1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
- -----------
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JUNE 29, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-24884
------------------------
CANNONDALE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 06-0871823
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
9 BROOKSIDE PLACE, 06829-0122
GEORGETOWN, CONNECTICUT (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code:
(203) 544-9800
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class: on which registered
- --------------------------------------------------------------------------------------------
None N/A
Scurities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01
------------------------
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definite proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
At September 20, 1996, the aggregate market value of the voting stock held by
non-affiliates of registrant was $143,828,104 based on the per share closing
price, and the registrant had 8,612,279 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's definitive Proxy Statement relating to the 1996 Annual
Meeting of Stockholders are incorporated by reference into Part III, as set
forth herein.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
PART I
ITEM 1. BUSINESS.
GENERAL.
Cannondale Corporation ("Cannondale" or the "Company") is a leading
manufacturer of high performance bicycles. The Company's bicycle line has grown
from 21 models in its 1992 model year to 57 models in its 1997 model year, all
of which are hand assembled and constructed with hand welded aluminum frames.
Cannondale also manufactures and sells bicycle accessories, which include
clothing, packs and bags, a line of components and bike trailers. The Company
was incorporated in Delaware in 1971.
The Company has experienced rapid growth, with net sales increasing from
$54.5 million in fiscal 1991 to $146 million in fiscal 1996. The Company
believes that the growth in cycling in general, and mountain biking in
particular, have contributed to its growth. Industry sources estimate that
mountain bikes accounted for 72 percent of all bicycle revenue in the United
States in 1995. Based on data from the Bicycle Market Research Institute
("BMRI"), the high performance segment of the bicycle market has grown more
rapidly than the market as a whole in recent years, which the Company believes
is due in large part to innovations such as lighter weight frames and suspension
systems.
PRODUCTS.
The Company's bicycles are marketed under the Cannondale brand name and
"Handmade in USA" logo. The Company's 1997 bicycle line offers 57 models, all of
which feature a Cannondale lightweight aluminum frame. Cannondale's use of
aluminum allows it to produce frames that are generally lighter in weight than
steel frames. Cannondale bicycles employ wide diameter tubing, which provides
greater frame rigidity as well as a distinctive look. Certain Cannondale models
also have full or front suspension systems, offering greater comfort and control
than non-suspended bikes.
The Company has recently introduced the Raven, a new high performance, full
suspension mountain bike. A product of the Company's ongoing research and
development, the Raven's frame is composed of lightweight carbon fiber skins
bonded to an aluminum spine, providing an even lighter frame weight than its
steel and aluminum counterparts. The Raven is currently scheduled for shipment
in the last quarter of 1997.
There are five major categories of bicycles sold in the adult market:
mountain, road racing, hybrid, touring and specialty. Mountain bikes have wide
tires, straight handlebars and are designed to handle off-road conditions. Road
racing bikes are lightweight with thin tires and drop (curved) handlebars.
Hybrid bikes have the straight handlebars and more upright riding position of
mountain bikes, but use thinner tires, making them suited for on- and off-road
use. Touring bikes are similar to road racing bikes in appearance, but the
frames are designed to carry packs and other touring supplies. The specialty
bicycle market encompasses various niche products, including tandem and
multi-sport bikes.
2
3
The 57 bicycle models in Cannondale's 1997 model year are distributed in
the five major bicycle categories as follows:
NUMBER OF
1997
CATEGORY MODELS
-------------------------------------------- ----------
Mountain Bikes:
Full Suspension........................ 10
Front Suspension....................... 8
Non-Suspended.......................... 9
Road Bikes:
Front Suspension....................... 2
Non-Suspended.......................... 11
Hybrid...................................... 7
Touring..................................... 3
Specialty:
Tandem................................. 4 (one front suspension)
Multi-Sport............................ 3
The Company's 1997 line of proprietary HeadShok front suspension forks
features a total of seven models. Each HeadShok model offers the Company an
important point of differentiation from other bicycle manufacturers, virtually
all of whose suspension bikes feature the same brand-name forks produced by one
of two independent suppliers. New in the 1997 model year are two HeadShok fork
models that can be mounted to non-Cannondale frames; all previous HeadShok forks
functioned with the bicycle's frame as part of an integrated system.
Like the HeadShok forks, the Company's use of its own CODA brand components
on its bicycles helps distinguish its models from those of its competitors. The
Company currently offers cranksets (chain rings), pedals, hubs, wheels, brakes,
handlebars, handlebar grips and stems, saddles, kickstands, and certain other
components under the CODA brand name. In addition to providing value-added
features exclusive to Cannondale's bicycles, CODA components also provide
revenues from aftermarket retail sales.
In addition to its bicycle, suspension fork and component lines, the
Company manufactures and sells bicycle accessories, including packs and bags,
apparel and other accessories, certain of which are manufactured for the Company
by third parties. These products are sold through the same distribution channels
as the Company's bicycles, forks and components.
MARKETING.
The goal of the Company's sales and marketing program is to establish
Cannondale as the leading high performance bicycle brand in the specialty
bicycle retail channel. The marketing effort is focused on innovation,
performance and quality leadership; publicity generated from the
Company-sponsored professional athletes; and a media campaign designed to
attract consumers to specialty bicycle retailers.
A major focus of the Company's marketing effort since January 1994 has been
the Volvo/Cannondale mountain bike racing team. The Company is leveraging the
competitive success of the racing team by using photo images of the athletes in
print media, on point-of-sale literature, banners, product packaging and product
catalogs. The Company also supports racing programs in other cycling areas,
including the New Balance/Cannondale triathlon racing team and the Saeco
professional road cycling team.
The Company's newest affiliation is with the Saeco team. A major force in
the Tour de France, Tour du Pont and other top professional road cycling events,
the Saeco team will compete aboard Cannondale bicycles, and in the Company's
cycling apparel, beginning in the spring of 1997. The Company's sponsorship of
the Saeco team is designed to increase Cannondale's visibility and credibility
among the high-end consumers dedicated to road racing.
3
4
The Company has historically maintained an active program to generate
publicity regarding its products in a variety of print and broadcast media, both
enthusiast and general interest. The public relations effort has been
supplemented by the Company's advertising program, which is primarily directed
to the enthusiast press, although the Company also advertises in more general
lifestyle publications targeting the upscale adult market with interests in
outdoor and leisure activities.
The Company has also made use of the internet to promote its brand and
image, offering consumers a web site (www.cannondale.com), which is currently
averaging more than one million hits per month.
SALES AND DISTRIBUTION.
Cannondale's distribution strategy is to sell its bicycles through
specialty bicycle retailers who it believes have the ability to provide
knowledgeable sales assistance regarding the technical and performance
characteristics of its products and to provide an ongoing commitment to service
its bicycles. The Company does not sell bicycles through mass merchandisers. A
key aspect of the Company's strategy is the addition of new retailers to its
existing specialty bicycle retailer network. When adding new retailers, the
Company takes into account a number of factors, including the targeting of
certain market areas determined by analyzing various population, demographic and
competitive characteristics.
In the United States and Canada, the Company currently sells bicycles and
accessories directly to approximately 1,300 specialty bicycle retailers and
sells accessories through an additional 400 retailers. Generally, the Company's
retailers do not have exclusive rights in any territory. The Company's 32 member
field sales force is responsible for marketing the Company's products to
retailers, providing retailer assistance and assisting in the Company's accounts
receivable management. The account managers also monitor retail sales at the
retailer level, enabling the Company to better respond to changes in market
demand and to adjust production accordingly.
Substantially all of Cannondale's domestic bicycle retailers participate in
the Authorized Retailer Program ("ARP"), in which they place orders for the year
and agree to take delivery at predetermined points throughout the year. This
program enables retailers to plan their business around the scheduled deliveries
and provides freight and pricing discounts, as well as payment terms that
generally vary from 30 to 180 days from the date of shipment, depending on the
time of year and other factors. Generally, retailers can place additional orders
during the year and can adjust their original ARP order as their sales warrant.
In addition, the ARP provides the Company with a valuable production planning
tool and helps to balance the production schedule. Historically, the Company has
received a substantial portion of its orders for the year under the ARP during
the first and second fiscal quarters. Orders may be canceled by the retailers
without penalty up to 30 days before shipment.
INTERNATIONAL OPERATIONS.
The Company's products are sold in over 60 foreign countries. The Company's
activities in Europe and Japan are conducted through two wholly-owned
subsidiaries, Cannondale Europe B.V. and Cannondale Japan KK, respectively.
Sales in other foreign countries are made by the Company from the United States,
through the use of 44 foreign distributors, who sell the Company's products to
approximately 680 specialty bicycle retailers overseas. During fiscal 1996, 1995
and 1994, Cannondale Europe accounted for 37, 35 and 32 percent, respectively,
of consolidated net sales, and Cannondale Japan accounted for 6, 6 and 5
percent, respectively.
Cannondale Europe. Cannondale Europe B.V., based in Oldenzaal, the
Netherlands, was formed in 1989. Cannondale Europe assembles bicycles at its
Netherlands facilities, using frames and components manufactured by the Company
as well as components manufactured by third parties. Cannondale Europe sells
bicycles and accessories directly to approximately 1,100 specialty bicycle
retailers in Austria, Belgium, Denmark, Finland, France, Germany, Italy, the
Netherlands, Norway, Spain, Sweden, Switzerland and the United Kingdom, using
locally based employee account managers supervised from the Oldenzaal
headquarters. Distributors are used in Greece, Hungary, Poland, Portugal, Turkey
and four republics comprising portions of former Czechoslovakia and Yugoslavia.
4
5
Cannondale Japan. The Company formed Cannondale Japan in fiscal 1992 to
undertake direct sales to Japanese specialty bicycle retailers. Cannondale
Japan, based in Osaka, imports fully assembled bicycles and a full line of
accessories from the Company and various components manufactured by third
parties. Cannondale Japan sells bicycles and accessories directly to
approximately 280 specialty retailers and sells only accessories to an
additional 89 retailers. Cannondale Japan also sells accessories to a Japanese
distributor which in turn sells to approximately 200 additional retailers.
Cannondale Australia. On July 11, 1996, Cannondale Australia Pty Limited
("Cannondale
Australia"), a newly formed subsidiary of the Company, purchased substantially
all the assets of Beaushan Trading Pty Limited, an Australian bicycle
distribution company, to undertake direct sales to Australian specialty bicycle
retailers. Cannondale Australia, based in Sydney, imports fully assembled
bicycles and a full line of accessories from the Company and various components
manufactured by third parties. Cannondale Australia sells bicycles and
accessories directly to approximately 110 specialty retailers.
