1
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 27, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the transition period from ________ to ________
Commission File Number 0-24884
CANNONDALE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 06-0871823
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16 TROWBRIDGE DRIVE, BETHEL, CONNECTICUT 06801
(Address of principal executive offices) (zip code)
(203) 749-7000
(Registrant's telephone number, including area code)
________________________________________________________________________________
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes X No .
--- ---
The number of shares outstanding of the issuer's Common Stock, $.01 par value
per share, as of May 7, 1999 was 7,478,261.
2
CANNONDALE CORPORATION
INDEX
Page
Part I Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 27,
1999, June 27, 1998 and March 28, 1998 1
Condensed Consolidated Statements of Earnings for the
three and nine months ended March 27, 1999 and March
28, 1998 2
Condensed Consolidated Statements of Cash Flows for the
nine months ended March 27, 1999 and March 28, 1998 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II Other Information
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 14
Signature 15
i
3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CANNONDALE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except share data)
MARCH 27, 1999 JUNE 27, 1998 MARCH 28, 1998
--------- --------- ---------
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash ................................................ $ 2,190 $ 3,031 $ 1,189
Trade accounts receivable, less allowances of
$10,359, $8,479 and $8,979 ....................... 77,144 61,746 77,484
Inventory ........................................... 35,832 39,420 39,845
Deferred income taxes ............................... 2,797 2,172 1,903
Prepaid expenses and other current assets ........... 5,249 4,449 3,425
--------- --------- ---------
Total current assets .................................... 123,212 110,818 123,846
Property, plant and equipment, net ...................... 38,160 35,769 30,792
Notes receivable and advances to related parties ........ 12,671 2,688 658
Other assets ............................................ 3,513 3,002 2,393
--------- --------- ---------
Total assets ............................................ $ 177,556 $ 152,277 $ 157,689
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................... $ 15,850 $ 16,747 $ 14,475
Revolving credit advances ........................... 3,202 2,141 1,484
Income taxes payable ................................ 1,933 1,732 535
Warranty and other accrued expenses ................. 7,021 5,820 6,594
Payroll and other employee related benefits ......... 1,214 2,142 1,765
Payable to related party ............................ -- 2,800 --
Current installments of long-term debt .............. 470 461 389
--------- --------- ---------
Total current liabilities ............................... 29,690 31,843 25,242
Long-term debt, less current installments ............... 70,897 40,352 53,045
Deferred income taxes ................................... 1,320 1,569 422
Other noncurrent liabilities ............................ 406 275 275
--------- --------- ---------
Total liabilities ....................................... 102,313 74,039 78,984
========= ========= =========
Stockholders' equity:
Common stock, $.01 par value:
Authorized shares - 40,000,000
Issued shares - 8,771,161, 8,737,088 and 8,711,088 88 87 87
Additional paid-in capital .......................... 57,708 57,303 57,196
Retained earnings ................................... 40,209 35,405 33,752
Less shares in treasury at cost - 1,292,900,
656,400 and 505,000 .............................. (20,162) (12,417) (10,133)
Accumulated other comprehensive income .............. (2,600) (2,140) (2,197)
--------- --------- ---------
Total stockholders' equity .............................. 75,243 78,238 78,705
--------- --------- ---------
Total liabilities and stockholders' equity .............. $ 177,556 $ 152,277 $ 157,689
========= ========= =========
See accompanying notes
1
4
CANNONDALE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(in thousands, except per share data)
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
MARCH 27, MARCH 28, MARCH 27, MARCH 28,
1999 1998 1999 1998
--------- --------- --------- ---------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net sales .............................. $ 41,714 $ 45,305 $ 131,833 $ 127,315
Cost of sales .......................... 25,967 28,101 85,300 81,191
--------- --------- --------- ---------
Gross profit ........................... 15,747 17,204 46,533 46,124
--------- --------- --------- ---------
Expenses:
Selling, general and administrative 9,325 10,277 30,442 29,118
Research and development .......... 2,540 1,552 7,513 4,269
--------- --------- --------- ---------
11,865 11,829 37,955 33,387
--------- --------- --------- ---------
Operating income ....................... 3,882 5,375 8,578 12,737
--------- --------- --------- ---------
Other income (expense):
Interest expense .................. (1,237) (685) (3,182) (1,246)
Other income ...................... 639 229 1,030 509
--------- --------- --------- ---------
(598) (456) (2,152) (737)
--------- --------- --------- ---------
Income before income taxes ............. 3,284 4,919 6,426 12,000
