that a
marketing strategy consistent with the bicycle product line, one that focuses on
innovation, differentiation, performance and quality leadership, used in the
motorsports market, provides the Company with a viable diversification growth
strategy.
PRODUCTS -- BICYCLES.
The Company's bicycles are marketed under the Cannondale brand name and
"Handmade in USA" logo. The Company's 2001 bicycle line offers 85 models, the
vast majority of which feature a lightweight Cannondale hand-welded and
hand-assembled aluminum frame. Cannondale's use of aluminum allows it to produce
frames that are generally lighter in weight than steel frames. Cannondale
bicycles employ wide diameter tubing, which provides greater frame rigidity as
well as a distinctive look. Certain Cannondale models also have full or front
suspension systems, offering greater comfort and control than non-suspended
bikes. The Company's 2001 bicycle line also features models with the Raven
frame. A high-performance, full suspension mountain bike frame, the Raven is
composed of lightweight thermoplastic carbon fiber skins bonded to a magnesium
spine, providing an even lighter frame weight than its steel and aluminum
counterparts.
There are five major categories of bicycles sold in the adult market:
mountain, road racing, multi-sport, 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. Multi-sport bikes, designed for triathlons and other multi-sport races,
typically have smaller diameter wheels than traditional road racing bikes, and
are crafted from aerodynamic tubes. The recreational segment is composed of
hybrid and comfort bikes. Both categories offer the more upright riding position
of mountain bikes, making them popular with non-enthusiast riders. Hybrid models
use thinner, more smoothly treaded tires than those found on mountain bikes for
lower rolling resistance, while comfort bikes are equipped with generously
padded saddles and other features to maximize rider comfort. The specialty
bicycle market encompasses various niche products, including tandem, touring,
cyclocross and street models.
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The 85 bicycle models in Cannondale's 2001 model year are distributed in
the five major bicycle categories as follows:
NUMBER OF
CATEGORY 2001 MODELS
- -------- -----------
Mountain Bikes:
Full Suspension...................... 16
Front Suspension..................... 13
Non-Suspended........................ 1
Road Bikes:
Front Suspension..................... 2
Non-Suspended........................ 14
Aero and Multi-Sport................... 4
Recreational:
Hybrid............................... 13 (five front suspension and one full
suspension)
Comfort.............................. 5 (two front suspension and one full
suspension)
Specialty:
Tandem............................... 5 (two front suspension)
Touring.............................. 3 (one front suspension)
Cyclocross........................... 2 (one front suspension)
Street............................... 7
The Company's 2001 line of proprietary HeadShok front suspension forks is
comprised of a total of 13 models. Each HeadShok model offers the Company an
important point of differentiation from other bicycle manufacturers, virtually
all of whom use the same brand-name forks produced by three independent
suppliers. The Company's 2001 HeadShok line is highlighted by three Lefty fork
models. The HeadShok Lefty models each feature a single telescoping blade that
dramatically reduces weight while delivering generous travel. The flagship Lefty
fork, the new Lefty Carbon ELO, features a carbon fiber telescoping blade and
weighs 317 grams less than the 2000 model year Lefty. The newer 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.
The Company also manufactures other proprietary components to further
distinguish itself from its competitors, and to pursue a strategy of "System
Integration." System Integration is the process by which Cannondale designers
create dedicated frames and components concurrently. The strategy allows
Cannondale 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 the Company's new CAAD6 road
frame, and its dedicated Hollowgram front gear assembly. The CAAD6 frame is
specially constructed to accommodate the Hollowgram components, which are 22%
lighter and 4% more efficient (stiffer) than the comparable leading parts
available to other bicycle manufacturers.
The Company also offers 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 specialized water and windproof shells cut
specifically for cold weather cycling. The line includes three collections:
Vertex, a high-performance, competition-level line including team apparel; HpX,
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 its bicycle, suspension fork, component and clothing lines,
the Company manufactures and sells bicycle accessories, including bags, shoes,
and other items, some of which are manufactured for the Company by third
parties. These products are sold primarily through the same distribution
channels as the Company's bicycles, forks, components and apparel.
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PRODUCTS -- MOTORSPORTS.
In May 2000, the Company shipped its first Cannondale MX400, a
high-performance motocross (off-road racing) motorcycle. The Cannondale MX400
allows the Company to extend its brand into a new market by capitalizing on
several of its core competencies, particularly the ability to design, test and
manufacture two-wheeled, welded and heat-treated aluminum-framed vehicles for
off-road use. The MX400 is 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. Fuel injection
also eliminates the carburetor, lowering the motorcycle's gas tank, and thus its
center of gravity, for improved handling. The elimination of the carburetor also
allows optimal shock absorber placement for improved rear wheel suspension
performance.
The Company also has three additional motorized recreational vehicles in
development: two new motorcycle models and a four-wheeled ATV. The two new
motorcycles, the EX400 and XC400, are based on the MX400 frame and engine
platforms, and are targeted at different segments of the off-road motorcycle
market. The FX400 ATV also utilizes the MX400 engine platform. The Company
expects to begin initial shipments of the FX400 by the end of the second quarter
or the beginning of the third quarter of fiscal 2001, with the two motorcycle
models following in the first half of fiscal 2002.
A collection of motorcycle apparel, Full Throttle Racewear, is also sold by
Cannondale and was introduced in 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
Consolidated Financial Statements included in this report.
MARKETING.
The goal of the Company's marketing program is to establish Cannondale as
the leading high-performance brand in the specialty bicycle and motorsports
retail channels. The marketing effort is focused on innovation, differentiation,
performance and quality leadership.
The Company uses the internet aggressively to promote its brand and image,
offering consumers a popular web site (www.cannondale.com), which averages more
than 18,200 visitors each day. The bicycle segment of the web site incorporates
several innovative features to link the Company and its 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 Cannondale, the customer, and their local dealer
coordinating the test ride process.
The Company has also expanded its on-line presence by offering foreign
language versions of key content areas. A password-protected dealer extranet,
the Cannondale Insider, is also in use. Future improvements to the Cannondale
Insider will ultimately allow the Company's retailers to check backorders and
product availability on-line, as well as place orders and review their account
status.
The web site is also home to the Company's CHAIN Gang, a loose
confederation of more than 50,000 Cannondale owners and fans of the Company who
receive regular e-mail updates concerning new products, sales promotions, race
results, and other news. The CHAIN Gang program is being expanded to include
product demos and the distribution of promotional CHAIN Gang items to members at
races, cycling festivals, and organized rides throughout the U.S. and Europe.
Another element of the Company's bicycle marketing effort is its
sponsorship of professional cycling teams. Since 1994, the Volvo/Cannondale
mountain bike racing team has made contributions to the bicycle product
development effort of the Company, and served as a major focus of the Company's
bicycle marketing effort. The Company is leveraging the competitive success of
the racing team by using photo images of the athletes on its web site, in print
media, on point-of-sale literature, banners, product packaging and product
catalogs.
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Cannondale's sponsorship of the Saeco/Valli&Valli professional road cycling
team is designed to increase the Company's visibility and credibility among the
high-end consumers dedicated to road racing. A major force in the Giro d'Italia,
Tour de France, U.S. Pro Championships and other top professional road cycling
events, the Saeco/Valli&Valli team has competed aboard Cannondale bicycles and
in the Company's cycling apparel since the spring of 1997.
The MX400 motorcycle and other motorsports products are being promoted
largely through a product-driven marketing strategy. Due to the innovations and
significant new technology that the Company is incorporating in its motorsports
products, the products have received significant amounts of favorable exposure
in enthusiast print media. The motorsports products are also supported by a
dedicated area within the Company's web site, and with a motorsports-specific
on-line mailing list similar to the CHAIN Gang.
All of the Company's 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.
Cannondale's distribution strategy is to sell its bicycles through
specialty bicycle retailers who it believes have the ability to provide
knowledgeable sales assistance regarding the technical and performance
characteristics of its products, and to provide an ongoing commitment to
servicing its bicycles. In addition, in order to increase the sales of its
clothing and accessory lines, the Company expanded its distribution network to
include sport-specialty retailers. The Company does not sell bicycles through
mass merchandisers. A key aspect of the Company's strategy is to align itself
with a network of specialty bicycle retailers that can support the Company's
growth objectives. When adding new retailers, the Company takes into account a
number of factors, including the targeting of certain market areas determined by
analyzing various population, demographic and competitive characteristics.
In the United States and Canada, the Company currently sells bicycles and
accessories directly to approximately 1,000 specialty bicycle retailer locations
and sells accessories through approximately an additional 500 retailer
locations. Generally, the Company's retailers do not have exclusive rights in
any territory. In addition to selling bicycles, the Company's 34-member
field-sales force is responsible for selling the Company's clothing, accessory,
CODA brand components and HeadShok lines. The Company's sales force contributes
to all aspects of customer service, including marketing the Company's products
to retailers, providing retailer assistance and assisting in the Company's
accounts receivable management. The account managers also monitor retail sales
at the retailer level, enabling the Company to better respond to changes in
market demand and to adjust production accordingly. In addition, the Company
employs a staff of inside sales representatives to handle retailer orders
between visits from the field-sales force, and maintains staff to handle
telemarketing and special incentive programs.
Substantially all of Cannondale's domestic and international bicycle
retailers participate in the Authorized Retailer Program ("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, the Cannondale sales force
formulates a delivery plan with its retailers, typically based upon historical
delivery information, that conforms with the retailers' growth objectives and
inventory needs. This program incorporates freight and pricing discounts as
incentives for the retailers to achieve their growth objectives formulated by
the retailers and the Company's sales force. The Company believes that the ARP
allows Cannondale to maximize the competitive advantage of its flexible domestic
manufacturing capabilities which provide the Company with the ability to rapidly
meet changes in market trends and demand. The payment terms offered by the
Company 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.
Cannondale's distribution strategy is to sell its 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 the
Company's products.
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Specialty motorsports retailers are also best able to provide proper initial
set-up and adjustment of the Company's products, as well as ongoing service and
repair. For motorcycles, the Company utilizes a third-party financial services
organization to finance dealer inventory purchases whereby the Company receives
payment from such organization for all motorcycle shipments within 30 days, less
an interest factor. All other product is sold with payment terms from 30 to 60
days.
INTERNATIONAL OPERATIONS.
The Company's bicycle products are sold in approximately 60 foreign
countries. The Company's activities in Europe, Japan and Australia are conducted
through three wholly-owned subsidiaries, Cannondale Europe B.V. ("Cannondale
Europe"), Cannondale Japan KK ("Cannondale Japan") and Cannondale Australia Pty
Limited ("Cannondale Australia"), respectively. Sales in other foreign countries
are made by the Company from the United States through the use of 45 foreign
distributors who sell the Company's products to specialty bicycle retailers
overseas. During fiscal 2000, 1999 and 1998, Cannondale Europe accounted for
41%, 48% and 45%, respectively, of consolidated net sales, while Cannondale
Japan accounted for 5%, 4% and 5%, respectively. Cannondale Australia accounted
for 2% of consolidated net sales in fiscal 2000 and 1% of consolidated net sales
in fiscal 1999 and 1998.
Motorsports products are not yet available to the international market.
Cannondale Europe. Cannondale Europe based in Oldenzaal, the Netherlands,
was formed in 1989. Cannondale Europe assembles bicycles at its Netherlands
facilities using frames and components manufactured by the Company, as well as
components manufactured by third parties. Cannondale Europe sells bicycles and
accessories directly to approximately 1,200 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. The Company 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
accessories from the Company 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
Zealand specialty bicycle retailers. Cannondale Australia, based in Sydney,
imports fully-assembled bicycles and a full line of accessories from the Company
and various components manufactured by third parties. Cannondale Australia sells
bicycles and accessories directly to approximately 200 specialty retailers.
SUPPLIERS.
Cannondale sources material and components on a global basis in order to
keep pricing and availability at stable levels. Cannondale has developed strong
relationships with vendors who have a proven track record in their markets. The
Company has few long-term agreements with its major suppliers. Aluminum tubing,
the primary material employed in the Company's manufacturing operations for its
bicycles and motorsports products, is available from a number of domestic
suppliers. The Company currently has a supply agreement for aluminum tubing
expiring June 30, 2001, with an option to extend the agreement for an additional
six months with price protection throughout the term of the contract. The
Company believes that the termination of its current agreement would not have a
significant impact on the availability of aluminum tubing, as the supply is
currently strong and the Company also utilizes other aluminum suppliers.
Purchases from Japanese component manufacturers are made through Cannondale
Japan. The Company's largest component supplier is Shimano, which was the source
of approximately 22% of the Company's total raw material inventory purchases in
fiscal 2000. Although the Company believes it has established close
relationships with the
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principal suppliers of its materials and components, the Company believes that
its future success will depend upon its ability to maintain flexible
relationships, which may be terminated by such suppliers on short notice, or to
substitute new suppliers without interruption of supply.
PATENTS AND TRADEMARKS.
The Company holds 39 United States patents relating to various products,
processes or designs with expiration dates ranging from 2001 to 2017. The
Company focuses on obtaining patent protection for its core technologies and
seeks broad coverage to protect its position in the industry. The Company
believes that its patented technology is a reflection of its success in product
innovation and that, collectively, its patents enhance its ability to compete.
However, in light of the nature of innovation in the bicycle and motorsports
industries, the Company does not believe that the loss of any one of its
patents, or the expiration of any of its current patents, would have a material
adverse effect on the Company's business or results of operations.
The Company holds numerous United States trademarks, covering the
CANNONDALE, CODA and HeadShok names and the names of a variety of products and
components. The CANNONDALE and CODA trademarks are also registered in
Cannondale's significant foreign markets. The Company believes its CANNONDALE
trademarks have strong brand name recognition in the bicycle and accessory
markets, which the Company believes is a significant competitive factor. The
Company also believes that its strong brand name will have a favorable effect on
the Company's entry into the motorsports market.
SEASONALITY.
The Company's business is seasonal due to consumer spending patterns, which
in turn affect retailer delivery preferences, and historically resulted in
significantly stronger operating results in the third and fourth fiscal quarters
(January through June). During fiscal 2000, 1999 and 1998, the Company's
operating results have deviated from this historical pattern. 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 report.
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 the Company faces competition from a
number of manufacturers in each of its product lines. A number of the Company's
competitors are larger and have greater resources than the Company. The Company
competes on the basis of the breadth and quality of its product line, the
development of an effective specialty retailer network and its brand
recognition.
The motorsports market is also highly competitive. The Company's principal
competitors are foreign manufacturers that have financial resources
substantially greater than those of the Company. These competitors also have
established manufacturing capabilities, are more diversified than the Company,
and market and sell products with strong brand recognition. As a result of the
foregoing, there can be no assurance that the Company will successfully
penetrate the motorsports market.
RESEARCH AND DEVELOPMENT.
Cannondale's bicycle research and development efforts are directed toward
the creation of new and innovative products, and improving existing designs by
making them lighter, stronger, faster and more comfortable. It is the objective
of the research and development group to design and deliver innovative products
to further the Company's efforts to position itself as an innovation leader. The
Company's research and development efforts are assisted by its sponsored race
teams, particularly the Volvo/Cannondale mountain bike racing team, which
provides significant feedback on product design, performance and durability.
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The Company's research and development efforts have resulted in design and
production systems that allow the Company to compress the time between concept
and production. The Company believes that its 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, the Company's collaboration with its 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 second-generation Raven, as well as the continuous
refinement of the Company's existing products.
The research and development group leveraged its core competencies as a
technology leader of frame and suspension products in the bicycle industry to
develop an innovative frame and suspension system for its first motocross
motorcycle, the MX400. In addition, the Company developed a proprietary 432cc
four-stroke engine, manufactured at the Company's new production facility in
Bedford, Pennsylvania, that will be used in the MX400 and other motorsports
products. The Company is incorporating the design, testing and production
techniques used in the development of its bicycle product line to continue to
bring new and innovative motorsports-related products to the market. The Company
invested approximately $4.7 million, $5.9 million and $2.0 million into research
and development of its motorsports products during fiscal years 2000, 1999 and
1998, respectively.
