1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 30, 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 of (I.R.S. Employer
incorporation or organization) Identification No.)
16 TROWBRIDGE DRIVE, BETHEL, CONNECTICUT 06801
(Address of principal executive offices) (zip code)
(203) 749-7000
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
The number of shares outstanding of the issuer's Common Stock, $.01 par value
per share, as of February 8, 2001 was 7,528,971.
2
INDEX
PAGE
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Part I Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 30, 2000,
July 1, 2000 and January 1, 2000 1
Condensed Consolidated Statements of Operations for the three
and six months ended December 30, 2000 and January 1, 2000 2
Condensed Consolidated Statements of Cash Flows for the six
months ended December 30, 2000 and January 1, 2000 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Part II Other Information
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
i
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PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CANNONDALE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 30, 2000 JULY 1, 2000 JANUARY 1, 2000
----------------- ------------ ---------------
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash ................................................ $ 2,602 $ 5,064 $ 1,212
Trade accounts receivable, less allowances of
$11,444, $10,076 and $9,573 ...................... 46,546 50,224 59,681
Inventories ......................................... 45,379 40,413 37,303
Deferred income taxes ............................... -- 5,571 5,256
Prepaid expenses and other current assets ........... 3,114 3,300 4,847
Interest receivable from a related party ............ -- 1,318 1,328
--------- --------- ---------
Total current assets .................................... 97,641 105,890 109,627
Property, plant and equipment, net ...................... 38,214 40,114 40,576
Notes receivable and advances to related parties ........ 1,293 13,197 12,978
Other assets ............................................ 4,630 5,706 3,492
--------- --------- ---------
Total assets ............................................ $ 141,778 $ 164,907 $ 166,673
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................... $ 14,949 $ 15,912 $ 16,295
Revolving credit advances ........................... 1,802 2,235 1,632
Income taxes payable ................................ 105 307 --
Warranty and other accrued expenses ................. 8,673 7,403 6,756
Current installments of long-term debt .............. 58,022 4,577 519
--------- --------- ---------
Total current liabilities ............................... 83,551 30,434 25,202
Long-term debt, less current installments ............... -- 63,363 65,552
Deferred income taxes ................................... -- -- 1,593
Other noncurrent liabilities ............................ 406 424 440
--------- --------- ---------
Total liabilities ....................................... 83,957 94,221 92,787
--------- --------- ---------
Commitments and contingencies ........................... -- -- --
Stockholders' equity:
Common stock, $.01 par value:
Authorized shares - 40,000,000
Issued shares - 8,821,871, 8,808,125 and
8,794,517 ...................................... 88 88 88
Additional paid-in capital .......................... 57,978 57,935 57,866
Retained earnings ................................... 26,604 38,802 40,497
Less 1,292,900 shares in treasury at cost ........... (20,162) (20,162) (20,162)
Accumulated other comprehensive loss ................ (6,687) (5,977) (4,403)
--------- --------- ---------
Total stockholders' equity .............................. 57,821 70,686 73,886
--------- --------- ---------
Total liabilities and stockholders' equity .............. $ 141,778 $ 164,907 $ 166,673
========= ========= =========
See accompanying notes
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CANNONDALE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 30, JANUARY 1, DECEMBER 30, JANUARY 1,
2000 2000 2000 2000
----------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net sales ......................... $ 34,687 $ 41,612 $ 71,374 $ 78,085
Cost of sales ..................... 24,469 28,662 51,194 54,398
-------- -------- -------- --------
Gross profit ...................... 10,218 12,950 20,180 23,687
-------- -------- -------- --------
Expenses:
Selling, general and
administrative ............. 8,801 10,065 18,270 19,877
Research and development ..... 1,955 1,765 3,917 4,189
-------- -------- -------- --------
10,756 11,830 22,187 24,066
-------- -------- -------- --------
Operating income (loss) ........... (538) 1,120 (2,007) (379)
-------- -------- -------- --------
Other income (expense):
Interest expense ............. (1,762) (1,362) (3,550) (2,404)