Income tax expense ..................... (967) (1,733) (1,622) (4,301)
--------- --------- --------- ---------
Net income ............................. $ 2,317 $ 3,186 $ 4,804 $ 7,699
========= ========= ========= =========
Basic earnings per share ............... $ .31 $ .38 $ .64 $ .90
========= ========= ========= =========
Diluted earnings per share ............. $ .30 $ .37 $ .62 $ .87
========= ========= ========= =========
See accompanying notes
2
5
CANNONDALE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
NINE MONTHS ENDED NINE MONTHS ENDED
MARCH 27, 1999 MARCH 28, 1998
-------- --------
(UNAUDITED) (UNAUDITED)
NET CASH USED IN OPERATING ACTIVITIES: $ (8,083) $(17,401)
-------- --------
INVESTING ACTIVITIES:
Loans provided to related parties ............................................ (10,017) (431)
Proceeds from repayments of loans provided to related parties ................ 34 --
Capital expenditures ......................................................... (10,637) (10,610)
Proceeds from sale of manufacturing facility and Cessna Citation aircraft .... 4,133 --
-------- --------
Net cash used in investing activities ........................................ (16,487) (11,041)
-------- --------
FINANCING ACTIVITIES:
Net proceeds from issuance of common stock ................................... 300 337
Proceeds from issuance of long-term debt ..................................... 20,738 --
Payments for the purchase of treasury stock .................................. (7,745) (10,133)
Net proceeds from borrowings under short-term revolving credit agreements .... 1,042 585
Net proceeds from borrowings under long-term revolving line of credit and
capital lease agreements................................................... 9,780 32,765
-------- --------
Net cash provided by financing activities .................................... 24,115 23,554
-------- --------
Effect of exchange rate changes on cash ...................................... (386) 556
-------- --------
Net decrease in cash ......................................................... (841) (4,332)
Cash at beginning of period .................................................. 3,031 5,521
-------- --------
Cash at end of period ........................................................ $ 2,190 $ 1,189
======== ========
See accompanying notes
3
6
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 27, 1999 are
not necessarily indicative of the results that may be expected for the year
ending July 3, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto for the year ended June 27, 1998
included in the Company's Annual Report on Form 10-K.
Reclassifications
Certain fiscal 1998 amounts have been reclassified to conform to the
current year's presentation.
2. INVENTORY
The components of inventory are as follows (in thousands):
MARCH 27, MARCH 28,
1999 JUNE 27, 1998 1998
-------- -------- --------
(UNAUDITED) (UNAUDITED)
Raw materials ..................... $ 18,025 $ 20,439 $ 21,255
Work-in-process ................... 2,320 2,856 2,481
Finished goods .................... 17,576 16,931 17,239
-------- -------- --------
37,921 40,226 40,975
Less reserve for obsolete inventory (2,089) (806) (1,130)
-------- -------- --------
$ 35,832 $ 39,420 $ 39,845
======== ======== ========
4
7
CANNONDALE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
3. EARNINGS PER SHARE AMOUNTS
The following table is an illustration of the reconciliation of the
numerator and denominator of basic and diluted earnings per share computations
and other related disclosures required by the Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share" (in thousands, except earnings
per share data):
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
MARCH 27, MARCH 28, MARCH 27, MARCH 28,
1999 1998 1999 1998
------ ------ ------ ------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
NUMERATOR:
Numerator for basic and diluted earnings
per share - income available to common
stockholders .......................... $2,317 $3,186 $4,804 $7,699
====== ====== ====== ======
DENOMINATOR:
Denominator for basic earnings per share -
weighted-average shares ............... 7,467 8,343 7,532 8,550
Effect of dilutive securities:
Employee stock options ................ 195 266 161 272
------ ------ ------ ------
Denominator for diluted earnings per share
- adjusted weighted-average shares and
assumed conversions ................... 7,662 8,609 7,693 8,822
====== ====== ====== ======
Basic earnings per share ................. $ .31 $ .38 $ .64 $ .90
====== ====== ====== ======
Diluted earnings per share ............... $ .30 $ .37 $ .62 $ .87
====== ====== ====== ======
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 27, 1999 ......... 4,999 $10.56-15.00
Three months ended March 28, 1998 ......... 133,636 $20.69-22.63
Nine months ended March 27, 1999 .......... 860,716 $9.31-16.56
Nine months ended March 28, 1998 .......... 102,277 $20.69-22.63
5
8
CANNONDALE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
4. COMPREHENSIVE INCOME
As of June 28, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." Comprehensive income generally represents all changes in
stockholders' equity except those resulting from investments or contributions by
stockholders. The Company has reclassified information for the prior period to
conform with the standard. The adoption of this Statement had no impact on the
Company's net income or shareholders' equity.
