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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
Commission File Number 0-24884
CANNONDALE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 06-0871823
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16 TROWBRIDGE DRIVE, BETHEL, CT 06801
(Address of principal executive offices, including
zip code)
(203) 749-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), Yes X No and (2) has been subject to such
filing requirements for the past 90 days Yes X No .
The number of shares outstanding of the issuer's Common Stock, $.01 par value,
as of May 4, 1998 was 8,108,088.
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CANNONDALE CORPORATION
INDEX
Page
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Part I Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 28, 1998,
June 28, 1997 and March 29, 1997 3
Condensed Consolidated Statements of Earnings for the three
and nine months ended March 28, 1998 and March 29, 1997 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended March 28, 1998 and March 29, 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Part II Other Information 11
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CANNONDALE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 28, 1998 JUNE 28, 1997 MARCH 29, 1997
-------------- ------------- --------------
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash ........................................ $ 1,189 $ 5,521 $ 3,088
Trade accounts receivable, less allowances of
$8,979, $6,432 and $7,805 ................ 77,484 61,272 76,183
Inventory ................................... 39,845 30,105 33,077
Deferred income taxes ....................... 1,903 2,623 2,985
Prepaid expenses and other current assets ... 3,425 2,386 1,637
--------- --------- ---------
Total current assets ............................ 123,846 101,907 116,970
Property, plant and equipment, net .............. 30,792 23,105 20,402
Other assets .................................... 3,051 2,272 1,611
--------- --------- ---------
Total assets .................................... $ 157,689 $ 127,284 $ 138,983
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................ $ 14,475 $ 12,330 $ 12,813
Revolving credit advances ................... 1,484 1,022 3,419
Income taxes payable ........................ 535 2,946 3,289
Warranty and other accrued expenses ......... 8,359 7,851 6,555
Current installments of long-term debt ...... 389 562 1,307
--------- --------- ---------
Total current liabilities ....................... 25,242 24,711 27,383
Long-term debt, less current installments ....... 53,045 20,319 33,608
Deferred income taxes ........................... 422 339 165
Other noncurrent liabilities .................... 275 294 294
--------- --------- ---------
Total liabilities ............................... 78,984 45,663 61,450
--------- --------- ---------
Stockholders' equity:
Common stock, $.01 par value:
Authorized shares - 40,000,000
Issued 8,711,088 shares,
Issued and outstanding shares -
8,687,615 and 8,673,634 ................. 87 87 87
Additional paid-in capital .................. 57,196 56,860 56,710
Less 505,000 shares in treasury at cost ..... (10,133) -- --
Retained earnings ........................... 33,752 26,053 21,741
Cumulative translation adjustment ........... (2,197) (1,379) (1,005)
--------- --------- ---------
Total stockholders' equity ...................... 78,705 81,621 77,533
--------- --------- ---------
Total liabilities and stockholders' equity ...... $ 157,689 $ 127,284 $ 138,983
========= ========= =========
See accompanying notes
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CANNONDALE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT FOR PER-SHARE DATA)
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
MARCH 28, MARCH 29, MARCH 28, MARCH 29,
--------- --------- --------- ---------
1998 1997 1998 1997
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net sales .............................. $ 45,305 $ 48,229 $ 127,315 $ 120,403
Cost of sales .......................... 28,101 28,698 81,191 74,747
-------- -------- --------- ---------
Gross profit ........................... 17,204 19,531 46,124 45,656
-------- -------- --------- ---------
Expenses:
Selling, general and administrative 10,277 9,436 29,118 27,225
Research and development .......... 1,552 946 4,269 2,608
-------- -------- --------- ---------
11,829 10,382 33,387 29,833
-------- -------- --------- ---------
Operating income ....................... 5,375 9,149 12,737 15,823
-------- -------- --------- ---------
Other income (expense):
Interest expense................... (685) (543) (1,246) (1,231)
Other income ...................... 229 290 509 281
-------- -------- --------- ---------
(456) (253) (737) (950)
-------- -------- --------- ---------
Income before income taxes ............. 4,919 8,896 12,000 14,873
Income tax expense ..................... (1,733) (3,344) (4,301) (5,679)
-------- -------- --------- ---------