Other income ................. 117 513 391 734
-------- -------- -------- --------
(1,645) (849) (3,159) (1,670)
-------- -------- -------- --------
Income (loss) before income taxes
and extraordinary item ............ (2,183) 271 (5,166) (2,049)
Income tax (provision) benefit .... (7,836) 383 (6,480) 1,218
-------- -------- -------- --------
Income (loss) before
extraordinary item ................ (10,019) 654 (11,646) (831)
Extraordinary loss from early
extinguishment of debt, net of $0
tax benefit ....................... (552) -- (552) --
-------- -------- -------- --------
Net income (loss) ................. $(10,571) $ 654 $(12,198) $ (831)
======== ======== ======== ========
Basic earnings (loss) per share
before extraordinary item ......... $ (1.34) $ 0.09 $ (1.55) $ (0.11)
Extraordinary loss per share ...... (0.07) -- (0.07) --
-------- -------- -------- --------
Basic earnings (loss) per share ... $ (1.41) $ 0.09 $ (1.62) $ (0.11)
======== ======== ======== ========
Diluted earnings (loss) per share
before extraordinary item ......... $ (1.34) $ 0.09 $ (1.55) $ (0.11)
Extraordinary loss per share ...... (0.07) -- (0.07) --
-------- -------- -------- --------
Diluted earnings (loss) per share.. $ (1.41) $ 0.09 $ (1.62) $ (0.11)
======== ======== ======== ========
See accompanying notes
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CANNONDALE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED SIX MONTHS ENDED
DECEMBER 30, 2000 JANUARY 1, 2000
----------------- ---------------
(UNAUDITED) (UNAUDITED)
NET CASH USED IN OPERATING ACTIVITIES ............................. $ (3,012) $ (10,960)
-------- --------
INVESTING ACTIVITIES:
Proceeds from repayments of loans provided to related parties ..... 12,022 31
Loans provided to related parties ................................. (118) (90)
Capital expenditures .............................................. (2,005) (2,927)
Proceeds from sale of equipment ................................... 12 633
-------- --------
Net cash provided by (used in) investing activities ............... 9,911 (2,353)
-------- --------
FINANCING ACTIVITIES:
Net proceeds from issuance of common stock ........................ 43 51
Payments for early extinguishment of debt ......................... (12,000) --
Net proceeds from (repayments of) borrowings under short-term
revolving credit agreements ................................... (277) 639
Net proceeds from borrowings under long-term debt and capital lease
agreements .................................................... 2,291 9,542
-------- --------
Net cash provided by (used in) financing activities ............... (9,943) 10,232
-------- --------
Effect of exchange rate changes on cash ........................... 582 993
-------- --------
Net decrease in cash .............................................. (2,462) (2,088)
Cash at beginning of period ....................................... 5,064 3,300
-------- --------
Cash at end of period ............................................. $ 2,602 $ 1,212
======== ========
See accompanying notes
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CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Cannondale Corporation (the "Company") have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three- and
six-month periods ended December 30, 2000 are not necessarily indicative of the
results that may be expected for the year ending June 30, 2001. For further
information, refer to the consolidated financial statements and footnotes
thereto for the year ended July 1, 2000 included in the Company's annual report
on Form 10-K.
Reclassifications
Certain fiscal 2000 amounts have been reclassified to conform to the
current year's presentation.
2. INVENTORIES
The components of inventories are as follows (in thousands):
DECEMBER 30, JANUARY 1,
2000 JULY 1, 2000 2000
--------- ------------ ----------
(UNAUDITED) (UNAUDITED)
Raw materials ......................... $ 25,010 $ 22,722 $ 21,971
Work-in-process ....................... 2,802 1,848 2,567
Finished goods ........................ 19,928 17,722 14,679
-------- -------- --------
47,740 42,292 39,217
Less reserve for obsolete inventories.. (2,361) (1,879) (1,914)
-------- -------- --------
$ 45,379 $ 40,413 $ 37,303
======== ======== ========
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CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. EARNINGS (LOSS) PER SHARE AMOUNTS
The following table is a reconciliation of the numerator and
denominator of basic and diluted earnings (loss) per share computations and
other related disclosures required by the Statement of Financial Accounting
Standards ("SFAS") No. 128, Earnings Per Share (in thousands, except earnings
per share data):
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 30, JANUARY 1, DECEMBER 30, JANUARY 1,
2000 2000 2000 2000
---------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