The Company's comprehensive income is as follows, net of tax (in thousands):
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
MARCH 27, MARCH 28, MARCH 27, MARCH 28,
1999 1998 1999 1998
------- ------- ------- -------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net income ................................. $ 2,317 $ 3,186 $ 4,804 $ 7,699
Foreign currency translation loss net of tax (2,058) (477) (460) (818)
------- ------- ------- -------
Total comprehensive income ................. $ 259 $ 2,709 $ 4,344 $ 6,881
======= ======= ======= =======
The component of accumulated other comprehensive income is as follows, net of
tax (in thousands):
MARCH 27, JUNE 27, MARCH 28,
1999 1998 1998
------- ------- -------
(UNAUDITED) (UNAUDITED)
Foreign currency translation adjustments, net of tax $(2,600) $(2,140) $(2,197)
------- ------- -------
Accumulated other comprehensive income ............. $(2,600) $(2,140) $(2,197)
======= ======= =======
5. RELATED PARTY TRANSACTIONS
In April 1998, the Company provided Joseph Montgomery, the President
and Chief Executive Officer of the Company, with a loan in the principal amount
of $2.0 million to enable him to meet certain tax obligations. In June 1998, the
Company agreed to provide Mr. Montgomery with an additional loan in the
principal amount of $10.0 million for the purchase of certain real property,
which loan has been combined with the previous $2.0 million loan made in April
1998. The loan matures on August 1, 2003, at which time the entire principal
balance is due. The interest rate on the loan is set at the prime rate as
published in the Wall Street Journal from time to time, and the loan is secured
by a pledge to the Company of all of the shares of the Company's common stock
held by Mr. Montgomery and by a mortgage on such real property. The principal
balance of the outstanding loan to Mr. Montgomery was $12.0 million at March 27,
1999.
During fiscal 1999, the Company began the construction of its
production facility for the motocross motorcycle and its clothing line. The
Company contracted an entity controlled by a director of the Company to act as
the general contractor for the construction of the project. The Company paid the
entity approximately $4.0 million for the construction of the project during the
first nine months of fiscal 1999.
6
9
CANNONDALE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
6. DEBT
On January 22, 1999, the Company entered into an $85.0 million amended
and restated multicurrency credit facility (the "facility") to serve as the
Company's principal source of working capital and capital funding. On May 1,
1999, the Company and its lenders amended the facility to adjust the performance
criteria and LIBOR (London Interbank Offered Rate) margin set forth for the
Company. The facility is secured by all of the Company's tangible and intangible
domestic assets. The facility, which extends through January 2002, allows for
Cannondale U.S.A., Cannondale Europe and Cannondale Japan to borrow up to $65.0
million under a multicurrency revolving line of credit and provides for a $20.0
million term loan that amortizes by $10.0 million in 30 months. The facility
includes a provision that permits the Company to borrow up to $10.0 million on a
short-term basis (less than 30 days). Under the revolving line of credit, the
Company has the option to borrow at the following rates: (1) a variable rate
that is defined as the higher of the bank's prime rate or the Federal Funds Rate
plus 50.0 basis points; (2) a short-term market rate that is an offered rate per
annum quoted by the bank; or (3) the LIBOR applicable to the currency borrowed
plus an interest rate margin ("LIBOR margin"). The LIBOR margin (ranging from
75.0 to 170.0 basis points) is determined quarterly based upon predetermined
performance criteria. The interest rate on the term loan is the LIBOR plus a
margin that was 175.0 basis points during the third quarter of fiscal 1999 and
increases to 225.0 basis points May 1, 1999, 250.0 basis points January 1,
2000, 275.0 basis points April 1, 2000 and 300.0 basis points July 1, 2000. The
Company is obligated to pay a facility fee (ranging from 25.0 to 30.0 basis
points) on the balance of the facility based on the same performance criteria
as the LIBOR margin. The facility contains restrictive and financial covenants
relating to, among other things, the repurchase of shares of the Company's
common stock and the maintenance of minimum levels of cash flow,
capitalization, interest coverage and tangible net worth. During the third
quarter of fiscal 1999, and before the May 1, 1999 amendment became effective,
the Company received a waiver from its lenders under the terms of the facility
pertaining to a certain covenant.
