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 March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------- ---------
Commission File Number 0-24884
CANNONDALE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 06-0871823
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16 TROWBRIDGE DRIVE, BETHEL, CONNECTICUT 06801
(Address of principal executive offices) (Zip code)
(203) 749-7000
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
The number of shares outstanding of the issuer's Common Stock, $.01 par value
per share, as of May 10, 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 March 31,
2001, July 1, 2000 and April 1, 2000 ..................................... 1
Condensed Consolidated Statements of Operations for the
three and nine months ended March 31, 2001 and April 1, 2000 ............. 2
Condensed Consolidated Statements of Cash Flows for the
nine months ended March 31, 2001 and April 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 ................. 15
Part II Other Information
Item 5. Other Information .......................................................... 17
Item 6. Exhibits and Reports on Form 8-K ........................................... 17
Signature .......................................................................................... 18
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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)
MARCH 31, 2001 JULY 1, 2000 APRIL 1, 2000
-------------- ------------ -------------
(UNAUDITED) (NOTE 1) (UNAUDITED)
ASSETS
Current assets:
Cash .................................................. $ 1,920 $ 5,064 $ 3,902
Trade accounts receivable, less allowances of
$11,146, $10,076 and $9,852 ....................... 47,833 50,224 61,523
Inventories ........................................... 42,861 40,413 41,902
Deferred income taxes ................................. -- 5,571 6,223
Prepaid expenses and other current assets ............. 3,719 3,300 4,456
Interest receivable from a related party .............. -- 1,318 1,110
--------- --------- ---------
Total current assets ....................................... 96,333 105,890 119,116
Property, plant and equipment, net ......................... 36,352 40,114 40,129
Notes receivable and advances to related parties ........... 1,349 13,197 13,174
Other assets ............................................... 4,354 5,706 3,142
--------- --------- ---------
Total assets ............................................... $ 138,388 $ 164,907 $ 175,561
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................... $ 13,970 $ 15,912 $ 18,264
Revolving credit advances ............................. 4,038 2,235 3,445
Income taxes payable .................................. 27 307 --
Warranty and other accrued expenses ................... 8,743 7,403 6,953
Current installments of long-term debt ................ 4,856 4,577 73,185
--------- --------- ---------
Total current liabilities .................................. 31,634 30,434 101,847
Long-term debt, less current installments .................. 54,760 63,363 --
Deferred income taxes ...................................... -- -- 1,492
Other noncurrent liabilities ............................... 437 424 432
--------- --------- ---------
Total liabilities .......................................... 86,831 94,221 103,771
--------- --------- ---------
Commitments and contingencies . ............................ -- -- --
Stockholders' equity:
Common stock, $.01 par value:
Authorized shares - 40,000,000
Issued shares - 8,821,871, 8,808,125 and 8,796,067 88 88 88
Additional paid-in capital ............................ 57,978 57,935 57,868
Retained earnings ..................................... 21,252 38,802 39,735
Less 1,292,900 shares in treasury at cost ............. (20,162) (20,162) (20,162)
Accumulated other comprehensive loss .................. (7,599) (5,977) (5,739)
--------- --------- ---------
Total stockholders' equity ................................. 51,557 70,686 71,790
--------- --------- ---------
Total liabilities and stockholders' equity ................. $ 138,388 $ 164,907 $ 175,561
========= ========= =========
See accompanying notes
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CANNONDALE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, APRIL 1, MARCH 31, APRIL 1,
2001 2000 2001 2000
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net sales .................................... $ 32,636 $ 40,308 $ 104,010 $ 118,393
Cost of sales ................................ 25,895 27,233 77,089 81,631
--------- --------- --------- ---------
Gross profit ................................. 6,741 13,075 26,921 36,762
--------- --------- --------- ---------
Expenses:
Selling, general and administrative .... 9,005 10,607 27,275 30,484
Research and development ............... 1,500 2,432 5,417 6,621
--------- --------- --------- ---------
10,505 13,039 32,692 37,105
--------- --------- --------- ---------
Operating income (loss) ...................... (3,764) 36 (5,771) (343)
--------- --------- --------- ---------
Other income (expense):
Interest expense ....................... (1,486) (1,901) (5,036) (4,305)
Other income (expense) ................. (199) 531 192 1,265
--------- --------- --------- ---------
(1,685) (1,370) (4,844) (3,040)
--------- --------- --------- ---------
Loss before income taxes and extraordinary
item ......................................... (5,449) (1,334) (10,615) (3,383)
Income tax benefit (provision) ............... 98 572 (6,382) 1,790
--------- --------- --------- ---------