The development of the motorsports and bicycle-related innovations
exemplify the commitment by the Company to continue to invest in developing
design, product and process technologies to differentiate itself from its
competition. The Company invested approximately $8.5 million, $10.2 million and
$6.8 million into research and development of both bicycle and motorsports
products during fiscal years 2000, 1999 and 1998, respectively.
ENVIRONMENTAL MATTERS.
The Company is subject to all applicable 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. The Company does not
believe that compliance with these regulations has an adverse effect upon its
business.
A portion of the Company's Bedford, Pennsylvania, property acquired in 1992
was the subject of a groundwater monitoring program, stemming from the removal,
prior to Cannondale's acquisition of the property, of certain underground
storage tanks. The Company received a waiver from the Department of
Environmental Protection that provided for the cessation of this program. During
the program, no groundwater contamination was indicated in the sampling results.
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 the Company's financial
condition.
EMPLOYEES.
As of July 1, 2000, Cannondale U.S. employed 832 full-time employees,
Cannondale Europe employed 147 full-time employees, Cannondale Japan employed 15
full-time employees, and Cannondale Australia employed 6 full-time employees.
FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES.
Please refer to Note 13 in the Notes to Consolidated Financial Statements
included in this report.
ITEM 2. PROPERTIES.
The Company's corporate headquarters and research and development facility
is located in Bethel, Connecticut. The corporate headquarters and research and
development facility contains 32,500 square feet on a five-acre site. The cost
of the facility was partially financed with a loan ($1.6 million) from the
Connecticut Development Authority. The loan extends to February 2008 and is
secured by the corporate headquarters and research and development facility.
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Cannondale has a facility in Bedford, Pennsylvania, for the production of
its bicycles and some of its bicycle-related products. This Bedford plant
contains 289,000 square feet on 23 acres and not only is a production facility,
but also houses the Company's customer service department and provides
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 the Company pursuant to installment
sales agreements. The Company makes monthly payments which 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 the Company and
PIDA's mortgages on the property will be released.
During fiscal 1999, construction was completed on the new facility in
Bedford, Pennsylvania, to house production of the Company's motorsports products
and to provide additional warehousing space. The facility contains 100,000
square feet on 23.9 acres. The project cost approximately $6.3 million, which
was 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 54,200 square foot facility in Oldenzaal, the
Netherlands, which houses administrative and sales offices, a bicycle assembly
plant and warehouse, which is partially secured by a $1.9 million mortgage.
Cannondale Europe's property provides additional space for further expansion.
Cannondale Japan and Cannondale Australia lease a total of 5,940 and 2,500
square feet of office and warehouse space, respectively.
The Company believes that its present facilities are in good condition and
will be suitable for the Company's operations and will provide sufficient
capacity to meet the Company's anticipated requirements for the foreseeable
future.
ITEM 3. LEGAL PROCEEDINGS.
The Company currently and from time to time is involved in product
liability lawsuits and other litigation incidental to the conduct of its
business. The Company is not a party to any lawsuit or proceeding that, in the
opinion of management, is likely to have a material adverse effect on the
results of operations, cash flows or financial condition of the Company;
however, due to the inherent uncertainty of litigation there can be no assurance
that the resolution of any particular claim or proceeding would not have a
material adverse effect on the Company's results of operations, cash flows or
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of stockholders of the Company during
the fourth quarter of the Company's 2000 fiscal year.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning executive
officers and other key members of management of the Company.
NAME AGE POSITION
---- --- --------
Joseph S. Montgomery...................... 60 Chairman, President, Chief Executive
Officer, Director
William A. Luca........................... 57 Vice President of Finance, Treasurer,
Chief Financial Officer, Chief Operating
Officer, Director
Daniel C. Alloway......................... 41 Vice President of Sales, Director
Leonard J. Konecny........................ 57 Vice President of Purchasing
John P. Moriarty.......................... 56 Assistant Treasurer and Assistant
Secretary, Chief Accounting Officer
Mario Galasso............................. 34 Vice President of Product Development
Michael T. Dower.......................... 48 Vice President of Information Technology
Mark A. Charpentier....................... 39 Vice President
JOSEPH S. MONTGOMERY founded Cannondale in 1971 and has been its Chairman,
President and Chief Executive Officer and a director since its formation. Mr.
Montgomery is the father of James Scott Montgomery, who is also a director of
the Company.
WILLIAM A. LUCA joined Cannondale in January 1994 as Vice President of
Finance, Treasurer and Chief Financial Officer. During 2000, he was appointed
the Chief Operating Officer of Cannondale. Prior to joining the Company he
served as a management consultant from 1989 to 1993, including consulting for
the Company 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 the Company in August 1994.
DANIEL C. ALLOWAY has held a number of positions since joining Cannondale
in 1982, including Vice President of Sales (November 1998 to the present), Vice
President of Sales-United States 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 the Company in June 1998.
LEONARD J. KONECNY joined Cannondale 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.
JOHN P. MORIARTY joined Cannondale 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).
MARIO GALASSO joined Cannondale in 1991 as a Project Engineer. He served as
the Manager of Research and Development from 1994 to 1996. Mr. Galasso currently
serves as the Vice President of Product Development.
MICHAEL T. DOWER joined Cannondale 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 the Company, he
worked as an independent information technology consultant for 10 years. Mr.
Dower was appointed Vice President of Information Technology in September 1999.
9
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MARK A. CHARPENTIER has held several positions since joining Cannondale 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). Mr. Charpentier was appointed Vice President in
July 2000.
Each of the officers of the Company is appointed by and serves at the
pleasure of the Board of Directors.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's 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 sale prices per share for the common
stock.
HIGH LOW
------ -----
FISCAL 2000
First Quarter (7/4/99 to 10/2/99)......................... $11.81 $8.31
Second Quarter (10/3/99 to 1/1/00)........................ 9.06 5.94
Third Quarter (1/2/00 to 4/1/00).......................... 8.63 6.19
Fourth Quarter (4/2/00 to 7/1/00)......................... 7.94 6.25
FISCAL 1999
First Quarter (6/28/98 to 9/26/98)........................ 13.38 8.88
Second Quarter (9/27/98 to 12/26/98)...................... 12.38 7.00
Third Quarter (12/27/98 to 3/27/99)....................... 13.75 7.00
Fourth Quarter (3/28/99 to 7/3/99)........................ 11.75 8.25
As of September 18, 2000, there were approximately 445 stockholders of
record of the common stock, excluding beneficial owners holding shares through
nominee names.
The Company has not paid any cash dividends on its common stock since its
inception and does not anticipate paying any cash dividends in the foreseeable
future. Certain financing agreements of the Company contain limitations on the
payment of dividends.
In June 2000, the Company issued warrants to purchase an aggregate of
393,916 shares of its common stock at a purchase price of $0.01 per share to
Ableco Finance LLC ("Ableco") in connection with the provisions of a $15.0
million term loan to the Company. The warrants are exercisable at any time after
June 30, 2001 and prior to June 30, 2005, provided the Company has not paid at
least $7.5 million of principal of the term loan by June 30, 2001. The issuance
of the warrants was deemed to be exempt from registration under the Securities
Act of 1933, as amended, in reliance upon Section 4(2) of the Securities Act, as
a transaction not involving a public offering.
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ITEM 6. SELECTED FINANCIAL DATA.
The following selected historical statement of operations data and balance
sheet data have been derived from the Consolidated Financial Statements of the
Company, some of which are presented herein. The information set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and related Notes appearing elsewhere in this Form 10-K.
TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS
ENDED JULY 1, ENDED JULY 3, ENDED JUNE 27, ENDED JUNE 28, ENDED JUNE 29,
2000 1999 1998 1997 1996
------------- -------------- -------------- -------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales......................... $160,519 $176,819 $171,496 $162,496 $145,976
Cost of sales..................... 112,100 114,627 110,113 101,334 92,804
-------- -------- -------- -------- --------
Gross profit...................... 48,419 62,192 61,383 61,162 53,172
-------- -------- -------- -------- --------
Expenses:
Selling, general and
administrative................ 39,718 40,599 39,361 35,707 32,577
Research and development........ 8,470 10,222 6,750 3,576 2,837
-------- -------- -------- -------- --------
Total operating expenses.......... 48,188 50,821 46,111 39,283 35,414
-------- -------- -------- -------- --------
Operating income.................. 231 11,371 15,272 21,879 17,758
-------- -------- -------- -------- --------
Other income (expense):
Interest expense................ (6,308) (4,557) (1,995) (1,574) (2,224)
Other income.................... 1,883 1,160 653 843 414
-------- -------- -------- -------- --------
(4,425) (3,397) (1,342) (731) (1,810)
-------- -------- -------- -------- --------
Income (loss) before income taxes
and extraordinary item.......... (4,194) 7,974 13,930 21,148 15,948
Income tax (expense) benefit...... 1,902 (2,051) (4,578) (7,642) (5,802)
-------- -------- -------- -------- --------
Income (loss) before extraordinary
item............................ (2,292) 5,923 9,352 13,506 10,146
Extraordinary loss, net of $143
tax benefit(1).................. (234) -- -- -- --
-------- -------- -------- -------- --------
Net income (loss)................. $ (2,526) $ 5,923 $ 9,352 $ 13,506 $ 10,146
======== ======== ======== ======== ========
BASIC EARNINGS (LOSS) PER COMMON
SHARE:(2)
Income (loss) before extraordinary
item............................ $ (0.31) $ 0.79 $ 1.11 $ 1.56 $ 1.23
Net income (loss)................. $ (0.34) $ 0.79 $ 1.11 $ 1.56 $ 1.23
Weighted-average common
shares(3)....................... 7,497 7,518 8,442 8,638 8,216
DILUTED EARNINGS (LOSS) PER COMMON
SHARE:(2)
Income (loss) before extraordinary
item............................ $ (0.31) $ 0.77 $ 1.08 $ 1.51 $ 1.19
Net income (loss)................. $ (0.34) $ 0.77 $ 1.08 $ 1.51 $ 1.19
Weighted-average common shares and
common equivalent shares
outstanding(3).................. 7,497 7,686 8,682 8,916 8,499
JULY 1, JULY 3, JUNE 27, JUNE 28, JUNE 29,
2000 1999 1998 1997 1996
------------- -------------- -------------- -------------- --------------
BALANCE SHEET DATA:
Working capital................... $ 75,456 $ 74,894 $ 78,975 $ 77,196 $ 62,032
Total assets...................... 164,907 162,379 152,277 127,284 109,945
Total long-term debt, excluding
current portion................. 63,363 55,997 40,352 20,319 13,114
Total stockholders' equity........ 70,686 75,010 78,238 81,621 68,294
- ---------------
(1) Extraordinary loss consists of the costs relating to early extinguishment of
debt, net of applicable tax benefit.
(2) No cash dividends were declared or paid on the common stock during any of
these periods.
(3) Weighted-average number of shares outstanding in 1996 reflects the issuance
of 1,366,666 shares of common stock in connection with a public offering in
fiscal 1996.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS.
The following table sets forth selected statement of operations data
expressed as a percentage of net sales.
FISCAL
-----------------------
2000 1999 1998
----- ----- -----
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 69.8 64.8 64.2
----- ----- -----
Gross profit................................................ 30.2 35.2 35.8
----- ----- -----
Expenses:
Selling, general and administrative....................... 24.7 23.0 23.0
Research and development.................................. 5.3 5.8 3.9
----- ----- -----
Total operating expenses.................................... 30.0 28.8 26.9
----- ----- -----
Operating income............................................ 0.2 6.4 8.9
----- ----- -----
Other income (expense):
Interest expense.......................................... (3.9) (2.6) (1.2)
Other income.............................................. 1.1 0.7 0.4
----- ----- -----
(2.8) (1.9) (0.8)
----- ----- -----
Income (loss) before income taxes and extraordinary item.... (2.6) 4.5 8.1
Income tax (expense) benefit................................ 1.2 (1.2) (2.7)
----- ----- -----
Income (loss) before extraordinary item..................... (1.4) 3.3 5.4
Extraordinary loss, net of tax benefit...................... (0.2) -- --
----- ----- -----
Net income (loss)........................................... (1.6)% 3.3% 5.4%
===== ===== =====
COMPARISON OF FISCAL 2000, 1999 AND 1998.
Net Sales. Net sales decreased to $160.5 million in fiscal 2000, from
$176.8 million in fiscal 1999 and $171.5 million in fiscal 1998. The decrease in
net sales during fiscal 2000 was primarily attributable to the impact of dealer
inventory adjustments in the European market and the resulting changes in
seasonality of shipments to European retailers, coupled with the weakening of
the Euro compared to the U.S. dollar. Conversely, the increase in net sales in
fiscal 1999 compared to fiscal 1998 was primarily due to sales growth in the
European bicycle market as the awareness of the Cannondale brand continued to
strengthen globally. Overall, the Company's rate of sales growth during the past
three years has decreased primarily as a result of the reduction in inventory by
many of the Company's domestic and international dealers and the reduced growth
in the bicycle market. In light of this, the Company has made an effort to
partner itself with specialty bicycle retailers capable of achieving growth
objectives consistent with those of the Company.
Net sales reported by Cannondale U.S. were $83.5 million in fiscal 2000,
$81.4 million in fiscal 1999 and $83.3 million in fiscal 1998. Net sales
reported by Cannondale Europe decreased to $66.4 million in fiscal 2000, from
$85.6 million in fiscal 1999 and $78.0 million in fiscal 1998; the significant
decrease in Cannondale Europe's net sales during fiscal 2000 resulted from the
dealer inventory adjustments and the weakening of the Euro compared to the U.S.
dollar, as mentioned above. Net sales of Cannondale Japan increased to $7.4
million in fiscal 2000 from $7.1 million in fiscal 1999, which had decreased
from $8.0 million in fiscal 1998. Net sales of Cannondale Australia increased to
$3.2 million in fiscal 2000 compared to $2.6 million in fiscal 1999 and $2.2
million in fiscal 1998.
Gross Profit. Gross profit as a percentage of net sales decreased to 30.2%
in fiscal 2000, from 35.2% in fiscal 1999 and 35.8% in fiscal 1998. The
reduction in the gross profit rate in fiscal 2000 reflects a less favorable
sales mix between the domestic market and the international market, where the
Company typically achieves a
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15
higher gross profit rate. Additionally, the strengthening of the Japanese yen
during fiscal 2000 compared to the U.S. dollar and the Euro negatively affected
the cost of components from Japanese suppliers, thus reducing the gross profit
percentage. Furthermore, the production start-up costs of the MX400 contributed
to the lower gross profit rate in fiscal 2000 as such costs were not
proportionately offset by revenues. The decrease in the gross profit rate in
fiscal 1999 compared to fiscal 1998 primarily reflects price pressure on the
Company and other bicycle suppliers in conjunction with the maturation of the
bicycle market and reduction in its growth rate.
Operating Expenses. Selling, general and administrative expenses decreased
to $39.7 million in fiscal 2000, from $40.6 million in fiscal 1999 which had
increased from $39.4 million in fiscal 1998. The decrease in selling, general
and administrative expenses in fiscal 2000 compared to fiscal 1999 reflects the
reductions in expenses directly related to sales levels, such as freight,
advertising, and travel, coupled with the effect of the weakening of the Euro
compared to the U.S. dollar. Increased selling, general and administrative
expenses in fiscal 1999 compared to fiscal 1998 primarily reflects higher
warranty costs associated with increased sales in Europe and the impact of
higher depreciation expense associated with the $15.3 million and $16.8 million
of capital expenditures in fiscal 1999 and 1998, respectively. As a percentage
of net sales, selling, general and administrative expenses were 24.7% in fiscal
2000, and 23.0% in fiscal 1999 and 1998. The fiscal 2000 increase in the
percentage of selling, general and administrative expenses to net sales is a
result of the lower net sales levels.