SUPPLIERS.
Aluminum tubing, the primary material employed in the Company's
manufacturing operations, is available from a number of domestic suppliers. The
Company currently has a supply agreement for aluminum tubing expiring December
31, 1996, with an option to extend the agreement for up to three years at
current pricing. The Company believes that the termination of its current
agreement would not have a significant impact on either the availability or cost
of aluminum tubing. Cannondale purchases most of its components from Japanese,
Taiwanese and United States OEM suppliers. Purchases from Japanese component
manufacturers are made through Cannondale Japan. The Company's largest component
supplier is Shimano, which was the source of approximately 19 percent of the
Company's total inventory purchases in fiscal 1996. The Company has few
long-term agreements with its major component manufacturers, and has no
long-term agreement with Shimano. Although the Company believes it has
established close relationships with the principal suppliers of these
components, the Company's future success will depend upon its ability to
maintain such relationships, which may be terminated by such suppliers on short
notice, or to substitute new suppliers without interruption of supply.
PATENTS AND TRADEMARKS.
The Company holds 48 United States patents relating to various products,
processes or designs with expiration dates ranging from 1997 to 2014. The
Company focuses its attention in this area on obtaining patent protection for
the Company's core technologies and seeks broad coverage to protect its position
in the industry. The Company believes that its patented technology is a
reflection of its success in product innovation and that, collectively, its
patents enhance its ability to compete. However, in light of the nature of
innovation in the bicycle industry, the Company does not believe that the loss
of any one of its patents, or the expiration of any of its current patents,
would have a material adverse effect on the Company's business or results of
operations.
The Company holds numerous United States trademarks, covering the
CANNONDALE, CODA and HeadShok names and the names of a variety of products and
components. The CANNONDALE and CODA marks are also registered in Cannondale's
significant foreign markets. The Company believes its CANNONDALE marks have
strong brand name recognition in the bicycle and accessory markets, which the
Company believes is a significant competitive factor.
SEASONALITY.
The Company's business is highly seasonal due to consumer spending
patterns, which in turn affect retailer delivery preferences, traditionally
resulting in significantly stronger operating results in the third and fourth
fiscal quarters (January through June). See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Selected Quarterly
Financial Data; Seasonality."
5
6
COMPETITION.
Competition in the high performance segment of the bicycle industry is
based primarily on perceived value, brand image, performance features, product
innovation and price. Competition in foreign markets may also be affected by
duties, tariffs, taxes and the effect of various trade agreements and import
restrictions. The worldwide market for bicycles and accessories is extremely
competitive, and the Company faces competition from a number of manufacturers in
each of its product lines. A number of the Company's competitors are larger and
have greater resources than the Company. The Company competes on the basis of
the breadth and quality of its product line, the development of an effective
specialty retailer network and its brand recognition.
RESEARCH AND DEVELOPMENT.
Cannondale's product development is directed at making bicycles lighter,
stronger, faster and more comfortable. It is the objective of the research and
development group to design and deliver innovative products designed to further
the Company's efforts to position itself as an innovation leader. The Company's
research and development efforts have resulted in design and production systems
that allow the Company to compress the time between concept and production. The
Company believes that its research and development efforts have benefitted from
efficiencies realized through the use of computer-aided design tools and
increased integration of the design and production processes. The Company spent
$2.8 million, $1.8 million, and $1.3 million on research and development during
fiscal years 1996, 1995 and 1994, respectively.
ENVIRONMENTAL MATTERS.
The Company is subject to all applicable federal, state and local laws and
regulations relating to the discharge of materials into the environment, or
otherwise relating to the protection of the environment. The Company does not
believe that compliance with these regulations has an adverse effect upon its
business.
A portion of the Company's Bedford, Pennsylvania property acquired in 1992
is currently the subject of a groundwater monitoring program, stemming from the
removal, prior to Cannondale's acquisition of the property, of certain
underground storage tanks. The costs of the monitoring are not material to the
Company. No groundwater contamination has been indicated in the sampling results
to date. In the unanticipated event that conditions requiring remediation were
discovered, the costs of such remediation could have a material adverse effect
on the Company's financial condition.
EMPLOYEES.
As of June 29, 1996, the Company employed a total of 760 full time
employees in the United States, Cannondale Europe employed 113 full time
employees and Cannondale Japan employed 19 full time employees.
FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES.
Please refer to Note 13 of the Notes to Consolidated Financial Statements
appearing elsewhere in this Form 10-K.
ITEM 2. PROPERTIES.
The Company's headquarters are located in Georgetown, Connecticut. The
headquarters contain 15,900 square feet on a three-acre site. The facility
houses senior corporate management; financial and accounting staffs; marketing
and sales; design and research and development; management information systems
and purchasing. The land and buildings are owned by the Company. The Company has
contracted to buy land for the construction of a new headquarters facility,
located approximately 10 miles from the current headquarters. The Company is
currently negotiating a contract for construction of the new facility. In
connection with construction of the new facility, the Company is also
negotiating a contract to sell the existing headquarters facility for
approximately $1.7 million; the Company will continue to occupy the current
facility on a month-to-month lease pending its move into the new headquarters.
The Company anticipates that the cost of the new
6
7
facility (approximately $2.2 million) will be paid for with the proceeds from
the sale of the current headquarters, available cash and borrowings under the
Company's current credit facilities.
Cannondale has manufacturing facilities in Bedford, Pennsylvania and
Philipsburg, Pennsylvania. The Bedford plant contains 125,000 square feet on 23
acres and is the main production facility for bicycles and clothing, and also
houses customer service. The Philipsburg plant consists of 40,000 square feet on
12 acres and houses the production of accessories, some clothing and bike
sub-assemblies. In connection with the financing of the facilities, the sites
are held in the names of local development agencies and are occupied by the
Company pursuant to installment sales agreements. The Company makes monthly
payments which will fully amortize the financing from the local agencies and
additional financing provided by the Pennsylvania Industrial Development
Authority ("PIDA"). Upon final amortization (2009 for Bedford, 2010 for
Philipsburg), title to the properties will be conveyed to the Company and PIDA's
mortgages on the properties will be released. The Company is currently
negotiating a contract for the construction of an addition to the Bedford
facility of up to 40,000 square feet. The additional space will be used for
warehousing and expanded production. The project is expected to cost
approximately $5.1 million, of which approximately 40% will be financed by the
same agencies which have previously provided financing for the Bedford facility.
Cannondale Europe owns a 54,200 square foot facility in Oldenzaal, the
Netherlands, which houses administrative and sales offices, a bicycle assembly
plant and warehouse. Cannondale Europe's property provides additional space for
further expansion. Cannondale Japan and Cannondale Australia lease a total of
5,940 and 2,500 square feet of office and warehouse space, respectively.
The Company believes that its present facilities are in good condition, and
upon completion of the planned construction projects will be suitable for the
Company's operations and will provide sufficient capacity to meet the Company's
anticipated requirements for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
The Company currently and from time to time is involved in product
liability lawsuits and other litigation incidental to the conduct of its
business. The Company is not a party to any lawsuit or proceeding that, in the
opinion of management, is likely to have a material adverse effect on the
results of operations or financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of stockholders of the Company during
the fourth quarter of the Company's 1996 fiscal year.
7
8
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning executive
officers and other key members of management of the Company.
NAME AGE POSITION
- ------------------------------- --- ------------------------------------------------------------------
Joseph S. Montgomery........... 55 Chairman, President, Chief Executive Officer, Director
William A. Luca................ 53 Vice President of Finance, Treasurer, Chief Financial Officer,
Director
Richard J. Resch............... 53 Vice President for Technology Development, Director
James Scott Montgomery......... 35 Vice President of Marketing, Director
Daniel C. Alloway.............. 37 Vice President of Sales-United States, Vice President of European
Operations
Daniel N. Pullman.............. 37 Vice President of International Sales, Vice President of Japanese
Operations
Harold DeWaltoff............... 49 Vice President of Accessories
Leonard J. Konecny............. 53 Vice President of Purchasing
John Moriarty.................. 52 Assistant Treasurer, Director of Accounting
Joseph S. Montgomery founded Cannondale in 1971 and has been its Chairman,
President and Chief Executive Officer and a director since its formation. Mr.
Montgomery is the father of James Scott Montgomery, who is also a director and
serves as the Company's Vice President of Marketing.
William A. Luca joined Cannondale in January 1994 as Vice President of
Finance, Treasurer and Chief Financial Officer. Prior to joining the Company he
served as a management consultant from 1989 to 1993, including consulting for
the Company between August and December 1993. Mr. Luca was appointed a director
of the Company in August 1994.
Richard J. Resch joined Cannondale in 1988 as Director of Manufacturing. He
subsequently served as Vice President of Operations and from 1991 to the present
has been Vice President for Technology Development. He has been a director of
the Company since February 1990.
James Scott Montgomery has held a number of positions since joining
Cannondale in 1984. He is currently Vice President of Marketing. His previous
positions with the Company include founder and President of Cannondale Japan's
Sales and Trading Divisions (1991 to 1993), co-founder and Managing Director of
Cannondale Europe (1989 to 1991) and Director of Purchasing. He was appointed a
director of the Company in August 1994. Mr. Montgomery is the son of Joseph S.
Montgomery, the Company's Chairman, President and Chief Executive Officer.
Daniel C. Alloway has held a number of positions since joining Cannondale
in 1982, including Vice President of Sales-United States and Vice President of
European Operations (March 1994 to the present), Managing Director of Cannondale
Europe (1992 to 1994), Director of Sales and Marketing (1990 to 1992) and
National Sales Manager (1987 to 1990).
Daniel N. Pullman joined Cannondale in 1993 as Vice President of
International Sales. He is also Vice President of Japanese Operations. From 1989
to 1992 he was Vice President of Sales of Call Interactive, a voice response
joint venture of Information Service Corporation (an affiliate of American
Express) and AT&T.
Harold DeWaltoff joined Cannondale in 1990 as Vice President of Sales and
Marketing, and is currently Vice President of Accessories, a position he has
held since 1993. He previously was Vice President-Research and Development for
the Keds division of Stride Rite Inc., a shoe manufacturer.
Leonard J. Konecny joined Cannondale in 1994 as Vice President of
Purchasing. From 1988 to 1994 he was Director of Materials for General Signal
Building Systems (Dual-Lite and Edwards divisions), responsible for the
materials and purchasing functions.