Loss before extraordinary item ............... (5,351) (762) (16,997) (1,593)
Extraordinary loss from early extinguishment
of debt, net of $0 tax benefit ............... -- -- (552) --
--------- --------- --------- ---------
Net loss ..................................... $ (5,351) $ (762) $ (17,549) $ (1,593)
========= ========= ========= =========
Basic and diluted loss per share before
extraordinary item ........................... $ (0.71) $ (0.10) $ (2.26) $ (0.21)
Extraordinary loss per share ................. -- -- (0.07) --
--------- --------- --------- ---------
Basic and diluted loss per share ............. $ (0.71) $ (0.10) $ (2.33) $ (0.21)
========= ========= ========= =========
See accompanying notes
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CANNONDALE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, 2001 APRIL 1, 2000
-------------- -------------
(UNAUDITED) (UNAUDITED)
NET CASH USED IN OPERATING ACTIVITIES $ (8,220) $(15,215)
-------- --------
INVESTING ACTIVITIES:
Proceeds from repayments of loans provided to related parties .............. 12,032 49
Loans provided to related parties .......................................... (184) (269)
Capital expenditures ....................................................... (2,996) (4,448)
Proceeds from sale of equipment . .......................................... 743 633
-------- --------
Net cash provided by (used in) investing activities ........................ 9,595 (4,035)
-------- --------
FINANCING ACTIVITIES:
Net proceeds from issuance of common stock ................................. 43 53
Payments for early extinguishment of debt .................................. (12,000) --
Net proceeds from borrowings under short-term revolving credit agreements .. 4,774 19,356
Net proceeds from borrowings under long-term debt agreements ............... 2,100 --
-------- --------
Net cash provided by (used in) financing activities ........................ (5,083) 19,409
-------- --------
Effect of exchange rate changes on cash .................................... 564 443
-------- --------
Net increase (decrease) in cash ............................................ (3,144) 602
Cash at beginning of period ................................................ 5,064 3,300
-------- --------
Cash at end of period ...................................................... $ 1,920 $ 3,902
======== ========
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
nine-month periods ended March 31, 2001 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.
The Condensed Consolidated Balance Sheet at July 1, 2000 has been
derived from the audited financial statements at that date but does not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements.
RECLASSIFICATIONS
Certain fiscal 2000 amounts have been reclassified to conform to the
current year's presentation.
ACCOUNTING DEVELOPMENTS
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 adoption
of this standard is not expected to have a material effect on operating results
or the financial position of the Company.
2. INVENTORIES
The components of inventories are as follows (in thousands):
MARCH 31, APRIL 1,
2001 JULY 1, 2000 2000
---- ------------ ----
(UNAUDITED) (UNAUDITED)
Raw materials ............................. $ 22,486 $ 22,722 $ 24,806
Work-in-process ........................... 2,974 1,848 2,891
Finished goods ............................ 19,817 17,722 16,536
-------- -------- --------
45,277 42,292 44,233
Less reserve for obsolete inventories ..... (2,416) (1,879) (2,331)
-------- -------- --------
$ 42,861 $ 40,413 $ 41,902
======== ======== ========
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CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. LOSS PER SHARE AMOUNTS
The following table is a reconciliation of the numerator and
denominator of basic and diluted 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 loss per share data):
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
MARCH 31, APRIL 1, MARCH 31, APRIL 1,
2001 2000 2001 2000
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
NUMERATOR:
Numerator for basic and diluted loss per share - loss
before extraordinary item ............................... $(5,351) $ (762) $ ( 16,997) $(1,593)
Extraordinary loss from early extinguishment of debt, net
of $0 tax benefit ....................................... -- -- (552) --
------- ------- ------------ -------
Net loss ................................................... $(5,351) $ (762) $ ( 17,549) $(1,593)
======= ======= ============ =======
DENOMINATOR:
Denominator for basic and diluted loss per share -
weighted-average shares ................................. 7,529 7,503 7,520 7,495
------- ------- ------------ -------
Basic and diluted loss per share before extraordinary item . $ (0.71) $ (0.10) $ (2.26) $ (0.21)
Extraordinary loss per share ............................... -- -- (0.07) --
------- ------- ------------ -------
Basic and diluted loss per share ........................... $ (0.71) $ (0.10) $ (2.33) $ (0.21)
======= ======= ============ =======
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 loss per share. For the 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
MARCH 31, 2001 ......... 2,890,257 $ 0.34 - $10.56
THREE MONTHS ENDED
APRIL 1, 2000 .......... 2,383,862 $ 0.34 - $15.00
NINE MONTHS ENDED
MARCH 31, 2001 ........ 2,617,697 $ 0.34 - $15.00
NINE MONTHS ENDED
APRIL 1, 2000 .......... 2,325,140 $ 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 nine
months ended March 31, 2001 due to the net loss incurred by the Company. See
Note 9 for further discussion concerning this warrant.