7. SALE-LEASEBACK TRANSACTION
During the third quarter of fiscal 1999, the Company entered into a
$2.9 million sale-leaseback transaction for its Cessna Citation Jet aircraft.
The sale resulted in a $131,000 gain for the Company which was deferred and is
being amortized over the five-year term of the lease. The lease provides the
Company with the option to terminate the lease before the end of the lease term
for predetermined amounts without penalty. At the end of the lease term, the
Company can purchase the aircraft for 90% of its original cost, renew the lease
for the then fair market value rental or sell the aircraft to a third party. If
the Company decides to sell the aircraft to a third party and the proceeds from
the sale of the aircraft are less than 90% of the purchase price, the Company
shall make a final payment in the amount of the deficiency not to exceed 72% of
the original cost. The related lease is being accounted for as an operating
lease and will result in additional rent expense of approximately $273,000
annually.
7
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Net Sales. Net sales were $41.7 million in the third quarter of fiscal
1999 compared to $45.3 million in the third quarter of fiscal 1998. The decrease
in sales for the quarter was primarily a result of inventory reductions by the
Company's domestic and international bicycle dealers. For the first nine months,
net sales increased 3.5% from $127.3 million in fiscal 1998 to $131.8 million in
fiscal 1999, an increase of $4.5 million. The increased sales for the first nine
months of fiscal 1999 were primarily a result of strong international demand for
Cannondale products during the first and second quarters of fiscal 1999 and, in
addition, a weaker U.S. dollar against the Dutch guilder.
Gross Profit. Gross profit as a percentage of net sales for the third
quarter of fiscal 1999 was 37.8%, consistent with the 38.0% recorded for the
third quarter of fiscal 1998. Gross profit was $15.7 million in the third
quarter of fiscal 1999, a decrease of $1.5 million, or 8.5% below the gross
profit in the third quarter of fiscal 1998 of $17.2 million. The reduction in
gross profit was primarily a result of the lower sales volume compared to the
same period last year. For the first nine months of fiscal 1999, gross profit as
a percentage of sales decreased to 35.3% compared to 36.2% for the same period
last year. Gross profit was $46.5 million for the first nine months of fiscal
1999, an increase of $400,000 compared to the gross profit for the same period
last year of $46.1 million. The decrease in the gross profit rate for the first
nine months of fiscal 1999 primarily relates to product mix during the second
fiscal quarter. The Company's ability to ship high-end, higher margin bicycles
during the second quarter was limited by its suppliers' ability to provide
sufficient quantities of certain components which resulted in lower shipments
and factory production levels. The less favorable product mix and lower factory
production levels in the second quarter of fiscal 1999 offset the benefit of a
sales mix that favored international markets, cost-reduction programs, the
Company's continued integration of proprietary technologies and a weaker U.S.
dollar against the Dutch guilder during the first nine months of the fiscal
year.
Operating Expenses. Operating expenses were $11.9 million for the third
quarter of fiscal 1999, flat compared to the $11.8 million recorded for the
third quarter of fiscal 1998. Operating expenses were $38.0 million for the
first nine months of fiscal 1999, an increase of approximately $4.6 million, or
13.7% over the $33.4 million recorded for the first nine months of fiscal 1998.
Selling, general and administrative expenses decreased 9.3% to $9.3
million in the third quarter of fiscal 1999 from $10.3 million recorded during
the prior-year period. The decrease in selling, general and administrative
expenses principally relates to administrative cost reductions by management and
expenses directly related to the lower sales volume in the third quarter of
fiscal 1999 compared to the prior-year period. For the first nine months of
fiscal 1999, selling, general and administrative expenses increased 4.5% to
$30.4 million from $29.1 million recorded during the prior-year period. The
increased selling, general and administrative expenses were associated with
additional personnel primarily relating to the Company's sales force, product
management team and marketing personnel to support the Company's current and
planned future growth. In addition, increased selling, general and
administrative expenses reflect the effect of higher depreciation expense
primarily associated with $16.8 million of capital expenditures in fiscal 1998
and a weaker U.S. dollar against the Dutch guilder. As a percentage of sales,
selling, general and administrative expenses increased slightly to 23.1% for the
first nine months of fiscal 1999 from 22.9% in the prior-year period.