John Moriarty joined Cannondale in 1993 as Assistant Treasurer and Director
of Accounting. From 1990 to 1993 he was Controller of Cuno, Inc., a manufacturer
of fluid filtration products. Between 1981 and 1989 he was employed by
Dual-Lite, Inc., as Vice President-Finance (1983 to 1989) and Controller (1981
to 1983).
Each of the officers of the Company is appointed by and serves at the
pleasure of the Board of Directors.
8
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock began trading on the Nasdaq National Market on
November 15, 1994, under the symbol BIKE. The following table sets forth for the
periods indicated the high and low sale prices per share for the Common Stock.
HIGH LOW
------ -----
FISCAL 1995
Second Quarter (from 11/15/94 to 12/31/94).......................... $14.50 $9.75
Third Quarter (1/1/95 to 4/1/95).................................... 17.00 10.25
Fourth Quarter (4/2/95 to 7/1/95)................................... 16.75 12.75
FISCAL 1996
First Quarter (7/2/95 to 9/30/95)................................... 19.50 13.25
Second Quarter (10/1/95 to 12/30/95)................................ 17.63 13.50
Third Quarter (12/31/95 to 3/30/96)................................. 18.75 13.75
Fourth Quarter (3/31/96 to 6/29/96)................................. 25.75 17.75
As of September 20, 1996, there were approximately 226 stockholders of
record of the Common Stock, excluding beneficial owners holding shares through
nominee names. Based on information available to it, the Company believes it had
more than 3,200 beneficial owners of its Common Stock as of such date.
The Company has not paid any cash dividends on its Common Stock during the
last two fiscal years and does not anticipate paying any cash dividends in the
foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following selected historical statement of operations data and balance
sheet data have been derived from the Consolidated Financial Statements of the
Company, some of which are presented herein. The information set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Conditions and Results of Operations" and the Consolidated Financial
Statements and related Notes appearing elsewhere in this Form 10-K.
TWELVE TWELVE TWELVE TEN TWELVE
MONTHS MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED
JUNE 29, JULY 1, JULY 2, JULY 3, SEPTEMBER 4,
1996 1995 1994 1993(6) 1992
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales....................... $145,976 $122,081 $102,084 $ 80,835 $ 76,911
Cost of sales................... 92,804 79,816 72,083 59,429 58,927
Gross profit.................... 53,172 42,265 30,001 21,406 17,984
Expenses:
Selling, general and
administrative............. 32,577 27,023 22,290 19,615 18,527
Research and development...... 2,837 1,751 1,317 1,105 1,314
Stock option compensation..... -- -- 2,046 -- --
Agent and distributor
termination costs.......... -- -- -- 271 1,196
Total operating expenses........ 35,414 28,774 25,653 20,991 21,037
Operating income (loss)......... 17,758 13,491 4,348 415 (3,053)
9
10
TWELVE TWELVE TWELVE TEN TWELVE
MONTHS MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED
JUNE 29, JULY 1, JULY 2, JULY 3, SEPTEMBER 4,
1996 1995 1994 1993(6) 1992
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Other income (expense):
Interest expense.............. (2,224) (3,929) (4,460) (4,177) (2,990)
Other income.................. 414 24 324 828 (868)
Total other income (expense).... (1,810) (3,905) (4,136) (3,349) (3,858)
Income (loss) before income
taxes, minority interest and
extraordinary item............ 15,948 9,586 212 (2,934) (6,911)
Income tax benefit (expense).... (5,802) (1,353) (791) (179) 1,422
Minority interest in net loss of
consolidated subsidiary....... -- -- -- -- 850
Income (loss) before
extraordinary item............ 10,146 8,233 (579) (3,113) (4,639)
Extraordinary item, net of
income taxes(1)............... -- (685) -- (464) --
Net income (loss)............... 10,146 7,548 (579) (3,577) (4,639)
Accumulated preferred stock
dividends(2).................. -- (400) (1,008) -- --
Income (loss) applicable to
common shares and
equivalents................... $ 10,146 $ 7,148 $ (1,587) $ (3,577) $ (4,639)
PER COMMON SHARE:
Income (loss) before
extraordinary item(3)......... $ 1.18 $ 1.18 $ (.37) $ (.73) $ (1.08)
Income (loss)................... $ 1.18 $ 1.08 $ (.37) $ (.83) $ (1.08)
Weighted average common and
common equivalent shares
outstanding(4)................ 8,597 6,606 4,246 4,291 4,296
JUNE 29, JULY 1, JULY 2, JULY 3, SEPTEMBER 4,
1996 1995(5) 1994 1993 1992
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Working capital................. 62$,032.... $ 40,304 $ 6,366 $ 6,107 $ 3,615
Total assets.................... 109,945 84,008 67,870 65,245 57,877
Subordinated debt............... -- -- 9,179 9,323 8,692
Total long-term and subordinated
debt, excluding current
portion....................... 13,114.... 23,593 16,174 17,195 16,176
Preferred stock................. -- -- 6,718 6,718 --
Total stockholders' equity,
including preferred stock..... 68,294.... 36,088 9,640 8,220 4,525
- ---------------
(1) Extraordinary items consist of the costs relating to early extinguishment of
debt, net of applicable tax benefit, if any.
(2) Reflects preferred stock dividends accumulated during the fiscal period. All
cumulative preferred stock dividends were paid in fiscal 1995 at the time of
the redemption of the preferred stock in connection with the Company's
initial public offering.
(3) No cash dividends were declared or paid on the Common Stock during any of
these periods.
(4) Shares underlying options granted during fiscal 1994 are treated as
outstanding for fiscal 1994 and all prior periods, using the treasury stock
method. See Note 1 of Notes to Consolidated Financial Statements. Weighted
average number of shares outstanding in fiscal 1995 reflects the issuance of
2,300,000 shares of Common Stock in connection with the Company's initial
public offering. Weighted average number of shares outstanding in 1996
reflects the issuance of 1,366,666 shares of common stock in connection with
a public offering in fiscal 1996.
(5) Certain fiscal 1995 amounts have been reclassified to conform to the fiscal
1996 presentation.
(6) In 1993, the Company changed its fiscal year to the Saturday closest to June
30th.
10
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS.
The following table sets forth selected statement of operations data
expressed as a percentage of net sales.
FISCAL
---------------------------------
1996 1995 1994
--------- --------- ---------
Net sales..................................................... 100.0% 100.0% 100.0%
Cost of sales................................................. 63.6 65.4 70.6
Gross profit.................................................. 36.4 34.6 29.4
Expenses:
Selling, general and administrative...................... 22.3 22.1 21.8
Research and development................................. 1.9 1.4 1.3
Stock option compensation................................ -- -- 2.0
Total operating expenses...................................... 24.2 23.5 25.1
Operating income.............................................. 12.2 11.1 4.3
Other income (expense):
Interest expense......................................... (1.5) (3.2) (4.4)
Other income............................................. .3 -- 0.3
Total other income (expense).................................. (1.2) (3.2) (4.1)
Income before income taxes and extraordinary item............. 11.0 7.9 0.2
Income tax expense............................................ (4.0) (1.1) (0.8)
Income (loss) before extraordinary item....................... 7.0 6.8 (0.6)
Extraordinary item, net of income taxes....................... -- (0.6) --
Net income (loss)............................................. 7.0% 6.2% (0.6%)
COMPARISON OF FISCAL 1996, 1995 AND 1994.
Net Sales. Net sales increased to $146.0 million in fiscal 1996, from
$122.1 million in 1995 and $102.1 million in 1994. The increase in net sales
over these periods is primarily due to expansion of the Company's specialty
bicycle retailer network and growth in sales to existing specialty retailers.
Over the last two years, the number of specialty retailers has increased to over
3,500 at the end of fiscal 1996 from approximately 2,900 at the end of 1994. The
increase in sales to existing specialty retailers is attributable to the
increase in the number of bicycle models offered from 38 models in fiscal 1994,
to 53 models in 1996, as well as the introduction of proprietary aftermarket
componentry sold under the CODA and HeadShok brand names. Net sales reported by
Cannondale USA were $83.2 million in fiscal 1996, $71.7 million in fiscal 1995,
and $64.1 million in 1994 . Net sales reported by Cannondale Europe increased to
$53.6 million in fiscal 1996, from $42.5 million in fiscal 1995, and $32.6
million in 1994. The Company attributes this growth primarily to increased sales
in non-bike categories and increased sales to existing foreign retailers, as the
Company has shifted from independent distributors to a direct sales force. Net
sales of Cannondale Japan have increased to $9.2 million in fiscal 1996, from
$7.9 million in fiscal 1995 and $5.4 million in 1994. Based on the Company's
relative market share within the domestic and international markets, management
anticipates that international sales will continue to increase as a percentage
of total sales in the future.
Gross Profits. Gross profit as a percentage of net sales has increased to
36.4% in fiscal 1996, from 34.6% in 1995 and 29.4% in 1994. The improved gross
margin reflects a more favorable product mix, with higher-end, higher-margin
full suspension bicycles representing a larger portion of overall sales, growth
in the Company's international markets, cost-reduction programs, and the
Company's continued integration of proprietary technology through the use of
Cannondale bicycle frames, CODA components and HeadShok suspension systems.
11
12
Operating Expenses. Selling, general and administrative expenses increased
to $32.6 million in fiscal 1996, from $27.0 million in fiscal 1995 and $22.3
million in 1994. Increases in selling, general and administrative expenses are
directly associated with the increased sales, and additional personnel,
advertising and marketing costs required to support the Company's growth. As a
percentage of net sales, selling, general and administrative expenses remained
fairly constant at 22.3%, 22.1% and 21.8% in fiscal 1996, 1995 and 1994,
respectively.
Research and development expenses have increased to $2.8 million in fiscal
1996, from $1.8 million in fiscal 1995 and $1.3 million in 1994, reflecting the
Company's commitment to improvement of its current products and the generation
of new products and manufacturing processes. The increase in spending during
fiscal 1996 was primarily attributable to the expansion of the Company's product
line, support for the Volvo/Cannondale mountain bike racing team, and the
development of new technologies.
The Company has integrated the Volvo/Cannondale mountain bike racing team
into its research and development efforts, allowing regular testing of both
prototype and finished production models. This collaboration has led to the
development of several competitive new products, including the downhill bike and
Moto fork, as well as refinement of the Company's existing product line.
The Company also invests in developing design, product and process
technologies for future competitiveness. The Raven, for example, is the product
of research into a new process for the construction of a high performance
bicycle frame. In fiscal 1996, the Company's research and development efforts
also supported the expansion of the CODA components product line.