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CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. COMPREHENSIVE INCOME (LOSS)
Pursuant to the provisions of SFAS No. 130, Reporting Comprehensive
Income, the Company's comprehensive loss is as follows, net of tax (in
thousands):
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
MARCH 31, APRIL 1, MARCH 31, APRIL 1,
2001 2000 2001 2000
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net loss.......................................... $ (5,351) $ (762) $ (17,549) $ (1,593)
Net accumulated derivative gains (losses)......... 273 -- (118) --
Foreign currency translation loss................. (1,185) (1,336) (1,504) (1,680)
----------- ----------- ------------ ----------
Total comprehensive loss.......................... $ (6,263) $ (2,098) $ (19,171) $ (3,273)
=========== =========== ============ ==========
The accumulated derivative gain and loss activity relating to cash flow
hedges for the three and nine months ended March 31, 2001 is as follows (in
thousands):
THREE MONTHS NINE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2001 2001
---- ----
(UNAUDITED) (UNAUDITED)
Beginning accumulated derivative losses........ $(391) $ --
Revaluations of cash flow hedge derivatives.... 303 237
Net reclassifications to earnings.............. (30) (355)
----- -----
Ending net accumulated derivative losses....... $(118) $(118)
===== =====
The components of the accumulated other comprehensive loss are as
follows, net of tax (in thousands):
MARCH 31, JULY 1, APRIL 1,
2001 2000 2000
---- ---- ----
(UNAUDITED) (UNAUDITED)
Net accumulated derivative losses.......... $ (118) $ -- $ --
Foreign currency translation adjustments... (7,481) (5,977) (5,739)
------- ------- -------
Accumulated other comprehensive loss....... $(7,599) $(5,977) $(5,739)
======= ======= =======
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CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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, its ATV (All-Terrain Vehicle)
and related accessories and clothing.
Summarized segment data is as follows (in thousands):
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
MARCH 31, APRIL 1, MARCH 31, APRIL 1,
2001 2000 2001 2000
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net sales to external customers:
Bicycles................... $ 30,899 $ 40,308 $ 100,830 $ 118,393
Motorsports................ 1,737 -- 3,180 --
--------- --------- --------- ---------
$ 32,636 $ 40,308 $ 104,010 $ 118,393
========= ========= ========= =========
Operating income (loss):
Bicycles................... $ 1,030 $ 2,656 $ 5,888 $ 5,303
Motorsports................ (4,794) (2,620) (11,659) (5,646)
--------- --------- --------- ---------
$ (3,764) $ 36 $ (5,771) $ (343)
========= ========= ========= =========
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CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
MARCH 31, APRIL 1, MARCH 31, APRIL 1,
2001 2000 2001 2000
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Total operating income (loss) for reportable
segments......................................... $ (3,764) $ 36 $ (5,771) $ (343)
Other income (expense):
Interest expense........................... (1,486) (1,901) (5,036) (4,305)
Other income (expense)..................... (199) 531 192 1,265
-------- -------- -------- --------
(1,685) (1,370) (4,844) (3,040)
-------- -------- -------- --------
Loss before income taxes and extraordinary item.. (5,449) (1,334) (10,615) (3,383)
Income tax benefit (provision).................. 98 572 (6,382) 1,790
-------- -------- -------- --------
Loss before extraordinary item................... (5,351) (762) (16,997) (1,593)
Extraordinary loss from early extinguishment of
debt, net of $0 tax benefit...................... -- -- (552) --
-------- -------- -------- --------
Net loss......................................... $ (5,351) $ (762) $(17,549) $ (1,593)
======== ======== ======== ========
Summarized segment assets are as follows (in thousands):
MARCH 31, JULY 1, APRIL 1,
2001 2000 2000
---- ---- ----
(UNAUDITED) (UNAUDITED)
Indentifiable assets:
Bicycles......... $116,215 $146,875 $161,351
Motorsports...... 22,173 18,032 14,210
-------- -------- --------
$138,388 $164,907 $175,561
======== ======== ========
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CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. NET DEFERRED TAX ASSETS