NUMERATOR:
Numerator for basic and diluted earnings
(loss) per share - income (loss) before
extraordinary item ..................... $ (10,019) $ 654 $ ( 11,646) $ (831)
Extraordinary loss from early
extinguishment of debt, net of $0 tax
benefit ................................ (552) -- (552) --
---------- ------- ---------- ----------
Net income (loss) ......................... $ (10,571) $ 654 $ ( 12,198) $ (831)
========== ======= ========== ==========
DENOMINATOR:
Denominator for basic earnings (loss) per
share - weighted-average shares ........ 7,515 7,492 7,515 7,492
Effect of dilutive securities:
Employee stock options and Ableco
warrants ............................... -- 134 -- --
---------- ------- ---------- ----------
Denominator for diluted earnings (loss) per
share - adjusted weighted-average shares
and assumed conversions ................ 7,515 7,626 7,515 7,492
========== ======= ========== ==========
Basic earnings (loss) per share before
extraordinary item ..................... $ (1.34) $ 0.09 $ (1.55) $ (0.11)
Extraordinary loss per share .............. (0.07) -- (0.07) --
---------- ------- ---------- ----------
Basic earnings (loss) per share ........... $ (1.41) $ 0.09 $ (1.62) $ (0.11)
========== ======= ========== ==========
Diluted earnings (loss) per share before
extraordinary item ..................... $ (1.34) $ 0.09 $ (1.55) $ (0.11)
Extraordinary loss per share .............. (0.07) -- (0.07) --
---------- ------- ---------- ----------
Diluted earnings (loss) per share ......... $ (1.41) $ 0.09 $ (1.62) $ (0.11)
========== ======= ========== ==========
5
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CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table sets forth the 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 the three
months ended January 1, 2000, the options' exercise prices were in excess of the
average market price of the Company's common stock, and therefore the effect was
antidilutive. For the remaining periods indicated, inclusion of such options
would result in an antidilutive effect due to the net loss incurred by the
Company.
OPTIONS RANGE OF EXERCISE PRICES
------- ------------------------
THREE MONTHS ENDED
DECEMBER 30, 2000 ....... 2,455,722 $ 0.34 - $10.56
THREE MONTHS ENDED
JANUARY 1, 2000 ........ 2,247,110 $ 7.41 - $15.00
SIX MONTHS ENDED
DECEMBER 30, 2000 ....... 2,481,417 $ 0.34 - $15.00
SIX MONTHS ENDED
JANUARY 1, 2000 ......... 2,399,985 $ 0.34 - $15.00
The warrant to purchase 393,916 shares of the Company's common stock
granted in June 2000 to Ableco Finance LLC, one of the Company's lenders, was
not included in the computation of the diluted loss per share for the three and
six months ended December 30, 2000 due to the net loss incurred by the Company.
4. COMPREHENSIVE INCOME (LOSS)
Pursuant to the provisions of SFAS No. 130, Reporting Comprehensive
Income, the Company's comprehensive loss is as follows, net of tax (in
thousands):
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 30, JANUARY 1, DECEMBER 30, JANUARY 1,
2000 2000 2000 2000
-------- ------- -------- -------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net income (loss) ............... $(10,571) $ 654 $(12,198) $ (831)
Net accumulated derivative
losses........................ (506) -- (391) --
Foreign currency translation gain
(loss), net of tax ........... 894 (1,499) (319) (344)
-------- ------- -------- -------
Total comprehensive loss ........ $(10,183) $ (845) $(12,908) $(1,175)
======== ======= ======== =======
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9
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The accumulated derivative gain and loss activity relating to cash flow
hedges for the three and six months ended December 30, 2000 is as follows (in
thousands):
THREE MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 30, DECEMBER 30,
2000 2000
----------- -----------
(UNAUDITED) (UNAUDITED)
Beginning accumulated derivative gains ...... $ 115 $ --
Revaluations of cash flow hedge derivatives.. (310) (66)
Net reclassifications to earnings ........... (196) (325)
----- -----
Ending net accumulated derivative losses .... $(391) $(391)
===== =====
The components of the accumulated other comprehensive loss are as
follows, net of tax (in thousands):
DECEMBER 30, JULY 1, JANUARY 1,
2000 2000 2000
--------- --------- ---------
(UNAUDITED) (UNAUDITED)
Net accumulated derivative losses .................. $ (391) $ -- $ --
Foreign currency translation adjustments,
net of tax........................................ (6,296) (5,977) (4,403)
------- ------- -------
Accumulated other comprehensive loss ............... $(6,687) $(5,977) $(4,403)
======= ======= =======
5. OPERATIONS BY INDUSTRY SEGMENTS
Pursuant to SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information, 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 (All-Terrain Vehicle).