During fiscal 1994, the Company adopted the 1994 Stock Option Plan and
awarded options to purchase an aggregate of 373,743 shares of Common Stock. The
difference between the option exercise price and the estimated fair value of the
option shares ($2.0 million) was recorded as compensation expense in fiscal
1994. All of the options were exercisable as of the end of fiscal 1994, except
for options to purchase 7,750 shares, which vest in 1997. All options granted
subsequent to the Company's initial public offering have an exercise price equal
to the fair market value of the Common Stock on the date of grant.
Interest Expense. Interest expense decreased to $2.2 million in fiscal
1996, from $3.9 million in 1995 and $4.5 million in 1994, due to lower borrowing
levels resulting from repayment of debt with the net proceeds of the Company's
initial public offering of Common Stock in November 1994 and a second offering
in September 1995. The decrease in interest expense also reflects the lower
interest rates negotiated as a result of the Company's improved performance and
capitalization.
Other Income. Sales by the Company's foreign subsidiaries have been 43%,
41% and 37% of consolidated net sales during fiscal 1996, 1995, and 1994,
respectively, and a significant number of components used in the Company's
products are purchased from foreign sources. Consequently, the Company's results
of operations have been subject to the effects of foreign currency fluctuations.
The Company enters into forward foreign currency contracts for a significant
portion of its current and expected net balance sheet exposures, principally
relating to trade receivables, payables and debt denominated in foreign
currencies. Over the last three fiscal periods, foreign currency losses have
been $138,000, $271,000, and $111,000 for fiscal 1996, 1995 and 1994,
respectively. Other income also includes finance charges relating to accounts
receivable, which totaled $552,000, $295,000, and $435,000 for fiscal 1996, 1995
and in 1994, respectively.
Income Tax Expense. Income tax expense increased to $5.8 million in fiscal
1996, from $1.4 million in fiscal 1995, and $791,000 in 1994 , which reflects
the Company's increasing profitability. In fiscal 1995, income tax expense was
affected by a $3.0 million reduction in the valuation allowance previously
provided against the Company's net deferred tax assets. In accordance with FASB
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," net deferred tax assets are not recognized when a company has cumulative
losses in recent years. However, as a result of its continued profitability, the
Company believes it is more likely than not that U.S. operations will generate
sufficient taxable income to realize the benefits of these deferred tax assets.
See Note 5 of Notes to Consolidated Financial Statements.
12
13
SELECTED QUARTERLY FINANCIAL DATA; SEASONALITY.
The following table presents selected unaudited quarterly data for the two
most recent fiscal years. This information has been prepared by the Company on a
basis consistent with the Company's audited consolidated financial statements
and includes all adjustments (consisting of normal recurring accruals) that
management considers necessary for a fair presentation of the results of such
quarters. The operating results for any quarter are not necessarily indicative
of the results for any future period.
FOR THE QUARTER ENDED
--------------------------------------------------------------------------------------
DECEM- SEPTEM- DECEM- OCTO-
JUNE 29, MARCH 30, BER 30, BER 30, JULY 1, APRIL 1, BER 31, BER 1,
1966 1996 1995 1995 1995 1995 1994 1994
--------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
Net sales........................... $39,008 $45,050 $35,069 $26,849 $36,050 $39,520 $27,014 $19,497
Cost of sales....................... 24,645 27,511 21,889 18,759 22,836 25,173 17,992 13,815
--------- --------- --------- --------- --------- --------- --------- ---------
Gross Profit........................ 14,363 17,539 13,180 8,090 13,214 14,347 9,022 5,682
--------- --------- --------- --------- --------- --------- --------- ---------
Expenses:
Selling, general and
administrative.................. 8,693 9,233 8,020 6,631 7,260 7,753 6,318 5,693
Research and development.......... 687 667 828 656 571 511 359 309
--------- --------- --------- --------- --------- --------- --------- ---------
Total operating expenses............ 9,380 9,900 8,848 7,287 7,831 8,264 6,677 6,002
--------- --------- --------- --------- --------- --------- --------- ---------
Operating income (loss)............. 4,983 7,639 4,332 803 5,383 6,083 2,345 (320)
Other income (expense).............. (22) (651) (637) (499) (720) (1,017) (952) (1,216)
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes... 4,961... 6,988 3,695 304 4,663 5,066 1,393 (1,536)
Income tax expense.................. (1,457) (2,764) (1,471) (110) (1,064) (143) (121) (25)
Extraordinary item.................. -- -- -- -- -- 456 (1,141) --
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss)................... $ 3,504 $ 4,224 $ 2,224 $ 194 $ 3,599 $ 5,379 $ 131 $(1,561)
========= ========= ========= ========= ========= ========= ========= =========
The Company's results fluctuate from quarter to quarter as a result of a
number of factors, including product mix, the timing and number of new retailer
openings, the timing of shipments and new product introductions, and the effect
of adverse weather conditions on consumer purchases. In addition, the Company's
business is highly seasonal due to consumer spending patterns, which in turn
affect dealer delivery preferences, resulting in more shipments and
significantly stronger results in the third and fourth fiscal quarters (January
through June). The third and fourth fiscal quarters together accounted for 57%
and 62% of the Company's total net sales in fiscal 1996 and 1995, respectively.
Although sales orders are received throughout the course of the year, shipments
are concentrated in the third and fourth fiscal quarters. In fiscal 1996, in an
effort to reduce the seasonality of its shipments and to smooth the production
process, the Company, through its ARP, provided incentives for retailers to take
delivery of a higher percentage of their annual bicycle order in the first
fiscal quarter.
The Company's gross margins fluctuate primarily according to product mix,
the cost of materials and the timing of product price adjustments and markdowns.
Although some operating expenses are variable with sales, most expenses are
incurred evenly throughout the year. As a result, the third and fourth fiscal
quarters accounted for 71% and 85% of the operating income for fiscal 1996 and
1995, respectively. It is unlikely that this seasonal pattern will change
significantly in the future. While the Company was successful in reducing the
impact of the seasonality in the first quarter of fiscal 1996, achieving
breakeven performance, the Company in the past has incurred, and may in the
future incur, operating losses in the first fiscal quarter, as the business
remains highly seasonal.
LIQUIDITY AND CAPITAL RESOURCES.
The Company's primary sources of working capital used over the past three
years have been borrowings under its revolving credit facilities, and the net
proceeds of the Company's two public offerings, which totaled approximately
$22.1 million in fiscal 1996 and approximately $8.3 million (after repayment of
the subordinated notes and redemption of the preferred stock, including
accumulated dividends) in fiscal 1995.
13
14
The Company maintains a domestic financing agreement that, as amended,
provides for a combined credit facility of up to $35 million. The facility,
which extends through December 31, 1997, is a combination of a multicurrency
revolving credit and a term loan, and is secured by substantially all the
tangible and intangible domestic assets of the Company. The interest rate on the
outstanding revolving credit and term loan is the prime rate with an option to
borrow at LIBOR plus 150 basis points. The combined credit facility, which is
the Company's principal source for financing its working capital requirements,
was further amended in September 1996 to allow the Company to take advantage of
favorable interest rates in foreign markets. As a result of the seasonality of
the Company's business and payment terms, which typically vary between 30 and
180 days from the date of shipment (depending on time of year and other
factors), borrowings under the Company's and subsidiaries' credit facilities
typically reach their highest level near the end of the third fiscal quarter and
are typically at their lowest level near the end of the first fiscal quarter.
The Company's credit facility contains restrictive and financial covenants
relating to, among other things, the maintenance of minimum levels of net worth
and working capital. The Company is currently in compliance with all restrictive
and financial covenants.
Cannondale Europe and Cannondale Japan each maintains a separate credit
facility. In December 1995, Cannondale Europe entered into a new financing
agreement that provides a base credit limit of 15,000,000 Dutch guilders
(approximately $8.8 million as of June 29, 1996) and a seasonal credit line of
an additional 10,000,000 Dutch guilders (approximately $5.9 million as of June
29, 1996) that is effective from December 1 to June 1 each year. Cannondale
Europe's credit facility is secured by outstanding balances of eligible accounts
receivable and inventory. Cannondale Japan has an unsecured revolving credit
facility for up to 155,000,000 Japanese yen (approximately $1.4 million at June
29, 1996). Approximately $1.9 million and $1.1 million of principal amount was
outstanding under the Dutch and Japanese facilities, respectively, at June 29,
1996. The Japanese facility is guaranteed by the Company.
Net cash provided by (used in) operating activities was ($6.8 million),
($2.0 million), and $122,000 in fiscal 1996, 1995 and 1994, respectively. The
principal uses of cash in operating activities over the three-year period were
to support the increased investment in accounts receivable and inventories
associated with the Company's growth in sales.
Capital expenditures were $3.0 million, $2.4 million and $2.5 million in
fiscal 1996, 1995 and 1994, respectively. The majority of these expenditures
related to investments in manufacturing equipment and facilities to support
increases in production volume. Management currently intends to spend
approximately $10.3 million in fiscal 1997 on capital expenditures, which
includes the expansion of the Company's production facility in Bedford,
Pennsylvania ($5.1 million), and the construction of a new corporate office and
research and development facility in Bethel, Connecticut ($2.2 million). It is
expected that 40% of the total cost of the plant addition will be financed
through the local development agency and the Pennsylvania Industrial Development
Authority at interest rates of approximately 3.75%. The cost of the corporate
headquarters and research and development facility will be partially funded with
the proceeds from the sale of the Company's current headquarters facility. The
Company expects that cash flow generated by its operations and borrowings under
the revolving credit facilities will be sufficient to meet its planned operating
and capital requirements for the foreseeable future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by Part II, Item
8, are included in Part IV, as indexed at Item 14(a)(1).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
14
15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 regarding directors is incorporated by
reference to the information appearing under the caption "Election of Directors"
in the Company's definitive Proxy Statement relating to its 1996 Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission within
120 days after the close of its fiscal year. The information required by Item 10
regarding executive officers appears under the caption "Executive Officers" in
Part I.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is incorporated by reference to the
information appearing under the caption "Executive Compensation" in the
Company's definitive Proxy Statement relating to its 1996 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within 120
days after the close of its fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is incorporated by reference to the
information appearing under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive Proxy Statement
relating to its 1996 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission within 120 days after the close of its fiscal
year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is incorporated by reference to the
information appearing under the caption "Certain Relationships and Related
Transactions" in the Company's definitive Proxy Statement relating to its 1996
Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission within 120 days after the close of its fiscal year.
15
16
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A)(1) FINANCIAL STATEMENTS.
Index to Consolidated Financial Statements.
Report of Independent Auditors.
Consolidated Balance Sheets as of June 29, 1996 and July 1, 1995.