The significant components of the Company's deferred tax assets and
liabilities at March 31, 2001, July 1, 2000 and April 1, 2000 are as follows (in
thousands):
MARCH 31, JULY 1, APRIL 1,
2001 2000 2000
---- ---- ----
(UNAUDITED) (UNAUDITED)
Deferred tax assets:
Accounts receivable and inventory reserves...... $ 2,597 $ 2,148 $ 2,133
Accrued liabilities............................. 1,155 1,028 1,028
Tax credits and NOL carryforwards............... 9,986 4,943 3,561
Other........................................... 888 915 929
-------- -------- --------
Total deferred assets........................... 14,626 9,034 7,651
-------- -------- --------
Deferred tax liabilities:
Tax over book depreciation...................... (1,841) (1,438) (1,237)
Accounts receivable fair value adjustment....... (358) (572) (644)
Other........................................... (1,411) (1,019) (1,039)
-------- -------- --------
Total deferred liabilities...................... (3,610) (3,029) (2,920)
-------- -------- --------
Net deferred tax asset before valuation allowance..... 11,016 6,005 4,731
Valuation allowance................................... (11,037) -- --
-------- -------- --------
Net deferred tax asset (liability).................... $ (21) $ 6,005 $ 4,731
======== ======== ========
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, and has adjusted the valuation allowance for
activity during the third quarter of fiscal 2001. 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 $21,000 pertains to
Cannondale Europe. This amount is included within "Warranty and other accrued
expenses" on the Condensed Consolidated Balance Sheet at March 31, 2001.
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.
9
12
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 March 31, 2001
was $242,000 and is included within "Prepaid expenses and other current assets"
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 nine-month
periods ended March 31, 2001 and is included in other income (expense) on the
Condensed Consolidated Statement of Operations. The total net accumulated
derivative losses of $118,000 included in the accumulated other comprehensive
loss at March 31, 2001 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 March 31, 2001, the maximum period
of time the Company was hedging its exposure to the variability in future cash
flows for forecasted transactions was four 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 March 31,
2001 and April 1, 2000, shipping and handling billings of approximately $373,000
and $442,000, respectively, have been included in net sales, and freight costs
of approximately $692,000 and $887,000, respectively, have been included in
selling, general and administrative expenses. For the nine months ended March
31, 2001 and April 1, 2000, shipping and handling billings of approximately
$1,186,000 and $1,368,000, respectively, have been included in net sales, and
freight costs of approximately $2,022,000 and $2,571,000, respectively, have
been included in selling, general and administrative expenses.
9. LONG-TERM DEBT
On April 30, 2001, the CIT Group/Business Credit Inc. and Ableco
Finance LLC amended their respective financing agreements with the Company,
effective as of December 31, 2001, in order to modify certain financial
covenants. As a result of these amendments, the Company is in compliance with
all financial covenants of its borrowing facilities. As a condition to entering
into these amendments, the Company was required to receive a cash infusion of at
least $7.0 million, of which no more than $3.0 million was to be paid by the
Company's foreign subsidiaries. In satisfaction of this condition, Cannondale
Europe repaid to the Company $3.0 million in intercompany indebtedness, and the
Company sold an aggregate of $4.0 million of convertible subordinated debentures
to two individual investors, including Cannondale's Chairman, Chief Executive
Officer and President, Joseph Montgomery. The $2.0 million debenture issued to
Mr. Montgomery is due June 28, 2005 and is convertible into shares of
Cannondale's common stock at an initial conversion price of $4.50 per share. The
$2.0 million debenture issued to a third party investor is due April 28, 2004
and is convertible into shares of Cannondale's common stock at an initial
conversion price of $3.75 per share. Both debentures bear interest at an annual
rate of 8%.