Research and development expenses decreased to $8.5 million in fiscal 2000,
from $10.2 million in fiscal 1999 which had increased from $6.8 million in
fiscal 1998. The decrease in fiscal 2000 research and development expenses
reflects the completion of the development stage of the MX400 motorcycle, which
had commenced in fiscal 1998 and continued through fiscal 1999. The Company
invested approximately $4.7 million, $5.9 million and $2.0 million in research
and development for its motorsports products during fiscal 2000, 1999 and 1998,
respectively. In addition, the Company continued to invest in the improvement
and expansion of its existing bicycle and CODA product lines. The Company's
integration of its sponsored race teams, in particular the Volvo/Cannondale
mountain bike racing team and the Saeco/Valli&Valli road racing team, into its
research and development efforts continued to be a significant aspect of its
investment during fiscal 2000. The Company uses its race teams for regular
testing of both prototype and finished production models.
Interest Expense. Interest expense increased to $6.3 million in fiscal
2000, from $4.6 million in fiscal 1999 and $2.0 million in fiscal 1998. The
increase in interest expense during fiscal 2000 compared to fiscal 1999 reflects
higher interest rates and debt levels associated with the Company's continued
investment in the motorsports product development. The increase in interest
expense for fiscal 1999 compared to fiscal 1998 is a result of the debt incurred
associated with the Company's repurchase of $7.8 million and $12.4 million of
its common stock during fiscal 1999 and fiscal 1998, respectively, its
investment of $15.3 million and $16.8 million in capital expenditures during
fiscal 1999 and fiscal 1998, respectively, and the increase in working capital
requirements. Interest expense incurred by the Company in fiscal 2000, 1999 and
1998 as a result of the $12.0 million loan to Joseph Montgomery is offset by
interest charged to him and 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 $396,000, $529,000 and
$885,000 for fiscal 2000, 1999 and 1998, respectively; foreign currency gains
(losses) of $169,000, ($78,000) and ($232,000) for fiscal 2000, 1999 and 1998,
respectively; and interest income of $1,105,000 and $804,000 in fiscal 2000 and
1999, respectively, from the loan to Joseph Montgomery.
Income Tax (Expense) Benefit. An income tax benefit of $1.9 million was
recorded during fiscal 2000 as a result of the net loss incurred by the Company.
Income tax expense decreased to $2.1 million in fiscal 1999 from $4.6 million in
fiscal 1998, which primarily reflected the Company's reduction in profitability
in fiscal 1999. The Company has recorded the benefit of several tax
carryforwards which will expire at various times between fiscal 2003 and 2020.
For additional information, see Note 6 in the Notes to Consolidated Financial
Statements included in this report.
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Extraordinary Loss. In June 2000, the Company used the proceeds of new
financing arrangements to retire its existing credit facility. The Company
recorded an extraordinary loss, net of tax benefit, of $234,000 which was
comprised of the write-off of net deferred financing costs (approximately
$1,122,000) offset by realized gains on the settlement of foreign-denominated
debt (approximately $325,000) and interest rate swap agreements (approximately
$420,000).
SELECTED QUARTERLY FINANCIAL DATA; SEASONALITY.
The following table presents selected unaudited quarterly data for the two
most recent fiscal years. This information has been prepared by the Company on a
basis consistent with the Company's audited consolidated financial statements
and includes all adjustments (consisting of normal recurring accruals) that
management considers necessary for a fair presentation of the results of such
quarters. The operating results for any quarter are not necessarily indicative
of the results for any future period.
FOR THE QUARTER ENDED
-------------------------------------------------------------------------------------------------
JULY 1, APRIL 1, JANUARY 1, OCTOBER 2, JULY 3, MARCH 27, DECEMBER 26, SEPTEMBER 26,
2000 2000 2000 1999 1999 1999 1998 1998
------- -------- ---------- ---------- ------- --------- ------------ -------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales..................... $43,494 $39,866 $41,150 $36,009 $44,986 $41,714 $47,901 $42,218
Cost of sales................. 30,469 27,233 28,662 25,736 29,327 25,967 31,719 27,614
------- ------- ------- ------- ------- ------- ------- -------
Gross profit.................. 13,025 12,633 12,488 10,273 15,659 15,747 16,182 14,604
------- ------- ------- ------- ------- ------- ------- -------
Expenses:
Selling, general and
administrative............ 10,602 10,165 9,603 9,348 10,489 9,242 10,326 10,542
Research and development.... 1,849 2,432 1,765 2,424 2,709 2,540 2,820 2,153
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses...... 12,451 12,597 11,368 11,772 13,198 11,782 13,146 12,695
------- ------- ------- ------- ------- ------- ------- -------
Operating income.............. 574 36 1,120 (1,499) 2,461 3,965 3,036 1,909
Other expense................. (1,385) (1,370) (849) (821) (1,245) (598) (851) (703)
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes and extraordinary
item........................ (811) (1,334) 271 (2,320) 1,216 3,367 2,185 1,206
Income tax (expense)
benefit..................... 112 572 383 835 (307) (997) (336) (411)
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
extraordinary item.......... (699) (762) 654 (1,485) 909 2,370 1,849 795
Extraordinary loss, net of
tax benefit................. (234) -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)............. $ (933) $ (762) $ 654 $(1,485) $ 909 $ 2,370 $ 1,849 $ 795
======= ======= ======= ======= ======= ======= ======= =======
Basic earnings (loss) per
share before extraordinary
item........................ $ (0.09) $ (0.10) $ 0.09 $ (0.20) $ 0.12 $ 0.32 $ 0.25 $ 0.10
Basic earnings (loss) per
share....................... $ (0.12) $ (0.10) $ 0.09 $ (0.20) $ 0.12 $ 0.32 $ 0.25 $ 0.10
Diluted earnings (loss) per
share before extraordinary
item........................ $ (0.09) $ (0.10) $ 0.09 $ (0.20) $ 0.12 $ 0.31 $ 0.24 $ 0.10
Diluted earnings (loss) per
share....................... $ (0.12) $ (0.10) $ 0.09 $ (0.20) $ 0.12 $ 0.31 $ 0.24 $ 0.10
The Company's 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, the
Company's business is seasonal due to consumer spending patterns, which in turn
affect dealer delivery preferences, and historically has resulted in more
shipments and significantly stronger results in the third and fourth fiscal
quarters (January through June). For fiscal 2000, 1999 and 1998, the Company's
operating results have deviated from this historical pattern. Through its ARP
program, the Company attempts to reduce the seasonality of its shipments and to
smooth the production process by providing incentives for retailers to take
delivery of a higher percentage of their annual bicycle order in the first and
second fiscal quarters. During fiscal 2000, significant inventory reductions
among the Company's international dealers occurred, which mirrored the trend
that began in fiscal 1998 among the Company's domestic dealers. For both fiscal
2000 and 1999, the inventory reduction by the Company's dealers was a
significant cause of the variation in the
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17
historical pattern of stronger sales in the Company's third and fourth fiscal
quarters. The third and fourth fiscal quarters together accounted for 52% and
49% of the Company's total net sales in fiscal 2000 and 1999, respectively. As a
result of the change in dealer delivery preferences, the Company expanded its
ARP at the end of fiscal 1999. Under the expanded ARP, the Cannondale sales
force formulates a delivery plan with its retailers, typically based upon
historical 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 the Company's sales force.
The Company believes that the expanded ARP allows Cannondale to maximize the
competitive advantage of its flexible domestic manufacturing capabilities which
provides the Company with the ability to meet changes in market trends and
demand rapidly.
LIQUIDITY AND CAPITAL RESOURCES.
The Company's primary sources of working capital used over the past three
years have been borrowings under its revolving credit facilities.
On June 30, 2000, the Company entered into a five year secured credit
facility (the "secured facility") in the amount of $60.0 million with the CIT
Group/Business Credit Inc. ("CIT") as the administrative and collateral agent.
The secured facility consists of a revolving line of credit and a term loan. The
outstanding amount of the revolving line of credit is limited to the lesser of
$45.0 million or a percentage of eligible receivables and inventories. At July
1, 2000, approximately $11.9 million was available under the revolving line of
credit. The term loan is in the amount of $15.0 million, and amortizes in 19
consecutive quarterly principal payments of $662,250 each followed by a final
payment of the remaining unamortized principal at maturity. In addition to these
quarterly payments, the agreement also provides for mandatory prepayments from
excess cash flow and from the repayment of the note receivable from Joseph
Montgomery (see Note 15 in the Notes to Consolidated Financial Statements
included in this report). The interest rate on the revolving line of credit and
term loan was 10.5% and 11.0%, respectively, at July 1, 2000. Interest on the
revolving line of credit and term loan is payable monthly and is computed as the
Chase Bank Rate (prime rate) plus an applicable revolver or term loan prime rate
margin per annum, or LIBOR (London Interbank Offered rate) plus the applicable
revolver or term loan LIBOR margin per annum. The revolver and term loan margins
are based on certain fixed charge coverage ratios, as defined, and range from
0.25% to 1.50% on the prime rate, or 1.75% to 3.00% on the LIBOR. The secured
facility is collateralized by substantially all Cannondale U.S. assets and the
issued and outstanding stock of Cannondale's subsidiaries. The secured facility
requires minimum fixed charge coverage, net worth, senior leverage and EBITDA
levels, as defined, and restricts the payment of cash dividends.
In conjunction with the secured facility, the Company also entered into a
three year financing agreement with Ableco, which provides for a $15.0 million
term loan. Such loan amortizes 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. The interest rate on the
term loan at July 1, 2000 was 15.5%. Such interest, determined on a monthly
basis, consists of a Reference rate (prime rate), as defined, plus a 6.0%
margin; 3.0% of this margin is payable in cash and the remaining 3.0% is
capitalized as additional principal of the loan. In June 2000, the Company
issued warrants to purchase an aggregate of 393,916 shares of its common stock
at a purchase price of $0.01 per share to Ableco. Such warrants may be exercised
at any time after June 30, 2001, but prior to June 30, 2005, provided the
Company has not paid or prepaid at least $7.5 million of principal under the
term loan by June 30, 2001. Such warrants would be immediately detachable and
include antidilutive provisions. The term loan is collateralized by a second
security interest in substantially all Cannondale U.S. assets and certain real
property owned by Joseph Montgomery which secures his note receivable to the
Company. The Ableco agreement requires minimum fixed charge coverage, net worth,
senior leverage and EBITDA levels, as defined, and restricts the payment of cash
dividends.
In February 2000, Cannondale Europe entered into a financing agreement with
IFN Finance, B.V. ("IFN") covering receivables from European customers for a
period of three years. The available financing is 85% of pledged receivables,
subject to a maximum of NLG 40,000,000 (approximately $17.3 million at July 1,
2000). The financing may be in the form of either a current account overdraft or
short-term loans. The interest
16
18
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%; as of July 1, 2000, the
interest rate was 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 a
portion of its office building and land. The mortgage is in the amount of NLG
2,850,000 (approximately $1.2 million at July 1, 2000), with a five year fixed
interest rate of 6.70%, and a variable rate thereafter. Such mortgage was
combined with the previous ABN Financing mortgage (approximately $653,000 at
July 1, 2000 with an interest rate of 7.25%), and the combined mortgage will
expire on September 12, 2016.
The Company used the proceeds of the CIT, Ableco, and IFN financing
arrangements to retire its existing $75.0 million amended and restated
multi-currency credit facility. The Company recorded an extraordinary loss, net
of tax benefit, 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).
Cannondale Europe and Cannondale Japan each maintain a separate credit
facility for short-term borrowings. In January 2000, 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 NLG
12,500,000 (approximately $5.4 million at July 1, 2000) on a short-term basis.
This credit arrangement is comprised of an overdraft facility of up to NLG
10,000,000 (approximately $4.3 million at July 1, 2000) and a contingent
liability facility for up to NLG 2,500,000 (approximately $1.1 million at July
1, 2000). 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 Japan has an unsecured revolving credit facility
for up to JPY 155,000,000 (approximately $1.5 million at July 1, 2000) with an
interest rate of 2.875%. Approximately $1.8 million and $500,000 of principal
amount was outstanding under the Dutch and Japanese facilities, respectively, at
July 1, 2000. The credit arrangements contain no specific expiration dates, and
may be terminated by either Cannondale Europe, Cannondale Japan or the lenders
at any time. The Dutch and Japanese facilities are guaranteed by Cannondale U.S.
Net cash (used in) provided by operating activities was $(5.9) million,
$14.7 million and $7.2 million in fiscal 2000, 1999 and 1998, respectively. 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. The increase in cash provided by operating
activities in fiscal 1999 was primarily due to a reduction of inventories
compared to the end of fiscal 1998 which reflected the effort by the Company to
maintain inventory levels consistent with its sales levels. Cash provided by
operating activities in fiscal 1998 was primarily due to the Company's continued
profitability and its management of receivable growth, offset by an increase in
raw material inventory levels caused by the lower sales growth levels in the
last two quarters of the 1998 fiscal year.
Capital expenditures were $6.0 million, $15.3 million and $16.8 million in
fiscal 2000, 1999 and 1998, respectively. For fiscal 2000, the majority of the
expenditures related to motorcycle equipment and tooling ($3.5 million) and
computer equipment ($1.3 million). In fiscal 1999, a significant portion of the
expenditures related to the construction of the motorsports manufacturing
facility and equipment to manufacture the motorcycle ($6.3 million). In fiscal
1998, the majority of the expenditures related to the completion of
the corporate headquarters and research and development facility in Bethel,
Connecticut, and the expansion of the Company's bicycle production facility in
Bedford, Pennsylvania ($4.8 million), and the commitment entered into by the
Company to purchase a Cessna Citation jet ($2.8 million). For both fiscal 1999
and 1998, the balance of capital expenditures principally represented
investments in computer equipment and manufacturing equipment. In fiscal 2000,
the Company obtained $1.0 million of financing from the Pennsylvania Industrial
Development Authority ("PIDA") for the Company's motorsports production facility
in Bedford, Pennsylvania. The Company also received funding in fiscal 1999
($337,500) from the Department of
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Economic and Community Development for research and development equipment
acquired in conjunction with the new facilities. The Company obtained $2.0
million of financing from PIDA to fund approximately 40% of the cost for the
expansion of the Company's bicycle production facility in Bedford, Pennsylvania,
of which $1.6 million was received during fiscal 1998, and the balance was
received during the first quarter of fiscal 1999. Additionally, the cost of the
corporate headquarters and research and development facility was partially
funded with the proceeds from the sale of the Company's previous headquarters
facility, and from the Connecticut Development Authority financing of $1.6
million, which was received during fiscal 1998. In connection with the Company's
current secured facility with CIT, future annual capital expenditures by
Cannondale U.S. are limited to $6.0 million for fiscal 2001 and 2002, and $8.0
million thereafter.
During the first quarter of fiscal 2000, the Company entered into a
$960,000 sale-leaseback transaction for manufacturing and research and
development equipment from which the Company 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 the Company 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 will result in rent
expense of approximately $141,000 annually.
During the third quarter of fiscal 1999, the Company entered into a $2.9
million sale-leaseback transaction for its Cessna Citation Jet aircraft. The
sale resulted in a $131,000 gain which was deferred and is being amortized over
the five year term of the lease. The lease provides the Company with the option
to terminate the lease before the end of the lease term for predetermined
amounts without penalty. At the end of the lease term, the Company can purchase
the equipment for 90% of its original cost, renew the lease for the then fair
market value rental or sell the aircraft to a third party. If the proceeds from
the sale of the aircraft are less than 90% of the purchase price, the Company
shall make a final payment in the amount of the deficiency not to exceed 72% of
the original cost. The related lease is being accounted for as an operating
lease and has resulted in additional rent expense of approximately $273,000
annually.
During the first quarter of fiscal 1999, the Company completed the sale of
its Philipsburg facility to the Moshannon Valley Development Authority for
approximately $1.4 million, an amount which approximated the net book value of
the facility. The operations from the Philipsburg facility were moved to the
Bedford facility in June 1998.