7
10
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Summarized segment data is as follows (in thousands):
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 30, JANUARY 1, DECEMBER 30, JANUARY 1,
2000 2000 2000 2000
--------- --------- --------- ---------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net sales to external customers:
Bicycles .................. $ 34,783 $ 41,612 $ 69,931 $ 78,085
Motorsports ............ (96) -- 1,443 --
-------- -------- -------- --------
$ 34,687 $ 41,612 $ 71,374 $ 78,085
======== ======== ======== ========
Operating income (loss):
Bicycles .................. $ 3,049 $ 2,657 $ 4,859 $ 2,647
Motorsports ............ (3,587) (1,537) (6,866) (3,026)
-------- -------- -------- --------
$ (538) $ 1,120 $ (2,007) $ (379)
======== ======== ======== ========
The Company evaluates performance of its segments based on profit or
loss from operations. The amounts below are not allocated between the segments
(in thousands):
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 30, JANUARY 1, DECEMBER 30, JANUARY 1,
2000 2000 2000 2000
--------- --------- --------- ---------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Total operating income (loss) for
reportable segments .............. $ (538) $ 1,120 $ (2,007) $ (379)
Other income (expense):
Interest expense ............ (1,762) (1,362) (3,550) (2,404)
Other income ................ 117 513 391 734
-------- ------- -------- -------
(1,645) (849) (3,159) (1,670)
-------- ------- -------- -------
Income (loss) before income taxes
and extraordinary item ........... (2,183) 271 (5,166) (2,049)
Income tax (provision) benefit ... (7,836) 383 (6,480) 1,218
-------- ------- -------- -------
Income (loss) before extraordinary
item ............................. (10,019) 654 (11,646) (831)
Extraordinary loss from early
extinguishment of debt, net of $0
tax benefit ...................... (552) -- (552) --
-------- ------- -------- -------
Net income (loss) ................ $(10,571) $ 654 $(12,198) $ (831)
======== ======= ======== =======
8
11
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Summarized segment assets are as follows (in thousands):
DECEMBER 30, JULY 1, JANUARY 1,
2000 2000 2000
--------- --------- ---------
(UNAUDITED) (UNAUDITED)
Indentifiable assets:
Bicycles ....... $121,892 $146,875 $156,133
Motorsports .... 19,886 18,032 10,540
-------- -------- --------
$141,778 $164,907 $166,673
======== ======== ========
6. NET DEFERRED TAX ASSETS
The significant components of the Company's deferred tax assets and
liabilities at December 30, 2000, July 1, 2000 and January 1, 2000 are as
follows (in thousands):
DECEMBER 30, JULY 1, JANUARY 1,
2000 2000 2000
--------- --------- ---------
(UNAUDITED) (UNAUDITED)
Deferred tax assets:
Accounts receivable and inventory reserves.. $ 2,329 $ 2,148 $ 2,026
Accrued liabilities ........................ 1,179 1,028 984
Tax credits and NOL carryforwards .......... 7,748 4,943 2,548
Other ...................................... 914 1,162 927
-------- ------- -------
Total deferred assets ...................... 12,170 9,281 6,485
-------- ------- -------
Deferred tax liabilities:
Tax over book depreciation ................. (1,644) (1,438) (1,206)
Accounts receivable fair value adjustment .. (429) (572) (715)
Other ...................................... (1,318) (1,019) (902)
-------- ------- -------
Total deferred liabilities ................. (3,391) (3,029) (2,823)
-------- ------- -------
Net deferred tax asset before valuation
allowance..................................... 8,779 6,252 3,662
Valuation allowance ............................. (8,802) -- --
-------- ------- -------
Net deferred tax asset (liability) .............. $ (23) $ 6,252 $ 3,662
======== ======= =======
The Company established a valuation allowance as of December 30, 2000
for substantially all of the excess of deferred tax assets over deferred tax
liabilities existent at that date. Although the Company ultimately expects to
realize these tax benefits in future years, SFAS No. 109, Accounting for Income
Taxes, requires the establishment of a valuation allowance when there is
uncertainty as to the realizability of deferred tax assets. The deferred tax
assets will be recognized in future periods to the extent that the Company
reasonably expects such assets to be realized. The Company evaluates the
realizability of its deferred tax assets on a quarterly basis. If the Company
determines a portion or all of the valuation allowance to be unnecessary, the
related tax benefits will reduce the future income tax provision anticipated at
that time.