Net income ............................. $ 3,186 $ 5,552 $ 7,699 $ 9,194
======== ======== ========= =========
Basic income per common share:
Net income ........................ $ .38 $ .64 $ .90 $ 1.07
======== ======== ========= =========
Diluted income per common share:
Net income ........................ $ .37 $ .62 $ .87 $ 1.03
======== ======== ========= =========
See accompanying notes
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CANNONDALE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED NINE MONTHS ENDED
MARCH 28, 1998 MARCH 29, 1997
-------------- --------------
(UNAUDITED) (UNAUDITED)
NET CASH USED IN OPERATING ACTIVITIES ............... $(17,832) $(18,216)
-------- --------
INVESTING ACTIVITIES:
Capital expenditures ................................ (10,610) (6,215)
Proceeds from sale of headquarters facility ......... -- 1,676
-------- --------
Net cash used in investing activities ............... (10,610) (4,539)
-------- --------
FINANCING ACTIVITIES:
Net proceeds from issuance of common stock .......... 337 746
Payments for the purchase of treasury stock ......... (10,133) --
Net proceeds from (repayments of) borrowings under
short-term revolving credit agreements .......... 585 (987)
Net proceeds from borrowings under long-term debt and
capital lease agreements ........................ 32,765 20,987
-------- --------
Net cash provided by financing activities ........... 23,554 20,746
-------- --------
Effect of exchange rate changes on cash ............. 556 792
-------- --------
Net decrease in cash ................................ (4,332) (1,217)
Cash at beginning of period ......................... 5,521 4,305
-------- --------
Cash at end of period ............................... $ 1,189 $ 3,088
======== ========
See accompanying notes
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CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Cannondale Corporation (the Company) have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three- and nine-month periods ended March 28, 1998 are
not necessarily indicative of the results that may be expected for the year
ending June 27, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto for the year ended June 28, 1997
included in the Company's Annual Report on Form 10-K/A.
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where necessary, restated to
conform to the Statement 128 requirements.
2. INVENTORY
The components of inventory are as follows (in thousands):
MARCH 28, MARCH 29,
--------- ---------
1998 JUNE 28, 1997 1997
---- ------------- ----
(UNAUDITED) (UNAUDITED)
Raw materials ..................... $ 21,255 $ 13,394 $ 14,888
Work-in-process ................... 2,481 1,455 1,834
Finished goods .................... 17,239 16,325 17,162
Less reserve for obsolete inventory (1,130) (1,069) (807)
-------- -------- --------
$ 39,845 $ 30,105 $ 33,077
======== ======== ========
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\ CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. EARNINGS PER SHARE AMOUNTS
The following table sets forth the computation of basic and diluted earnings per
share:
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
MARCH 28, MARCH 29, MARCH 28, MARCH 29,
--------- --------- --------- ---------
1998 1997 1998 1997
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
NUMERATOR:
Numerator for basic and diluted
earnings per share - income available
to common stockholders ................ $3,186 $5,552 $7,699 $9,194
====== ====== ====== ======
DENOMINATOR:
Denominator for basic earnings per share -
weighted-average shares ............... 8,343 8,648 8,550 8,625
Effect of dilutive securities:
Employee stock options ................ 266 312 272 299
------ ------ ------ ------
Denominator for diluted earnings per share
- adjusted weighted-average shares and
assumed conversions ................... 8,609 8,960 8,822 8,924
====== ====== ====== ======
Basic earnings per share ................. $ .38 $ .64 $ .90 $ 1.07
====== ====== ====== ======
Diluted earnings per share ............... $ .37 $ .62 $ .87 $ 1.03
====== ====== ====== ======
The following table sets forth the options to purchase shares of common stock at
the respective ranges of exercise prices that were not included in the
computation of diluted earnings per share because the options' exercise prices
were greater than the average market price of the common shares, and therefore,
the effect would be antidilutive:
OPTIONS RANGE OF EXERCISE PRICES
------- ------------------------
Three months ended March 28, 1998................ 133,636 $20.69 - $22.63
Three months ended March 29, 1997................ 46,718 $21.50 - $22.63
Nine months ended March 28, 1998................. 102,277 $20.69 - $22.63
Nine months ended March 29, 1997................. 18,753 $21.50 - $22.63
4. STOCK OPTIONS
On March 27, 1998, an aggregate of 509,426 options to purchase common stock with
exercise prices in excess of $17.63 were canceled and new options were issued in
replacement thereof with exercise prices of $16.50.