Research and development expenses increased 63.7% to $2.5 million in
the third quarter of fiscal 1999 from $1.6 million recorded during the
prior-year period. For the first nine months of fiscal 1999, research and
development expenses increased 76.0% to $7.5 million from $4.3 million recorded
during the prior-year period. The increase in research and development expenses
reflects the Company's
8
11
commitment to the improvement of its current products and the generation of new
products and manufacturing processes. For both periods, the increase in spending
was primarily attributable to the product and process development of the
motocross motorcycle and, in addition, the Company's effort to improve and
expand its existing bicycle and CODA product lines. The Company plans to
introduce the motocross motorcycle to the market during the first quarter of
fiscal year 2000 (July 1999 to September 1999). As a percentage of sales, the
Company increased its investment in research and development expense to 5.7% for
the first nine months of fiscal 1999 compared to 3.4% for the first nine months
of fiscal 1998.
Other income (expense). Adjusted for capitalized interest costs related
to the Company's investment in the production facility for the motocross
motorcycle and clothing line, interest expense increased to $1.3 million in the
third quarter of fiscal 1999 from $685,000 recorded during the prior-year
period. For the first nine months of fiscal 1999, interest expense increased to
$3.3 million from $1.3 million, with both periods adjusted for the capitalized
interest costs. The increase in interest expense is primarily attributable to
higher average borrowings pursuant to the Company's share repurchase programs,
capital expenditures during fiscal 1998 and the first nine months of fiscal 1999
and the loan to Joseph Montgomery (see Liquidity and Capital Resources) offset
by improvements in working capital levels. Other income primarily consists of
finance charges relating to accounts receivable, and in fiscal 1999, interest
income related to the loan to Joseph Montgomery.
Income tax expense. Income tax expense decreased 44.2% to $967,000 in
the third quarter of fiscal 1999, from $1.7 million recorded during the
prior-year period. For the first nine months of fiscal 1999, income tax expense
decreased 62.3% to $1.6 million from $4.3 million recorded during the prior-year
period. For both periods, the reduction in the income tax rate is primarily
attributable to the twelve month retroactive extension by the U.S. government of
the research tax credit in November 1998 and a shift in the operating results
among the domestic and international entities during fiscal 1999 compared to the
prior-year period.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $8.1 million for the first
nine months of fiscal 1999 compared to the $17.4 million used in operating
activities for the first nine months of fiscal 1998. The decrease in the
Company's use of cash during the first nine months of fiscal 1999 compared to
the same period last year primarily reflects the reduction in the Company's
inventory levels to compensate for the lower sales levels during the third
quarter. The reduction of inventory growth is a reflection of the Company's
efforts to maintain inventory levels more consistent with its sales levels. The
net use of cash is typical for the first nine months of the fiscal year due to
seasonal activity. The seasonal activity includes greater working capital
requirements principally as a result of seasonal terms offered to dealers
through the Company's Authorized Retailer Program.
Capital expenditures for the first nine months of fiscal 1999 were
$10.6 million, the same compared to the amount spent during the first nine
months of fiscal 1998. Capital expenditures during the first nine months of
fiscal 1999 principally consist of the Company's investments in a production
facility for the motocross motorcycle and the Company's clothing line in
Bedford, Pennsylvania, as well as computer and manufacturing equipment to
support the Company's planned increases in production volume and future growth.
Capital expenditures in fiscal 1998 primarily reflected the Company's investment
in its new administrative headquarters and research and development facility and
the expansion of its production facility.
During the first quarter of fiscal 1999, the Company completed the sale
of its Philipsburg facility to the Moshannon Valley Development Authority for
approximately $1.4 million, an amount which approximated the net book value of
the facility. The operations from the Philipsburg facility were moved to the
Bedford facility in June 1998.
9
12
During the third quarter of fiscal 1999, the Company entered into a
$2.9 million sale-leaseback transaction for its Cessna Citation Jet aircraft.
The sale resulted in a $131,000 gain for the Company which was deferred and is
being amortized over the five-year term of the lease. The related lease is being
accounted for as an operating lease and will result in additional rent expense
of approximately $273,000 annually.
In April 1998, the Company provided Joseph Montgomery, the President
and Chief Executive Officer of the Company, with a loan in the principal amount
of $2.0 million to enable him to meet certain tax obligations. In June 1998, the
Company agreed to provide Mr. Montgomery with an additional loan in the
principal amount of $10.0 million for the purchase of certain real property,
which loan has been combined with the previous $2.0 million loan made in April
1998. The loan matures on August 1, 2003, at which time the entire principal
balance is due. The interest rate on the loan is set at the prime rate as
published in the Wall Street Journal from time to time, and the loan is secured
by a pledge to the Company of all of the shares of the Company's common stock
held by Mr. Montgomery and by a mortgage on such real property. The principal
balance of the outstanding loan to Mr. Montgomery was $12.0 million at May 11,
1999.