Consolidated Statements of Operations for the years ended June 29, 1996,
July 1, 1995 and July 2, 1994.
Consolidated Statements of Stockholders' Equity for the years ended June
29, 1996, July 1, 1995 and July 2, 1994.
Consolidated Statements of Cash Flows for the years ended June 29, 1996,
July 1, 1995 and July 2, 1994.
Notes to Consolidated Financial Statements.
(A)(2) FINANCIAL STATEMENT SCHEDULE.
Report of Independent Auditors on Financial Statement Schedule.
Schedule II -- Valuation and Qualifying Accounts.
All other financial statement schedules are omitted because they are not
applicable, or not required, or because the required information is included in
the Consolidated Financial Statements or Notes thereto.
(A)(3) EXHIBITS.
10.1.4 -- First Amendment to Amended and Restated Loan and Security
Agreement, Dated May 9, 1996 between the Company and Fleet
Capital Corporation.
10.1.5 -- Second Amendment to Amended and Restated Loan and Security
Agreement, Dated September 13, 1996 between the Company and Fleet
Capital Corporation.
11 -- Computation of Earnings Per Share.
21 -- Subsidiaries of the Registrant.
23 -- Consent of Independent Auditors.
- ---------------
THE COMPANY UNDERTAKES TO PROVIDE A COPY OF ANY OF THE FOREGOING EXHIBITS TO ANY
COMPANY STOCKHOLDER OF RECORD ON SEPTEMBER 23, 1996. REQUESTS SHOULD BE MADE IN
WRITING TO THE COMPANY AT 9 BROOKSIDE DRIVE, GEORGETOWN, CONNECTICUT 06829,
ATTN: INVESTOR RELATIONS, AND SHOULD BE ACCOMPANIED BY PAYMENT OF $5.00 PER
EXHIBIT, TO COVER THE COMPANY'S EXPENSES IN PROVIDING SUCH EXHIBIT(S).
(B) REPORTS ON FORM 8-K.
None.
16
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CANNONDALE CORPORATION
September 25, 1996 By /s/ WILLIAM A. LUCA
William A. Luca
Vice President of Finance, Treasurer
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------ -------------------
/s/ JOSEPH S. MONTGOMERY Chairman, President, Chief September 25, 1996
Executive Officer and Director
Joseph S. Montgomery (Principal Executive Officer)
/s/ WILLIAM A. LUCA Vice President of Finance, September 25, 1996
Treasurer, Chief Financial
William A. Luca officer and Director
(Principal Financial Officer)
/s/ RICHARD J. RESCH Vice President of Technology September 25, 1996
Development and Director
Richard J. Resch
Vice President of Marketing,
Director
James Scott Montgomery
/s/ JOHN MORIARTY Assistant Treasurer, Director September 25, 1996
of Accounting (Principal
John Moriarty Accounting Officer)
Director
Tarek Abdel-Meguid
Director
Michael Carter
/s/ MICHAEL J. STIMOLA Director September 25, 1996
Michael J. Stimola
17
18
CANNONDALE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors......................................................... F-2
Consolidated Balance Sheets as of June 29, 1996 and July 1, 1995....................... F-3
Consolidated Statements of Operations for the years ended June 29, 1996, July 1, 1995,
and July 2, 1994..................................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended June 29, 1996, July
1, 1995,
and July 2, 1994..................................................................... F-5
Consolidated Statements of Cash Flows for the years ended June 29, 1996, July 1, 1995,
and July 2, 1994..................................................................... F-6
Notes to Consolidated Financial Statements............................................. F-7
F-1
19
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Cannondale Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Cannondale
Corporation and subsidiaries as of June 29, 1996 and July 1, 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years ended June 29, 1996, July 1, 1995 and July 2, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cannondale
Corporation and subsidiaries at June 29, 1996 and July 1, 1995, and the
consolidated results of their operations and their cash flows for the years
ended June 29, 1996, July 1, 1995 and July 2, 1994, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
STAMFORD, CONNECTICUT
AUGUST 9, 1996
F-2
20
CANNONDALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 29,
1996 JULY 1, 1995
------------ ------------
Current assets:
Cash...................................................... $ 4,305 $ 2,255
Trade accounts receivable, less allowances of $5,238 and
$3,693.................................................. 52,027 37,927
Inventory................................................. 30,526 21,259
Deferred income taxes..................................... 2,041 1,513
Prepaid expenses and other current assets................. 1,154 1,110
Total current assets........................................... 90,053 64,064
Property, plant and equipment, net............................. 18,527 18,213
Other assets................................................... 1,365 1,731
Total assets................................................... $109,945 $ 84,008
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 12,431 $ 9,802
Revolving credit advances................................. 4,756 4,806
Income taxes payable...................................... 1,845 214
Other accrued expenses.................................... 2,942 3,380
Accrued warranty expense.................................. 2,101 1,973
Payroll and other employee related benefits............... 2,266 1,709
Current installments of long-term debt.................... 1,680 1,876
Total current liabilities...................................... 28,021 23,760
Long-term debt, less current installments...................... 13,114 23,593
Deferred income taxes.......................................... 235 152
Other noncurrent liabilities................................... 281 415
Total liabilities.............................................. 41,651 47,920
Stockholders' equity:
Common Stock, $.01 par value:
Authorized Shares -- 18,000,000
Issued and outstanding shares -- 8,611,715 in 1996
and 7,127,181 in 1995................................ 86 71
Additional paid-in capital................................ 55,965 33,294
Retained earnings......................................... 12,547 2,401
Cumulative translation adjustment......................... (304) 322
Total stockholders' equity..................................... 68,294 36,088
Total liabilities and stockholders' equity..................... $109,945 $ 84,008
See accompanying notes
F-3
21
CANNONDALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
YEAR ENDED
JUNE 29, YEAR ENDED YEAR ENDED
1996 JULY 1, 1995 JULY 2, 1994
------------ ------------ ------------
Net sales...................................... $145,976 $122,081 $102,084
Cost of sales.................................. 92,804 79,816 72,083
Gross profit................................... 53,172 42,265 30,001
Expenses:
Selling, general and administrative....... 32,577 27,023 22,290
Research and development.................. 2,837 1,751 1,317
Stock option compensation................. -- -- 2,046
35,414 28,774 25,653
Operating income............................... 17,758 13,491 4,348
Other income (expense):
Interest expense.......................... (2,224) (3,929) (4,460)
Other income................................. 414 24 324
(1,810) (3,905) (4,136)
Income before income taxes and extraordinary
item......................................... 15,948 9,586 212
Income tax expense............................. (5,802) (1,353) (791)
Income (loss) before extraordinary item........ 10,146 8,233 (579)
Extraordinary item:
Loss from early extinguishment of debt,
net of income taxes..................... -- (685) --
Net income (loss).............................. 10,146 7,548 (579)
Accumulated preferred stock dividends.......... -- (400) (1,008)
Income (loss) applicable to common shares and
equivalents.................................. $ 10,146 $ 7,148 $ (1,587)
Primary income (loss) per share:
Income (loss) before extraordinary item... $ 1.18 $ 1.18 $ (.37)
Extraordinary item........................ -- (.10) --
Net income (loss)......................... $ 1.18 $ 1.08 $ (.37)
Fully diluted income (loss) per share:
Income (loss) before extraordinary item... $ 1.17 $ 1.18 $ (.37)
Extraordinary item........................ -- (.10) --
Net income (loss)......................... $ 1.17 $ 1.08 $ (.37)
See accompanying notes
F-4
22
CANNONDALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
SERIES A
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED CUMULATIVE
----------------- ---------------------- PAID-IN EARNINGS TRANSLATION
SHARES VALUE SHARES PAR VALUE CAPITAL (DEFICIT) ADJUSTMENT TOTAL
------ ------ -------- ---------- ---------- -------- ---------- -------
Balance at July 2, 1993.......... 6,718 $6,718 3,921,236 $ 39 $ 5,883 $(4,568 ) $ 148 $ 8,220
Net loss....................... -- -- -- -- -- (579 ) -- (579)
Stock option compensation...... -- -- -- -- 2,046 -- -- 2,046
Purchase and retirement of
common shares................ -- -- (77,887) (1) (55) -- -- (56)
Foreign currency adjustment.... -- -- -- -- -- -- 9 9
Balance at July 2, 1994.......... 6,718 6,718 3,843,349 38 7,874 (5,147 ) 157 9,640
Net income..................... -- -- -- -- -- 7,548 -- 7,548
Redemption of fractional shares
in connection with stock
split........................ -- -- (16) -- -- -- -- --
Purchase and retirement of
common shares................ -- -- (3,875) -- (3) -- -- (3)
Issuance of common stock (net
of $3,078 of offering
costs)....................... -- -- 2,300,000 23 26,799 -- -- 26,822
Exercise of warrants........... -- -- 958,261 10 (10) -- -- --
Redemption of Series A
Preferred Stock.............. (6,718) (6,718) -- -- -- -- -- (6,718)
Dividend payment to preferred
stockholders................. -- -- -- -- (1,408) -- -- (1,408)
Exercise of options............ -- -- 29,462 -- 42 -- -- 42
Foreign currency adjustment.... -- -- -- -- -- -- 165 165
Balance at July 1, 1995.......... -- -- 7,127,181 71 33,294 2,401 322 36,088
Net income..................... -- -- -- -- -- 10,146 -- 10,146
Issuance of common stock (net
of $1,490 of offering
costs........................ -- -- 1,366,666 14 22,071 -- -- 22,085
Exercise of options............ -- -- 117,868 1 600 -- -- 601
Foreign currency adjustment.... -- -- -- -- -- -- (626) (626)
Balance at June 29, 1996......... -- $ -- 8,611,715 $ 86 $ 55,965 $12,547 $ (304) $68,294
See accompanying notes
F-5
23
CANNONDALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED
JUNE 29, YEAR ENDED YEAR ENDED
1996 JULY 1, 1995 JULY 2, 1994
------------ ------------ ------------
OPERATING ACTIVITIES
Net income (loss).............................. $ 10,146 $ 7,548 $ (579)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Extraordinary item...................... -- 685 --
Stock compensation...................... -- -- 2,046
Depreciation and amortization........... 2,994 2,740 2,595
Provision for bad debt, discount, credit
and return and late charge
reserves............................. 10,114 3,934 2,425
Provision for obsolete and excess
inventory............................ 883 912 443
Unrealized (gain) loss on foreign
currency transactions................ (43) 389 147
Accretion of interest................... -- 94 251
Loss on disposal of fixed assets........ 31 49 --
Deferred income taxes................... (616) (1,361) --
Changes in assets and liabilities:
Trade accounts receivable............ (25,136) (12,680) (6,308)
Inventory............................ (10,402) (4,749) (275)
Prepaid expenses and other assets.... 174 (1,136) 668
Accounts payable..................... 3,058 37 (1,506)
Warranty and other accrued
expenses........................... 323 1,926 (447)
Income taxes payable and other
liabilities........................ 1,686 (348) 662
Net cash provided by (used in) operating
activities................................... (6,788) (1,960) 122
INVESTING ACTIVITIES
Capital expenditures........................... (3,023) (2,350) (2,463)
Net cash used in investing activities.......... (3,023) (2,350) (2,463)
FINANCING ACTIVITIES
Redemption of subordinated debt................ -- (10,000) --
Net proceeds from the issuance of common
stock........................................ 22,686 26,864 --
Redemption of preferred stock.................. -- (6,718) --
Dividend payment to preferred stockholders..... -- (1,408) --
Net proceeds from (repayments of) borrowings
under short-term revolving credit
agreements................................... 478 (1,294) (551)
Proceeds from issuance of long-term debt....... 489 -- 1,016
Purchase and retirement of common shares....... -- (3) (56)
Net proceeds from (repayments of) borrowings
under long-term debt and capital lease
agreements................................... (11,291) (2,380) 819
Net cash provided by financing activities...... 12,362 5,061 1,228
Effect of exchange rate changes on cash........ (501) 147 (97)
Net increase (decrease) in cash................ 2,050 898 (1,210)
Cash at beginning of period.................... 2,255 1,357 2,567
Cash at end of period.......................... $ 4,305 $ 2,255 $ 1,357
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest..................................... $ 2,426 $ 3,639 $ 4,335
Income taxes, net of refunds................. $ 4,375 $ 1,940 $ 272
See accompanying notes
F-6
24
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
Description of Business
Cannondale Corporation ("Cannondale U.S.") manufactures and distributes
bicycles and bicycling accessories and equipment. International operations are
conducted through two wholly-owned subsidiaries: Cannondale Europe B.V.