The remaining deferred tax liability shown above of $23,000 pertains to
Cannondale Europe. This amount is included within "Warranty and other accrued
expenses" on the Condensed Consolidated Balance Sheet at December 30, 2000.
9
12
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. DERIVATIVES AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, and its
amendments SFAS No. 137 and SFAS No. 138, in June 1999 and June 2000,
respectively. The Statement requires 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 earnings. If a derivative is a hedge, depending
on the nature of the hedge, changes in the fair value of derivatives are either
offset against the change in fair value of assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The Company adopted SFAS No. 133, as amended, effective July 2, 2000; the effect
of such adoption was not material to either operating results or financial
position for the quarter ended September 30, 2000.
The Company enters into forward foreign currency contracts to purchase
and sell U.S., European, Australian, Canadian and Japanese currencies to reduce
exposures to foreign currency risks. The 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
Company also uses forward foreign currency contracts as cash flow hedges to
mitigate foreign currency risks related to the settlements of forecasted sales
and purchase transactions. 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 carrying amount of derivatives at fair value as of December 30,
2000 was $(710,000) and is included within "Warranty and other accrued expenses"
on the Company's Condensed Consolidated Balance Sheet. The net expense relating
to amortization of premiums and discounts of cash flow hedges was not material
to either operating results or financial position for the three- and six-month
periods ended December 30, 2000 and is included in other income (expense) on the
Condensed Consolidated Statement of Operations. The total net accumulated
derivative losses of $391,000 included in the accumulated other comprehensive
loss at December 30, 2000 are expected to be reclassified into earnings within
the next 12 months upon settlement of the related hedged item (accounts
receivable or sale of inventory to a third party). As of December 30, 2000 the
maximum period of time the Company was hedging its exposure to the variability
in future cash flows for forecasted transactions was six months.
8. SHIPPING AND HANDLING FEES AND COSTS
Prior year net sales and selling, general and administrative expenses
have been restated pursuant to EITF Issue 00-10, Accounting for Shipping and
Handling Fees and Costs. In accordance with such, all shipping and handling
billings to customers have been included in net sales, and freight costs
incurred for product shipments have been included in selling, general and
administrative expenses. Previously, the Company offset shipping and handling
charges billed to customers and the related freight costs within selling,
general and administrative expenses. For the quarterly periods ended December
30, 2000 and January 1, 2000, shipping and handling billings of approximately
$321,000 and $462,000, respectively, have been included in net sales, and
freight costs of approximately $584,000 and $894,000, respectively, have been
included in selling, general and administrative expenses. For the six months
ended December 30, 2000 and January 1, 2000, shipping and handling billings of
approximately $813,000 and $926,000, respectively, have been included in net
sales, and freight costs of approximately $1,330,000 and $1,685,000,
respectively, have been included in selling, general and administrative
expenses.
10
13
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. LONG-TERM DEBT
During the second quarter of fiscal 2001, the Company paid down $12.0
million in long-term debt and recorded an extraordinary loss of $552,000
relating to the write-off of certain deferred financing costs. The pay-down
terminated the warrant to purchase 393,916 shares of the Company's common stock
granted in June 2000 to Ableco Finance LLC, one of the Company's lenders.
At December 30, 2000, the Company was not in compliance with the
financial covenants of its borrowing facilities. Accordingly, long-term debt has
been reclassified to a current liability on the Condensed Consolidated Balance
Sheet as of December 30, 2000. The lenders have waived the covenant non
compliance, and the Company is currently negotiating amendments to its current
financing agreements with its lenders.
10. STOCK OPTION PLAN
Effective December 11, 2000, the Company adopted a new stock option
plan (the "2000 plan") pursuant to which the Company may issue and sell a total
of 1,000,000 shares of its common stock, $0.01 par value per share. Options may
be granted under the plan to employees who do not serve as both officers and
directors of the Company. The 2000 plan expires on December 11, 2010.
11. RELATED PARTY TRANSACTION
During the first quarter of fiscal 2001, Joseph Montgomery paid $1.4
million to the Company as full payment of all deferred interest and accrued
interest thereon. During the second quarter of fiscal 2001, Mr. Montgomery
repaid his entire notes payable obligation to the Company totaling $12.0 million
plus all accrued interest thereon. The proceeds of such repayment were used to
retire a portion of the Company's long-term debt, as discussed above in Note 9.