Under its stock repurchase programs, the Company repurchased an
aggregate of 636,500 shares of its common stock during the first quarter of
fiscal 1999, at a cost of $7.7 million. The Company did not repurchase any
shares of its common stock during the second and third quarters of fiscal 1999.
During the first nine months of fiscal 1998, the Company repurchased an
aggregate of 505,000 shares of its common stock at a cost of $10.1 million.
Net cash provided by financing activities for the first nine months of
fiscal 1999 was $24.1 million, an increase of approximately $560,000 compared to
the $23.6 million for the first nine months of fiscal 1998. The net cash
provided by financing activities in fiscal 1999 primarily reflects the net
proceeds from borrowings under the Company's multicurrency revolving credit
facility to meet its operating and capital requirements, to finance the
Company's programs to repurchase shares of its common stock and to finance the
loan to Joseph Montgomery.
On January 22, 1999, the Company entered into an $85.0 million amended
and restated multicurrency credit facility (the "facility") to serve as the
Company's principal source of working capital and capital funding. On May 1,
1999, the Company and its lenders amended the facility to adjust the performance
criteria and LIBOR (London Interbank Offered Rate) margin set forth for the
Company. The facility is secured by all of the Company's tangible and intangible
domestic assets. The facility, which extends through January 2002, allows for
Cannondale U.S.A., Cannondale Europe and Cannondale Japan to borrow up to $65.0
million under a multicurrency revolving line of credit and provides for a $20.0
million term loan that amortizes by $10.0 million in 30 months. The facility
includes a provision that permits the Company to borrow up to $10.0 million on a
short-term basis (less than 30 days). Under the revolving line of credit, the
Company has the option to borrow at the following rates: (1) a variable rate
that is defined as the higher of the bank's prime rate or the Federal Funds Rate
plus 50.0 basis points; (2) a short-term market rate that is an offered rate per
annum quoted by the bank; or (3) the LIBOR applicable to the currency borrowed
plus an interest rate margin ("LIBOR margin"). The LIBOR margin (ranging from
75.0 to 170.0 basis points) is determined quarterly based upon predetermined
performance criteria. The interest rate on the term loan is the LIBOR plus a
margin that was 175.0 basis points during the third quarter of fiscal 1999 and
increases to 225.0 basis points May 1, 1999, 250.0 basis points January 1,
2000, 275.0 basis points April 1, 2000 and 300.0 basis points July, 1 2000. The
Company is obligated to pay a facility fee (ranging from 25.0 to 30.0 basis
points) on the balance of the facility based on the same performance criteria
as the LIBOR margin. The facility contains restrictive and financial covenants
relating to, among other things, the repurchase of shares of the Company's
common stock and the maintenance of minimum levels of cash flow,
capitalization, interest coverage and tangible net worth. During the third
quarter of fiscal 1999, and before the May 1, 1999 amendment became effective,
the Company received a waiver from its lenders under the terms of the facility
pertaining to a certain covenant. Pursuant to the May 1, 1999 amendment to the
facility, the Company expects that it will be in compliance with the covenants
under the provisions of the facility. The Company also expects that cash flow
generated by its operations
10
13
and borrowings under the facility will be sufficient to meet its planned
operating and capital requirements for the foreseeable future.
Year 2000 Compliance
The Company has assessed its exposure to the Year 2000 problem and has
successfully completed a comprehensive response to that exposure. Generally, the
Company has potential Year 2000 exposures in three areas: (i) financial and
management operating computer systems used to manage the Company's business,
(ii) manufacturing equipment used by the Company ("embedded chips") and (iii)
computer systems used by third parties, in particular customers and suppliers of
the Company.
The Company 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 internal and third-party service
providers. The Company has successfully completed the programming changes to its
software applications to accommodate Year 2000 dating and the testing thereon,
and successfully completed the implementation of its Year 2000 system
modifications during the fourth quarter of fiscal 1999. In concert with the
Company's assessment of its hardware and software applications, the Company's
examination of its Year 2000 exposure also included the following: (1) the
Company has contacted its hardware and software vendors to determine their Year
2000 readiness, (2) the Company has completed a survey of its major third-party
suppliers to determine their status with Year 2000 compliance and (3) the
Company has successfully modified its factory equipment with microprocessors to
be Year 2000 compliant. The Company spent approximately $62,000 in this effort.