10
13
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
10. SALE-LEASEBACK TRANSACTIONS
During the third quarter of fiscal 2001, the Company entered into two
sale-leaseback transactions for recently-purchased manufacturing equipment. No
gain or loss was recognized on a $421,000 transaction which will result in
approximately $152,000 of additional rent expense annually for a three year
period. A $39,000 gain was realized on a $310,000 transaction in which the
Company received $160,000 and the lender paid the balance of the equipment cost.
The gain was deferred and is being amortized over the six year term of the
lease. This lease will result in approximately $63,000 of additional rent
expense annually. Both leases are being accounted for as operating leases.
11. 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 only to employees who do not serve as both officers
and directors of the Company. The 2000 plan expires on December 11, 2010.
12. RELATED PARTY TRANSACTION
On April 27, 2001, the Company sold a $2.0 million debenture to Joseph
Montgomery, Cannondale's Chairman, Chief Executive Officer and President. See
Note 9 for further detail.
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.
13. 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.
14. 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 $32.6 million in the third quarter of
fiscal 2001 from $40.3 million in the third quarter of fiscal 2000, a decrease
of approximately $7.7 million or 19%. Approximately $1.2 million, or 15% 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. The
remainder of the sales decrease is due to dealers' cautious buying patterns
relating to the weakening economy, adverse weather conditions, and a delay in
delivery of bicycle accessories from vendors which affected shipments in March
2001. Shipments of the Company's FX400 ATV (All-Terrain Vehicle) began in
February 2001, and are included in the total motorsports shipments amount of
$1.7 million for the quarter ended March 31, 2001. Net sales for the third
quarters of fiscal 2001 and 2000 include shipping and handling billings of
approximately $373,000 and $442,000, respectively, pursuant to EITF Issue 00-10,
Accounting for Shipping and Handling Fees and Costs.
For the nine months ended March 31, 2001, net sales were $104.0
million, a decrease of approximately $14.4 million or 12%, from the $118.4
million recorded for the same period last year. Included in the net sales amount
for the first nine months of fiscal 2001 is approximately $3.2 million in
motorsports shipments. Approximately $6.5 million, or 45% 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. The
remainder of the sales decrease is due to dealers' cautious buying patterns
relating to the weakening economy, adverse weather conditions, and a delay in
delivery of bicycle accessories from vendors which affected shipments in March
2001. Net sales for the nine months ended March 31, 2001 and April 1, 2000
include shipping and handling billings of approximately $1,186,000 and
$1,368,000, respectively, pursuant to EITF Issue 00-10, Accounting for Shipping
and Handling Fees and Costs.
Gross Profit. Gross profit was $6.7 million in the third quarter of
fiscal 2001, a decrease of 48% from the gross profit in the third quarter of
fiscal 2000 of $13.1 million. Gross profit as a percentage of net sales in the
third quarter of fiscal 2001 decreased to 20.7% compared to 32.4% for the third
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 and FX400 which were not proportionately offset by revenues.
Bicycle margins for the third quarter of fiscal 2001 were 30.4% compared to
34.3% in the prior year primarily as a result of a less favorable product mix
coupled with the unfavorable foreign exchange impact from the weakened Euro
compared to the U.S. dollar.
Gross profit was $26.9 million for the first nine months of fiscal
2001, a decrease of 27% from the gross profit for the first nine months of
fiscal 2000 of $36.8 million. Gross profit as a percentage of net sales for the
first nine months of fiscal 2001 decreased to 25.9% compared to 31.1% for the
first nine 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 and FX400 which were not proportionately offset by
revenues. Bicycle margins increased to 32.4% for the first nine months of fiscal
2001 from 32.0% in the prior year primarily as a result of a more favorable
product mix, partially offset by the unfavorable foreign exchange impact of
approximately $1.9 million primarily resulting from the weakened Euro compared
to the U.S. dollar.