12. INTERCOMPANY DIVIDEND
During the first quarter of fiscal 2001, the Company received a
dividend from Cannondale Europe, a wholly-owned foreign subsidiary, in the
amount of $1,073,000. The Company has provided for additional 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. See Note 6 for further discussion
concerning the accounting treatment of these taxes.
13. 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.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Sales. Net sales decreased to $34.7 million in the second quarter
of fiscal 2001 from $41.6 million in the second quarter of fiscal 2000, a
decrease of approximately $6.9 million or 16.6%. Approximately $2.6 million, or
38% of the decrease in net sales, is attributable to an unfavorable foreign
exchange impact primarily resulting from the weakened Euro compared to the U.S.
dollar. Additionally, the severe winter weather and general softening in
consumer purchases caused the bicycle dealers to tighten inventory levels, thus
causing the remainder of the Company's bicycle sales decrease. Shipments of the
Company's MX400 motorcycle resumed in December after being temporarily suspended
while the Company completed testing and implementation of various improved
engine components. Net sales for the second quarters of fiscal 2001 and 2000
include shipping and handling billings of approximately $321,000 and $462,000,
respectively, pursuant to EITF Issue 00-10, Accounting for Shipping and Handling
Fees and Costs.
For the six months ended December 30, 2000, net sales were $71.4
million, a decrease of approximately $6.7 million or 8.6% from the $78.1 million
recorded for the same period last year. Included in the net sales amount for the
first six months of fiscal 2001 is approximately $1.4 million in motorsports
shipments. Approximately $5.4 million, or 81% of the decrease in total net
sales, is attributable to an unfavorable foreign exchange impact primarily
resulting from the weakened Euro compared to the U.S. dollar. Additionally, the
severe winter weather and general softening in consumer purchases caused the
bicycle dealers to tighten inventory levels, thus causing the remainder of the
Company's bicycle sales decrease. Net sales for the six months ended December
30, 2000 and January 1, 2000 include shipping and handling billings of
approximately $813,000 and $926,000, respectively, pursuant to EITF Issue 00-10,
Accounting for Shipping and Handling Fees and Costs.
Gross Profit. Gross profit was $10.2 million in the second quarter of
fiscal 2001, a decrease of 21.1% from the gross profit in the second quarter of
fiscal 2000 of $13.0 million. Gross profit as a percentage of net sales in the
second quarter of fiscal 2001 decreased to 29.5% compared to 31.1% for the
second quarter of fiscal 2000. The decrease in gross profit dollars and gross
profit as a percentage of net sales was primarily attributable to the production
start-up costs of the MX400 which were not proportionately offset by revenues.
Bicycle margins increased to 33.7% for the second quarter of fiscal 2001 from
31.8% in the prior year primarily as a result of a more favorable product mix;
this margin increase includes the unfavorable foreign exchange impact of
approximately $763,000 primarily resulting from the weakened Euro compared to
the U.S. dollar.
Gross profit was $20.2 million for the first six months of fiscal 2001,
a decrease of 14.8% from the gross profit for the first six months of fiscal
2000 of $23.7 million. Gross profit as a percentage of net sales for the first
six months of fiscal 2001 decreased to 28.3% compared to 30.3% for the first six
months of fiscal 2000. The decrease in gross profit dollars and gross profit as
a percentage of net sales was primarily attributable to the production start-up
costs of the MX400 which were not proportionately offset by revenues. Bicycle
margins increased to 33.3% for the first six months of fiscal 2001 from 30.9% in
the prior year primarily as a result of a more favorable product mix; this
margin increase includes the unfavorable foreign exchange impact of
approximately $1.6 million primarily resulting from the weakened Euro compared
to the U.S. dollar.
Operating Expenses. Operating expenses were $10.8 million for the
second quarter of fiscal 2001, a decrease of 9.1% from the $11.8 million
recorded for the second quarter of fiscal 2000. For the first six months of
fiscal 2001, operating expenses decreased 7.8% to $22.2 million from $24.1
million for the same period last year.