The Company increased its overall information technologies budget to accommodate
Year 2000 issues and has not delayed other information technology projects
critical to the Company's business as a result of the increase. Based on the
Company's examination of the Year 2000 problem, its implementation of
modifications to its internal systems, the representations made by its suppliers
through its survey and the completion of its modifications to factory equipment,
the Company does not anticipate that the Year 2000 problem will have a material
adverse impact on its operations.
If the Company unsuccessfully completed its remediation of
non-compliant operating systems or correcting of embedded chips or if customers
or suppliers cannot rectify Year 2000 issues applicable to them, the Company is
likely to incur substantial additional costs to develop alternative methods of
managing its business and replacing non-compliant equipment. The Company may
also experience delays in payments by customers or to suppliers and delays in
providing its products to customers. The Year 2000 problem is pervasive and
complex and there can be no assurance that the Company has identified all of the
Year 2000 issues that may affect the Company or that the remedial efforts it has
taken will adequately address any potential Year 2000 problems.
The Euro
On January 1, 1999, certain member countries of the European Union
adopted the Euro as their common legal currency. Between January 1, 1999 and
January 1, 2002, transactions may be conducted in either the Euro or the
participating countries' national currency. However, by July 1, 2002, the
participating countries will withdraw their national currency as legal tender
and complete the conversion to the Euro. The Company conducts business in Europe
and does not expect the conversion to the Euro to have a material adverse effect
on its competitive position or consolidated financial position. The Company is
in the process of making the necessary system modifications and, in addition, is
evaluating Enterprise Resource Planning systems on the market to replace its
current systems that will allow the Company to conduct business in both the Euro
as well as the participating countries' national currency. The Company has
determined that failure to implement systems that are able to process both Euro
and participating countries' national currency may cause disruptions to
operations including, among other things, a temporary inability to process
transactions, send invoices or engage in normal business activities.
11
14
Certain Factors Which May Affect the Company's Future Performance
This Quarterly Report on Form 10-Q contains certain forward looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
which represent the Company's expectations or beliefs concerning future events,
including, but not limited to, the following: statements regarding the Company's
capital and current operational investments to finance the future growth of the
Company; statements regarding the Company's expected cash needs and sources of
cash to fund its planned operating and capital requirements; and statements
regarding the impact of the Year 2000 issue and the Euro conversion on
computerized information systems. Such statements are based upon the facts
presently known to the Company and assumptions as to important future events,
many of which are beyond the control of the Company. Reference is made to the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in the Company's annual report on Form 10-K for the fiscal
year ended June 27, 1998 for a description of certain additional risk factors
which may affect the Company's future results.
12
15
PART II OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On April 26, 1999, the Board of Directors (the "Board")
amended Article II, Section 11 of the Company's Bylaws, Notice of Stockholder
Business and Nominations, to provide substantially as follows:
(A) Annual Meetings of Stockholders. (1) Nominations for
election to the Board and the proposal of business to be considered by the
stockholders may be made at an annual meeting of stockholders only (a) pursuant
to the Company's notice of meeting, (b) at the direction of the Board or the
Chairman of the Board or (c) by any stockholder who was a stockholder of the
Company at the time the notice provided for below is delivered to the Secretary
of the Company and who is entitled to vote at the meeting and complies with the
procedures set forth below.
(2) For nominations or other business to come before an annual
meeting by a stockholder pursuant to subsection (c) above, the stockholder must
have given timely written notice to the Secretary and such business must be
proper for stockholder action. To be timely, a stockholder's notice must be
received by the Secretary not later than the 70th day nor earlier than the 90th
day prior to the first anniversary of the prior year's annual meeting; provided,
however, if the date of the annual meeting is more than 20 days before or more
than 70 days after such anniversary, notice by the stockholder must be received
not earlier than the later of (i) the 70th day prior to such annual meeting or
(ii) the 10th day after the first public announcement (as defined in Article II,
Section 11) of the date of such meeting. The public announcement of an
adjournment or postponement of an annual meeting shall not commence a new time
period for giving notice as described herein. A stockholder's notice shall set
forth: (a) for each person the stockholder proposes to nominate for election or
reelection as a director, all information required to be disclosed in
solicitations of proxies for election of directors in an election contest, or is
otherwise required, in each case pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and Rule 14a-11
thereunder; (b) as to other business that the stockholder proposes, a brief
description of the business desired to be brought before the meeting, the
reasons for conducting such business and any material interest in such business
of the stockholder and the beneficial owner, if any, on whose behalf the
proposal is made, and if such business includes a proposal to amend the Bylaws,
the language of the proposed amendment; and (c) for the stockholder giving
notice and the beneficial owner, if any, on whose behalf the nomination or
proposal is made (i) the name and address of the stockholder, as they appear on
the Company's books, and of the beneficial owner, (ii) the class and number of
shares of capital stock that are owned beneficially and of record by the
stockholder and the beneficial owner, (iii) a representation that the
stockholder is a holder of record entitled to vote at the meeting and intends to
appear in person or by proxy to propose such business or nomination, and (iv) a
representation whether the stockholder or the beneficial owner, if any, intends
or is part of a group which intends to (a) deliver a proxy statement and/or form
of proxy to holders of at least the percentage of the Company's outstanding
common stock required to approve or adopt the proposal or elect the nominee
and/or (b) otherwise solicit proxies from stockholders in support of the
proposal or nomination. The Company may require information from a proposed
nominee to determine whether such proposed nominee is eligible to serve as a
director.