Operating Expenses. Operating expenses were $10.5 million for the third
quarter of fiscal 2001, a decrease of $2.5 million, or 19%, from the $13.0
million recorded for the third quarter of fiscal 2000. For the first nine months
of fiscal 2001, operating expenses decreased by $4.4 million, or 12%, to $32.7
million from $37.1 million for the same period last year.
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Selling, general and administrative expenses decreased to $9.0 million
for the third quarter of fiscal 2001, from $10.6 million recorded during the
prior-year period. For the first nine months of fiscal 2001, selling, general
and administrative expenses decreased to $27.3 million from $30.5 million during
the prior-year period. Decreased selling, general and administrative expenses
during the third quarter and first nine 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 26.2% for the first
nine months of fiscal 2001 compared to 25.7% in the prior-year period.
Research and development expenses decreased to $1.5 million in the
third quarter of fiscal 2001, from $2.4 million recorded during the prior-year
period. The decrease in research and development expenses during the third
quarter of fiscal 2001 primarily reflects the transition of the MX400 and FX400
from the development stages to production, as well as the timing of bicycle
research and development projects. For the first nine months of fiscal 2001,
research and development expenses decreased to $5.4 million from $6.6 million
recorded during the prior year due to the production start-up of the MX400 and
FX400. The Company invested approximately $763,000 in research and development
for its motorsports products during the third quarter of fiscal 2001 compared to
approximately $1.3 million during the same period last year. For the first nine
months of fiscal 2001, the Company invested approximately $3.1 million in
research and development for its motorsports products compared to approximately
$3.4 million during the prior-year period. As a percentage of net sales,
research and development expenses were 5.2% for the first nine months of fiscal
2001 compared to 5.6% for the first nine months of fiscal 2000.
Other Income (Expense). Interest expense decreased to $1.5 million in
the third quarter of fiscal 2001 from $1.9 million recorded during the
prior-year period. Such decrease is a result of lower average debt balances, due
to the $12.0 million pay-down of debt at the end of the second quarter of fiscal
2001, and lower interest rates, due to the decrease in the prime rate, for the
third quarter of fiscal 2001 compared to the third quarter of fiscal 2000. For
the first nine months of fiscal 2001, interest expense was $5.0 million compared
to $4.3 million recorded for the first nine months of fiscal 2000. The increase
in interest expense for the first nine months of fiscal 2001 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 third quarter and first nine months of fiscal 2001, other
income primarily consisted of finance charge income from accounts receivable,
offset by foreign exchange losses; additionally, for the first six months of
fiscal 2001, interest income from the loan to Joseph Montgomery, totaling
$541,000, was included in other income.
Income Taxes. For the three months ended March 31, 2001, the income tax
benefit was $98,000 compared to the income tax benefit of $572,000 recorded for
the three months ended April 1, 2000. For the nine months ended March 31, 2001,
income tax expense was $6.4 million compared to the income tax benefit of $1.8
million recorded for the same period last year. The significant increase in tax
expense for the nine months ended March 31, 2001 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 $8.2 million for the first
nine months of fiscal 2001, a decrease of approximately $7.0 million compared to
$15.2 million of net cash used in operating activities for the first nine months
of fiscal 2000. The decrease in net cash used in operating activities during the
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first nine months of fiscal 2001 compared to the same period last year was
primarily attributable to an increase in accrued expenses and a decrease in
accounts receivable levels, coupled with the receipt of approximately $1.9
million in accrued interest from Joseph Montgomery.
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 $3.0 million for the first nine months of
fiscal 2001, compared to $4.4 million for the first nine months of fiscal 2000.
Capital expenditures during the first nine months of fiscal 2001 principally
related to tooling used in the production of motorsports products, whereas
capital expenditures during the first nine months of fiscal 2000 related to
computer equipment and manufacturing equipment associated with the production of
both the bicycle and motorsports product lines.
During the third quarter of fiscal 2001, the Company entered into two
sale-leaseback transactions for recently-purchased manufacturing equipment. No
gain or loss was recognized on a $421,000 transaction which will result in
approximately $152,000 of additional rent expense annually for a three year
period. A $39,000 gain was realized on a $310,000 transaction in which the
Company received $160,000 and the lender paid the balance of the equipment cost.