In September 1997, the Company's Board of Directors authorized the
repurchase by the Company of up to 1,000,000 shares of its common stock at an
aggregate price not to exceed $20.0 million. In July 1998, the Company's Board
of Directors authorized a second stock repurchase program by the Company to
repurchase up to 1,000,000 shares of its common stock. Under both plans,
purchases by the Company can be made from time to time in the open market or in
private transactions. The repurchase programs can be suspended or discontinued
at any time. Shares repurchased by the Company will be available for general
corporate purposes, including the issuance upon exercise of stock options. As of
July 3, 1999, the Company had repurchased an aggregate of 1,292,900 shares of
its common stock under the programs at a cost of $20.2 million. The Company has
not repurchased any shares of its common stock since such date.
During the first quarter of fiscal 1999, the Company provided Joseph
Montgomery, the President and Chief Executive Officer of the Company, 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 combined loan matures on August 1, 2003, at which time the entire principal
balance is due. The interest rate on the loan is set at the prime rate as
published in the Wall Street Journal from time to time, and the loan is secured
by a pledge to the Company of all of the shares of the Company's common stock
held by Mr. Montgomery and by a third mortgage on certain real property. The
Company deferred the first interest payment of approximately $900,000 payable by
Mr. Montgomery to the Company 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 stock in the Company per quarter beginning in the third
quarter of fiscal 2000, and the net proceeds of such sales were to be remitted
to the Company 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
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quarter. During the third and fourth quarters of fiscal 2000, Mr. Montgomery
sold 98,100 shares of his stock in the Company pursuant to the terms of the
agreement, thus reducing his deferred interest balance by approximately
$614,000. The Company 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 the Company as full payment of all deferred interest and
accrued interest thereon.
In June 2000, Cannondale Europe remitted a dividend of approximately $11.5
million to Cannondale U.S. Such dividend was used to retire the Company's
existing credit facility. It is the Company's intention to transfer excess cash
as a dividend from time to time in the future from Cannondale Europe to
Cannondale U.S.
Inflation is not a material factor affecting the Company's results of
operations and financial condition. General operating expenses such as salaries,
employee benefits and occupancy costs are, however, subject to normal
inflationary pressures.
The Company expects that cash flows generated by its operations and
borrowings under the revolving credit facilities will be sufficient to meet its
planned operating and capital requirements for the foreseeable future.
ACCOUNTING DEVELOPMENTS.
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("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 the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives are either offset against the changes
in the 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. The Company adopted SFAS No. 133, as
amended, effective July 2, 2000; the effect of such adoption is not expected to
be material to both operating results and financial position for the quarter
ending September 30, 2000.
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. It
specifically addresses revenue recognition requirements for certain
transactions, such as bill-and-hold transactions, up-front fees when the seller
has continuing involvement, long-term service transactions, and layaway sales.
SAB 101 also provides guidance on the required disclosures for revenue
recognition policies and the impact of events and trends on revenue. SAB 101
will be effective for the Company's fourth quarter of fiscal 2001; the effect of
adopting this standard cannot be estimated at this time.
In July 2000, the Emerging Issues Task Force ("EITF") reached a consensus
on Issue 00-10, "Accounting for Shipping and Handling Fees and Costs." The EITF
concluded that all shipping and handling billings to a customer in a sales
transaction represent the revenue earned for the goods provided and,
accordingly, should be classified as revenue. Currently, the Company offsets
shipping and handling charges billed to customers with the freight costs paid to
carriers within selling, general and administrative expenses. EITF Issue 00-10
will be effective for the Company's fourth quarter of fiscal 2001; adoption of
this standard will have no impact on the net income or financial position of the
Company.
THE EURO.
On January 1, 1999, certain member countries of the European Union adopted
the Euro as their common legal currency. Between January 1, 1999 and January 1,
2002, transactions may be conducted in either the Euro or the participating
countries' national currency. However, by July 1, 2002, the participating
countries will withdraw their national currency as legal tender and complete the
conversion to the Euro. The Company
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conducts business in Europe and does not expect the conversion to the Euro to
have a material adverse effect on its competitive position or consolidated
financial position. The Company has completed the necessary system modifications
that allow the Company to conduct business in both the Euro as well as the
participating countries' national currency.
CERTAIN FACTORS WHICH MAY AFFECT THE COMPANY'S 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, which represent
the Company's expectations or beliefs concerning future events, including, but
not limited to, the following: statements regarding the state of the bicycle
industry and the growth opportunity pursued by the Company with its motorsports
products; statements regarding the sufficiency of the Company's capital and
current operational investments to finance its future growth; statements
regarding the Company's expected cash needs and sources of cash to fund its
planned operating and capital requirements; statements regarding the impact of
the Company's brand image, distribution, reputation and innovative products on
the successful introduction of new products; statements regarding expected
remediation and other costs relating to an environmental condition; statements
regarding the effect of pending lawsuits on the Company; statements regarding
the impact of the Euro conversion on computerized information systems; and
statements regarding the condition of the Company's present facilities and the
ability of its present facilities to support its current and future production
capacity. Such statements are based upon the facts presently known to the
Company and assumptions as to important future events, many of which are beyond
the control of the Company. Among the more important factors which could
adversely affect actual results of operations are the following:
Seasonality. The Company's results fluctuate from quarter to quarter 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,
the Company's business is seasonal due to consumer spending patterns, which in
turn affect dealer delivery preferences, and historically has resulted in more
shipments and significantly stronger results in the third and fourth fiscal
quarters (January through June). For fiscal 2000, 1999 and 1998, the Company's
operating results have deviated from this historical pattern. The Company's
gross margins fluctuate primarily according to product mix, the cost of
materials, fluctuations in foreign exchange rates and the timing of product
price adjustments and markdowns. Although some operating expenses are variable
with sales, most expenses are incurred evenly throughout the year. The Company
in the past has incurred, and may in the future incur, operating losses in a
fiscal quarter, as a result of the factors noted above.
Introduction and Market Acceptance of New Products. The Company's ability
to return to the growth pattern that characterized its operations in recent
years is dependent, to a significant degree, on its 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 currently a substantial part of the Company's
sales are attributable to mountain and road bikes, the introduction of new
product lines, particularly its motorsports products, will provide
diversification of the Company's products. The Company's ability to recover its
investment and achieve profitability in its motorsports product lines will
depend on its ability to generate market acceptance for these products. In order
to generate sufficient market acceptance, the Company must increase consumer
awareness of these products, establish a reputation for high quality and
continue to develop a network of independent motorsports dealers to sell these
products. The Company may incur significant costs in establishing such market
acceptance.
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 fluctuations in exchange rates. The
worldwide market for bicycles and accessories is extremely competitive, and the
Company faces competition from a number of manufacturers in each of its product
lines. A number of the Company's competitors are larger and have greater
resources than the Company. The
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Company competes on the basis of the breadth and quality of its product line,
the development of an effective specialty retailer network and its brand
recognition.
The motorsports market is also highly competitive. The Company's principal
competitors are foreign manufacturers that have financial resources
substantially greater than those of the Company, that have established
manufacturing capabilities, market and sell a product with strong brand
recognition in the market and are more diversified than the Company. As a result
of the foregoing, there can be no assurance that the Company will successfully
penetrate the motorsports market.
Foreign Exchange Rates. A substantial portion of the Company's sales is
generated by the Company's foreign subsidiaries. Results of operations by these
subsidiaries may be adversely affected by changes in the exchange ratio between
the local currencies and the U.S. dollar. A substantial portion of the Company's
raw materials is purchased from overseas suppliers; accordingly, the gross
margin of the Company may be adversely affected by changes in the exchange ratio
between the U.S. dollar and the local currency of the supplier.
Customer Base. Sales of the Company's products are made to specialty
bicycle retailers, many of which are small businesses with limited capital. The
Company's credit policies are designed to minimize the risks associated with
business failures among such customers. Nevertheless, unpredictable matters such
as poor weather could have a serious impact on important segments of the
Company's customer base.
For motorcycles, the Company utilizes a third-party financial services
organization to finance dealer inventory purchases whereby the Company receives
payment from such organization for all motorcycle shipments within 30 days, less
an interest factor. Nonperformance by the financial services organization could
result in a delay in the receipt of payments.
Adverse Weather. The Company's products are primarily used outdoors and
therefore adverse weather conditions can have a negative impact on consumer
demand.
Reliance on Key Vendor and Supplier Relationships. The Company's ability
to distribute its products on schedule is highly dependent on timely receipt of
an adequate supply of components and materials. The bicycles incorporate
numerous components manufactured by other companies. Aluminum tubing, the
primary material employed in the Company's manufacturing operations, is
available from a number of domestic suppliers. The Company has few long-term
agreements with its component manufacturers, and has no long-term agreement with
Shimano, its largest single supplier, or with suppliers of many of the materials
used in the manufacture of its products. Thus, the Company's supply of materials
and components from most of its current suppliers is not assured. Although the
Company believes it has established close relationships with the principal
suppliers of these components, the Company's future success will depend upon its
ability to maintain flexible relationships, which may be terminated by such
suppliers on short notice, 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 adversely affect
the Company's operations.
The Company has selected the suppliers that it will use to purchase the raw
material parts and components for the manufacturing operations of its
motorsports products. During the process of identifying these vendors, the
Company has established strong relationships with key third-party suppliers,
however the Company has not yet entered into any long-term supply contracts.
Generally, the raw material parts and components needed to manufacture its
motorsports products are available from a variety of sources, however,
manufacturing operations may be interrupted or otherwise adversely affected by
delays in the supply of parts or components from third-party suppliers. Even if
parts and components are available from alternative sources, the Company may be
subject to increased costs and production delays in connection with the
replacement of an existing third-party supplier with one or more alternative
suppliers.
Limited Motorsports Product Experience. While the Company believes that it
can capitalize on many of its core competencies in producing its motorsports
products, the Company has limited experience in designing and manufacturing
motorsports products. This may lead to unforeseen expenses and delays in
manufacturing and selling its motorsports products. For example, although the
Company conducts significant testing of its motorsports products, these products
could contain unforeseen defects. These defects could result in costly
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product recalls, product liability claims and damage to the Company's brand
name. In addition, the Company may encounter significant difficulties and incur
unforeseen expenses in manufacturing its motorsports products in commercial
quantities and on a timely basis.
Discretionary Consumer Spending. Purchases of bicycles and motorsports
products, particularly the high-performance models manufactured by the Company,
and the Company's other products are discretionary for consumers. The success of
the Company is influenced by a number of economic factors affecting disposable
consumer income, such as employment levels, business conditions, interest rates
and taxation rates. Adverse changes in these economic factors may restrict
consumer spending, thereby negatively affecting the Company's growth and
profitability.
Dependence on Key Personnel. The Company depends substantially on 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, the Company's
Chairman, President and Chief Executive Officer, could have a material adverse
effect on the Company's operations. Executive officers of the Company and other
management personnel frequently travel between the Company's executive offices
and its manufacturing facilities on an aircraft leased by the Company. An
accident involving the corporate aircraft and any resulting injury or loss of
life could have a material adverse effect on the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risks relating to the Company's operations result primarily from
changes in interest rates and foreign exchange rates, as well as credit risk
concentrations. To address these risks, the Company enters into various hedging
transactions as described below. The Company does not use financial instruments
for trading purposes.
CREDIT RISKS.
The Company's customer base is composed of specialty bicycle retailers
which are located principally throughout the United States and Europe. The
Company's net sales are concentrated in the United States and Germany. No other
single country accounted for more than 10% of the Company's net sales during
fiscal 2000, 1999 or 1998. No single customer accounted for more than 5% of the
Company's sales during fiscal 2000, 1999 or 1998. As a result of the seasonality
of the Company's business, the payment terms offered to its bicycle dealers
generally range from 30 to 210 days depending on the time of year and other
factors.
FOREIGN CURRENCY AND INTEREST RATE RISKS.
The Company enters into forward contracts to purchase and sell U.S.,
European, Australian, Canadian and Japanese currencies to reduce exposures to
foreign currency risk. The Company enters into forward foreign currency
contracts for a significant portion of its current and net balance sheet
exposures, principally relating to trade receivables and payables denominated in
foreign currencies, and firm sale and purchase commitments. The forward exchange
contracts generally have maturities that do not exceed 12 months and require the
Company to exchange, at maturity, various currencies for U.S. dollars and Euros
at rates agreed to at the inception of the contracts. Deferred gains and losses
resulting from effective hedges of firm commitments are included in prepaid
expenses and other current assets and are recognized in earnings when the
offsetting gains and losses are recognized on the related transaction. The net
gains or losses explicitly deferred at July 1, 2000, July 3, 1999 and June 27,
1998 were not significant. Realized and unrealized gains and losses on foreign
currency forward contracts that are designated and effective as hedges of
receivables and payables denominated in foreign currencies are recognized in
earnings and offset the impact of valuing such receivables and payables.
Discounts or premiums on such forward contracts are amortized over the
respective contract lives. Gains and losses on foreign currency transactions
that do not satisfy the accounting requirements of an effective hedge are
reported currently as other income or expense in the Consolidated Statement of
Operations.
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The following table provides information about the Company's 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 the Company's debt obligations at July 1, 2000.
INTEREST RATE SENSITIVITY
PRINCIPAL (NOTIONAL) AMOUNT BY EXPECTED MATURITY
(IN THOUSANDS)
FAIR VALUE
AT JULY 1,
2001 2002 2003 2004 2005 THEREAFTER TOTAL 2000
------ ------ ------- ------ ------- ---------- ------- ----------
LIABILITIES:
Long-term debt, including current portion
Fixed rate................................ $ 403 $ 355 $ 332 $ 334 $ 351 $2,366 $ 4,141 $ 4,084
Average interest rate..................... 4.45% 4.04% 3.98% 4.00% 4.16% 3.76% 3.92%
Variable rate............................. $4,174 $4,832 $25,948 $3,316 $23,456 $2,073 $63,799 $63,112
Average interest rate..................... 12.28% 12.70% 11.11% 10.16% 10.57% 6.66% 10.91%
The following table summarizes information on foreign currency forward
exchange agreements which are denominated in currencies other than the
functional currency and are sensitive to foreign currency exchange rate changes.
For these foreign currency forward exchange agreements, the table presents the
notional amounts and weighted-average exchange rates by expected (contractual)
maturity dates. These notional amounts are 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 JULY 1,
2001 2002 2003 2004 2005 THEREAFTER TOTAL 2000
------- ---- ---- ---- ---- ---------- ------- ----------
FORWARD CONTRACTS TO SELL FOREIGN CURRENCY
FOR EUROS:
Norwegian Krona
Notional amount........................... $ 832 -- -- -- -- -- $ 832 $ (3)
Contract rate........................... 0.1217 0.1217
British Sterling
Notional amount........................... $ 2,086 -- -- -- -- -- $ 2,086 $ 53
Contract rate........................... 1.6298 1.6298
FORWARD CONTRACTS TO BUY FOREIGN CURRENCY
FOR EUROS:
Japanese Yen
Notional amount........................... $ 990 -- -- -- -- -- $ 990 $(41)
Contract rate........................... 0.0103 0.0103
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by this Item are
included herein on pages F-1 through F-27.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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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 the Company's
definitive Proxy Statement relating to its 2000 Annual Meeting of Stockholders
to be filed with the Securities and Exchange Commission within 120 days after
the close of its 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 the
Company's definitive Proxy Statement relating to its 2000 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within 120
days after the close of its 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 caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive Proxy Statement
relating to its 2000 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission within 120 days after the close of its 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 the Company's definitive Proxy Statement relating to its 2000
Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission within 120 days after the close of its fiscal year.
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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 July 1, 2000 and July 3, 1999.
Consolidated Statements of Operations for the years ended July 1, 2000,
July 3, 1999 and June 27, 1998.
Consolidated Statements of Stockholders' Equity for the years ended July 1,
2000, July 3, 1999 and June 27, 1998.
Consolidated Statements of Cash Flows for the years ended July 1, 2000,
July 3, 1999 and June 27, 1998.