(3) Notwithstanding anything in the second sentence of (A)(2)
above to the contrary, if the number of directors to be elected to the Board in
the class of directors being elected is increased and there is no public
announcement by the Company naming the nominees for election to such class or
specifying the size of the increased class at least 80 days prior to the first
anniversary of the preceding year's annual meeting, a stockholder's notice shall
be considered timely with respect to nominees for any new positions created by
such increase, if it shall be delivered to the Secretary of the Company not
later than the 10th day after a public announcement is first made.
(B) Special Meeting of Stockholders. Only such business shall
be conducted at a special meeting of stockholders as shall have been brought
before the meeting pursuant to the Company's notice of meeting. Nominations of
persons for election to the Board may be made at a special meeting of
stockholders at which directors are to be elected pursuant to the Company's
notice of meeting (a) by or at the direction of the Board or (b) provided that
the Board has determined that directors shall be elected at such meeting, by any
stockholder of the Company who is a stockholder of record at the time the notice
is delivered to the Secretary of the Company, who shall be entitled to vote at
the meeting and upon such election and who complies with the notice procedures
established below. If the Company calls a special meeting of stockholders for
the purpose of electing one or more directors, any stockholder entitled to vote
in the election may nominate a person or persons for election to such
position(s) as specified in the Company's notice of meeting, if the
stockholder's notice required by Section (A)(2) above shall be delivered to the
Secretary not earlier than the 90th day prior to such special meeting and not
later than the later of (i) the 70th day prior to such special meeting, or (ii)
the 10th day after a public announcement is first made of the date of the
special meeting and of the nominees proposed by the Board to be elected at such
meeting. An adjournment or postponement of a special meeting shall not commence
a new time period for the giving of notice as described above.
In addition to the foregoing, the Board also amended Article X
of the Company's Bylaws to provide that any amendment or repeal of the Bylaws or
adoption of new bylaws by the stockholders be approved by at least 66 2/3% of
the issued and outstanding shares of the Company's capital stock entitled to
vote thereon.
These Bylaw provisions could have the effect of making it more
difficult for a third party to acquire control of the Company.
13
16
The preceding summary of the amendments to the Company's
Bylaws is qualified in its entirety by reference to the Amended and Restated
Bylaws of the Company, a copy of which is filed as an exhibit to this Form 10-Q.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1(ii) Amended and Restated Bylaws of the Company.
10.1 Amended and Restated Credit Agreement, dated as of January 22,
1999, among the Company, certain subsidiaries of the Company
and NationsBank N.A., as Administrative Agent, Fronting Bank,
Documentation Agent and Swingline Bank and Fleet National
Bank, The Chase Manhattan Bank, State Street Bank and Trust
Company and BankBoston, N.A.
27 Financial data schedule for the nine months ended March 27,
1999.
(b) Reports on Form 8-K.
None
14
17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CANNONDALE CORPORATION
Date: May 11, 1999 /s/ WILLIAM A. LUCA
-----------------------------------
William A. Luca
Vice President, Treasurer
and Chief Financial Officer
(Principal Financial Officer
and authorized signatory)
15
18
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- - - - - - - - - - - - - ------ -----------
3.1(ii) Amended and Restated Bylaws of the Company
10.1 Amended and Restated Credit Agreement, dated as of January 22,
1999, among the Company, certain subsidiaries of the Company
and NationsBank N.A., as Administrative Agent, Fronting Bank,
Documentation Agent and Swingline Bank and Fleet National
Bank, The Chase Manhattan Bank, State Street Bank and Trust
Company and BankBoston, N.A.
27 Financial Data Schedule for the Nine Months Ended March 27,
1999.