The gain was deferred and is being amortized over the six year term of the
lease. This lease will result in approximately $63,000 of additional rent
expense annually. Both leases are being accounted for as operating leases.
Net cash used by financing activities for the first nine months of
fiscal 2001 was $5.1 million, compared to the $19.4 million of net cash provided
by financing activities for the first nine months of fiscal 2000. The net cash
used in financing activities during the first nine 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, offset
by net borrowings of approximately $4.8 million and $2.1 million under the
Company's short- and long-term borrowing facilities, respectively. The net cash
provided by financing activities for the first nine 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 March 31, 2001, the availability under the Company's revolving
line of credit with the CIT Group/Business Credit Inc. was approximately $6.7
million.
On April 30, 2001, the CIT Group/Business Credit Inc. and Ableco
Finance LLC amended their respective financing agreements with the Company,
effective as of December 31, 2001, in order to modify certain financial
covenants. As a result of these amendments, the Company is in compliance with
all financial covenants of its borrowing facilities. As a condition to entering
into these amendments, the Company was required to receive a cash infusion of at
least $7.0 million, of which no more than $3.0 million was to be paid by the
Company's foreign subsidiaries. In satisfaction of this condition, Cannondale
Europe repaid to the Company $3.0 million in intercompany indebtedness, and the
Company sold an aggregate of $4.0 million of convertible subordinated debentures
to two individual investors, including Cannondale's Chairman, Chief Executive
Officer and President, Joseph Montgomery. The $2.0 million debenture issued to
Mr. Montgomery is due June 28, 2005 and is convertible into shares of
Cannondale's common stock at an initial conversion price of $4.50 per share. The
$2.0 million debenture issued to a third party investor is due April 28, 2004
and is convertible into shares of Cannondale's common stock at an initial
conversion price of $3.75 per share. Both debentures bear interest at an annual
rate of 8%.
The Company expects that cash flow generated by its operations and
borrowings under its financing facilities will be sufficient to meet its planned
operating and capital requirements for the foreseeable future.
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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. In addition, when used in this report, the
words "anticipates," "plans," "believes," "estimates," "expects" and similar
expressions as they relate to the Company or its management are intended to
identify forward-looking statements. 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. All forward-looking
statements involve risks and uncertainties. Actual results may differ materially
from those discussed in, or implied by, the forward-looking statements as a
result of certain factors, including, but not limited to, seasonality, the
timing of the introduction and the market acceptance of new products,
competition, changes in foreign exchange rates, credit risks related to the
Company's customer base, adverse weather, the Company's reliance on key vendor
and supplier relationships, the Company's limited motorsports products
experience, changes in discretionary consumer spending and the Company's
dependence on key personnel. 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 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.
CREDIT RISKS.
The Company's customer base is composed of specialty bicycle retailers
which are located principally throughout the United States and Europe, and
motorsports retailers located in 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 nine months of
fiscal 2001. No single customer accounted for more than 5% of the Company's
sales during the first nine 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
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and Euros at rates agreed to at the inception of the contracts. As of March 31,
2001, the maximum period of time the Company was hedging its exposure to the
variability in future cash flows for forecasted transactions was four months.
The carrying amount of derivatives at fair value as of March 31, 2001 was
$242,000 and is included within "Prepaid expenses and other current assets" on
the Company's Condensed Consolidated Balance Sheet.
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PART II OTHER INFORMATION
Item 5. OTHER INFORMATION
On April 27, 2001, the Company sold an aggregate of $4.0 million of
convertible subordinated debentures to two individual investors, including the
Company's Chairman, Chief Executive Officer and President, Joseph Montgomery.
The $2.0 million debenture issued to Mr. Montgomery is due June 28, 2005 and is
convertible into shares of the Company's common stock at an initial conversion
price of $4.50 per share. The $2.0 million debenture issued to the third party
investor is due April 28, 2004 and is convertible into shares of the Company's
common stock at an initial conversion price of $3.75 per share. Based on the
initial conversion prices, the debentures are convertible into an aggregate of
977,777 shares of the Company's common stock. The holders of the debentures are
entitled to certain registration rights with respect to the Common Stock into
which the debentures are convertible. Both debentures bear interest at an annual
rate of 8%.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the quarter
ended March 31, 2001.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CANNONDALE CORPORATION
Date: May 15, 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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