Notes to Consolidated Financial Statements.
(a)(2) FINANCIAL STATEMENT SCHEDULE.
Report of Independent Auditors on 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) Form of Amended and Restated Certificate of Incorporation of
the Company. (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 Company. (Filed as
Exhibit 3.1 (ii) to the Registrant's Form 10-Q for the
quarterly period ended March 27, 1999).+
4.1 Rights Agreement, dated December 22, 1997, between the
Company and BankBoston, N.A., as Rights Agent. (Filed as
Exhibit 4.1 to the Registrant's Form 8-K filed on December
23, 1997).+
4.2 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).+
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EXHIBIT NO. DESCRIPTION
- ----------- -----------
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).+
10.1 Severance Agreement, dated as of February 16, 2000, by and
between the Company and William A. Luca.*
10.2 Financing Agreement, dated as of June 27, 2000, among the
Company and The CIT Group/ Business Credit Inc., as Agent.*
10.3 Employee Patent and Confidential Information Agreement,
dated August 20, 1982, between the Company and Daniel C.
Alloway. (Filed as Exhibit 10.49 to the Registrant's
Registration Statement on Form S-1, Registration No.
33-84566).+
10.4 Employment Agreement, dated June 6, 1994, between the
Company and Leonard Konecny. (Filed as Exhibit 10.53 to the
Registrant's Registration Statement on Form S-1,
Registration No. 33-84566).+
10.5 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).+
10.6 Cannondale Corporation Employee Stock Purchase Plan. (Filed
as Exhibit 10.57 to the Registrant's Registration Statement
on Form S-1, Registration No. 33-84566).+
10.7 Form of Indemnification Agreement between the Company 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).+
10.8 Change of Control Employment Agreement, dated February 5,
1998, between Cannondale Corporation and William A. Luca.
(Filed as Exhibit 10.68 to the Registrant's Form 10-Q for
the quarterly period ended March 28, 1998).+
10.9 Change of Control Employment Agreement, dated February 5,
1998, between Cannondale Corporation 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).+
10.10 Change of Control Employment Agreement, dated February 5,
1998, between Cannondale Corporation and John Moriarty.
(Filed as Exhibit 10.68.2 to the Registrant's Form 10-Q for
the quarterly period ended March 28, 1998).+
10.11 Change of Control Employment Agreement, dated February 5,
1998, between Cannondale Corporation 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).+
10.12 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).+
10.13 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).+
10.14 Form of Non-Competition Agreement, dated as of February 5,
1998, between the Company and each of Joseph S. Montgomery,
William A. Luca and Daniel C. Alloway.*
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).*
27.1 Financial Data Schedule for Fiscal Year Ended July 1, 2000.*
- ---------------
+ Incorporated by reference.
* Filed herewith.
(b) REPORTS ON FORM 8-K.
None.
26
28
CANNONDALE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of July 1, 2000 and July 3,
1999...................................................... F-3
Consolidated Statements of Operations for the years ended
July 1, 2000, July 3, 1999 and June 27, 1998.............. F-4
Consolidated Statements of Stockholders' Equity for the
years ended July 1, 2000, July 3, 1999 and June 27,
1998...................................................... F-5
Consolidated Statements of Cash Flows for the years ended
July 1, 2000, July 3, 1999 and June 27, 1998.............. F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
29
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 July 1, 2000 and July 3, 1999, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years ended July 1, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements 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 July 1, 2000 and July 3, 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended July 1, 2000, in conformity with accounting
principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
August 11, 2000,
except for the second paragraph
of Note 15, as to
which the date is
August 28, 2000
F-2
30
CANNONDALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JULY 1, 2000 JULY 3, 1999
------------ ------------
ASSETS
Current assets:
Cash...................................................... $ 5,064 $ 3,300
Trade accounts receivable, less allowances of $10,076 and
$10,074................................................ 50,224 59,379
Inventories............................................... 40,413 33,165
Prepaid expenses and other current assets................. 3,300 4,827
Interest receivable from a related party.................. 1,318 827
Deferred income taxes..................................... 5,571 2,749
-------- --------
Total current assets........................................ 105,890 104,247
Property, plant and equipment, net.......................... 40,114 41,377
Notes receivable and advances to related parties............ 13,197 12,954
Other assets................................................ 5,706 3,801
-------- --------
Total assets................................................ $164,907 $162,379
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 15,912 $ 17,329
Revolving line of credit.................................. 2,235 882
Income taxes payable...................................... 307 2,252
Other accrued expenses.................................... 3,639 4,476
Accrued warranty expense.................................. 2,524 2,808
Payroll and other employee-related benefits............... 1,240 1,150
Current installments of long-term debt.................... 4,577 456
-------- --------
Total current liabilities................................... 30,434 29,353
Long-term debt, less current installments................... 63,363 55,997
Deferred income taxes....................................... -- 1,619
Other noncurrent liabilities................................ 424 400
-------- --------
Total liabilities........................................... 94,221 87,369
-------- --------
Commitments and contingencies............................... -- --
Stockholders' equity:
Common Stock, $.01 par value:
Authorized shares -- 40,000,000
Issued 8,808,125 and 8,784,308 shares.................. 88 88
Additional paid-in capital................................ 57,935 57,815
Retained earnings......................................... 38,802 41,328
Less 1,292,900 shares in treasury at cost................. (20,162) (20,162)
Accumulated other comprehensive loss...................... (5,977) (4,059)
-------- --------
Total stockholders' equity.................................. 70,686 75,010
-------- --------
Total liabilities and stockholders' equity.................. $164,907 $162,379
======== ========
See accompanying notes
F-3
31
CANNONDALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 1, 2000 JULY 3, 1999 JUNE 27, 1998
------------ ------------ -------------
Net sales.............................................. $160,519 $176,819 $171,496
Cost of sales.......................................... 112,100 114,627 110,113
-------- -------- --------
Gross profit........................................... 48,419 62,192 61,383
-------- -------- --------
Expenses:
Selling, general and administrative.................. 39,718 40,599 39,361
Research and development............................. 8,470 10,222 6,750
-------- -------- --------
48,188 50,821 46,111
-------- -------- --------
Operating income....................................... 231 11,371 15,272
-------- -------- --------
Other income (expense):
Interest expense..................................... (6,308) (4,557) (1,995)
Other income......................................... 1,883 1,160 653
-------- -------- --------
(4,425) (3,397) (1,342)
-------- -------- --------
Income (loss) before income taxes and extraordinary
item................................................. (4,194) 7,974 13,930
Income tax (expense) benefit........................... 1,902 (2,051) (4,578)
-------- -------- --------
Income (loss) before extraordinary item................ (2,292) 5,923 9,352
Extraordinary loss on early extinguishment of debt, net
of $143 tax benefit.................................. (234) -- --
-------- -------- --------
Net income (loss)...................................... $ (2,526) $ 5,923 $ 9,352
======== ======== ========
Basic earnings (loss) per share before extraordinary
item................................................. $ (0.31) $ 0.79 $ 1.11
Extraordinary loss per share........................... (0.03) -- --
-------- -------- --------
Basic earnings (loss) per share........................ $ (0.34) $ 0.79 $ 1.11
======== ======== ========
Diluted earnings (loss) per share before extraordinary
item................................................. $ (0.31) $ 0.77 $ 1.08
Extraordinary loss per share........................... (0.03) -- --
-------- -------- --------
Diluted earnings (loss) per share...................... $ (0.34) $ 0.77 $ 1.08
======== ======== ========
See accompanying notes
F-4
32
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 JUNE 28, 1997.... 8,687,615 $87 $56,860 $26,053 -- $ -- $(1,379) $81,621
-------
Net income.................. -- -- -- 9,352 -- -- -- 9,352
Foreign currency
translation, (net of tax
of $(247))................ -- -- -- -- -- -- (761) (761)
-------
Comprehensive income........ 8,591
Exercise of options......... 49,473 -- 443 -- -- -- -- 443
Purchase of treasury
stock..................... -- -- -- -- (656,400) (12,417) -- (12,417)
--------- --- ------- ------- ---------- -------- ------- -------
BALANCE AT JUNE 27, 1998.... 8,737,088 87 57,303 35,405 (656,400) (12,417) (2,140) 78,238
-------
Net income.................. -- -- -- 5,923 -- -- -- 5,923
Foreign currency
translation, (net of tax
benefit of $25)........... -- -- -- -- -- -- (1,919) (1,919)
-------
Comprehensive income........ 4,004
Exercise of options......... 17,875 -- 169 -- -- -- -- 169
Shares issued under employee
stock purchase plan....... 29,345 1 238 -- -- -- -- 239
Stock option compensation... -- -- 105 -- -- -- -- 105
Purchase of treasury
stock..................... -- -- -- -- (636,500) (7,745) -- (7,745)
--------- --- ------- ------- ---------- -------- ------- -------
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, (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
========= === ======= ======= ========== ======== ======= =======
See accompanying notes
F-5
33
CANNONDALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 1, 2000 JULY 3, 1999 JUNE 27, 1998
------------ ------------ -------------
OPERATING ACTIVITIES
Net income (loss)...................................... $ (2,526) $ 5,923 $ 9,352
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Extraordinary loss, net of tax benefit............ 494 -- --
Depreciation and amortization..................... 6,901 5,782 4,054
Provisions for bad debts, discounts, credits and
returns and late charges........................ 11,027 9,498 7,141
Provision for obsolete inventories................ 2,157 2,309 1,425
Unrealized (gain) loss on foreign currency
transactions.................................... (554) (865) 642
Deferred income taxes............................. (248) (129) 425
Stock option compensation......................... -- 105 --
Other............................................. 129 122 16
Changes in assets and liabilities:
Trade accounts receivable....................... (3,064) (8,151) (8,894)
Inventories..................................... (9,893) 4,040 (11,589)
Prepaid expenses and other assets............... (5,144) (2,723) (3,319)
Accounts payable................................ (1,026) 505 4,711
Warranty and other accrued expenses............. (1,274) (2,480) 3,174
Income taxes payable and other liabilities...... (2,908) 743 36
-------- -------- --------
Net cash provided by (used in) operating activities.... (5,929) 14,679 7,174
-------- -------- --------
INVESTING ACTIVITIES
Capital expenditures................................... (5,982) (15,257) (16,762)
Proceeds from sale of plant and equipment.............. 633 4,264 --
Loans provided to related parties, net of repayments... (243) (10,231) (2,461)
-------- -------- --------
Net cash used in investing activities.................. (5,592) (21,224) (19,223)
-------- -------- --------
FINANCING ACTIVITIES
Net proceeds from the issuance of common stock......... 120 408 443
Payments for the purchase of treasury stock............ -- (7,745) (12,417)
Proceeds from issuance of long-term debt............... 43,632 20,738 3,203
Payments for early extinguishment of debt.............. (64,596) -- --
Net proceeds from (repayments of) borrowings under
short-term revolving credit agreements............... 1,352 (1,383) 1,291
Net proceeds from (repayments of) borrowings under
long-term debt and capital lease agreements.......... 32,673 (5,267) 16,833
-------- -------- --------
Net cash provided by financing activities.............. 13,181 6,751 9,353
-------- -------- --------
Effect of exchange rate changes on cash................ 104 63 206
-------- -------- --------
Net increase (decrease) in cash........................ 1,764 269 (2,490)
Cash at beginning of period............................ 3,300 3,031 5,521
-------- -------- --------
Cash at end of period.................................. $ 5,064 $ 3,300 $ 3,031
======== ======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest............................................. $ 5,490 $ 3,889 $ 2,071
======== ======== ========
Income taxes, net of refunds......................... $ 2,906 $ 2,385 $ 7,341
======== ======== ========
See accompanying notes
F-6
34
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
Description of Business
Cannondale Corporation (the "Company") manufactures and distributes
bicycles, motorcycles, and bicycling and motorcycling accessories and equipment.
International operations are conducted through the Company's wholly-owned
subsidiaries: Cannondale Europe B.V. ("Cannondale Europe"), Cannondale Japan KK
("Cannondale Japan"), Cannondale FSC, and Cannondale Australia Pty Limited
("Cannondale Australia").
During fiscal 2000, the Company entered the motorsports industry with the
production and shipment of its first MX400 motocross motorcycle. The Company is
also in the process of developing two additional motorcycle models and an
All-Terrain Vehicle ("ATV").
Business and Credit Concentrations
The Company's bicycle customer base is composed of specialty bicycle
retailers who are located principally throughout the United States and Europe.
The Company's net sales are concentrated in the United States and Germany. No
other single country accounted for more than 10% of the Company's net sales
during fiscal 2000, 1999 or 1998. No single customer accounted for more than 5%
of the Company's net sales during the years ended July 1, 2000, July 3, 1999 or
June 27, 1998. As a result of the seasonality of the Company's business, the
payment terms offered to its bicycle dealers generally range from 30 to 210 days
depending on the time of year and other factors.
The Company's motorsports customer base is composed of specialty motorcycle
retailers who are located within the United States. For motorcycles, the Company
utilizes a third-party financial services organization to finance dealer
inventory purchases whereby the Company receives payment from such organization
for all motorcycle shipments within 30 days, less an interest factor. All other
product is sold with payment terms from 30 to 60 days.
The Company's raw materials are readily available and the Company is not
completely dependent upon a single supplier. The Company has, however,
preferences with respect to continuing its relationships with certain selected
vendors, and a material portion of the Company's bicycle inventory purchases is
from a single supplier. That single supplier was the source of approximately 22%
of the Company's total raw material inventory purchases in fiscal 2000.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Revenue Recognition
Sales, net of estimated returns and allowances, are recognized when
products are shipped. Provisions for returns and allowances are determined
principally on the basis of past experience.
Product Warranties
The Company provides original owners of its bicycles with a lifetime
warranty for the bicycle frame and a one year warranty for suspensions and
components. During the warranty period, the Company will repair or replace a
defective part or assembly at no cost to the owner. Provisions for estimated
warranty expense are recognized at the time of sale, determined principally on
the basis of past experience.
F-7
35
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
There is no warranty offered on the motocross motorcycle (motorsports)
products, which is customary in the industry.
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.
Depreciation of plant and equipment is calculated on the straight-line
method over 20 to 40 years for buildings and improvements and 3 to 10 years for
equipment. Depreciation of assets recorded under capitalized lease obligations
is recognized over the lesser of the useful lives or lease terms and such amount
is included in depreciation and amortization expense.
Interest costs for the construction of certain long-lived assets are
capitalized and amortized over the related asset's useful life. The Company
capitalized interest costs of $101,000 and $88,000 for the years ended July 3,
1999 and June 27, 1998, respectively, related to the construction of the
Company's new motorsports facility, headquarters facility and the expansion of
its bicycle manufacturing facility. Total interest incurred before the
recognition of the capitalized amount was $4,658,000 and $2,083,000 for fiscal
1999 and 1998, respectively. The Company did not capitalize any interest costs
during fiscal 2000.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
It requires an asset and liability approach for financial accounting and
reporting for deferred income taxes. Taxes are recognized for all temporary
differences between the tax and financial reporting bases of the Company's
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.
Foreign Currency Translation
The assets and liabilities of the Company's foreign subsidiaries are
translated into U.S. dollars at current exchange rates. Revenues, costs and
expenses are translated at the average exchange rates applicable for the period.
Translation adjustments resulting from changes in exchange rates are reported as
a component of accumulated other comprehensive income pursuant to SFAS No. 130,
"Reporting Comprehensive Income."
Financial Instruments
The Company enters into forward contracts to purchase and sell U.S.,
European, Australian, Canadian and Japanese currencies to reduce exposures to
foreign currency risk. The Company enters into forward foreign currency
contracts for a significant portion of its current and net balance sheet
exposures, principally relating to trade receivables and payables denominated in
foreign currencies, and firm sale and purchase commitments. The forward exchange
contracts generally have maturities that do not exceed 12 months and require the
Company to exchange, at maturity, various currencies for U.S. dollars and Euros
at rates agreed to at the inception of the contracts. The Company does not hold
foreign currency forward contracts for trading purposes. Deferred gains and
losses resulting from effective hedges of firm commitments are included in
prepaid expenses and other current assets on the Company's Consolidated Balance
Sheet and are recognized in earnings when the offsetting gains and losses are
recognized on the related transaction. The net gains or losses explicitly
deferred at July 1, 2000, July 3, 1999 and June 27, 1998 were not significant.