("Cannondale Europe") and Cannondale Japan KK ("Cannondale Japan").
Business and Credit Concentrations
The Company's customer base is composed of specialty bicycle retailers who
are located principally throughout the United States and Europe. There is no
single geographic area of concentration in the United States or Europe. No
single customer accounted for more than 5% of the Company's sales during the
years ended June 29, 1996, July 1, 1995 or July 2, 1994.
The Company's raw materials are readily available and the Company is not
completely dependent on a single supplier. The Company has, however, preferences
with respect to continuing its relationships with certain selected vendors, and
a material portion of the Company's inventory purchases is from a single
supplier.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Cannondale U.S. and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Revenue Recognition
Sales, net of estimated returns and allowances, are recognized when
products are shipped. Provisions for returns and allowances are determined
principally on the basis of past experience.
Product Warranties
The Company provides original owners of its bicycles with a lifetime
warranty for bicycle frames and a one-year warranty for suspensions and
components. During the warranty period, the Company will repair or replace a
defective part or assembly at no cost to the owner. Provisions for estimated
warranty expense are recognized at the time of sale, determined principally on
the basis of past experience.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or
market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Plant and equipment under
capitalized lease obligations are recorded at the present value of minimum lease
payments.
Depreciation of plant and equipment is calculated on the straight-line
method over 25 to 40 years for buildings and 3 to 10 years for equipment.
Amortization of assets recorded under capitalized lease obligations is
recognized over the lesser of the useful lives or lease terms and such amount is
included in depreciation and amortization expense.
The Company constructs machinery and equipment to be used in the
manufacturing process. Costs capitalized include direct salaries and benefits of
personnel, and purchased material. For the years ended
F-7
25
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
June 29, 1996 and July 1, 1995, respectively, approximately $257,000 and
$757,000 of such costs were capitalized and are included within property, plant
and equipment.
Income Taxes
The Company accounts for income taxes under the provisions of Financial
Accounting Standards Board (FASB) Statement No. 109 "Accounting for Income
Taxes." It requires an asset and liability approach for financial accounting and
reporting for deferred income taxes. Taxes are recognized for all temporary
differences between the tax and financial reporting bases of the Company's
assets and liabilities based on the enacted tax laws and statutory tax rates
applicable to the periods in which differences are expected to affect taxable
income.
Foreign Currency Translation
During the year ended June 29, 1996, management reevaluated the
appropriateness of continuing the designation of the U.S. dollar as Cannondale
Europe's functional currency. Due to significant changes in the economic facts
and circumstances of Cannondale Europe, it was determined that the Dutch guilder
most accurately portrays the economic results of Cannondale Europe. Accordingly,
effective March 31, 1996, the Company designated the Dutch guilder as the
functional currency of Cannondale Europe. At June 29, 1996, the assets and
liabilities of Cannondale Europe have been translated at year-end exchange
rates, while revenues and expenses have been translated at average rates of
exchange in effect during the three-month period ended June 29, 1996. Prior to
the change in Cannondale Europe's functional currency, remeasurement adjustments
related to its operations were included in net income. Subsequently, cumulative
translation adjustments relating to Cannondale Europe have been recorded as a
separate component of stockholders' equity.
The assets and liabilities of Cannondale Japan have been translated at
year-end exchange rates, while revenues and expenses have been translated at
average rates of exchange in effect during the period. Cumulative translation
adjustments relating to Cannondale Japan have been recorded as a separate
component of stockholders' equity.
Foreign Currency Forward Contracts
The Company enters into forward contracts to purchase and sell U.S.,
European, and Japanese currencies to reduce exposures to foreign currency risk.
The Company does not hold foreign currency forward contracts for trading
purposes. Gains and losses resulting from effective hedges of existing assets,
liabilities or firm commitments are deferred and recognized when the offsetting
gains and losses are recognized on the related transaction. Gains and losses on
foreign currency transactions that do not satisfy the accounting requirements of
an effective hedge are reported currently as other income or expense.
Stock-Based Compensation
The Company grants stock options to employees, officers and directors with
an exercise price determined by the Board of Directors at the time of grant. The
Company accounts for stock option grants in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees," which requires that compensation
expense be recognized for the difference between the quoted market price of the
stock at the grant date less the amount that the employee is required to pay.
F-8
26
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassifications
Certain 1995 and 1994 amounts have been reclassified to conform to the
current year's presentation.
Earnings Per Share Amounts
Earnings (loss) per share of common stock are computed using the weighted
average number of shares of common stock and common stock equivalents
outstanding for each period. The weighted average number of shares of common
stock used in the computation of earnings (loss) per share was 8,596,910,
6,605,599 and 4,246,280 for the years ended June 29, 1996, July 1, 1995 and July
2, 1994, respectively. Common stock equivalents include warrants to purchase
common stock and stock options. In computing the earnings (loss) per common
share, dividends applicable to Series A preferred stock decrease the earnings
(increase the loss) applicable to common shares and common stock equivalents in
fiscal 1995 and 1994.
During the year ended July 2, 1994, all common stock equivalents were
antidilutive. However, in accordance with Staff Accounting Bulletin 83 of the
Securities and Exchange Commission (SEC), the common stock equivalents issued
during the twelve months preceding the Company's initial public offering (stock
options granted during fiscal 1994) at a price below the expected initial public
offering price have been included in the Company's net loss per share
computation and treated as if they had been outstanding for fiscal 1994 using
the treasury stock method even though they were antidilutive.
Intangible Assets
Included in other assets are intangible assets, which represent the cost of
patents, goodwill and deferred financing charges. Intangible assets were
$1,782,000 and $1,726,000 at June 29, 1996 and July 1, 1995, respectively.
Accumulated amortization on intangible assets amounted to $752,000 and $532,000
at June 29, 1996 and July 1, 1995, respectively. Amortization is provided using
the straight-line method over the estimated useful lives of the assets, not
exceeding 17 years.
2. INVENTORY
The components of inventory are as follows (in thousands):
JUNE 29, JULY 1,
1996 1995
----------- ---------
Raw materials....................................... $14,664 $11,247
Work-in-process..................................... 1,772 1,088
Finished goods...................................... 15,505 10,180
Less reserve for obsolete inventory................. (1,415) (1,256)
$30,526 $21,259
F-9
27
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are as follows (in
thousands):
JUNE 29,
1996 JULY 1, 1995
------------ ------------
Land........................................... $ 1,252 $ 1,276
Buildings and improvements..................... 10,070 9,780
Factory and office equipment................... 21,804 19,443
Construction in progress....................... 889 413
34,015 30,912
Less accumulated depreciation.................. (15,488) (12,699)
$ 18,527 $ 18,213
Purchases of equipment through capitalized lease obligations and notes were
$291,000, $244,000, and $85,000 in fiscal 1996, 1995, and 1994, respectively.
4. DEBT
Short-Term Revolving Credit Advances (in thousands):
JUNE 29, JULY 1,
1996 1995
----------- ---------
Cannondale U.S...................................... $ 1,731 $ --
Cannondale Europe................................... 1,931 3,625
Cannondale Japan.................................... 1,094 1,181
Total..................................... $ 4,756 $ 4,806
In March 1996, the Company entered into an unsecured multicurrency demand
credit facility with a maximum principal amount of $2,000,000. Borrowings under
the demand credit facility may be made in U.S. dollars and Japanese yen
(190,000,000 yen at June 29, 1996). The interest rate on the outstanding demand
credit facility is LIBOR (London Interbank Offered Rate) plus 1/2%. LIBOR for
the Japanese yen borrowings was 0.563% at June 29, 1996.
In December 1995, Cannondale Europe entered into a new financing agreement
that provides a base credit limit of 15,000,000 Dutch guilders (approximately
$8,776,000 as of June 29, 1996) and a seasonal credit of an additional
10,000,000 Dutch guilders (approximately $5,851,000 as of June 29, 1996) that is
effective from December 1 to June 1 each year. The credit facility is secured by
outstanding balances of eligible accounts receivable and inventory. The interest
rate on the outstanding revolving line of credit balance is 2.0% in excess of
the prime rate of DNB (De Nederlandsche Bank) with a minimum rate of 5.0% (the
prime rate was 2.5% at June 29, 1996). The credit facility extends for an
indefinite period of time, with either party having an option to terminate the
agreement at any time.
Cannondale Japan has an unsecured revolving credit facility for up to
155,000,000 yen (approximately $1,413,000 at June 29, 1996). The interest rate
on the outstanding borrowings was 2.875% and 3.625% at June 29, 1996 and July 1,
1995, respectively. The credit facility contains no specific expiration date,
and may be terminated by either party at any time.