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Selling, general and administrative expenses decreased to $8.8 million
for the second quarter of fiscal 2001, from $10.1 million recorded during the
prior-year period. For the first six months of fiscal 2001, selling, general and
administrative expenses decreased to $18.3 million from $19.9 million during the
prior-year period. Decreased selling, general and administrative expenses during
the second quarter and first six months of fiscal 2001 resulted from the
continued cost-reduction efforts of the Company and a reduction in those
expenses tied directly to sales volume, coupled with the foreign exchange impact
of the weakened Euro compared to the U.S. dollar. As a percentage of net sales,
selling, general and administrative expenses represented 25.6% for the first six
months of fiscal 2001 compared to 25.5% in the prior-year period.
Research and development expenses increased to $2.0 million in the
second quarter of fiscal 2001, from $1.8 million recorded during the prior-year
period. The increase in research and development expenses during the second
quarter of fiscal 2001 primarily reflects the expenses related to the
development of the FX400 ATV. For the first six months of fiscal 2001, research
and development expenses decreased to $3.9 million from $4.2 million recorded
during the prior year due to the reduced activity during the first quarter of
fiscal 2001. The Company invested approximately $1.3 million in research and
development for its motorsports products during the second quarter of fiscal
2001 compared to approximately $1.0 million during the same period last year.
For the first six months of fiscal 2001, the Company invested approximately $2.3
million in research and development for its motorsports products compared to
approximately $2.0 million during the prior-year period. As a percentage of net
sales, research and development expenses were 5.5% for the first six months of
fiscal 2001 compared to 5.4% for the first six months of fiscal 2000.
Other Income (Expense). Interest expense increased to $1.8 million in
the second quarter of fiscal 2001 from $1.4 million recorded during the
prior-year period. For the first six months of fiscal 2001, interest expense was
$3.6 million compared to $2.4 million recorded for the first six months of
fiscal 2000. The increase in interest expense was primarily attributable to
higher average debt balances and higher interest rates associated with the
Company's new credit facilities compared to the same periods last year. For the
second quarter and first six months of fiscal 2001, other income primarily
consisted of interest income from the loan to Joseph Montgomery coupled with
finance charge income from accounts receivable, offset by foreign exchange
losses. For the second quarter and first six months of fiscal 2001, interest
income from the loan to Joseph Montgomery totaled $238,000 and $541,000,
respectively.
Income Taxes. For the three months ended December 30, 2000, income tax
expense was $7.8 million compared to the tax benefit of $383,000 recorded for
the three months ended January 1, 2000. For the six months ended December 30,
2000, income tax expense was $6.5 million compared to the tax benefit of $1.2
million recorded for the same period last year. The significant increases in tax
expense for the three and six months ended December 30, 2000 relates to the
deferred tax asset valuation allowance established by the Company. Although the
Company ultimately expects to realize its net deferred tax assets in future
years, Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes, requires the establishment of a valuation allowance when there is
uncertainty as to the realizability of deferred tax assets. See Note 6 in the
Notes to the Condensed Consolidated Financial Statements for further discussion.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $3.0 million for the first
six months of fiscal 2001, a decrease of approximately $8.0 million compared to
$11.0 million of net cash used in operating activities for the first six months
of fiscal 2000. The decrease in net cash used in operating activities during the
first six months of fiscal 2001 compared to the same period last year was
primarily attributable to lower accounts receivable levels of approximately $3.5
million, the receipt of approximately $1.9 million of accrued interest from
Joseph Montgomery, and an increase in accrued and current liabilities of
approximately $3.0 million.
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During the second quarter of fiscal 2001, Mr. Montgomery repaid his
entire notes payable obligation to the Company totaling $12.0 million plus all
accrued interest thereon. The proceeds of such repayment were used to retire a
portion of the Company's long-term debt, as discussed in Note 9 to the Condensed
Consolidated Financial Statements.
Capital expenditures were $2.0 million for the first six months of
fiscal 2001, compared to $2.9 million for the first six months of fiscal 2000.
Capital expenditures during the first six months of fiscal 2001 principally
related to tooling used in the production of motorsports products, whereas
capital expenditures during the first six months of fiscal 2000 related to
computer equipment and manufacturing equipment associated with the production of
both the bicycle and motorsports product lines.