Realized and
F-8
36
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
unrealized gains and losses on foreign currency forward contracts that are
designated and effective as hedges of receivables and payables denominated in
foreign currencies are recognized in earnings and offset the impact of valuing
such receivables and payables. Discounts or premiums on such forward contracts
are amortized over the respective contract lives. Gains and losses on foreign
currency transactions that do not satisfy the accounting requirements of an
effective hedge are reported currently as other income or expense in the
Consolidated Statement of Operations.
During fiscal 1998, the Company entered into interest rate swap agreements
to manage exposure to fluctuations in interest rates. The differential between
the interest paid or received on a specified notional amount was recognized as
an adjustment to interest expense. The fair value of the swap agreements and
changes in the fair value as a result of changes in market interest rates were
not recognized in the financial statements as required by accounting principles
generally accepted in the United States. In June 2000, the interest rate swap
agreements were terminated in conjunction with the early extinguishment of
long-term debt (see Note 5). The gain of $420,000 recognized upon such
termination is included as a component of the net extraordinary loss in the
Company's Consolidated Statement of Operations for fiscal 2000.
Stock-Based Compensation
The Company grants stock options to officers, directors, employees,
consultants and advisors with an exercise price determined by the Board of
Directors at the time of grant. The Company accounts for stock option grants,
except for those granted to consultants and advisors of the Company, in
accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," which requires that compensation expense be
recognized 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. The Company
accounts for stock option grants to consultants and advisors in accordance with
SFAS No. 123, "Accounting for Stock-Based Compensation." During fiscal 1999, the
Company incurred $105,000 of stock option compensation related to options
granted to consultants of the Company. As prescribed under SFAS No. 123, the
Company has disclosed in Note 7 the pro-forma effects on net income (loss) and
earnings (loss) per share of recording compensation expense for the fair value
of all stock options granted subsequent to July 1, 1995. It is the opinion of
management that the existing model to estimate the fair value of employee
options according to SFAS No. 123, and the assumptions used to calculate the
impact, may not be representative of the effects on future years and does not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Reclassifications
Certain 1999 and 1998 amounts have been reclassified to conform to the
current year's presentation.
Computer Software Developed for Internal Use
During the fourth fiscal quarter of 1999, the Company adopted Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." In accordance with SOP 98-1, the Company
capitalizes certain costs incurred in connection with developing or obtaining
internal use software. The Company capitalized approximately $141,000 and
$549,000 related to internally developed software costs during fiscal 2000 and
1999, respectively.
F-9
37
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Intangible Assets
Included in other assets are intangible assets, which represent the cost of
patents, goodwill and deferred financing charges. Intangible assets were
$3,644,000 and $2,378,000 at July 1, 2000 and July 3, 1999, respectively.
Amortization expense recorded for intangible assets was $772,000, $353,000 and
$157,000 for fiscal 2000, 1999 and 1998, respectively. Accumulated amortization
on intangible assets amounted to $540,000 and $624,000 at July 1, 2000 and July
3, 1999, respectively. Amortization of goodwill and patents is provided using
the straight-line method over the estimated useful lives of the assets, not
exceeding 17 years. Amortization of deferred financing charges is provided over
the term of the related debt instrument. In connection with the early
extinguishment of debt during fiscal 2000 (see Note 5), the Company expensed
approximately $1,122,000 of unamortized deferred financing costs relating to the
retired debt; such amount is included in the net extraordinary loss in the
Consolidated Statement of Operations for fiscal 2000.
Advertising Expenses
Advertising costs are expensed during the year incurred. Selling, general
and administrative expenses of the Company include advertising and promotion
costs of $2,650,000, $3,441,000 and $3,906,000 for the years ended July 1, 2000,
July 3, 1999 and June 27, 1998, respectively.
Accounting Developments
In June 1998, the Financial Accounting Standards Board (the "FASB") 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 the Company to recognize all derivatives on
the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge, depending
on the nature of the hedge, changes in the fair value of derivatives are either
offset against the changes in the 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.
The Company adopted SFAS No. 133, as amended, effective July 2, 2000; the effect
of such adoption is not expected to be material to both operating results and
financial position for the quarter ending September 30, 2000.
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. It
specifically addresses revenue recognition requirements for certain
transactions, such as bill-and-hold transactions, up-front fees when the seller
has continuing involvement, long-term service transactions, and layaway sales.
SAB 101 also provides guidance on the required disclosures for revenue
recognition policies and the impact of events and trends on revenue. SAB 101
will be effective for the Company's fourth quarter of fiscal 2001; the effect of
adopting this standard cannot be estimated at this time.
In July 2000, the Emerging Issues Task Force ("EITF") reached a consensus
on Issue 00-10, "Accounting for Shipping and Handling Fees and Costs." The EITF
concluded that all shipping and handling billings to a customer in a sales
transaction represent the revenue earned for the goods provided and,
accordingly, should be classified as revenue. Currently, the Company offsets
shipping and handling charges billed to customers with the freight costs paid to
carriers within selling, general and administrative expenses. EITF Issue 00-10
will be effective for the Company's fourth quarter of fiscal 2001; adoption of
this standard will have no impact on the net income or financial position of the
Company.
F-10
38
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. INVENTORIES
The components of inventories are as follows (in thousands):
JULY 1, 2000 JULY 3, 1999
------------ ------------
Raw materials........................................ $22,722 $17,723
Work-in-process...................................... 1,848 2,110
Finished goods....................................... 17,722 14,993
------- -------
42,292 34,826
Less reserve for obsolete inventories................ (1,879) (1,661)
------- -------
$40,413 $33,165
======= =======
3. PROPERTY, PLANT AND EQUIPMENT, NET
The components of property, plant and equipment, net, are as follows (in
thousands):
JULY 1, 2000 JULY 3, 1999
------------ ------------
Land................................................. $ 1,796 $ 1,841
Buildings and improvements........................... 23,148 22,868
Factory and office equipment......................... 45,889 39,633
Construction and projects-in-progress................ 1,427 3,369
-------- --------
72,260 67,711
Less accumulated depreciation........................ (32,146) (26,334)
-------- --------
$ 40,114 $ 41,377
======== ========
Purchases of equipment through capitalized lease obligations and notes were
$87,000 and $146,000 in fiscal 2000 and 1999, respectively. The Company did not
enter into any capital leases during fiscal 1998.
F-11
39
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. EARNINGS PER SHARE
The following table is a reconciliation of the numerator and denominator
for basic and diluted earnings (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
JULY 1, 2000 JULY 3, 1999 JUNE 27, 1998
------------ ------------ -------------
NUMERATOR:
Numerator for basic and diluted earnings
(loss) per share -- income (loss) available
to common stockholders before extraordinary
item........................................ $(2,292) $5,923 $9,352
Extraordinary loss on early extinguishment of
debt, net of $143 tax benefit............... (234) -- --
------- ------ ------
Net income (loss)............................. $(2,526) $5,923 $9,352
======= ====== ======
DENOMINATOR:
Denominator for basic earnings (loss) per
share -- weighted-average shares............ 7,497 7,518 8,442
Effect of dilutive securities:
Employee stock options...................... -- 168 240
------- ------ ------
Denominator for diluted earnings (loss) per
share -- adjusted weighted-average shares
and assumed conversions..................... 7,497 7,686 8,682
======= ====== ======
Basic earnings (loss) per share before
extraordinary item.......................... $ (0.31) $ 0.79 $ 1.11
Extraordinary loss per share.................. (0.03) -- --
------- ------ ------
Basic earnings (loss) per share............... $ (0.34) $ 0.79 $ 1.11
======= ====== ======
Diluted earnings (loss) per share before
extraordinary item.......................... $ (0.31) $ 0.77 $ 1.08
Extraordinary loss per share.................. (0.03) -- --
------- ------ ------
Diluted earnings (loss) per share............. $ (0.34) $ 0.77 $ 1.08
======= ====== ======
The following table sets forth the average number of options to purchase
shares of common stock at the respective ranges of exercise prices that were not
included in the computation of diluted earnings (loss) per share. For fiscal
2000, inclusion of such options would result in an antidilutive effect due to
the net loss incurred by the Company. For fiscal 1999 and 1998, the options'
exercise prices were greater than the average market price of the common shares,
and therefore, the effect was antidilutive:
OPTIONS RANGE OF EXERCISE PRICES
--------- ------------------------
FISCAL 2000......................................... 2,364,704 $ 0.34 - $15.00
FISCAL 1999......................................... 1,021,843 $ 9.31 - $16.56
FISCAL 1998......................................... 377,528 $15.00 - $22.63
F-12
40
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. DEBT
Short-term revolving credit advances (in thousands):
JULY 1, 2000 JULY 3, 1999
------------ ------------
Cannondale Europe........................................... $1,716 $262
Cannondale Japan............................................ 519 620
------ ----
$2,235 $882
====== ====
In February 1998, Cannondale Europe entered into a multi-currency credit
arrangement, which allowed Cannondale Europe to borrow up to NLG 12,500,000 on a
short-term basis. The interest rate on outstanding borrowings was a market rate,
applicable to the currencies borrowed, plus 1.50% with a minimum rate of 3.00%.
The credit arrangement contained no specific expiration date, and could be
terminated by either the borrower or the lender at any time. Cannondale Europe's
multi-currency credit arrangement was guaranteed by Cannondale U.S.
In January 2000, 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 NLG 12,500,000 (approximately $5,415,000 at
July 1, 2000) on a short-term basis. This credit arrangement is comprised of an
overdraft facility of up to NLG 10,000,000 (approximately $4,332,000 at July 1,
2000) and a contingent liability facility for up to NLG 2,500,000 (approximately
$1,083,000 at July 1, 2000). 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. 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.
Cannonale Japan has an unsecured revolving credit facility for up to JPY
155,000,000 (approximately $1,462,000 at July 1, 2000). The interest rate on the
outstanding borrowings was 2.875% at July 1, 2000 and July 3, 1999. The credit
facility contains no specific expiration date, and may be terminated by either
the borrower or the lender at any time. Cannondale Japan's unsecured revolving
credit facility is guaranteed by Cannondale U.S.
The weighted-average interest rate on the Company's short-term revolving
credit advances was 5.65% and 3.32% at July 1, 2000 and July 3, 1999,
respectively.
F-13
41
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-term debt (in thousands):
JULY 1, 2000 JULY 3, 1999
------------ ------------
Revolving debt.............................................. $18,887 $30,643
Term loans.................................................. 30,000 20,000
IFN Finance, B.V. loan, interest at 6.75%................... 11,458 --
ABN AMRO Onroerend Goed Lease en Financieringen B.V. loan... 1,888 751
Pennsylvania Industrial Development Authority bonds,
interest rates ranging from 2.0% to 4.5%.................. 3,696 2,951
Connecticut Development Authority loan...................... 1,566 1,602
Department of Economic and Community Development loan,
interest at 4.0%.......................................... 293 321
Notes secured by equipment and capitalized leases........... 152 185
------- -------
67,940 56,453
Less current portion........................................ (4,577) (456)
------- -------
$63,363 $55,997
======= =======
On June 30, 2000, the Company entered into a five year secured credit
facility (the "secured facility") in the amount of $60.0 million with the CIT
Group/Business Credit Inc. ("CIT") as the administrative and collateral agent.
The secured facility consists of a revolving line of credit and a term loan. The
outstanding amount of the revolving line of credit is limited to the lesser of
$45.0 million or a percentage of eligible receivables and inventories. At July
1, 2000, approximately $11.9 million was available under the revolving line of
credit. The term loan is in the amount of $15.0 million, and amortizes in 19
consecutive quarterly principal payments of $662,250 each followed by a final
payment of the remaining unamortized principal at maturity. In addition to these
quarterly payments, the agreement also provides for mandatory prepayments from
excess cash flow and from the repayment of the note receivable from Joseph
Montgomery (see Note 15). The interest rate on the revolving line of credit and
term loan was 10.5% and 11.0%, respectively, at July 1, 2000. Interest on the
revolving line of credit and term loan is payable monthly and is computed as the
Chase Bank Rate (prime rate) plus an applicable revolver or term loan prime rate
margin per annum, or LIBOR (London Interbank Offered rate) plus the applicable
revolver or term loan LIBOR margin per annum. The revolver and term loan margins
are based on certain financial ratios tied to the fixed charge coverage ratios,
as defined, and range from 0.25% to 1.50% on the prime rate, or 1.75% to 3.00%
on the LIBOR. The secured facility is collateralized by substantially all
Cannondale U.S. assets and the issued and outstanding stock of Cannondale's
subsidiaries. The secured facility requires minimum fixed charge coverage, net
worth, senior leverage and EBITDA levels, as defined, and restricts the payment
of cash dividends.
In conjunction with the secured facility, the Company also entered into a
three year financing agreement with Ableco Finance LLC ("Ableco"), which
provides for a $15.0 million term loan. Such loan amortizes 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. The interest rate on the term loan at July 1, 2000 was 15.5%. Such
interest, determined on a monthly basis, consists of a Reference rate (prime
rate), as defined, plus a 6.0% margin; 3.0% of this margin is payable in cash
and the remaining 3.0% is capitalized as additional principal of the loan. In
June 2000, the Company issued warrants to purchase an aggregate of 393,916
shares of its common stock at a purchase price of $0.01 per share to Ableco.
Such warrants may be exercised at any time after June 30, 2001 but prior to June
30, 2005 provided the Company has not paid or prepaid at least $7.5 million of
principal under the term loan by June 30, 2001. Such warrants would be
immediately detachable and include antidilutive provisions. The term loan is
collateralized by a second security interest in substantially all Cannondale
U.S. assets and certain real property owned by Joseph Montgomery which secures
his note receivable to the Company. The Ableco agreement requires minimum
F-14
42
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fixed charge coverage, net worth, senior leverage and EBITDA levels, as defined,
and restricts the payment of cash dividends.
The Company used the proceeds of the CIT, Ableco, and IFN financing
arrangements to retire its existing $75.0 million amended and restated
multi-currency credit facility (the "existing facility"). The Company recorded
an extraordinary loss of $234,000 (net of a $143,000 tax benefit), which was
comprised of the write-off of net deferred financing costs (approximately
$1,122,000) offset by realized gains on the settlement of the
foreign-denominated debt (approximately $325,000) and the interest rate swap
agreements (approximately $420,000).
As of July 3, 1999, the existing facility allowed for Cannondale U.S.,
Cannondale Europe and Cannondale Japan to borrow up to $65.0 million under a
multi-currency revolving line of credit and provided for a $20.0 million term
loan. The facility included a provision that permitted the Company to borrow up
to $10.0 million of the $65.0 million revolving line of credit on a short-term
basis (less than 30 days). The outstanding borrowings consisted of U.S. dollars
($45,320,000), Dutch guilders (7,000,000) and Japanese yen (250,705,000) at July
3, 1999. The facility contained restrictive and financial covenants relating to,
among other things, the payment of dividends and the repurchase of shares of the
Company's common stock, and the maintenance of minimum levels of cash flow,
capitalization, interest coverage and tangible net worth. Under the facility,
the Company had the option to borrow at the following rates: (1) a variable rate
that was defined as the higher of the bank prime rate or the Federal Funds Rate
plus 50.0 basis points, (2) a short-term market rate that was an offered rate
per annum quoted by the bank, or (3) the LIBOR applicable to the currency
borrowed plus an interest rate margin (the "LIBOR margin"). At July 3, 1999, the
rate(s) of outstanding borrowings under the LIBOR option were 6.70% and 6.76%
for U.S. dollar borrowings, 4.31% for Dutch guilder borrowings and 1.84% for
Japanese yen borrowings. The LIBOR margin (ranging from 75.0 to 170.0 basis
points) was determined quarterly based upon predetermined performance criteria.