The weighted average interest rate on the Company's revolving lines of
credit was 4.60% and 9.56% at June 29, 1996 and July 1, 1995, respectively.
F-10
28
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-Term Debt (in thousands):
JUNE 29, JULY 1,
1996 1995
----------- -----------
Domestic revolving line of credit.................... $ 8,595 $17,991
Domestic term loan................................... 1,470 2,166
Pennsylvania Industrial Development Authority bonds,
interest rates ranging from 2.0% to 4.5%........... 1,755 1,905
Algemene Bank Nederland N.V., interest at 10.25%..... 1,184 1,427
Rush Township Construction Loan, interest at 3%...... 453 506
Daiichi Kangyo Bank term loan, interest at 3.25%..... 455 --
Notes secured by equipment and capitalized leases.... 882 1,474
----------- -----------
14,794 25,469
Less current portion................................. (1,680) (1,876)
----------- -----------
$13,114 $23,593
=========== ===========
On July 2, 1993, the Company entered into a domestic financing agreement,
as amended, that provides for a multicurrency revolving line of credit
($3,525,000 and 8,665,000 Dutch guilders at June 29, 1996) and a term loan ("the
combined credit facility"). The combined credit facility, which extends through
December 31, 1997, provides up to $35,000,000 under: 1) a revolving line of
credit based on outstanding balances of eligible accounts receivable and
inventory, and 2) a term loan. The agreement requires the maintenance of
specified levels of tangible net worth and working capital.
The combined credit facility is secured by virtually all tangible and
intangible assets of the Company. The interest rate on the outstanding combined
credit facility was the prime rate with an option to borrow at LIBOR plus 1.50%
at June 29, 1996, and 1/2% over the prime rate at July 1, 1995. LIBOR for the
U.S. dollar and Dutch guilder borrowings was 5.457% and 2.75% on June 29, 1996,
respectively. The prime rate on June 29, 1996 and July 1, 1995 was 8.25% and
9.0%, respectively. The Company is obligated to pay a line of credit fee of 25
basis points on the unused revolving line of credit, and various prepayment fees
if the facility is terminated before December 31, 1996.
The term-loan component of the combined credit facility is payable in
monthly installments of $58,000 plus interest and a final payment of $484,000
plus interest on December 31, 1997.
The Pennsylvania Industrial Development Authority bonds are secured by the
Company's Bedford, Pennsylvania facility. The loans are payable from 12 to 25
years in equal monthly payments of approximately $16,000, including interest.
The Algemene Bank of Nederland N.V. loan is secured by Cannondale Europe's
factory in Oldenzaal, Netherlands. The loan is payable in Dutch guilders over 25
years with equal quarterly installments of approximately $53,000, including
interest.
The Rush Township Construction Loan is secured by the Company's
Philipsburg, Pennsylvania facility. The loan is payable through 2003 with equal
monthly installments of approximately $4,800, including interest.
The Daiichi Kangyo Bank term loan is unsecured. The loan is payable through
1999 with quarterly installments of approximately $40,000, including interest.
Capitalized lease obligations represent the present value of future minimum
lease payments, discounted at rates ranging from 7.0% to 13.73%, payable in
monthly installments of approximately $48,000.
F-11
29
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Maturities of long-term debt, including payments under capitalized lease
obligations are as follows (in thousands):
1997..................................................... $ 1,711
1998..................................................... 9,960
1999..................................................... 507
2000..................................................... 333
2001..................................................... 284
Thereafter............................................... 2,043
14,838
Amounts representing interest on capitalized lease
obligations............................................ (44)
$14,794
Subordinated Debt
In June 1992, the Company issued $10,000,000 of 8% subordinated notes due
June 1997 and warrants, exercisable at $.01 per share at the sole option of the
holders, into 341,821 shares (increased to 507,113 shares on July 2, 1994 -- see
Note 8) of the Company's common stock in exchange for $10,000,000. The warrants
to purchase the 341,821 shares were valued at $1,964,000 at their date of
issuance. The corresponding original debt amount of $8,036,000 was increased
through charges to interest expense based on the interest method to yield
approximately 11.5% to its face amount through maturity. Interest at 8%,
commencing from June 3, 1993, was payable semi-annually in arrears. In November
1994, the subordinated debt with a carrying amount of $9,273,000 was retired in
conjunction with the initial public offering. This early retirement of debt
resulted in an extraordinary charge of $1,141,000, comprised of the unamortized
discount and related deferred charges, net of an income tax benefit of $456,000.
5. INCOME TAXES
Income before income taxes and extraordinary item by geographic location is
as follows (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 29, JULY 1, JULY 2,
1996 1995 1994
--------------- --------------- ---------------
United States................................ $ 5,925 $ 5,072 $ (229)
Foreign...................................... 10,023 4,514 441
$15,948 $ 9,586 $ 212
The income tax provision consists of the following:
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 29, JULY 1, JULY 2,
1996 1995 1994
--------------- --------------- ---------------
Current Federal.............................. $ 2,281 $ 1,052 $ 299
Foreign.................................... 3,551 1,162 343
State...................................... 586 500 149
Total current........................... 6,418 2,714 791
Deferred Federal............................. (384) (1,590) --
Foreign.................................... (189) 422 --
State...................................... (43) (193) --
Total deferred.......................... (616) (1,361) --
Total................................... $ 5,802 $ 1,353 $ 791
F-12
30
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The 1994 federal provision consists of alternative minimum taxes, and the
provision for foreign taxes is attributable to certain profitable operations,
which cannot be offset against losses from other operations.
The provision for income taxes on income before income taxes and
extraordinary item differs from the amount computed by applying the U.S. federal
income tax rate (34%) because of the effects of the following items:
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 29, 1996 JULY 1, 1995 JULY 2, 1994
--------------- --------------- ---------------
Tax at U.S. statutory rate................... 34.0% 34.0% 34.0%
State income taxes, net of federal benefit... 2.4 2.9 19.5
Higher effective income taxes of other
countries.................................. 1.6 6.6 64.3
Change in valuation allowance of deferred tax
assets..................................... (1.5) (31.6) 255.3
Other........................................ (0.1) 2.2 --
36.4% 14.1% 373.1%
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets and liabilities as of June 29,
1996 and July 1, 1995 are as follows:
1996 1995
---------- ----------
Deferred tax assets:
Accounts receivable and inventory reserves......... $ 1,224 $ 1,108
Stock option compensation.......................... 583 796
Accrued liabilities................................ 939 895
Tax credits........................................ -- 197
Other.............................................. 266 200
3,012 3,196
Deferred tax liabilities:
Tax over book depreciation......................... (771) (899)
Other.............................................. (435) (704)
Total deferred liabilities......................... (1,206) (1,603)
Valuation allowance.................................. -- (232)
Net deferred tax assets.............................. $ 1,806 $ 1,361
FASB Statement 109 generally provides that net deferred tax assets are not
recognized when a company has cumulative losses in recent years. Accordingly, a
valuation allowance was established in prior years for the excess of deferred
tax assets over deferred tax liabilities. As a result of the Company's continued
profitability, and in accordance with FASB Statement 109, the Company reduced
its valuation allowance related to net deferred tax assets by $3,031,000 for the
fiscal year ended July 1, 1995. As the Company believed it was more likely than
not that operations would generate future taxable income. Additionally, for the
fiscal year ended June 29, 1996, the Company reduced its valuation allowance by
$232,000 due to the reevaluation of the recoverability of deferred tax assets.
The Company has not provided for possible U.S. taxes on the undistributed
earnings of foreign subsidiaries ($7,721,000) at June 29, 1996 that are
considered to be reinvested indefinitely.
F-13
31
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCK OPTIONS
During fiscal 1994, the Company adopted the 1994 Stock Option Plan (the
"1994 Plan") providing for the grant from time to time to officers, directors
and employees of options to purchase up to an aggregate of 387,500 shares of
common stock. In addition, during fiscal 1994, the Company granted options under
the 1994 Plan to purchase an aggregate of 373,743 shares of common stock at an
exercise price per share of $0.34. The options awarded under the 1994 Plan,
substantially all of which vested in full on July 2, 1994, were accounted for at
an estimated fair value of $5.71 per share, and accordingly, a non-cash
compensation expense of $2 million was charged to operations in 1994. This
estimate of fair value was based on an independent valuation at that date, which
principally considered the marketability of the Company's common stock,
restrictions imposed on sale of option shares under the 1994 Plan, the Company's
financial position, current and expected results of operations and a comparison
to the valuation of other companies in the sporting goods industry. The 1994
Plan terminates on December 31, 2003.
In September 1994, the Company adopted the 1994 Management Stock Option
Plan (the "Management Plan"), pursuant to which options to purchase 310,000
shares of Common Stock were authorized to be granted to key executive employees
and consultants and advisors to the Company, as determined from time to time by
the Committee administering the Management Plan. The terms of the Management
Plan are substantially the same as the terms of the 1994 Plan. The vesting of
options granted under the Management Plan is at the discretion of the Board of
Directors. The Management Plan also provides for the grant to new non-employee
directors of the Company of options to purchase up to an aggregate of 10,000
shares of common stock. On the date of election or appointment to the Board of
Directors, each new non-employee director will be granted an immediately
exercisable option to purchase 1,000 shares of Common Stock, at an exercise
price per share equal to the fair market value of the Common Stock on the date
of grant. Other than the directors' options, all options granted under the
Management Plan will vest in three equal annual installments. The Management
Plan terminates on December 31, 2004.
In November 1995, the Company adopted the 1995 Stock Option Plan (the "1995
Plan"), pursuant to which options to purchase 500,000 shares of Common Stock
were authorized to be granted to employees, officers, advisors and consultants
to the Company, as determined from time to time by the Committee administering
the 1995 Plan. The terms of the 1995 Plan are substantially the same as the
terms of the 1994 Plan. The vesting of options granted under the 1995 Plan is at
the discretion of the Board of Directors. All options granted under the 1995
Plan during fiscal 1996 will vest in three equal annual installments. The 1995
Plan terminates on December 31, 2005.
Under the 1994 Plan, the Management Plan and the 1995 Plan, the Company may
at its discretion, repurchase the stock at the time of termination of service of
an employee at fair market value.