Net cash used in financing activities for the first six months of
fiscal 2001 was $9.9 million, compared to the $10.2 million of net cash provided
by financing activities for the first six months of fiscal 2000. The net cash
used in financing activities during the first six months of fiscal 2001 was
primarily due to the early repayment of $12.0 million of long-term debt, as
discussed in Note 9 to the Condensed Consolidated Financial Statements. The net
cash provided by financing activities for the first six months of fiscal 2000
primarily reflected the increase in the Company's multi-currency revolving
credit facility in order to finance working capital needs and capital
expenditures. At December 30, 2000, the availability under the Company's
revolving line of credit with the CIT Group/Business Credit Inc. was
approximately $6.5 million.
At December 30, 2000, the Company was not in compliance with the
financial covenants of its borrowing facilities. Accordingly, long-term debt has
been reclassified to a current liability on the Condensed Consolidated Balance
Sheet as of December 30, 2000. The lenders have waived the covenant non
compliance, and the Company is currently negotiating amendments to its current
financing agreements with its lenders.
CERTAIN FACTORS WHICH MAY AFFECT THE COMPANY'S FUTURE PERFORMANCE
This Quarterly Report on Form 10-Q contains certain forward looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
which represent the Company's expectations or beliefs concerning future events,
including, but not limited to, the following: statements regarding the timing of
the Company's planned production and shipping of its motorsports products;
statements regarding the Company's capital and current operational investments
to finance the planned growth of the Company; statements regarding the Company's
expected cash needs, sources of cash to fund its planned operating and capital
requirements and its future ability to comply with the terms and conditions of
its present financing facilities. 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. Reference is made to the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in the Company's annual report on Form 10-K for the fiscal
year ended July 1, 2000 for a description of certain additional risk factors
which may affect the Company's future results.
Item 3. 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. For further discussion of the quantitative and qualitative
aspects of market risk, see Part II Item 7A of the Company's annual report on
Form 10-K for the fiscal year ended July 1, 2000.
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CREDIT RISKS.
The Company's customer base is composed of specialty bicycle retailers
which are located principally throughout the United States and Europe, and
specialty motorsports dealers which are located throughout the United States.
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 the first six months of fiscal 2001. No single customer accounted for
more than 5% of the Company's sales during the first six months of fiscal 2001.
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 RISKS.
The Company enters into forward foreign currency contracts to purchase
and sell U.S., European, Australian, Canadian and Japanese currencies to reduce
exposures to foreign currency risks. The 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
Company also uses forward foreign currency contracts as cash flow hedges to
mitigate foreign currency risks related to the settlements of forecasted sales
and purchase transactions. 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. As of December 30, 2000, the maximum period of time
the Company was hedging its exposure to the variability in future cash flows for
forecasted transactions was six months. The carrying amount of derivatives at
fair value as of December 30, 2000 was $(710,000) and is included within
"Warranty and other accrued expenses" on the Company's Condensed Consolidated
Balance Sheet.
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PART II OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An Annual Meeting of Stockholders was held on November 15, 2000 and reconvened
on November 29, 2000. At the Annual Meeting, the Company's stockholders:
a. Elected three Class III Directors to serve for the ensuing three years.
Mr. William A. Luca was elected as a Class III Director with
5,543,657.5 votes for and 1,772,048 votes withheld. Mr. Daniel C.
Alloway was elected as a Class III Director with 5,565,853.5 votes for
and 1,749,852 votes withheld. Mr. Gregory Griffin was elected as a
Class III Director with 6,030,589.5 votes for and 1,285,116 votes
withheld. Class I Directors, whose term of office continued after the
Annual Meeting and expires in 2001, are Joseph S. Montgomery and
Michael J. Stimola. Class II Directors, whose term of office continued
after the Annual Meeting and expires in 2002, are Mr. John Sanders, Mr.
James S. Montgomery, and Ms. Sally G. Palmer.
b. Failed to approve an amendment to the Company's 1998 Stock Option Plan.
Of the votes cast, there were 2,455,117.5 votes for, 2,125,965 votes
against, 419,038 votes abstaining, and 2,315,585 non-votes.
c. Ratified the selection by the Board of Directors of Ernst&Young LLP to
serve as the Company's independent auditors for the fiscal year ending
June 30, 2001. Of the votes cast, there were 6,768,826.50 for, 537,761
votes against, and 9,118 votes abstaining.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the quarter ended
December 30, 2000.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CANNONDALE CORPORATION
Date: February 13, 2001 /s/ WILLIAM A. LUCA
-----------------------------------
William A. Luca
Vice President of Finance, Treasurer,
Chief Financial Officer and Chief
Operating Officer
(Principal Financial Officer
and authorized signatory)
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