The Company was obligated to pay a facility fee (ranging from 25.0 to 30.0 basis
points) on the balance of the facility based on the same performance criteria as
the LIBOR margin. The LIBOR margin was 170.0 basis points at July 3, 1999. The
facility fee was 30.0 basis points at July 3, 1999. The interest rate on the
term loan was the LIBOR plus a margin that was 225.0 basis points at July 3,
1999, and increased to 250.0 basis points January 1, 2000 and 275.0 basis points
April 1, 2000. The weighted-average interest rate for borrowings under this
facility was 6.58% at July 3, 1999.
During fiscal 2000, the availability under the existing facility was
decreased from $85.0 to $75.0 million, and borrowings under the multi-currency
revolving line of credit could not exceed the lesser of $55.0 million or 110% of
the Company's eligible accounts receivable.
In February 2000, Cannondale Europe entered into a financing agreement with
IFN Finance, B.V. ("IFN") covering receivables from European customers for a
period of three years. The available financing is 85% of pledged receivables,
subject to a maximum of NLG 40,000,000 (approximately $17,330,000 at July 1,
2000). The financing may be in the form of either a current account overdraft or
short-term loans. 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%. 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 a
portion of its office building and land amounting to NLG 2,850,000
(approximately $1,235,000 at July 1, 2000), with a five year fixed interest rate
of 6.70%, and a variable rate thereafter. Such mortgage was combined with the
previous ABN Financing mortgage (approximately $653,000 at July 1, 2000 with an
interest rate of 7.25%), and the combined mortgage will expire on September 12,
2016.
F-15
43
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Pennsylvania Industrial Development Authority bonds are secured by the
Company's bicycle and motorsports manufacturing facilities located in Bedford,
Pennsylvania. The loans extend through 2015, and are payable in equal monthly
payments.
The Connecticut Development Authority loan is secured by the Company's
Bethel, Connecticut, headquarters and research and development facility. The
interest rate was fixed at 4.65% until January 2000; at such time, the interest
rate was adjusted to 6.45% in order to yield the U.S. Government Securities Ten
Year Treasury. 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.
The Department of Economic and Community Development loan is secured by
certain machinery and equipment used for research and development by the
Company. The loan extends through 2009 and is payable in equal monthly
installments.
Capitalized lease obligations extend through 2004, and represent the
present value of future minimum lease payments, discounted at rates ranging from
6.80% to 9.50%, payable in monthly installments.
Maturities of long-term debt, including payments under capitalized lease
obligations, are as follows (in thousands):
2001....................................................... $ 4,577
2002....................................................... 5,187
2003....................................................... 26,280
2004....................................................... 3,650
2005....................................................... 23,807
Thereafter................................................. 4,439
-------
$67,940
=======
At July 1, 2000, the Company had an outstanding standby letter of credit
for JPY 120,000,000 (approximately $1,132,000) and outstanding trade letters of
credit for approximately $509,000.
6. INCOME TAXES
Income (loss) before income taxes and extraordinary item by geographic
location is as follows (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 1, 2000 JULY 3, 1999 JUNE 27, 1998
------------ ------------ -------------
United States.................................. $(8,273) $ (22) $ (872)
Foreign........................................ 4,079 7,996 14,802
------- ------ -------
$(4,194) $7,974 $13,930
======= ====== =======
F-16
44
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The income tax (benefit) provision consists of the following (in
thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 1, 2000 JULY 3, 1999 JUNE 27, 1998
------------ ------------ -------------
Current:
Federal...................................... $(2,978) $ (309) $ (786)
Foreign...................................... 1,821 2,733 5,067
State........................................ (497) (244) (128)
------- ------ ------
Total current............................. (1,654) 2,180 4,153
------- ------ ------
Deferred:
Federal...................................... 230 (52) 412
Foreign...................................... (526) (71) (59)
State........................................ 48 (6) 72
------- ------ ------
Total deferred............................ (248) (129) 425
------- ------ ------
Total..................................... $(1,902) $2,051 $4,578
======= ====== ======
The provision (benefit) for income taxes on income (loss) before income
taxes differs from the amount computed by applying the U.S. federal income tax
rate (34.0%) because of the effects of the following items:
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 1, 2000 JULY 3, 1999 JUNE 27, 1998
------------ ------------ --------------
Tax at U.S. statutory rate..................... (34.0)% 34.0% 34.0%
State income benefit, net of federal tax....... (6.9) (3.2) (0.6)
Lower effective income taxes of other
countries.................................... (2.2) (0.7) (0.2)
Tax effect of research and development
credit....................................... (9.4) (5.0) (1.8)
Tax effect of dividend from foreign
subsidiary................................... 5.9 -- --
Other.......................................... 1.3 0.6 1.5
----- ---- ----
(45.3)% 25.7% 32.9%
===== ==== ====
F-17
45
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The significant components of the Company's deferred tax assets and
liabilities at July 1, 2000 and July 3, 1999 are as follows (in thousands):
JULY 1, 2000 JULY 3, 1999
------------ -------------
Deferred tax assets:
Accounts receivable and inventory reserves................ $ 2,148 $ 1,988
Stock option compensation................................. 341 304
Accrued liabilities....................................... 1,028 1,119
Tax credits and NOL carryforwards......................... 4,943 --
Other..................................................... 821 523
------- -------
Total deferred assets..................................... 9,281 3,934
------- -------
Deferred tax liabilities:
Tax over book depreciation................................ (1,438) (1,078)
Accounts receivable fair value adjustment................. (572) (858)
Other..................................................... (1,019) (868)
------- -------
Total deferred liabilities................................ (3,029) (2,804)
------- -------
Net deferred tax assets..................................... $ 6,252 $ 1,130
======= =======
The net noncurrent portion ($681,000) of the above net deferred tax asset
is included in other assets on the Company's Consolidated Balance Sheet at July
1, 2000.
Included in the deferred tax asset balance as of July 1, 2000, the Company
has available for U.S. federal income tax purposes research and development
credit, foreign tax credit and alternative minimum tax credit carryforwards of
approximately $1,239,000, $2,839,000 and $180,000, respectively. The Company
also has state net operating loss carryforwards of approximately $449,000. The
research and development credit carryforwards expire in fiscal 2019 and 2020.
The foreign tax credit carryforward expires in fiscal 2005. The alternative
minimum tax credit carryforward has no expiration, and will be carried forward
indefinitely until utilized. The state net operating loss carryforwards are
related to a number of state jurisdictions and will expire at various times
between fiscal 2003 and 2015.
Realization of these tax carryforwards is dependent on generating
sufficient taxable income prior to the expiration of the various credits.
Approximately $13 million of future taxable income during the carryforward
period will be necessary for the Company to utilize the entire credit
carryforward amount. In the event that the Company does not realize such
earnings, a charge would be required. Management believes the Company will
obtain the full benefit of the entire deferred tax asset on the basis of its
evaluation of the Company's anticipated future profitability from both its
motorsports and bicycle operating segments. Based on management's assessment, it
is more likely than not that the entire net deferred tax asset recorded as of
July 1, 2000 will be realized through future taxable earnings and/or
implementation of tax planning strategies.
Also included in the Company's deferred tax asset balance as of July 1,
2000 is a net operating loss carryforward of approximately $236,000 from the
Company's subsidiary in Japan, which will expire in 2005. Based on management's
assessment, it is more likely than not this deferred tax asset will be realized
within the required period through future taxable earnings by the Company's
subsidiary in Japan.
In the fourth quarter of fiscal 2000, the Company received a dividend from
Cannondale Europe, a 100% owned foreign subsidiary, in the amount of
$11,490,000. This dividend was paid from Cannondale Europe's undistributed
earnings. The Company has provided for an additional $247,000 in U.S. federal
income taxes representing the net tax impact of the dividend after the effect of
foreign tax credit adjustments, which offset the majority of the U.S. federal
income taxes generated by this dividend.
F-18
46
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective July 1, 2000, the Company's policy is to repatriate future
earnings to the extent of foreign subsidiaries' prospective earnings.
Undistributed earnings of the Company's foreign subsidiaries as of July 1, 2000
amount to approximately $23,031,000. Those earnings are considered to be
indefinitely reinvested and, accordingly, no provision for U.S. federal and
state income taxes has been provided thereon. Upon distribution of those
earnings in the form of dividends or otherwise, the Company 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, additional foreign tax credit carryforwards would be
available to reduce some portion of the resulting U.S. tax liability.
Withholding taxes of approximately $1,286,000 would be payable upon remittance
of all previously unremitted earnings at July 1, 2000.
7. STOCK OPTIONS
SFAS No. 123 requires that the Company disclose the pro-forma impact on net
income (loss) and earnings (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 July 1, 2000, July 3, 1999 and June 27, 1998, respectively: an
expected volatility of .43, .43 and .50, an expected term of 4.34, 4.29 and
4.18, risk-free interest rates of 6.23%, 4.85% and 5.50%, and no expected
dividend yield.
For purposes of pro-forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro-forma information is as follows (in thousands, except per share data):
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 1, 2000 JULY 3, 1999 JUNE 27, 1998
------------ ------------ -------------
Pro-forma net income (loss).................... $(4,147) $3,107 $7,000
Pro-forma basic earnings (loss) per share...... $ (0.55) $ 0.41 $ 0.83
Pro-forma diluted earnings (loss) per share.... $ (0.55) $ 0.41 $ 0.80
The pro-forma effect of SFAS No. 123 will not be fully reflected until 2001
due to the inclusion of options granted only subsequent to July 1, 1995.
The Company has five 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") and the 1998 Stock Option Plan (the "1998 Plan"). Under the terms of the
plans, the committee administering the plans may grant options to purchase
shares of the Company's common stock to officers, directors, employees,
consultants and advisors for up to 2,957,500 shares. The vesting of options
granted under the plans is at the discretion of the 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 and the 1998 Plan terminate on December 31, 2003, December 31, 2004,
December 31, 2005, December 31, 2006 and December 31, 2008, respectively.
In February 1998, the Company amended its 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, an
aggregate of 1,430,652 options to purchase common stock with exercise prices in
excess of $12.50 were canceled and new options were issued with the same
exercise prices and terms as the old
F-19
47
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
options; provided, however, that in the event of a change of control, the
exercise price of the new options will be $12.50 (the fair value of the
Company's common stock at the time of the grant).
On March 27, 1998, an aggregate of 509,426 options to purchase common stock
with exercise prices in excess of $16.50 were canceled and new options were
issued in replacement thereof with exercise prices of $16.50 and terms identical
to those canceled.
On September 3, 1998, an aggregate of 1,462,252 options to purchase common
stock with exercise prices in excess of $9.31 were canceled and new options were
issued in replacement thereof with exercise prices of $9.31 and terms identical
to those canceled.
A summary of the status of the Company's stock option plans as of July 1,
2000, July 3, 1999 and June 27, 1998, and changes during the years ending on
those dates is presented below:
2000 1999 1998
---------------------- ----------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- --------- ----------- --------- ----------- ---------
Outstanding at beginning of year................. 2,274,266 $8.30 1,651,447 $14.30 1,353,204 $14.25
Granted.......................................... 442,286 $7.79 2,208,552 $ 8.90 2,379,758 $16.30
Exercised........................................ (2,895) $4.51 (17,875) $ 8.53 (49,473) $ 5.47
Terminated or canceled........................... (221,631) $8.74 (1,567,858) $15.48 (2,032,042) $16.83
---------- ----------- -----------
Outstanding at end of year....................... 2,492,026 $8.18 2,274,266 $ 8.30 1,651,447 $14.30
========== =========== ===========
Options exercisable at end of year............... 922,639 $7.82 874,017 $ 7.72 742,898 $11.73
Weighted-average fair value of options granted
during the year................................ $ 3.24 $ 3.47 $ 5.92
The following table summarizes information about fixed stock options
outstanding at July 1, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -------------------------------
NUMBER OF WEIGHTED- NUMBER OF
OPTIONS AVERAGE WEIGHTED- OPTIONS WEIGHTED-
RANGE OF EXERCISE OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
PRICES JULY 1, 2000 CONTRACTUAL LIFE EXERCISE PRICE JULY 1, 2000 EXERCISE PRICE
- -------------------- -------------- ---------------- -------------- -------------- --------------
$ 0.34.... 151,325 3.99 $ 0.34 151,325 $ 0.34
$ 6.44 to $ 8.75.... 811,273 8.99 $ 7.41 14,000 $ 7.41
$ 9.31 to $10.00.... 1,524,429 6.63 $ 9.35 752,315 $ 9.31
$10.38 to $15.00.... 4,999 7.74 $11.30 4,999 $11.30
--------- -------
$ 0.34 to $15.00.... 2,492,026 7.24 $ 8.18 922,639 $ 7.82
========= =======
8. PROFIT SHARING PLAN
The Company has 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 the Board of Directors. There were no contributions in
fiscal 2000, 1999 or 1998.
9. STOCKHOLDERS' EQUITY
In September 1997, the Company's Board of Directors authorized the
repurchase by the Company of up to 1,000,000 shares of its common stock at an
aggregate price not to exceed $20.0 million. In July 1998, the Company's Board
of Directors authorized a new stock repurchase program by the Company to
repurchase up to 1,000,000 shares of its 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. Purchases by the
F-20
48
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company may be made from time to time in the open market or in private
transactions. The repurchase program may be suspended or discontinued at any
time. Shares repurchased by the Company will be available for general corporate
purposes, including issuance upon the exercise of employee stock options. As of
July 3, 1999, the Company had repurchased an aggregate of 1,292,900 shares of
its common stock under the programs at a cost of $20.2 million. The Company did
not repurchase any shares of its common stock during fiscal 2000.
In December 1997, the Company's Board of Directors adopted a Stockholders'
Rights Plan pursuant to which rights to purchase shares of common stock of the
Company 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 common stock of the
Company 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 the outstanding common stock of the Company, 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 the common stock of the Company. In the event that the Company is
acquired in a merger or other business combination or 50% or more of the
Company's 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 of the Company, including, without limitation, the right
to vote, or to receive dividends. The rights expire December 22, 2007 unless
extended or unless rights are redeemed by the Company.
In September 1994, the Company adopted an Employee Stock Purchase Plan (the
"Purchase Plan") which is intended to allow qualified employees to purchase
common stock of the Company at a discount to the market value of such common
stock. A total of 348,750 shares of common stock have been reserved 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 the
Company's common stock on the date the offering period begins or 85% of the
closing price of the Company's common stock on the termination date of the
offering period. 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. During fiscal year 1999, employees purchased 29,345 shares of common
stock at prices ranging from $7.23 to $11.37 per share.
At July 1, 2000, there were 2,970,510 shares of common stock reserved for
the exercise of options and employee stock purchases. In addition, there were
393,916 shares of common stock reserved for the exercise of warrants issued to
Ableco (see Note 5).
10. OPERATING LEASES
The Company and its subsidiaries 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
F-21
49
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
minimum lease payments under noncancellable operating leases with initial or
remaining lease terms of greater than one year are as follows (in thousands):
2001...................................................... $ 973
2002...................................................... 535
2003...................................................... 434
2004...................................................... 384
2005 and thereafter....................................... 341
------
$2,667
======
Rent expense amounted to $1,729,000, $1,582,000 and $2,052,000 in fiscal
2000, 1999 and 1998, respectively.
During the first quarter of fiscal 2000, the Company entered into a
$960,000 sale-leaseback transaction for manufacturing and research and
development equipment from which the Company 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 the Company 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 will result in rent
expense of approximately $141,000 annually.