Stock option activity is shown below:
OPTION PRICE
SHARES PER SHARE
-------- ------------
Outstanding at July 2, 1994........................ 373,743 $ 0.34
Options granted............................... 330,674 $12.50-13.25
Options exercised............................. (29,462) $ 0.34
Options terminated............................ (33,350) $ 0.34-13.00
F-14
32
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OPTION PRICE
SHARES PER SHARE
-------- ------------
Outstanding at July 1, 1995........................ 641,605 $ 0.34-13.25
Options granted............................... 543,769 $13.63-21.50
Options exercised............................. (117,868) $ 0.34-13.00
Options terminated............................ (32,011) $12.50-16.50
Outstanding at June 29, 1996....................... 1,035,495 $ 0.34-21.50
Exercisable at June 29, 1996....................... 318,231 $ 0.34-13.00
Available for grant at June 29, 1996............... 32,673
7. PROFIT SHARING PLAN
The Company has a qualified, defined contribution savings plan covering all
full-time U.S. employees who have attained the age of 18 with more than three
months of service. Contributions to the plan, which are discretionary, are
determined annually by the Board of Directors. There were no contributions in
fiscal 1996, 1995 or 1994.
8. STOCKHOLDERS' EQUITY
In June 1992, the Company issued warrants, with antidilutive provisions, to
purchase 341,821 shares at $.01 per share, subject to future adjustments, of the
Company's Common Stock in connection with a borrowing from three limited
partnerships managed by Morgan Stanley & Co. The holders of the warrants were
entitled to exercise the warrants in whole or in part at any time after 10 days
prior written notice to the Company up to June 3, 1997, the expiration date. On
July 2, 1993, warrants to purchase 130,618 shares of the Company's Common Stock,
with terms identical to the above warrants, were issued as additional
consideration in connection with the borrowings. The value of such additional
warrants (approximately $540,000) was credited to additional paid-in capital and
included in other assets, and was charged to interest expense over the remaining
term of the related borrowing. The number of common shares for which such
warrants were exercisable, including the effects of the antidilutive provisions
resulting from the granting of stock options during fiscal 1994, increased to
507,113 on July 1, 1994. Of this amount, 506,722 were exercised in conjunction
with the initial public offering and the balance was surrendered in payment of
the exercise price.
On July 2, 1993, the Company entered into an agreement with Morgan Stanley
& Co. to exchange four short-term notes for 6,718 shares of Series A redeemable
convertible preferred stock and warrants, with antidilutive protection, to
purchase an aggregate of 330,708 shares of common stock of the Company at $.01
per share. The number of common shares for which the warrants were exercisable,
including the effects of the antidilutive provisions resulting from the granting
of stock options during fiscal 1994, increased to 451,887. Of this amount,
451,539 were exercised in conjunction with the initial public offering and the
balance was surrendered in payment of the exercise price.
During August 1994, the Company increased its authorized shares to
2,000,000 (from 20,000) and 18,000,000 (from 1,000,000) for preferred and common
stock, respectively.
The holders of the Series A Preferred Stock were entitled to cumulative
quarterly dividends (payable as declared) at the annual rate of $150 per share
and a liquidation preference over holders of Common Stock of $1,000 per share
plus accumulated dividends. Accumulated dividends in the amount of $1,408,000
were paid to the holders of Series A preferred stock in conjunction with the
initial public offering. Additionally, such shares, which contained voting
rights, as defined, were convertible, at the option of the holder into shares of
the Company's Common Stock at fair market value at the date of conversion. The
Company redeemed the
F-15
33
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Series A Preferred Stock, at the liquidation preference amount described above,
with the proceeds from the initial public offering of Common Stock.
In September 1994, the Company adopted an Employee Stock Purchase Plan (the
"Purchase Plan"), which is intended to allow qualified employees to purchase
common stock of the Company at a discount to the market value of such common
stock. A total of 348,750 shares of Common Stock have been reserved for issuance
under the Purchase Plan. As of June 29, 1996, no shares were issued under the
Purchase Plan.
In November 1994, the Company sold 2,300,000 shares of Common Stock through
a public offering at a price of $13.00 per share. The net proceeds of
approximately $26.8 million, after deducting the underwriters' discount and
offering expenses, were used to retire $10,000,000 of subordinated debt, to pay
$380,000 of accrued interest on the subordinated debt, and to redeem all 6,718
shares outstanding of the Series A redeemable convertible preferred stock,
including the payment of accumulated dividends on such stock, for $8,126,000.
The balance of the proceeds were used to reduce outstanding borrowings under the
Company's domestic line of credit. Had the offering occurred on July 3, 1994
primary earnings per share for the year ended July 1, 1995 would have been
$1.07.
In September 1995, the Company completed a public offering of 1,300,000
shares of common stock at a price of $17.25 per share. The net proceeds were
approximately $21.0 million after deducting the underwriting discount and
offering expenses. Additionally, in October 1995, the Company issued 66,666
shares of common stock, upon the partial exercise of the over-allotment option
granted to the underwriters in connection with the September 1995 public
offering. The net proceeds to the Company from the additional shares issued, at
the public offering price of $17.25 per share, were approximately $1.1 million
after deducting the underwriting discount and expenses. The net proceeds of the
offering were used to reduce outstanding borrowings under the Company's domestic
revolving credit facility. Had the offering occurred on July 2, 1995 primary
earnings per share for the year ended June 29, 1996 would have been $1.17.
At June 29, 1996, there were 1,416,920 shares of Common Stock reserved for
the exercise of options and employee stock purchases.
9. OPERATING LEASES
The Company and its subsidiaries lease software, computer, and other office
and factory equipment under long-term operating leases with varying terms. The
aggregate future minimum lease payments under noncancellable operating leases
with initial or remaining lease terms of greater than one year are as follows
(in thousands):
1997...................................................... $1,461
1998...................................................... 980
1999...................................................... 689
2000...................................................... 275
2001 and after............................................ 167
$3,572
Rent expense amounted to $1,203,000, $1,023,000 and $1,056,000 in 1996,
1995 and 1994, respectively.
10. FOREIGN EXCHANGE RISK MANAGEMENT
At June 29, 1996 and July 1, 1995, the Company had approximately $5.9
million and $2.6 million, respectively, of forward exchange contracts
outstanding to exchange European, Japanese and U.S. currencies to reduce
exposures to foreign currency risk. The Company enters into forward foreign
currency contracts for a significant portion of its current and net balance
sheet exposures, principally relating to trade receivables and
F-16
34
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
payables denominated in foreign currencies, and firm sale and purchase
commitments. The forward exchange contracts generally have maturities that do
not exceed 12 months and require the Company to exchange, at maturity, various
currencies for U.S. dollars, Dutch guilders and Japanese yen at rates agreed to
at inception of the contracts. At June 29, 1996, the amount of net losses
explicitly deferred from hedging firm sale and purchase commitments was
approximately $40,000. Deferred gains and losses are included in prepaid
expenses and other current assets, and are recognized in earnings when the
future sales and purchases occur. The net loss deferred at June 29, 1996 will be
recognized in earnings during fiscal 1997.
The Company's credit risk in these transactions is the cost of replacing
these contracts, at current market rates, in the event of default by a
counterparty, which is typically a major international financial institution.
Additionally, market risk exists during the period between the date of the
contract and its designation as an effective hedge for financial reporting
purposes. The Company believes that its exposure to credit risk and market risk
in these transactions is not significant in relation to earnings.
At June 29, 1996 the Company had outstanding borrowings of 190 million
Japanese yen (approximately $1,732,000 at June 29, 1996) and 8,665,000 Dutch
guilders (approximately $5,070,000 at June 29, 1996) to hedge the Company's net
investments in its foreign subsidiaries. Gains and losses on hedges of net
investments are recognized as a component of stockholders' equity.
11. OTHER INCOME
For the years ended June 29, 1996, July 1, 1995 and July 2, 1994, net
foreign currency losses included in other income aggregated approximately
$138,000, $271,000 and $111,000, respectively. The balance consists principally
of finance charges related to accounts receivable.
12. FINANCIAL INSTRUMENTS
On June 29, 1996, the carrying value of financial instruments such as cash,
trade receivables and payables approximated their fair values, based on the
short-term maturities of these instruments. The carrying amounts of the
Company's borrowings under its variable rate short- and long-term credit
agreements approximate their fair value. The carrying value of the Company's
other long-term debt, which approximates its fair value, is estimated based on
expected future cash flows, discounted at current rates for the same or similar
issues. The carrying value of the Company's foreign currency forward contracts,
which approximates their fair value, is the amount at which the contracts could
be settled based on quotes provided by major financial institutions.
13. GEOGRAPHIC DATA
Summarized data by geographic area is as follows (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 29, JULY 1, JULY 2,
1996 1995 1994
----------- ---------- ----------
Net Sales:
United States........................... $ 106,035 $ 88,888 $ 79,207
Foreign................................. 78,449 64,791 54,280
Intercompany............................ (38,508) (31,598) (31,403)
$ 145,976 $122,081 $102,084
Operating Earnings:
United States........................... $ 5,398 $ 6,830 $ 2,391
Foreign................................. 12,451 6,421 2,229
Intercompany............................ (91) 240 (272)
$ 17,758 $ 13,491 $ 4,348
F-17
35
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 29, JULY 1, JULY 2,
1996 1995 1994
----------- ---------- ----------
Identifiable Assets:
United States........................... $ 93,627 $ 70,918 $ 61,230
Foreign................................. 30,090 21,760 20,952
Intercompany............................ (13,772) (8,670) (14,312)
$ 109,945 $ 84,008 $ 67,870
At June 29, 1996, the net assets of Cannondale Europe and Cannondale Japan
were $6,547,000 and $1,423,000, respectively.
14. SUBSEQUENT EVENT
On July 11, 1996, Cannondale Australia Pty Limited ("Cannondale
Australia"), a newly formed subsidiary of the Company, purchased substantially
all the assets of Beaushan Trading Pty Limited, an Australian bicycle
distribution company for cash, net of liabilities owed to the Company. The
purchase price was approximately $610,000. The net assets, and the revenue and
expenses of Cannondale Australia will be included in the consolidated financial
statements of the Company in fiscal 1997.
F-18
36
EXHIBIT IDNEX
-------------
Exhibit
No. Desciption
------- ----------
10.1.4 -- First Amendment to Amended and Restated Loan and Security
Agreement, Dated May 9, 1996 between the Company and Fleet
Capital Corporation.
10.1.5 -- Second Amendment to Amended and Restated Loan and Security
Agreement, Dated September 13, 1996 between the Company and Fleet
Capital Corporation.
11 -- Computation of Earnings Per Share.
21 -- Subsidiaries of the Registrant.
23 -- Consent of Independent Auditors.
27 -- Financial Data Schedule