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Sales. Net sales decreased from $48.2 million in the third quarter of fiscal
1997 to $45.3 million in the third quarter of fiscal 1998, a decrease of $2.9
million or 6.1%. The decrease in sales for the quarter was primarily caused by a
reduction in inventory by many of the Company's domestic dealers and bad weather
in the United States. For the first nine months, net sales increased 5.7% from
$120.4 million in fiscal 1997 to $127.3 million in fiscal 1998, an increase of
$6.9 million. The increase in sales for the first nine months of fiscal 1998 was
a primarily a result of strong international demand for Cannondale products.
Gross Profit. Gross profit as a percentage of net sales decreased to 38.0% for
the third quarter of fiscal 1998 compared to 40.5% for the third quarter of
fiscal 1997. The gross profit for the third quarter of 1998 was $17.2 million, a
decrease of $2.3 million, or 11.9% below the gross profit of $19.5 million for
the third quarter of fiscal 1997. For the first nine months of fiscal 1998,
gross profit as a percentage of net sales decreased to 36.2% compared to 37.9%
in fiscal 1997. The gross profit for the first nine months of fiscal 1998 was
$46.1 million, an increase of approximately $400,000 over the gross profit of
$45.7 million for the for the first nine months of fiscal 1997. In both periods,
the lower gross-profit rate primarily reflects the effect of a stronger U.S.
dollar on sales by the Company's foreign subsidiaries, as the cost of materials
purchased from the U.S. increased compared to the same period last year. The
impact of the stronger U.S. dollar offset the benefits of a mix that favored
international markets, cost-reduction programs and the Company's continued
integration of proprietary technology through the use of its Cannondale bicycle
frames, CODA components and HeadShok suspension systems.
Operating Expenses. Operating expenses were $11.8 million for the third quarter
of fiscal 1998, an increase of approximately $1.4 million, or 13.9% over the
third quarter fiscal 1997 operating expenses of $10.4 million. For the first
nine months of fiscal 1998, operating expenses were $33.4 million, an increase
of approximately $3.6 million, or 11.9% over the $29.8 million recorded for the
first nine months of fiscal 1997.
For both periods, increased selling, general and administrative expenses, offset
by the effect of a stronger U.S. dollar, were primarily associated with meeting
the Company's current and planned growth objectives. The additional expenses
related to personnel hired for the expanded field-sales force, increased
investment in international marketing, increased depreciation expense associated
with the growth of capital expenditures and expenses associated with upgrading
the Company's shipping system. As a percentage of net sales, selling, general
and administrative expenses remained relatively constant during the first nine
months of fiscal 1998 at 22.9%, compared to 22.6% during the prior-year period.
The increase in research and development expenses reflects the Company's
commitment to innovation and the generation of new products and manufacturing
processes. During the first nine months of fiscal 1998, as a percentage of net
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sales, the Company increased its investment in research and development to 3.4%
compared to 2.2% during the prior-year period.
Other income (expense). Interest expense for the third quarter of fiscal 1998
was $685,000, an increase of approximately $142,000 from the third quarter of
fiscal 1997. Adjusted for capitalized interest costs related to the construction
of the Company's new headquarters facility and the expansion of the
manufacturing facility, interest expense for the first nine months of fiscal
1998 was $1.3 million, an increase of approximately $103,000 from the first nine
months of fiscal 1997. In both periods, the increase in interest expense
reflects the effect of higher average borrowings primarily relating to the
Company's common stock repurchase program and increased capital expenditures,
partially offset by lower interest rates available under the Company's unsecured
multi-currency revolving credit facility.