During the third quarter of fiscal 1999, the Company entered into a $2.9
million sale-leaseback transaction for its Cessna Citation Jet aircraft. The
sale resulted in a gain of $131,000 which was deferred and is being amortized
over the five year term of the lease. The lease provides the Company with the
option to terminate the lease before the end of the lease term for predetermined
amounts without penalty. At the end of the lease term, the Company can purchase
the equipment for 90% of its original cost, renew the lease for the then fair
market value rental or sell the aircraft to a third party. If the proceeds from
the sale of the aircraft are less than 90% of the purchase price, the Company
shall make a final payment in the amount of the deficiency not to exceed 72% of
the original cost. The related lease is being accounted for as an operating
lease and has resulted in additional rent expense of approximately $273,000
annually.
11. FINANCIAL INSTRUMENTS
Balance Sheet Financial Instruments
At July 1, 2000, the carrying value of 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 the Company's notes
receivable and borrowings under its variable rate short- and long-term credit
agreements approximated their fair value. The carrying value of the Company's
other long-term debt is estimated based on expected future cash flows,
discounted at current rates for the same or similar issues. The carrying value
of the Company's other long-term debt approximated the fair value as of July 1,
2000, except for the ABN Financing mortgage, which had a carrying value and fair
value of approximately $1.9 million and $1.2 million, respectively.
Forward Foreign Exchange Contracts
At July 1, 2000 and July 3, 1999, the Company had approximately $3.9
million and $10.4 million, respectively, of forward exchange contracts
outstanding to exchange European, Japanese, Australian, Canadian and U.S.
currencies to reduce exposures to foreign currency risk. The Company enters into
forward foreign currency contracts for a significant portion of its current and
net balance sheet exposures, principally relating to trade receivables and
payables denominated in foreign currencies, and firm sale and purchase
commitments. The forward exchange contracts generally have maturities that do
not exceed 12 months and
F-22
50
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
require the Company to exchange, at maturity, various currencies for U.S.
dollars and Euros at rates agreed to at the inception of the contracts. At July
1, 2000, the net loss deferred from hedging firm sale and purchase commitments
was not material.
The Company's 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.
Additionally, market risk exists during the period between the date of the
contract and its designation as an effective hedge for financial reporting
purposes. The Company believes that its exposure to credit risk and market risk
in these transactions is not significant in relation to earnings.
Prior to the retirement of the Company's multi-currency revolving credit
facility, the Company used borrowings of Japanese yen, Euros, and Dutch guilders
to hedge its net investments in its foreign subsidiaries. The Company had
outstanding borrowings of 251.0 million Japanese yen (approximately $2,072,000)
and 7.0 million Dutch guilders (approximately $3,252,000) at July 3, 1999. 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 the net extraordinary loss in the Company's Statement
of Operations for fiscal 2000.
Interest Rate Swaps
In April 1998, the Company 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 the Company's
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). The
gain recognized upon such termination of $420,000 is included as a component of
the net extraordinary loss in the Company's Consolidated Statement of Operations
for fiscal 2000.
12. OTHER INCOME
Other income primarily consisted of finance charges relating to accounts
receivable, which totaled $396,000, $529,000 and $885,000 for fiscal 2000, 1999
and 1998, respectively; foreign currency gains (losses) of $169,000, ($78,000)
and ($232,000) for fiscal 2000, 1999 and 1998, respectively; and interest income
of $1,105,000 and $804,000 from a related party loan in fiscal 2000 and 1999,
respectively.
13. OPERATIONS BY INDUSTRY SEGMENTS AND GEOGRAPHIC AREAS
In fiscal year 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which changed the method the
Company used in reporting information about its operating segments.
The Company's reportable segments are Bicycles and Motorsports. The Company
operates 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. The Company has also entered the motorsports industry with its
line of motocross motorcycles and related accessories and clothing, as well as
its development of an ATV.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies.
F-23
51
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized data by geographic area is as follows (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 1, 2000 JULY 3, 1999 JUNE 27, 1998
------------ ------------ -------------
Net sales from external customers:
Bicycles............................................. $160,462 $176,819 $171,496
Motorsports.......................................... 57 -- --
-------- -------- --------
$160,519 $176,819 $171,496
======== ======== ========
Operating income (loss):
Bicycles............................................. $ 8,767 $ 17,278 $ 17,306
Motorsports.......................................... (8,536) (5,907) (2,034)
-------- -------- --------
$ 231 $ 11,371 $ 15,272
======== ======== ========
Identifiable assets:
Bicycles............................................. $146,875 $153,072 $152,018
Motorsports.......................................... 18,032 9,307 259
-------- -------- --------
$164,907 $162,379 $152,277
======== ======== ========
Capital expenditures:
Bicycles............................................. $ 2,395 $ 6,190 $ 16,503
Motorsports.......................................... 3,587 9,067 259
-------- -------- --------
$ 5,982 $ 15,257 $ 16,762
======== ======== ========
Depreciation and amortization expense:
Bicycles............................................. $ 6,544 $ 5,721 $ 4,054
Motorsports.......................................... 357 61 --
-------- -------- --------
$ 6,901 $ 5,782 $ 4,054
======== ======== ========
The Company evaluates performance of its segments based on profit or loss
from operations. The amounts below are not allocated between the segments.
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 1, 2000 JULY 3, 1999 JUNE 27, 1998
------------ ------------ -------------
Total operating income for reportable segments......... $ 231 $11,371 $15,272
Other income (expense):
Interest expense..................................... (6,308) (4,557) (1,995)
Other income......................................... 1,883 1,160 653
------- ------- -------
(4,425) (3,397) (1,342)
------- ------- -------
Income (loss) before income taxes and extraordinary
item................................................. (4,194) 7,974 13,930
Income tax (expense) benefit........................... 1,902 (2,051) (4,578)
------- ------- -------
Income (loss) before extraordinary item................ (2,292) 5,923 9,352
Extraordinary loss on early extinguishment of debt, net
of $143 tax benefit.................................. (234) -- --
------- ------- -------
Net income (loss)...................................... $(2,526) $ 5,923 $ 9,352
======= ======= =======
F-24
52
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized data by geographic area is as follows (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 1, 2000 JULY 3, 1999 JUNE 27, 1998
------------ ------------- -------------
Net sales from external customers(a):
United States............................... $ 73,575 $ 72,413 $ 75,193
Other European countries.................... 46,461 59,008 52,603
Germany..................................... 19,948 26,639 25,382
All other countries......................... 20,535 18,759 18,318
-------- -------- --------
$160,519 $176,819 $171,496
======== ======== ========
Long-lived assets(b):
United States............................... $ 55,059 $ 54,798 $ 37,937
Netherlands................................. 2,265 2,886 3,141
All other countries......................... 1,012 449 380
-------- -------- --------
$ 58,336 $ 58,133 $ 41,458
======== ======== ========
- ---------------
(a) Net sales are attributed to countries based on location of customer.
(b) Long-lived assets are located in the respective geographic regions.
At July 1, 2000, the net assets of Cannondale Europe, Cannondale Japan and
Cannondale Australia were $15,066,000, $1,259,000 and $1,118,000, respectively.
14. CAPITALIZATION OF COSTS OF COMPUTER SOFTWARE DEVELOPED FOR INTERNAL USE
In March 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1, which was adopted by the Company as of the
beginning of its fourth fiscal quarter of 1999, requires capitalization of
certain costs incurred in connection with developing or obtaining internal use
software. In fiscal 1998 and prior, the Company expensed such costs as incurred.
SOP 98-1 required companies to adopt its provisions as of the beginning of the
fiscal year and restate previously reported interim results. The effect of this
accounting change was to increase net income for the fiscal year ended July 3,
1999 by $322,000 ($0.04 per share). In addition, in the fiscal year 1999 Form
10-K, the Company restated previously reported 1999 quarterly earnings as
follows (in thousands, except per share data):
THREE MONTHS THREE MONTHS SIX MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED ENDED
SEPTEMBER 27, DECEMBER 27, DECEMBER 27, MARCH 27, MARCH 27,
1998 1998 1998 1999 1999
------------- ------------ ------------ ------------ -----------
Previously reported
earnings................ $ 712 $1,775 $2,487 $2,317 $4,804
Change in accounting for
internal use software... 83 74 157 53 210
----- ------ ------ ------ ------
Adjusted earnings......... $ 795 $1,849 $2,644 $2,370 $5,014
===== ====== ====== ====== ======
F-25
53
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THREE MONTHS THREE MONTHS SIX MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED ENDED
SEPTEMBER 27, DECEMBER 27, DECEMBER 27, MARCH 27, MARCH 27,
1998 1998 1998 1999 1999
------------- ------------ ------------ ------------ -----------
Previously reported basic
earnings per share...... $0.09 $ 0.24 $ 0.33 $ 0.31 $ 0.64
Adjusted basic earnings
per share............... $0.10 $ 0.25 $ 0.35 $ 0.32 $ 0.67
Previously reported
diluted earnings per
share................... $0.09 $ 0.23 $ 0.32 $ 0.30 $ 0.62
Adjusted diluted earnings
per share............... $0.10 $ 0.24 $ 0.34 $ 0.31 $ 0.65
15. RELATED PARTY TRANSACTIONS
During the first quarter of fiscal 1999, the Company provided Joseph
Montgomery, the President and Chief Executive Officer of the Company, 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 combined loan matures on August 1, 2003, at which time the entire principal
balance is due. The interest rate on the loan is set at the prime rate as
published in the Wall Street Journal from time to time, and the loan is secured
by a pledge to the Company of all of the shares of the Company's common stock
held by Mr. Montgomery and by a third mortgage on certain real property.
The Company deferred the first interest payment of approximately $900,000
payable by Mr. Montgomery to the Company 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 stock in the Company per quarter beginning in the
third quarter of fiscal 2000, and the net proceeds of such sales were to be
remitted to the Company 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 in the Company pursuant to the terms of the
agreement, thus reducing his deferred interest balance by approximately
$614,000. The Company also deferred the interest payment due August 1, 2000 of
approximately $1,067,000 until August 28, 2000. At such time, Mr. Montgomery
paid $1.4 million to the Company as full payment of all deferred interest and
accrued interest thereon.
During 1998, the Company 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 its lease with JSM for the rental of the same
aircraft. The purchase price of the Cessna Citation Jet aircraft was determined
by the Company based on independent valuations of the market value of the
aircraft. The Company also assumed the obligations of JSM Aviation, LLC ("JSM
LLC"), a Connecticut limited liability company in which Mr. Montgomery and a
director of the Company 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, the Company reimbursed JSM LLC $160,922 for the cost
of certain leasehold improvements made to the hangar by JSM LLC. The Company
uses the Cessna Citation Jet aircraft largely for transporting personnel between
its Connecticut headquarters and its Pennsylvania manufacturing facilities, and
anticipates that it will have an increased need for an aircraft in connection
with the growth of the business. In connection with the purchase of the Cessna
Citation Jet aircraft, the Company also purchased, for $500,000, JSM's right to
acquire a Learjet aircraft. JSM had entered into a contract with Learjet, Inc.
("Learjet") to purchase an aircraft, and had paid Learjet $500,000 as a deposit
with respect to such purchase. The Company had assumed JSM's rights and
obligations under this contract. In the second quarter of fiscal 2000, the
Company decided not to
F-26
54
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purchase the Learjet aircraft and, accordingly, the deposit was returned to the
Company with accrued interest thereon.
During the third quarter of fiscal 1999, the Company entered into a $2.9
million sale-leaseback transaction for the Cessna Citation Jet (See Note 10).
The lease provides JSM with the right of first refusal should the Company
purchase the aircraft pursuant to the terms of the lease agreement.
The Company has provided three officers of the Company with interest-free
loans to enable them to purchase homes in the vicinity of the Company's
headquarters. As of July 1, 2000 and July 3, 1999, $1,090,000 and $650,000,
respectively, had been loaned to the 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 Company advanced
$80,000 to another officer of the Company during fiscal 1999; such advance was
converted into a demand note receivable during fiscal 2000 and is included in
the total loan amount stated above.
During fiscal 1998, construction of the Company's headquarters and research
and development facility and the expansion of its manufacturing facility was
completed. During fiscal 1999, the construction of the Company's new motorsports
manufacturing facility was completed. The Company contracted an entity
controlled by a director of the Company to act as the general contractor for the
construction of these projects. The Company paid the entity approximately $6.3
million and $5.6 million for the construction of these facilities during the
fiscal years ended July 3, 1999 and June 27, 1998, respectively. During fiscal
2000, the Company paid the entity a final payment of approximately $131,000 for
the construction of the motorsports manufacturing facility.
16. LITIGATION
The Company currently and from time to time is involved in product
liability lawsuits and other litigation incidental to the conduct of its
business. The Company is not a party to any lawsuit or proceeding that, in the
opinion of management, is likely to have a material adverse effect on the
results of operations, cash flows or financial condition of the Company;
however, due to the inherent uncertainty of litigation there can be no assurance
that the resolution of any particular claim or proceeding would not have a
material adverse effect on the Company's results of operations, cash flows or
financial condition.
F-27
55
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 29, 2000 /s/ WILLIAM A. LUCA
--------------------------------------
William A. Luca
Vice President of Finance,
Treasurer, 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 true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his 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
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent or their 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 indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JOSEPH S. MONTGOMERY Chairman, President, Chief September 29, 2000
- --------------------------------------------------- Executive Officer and
Joseph S. Montgomery Director (Principal
Executive Officer)
/s/ WILLIAM A. LUCA Vice President of Finance, September 29, 2000
- --------------------------------------------------- Treasurer, Chief Financial
William A. Luca Officer, Chief Operating
Officer and Director
(Principal Financial
Officer)
/s/ DANIEL C. ALLOWAY Vice President of Sales and September 29, 2000
- --------------------------------------------------- Director
Daniel C. Alloway
/s/ JOHN P. MORIARTY Assistant Treasurer and September 29, 2000
- --------------------------------------------------- Assistant Secretary, Chief
John P. Moriarty Accounting Officer
(Principal Accounting
Officer)
/s/ JAMES S. MONTGOMERY Director September 29, 2000
- ---------------------------------------------------
James S. Montgomery
/s/ GREGORY GRIFFIN Director September 29, 2000
- ---------------------------------------------------
Gregory Griffin
/s/ JOHN SANDERS Director September 29, 2000
- ---------------------------------------------------
John Sanders
/s/ MICHAEL J. STIMOLA Director September 29, 2000
- ---------------------------------------------------
Michael J. Stimola
/s/ SALLY G. PALMER Director September 29, 2000
- ---------------------------------------------------
Sally G. Palmer
56
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Shareholders
Cannondale Corporation and Subsidiaries
We have audited the consolidated financial statements of Cannondale Corporation
and subsidiaries as of July 1, 2000 and July 3, 1999, and for each of the three
years in the period ended July 1, 2000, and have issued our report thereon dated
August 11, 2000, except for the second paragraph of Note 15, as to which the
date is August 28, 2000 (included elsewhere in this Annual Report). Our audits
also included the financial statement schedule listed in Item 14(a)(2) of this
Form 10-K. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, 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
September 27, 2000
57
SCHEDULE II
CANNONDALE CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- ------------ ---------- ---------- ---------- ----------
(IN THOUSANDS)
ALLOWANCE FOR BAD DEBTS, DISCOUNTS,
CREDITS AND RETURNS AND LATE
CHARGES
Year ended June 27, 1998......... $ 6,432 $ 7,586 $ (5) $ (5,534)(1) $ 8,479
======= =======
Year ended July 3, 1999.......... $ 8,479 $ 9,297 $ 4 $ (7,706)(1) $10,074
======= =======
Year ended July 1, 2000.......... $10,074 $11,203 $ 6 $(11,207)(1) $10,076
======= =======
RESERVE FOR OBSOLETE INVENTORIES
Year ended June 27, 1998......... $ 1,069 $ 1,425 $(39) $ (1,649)(2) $ 806
======= =======
Year ended July 3, 1999.......... $ 806 $ 2,309 $ 5 $ (1,459)(2) $ 1,661
======= =======
Year ended July 1, 2000.......... $ 1,661 $ 2,191 $ 9 $ (1,982)(2) $ 1,879
======= =======
- ---------------
(1) Discounts, late charges and uncollectible accounts written off, net of
recoveries.
(2) Inventory disposed.