In both periods, other income primarily represents the receipt of finance
charges payable by dealers.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $17.8 million for the first nine
months of fiscal 1998, which was relatively constant compared to the $18.2
million used for the first nine months of fiscal 1997. The net use of cash is
typical for the first nine months of the fiscal year due to seasonal activity,
which includes higher working capital requirements during the busiest shipping
period of the fiscal year and seasonal terms offered to dealers through the
Company's Authorized Retailer Program.
Capital expenditures were $10.6 million for the first nine months of fiscal
1998, compared to $6.2 million in the first nine months of fiscal 1997. The
increase in spending primarily reflects the completion of the Company's new
administrative headquarters and research and development facility and the
expansion of the Company's production facility in fiscal 1998, which was
required to support increases in production volume and to support future growth.
During fiscal 1997, the proceeds from the sale of the Company's former
headquarters facility, $1.7 million, were reinvested in this expansion.
Net cash provided by financing activities for the first six months of fiscal
1998 was $23.6 million, an increase of $2.9 million compared to the $20.7
million for the first nine months of fiscal 1997. Net cash provided by financing
activities in the first nine months of the fiscal year primarily represents
borrowings under the Company's long-term revolving credit facility to meet its
operating and capital requirements. The increase in proceeds from long-term
borrowings in fiscal 1998 primarily reflects the investment in its new
administrative headquarters and research and development facility and the
expansion of the Company's production facility, as well as the effect of the
repurchase of $10.1 million of the Company's common stock. The Company is
authorized to repurchase up to 1,000,000 shares of its common stock at an
aggregate price not to exceed $20 million. In order to accommodate the capital
requirements of the repurchase program, on October 14, 1997, the Company and its
lenders amended the revolving credit facility to allow the Company and its
subsidiaries to borrow up to $70 million. The amendment to the revolving credit
facility includes adjustments to specified levels of tangible net worth and cash
flow levels that the Company must maintain.
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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, and to accommodate the capital requirements
of the Company's share repurchase program for the foreseeable future.
YEAR 2000 COMPLIANCE
The Company has performed an examination of its hardware and software
applications to determine whether the systems it uses to operate its business
are prepared to accommodate the year 2000. Upon identifying the applications
that require modification to accommodate year 2000 dating, the Company initiated
a program to modify the software using third-party service providers. This
program is currently in process and the Company anticipates that it will be
completed by the end of fiscal year 1999. The Company believes that the cost
associated with the modifications of software will not be material to its
financial results. In concert with the Company's assessment of its internal
systems, it also initiated a program to contact its major third-party suppliers
to determine their status with year 2000 compliance. This program is in progress
and the Company has not completely assessed the status of its third-party
suppliers and the year 2000 problem. Based on its current examination of the
year 2000 problem and its progress with modifications to its internal systems,
the Company does not anticipate that the year 2000 problem will have a material
adverse impact on its operations or its financial condition.
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PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
PAGE
(a) Index to Exhibits 13
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CANNONDALE CORPORATION
Date: May 11, 1998 /s/ WILLIAM A. LUCA
------------------------------------
William A. Luca
Vice President of Finance, Treasurer
and Chief Financial Officer
(Principal Financial Officer
and authorized signatory)
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.1.11 Credit Agreement, dated February 5, 1998, between Cannondale
Europe B.V. and ABN AMRO Bank N.V..
10.68 Change of Control Employment Agreement, dated February 5, 1998,
between Cannondale Corporation and William A. Luca.
10.68.1 Change of Control Employment Agreement, dated February 5, 1998,
between Cannondale Corporation and Joseph S. Montgomery.
10.68.2 Change of Control Employment Agreement, dated February 5, 1998,
between Cannondale Corporation and John Moriarty.
10.68.3 Change of Control Employment Agreement, dated February 5, 1998,
between Cannondale Corporation and Daniel C. Alloway.
10.68.4 Cannondale Corporation Change of Control Separation Plan A.
10.68.5 Cannondale Corporation Change of Control Separation Plan B.
27 Financial Data Schedule
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